UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | |
(X)☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 201829, 2019
or
|
| | |
( )☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _______________
Commission file number: 1-2207
THE WENDY’S COMPANY
(Exact name of registrantsregistrant 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) (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 [x]☒ 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 [x]☒ 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 [x] | ☒ | 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 [x]☒
There were 236,768,234230,047,087 shares of The Wendy’s Company common stock outstanding as of October 31, 2018.30, 2019.
THE WENDY’S COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Par Value)
| | | September 30, 2018 | | December 31, 2017 | September 29, 2019 | | December 30, 2018 |
ASSETS | (Unaudited) | (Unaudited) |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 634,751 |
| | $ | 171,447 |
| $ | 439,421 |
| | $ | 431,405 |
|
Restricted cash | 29,874 |
| | 32,633 |
| 28,769 |
| | 29,860 |
|
Accounts and notes receivable, net | 100,148 |
| | 114,390 |
| 105,017 |
| | 109,805 |
|
Inventories | 3,335 |
| | 3,156 |
| 3,549 |
| | 3,687 |
|
Prepaid expenses and other current assets | 18,147 |
| | 20,125 |
| 12,638 |
| | 14,452 |
|
Advertising funds restricted assets | 69,835 |
| | 62,602 |
| 84,380 |
| | 76,509 |
|
Total current assets | 856,090 |
| | 404,353 |
| 673,774 |
| | 665,718 |
|
Properties | 1,223,982 |
| | 1,263,059 |
| 980,872 |
| | 1,023,267 |
|
Finance lease assets | | 198,415 |
| | 189,969 |
|
Operating lease assets | | 871,108 |
| | — |
|
Goodwill | 749,192 |
| | 743,334 |
| 755,588 |
| | 747,884 |
|
Other intangible assets | 1,303,690 |
| | 1,321,585 |
| 1,251,699 |
| | 1,294,153 |
|
Investments | 52,575 |
| | 56,002 |
| 46,898 |
| | 47,660 |
|
Net investment in direct financing leases | 226,149 |
| | 229,089 |
| |
Net investment in sales-type and direct financing leases | | 250,602 |
| | 226,477 |
|
Other assets | 95,754 |
| | 79,516 |
| 107,264 |
| | 96,907 |
|
Total assets | $ | 4,507,432 |
| | $ | 4,096,938 |
| $ | 5,136,220 |
| | $ | 4,292,035 |
|
|
|
| | |
|
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
| |
| | |
|
Current liabilities: | |
| | |
| |
| | |
|
Current portion of long-term debt | $ | 31,291 |
| | $ | 30,172 |
| $ | 22,750 |
| | $ | 23,250 |
|
Current portion of finance lease liabilities | | 10,584 |
| | 8,405 |
|
Current portion of operating lease liabilities | | 43,474 |
| | — |
|
Accounts payable | 24,061 |
| | 22,764 |
| 23,793 |
| | 21,741 |
|
Income taxes payable | 84,623 |
| | 1,115 |
| |
Accrued expenses and other current liabilities | 120,203 |
| | 110,509 |
| 146,693 |
| | 150,636 |
|
Advertising funds restricted liabilities | 78,925 |
| | 62,602 |
| 90,152 |
| | 80,153 |
|
Total current liabilities | 339,103 |
| | 227,162 |
| 337,446 |
| | 284,185 |
|
Long-term debt | 2,759,766 |
| | 2,724,230 |
| 2,270,866 |
| | 2,305,552 |
|
Long-term finance lease liabilities | | 471,704 |
| | 447,231 |
|
Long-term operating lease liabilities | | 911,213 |
| | — |
|
Deferred income taxes | 275,312 |
| | 299,053 |
| 273,097 |
| | 269,160 |
|
Deferred franchise fees | 92,522 |
| | 10,881 |
| 91,437 |
| | 92,232 |
|
Other liabilities | 257,411 |
| | 262,409 |
| 130,866 |
| | 245,226 |
|
Total liabilities | 3,724,114 |
| | 3,523,735 |
| 4,486,629 |
| | 3,643,586 |
|
Commitments and contingencies |
|
| |
|
|
|
| |
|
|
Stockholders’ equity: |
|
| | | | | |
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 238,318 and 240,512 shares outstanding, respectively | 47,042 |
| | 47,042 |
| |
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 230,371 and 231,233 shares outstanding, respectively | | 47,042 |
| | 47,042 |
|
Additional paid-in capital | 2,883,298 |
| | 2,885,955 |
| 2,885,404 |
| | 2,884,696 |
|
Retained earnings (accumulated deficit) | 146,983 |
| | (163,289 | ) | |
Common stock held in treasury, at cost; 232,106 and 229,912 shares, respectively | (2,242,870 | ) | | (2,150,307 | ) | |
Retained earnings | | 186,282 |
| | 146,277 |
|
Common stock held in treasury, at cost; 240,053 and 239,191 shares, respectively | | (2,415,027 | ) | | (2,367,893 | ) |
Accumulated other comprehensive loss | (51,135 | ) | | (46,198 | ) | (54,110 | ) | | (61,673 | ) |
Total stockholders’ equity | 783,318 |
| | 573,203 |
| 649,591 |
| | 648,449 |
|
Total liabilities and stockholders’ equity | $ | 4,507,432 |
| | $ | 4,096,938 |
| $ | 5,136,220 |
| | $ | 4,292,035 |
|
See accompanying notes to condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 | September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
| (Unaudited) | (Unaudited) |
Revenues: | | | | | | | | | | | | | | |
Sales | $ | 165,323 |
| | $ | 158,843 |
| | $ | 486,316 |
| | $ | 467,914 |
| $ | 181,977 |
| | $ | 165,323 |
| | $ | 530,724 |
| | $ | 486,316 |
|
Franchise royalty revenue and fees | 103,212 |
| | 98,882 |
| | 308,679 |
| | 306,120 |
| 109,155 |
| | 103,212 |
| | 320,233 |
| | 308,679 |
|
Franchise rental income | 50,474 |
| | 50,275 |
| | 152,110 |
| | 140,127 |
| 59,918 |
| | 50,474 |
| | 176,931 |
| | 152,110 |
|
Advertising funds revenue | 81,541 |
| | — |
| | 245,011 |
| | — |
| 86,830 |
| | 81,541 |
| | 253,923 |
| | 245,011 |
|
| 400,550 |
| | 308,000 |
| | 1,192,116 |
| | 914,161 |
| 437,880 |
| | 400,550 |
| | 1,281,811 |
| | 1,192,116 |
|
Costs and expenses: | | | | | | | | | | | | | | |
Cost of sales | 139,348 |
| | 133,631 |
| | 409,721 |
| | 388,755 |
| 152,425 |
| | 139,348 |
| | 446,096 |
| | 409,721 |
|
Franchise support and other costs | 5,349 |
| | 3,690 |
| | 18,553 |
| | 11,122 |
| 9,739 |
| | 5,349 |
| | 19,823 |
| | 18,553 |
|
Franchise rental expense | 22,260 |
| | 24,076 |
| | 69,829 |
| | 64,841 |
| 32,364 |
| | 22,260 |
| | 92,842 |
| | 69,829 |
|
Advertising funds expense | 81,541 |
| | — |
| | 245,011 |
| | — |
| 87,883 |
| | 81,541 |
| | 257,031 |
| | 245,011 |
|
General and administrative | 46,545 |
| | 51,716 |
| | 146,064 |
| | 153,089 |
| 46,169 |
| | 46,545 |
| | 146,266 |
| | 146,064 |
|
Depreciation and amortization | 29,070 |
| | 31,216 |
| | 94,649 |
| | 91,690 |
| 33,306 |
| | 29,070 |
| | 97,975 |
| | 94,649 |
|
System optimization (gains) losses, net | (486 | ) | | 106 |
| | (8 | ) | | 39,749 |
| |
System optimization gains, net | | (1,040 | ) | | (486 | ) | | (1,162 | ) | | (8 | ) |
Reorganization and realignment costs | 941 |
| | 2,888 |
| | 6,691 |
| | 20,768 |
| 403 |
| | 941 |
| | 4,771 |
| | 6,691 |
|
Impairment of long-lived assets | 347 |
| | 1,041 |
| | 2,156 |
| | 1,804 |
| — |
| | 347 |
| | 1,684 |
| | 2,156 |
|
Other operating income, net | (1,713 | ) | | (2,021 | ) | | (4,643 | ) | | (5,828 | ) | (2,392 | ) | | (1,713 | ) | | (9,377 | ) | | (4,643 | ) |
| 323,202 |
| | 246,343 |
| | 988,023 |
| | 765,990 |
| 358,857 |
| | 323,202 |
| | 1,055,949 |
| | 988,023 |
|
Operating profit | 77,348 |
| | 61,657 |
| | 204,093 |
| | 148,171 |
| 79,023 |
| | 77,348 |
| | 225,862 |
| | 204,093 |
|
Interest expense, net | (29,625 | ) | | (29,977 | ) | | (89,939 | ) | | (87,887 | ) | (27,930 | ) | | (29,625 | ) | | (86,943 | ) | | (89,939 | ) |
Loss on early extinguishment of debt | — |
| | — |
| | (11,475 | ) | | — |
| — |
| | — |
| | (7,150 | ) | | (11,475 | ) |
Investment income (loss), net | 450,133 |
| | (636 | ) | | 450,432 |
| | 2,086 |
| |
Investment income, net | | 340 |
| | 450,133 |
| | 999 |
| | 450,432 |
|
Other income, net | 1,061 |
| | 511 |
| | 2,423 |
| | 1,022 |
| 1,878 |
| | 1,061 |
| | 6,166 |
| | 2,423 |
|
Income before income taxes | 498,917 |
| | 31,555 |
| | 555,534 |
| | 63,392 |
| 53,311 |
| | 498,917 |
| | 138,934 |
| | 555,534 |
|
Provision for income taxes | (107,668 | ) | | (17,298 | ) | | (114,250 | ) | | (28,639 | ) | (7,184 | ) | | (107,668 | ) | | (28,527 | ) | | (114,250 | ) |
Net income | $ | 391,249 |
| | $ | 14,257 |
| | $ | 441,284 |
| | $ | 34,753 |
| $ | 46,127 |
| | $ | 391,249 |
| | $ | 110,407 |
| | $ | 441,284 |
|
| | | | | | | | | | | | | | |
Net income per share | | | | | | | | |
Net income per share: | | | | | | | | |
Basic | $ | 1.65 |
| | $ | .06 |
| | $ | 1.85 |
| | $ | .14 |
| $ | .20 |
| | $ | 1.65 |
| | $ | .48 |
| | $ | 1.85 |
|
Diluted | 1.60 |
| | .06 |
| | 1.79 |
| | .14 |
| .20 |
| | 1.60 |
| | .47 |
| | 1.79 |
|
See accompanying notes to condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 | September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
| (Unaudited) | (Unaudited) |
Net income | $ | 391,249 |
| | $ | 14,257 |
| | $ | 441,284 |
| | $ | 34,753 |
| $ | 46,127 |
| | $ | 391,249 |
| | $ | 110,407 |
| | $ | 441,284 |
|
Other comprehensive income (loss), net: | | | | | | | | |
Other comprehensive (loss) income, net: | | | | | | | | |
Foreign currency translation adjustment | 5,315 |
| | 8,787 |
| | (5,054 | ) | | 16,797 |
| (2,297 | ) | | 5,315 |
| | 7,563 |
| | (5,054 | ) |
Change in unrecognized pension loss: | | | | | | | | | | | | | | |
Unrealized gains arising during the period | — |
| | — |
| | 156 |
| | 156 |
| — |
| | — |
| | — |
| | 156 |
|
Income tax provision | — |
| | — |
| | (39 | ) | | (60 | ) | — |
| | — |
| | — |
| | (39 | ) |
| — |
| | — |
| | 117 |
| | 96 |
| — |
| | — |
| | — |
| | 117 |
|
Effect of cash flow hedges: | | | | | | | | |
Reclassification of losses into Net income | — |
| | 723 |
| | — |
| | 2,170 |
| |
Income tax provision | — |
| | (279 | ) | | — |
| | (838 | ) | |
| — |
| | 444 |
| | — |
| | 1,332 |
| |
Other comprehensive income (loss), net | 5,315 |
| | 9,231 |
| | (4,937 | ) | | 18,225 |
| |
Other comprehensive (loss) income, net | | (2,297 | ) | | 5,315 |
| | 7,563 |
| | (4,937 | ) |
Comprehensive income | $ | 396,564 |
| | $ | 23,488 |
| | $ | 436,347 |
| | $ | 52,978 |
| $ | 43,830 |
| | $ | 396,564 |
| | $ | 117,970 |
| | $ | 436,347 |
|
See accompanying notes to condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Common Stock Held in Treasury | | Accumulated Other Comprehensive Loss | | Total |
| | | | | |
| (Unaudited) |
Balance at December 30, 2018 | $ | 47,042 |
| | $ | 2,884,696 |
| | $ | 146,277 |
| | $ | (2,367,893 | ) | | $ | (61,673 | ) | | $ | 648,449 |
|
Net income | — |
| | — |
| | 31,894 |
| | — |
| | — |
| | 31,894 |
|
Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | 6,025 |
| | 6,025 |
|
Cash dividends | — |
| | — |
| | (23,069 | ) | | — |
| | — |
| | (23,069 | ) |
Repurchases of common stock | — |
| | — |
| | — |
| | (29,370 | ) | | — |
| | (29,370 | ) |
Share-based compensation | — |
| | 5,022 |
| | — |
| | — |
| | — |
| | 5,022 |
|
Common stock issued upon exercises of stock options | — |
| | (205 | ) | | — |
| | 9,053 |
| | — |
| | 8,848 |
|
Common stock issued upon vesting of restricted shares | — |
| | (8,874 | ) | | — |
| | 2,819 |
| | — |
| | (6,055 | ) |
Cumulative effect of change in accounting principle | — |
| | — |
| | (1,105 | ) | | — |
| | — |
| | (1,105 | ) |
Other | — |
| | 24 |
| | (6 | ) | | 37 |
| | — |
| | 55 |
|
Balance at March 31, 2019 | $ | 47,042 |
| | $ | 2,880,663 |
| | $ | 153,991 |
| | $ | (2,385,354 | ) | | $ | (55,648 | ) | | $ | 640,694 |
|
Net income | — |
| | — |
| | 32,386 |
| | — |
| | — |
| | 32,386 |
|
Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | 3,835 |
| | 3,835 |
|
Cash dividends | — |
| | — |
| | (23,124 | ) | | — |
| | — |
| | (23,124 | ) |
Repurchases of common stock | — |
| | — |
| | — |
| | (20,391 | ) | | — |
| | (20,391 | ) |
Share-based compensation | — |
| | 4,986 |
| | — |
| | — |
| | — |
| | 4,986 |
|
Common stock issued upon exercises of stock options | — |
| | (339 | ) | | — |
| | 10,830 |
| | — |
| | 10,491 |
|
Common stock issued upon vesting of restricted shares | — |
| | (1,852 | ) | | — |
| | 964 |
| | — |
| | (888 | ) |
Other | — |
| | 26 |
| | (4 | ) | | 37 |
| | — |
| | 59 |
|
Balance at June 30, 2019 | $ | 47,042 |
| | $ | 2,883,484 |
| | $ | 163,249 |
| | $ | (2,393,914 | ) | | $ | (51,813 | ) | | $ | 648,048 |
|
Net income | — |
| | — |
| | 46,127 |
| | — |
| | — |
| | 46,127 |
|
Other comprehensive loss, net | — |
| | — |
| | — |
| | — |
| | (2,297 | ) | | (2,297 | ) |
Cash dividends | — |
| | — |
| | (23,087 | ) | | — |
| | — |
| | (23,087 | ) |
Repurchases of common stock | — |
| | — |
| | — |
| | (26,462 | ) | | — |
| | (26,462 | ) |
Share-based compensation | — |
| | 3,981 |
| | — |
| | — |
| | — |
| | 3,981 |
|
Common stock issued upon exercises of stock options | — |
| | 545 |
| | — |
| | 4,171 |
| | — |
| | 4,716 |
|
Common stock issued upon vesting of restricted shares | — |
| | (2,636 | ) | | — |
| | 1,147 |
| | — |
| | (1,489 | ) |
Other | — |
| | 30 |
| | (7 | ) | | 31 |
| | — |
| | 54 |
|
Balance at September 29, 2019 | $ | 47,042 |
| | $ | 2,885,404 |
| | $ | 186,282 |
| | $ | (2,415,027 | ) | | $ | (54,110 | ) | | $ | 649,591 |
|
See accompanying notes to condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED
(In Thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Common Stock Held in Treasury | | Accumulated Other Comprehensive Loss | | Total |
| | | | | |
| (Unaudited) |
Balance at December 31, 2017 | $ | 47,042 |
| | $ | 2,885,955 |
| | $ | (163,289 | ) | | $ | (2,150,307 | ) | | $ | (46,198 | ) | | $ | 573,203 |
|
Net income | — |
| | — |
| | 20,159 |
| | — |
| | — |
| | 20,159 |
|
Other comprehensive loss, net | — |
| | — |
| | — |
| | — |
| | (5,927 | ) | | (5,927 | ) |
Cash dividends | — |
| | — |
| | (20,355 | ) | | — |
| | — |
| | (20,355 | ) |
Repurchases of common stock | — |
| | — |
| | — |
| | (39,407 | ) | | — |
| | (39,407 | ) |
Share-based compensation | — |
| | 4,458 |
| | — |
| | — |
| | — |
| | 4,458 |
|
Common stock issued upon exercises of stock options | — |
| | (7,460 | ) | | — |
| | 11,038 |
| | — |
| | 3,578 |
|
Common stock issued upon vesting of restricted shares | — |
| | (4,170 | ) | | — |
| | 1,620 |
| | — |
| | (2,550 | ) |
Cumulative effect of change in accounting principle | — |
| | — |
| | (70,210 | ) | | — |
| | — |
| | (70,210 | ) |
Other | — |
| | 21 |
| | (5 | ) | | 32 |
| | — |
| | 48 |
|
Balance at April 1, 2018 | $ | 47,042 |
| | $ | 2,878,804 |
| | $ | (233,700 | ) | | $ | (2,177,024 | ) | | $ | (52,125 | ) | | $ | 462,997 |
|
Net income | — |
| | — |
| | 29,876 |
| | — |
| | — |
| | 29,876 |
|
Other comprehensive loss, net | — |
| | — |
| | — |
| | — |
| | (4,325 | ) | | (4,325 | ) |
Cash dividends | — |
| | — |
| | (20,290 | ) | | — |
| | — |
| | (20,290 | ) |
Repurchases of common stock | — |
| | — |
| | — |
| | (45,787 | ) | | — |
| | (45,787 | ) |
Share-based compensation | — |
| | 5,133 |
| | — |
| | — |
| | — |
| | 5,133 |
|
Common stock issued upon exercises of stock options | — |
| | 396 |
| | — |
| | 2,840 |
| | — |
| | 3,236 |
|
Common stock issued upon vesting of restricted shares | — |
| | (1,199 | ) | | — |
| | 828 |
| | — |
| | (371 | ) |
Other | — |
| | 33 |
| | (6 | ) | | 43 |
| | — |
| | 70 |
|
Balance at July 1, 2018 | $ | 47,042 |
| | $ | 2,883,167 |
| | $ | (224,120 | ) | | $ | (2,219,100 | ) | | $ | (56,450 | ) | | $ | 430,539 |
|
Net income | — |
| | — |
| | 391,249 |
| | — |
| | — |
| | 391,249 |
|
Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | 5,315 |
| | 5,315 |
|
Cash dividends | — |
| | — |
| | (20,141 | ) | | — |
| | — |
| | (20,141 | ) |
Repurchases of common stock | — |
| | — |
| | — |
| | (56,421 | ) | | — |
| | (56,421 | ) |
Share-based compensation | — |
| | 4,810 |
| | — |
| | — |
| | — |
| | 4,810 |
|
Common stock issued upon exercises of stock options | — |
| | (2,409 | ) | | — |
| | 31,484 |
| | — |
| | 29,075 |
|
Common stock issued upon vesting of restricted shares | — |
| | (2,300 | ) | | — |
| | 1,132 |
| | — |
| | (1,168 | ) |
Other | — |
| | 30 |
| | (5 | ) | | 35 |
| | — |
| | 60 |
|
Balance at September 30, 2018 | $ | 47,042 |
| | $ | 2,883,298 |
| | $ | 146,983 |
| | $ | (2,242,870 | ) | | $ | (51,135 | ) | | $ | 783,318 |
|
See accompanying notes to condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| | | Nine Months Ended | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | September 29, 2019 | | September 30, 2018 |
| (Unaudited) | (Unaudited) |
Cash flows from operating activities: | | | | | | |
Net income | $ | 441,284 |
| | $ | 34,753 |
| $ | 110,407 |
| | $ | 441,284 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 94,649 |
| | 91,690 |
| 97,975 |
| | 94,649 |
|
Share-based compensation | 14,401 |
| | 16,356 |
| 13,989 |
| | 14,401 |
|
Impairment of long-lived assets | 2,156 |
| | 1,804 |
| 1,684 |
| | 2,156 |
|
Deferred income tax | (1,527 | ) | | 945 |
| 5,524 |
| | (1,527 | ) |
Non-cash rental income, net | (10,868 | ) | | (8,348 | ) | |
Non-cash rental expense (income), net | | 18,722 |
| | (10,868 | ) |
Change in operating lease liabilities | | (31,481 | ) | | — |
|
Net receipt of deferred vendor incentives | 2,689 |
| | 4,547 |
| 2,269 |
| | 2,689 |
|
System optimization (gains) losses, net | (8 | ) | | 39,749 |
| |
System optimization gains, net | | (1,162 | ) | | (8 | ) |
Gain on sale of investments, net | (450,000 | ) | | (1,807 | ) | (130 | ) | | (450,000 | ) |
Distributions received from TimWen joint venture | 9,060 |
| | 5,524 |
| |
Equity in earnings in joint ventures, net | (5,810 | ) | | (6,113 | ) | |
Long-term debt-related activities, net (see below) | 16,860 |
| | 9,051 |
| |
Other, net | 4,596 |
| | 2,023 |
| |
Changes in operating assets and liabilities: | | | | |
Accounts and notes receivable, net | 11,382 |
| | (14,193 | ) | |
Inventories | (82 | ) | | (44 | ) | |
Prepaid expenses and other current assets | 2,754 |
| | (1,281 | ) | |
Advertising funds restricted assets and liabilities | 8,879 |
| | (15,823 | ) | |
Accounts payable | (559 | ) | | (1,557 | ) | |
Accrued expenses and other current liabilities | 89,806 |
| | 3,039 |
| |
Distributions received from joint ventures, net of equity in earnings | | 2,926 |
| | 3,250 |
|
Long-term debt-related activities, net | | 12,386 |
| | 16,860 |
|
Changes in operating assets and liabilities and other, net | | 4,391 |
| | 116,776 |
|
Net cash provided by operating activities | 229,662 |
| | 160,315 |
| 237,500 |
| | 229,662 |
|
Cash flows from investing activities: | |
| | |
| |
| | |
|
Capital expenditures | (39,717 | ) | | (53,711 | ) | (40,984 | ) | | (39,717 | ) |
Acquisitions | (21,401 | ) | | (86,788 | ) | (5,052 | ) | | (21,401 | ) |
Dispositions | 2,863 |
| | 80,058 |
| 2,038 |
| | 2,863 |
|
Proceeds from sale of investments | 450,000 |
| | 3,282 |
| 130 |
| | 450,000 |
|
Notes receivable, net | (283 | ) | | (4,174 | ) | (1,834 | ) | | (283 | ) |
Payments for investments | (13 | ) | | (375 | ) | — |
| | (13 | ) |
Net cash provided by (used in) investing activities | 391,449 |
| | (61,708 | ) | |
Net cash (used in) provided by investing activities | | (45,702 | ) | | 391,449 |
|
Cash flows from financing activities: | |
| | |
| |
| | |
|
Proceeds from long-term debt | 934,837 |
| | 22,675 |
| 850,000 |
| | 934,837 |
|
Repayments of long-term debt | (893,039 | ) | | (42,966 | ) | (883,564 | ) | | (888,689 | ) |
Repayments of finance lease liabilities | | (5,178 | ) | | (4,350 | ) |
Deferred financing costs | (17,340 | ) | | (1,069 | ) | (14,008 | ) | | (17,340 | ) |
Repurchases of common stock | (140,199 | ) | | (90,065 | ) | (76,948 | ) | | (140,199 | ) |
Dividends | (60,786 | ) | | (51,464 | ) | (69,280 | ) | | (60,786 | ) |
Proceeds from stock option exercises | 42,299 |
| | 10,419 |
| 24,069 |
| | 42,299 |
|
Payments related to tax withholding for share-based compensation | (10,464 | ) | | (4,484 | ) | (8,447 | ) | | (10,464 | ) |
Contingent consideration payment | (6,269 | ) | | — |
| — |
| | (6,269 | ) |
Net cash used in financing activities | (150,961 | ) | | (156,954 | ) | (183,356 | ) | | (150,961 | ) |
Net cash provided by (used in) operations before effect of exchange rate changes on cash | 470,150 |
| | (58,347 | ) | |
Net cash provided by operations before effect of exchange rate changes on cash | | 8,442 |
| | 470,150 |
|
Effect of exchange rate changes on cash | (2,195 | ) | | 6,910 |
| 2,755 |
| | (2,195 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | 467,955 |
| | (51,437 | ) | |
Net increase in cash, cash equivalents and restricted cash | | 11,197 |
| | 467,955 |
|
Cash, cash equivalents and restricted cash at beginning of period | 212,824 |
| | 275,949 |
| 486,512 |
| | 212,824 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 680,779 |
| | $ | 224,512 |
| $ | 497,709 |
| | $ | 680,779 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED
(In Thousands)
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2018 | | October 1, 2017 |
| (Unaudited) |
Detail of cash flows from operating activities: | | | |
Long-term debt-related activities, net: | | | |
Loss on early extinguishment of debt | $ | 11,475 |
| | $ | — |
|
Accretion of long-term debt | 940 |
| | 927 |
|
Amortization of deferred financing costs | 4,445 |
| | 5,954 |
|
Reclassification of unrealized losses on cash flow hedges | — |
| | 2,170 |
|
| $ | 16,860 |
| | $ | 9,051 |
|
| | | |
Supplemental cash flow information: | | | |
Cash paid for: | |
| | |
|
Interest | $ | 103,240 |
| | $ | 93,701 |
|
Income taxes, net of refunds | 5,925 |
| | 22,092 |
|
| | | |
Supplemental non-cash investing and financing activities: | | | |
Capital expenditures included in accounts payable | $ | 9,588 |
| | $ | 9,621 |
|
Capitalized lease obligations | 6,569 |
| | 239,721 |
|
Accrued debt issuance costs | 332 |
| | — |
|
| | | |
| September 30, 2018 | | December 31, 2017 |
Reconciliation of cash, cash equivalents and restricted cash at end of period: | | | |
Cash and cash equivalents | $ | 634,751 |
| | $ | 171,447 |
|
Restricted cash | 29,874 |
| | 32,633 |
|
Restricted cash, included in Advertising funds restricted assets | 16,154 |
| | 8,579 |
|
Restricted cash, included in Other assets | — |
| | 165 |
|
Total cash, cash equivalents and restricted cash | $ | 680,779 |
| | $ | 212,824 |
|
|
| | | | | | | |
| Nine Months Ended |
| September 29, 2019 | | September 30, 2018 |
| (Unaudited) |
Supplemental non-cash investing and financing activities: | | | |
Capital expenditures included in accounts payable | $ | 7,582 |
| | $ | 9,588 |
|
Finance leases | 34,084 |
| | 6,569 |
|
| | | |
| September 29, 2019 | | December 30, 2018 |
Reconciliation of cash, cash equivalents and restricted cash at end of period: | | | |
Cash and cash equivalents | $ | 439,421 |
| | $ | 431,405 |
|
Restricted cash | 28,769 |
| | 29,860 |
|
Restricted cash, included in Advertising funds restricted assets | 29,519 |
| | 25,247 |
|
Total cash, cash equivalents and restricted cash | $ | 497,709 |
| | $ | 486,512 |
|
See accompanying notes to condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of September 30, 201829, 2019, the results of our operations for the three and nine months ended September 29, 2019 and September 30, 2018 and October 1, 2017 and cash flows for the nine months ended September 29, 2019 and September 30, 2018 and October 1, 2017.2018. The results of operations for the three and nine months ended September 30, 201829, 2019 are not necessarily indicative of the results to be expected for the full 20182019 fiscal year. TheseThe Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 201730, 2018 (the “Form 10-K”).
The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s® restaurants in North America (defined as the United States of America (“U.S.”) and Canada) comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material. As a result of the realignment of our management and operating structure in May 2019, the Company is continuing to evaluate the impact these changes will have on its existing operating segment structure. The Company currently expects to report its results in the following three segments beginning with our Annual Report on Form 10-K for the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. See Note 6 for further information.
We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.
Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.
Certain reclassifications have been made to the prior year presentation to conform to the current year presentation. See Note 2 for further information.
The Company has reclassified certain costs associated with the Company’s franchise operations to “Franchise support and other costs,” which were previously recorded to “Other operating expense (income), net.” The costs reclassified include costs incurred to provide direct support services to our franchisees, as well as certain other direct and incremental costs for the Company’s franchise operations. Also, the Company reclassified certain restaurant operational costs from “General and administrative” to “Cost of sales.” The Company believes this new presentation will aid users in understanding its results of operations. The prior periods reflect the reclassifications of these expenses to conform to the current year presentation. There was no impact to operating profit, income before income taxes or net income as a result of these reclassifications.
The following tables illustrate the expense reclassifications made to the condensed consolidated statements of operations for the three and nine months ended October 1, 2017:
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| | | Reclassifications | | |
| As Previously Reported | | Franchise support and other costs | | Restaurant operational costs | | As Currently Reported |
Cost of sales | $ | 132,387 |
| | $ | — |
| | $ | 1,244 |
| | $ | 133,631 |
|
Franchise support and other costs | — |
| | 3,690 |
| | — |
| | 3,690 |
|
General and administrative | 52,960 |
| | — |
| | (1,244 | ) | | 51,716 |
|
Other operating expense (income), net | 1,669 |
| | (3,690 | ) | | — |
| | (2,021 | ) |
| $ | 187,016 |
| | $ | — |
| | $ | — |
| | $ | 187,016 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
|
| | | | | | | | | | | | | | | |
| Nine Months Ended |
| | | Reclassifications | | |
| As Previously Reported | | Franchise support and other costs | | Restaurant operational costs | | As Currently Reported |
Cost of sales | $ | 385,154 |
| | $ | — |
| | $ | 3,601 |
| | $ | 388,755 |
|
Franchise support and other costs | — |
| | 11,122 |
| | — |
| | 11,122 |
|
General and administrative | 156,690 |
| | — |
| | (3,601 | ) | | 153,089 |
|
Other operating expense (income), net | 5,294 |
| | (11,122 | ) | | — |
| | (5,828 | ) |
| $ | 547,138 |
| | $ | — |
| | $ | — |
| | $ | 547,138 |
|
(2) New Accounting Standards
New Accounting Standards
Credit Losses
In August 2018,June 2016, the Financial Accounting Standards Board (“FASB”) issued an amendment that will require the Company to use a current expected credit loss model that will result in the immediate recognition of an estimate of credit losses that are expected to occur over the life of the financial instruments that are within the scope of the guidance, including trade receivables. The amendment is effective commencing with our 2020 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our condensed consolidated financial statements.
New Accounting Standards Adopted
Cloud Computing
In August 2018, the FASB issued new guidance on accounting for implementation costs of a cloud computing arrangement that is a service contract. The new guidance aligns the accounting for such implementation costs of a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The Company doesadopted this amendment during the first quarter of 2019. The adoption of this guidance did not expect the amendment, which is effective beginning with our 2019 fiscal year, to have a material impact on our condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In August 2018, the FASB issued new guidance on disclosure requirements for fair value measurements. The objective of the new guidance, which is effective beginning with our 2020 fiscal year, is to provide additional information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. New incremental disclosure requirements include the amount of fair value hierarchy level 3 changes in unrealized gains and losses and the range and weighted average used to develop significant unobservable inputs for level 3 fair value measurements. The Company does not expect the amendment to have a material impact on our consolidated financial statements.Thousands Except Per Share Amounts)
In August 2018, the FASB issued new guidance on disclosure requirements for employer sponsored defined benefit plans. The amendments remove disclosure requirements that no longer are considered cost beneficial and add disclosure requirements that are identified as relevant. New incremental disclosure requirements include the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates as well as an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The Company does not expect the amendment, which is effective beginning with our 2020 fiscal year, to have a material impact on our consolidated financial statements.
Nonemployee Share-Based Payments
In June 2018, the FASB issued new guidance on nonemployee share-based payment arrangements. The new guidance aligns the requirements for nonemployee share-based payments with the requirements for employee share-based payments. The Company doesadopted this amendment during the first quarter of 2019. The adoption of this guidance did not expect the amendment, which is effective beginning with our 2019 fiscal year, to have a material impact on our condensed consolidated financial statements.
Leases
In February 2016, the FASB issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance which is effective beginning with our 2019 fiscal year, requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases. The Company adopted the new guidance during the first quarter of 2019 using the effective date as the date of initial application; therefore, the comparative period has not been adjusted and continues to be reported under the previous lease guidance.
The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases withthat fall under the definition of a short-term lease, termsthe Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did not recognize right-of-use (“ROU”) assets or liabilities, which included not recognizing ROU assets or lease liabilities for existing short-term leases of more than 12 months.those assets in transition. The guidance allowsCompany also elected the practical expedient for either (1)lessees to account for lease components and nonlease components as a modified retrospective transition method under whichsingle lease component for all underlying classes of assets. In addition, the Company elected the practical expedient for lessors to account for lease components and nonlease components as a single lease component in instances where the lease component is predominant, the timing and pattern of transfer for the lease component and nonlease component are the same and the lease component, if accounted for separately, would be classified as an operating lease. The Company did not elect the use-of-hindsight practical expedient.
The standard is appliedhad a material impact on our condensed consolidated balance sheets and related disclosures. Upon adoption at the beginning of 2019, we recognized operating lease liabilities of $1,011,000 based on the earliest period presented inpresent value of the financial statements or (2) an alternative transition method under which the standard is applied at the adoption date and a cumulative-effect adjustment to the opening balance of retained earnings is recognized in the period of adoption. The Company currently plans to adopt the standard using the alternative transition method. We are currently implementing a new lease management system to facilitate the adoption of this guidance. As shown in Note 14, there are $1,546,470 in futureremaining minimum rental payments, with corresponding ROU assets of $934,000. The measurement of the operating lease ROU assets included, among other items, favorable lease amounts of $23,000 and unfavorable lease amounts of $30,000, which were previously included in “Other intangible assets” and “Other liabilities,” respectively, as well as the excess of rent expense recognized on a straight-line basis over the minimum rents paid of $67,000, which was previously included in “Other liabilities.” In addition, the standard requires lessors to recognize lessees’ payments to the Company for operating leases that are not currentlyexecutory costs on our balance sheet; therefore,a gross basis as revenue with a corresponding expense, which we expect this will result in an increase of approximately $40,000 to our 2019 franchise rental income and expense. The Company also recognized a decrease to retained earnings of $1,105 as a result of impairing newly recognized ROU assets upon transition to the new guidance. The adoption of the guidance did not have a material impact on our condensed consolidated balance sheets and related disclosures. We do not expectstatement of cash flows.
In connection with the adoption of this guidancethe standard, the Company has reclassified finance lease ROU assets to have a material impact on our consolidated statements“Finance lease assets,” which were previously recorded to “Properties.” The Company also reclassified the current and long-term finance lease liabilities to “Current portion of operationsfinance lease liabilities” and statements“Long-term finance lease liabilities,” respectively, which were previously recorded to “Current portion of cash flows.long-term debt” and “Long-term debt,” respectively. The prior period reflects the reclassifications of these assets and liabilities to conform to the current year presentation.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
New Accounting Standards Adopted
In May 2017,The following table illustrates the FASB issued new guidance onreclassifications made to the scope of modification accounting for share-based payment arrangements. The new guidance provides relief to entities that make non-substantive changes to their share-based payment arrangements. The Company adopted this amendment, prospectively, during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.
In January 2017, the FASB issued an amendment that clarifies the definition of a business in determining whether to account for a transaction as an asset acquisition or a business combination. The Company adopted this amendment, prospectively, during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.
In November 2016, the FASB issued an amendment that clarifies guidance for proper classification and presentation of restricted cash in the statement of cash flows. Accordingly, changes in restricted cash that have historically been included within operating, investing and financing activities have been eliminated, and restricted cash, including the restricted cash of the national advertising funds, is combined with cash and cash equivalents when reconciling the beginning and end of period balances for all periods presented. The Company adopted this amendment during the first quarter of 2018. The adoption of the amendment resulted in an increase in net cash used in investing activities of $23,624 during the nine months ended October 1, 2017. In addition, during the nine months ended October 1, 2017, net cash provided by operating activities decreased $16,428, primarily due to changes in restricted cash of the national advertising funds. Because of the inclusion of restricted cash in the beginning and end of period balances, our cash, cash equivalents and restricted cash as presented in the statement of cash flows increased $37,883 and $77,709 as of October 1, 2017 and January 1, 2017, respectively. This amendment did not impact the Company’s condensed consolidated statements of operations and condensed consolidated balance sheets.
In August 2016, the FASB issued an amendment that provides guidance for proper classificationsheet as of certain cash receipts and payments in the statement of cash flows. Upon adoption in the first quarter of 2018, the Company elected to use the nature of distribution approach for all distributions it receives from its equity method investees. The adoption of this guidance did not impact our condensed consolidated financial statements.
In March 2016, the FASB issued an amendment that provides guidance on extinguishing financial liabilities for certain prepaid stored-value products. The Company adopted this amendment during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.
In January 2016, the FASB issued an amendment that revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The Company adopted this amendment during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued amended guidance for revenue recognition. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. The Company adopted the new guidance on January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.
The Company applied the new guidance using the modified retrospective method, whereby the cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative period has not been adjusted and continues to be reported under the previous revenue recognition guidance. The details of the significant changes and quantitative impact of the changes are discussed below. See Note 3 for further information regarding our revenue policies and disaggregation of our sources of revenue.
December 30, 2018:
10 |
| | | | | | | | | | | |
| As Previously Reported | | Reclassifications | | As Currently Reported |
Properties | $ | 1,213,236 |
| | $ | (189,969 | ) | | $ | 1,023,267 |
|
Finance lease assets | — |
| | 189,969 |
| | 189,969 |
|
Current portion of long-term debt | 31,655 |
| | (8,405 | ) | | 23,250 |
|
Current portion of finance lease liabilities | — |
| | 8,405 |
| | 8,405 |
|
Long-term debt | 2,752,783 |
| | (447,231 | ) | | 2,305,552 |
|
Long-term finance lease liabilities | — |
| | 447,231 |
| | 447,231 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Franchise Fees(3) Revenue
Under previous revenue recognition guidance, new build technical assistance fees and development fees were recognized as revenue when a franchised restaurant opened, as all material services and conditions related to the franchise fee had been substantially performed upon the restaurant opening. In addition, under previous guidance, technical assistance fees received in connection with salesDisaggregation of Company-operated restaurants to franchisees and facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”), as well as renewal fees, were recognized as revenue when the license agreements were signed and the restaurant opened. Under the new guidance, these franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement.Revenue
National Advertising Funds
The Company maintains two national advertising funds (the “Advertising Funds”) established to collectfollowing tables disaggregate revenue by primary geographical market and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Previously, the revenue, expenses and cash flows of such Advertising Funds were not included in the Company’s condensed consolidated statements of operations and statements of cash flows because the contributions to these Advertising Funds were designated for specific purposes and the Company acted as an agent, in substance, with regard to these contributions as a result of industry-specific guidance. Under the new guidance, which superseded the previous industry-specific guidance, the revenue, expenses and cash flows of the Advertising Funds are fully consolidated into the Company’s condensed consolidated statements of operations and statements of cash flows. In addition, the Company reclassified the total stockholders’ equity of the Advertising Funds from “Advertising funds restricted liabilities” to “Accumulated deficit” upon adoption of the guidance. Upon the full consolidation of the Advertising Funds, the Company also eliminated certain amounts due to and from affiliates from “Advertising funds restricted assets” and “Advertising funds restricted liabilities.” The Company allocates a portion of its advertising funds expense to “Cost of sales” based on a percentage of sales of Company-operated restaurants. Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.
source:
|
| | | | | | | | | | | | | | | |
| U.S. | | Canada | | Other International | | Total |
Three Months Ended September 29, 2019 | | | | | | | |
Sales at Company-operated restaurants | $ | 181,977 |
| | $ | — |
| | $ | — |
| | $ | 181,977 |
|
Franchise royalty revenue | 90,791 |
| | 6,529 |
| | 4,947 |
| | 102,267 |
|
Franchise fees | 5,838 |
| | 877 |
| | 173 |
| | 6,888 |
|
Franchise rental income | 50,987 |
| | 8,931 |
| | — |
| | 59,918 |
|
Advertising funds revenue | 81,386 |
| | 5,444 |
| | — |
| | 86,830 |
|
Total revenues | $ | 410,979 |
| | $ | 21,781 |
| | $ | 5,120 |
| | $ | 437,880 |
|
| | | | | | | |
Nine Months Ended September 29, 2019 | | | | | | | |
Sales at Company-operated restaurants | $ | 530,724 |
| | $ | — |
| | $ | — |
| | $ | 530,724 |
|
Franchise royalty revenue | 266,599 |
| | 18,341 |
| | 14,991 |
| | 299,931 |
|
Franchise fees | 17,563 |
| | 1,997 |
| | 742 |
| | 20,302 |
|
Franchise rental income | 151,693 |
| | 25,238 |
| | — |
| | 176,931 |
|
Advertising funds revenue | 238,804 |
| | 15,119 |
| | — |
| | 253,923 |
|
Total revenues | $ | 1,205,383 |
| | $ | 60,695 |
| | $ | 15,733 |
| | $ | 1,281,811 |
|
| | | | | | | |
Three Months Ended September 30, 2018 | | | | | | | |
Sales at Company-operated restaurants | $ | 165,323 |
| | $ | — |
| | $ | — |
| | $ | 165,323 |
|
Franchise royalty revenue | 84,648 |
| | 6,260 |
| | 4,593 |
| | 95,501 |
|
Franchise fees | 5,575 |
| | 1,855 |
| | 281 |
| | 7,711 |
|
Franchise rental income | 43,900 |
| | 6,574 |
| | — |
| | 50,474 |
|
Advertising funds revenue | 76,492 |
| | 5,049 |
| | — |
| | 81,541 |
|
Total revenues | $ | 375,938 |
| | $ | 19,738 |
| | $ | 4,874 |
| | $ | 400,550 |
|
| | | | | | | |
Nine Months Ended September 30, 2018 | | | | | | | |
Sales at Company-operated restaurants | $ | 486,316 |
| | $ | — |
| | $ | — |
| | $ | 486,316 |
|
Franchise royalty revenue | 252,094 |
| | 17,696 |
| | 13,812 |
| | 283,602 |
|
Franchise fees | 19,671 |
| | 4,776 |
| | 630 |
| | 25,077 |
|
Franchise rental income | 133,046 |
| | 19,064 |
| | — |
| | 152,110 |
|
Advertising funds revenue | 230,391 |
| | 14,620 |
| | — |
| | 245,011 |
|
Total revenues | $ | 1,121,518 |
| | $ | 56,156 |
| | $ | 14,442 |
| | $ | 1,192,116 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Impacts on Financial Statements
The following tables summarize the impacts of adopting the revenue recognition standard on the Company’s condensed consolidated financial statements:
|
| | | | | | | | | | | | | | | |
| | | Adjustments | | |
| As Reported | | Franchise Fees | | Advertising Funds | | Balances Without Adoption |
Condensed Consolidated Balance Sheet | | | | | | | |
September 30, 2018 | | | | | | | |
Accrued expenses and other current liabilities | $ | 120,203 |
| | $ | (1,664 | ) | | $ | — |
| | $ | 118,539 |
|
Advertising funds restricted liabilities | 78,925 |
| | — |
| | (6,645 | ) | | 72,280 |
|
Total current liabilities | 339,103 |
| | (1,664 | ) | | (6,645 | ) | | 330,794 |
|
Deferred income taxes | 275,312 |
| | 21,463 |
| | — |
| | 296,775 |
|
Deferred franchise fees | 92,522 |
| | (81,686 | ) | | — |
| | 10,836 |
|
Total liabilities | 3,724,114 |
| | (61,887 | ) | | (6,645 | ) | | 3,655,582 |
|
Retained earnings | 146,983 |
| | 62,011 |
| | 6,645 |
| | 215,639 |
|
Accumulated other comprehensive loss | (51,135 | ) | | (124 | ) | | — |
| | (51,259 | ) |
Total stockholders’ equity | 783,318 |
| | 61,887 |
| | 6,645 |
| | 851,850 |
|
| | | | | | | |
Condensed Consolidated Statements of Operations | | | | | | |
Three Months Ended September 30, 2018 | | | | | | | |
Franchise royalty revenue and fees (a) | $ | 103,212 |
| | $ | (497 | ) | | $ | — |
| | $ | 102,715 |
|
Advertising funds revenue | 81,541 |
| | — |
| | (81,541 | ) | | — |
|
Total revenues | 400,550 |
| | (497 | ) | | (81,541 | ) | | 318,512 |
|
Advertising funds expense | 81,541 |
| | — |
| | (81,541 | ) | | — |
|
Total costs and expenses | 323,202 |
| | — |
| | (81,541 | ) | | 241,661 |
|
Operating profit | 77,348 |
| | (497 | ) | | — |
| | 76,851 |
|
Income before income taxes | 498,917 |
| | (497 | ) | | — |
| | 498,420 |
|
Provision for income taxes | (107,668 | ) | | 124 |
| | — |
| | (107,544 | ) |
Net income | 391,249 |
| | (373 | ) | | — |
| | 390,876 |
|
| | | | | | | |
Nine Months Ended September 30, 2018 | | | | | | | |
Franchise royalty revenue and fees (a) | $ | 308,679 |
| | $ | (2,087 | ) | | $ | — |
| | $ | 306,592 |
|
Advertising funds revenue | 245,011 |
| | — |
| | (245,011 | ) | | — |
|
Total revenues | 1,192,116 |
| | (2,087 | ) | | (245,011 | ) | | 945,018 |
|
Advertising funds expense | 245,011 |
| | — |
| | (245,011 | ) | | — |
|
Total costs and expenses | 988,023 |
| | — |
| | (245,011 | ) | | 743,012 |
|
Operating profit | 204,093 |
| | (2,087 | ) | | — |
| | 202,006 |
|
Income before income taxes | 555,534 |
| | (2,087 | ) | | — |
| | 553,447 |
|
Provision for income taxes | (114,250 | ) | | 533 |
| | — |
| | (113,717 | ) |
Net income | 441,284 |
| | (1,554 | ) | | — |
| | 439,730 |
|
_______________
| |
(a) | The adjustments for the three and nine months ended September 30, 2018 include the reversal of franchise fees recognized over time under the new revenue recognition guidance of $2,266 and $7,393, respectively, as well as franchisee fees that would have been recognized under the previous revenue recognition guidance when the license agreements were signed and the restaurant opened of $1,769 and $5,306, respectively. See Note 3 for further information. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
|
| | | | | | | | | | | | | | | |
| | | Adjustments | | |
| As Reported | | Franchise Fees | | Advertising Funds | | Balances Without Adoption |
Condensed Consolidated Statement of Cash Flows | | | | | | |
Nine Months Ended September 30, 2018 | | | | | | | |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 441,284 |
| | $ | (1,554 | ) | | $ | — |
| | $ | 439,730 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Deferred income tax | (1,527 | ) | | (533 | ) | | — |
| | (2,060 | ) |
Other, net | 4,596 |
| | (219 | ) | | — |
| | 4,377 |
|
Changes in operating assets and liabilities: | | | | | | | |
Accrued expenses and other current liabilities | 89,806 |
| | 2,306 |
| | — |
| | 92,112 |
|
(3) Revenue
Nature of Goods and Services
Wendy’s franchises and operates Wendy’s® quick-service restaurants specializing in hamburger sandwiches throughout North America. Wendy’s also has franchised restaurants in 30 foreign countries and U.S. territories other than North America. At September 30, 2018, Wendy’s operated and franchised 350 and 6,319 restaurants, respectively. The Company generates revenues from sales at Company-operated restaurants and earns fees and rental income from franchised restaurants.
The rights and obligations governing franchised restaurants are set forth in the franchise agreement. The franchise agreement provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site accepted by Wendy’s and to use the Wendy’s system in connection with the operation of the restaurant at that site. The franchise agreement generally provides for a 20-year term and a 10-year renewal subject to certain conditions. The initial term may be extended up to 25 years and the renewal extended up to 20 years for qualifying restaurants under certain new restaurant development programs.
The franchise agreement requires that the franchisee pay a royalty based on a percentage of sales of the franchised restaurant, as well as make contributions to the Advertising Funds based on a percentage of sales. The agreement also typically requires that the franchisee pay Wendy’s a technical assistance fee. The technical assistance fee is used to defray some of the costs to Wendy’s for training, start-up and transitional services related to new and existing franchisees acquiring restaurants and in the development and opening of new restaurants.
Wendy’s also enters into development agreements with certain franchisees. The development agreement provides the franchisee with the right to develop a specified number of new Wendy’s restaurants using the Image Activation design within a stated, non-exclusive territory for a specified period, subject to the franchisee meeting interim new restaurant development requirements.
Wendy’s owns and leases sites from third parties, which it leases and/or subleases to franchisees. Noncancelable lease terms are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. The lease term for properties leased or subleased to franchisees is determined based upon the economic detriment to the franchisee and includes consideration of the length of the franchise agreement, historical performance of the restaurant and the existence of bargain renewal options.
Royalties and contributions to the Advertising Funds are generally due within the month subsequent to which the revenue was generated through sales of the franchised restaurant. Technical assistance fees, renewal fees and development fees are generally due upon execution of the related franchise agreement. Rental income is due in accordance with the terms of each lease, which is generally at the beginning of each month.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Significant Accounting Policy
“Sales” includes revenues recognized upon delivery of food to the customer at Company-operated restaurants. “Sales” excludes taxes collected from the Company’s customers. Revenue is recognized when the performance obligation is satisfied, which occurs upon delivery of food to the customer. “Sales” also includes income for gift cards. Gift card payments are recorded as deferred income when received and are recognized as revenue in proportion to actual gift card redemptions.
“Franchise royalty revenue and fees” includes royalties, new build technical assistance fees, renewal fees, Franchise Flip technical assistance fees, Franchise Flip advisory fees and development fees. Royalties from franchised restaurants are based on a percentage of sales of the franchised restaurant and are recognized as earned. New build technical assistance fees, renewal fees and Franchise Flip technical assistance fees are recorded as deferred revenue when received and recognized as revenue over the contractual term of the franchise agreements, once the restaurant has opened. Development fees are deferred when received, allocated to each agreed upon restaurant, and recognized as revenue over the contractual term of each respective franchise agreement, once the restaurant has opened. These franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. Franchise Flip advisory fees include valuation services and fees for selecting pre-approved buyers for Franchise Flips. Franchise Flip advisory fees are paid by the seller and are recognized as revenue at closing of the Franchise Flip transaction.
“Advertising funds revenue” includes contributions to the Advertising Funds by franchisees. Revenue related to these contributions is based on a percentage of sales of the franchised restaurants and is recognized as earned.
“Franchise rental income” includes rental income from properties owned and leased by the Company and leased or subleased to franchisees. Rental income is recognized on a straight-line basis over the respective operating lease terms. Favorable and unfavorable lease amounts related to the leased and/or subleased properties are amortized to rental income on a straight-line basis over the remaining term of the leases.
Disaggregation of Revenue
The following table disaggregates revenue by primary geographical market and source:
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | September 30, 2018 |
Primary geographical markets | | | |
United States | $ | 375,938 |
| | $ | 1,121,518 |
|
Canada | 19,738 |
| | 56,156 |
|
International | 4,874 |
| | 14,442 |
|
Total revenue | $ | 400,550 |
| | $ | 1,192,116 |
|
|
| | |
Sources of revenue | | | |
Sales at Company-operated restaurants | $ | 165,323 |
| | $ | 486,316 |
|
Franchise royalty revenue | 95,501 |
| | 283,602 |
|
Franchise fees | 7,711 |
| | 25,077 |
|
Franchise rental income | 50,474 |
| | 152,110 |
|
Advertising funds revenue | 81,541 |
| | 245,011 |
|
Total revenue | $ | 400,550 |
| | $ | 1,192,116 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Contract Balances
The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
| | | September 30, 2018 (a) | September 29, 2019 (a) | | December 30, 2018 (a) |
Receivables, which are included in “Accounts and notes receivable, net” (b) | $ | 39,281 |
| $ | 39,669 |
| | $ | 40,300 |
|
Receivables, which are included in “Advertising funds restricted assets” | 42,226 |
| 49,102 |
| | 47,332 |
|
Deferred franchise fees (c) | 103,012 |
| 100,751 |
| | 102,205 |
|
_______________
| |
(a) | Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s statementcondensed consolidated statements of operations. |
| |
(b) | Includes receivables related to “Sales” and “Franchise royalty revenue and fees.” |
| |
(c) | Deferred franchise fees of $10,490 and $92,522 are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees,”fees” and totaled $9,314 and $91,437 as of September 29, 2019, respectively, and $9,973 and $92,232 as of December 30, 2018, respectively. |
Significant changes in deferred franchise fees are as follows:
|
| | | | | | | |
| Nine Months Ended |
| September 29, 2019 | | September 30, 2018 |
Deferred franchise fees at beginning of period | $ | 102,205 |
| | $ | 102,492 |
|
Revenue recognized during the period | (6,635 | ) | | (7,393 | ) |
New deferrals due to cash received and other | 5,181 |
| | 7,913 |
|
Deferred franchise fees at end of period | $ | 100,751 |
| | $ | 103,012 |
|
|
| | | |
| Nine Months Ended |
| September 30, 2018 |
Deferred franchise fees at beginning of period | $ | 102,492 |
|
Revenue recognized during the period | (7,393 | ) |
New deferrals due to cash received and other | 7,913 |
|
Deferred franchise fees at end of period | $ | 103,012 |
|
Anticipated Future Recognition of Deferred Franchise Fees
The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
| | Estimate for fiscal year: | | |
2018 (a) | $ | 2,445 |
| |
2019 | 7,774 |
| |
2019 (a) | | $ | 2,164 |
|
2020 | 6,282 |
| 7,399 |
|
2021 | 5,749 |
| 6,118 |
|
2022 | 5,559 |
| 5,858 |
|
2023 | | 5,633 |
|
Thereafter | 75,203 |
| 73,579 |
|
| $ | 103,012 |
| $ | 100,751 |
|
_______________
| |
(a) | Represents franchise fees expected to be recognized for the remainder of the 2018 fiscal year,2019, which includes development-related franchise fees expected to be recognized over a duration of one year or less. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(4) Acquisitions
During the nine months ended September 30, 2018,29, 2019, the Company acquired 165 restaurants from a franchiseefranchisees for total net cash consideration of $21,401.$5,052. The Company did not incur any material acquisition-related costs associated with the acquisitionacquisitions and such transaction wastransactions were not significant to our condensed consolidated financial statements. The table below presents the allocation of the total purchase price to the fair value of assets acquired and liabilities assumed for restaurants acquired from the franchisee:franchisees:
|
| | | |
| Nine Months Ended |
| September 29, 2019 |
Restaurants acquired from franchisees | 5 |
|
| |
Total consideration paid, net of cash received | $ | 5,052 |
|
Identifiable assets acquired and liabilities assumed: | |
Properties | 666 |
|
Acquired franchise rights | 1,354 |
|
Finance lease assets | 5,350 |
|
Finance lease liabilities | (4,084 | ) |
Other | (2,316 | ) |
Total identifiable net assets | 970 |
|
Goodwill | $ | 4,082 |
|
|
| | | |
| Nine Months Ended |
| September 30, 2018 |
Restaurants acquired from franchisee | 16 |
|
| |
Total consideration paid, net of cash received | $ | 21,401 |
|
Identifiable assets acquired and liabilities assumed: | |
Properties | 4,363 |
|
Acquired franchise rights | 10,127 |
|
Capital lease assets | 5,360 |
|
Other assets | 621 |
|
Capital lease obligations | (3,135 | ) |
Unfavorable leases | (733 | ) |
Other liabilities | (1,960 | ) |
Total identifiable net assets | 14,643 |
|
Goodwill | $ | 6,758 |
|
On May 31, 2017,During 2018, the Company also entered intoacquired 16 restaurants from a franchisee for total net cash consideration of $21,401. The fair values of the DavCoidentifiable intangible assets related to the acquisition were provisional amounts as of December 30, 2018, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended March 31, 2019, which resulted in a decrease in the fair value of acquired franchise rights of $2,989 and NPC Transactions. See Note 5 for further information.an increase in deferred tax assets of $140.
(5) System Optimization (Gains) Losses,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. TheFlips”). 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 as of January 1, 2017.system. While the Company has no plans to reduce its ownership below the approximately 5% level, Wendy’s willthe Company expects to continue to optimize itsthe 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, and drive new restaurant development and accelerate reimages inreimages.
During the Image Activation format.
Duringnine months ended September 29, 2019 and September 30, 2018, the Company facilitated 3 and 73 Franchise Flips, respectively. Additionally, during the nine months ended September 30, 2018, the Company completed the sale of three3 Company-operated restaurants to a franchisee. In addition, the Company facilitated 73 and 270 Franchise FlipsNaN Company-operated restaurants were sold to franchisees during the nine months ended September 30, 2018 and October 1, 2017, respectively (excluding the DavCo and NPC Transactions discussed below).29, 2019.
Gains and losses recognized on dispositions are recorded to “System optimization (gains) losses,gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 6. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 | September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
Gain on sale of restaurants, net (a) | $ | — |
| | $ | — |
| | $ | 89 |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 89 |
|
Post-closing adjustments on sales of restaurants (b) | 279 |
| | 418 |
| | 54 |
| | 1,345 |
| 1,033 |
| | 279 |
| | 1,087 |
| | 54 |
|
Gain (loss) on sales of other assets, net (c) | 207 |
| | (539 | ) | | (135 | ) | | 2,040 |
| 7 |
| | 207 |
| | 75 |
| | (135 | ) |
Gain (loss) on DavCo and NPC Transactions (d) | — |
| | 15 |
| | — |
| | (43,134 | ) | |
System optimization gains (losses), net | $ | 486 |
| | $ | (106 | ) | | $ | 8 |
| | $ | (39,749 | ) | |
System optimization gains, net | | $ | 1,040 |
| | $ | 486 |
| | $ | 1,162 |
| | $ | 8 |
|
_______________
| |
(a) | During the nine months ended September 30, 2018, the Company received cash proceeds of $1,436 from the sale of three3 Company-operated restaurants. NetThe value of the net assets soldthat were included in the sale totaled $1,139 and consisted primarily of equipment. In addition, goodwill of $208 was written off in connection with the sale. |
| |
(b) | The nine months ended September 30, 2018 includes cash proceeds, net of payments of $6. The three and nine months ended October 1, 2017 includes cash payments, net of proceeds received, of $333 and $33, respectively, related to post-closing reconciliations with franchisees. The three and nine months ended September 29, 2019 and September 30, 2018 and the nine months ended October 1, 2017 include the recognition of deferred gains of $503$911 and $312,$503, respectively, as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. The nine months ended September 30, 2018 also includes cash proceeds, net of payments of $6. |
| |
(c) | During the three and nine months ended September 30, 2018,29, 2019, the Company received cash proceeds primarily from the sale of surplus properties, of $1,049$798 and $1,421,$2,038, respectively, and received cash proceeds of $2,411 and $9,403 during the three and nine months ended October 1, 2017, respectively. The nine months ended October 1, 2017 also includes the recognitionSeptember 30, 2018 received cash proceeds of a deferred gain of $375 related to$1,049 and $1,421, respectively, primarily from the sale of a share in an aircraft.surplus properties. |
| |
(d) | As part of our system optimization initiative, the Company acquired 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”) for total net cash consideration of $86,788, which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company, for cash proceeds of $70,688 (the “DavCo and NPC Transactions”). The acquisition of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such, the Company accounted for the transactions as an acquisition and subsequent disposition of a business. As part of the transactions, the Company retained leases for purposes of subleasing such properties to NPC. |
The total consideration paid to DavCo was allocated to net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. Refer to the Form 10-KAssets Held for further information regarding the purchase price allocation. The Company finalized the purchase price allocation during 2018 with no differences from the provisional amounts previously reported. The gain on the DavCo and NPC Transactions during the three months ended October 1, 2017 was comprised of a decrease in goodwill of $27 related to adjustments in the fair value of deferred taxes and net unfavorable leases, partially offset by additional selling and other costs of $12. The loss on the DavCo and NPC Transactions during the nine months ended October 1, 2017 was comprised of the write-off of goodwill of $65,476 and selling and other costs of $1,692, partially offset by the recognition of net favorable leases of $24,034.Sale
As part of the DavCo acquisition, the Company recognized a supplemental purchase price liability of $6,269, which was settled during the nine months ended September 30, 2018.
As of September 30, 201829, 2019 and December 31, 2017,30, 2018, the Company had assets held for sale of $2,519$2,391 and $2,235,$2,435, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”
(6) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
G&A realignment | $ | 396 |
| | $ | 629 |
| | $ | 4,695 |
| | $ | 6,375 |
|
System optimization initiative | 7 |
| | 312 |
| | 76 |
| | 316 |
|
Reorganization and realignment costs | $ | 403 |
| | $ | 941 |
| | $ | 4,771 |
| | $ | 6,691 |
|
General and Administrative (“G&A”) Realignment
In May 2017, the Company initiated a plan to further reduce its G&A expenses. Additionally, the Company announced in May 2019 changes to its leadership structure that includes the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the Chief Operations Officer position. During the nine months ended September 29, 2019 and September 30, 2018, the Company recognized costs related to the plan totaling $4,695 and $6,375, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $2,700, comprised of (1) severance and related employee costs of approximately $1,900, (2) recruitment and relocation costs of approximately $450, (3) third-party and other costs of approximately $50 and (4) share-based compensation of approximately $300. The Company expects to incur total costs aggregating approximately $35,000 to $38,000 related to the plan.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(6) Reorganization and Realignment Costs
The following isAs a summaryresult of the initiatives included in “Reorganizationrealignment of our management and realignment costs:”
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 |
G&A realignment | $ | 629 |
| | $ | 2,656 |
| | $ | 6,375 |
| | $ | 19,901 |
|
System optimization initiative | 312 |
| | 232 |
| | 316 |
| | 867 |
|
Reorganization and realignment costs | $ | 941 |
| | $ | 2,888 |
| | $ | 6,691 |
| | $ | 20,768 |
|
General and Administrative (“G&A”) Realignment
In May 2017,operating structure as described above, the Company initiated a planis continuing to further reduceevaluate the impact these changes will have on its G&A expenses.existing operating segment structure. The Company currently expects to incur total costs aggregating approximately $30,000 to $33,000 related toreport its results in the plan. The Company recognized costs totaling $6,375 duringfollowing three segments beginning with our Annual Report on Form 10-K for the nine monthsfiscal year ended September 30, 2018, which primarily included severanceDecember 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $4,500, comprised of (1) severance and related employee costs of approximately $1,000, (2) recruitment and relocation costs of approximately $2,000, (3) third-party and other costs of approximately $500 and (4) share-based compensation of approximately $1,000. The Company expects to continue to recognize costs associated with the plan into 2019.Global Real Estate & Development.
The following is a summary of the activity recorded as a result of the G&A realignment plan:
| | | Three Months Ended | | Nine Months Ended | | Total Incurred Since Inception | Three Months Ended | | Nine Months Ended | | Total Incurred Since Inception |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 | | September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 | |
Severance and related employee costs | $ | 57 |
| | $ | 1,210 |
| | $ | 3,168 |
| | $ | 14,436 |
| | $ | 18,124 |
| $ | 214 |
| | $ | 57 |
| | $ | 2,816 |
| | $ | 3,168 |
| | $ | 21,569 |
|
Recruitment and relocation costs | 200 |
| | 145 |
| | 708 |
| | 145 |
| | 1,197 |
| 58 |
| | 200 |
| | 654 |
| | 708 |
| | 2,220 |
|
Third-party and other costs | 39 |
| | 496 |
| | 971 |
| | 821 |
| | 2,062 |
| 25 |
| | 39 |
| | 112 |
| | 971 |
| | 2,222 |
|
| 296 |
| | 1,851 |
| | 4,847 |
| | 15,402 |
| | 21,383 |
| 297 |
| | 296 |
| | 3,582 |
| | 4,847 |
| | 26,011 |
|
Share-based compensation (a) | 333 |
| | 805 |
| | 1,528 |
| | 4,499 |
| | 6,655 |
| 99 |
| | 333 |
| | 1,113 |
| | 1,528 |
| | 7,797 |
|
Termination of defined benefit plans | | — |
| | — |
| | — |
| | — |
| | 1,335 |
|
Total G&A realignment | $ | 629 |
| | $ | 2,656 |
| | $ | 6,375 |
| | $ | 19,901 |
| | $ | 28,038 |
| $ | 396 |
| | $ | 629 |
| | $ | 4,695 |
| | $ | 6,375 |
| | $ | 35,143 |
|
_______________
| |
(a) | Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our G&A realignment plan. |
As of September 30, 2018, theThe accruals for our G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $3,491 and $507 as of September 29, 2019, respectively, and $6,817 and $1,432 as of September 30, 2018, respectively. The tables below present a rollforward of our accruals for the plan.
| | | Balance December 31, 2017 | | Charges | | Payments | | Balance September 30, 2018 | Balance December 30, 2018 | | Charges | | Payments | | Balance September 29, 2019 |
Severance and related employee costs | $ | 12,093 |
| | $ | 3,168 |
| | $ | (7,103 | ) | | $ | 8,158 |
| $ | 7,241 |
| | $ | 2,816 |
| | $ | (6,216 | ) | | $ | 3,841 |
|
Recruitment and relocation costs | 177 |
| | 708 |
| | (794 | ) | | 91 |
| 83 |
| | 654 |
| | (580 | ) | | 157 |
|
Third-party and other costs | — |
| | 971 |
| | (971 | ) | | — |
| — |
| | 112 |
| | (112 | ) | | — |
|
| $ | 12,270 |
| | $ | 4,847 |
| | $ | (8,868 | ) | | $ | 8,249 |
| $ | 7,324 |
| | $ | 3,582 |
| | $ | (6,908 | ) | | $ | 3,998 |
|
18 |
| | | | | | | | | | | | | | | |
| Balance December 31, 2017 | | Charges | | Payments | | Balance September 30, 2018 |
Severance and related employee costs | $ | 12,093 |
| | $ | 3,168 |
| | $ | (7,103 | ) | | $ | 8,158 |
|
Recruitment and relocation costs | 177 |
| | 708 |
| | (794 | ) | | 91 |
|
Third-party and other costs | — |
| | 971 |
| | (971 | ) | | — |
|
| $ | 12,270 |
| | $ | 4,847 |
| | $ | (8,868 | ) | | $ | 8,249 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
|
| | | | | | | | | | | | | | | |
| Balance January 1, 2017 | | Charges | | Payments | | Balance October 1, 2017 |
Severance and related employee costs | $ | — |
| | $ | 14,436 |
| | $ | (1,350 | ) | | $ | 13,086 |
|
Recruitment and relocation costs | — |
| | 145 |
| | (36 | ) | | 109 |
|
Third-party and other costs | — |
| | 821 |
| | (821 | ) | | — |
|
| $ | — |
| | $ | 15,402 |
| | $ | (2,207 | ) | | $ | 13,195 |
|
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $72,225$72,268 under the initiative since inception. The Companyinception and does not expect to incur any additional costs in 2018 in connection with acquisitions or dispositions under our system optimization initiative.during the remainder of 2019.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(7) Investments
Equity Investments
Wendy’s has a 50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand. (Tim Hortons is a registered trademark of Tim Hortons USA Inc.) In addition, a wholly-owned subsidiary of Wendy’s has a 20% share in a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.”
Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:
| | | Nine Months Ended | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | September 29, 2019 | | September 30, 2018 |
Balance at beginning of period | $ | 55,363 |
| | $ | 54,545 |
| $ | 47,021 |
| | $ | 55,363 |
|
| | | | | | |
Investment | 13 |
| | 375 |
| — |
| | 13 |
|
| | | | | | |
Equity in earnings for the period | 7,566 |
| | 7,844 |
| 8,812 |
| | 7,566 |
|
Amortization of purchase price adjustments (a) | (1,756 | ) | | (1,731 | ) | (1,700 | ) | | (1,756 | ) |
| 5,810 |
| | 6,113 |
| 7,112 |
| | 5,810 |
|
Distributions received (b) | (9,060 | ) | | (8,128 | ) | (10,038 | ) | | (9,060 | ) |
Foreign currency translation adjustment included in “Other comprehensive income (loss), net” and other | (191 | ) | | 4,304 |
| |
Foreign currency translation adjustment included in “Other comprehensive (loss) income, net” and other | | 2,164 |
| | (191 | ) |
Balance at end of period | $ | 51,935 |
| | $ | 57,209 |
| $ | 46,259 |
| | $ | 51,935 |
|
_______________
| |
(a) | Purchase price adjustments that impacted the carrying value of the Company’s investment in TimWen are being amortized over the average original aggregate life of 21 years. |
| |
(b) | The nine months ended October 1, 2017 included a distribution receivable from TimWen of $2,604, which was included in “Accounts and notes receivable, net.” |
Other Investments in Equity Securities
On October 11, 2019, the Company received a $25,000 cash settlement related to a previously held investment.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Indirect Investment in Inspire Brands
In connection with the sale of Arby’s Restaurant Group, Inc. (“Arby’s) during 2011, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”) obtained an 18.5% equity interest in ARG Holding Corporation (“ARG Parent”) (through which Wendy’s Restaurants indirectly retained an 18.5% interest in Arby’s). The carrying value of our investment was reduced to zero during 2013 in connection with the receipt of a dividend.
Our 18.5% equity interest was diluted to 12.3% on February 5, 2018, when a subsidiary of ARG Parent acquired Buffalo Wild Wings, Inc. As a result, our diluted ownership interest included both the Arby’s and Buffalo Wild Wings brands under the newly formed combined company, Inspire Brands, Inc. (“Inspire Brands”). On August 16, 2018, the Company sold its remaining 12.3% ownership interest to Inspire Brands for $450,000 and incurred transaction costs of $79, which were recorded to “Investment income (loss), net.” The Company expects to pay income taxes on the transaction of approximately $95,000 during the fourth quarter of 2018.
(8) Long-Term Debt
Long-term debt consisted of the following:
|
| | | | | | | |
| September 29, 2019 | | December 30, 2018 |
Series 2019-1 Class A-2 Notes: | | | |
3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 | $ | 399,000 |
| | $ | — |
|
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 | 448,875 |
| | — |
|
Series 2018-1 Class A-2 Notes: | | | |
3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025 | 442,125 |
| | 445,500 |
|
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 | 466,688 |
| | 470,250 |
|
Series 2015-1 Class A-2 Notes: | | | |
4.080% Series 2015-1 Class A-2-II Notes, repaid in connection with the June 2019 refinancing | — |
| | 870,750 |
|
4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025 | 480,000 |
| | 483,750 |
|
7% debentures, due in 2025 | 91,722 |
| | 90,769 |
|
Unamortized debt issuance costs | (34,794 | ) | | (32,217 | ) |
| 2,293,616 |
| | 2,328,802 |
|
Less amounts payable within one year | (22,750 | ) | | (23,250 | ) |
Total long-term debt | $ | 2,270,866 |
| | $ | 2,305,552 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Series 2018-1 Class A-2 Notes: | | | |
3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025 | $ | 446,625 |
| | $ | — |
|
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 | 471,438 |
| | — |
|
Series 2015-1 Class A-2 Notes: | | | |
3.371% Series 2015-1 Class A-2-I Notes, repaid with 2018 refinancing | — |
| | 855,313 |
|
4.080% Series 2015-1 Class A-2-II Notes, anticipated repayment date 2022 | 873,000 |
| | 879,750 |
|
4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025 | 485,000 |
| | 488,750 |
|
7% debentures, due in 2025 | 90,454 |
| | 89,514 |
|
Capital lease obligations, due through 2045 | 458,347 |
| | 467,964 |
|
Unamortized debt issuance costs | (33,807 | ) | | (26,889 | ) |
| 2,791,057 |
| | 2,754,402 |
|
Less amounts payable within one year | (31,291 | ) | | (30,172 | ) |
Total long-term debt | $ | 2,759,766 |
| | $ | 2,724,230 |
|
On January 17, 2018,June 26, 2019, Wendy’s Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, completed a debt refinancing transaction under which the Master Issuer issued fixed rate senior secured notes in the following 2018-12019-1 series: Class A-2-I with an initial principal amount of $450,000$400,000 and Class A-2-II with an initial principal amount of $475,000$450,000 (collectively, the “Series 2018-12019-1 Class A-2 Notes”). Interest payments on the Series 2018-12019-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series 2018-12019-1 Class A-2 Notes is in March 2048.June 2049. If the Master Issuer has not repaid or redeemedrefinanced the Series 2018-12019-1 Class A-2 Notes prior to the respective anticipated repayment date, additional interest will accrue on these noteseach tranche of the Series 2019-1 Class A-2 Notes at a rate equal to the greater of (1)(A) 5.00% per annum and (2)(B) a per annum interest rate equal to the excess,amount, if any, by which the sum of (a)(i) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on such anticipated repayment date of the United States Treasury Security having a term closest to 10 years, plus (b)(ii) 5.00%, plus (c) (i)(iii) (1) with respect to the Series 2018-12019-1 Class A-2-I Notes, 1.35%1.863%, and (ii)(2) with respect to the Series 2018-12019-1 Class A-2-II Notes, 1.58%2.051%, exceeds the original interest rate with respect to such tranche. The net proceeds from the sale of the Series 2018-1 Class A-2 Notes were used to redeem the Master Issuer’s outstanding Series 2015-1 Class A-2-IA-2-II Notes to pay prepayment and transaction costs, and for general corporate purposes.were repaid as part of the refinancing transaction. As a result, the Company recorded a loss on early extinguishment of debt of $11,475$7,150 during the nine months ended September 30, 2018,29, 2019, which was comprised of the write-off of certain unamortized deferred financing costs and a specified make-whole payment.costs. The Series 2018-12019-1 Class A-2 Notes have scheduled principal payments of $9,250$4,250 in 2019, $8,500 annually from 20182020 through 2024, $423,2502025, $378,500 in 2025, $4,7502026, $4,500 in each 2026 throughof 2027 and $427,5002028 and $407,250 in 2028.2029.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Concurrently,the Series 2019-1 Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series 2018-12019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2018-12019-1 Class A-1 Notes” and, together with the Series 2018-12019-1 Class A-2 Notes, the “Series 2018-12019-1 Senior Notes”), which allows for the drawing of up to $150,000 on a revolving basis using various credit instruments, including a letter of credit facility. NoNaN amounts were borrowed under the Series 2018-12019-1 Class A-1 Notes during the nine months ended September 30, 2018.29, 2019. The Series 2015-12019-1 Class A-1 Notes replaced the Company’s $150,000 Series 2018-1 Class A-1 Notes, which were canceled on the closing date, and the letters of credit outstanding against the Series 2015-12018-1 Class A-1 Notes were transferred to the Series 2018-12019-1 Class A-1 Notes.
The Series 2018-12019-1 Senior Notes are secured by substantially all of the assets of the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors (the “Guarantors”), excluding certain real estate assets and subject to certain limitations. The Series 2018-12019-1 Senior Notes are subject to the same series of covenants and restrictions as the Company’s outstanding Series 2018-1 Class A-2 Notes and Series 2015-1 SeniorClass A-2 Notes.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
During the nine months ended September 30, 2018,29, 2019, the Company incurred debt issuance costs of $17,672$14,008 in connection with the issuance of the Series 2018-12019-1 Senior Notes. The debt issuance costs are beingwill be amortized to “Interest expense, net” through the anticipated repayment dates of the Series 2018-12019-1 SeniorNotes utilizing the effective interest rate method.
Wendy’s U.S. advertising fund has a revolving line of credit of $25,000. Neither the Company nor Wendy’s is the guarantor of the debt. The advertising fund facility was established to fund the advertising fund operations. During the nine months ended September 30, 2018, the Company borrowed $9,837 and repaid $9,837 and $11,124 under the line of credit. There were 0 borrowings or repayments under the line of credit respectively. Duringduring the nine months ended October 1, 2017, the Company borrowed and repaid $22,675 under the line of credit.September 29, 2019.
(9) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. These inputs are classified into the following hierarchy:
Level 1 Inputs - Quoted prices for identical assets or liabilities in active markets.
Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
| | | September 30, 2018 | | December 31, 2017 | | September 29, 2019 | | December 30, 2018 | |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Fair Value Measurements | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Fair Value Measurements |
Financial assets | | | | | | | | | | | | | | | | |
Cash equivalents | $ | 444,012 |
| | $ | 444,012 |
| | $ | 338 |
| | $ | 338 |
| | Level 1 | $ | 206,094 |
| | $ | 206,094 |
| | $ | 222,228 |
| | $ | 222,228 |
| | Level 1 |
Non-current cost method investments (a) | 640 |
| | 2,409 |
| | 639 |
| | 327,710 |
| | Level 3 | |
Other investments in equity securities (a) | | 639 |
| | 1,818 |
| | 639 |
| | 2,181 |
| | Level 3 |
| | | | | | | | | | | | | | | | |
Financial liabilities | | | | | | | | | | | | | | | | |
Series 2019-1 Class A-2-I Notes (b) | | 399,000 |
| | 405,863 |
| | — |
| | — |
| | Level 2 |
Series 2019-1 Class A-2-II Notes (b) | | 448,875 |
| | 463,598 |
| | — |
| | — |
| | Level 2 |
Series 2018-1 Class A-2-I Notes (b) | 446,625 |
| | 425,678 |
| | — |
| | — |
| | Level 2 | 442,125 |
| | 448,580 |
| | 445,500 |
| | 424,026 |
| | Level 2 |
Series 2018-1 Class A-2-II Notes (b) | 471,438 |
| | 449,186 |
| | — |
| | — |
| | Level 2 | 466,688 |
| | 476,208 |
| | 470,250 |
| | 439,353 |
| | Level 2 |
Series 2015-1 Class A-2-I Notes (b) | — |
| | — |
| | 855,313 |
| | 856,510 |
| | Level 2 | |
Series 2015-1 Class A-2-II Notes (b) | 873,000 |
| | 866,714 |
| | 879,750 |
| | 897,961 |
| | Level 2 | — |
| | — |
| | 870,750 |
| | 865,342 |
| | Level 2 |
Series 2015-1 Class A-2-III Notes (b) | 485,000 |
| | 481,654 |
| | 488,750 |
| | 513,188 |
| | Level 2 | 480,000 |
| | 492,624 |
| | 483,750 |
| | 482,522 |
| | Level 2 |
7% debentures, due in 2025 (b) | 90,454 |
| | 104,500 |
| | 89,514 |
| | 107,000 |
| | Level 2 | 91,722 |
| | 107,500 |
| | 90,769 |
| | 102,750 |
| | Level 2 |
Guarantees of franchisee loan obligations (c) | 22 |
| | 22 |
| | 37 |
| | 37 |
| | Level 3 | 2 |
| | 2 |
| | 17 |
| | 17 |
| | Level 3 |
_______________
| |
(a) | The fair value of our indirect investment in Arby’s as of December 31, 2017 was based on applying a multiple to Arby’s adjusted earnings before income taxes, depreciation and amortization per its current unaudited financial information. The carrying value of our indirect investment in Arby’s was reduced to zero during 2013 in connection with the receipt of a dividend. On February 5, 2018, a subsidiary of ARG Parent acquired Buffalo Wild Wings, Inc. As a result, our ownership interest included both the Arby’s and Buffalo Wild Wings brands under the newly formed combined company, Inspire Brands. On August 16, 2018, the Company sold its remaining ownership interest to Inspire Brands for $450,000. See Note 7 for further information. The fair values of our remaining investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| |
(b) | The fair values were based on quoted market prices in markets that are not considered active markets. |
| |
(c) | Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for equipment financing. We have accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted average risk percentage. |
The carrying amounts of cash, accounts payable and accrued expenses approximated fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximated fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents and guarantees are the only financial assets and liabilities measured and recorded at fair value on a recurring basis.
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, and favorable lease assets and ROU assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair valuevalues of long-lived assets held and used presented in the tables below represents the remaining carrying value and waswere estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance.
Total impairment losses may also include the impact of remeasuring long-lived assets held for sale, which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represents the remaining carrying value and were estimated based on current market values. See Note 10 for further information on impairment of our long-lived assets.
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements |
| September 29, 2019 | | Level 1 | | Level 2 | | Level 3 |
Held and used | $ | 1,866 |
| | $ | — |
| | $ | — |
| | $ | 1,866 |
|
Held for sale | 988 |
| | — |
| | — |
| | 988 |
|
Total | $ | 2,854 |
| | $ | — |
| | $ | — |
| | $ | 2,854 |
|
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements |
| September 30, 2018 | | Level 1 | | Level 2 | | Level 3 |
Held and used | $ | 226 |
| | $ | — |
| | $ | — |
| | $ | 226 |
|
Held for sale | 1,115 |
| | — |
| | — |
| | 1,115 |
|
Total | $ | 1,341 |
| | $ | — |
| | $ | — |
| | $ | 1,341 |
|
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements |
| December 30, 2018 | | Level 1 | | Level 2 | | Level 3 |
Held and used | $ | 462 |
| | $ | — |
| | $ | — |
| | $ | 462 |
|
Held for sale | 1,031 |
| | — |
| | — |
| | 1,031 |
|
Total | $ | 1,493 |
| | $ | — |
| | $ | — |
| | $ | 1,493 |
|
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements |
| December 31, 2017 | | Level 1 | | Level 2 | | Level 3 |
Held and used | $ | 757 |
| | $ | — |
| | $ | — |
| | $ | 757 |
|
Held for sale | 1,560 |
| | — |
| | — |
| | 1,560 |
|
Total | $ | 2,317 |
| | $ | — |
| | $ | — |
| | $ | 2,317 |
|
Total impairment losses for the three and nine months ended September 30, 2018 included remeasuring long-lived assets held and used of $118 and $1,886, respectively, and remeasuring long-lived assets held for sale of $229 and $270, respectively. Total impairment losses for the three and nine months ended October 1, 2017 included remeasuring long-lived assets held and used of $928 and $1,146, respectively, and remeasuring long-lived assets held for sale of $113 and $658, respectively.
(10) Impairment of Long-Lived Assets
During the three and nine months ended September 30, 2018 and October 1, 2017, theThe Company recordedrecords impairment charges on long-lived assets as a result of (1) closing Company-operated restaurants and classifying such surplus properties as held for sale, (2) the deterioration of operating performance of certain Company-operated restaurants and (2)(3) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications. Additionally, during the nine months ended September 30, 2018 and the three and nine months ended October 1, 2017, the Company recorded impairment charges on long-lived assets as a result of the deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in previously impaired restaurants that did not subsequently recover.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets.assets:”
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
Surplus properties | $ | — |
| | $ | 229 |
| | $ | 1,397 |
| | $ | 270 |
|
Company-operated restaurants | — |
| | — |
| | 287 |
| | 1,603 |
|
Restaurants leased or subleased to franchisees | — |
| | 118 |
| | — |
| | 283 |
|
| $ | — |
| | $ | 347 |
| | $ | 1,684 |
| | $ | 2,156 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 |
Surplus properties | $ | 229 |
| | $ | 113 |
| | $ | 270 |
| | $ | 658 |
|
Restaurants leased or subleased to franchisees | 118 |
| | 95 |
| | 283 |
| | 95 |
|
Company-operated restaurants | — |
| | 833 |
| | 1,603 |
| | 1,051 |
|
| $ | 347 |
| | $ | 1,041 |
| | $ | 2,156 |
| | $ | 1,804 |
|
(11) Income Taxes
The Company’s effective tax rate for the three months ended September 29, 2019 and September 30, 2018 was 13.5% and October 1, 2017 was 21.6% and 54.8% respectively. The Company’s effective tax rate variesvaried from the U.S. federal statutory rate of 21% and 35% in the third quarter of 2018 and 2017, respectively, primarily due to (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the three months ended September 29, 2019, (2) a reduction for stock-based compensation, which included net excess tax benefits relatedof $1,103 and $5,251 for the three months ended September 29, 2019 and September 30, 2018, respectively, and (3) an increase due to share-based payments, which resulted in a benefit of $5,251 in the third quarter of 2018, (2) the impact of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), (3) the system optimization initiative provision of $5,019 in 2017, reflecting goodwill adjustments, changes to valuation allowances on state net operating loss carryforwards and state deferred taxes, and (4) state income tax provision in 2017,taxes, including non-recurring changes to state deferred taxes net of federal benefits.
The Company’s effective tax rate for the nine months ended September 29, 2019 and September 30, 2018 was 20.5% and October 1, 2017 was 20.6% and 45.2%, respectively. The Company’s effective tax rate variesvaried immaterially from the U.S. federal statutory rate of 21% and 35% for the first nine months of 2018 and 2017, respectively, primarily due to (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the nine months ended September 29, 2019, (2) a reduction for stock-based compensation, which included net excess tax benefits related to share-based payments, which resulted in a benefit of $4,028 and $12,142 infor the first nine months ofended September 29, 2019 and September 30, 2018, (2)respectively, and (3) an increase due to state income taxes, (3) the impact of the Tax Act and (4) the system optimization initiative in 2017, reflecting goodwill adjustments,including non-recurring changes to valuation allowances on state net operating loss carryforwards and state deferred taxes.taxes net of federal benefits.
On December 22, 2017, the U.S. government enacted the Tax Act. In our continued analysis of the impact of the Tax Act induring the first nine months of 2018 under Staff Accounting Bulletin 118, we have adjusted our provisional amounts for a discrete net tax expense of $2,076. This includesincluded a net expense of $2,426 related to the impact of the corporate rate reduction on our net deferred tax liabilities and a net expense of $991 related to limitations on the deductibility of certain executive compensation, partially offset by $1,341 for the tax benefit of foreign tax credits. The Company considers the impact of the Tax Act related to these items to be final. The impact of the Tax Act on the Company’s state income taxes is not yet final; however, we do not expect any material change to the provisional amounts made for state taxes.
Unrecognized tax benefits for the Company increaseddecreased by $3,554$5,639 and $2,547$6,475 during the three and nine months ended September 30, 2018,29, 2019, respectively. The increasedecrease was primarily related to the salelapse of our ownership interest in Inspire Brands (see Note 7 for further information).statutes of limitations during the third quarter of 2019. During the next twelve months, we believe it is reasonably possible the Company will reduceCompany’s unrecognized tax benefits will decrease by up to $11,241$2,081 due to the lapse of statutes of limitations and expected settlements with taxing authorities.
The current portion of refundable income taxes was $5,851$6,719 and $26,262$14,475 as of September 30, 201829, 2019 and December 31, 2017,30, 2018, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. There were no0 long-term refundable income taxes as of September 30, 201829, 2019 and December 31, 2017.30, 2018.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(12) Net Income Per Share
Basic net income per share was computed by dividing net income amounts by the weighted average number of shares of common sharesstock outstanding.
The weighted average number of shares used to calculate basic and diluted net income per share were as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
Common stock: | | | | | | | |
Weighted average basic shares outstanding | 230,723 |
| | 237,696 |
| | 230,779 |
| | 238,872 |
|
Dilutive effect of stock options and restricted shares | 4,995 |
| | 7,070 |
| | 5,122 |
| | 7,574 |
|
Weighted average diluted shares outstanding | 235,718 |
| | 244,766 |
| | 235,901 |
| | 246,446 |
|
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 |
Common stock: | | | | | | | |
Weighted average basic shares outstanding | 237,696 |
| | 243,354 |
| | 238,872 |
| | 245,073 |
|
Dilutive effect of stock options and restricted shares | 7,070 |
| | 8,383 |
| | 7,574 |
| | 8,103 |
|
Weighted average diluted shares outstanding | 244,766 |
| | 251,737 |
| | 246,446 |
| | 253,176 |
|
Diluted net income per share for the three and nine months ended September 29, 2019 and September 30, 2018 and October 1, 2017 was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of 3,257 and 2,488 for the three and nine months ended September 29, 2019, respectively, and 1,121 and 1,287 for the three and nine months ended September 30, 2018, respectively, and 1,617 and 618 for the three and nine months ended October 1, 2017, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
(13) Stockholders’ Equity
Stockholders’ EquityDividends
The following is a summaryDuring each of the changes in stockholders’ equity:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 |
Balance at beginning of period | $ | 430,539 |
| | $ | 487,049 |
| | $ | 573,203 |
| | $ | 527,736 |
|
Comprehensive income | 396,564 |
| | 23,488 |
| | 436,347 |
| | 52,978 |
|
Cash dividends ($.085 and $.07 per share for the three months and $.255 and $.21 per share for the nine months ended September 30, 2018 and October 1, 2017, respectively) | (20,141 | ) | | (17,017 | ) | | (60,786 | ) | | (51,464 | ) |
Repurchases of common stock | (56,421 | ) | | (38,463 | ) | | (141,615 | ) | | (90,964 | ) |
Share-based compensation | 4,810 |
| | 4,984 |
| | 14,401 |
| | 16,356 |
|
Exercises of stock options | 29,075 |
| | 4,033 |
| | 35,889 |
| | 10,194 |
|
Vesting of restricted shares | (1,168 | ) | | (1,528 | ) | | (4,089 | ) | | (4,260 | ) |
Cumulative effect of change in accounting principle (a) | — |
| | — |
| | (70,210 | ) | | 1,880 |
|
Other | 60 |
| | 49 |
| | 178 |
| | 139 |
|
Balance at end of period | $ | 783,318 |
| | $ | 462,595 |
| | $ | 783,318 |
| | $ | 462,595 |
|
_______________
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| |
(a) | During the nine months ended September 30, 2018, the Company recognized a net increase to “Accumulated deficit” of $70,210 as a result of adoption of amended guidance for revenue recognition. The net increase resulted from an increase to deferred franchise fees of $85,561 and a decrease to “Deferred income taxes” of $21,996 as a result of now deferring franchise fees over the contractual term of the franchise agreements. Additionally, an increase to “Advertising funds restricted liabilities” of $6,645 was recognized as a result of a reclassification of the total stockholders’ deficit of the Advertising Funds as of December 31, 2017. See Note 2 for further information. |
During the nine months ended October 1, 2017,2019, the Company recognized a tax benefit as a reduction topaid quarterly cash dividends of $.10 per share. During each of the Company’s deferred tax liability with an equal offsetting increase to “Accumulated deficit.” The adjustment was recognized as a resultfirst three quarters of adoption2018, the Company paid quarterly cash dividends of an amendment to the accounting for employee share-based payment transactions.$.085 per share.
Repurchases of Common Stock
In February 2019, our Board of Directors authorized a repurchase program for up to $225,000 of our common stock through March 1, 2020, when and if market conditions warrant and to the extent legally permissible. In connection with the February 2019 authorization, the Company’s previous November 2018 repurchase authorization for up to $220,000 of our common stock was canceled. During the nine months ended September 29, 2019, the Company repurchased 4,153 shares with an aggregate purchase price of $76,165, of which $1,102 was accrued at September 29, 2019, and excluding commissions of $58, under the November 2018 and February 2019 authorizations. As of September 29, 2019, the Company had $170,292 of availability remaining under its February 2019 authorization. Subsequent to September 29, 2019 through October 30, 2019, the Company repurchased 443 shares under the February 2019 authorization with an aggregate purchase price of $9,190, excluding commissions of $6. As part of the February 2019 authorization, the Company announced on October 11, 2019 its intention to launch a $100,000 accelerated share repurchase program during the fourth quarter of 2019.
In February 2018, our Board of Directors authorized a repurchase program for up to $175,000 of our common stock through March 3, 2019, when and if market conditions warrantwarranted and to the extent legally permissible. In August 2018, our Board of Directors authorized an additional share repurchase program for up to $100,000 of our common stock through December 27, 2019 with a portion of the proceeds obtained through the sale of our ownership interest in Inspire Brands, when and if market conditions warrant and to the extent legally permissible. During the nine months ended September 30, 2018, the Company repurchased 6,896 shares under the February 2018 repurchase authorization with an aggregate purchase price of $118,866, of which $2,675 was accrued at September 30, 2018, and excluding commissions of $97. As of September 30, 2018, the Company had $56,134 of availability remaining under its February 2018 authorization and $100,000 remaining under its August 2018 authorization. Subsequent to September 30, 2018 through October 31, 2018, the Company repurchased 1,596 shares under the February 2018 authorization with an aggregate purchase price of $27,288, excluding commissions of $22. In addition, subsequent to September 30, 2018, the Board of Directors approved an increase of $120,000 to the August 2018 authorization, which now totals $220,000 and expires on December 27, 2019.
In February 2017, our Board of Directors authorized a repurchase program for up to $150,000 of our common stock through March 4, 2018, when and if market conditions warranted and to the extent legally permissible. DuringAdditionally, during the nine months ended September 30, 2018, the Company completed theits previous February 2017 repurchase authorization for up to $150,000 programof our common stock with the repurchase of 1,385 shares with an aggregate purchase price of $22,633, excluding commissions of $19. During the nine months ended October 1, 2017, the Company repurchased 6,131 shares with an aggregate purchase price
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Accumulated Other Comprehensive Loss
The following table provides a rollforward of the components of accumulated other comprehensive loss, net of tax as applicable:
|
| | | | | | | | | | | |
| Foreign Currency Translation | | Pension | | Total |
Balance at December 30, 2018 | $ | (61,673 | ) | | $ | — |
| | $ | (61,673 | ) |
Current-period other comprehensive income | 7,563 |
| | — |
| | 7,563 |
|
Balance at September 29, 2019 | $ | (54,110 | ) | | $ | — |
| | $ | (54,110 | ) |
| | | | | |
Balance at December 31, 2017 | $ | (45,149 | ) | | $ | (1,049 | ) | | $ | (46,198 | ) |
Current-period other comprehensive (loss) income | (5,054 | ) | | 117 |
| | (4,937 | ) |
Balance at September 30, 2018 | $ | (50,203 | ) | | $ | (932 | ) | | $ | (51,135 | ) |
|
| | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Cash Flow Hedges (a) | | Pension | | Total |
Balance at December 31, 2017 | $ | (45,149 | ) | | $ | — |
| | $ | (1,049 | ) | | $ | (46,198 | ) |
Current-period other comprehensive (loss) income | (5,054 | ) | | — |
| | 117 |
| | (4,937 | ) |
Balance at September 30, 2018 | $ | (50,203 | ) | | $ | — |
| | $ | (932 | ) | | $ | (51,135 | ) |
| | | | | | | |
Balance at January 1, 2017 | $ | (60,299 | ) | | $ | (1,797 | ) | | $ | (1,145 | ) | | $ | (63,241 | ) |
Current-period other comprehensive income | 16,797 |
| | 1,332 |
| | 96 |
| | 18,225 |
|
Balance at October 1, 2017 | $ | (43,502 | ) | | $ | (465 | ) | | $ | (1,049 | ) | | $ | (45,016 | ) |
(14) Leases
| |
(a) | Current-period other comprehensive income included the reclassification of unrealized losses on cash flow hedges from “Accumulated other comprehensive loss” to our condensed consolidated statements of operations of $444 and $1,332 for the three and nine months ended October 1, 2017, respectively. The reclassification of unrealized losses on cash flow hedges consisted of $723 and $2,170 for the three and nine months ended October 1, 2017, respectively, recorded to “Interest expense, net,” net of the related income tax benefit of $279 and $838 for the three and nine months ended October 1, 2017, respectively, recorded to “Provision for income taxes.” |
Nature of Leases
The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At September 29, 2019, Wendy’s and its franchisees operated 6,743 Wendy’s restaurants. Of the 356 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 143 restaurants, owned the building and held long-term land leases for 144 restaurants and held leases covering the land and building for 69 restaurants. Wendy’s also owned 512 and leased 1,255 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.
Determination of Whether a Contract Contains a Lease
The Company evaluates the contracts it enters into to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.
ROU Model and Determination of Lease Term
The Company uses the ROU model to account for leases where the Company is the lessee, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the initial measurement of the lease liability, adjusted for any favorable or unfavorable terms for leases acquired from franchisees, as well as payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, the Company includes option periods that it is reasonably certain to exercise as failure to renew the lease would impose a significant economic detriment. For properties used for Company-operated restaurants, the primary economic detriment relates to the existence of unamortized leasehold improvements which might be impaired if we choose not to exercise the available renewal options. The lease term for properties leased or subleased to franchisees is determined based upon the economic detriment to the franchisee and includes consideration of the length of the franchise agreement, historical performance of the restaurant and the existence of bargain renewal options. Lease terms for real estate are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(14)Operating Leases
At September 30, 2018, Wendy’sFor operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are recognized as rent expense where the Company is a lessee, or income where the Company is a lessor, as applicable, on a straight-line basis (“Straight-Line Rent”) over the applicable lease terms. There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and its franchisees operated 6,669 Wendy’s restaurants. Ofends on the 350 Company-operated Wendy’s restaurants, Wendy’s ownedrent commencement date. During a Rent Holiday, no cash rent payments are typically due under the landterms of the lease; however, expense is recorded for that period on a straight-line basis. The excess of the Straight-Line Rent over the minimum rents paid is included in the ROU asset where the Company is a lessee. The excess of the Straight-Line Rent over the minimum rents received is recorded as a deferred lease asset and buildingis included in “Other assets” where the Company is a lessor. Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or the asset is earned.
Lease cost for 145 restaurants, ownedoperating leases is recognized on a straight-line basis and includes the buildingamortization of the ROU asset and held long-term landinterest expense related to the operating lease liability. Variable lease cost for operating leases includes Contingent Rent and payments for executory costs such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. Short-term lease cost for operating leases includes rental expense for leases with a term of less than 12 months. Lease costs are recorded in the condensed consolidated statements of operations based on the nature of the underlying lease as follows: (1) rental expense related to leases for 141Company-operated restaurants and held leases covering land and buildingis recorded to “Cost of sales,” (2) rental expense for 64 restaurants. Wendy’s also owned 519 and leased 1,281 properties that were eitherare subsequently subleased to franchisees is recorded to “Franchise rental expense” and (3) rental expense related to leases for corporate offices and equipment is recorded to “General and administrative.”
Favorable and unfavorable lease amounts for operating leases where the Company is the lessor are recorded as components of “Other intangible assets” and “Other liabilities,” respectively. Favorable and unfavorable lease amounts are amortized on a straight-line basis over the term of the leases. When the expected term of a lease is determined to be shorter than the original amortization period, the favorable or unfavorable lease balance associated with the lease is adjusted to reflect the revised lease term.
Rental income and favorable and unfavorable lease amortization for operating leases on properties leased or subleased principally to franchisees.
Rental expensefranchisees is recorded to “Franchise rental income.” Lessees’ variable payments to the Company for executory costs under operating leases consistsare recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”
Finance Leases
Lease cost for finance leases includes the amortization of the following components:ROU asset, which is amortized on a straight-line basis and recorded to “Depreciation and amortization,” and interest expense on the finance lease liability, which is calculated using the interest method and recorded to “Interest expense, net.”
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 |
Rental expense: | | | | | | | |
Minimum rentals | $ | 22,814 |
| | $ | 23,997 |
| | $ | 72,738 |
| | $ | 66,701 |
|
Contingent rentals | 5,061 |
| | 5,395 |
| | 14,522 |
| | 14,405 |
|
Total rental expense (a) (b) | $ | 27,875 |
| | $ | 29,392 |
| | $ | 87,260 |
| | $ | 81,106 |
|
Sales-Type and Direct Financing Leases_______________
| |
(a) | Amounts include rental expense related to (1) leases for Company-operated restaurants recorded to “Cost of sales,” (2) leased properties that are subsequently leased to franchisees recorded to “Franchise rental expense” and (3) leases for corporate offices and equipment recorded to “General and administrative.” |
| |
(b) | Amounts exclude sublease income of $34,097 and $103,353 recognized during the three and nine months ended September 30, 2018, respectively, and $35,022 and $92,434 recognized during the three and nine months ended October 1, 2017, respectively. |
Rental income for operatingFor sales-type and direct financing leases and subleases consistswhere the Company is the lessor, the Company records its investment in properties leased to franchisees on a net basis, which is comprised of the following components:present value of the lease payments not yet received and the present value of the guaranteed and unguaranteed residual assets. The current and long-term portions of our net investment in sales-type and direct financing leases are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. Unearned income is recognized as interest income over the lease term and is included in “Interest expense, net.” Sales-type leases result in the recognition of gain or loss at the commencement of the lease, which is recorded to “Other operating income, net.” The gain or loss recognized upon commencement of the lease is directly affected by the Company’s estimate of the amount to be derived from the guaranteed and unguaranteed residual assets at the end of the lease term. The Company’s main component of this estimate is the expected fair value of the underlying assets, primarily the fair value of land. Lessees’ variable payments to the Company for executory costs under sales-type and direct financing leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2018 | | October 1, 2017 | | September 30, 2018 | | October 1, 2017 |
Rental income: | | | | | | | |
Minimum rentals | $ | 45,291 |
| | $ | 44,682 |
| | $ | 137,549 |
| | $ | 124,847 |
|
Contingent rentals | 5,183 |
| | 5,593 |
| | 14,561 |
| | 15,280 |
|
Total rental income | $ | 50,474 |
| | $ | 50,275 |
| | $ | 152,110 |
| | $ | 140,127 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Significant Assumptions and Judgments
Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, property lives, discount rates and probable term, all of which can impact (1) the classification and accounting for a lease or sublease as operating or finance, including sales-type and direct financing, (2) the Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent, (3) the term over which leasehold improvements for each restaurant are amortized and (4) the values and lives of adjustments to the initial ROU asset where the Company is the lessee, or favorable and unfavorable leases where the Company is the lessor. The amount of depreciation and amortization, interest and rent expense and income reported would vary if different estimates and assumptions were used.
Company as Lessee
The following table illustrates the Company’s future minimum rental payments and rental receipts for non-cancelable leases and subleases, including rental receipts for direct financing leasescomponents of lease cost are as of September 30, 2018. Rental receipts below are presented separately for owned properties and for leased properties based on the classification of the underlying lease.follows:
|
| | | | | | | | | | | | | | | | | | | |
| Rental Payments | | Rental Receipts |
Fiscal Year | Capital Leases | | Operating Leases | | Capital Leases | | Operating Leases | | Owned Properties |
2018 (a) | $ | 12,967 |
| | $ | 25,217 |
| | $ | 16,007 |
| | $ | 18,911 |
| | $ | 13,488 |
|
2019 | 45,323 |
| | 95,216 |
| | 64,376 |
| | 76,044 |
| | 54,736 |
|
2020 | 46,252 |
| | 94,079 |
| | 65,467 |
| | 75,810 |
| | 55,348 |
|
2021 | 47,849 |
| | 93,580 |
| | 67,267 |
| | 75,771 |
| | 56,943 |
|
2022 | 48,937 |
| | 93,304 |
| | 68,451 |
| | 76,222 |
| | 58,514 |
|
Thereafter | 751,317 |
| | 1,145,074 |
| | 1,034,322 |
| | 935,083 |
| | 948,620 |
|
Total minimum payments | $ | 952,645 |
| | $ | 1,546,470 |
| | $ | 1,315,890 |
| | $ | 1,257,841 |
| | $ | 1,187,649 |
|
Less interest | (494,298 | ) | | | | | | | | |
Present value of minimum capital lease payments (b) | $ | 458,347 |
| | | | | | | | |
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2019 | | September 29, 2019 |
Finance lease cost: | | | |
Amortization of finance lease assets | $ | 3,201 |
| | $ | 7,949 |
|
Interest on finance lease liabilities | 10,116 |
| | 26,808 |
|
| 13,317 |
| | 34,757 |
|
Operating lease cost | 23,358 |
| | 67,087 |
|
Variable lease cost (a) | 15,435 |
| | 44,910 |
|
Short-term lease cost | 1,141 |
| | 3,420 |
|
Total operating lease cost (b) | 39,934 |
| | 115,417 |
|
Total lease cost | $ | 53,251 |
| | $ | 150,174 |
|
_______________
| |
(a) | Represents future minimum rental paymentsThe three and rental receiptsnine months ended September 29, 2019 includes expenses for non-cancelable leasesexecutory costs of $9,908 and subleases$29,211, respectively, for which the remainder of the 2018 fiscal year.Company is reimbursed by sublessees. |
| |
(b) | The present valuethree and nine months ended September 29, 2019 includes $32,342 and $92,815, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees and $6,892 and $20,492, respectively, recorded to “Cost of minimum capital lease payments of $8,041 and $450,306 are included in “Current portion of long-term debt” and “Long-term debt,” respectively.sales” for leases for Company-operated restaurants. |
Properties owned by the CompanyThe following table includes supplemental cash flow and leased to franchisees and other third parties under operating leases include:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Land | $ | 272,730 |
| | $ | 272,411 |
|
Buildings and improvements | 313,706 |
| | 313,108 |
|
Restaurant equipment | 2,443 |
| | 2,444 |
|
| 588,879 |
| | 587,963 |
|
Accumulated depreciation and amortization | (139,802 | ) | | (128,003 | ) |
| $ | 449,077 |
| | $ | 459,960 |
|
Our net investment in direct financing leases is as follows:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Future minimum rental receipts | $ | 633,039 |
| | $ | 662,889 |
|
Unearned interest income | (406,230 | ) | | (433,175 | ) |
Net investment in direct financing leases | 226,809 |
| | 229,714 |
|
Net current investment in direct financing leases (a) | (660 | ) | | (625 | ) |
Net non-current investment in direct financing leases | $ | 226,149 |
| | $ | 229,089 |
|
_______________
| |
(a) | Included in “Accounts and notes receivable, net.” |
During the three and nine months ended September 30, 2018, the Company recognized $6,844 and $20,861 in interest incomenon-cash information related to our direct financing leases, respectively, and $6,467 and $16,312 recognized during the three and nine months ended October 1, 2017, respectively, which is included in “Interest expense, net,”
leases:
28 |
| | | |
| Nine Months Ended |
| September 29, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from finance leases | $ | 29,683 |
|
Operating cash flows from operating leases | 69,277 |
|
Financing cash flows from finance leases | 5,178 |
|
Right-of-use assets obtained in exchange for lease obligations: | |
Finance lease liabilities | 34,084 |
|
Operating lease liabilities | 8,212 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table includes supplemental information related to leases:
|
| | |
| September 29, 2019 |
Weighted-average remaining lease term (years): | |
Finance leases | 17.3 |
|
Operating leases | 15.5 |
|
| |
Weighted average discount rate: | |
Finance leases | 10.03 | % |
Operating leases | 5.10 | % |
The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of September 29, 2019:
|
| | | | | | | | | | | | | | | |
| Finance Leases | | Operating Leases |
Fiscal Year | Company-Operated | | Franchise and Other | | Company-Operated | | Franchise and Other |
2019 (a) | $ | 707 |
| | $ | 12,759 |
| | $ | 5,001 |
| | $ | 17,602 |
|
2020 | 2,862 |
| | 45,340 |
| | 19,921 |
| | 70,690 |
|
2021 | 2,973 |
| | 46,826 |
| | 19,733 |
| | 70,540 |
|
2022 | 3,023 |
| | 47,830 |
| | 19,421 |
| | 70,696 |
|
2023 | 2,975 |
| | 49,504 |
| | 19,400 |
| | 70,655 |
|
Thereafter | 39,104 |
| | 704,276 |
| | 201,762 |
| | 827,387 |
|
Total minimum payments | $ | 51,644 |
| | $ | 906,535 |
| | $ | 285,238 |
| | $ | 1,127,570 |
|
Less interest | (23,407 | ) | | (452,484 | ) | | (88,577 | ) | | (369,544 | ) |
Present value of minimum lease payments (b) (c) | $ | 28,237 |
| | $ | 454,051 |
| | $ | 196,661 |
| | $ | 758,026 |
|
_______________
| |
(a) | Represents future minimum rental payments for non-cancelable leases for the remainder of 2019. |
| |
(b) | The present value of minimum finance lease payments of $10,584 and $471,704 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively. |
| |
(c) | The present value of minimum operating lease payments of $43,474 and $911,213 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of December 30, 2018:
|
| | | | | | | | | | | | | | | |
| Finance Leases | | Operating Leases |
Fiscal Year | Company-Operated | | Franchise and Other | | Company-Operated | | Franchise and Other |
2019 | $ | 1,962 |
| | $ | 45,125 |
| | $ | 20,174 |
| | $ | 75,703 |
|
2020 | 1,978 |
| | 43,969 |
| | 20,052 |
| | 73,320 |
|
2021 | 2,082 |
| | 45,522 |
| | 19,820 |
| | 73,167 |
|
2022 | 2,114 |
| | 46,573 |
| | 19,530 |
| | 73,300 |
|
2023 | 2,084 |
| | 48,109 |
| | 19,430 |
| | 73,377 |
|
Thereafter | 23,558 |
| | 676,139 |
| | 203,073 |
| | 854,964 |
|
Total minimum payments | $ | 33,778 |
| | $ | 905,437 |
| | $ | 302,079 |
| | $ | 1,223,831 |
|
Less interest | (16,874 | ) | | (466,705 | ) | | | | |
Present value of minimum lease payments (a) | $ | 16,904 |
| | $ | 438,732 |
| | | | |
_______________
| |
(a) | The present value of minimum finance lease payments of $8,405 and $447,231 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively. |
Company as Lessor
The components of lease income are as follows:
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2019 | | September 29, 2019 |
Sales-type and direct-financing leases: | | | |
Selling (loss) profit | $ | (97 | ) | | $ | 1,874 |
|
Interest income | 7,240 |
| | 19,045 |
|
| | | |
Operating lease income | $ | 44,892 |
| | $ | 134,056 |
|
Variable lease income | 15,026 |
| | 42,875 |
|
Franchise rental income (a) | $ | 59,918 |
| | $ | 176,931 |
|
_______________
| |
(a) | Includes sublease income of $44,821 and $130,763 recognized during the three and nine months ended September 29, 2019, respectively, of which $9,683 and $28,894, respectively, represents lessees’ variable payments to the Company for executory costs. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of September 29, 2019:
|
| | | | | | | | | | | | | | | |
| Sales-Type and Direct Financing Leases | | Operating Leases |
Fiscal Year | Subleases | | Owned Properties | | Subleases | | Owned Properties |
2019 (a) | $ | 6,953 |
| | $ | 489 |
| | $ | 27,614 |
| | $ | 13,129 |
|
2020 | 28,528 |
| | 2,036 |
| | 111,227 |
| | 52,912 |
|
2021 | 29,668 |
| | 2,068 |
| | 111,946 |
| | 54,700 |
|
2022 | 30,342 |
| | 2,148 |
| | 113,017 |
| | 56,173 |
|
2023 | 31,381 |
| | 2,192 |
| | 114,021 |
| | 56,378 |
|
Thereafter | 486,141 |
| | 27,115 |
| | 1,339,940 |
| | 861,865 |
|
Total future minimum receipts | 613,013 |
| | 36,048 |
| | $ | 1,817,765 |
| | $ | 1,095,157 |
|
Unearned interest income | (376,192 | ) | | (19,472 | ) | | | | |
Net investment in sales-type and direct financing leases (b) | $ | 236,821 |
| | $ | 16,576 |
| | | | |
_______________
| |
(a) | Represents future minimum rental receipts for non-cancelable leases for the remainder of 2019. |
| |
(b) | The present value of minimum direct financing rental receipts of $2,795 and $250,602 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. The present value of minimum direct financing rental receipts includes a net investment in unguaranteed residual assets of $195. |
The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of December 30, 2018:
|
| | | | | | | | | | | | | | | |
| Sales-Type and Direct Financing Leases | | Operating Leases |
Fiscal Year | Subleases | | Owned Properties | | Subleases | | Owned Properties |
2019 | $ | 26,239 |
| | $ | 1,937 |
| | $ | 113,180 |
| | $ | 52,527 |
|
2020 | 26,859 |
| | 2,006 |
| | 113,578 |
| | 53,066 |
|
2021 | 27,904 |
| | 2,043 |
| | 114,447 |
| | 54,615 |
|
2022 | 28,563 |
| | 2,119 |
| | 115,552 |
| | 56,092 |
|
2023 | 29,512 |
| | 2,159 |
| | 116,463 |
| | 56,284 |
|
Thereafter | 448,851 |
| | 26,404 |
| | 1,372,646 |
| | 858,755 |
|
Total future minimum receipts | 587,928 |
| | 36,668 |
| | $ | 1,945,866 |
| | $ | 1,131,339 |
|
Unearned interest income | (377,046 | ) | | (20,338 | ) | | | | |
Net investment in sales-type and direct financing leases (a) | $ | 210,882 |
| | $ | 16,330 |
| | | | |
_______________
| |
(a) | The present value of minimum direct financing rental receipts of $735 and $226,477 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Properties owned by the Company and leased to franchisees and other third parties under operating leases include:
|
| | | |
| September 29, 2019 |
Land | $ | 281,744 |
|
Buildings and improvements | 310,936 |
|
Restaurant equipment | 1,726 |
|
| 594,406 |
|
Accumulated depreciation and amortization | (153,379 | ) |
| $ | 441,027 |
|
(15) Transactions with Related Parties
Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K.
TimWen Lease and Management Fee Payments
A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. During the nine months ended September 29, 2019 and September 30, 2018, and October 1, 2017, Wendy’s paid TimWen $9,967$12,710 and $9,362,$9,967, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $161$155 and $158$161 during the nine months ended September 29, 2019 and September 30, 2018, and October 1, 2017, respectively, which has been included as a reduction to “General and administrative.”
(16) Guarantees and Other Commitments and Contingencies
TheExcept 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.
Franchisee Image Activation Incentive Programs
In order to promote Image Activation new restaurant development, Wendy’s has an incentive program for franchisees that provides for reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants opened by December 31, 2020, with the value of the incentives declining in the later years of the program. In August 2018, Wendy’s announced a new restaurant development incentive program that provides for reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants for franchisees that sign up for the program and commit to incremental development under a new development agreement by July 1, 2019. Wendy’s also had incentive programs for 2017 available to franchisees that commenced Image Activation restaurant remodels by December 15, 2017. The remodel incentive programs provide for reductions in royalty payments for one year after the completion of construction.
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 $51,309$74,898 as of September 30, 2018.29, 2019. These leases extend through 2056. We have not received any notice of default related to these leases as of September 30, 2018.29, 2019. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations.
Wendy’s is contingently liable for certain other leases which have been assigned to unrelated third parties who have indemnified Wendy’s against future liabilities amounting to $365 as of September 30, 2018. These leases expire on various dates through 2021.
Letters of Credit
As of September 30, 2018,29, 2019, the Company had outstanding letters of credit with various parties totaling $27,102.$25,082. The outstanding letters of credit include amounts outstanding against the Series 2018-12019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Purchase and Capital Commitments
Beverage Agreement
The Company has an agreement with a beverage vendor that provides fountain beverage products and certain marketing support funding to the Company and its franchisees. This agreement requires minimum purchases of certain fountain beverages (“Fountain Beverages”) by the Company and its franchisees at certain agreed upon prices until the total contractual gallon volume usage is reached. This agreement also provides for an annual advance to be paid to the Company based on the vendor’s expectation of the Company’s annual Fountain Beverages usage, which is amortized over actual usage during the year. In January 2019, the Company amended its contract with the beverage vendor, which now expires at the later of reaching a threshold usage requirement or December 31, 2025. Beverage purchases made by the Company under this agreement during the nine months ended September 29, 2019 were $8,417. As of September 29, 2019, the Company estimates future purchases to be approximately $2,700 for the remainder of 2019, $10,800 in 2020, $11,100 in 2021, $11,600 in 2022 and $12,100 in 2023 based on current pricing and the expected ratio of usage at Company-operated restaurants to usage at franchised restaurants.
(17) Legal and Environmental Matters
We areThe Company is involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate accruals for continuing operations for all of our legal and environmental matters. We cannot estimate the aggregate possible range of loss duefor various reasons, including, but not limited to, mostmany proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur andand/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 Company’s Annual Report on Form 10-K filed with10-K. Except as set forth below, there were no material developments in those legal proceedings as of September 29, 2019.
As previously reported, the SEC on February 28, 2018. The Company was previously named as a defendant in putative class action lawsuits alleging, among other things, that the Company failed to safeguard customer credit card information and failed to provide notice that credit card information had been compromised. Jonathan Torres and other consumers filed an action in the U.S. District Court for the Middle District of Florida (the “Torres Case”). The operative complaint seeks to certifyOn August 23, 2018, the court preliminarily approved a nationwide classclass-wide settlement. A final approval hearing of consumers, or in the alternative, statewide classessettlement of consumers for Florida, New York, New Jersey, Texasthe Torres Case was held on February 26, 2019, and Tennessee,final approval was granted by the court. At this time, the action has been dismissed with prejudice (with no appeal taken), all claims and other amounts payable per the terms of the settlement agreement have been paid, and the matter is considered closed.
Also as well as statewide classes of consumers under those states’ consumer protection and unfair trade practices laws. Certainpreviously reported, certain financial institutions have also filed class actionactions lawsuits in the U.S. District Court for the Western District of Pennsylvania, which seeksought to certify a nationwide class of financial institutions that issued payment cards that were allegedly impacted. Those cases were consolidated into a single case (the “FI Case”). InOn February 13, 2019, the Torres CaseCompany and the plaintiffs filed a settlement agreement and a motion for preliminary approval of a class-wide settlement of the FI Case with the plaintiffs seek monetary damages, injunctivecourt. Under the terms of the settlement agreement, if approved and equitable relief,finalized, a settlement class of financial institutions will receive $50,000, inclusive of attorneys’ fees and other costs. After exhaustion of applicable insurance, the Company now expects to pay approximately $25,000 of this amount. In exchange, the Company and its franchisees will receive a full release of all claims that have or could have been brought by financial institutions who do not opt out of the settlement related to the cybersecurity incidents described herein. On August 23, 2018,February 26, 2019, the court preliminarily approved classthe settlement in the Torres case. Aagreement and scheduled a final approval hearing for November 6, 2019. The settlement agreement remains subject to a notice and objection process and final court approval. If approved, the Company anticipates that payment will occur in early 2020. The Company recorded a liability of $50,000 and insurance receivables of $22,500 for the FI case during 2018. As a result of cost savings related to the settlement of the Torres settlement is scheduled for February 25, 2019. On August 27, 2018,Case in the three months ended September 29, 2019, the Company filed a motionadjusted its insurance receivables for judgment on the pleadings in the FI Case, seeking dismissal of the plaintiffs’ negligence and negligence per se claims under Ohio law. That motion is pending before the court. Discovery as between the parties in the FI Case is stayed while settlement discussions are occurring.case to approximately $25,000.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations.
Introduction
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 201730, 2018 (the “Form 10-K”). There have been no material changes as of September 30, 201829, 2019 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II - Other Information” preceding Item 1 of Part II of this report. You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchises and operates Wendy’s® quick-service restaurants specializing in hamburger sandwiches throughout North America (defined as the United States of America (“U.S.”) and Canada). Wendy’s also has franchised restaurants in 30 foreign countries and U.S. territories.
Each Wendy’s restaurants offerrestaurant 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, chicken tenders, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited time basis. Wendy’s also currently offers breakfast in more than 300 restaurants in the United States.
The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s restaurants in North America comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material. The results of operations discussed below may not necessarily be indicative of future results.
The Company reports on aCompany’s fiscal year consistingreporting periods consist of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.
We adopted the new accounting guidance for revenue recognitionleases effective January 1,December 31, 2018, which had a material impact on our condensed consolidated financial statements. Beginning with the first quarter of 2018,2019, our financial condition and results of operations reflect adoption of the guidance; however, prior period results were not restated. See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
Executive Overview
Our Business
As of September 30, 2018,29, 2019, the Wendy’s restaurant system was comprised of 6,6696,743 restaurants, of which 350356 were owned and operated by the Company. All of our Company-operated restaurants are located in the United States.
Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and decreased consumer spending levels, general economic and market trends and weather.
Wendy’s long-term growth opportunities include (1) systemwide same-restaurant sales growth through continuing core menu improvement, product innovation, customer count growth and strategic price increases on our menu items, (2) system investment in our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants and focused execution of operational excellence, (3) growth in new restaurants, including global growth, (4) increased focus on consumer-facing digital platforms and technologies, (5) increased restaurant utilization in various dayparts, including the Company’s recent announcement of its plan to launch breakfast across the U.S. system in the first quarter of 2020 (see “Breakfast Launch” below), (6) strengthening our operations through our system optimization initiative and brand access utilizing mobile technology, (5)(7) building shareholderstockholder value through financial management strategies and (6) our system optimization initiative.strategies.
Key Business Measures
We track our results of operations and manage our business using the following key business measures:measures, which includes a non-GAAP financial measure:
Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes. Same-restaurant sales exclude the impact of currency translation.
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 restaurantrestaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company believes systemwide sales data is useful in assessing consumer demand for the Company’s products, the overall success of the Wendy’s brand and, ultimately, the performance of the Company. The Company’s royalty revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty revenues and therefore on the Company’s profitability.
The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.
Same-restaurant sales and systemwide sales exclude sales from Venezuela and, beginning in the third quarter of 2018, exclude sales from Argentina, due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.
The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.
Indirect Investment in Inspire BrandsBreakfast Launch
In connection with the sale of Arby’s Restaurant Group, Inc. (“Arby’s) during 2011, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”) obtained an 18.5% equity interest in ARG Holding Corporation (“ARG Parent”) (through which Wendy’s Restaurants indirectly retained an 18.5% interest in Arby’s). The carrying value of our investment was reduced to zero during 2013 in connection with the receipt of a dividend.
Our 18.5% equity interest was diluted to 12.3% on February 5, 2018, when a subsidiary of ARG Parent acquired Buffalo Wild Wings, Inc. As a result, our diluted ownership interest included both the Arby’s and Buffalo Wild Wings brands under the newly formed combined company, Inspire Brands, Inc. (“Inspire Brands”). On August 16, 2018,September 2019, the Company sold its remaining 12.3% ownership interestannounced that it plans to Inspire Brands for $450.0 million and incurred transaction costslaunch breakfast across the U.S. system in the first quarter of $0.1 million, which were recorded to “Investment income (loss), net.”2020. The Company expects to pay income taxes on the transactionmake one-time investments during 2019 of approximately $95.0$20.0 million duringto support the fourth quarterU.S. system in preparation of 2018.the national launch. The 2019 investments are primarily comprised of (1) the purchase of smallwares and menuboards for franchisees and (2) a national recruiting advertising campaign and other talent acquisition costs.
Other Investments in Equity Securities
On October 11, 2019, the Company received a $25.0 million cash settlement related to a previously held investment.
General and Administrative (“G&A”) Realignment
In May 2017, the Company initiated a plan to further reduce its G&A expenses. TheAdditionally, the Company expectsannounced in May 2019 changes to its leadership structure that approximately three-quartersincludes 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 total G&A expense reduction of approximately $35.0 million will be realized byChief Operations Officer position. During the end ofnine months ended September 29, 2019 and September 30, 2018, with the remainder of the savings being realized in 2019. The Company expects to incur totalrecognized costs aggregating approximately $30.0 million to $33.0 million, of which $23.0 million to $27.0 million will be cash expenditures, related to such savings. The cash expenditures are expected to continue into 2019, with approximately half of the total cash expenditures occurring in 2018. Costs related to the plan are recorded to “Reorganizationtotaling $4.7 million and realignment costs.” The Company recognized costs totaling $6.4 million, during the first nine months of 2018,respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $4.5$2.7 million, comprised of (1) severance and related employee costs of approximately $1.0$1.9 million, (2) recruitment and relocation costs of approximately $2.0$0.4 million, (3) third-party and other costs of approximately $0.5$0.1 million and (4) share-based compensation of approximately $1.0$0.3 million. The Company expects to continueincur total costs aggregating approximately $35.0 million to recognize costs associated with$38.0 million, of which $26.0 million to $29.0 million will be cash expenditures, related to the plan. The Company expects to realize a total G&A expense reduction through the plan into 2019.of approximately $35.0 million.
Cybersecurity Incident
As a result of the realignment of our management and operating structure as described above, the Company is continuing to evaluate the impact these changes will have on its existing operating segment structure. The Company first reported unusual payment card activity affecting some franchise-owned restaurants in February 2016 and that malware had been discovered on certain systems. Subsequently, on June 9, 2016, the Company reported that an additional malware variant had been identified and disabled. On July 7, 2016, the Company, on behalf of affected franchise locations, provided information about specific restaurant locations that may have been impacted by these attacks, all of which are locatedcurrently expects to report its results in the United States, alongfollowing three segments beginning with support for customers who may have been affected by the malware variants. See the Company’sour Annual Report on Form 10-K for further information.the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development.
Results of Operations
The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the third quarter and the first nine months of 20182019 and 2017.2018.
| | | Third Quarter | | Nine Months | Third Quarter | | Nine Months |
| 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Revenues: | | | | | | | | | | | | | | | | | | | | | | |
Sales | $ | 165.3 |
| | $ | 158.8 |
| | $ | 6.5 |
| | $ | 486.3 |
| | $ | 467.9 |
| | $ | 18.4 |
| $ | 182.0 |
| | $ | 165.3 |
| | $ | 16.7 |
| | $ | 530.7 |
| | $ | 486.3 |
| | $ | 44.4 |
|
Franchise royalty revenue and fees | 103.2 |
| | 98.9 |
| | 4.3 |
| | 308.7 |
| | 306.1 |
| | 2.6 |
| 109.2 |
| | 103.2 |
| | 6.0 |
| | 320.3 |
| | 308.7 |
| | 11.6 |
|
Franchise rental income | 50.5 |
| | 50.3 |
| | 0.2 |
| | 152.1 |
| | 140.2 |
| | 11.9 |
| 59.9 |
| | 50.5 |
| | 9.4 |
| | 176.9 |
| | 152.1 |
| | 24.8 |
|
Advertising funds revenue | 81.6 |
| | — |
| | 81.6 |
| | 245.0 |
| | — |
| | 245.0 |
| 86.8 |
| | 81.6 |
| | 5.2 |
| | 253.9 |
| | 245.0 |
| | 8.9 |
|
| 400.6 |
| | 308.0 |
| | 92.6 |
| | 1,192.1 |
| | 914.2 |
| | 277.9 |
| 437.9 |
| | 400.6 |
| | 37.3 |
| | 1,281.8 |
| | 1,192.1 |
| | 89.7 |
|
Costs and expenses: | | | | | |
| | | | | | |
| | | | | |
| | | | | | |
|
Cost of sales | 139.3 |
| | 133.6 |
| | 5.7 |
| | 409.7 |
| | 388.8 |
| | 20.9 |
| 152.4 |
| | 139.3 |
| | 13.1 |
| | 446.1 |
| | 409.7 |
| | 36.4 |
|
Franchise support and other costs | 5.4 |
| | 3.7 |
| | 1.7 |
| | 18.6 |
| | 11.1 |
| | 7.5 |
| 9.7 |
| | 5.4 |
| | 4.3 |
| | 19.8 |
| | 18.6 |
| | 1.2 |
|
Franchise rental expense | 22.3 |
| | 24.1 |
| | (1.8 | ) | | 69.8 |
| | 64.8 |
| | 5.0 |
| 32.4 |
| | 22.3 |
| | 10.1 |
| | 92.8 |
| | 69.8 |
| | 23.0 |
|
Advertising funds expense | 81.6 |
| | — |
| | 81.6 |
| | 245.0 |
| | — |
| | 245.0 |
| 87.9 |
| | 81.6 |
| | 6.3 |
| | 257.0 |
| | 245.0 |
| | 12.0 |
|
General and administrative | 46.5 |
| | 51.7 |
| | (5.2 | ) | | 146.1 |
| | 153.1 |
| | (7.0 | ) | 46.2 |
| | 46.5 |
| | (0.3 | ) | | 146.3 |
| | 146.1 |
| | 0.2 |
|
Depreciation and amortization | 29.1 |
| | 31.2 |
| | (2.1 | ) | | 94.6 |
| | 91.7 |
| | 2.9 |
| 33.3 |
| | 29.1 |
| | 4.2 |
| | 98.0 |
| | 94.6 |
| | 3.4 |
|
System optimization (gains) losses, net | (0.5 | ) | | 0.1 |
| | (0.6 | ) | | — |
| | 39.7 |
| | (39.7 | ) | |
System optimization gains, net | | (1.0 | ) | | (0.5 | ) | | (0.5 | ) | | (1.2 | ) | | — |
| | (1.2 | ) |
Reorganization and realignment costs | 0.9 |
| | 2.9 |
| | (2.0 | ) | | 6.7 |
| | 20.8 |
| | (14.1 | ) | 0.4 |
| | 0.9 |
| | (0.5 | ) | | 4.8 |
| | 6.7 |
| | (1.9 | ) |
Impairment of long-lived assets | 0.3 |
| | 1.0 |
| | (0.7 | ) | | 2.2 |
| | 1.8 |
| | 0.4 |
| — |
| | 0.3 |
| | (0.3 | ) | | 1.7 |
| | 2.2 |
| | (0.5 | ) |
Other operating income, net | (1.6 | ) | | (2.0 | ) | | 0.4 |
| | (4.7 | ) | | (5.8 | ) | | 1.1 |
| (2.4 | ) | | (1.6 | ) | | (0.8 | ) | | (9.4 | ) | | (4.7 | ) | | (4.7 | ) |
| 323.3 |
| | 246.3 |
| | 77.0 |
| | 988.0 |
| | 766.0 |
| | 222.0 |
| 358.9 |
| | 323.3 |
| | 35.6 |
| | 1,055.9 |
| | 988.0 |
| | 67.9 |
|
Operating profit | 77.3 |
| | 61.7 |
| | 15.6 |
| | 204.1 |
| | 148.2 |
| | 55.9 |
| 79.0 |
| | 77.3 |
| | 1.7 |
| | 225.9 |
| | 204.1 |
| | 21.8 |
|
Interest expense, net | (29.6 | ) | | (30.0 | ) | | 0.4 |
| | (89.9 | ) | | (87.9 | ) | | (2.0 | ) | (27.9 | ) | | (29.6 | ) | | 1.7 |
| | (86.9 | ) | | (89.9 | ) | | 3.0 |
|
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | (11.5 | ) | | — |
| | (11.5 | ) | — |
| | — |
| | — |
| | (7.2 | ) | | (11.5 | ) | | 4.3 |
|
Investment income (loss), net | 450.1 |
| | (0.6 | ) | | 450.7 |
| | 450.4 |
| | 2.1 |
| | 448.3 |
| |
Investment income, net | | 0.3 |
| | 450.1 |
| | (449.8 | ) | | 1.0 |
| | 450.4 |
| | (449.4 | ) |
Other income, net | 1.1 |
| | 0.5 |
| | 0.6 |
| | 2.4 |
| | 1.0 |
| | 1.4 |
| 1.9 |
| | 1.1 |
| | 0.8 |
| | 6.1 |
| | 2.4 |
| | 3.7 |
|
Income before income taxes | 498.9 |
| | 31.6 |
| | 467.3 |
| | 555.5 |
| | 63.4 |
| | 492.1 |
| 53.3 |
| | 498.9 |
| | (445.6 | ) | | 138.9 |
| | 555.5 |
| | (416.6 | ) |
Provision for income taxes | (107.7 | ) | | (17.3 | ) | | (90.4 | ) | | (114.2 | ) | | (28.6 | ) | | (85.6 | ) | (7.2 | ) | | (107.7 | ) | | 100.5 |
| | (28.5 | ) | | (114.2 | ) | | 85.7 |
|
Net income | $ | 391.2 |
| | $ | 14.3 |
| | $ | 376.9 |
| | $ | 441.3 |
| | $ | 34.8 |
| | $ | 406.5 |
| $ | 46.1 |
| | $ | 391.2 |
| | $ | (345.1 | ) | | $ | 110.4 |
| | $ | 441.3 |
| | $ | (330.9 | ) |
| | | Third Quarter | | Nine Months | Third Quarter | | Nine Months |
| 2018 | | % of Total Revenues | | 2017 | | % of Total Revenues | | 2018 | | % of Total Revenues | | 2017 | | % of Total Revenues | 2019 | | % of Total Revenues | | 2018 | | % of Total Revenues | | 2019 | | % of Total Revenues | | 2018 | | % of Total Revenues |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales | $ | 165.3 |
| | 41.3 | % | | $ | 158.8 |
| | 51.6 | % | | $ | 486.3 |
| | 40.8 | % | | $ | 467.9 |
| | 51.2 | % | $ | 182.0 |
| | 41.6 | % | | $ | 165.3 |
| | 41.3 | % | | $ | 530.7 |
| | 41.4 | % | | $ | 486.3 |
| | 40.8 | % |
Franchise royalty revenue and fees: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Royalty revenue | 95.5 |
| | 23.8 | % | | 93.7 |
| | 30.4 | % | | 283.6 |
| | 23.8 | % | | 275.0 |
| | 30.1 | % | 102.3 |
| | 23.4 | % | | 95.5 |
| | 23.8 | % | | 300.0 |
| | 23.4 | % | | 283.6 |
| | 23.8 | % |
Franchise fees | 7.7 |
| | 1.9 | % | | 5.2 |
| | 1.7 | % | | 25.1 |
| | 2.1 | % | | 31.1 |
| | 3.4 | % | 6.9 |
| | 1.5 | % | | 7.7 |
| | 1.9 | % | | 20.3 |
| | 1.6 | % | | 25.1 |
| | 2.1 | % |
Total franchise royalty revenue and fees | 103.2 |
| | 25.7 | % | | 98.9 |
| | 32.1 | % | | 308.7 |
| | 25.9 | % | | 306.1 |
| | 33.5 | % | 109.2 |
| | 24.9 | % | | 103.2 |
| | 25.7 | % | | 320.3 |
| | 25.0 | % | | 308.7 |
| | 25.9 | % |
Franchise rental income | 50.5 |
| | 12.6 | % | | 50.3 |
| | 16.3 | % | | 152.1 |
| | 12.8 | % | | 140.2 |
| | 15.3 | % | 59.9 |
| | 13.7 | % | | 50.5 |
| | 12.6 | % | | 176.9 |
| | 13.8 | % | | 152.1 |
| | 12.8 | % |
Advertising funds revenue | 81.6 |
| | 20.4 | % | | — |
| | — | % | | 245.0 |
| | 20.5 | % | | — |
| | — | % | 86.8 |
| | 19.8 | % | | 81.6 |
| | 20.4 | % | | 253.9 |
| | 19.8 | % | | 245.0 |
| | 20.5 | % |
Total revenues | $ | 400.6 |
| | 100.0 | % | | $ | 308.0 |
| | 100.0 | % | | $ | 1,192.1 |
| | 100.0 | % | | $ | 914.2 |
| | 100.0 | % | $ | 437.9 |
| | 100.0 | % | | $ | 400.6 |
| | 100.0 | % | | $ | 1,281.8 |
| | 100.0 | % | | $ | 1,192.1 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months | Third Quarter | | Nine Months |
| 2018 | | % of Sales | | 2017 | | % of Sales | | 2018 | | % of Sales | | 2017 | | % of Sales | 2019 | | % of Sales | | 2018 | | % of Sales | | 2019 | | % of Sales | | 2018 | | % of Sales |
Cost of sales: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Food and paper | $ | 53.0 |
| | 32.1 | % | | $ | 51.8 |
| | 32.6 | % | | $ | 154.8 |
| | 31.8 | % | | $ | 147.1 |
| | 31.4 | % | $ | 57.2 |
| | 31.4 | % | | $ | 53.0 |
| | 32.1 | % | | $ | 167.3 |
| | 31.5 | % | | $ | 154.8 |
| | 31.8 | % |
Restaurant labor | 48.4 |
| | 29.3 | % | | 46.3 |
| | 29.2 | % | | 144.1 |
| | 29.6 | % | | 137.7 |
| | 29.5 | % | 54.7 |
| | 30.1 | % | | 48.4 |
| | 29.3 | % | | 160.1 |
| | 30.2 | % | | 144.1 |
| | 29.6 | % |
Occupancy, advertising and other operating costs | 37.9 |
| | 22.9 | % | | 35.5 |
| | 22.3 | % | | 110.8 |
| | 22.8 | % | | 104.0 |
| | 22.2 | % | 40.5 |
| | 22.3 | % | | 37.9 |
| | 22.9 | % | | 118.7 |
| | 22.4 | % | | 110.8 |
| | 22.8 | % |
Total cost of sales | $ | 139.3 |
| | 84.3 | % | | $ | 133.6 |
| | 84.1 | % | | $ | 409.7 |
| | 84.2 | % | | $ | 388.8 |
| | 83.1 | % | $ | 152.4 |
| | 83.8 | % | | $ | 139.3 |
| | 84.3 | % | | $ | 446.1 |
| | 84.1 | % | | $ | 409.7 |
| | 84.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2018 | | % of Sales | | 2017 | | % of Sales | | 2018 | | % of Sales | | 2017 | | % of Sales |
Restaurant margin | $ | 26.0 |
| | 15.7 | % | | $ | 25.2 |
| | 15.9 | % | | $ | 76.6 |
| | 15.8 | % | | $ | 79.1 |
| | 16.9 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2019 | | % of Sales | | 2018 | | % of Sales | | 2019 | | % of Sales | | 2018 | | % of Sales |
Restaurant margin | $ | 29.6 |
| | 16.2 | % | | $ | 26.0 |
| | 15.7 | % | | $ | 84.6 |
| | 15.9 | % | | $ | 76.6 |
| | 15.8 | % |
The tables below present key business measures which are defined and further discussed in the “Executive Overview” section included herein.
| | | Third Quarter | | Nine Months | Third Quarter | | Nine Months |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Key business measures: | | | | | | | | | | | | | | |
North America same-restaurant sales: | | | | | | | | |
North America same-restaurant sales growth: | | | | | | | | |
Company-operated | 1.2 | % | | (0.5 | )% | | 1.4 | % | | 0.7 | % | 4.7 | % | | 1.2 | % | | 2.5 | % | | 1.4 | % |
Franchised | (0.3 | )% | | 2.1 | % | | 1.1 | % | | 2.4 | % | 4.3 | % | | (0.3 | )% | | 2.4 | % | | 1.1 | % |
Systemwide | (0.2 | )% | | 2.0 | % | | 1.1 | % | | 2.3 | % | 4.4 | % | | (0.2 | )% | | 2.4 | % | | 1.1 | % |
| | | | | | | | | | | | | | |
Total same-restaurant sales: | | | | | | | | |
Global same-restaurant sales growth: | | | | | | | | |
Company-operated | 1.2 | % | | (0.5 | )% | | 1.4 | % | | 0.7 | % | 4.7 | % | | 1.2 | % | | 2.5 | % | | 1.4 | % |
Franchised (a) | (0.1 | )% | | 2.1 | % | | 1.3 | % | | 2.4 | % | 4.4 | % | | (0.1 | )% | | 2.5 | % | | 1.3 | % |
Systemwide (a) | 0.0 | % | | 1.9 | % | | 1.3 | % | | 2.3 | % | 4.4 | % | | 0.0 | % | | 2.5 | % | | 1.3 | % |
________________
(a) Includes international franchised same-restaurant sales (excluding Venezuela, and excluding Argentina beginning in the third quarter of 2018, due to the impact of the highly inflationary economies of those countries).
| | | Third Quarter | | Nine Months | Third Quarter | | Nine Months |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Key business measures (continued): | | | | | | | | | | | | | | |
Systemwide sales: (a) | | | | | | | | | | | | | | |
Company-operated | $ | 165.3 |
| | $ | 158.8 |
| | $ | 486.3 |
| | $ | 467.9 |
| $ | 182.0 |
| | $ | 165.3 |
| | $ | 530.7 |
| | $ | 486.3 |
|
North America franchised | 2,358.5 |
| | 2,347.2 |
| | 7,043.4 |
| | 6,897.4 |
| 2,478.2 |
| | 2,358.5 |
| | 7,251.4 |
| | 7,043.4 |
|
North America systemwide | | 2,660.2 |
| | 2,523.8 |
| | 7,782.1 |
| | 7,529.7 |
|
International franchised (b) | 126.5 |
| | 119.4 |
| | 385.8 |
| | 351.6 |
| 137.8 |
| | 126.5 |
| | 410.8 |
| | 385.8 |
|
Global systemwide sales | $ | 2,650.3 |
| | $ | 2,625.4 |
| | $ | 7,915.5 |
| | $ | 7,716.9 |
| |
Global systemwide | | $ | 2,798.0 |
| | $ | 2,650.3 |
| | $ | 8,192.9 |
| | $ | 7,915.5 |
|
________________
| |
(a) | During the third quarter of 2019 and 2018, global systemwide sales increased 5.7% and 2017,1.7%, respectively, North America systemwide sales increased 1.2%5.5% and 3.0%1.2%, respectively, and international franchised sales increased 13.2%9.2% and 13.4%, respectively, and global systemwide sales increased 1.7% and 3.4%13.2%, respectively, on a constant currency basis. During the first nine months of 2019 and 2018, global systemwide sales increased 4.1% and 2017,2.7%, respectively, North America systemwide sales increased 2.2%3.8% and 3.2%2.2%, respectively, and international franchised sales increased 13.2%9.8% and 15.0%, respectively, and global systemwide sales increased 2.7% and 3.7%13.2%, respectively, on a constant currency basis. |
| |
(b) | Excludes Venezuela, and excludes Argentina beginning in the third quarter of 2018, due to the impact of the highly inflationary economies of those countries. |
| | | Third Quarter | Third Quarter |
| Company-operated | | North America Franchised | | International Franchised | | Systemwide | Company-operated | | North America Franchised | | International Franchised | | Systemwide |
Restaurant count: | | | | | | | | | | | | | | |
Restaurant count at July 1, 2018 | 332 |
| | 5,802 |
| | 522 |
| | 6,656 |
| |
Restaurant count at June 30, 2019 | | 358 |
| | 5,828 |
| | 533 |
| | 6,719 |
|
Opened | 2 |
| | 21 |
| | 14 |
| | 37 |
| — |
| | 27 |
| | 13 |
| | 40 |
|
Closed | — |
| | (16 | ) | | (8 | ) | | (24 | ) | (2 | ) | | (10 | ) | | (4 | ) | | (16 | ) |
Net purchased from (sold by) franchisees | 16 |
| | (16 | ) | | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Restaurant count at September 30, 2018 | 350 |
| | 5,791 |
| | 528 |
| | 6,669 |
| |
Restaurant count at September 29, 2019 | | 356 |
| | 5,845 |
| | 542 |
| | 6,743 |
|
| | | | | | | | | | | | | | |
| Nine Months | Nine Months |
| Company-operated | | North America Franchised | | International Franchised | | Systemwide | Company-operated | | North America Franchised | | International Franchised | | Systemwide |
| | | | | | | | |
Restaurant count at December 31, 2017 | 337 |
| | 5,793 |
| | 504 |
| | 6,634 |
| |
Restaurant count: | | | | | | | | |
Restaurant count at December 30, 2018 | | 353 |
| | 5,825 |
| | 533 |
| | 6,711 |
|
Opened | 3 |
| | 61 |
| | 42 |
| | 106 |
| — |
| | 76 |
| | 35 |
| | 111 |
|
Closed | (4 | ) | | (49 | ) | | (18 | ) | | (71 | ) | (2 | ) | | (51 | ) | | (26 | ) | | (79 | ) |
Net purchased from (sold by) franchisees | 14 |
| | (14 | ) | | — |
| | — |
| 5 |
| | (5 | ) | | — |
| | — |
|
Restaurant count at September 30, 2018 | 350 |
| | 5,791 |
| | 528 |
| | 6,669 |
| |
Restaurant count at September 29, 2019 | | 356 |
| | 5,845 |
| | 542 |
| | 6,743 |
|
| | Sales | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Sales | $ | 6.5 |
| | $ | 18.4 |
| $ | 182.0 |
| | $ | 165.3 |
| | $ | 16.7 |
| | $ | 530.7 |
| | $ | 486.3 |
| | $ | 44.4 |
|
The increase in sales for the third quarter and the first nine months of 20182019 was primarily due to a 1.2% and 1.4% increase in same-restaurant sales, respectively, as well as a net increase in the number of Company-operated restaurants in operation during 20182019 compared to 2017.2018. In addition, sales for the third quarter and the first nine months of 2019 benefited from a 4.7% and 2.5% increase in Company-operated same-restaurant sales, respectively. Company-operated same-restaurant sales improved due to an increase in our average per customer check amount, reflecting benefits from strategic price increases on our menu items and changes in product mix. These benefits were partially offset by a decrease in customer count.
| | Franchise Royalty Revenue and Fees | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Royalty revenue | $ | 1.8 |
| | $ | 8.6 |
| $ | 102.3 |
| | $ | 95.5 |
| | $ | 6.8 |
| | $ | 300.0 |
| | $ | 283.6 |
| | $ | 16.4 |
|
Franchise fees | 2.5 |
| | (6.0 | ) | 6.9 |
| | 7.7 |
| | (0.8 | ) | | 20.3 |
| | 25.1 |
| | (4.8 | ) |
| $ | 4.3 |
| | $ | 2.6 |
| $ | 109.2 |
| | $ | 103.2 |
| | $ | 6.0 |
| | $ | 320.3 |
| | $ | 308.7 |
| | $ | 11.6 |
|
The increase in franchise royalty revenue during the third quarter and the first nine months of 20182019 was primarily due to the absence of an incentive program for Image Activation restaurant remodels, which largely ended at December 31, 2017, as well asa 4.4% and 2.5% increase in franchise same-restaurant sales, respectively. Royalty revenue was also positively impacted by a net increase in the number of franchise restaurants in operation during 2018 compared to 2017. Royalty revenue was also positively impacted by a 1.3% increase in franchise same-restaurant sales during the first nine months of 2018.operation.
The increasedecrease in franchise fees during the third quarter of 20182019 was primarily due to lower other miscellaneous franchise fees, partially offset by higher fees for providing information technology and other services to franchisees and other miscellaneous fees.franchisees. The decrease in franchise fees during the first nine months of 20182019 was primarily due to lower other miscellaneous franchise fees and facilitating fewer franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and the related impact of the new accounting guidance for revenue recognition effective January 1, 2018. The Company facilitated 73 and 270 Franchise Flips during the first nine months of 2018 and 2017, respectively (excluding the DavCo and NPC Transactions discussed below). Franchise Flip technical assistance fees are recognized as revenue over the contractual term of the franchise agreements under the new accounting guidance. Under previous guidance, technical assistance fees received in connection with Franchise Flips were recognized as revenue when the license agreements were signed and the restaurant opened. See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the new accounting guidance for revenue recognition. This decrease in franchise fees during the first nine months of 2018 was2019, partially offset by higher fees for providing information technology and other services to franchisees and other miscellaneous franchise fees.franchisees.
| | Franchise Rental Income | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Franchise rental income | $ | 0.2 |
| | $ | 11.9 |
| $ | 59.9 |
| | $ | 50.5 |
| | $ | 9.4 |
| | $ | 176.9 |
| | $ | 152.1 |
| | $ | 24.8 |
|
The increase in franchise rental income during the third quarter and the first nine months of 20182019 was primarily due to subleasing propertiesthe adoption of new accounting guidance for leases. Under the new guidance, lessees’ payments to franchisees in connectionthe Company for executory costs are recorded on a gross basis as revenue with facilitating Franchise Flipsa corresponding expense. See “Franchise Rental Expense” below. The increase during 2017.the first nine months of 2019 was partially offset by the assignment of certain leases to a franchisee.
| | Advertising Funds Revenue | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Advertising funds revenue | $ | 81.6 |
| | $ | 245.0 |
| $ | 86.8 |
| | $ | 81.6 |
| | $ | 5.2 |
| | $ | 253.9 |
| | $ | 245.0 |
| | $ | 8.9 |
|
The Company maintains two national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales of the franchised restaurants. Under the new accounting guidance for revenue recognition effective January 1, 2018, the revenue of the nationalThe increase in advertising funds is fully consolidated intorevenue during the third quarter and the first nine months of 2019 was primarily due to an increase in North America franchise same-restaurant sales, as well as a net increase in the number of North America franchise restaurants in operation. These increases were partially offset by reductions in advertising receipts under the Company’s condensed consolidated statements of operations.restaurant development incentive program.
| | Cost of Sales, as a Percent of Sales | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Food and paper | (0.5 | )% | | 0.4 | % | 31.4 | % | | 32.1 | % | | (0.7 | )% | | 31.5 | % | | 31.8 | % | | (0.3 | )% |
Restaurant labor | 0.1 | % | | 0.1 | % | 30.1 | % | | 29.3 | % | | 0.8 | % | | 30.2 | % | | 29.6 | % | | 0.6 | % |
Occupancy, advertising and other operating costs | 0.6 | % | | 0.6 | % | 22.3 | % | | 22.9 | % | | (0.6 | )% | | 22.4 | % | | 22.8 | % | | (0.4 | )% |
| 0.2 | % | | 1.1 | % | 83.8 | % | | 84.3 | % | | (0.5 | )% | | 84.1 | % | | 84.2 | % | | (0.1 | )% |
The increasedecrease in cost of sales, as a percent of sales, during the third quarter and the first nine months of 2019 was primarily due to benefits from strategic price increases on certain of our menu items and changes in product mix. This decrease was partially offset by an increase in restaurant labor rates and higher insurance costs, partially offset by lower commodity costs. The increase in cost of sales, as a percent of sales, during the first nine months of 2018 was primarily due to an increase in restaurant labor rates and higher commodity costs. Cost of sales, as a percent of sales, for both the third quarter and the first nine months of 2018 benefited from strategic price increases on our menu items.
| | Franchise Support and Other Costs | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Franchise support and other costs | $ | 1.7 |
| | $ | 7.5 |
| $ | 9.7 |
| | $ | 5.4 |
| | $ | 4.3 |
| | $ | 19.8 |
| | $ | 18.6 |
| | $ | 1.2 |
|
The increase in franchise support and other costs during the third quarter and the first nine months of 20182019 was primarily due to the purchase of digital scanning equipment for franchisees of $3.9 million, partially offset by lower costs incurred to provide information technology and other services to our franchisees.
| | Franchise Rental Expense | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Franchise rental expense | $ | (1.8 | ) | | $ | 5.0 |
| $ | 32.4 |
| | $ | 22.3 |
| | $ | 10.1 |
| | $ | 92.8 |
| | $ | 69.8 |
| | $ | 23.0 |
|
The decreaseincrease in franchise rental expense during the third quarter and the first nine months of 20182019 was primarily due to the assignmentadoption of certain leasesnew accounting guidance for leases. Under the new guidance, lessees’ payments to the Company for executory costs are recorded on a franchisee.gross basis as revenue with a corresponding expense. See “Franchise Rental Income” above. The increase in franchise rental expense during the first nine months of 20182019 was primarilypartially offset by the impact of assigning certain leases to a result of leases entered into in connection with Franchise Flips during 2017.franchisee.
| | Advertising Funds Expense | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Advertising funds expense | $ | 81.6 |
| | $ | 245.0 |
| $ | 87.9 |
| | $ | 81.6 |
| | $ | 6.3 |
| | $ | 257.0 |
| | $ | 245.0 |
| | $ | 12.0 |
|
The expenses of the nationalincrease in advertising funds are now fully consolidated intoexpense during the Company’s condensed consolidated statementsthird quarter and the first nine months of operations under2019 was primarily due to the new accounting guidancesame factors as described above for revenue recognition effective January 1, 2018.advertising funds revenue. On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. During the third quarter and the first nine months of 2019, advertising funds expense exceeded advertising funds revenue by $1.1 million and $3.1 million, respectively, reflecting a portion of the expected advertising spend in excess of advertising funds revenue for the remainder of 2019. This excess for 2019 is expected to approximate the amount by which advertising funds revenue exceeded advertising funds expense in 2018.
| | General and Administrative | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Employee compensation and related expenses | $ | (3.4 | ) | | $ | (4.3 | ) | $ | 43.4 |
| | $ | 39.4 |
| | $ | 4.0 |
| | $ | 125.3 |
| | $ | 120.7 |
| | $ | 4.6 |
|
Professional services | 0.1 |
| | (1.8 | ) | |
Legal reserves | | (2.8 | ) | | — |
| | (2.8 | ) | | (2.3 | ) | | 0.1 |
| | (2.4 | ) |
Other, net | (1.9 | ) | | (0.9 | ) | 5.6 |
| | 7.1 |
| | (1.5 | ) | | 23.3 |
| | 25.3 |
| | (2.0 | ) |
| $ | (5.2 | ) | | $ | (7.0 | ) | $ | 46.2 |
| | $ | 46.5 |
| | $ | (0.3 | ) | | $ | 146.3 |
| | $ | 146.1 |
| | $ | 0.2 |
|
The decrease in general and administrative expenses during the third quarter and the first nine months of 20182019 was primarily due to lowera reduction in legal reserves as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the Financial Institutions case (see Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information). This decrease was offset by higher employee compensation and related expenses, reflecting a decreasean increase in incentive compensation accruals and changesaccruals.
The increase in staffing driven by our G&A realignment plan. In addition, general and administrative expenses during the first nine months of 2018 decreased2019 was primarily due to lower professional services, including lowerhigher employee compensation and related expenses, reflecting an increase in incentive compensation accruals and additional expenditures to support our digital experience and international organizations. This increase was partially offset by (1) a reduction in legal fees.reserves as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the Financial Institutions case (see Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information) and (2) changes in staffing driven by our G&A realignment plan.
| | Depreciation and Amortization | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Restaurants | $ | (2.8 | ) | | $ | (0.3 | ) | $ | 21.8 |
| | $ | 17.4 |
| | $ | 4.4 |
| | $ | 63.7 |
| | $ | 60.3 |
| | $ | 3.4 |
|
Corporate and other | 0.7 |
| | 3.2 |
| 11.5 |
| | 11.7 |
| | (0.2 | ) | | 34.3 |
| | 34.3 |
| | — |
|
| $ | (2.1 | ) | | $ | 2.9 |
| $ | 33.3 |
| | $ | 29.1 |
| | $ | 4.2 |
| | $ | 98.0 |
| | $ | 94.6 |
| | $ | 3.4 |
|
The decreaseincrease in restaurant depreciation and amortization during the third quarter and the first nine months of 20182019 was primarily due to the assignment of certain leases to a franchisee in 2018, resulting in the write-off of the related net investment in the lease, partially offset by the impact of capital leases resulting from facilitating Franchise Flips during 2017. Corporate and other expense increased due to depreciation and amortization for technology investments.leases.
|
| | | | | | | | | | | | | | | |
System Optimization (Gains) Losses, Net | Third Quarter | | Nine Months |
| 2018 | | 2017 | | 2018 | | 2017 |
System optimization (gains) losses, net | $ | (0.5 | ) | | $ | 0.1 |
| | $ | — |
| | $ | 39.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
System Optimization Gains, Net | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
System optimization gains, net | $ | (1.0 | ) | | $ | (0.5 | ) | | $ | (0.5 | ) | | $ | (1.2 | ) | | $ | — |
| | $ | (1.2 | ) |
System optimization (gains) losses,gains, net for the third quarter and the first nine months of 2019 and 2018 and 2017 were primarily comprised of post-closing adjustments on previous sales of restaurants and gains (losses) on the sale of surplus properties. System optimization (gains) losses, net for the first nine months of 2017 included the acquisition of 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”), which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company (the “DavCo and NPC Transactions”). The transactions resulted in a loss of $43.1 million during the first nine months of 2017.restaurants.
| | Reorganization and Realignment Costs | Third Quarter | | Nine Months | Third Quarter | | Nine Months |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
G&A realignment | $ | 0.6 |
| | $ | 2.7 |
| | $ | 6.4 |
| | $ | 19.9 |
| $ | 0.4 |
| | $ | 0.6 |
| | $ | (0.2 | ) | | $ | 4.7 |
| | $ | 6.4 |
| | (1.7 | ) |
System optimization initiative | 0.3 |
| | 0.2 |
| | 0.3 |
| | 0.9 |
| — |
| | 0.3 |
| | (0.3 | ) | | 0.1 |
| | 0.3 |
| | (0.2 | ) |
| $ | 0.9 |
| | $ | 2.9 |
| | $ | 6.7 |
| | $ | 20.8 |
| $ | 0.4 |
| | $ | 0.9 |
| | $ | (0.5 | ) | | $ | 4.8 |
| | $ | 6.7 |
| | $ | (1.9 | ) |
In May 2017, the Company initiated a G&A realignment plan to further reduce its G&A expenses. During the third quarter of 2018,In addition, the Company recognizedannounced changes to its leadership structure in May 2019. G&A realignment costs associated with the plan totaling $0.6 million, which primarily included (1) share-based compensation of $0.3 million and (2) recruitment and relocation costs of $0.2 million. During the first nine months of 2018, the Company recognized costs totaling $6.4 million, which primarily included (1) severance and related employee costs of $3.2 million, (2) share-based compensation of $1.5 million, (3) third-party and other costs of $1.0 million and (4) recruitment and relocation costs of $0.7 million. During the third quarter of 2017, the Company recognized costs totaling $2.7 million, which primarily included (1) severance and related employee costs of $1.2 million, (2) share-based compensation of $0.8 million and (3) third-party and other costs of $0.5 million. During the first nine months of 2017, the Company recognized costs totaling $19.9 million, which primarily included (1) severance and related employee costs of $14.4 million, (2) shared-based compensation of $4.5 million and (3) third-party and other costs of $0.8 million.
Duringfor the third quarter and the first nine months of 2019 and 2018 were primarily comprised of severance and 2017, the Company recognizedrelated employee costs associated with its system optimization initiative, which primarily included professional fees.and share-based compensation.
| | Impairment of Long-Lived Assets | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Impairment of long-lived assets | $ | (0.7 | ) | | $ | 0.4 |
| $ | — |
| | $ | 0.3 |
| | $ | (0.3 | ) | | $ | 1.7 |
| | $ | 2.2 |
| | $ | (0.5 | ) |
The changeschange in impairment charges during the third quarter of 2019 was primarily driven by lower impairment charges as a result of closing Company-operated restaurants and classifying such surplus properties as held for sale when compared to the third quarter of 2018. The change in impairment charges during the first nine months of 2018 were2019 was primarily driven by variations in losses resulting fromlower impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants when compared to the first nine months of 2018, partially offset by higher impairment charges as a result of closing Company-operated restaurants and chargesclassifying such surplus properties as held for capital improvements in previously impaired restaurants that did not subsequently recover.sale.
| | Other Operating Income, Net | Third Quarter | | Nine Months | Third Quarter | | Nine Months |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Equity in earnings in joint ventures, net | | $ | (2.1 | ) | | $ | (2.2 | ) | | $ | 0.1 |
| | $ | (7.0 | ) | | $ | (5.8 | ) | | $ | (1.2 | ) |
Losses (gains) on sales-type leases | | 0.1 |
| | — |
| | 0.1 |
| | (1.9 | ) | | — |
| | (1.9 | ) |
Lease buyout | $ | 0.3 |
| | $ | 0.2 |
| | $ | 0.9 |
| | $ | 0.1 |
| (0.4 | ) | | 0.3 |
| | (0.7 | ) | | (0.6 | ) | | 0.9 |
| | (1.5 | ) |
Equity in earnings in joint ventures, net | (2.2 | ) | | (2.3 | ) | | (5.8 | ) | | (6.1 | ) | |
Other, net | 0.3 |
| | 0.1 |
| | 0.2 |
| | 0.2 |
| — |
| | 0.3 |
| | (0.3 | ) | | 0.1 |
| | 0.2 |
| | (0.1 | ) |
| $ | (1.6 | ) | | $ | (2.0 | ) | | $ | (4.7 | ) | | $ | (5.8 | ) | $ | (2.4 | ) | | $ | (1.6 | ) | | $ | (0.8 | ) | | $ | (9.4 | ) | | $ | (4.7 | ) | | $ | (4.7 | ) |
The change in other operating income, net during the third quarter and the first nine months of 20182019 was primarily due to lease buyout activity. The change in other operating income, net during the first nine months of 2019 was due to (1) gains on new and modified sales-type leases as a result of the new accounting guidance for leases, (2) lease buyout activity and a decrease(3) an increase in incomethe equity in earnings from our equity method investments.TimWen joint venture.
| | Interest Expense, Net | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Interest expense, net | $ | (0.4 | ) | | $ | 2.0 |
| $ | 27.9 |
| | $ | 29.6 |
| | $ | (1.7 | ) | | $ | 86.9 |
| | $ | 89.9 |
| | $ | (3.0 | ) |
Interest expense, net decreased during the third quarter and the first nine months of 20182019 primarily due to lower outstanding principal amounts of long-term debt, reflecting the impact of the completion of refinancing a decrease in amortizationportion of debt issuance costs resulting from the refinancing transaction during the first quarter of 2018. Interest expense, net was higherCompany’s securitized financing facility during the first nine months of 20182019. Interest expense, net also decreased during the first nine months of 2019 due to an increase in capitalthe timing of interest expense on the Company’s finance lease obligations resulting from facilitating Franchise Flips during 2017, partially offset by a decrease in amortization of debt issuance costs.obligations.
| | Loss on Early Extinguishment of Debt | Change | Third Quarter | | Nine Months |
| Third Quarter | | Nine Months | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Loss on early extinguishment of debt | $ | — |
| | $ | 11.5 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 7.2 |
| | $ | 11.5 |
| | $ | (4.3 | ) |
During the firstsecond quarter of 2018,2019, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of redeemingrepaying its outstanding Series 2015-1 Class A-2-II Notes primarily with the proceeds from the issuance of its Series 2019-1 Class A-2 Notes. The loss on the early extinguishment of debt of $7.2 million was comprised of the write-off of certain deferred financing costs.
During the first quarter of 2018, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of repaying its outstanding Series 2015-1 Class A-2-I Notes with the proceeds from the saleissuance of theits Series 2018-1 Class A-2 Notes. The loss on the early extinguishment of debt of $11.5 million was comprised of the write-off of certain deferred financing costs and a specified make-whole payment.
|
| | | | | | | |
Investment Income (Loss), Net | Change |
| Third Quarter | | Nine Months |
Investment income (loss), net | $ | 450.7 |
| | $ | 448.3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Investment Income, Net | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Investment income, net | $ | 0.3 |
| | $ | 450.1 |
| | $ | (449.8 | ) | | $ | 1.0 |
| | $ | 450.4 |
| | $ | (449.4 | ) |
Investment income, (loss), net increaseddecreased during the third quarter and the first nine months of 20182019 due to the $450.0 million gain recorded on the sale of the Company’s ownership interest in Inspire Brands, Inc. (“Inspire Brands”) on August 16, 2018. See Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
|
| | | | | | | | | | | | | | | |
Provision for Income Taxes | Third Quarter | | Nine Months |
| 2018 | | 2017 | | 2018 | | 2017 |
Income before income taxes | $ | 498.9 |
| | $ | 31.6 |
| | $ | 555.5 |
| | $ | 63.4 |
|
Provision for income taxes | 107.7 |
| | 17.3 |
| | 114.2 |
| | 28.6 |
|
Effective tax rate on income | 21.6 | % | | 54.8 | % | | 20.6 | % | | 45.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Other Income, Net | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Other income, net | $ | 1.9 |
| | $ | 1.1 |
| | $ | 0.8 |
| | $ | 6.1 |
| | $ | 2.4 |
| | $ | 3.7 |
|
Other income, net increased during the third quarter and the first nine months of 2019 primarily due to higher interest income earned on our cash equivalents.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Provision for Income Taxes | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Income before income taxes | $ | 53.3 |
| | $ | 498.9 |
| | $ | (445.6 | ) | | $ | 138.9 |
| | $ | 555.5 |
| | $ | (416.6 | ) |
Provision for income taxes | (7.2 | ) | | (107.7 | ) | | 100.5 |
| | (28.5 | ) | | (114.2 | ) | | 85.7 |
|
Effective tax rate on income | 13.5 | % | | 21.6 | % | | (8.1 | )% | | 20.5 | % | | 20.6 | % | | (0.1 | )% |
Our effective tax rates infor the third quarter of 20182019 and 20172018 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year, include the following: (1) net excessa reduction in unrecognized tax benefits relateddue to share-based payments, which resulted in a benefitlapse of $5.3 millionstatute of limitations in the third quarter of 2018,2019, (2) a change to our provisional amount, recorded inreduction for the impact of stock-based compensation, which included net excess tax benefits of $1.1 million and $5.3 million for the third quarter of 2019 and 2018, for the impact of the Tax Cutsrespectively, and Jobs Act (the “Tax Act”), which resulted in(3) an expense of $4.9 million, (3) the system optimization initiative in 2017 and (4) state income tax provision in 2017, includingincrease due to non-recurring changes to state deferred taxes net of federal benefits.taxes.
Our effective tax rates infor the first nine months of 20182019 and 20172018 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year, include the following: (1) net excessa reduction in unrecognized tax benefits relateddue to share-based payments, which resulted in a benefitlapse of $12.1 millionstatute of limitations in the first nine months of 2018,2019, (2) state income taxes, (3) a change to our provisional amount, recorded inreduction for the impact of stock-based compensation, which included net excess tax benefits of $4.0 million and $12.1 million for the first nine months of 2019 and 2018, for the impact of the Tax Act, which resulted inrespectively, and (3) an expense of $2.1 million, and (4) the system optimization initiative in 2017.increase due to non-recurring changes to state deferred taxes.
Liquidity and Capital Resources
Cash Flows
Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized
financing facility. Principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to shareholders.stockholders.
Our anticipated cash requirements for the remainder of 2018,2019, exclusive of operating cash flow requirements, consist principally of:
capital expenditures of approximately $30.0$34.0 million to $35.0$39.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $70.0$75.0 million to $75.0 million.$80.0 million;
cash dividends aggregating up to approximately $20.1$27.6 million as discussed below in “Dividends;” and
potential stock repurchases of up to $170.3 million, of which $9.2 million was repurchased subsequent to September 29, 2019 through October 30, 2019, as discussed below in “Stock Repurchases.”
In addition to the anticipated cash requirements above, the Company expects to make one-time investments during 2019 of approximately $20.0 million to support the U.S. system in preparation of the launch of breakfast in the first quarter of 2020.
Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.
The table below summarizes our cash flows from operating, investing and financing activities for the first nine months of 20182019 and 2017:2018:
| | | Nine Months | Nine Months |
| 2018 | | 2017 | | Change | 2019 | | 2018 | | Change |
Net cash provided by (used in): | | | | | | | | | | |
Operating activities | $ | 229.7 |
| | $ | 160.3 |
| | $ | 69.4 |
| $ | 237.5 |
| | $ | 229.7 |
| | $ | 7.8 |
|
Investing activities | 391.4 |
| | (61.7 | ) | | 453.1 |
| (45.7 | ) | | 391.4 |
| | (437.1 | ) |
Financing activities | (151.0 | ) | | (156.9 | ) | | 5.9 |
| (183.4 | ) | | (151.0 | ) | | (32.4 | ) |
Effect of exchange rate changes on cash | (2.1 | ) | | 6.9 |
| | (9.0 | ) | 2.8 |
| | (2.1 | ) | | 4.9 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 468.0 |
| | $ | (51.4 | ) | | $ | 519.4 |
| |
Net increase in cash, cash equivalents and restricted cash | | $ | 11.2 |
| | $ | 468.0 |
| | $ | (456.8 | ) |
Operating Activities
Cash provided by operating activities was $229.7$237.5 million and $160.3$229.7 million in the first nine months of 20182019 and 2017,2018, respectively. Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities. Cash provided by operating activities increased $69.4$7.8 million during the first nine months of 20182019 as compared to the first nine months of 2017,2018, primarily due to (1) higher net income from operations, adjusted for non-cash expenses and (2) a favorable changedecrease in operating assets and liabilities. The favorable change in operating assets and liabilities resulted primarily from (1) the timing of payments for marketing expenses of the national advertising funds, (2)incentive compensation. These favorable changes were partially offset by (1) the timing of collections of royalty receivables and (3) a decrease(2) changes in paymentsreceivables for incentive compensation for the 2017 fiscal year.income tax refunds. Further, income taxes payable increaseddecreased significantly in the first nine months of 2019 as compared to the first nine months of 2018 due to income taxes associated with the gain on sale of our ownership interest in Inspire Brands during the first nine months of 2018 (which offsetsoffset the income tax expense recognized in net income). We expectincome for the income tax associated with the gain to be paid in the fourth quarterfirst nine months of 2018.2018).
Investing Activities
Cash provided byused in investing activities increased $453.1$437.1 million during the first nine months of 20182019 as compared to the first nine months of 2017,2018, primarily due to (1)the proceeds from the sale of our ownership interest in Inspire Brands during the first nine months of 2018 of $450.0 million, (2) net cash used in the DavCo and NPC Transactions during 2017 of $16.1 million and (3) a decrease in capital expenditures of $14.0 million. These favorable changes wereThis change was partially offset by (1) an increasea decrease in cash used for the Company’s acquisition of franchised restaurants from franchisees of $21.4 million and (2) a decrease in proceeds from dispositions of surplus properties and other assets of $6.5$16.3 million.
Financing Activities
Cash used in financing activities decreased $5.9increased $32.4 million during the first nine months of 20182019 as compared to the first nine months of 2017,2018, primarily due to (1) a net increase in cash provided byused for long-term debt activities of $45.8$76.4 million, reflecting the respective impacts of the completion of adebt refinancing transactiontransactions during the first quarternine months of 2019 and 2018, and (2) an increasea decrease in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $25.9$16.2 million, and (3) an increase in dividends of $8.5 million. These changes were partially offset by (1) an increasea decrease in repurchases of common stock of $50.1 million, (2) an increase in dividends of $9.3$63.3 million and (3)(2) the settlement of a supplemental purchase price liability associated with the acquisition of 140 Wendy’s restaurants from DavCo Restaurants, LLC of $6.3 million.million during the first nine months of 2018.
Long-Term Debt, Including Current Portion
Except as described below, there were no material changes to the terms of any debt obligations since December 31, 2017.30, 2018. The Company was in compliance with its debt covenants as of September 30, 2018.29, 2019. See Note 8 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.
On January 17, 2018,June 26, 2019, Wendy’s Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, completed a debt refinancing transaction under which the Master Issuer issued fixed rate senior secured notes in the following 2018-12019-1 series: Class A-2-I with an interest rate of 3.573%3.783% and initial principal amount of $450.0$400.0 million and Class A-2-II with an interest rate of 3.884%4.080% and initial principal amount of $475.0$450.0 million (collectively, the “Series 2018-12019-1 Class A-2 Notes”). The net proceeds from the sale of the Series 2018-1 Class A-2 Notes were used to redeem the Master Issuer’s outstanding Series 2015-1 Class A-2-IA-2-II Notes to pay prepayment and transaction costs, and for general corporate purposes.were redeemed as part of the refinancing transaction.
Concurrently,In connection with the issuance of the Series 2019-1 Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series 2018-12019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2018-12019-1 Class A-1 Notes”), which allows for the drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2018-12019-1 Class A-1 Notes during the nine months ended September 30, 2018.29, 2019. The Series 2015-12019-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2018-1 Class A-1 Notes, which were canceled on the closing date and the letters of credit outstanding against the Series 2015-12018-1 Class A-1 Notes were transferred to the Series 2018-12019-1 Class A-1 Notes.
Dividends
On March 15, 2018,2019, June 15, 201817, 2019 and September 18, 2018,17, 2019, the Company paid quarterly cash dividends of $0.085$.10 per share on its common stock, aggregating $60.8$69.3 million. On November 1, 2018,October 11, 2019, the Company declared a dividend of $0.085$.12 per share to be paid on December 17, 201816, 2019 to shareholdersstockholders of record as of December 3, 2018.2, 2019. As a result of the October 11 declaration, the Company’sCompany expects that its total cash requirements for the fourth quarter of 20182019 will be approximately $20.1$27.6 million based on the estimated number of shares of its common stock outstanding at October 31, 2018.30, 2019. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid in the future or of the amount or timing of such dividends, if any.
Stock Repurchases
In February 2019, our Board of Directors authorized a repurchase program for up to $225.0 million of our common stock through March 1, 2020, when and if market conditions warrant and to the extent legally permissible. In connection with the February 2019 authorization, the Company’s previous November 2018 repurchase authorization for up to $220.0 million of our common stock was canceled. During the nine months ended September 29, 2019, the Company repurchased 4.2 million shares with an aggregate purchase price of $76.2 million, of which $1.1 million was accrued at September 29, 2019, and excluding commissions of $0.1 million, under the November 2018 and February 2019 authorizations. As of September 29, 2019, the Company had $170.3 million of availability remaining under its February 2019 authorization. Subsequent to September 29, 2019 through October 30, 2019, the Company repurchased 0.4 million shares under the February 2019 authorization with an aggregate purchase price of $9.2 million, excluding commissions. As part of the February 2019 authorization, the Company
announced on October 11, 2019 its intention to launch a $100.0 million accelerated share repurchase program during the fourth quarter of 2019.
In February 2018, our Board of Directors authorized a repurchase program for up to $175.0 million of our common stock through March 3, 2019, when and if market conditions warrant and to the extent legally permissible. In August 2018, our Board of Directors authorized an additional share repurchase program for up to $100.0 million of our common stock through December 27, 2019 with a portion of the proceeds obtained through the sale of our ownership interest in Inspire Brands, when and if market conditions warrantwarranted and to the extent legally permissible. During the nine months ended September 30, 2018, the Company repurchased 6.9 million shares under the February 2018 repurchase authorization with an aggregate purchase price of $118.9 million, of which $2.7 million was accrued at September 30, 2018, and excluding commissions of $0.1 million. Subsequent to September 30, 2018 through October 31, 2018, the Company repurchased 1.6 million shares under the February 2018 authorization with an aggregate purchase price of $27.3 million, excluding commissions.
The following table summarizes the Company’s outstanding share repurchase authorizations as of September 30, 2018:
|
| | | | | | | | | | | | | | |
Announced | | Expiration Date | | Authorization | | Utilization | | Availability Remaining |
February 2018 | | March 3, 2019 | | $ | 175.0 |
| | $ | 118.9 |
| | $ | 56.1 |
|
August 2018 | | December 27, 2019 | | 100.0 |
| | — |
| | 100.0 |
|
| | | | $ | 275.0 |
| | $ | 118.9 |
| | $ | 156.1 |
|
Subsequent to September 30, 2018, the Board of Directors approved an increase of $120.0 million to the August 2018 authorization, which now totals $220.0 million and expires on December 27, 2019.
In February 2017, our Board of Directors authorized a repurchase program for up to $150.0 million of our common stock through March 4, 2018, when and if market conditions warranted and to the extent legally permissible. DuringAdditionally, during the nine months ended September 30, 2018, the Company completed theits previous February 2017 repurchase authorization for up to $150.0 million programof our common stock with the repurchase of 1.4 million shares with an aggregate purchase price of $22.6 million, excluding commissions. During the nine months ended October 1, 2017, the Company repurchased 6.1 million shares with an aggregate purchase price of $90.9 million, of which $0.9 million was accrued at October 1, 2017, and excluding commissions of $0.1 million.
General Inflation, Commodities and Changing Prices
We believe that general inflation did not have a significant effect on our consolidated results of operations, except as mentioned below for certain commodities, during the reporting periods.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 increase food prices.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 theour business is moderately seasonal, results for anya particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
This “Quantitative and Qualitative Disclosures about Market Risk” should be read in conjunction with “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our annual report on Form 10-K for the fiscal year ended December 31, 201730, 2018 (the “Form 10-K”).
As of September 30, 2018,29, 2019, there were no material changes from the information contained in the Form 10-K, except as described below.
Interest Rate Risk
As discussed in “Item“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operation” under “Liquidity“Liquidity and Capital Resources,,” the Company completed a $925.0an $850.0 million debt refinancing transaction on January 17, 2018.June 26, 2019. The proceeds were used to repay all amountsCompany’s outstanding on the Series 2015-1 Class A-2-IA-2-II Notes to pay prepayment and transaction costs, and for general corporate purposes. Thewere repaid as part of the refinancing transaction. In aggregate, the Company’s new notesSeries 2019-1 Class A-2 Notes bear a weighted-average fixed-rate interest at rates slightly higherlower than our historical effective rates on the Series 2015-1 Class A-2-IA-2-II Notes. In addition, the principal amounts outstanding on the Series 2018-12019-1 Class A-2 Notes exceedare lower than the amounts that were outstanding on the Series 2015-1 Class A-2-IA-2-II Notes. The final legal maturity dateIn connection with the issuance of the Series 2018-12019-1 Class A-2 Notes, is in 2048; however, the anticipated repayment datesa wholly-owned subsidiary of the Series 2018-1 Class A-2 Notes range from 2025 through 2028, which is up to six years longer than the prior Series 2015-1 Class A-2-I Notes. Concurrently, the Company also entered into a revolving financing facility, the Series 2018-12019-1 Class A-1 Notes, which allows for the drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. The Series 2015-12019-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2018-1 Class A-1 Notes, which were canceled on the closing date.date, and the letters of credit outstanding against the Series 2018-1 Class A-1 Notes were transferred to the Series 2019-1 Class A-1 Notes.
Consequently, our long-term debt, including the current portion, aggregated $2,834.4$2,336.7 million and consisted of $2,376.1 million of fixed-rate debt and $458.3 million of capital lease obligations as of September 30, 201829, 2019 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure has reduced its exposure to interest rate increases that could adversely affect its earnings and cash flows. The Company is exposed to interest rate increases under the Series 2018-12019-1 Class A-1 Notes; however, the Company had no outstanding borrowings under itsthe Series 2018-12019-1 Class A-1 Notes as of September 30, 2018.29, 2019.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of itsthe Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2018.29, 2019. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018,29, 2019, the disclosure controls and procedures of the Company were effective at a reasonable assurance level in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the internal control over financial reporting of the Company during the third quarter of 20182019 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, the management of the Company, including its Chief Executive Officer and Chief Financial Officer, does not expect that the control system can prevent or detect all errors or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Special Note Regarding Forward-Looking Statements and Projections
This Quarterly Report on Form 10-Q and oral statements made from time to time by representatives of the Company may contain or incorporate by reference certain statements that are not historical facts, including, most importantly, information concerning possible or assumed future results of operations of the Company. Those statements, as well as statements preceded by, followed by, or that include the words “may,” “believes,” “plans,” “expects,” “anticipates,” or the negation thereof, or similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). All statements that address future operating, financial or business performance; strategies, initiatives or expectations; future synergies, efficiencies or overhead savings; anticipated costs or charges; future capitalization; and anticipated financial impacts of recent or pending transactions are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are based on our expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed in or implied by our forward-looking statements. For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Many important factors could affect our future results and could cause those results to differ materially from those expressed in or implied by the forward-looking statements contained herein. Such factors, all of which are difficult or impossible to predict accurately, and many of which are beyond our control, include, but are not limited to, the following:
competition, including pricing pressures, couponing, aggressive marketing and the potential impact of competitors’ new unit openings on sales of Wendy’s restaurants;
consumers’ perceptions of the relative quality, variety, affordability and value of the food products we offer;offer, and changes in consumer tastes and preferences;
food safety events, including instances of food-borne illness (such as salmonella or E. coli) involving Wendy’s or its supply chain;
consumer concerns over nutritional aspects of beef, poultry,chicken, french fries or other products we sell, concerns regarding the ingredients in our products and/or the cooking processes used in our restaurants, or concerns regarding the effects ofrestaurants;
conditions beyond our control, such as weather, natural disasters, disease outbreaks, epidemics or pandemics impacting the Company’sour customers or food supplies;supplies, or acts of war or terrorism;
the effects of negative publicity that can occur from increased use of social media;
success of operating and marketing initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors;
the impact of generalprevailing economic, market and business conditions affecting us, including competition from other food service providers, unemployment and increases in unemployment rates ondecreased consumer spending levels, particularly in geographic regions that contain a high concentration of Wendy’s restaurants;
changes in consumer tastes and preferences, and in discretionary consumer spending;
changes inthe quick-service restaurant industry, spending patterns and demographic trends, such as the extent to which consumers eatconsumer trends toward value-oriented products and promotions or toward consuming fewer meals away from home;
certain factors affecting our franchisees, including the business and financial viability of franchisees, the timely payment of such franchisees’ obligations due to us or to national or local advertising organizations, and the ability of our franchisees to open new restaurants and remodelreimage existing restaurants in accordance with their development and franchise commitments, including their ability to finance restaurant development and remodels;reimages;
increased labor costs due to competition or increased minimum wage or employee benefit costs;
changes in commodity costs (including beef, chicken, pork, cheese and grains), labor, supplies, fuel, utilities, distribution and other operating costs;
the availability locationof suitable locations and terms of sites for restaurant development by us and our franchisees;
development costs, including real estate and construction costs;
delays in opening new restaurants or completing reimages of existing restaurants, including risks associated with theour Image Activation program;
the timingability to effectively manage the acquisition and impactdisposition of acquisitions and dispositions of restaurants;restaurants or successfully implement other strategic initiatives;
anticipated or unanticipated restaurant closures by us and our franchisees;
our ability to identify, attract and retain potential franchisees with sufficient experience and financial resources to develop and operate Wendy’s restaurants successfully;
availability of qualified restaurant personnel to us and to our franchisees, and the ability to retain such personnel;
our ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to Wendy’s restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;
availability and cost of insurance;
adverse weather conditions;
availability, terms (including changes in interest rates) and deployment of capital;capital, and changes in debt, equity and securities markets;
changes in, and our ability to comply with, legal, regulatory or similar requirements, including franchising laws, payment card industry rules, overtime rules, minimum wage rates, wage and hour laws, tax legislation, federal ethanol policy and accounting standards, (including the new guidance on leases that will become effective for fiscal year 2019);policies and practices;
the costs, uncertainties and other effects of legal, environmental and administrative proceedings;
the effects of charges for impairment of goodwill or for the impairment of other long-lived assets;
the effects of war or terrorist activities;
risks associated with failures, interruptions or security breaches of the Company’sour computer systems or technology, or the occurrence of cyber incidents or a deficiency in cybersecurity that impacts the Companyus or itsour franchisees, including the cybersecurity incident described in Item 2 above;the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2019 (the “Form 10-K”);
the difficulty in predicting the ultimate costs that will be incurred in connection with the Company’sour plan to reduce its general and administrative expense, and the future impact on the Company’sour earnings;
risks associated with the Company’sour securitized financing facility and other debt agreements, including the ability to generate sufficient cash flow to meet increased debt service obligations, compliance with operational and financial covenants, and restrictions on the Company’sour ability to raise additional capital;
risks associated with the amount and timing of share repurchases under the share repurchase programs approved by theour Board of Directors;
risks associated with the proposed settlement of the Financial Institutions case described in the Form 10-K, including the timing and amount of payments;
risks associated with our digital commerce strategy, platforms and technologies, including our ability to adapt to changes in industry trends and consumer preferences;
risks associated with our evolving organizational and leadership structure;
risks associated with our plans to enter the breakfast daypart across the U.S. system in 2020, including related investments;
risks associated with our international growth strategy, including related investments; and
other risks and uncertainties affecting us and our subsidiaries referred to in our Annual Report onthe Form 10-K for the fiscal year ended December 31, 2017 (the “Form 10-K”) (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the SEC.Securities and Exchange Commission.
All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q as a result of new information, future events or developments, except as required by federal securities laws. In addition, it is our policy generallywe do not to endorse any projections regarding future performance that may be made by third parties.
Item 1. Legal Proceedings.
We areThe Company is involved in litigation and claims incidental to our current and prior businesses, including the legal proceedings related to a cybersecurity incident referenced in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Item 2 herein.businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. The Company believes it has adequate accruals for continuing operations for all of its legal and environmental matters. We cannot estimate the aggregate possible range of loss duefor various reasons, including, but not limited to, mostmany proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur andand/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period.
See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information regarding certain legal proceedings in which we are involved.
Item 1A. Risk Factors.
In addition to the information contained in this report, you should carefully consider the risk factors disclosed in our Form 10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2019, which could materially affect our business, financial condition or future results. Except as set forth below or as may otherwise be described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K.10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2019.
Wendy’s plans to launch breakfast across the U.S. system in 2020. The breakfast daypart is competitive across the restaurant industry and it may prove difficult to achieve market share and reach targeted levels of breakfast sales and profits.
As previously announced, Wendy’s plans to enter the breakfast daypart across the U.S. system in the first quarter of 2020. The Company and franchisee leadership have worked closely to align with the U.S. system on a breakfast program that the Company believes will drive incremental sales and profits through a strong economic model. However, previous breakfast initiatives were accompanied by competitive pressures and responses from our competitors, some of whom are well-established in the breakfast daypart, operational complexity, challenging food and labor costs, varied consumer acceptance and discretionary spending patterns that differ from other dayparts, and these factors could again impact our ability to achieve market share and reach targeted levels of breakfast sales and profits. In addition, breakfast sales could cannibalize sales during other parts of the day and may have negative impacts on restaurant margins. The continued active support and engagement of our franchisees is also critical for the successful launch and execution of breakfast. The Company and its franchisees plan to hire approximately 20,000 crew members across the country to support the breakfast initiative. Qualified individuals needed to fill these positions are in short supply in some geographic areas and our inability to successfully recruit, hire, train, motivate and retain qualified employees could adversely affect our operations. The launch of breakfast will also require significant financial resources, including the Company’s plans to support the system by investing approximately $20 million in 2019 to offset certain start-up costs and by reinvesting royalties from breakfast sales beginning in 2020 to fund incremental marketing and advertising campaigns. Our strategy to launch breakfast across the U.S. system may expose us to additional risks and our inability to successfully execute on our strategy could have a material adverse impact on our business, financial condition and results of operations.
Wendy’s planned expansion into the United Kingdom and other European markets may present increased risks due to low brand awareness, geopolitical risks and other factors.
As previously announced, Wendy’s intends to open Company-operated restaurants in the United Kingdom beginning in the next 12 to 18 months and, if successful, plans to expand into other anchor markets in Europe utilizing a franchise model. New markets, such as the United Kingdom, may have low brand awareness as well as competitive conditions, consumer tastes, discretionary spending patterns and social and cultural differences that are more difficult to predict or satisfy than our existing markets. We may need to make greater investments than we originally planned in advertising and promotional activity to build brand awareness, which could negatively impact the profitability of our operations. In addition, we may be unable to obtain desirable locations for new restaurants at reasonable prices, or at all, and restaurants may have higher construction, occupancy, food and labor costs than we currently anticipate. Geopolitical risks, including the United Kingdom’s decision to leave the European Union through a negotiated exit over a period of time, may result in increased regulatory complexities and economic uncertainty. Any of these risks and uncertainties, and other factors we cannot anticipate, could have a material adverse impact on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to repurchases of shares of our common stock by us and our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the third quarter of 20182019:
Issuer Repurchases of Equity Securities
|
| | | | | | | | | | |
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (2) |
July 2, 2018 through August 5, 2018 | 1,136,233 |
|
| $17.20 |
| 1,128,554 |
|
| $93,114,300 |
|
August 6, 2018 through September 2, 2018 | 815,688 |
|
| $17.89 |
| 747,288 |
|
| $179,716,861 |
|
September 3, 2018 through September 30, 2018 | 1,345,861 |
|
| $17.55 |
| 1,344,926 |
|
| $156,134,246 |
|
Total | 3,297,782 |
|
| $17.51 |
| 3,220,768 |
|
| $156,134,246 |
|
|
| | | | | | | | | | |
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (2) |
July 1, 2019 through August 4, 2019 | 525,920 |
|
| $19.19 |
| 520,672 |
|
| $186,755 |
|
August 5, 2019 through September 1, 2019 | 317,484 |
|
| $20.50 |
| 253,946 |
|
| $181,515 |
|
September 2, 2019 through September 29, 2019 | 560,105 |
|
| $20.30 |
| 553,750 |
|
| $170,292 |
|
Total | 1,403,509 |
|
| $19.93 |
| 1,328,368 |
|
| $170,292 |
|
| |
(1) | Includes 77,01475,141 shares reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective awards. The shares were valued at the average of the high and low trading prices of our common stock on the vesting or exercise date of such awards. |
| |
(2) | In February 2018,2019, our Board of Directors authorized thea repurchase ofprogram for up to $175.0$225.0 million of our common stock through March 3, 2019,1, 2020, when and if market conditions warrant and to the extent legally permissible. In August 2018, our Board of Directors authorized an additional share repurchase program for up to $100.0 million of our common stock through December 27, 2019, when and if market conditions warrant and to the extent legally permissible. |
Subsequent to September 30, 201829, 2019 through October 31, 2018,30, 2019, the Company repurchased 1.60.4 million shares under the February 2019 authorization with an aggregate purchase price of $27.3$9.2 million, excluding commissions.
|
| |
EXHIBIT NO. | DESCRIPTION |
| |
31.1 | |
31.2 | |
32.1 | |
101.INS101 | XBRL Instance Document*The following financial information from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2019 formatted in Inline eXtensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. |
101.SCH104 | The cover page from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2019, formatted in Inline XBRL Taxonomy Extension Schema Document* |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document*and contained in Exhibit 101. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| |
| THE WENDY’S COMPANY (Registrant) |
Date: November 6, 20182019 |
By: /s/ Gunther Plosch |
| Gunther Plosch |
| Chief Financial Officer |
| (On behalf of the registrant) |
| |
Date: November 6, 20182019 | By: /s/ Leigh A. Burnside |
| Leigh A. Burnside |
| Senior Vice President, Finance and Chief Accounting Officer |
| (Principal Accounting Officer) |