Item 1. Financial Statements
Item 1. Financial Statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Par Value)
September 27,
2020 December 29,
2019
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 313,187 $ 300,195
Restricted cash 38,460 34,539
Accounts and notes receivable, net 100,125 117,461
Inventories 4,604 3,891
Prepaid expenses and other current assets 34,825 15,585
Advertising funds restricted assets 116,535 82,376
Total current assets 607,736 554,047
Properties 922,717 977,000
Finance lease assets 207,933 200,144
Operating lease assets 827,123 857,199
Goodwill 749,670 755,911
Other intangible assets 1,229,343 1,247,212
Investments 43,422 45,949
Net investment in sales-type and direct financing leases 259,588 256,606
Other assets 115,492 100,461
Total assets $ 4,963,024 $ 4,994,529
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 35,358 $ 22,750
Current portion of finance lease liabilities 11,438 11,005
Current portion of operating lease liabilities 44,677 43,775
Accounts payable 18,014 22,701
Accrued expenses and other current liabilities 124,143 165,272
Advertising funds restricted liabilities 126,620 84,195
Total current liabilities 360,250 349,698
Long-term debt 2,226,243 2,257,561
Long-term finance lease liabilities 498,584 480,847
Long-term operating lease liabilities 869,161 897,737
Deferred income taxes 276,273 270,759
Deferred franchise fees 88,834 91,790
Other liabilities 122,144 129,778
Total liabilities 4,441,489 4,478,170
Commitments and contingencies
Stockholders’ equity:
Common stock, $ 0.10 par value; 1,500,000 shares authorized;
470,424 shares issued; 224,081 and 224,889 shares outstanding, respectively
47,042 47,042
Additional paid-in capital 2,896,767 2,874,001
Retained earnings 215,635 185,725
Common stock held in treasury, at cost; 246,343 and 245,535 shares, respectively
( 2,578,943 ) ( 2,536,581 )
Accumulated other comprehensive loss ( 58,966 ) ( 53,828 )
Total stockholders’ equity 521,535 516,359
Total liabilities and stockholders’ equity $ 4,963,024 $ 4,994,529
See accompanying notes to condensed consolidated financial statements.
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THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
(Unaudited)
Revenues:
Sales $ 191,946 $ 181,977 $ 522,961 $ 530,724
Franchise royalty revenue and fees 116,820 109,155 321,645 320,233
Franchise rental income 58,721 59,918 173,434 176,931
Advertising funds revenue 84,755 86,830 241,468 253,923
452,242 437,880 1,259,508 1,281,811
Costs and expenses:
Cost of sales 159,545 152,425 450,170 446,096
Franchise support and other costs 5,960 9,739 19,427 19,823
Franchise rental expense 32,426 32,364 93,024 92,842
Advertising funds expense 92,048 87,883 253,353 257,031
General and administrative 47,322 46,169 147,553 146,266
Depreciation and amortization 32,966 33,306 98,726 97,975
System optimization gains, net ( 23 ) ( 1,040 ) ( 2,333 ) ( 1,162 )
Reorganization and realignment costs 3,375 403 10,196 4,771
Impairment of long-lived assets 23 — 4,727 1,684
Other operating income, net ( 2,748 ) ( 2,392 ) ( 6,076 ) ( 9,377 )
370,894 358,857 1,068,767 1,055,949
Operating profit 81,348 79,023 190,741 225,862
Interest expense, net ( 29,086 ) ( 27,930 ) ( 86,696 ) ( 86,943 )
Loss on early extinguishment of debt — — — ( 7,150 )
Other income, net 181 2,218 1,113 7,165
Income before income taxes 52,443 53,311 105,158 138,934
Provision for income taxes ( 12,690 ) ( 7,184 ) ( 26,060 ) ( 28,527 )
Net income $ 39,753 $ 46,127 $ 79,098 $ 110,407
Net income per share:
Basic $ .18 $ .20 $ .35 $ .48
Diluted .17 .20 .35 .47
See accompanying notes to condensed consolidated financial statements.
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THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Three Months Ended Nine Months Ended
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
(Unaudited)
Net income $ 39,753 $ 46,127 $ 79,098 $ 110,407
Other comprehensive income (loss):
Foreign currency translation adjustment 3,220 ( 2,297 ) ( 5,138 ) 7,563
Other comprehensive income (loss) 3,220 ( 2,297 ) ( 5,138 ) 7,563
Comprehensive income
$ 42,973 $ 43,830 $ 73,960 $ 117,970
See accompanying notes to condensed consolidated financial statements.
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THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
Common
Stock Additional
Paid-In
Capital Retained Earnings Common Stock Held in Treasury Accumulated Other Comprehensive Loss Total
(Unaudited)
Balance at December 29, 2019 $ 47,042 $ 2,874,001 $ 185,725 $ ( 2,536,581 ) $ ( 53,828 ) $ 516,359
Net income — — 14,441 — — 14,441
Other comprehensive loss
— — — — ( 12,507 ) ( 12,507 )
Cash dividends — — ( 26,793 ) — — ( 26,793 )
Repurchases of common stock, including accelerated share repurchase
— 15,000 — ( 58,336 ) — ( 43,336 )
Share-based compensation — 4,539 — — — 4,539
Common stock issued upon exercises of stock options
— 280 — 1,330 — 1,610
Common stock issued upon vesting of restricted shares
— ( 4,017 ) — 726 — ( 3,291 )
Other — 33 ( 7 ) 27 — 53
Balance at March 29, 2020 $ 47,042 $ 2,889,836 $ 173,366 $ ( 2,592,834 ) $ ( 66,335 ) $ 451,075
Net income — — 24,904 — — 24,904
Other comprehensive income
— — — — 4,149 4,149
Cash dividends — — ( 11,181 ) — — ( 11,181 )
Share-based compensation — 4,787 — — — 4,787
Common stock issued upon exercises of stock options
— ( 902 ) — 11,361 — 10,459
Common stock issued upon vesting of restricted shares
— ( 1,041 ) — 773 — ( 268 )
Other — 19 ( 3 ) 42 — 58
Balance at June 28, 2020 $ 47,042 $ 2,892,699 $ 187,086 $ ( 2,580,658 ) $ ( 62,186 ) $ 483,983
Net income — — 39,753 — — 39,753
Other comprehensive income
— — — — 3,220 3,220
Cash dividends — — ( 11,202 ) — — ( 11,202 )
Repurchases of common stock — — — ( 1,708 ) — ( 1,708 )
Share-based compensation — 5,786 — — — 5,786
Common stock issued upon exercises of stock options
— 838 — 2,465 — 3,303
Common stock issued upon vesting of restricted shares
— ( 2,600 ) — 918 — ( 1,682 )
Other — 44 ( 2 ) 40 — 82
Balance at September 27, 2020 $ 47,042 $ 2,896,767 $ 215,635 $ ( 2,578,943 ) $ ( 58,966 ) $ 521,535
See accompanying notes to condensed consolidated financial statements.
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THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED
(In Thousands)
Common Stock Additional
Paid-In
Capital Retained Earnings Common Stock Held in Treasury Accumulated Other Comprehensive Loss Total
(Unaudited)
Balance at December 30, 2018 $ 47,042 $ 2,884,696 $ 146,277 $ ( 2,367,893 ) $ ( 61,673 ) $ 648,449
Net income — — 31,894 — — 31,894
Other comprehensive income — — — — 6,025 6,025
Cash dividends — — ( 23,069 ) — — ( 23,069 )
Repurchases of common stock — — — ( 29,370 ) — ( 29,370 )
Share-based compensation — 5,022 — — — 5,022
Common stock issued upon exercises of stock options
— ( 205 ) — 9,053 — 8,848
Common stock issued upon vesting of restricted shares
— ( 8,874 ) — 2,819 — ( 6,055 )
Cumulative effect of change in accounting principle
— — ( 1,105 ) — — ( 1,105 )
Other — 24 ( 6 ) 37 — 55
Balance at March 31, 2019 $ 47,042 $ 2,880,663 $ 153,991 $ ( 2,385,354 ) $ ( 55,648 ) $ 640,694
Net income — — 32,386 — — 32,386
Other comprehensive income — — — — 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 — — — — ( 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.
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THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 27,
2020 September 29,
2019
(Unaudited)
Cash flows from operating activities:
Net income $ 79,098 $ 110,407
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 98,726 97,975
Share-based compensation 15,112 13,989
Impairment of long-lived assets 4,727 1,684
Deferred income tax 5,878 5,524
Non-cash rental expense, net 19,967 18,722
Change in operating lease liabilities ( 29,539 ) ( 31,481 )
Net receipt of deferred vendor incentives 5,061 2,269
System optimization gains, net ( 2,333 ) ( 1,162 )
Distributions received from joint ventures, net of equity in earnings 1,187 2,926
Long-term debt-related activities, net 4,866 12,386
Changes in operating assets and liabilities and other, net 3,009 4,261
Net cash provided by operating activities 205,759 237,500
Cash flows from investing activities:
Capital expenditures ( 44,876 ) ( 40,984 )
Acquisitions — ( 5,052 )
Dispositions 3,570 2,038
Proceeds from sale of investments 169 130
Notes receivable, net 138 ( 1,834 )
Net cash used in investing activities ( 40,999 ) ( 45,702 )
Cash flows from financing activities:
Proceeds from long-term debt 153,315 850,000
Repayments of long-term debt ( 174,959 ) ( 883,564 )
Repayments of finance lease liabilities ( 5,850 ) ( 5,178 )
Deferred financing costs ( 2,122 ) ( 14,008 )
Repurchases of common stock ( 46,667 ) ( 76,948 )
Dividends ( 49,176 ) ( 69,280 )
Proceeds from stock option exercises 15,540 24,069
Payments related to tax withholding for share-based compensation ( 5,409 ) ( 8,447 )
Net cash used in financing activities ( 115,328 ) ( 183,356 )
Net cash provided by operations before effect of exchange rate changes on cash 49,432 8,442
Effect of exchange rate changes on cash ( 1,715 ) 2,755
Net increase in cash, cash equivalents and restricted cash 47,717 11,197
Cash, cash equivalents and restricted cash at beginning of period 358,707 486,512
Cash, cash equivalents and restricted cash at end of period $ 406,424 $ 497,709
Supplemental non-cash investing and financing activities:
Capital expenditures included in accounts payable $ 4,789 $ 7,582
Finance leases 24,617 34,084
September 27,
2020 December 29,
2019
Reconciliation of cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents $ 313,187 $ 300,195
Restricted cash 38,460 34,539
Restricted cash, included in Advertising funds restricted assets 54,777 23,973
Total cash, cash equivalents and restricted cash $ 406,424 $ 358,707
See accompanying notes to condensed consolidated financial statements.
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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of September 27, 2020, the results of our operations for the three and nine months ended September 27, 2020 and September 29, 2019 and our cash flows for the nine months ended September 27, 2020 and September 29, 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 29, 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 and nine months ended September 27, 2020 are not necessarily indicative of the results to be expected for the full 2020 fiscal year. See Notes 7, 9, 11 and 14 for further information regarding actions taken by the Company in response to the COVID-19 pandemic and certain impacts of the COVID-19 pandemic on our condensed consolidated financial statements.
The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business in the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Certain prior period financial information has been revised to align with this segment reporting structure. See Note 19 for further information.
We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.
Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.
(2) New Accounting Standards
New Accounting Standards
Financial Instruments
In August 2020, the Financial Accounting Standards Board (“FASB”) issued an amendment that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendment simplifies accounting for convertible instruments by removing major separation models required under current accounting guidance. In addition, the amendment removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception, and also simplifies the diluted earnings per share calculation in certain areas. The amendment is effective commencing with our 2022 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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, transactions that result in a step-up in the tax basis of goodwill, separate entity financial statements and interim recognition of enactment of tax laws or tax 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.
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 FASB issued an amendment that requires the Company to use a current expected credit loss model that results 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 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(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 September 27, 2020
Sales at Company-operated restaurants $ 191,946 $ — $ — $ 191,946
Franchise royalty revenue 98,128 11,216 — 109,344
Franchise fees 5,651 463 1,362 7,476
Franchise rental income — — 58,721 58,721
Advertising funds revenue 79,170 5,585 — 84,755
Total revenues $ 374,895 $ 17,264 $ 60,083 $ 452,242
Nine Months Ended September 27, 2020
Sales at Company-operated restaurants $ 522,961 $ — $ — $ 522,961
Franchise royalty revenue 271,082 30,809 — 301,891
Franchise fees 16,244 1,369 2,141 19,754
Franchise rental income — — 173,434 173,434
Advertising funds revenue 226,907 14,561 — 241,468
Total revenues $ 1,037,194 $ 46,739 $ 175,575 $ 1,259,508
Three Months Ended September 29, 2019
Sales at Company-operated restaurants $ 181,977 $ — $ — $ 181,977
Franchise royalty revenue 90,791 11,476 — 102,267
Franchise fees 5,199 1,011 678 6,888
Franchise rental income — — 59,918 59,918
Advertising funds revenue 81,386 5,444 — 86,830
Total revenues $ 359,353 $ 17,931 $ 60,596 $ 437,880
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Wendy’s U.S. Wendy’s International Global Real Estate & Development Total
Nine Months Ended September 29, 2019
Sales at Company-operated restaurants $ 530,724 $ — $ — $ 530,724
Franchise royalty revenue 266,599 33,332 — 299,931
Franchise fees 15,867 2,508 1,927 20,302
Franchise rental income — — 176,931 176,931
Advertising funds revenue 238,804 15,119 — 253,923
Total revenues $ 1,051,994 $ 50,959 $ 178,858 $ 1,281,811
Contract Balances
The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
September 27,
2020 (a) December 29,
2019 (a)
Receivables, which are included in “Accounts and notes receivable, net” (b) $ 44,637 $ 39,188
Receivables, which are included in “Advertising funds restricted assets”
55,682 54,394
Deferred franchise fees (c) 98,045 100,689
_______________
(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 $ 9,211 and $ 88,834 as of September 27, 2020, respectively, and $ 8,899 and $ 91,790 as of December 29, 2019, respectively.
Significant changes in deferred franchise fees are as follows:
Nine Months Ended
September 27,
2020 September 29,
2019
Deferred franchise fees at beginning of period $ 100,689 $ 102,205
Revenue recognized during the period
( 6,286 ) ( 6,635 )
New deferrals due to cash received and other 3,642 5,181
Deferred franchise fees at end of period $ 98,045 $ 100,751
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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:
2020 (a) $ 4,563
2021 6,231
2022 6,041
2023 5,871
2024 5,672
Thereafter 69,667
$ 98,045
_______________
(a) Represents franchise fees expected to be recognized for the remainder of 2020, which includes development-related franchise fees expected to be recognized over a duration of one year or less.
(4) Acquisitions
No restaurants were acquired from franchisees during the nine months ended September 27, 2020. During the nine months ended September 29, 2019, the Company acquired five restaurants from franchisees for total net cash consideration of $ 5,052 . The Company did not incur any material acquisition-related costs associated with the acquisitions during the nine months ended September 29, 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
September 29,
2019
Restaurants acquired from franchisees 5
Total consideration paid, net of cash received $ 5,052
Identifiable assets acquired and liabilities assumed:
Properties 666
Acquired franchise rights 1,354
Finance lease assets 5,350
Finance lease liabilities ( 4,084 )
Other ( 2,316 )
Total identifiable net assets 970
Goodwill $ 4,082
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 .
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(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 nine months ended September 27, 2020 and September 29, 2019, the Company facilitated 22 and three Franchise Flips, respectively. The Company expects to sell 43 Company-operated restaurants in New York to franchisees in the first quarter of 2021. The Company expects to retain its Company-operated restaurants 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 following is a summary of the disposition activity recorded as a result of our system optimization initiative:
Three Months Ended Nine Months Ended
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
Post-closing adjustments on sales of restaurants (a) $ 23 $ 1,033 $ 368 $ 1,087
Gain on sales of other assets, net (b) — 7 1,965 75
System optimization gains, net $ 23 $ 1,040 $ 2,333 $ 1,162
_______________
(a) The three and nine months ended September 27, 2020 represent the recognition of deferred gains as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. The three and nine months ended September 29, 2019 include the recognition of such deferred gains of $ 911 .
(b) During the nine months ended September 27, 2020, the Company received net cash proceeds of $ 3,570 , and during the three and nine months ended September 29, 2019, received cash proceeds of $ 798 and $ 2,038 , respectively, primarily from the sale of surplus and other properties.
Assets Held for Sale
September 27,
2020 December 29,
2019
Number of restaurants classified as held for sale 43 —
Net restaurant assets held for sale (a) $ 20,178 $ —
Other assets held for sale (b) $ 2,817 $ 1,437
_______________
(a) Net restaurant assets held for sale include the New York Company-operated restaurants we expect to sell in the first quarter of 2021 and consist primarily of cash, inventory, property and an estimate of allocable goodwill.
(b) Other assets held for sale primarily consist of surplus properties.
Assets held for sale are included in “Prepaid expenses and other current assets.”
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(6) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
Three Months Ended Nine Months Ended
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
Operations and field realignment $ 3,021 $ — $ 3,021 $ —
IT realignment 403 — 6,809 —
G&A realignment ( 49 ) 396 282 4,695
System optimization initiative — 7 84 76
Reorganization and realignment costs $ 3,375 $ 403 $ 10,196 $ 4,771
Operations and Field Realignment
In September 2020, the Company initiated a plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment Plan realigns the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. We also expect to incur contract termination charges, including the planned closure of certain field offices. The Company expects to incur total costs aggregating approximately $ 7,000 to $ 9,000 related to the Operations and Field Realignment Plan. During the nine months ended September 27, 2020, the Company recognized costs totaling $ 3,021 , which included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $ 4,000 to $ 6,000 , comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs associated with the Operations and Field Realignment Plan during the remainder of 2020 and 2021.
The following is a summary of the activity recorded as a result of the Operations and Field Realignment Plan:
Three Months Ended
September 27,
2020
Severance and related employee costs $ 2,502
Share-based compensation (a) 519
Total operations and field realignment $ 3,021
_______________
(a) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the Operations and Field Realignment Plan.
The table below presents a rollforward of our accruals for the Operations and Field Realignment Plan, which are included in “Accrued expenses and other current liabilities” as of September 27, 2020.
Balance
December 29, 2019 Charges Payments Balance
September 27,
2020
Severance and related employee costs $ — $ 2,502 $ — $ 2,502
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Information Technology ( “ IT ”) Realignment
In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth (the “IT Realignment Plan”). The Company has partnered with a third-party global IT consultant on this new structure to leverage their global capabilities, which will enable a more seamless integration between its digital and corporate IT assets. The IT Realignment Plan has reduced and will continue to reduce certain employee compensation and other related costs that the Company is reinvesting back into IT to drive additional capabilities and capacity across all of its technology platforms. Additionally, in June 2020, the Company made changes to its leadership structure that included the creation of a Chief Information Officer position and the elimination of the Chief Digital Experience Officer position. As a result, the Company expects to incur total costs aggregating approximately $ 16,000 to $ 17,000 related to the IT Realignment Plan. During the nine months ended September 27, 2020, the Company recognized costs totaling $ 6,809 , which primarily included third-party and other costs and severance and related employee costs. The Company expects to incur additional costs aggregating approximately $ 1,000 , comprised primarily of recruitment and relocation costs. The Company expects to recognize the majority of the remaining costs associated with the IT Realignment Plan during the remainder of 2020. Subsequent to September 27, 2020, the Company announced the appointment of its new Chief Information Officer.
The following is a summary of the activity recorded as a result of the IT Realignment Plan:
Three Months Ended Nine Months Ended Total
Incurred Since Inception
September 27,
2020 September 27,
2020
Severance and related employee costs $ 34 $ 1,009 $ 8,557
Recruitment and relocation costs 345 659 659
Third-party and other costs 24 5,141 6,527
403 6,809 15,743
Share-based compensation (a) — — 193
Total IT realignment $ 403 $ 6,809 $ 15,936
_______________
(a) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the IT Realignment Plan.
The table below presents a rollforward of our accruals for the IT Realignment Plan, which are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 2,739 and $ 178 as of September 27, 2020, respectively.
Balance
December 29, 2019 Charges Payments Balance
September 27,
2020
Severance and related employee costs $ 7,548 $ 1,009 $ ( 5,640 ) $ 2,917
Recruitment and relocation costs — 659 ( 659 ) —
Third-party and other costs 1,076 5,141 ( 6,217 ) —
$ 8,624 $ 6,809 $ ( 12,516 ) $ 2,917
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
General and Administrative ( “ G&A ”) Realignment
In May 2017, the Company initiated a plan to further reduce its G&A expenses (the “G&A Realignment Plan”). Additionally, in May 2019, the Company announced changes to its management and operating structure that included the creation of two new positions, a President, U.S. and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the Chief Operations Officer position. During the nine months ended September 27, 2020 and September 29, 2019, the Company recognized costs related to the G&A Realignment Plan totaling $ 282 and $ 4,695 , respectively, which primarily included share-based compensation for 2020 and severance and related employee costs and share-based compensation for 2019. The Company does not expect to incur any material additional costs under the G&A Realignment Plan.
The following is a summary of the activity recorded as a result of the G&A Realignment Plan:
Three Months Ended Nine Months Ended Total
Incurred Since Inception
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
Severance and related employee costs (a) $ ( 116 ) $ 214 $ 30 $ 2,816 $ 24,268
Recruitment and relocation costs 27 58 42 654 2,558
Third-party and other costs 9 25 10 112 2,220
( 80 ) 297 82 3,582 29,046
Share-based compensation (b) 31 99 200 1,113 8,098
Termination of defined benefit plans — — — — 1,335
Total G&A realignment $ ( 49 ) $ 396 $ 282 $ 4,695 $ 38,479
_______________
(a) The three and nine months ended September 27, 2020 includes a reversal of an accrual as a result of a change in estimate.
(b) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the G&A Realignment Plan.
The accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 1,705 and $ 18 as of September 27, 2020, respectively, and $ 3,491 and $ 507 as of September 29, 2019, respectively. The tables below present a rollforward of our accruals for the G&A Realignment Plan.
Balance
December 29,
2019 Charges Payments Balance
September 27,
2020
Severance and related employee costs $ 5,276 $ 30 $ ( 3,627 ) $ 1,679
Recruitment and relocation costs 83 42 ( 81 ) 44
Third-party and other costs — 10 ( 10 ) —
$ 5,359 $ 82 $ ( 3,718 ) $ 1,723
Balance
December 30,
2018 Charges Payments Balance
September 29,
2019
Severance and related employee costs $ 7,241 $ 2,816 $ ( 6,216 ) $ 3,841
Recruitment and relocation costs 83 654 ( 580 ) 157
Third-party and other costs — 112 ( 112 ) —
$ 7,324 $ 3,582 $ ( 6,908 ) $ 3,998
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $ 72,365 under the initiative since inception and does not expect to incur any material additional costs under the plan.
(7) Cash and Receivables
September 27,
2020 December 29, 2019
Cash and cash equivalents
Cash $ 238,125 $ 185,203
Cash equivalents 75,062 114,992
313,187 300,195
Restricted cash
Accounts held by trustee for the securitized financing facility 38,127 34,209
Other 333 330
38,460 34,539
Advertising Funds (a) 54,777 23,973
93,237 58,512
Total cash, cash equivalents and restricted cash
$ 406,424 $ 358,707
_______________
(a) Included in “Advertising funds restricted assets.”
September 27, 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) (b) $ 89,593 $ ( 3,920 ) $ 85,673 $ 103,852 $ ( 3,314 ) $ 100,538
Notes receivable from franchisees (c) (d)
18,972 ( 4,520 ) 14,452 23,628 ( 6,705 ) 16,923
$ 108,565 $ ( 8,440 ) $ 100,125 $ 127,480 $ ( 10,019 ) $ 117,461
Non-current (e)
Notes receivable from franchisees (d)
$ 6,177 $ ( 985 ) $ 5,192 $ 1,617 $ — $ 1,617
_______________
(a) Includes income tax refund receivables of $ 7,089 and $ 13,555 as of September 27, 2020 and December 29, 2019, respectively. Additionally, 2019 includes receivables of $ 25,350 related to insurance coverage for the financial institutions class action.
(b) During the nine months ended September 27, 2020, rent receivables increased by $ 7,291 . This increase was primarily due to actions taken by the Company in response to the COVID-19 pandemic, which included offering to defer base rent payments on properties owned by Wendy’s and leased to franchisees by 50%, and offering to pass along any deferrals that were obtained on properties leased by Wendy’s and subleased to franchisees by up to 100%, beginning in May for a three month period, which are being repaid over a 12 month period beginning in August 2020.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(c) Includes the current portion of sales-type and direct financing lease receivables of $ 4,054 and $ 3,146 as of September 27, 2020 and December 29, 2019, respectively.
Included a note receivable from a U.S. franchisee totaling $ 1,000 as of December 29, 2019. The note was repaid during the nine months ended September 27, 2020.
(d) Includes a note receivable from a franchisee in India totaling $ 985 and $ 1,000 as of September 27, 2020 and December 29, 2019, respectively, which is included in non-current notes receivable as of September 27, 2020 and is included in current notes receivable as of December 29, 2019. As of September 27, 2020 and December 29, 2019, the Company had a reserve of $ 985 on the loan outstanding to the franchisee in India.
Includes a note receivable from a franchisee in Indonesia, of which $ 1,643 and $ 1,262 are included in current notes receivable and $ 842 and $ 1,617 are included in non-current notes receivable as of September 27, 2020 and December 29, 2019, respectively.
Includes notes receivable related to a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”), of which $ 11,975 and $ 15,920 are included in current notes receivable as of September 27, 2020 and December 29, 2019, respectively, and $ 4,350 is included in non-current notes receivable as of September 27, 2020. As of September 27, 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 September 27, 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
Nine Months Ended September 27, 2020
Balance at December 29, 2019 $ 3,314 $ 6,705 $ 10,019
Provision for doubtful accounts 699 ( 8 ) 691
Uncollectible accounts written off, net of recoveries ( 93 ) ( 1,192 ) ( 1,285 )
Balance at September 27, 2020 $ 3,920 $ 5,505 $ 9,425
Nine Months Ended September 29, 2019
Balance at December 30, 2018 $ 4,940 $ 2,000 $ 6,940
Provision for doubtful accounts ( 1,544 ) 2,089 545
Uncollectible accounts written off, net of recoveries ( 220 ) 11 ( 209 )
Balance at September 29, 2019 $ 3,176 $ 4,100 $ 7,276
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(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 the Brazil JV. The Company has significant influence over these investees. Such investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.”
Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:
Nine Months Ended
September 27,
2020 September 29,
2019
Balance at beginning of period $ 45,310 $ 47,021
Equity in earnings for the period 6,113 8,812
Amortization of purchase price adjustments (a) ( 1,671 ) ( 1,700 )
4,442 7,112
Distributions received ( 5,629 ) ( 10,038 )
Foreign currency translation adjustment included in “Other comprehensive income (loss)” and other
( 701 ) 2,164
Balance at end of period $ 43,422 $ 46,259
_______________
(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.
(9) Long-Term Debt
Long-term debt consisted of the following:
September 27,
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
$ 391,000 $ 398,000
4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029
439,875 447,750
Series 2018-1 Class A-2 Notes:
3.573 % Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025
437,625 441,000
3.884 % Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028
461,938 465,500
Series 2015-1 Class A-2 Notes:
4.497 % Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025
475,000 478,750
Canadian revolving credit facility 4,108 —
7 % debentures, due in 2025
83,696 82,837
Unamortized debt issuance costs ( 31,641 ) ( 33,526 )
2,261,601 2,280,311
Less amounts payable within one year ( 35,358 ) ( 22,750 )
Total long-term debt $ 2,226,243 $ 2,257,561
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Senior Notes
Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. Under this facility, in June 2019, the Master Issuer issued outstanding Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019-1 Class A-1 Notes”), which allow for the borrowing of up to $ 150,000 from time to time on a revolving basis using various credit instruments, including a letter of credit facility. In March 2020, the Company drew down $ 120,000 under the 2019-1 Class A-1 Notes, which the Company fully repaid in July 2020. As a result, as of September 27, 2020, the Company had no outstanding borrowings under the 2019-1 Class A-1 Notes. In June 2020, the Master Issuer also issued outstanding Series 2020-1 Variable Funding Senior Secured Notes, Class A-1 (the “2020-1 Class A-1 Notes”), which allow for the borrowing of up to $ 100,000 from time to time on a revolving basis using various credit instruments. The Company had no outstanding borrowings under the Series 2020-1 Class A-1 Notes as of September 27, 2020. The drawdown of the 2019-1 Class A-1 Notes in March 2020 and the issuance of the 2020-1 Class A-1 Notes in June 2020 were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic.
The 2019-1 Class A-1 Notes and the 2020-1 Class A-1 Notes (collectively, the “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 respective purchase agreements for the Class A-1 Notes. There is a commitment fee on the unused portions of the Class A-1 Notes, which ranges from 0.40 % to 0.75 % based on utilization for the 2019-1 Class A-1 Notes, and is 1.50 % for the 2020-1 Class A-1 Notes. As of September 27, 2020, $ 26,040 of letters of credit were outstanding against the 2019-1 Class A-1 Notes, which relate primarily to interest reserves required under the indenture governing the 2019-1 Class A-1 Notes.
During the nine months ended September 27, 2020, the Company incurred debt issuance costs of $ 2,122 in connection with the issuance of the 2020-1 Class A-1 Notes. The debt issuance costs are being amortized to “Interest expense, net” utilizing the effective interest rate method.
Other Long-Term Debt
A Canadian subsidiary of Wendy’s has a revolving credit facility of C$ 6,000 , which bears interest at the Bank of Montreal Prime Rate. Borrowings under the facility are guaranteed by Wendy’s. In March 2020, the Company drew down C$ 5,500 under the revolving credit facility. As a result, as of September 27, 2020, the Company had outstanding borrowings of C$ 5,500 under the revolving credit facility.
Wendy’s U.S. advertising fund has a revolving line of credit of $ 25,000 , which was established to support the advertising fund operations and bears interest at LIBOR plus 2.15 %. Borrowings under the line of credit are guaranteed by Wendy’s. In February 2020, the Company drew down $ 4,397 under the revolving line of credit, which the Company fully repaid in February 2020. In March 2020, the Company drew down $ 25,000 under the revolving line of credit, which the Company fully repaid in September 2020. As a result, as of September 27, 2020, the Company had no outstanding borrowings 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(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.
Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
September 27,
2020 December 29,
2019
Carrying
Amount Fair
Value Carrying
Amount Fair
Value Fair Value
Measurements
Financial assets
Cash equivalents $ 75,062 $ 75,062 $ 114,992 $ 114,992 Level 1
Other investments in equity securities (a) — — 639 1,649 Level 3
Financial liabilities
Series 2019-1 Class A-2-I Notes (b) 391,000 414,499 398,000 405,152 Level 2
Series 2019-1 Class A-2-II Notes (b) 439,875 477,792 447,750 459,136 Level 2
Series 2018-1 Class A-2-I Notes (b) 437,625 452,198 441,000 444,859 Level 2
Series 2018-1 Class A-2-II Notes (b) 461,938 491,641 465,500 475,718 Level 2
Series 2015-1 Class A-2-III Notes (b)
475,000 486,543 478,750 490,531 Level 2
Canadian revolving credit facility 4,108 4,108 — — Level 2
7% debentures, due in 2025 (b) 83,696 98,100 82,837 94,838 Level 2
_______________
(a) The fair values of our investments were not significant and were 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. In June 2020, the Company impaired a miscellaneous investment due to the deterioration in operating performance of the underlying assets. In July 2020, the Company sold its remaining interest in this investment.
(b) The fair values were based on quoted market prices in markets that are not considered active markets.
The carrying amounts of cash, accounts payable and accrued expenses approximate fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximate fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents are the only financial assets measured and recorded at fair value on a recurring basis.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Non-Recurring Fair Value Measurements
Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.
Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, favorable lease assets and right-of-use assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below represent the remaining carrying value and were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance.
Total impairment losses may also include the impact of remeasuring long-lived assets held for sale, which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 11 for further information on impairment of our long-lived assets.
Fair Value Measurements
September 27,
2020 Level 1 Level 2 Level 3
Held and used $ 304 $ — $ — $ 304
Held for sale 1,417 — — 1,417
Total $ 1,721 $ — $ — $ 1,721
Fair Value Measurements
December 29,
2019 Level 1 Level 2 Level 3
Held and used $ 3,582 $ — $ — $ 3,582
Held for sale 988 — — 988
Total $ 4,570 $ — $ — $ 4,570
(11) Impairment of Long-Lived Assets
During the nine months ended September 27, 2020 and September 29, 2019, the Company recorded impairment charges as a result of (1) the deterioration of operating performance of certain Company-operated restaurants and (2) closing Company-operated restaurants and classifying such surplus properties as held for sale. Impairment charges during the nine months ended September 27, 2020 were primarily incurred in the first quarter of 2020 due to the expected deterioration in operating performance of certain Company-operated restaurants as a result of the COVID-19 pandemic. Additional impairment charges may be recognized by the Company in the event of further deterioration in operating performance of Company-operated restaurants.
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
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
Company-operated restaurants $ — $ — $ 4,395 $ 287
Surplus properties 23 — 332 1,397
$ 23 $ — $ 4,727 $ 1,684
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(12) Income Taxes
The Company’s effective tax rate for the three months ended September 27, 2020 and September 29, 2019 was 24.2 % and 13.5 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % primarily due an increase for state income taxes, partially offset by (1) a reduction for the benefit of share-based compensation and (2) a reduction in unrecognized tax benefits due to a lapse of statute of limitations during the three months ended September 29, 2019.
The Company’s effective tax rate for the nine months ended September 27, 2020 and September 29, 2019 was 24.8 % and 20.5 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % primarily due to an increase for state income taxes, partially offset by (1) a reduction for the benefit of share-based compensation and (2) a reduction in unrecognized tax benefits due to a lapse of statute of limitations during the nine months ended September 29, 2019.
There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three and nine months ended September 27, 2020. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $ 1,344 due primarily to the lapse of statutes of limitations and expected settlements.
The current portion of refundable income taxes was $ 7,089 and $ 13,555 as of September 27, 2020 and December 29, 2019, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. There were no long-term refundable income taxes as of September 27, 2020 and December 29, 2019.
(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
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
Common stock:
Weighted average basic shares outstanding 223,907 230,723 223,521 230,779
Dilutive effect of stock options and restricted shares
4,410 4,995 4,312 5,122
Weighted average diluted shares outstanding 228,317 235,718 227,833 235,901
Diluted net income per share for the three and nine months ended September 27, 2020 and September 29, 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 1,049 and 2,117 for the three and nine months ended September 27, 2020, respectively, and 3,257 and 2,488 for the three and nine months ended September 29, 2019, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(14) Stockholders’ Equity
Dividends
During the first, second, and third quarter of 2020, the Company paid dividends per share of $ .12 , $ .05 and $ .05 , respectively. During each of the first three quarters of 2019, the Company paid dividends per share of $ .10 .
Repurchases of Common Stock
In February 2020, our Board of Directors authorized a repurchase program for up to $ 100,000 of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020. During the nine months ended September 27, 2020, the Company repurchased 860 shares under the February 2020 repurchase authorization with an aggregate purchase price of $ 16,244 , of which $ 178 was accrued at September 27, 2020, and excluding commissions of $ 12 . As of September 27, 2020, the Company had $ 83,756 of availability remaining under its February 2020 authorization. Subsequent to September 27, 2020 through October 28, 2020, the Company repurchased 86 shares under the February 2020 authorization with an aggregate purchase price of $ 2,041 , excluding commissions of $ 1 .
In February 2019, our Board of Directors authorized a repurchase program for up to $ 225,000 of our common stock through March 1, 2020, when and if market conditions warranted and to the extent legally permissible. In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $ 100,000 in cash and received an initial delivery of 4,051 shares of common stock, representing an estimated 85 % of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 628 shares of common stock at an average purchase price of $ 23.89 . The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2019 ASR Agreement, less an agreed upon discount. In total, 4,679 shares were delivered under the 2019 ASR Agreement at an average purchase price of $ 21.37 per share.
In addition to the shares repurchased in connection with the 2019 ASR Agreement, during the nine months ended September 27, 2020, the Company repurchased 1,312 shares with an aggregate purchase price of $ 28,770 , excluding commissions of $ 18 , under the February 2019 authorization. After taking into consideration these repurchases, with the completion of the 2019 ASR Agreement in February 2020, the Company completed its February 2019 authorization.
During the nine months ended September 29, 2019, the Company repurchased 4,153 shares with an aggregate purchase price of $ 76,165 , of which $ 1,102 was accrued at September 29, 2019, and excluding commissions of $ 58 , under the February 2019 authorization and the Company’s previous November 2018 authorization to repurchase up to $ 220,000 of our common stock.
Accumulated Other Comprehensive Loss
The following table provides a rollforward of accumulated other comprehensive loss:
Nine Months Ended
September 27,
2020 September 29,
2019
Balance at beginning of period $ ( 53,828 ) $ ( 61,673 )
Foreign currency translation
( 5,138 ) 7,563
Balance at end of period $ ( 58,966 ) $ ( 54,110 )
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(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 September 27, 2020, Wendy’s and its franchisees operated 6,814 Wendy’s restaurants. Of the 360 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 142 restaurants, owned the building and held long-term land leases for 147 restaurants and held leases covering the land and building for 71 restaurants. Wendy’s also owned 510 and leased 1,244 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.
Company as Lessee
The components of lease cost are as follows:
Three Months Ended Nine Months Ended
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
Finance lease cost:
Amortization of finance lease assets $ 3,471 $ 3,201 $ 9,995 $ 7,949
Interest on finance lease liabilities 10,244 10,116 30,462 26,808
13,715 13,317 40,457 34,757
Operating lease cost 23,170 23,358 68,304 67,087
Variable lease cost (a) 15,548 15,435 43,766 44,910
Short-term lease cost 1,006 1,141 3,327 3,420
Total operating lease cost (b) 39,724 39,934 115,397 115,417
Total lease cost $ 53,439 $ 53,251 $ 155,854 $ 150,174
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(a) Includes expenses for executory costs of $ 9,326 and $ 9,908 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $ 28,526 and $ 29,211 for the nine months ended September 27, 2020 and September 29, 2019, respectively, for which the Company is reimbursed by sublessees.
(b) Includes $ 32,421 and $ 32,342 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $ 92,975 and $ 92,815 for the nine months ended September 27, 2020 and September 29, 2019, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 6,651 and $ 6,892 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $ 20,315 and $ 20,492 for the nine months ended September 27, 2020 and September 29, 2019, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.
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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Company as Lessor
The components of lease income are as follows:
Three Months Ended Nine Months Ended
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
Sales-type and direct-financing leases:
Selling profit (loss) $ 182 $ ( 97 ) $ 1,379 $ 1,874
Interest income 7,296 7,240 21,804 19,045
Operating lease income $ 43,510 $ 44,892 $ 130,514 $ 134,056
Variable lease income 15,211 15,026 42,920 42,875
Franchise rental income (a) $ 58,721 $ 59,918 $ 173,434 $ 176,931
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(a) Includes sublease income of $ 43,122 and $ 44,821 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $ 126,653 and $ 130,763 for the nine months ended September 27, 2020 and September 29, 2019, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 9,379 and $ 9,683 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $ 28,538 and $ 28,894 for the nine months ended September 27, 2020 and September 29, 2019, respectively.
(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 the nine months ended September 27, 2020 and September 29, 2019, Wendy’s paid TimWen $ 11,970 and $ 12,710 , respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $ 152 and $ 155 during the nine months ended September 27, 2020 and September 29, 2019, respectively, which has been included as a reduction to “General and administrative.”
(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 $ 81,275 as of September 27, 2020. These leases extend through 2045. We have not received any notice of default related to these leases as of September 27, 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 September 27, 2020, the Company had outstanding letters of credit with various parties totaling $ 26,381 . Substantially all of the outstanding letters of credit include amounts outstanding against the 2019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.
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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(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, and we believe we have adequate accruals for continuing operations for all such matters. We cannot estimate the aggregate possible range of loss for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period.
We previously described certain legal proceedings in the Form 10-K. As of September 27, 2020, there were no material developments in those legal proceedings.
(19) Segment Information
Revenues by segment were as follows:
Three Months Ended Nine Months Ended
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
Wendy’s U.S. $ 374,895 $ 359,353 $ 1,037,194 $ 1,051,994
Wendy’s International 17,264 17,931 46,739 50,959
Global Real Estate & Development 60,083 60,596 175,575 178,858
Total revenues $ 452,242 $ 437,880 $ 1,259,508 $ 1,281,811
The following table reconciles profit by segment to the Company’s consolidated income before income taxes:
Three Months Ended Nine Months Ended
September 27,
2020 September 29,
2019 September 27,
2020 September 29,
2019
Wendy’s U.S. (a) $ 108,297 $ 98,342 $ 283,261 $ 290,969
Wendy’s International 6,567 6,271 15,256 17,500
Global Real Estate & Development 25,340 26,408 75,541 83,260
Total segment profit $ 140,204 $ 131,021 $ 374,058 $ 391,729
Advertising funds deficit ( 1,140 ) ( 1,053 ) ( 3,547 ) ( 3,108 )
Unallocated general and administrative (b) ( 21,424 ) ( 18,254 ) ( 68,594 ) ( 59,606 )
Depreciation and amortization ( 32,966 ) ( 33,306 ) ( 98,726 ) ( 97,975 )
System optimization gains, net 23 1,040 2,333 1,162
Reorganization and realignment costs ( 3,375 ) ( 403 ) ( 10,196 ) ( 4,771 )
Impairment of long-lived assets ( 23 ) — ( 4,727 ) ( 1,684 )
Unallocated other operating income, net 49 ( 22 ) 140 115
Interest expense, net ( 29,086 ) ( 27,930 ) ( 86,696 ) ( 86,943 )
Loss on early extinguishment of debt — — — ( 7,150 )
Other income, net 181 2,218 1,113 7,165
Income before income taxes $ 52,443 $ 53,311 $ 105,158 $ 138,934
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(a) For the three and nine months ended September 27, 2020, includes advertising funds expense of $ 6,153 and $ 8,338 , respectively, related to the expected Company funding of incremental advertising during 2020.
(b) Includes corporate overhead costs, such as employee compensation and related benefits.
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