UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | |
☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberMarch 29, 20192020
or
|
| | |
☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _______________
Commission file number: 1-2207
THE WENDY’S COMPANY
(Exact name of registrant as specified in its charter)
|
| | | |
Delaware | | 38-0471180 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
One Dave Thomas Blvd. | | |
Dublin, | Ohio | | 43017 |
(Address of principal executive offices) | | (Zip Code) |
(614) 764-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.10 par value | WEN | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
There were 230,047,087222,692,815 shares of The Wendy’s Company common stock outstanding as of October 30, 2019.April 29, 2020.
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 29, 2019 | | December 30, 2018 | March 29, 2020 | | December 29, 2019 |
ASSETS | (Unaudited) | (Unaudited) |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 439,421 |
| | $ | 431,405 |
| $ | 294,890 |
| | $ | 300,195 |
|
Restricted cash | 28,769 |
| | 29,860 |
| 53,459 |
| | 34,539 |
|
Accounts and notes receivable, net | 105,017 |
| | 109,805 |
| 80,999 |
| | 117,461 |
|
Inventories | 3,549 |
| | 3,687 |
| 4,558 |
| | 3,891 |
|
Prepaid expenses and other current assets | 12,638 |
| | 14,452 |
| 37,969 |
| | 15,585 |
|
Advertising funds restricted assets | 84,380 |
| | 76,509 |
| 120,008 |
| | 82,376 |
|
Total current assets | 673,774 |
| | 665,718 |
| 591,883 |
| | 554,047 |
|
Properties | 980,872 |
| | 1,023,267 |
| 949,006 |
| | 977,000 |
|
Finance lease assets | 198,415 |
| | 189,969 |
| 202,718 |
| | 200,144 |
|
Operating lease assets | 871,108 |
| | — |
| 839,068 |
| | 857,199 |
|
Goodwill | 755,588 |
| | 747,884 |
| 748,640 |
| | 755,911 |
|
Other intangible assets | 1,251,699 |
| | 1,294,153 |
| 1,240,425 |
| | 1,247,212 |
|
Investments | 46,898 |
| | 47,660 |
| 42,778 |
| | 45,949 |
|
Net investment in sales-type and direct financing leases | 250,602 |
| | 226,477 |
| 258,816 |
| | 256,606 |
|
Other assets | 107,264 |
| | 96,907 |
| 108,382 |
| | 100,461 |
|
Total assets | $ | 5,136,220 |
| | $ | 4,292,035 |
| $ | 4,981,716 |
| | $ | 4,994,529 |
|
|
|
| | |
|
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
| |
| | |
|
Current liabilities: | |
| | |
| |
| | |
|
Current portion of long-term debt | $ | 22,750 |
| | $ | 23,250 |
| $ | 150,918 |
| | $ | 22,750 |
|
Current portion of finance lease liabilities | 10,584 |
| | 8,405 |
| 9,979 |
| | 11,005 |
|
Current portion of operating lease liabilities | 43,474 |
| | — |
| 43,670 |
| | 43,775 |
|
Accounts payable | 23,793 |
| | 21,741 |
| 22,537 |
| | 22,701 |
|
Accrued expenses and other current liabilities | 146,693 |
| | 150,636 |
| 80,142 |
| | 165,272 |
|
Advertising funds restricted liabilities | 90,152 |
| | 80,153 |
| 123,513 |
| | 84,195 |
|
Total current liabilities | 337,446 |
| | 284,185 |
| 430,759 |
| | 349,698 |
|
Long-term debt | 2,270,866 |
| | 2,305,552 |
| 2,244,930 |
| | 2,257,561 |
|
Long-term finance lease liabilities | 471,704 |
| | 447,231 |
| 488,039 |
| | 480,847 |
|
Long-term operating lease liabilities | 911,213 |
| | — |
| 881,005 |
| | 897,737 |
|
Deferred income taxes | 273,097 |
| | 269,160 |
| 270,019 |
| | 270,759 |
|
Deferred franchise fees | 91,437 |
| | 92,232 |
| 90,628 |
| | 91,790 |
|
Other liabilities | 130,866 |
| | 245,226 |
| 125,261 |
| | 129,778 |
|
Total liabilities | 4,486,629 |
| | 3,643,586 |
| 4,530,641 |
| | 4,478,170 |
|
Commitments and contingencies |
|
| |
|
|
|
| |
|
|
Stockholders’ equity: | | | | | | |
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 230,371 and 231,233 shares outstanding, respectively | 47,042 |
| | 47,042 |
| |
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 222,571 and 224,889 shares outstanding, respectively | | 47,042 |
| | 47,042 |
|
Additional paid-in capital | 2,885,404 |
| | 2,884,696 |
| 2,889,836 |
| | 2,874,001 |
|
Retained earnings | 186,282 |
| | 146,277 |
| 173,366 |
| | 185,725 |
|
Common stock held in treasury, at cost; 240,053 and 239,191 shares, respectively | (2,415,027 | ) | | (2,367,893 | ) | |
Common stock held in treasury, at cost; 247,853 and 245,535 shares, respectively | | (2,592,834 | ) | | (2,536,581 | ) |
Accumulated other comprehensive loss | (54,110 | ) | | (61,673 | ) | (66,335 | ) | | (53,828 | ) |
Total stockholders’ equity | 649,591 |
| | 648,449 |
| 451,075 |
| | 516,359 |
|
Total liabilities and stockholders’ equity | $ | 5,136,220 |
| | $ | 4,292,035 |
| $ | 4,981,716 |
| | $ | 4,994,529 |
|
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 |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 | March 29, 2020 | | March 31, 2019 |
| (Unaudited) | (Unaudited) |
Revenues: | | | | | | | | | | |
Sales | $ | 181,977 |
| | $ | 165,323 |
| | $ | 530,724 |
| | $ | 486,316 |
| $ | 166,798 |
| | $ | 167,697 |
|
Franchise royalty revenue and fees | 109,155 |
| | 103,212 |
| | 320,233 |
| | 308,679 |
| 101,705 |
| | 101,953 |
|
Franchise rental income | 59,918 |
| | 50,474 |
| | 176,931 |
| | 152,110 |
| 57,856 |
| | 58,452 |
|
Advertising funds revenue | 86,830 |
| | 81,541 |
| | 253,923 |
| | 245,011 |
| 78,601 |
| | 80,481 |
|
| 437,880 |
| | 400,550 |
| | 1,281,811 |
| | 1,192,116 |
| 404,960 |
| | 408,583 |
|
Costs and expenses: | | | | | | | | | | |
Cost of sales | 152,425 |
| | 139,348 |
| | 446,096 |
| | 409,721 |
| 149,999 |
| | 142,579 |
|
Franchise support and other costs | 9,739 |
| | 5,349 |
| | 19,823 |
| | 18,553 |
| 8,013 |
| | 6,018 |
|
Franchise rental expense | 32,364 |
| | 22,260 |
| | 92,842 |
| | 69,829 |
| 29,301 |
| | 32,451 |
|
Advertising funds expense | 87,883 |
| | 81,541 |
| | 257,031 |
| | 245,011 |
| 79,988 |
| | 80,481 |
|
General and administrative | 46,169 |
| | 46,545 |
| | 146,266 |
| | 146,064 |
| 51,639 |
| | 49,313 |
|
Depreciation and amortization | 33,306 |
| | 29,070 |
| | 97,975 |
| | 94,649 |
| 31,046 |
| | 33,185 |
|
System optimization gains, net | (1,040 | ) | | (486 | ) | | (1,162 | ) | | (8 | ) | (323 | ) | | (12 | ) |
Reorganization and realignment costs | 403 |
| | 941 |
| | 4,771 |
| | 6,691 |
| 3,910 |
| | 798 |
|
Impairment of long-lived assets | — |
| | 347 |
| | 1,684 |
| | 2,156 |
| 4,587 |
| | 1,486 |
|
Other operating income, net | (2,392 | ) | | (1,713 | ) | | (9,377 | ) | | (4,643 | ) | (1,932 | ) | | (3,982 | ) |
| 358,857 |
| | 323,202 |
| | 1,055,949 |
| | 988,023 |
| 356,228 |
| | 342,317 |
|
Operating profit | 79,023 |
| | 77,348 |
| | 225,862 |
| | 204,093 |
| 48,732 |
| | 66,266 |
|
Interest expense, net | (27,930 | ) | | (29,625 | ) | | (86,943 | ) | | (89,939 | ) | (28,525 | ) | | (29,082 | ) |
Loss on early extinguishment of debt | — |
| | — |
| | (7,150 | ) | | (11,475 | ) | |
Investment income, net | 340 |
| | 450,133 |
| | 999 |
| | 450,432 |
| |
Other income, net | 1,878 |
| | 1,061 |
| | 6,166 |
| | 2,423 |
| 1,076 |
| | 2,700 |
|
Income before income taxes | 53,311 |
| | 498,917 |
| | 138,934 |
| | 555,534 |
| 21,283 |
| | 39,884 |
|
Provision for income taxes | (7,184 | ) | | (107,668 | ) | | (28,527 | ) | | (114,250 | ) | (6,842 | ) | | (7,990 | ) |
Net income | $ | 46,127 |
| | $ | 391,249 |
| | $ | 110,407 |
| | $ | 441,284 |
| $ | 14,441 |
| | $ | 31,894 |
|
| | | | | | | | | | |
Net income per share: | | | | | | | | |
Basic | $ | .20 |
| | $ | 1.65 |
| | $ | .48 |
| | $ | 1.85 |
| |
Diluted | .20 |
| | 1.60 |
| | .47 |
| | 1.79 |
| |
Basic and diluted net income per share | | $ | .06 |
| | $ | .14 |
|
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 |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
| (Unaudited) |
Net income | $ | 46,127 |
| | $ | 391,249 |
| | $ | 110,407 |
| | $ | 441,284 |
|
Other comprehensive (loss) income, net: | | | | | | | |
Foreign currency translation adjustment | (2,297 | ) | | 5,315 |
| | 7,563 |
| | (5,054 | ) |
Change in unrecognized pension loss: | | | | | | | |
Unrealized gains arising during the period | — |
| | — |
| | — |
| | 156 |
|
Income tax provision | — |
| | — |
| | — |
| | (39 | ) |
| — |
| | — |
| | — |
| | 117 |
|
Other comprehensive (loss) income, net | (2,297 | ) | | 5,315 |
| | 7,563 |
| | (4,937 | ) |
Comprehensive income | $ | 43,830 |
| | $ | 396,564 |
| | $ | 117,970 |
| | $ | 436,347 |
|
|
| | | | | | | |
| Three Months Ended |
| March 29, 2020 | | March 31, 2019 |
| (Unaudited) |
Net income | $ | 14,441 |
| | $ | 31,894 |
|
Other comprehensive (loss) income: | | | |
Foreign currency translation adjustment | (12,507 | ) | | 6,025 |
|
Other comprehensive (loss) income | (12,507 | ) | | 6,025 |
|
Comprehensive income | $ | 1,934 |
| | $ | 37,919 |
|
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 | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Common Stock Held in Treasury | | Accumulated Other Comprehensive Loss | | Total |
| | |
| (Unaudited) | (Unaudited) |
Balance at December 29, 2019 | | $ | 47,042 |
| | $ | 2,874,001 |
| | $ | 185,725 |
| | $ | (2,536,581 | ) | | $ | (53,828 | ) | | $ | 516,359 |
|
Net income | | — |
| | — |
| | 14,441 |
| | — |
| | — |
| | 14,441 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (12,507 | ) | | (12,507 | ) |
Cash dividends | | — |
| | — |
| | (26,793 | ) | | — |
| | — |
| | (26,793 | ) |
Repurchases of common stock, including accelerated share repurchase | | — |
| | 15,000 |
| | — |
| | (58,336 | ) | | — |
| | (43,336 | ) |
Share-based compensation | | — |
| | 4,539 |
| | — |
| | — |
| | — |
| | 4,539 |
|
Common stock issued upon exercises of stock options | | — |
| | 280 |
| | — |
| | 1,330 |
| | — |
| | 1,610 |
|
Common stock issued upon vesting of restricted shares | | — |
| | (4,017 | ) | | — |
| | 726 |
| | — |
| | (3,291 | ) |
Other | | — |
| | 33 |
| | (7 | ) | | 27 |
| | — |
| | 53 |
|
Balance at March 29, 2020 | | $ | 47,042 |
| | $ | 2,889,836 |
| | $ | 173,366 |
| | $ | (2,592,834 | ) | | $ | (66,335 | ) | | $ | 451,075 |
|
| | | | | | | | | | | | |
Balance at December 30, 2018 | $ | 47,042 |
| | $ | 2,884,696 |
| | $ | 146,277 |
| | $ | (2,367,893 | ) | | $ | (61,673 | ) | | $ | 648,449 |
| $ | 47,042 |
| | $ | 2,884,696 |
| | $ | 146,277 |
| | $ | (2,367,893 | ) | | $ | (61,673 | ) | | $ | 648,449 |
|
Net income | — |
| | — |
| | 31,894 |
| | — |
| | — |
| | 31,894 |
| — |
| | — |
| | 31,894 |
| | — |
| | — |
| | 31,894 |
|
Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | 6,025 |
| | 6,025 |
| |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 6,025 |
| | 6,025 |
|
Cash dividends | — |
| | — |
| | (23,069 | ) | | — |
| | — |
| | (23,069 | ) | — |
| | — |
| | (23,069 | ) | | — |
| | — |
| | (23,069 | ) |
Repurchases of common stock | — |
| | — |
| | — |
| | (29,370 | ) | | — |
| | (29,370 | ) | — |
| | — |
| | — |
| | (29,370 | ) | | — |
| | (29,370 | ) |
Share-based compensation | — |
| | 5,022 |
| | — |
| | — |
| | — |
| | 5,022 |
| — |
| | 5,022 |
| | — |
| | — |
| | — |
| | 5,022 |
|
Common stock issued upon exercises of stock options | — |
| | (205 | ) | | — |
| | 9,053 |
| | — |
| | 8,848 |
| — |
| | (205 | ) | | — |
| | 9,053 |
| | — |
| | 8,848 |
|
Common stock issued upon vesting of restricted shares | — |
| | (8,874 | ) | | — |
| | 2,819 |
| | — |
| | (6,055 | ) | — |
| | (8,874 | ) | | — |
| | 2,819 |
| | — |
| | (6,055 | ) |
Cumulative effect of change in accounting principle | — |
| | — |
| | (1,105 | ) | | — |
| | — |
| | (1,105 | ) | — |
| | — |
| | (1,105 | ) | | — |
| | — |
| | (1,105 | ) |
Other | — |
| | 24 |
| | (6 | ) | | 37 |
| | — |
| | 55 |
| — |
| | 24 |
| | (6 | ) | | 37 |
| | — |
| | 55 |
|
Balance at March 31, 2019 | $ | 47,042 |
| | $ | 2,880,663 |
| | $ | 153,991 |
| | $ | (2,385,354 | ) | | $ | (55,648 | ) | | $ | 640,694 |
| $ | 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 |
| September 29, 2019 | | September 30, 2018 |
| (Unaudited) |
Cash flows from operating activities: | | | |
Net income | $ | 110,407 |
| | $ | 441,284 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 97,975 |
| | 94,649 |
|
Share-based compensation | 13,989 |
| | 14,401 |
|
Impairment of long-lived assets | 1,684 |
| | 2,156 |
|
Deferred income tax | 5,524 |
| | (1,527 | ) |
Non-cash rental expense (income), net | 18,722 |
| | (10,868 | ) |
Change in operating lease liabilities | (31,481 | ) | | — |
|
Net receipt of deferred vendor incentives | 2,269 |
| | 2,689 |
|
System optimization gains, net | (1,162 | ) | | (8 | ) |
Gain on sale of investments, net | (130 | ) | | (450,000 | ) |
Distributions received from joint ventures, net of equity in earnings | 2,926 |
| | 3,250 |
|
Long-term debt-related activities, net | 12,386 |
| | 16,860 |
|
Changes in operating assets and liabilities and other, net | 4,391 |
| | 116,776 |
|
Net cash provided by operating activities | 237,500 |
| | 229,662 |
|
Cash flows from investing activities: | |
| | |
|
Capital expenditures | (40,984 | ) | | (39,717 | ) |
Acquisitions | (5,052 | ) | | (21,401 | ) |
Dispositions | 2,038 |
| | 2,863 |
|
Proceeds from sale of investments | 130 |
| | 450,000 |
|
Notes receivable, net | (1,834 | ) | | (283 | ) |
Payments for investments | — |
| | (13 | ) |
Net cash (used in) provided by investing activities | (45,702 | ) | | 391,449 |
|
Cash flows from financing activities: | |
| | |
|
Proceeds from long-term debt | 850,000 |
| | 934,837 |
|
Repayments of long-term debt | (883,564 | ) | | (888,689 | ) |
Repayments of finance lease liabilities | (5,178 | ) | | (4,350 | ) |
Deferred financing costs | (14,008 | ) | | (17,340 | ) |
Repurchases of common stock | (76,948 | ) | | (140,199 | ) |
Dividends | (69,280 | ) | | (60,786 | ) |
Proceeds from stock option exercises | 24,069 |
| | 42,299 |
|
Payments related to tax withholding for share-based compensation | (8,447 | ) | | (10,464 | ) |
Contingent consideration payment | — |
| | (6,269 | ) |
Net cash used in financing activities | (183,356 | ) | | (150,961 | ) |
Net cash provided by operations before effect of exchange rate changes on cash | 8,442 |
| | 470,150 |
|
Effect of exchange rate changes on cash | 2,755 |
| | (2,195 | ) |
Net increase in cash, cash equivalents and restricted cash | 11,197 |
| | 467,955 |
|
Cash, cash equivalents and restricted cash at beginning of period | 486,512 |
| | 212,824 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 497,709 |
| | $ | 680,779 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED
(In Thousands)
|
| | | | | | | |
| Nine Months Ended |
| September 29, 2019 | | September 30, 2018 |
| (Unaudited) |
Supplemental non-cash investing and financing activities: | | | |
Capital expenditures included in accounts payable | $ | 7,582 |
| | $ | 9,588 |
|
Finance leases | 34,084 |
| | 6,569 |
|
| | | |
| September 29, 2019 | | December 30, 2018 |
Reconciliation of cash, cash equivalents and restricted cash at end of period: | | | |
Cash and cash equivalents | $ | 439,421 |
| | $ | 431,405 |
|
Restricted cash | 28,769 |
| | 29,860 |
|
Restricted cash, included in Advertising funds restricted assets | 29,519 |
| | 25,247 |
|
Total cash, cash equivalents and restricted cash | $ | 497,709 |
| | $ | 486,512 |
|
|
| | | | | | | |
| Three Months Ended |
| March 29, 2020 | | March 31, 2019 |
| (Unaudited) |
Cash flows from operating activities: | | | |
Net income | $ | 14,441 |
| | $ | 31,894 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | |
Depreciation and amortization | 31,046 |
| | 33,185 |
|
Share-based compensation | 4,539 |
| | 5,022 |
|
Impairment of long-lived assets | 4,587 |
| | 1,486 |
|
Deferred income tax | 748 |
| | 842 |
|
Non-cash rental expense, net | 6,218 |
| | 7,818 |
|
Change in operating lease liabilities | (10,611 | ) | | (10,496 | ) |
Net (recognition) receipt of deferred vendor incentives | (2,305 | ) | | 8,033 |
|
System optimization gains, net | (323 | ) | | (12 | ) |
Distributions received from joint ventures, net of equity in earnings | 180 |
| | 415 |
|
Long-term debt-related activities, net | 1,556 |
| | 1,823 |
|
Changes in operating assets and liabilities and other, net | (69,445 | ) | | (17,989 | ) |
Net cash (used in) provided by operating activities | (19,369 | ) | | 62,021 |
|
Cash flows from investing activities: | |
| | |
|
Capital expenditures | (12,629 | ) | | (11,215 | ) |
Acquisitions | — |
| | (5,052 | ) |
Dispositions | 195 |
| | — |
|
Proceeds from sale of investments | — |
| | 130 |
|
Notes receivable, net | 313 |
| | 248 |
|
Net cash used in investing activities | (12,121 | ) | | (15,889 | ) |
Cash flows from financing activities: | |
| | |
|
Proceeds from long-term debt | 153,315 |
| | — |
|
Repayments of long-term debt | (14,334 | ) | | (5,813 | ) |
Repayments of finance lease liabilities | (1,967 | ) | | (1,881 | ) |
Repurchases of common stock | (45,137 | ) | | (30,929 | ) |
Dividends | (26,793 | ) | | (23,069 | ) |
Proceeds from stock option exercises | 1,722 |
| | 5,196 |
|
Payments related to tax withholding for share-based compensation | (3,402 | ) | | (6,055 | ) |
Net cash provided by (used in) financing activities | 63,404 |
| | (62,551 | ) |
Net cash provided by (used in) operations before effect of exchange rate changes on cash | 31,914 |
| | (16,419 | ) |
Effect of exchange rate changes on cash | (5,086 | ) | | 1,884 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash | 26,828 |
| | (14,535 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 358,707 |
| | 486,512 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 385,535 |
| | $ | 471,977 |
|
| | | |
Supplemental non-cash investing and financing activities: | | | |
Capital expenditures included in accounts payable | $ | 9,579 |
| | $ | 5,125 |
|
Finance leases | 9,274 |
| | 13,810 |
|
| | | |
| March 29, 2020 | | December 29, 2019 |
Reconciliation of cash, cash equivalents and restricted cash at end of period: | | | |
Cash and cash equivalents | $ | 294,890 |
| | $ | 300,195 |
|
Restricted cash | 53,459 |
| | 34,539 |
|
Restricted cash, included in Advertising funds restricted assets | 37,186 |
| | 23,973 |
|
Total cash, cash equivalents and restricted cash | $ | 385,535 |
| | $ | 358,707 |
|
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 SeptemberMarch 29, 20192020, and the results of our operations for the three and nine months ended September 29, 2019 and September 30, 2018 and cash flows for the ninethree months ended SeptemberMarch 29, 20192020 and September 30, 2018. The results of operations for the three and nine months ended September 29, 2019 are not necessarily indicative of the results to be expected for the full 2019 fiscal year.March 31, 2019. The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 30, 201829, 2019 (the “Form 10-K”).
The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has materially affected and could continue to materially affect our financial condition and results of operations for an extended period of time. As such, the results of operations for the three months ended March 29, 2020 are not necessarily indicative of the results to be expected for the full 2020 fiscal year. We cannot predict whether, when or the manner in which the conditions surrounding the pandemic will change and cannot currently estimate the impact on our business in the short or long-term. See Note 9 for the debt-related actions taken by the Company in response to the COVID-19 pandemic and Note 11 for the impact of the COVID-19 pandemic on the recoverability of the Company’s long-lived assets.
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:segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Certain prior period financial information has been revised to align with this segment reporting structure. See Note 619 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-monththree-month periods presented herein contain 13 weeks and 39 weeks, respectively.weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.
Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.
Certain reclassifications have been made to the prior year presentation to conform to the current year presentation. See Note 2 for further information.
(2) New Accounting Standards
New Accounting Standards Adopted
Income Taxes
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and the simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The Company early adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued new guidance on disclosure requirements for fair value measurements. The objective of the new guidance 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 adopted this guidance during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Goodwill Impairment
In January 2017, the FASB issued new guidance that simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. The Company adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”)FASB issued an amendment that will requirerequires the Company to use a current expected credit loss model that will resultresults in the immediate recognition of an estimate of credit losses that are expected to occur over the life of the financial instruments that are within the scope of the guidance, including trade receivables. The amendment is effective commencing with our 2020 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our condensed consolidated financial statements.
New Accounting Standards Adopted
Cloud Computing
In August 2018, the FASB issued new guidance on accounting for implementation costs of a cloud computing arrangement that is a service contract. The new guidance aligns the accounting for such implementation costs of a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The Company adopted this amendment during the first quarter of 2019.2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
11(3) Revenue
Disaggregation of Revenue
The following tables disaggregate revenue by segment and source:
|
| | | | | | | | | | | | | | | |
| Wendy’s U.S. | | Wendy’s International | | Global Real Estate & Development | | Total |
Three Months Ended March 29, 2020 | | | | | | | |
Sales at Company-operated restaurants | $ | 166,798 |
| | $ | — |
| | $ | — |
| | $ | 166,798 |
|
Franchise royalty revenue | 84,833 |
| | 10,523 |
| | — |
| | 95,356 |
|
Franchise fees | 5,285 |
| | 473 |
| | 591 |
| | 6,349 |
|
Franchise rental income | — |
| | — |
| | 57,856 |
| | 57,856 |
|
Advertising funds revenue | 74,125 |
| | 4,476 |
| | — |
| | 78,601 |
|
Total revenues | $ | 331,041 |
| | $ | 15,472 |
| | $ | 58,447 |
| | $ | 404,960 |
|
| | | | | | | |
Three Months Ended March 31, 2019 | | | | | | | |
Sales at Company-operated restaurants | $ | 167,697 |
| | $ | — |
| | $ | — |
| | $ | 167,697 |
|
Franchise royalty revenue | 84,378 |
| | 10,465 |
| | — |
| | 94,843 |
|
Franchise fees | 5,430 |
| | 1,033 |
| | 647 |
| | 7,110 |
|
Franchise rental income | — |
| | — |
| | 58,452 |
| | 58,452 |
|
Advertising funds revenue | 75,981 |
| | 4,500 |
| | — |
| | 80,481 |
|
Total revenues | $ | 333,486 |
| | $ | 15,998 |
| | $ | 59,099 |
| | $ | 408,583 |
|
Contract Balances
The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
|
| | | | | | | |
| March 29, 2020 (a) | | December 29, 2019 (a) |
Receivables, which are included in “Accounts and notes receivable, net” (b) | $ | 35,450 |
| | $ | 39,188 |
|
Receivables, which are included in “Advertising funds restricted assets” | 44,635 |
| | 54,394 |
|
Deferred franchise fees (c) | 99,611 |
| | 100,689 |
|
_______________
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Nonemployee Share-Based Payments
In June 2018, the FASB issued new guidance on nonemployee share-based payment arrangements. The new guidance aligns the requirements for nonemployee share-based payments with the requirements for employee share-based payments. The Company adopted this amendment during the first quarter of 2019. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Leases
In February 2016, the FASB issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases. The Company adopted the new guidance during the first quarter of 2019 using the effective date as the date of initial application; therefore, the comparative period has not been adjusted and continues to be reported under the previous lease guidance.
The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did not recognize right-of-use (“ROU”) assets or liabilities, which included not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient for lessees to account for lease components and nonlease components as a single lease component for all underlying classes of assets. In addition, the Company elected the practical expedient for lessors to account for lease components and nonlease components as a single lease component in instances where the lease component is predominant, the timing and pattern of transfer for the lease component and nonlease component are the same and the lease component, if accounted for separately, would be classified as an operating lease. The Company did not elect the use-of-hindsight practical expedient.
The standard had a material impact on our condensed consolidated balance sheets and related disclosures. Upon adoption at the beginning of 2019, we recognized operating lease liabilities of $1,011,000 based on the present value of the remaining minimum rental payments, with corresponding ROU assets of $934,000. The measurement of the operating lease ROU assets included, among other items, favorable lease amounts of $23,000 and unfavorable lease amounts of $30,000, which were previously included in “Other intangible assets” and “Other liabilities,” respectively, as well as the excess of rent expense recognized on a straight-line basis over the minimum rents paid of $67,000, which was previously included in “Other liabilities.” In addition, the standard requires lessors to recognize lessees’ payments to the Company for executory costs on a gross basis as revenue with a corresponding expense, which we expect will result in an increase of approximately $40,000 to our 2019 franchise rental income and expense. The Company also recognized a decrease to retained earnings of $1,105 as a result of impairing newly recognized ROU assets upon transition to the new guidance. The adoption of the guidance did not have a material impact on our condensed consolidated statement of cash flows.
In connection with the adoption of the standard, the Company has reclassified finance lease ROU assets to “Finance lease assets,” which were previously recorded to “Properties.” The Company also reclassified the current and long-term finance lease liabilities to “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively, which were previously recorded to “Current portion of long-term debt” and “Long-term debt,” respectively. The prior period reflects the reclassifications of these assets and liabilities to conform to the current year presentation.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table illustrates the reclassifications made to the condensed consolidated balance sheet as of December 30, 2018:
|
| | | | | | | | | | | |
| As Previously Reported | | Reclassifications | | As Currently Reported |
Properties | $ | 1,213,236 |
| | $ | (189,969 | ) | | $ | 1,023,267 |
|
Finance lease assets | — |
| | 189,969 |
| | 189,969 |
|
Current portion of long-term debt | 31,655 |
| | (8,405 | ) | | 23,250 |
|
Current portion of finance lease liabilities | — |
| | 8,405 |
| | 8,405 |
|
Long-term debt | 2,752,783 |
| | (447,231 | ) | | 2,305,552 |
|
Long-term finance lease liabilities | — |
| | 447,231 |
| | 447,231 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(3) Revenue
Disaggregation of Revenue
The following tables disaggregate revenue by primary geographical market and source:
|
| | | | | | | | | | | | | | | |
| U.S. | | Canada | | Other International | | Total |
Three Months Ended 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)
Contract Balances
The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
|
| | | | | | | |
| September 29, 2019 (a) | | December 30, 2018 (a) |
Receivables, which are included in “Accounts and notes receivable, net” (b) | $ | 39,669 |
| | $ | 40,300 |
|
Receivables, which are included in “Advertising funds restricted assets” | 49,102 |
| | 47,332 |
|
Deferred franchise fees (c) | 100,751 |
| | 102,205 |
|
_______________
| |
(a) | Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s condensed consolidated statements of operations. |
| |
(b) | Includes receivables related to “Sales” and “Franchise royalty revenue and fees.” |
| |
(c) | Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled $9,314$8,983 and $91,437$90,628 as of SeptemberMarch 29, 2019,2020, respectively, and $9,973$8,899 and $92,232$91,790 as of December 30, 2018,29, 2019, respectively. |
Significant changes in deferred franchise fees are as follows:
| | | Nine Months Ended | Three Months Ended |
| September 29, 2019 | | September 30, 2018 | March 29, 2020 | | March 31, 2019 |
Deferred franchise fees at beginning of period | $ | 102,205 |
| | $ | 102,492 |
| $ | 100,689 |
| | $ | 102,205 |
|
Revenue recognized during the period | (6,635 | ) | | (7,393 | ) | (2,144 | ) | | (2,772 | ) |
New deferrals due to cash received and other | 5,181 |
| | 7,913 |
| 1,066 |
| | 2,036 |
|
Deferred franchise fees at end of period | $ | 100,751 |
| | $ | 103,012 |
| $ | 99,611 |
| | $ | 101,469 |
|
Anticipated Future Recognition of Deferred Franchise Fees
The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
| | Estimate for fiscal year: | | |
2019 (a) | $ | 2,164 |
| |
2020 | 7,399 |
| |
2020 (a) | | $ | 7,434 |
|
2021 | 6,118 |
| 6,301 |
|
2022 | 5,858 |
| 5,971 |
|
2023 | 5,633 |
| 5,798 |
|
2024 | | 5,594 |
|
Thereafter | 73,579 |
| 68,513 |
|
| $ | 100,751 |
| $ | 99,611 |
|
_______________
| |
(a) | Represents franchise fees expected to be recognized for the remainder of 2019,2020, 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
NaN restaurants were acquired from franchisees during the three months ended March 29, 2020. During the ninethree months ended September 29,March 31, 2019, the Company acquired 5 restaurants from franchisees for total net cash consideration of $5,052. The Company did not incur any material acquisition-related costs associated with the acquisitions during the three months ended March 31, 2019 and such transactions were not significant to our condensed consolidated financial statements. The table below presents the allocation of the total purchase price to the fair value of assets acquired and liabilities assumed for restaurants acquired from franchisees:
| | | Nine Months Ended | Three Months Ended |
| September 29, 2019 | March 31, 2019 |
Restaurants acquired from franchisees | 5 |
| 5 |
|
| | |
Total consideration paid, net of cash received | $ | 5,052 |
| $ | 5,052 |
|
Identifiable assets acquired and liabilities assumed: | | |
Properties | 666 |
| 666 |
|
Acquired franchise rights | 1,354 |
| 1,354 |
|
Finance lease assets | 5,350 |
| 5,350 |
|
Finance lease liabilities | (4,084 | ) | (4,084 | ) |
Other | (2,316 | ) | (2,316 | ) |
Total identifiable net assets | 970 |
| 970 |
|
Goodwill | $ | 4,082 |
| $ | 4,082 |
|
During 2018, the Company acquired 16 restaurants from a franchisee for total net cash consideration of $21,401. The fair values of the identifiable intangible assets related to the acquisition were provisional amounts as of December 30, 2018, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended March 31, 2019, which resulted in a decrease in the fair value of acquired franchise rights of $2,989 and an increase in deferred tax assets of $140.
(5) System Optimization Gains, Net
The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”). As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to reduce its ownership below the approximately 5% level, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages.
During the ninethree months ended SeptemberMarch 29, 2019 and September 30, 2018,2020, the Company facilitated 3 and 73Franchise Flips. NaN Franchise Flips respectively. Additionally,were facilitated by the Company during the ninethree months ended September 30, 2018,March 31, 2019. During the next twelve months, the Company completed the sale of 3expects to sell 43 Company-operated restaurants in New York to a franchisee. NaNfranchisees. The Company expects to retain its Company-operated restaurants were sold to franchisees during the nine months ended September 29, 2019.in Manhattan.
Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 6. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”
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 |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
Gain on sale of restaurants, net (a) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 89 |
|
Post-closing adjustments on sales of restaurants (b) | 1,033 |
| | 279 |
| | 1,087 |
| | 54 |
|
Gain (loss) on sales of other assets, net (c) | 7 |
| | 207 |
| | 75 |
| | (135 | ) |
System optimization gains, net | $ | 1,040 |
| | $ | 486 |
| | $ | 1,162 |
| | $ | 8 |
|
|
| | | | | | | |
| Three Months Ended |
| March 29, 2020 | | March 31, 2019 |
Post-closing adjustments on sales of restaurants (a) | $ | 345 |
| | $ | (8 | ) |
(Loss) gain on sales of other assets, net (b) | (22 | ) | | 20 |
|
System optimization gains, net | $ | 323 |
| | $ | 12 |
|
_______________
| |
(a) | During the nineThe three months ended September 30, 2018, the Company received cash proceeds of $1,436 from the sale of 3 Company-operated restaurants. The value of the net assets that were included in the sale totaled $1,139 and consisted primarily of equipment. In addition, goodwill of $208 was written off in connection with the sale. |
| |
(b) | The three and nine months ended SeptemberMarch 29, 2019 and September 30, 2018 include2020 represents the recognition of deferred gains of $911 and $503, respectively, as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. The nine months ended September 30, 2018 also includes cash proceeds, net of payments of $6. |
| |
(c)(b) | During the three and nine months ended SeptemberMarch 29, 2019,2020, the Company received cash proceeds of $798 and $2,038, respectively, and during the three and nine months ended September 30, 2018 received cash proceeds of $1,049 and $1,421, respectively,$195 primarily from the sale of surplus properties. |
Assets Held for Sale
As of September 29, 2019 and December 30, 2018, the Company had assets held for sale of $2,391 and $2,435, respectively, primarily consisting of surplus properties. |
| | | | | | | |
| March 29, 2020 | | December 29, 2019 |
Number of restaurants classified as held for sale | 43 |
| | — |
|
Net restaurant assets held for sale (a) | $ | 20,278 |
| | $ | — |
|
Other assets held for sale (b) | $ | 1,804 |
| | $ | 1,437 |
|
_______________
| |
(a) | Net restaurant assets held for sale include the New York Company-operated restaurants we expect to sell during the next twelve months and consist primarily of cash, inventory, property and an estimate of allocable goodwill. |
| |
(b) | Other assets held for sale primarily consist of surplus properties. |
Assets held for sale are included in “Prepaid expenses and other current assets.”
(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 | Three Months Ended |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 | March 29, 2020 | | March 31, 2019 |
IT realignment | | $ | 3,559 |
| | $ | — |
|
G&A realignment | $ | 396 |
| | $ | 629 |
| | $ | 4,695 |
| | $ | 6,375 |
| 267 |
| | 782 |
|
System optimization initiative | 7 |
| | 312 |
| | 76 |
| | 316 |
| 84 |
| | 16 |
|
Reorganization and realignment costs | $ | 403 |
| | $ | 941 |
| | $ | 4,771 |
| | $ | 6,691 |
| $ | 3,910 |
| | $ | 798 |
|
Information Technology (“IT”) Realignment
In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth. The Company is partnering with a third-party global IT consultant on this new structure to leverage their global capabilities, which the Company believes will enable a more seamless integration between its digital and corporate IT assets. The Company expects that the realignment plan will reduce certain employee compensation and other related costs that the Company intends to reinvest back into IT to drive additional capabilities and capacity across all of its technology platforms. The Company expects the majority of the impact of the realignment plan to occur at its Restaurant Support Center in Dublin, Ohio. The Company expects to incur total costs aggregating approximately $13,000 to $15,000 related to the
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
plan. During the three months ended March 29, 2020, the Company recognized costs totaling $3,559, which primarily included third-party and other costs. The Company expects to incur additional costs aggregating approximately $1,500, comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs associated with the plan during the second quarter of 2020.
The following is a summary of the activity recorded as a result of the IT realignment plan:
|
| | | | | | | |
| Three Months Ended | | Total Incurred Since Inception |
| March 29, 2020 | |
Severance and related employee costs | $ | 145 |
| | $ | 7,693 |
|
Recruitment and relocation costs | 171 |
| | 171 |
|
Third-party and other costs | 3,243 |
| | 4,629 |
|
| 3,559 |
| | 12,493 |
|
Share-based compensation (a) | — |
| | 193 |
|
Total IT realignment | $ | 3,559 |
| | $ | 12,686 |
|
_______________
| |
(a) | Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our IT realignment plan. |
The table below presents a rollforward of our accruals for the plan, which are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $6,744 and $237 as of March 29, 2020, respectively.
|
| | | | | | | | | | | | | | | |
| Balance December 29, 2019 | | Charges | | Payments | | Balance March 29, 2020 |
Severance and related employee costs | $ | 7,548 |
| | $ | 145 |
| | $ | (712 | ) | | $ | 6,981 |
|
Recruitment and relocation costs | — |
| | 171 |
| | (171 | ) | | — |
|
Third-party and other costs | 1,076 |
| | 3,243 |
| | (4,319 | ) | | — |
|
| $ | 8,624 |
| | $ | 3,559 |
| | $ | (5,202 | ) | | $ | 6,981 |
|
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 leadershipmanagement and operating structure that includesincluded 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 ninethree months ended SeptemberMarch 29, 20192020 and September 30, 2018,March 31, 2019, the Company recognized costs related to the plan totaling $4,695$267 and $6,375,$782, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expectsdoes not expect to incur any additional material 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 tounder the plan.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
As a result of the realignment of our management and operating structure as described above, the Company is continuing to evaluate the impact these changes will have on its existing operating segment structure. The Company currently expects to report its results in the following three segments beginning with our Annual Report on Form 10-K for the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development.
The following is a summary of the activity recorded as a result of the G&A realignment plan:
| | | Three Months Ended | | Nine Months Ended | | Total Incurred Since Inception | Three Months Ended | | Total Incurred Since Inception |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 | | March 29, 2020 | | March 31, 2019 | |
Severance and related employee costs | $ | 214 |
| | $ | 57 |
| | $ | 2,816 |
| | $ | 3,168 |
| | $ | 21,569 |
| $ | 152 |
| | $ | 472 |
| | $ | 24,390 |
|
Recruitment and relocation costs | 58 |
| | 200 |
| | 654 |
| | 708 |
| | 2,220 |
| 15 |
| | 114 |
| | 2,531 |
|
Third-party and other costs | 25 |
| | 39 |
| | 112 |
| | 971 |
| | 2,222 |
| 1 |
| | 16 |
| | 2,211 |
|
| 297 |
| | 296 |
| | 3,582 |
| | 4,847 |
| | 26,011 |
| 168 |
| | 602 |
| | 29,132 |
|
Share-based compensation (a) | 99 |
| | 333 |
| | 1,113 |
| | 1,528 |
| | 7,797 |
| 99 |
| | 180 |
| | 7,997 |
|
Termination of defined benefit plans | — |
| | — |
| | — |
| | — |
| | 1,335 |
| — |
| | — |
| | 1,335 |
|
Total G&A realignment | $ | 396 |
| | $ | 629 |
| | $ | 4,695 |
| | $ | 6,375 |
| | $ | 35,143 |
| $ | 267 |
| | $ | 782 |
| | $ | 38,464 |
|
_______________
| |
(a) | Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our G&A realignment plan. |
The accruals for our G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $3,491$3,781 and $507$408 as of SeptemberMarch 29, 2019,2020, respectively, and $6,817$4,730 and $1,432$765 as of September 30, 2018,March 31, 2019, respectively. The tables below present a rollforward of our accruals for the plan.
| | | Balance December 30, 2018 | | Charges | | Payments | | Balance September 29, 2019 | Balance December 29, 2019 | | Charges | | Payments | | Balance March 29, 2020 |
Severance and related employee costs | $ | 7,241 |
| | $ | 2,816 |
| | $ | (6,216 | ) | | $ | 3,841 |
| $ | 5,276 |
| | $ | 152 |
| | $ | (1,306 | ) | | $ | 4,122 |
|
Recruitment and relocation costs | 83 |
| | 654 |
| | (580 | ) | | 157 |
| 83 |
| | 15 |
| | (31 | ) | | 67 |
|
Third-party and other costs | — |
| | 112 |
| | (112 | ) | | — |
| — |
| | 1 |
| | (1 | ) | | — |
|
| $ | 7,324 |
| | $ | 3,582 |
| | $ | (6,908 | ) | | $ | 3,998 |
| $ | 5,359 |
| | $ | 168 |
| | $ | (1,338 | ) | | $ | 4,189 |
|
| | | Balance December 31, 2017 | | Charges | | Payments | | Balance September 30, 2018 | Balance December 30, 2018 | | Charges | | Payments | | Balance March 31, 2019 |
Severance and related employee costs | $ | 12,093 |
| | $ | 3,168 |
| | $ | (7,103 | ) | | $ | 8,158 |
| $ | 7,241 |
| | $ | 472 |
| | $ | (2,218 | ) | | $ | 5,495 |
|
Recruitment and relocation costs | 177 |
| | 708 |
| | (794 | ) | | 91 |
| 83 |
| | 114 |
| | (197 | ) | | — |
|
Third-party and other costs | — |
| | 971 |
| | (971 | ) | | — |
| — |
| | 16 |
| | (16 | ) | | — |
|
| $ | 12,270 |
| | $ | 4,847 |
| | $ | (8,868 | ) | | $ | 8,249 |
| $ | 7,324 |
| | $ | 602 |
| | $ | (2,431 | ) | | $ | 5,495 |
|
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $72,268$72,365 under the initiative since inception and does not expect to incur any material additional costs duringunder the remainder of 2019.plan.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(7)Cash and Receivables
|
| | | | | | | |
| March 29, 2020 | | December 29, 2019 |
Cash and cash equivalents | | | |
Cash | $ | 174,617 |
| | $ | 185,203 |
|
Cash equivalents | 120,273 |
| | 114,992 |
|
| 294,890 |
| | 300,195 |
|
Restricted cash | | | |
Accounts held by trustee for the securitized financing facility | 53,127 |
| | 34,209 |
|
Other | 332 |
| | 330 |
|
| 53,459 |
| | 34,539 |
|
Advertising Funds (a) | 37,186 |
| | 23,973 |
|
| 90,645 |
| | 58,512 |
|
Total cash, cash equivalents and restricted cash | $ | 385,535 |
| | $ | 358,707 |
|
_______________
| |
(a) | Included in “Advertising funds restricted assets.” |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 29, 2020 | | December 29, 2019 |
| | Gross | | Allowance for Doubtful Accounts | | Net | | Gross | | Allowance for Doubtful Accounts | | Net |
Accounts and Notes Receivable, Net | | | | | | | | | | | | |
Current | | | | | | | | | | | | |
Accounts receivable (a) | | $ | 71,750 |
| | $ | (3,881 | ) | | $ | 67,869 |
| | $ | 103,852 |
| | $ | (3,314 | ) | | $ | 100,538 |
|
Notes receivable from franchisees (b) (c) (d) | | 18,635 |
| | (5,505 | ) | | 13,130 |
| | 23,628 |
| | (6,705 | ) | | 16,923 |
|
| | $ | 90,385 |
| | $ | (9,386 | ) | | $ | 80,999 |
| | $ | 127,480 |
| | $ | (10,019 | ) | | $ | 117,461 |
|
Non-current (e) | | | | | | | | | | | | |
Notes receivable from franchisees (d) | | $ | 5,623 |
| | $ | — |
| | $ | 5,623 |
| | $ | 1,617 |
| | $ | — |
| | $ | 1,617 |
|
_______________
| |
(a) | Includes accrued interest receivables, net of $1,008 and $1,304 and income tax refund receivables $9,764 and $13,555 as of March 29, 2020 and December 29, 2019, respectively. Additionally, 2019 includes receivables of $25,350 related to insurance coverage for the financial institutions case. |
| |
(b) | Includes the current portion of sales-type and direct financing lease receivables of $3,438 and $3,146 as of March 29, 2020 and December 29, 2019, respectively. |
| |
(c) | Includes a note receivable from a franchisee in India totaling $1,000 as of March 29, 2020 and December 29, 2019. As of March 29, 2020 and December 29, 2019, the Company had a reserve of $985 on the loan outstanding to the franchisee in India. |
Included a note receivable from a U.S. franchisee totaling $1,000 as of December 29, 2019. The note was repaid during the three months ended March 29, 2020.
| |
(d) | Includes a note receivable from a franchisee in Indonesia, of which $1,097 and $1,262 are included in current notes receivable and $1,273 and $1,617 are included in non-current notes receivable as of March 29, 2020 and December 29, 2019, respectively. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Includes notes receivable related to a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”), of which $11,800 and $15,920 are included in current notes receivable as of March 29, 2020 and December 29, 2019, respectively, and $4,350 is included in non-current notes receivable as of March 29, 2020. As of March 29, 2020 and December 29, 2019, the Company had reserves of $4,520 and $5,720, respectively, on the loans outstanding related to the Brazil JV.
| |
(e) | Included in “Other assets.” |
Reserve estimates include consideration of the likelihood of default expected over the estimated life of the receivable. The Company periodically assesses the need for an allowance for doubtful accounts on its receivables based upon several key credit quality indicators such as outstanding past due balances, the financial strength of the obligor, the estimated fair value of any underlying collateral and agreement characteristics. We believe that our vulnerability to risk concentrations in our receivables is mitigated by (1) favorable historical collectability on past due balances, (2) recourse to the underlying collateral regarding sales-type and direct financing lease receivables, and (3) our expectations for fluctuations in general market conditions. Receivables are considered delinquent once they are contractually past due under the terms of the underlying agreements. As of March 29, 2020, there were no material receivables more than one year past due.
The following is an analysis of the allowance for doubtful accounts:
|
| | | | | | | | | | | |
| Accounts Receivable | | Notes Receivable | | Total |
Three Months Ended March 29, 2020 | | | | | |
Balance at December 29, 2019 | $ | 3,314 |
| | $ | 6,705 |
| | $ | 10,019 |
|
Provision for doubtful accounts | 588 |
| | (8 | ) | | 580 |
|
Uncollectible accounts written off, net of recoveries | (21 | ) | | (1,192 | ) | | (1,213 | ) |
Balance at March 29, 2020 | $ | 3,881 |
| | $ | 5,505 |
| | $ | 9,386 |
|
| | | | | |
Three Months Ended March 31, 2019 | | | | | |
Balance at December 30, 2018 | $ | 4,940 |
| | $ | 2,000 |
| | $ | 6,940 |
|
Provision for doubtful accounts | (570 | ) | | 594 |
| | 24 |
|
Uncollectible accounts written off, net of recoveries | (123 | ) | | 6 |
| | (117 | ) |
Balance at March 31, 2019 | $ | 4,247 |
| | $ | 2,600 |
| | $ | 6,847 |
|
(8) 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”).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.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:
| | | Nine Months Ended | Three Months Ended |
| September 29, 2019 | | September 30, 2018 | March 29, 2020 | | March 31, 2019 |
Balance at beginning of period | $ | 47,021 |
| | $ | 55,363 |
| $ | 45,310 |
| | $ | 47,021 |
|
| | | | | | |
Investment | — |
| | 13 |
| |
| | | | |
Equity in earnings for the period | 8,812 |
| | 7,566 |
| 1,985 |
| | 2,397 |
|
Amortization of purchase price adjustments (a) | (1,700 | ) | | (1,756 | ) | (562 | ) | | (566 | ) |
| 7,112 |
| | 5,810 |
| 1,423 |
| | 1,831 |
|
Distributions received | (10,038 | ) | | (9,060 | ) | (1,603 | ) | | (2,246 | ) |
Foreign currency translation adjustment included in “Other comprehensive (loss) income, net” and other | 2,164 |
| | (191 | ) | |
Foreign currency translation adjustment included in “Other comprehensive (loss) income” and other | | (2,991 | ) | | 1,166 |
|
Balance at end of period | $ | 46,259 |
| | $ | 51,935 |
| $ | 42,139 |
| | $ | 47,772 |
|
_______________
| |
(a) | Purchase price adjustments that impacted the carrying value of the Company’s investment in TimWen are being amortized over the average original aggregate life of 21 years. |
Other Investments in Equity Securities
On October 11, 2019, the Company received a $25,000 cash settlement related to a previously held investment.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(8) Long-Term Debt
Long-term debt consisted of the following:
| | | September 29, 2019 | | December 30, 2018 | March 29, 2020 | | December 29, 2019 |
Series 2019-1 Class A-2 Notes: | | | | | | |
3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 | $ | 399,000 |
| | $ | — |
| $ | 395,000 |
| | $ | 398,000 |
|
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 | 448,875 |
| | — |
| 444,375 |
| | 447,750 |
|
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 |
| 439,875 |
| | 441,000 |
|
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 | 466,688 |
| | 470,250 |
| 464,313 |
| | 465,500 |
|
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 |
| 477,500 |
| | 478,750 |
|
Series 2019-1 Class A-1 Variable Funding Senior Secured Notes | | 120,000 |
| | — |
|
Canadian revolving credit facility | | 3,918 |
| | — |
|
7% debentures, due in 2025 | 91,722 |
| | 90,769 |
| 83,126 |
| | 82,837 |
|
Unamortized debt issuance costs | (34,794 | ) | | (32,217 | ) | (32,259 | ) | | (33,526 | ) |
| 2,293,616 |
| | 2,328,802 |
| 2,395,848 |
| | 2,280,311 |
|
Less amounts payable within one year | (22,750 | ) | | (23,250 | ) | (150,918 | ) | | (22,750 | ) |
Total long-term debt | $ | 2,270,866 |
| | $ | 2,305,552 |
| $ | 2,244,930 |
| | $ | 2,257,561 |
|
On June 26, 2019, Senior Notes
Wendy’s Funding, LLC, (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the Company, completed a debt refinancing transaction under which the Master Issuer issued fixed ratemaster issuer (the “Master Issuer”) of outstanding senior secured notes in the following 2019-1 series: Class A-2-I with an initial principal amount of $400,000 and Class A-2-II with an initial principal amount of $450,000 (collectively, the “Series 2019-1 Class A-2 Notes”). Interest payments on the Series 2019-1 Class A-2 Notes are payable onunder a quarterly basis. The legal final maturity date of the Series 2019-1 Class A-2 Notes issecuritized financing facility that was entered into in June 2049. If the Master Issuer has not repaid or refinanced the Series 2019-1 Class A-2 Notes prior to the respective anticipated repayment date, additional interest will accrue on each tranche of the Series 2019-1 Class A-2 Notes at a rate equal to the greater of (A) 5.00% per annum and (B) a per annum interest rate equal to the amount, if any, by which the sum of (i) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on such anticipated repayment date of the United States Treasury Security having a term closest to 10 years, plus (ii) 5.00%, plus (iii) (1) with respect to the Series 2019-1 Class A-2-I Notes, 1.863%, and (2) with respect to the Series 2019-1 Class A-2-II Notes, 2.051%, exceeds the original interest rate with respect to such tranche. The Master Issuer’s outstanding Series 2015-1 Class A-2-II Notes were repaid as part of the refinancing transaction. As a result, the Company recorded a loss on early extinguishment of debt of $7,150 during the nine months ended September 29,2015. Under this facility, in June 2019, which was comprised of the write-off of certain unamortized deferred financing costs. The Series 2019-1 Class A-2 Notes have scheduled principal payments of $4,250 in 2019, $8,500 annually from 2020 through 2025, $378,500 in 2026, $4,500 in each of 2027 and 2028 and $407,250 in 2029.
In connection with the issuance of the Series 2019-1 Class A-2 Notes, the Master Issuer also entered into a revolving financing facility ofissued outstanding Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2019-1 Class“Class A-1 Notes” and, together with the Series 2019-1 Class A-2 Notes, the “Series 2019-1 Senior Notes”), which allows for the drawingborrowing of up to $150,000 from time to time on a revolving basis using various credit instruments, including a letter of credit facility. NaN amounts were borrowedIn March 2020, the Company drew down $120,000 under the Series 2019-1Class A-1 Notes. As a result, as of March 29, 2020, the Company had outstanding borrowings of $120,000 under the Class A-1 Notes. The increased borrowing was taken as a precautionary measure to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic. The Class A-1 Notes duringaccrue interest at a variable interest rate based on (i) the nine months ended September 29, 2019. The Series 2019-1 Class A-1 Notes replacedprime rate, (ii) overnight federal funds rates, (iii) the Company’s $150,000 Series 2018-1 Class A-1 Notes, which were canceled on the closing date, and the letters of credit outstanding against the Series 2018-1 Class A-1 Notes were transferred to the Series 2019-1 Class A-1 Notes.
The Series 2019-1 Senior Notes are secured by substantially all of the assets of the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors (the “Guarantors”London interbank offered rate (“LIBOR”), excluding certain real estate assets and subject to certain limitations. The Series 2019-1 Senior Notes are subject to the same series of covenants and restrictions as the Company’s outstanding Series 2018-1 Class A-2 Notes and Series 2015-1 Class A-2 Notes.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Duringfor U.S. Dollars or (iv) with respect to advances made by conduit investors, the nine months ended September 29, 2019, the Company incurred debt issuance costsweighted average cost of, $14,008 in connection withor related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the Series 2019-1 Senior Notes.Class A-1 Note agreement. As of March 29, 2020, $24,756 of letters of credit were outstanding against the Class A-1 Notes, which relate primarily to interest reserves required under the Indenture.
Other Long-Term Debt
A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6,000, which bears interest at the Bank of Montreal Prime Rate. The debt issuance costs will be amortized to “Interest expense, net” throughis guaranteed by Wendy’s. In March 2020, the anticipated repayment datesCompany drew down C$5,500 under the revolving credit facility. As a result, as of March 29, 2020, the Series 2019-1 SeniorNotes utilizingCompany had outstanding borrowings of C$5,500 under the effective interest rate method.revolving credit facility.
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$25,000, which was established to fund the advertising fund operations. During the nine months ended September 30, 2018,operations and bears interest at LIBOR plus 2.75%. In February 2020, the Company borrowed $9,837 anddrew down $4,397 under the revolving line of credit, which the Company repaid $11,124in February 2020. In March 2020, the Company drew down $25,000 under the revolving line of credit. There were 0As a result, as of March 29, 2020, the Company had outstanding borrowings or repaymentsof $25,000 under the revolving line of credit, duringwhich is included in “Advertising funds restricted liabilities.”
The increased borrowings were taken as precautionary measures to provide enhanced financial flexibility considering the nine months ended September 29, 2019.uncertain market conditions arising from the COVID-19 pandemic.
(9)(10) 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 29, 2019 | | December 30, 2018 | | March 29, 2020 | | December 29, 2019 | |
| 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 | $ | 206,094 |
| | $ | 206,094 |
| | $ | 222,228 |
| | $ | 222,228 |
| | Level 1 | $ | 120,273 |
| | $ | 120,273 |
| | $ | 114,992 |
| | $ | 114,992 |
| | Level 1 |
Other investments in equity securities (a) | 639 |
| | 1,818 |
| | 639 |
| | 2,181 |
| | Level 3 | 639 |
| | 1,032 |
| | 639 |
| | 1,649 |
| | Level 3 |
| | | | | | | | | | | | | | | | |
Financial liabilities | | | | | | | | | | | | | | | | |
Series 2019-1 Class A-2-I Notes (b) | 399,000 |
| | 405,863 |
| | — |
| | — |
| | Level 2 | 395,000 |
| | 360,315 |
| | 398,000 |
| | 405,152 |
| | Level 2 |
Series 2019-1 Class A-2-II Notes (b) | 448,875 |
| | 463,598 |
| | — |
| | — |
| | Level 2 | 444,375 |
| | 395,058 |
| | 447,750 |
| | 459,136 |
| | Level 2 |
Series 2018-1 Class A-2-I Notes (b) | 442,125 |
| | 448,580 |
| | 445,500 |
| | 424,026 |
| | Level 2 | 439,875 |
| | 408,274 |
| | 441,000 |
| | 444,859 |
| | Level 2 |
Series 2018-1 Class A-2-II Notes (b) | 466,688 |
| | 476,208 |
| | 470,250 |
| | 439,353 |
| | Level 2 | 464,313 |
| | 417,083 |
| | 465,500 |
| | 475,718 |
| | Level 2 |
Series 2015-1 Class A-2-II Notes (b) | — |
| | — |
| | 870,750 |
| | 865,342 |
| | Level 2 | |
Series 2015-1 Class A-2-III Notes (b) | 480,000 |
| | 492,624 |
| | 483,750 |
| | 482,522 |
| | Level 2 | 477,500 |
| | 459,202 |
| | 478,750 |
| | 490,531 |
| | Level 2 |
Series 2019-1 Class A-1 Notes (b) | | 120,000 |
| | 115,500 |
| | — |
| | — |
| | Level 2 |
U.S. advertising fund revolving line of credit | | 25,000 |
| | 25,000 |
| | — |
| | — |
| | Level 2 |
Canadian revolving credit facility | | 3,918 |
| | 3,918 |
| | — |
| | — |
| | Level 2 |
7% debentures, due in 2025 (b) | 91,722 |
| | 107,500 |
| | 90,769 |
| | 102,750 |
| | Level 2 | 83,126 |
| | 89,550 |
| | 82,837 |
| | 94,838 |
| | Level 2 |
Guarantees of franchisee loan obligations (c) | 2 |
| | 2 |
| | 17 |
| | 17 |
| | Level 3 | |
_______________
| |
(a) | The fair values of our investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments. |
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 approximatedand lines of credit approximate fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximatedapproximate fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents and guarantees are the only financial assets and liabilities measured and recorded at fair value on a recurring basis.
Non-Recurring Fair Value Measurements
Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.
Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, favorable lease assets and ROU assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below representsrepresent the remaining carrying value and were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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 representsrepresent the remaining carrying value and were estimated based on current market values. See Note 1011 for further information on impairment of our long-lived assets.
| | | | | Fair Value Measurements | | | Fair Value Measurements |
| September 29, 2019 | | Level 1 | | Level 2 | | Level 3 | March 29, 2020 | | Level 1 | | Level 2 | | Level 3 |
Held and used | $ | 1,866 |
| | $ | — |
| | $ | — |
| | $ | 1,866 |
| $ | 358 |
| | $ | — |
| | $ | — |
| | $ | 358 |
|
Held for sale | 988 |
| | — |
| | — |
| | 988 |
| 927 |
| | — |
| | — |
| | 927 |
|
Total | $ | 2,854 |
| | $ | — |
| | $ | — |
| | $ | 2,854 |
| $ | 1,285 |
| | $ | — |
| | $ | — |
| | $ | 1,285 |
|
| | | | | Fair Value Measurements | | | Fair Value Measurements |
| December 30, 2018 | | Level 1 | | Level 2 | | Level 3 | December 29, 2019 | | Level 1 | | Level 2 | | Level 3 |
Held and used | $ | 462 |
| | $ | — |
| | $ | — |
| | $ | 462 |
| $ | 3,582 |
| | $ | — |
| | $ | — |
| | $ | 3,582 |
|
Held for sale | 1,031 |
| | — |
| | — |
| | 1,031 |
| 988 |
| | — |
| | — |
| | 988 |
|
Total | $ | 1,493 |
| | $ | — |
| | $ | — |
| | $ | 1,493 |
| $ | 4,570 |
| | $ | — |
| | $ | — |
| | $ | 4,570 |
|
(10)(11) Impairment of Long-Lived Assets
The adverse impacts of the COVID-19 pandemic resulted in the Company recordstesting its Company-operated restaurant long-lived assets for recoverability. As a result of this analysis, the Company recorded impairment charges due to the expected deterioration in operating performance of certain Company-operated restaurants. Additional impairment charges may be recognized by the Company as a result of further deterioration in operating performance of Company-operated restaurants. The Company also recorded impairment charges as a result of (1) closing Company-operated restaurants and classifying such surplus properties as held for sale, (2) the deterioration of operating performance of certain Company-operated restaurants and (3) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
sale.
The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:”
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 | March 29, 2020 | | March 31, 2019 |
Company-operated restaurants | | $ | 4,395 |
| | $ | 201 |
|
Surplus properties | $ | — |
| | $ | 229 |
| | $ | 1,397 |
| | $ | 270 |
| 192 |
| | 1,285 |
|
Company-operated restaurants | — |
| | — |
| | 287 |
| | 1,603 |
| |
Restaurants leased or subleased to franchisees | — |
| | 118 |
| | — |
| | 283 |
| |
| $ | — |
| | $ | 347 |
| | $ | 1,684 |
| | $ | 2,156 |
| $ | 4,587 |
| | $ | 1,486 |
|
(11)(12) Income Taxes
The Company’s effective tax rate for the three months ended SeptemberMarch 29, 2020 and March 31, 2019 was 32.1% and September 30, 2018 was 13.5% and 21.6%20.0%, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to (1) an increase in tax on our foreign operations, (2) an increase in state income taxes and (3) a reduction infor the benefit of share-based compensation.
There were no significant changes to the unrecognized tax benefits due to a lapse of statute of limitations in the three months ended September 29, 2019, (2) a reduction for stock-based compensation, which included net excess tax benefits of $1,103or related interest and $5,251penalties for the three months ended SeptemberMarch 29, 2019 and September 30, 2018, respectively, and (3) an increase due to state income taxes, including non-recurring changes to state deferred taxes net of federal benefits.
The Company’s effective tax rate for the nine months ended September 29, 2019 and September 30, 2018 was 20.5% and 20.6% respectively. The Company’s effective tax rate varied immaterially from the U.S. federal statutory rate of 21% primarily due to (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the nine months ended September 29, 2019, (2) a reduction for stock-based compensation, which included net excess tax benefits of $4,028 and $12,142 for the nine months ended September 29, 2019 and September 30, 2018, respectively, and (3) an increase due to state income taxes, including non-recurring changes to state deferred taxes net of federal benefits.
On December 22, 2017, the U.S. government enacted the Tax Act. In our continued analysis of the impact of the Tax Act during the first nine months of 2018 under Staff Accounting Bulletin 118, we adjusted our provisional amounts for a discrete net tax expense of $2,076. This included a net expense of $2,426 related to the impact of the corporate rate reduction on our net deferred tax liabilities and a net expense of $991 related to limitations on the deductibility of certain executive compensation, partially offset by $1,341 for the tax benefit of foreign tax credits.
Unrecognized tax benefits for the Company decreased by $5,639 and $6,475 during the three and nine months ended September 29, 2019, respectively. The decrease was primarily related to the lapse of statutes of limitations during the third quarter of 2019.2020. During the next twelve months, we believe it is reasonably possible the Company’sCompany will reduce unrecognized tax benefits will decrease by up to $2,081$1,399 due primarily to the lapse of statutes of limitations and expected settlements with taxing authorities.settlements.
The current portion of refundable income taxes was $6,719$9,764 and $14,475$13,555 as of SeptemberMarch 29, 20192020 and December 30, 2018,29, 2019, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. There were 0 long-term refundable income taxes as of SeptemberMarch 29, 20192020 and December 30, 2018.29, 2019.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(12)(13) Net Income Per Share
Basic net income per share was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding.
The weighted average number of shares used to calculate basic and diluted net income per share were as follows:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 | March 29, 2020 | | March 31, 2019 |
Common stock: | | | | | | | | | | |
Weighted average basic shares outstanding | 230,723 |
| | 237,696 |
| | 230,779 |
| | 238,872 |
| 223,533 |
| | 230,584 |
|
Dilutive effect of stock options and restricted shares | 4,995 |
| | 7,070 |
| | 5,122 |
| | 7,574 |
| 4,474 |
| | 5,310 |
|
Weighted average diluted shares outstanding | 235,718 |
| | 244,766 |
| | 235,901 |
| | 246,446 |
| 228,007 |
| | 235,894 |
|
Diluted net income per share for the three and nine months ended SeptemberMarch 29, 20192020 and September 30, 2018March 31, 2019 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 3,2572,667 and 2,4882,158 for the three and nine months ended SeptemberMarch 29, 2019, respectively,2020 and 1,121 and 1,287 for the three and nine months ended September 30, 2018,March 31, 2019, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
(13)(14) Stockholders’ Equity
Dividends
During each of the first three quartersquarter of 2020 and 2019, the Company paid quarterly cash dividends per share of $.12 and $.10 per share. During each of the first three quarters of 2018, the Company paid quarterly cash dividends of $.085 per share.share, respectively.
Repurchases of Common Stock
In February 2020, our Board of Directors authorized a repurchase program for up to $100,000 of our common stock through February 28, 2021, when and if market conditions warrant and to the extent legally permissible. During the three months ended March 29, 2020, the Company repurchased 779 shares under the February 2020 repurchase authorization with an aggregate purchase price of $14,537, excluding commissions of $11. As of March 29, 2020, the Company had $85,463 of availability remaining under its February 2020 authorization. As previously announced, beginning in March 2020, the Company suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic.
In February 2019, our Board of Directors authorized a repurchase program for up to $225,000$225,000 of our common stock through March 1, 2020, when and if market conditions warrantwarranted and to the extent legally permissible. In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $100,000 in cash and received an initial delivery of 4,051 shares of common stock, representing an estimated 85% of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 628 shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2019 ASR Agreement, less an agreed upon discount. In total, 4,679 shares were delivered under the 2019 ASR Agreement at an average purchase price of $21.37 per share.
In addition to the shares repurchased in connection with the February 2019 authorization,ASR Agreement, during the Company’s previous November 2018 repurchase authorization for up to $220,000 of our common stock was canceled. During the ninethree months ended SeptemberMarch 29, 2019,2020, the Company repurchased 4,1531,312 shares with an aggregate purchase price of $76,165, of which $1,102 was accrued at September 29, 2019, and$28,770, 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$18, under the February 2019 authorizationauthorization. After taking into consideration these repurchases, with an aggregate purchase price of $9,190, excluding commissions of $6. As partthe completion of the 2019 ASR Agreement in February 2019 authorization, the Company announced on October 11, 2019 its intention to launch a $100,000 accelerated share repurchase program during the fourth quarter of 2019.
In February 2018, our Board of Directors authorized a repurchase program for up to $175,000 of our common stock through March 3, 2019, when and if market conditions warranted and to the extent legally permissible. During the nine months ended September 30, 2018, the Company repurchased 6,896 shares under the February 2018 repurchase authorization with an aggregate purchase price of $118,866, of which $2,675 was accrued at September 30, 2018, and excluding commissions of $97. Additionally, during the nine months ended September 30, 2018,2020, the Company completed its previous February 2017 repurchase authorization for up to $150,000 of our common stock with the repurchase of 1,385 shares with an aggregate purchase price of $22,633, excluding commissions of $19.2019 authorization.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
During the three months ended March 31, 2019, the Company repurchased 1,744 shares with an aggregate purchase price of $29,345, of which $268 was accrued at March 31, 2019, and excluding commissions of $25, under the February 2019 authorization and the Company’s previous November 2018 authorization for up to $220,000 of common stock.
Accumulated Other Comprehensive Loss
The following table provides a rollforward of the components of accumulated other comprehensive loss, net of tax as applicable:loss:
|
| | | | | | | | | | | |
| 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 | ) |
|
| | | | | | | |
| Three Months Ended |
| March 29, 2020 | | March 31, 2019 |
Balance at beginning of period | $ | (53,828 | ) | | $ | (61,673 | ) |
Foreign currency translation | (12,507 | ) | | 6,025 |
|
Balance at end of period | $ | (66,335 | ) | | $ | (55,648 | ) |
(14)(15) Leases
Nature of Leases
The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At SeptemberMarch 29, 2019,2020, Wendy’s and its franchisees operated 6,7436,805 Wendy’s restaurants. Of the 356358 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 144145 restaurants and held leases covering the land and building for 6970 restaurants. Wendy’s also owned 512511 and leased 1,2551,244 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 LeaseCompany as Lessee
The Company evaluates the contracts it enters into to determine whether such contracts contain leases. A contract contains acomponents of 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 leasecost 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.follows:
|
| | | | | | | |
| Three Months Ended |
| March 29, 2020 | | March 31, 2019 |
Finance lease cost: | | | |
Amortization of finance lease assets | $ | 3,186 |
| | $ | 3,117 |
|
Interest on finance lease liabilities | 10,058 |
| | 6,753 |
|
| 13,244 |
| | 9,870 |
|
Operating lease cost | 21,165 |
| | 24,643 |
|
Variable lease cost (a) | 14,370 |
| | 14,104 |
|
Short-term lease cost | 1,330 |
| | 1,126 |
|
Total operating lease cost (b) | 36,865 |
| | 39,873 |
|
Total lease cost | $ | 50,109 |
| | $ | 49,743 |
|
_______________
ROU Model and Determination of Lease Term
| |
(a) | Includes expenses for executory costs of $9,743 and $9,524 for the three months ended March 29, 2020 and March 31, 2019, respectively, for which the Company is reimbursed by sublessees. |
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.
| |
(b) | The three months ended March 29, 2020 and March 31, 2019 include $29,291 and $32,451, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees and $6,833 and $6,593, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Operating Leases
For operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are recognized as rent expense where the Company is a lessee, or income where the Company is a lessor, as applicable, on a straight-line basis (“Straight-Line Rent”) over the applicable lease terms. There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and ends on the rent commencement date. During a Rent Holiday, no cash rent payments are typically due under the terms of the lease; however, expense is recorded for that period on a straight-line basis. The excess of the Straight-Line Rent over the minimum rents paid is included in the ROU asset where the Company is a lessee. The excess of the Straight-Line Rent over the minimum rents received is recorded as a deferred lease asset and is included in “Other assets” where the Company is a lessor. Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or the asset is earned.
Lease cost for operating leases is recognized on a straight-line basis and includes the amortization of the ROU asset and interest expense related to the operating lease liability. Variable lease cost for operating leases includes Contingent Rent and payments for executory costs such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. Short-term lease cost for operating leases includes rental expense for leases with a term of less than 12 months. Lease costs are recorded in the condensed consolidated statements of operations based on the nature of the underlying lease as follows: (1) rental expense related to leases for Company-operated restaurants is recorded to “Cost of sales,” (2) rental expense for leased properties that are subsequently subleased to franchisees is recorded to “Franchise rental expense” and (3) rental expense related to leases for corporate offices and equipment is recorded to “General and administrative.”
Favorable and unfavorable lease amounts for operating leases where the Company is the lessor are recorded as components of “Other intangible assets” and “Other liabilities,” respectively. Favorable and unfavorable lease amounts are amortized on a straight-line basis over the term of the leases. When the expected term of a lease is determined to be shorter than the original amortization period, the favorable or unfavorable lease balance associated with the lease is adjusted to reflect the revised lease term.
Rental income and favorable and unfavorable lease amortization for operating leases on properties leased or subleased to franchisees is recorded to “Franchise rental income.” Lessees’ variable payments to the Company for executory costs under operating leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”
Finance Leases
Lease cost for finance leases includes the amortization of the ROU asset, which is amortized on a straight-line basis and recorded to “Depreciation and amortization,” and interest expense on the finance lease liability, which is calculated using the interest method and recorded to “Interest expense, net.”
Sales-Type and Direct Financing Leases
For sales-type and direct financing leases where the Company is the lessor, the Company records its investment in properties leased to franchisees on a net basis, which is comprised of the present value of the lease payments not yet received and the present value of the guaranteed and unguaranteed residual assets. The current and long-term portions of our net investment in sales-type and direct financing leases are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. Unearned income is recognized as interest income over the lease term and is included in “Interest expense, net.” Sales-type leases result in the recognition of gain or loss at the commencement of the lease, which is recorded to “Other operating income, net.” The gain or loss recognized upon commencement of the lease is directly affected by the Company’s estimate of the amount to be derived from the guaranteed and unguaranteed residual assets at the end of the lease term. The Company’s main component of this estimate is the expected fair value of the underlying assets, primarily the fair value of land. Lessees’ variable payments to the Company for executory costs under sales-type and direct financing leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Significant Assumptions and Judgments
Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, property lives, discount rates and probable term, all of which can impact (1) the classification and accounting for a lease or sublease as operating or finance, including sales-type and direct financing, (2) the Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent, (3) the term over which leasehold improvements for each restaurant are amortized and (4) the values and lives of adjustments to the initial ROU asset where the Company is the lessee, or favorable and unfavorable leases where the Company is the lessor. The amount of depreciation and amortization, interest and rent expense and income reported would vary if different estimates and assumptions were used.
Company as Lessee
The components of lease cost are as follows:
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2019 | | September 29, 2019 |
Finance lease cost: | | | |
Amortization of finance lease assets | $ | 3,201 |
| | $ | 7,949 |
|
Interest on finance lease liabilities | 10,116 |
| | 26,808 |
|
| 13,317 |
| | 34,757 |
|
Operating lease cost | 23,358 |
| | 67,087 |
|
Variable lease cost (a) | 15,435 |
| | 44,910 |
|
Short-term lease cost | 1,141 |
| | 3,420 |
|
Total operating lease cost (b) | 39,934 |
| | 115,417 |
|
Total lease cost | $ | 53,251 |
| | $ | 150,174 |
|
_______________
| |
(a) | The three and nine months ended September 29, 2019 includes expenses for executory costs of $9,908 and $29,211, respectively, for which the Company is reimbursed by sublessees. |
| |
(b) | The three and nine months ended September 29, 2019 includes $32,342 and $92,815, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees and $6,892 and $20,492, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. |
The following table includes supplemental cash flow and non-cash information related to leases:
|
| | | |
| Nine Months Ended |
| September 29, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from finance leases | $ | 29,683 |
|
Operating cash flows from operating leases | 69,277 |
|
Financing cash flows from finance leases | 5,178 |
|
Right-of-use assets obtained in exchange for lease obligations: | |
Finance lease liabilities | 34,084 |
|
Operating lease liabilities | 8,212 |
|
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 | Three Months Ended |
| September 29, 2019 | | September 29, 2019 | March 29, 2020 | | March 31, 2019 |
Sales-type and direct-financing leases: | | | | | | |
Selling (loss) profit | $ | (97 | ) | | $ | 1,874 |
| |
Selling profit | | $ | 628 |
| | $ | 1,934 |
|
Interest income | 7,240 |
| | 19,045 |
| 7,248 |
| | 4,733 |
|
| | | | | | |
Operating lease income | $ | 44,892 |
| | $ | 134,056 |
| $ | 43,952 |
| | $ | 45,205 |
|
Variable lease income | 15,026 |
| | 42,875 |
| 13,904 |
| | 13,247 |
|
Franchise rental income (a) | $ | 59,918 |
| | $ | 176,931 |
| $ | 57,856 |
| | $ | 58,452 |
|
_______________
| |
(a) | IncludesThe three months ended March 29, 2020 and March 31, 2019 include sublease income of $44,821$42,042 and $130,763 recognized during the three and nine months ended September 29, 2019,$43,021, respectively, of which $9,683$9,709 and $28,894,$9,432, 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)(16) Transactions with Related Parties
Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K.
TimWen Lease and Management Fee Payments
A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen, which are then subleased to franchisees for the operation of Wendy’s/Tim Hortons combo units in Canada. During both the ninethree months ended SeptemberMarch 29, 20192020 and September 30, 2018,March 31, 2019, Wendy’s paid TimWen $12,710 and $9,967, respectively,$3,855 under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $155$51 and $161$52 during the ninethree months ended SeptemberMarch 29, 20192020 and September 30, 2018,March 31, 2019, respectively, which has been included as a reduction to “General and administrative.”
(16)(17) Guarantees and Other Commitments and Contingencies
Except as described below, the Company did not have any significant changes in guarantees and other commitments and contingencies during the current fiscal period since those reported in the Form 10-K. Refer to the Form 10-K for further information regarding the Company’s additional commitments and obligations.
Lease Guarantees
Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees, amounting to $74,898$77,811 as of SeptemberMarch 29, 2019.2020. These leases extend through 2056.2045. We have not received any notice of default related to these leases as of SeptemberMarch 29, 2019.2020. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations.
Letters of Credit
As of SeptemberMarch 29, 2019,2020, the Company had outstanding letters of credit with various parties totaling $25,082. TheSubstantially all of the outstanding letters of credit include amounts outstanding against the Series 2019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.
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)(18) Legal and Environmental Matters
The Company is involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. Weestimable, and we believe we have adequate accruals for continuing operations for all of our legal and environmentalsuch matters. We cannot estimate the aggregate possible range of loss for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period.
We previously described certain legal proceedings in the Form 10-K. Except as set forth below,As of March 29, 2020, there were no material developments in those legal proceedings as of September 29, 2019.proceedings.
As previously reported, the Company was named as a defendant in putative class action lawsuits alleging, among other things, that the Company failed to safeguard customer credit card information and failed to provide notice that credit card information had been compromised. Jonathan Torres and other consumers filed an action in the U.S. District Court for the Middle District of Florida (the “Torres Case”). On August 23, 2018, the court preliminarily approved a class-wide settlement. A final approval hearing of the settlement of the Torres Case was held on February 26, 2019, and final approval was granted by the court. At this time, the action has been dismissed with prejudice (with no appeal taken), all claims and other amounts payable per the terms of the settlement agreement have been paid, and the matter is considered closed.(19)Segment Information
AlsoRevenues by segment were as previously reported, certain financial institutions have also filed class actions lawsuits in the U.S. District Court for the Western District of Pennsylvania, which sought to certify a nationwide class of financial institutions that issued payment cards that were allegedly impacted. Those cases were consolidated into a single case (the “FI Case”). On February 13, 2019, the Company and the plaintiffs filed a settlement agreement and a motion for preliminary approval of a class-wide settlement of the FI Case with the court. Under the terms of the settlement agreement, if approved and finalized, a settlement class of financial institutions will receive $50,000, inclusive of attorneys’ fees and costs. After exhaustion of applicable insurance, the Company now expects to pay approximately $25,000 of this amount. In exchange, the Company and its franchisees will receive a full release of all claims that have or could have been broughtfollows:
|
| | | | | | | |
| Three Months Ended |
| March 29, 2020 | | March 31, 2019 |
Wendy’s U.S. | $ | 331,041 |
| | $ | 333,486 |
|
Wendy’s International | 15,472 |
| | 15,998 |
|
Global Real Estate & Development | 58,447 |
| | 59,099 |
|
Total revenues | $ | 404,960 |
| | $ | 408,583 |
|
The following table reconciles profit by financial institutions who do not opt out of the settlement relatedsegment to the cybersecurity incidents described herein. On February 26, 2019, the court preliminarily approved the settlement agreement and scheduled a final approval hearing for November 6, 2019. The settlement agreement remains subject to a notice and objection process and final court approval. If approved, the Company anticipates that payment will occur in early 2020. The Company recorded a liability of $50,000 and insurance receivables of $22,500 for the FI case during 2018. As a result of cost savings related to the settlement of the Torres Case in the three months ended September 29, 2019, the Company adjusted its insurance receivables for the FI case to approximately $25,000.Company’s consolidated income before income taxes:
|
| | | | | | | |
| Three Months Ended |
| March 29, 2020 | | March 31, 2019 |
Wendy’s U.S. | $ | 81,828 |
| | $ | 89,654 |
|
Wendy’s International | 5,095 |
| | 5,747 |
|
Global Real Estate & Development | 26,490 |
| | 26,953 |
|
Total segment profit | $ | 113,413 |
| | $ | 122,354 |
|
Advertising funds deficit | (1,387 | ) | | — |
|
Unallocated general and administrative (a) | (24,119 | ) | | (20,742 | ) |
Depreciation and amortization | (31,046 | ) | | (33,185 | ) |
System optimization gains, net | 323 |
| | 12 |
|
Reorganization and realignment costs | (3,910 | ) | | (798 | ) |
Impairment of long-lived assets | (4,587 | ) | | (1,486 | ) |
Unallocated other operating income, net | 45 |
| | 111 |
|
Interest expense, net | (28,525 | ) | | (29,082 | ) |
Other income, net | 1,076 |
| | 2,700 |
|
Income before income taxes | $ | 21,283 |
| | $ | 39,884 |
|
_______________
| |
(a) | Includes corporate overhead costs, such as employee compensation and related benefits. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 30, 201829, 2019 (the “Form 10-K”). There have been no material changes as of SeptemberMarch 29, 20192020 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II - Other Information” of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchisesis primarily engaged in the business of operating, developing and operates Wendy’s®franchising a system of distinctive quick-service restaurants specializingserving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the world’s third largest quick-service restaurant company in the hamburger sandwiches throughout North America (defined assandwich segment, with 6,805 restaurants in the United States of America (“U.S.(the “U.S.”) and Canada). Wendy’s also has franchised restaurants in 30 foreign countries and U.S. territories.territories as of March 29, 2020.
Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited time basis. Wendy’s also currently offersentered the breakfast in more than 300 restaurants indaypart across the United States.U.S. system on March 2, 2020. Wendy’s breakfast menu features a variety of breakfast sandwiches, biscuits and croissants, sides such as seasoned potatoes, oatmeal bars and seasonal fruit, and a beverage platform that includes hot coffee, cold brew iced coffee and our vanilla and chocolate Frosty-ccino iced coffee.
The Company managesis comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and internally reports its business geographically. The(3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in North America comprises virtually all of our current operationsthe U.S. and represents a single reportable segment. Thederives its revenues from sales at Company-operated restaurants and operating resultsroyalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the franchising of Wendy’s restaurants outsidein countries and territories other than the U.S. and derives its revenues from royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of North America are not material.the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company reports on the segment profit for each of the three segments described above. The resultsCompany measures segment profit based on segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. See “Results of operations discussedOperations” below may not necessarily be indicative of future results.and Note 19 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information.
The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three- and nine-monththree-month periods presented herein contain 13 weeks and 39 weeks, respectively.weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.
We adopted the new accounting guidance for leases effective December 31, 2018, which had a material impact on our condensed consolidated financial statements. Beginning with the first quarter of 2019, our financial condition and results of operations reflect adoption of the guidance; however, prior period results were not restated. See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
Executive Overview
Our Business
As of SeptemberMarch 29, 2019,2020, the Wendy’s restaurant system was comprised of 6,7436,805 restaurants, of which 356with 5,861 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 358 were owned and operated by the Company. AllCompany and 5,503 were operated by a total of 239 franchisees. In addition, at March 29, 2020, there were 944 Wendy’s restaurants in operation in 30 foreign countries and U.S. territories, all of which were franchised.
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants are located inand (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the United States.total Wendy’s system as of March 29, 2020.
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. The COVID-19 pandemic has had and may continue to have the effect of heightening the impact of many of these factors. See “COVID-19 Update” below for additional information.
Wendy’s long-term growth opportunities include (1) systemwideaccelerating U.S. same-restaurant sales growth through (1) its “One More Visit, One More Dollar” strategy, which includes 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 oncontinued implementation of consumer-facing digital platforms and technologies (5)and (4) increased restaurant utilization in various dayparts, including the Company’s recent announcementlaunch of its plan to launch breakfast across the U.S. system on March 2, 2020. Wendy’s also expects growth in the first quarternumber of 2020 (see “Breakfast Launch” below), (6) strengthening our operationsnew restaurants through our system optimization initiativetargeted U.S. expansion and (7) building stockholder valueaccelerated international expansion through financial management strategies.same-restaurant sales growth and new restaurant development.
Key Business Measures
We track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure:
Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one fiscal week are excluded from same-restaurant sales. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes.
Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.
Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company believes systemwide sales data is useful in assessing consumer demand for the Company’s products, the overall success of the Wendy’s brand and, ultimately, the performance of the Company. The Company’s royalty revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty revenues and profitability.
The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.
Same-restaurant sales and systemwide sales exclude sales from VenezuelaArgentina and beginning in the third quarter of 2018, exclude sales from Argentina,Venezuela due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.
The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.
Breakfast LaunchCOVID-19 Update
In September 2019,On March 11, 2020, the Company announced that it plansWorld Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. We cannot predict whether, when or the manner in which the conditions surrounding the pandemic will change and cannot currently estimate the impact on our business in the short or long-term. We continue to launch breakfast acrossmonitor the dynamic nature of the COVID-19 pandemic and, in response, Wendy’s has updated its brand standard to include the closure of all dining rooms except where there are specific needs, or a drive-thru or pick-up window option is not available, subject to applicable state and local requirements. Substantially all Wendy’s restaurants continue to offer drive-thru and delivery service to our customers. Decisions to continue to offer carryout services at select restaurants are being made on a case-by-case basis and in compliance with applicable state or local requirements. As of March 29, 2020, systemwide temporary restaurant closures totaled 52 and 233 in the U.S. and internationally, respectively, which represents approximately 4.2% of all system restaurants.
As a result of the COVID-19 pandemic, systemwide same-restaurant sales were materially adversely impacted during the month ended March 29, 2020. The following table shows same-restaurant sales in the first quarter, of 2020. The Company expects to make one-time investments during 2019 of approximately $20.0 million to supportwith a breakdown between the U.S. system in preparation oftwo months ended March 1, 2020 and 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.month ended March 29, 2020:
|
| | | | | | | | |
| Two Months Ended March 1, 2020 | | Month Ended March 29, 2020 | | First Quarter 2020 |
U.S. systemwide same-restaurant sales | 3.7 | % | | (7.7 | )% | | 0.0 | % |
International same-restaurant sales | 5.4 | % | | (17.0 | )% | | (1.6 | )% |
Global systemwide same-restaurant sales | 3.9 | % | | (8.6 | )% | | (0.2 | )% |
Other Investments in Equity SecuritiesSubsequent to March 29, 2020 through the week ended April 26, 2020, systemwide same-restaurant sales continued to be materially adversely impacted by the COVID-19 pandemic. The following table shows same-restaurant sales by week subsequent to March 29, 2020 through the week ended April 26, 2020:
|
| | | | | | | | | | | |
| Week Ended April 5, 2020 | | Week Ended April 12, 2020 | | Week Ended April 19, 2020 | | Week Ended April 26, 2020 |
U.S. systemwide same-restaurant sales | (25.8 | )% | | (24.9 | )% | | (8.8 | )% | | (8.5 | )% |
International same-restaurant sales | (35.7 | )% | | (39.1 | )% | | (24.0 | )% | | (23.6 | )% |
Global systemwide same-restaurant sales | (26.7 | )% | | (26.2 | )% | | (10.1 | )% | | (9.9 | )% |
On October 11, 2019,As of April 26, 2020, systemwide temporary restaurant closures totaled 66 and 261 in the U.S. and internationally, respectively, which represents approximately 4.8% of all system restaurants. Additionally, the COVID-19 pandemic has led, and could continue to lead, to interruptions in the delivery of food or other supplies to Wendy’s restaurants arising from delays or restrictions on shipping or manufacturing, closures of supplier or distributor facilities or other factors. These delays or interruptions could impact the availability of certain food items at Wendy’s restaurants, including beef, chicken, pork and other core menu products.
Due to the current unprecedented market and economic conditions in the U.S. and internationally, the expected impact of the COVID-19 pandemic on the Company’s 2020 net income and cash flows cannot be reasonably estimated. However, as of the date of this filing, we expect our net income and cash flows for the remainder of 2020 to be adversely impacted by the pandemic. See “Item 1A. Risk Factors” in “Part II. Other Information” for further information regarding the risks associated with the COVID-19 pandemic and the impact on our business, results and financial condition. Also, see “Liquidity and Capital Resources” below for certain actions taken by the Company received a $25.0 million cash settlement relatedin response to a previously held investment.the COVID-19 pandemic.
Goodwill and Indefinite-Lived Intangible Assets
We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that it may be impaired. The negative impacts of the COVID-19 pandemic, including the decline in same-restaurant sales described above and the volatility in the price of our common stock, resulted in the Company testing its goodwill for impairment in March 2020. A goodwill impairment loss is recognized if the fair value of a reporting unit is less than its carrying value.
GeneralThe Company’s goodwill impairment test in March 2020 included three reporting units, which were comprised of its (1) U.S. Company-operated and Administrativefranchise restaurants, (2) Canada franchise restaurants and (3) global real estate and development operations. Based on the results of our goodwill impairment test, we determined the fair values of our U.S. Company-operated and franchise restaurants and our Canada franchise restaurants reporting units continued to significantly exceed their carrying values. The goodwill impairment test for our global real estate and development operations also indicated the fair value of the reporting unit exceeded its carrying value; however, the fair value exceeded the carrying value of the reporting unit by only a nominal amount. Given the limited excess of the fair value over carrying value, this reporting unit is more sensitive to changes in assumptions regarding its fair value. A 50 basis point increase in the discount rate, or a moderate decline in estimated future cash flows, would result in the fair value of the reporting unit being less than its carrying value. As of March 29, 2020, the goodwill balance associated with our global real estate and development operations was $122.5 million.
The Company also tested our indefinite-lived intangible assets, which represent trademarks, for impairment in March 2020. Based on the results of our impairment test, we determined the fair value of our trademarks continued to significantly exceed their carrying value.
Further adverse changes as a result of the COVID-19 pandemic could further reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could result in future impairment charges of goodwill and indefinite-lived intangible assets.
Information Technology (“G&A”IT”) Realignment
In May 2017, the Company initiatedDecember 2019, our Board of Directors approved a plan to further reducerealign and reinvest resources in the Company’s IT organization to strengthen its G&A expenses. Additionally,ability to accelerate growth. The Company is partnering with a third-party global IT consultant on this new structure to leverage their global capabilities, which the Company announced in May 2019 changesbelieves will enable a more seamless integration between its digital and corporate IT assets. The Company expects that the realignment plan will reduce certain employee compensation and other related costs that the Company intends to reinvest back into IT to drive additional capabilities and capacity across all of its leadership structure that includestechnology platforms. The Company expects the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer, and the eliminationmajority of the Chief Operations Officer position.impact of the realignment plan to occur at its Restaurant Support Center in Dublin, Ohio. The Company expects to incur total costs aggregating approximately $13.0 million to $15.0 million related to the plan. During the ninethree months ended SeptemberMarch 29, 2019 and September 30, 2018,2020, the Company recognized costs related to the plan totaling $4.7$3.6 million, and $6.4 million, respectively, which primarily included severancethird-party and related employee costs and share-based compensation.other costs. The Company expects to incur additional costs aggregating approximately $2.7$1.5 million, comprised primarily of (1) severance and related employee costs of approximately $1.9 million, (2) recruitment and relocation costs of approximately $0.4 million, (3) third-party and other costs of approximately $0.1 million and (4) share-based compensation of approximately $0.3 million.costs. The Company expects to incur totalrecognize the majority of the remaining costs aggregating approximately $35.0 million to $38.0 million, of which $26.0 million to $29.0 million will be cash expenditures, related to the plan. The Company expects to realize a total G&A expense reduction throughassociated with the plan during the second quarter of approximately $35.0 million.2020.
As a result of the realignment of our management and operating structure as described above, the Company is continuing to evaluate the impact these changes will have on its existing operating segment structure. The Company currently expects to report its results in the following three segments beginning with our Annual Report on Form 10-K for the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development.
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 thirdfirst quarter of 2020 and the first nine months of 2019 and 2018.2019.
| | | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Revenues: | | | | | | | | | | | | | | | | |
Sales | $ | 182.0 |
| | $ | 165.3 |
| | $ | 16.7 |
| | $ | 530.7 |
| | $ | 486.3 |
| | $ | 44.4 |
| $ | 166.8 |
| | $ | 167.7 |
| | $ | (0.9 | ) |
Franchise royalty revenue and fees | 109.2 |
| | 103.2 |
| | 6.0 |
| | 320.3 |
| | 308.7 |
| | 11.6 |
| 101.7 |
| | 102.0 |
| | (0.3 | ) |
Franchise rental income | 59.9 |
| | 50.5 |
| | 9.4 |
| | 176.9 |
| | 152.1 |
| | 24.8 |
| 57.9 |
| | 58.4 |
| | (0.5 | ) |
Advertising funds revenue | 86.8 |
| | 81.6 |
| | 5.2 |
| | 253.9 |
| | 245.0 |
| | 8.9 |
| 78.6 |
| | 80.5 |
| | (1.9 | ) |
| 437.9 |
| | 400.6 |
| | 37.3 |
| | 1,281.8 |
| | 1,192.1 |
| | 89.7 |
| 405.0 |
| | 408.6 |
| | (3.6 | ) |
Costs and expenses: | | | | | |
| | | | | | |
| | | | | |
|
Cost of sales | 152.4 |
| | 139.3 |
| | 13.1 |
| | 446.1 |
| | 409.7 |
| | 36.4 |
| 150.0 |
| | 142.6 |
| | 7.4 |
|
Franchise support and other costs | 9.7 |
| | 5.4 |
| | 4.3 |
| | 19.8 |
| | 18.6 |
| | 1.2 |
| 8.0 |
| | 6.0 |
| | 2.0 |
|
Franchise rental expense | 32.4 |
| | 22.3 |
| | 10.1 |
| | 92.8 |
| | 69.8 |
| | 23.0 |
| 29.3 |
| | 32.4 |
| | (3.1 | ) |
Advertising funds expense | 87.9 |
| | 81.6 |
| | 6.3 |
| | 257.0 |
| | 245.0 |
| | 12.0 |
| 80.0 |
| | 80.5 |
| | (0.5 | ) |
General and administrative | 46.2 |
| | 46.5 |
| | (0.3 | ) | | 146.3 |
| | 146.1 |
| | 0.2 |
| 51.6 |
| | 49.3 |
| | 2.3 |
|
Depreciation and amortization | 33.3 |
| | 29.1 |
| | 4.2 |
| | 98.0 |
| | 94.6 |
| | 3.4 |
| 31.0 |
| | 33.2 |
| | (2.2 | ) |
System optimization gains, net | (1.0 | ) | | (0.5 | ) | | (0.5 | ) | | (1.2 | ) | | — |
| | (1.2 | ) | (0.3 | ) | | — |
| | (0.3 | ) |
Reorganization and realignment costs | 0.4 |
| | 0.9 |
| | (0.5 | ) | | 4.8 |
| | 6.7 |
| | (1.9 | ) | 3.9 |
| | 0.8 |
| | 3.1 |
|
Impairment of long-lived assets | — |
| | 0.3 |
| | (0.3 | ) | | 1.7 |
| | 2.2 |
| | (0.5 | ) | 4.6 |
| | 1.5 |
| | 3.1 |
|
Other operating income, net | (2.4 | ) | | (1.6 | ) | | (0.8 | ) | | (9.4 | ) | | (4.7 | ) | | (4.7 | ) | (1.8 | ) | | (4.0 | ) | | 2.2 |
|
| 358.9 |
| | 323.3 |
| | 35.6 |
| | 1,055.9 |
| | 988.0 |
| | 67.9 |
| 356.3 |
| | 342.3 |
| | 14.0 |
|
Operating profit | 79.0 |
| | 77.3 |
| | 1.7 |
| | 225.9 |
| | 204.1 |
| | 21.8 |
| 48.7 |
| | 66.3 |
| | (17.6 | ) |
Interest expense, net | (27.9 | ) | | (29.6 | ) | | 1.7 |
| | (86.9 | ) | | (89.9 | ) | | 3.0 |
| (28.5 | ) | | (29.1 | ) | | 0.6 |
|
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | (7.2 | ) | | (11.5 | ) | | 4.3 |
| |
Investment income, net | 0.3 |
| | 450.1 |
| | (449.8 | ) | | 1.0 |
| | 450.4 |
| | (449.4 | ) | |
Other income, net | 1.9 |
| | 1.1 |
| | 0.8 |
| | 6.1 |
| | 2.4 |
| | 3.7 |
| 1.1 |
| | 2.7 |
| | (1.6 | ) |
Income before income taxes | 53.3 |
| | 498.9 |
| | (445.6 | ) | | 138.9 |
| | 555.5 |
| | (416.6 | ) | 21.3 |
| | 39.9 |
| | (18.6 | ) |
Provision for income taxes | (7.2 | ) | | (107.7 | ) | | 100.5 |
| | (28.5 | ) | | (114.2 | ) | | 85.7 |
| (6.9 | ) | | (8.0 | ) | | 1.1 |
|
Net income | $ | 46.1 |
| | $ | 391.2 |
| | $ | (345.1 | ) | | $ | 110.4 |
| | $ | 441.3 |
| | $ | (330.9 | ) | $ | 14.4 |
| | $ | 31.9 |
| | $ | (17.5 | ) |
| | | Third Quarter | | Nine Months | First Quarter |
| 2019 | | % of Total Revenues | | 2018 | | % of Total Revenues | | 2019 | | % of Total Revenues | | 2018 | | % of Total Revenues | 2020 | | % of Total Revenues | | 2019 | | % of Total Revenues |
Revenues: | | | | | | | | | | | | | | | | | | | | | | |
Sales | $ | 182.0 |
| | 41.6 | % | | $ | 165.3 |
| | 41.3 | % | | $ | 530.7 |
| | 41.4 | % | | $ | 486.3 |
| | 40.8 | % | $ | 166.8 |
| | 41.2 | % | | $ | 167.7 |
| | 41.0 | % |
Franchise royalty revenue and fees: | | | | | | | | | | | | | | | | | | | | | | |
Royalty revenue | 102.3 |
| | 23.4 | % | | 95.5 |
| | 23.8 | % | | 300.0 |
| | 23.4 | % | | 283.6 |
| | 23.8 | % | 95.4 |
| | 23.6 | % | | 94.9 |
| | 23.2 | % |
Franchise fees | 6.9 |
| | 1.5 | % | | 7.7 |
| | 1.9 | % | | 20.3 |
| | 1.6 | % | | 25.1 |
| | 2.1 | % | 6.3 |
| | 1.5 | % | | 7.1 |
| | 1.8 | % |
Total franchise royalty revenue and fees | 109.2 |
| | 24.9 | % | | 103.2 |
| | 25.7 | % | | 320.3 |
| | 25.0 | % | | 308.7 |
| | 25.9 | % | 101.7 |
| | 25.1 | % | | 102.0 |
| | 25.0 | % |
Franchise rental income | 59.9 |
| | 13.7 | % | | 50.5 |
| | 12.6 | % | | 176.9 |
| | 13.8 | % | | 152.1 |
| | 12.8 | % | 57.9 |
| | 14.3 | % | | 58.4 |
| | 14.3 | % |
Advertising funds revenue | 86.8 |
| | 19.8 | % | | 81.6 |
| | 20.4 | % | | 253.9 |
| | 19.8 | % | | 245.0 |
| | 20.5 | % | 78.6 |
| | 19.4 | % | | 80.5 |
| | 19.7 | % |
Total revenues | $ | 437.9 |
| | 100.0 | % | | $ | 400.6 |
| | 100.0 | % | | $ | 1,281.8 |
| | 100.0 | % | | $ | 1,192.1 |
| | 100.0 | % | $ | 405.0 |
| | 100.0 | % | | $ | 408.6 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Nine Months | First Quarter |
| 2019 | | % of Sales | | 2018 | | % of Sales | | 2019 | | % of Sales | | 2018 | | % of Sales | 2020 | | % of Sales | | 2019 | | % of Sales |
Cost of sales: | | | | | | | | | | | | | | | | | | | | | | |
Food and paper | $ | 57.2 |
| | 31.4 | % | | $ | 53.0 |
| | 32.1 | % | | $ | 167.3 |
| | 31.5 | % | | $ | 154.8 |
| | 31.8 | % | $ | 52.5 |
| | 31.5 | % | | $ | 52.2 |
| | 31.1 | % |
Restaurant labor | 54.7 |
| | 30.1 | % | | 48.4 |
| | 29.3 | % | | 160.1 |
| | 30.2 | % | | 144.1 |
| | 29.6 | % | 57.0 |
| | 34.2 | % | | 51.7 |
| | 30.8 | % |
Occupancy, advertising and other operating costs | 40.5 |
| | 22.3 | % | | 37.9 |
| | 22.9 | % | | 118.7 |
| | 22.4 | % | | 110.8 |
| | 22.8 | % | 40.5 |
| | 24.2 | % | | 38.7 |
| | 23.1 | % |
Total cost of sales | $ | 152.4 |
| | 83.8 | % | | $ | 139.3 |
| | 84.3 | % | | $ | 446.1 |
| | 84.1 | % | | $ | 409.7 |
| | 84.2 | % | $ | 150.0 |
| | 89.9 | % | | $ | 142.6 |
| | 85.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | % |
|
| | | | | | | | | | | | | |
| First Quarter |
| 2020 | | % of Sales | | 2019 | | % of Sales |
Restaurant margin | $ | 16.8 |
| | 10.1 | % | | $ | 25.1 |
| | 15.0 | % |
The tables below present certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.
|
| | | | | | | | | | | |
| Third Quarter | | Nine Months |
| 2019 | | 2018 | | 2019 | | 2018 |
Key business measures: | | | | | | | |
North America same-restaurant sales growth: | | | | | | | |
Company-operated | 4.7 | % | | 1.2 | % | | 2.5 | % | | 1.4 | % |
Franchised | 4.3 | % | | (0.3 | )% | | 2.4 | % | | 1.1 | % |
Systemwide | 4.4 | % | | (0.2 | )% | | 2.4 | % | | 1.1 | % |
| | | | | | | |
Global same-restaurant sales growth: | | | | | | | |
Company-operated | 4.7 | % | | 1.2 | % | | 2.5 | % | | 1.4 | % |
Franchised (a) | 4.4 | % | | (0.1 | )% | | 2.5 | % | | 1.3 | % |
Systemwide (a) | 4.4 | % | | 0.0 | % | | 2.5 | % | | 1.3 | % |
|
| | | | | |
| First Quarter |
| 2020 | | 2019 |
Key business measures: | | | |
U.S. same-restaurant sales: | | | |
Company-operated restaurants | (0.7 | )% | | 2.1 | % |
Franchised restaurants | 0.1 | % | | 1.2 | % |
Systemwide | 0.0 | % | | 1.2 | % |
| | | |
International same-restaurant sales (a) | (1.6 | )% | | 2.7 | % |
| | | |
Global same-restaurant sales: | | | |
Company-operated restaurants | (0.7 | )% | | 2.1 | % |
Franchised restaurants (a) | (0.1 | )% | | 1.3 | % |
Systemwide (a) | (0.2 | )% | | 1.4 | % |
________________
(a) Includes international franchised restaurants same-restaurant sales (excluding Venezuela,Argentina and excluding Argentina beginning in the third quarter of 2018,Venezuela due to the impact of the highly inflationary economies of those countries).
| | | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Key business measures (continued): | | | | | | | | | | |
Systemwide sales: (a) | | | | | | | | | | |
Company-operated | $ | 182.0 |
| | $ | 165.3 |
| | $ | 530.7 |
| | $ | 486.3 |
| $ | 166.8 |
| | $ | 167.7 |
|
North America franchised | 2,478.2 |
| | 2,358.5 |
| | 7,251.4 |
| | 7,043.4 |
| |
North America systemwide | 2,660.2 |
| | 2,523.8 |
| | 7,782.1 |
| | 7,529.7 |
| |
U.S. franchised | | 2,174.2 |
| | 2,150.3 |
|
U.S. systemwide | | 2,341.0 |
| | 2,318.0 |
|
International franchised (b) | 137.8 |
| | 126.5 |
| | 410.8 |
| | 385.8 |
| 272.6 |
| | 273.3 |
|
Global systemwide | $ | 2,798.0 |
| | $ | 2,650.3 |
| | $ | 8,192.9 |
| | $ | 7,915.5 |
| $ | 2,613.6 |
| | $ | 2,591.3 |
|
________________
| |
(a) | During the thirdfirst quarter of 20192020 and 2018,2019, global systemwide sales increased 5.7%1.0% and 1.7%3.3%, respectively, North AmericaU.S. systemwide sales increased 5.5%1.0% and 1.2%2.6%, respectively, and international franchised sales increased 9.2%1.0% and 13.2%, respectively, on a constant currency basis. During the first nine months of 2019 and 2018, global systemwide sales increased 4.1% and 2.7%, respectively, North America systemwide sales increased 3.8% and 2.2%, respectively, and international franchised sales increased 9.8% and 13.2%10.2%, respectively, on a constant currency basis. |
| |
(b) | Excludes Venezuela,Argentina and excludes Argentina beginning in the third quarter of 2018,Venezuela due to the impact of the highly inflationary economies of those countries. |
|
| | | | | | | | | | | |
| Third Quarter |
| Company-operated | | North America Franchised | | International Franchised | | Systemwide |
Restaurant count: | | | | | | | |
Restaurant count at June 30, 2019 | 358 |
| | 5,828 |
| | 533 |
| | 6,719 |
|
Opened | — |
| | 27 |
| | 13 |
| | 40 |
|
Closed | (2 | ) | | (10 | ) | | (4 | ) | | (16 | ) |
Net purchased from (sold by) franchisees | — |
| | — |
| | — |
| | — |
|
Restaurant count at September 29, 2019 | 356 |
| | 5,845 |
| | 542 |
| | 6,743 |
|
| | | | | | | |
| Nine Months |
| Company-operated | | North America Franchised | | International Franchised | | Systemwide |
Restaurant count: | | | | | | | |
Restaurant count at December 30, 2018 | 353 |
| | 5,825 |
| | 533 |
| | 6,711 |
|
Opened | — |
| | 76 |
| | 35 |
| | 111 |
|
Closed | (2 | ) | | (51 | ) | | (26 | ) | | (79 | ) |
Net purchased from (sold by) franchisees | 5 |
| | (5 | ) | | — |
| | — |
|
Restaurant count at September 29, 2019 | 356 |
| | 5,845 |
| | 542 |
| | 6,743 |
|
|
| | | | | | | | | | | |
| First Quarter |
| Company-operated | | U.S. Franchised | | International Franchised | | Systemwide |
Restaurant count: | | | | | | | |
Restaurant count at December 29, 2019 | 357 |
| | 5,495 |
| | 936 |
| | 6,788 |
|
Opened | 1 |
| | 26 |
| | 14 |
| | 41 |
|
Closed (a) | — |
| | (18 | ) | | (6 | ) | | (24 | ) |
Restaurant count at March 29, 2020 | 358 |
| | 5,503 |
| | 944 |
| | 6,805 |
|
________________
| |
(a) | Excludes restaurants temporarily closed due to the impact of the COVID-19 pandemic. |
|
| | | | | | | | | | | |
Sales | First Quarter |
| 2020 | | 2019 | | Change |
Sales | $ | 166.8 |
| | $ | 167.7 |
| | $ | (0.9 | ) |
The decrease in sales for the first quarter of 2020 was primarily due to a 0.7% decrease in Company-operated same-restaurant sales. Company-operated same-restaurant sales decreased due to the impact of the COVID-19 pandemic during March 2020, partially offset by the positive impact from the launch of breakfast on March 2, 2020.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Sales | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Sales | $ | 182.0 |
| | $ | 165.3 |
| | $ | 16.7 |
| | $ | 530.7 |
| | $ | 486.3 |
| | $ | 44.4 |
|
|
| | | | | | | | | | | |
Franchise Royalty Revenue and Fees | First Quarter |
| 2020 | | 2019 | | Change |
Royalty revenue | $ | 95.4 |
| | $ | 94.9 |
| | $ | 0.5 |
|
Franchise fees | 6.3 |
| | 7.1 |
| | (0.8 | ) |
| $ | 101.7 |
| | $ | 102.0 |
| | $ | (0.3 | ) |
The increase in sales for the third quarter andfranchise royalty revenue during the first nine monthsquarter of 20192020 was primarily due to a net increase in the number of Company-operatedfranchise restaurants in operation during 2019the first quarter of 2020 compared to 2018. In addition, sales for the third quarter and the first nine monthsquarter 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 | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Royalty revenue | $ | 102.3 |
| | $ | 95.5 |
| | $ | 6.8 |
| | $ | 300.0 |
| | $ | 283.6 |
| | $ | 16.4 |
|
Franchise fees | 6.9 |
| | 7.7 |
| | (0.8 | ) | | 20.3 |
| | 25.1 |
| | (4.8 | ) |
| $ | 109.2 |
| | $ | 103.2 |
| | $ | 6.0 |
| | $ | 320.3 |
| | $ | 308.7 |
| | $ | 11.6 |
|
The increase in franchise royalty revenue during the third quarter and the first nine months of 2019 was primarily due to a 4.4% and 2.5% increase in franchise same-restaurant sales, respectively. Royalty revenue was also positively impacted by a net increase in the number of franchise restaurants in operation.
2019. The decrease in franchise fees during the thirdfirst quarter of 20192020 was primarily due to lower other miscellaneous franchise fees, partially offset by higher fees for providing information technology and other services to franchisees. fees.
|
| | | | | | | | | | | |
Franchise Rental Income | First Quarter |
| 2020 | | 2019 | | Change |
Franchise rental income | $ | 57.9 |
| | $ | 58.4 |
| | $ | (0.5 | ) |
The decrease in franchise feesrental income during the first nine monthsquarter of 20192020 was primarily due to lower other miscellaneous franchise fees and facilitating fewer franchisee-to-franchisee restaurant transfers (“Franchise Flips”) in 2019, partially offset by higher fees for providing information technology and other servicesthe impact of assigning certain leases to franchisees.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Franchise Rental Income | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Franchise rental income | $ | 59.9 |
| | $ | 50.5 |
| | $ | 9.4 |
| | $ | 176.9 |
| | $ | 152.1 |
| | $ | 24.8 |
|
The increase in franchise rental income during the third quarter and the first nine months of 2019 was primarily due to the adoption of new accounting guidance for leases. Under the new guidance, lessees’ payments to the Company for executory costs are recorded on a gross basis as revenue with a corresponding expense. See “Franchise Rental Expense” below. The increase during the first nine months of 2019 was partially offset by the assignment of certain leases to a franchisee.
| | Advertising Funds Revenue | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Advertising funds revenue | $ | 86.8 |
| | $ | 81.6 |
| | $ | 5.2 |
| | $ | 253.9 |
| | $ | 245.0 |
| | $ | 8.9 |
| $ | 78.6 |
| | $ | 80.5 |
| | $ | (1.9 | ) |
The Company maintains two national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales of the franchised restaurants. The increasedecrease in advertising funds revenue during the thirdfirst quarter and the first nine months of 20192020 was primarily due to an increase in North America franchise same-restaurant(1) the impact of the COVID-19 pandemic during March 2020 and (2) the abatement of U.S. national advertising fund contributions on breakfast sales as well asprior to our official launch of breakfast on March 2, 2020. These decreases were partially offset by a net increase in the number of North America franchise restaurants in operation. These increases were partially offset by reductionsoperation in advertising receipts under the Company’s restaurant development incentive program.first quarter of 2020 compared with the first quarter of 2019.
| | Cost of Sales, as a Percent of Sales | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Food and paper | 31.4 | % | | 32.1 | % | | (0.7 | )% | | 31.5 | % | | 31.8 | % | | (0.3 | )% | 31.5 | % | | 31.1 | % | | 0.4 | % |
Restaurant labor | 30.1 | % | | 29.3 | % | | 0.8 | % | | 30.2 | % | | 29.6 | % | | 0.6 | % | 34.2 | % | | 30.8 | % | | 3.4 | % |
Occupancy, advertising and other operating costs | 22.3 | % | | 22.9 | % | | (0.6 | )% | | 22.4 | % | | 22.8 | % | | (0.4 | )% | 24.2 | % | | 23.1 | % | | 1.1 | % |
| 83.8 | % | | 84.3 | % | | (0.5 | )% | | 84.1 | % | | 84.2 | % | | (0.1 | )% | 89.9 | % | | 85.0 | % | | 4.9 | % |
The decreaseincrease in cost of sales, as a percent of sales, during the thirdfirst quarter and the first nine months of 20192020 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(1) restaurant labor rate inflation, (2) an increase in restaurant labor ratescommodity costs, (3) incremental training costs incurred as a result of launching the breakfast daypart and commodity(4) an increase in maintenance costs.
| | Franchise Support and Other Costs | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Franchise support and other costs | $ | 9.7 |
| | $ | 5.4 |
| | $ | 4.3 |
| | $ | 19.8 |
| | $ | 18.6 |
| | $ | 1.2 |
| $ | 8.0 |
| | $ | 6.0 |
| | $ | 2.0 |
|
The increase in franchise support and other costs during the thirdfirst quarter and the first nine months of 20192020 was primarily due to investments to support U.S. franchisees in preparation of the purchasenational launch 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.breakfast on March 2, 2020.
| | Franchise Rental Expense | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Franchise rental expense | $ | 32.4 |
| | $ | 22.3 |
| | $ | 10.1 |
| | $ | 92.8 |
| | $ | 69.8 |
| | $ | 23.0 |
| $ | 29.3 |
| | $ | 32.4 |
| | $ | (3.1 | ) |
The increasedecrease in franchise rental expense during the thirdfirst quarter and the first nine months of 20192020 was primarily due to the adoption of new accounting guidance for leases. Under the new guidance, lessees’ payments to the Company for executory costs are recorded on a gross basis as revenue with a corresponding expense. See “Franchise Rental Income” above. The increase during the first nine months of 2019 was partially offset by the impact of assigning certain leases to a franchisee.franchisees.
| | Advertising Funds Expense | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Advertising funds expense | $ | 87.9 |
| | $ | 81.6 |
| | $ | 6.3 |
| | $ | 257.0 |
| | $ | 245.0 |
| | $ | 12.0 |
| $ | 80.0 |
| | $ | 80.5 |
| | $ | (0.5 | ) |
The increasedecrease in advertising funds expense during the thirdfirst quarter and the first nine months of 20192020 was primarily due to the same factors as described above for advertising funds revenue.“Advertising Funds Revenue.” On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. During the thirdfirst quarter and the first nine months of 2019,2020, advertising funds expense exceeded advertising funds revenue by $1.1$1.4 million, and $3.1 million, respectively, reflecting a portion of the expected advertising spend in excess of advertising funds revenue for the remainder of 2019.2020. This excess for 20192020 is expected to approximate the amount by which advertising funds revenue exceeded advertising funds expense in 2019 and 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | |
General and Administrative | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Employee compensation and related expenses | $ | 43.4 |
| | $ | 39.4 |
| | $ | 4.0 |
| | $ | 125.3 |
| | $ | 120.7 |
| | $ | 4.6 |
|
Legal reserves | (2.8 | ) | | — |
| | (2.8 | ) | | (2.3 | ) | | 0.1 |
| | (2.4 | ) |
Other, net | 5.6 |
| | 7.1 |
| | (1.5 | ) | | 23.3 |
| | 25.3 |
| | (2.0 | ) |
| $ | 46.2 |
| | $ | 46.5 |
| | $ | (0.3 | ) | | $ | 146.3 |
| | $ | 146.1 |
| | $ | 0.2 |
|
The decrease in general and administrative expenses during the third quarter of 2019 was primarily due to a reduction in legal reserves as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the Financial Institutions case (see Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information). This decrease was offset by higher employee compensation and related expenses, reflecting an increase in incentive compensation accruals. |
| | | | | | | | | | | |
General and Administrative | First Quarter |
| 2020 | | 2019 | | Change |
Employee compensation and related benefits | $ | 30.5 |
| | $ | 28.8 |
| | $ | 1.7 |
|
Incentive compensation | 3.0 |
| | 4.9 |
| | (1.9 | ) |
Severance expense | 1.2 |
| | 0.1 |
| | 1.1 |
|
Other, net | 16.9 |
| | 15.5 |
| | 1.4 |
|
| $ | 51.6 |
| | $ | 49.3 |
| | $ | 2.3 |
|
The increase in general and administrative expenses during the first nine monthsquarter of 20192020 was primarily due to higher employee compensationincreases in (1) salaries and relatedbenefits, (2) severance expense and (3) other miscellaneous charges largely consisting of meeting cancellation expenses reflecting an increasedue to the COVID-19 pandemic. These increases were partially offset by a decrease in incentive compensation accruals and additional expenditures to support our digital experience and international organizations. This increase was partially offset by (1) a reduction in legal reserves as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the Financial Institutions case (see Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information) and (2) changes in staffing driven by our G&A realignment plan.accruals.
| | Depreciation and Amortization | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Restaurants | $ | 21.8 |
| | $ | 17.4 |
| | $ | 4.4 |
| | $ | 63.7 |
| | $ | 60.3 |
| | $ | 3.4 |
| $ | 19.5 |
| | $ | 21.9 |
| | $ | (2.4 | ) |
Corporate and other | 11.5 |
| | 11.7 |
| | (0.2 | ) | | 34.3 |
| | 34.3 |
| | — |
| 11.5 |
| | 11.3 |
| | 0.2 |
|
| $ | 33.3 |
| | $ | 29.1 |
| | $ | 4.2 |
| | $ | 98.0 |
| | $ | 94.6 |
| | $ | 3.4 |
| $ | 31.0 |
| | $ | 33.2 |
| | $ | (2.2 | ) |
The increasedecrease in restaurant depreciation and amortization during the thirdfirst quarter and the first nine months of 20192020 was primarily due to (1) assets becoming fully depreciated and (2) a decrease in depreciation on assets classified as held for sale resulting from the assignmentexpected sale of certain leases43 restaurants in New York to a franchisee in 2018, resultingfranchisees in the write-off of the related net investment in the leases.next 12 months.
| | System Optimization Gains, Net | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
System optimization gains, net | $ | (1.0 | ) | | $ | (0.5 | ) | | $ | (0.5 | ) | | $ | (1.2 | ) | | $ | — |
| | $ | (1.2 | ) | $ | (0.3 | ) | | $ | — |
| | $ | (0.3 | ) |
System optimization gains, net for the thirdfirst quarter and the first nine months of 2019 and 20182020 were primarily comprised of post-closing adjustments on previous sales of restaurants.
| | Reorganization and Realignment Costs | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
IT realignment | | $ | 3.5 |
| | $ | — |
| | $ | 3.5 |
|
G&A realignment | $ | 0.4 |
| | $ | 0.6 |
| | $ | (0.2 | ) | | $ | 4.7 |
| | $ | 6.4 |
| | (1.7 | ) | 0.3 |
| | 0.8 |
| | (0.5 | ) |
System optimization initiative | — |
| | 0.3 |
| | (0.3 | ) | | 0.1 |
| | 0.3 |
| | (0.2 | ) | 0.1 |
| | — |
| | 0.1 |
|
| $ | 0.4 |
| | $ | 0.9 |
| | $ | (0.5 | ) | | $ | 4.8 |
| | $ | 6.7 |
| | $ | (1.9 | ) | $ | 3.9 |
| | $ | 0.8 |
| | $ | 3.1 |
|
In December 2019, the Company’s Board of Directors approved a plan to realign and reinvest resources in its IT organization to strengthen its ability to accelerate growth. During the first quarter of 2020, the Company recognized costs associated with this plan totaling $3.5 million, which primarily included third-party and other costs.
In May 2017, the Company initiated a G&A realignment plan to further reduce its G&A expenses. In addition, the Company announced changes to its leadership structure in May 2019. G&A realignment costs for the thirdfirst quarter of 2020 and the first nine months of 2019 and 2018 were primarily comprised of severance and related employee costs and share-based compensation. The Company does not expect to incur any additional material costs under the plan.
| | Impairment of Long-Lived Assets | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Impairment of long-lived assets | $ | — |
| | $ | 0.3 |
| | $ | (0.3 | ) | | $ | 1.7 |
| | $ | 2.2 |
| | $ | (0.5 | ) | $ | 4.6 |
| | $ | 1.5 |
| | $ | 3.1 |
|
The change in impairment charges during the third quarter of 2019 was primarily driven by lower impairment charges as a result of closing Company-operated restaurants and classifying such surplus properties as held for sale when compared to the third quarter of 2018. The changeincrease in impairment charges during the first nine monthsquarter of 20192020 was primarily driven by lower impairment chargesthe Company testing its Company-operated restaurant long-lived assets for recoverability as a result of the adverse impacts of the COVID-19 pandemic. As a result of this analysis, the Company recorded impairment charges due to the expected deterioration in operating performance of certain Company-operated restaurants when compared to the first nine months of 2018, partially offset by higher impairment charges as a result of closing Company-operated restaurants and classifying such surplus properties as held for sale.restaurants.
| | Other Operating Income, Net | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Gains on sales-type leases | | $ | (0.6 | ) | | $ | (1.9 | ) | | $ | 1.3 |
|
Equity in earnings in joint ventures, net | $ | (2.1 | ) | | $ | (2.2 | ) | | $ | 0.1 |
| | $ | (7.0 | ) | | $ | (5.8 | ) | | $ | (1.2 | ) | (1.4 | ) | | (1.8 | ) | | 0.4 |
|
Losses (gains) on sales-type leases | 0.1 |
| | — |
| | 0.1 |
| | (1.9 | ) | | — |
| | (1.9 | ) | |
Lease buyout | (0.4 | ) | | 0.3 |
| | (0.7 | ) | | (0.6 | ) | | 0.9 |
| | (1.5 | ) | |
Other, net | — |
| | 0.3 |
| | (0.3 | ) | | 0.1 |
| | 0.2 |
| | (0.1 | ) | 0.2 |
| | (0.3 | ) | | 0.5 |
|
| $ | (2.4 | ) | | $ | (1.6 | ) | | $ | (0.8 | ) | | $ | (9.4 | ) | | $ | (4.7 | ) | | $ | (4.7 | ) | $ | (1.8 | ) | | $ | (4.0 | ) | | $ | 2.2 |
|
The change in other operating income, net during the thirdfirst quarter of 20192020 was primarily due to lease buyout activity. The changedecreases 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,and (2) lease buyout activity and (3) an increase in the equity in earnings from our TimWen joint venture.
| | Interest Expense, Net | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Interest expense, net | $ | 27.9 |
| | $ | 29.6 |
| | $ | (1.7 | ) | | $ | 86.9 |
| | $ | 89.9 |
| | $ | (3.0 | ) | $ | 28.5 |
| | $ | 29.1 |
| | $ | (0.6 | ) |
Interest expense, net decreased during the thirdfirst quarter and the first nine months of 20192020 primarily due to lower outstanding principal amounts of long-term debt, reflecting the impact of the completion of refinancing a portion of the Company’s securitized financing facility during the first nine months ofin June 2019. Interest expense, net also decreased during the first nine months of 2019 due to the timing of interest expense on the Company’s finance lease obligations.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Loss on Early Extinguishment of Debt | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Loss on early extinguishment of debt | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7.2 |
| | $ | 11.5 |
| | $ | (4.3 | ) |
|
| | | | | | | | | | | |
Other Income, Net | First Quarter |
| 2020 | | 2019 | | Change |
Other income, net | $ | 1.1 |
| | $ | 2.7 |
| | $ | (1.6 | ) |
During the second quarter of 2019, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of repaying its outstanding Series 2015-1 Class A-2-II Notes primarily with the proceeds from the issuance of its Series 2019-1 Class A-2 Notes. The loss on the early extinguishment of debt of $7.2 million was comprised of the write-off of certain deferred financing costs.
During the first quarter of 2018, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of repaying its outstanding Series 2015-1 Class A-2-I Notes with the proceeds from the issuance of its Series 2018-1 Class A-2 Notes. The loss on the early extinguishment of debt of $11.5 million was comprised of the write-off of certain deferred financing costs and a specified make-whole payment.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Investment Income, Net | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Investment income, net | $ | 0.3 |
| | $ | 450.1 |
| | $ | (449.8 | ) | | $ | 1.0 |
| | $ | 450.4 |
| | $ | (449.4 | ) |
InvestmentOther income, net decreased during the thirdfirst quarter and the first nine months of 2019 due to the $450.0 million gain recorded on the sale of the Company’s ownership interest in Inspire Brands, Inc. (“Inspire Brands”) on August 16, 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Other Income, Net | Third Quarter | | Nine Months |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Other income, net | $ | 1.9 |
| | $ | 1.1 |
| | $ | 0.8 |
| | $ | 6.1 |
| | $ | 2.4 |
| | $ | 3.7 |
|
Other income, net increased during the third quarter and the first nine months of 20192020 primarily due to higherlower interest income earned on our cash equivalents.
| | Provision for Income Taxes | Third Quarter | | Nine Months | First Quarter |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Income before income taxes | $ | 53.3 |
| | $ | 498.9 |
| | $ | (445.6 | ) | | $ | 138.9 |
| | $ | 555.5 |
| | $ | (416.6 | ) | $ | 21.3 |
| | $ | 39.9 |
| | $ | (18.6 | ) |
Provision for income taxes | (7.2 | ) | | (107.7 | ) | | 100.5 |
| | (28.5 | ) | | (114.2 | ) | | 85.7 |
| (6.9 | ) | | (8.0 | ) | | 1.1 |
|
Effective tax rate on income | 13.5 | % | | 21.6 | % | | (8.1 | )% | | 20.5 | % | | 20.6 | % | | (0.1 | )% | 32.1 | % | | 20.0 | % | | 12.1 | % |
Our effective tax rates for the thirdfirst quarter of 20192020 and 20182019 were impacted by variations in income before income taxes, including uncertainty in 2020 income before income taxes arising from the COVID-19 pandemic, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year, include the following: (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitationsThe increase in the thirdeffective tax rate for the first quarter of 2020 compared with the first quarter of 2019 (2) a reduction for the impact of stock-based compensation, which included net excess tax benefits of $1.1 million and $5.3 million for the third quarter of 2019 and 2018, respectively, and (3)was primarily due to (1) an increase due toin tax on our foreign operations, (2) an increase in state income taxes, including non-recurring changes to state deferred taxes.taxes net of federal benefits, and (3) a reduction in the benefit of share-based compensation.
Segment Information
See Note 19 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments.
Our effective tax rates for
Wendy’s U.S.
|
| | | | | | | | | | | |
| First Quarter |
| 2020 | | 2019 | | Change |
Sales | $ | 166.8 |
| | $ | 167.7 |
| | $ | (0.9 | ) |
Franchise royalty revenue | 84.8 |
| | 84.4 |
| | 0.4 |
|
Franchise fees | 5.3 |
| | 5.4 |
| | (0.1 | ) |
Advertising fund revenue | 74.1 |
| | 76.0 |
| | (1.9 | ) |
Total revenues | $ | 331.0 |
| | $ | 333.5 |
| | $ | (2.5 | ) |
Segment profit | $ | 81.8 |
| | $ | 89.7 |
| | $ | (7.9 | ) |
The decrease in Wendy’s U.S. revenues during the first nine monthsquarter of 2020 was primarily due to (1) a decrease in same-restaurant sales resulting from the impact of the COVID-19 pandemic in March 2020 and (2) the abatement of U.S. national advertising fund contributions on breakfast sales prior to our official launch of breakfast on March 2, 2020. These decreases were partially offset by (1) a net increase in the number of restaurants in operation during the first quarter of 2020 compared to the first quarter of 2019 and 2018 were impacted(2) the positive impact from the launch of breakfast on March 2, 2020.
The decrease in Wendy’s U.S. segment profit during the first quarter of 2020 was primarily due to (1) lower revenues and (2) higher cost of sales, as a percent of sales, for Company-operated restaurants driven by variationsthe same factors as described above for “Cost of Sales, as a Percent of Sales.”
Wendy’s International
|
| | | | | | | | | | | |
| First Quarter |
| 2020 | | 2019 | | Change |
Franchise royalty revenue | $ | 10.5 |
| | $ | 10.5 |
| | $ | — |
|
Franchise fees | 0.5 |
| | 1.0 |
| | (0.5 | ) |
Advertising fund revenue | 4.5 |
| | 4.5 |
| | — |
|
Total revenues | $ | 15.5 |
| | $ | 16.0 |
| | $ | (0.5 | ) |
Segment profit | $ | 5.1 |
| | $ | 5.7 |
| | $ | (0.6 | ) |
The decrease in income before income taxes, adjusted for recurring items such as non-deductible expensesWendy’s International revenues 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, includesegment profit during the following: (1) a reduction in unrecognized tax benefitsfirst quarter of 2020 was primarily due to a lapse of statute of limitationsdecrease in franchise fees reflecting lower other miscellaneous franchise fees.
Global Real Estate & Development
|
| | | | | | | | | | | |
| First Quarter |
| 2020 | | 2019 | | Change |
Franchise fees | $ | 0.5 |
| | $ | 0.6 |
| | $ | (0.1 | ) |
Franchise rental income | 57.9 |
| | 58.5 |
| | (0.6 | ) |
Total revenues | $ | 58.4 |
| | $ | 59.1 |
| | $ | (0.7 | ) |
Segment profit | $ | 26.5 |
| | $ | 27.0 |
| | $ | (0.5 | ) |
The decrease in Global Real Estate & Development revenues during the first nine monthsquarter of 2019, (2) a reduction for the impact of stock-based compensation, which included net excess tax benefits of $4.0 million and $12.1 million for the first nine months of 2019 and 2018, respectively, and (3) an increase2020 was primarily due to non-recurring changesthe assignment of certain leases to state deferred taxes.franchisees. The decrease in Global Real Estate & Development segment profit was primarily due to (1) a decrease in gains on new and modified sales-type leases and (2) higher general and administrative expenses. These unfavorable impacts were partially offset by lower franchise rental expense due to the assignment of certain leases to franchisees.
Liquidity and Capital Resources
Cash Flows
Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized
financing facility. Principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to stockholders.
Our anticipated cash requirementsDuring the three months ended March 29, 2020, the Company made a payment of $24.7 million related to the settlement of the financial institutions class action (the “FI Case”) (see Note 23 of the Financial Statements and Supplementary Data contained in Item 8 of the Form 10-K for the remainder of 2019, exclusive of operating cash flow requirements, consist principally of:further information).
In response to the COVID-19 pandemic, the Company has taken the following actions impacting its liquidity and capital expenditures of approximately $34.0 million to $39.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $75.0 million to $80.0 million;resources:
increased its cash dividends aggregating upposition by draw downs under the Company’s Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Class A-1 Notes”) and the Company’s other lines of credit in March 2020 as discussed below in “Long-Term Debt, Including Current Portion;”
reduced its quarterly cash dividend from $.12 per share in the first quarter to approximately $27.6 million$.05 per share in the second quarter 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,suspended all share repurchase activity under the February 2020 share repurchase authorization as discussed below in “Stock Repurchases.Repurchases;”
evaluated its planned 2020 general and administrative expenses and capital plan and identified approximately $10.0 million and $20.0 million, respectively, for a total of $30.0 million in savings, and revised its planned 2020 advertising expenses to remove incremental advertising for breakfast;
deferred payment of the Company’s share of Social Security payroll taxes as permitted under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which allows for the deferral of these payments through the end of 2020 and requires repayment of the deferred amounts in 2021 and 2022;
to support the franchise system, (1) extended payment terms for royalties and national advertising funds contributions by 45 days beginning in April for a three month period, (2) abated national advertising fund contributions on breakfast sales for the remainder of 2020, (3) offered to defer base rent payments on properties owned by Wendy’s and leased to franchisees by 50% beginning in May for a three month period, which will be repaid over 12 months, and (4) extended Image Activation and new restaurant development requirements by one year; and
to support Company-operated restaurant employees, (1) implemented a new emergency paid sick leave policy with up to 14 days paid leave in the event an employee is unable to work as a result of the COVID-19 pandemic and (2) announced that hourly crew members, shift managers and assistant general managers will receive a 10% increase in hourly pay for the months of April and May, and the Company will protect part of the monthly bonus through May for general managers and district managers.
In addition, to the anticipated cash requirements above, the Company expects to make one-time investments during 2019 of approximately $20.0 millionbenefit from the technical amendments under the CARES Act by treating qualified improvement property (“QIP”) as 15-year property and allowing such property to supportbe eligible for the U.S. system100 percent bonus depreciation for QIP placed in preparation of the launch of breakfast in the first quarter of 2020.service after December 31, 2017.
Based on current levels of operations and certain actions taken, including the draw down of the Class A-1 Notes, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.
We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. Due to the uncertainty in the credit markets caused by the COVID-19 pandemic, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us.
The table below summarizes our cash flows from operating, investing and financing activities for the first ninethree months of 20192020 and 2018:2019:
| | | Nine Months | Three Months |
| 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Net cash provided by (used in): | | | | | | |
Net cash (used in) provided by: | | | | | | |
Operating activities | $ | 237.5 |
| | $ | 229.7 |
| | $ | 7.8 |
| $ | (19.4 | ) | | $ | 62.0 |
| | $ | (81.4 | ) |
Investing activities | (45.7 | ) | | 391.4 |
| | (437.1 | ) | (12.1 | ) | | (15.9 | ) | | 3.8 |
|
Financing activities | (183.4 | ) | | (151.0 | ) | | (32.4 | ) | 63.4 |
| | (62.5 | ) | | 125.9 |
|
Effect of exchange rate changes on cash | 2.8 |
| | (2.1 | ) | | 4.9 |
| (5.1 | ) | | 1.9 |
| | (7.0 | ) |
Net increase in cash, cash equivalents and restricted cash | $ | 11.2 |
| | $ | 468.0 |
| | $ | (456.8 | ) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 26.8 |
| | $ | (14.5 | ) | | $ | 41.3 |
|
Operating Activities
Cash provided by operating activities was $237.5 million and $229.7 million in the first nine months of 2019 and 2018, respectively. Cash(used in) 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 (used in) provided by operating activities increased $7.8was $(19.4) million duringand $62.0 million in the first nine monthsquarter of 2020 and 2019, as compared to the first nine months of 2018,respectively. The change was primarily due to (1) highera cash payment of $24.7 million related to the settlement of the FI Case in January 2020, (2) lower net income, from operations, adjusted for non-cash expenses, and (2) a decrease(3) an increase in payments for incentive compensation. These favorable changes were partially offset by (1)compensation for the 2019 fiscal year paid in 2020, (4) the timing of collectionspayments for marketing expenses of royalty receivablesthe national advertising funds and (2) changes(5) a reduction in receivables for income tax refunds. Further, income taxes payable decreased significantly indeferred vendor incentives driven by the first nine monthstiming of 2019 as compared to the first nine monthsreceipt of 2018 due to income taxes associated with the gain on sale of our ownership interest in Inspire Brands during the first nine months of 2018 (which offset the income tax expense recognized in net income for the first nine months of 2018).an annual advance.
Investing Activities
Cash used in investing activities increased $437.1was $12.1 million duringand $15.9 million in the first nine monthsquarter of 2020 and 2019, as compared to the first nine months of 2018,respectively. The change was primarily due to the proceedsno acquisitions of restaurants from the sale of our ownership interestfranchisees in Inspire Brands during the first nine monthsquarter of 20182020 compared with cash used for acquisitions of $450.0 million.$5.1 million in the first quarter of 2019. This change was partially offset by a decreasean increase in cash used for the Company’s acquisitioncapital expenditures of restaurants from franchisees of $16.3$1.4 million.
Financing Activities
Cash used inprovided by (used in) financing activities increased $32.4was $63.4 million duringand $(62.5) million in the first nine monthsquarter of 2020 and 2019, as compared to the first nine months of 2018,respectively. The change was primarily due to (1) a net increase in cash used forprovided by long-term debt activities of $76.4$144.8 million, reflecting the respective impactsimpact of the completiondraw downs under the Class A-1 Notes and the Company’s other lines of credit. See “Long-Term Debt, Including Current Portion” for additional details on the long-term debt refinancing transactions duringactivities in the first nine monthsquarter of 2019 and 2018, (2) a decrease in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $16.2 million, and (3) an increase in dividends of $8.5 million.2020. These changes were partially offset by (1) a decreasean increase in repurchases of common stock of $63.3$14.2 million and (2) the settlementan increase in dividends of a supplemental purchase price liability associated with the acquisition of 140 Wendy’s restaurants from DavCo Restaurants, LLC of $6.3 million during the first nine months of 2018.$3.7 million.
Long-Term Debt, Including Current Portion
Except as described below, there were no material changes to the terms of any debt obligations since December 30, 2018.29, 2019. The Company was in compliance with its debt covenants as of SeptemberMarch 29, 2019.2020. See Note 8 to9 of the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.
On June 26, 2019, Wendy’s Funding, LLC, (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the Company, completed a debt refinancing transaction under which the Master Issuer issued fixed ratemaster issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in the following 2019-1 series: Class A-2-I with an interest rate of 3.783% and initial principal amount of $400.0 million and Class A-2-II with an interest rate of 4.080% and initial principal amount of $450.0 million (collectively, the “Series 2019-1 Class A-2 Notes”). The Master Issuer’s outstanding Series 2015-1 Class A-2-II Notes were redeemed as part of the refinancing transaction.
In connection with the issuance of the Series 2019-1 Class A-2 Notes,June 2015. Under this facility, in June 2019, the Master Issuer also entered into a revolving financing facility of Series 2019-1 Variable Funding Senior Secured Notes,issued outstanding Class A-1 (the “Series 2019-1 Class A-1 Notes”),Notes, which allowsallowed for the drawingborrowing of up to $150.0 million from time to time on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowedIn March 2020, the Company drew down $120.0 million under the Series 2019-1 Class A-1 Notes during the nine months ended September 29, 2019. The Series 2019-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2018-1 Class A-1 Notes, which were canceled on the closing date and the letters of credit outstanding against the Series 2018-1 Class A-1 Notes were transferred to the Series 2019-1 Class A-1 Notes. As a result, as of March 29, 2020, the Company had outstanding borrowings of $120.0 million under the Class A-1 Notes.
A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6.0 million. In March 2020, the Company drew down C$5.5 million under the revolving credit facility. As a result, as of March 29, 2020, the Company had outstanding borrowings of C$5.5 million under the revolving credit facility.
Wendy’s U.S. advertising fund has a revolving line of credit of $25.0 million, which was established to fund the advertising fund operations. In February 2020, the Company drew down $4.4 million under the revolving line of credit, which the Company repaid in February 2020. In March 2020, the Company drew down $25.0 million under the revolving line of credit. As a result, as of March 29, 2020, the Company had outstanding borrowings of $25.0 million under the revolving line of credit.
The increased borrowings were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic.
Dividends
On March 15, 2019, June 17, 2019 and September 17, 2019,16, 2020, the Company paid quarterly cash dividends of $.10$.12 per share on its common stock, aggregating $69.3$26.8 million. On October 11, 2019,May 6, 2020, the Company declared a dividend of $.12$.05 per share to be paid on December 16, 2019June 15, 2020 to stockholders of record as of December 2, 2019. As a result of the October 11 declaration,June 1, 2020. If the Company expects that itspays regular quarterly cash dividends for the remainder of 2020 at the same rate as declared in the second quarter of 2020, the Company’s total cash requirementsrequirement for dividends for the fourth quarterremainder of 20192020 will be approximately $27.6$33.4 million based on the number of shares of its common stock outstanding at October 30, 2019.April 29, 2020. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any.
Stock Repurchases
In February 2020, our Board of Directors authorized a repurchase program for up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warrant and to the extent legally permissible. During the three months ended March 29, 2020, the Company repurchased 0.8 million shares under the February 2020 repurchase authorization with an aggregate purchase price of $14.5 million, excluding commissions. As of March 29, 2020, the Company had $85.5 million of availability remaining under its February 2020 authorization. As previously announced, beginning in March 2020, the Company suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic.
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 warrantwarranted and to the extent legally permissible. In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $100.0 million in cash and received an initial delivery of 4.1 million shares of common stock, representing an estimated 85% of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 0.6 million shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2019 ASR Agreement, less an agreed upon discount. In total, 4.7 million shares were delivered under the 2019 ASR Agreement at an average purchase price of $21.37 per share.
In addition to the shares repurchased in connection with the February 2019 authorization,ASR Agreement, during the Company’s previous November 2018 repurchase authorization for up to $220.0 million of our common stock was canceled. During the ninethree months ended SeptemberMarch 29, 2019,2020, the Company repurchased 4.21.3 million shares with an aggregate purchase price of $76.2$28.8 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. Asauthorization. After taking into consideration these repurchases, with the completion of September 29,the 2019 ASR Agreement in February 2020, the Company had $170.3 million of availability remaining undercompleted its February 2019 authorization. Subsequent to September 29, 2019 through October 30,
During the three months ended March 31, 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 warranted and to the extent legally permissible. During the nine months ended September 30, 2018, the Company repurchased 6.9 million shares under the February 2018 repurchase authorization with an aggregate purchase price of $118.9 million, of which $2.7 million was accrued at September 30, 2018, and excluding commissions of $0.1 million. Additionally, during the nine months ended September 30, 2018, the Company completed its previous February 2017 repurchase authorization for up to $150.0 million of our common stock with the repurchase of 1.41.7 million shares with an aggregate purchase price of $22.6$29.3 million, of which $0.3 million was accrued at March 31, 2019, and excluding commissions.commissions, under the February 2019 authorization and the Company’s previous November 2018 authorization for up to $220.0 million of common stock.
General Inflation, Commodities and Changing Prices
We believe that general inflation did not have a significant effect on our consolidated results of operations. We attempt to manage any inflationary costs and commodity price increases through product mix and selective menu price increases. Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases.
Seasonality
Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year. Currently, we are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business.
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 onthe Form 10-K for the fiscal year ended December 30, 2018 (the “Form 10-K”).10-K.
As of SeptemberMarch 29, 2019,2020, there were no material changes from the information contained in the Form 10-K, except as described below.
Interest Rate Risk
As discussed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation” under “Liquidity and Capital Resources,”March 29, 2020, the Company completed an $850.0had outstanding borrowings of $120.0 million debt refinancing transaction on June 26, 2019. The Company’s outstanding Series 2015-1under the Class A-2-II Notes were repaid as part of the refinancing transaction. In aggregate, the Company’s new Series 2019-1 Class A-2 Notes bear a weighted-average fixed-rate interest at rates slightly lower than our historical effective rates on the Series 2015-1 Class A-2-IIA-1 Notes. In addition, the principal amountsCompany had outstanding onborrowings of $25.0 million under the Series 2019-1 Class A-2 Notes are lower than the amounts that wereU.S. advertising fund revolving line of credit and C$5.5 million of outstanding on the Series 2015-1 Class A-2-II Notes. In connection with the issuance of the Series 2019-1 Class A-2 Notes,borrowings under a wholly-owned subsidiary of the Company also entered into aCanadian subsidiary’s revolving financing facility, the Series 2019-1 Class A-1 Notes, which allows for the drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. The Series 2019-1 Class A-1 Notes replacedincreased borrowings were taken as precautionary measures to provide enhanced flexibility considering the Company’s $150.0 million Series 2018-1 Class A-1 Notes, which were canceled onuncertain market conditions arising from the closing date, and the letters of credit outstanding against the Series 2018-1 Class A-1 Notes were transferred to the Series 2019-1 Class A-1 Notes.COVID-19 pandemic.
Consequently, ourOur long-term debt, including the current portion and the advertising fund revolving line of credit, aggregated $2,336.7$2,460.0 million as of SeptemberMarch 29, 20192020 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure has reduced its exposure to interest rate increases that could adversely affect its earnings and cash flows. The Company is exposed to interest rate increases under the Series 2019-1 Class A-1 Notes;flows; however, the Company had noCompany’s outstanding borrowings under the Series 2019-1 Class A-1 Notes accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate (“LIBOR”) for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the Class A-1 Note agreement. In addition, the U.S. advertising fund revolving line of September 29, 2019.credit bears interest at LIBOR plus 2.75% and our Canadian subsidiary’s revolving credit facility bears interest at the Bank of Montreal Prime Rate. An increase or decrease of 1.0% in the effective interest rate applied to these outstanding borrowings would result in a pre-tax interest expense fluctuation of approximately $1.5 million on an annualized basis.
In addition, LIBOR is expected to be discontinued after 2021. If LIBOR is discontinued, we may need to renegotiate certain loan documents and we cannot predict what alternative index would be negotiated with our lenders or the resulting impact on our interest expense.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of itsthe Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’sits 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 SeptemberMarch 29, 2019.2020. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of SeptemberMarch 29, 2019,2020, 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 thirdfirst quarter of 20192020 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. As previously announced, the Company is realigning and reinvesting resources in its IT organization and partnering with a third-party global IT consultant. The Company continues to evaluate the impact of this initiative on its internal control over financial reporting. As the transition of certain IT services is completed during the second quarter of 2020, the Company will evaluate the impact of changes to the control environment and update and implement controls as appropriate.
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 errorserror 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”). AllGenerally, forward-looking statements include the words “may,” “believes,” “plans,” “expects,” “anticipates,” “intends,” “estimate,” “goal,” “upcoming,” “outlook,” “guidance” or the negation thereof, or similar expressions. In addition, all statements that address future operating, financial or business performance;performance, strategies or initiatives, or expectations; future synergies, efficiencies or overhead savings;savings, anticipated costs or charges;charges, future capitalization; andcapitalization, anticipated financial impacts of recent or pending investments or transactions and statements expressing general views about future results or brand health are forward-looking statements within the meaning of the Reform Act. The forward-lookingForward-looking statements are based on our expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors. For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed in or implied by our forward-looking statements. 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 theour forward-looking statements contained herein.statements. 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 marketingthe disruption to our business from the novel coronavirus (COVID-19) pandemic and the potential impact of competitors’ new unit openingsthe pandemic on salesour results of Wendy’s restaurants;operations, financial condition and prospects;
consumers’ perceptionsthe impact of competition, including from outside the relative quality, variety, affordability and value of the food products we offer, and quick-service restaurant industry;
changes in consumer tastes and preferences;preferences and discretionary consumer spending;
prevailing conditions and disruptions in the national and global economies, including areas with a high concentration of Wendy’s restaurants;
food safety events, including instances of food-borne illness, (such as salmonella or E. coli) involving Wendy’s, or its supply chain;chain or other food service companies;
the success of our operating, promotional, marketing or new product development initiatives, including risks associated with our entry into the breakfast daypart across the U.S. system;
our ability to achieve our growth strategy through net new restaurant development, including the availability of suitable locations and terms, and the success of our Image Activation program, including the ability of reimaged restaurants to positively affect sales;
changes in commodity and other operating costs, including supply, distribution and labor costs;
our ability to attract and retain qualified restaurant personnel;
shortages or interruptions in the supply or distribution of food or other products and other risks associated with our independent supply chain purchasing co-op;
consumer concerns overregarding the nutritional aspects of beef, chicken, french fries or other products we sell, the ingredients in our products and/or the cooking processes used in our restaurants;products;
conditions beyond our control, such as weather, natural disasters,the effects of disease outbreaks, epidemics or pandemics impacting our customers or food supplies, or acts of war or terrorism;pandemics;
the effects of negative publicity that can occur from increased use of social media;
success of operating and marketing initiatives,risks associated with our international operations, including advertising and promotional efforts and new product and concept development by us and our competitors;ability to achieve our international growth strategy;
prevailing economic, marketrisks associated with our digital commerce strategy, platforms and business conditions affecting us,technologies, including competition from other food service providers, unemploymentour ability to adapt to changes in industry trends and decreased consumer spending levels, particularly in geographic regions that contain a high concentration of Wendy’s restaurants;preferences;
changes in the quick-service restaurant industry, spending patterns
our dependence on computer systems and demographic trends, such as consumer trends toward value-oriented products and promotions or toward consuming fewer meals away from home;
certain factors affecting our franchisees, including the business and financial viability of franchisees, the timely payment of franchisees’ obligations due to us or to national or local advertising organizations, and the ability of franchisees to open new restaurants and reimage existing restaurants in accordance with their development and franchise commitments, including their ability to finance restaurant development and reimages;
increased labor costs due to competition or increased minimum wage or employee benefit costs;
changes in commodity costs (including beef, chicken, pork, cheese and grains), labor, supplies, fuel, utilities, distribution and other operating costs;
the availability of suitable locations and terms for restaurant development by us and our franchisees;
development costs, including real estate and construction costs;
delays in opening new restaurants or completing reimages of existing restaurants,information technology, including risks associated with the failure, interruption or breach of our Image Activation program;systems or technology or other cyber incidents or deficiencies;
therisks associated with our plan to realign and reinvest resources in our IT organization to accelerate growth;
our ability to effectively manage the acquisition and disposition of restaurants or successfully implement other strategic initiatives;
anticipatedconditions beyond our control, such as adverse weather conditions, natural disasters, hostilities, social unrest or unanticipated restaurant closures by us and our franchisees;other catastrophic events;
our ability to identify, attract and retain franchisees with sufficient experience and financial resources to develop and operate Wendy’s restaurants successfully;
availability of qualified restaurant personnel to us and our franchisees, and the ability to retain such personnel;
our ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to Wendy’s restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;
availability and cost of insurance;
availability, terms (including changes in interest rates) and deployment of capital, and changes in debt, equity and securities markets;
changes in, and our ability to comply with, legal, regulatory or similar requirements, including franchising laws, payment card industry rules, overtime rules, minimum wage rates, wage and hour laws, tax legislation, federal ethanol policy and accounting standards, policies and practices;protect our intellectual property;
the costs, uncertaintiescontinued succession and other effectsretention of key personnel and the effectiveness of our leadership structure;
compliance with legal or regulatory requirements, the impact of legal or regulatory proceedings and risks associated with an increased focus on environmental, social and administrative proceedings;governance issues;
risks associated with leasing and owning significant amounts of real estate, including a decline in the value of our real estate assets or liability for environmental matters;
the effects of charges for impairment of goodwill or for the impairment of other long-lived assets;
risks associated with failures, interruptions or security breaches of our computer systems or technology, or the occurrence of cyber incidents or a deficiency in cybersecurity that impacts us or our franchisees, including the cybersecurity incident described in the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2019 (the “Form 10-K”);
the difficulty in predicting the ultimate costs that will be incurred in connection with our plan to reduce general and administrative expense, and the future impact on our earnings;
risks associated with our securitized financing facility and other debt agreements, including theour overall debt levels and our ability to generate sufficient cash flow to meet increased debt service obligations, compliance with operational and financial covenants and restrictions on our ability to raise additional capital;
risks associated withthe availability, terms and deployment of capital, including the amount and timing of share repurchases under share repurchase programs approved by our Board of Directors;equity and debt repurchases;
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 thethis Quarterly Report on Form 10-Q (see especially Part II, “Item 1A. Risk Factors”), our Annual Report on Form 10-K filed with the SEC on February 26, 2020 (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the Securities and Exchange Commission.
In addition to the factors described above, there are risks associated with our predominantly franchised business model that could impact our results, performance and achievements. Such risks include our ability to identify, attract and retain experienced and qualified franchisees, the business and financial health of franchisees, the ability of franchisees to meet their royalty, advertising, development, reimaging and other commitments, participation by franchisees in brand strategies and the fact that franchisees are independent third parties that own, operate and are responsible for overseeing the operations of their restaurants. Our predominantly franchised business model may also impact the ability of the Wendy’s system to effectively respond and adapt to market changes. Many of these risks have been or in the future may be heightened due to the business disruption and impact from the COVID-19 pandemic.
All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.above. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us.
We assume no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q as a result of new information, future events or developments, except as required by federal securities laws. In addition,laws, although we may do so from time to time. We do not endorse any projections regarding future performance that may be made by third parties.
Item 1. Legal Proceedings.
The Company is involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. Theestimable, and the Company believes it has adequate accruals for continuing operations for all of its legal and environmentalsuch matters. We cannot estimate the aggregate possible range of loss for various reasons, including,
but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period.
See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information regarding certain legal proceedings in which we are involved.
Item 1A. Risk Factors.
In addition to the information contained in this report, you should carefully consider the risk factors disclosed in our Form 10-K, and our Quarterly Report on Form 10-Q for the period ended March 31, 2019, which could materially affect our business, financial condition or future results. Except as set forth below or as may otherwise be described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K10-K.
The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our Quarterly Report onbusiness, which has materially affected and could continue to materially affect our results of operations, financial condition and prospects for an extended period of time.
In March 2020, the World Health Organization declared the novel coronavirus (COVID-19) a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected customers, workforces, economies and financial markets, and, along with decreased consumer spending, have led to an economic downturn in many of our markets. Governmental restrictions and public perceptions of the risks associated with COVID-19 have caused consumers to avoid or limit non-essential travel, gatherings in public places and other social interactions, which has adversely affected, and could continue to adversely affect, our business.
In response to the COVID-19 pandemic, we have updated our brand standard to include the closure of all dining rooms except where there are specific needs, or a drive-thru or pick-up window option is not available, subject to applicable governmental requirements. As of the date of this Form 10-Q, substantially all of our Company-operated and franchised restaurants in the United States and Canada have closed their dine-in operations and are operating drive-thru and delivery only, sometimes with limited hours, menus and capacity. In addition, several international markets have temporarily closed all restaurants, and many other international markets have limited restaurant operations. As a result, restaurant traffic and systemwide sales have been significantly negatively impacted. Even after the mobility restrictions are lifted, customers may still be reluctant to return to in-restaurant dining, and consumer spending may be adversely impacted for an extended period of time as a result of decreased consumer confidence and the period ended March 31, 2019.impact of lost wages due to increased unemployment.
Wendy’s plansThe COVID-19 pandemic has also adversely affected new restaurant development and restaurant reimaging. Due to launch breakfast across the U.S. systemuncertain and challenging economic and market conditions, we have delayed construction of substantially all new Company-operated restaurants and reimaging of existing Company-operated restaurants and have also delayed the new restaurant development and Image Activation requirements of our franchisees. These delays could affect our ability to drive future growth in 2020. The breakfast daypart is competitive across the restaurant industry and it may prove difficult to achieve market share and reach targeted levelsour business, particularly if they continue for a significant amount of breakfast sales and profits.time.
As previously announced, Wendy’s plansOur operating results and financial condition are impacted to entera large extent by the breakfast daypart acrossoperational and financial success of our franchisees. The impact of the U.S. systemCOVID-19 pandemic has had, and could continue to have, an adverse effect on our franchisees’ operations and financial condition. Because a significant portion of restaurant operating costs are fixed or semi-fixed in nature, the loss of sales during a prolonged period of time negatively impacts operating margins and can result in restaurant operating losses. We have taken certain actions to support our franchisees, including extending payment terms for royalties, extending or abating payment terms for advertising fund contributions and offering to defer base rent payments on properties owned by the Company and leased to franchisees. These actions are expected to adversely affect our cash flows and financial condition in the first quarterupcoming quarters. To the extent our franchisees experience financial distress, it could negatively affect our results of 2020. operations, cash flows and financial condition through delayed or reduced payments of royalties, advertising fund contributions or rent. In addition, in the event our franchisees institute insolvency or bankruptcy proceedings, we could be prevented from collecting or retaining certain payments or exercising certain rights under the related franchise, development or other agreements.
The CompanyCOVID-19 pandemic has led, and franchisee leadership have worked closelycould continue to align withlead, to interruptions in the U.S. systemdelivery of food or other supplies to Wendy’s restaurants arising from delays or restrictions on shipping or manufacturing, closures of supplier or distributor facilities or financial distress or insolvency of suppliers or distributors. These delays or interruptions could impact the availability of certain food items at Wendy’s restaurants, including beef, chicken, pork and other core menu products. Our results of operations and those of our franchisees could be adversely affected if our key suppliers or distributors are unable to fulfill their responsibilities
and we are unable to identify alternative suppliers or distributors in a breakfast programtimely manner or effectively transition the impacted business to new suppliers or distributors.
The COVID-19 pandemic could also lead to labor shortages or increased labor costs. Because COVID-19 can be transmitted through human contact, the risk or perceived risk of contracting the virus could adversely affect the ability or cost of adequately staffing restaurants, which could be exacerbated to the extent that the Company believes will drive incremental salesor franchisees have employees who test positive for the virus. If a significant percentage of our or our franchisees’ workforce is unable to work, whether because of illness, quarantine, travel limitations or other governmental restrictions, our operations 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 engagementoperations 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 employeesmay be negatively impacted, which could adverselymaterially affect our operations. results of operations and financial condition. We have taken several actions to help support our employees and protect the health and safety of our employees and customers, such as implementing a new emergency sick leave policy, providing temporary wage increases to restaurant employees and purchasing additional sanitation supplies and personal protective materials, which have contributed to increased operating costs.
The launch of breakfast will also require significant financial resources, includingimpacts from 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 strategyCOVID-19 pandemic could have a material adverse impacteffect on our liquidity and capital resources. We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. Due to the uncertainty in the credit markets caused by the COVID-19 pandemic, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us. If the disruptions caused by COVID-19 worsen or last longer than we currently expect, our ability to comply with certain debt covenants under our securitized financing facility could be adversely affected. Additionally, negative changes to our credit ratings due to the impact or expected impact of COVID-19 could have an adverse effect on our existing indebtedness, our ability to access additional capital, our cost of borrowing and our overall liquidity position and financial condition.
We cannot predict the duration, scope or severity of the COVID-19 pandemic. COVID-19 has disrupted and is expected to continue to disrupt our business, which has materially affected and could continue to materially affect our results of operations, financial condition and resultsprospects for an extended period of operations.time.
Wendy’s planned expansion intoIn addition to the United Kingdomrisks described above, the COVID-19 pandemic has had, and could continue to have, the effect of heightening 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 restaurantsdisclosed in the United Kingdom beginning“Risk Factors” section of our Form 10-K, including, but not limited to, risks related to competition, consumer preferences and spending, economic conditions and disruptions, labor, supply chain and purchasing, new restaurant development and reimaging, performance of the breakfast daypart, franchisee actions, results and financial condition, leasing and ownership of real estate, complaints or litigation, legal or regulatory requirements, international operations and expansion, digital commerce and technology, cybersecurity, asset impairments, our securitized financing facility and levels of indebtedness, and payment of future dividends. Because the COVID-19 pandemic is unprecedented and continuously evolving, the potential impacts to the risk factors that are further described 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.Form 10-K remain uncertain.
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 thirdfirst quarter of 20192020:
Issuer Repurchases of Equity Securities
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| | | | | | | | | | |
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 |
|
|
| | | | | | | | | | |
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) |
December 30, 2019 through February 2, 2020 | 1,081,173 |
|
| $21.89 |
| 1,054,271 |
|
| $20,713,003 |
|
February 3, 2020 through March 1, 2020 | 1,117,612 |
|
| $23.00 |
| 982,388 |
|
| $98,162,283 |
|
March 2, 2020 through March 29, 2020 | 683,922 |
|
| $18.63 |
| 682,373 |
|
| $85,462,519 |
|
Total | 2,882,707 |
|
| $21.55 |
| 2,719,032 |
|
| $85,462,519 |
|
| |
(1) | Includes 75,141163,675 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. |
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(2) | In February 2019, our Board of Directors authorized a repurchase program for up to $225.0 million of our common stock through March 1, 2020, when and if market conditions warranted and to the extent legally permissible. In February 2020, the Company completed the 2019 ASR Agreement and received 0.6 million shares of common stock. With the completion of the 2019 ASR Agreement, the Company completed its $225.0 million February 2019 authorization. In February 2020, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warrant and to the extent legally permissible. |
Subsequent to September 29, 2019 through October 30, 2019,As previously announced, in March 2020, the Company repurchased 0.4 million shares undersuspended all share repurchase activity in connection with the February 2019 authorization with an aggregate purchase price of $9.2 million, excluding commissions.
Company’s response to the COVID-19 pandemic.
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EXHIBIT NO. | DESCRIPTION |
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10.1 | |
31.1 | |
31.2 | |
32.1 | |
101 | The following financial information from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberMarch 29, 20192020 formatted in Inline eXtensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. |
104 | The cover page from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberMarch 29, 2019,2020, formatted in Inline XBRL and contained in Exhibit 101. |
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* | Filed herewith. |
** | Identifies a management contract or compensatory plan or arrangement. |
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.
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| |
| THE WENDY’S COMPANY (Registrant) |
Date: NovemberMay 6, 20192020 |
By: /s/ Gunther Plosch |
| Gunther Plosch |
| Chief Financial Officer |
| (On behalf of the registrant) |
| |
Date: NovemberMay 6, 20192020 | By: /s/ Leigh A. Burnside |
| Leigh A. Burnside |
| Senior Vice President, Finance and Chief Accounting Officer |
| (Principal Accounting Officer) |