UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(X)☒ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED December 30, 2018January 2, 2022
or
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( )☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
Commission file number: 1-2207
THE WENDY’S COMPANY
(Exact name of registrantsregistrant as specified in its charter)
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| Delaware | | 38-0471180 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer Identification No.) |
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One Dave Thomas Blvd., Dublin, Ohio | | 43017 |
| Dublin, | Ohio | | (Zip Code) |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s Telephone Number, Including Area Code:telephone number, including area code: (614) 764-3100
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Securities registered pursuant to Section 12(b) of the Act: |
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| 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 |
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| Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Yes [x] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ]☐ No [x]☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x]☒ No [ ]☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]
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.
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| Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
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Large accelerated filer [x] | Accelerated filer [ ] |
Non-accelerated filer [ ] | Smaller reporting company [ ] |
| Emerging growth company [ ] | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Yes [ ] No [x]
The aggregate market value of common equity held by non-affiliates of The Wendy’s Company as of June 29, 2018July 2, 2021 was approximately $3,213.1$4,136.8 million. As of February 19, 2019,22, 2022, there were 230,230,350215,230,857 shares of The Wendy’s Company common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Form 10-K, to the extent not set forth herein, is incorporated herein by reference from The Wendy’s Company’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 30, 2018.
THE WENDY’S COMPANY AND SUBSIDIARIES
FORM 10-K TABLE OF CONTENTS
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| Page |
| PART I |
| Item 1. | Business | |
| Item 1A. | Risk Factors | |
| Item 1B. | Unresolved Staff Comments | |
| Item 2. | Properties | |
| Item 3. | Legal Proceedings | |
| Item 4. | Mine Safety Disclosures | |
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| PART II |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| Item 6. | [Reserved] | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 8. | Financial Statements and Supplementary Data | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| Item 9A. | Controls and Procedures | |
| Item 9B. | Other Information | |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |
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| PART III |
| Item 10. | Directors, Executive Officers and Corporate Governance | |
| Item 11. | Executive Compensation | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
| Item 14. | Principal Accountant Fees and Services | |
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| PART IV |
| Item 15. | Exhibits and Financial Statement Schedules | |
| Item 16. | Form 10-K Summary | |
PART I
Explanatory Note
The Wendy’s Company (“The Wendy’s Company”) is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC (formerly known as Wendy’s International, Inc.). Wendy’s International, LLC is the indirect parent company of (1) Quality Is Our Recipe, LLC (“Quality”), which is the owner and franchisor of the Wendy’s® restaurant system in the United States and all international jurisdictions except for Canada, and (2) Wendy’s Restaurants of Canada Inc., which is the owner and franchisor of the Wendy’s restaurant system in Canada. As used in this report, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to the ownership or franchising of the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand. References in this Annual Report on Form 10-K (the “Form 10-K”) to restaurants that we “own” or that are “Company-operated” include owned and leased restaurants.
Special Note Regarding Forward-Looking Statements and Projections
This Annual Report on Form 10-K 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 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 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 marketing•the 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 operations, financial condition and prospects;
•the impact of competition or poor customer experiences at Wendy’s restaurants;
consumers’ perceptions of the relative quality, variety, affordability and value of the food products we offer, and changes•adverse economic conditions or disruptions, including in consumer tastes and preferences;
food safety events, including instances of food-borne illness (such as salmonella or E. coli) involving Wendy’s or its supply chain;
consumer concerns over nutritional aspects of beef, chicken, french fries or other products we sell, the ingredients in our products and/or the cooking processes used in our restaurants;
conditions beyond our control, such as weather, natural disasters, disease outbreaks, epidemics or pandemics impacting our customers or food supplies, or acts of war or terrorism;
the effects of negative publicity that can occur from increased use of social media;
success of operating and marketing initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors;
prevailing economic, market and business conditions affecting us, including competition from other food service providers, unemployment and decreased consumer spending levels, particularly in geographic regions that containwith a high concentration of Wendy’s restaurants;
•changes in discretionary consumer spending and consumer tastes and preferences;
•impacts to our corporate reputation or the quick-service restaurant industry, spending patternsvalue and demographic trends, such as consumer trends toward value-oriented productsperception of our brand;
•the effectiveness of our marketing and promotions or toward consuming fewer meals away from home;advertising programs and new product development;
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 financemanage the accelerated impact of social media;
•our ability to protect our intellectual property;
•food safety events or health concerns involving our products;
•our ability to achieve our growth strategy through new restaurant development and 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, including risks associated with our Image Activation program;
the•our ability to effectively manage the acquisition and disposition of restaurants or successfully implement other strategic initiatives;
anticipated or unanticipated restaurant closures by us•risks associated with leasing and our franchisees;owning significant amounts of real estate, including environmental matters;
•our ability to identify, attractachieve and retain franchisees with sufficient experience and financial resources to develop and operate Wendy’s restaurants successfully;maintain market share in the breakfast daypart;
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 (including the changes to lease accounting standards that are effective for fiscal year 2019);
the costs, uncertainties and other effects of legal, environmental and administrative proceedings;
the effects of charges for impairment of goodwill or for the impairment of other long-lived assets;
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 “Item 1A. Risk Factors” below;
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,international operations, including the 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;execute our international growth strategy;
•changes in commodity and other operating costs;
•shortages or interruptions in the supply or distribution of our products and other risks associated with our independent supply chain purchasing co-op;
•the amountimpact of increased labor costs or labor shortages;
•the continued succession and timingretention of share repurchases under share repurchase programs approved bykey personnel and the effectiveness of our Board of Directors;leadership structure;
risks associated with the proposed settlement of the Financial Institutions case described herein, 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;
•our dependence on computer systems and information technology, including risks associated with the failure, misuse, interruption or breach of our systems or technology or other cyber incidents or deficiencies;
•risks associated with our securitized financing facility and other debt agreements, including compliance with operational and financial covenants, restrictions on our ability to raise additional capital, the impact of our overall debt levels and our ability to generate sufficient cash flow to meet our debt service obligations and operate our business;
•risks associated with our capital allocation policy, including the amount and timing of equity and debt repurchases and dividend payments;
•risks associated with complaints and litigation, compliance with legal and regulatory requirements and an increased focus on environmental, social and governance issues;
•risks associated with the availability and cost of insurance, changes in accounting standards, the recognition of impairment or other charges, the impact of realignment and reorganization initiatives, changes in tax rates or tax laws and fluctuations in foreign currency exchange rates;
•conditions beyond our control, such as adverse weather conditions, natural disasters, hostilities, social unrest, health epidemics or pandemics or other catastrophic events;
•our evaluation of a potential debt raise transaction, including the size and timing of, and expected use of proceeds from, any such transaction; and
•other risks and uncertainties affecting us and our subsidiaries referred to in this Annual Report on Form 10-K (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the 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, our ability to effectively manage the transfer of restaurants between and among franchisees, the business and financial health of franchisees, the ability of franchisees to meet their royalty, advertising, development, reimaging and other commitments, participation by franchisees in brand strategies and the fact that franchisees are independent third parties that own, operate and are responsible for overseeing the operations of their restaurants. Our predominantly franchised business model may also impact the ability of the Wendy’s system to effectively respond and adapt to market changes. Many of these risks have been or in the future may be heightened due to the business disruption and impact from the COVID-19 pandemic.
All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.above. New risks and uncertainties arise from time to time, and factors that we currently deem immaterial may become material, and it is impossible for us to predict these events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this Annual Report on Form 10-K 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. Business.
IntroductionCompany Overview
The Wendy’s Company (“Theis primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s Company”)opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the parentsecond largest quick-service restaurant company in the hamburger sandwich segment in the United States (the “U.S.”) based on traffic share, and the third largest globally with 6,949 restaurants in the United States and 31 foreign countries and U.S. territories as of its 100% owned subsidiary holding companyJanuary 2, 2022.
At January 2, 2022, there were 5,938 Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC, formerly known as Wendy’s International, Inc. Wendy’s International, LLC is the indirect parent company of Quality Is Our Recipe, LLC (“Quality”), which is the owner and franchisor of the Wendy’s® restaurant systemrestaurants in operation in the United States. As used in this report, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to ownership of or franchising the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand.
As of December 30, 2018, the Wendy’s restaurant system was comprised of 6,711Of these restaurants, of which 353403 were owned and operated by the Company. ReferencesCompany and 5,535 were operated by a total of 228 franchisees. In addition, at January 2, 2022, there were 1,011 Wendy’s restaurants in this Annual Report on Form 10-Koperation in 31 foreign countries and U.S. territories. Of the international restaurants, 1,006 were operated by franchisees and five were operated by the Company in the United Kingdom (the “Form 10-K”“U.K.”) to restaurants that we “own” or that.
The Company’s principal executive offices are “Company-operated” include ownedlocated at One Dave Thomas Blvd., Dublin, Ohio 43017, and leased restaurants. its telephone number is (614) 764-3100.
Corporate History
The Wendy’s Company’s corporate predecessor was incorporated in Ohio in 1929 and was reincorporated in Delaware in June 1994. Effective September 29, 2008, in conjunction with the merger with Wendy’s Merger (as defined below), the Company’s corporate name was changed from Triarc Companies, Inc. (“Triarc”) to Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s”). Effective July 5, 2011, in connection with the Company’s sale of Arby’s Restaurant Group, Inc. (“Arby’s”), Wendy’s/Arby’sthe Company’s corporate name was changed its name to The Wendy’s Company. The Company’s principal executive offices are located at One Dave Thomas Blvd., Dublin, Ohio 43017, and its telephone number is (614) 764-3100. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, as well as our annual proxy statement, available, free of charge, on the Investor Relations portion of our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. We also provide our Code of Business Conduct and Ethics, free of charge, on our website. Our website address is www.wendys.com/who-we-are. Information contained on that website is not part of this Form 10-K.
Merger with Wendy’s
On September 29, 2008, Triarc Companies, Inc. and Wendy’s International, Inc. completed their merger (the “Wendy’s Merger”) in an all-stock transaction in which Wendy’s shareholders received 4.25 shares of Wendy’s/Arby’s Class A common stock for each Wendy’s common share owned. In the Wendy’s Merger, approximately 377,000,000 shares of Wendy’s/Arby’s Class A common stock were issued to Wendy’s shareholders. In addition, effective on the date of the Wendy’s Merger, Wendy’s/Arby’s Class B common stock was converted into Class A common stock. In connection with the May 28, 2009 amendment and restatement of Wendy’s/Arby’s Certificate of Incorporation, Wendy’s/Arby’s Class A common stock was redesignated as “Common Stock.”
Sale of Arby’s
On July 4, 2011, Wendy’s Restaurantsthe Company completed the sale of 100% of the common stock of Arby’s to ARG IH Corporation (“ARG”), a wholly-owned subsidiary of ARG Holding Corporation (“ARG Parent”), for $130.0 million in cash (subject to customary purchase price adjustments) and 18.5% of the common stock of ARG Parent (through which Wendy’s Restaurantsthe Company indirectly retained an 18.5% interest in Arby’s). Our 18.5% equity interest was diluted to 12.3% on February 5, 2018, when a subsidiary of ARG Parent acquired Buffalo Wild Wings, Inc. As a result, our diluted ownership interest included both the Arby’s® and Buffalo Wild Wings® brands under the newly formed combined company, Inspire Brands, Inc. (“Inspire Brands”). On August 16, 2018, the Company sold its remaining 12.3% ownership interest to Inspire Brands for $450.0 million. (Arby’s is a registered trademark of Arby’s IP Holder, LLC and Buffalo Wild Wings is a registered trademark of Buffalo Wild Wings, Inc.)
Fiscal Year
The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31 and are referred to herein as (1) “the year ended December 30, 2018”January 2, 2022” or “2018,“2021,” which consisted of 52 weeks, (2) “the year ended December 31, 2017”January 3, 2021” or “2017”“2020,” which consisted of 53 weeks, and (3) “the year ended January 1, 2017”December 29, 2019” or “2016,“2019,” all of which consisted of 52 weeks.
Business Strategy
Wendy’s long-term growth opportunities include investing in accelerated global growth through (1) building our breakfast daypart, (2) accelerating our implementation of consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint through targeted U.S. restaurant expansion and accelerated international restaurant expansion. Wendy’s vision is to become the world’s most thriving and beloved restaurant brand.
Business Segments
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 (defined as the United StatesU.S. and Canada) comprises virtually all of our current operationsderives its revenues from sales at Company-operated restaurants and represents a single reportable segment. The revenuesroyalties, fees and operating resultsadvertising fund collections from franchised restaurants. Wendy’s International includes the operation and franchising of Wendy’s restaurants outsidein countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of North America are not material.the income of our Canadian restaurant real estate joint venture (“TimWen”). 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. See Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7 herein and Note 2526 of the Financial Statements and Supplementary Data contained in Item 8 herein for segment financial information attributable to our geographic areas.information.
The Wendy’s Restaurant System
Wendy’s is the world’s third largest quick-service restaurant company in the hamburger sandwich segment.
Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. At December 30, 2018, there were 6,178 Wendy’s restaurants in operation in North America. Of these restaurants, 353 were operated by the Company and 5,825 were operated by a total of 330 franchisees. In addition, at December 30, 2018, there were 533 franchised Wendy’s restaurants in operation in 30 countries and territories other than North America. See “Item 2. Properties” herein for a listing of the number of Company-operated and franchised locations in the United States and in foreign countries and United States territories.
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of December 30, 2018.January 2, 2022.
Wendy’s RestaurantsRestaurant Openings and Closings
During 2021, Wendy’s opened its first restaurant in Columbus, Ohio in 1969. During 2018, Wendy’s opened seven12 new Company-operated restaurants and closed fiveeight generally underperforming Company-operated restaurants. During 2018,2021, Wendy’s franchisees opened 152198 new restaurants and closed 7781 generally underperforming restaurants.
The following table sets forth the number of Wendy’s restaurants in operation at the beginning and end of each fiscal year from 20162019 to 2018:2021:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Restaurants open at beginning of period | 6,828 | | | 6,788 | | | 6,711 | |
| Restaurants opened during period | 210 | | | 147 | | | 182 | |
| Restaurants closed during period | (89) | | | (107) | | | (105) | |
| Restaurants open at end of period | 6,949 | | | 6,828 | | | 6,788 | |
|
| | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Restaurants open at beginning of period | 6,634 |
| | 6,537 |
| | 6,479 |
|
| Restaurants opened during period | 159 |
| | 174 |
| | 149 |
|
| Restaurants closed during period | (82 | ) | | (77 | ) | | (91 | ) |
| Restaurants open at end of period | 6,711 |
| | 6,634 |
| | 6,537 |
|
Restaurant Operations
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 toppings and condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty®Frosty® desserts and kids’ meals. In addition, theWendy’s restaurants sell a variety of promotional products on a limited time basis. In March 2020, Wendy’s also offersentered the breakfast in some restaurants indaypart across the United States.U.S. system. Wendy’s breakfast menu features a variety of breakfast sandwiches, biscuits and croissants, sides such as seasoned potatoes, oatmeal bars and seasonal fruit, and a beverage platform that includes hot coffee, cold brew iced coffee and our vanilla and chocolate Frosty-ccino iced coffee.
Free-standing Wendy’s restaurants generally include a pick-up window in addition to a dining room. ApproximatelyIn 2019, approximately two-thirds of sales at Company-operated Wendy’s restaurants occuroccurred through the pick-up window. In 2020 and 2021,
pick-up window sales represented approximately 83% and 82% of sales at Company-operated restaurants, respectively, reflecting the impact of the COVID-19 pandemic and other macroeconomic factors.
Wendy’s strives to maintain quality and uniformity throughout all restaurants by publishing detailed specifications for food products, preparation and service, continual in-service training of employees, restaurant operational audits and field visits from Wendy’s supervisors. In the case of franchisees, field visits are made by Wendy’s personnel who review operations, including quality, service and cleanliness and make recommendations to assist in compliance with Wendy’s specifications.
Wendy’s does not sell food or restaurant supplies to its franchisees.
Raw MaterialsSupply Chain, Distribution and Purchasing
As of December 30, 2018, fourJanuary 2, 2022, three independent processors (five total production facilities) supplied all of the beef used by Wendy’s beefrestaurants in the United States. In addition, sixseven independent processors (12(15 total production facilities) supplied all of the chicken used by Wendy’s chickenrestaurants in the United States. In addition, there was one main in-line distributor of food, packaging and beverage products, excluding breads, that serviced approximately 67% of Wendy’s restaurants in the United States and four additional in-line distributors that, in the aggregate, serviced approximately 32% of Wendy’s restaurants in the United States. Except as discussed below, Wendy’s and its franchisees have not experienced any material shortages of food, equipment, fixtures or other products that are necessary to maintain restaurant operations.operations, and Wendy’s anticipates no such shortages of products and believes that alternate suppliers and distribution sources are available. During 2020, the COVID-19 pandemic led to interruptions in the delivery of certain products to Wendy’s restaurants. For example, we experienced disruptions to our beef supply beginning in early May 2020 as beef suppliers across North America faced production challenges. As a result, some menu items were occasionally in short supply at some Wendy’s system restaurants. While we and our supply chain partners effectively managed through this disruption and the beef supply subsequently returned to normal levels across the Wendy’s system, the pandemic has continued to impact our supply chain and there can be no assurances that we will not see similar disruptions in the future. Suppliers and distributors to the Wendy’s system must comply with United States Department of Agriculture (“USDA”) and United States Food and Drug Administration (“FDA”) regulations governing the manufacture, packaging, storage, distribution and sale of all food and packaging products.
Wendy’s has a purchasing co-op relationship agreementstructure with its franchisees whichthat establishes Quality Supply Chain Co-op, Inc. (“QSCC”). QSCC manages, for the Wendy’s system in the United States and Canada, contracts for the purchase and distribution of food, proprietary paper, operating supplies and equipment under national agreements with pricing based upon total system volume. QSCC’s supply chain management facilitates the continuity of supply and provides consolidated purchasing efficiencies while monitoring and seeking to minimize possible obsolete inventory throughout the Wendy’s supply chain in the United States and Canada. Wendy’s and its franchisees pay sourcing fees to third-party vendors on certain products sourced by QSCC. Such sourcing fees are remitted by these vendors to QSCC and are the primary means of funding QSCC’s operations. Should QSCC’s sourcing fees exceed its expected needs, QSCC’s board of directors may return some or all of the excess to its members in the form of a patronage dividend.
Wendy’s does not sell food or restaurant supplies to its franchisees.
Quality Assurance
Wendy’s quality assurance program is designed to verify that the food products supplied to our restaurants are processed in a safe, sanitary environment and in compliance with our food safety and quality standards. Wendy’s quality assurance personnel regularly conduct multiple on-site sanitation and production audits throughout the year atfor all of our core menu product processing facilities, which include beef, chicken, pork, buns, french fries, Frosty®Frosty® dessert ingredients and produce. Animal welfare audits are also conducted every year at all beef, chicken and pork facilities to confirm compliance with our required animal welfare and handling policies and procedures. In addition to our facility audit program, weekly samples of beef, chicken and other core menu products from our distribution centers are randomly sampled and analyzed by a third-party laboratory to test conformance to our quality specifications. Each year, Wendy’s representatives, including third-party auditors, regularly conduct unannouncedevaluations and inspections of all Company-operated and franchisefranchised restaurants to test conformance to our sanitation, food safety and operational requirements. Wendy’s has the right to terminate franchise agreements if franchisees fail to comply with quality standards. In response to the COVID-19 pandemic, we adapted and evolved certain of our auditing practices which were traditionally conducted onsite, taking advantage of various virtual tools and resources to engage effectively with our suppliers. We also reviewed and reinforced our strict policies and procedures related to food safety procedures, personal hygiene standards, handwashing requirements and sanitation protocols through frequent communications and retraining. As the COVID-19 pandemic continues to evolve, we provide guidance to Company-operated and franchised restaurants to be aware of any federal, state/provincial or local laws, regulations, rules or requirements related to the pandemic, including face mask, occupancy or vaccination confirmation requirements, to encourage compliance.
Information Technology
Wendy’s relies on computer systems and information technology to conduct its business. Wendy’s utilizes both commercially available third-party software and proprietary software owned by the Company to run the point-of-sale and kitchen delivery functions and certain other consumer-facing and back-office functions in Wendy’s restaurants. Wendy’s has invested significant resources to focus on consumer-facing technology, including installing a single point-of-sale system for Wendy’s restaurants, activating mobile ordering via Wendy’s mobile apps, launching the Wendy’s Rewards loyalty program and establishing delivery arrangements with third-party vendors for Wendy’s U.S. and Canadian restaurants. We believe our digital platforms are critical to creating a more seamless user experience, providing insights to enhance our relationship with customers and meeting consumer demand for customization, speed and convenience. In December 2019, we implemented a plan to realign and reinvest resources in our IT organization to strengthen our ability to accelerate growth. We are partnering with a third-party global IT consultant on this new structure to leverage their global capabilities and enable a more seamless integration between our digital and corporate IT assets. In October 2021, we announced a partnership with a third-party global cloud provider with the intention to enhance our restaurant experience and unlock new customer, restaurant and employee experiences through data-driven insights.
Trademarks and Service Marks
Wendy’s or its subsidiaries have registered certain trademarks and service marks in the United States Patent and Trademark Office and in international jurisdictions, some of which include Wendy’s®, Old Fashioned Hamburgers® and Quality Is Our Recipe®.and the Wendy Cameo design. Wendy’s believes that these and other related marks are of material importance to its business. Domestic trademarks and service marks expirehave their next required maintenance filings at various times from 20192022 to 2028,2032 in order to keep such registrations in force, while international trademarks and service marks have various durations of ten to 15 years. Wendy’s generally intends to maintain and renew its trademarks and service marks that are scheduled to expire.mark registrations in accordance with applicable deadlines.
Wendy’s entered into an Assignment of Rights Agreement with the Company’s founder, R. DavidDave Thomas, and his wife dated as of November 5, 2000 (the “Assignment”). Wendy’s had used Mr. Thomas, who was Senior Chairman of the Board until his death on January 8, 2002, as a spokesperson and focal point for its products and services for many years. With the efforts and attributes of Mr. Thomas, Wendy’s has, through its extensive investment in the advertising and promotional use of Mr. Thomas’ name, likeness, image, voice, caricature, endorsement rights and photographs (the “Thomas Persona”), made the Thomas Persona well known in the United States and throughout North America and a valuable asset for both Wendy’s and Mr. Thomas’ estate. Under the terms of the Assignment, Wendy’s acquired the entire right, title, interest and ownership in and to the Thomas Persona, including the sole and exclusive right to commercially use the Thomas Persona.
Research and Development
New product development is important to the Wendy’s system. The Company believes that the development and testing of new and improved products is critical to increasing sales, attracting new customers and differentiating the Wendy’s brand from competitors. The Company maintains a state-of-the-art research and development facility that includes a sensory lab, analytical labs, culinary kitchens and a Wendy’s test kitchen. The Company employs a variety of professionals from the culinary and food science disciplines to bring new and improved products to market.
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 any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Competition
Each Wendy’s restaurant is in competition with other food service operations within the same geographical area. The quick-service restaurant segment is highly competitive and includes well-established competitors. Wendy’s competes with other restaurant companies and food outlets, primarily through the quality, variety, convenience, price and value perception of food and beverage products offered. The number and location of units,restaurants, quality and speed of service, attractiveness of facilities, effectiveness of marketing and new product development by Wendy’s and its competitors are also important factors. The price charged for each menu item may vary from market to market (and within markets) depending on competitive pricing
and the local cost structure. Wendy’s also competes within the food service industry and the quick-service restaurant sector not only for customers but alsoas well as for personnel, suitable real estate sites and qualified franchisees.
Wendy’s competitive position is differentiated by a focus on high quality, craveable food, its use ofmade-to-order square hamburgers using fresh, never frozen ground beef* and fresh-cut vegetables in the United States and Canada and certain other countries,, its unique and diverse menu, including chicken sandwiches, freshly-prepared salads and other signature items like chili, baked potatoes and the Frosty® dessert, its promotional products, its choice of toppings and condiments and the atmosphere and decordécor of its restaurants. (*Fresh beef available in the contiguous U.S., Alaska and Canada.) Wendy’s continues to implement its Image Activation program, which includes reimaging existing Wendy’s restaurants and building new Wendy’s restaurants with innovative exterior and interior restaurant designs, with plans for a significant number of new and reimaged Company-operated and franchised restaurants in 20192022 and beyond. The Image Activation program also differentiates the Company from its competitors by its emphasis on selection and performance of restaurant employees that provide friendly and engaged customer service in Wendy’s restaurants.
Many of the leading restaurant chains continue to focus on new unitrestaurant development as one strategy to increase market share through increased consumer awareness and convenience. This results in increased competition for available development sites and higher development costs for those sites. Competitors also employ marketing strategies such as frequent use of price discounting, frequent promotions and heavy advertising expenditures. Continued price discounting, including the use of coupons and offers, in the quick-service restaurant industry and the emphasis on value menus has had and could continue to have an adverse impact on Wendy’s business.
Other restaurant chains have also competed by offering high quality sandwiches made with fresh ingredients and artisan breads, and there are several emerging restaurant chains featuring high quality food served at in-line locations. Several chains have also sought to compete by targeting certain consumer groups, such as capitalizing on trends toward certain types of diets or dietdietary preferences (e.g., plant-based food, alternative proteins, low carbohydrate, low trans fat,trans-fat, gluten free or antibiotic free) by offering menu items that are promoted as being consistent with such diets.
Additional competitive pressures for prepared food purchases come from operators outside the restaurant industry. A number of major grocery chains offer fresh deli sandwiches and fully prepared food and meals to go as part of their deli sections. Some of these chains also have in-store cafes with service counters and tables where consumers can order and consume a full menu of items prepared especially for that portion of the operation. Additionally, convenience stores and retail outlets at gas stations frequently offer a wide variety of sandwiches and other foods.
Wendy’s also competes with grocery chains and other retail outlets whichthat sell food that willto be prepared at home. Competition with these chains and other outlets has increased ascould increase based on the gap between the price of food prepared at home compared to the price of food purchased at restaurants has widened.restaurants.
Technology and delivery are becoming increasingly critical parts of the restaurant consumer experience. RestaurantIn the quick-service restaurant category, technology includesinitiatives include mobile interactive technology for brand and menu search information, mobile ordering, mobile payment, mobile offers, mobile order pick-up and carryout, customer loyalty and rewards programs and other self-service technologies. Wendy’s has established a delivery arrangement using a third-party vendor in several United States markets, and certainAn increasing number of our franchisees have established delivery arrangements using a third-party vendor in several Canadian markets. As of December 30, 2018, delivery was available at more than 60% of Wendy’s North America system restaurants. Other restaurant chains have also introduced or expanded their restaurant technology initiatives and delivery arrangements as another strategy to increase market share. If our technology initiatives, digital commerce platforms or third-party delivery providers do not meet customers’ expectations in terms of security, speed, cost, attractiveness or ease of use, customers may be less inclined to use those platforms or providers and our competitive position could be adversely impacted.
AcquisitionsSystem Optimization
The Company’s system optimization initiative included a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and Dispositions of Wendy’s Restaurants
dispositions, as well as by facilitating Franchise Flips. During 2016, the Company completed the sale of 310 Company-operated restaurants to franchisees, which resulted in the completionachievement of the Company’sits plan to reduce its ongoing Company-operated restaurant ownership percentage to approximately 5% of the total Wendy’s system. During 2017,
While the Company acquired 140 Wendy’s restaurantshas no plans to move its ownership away from DavCo Restaurants, LLC (“DavCo”), which were immediately sold to NPC International, Inc. (“NPC”), an existing franchiseeapproximately 5% of the Company. During 2018, the Company sold three Company-operated restaurants to franchisees and acquired 16 Wendy’s restaurants from franchisees. In addition, during 2018, 2017 and 2016, the Company facilitated franchisee-to-franchisee transfers of 96, 400 and 144 restaurants, respectively.
Wendy’ssystem, it expects to continue to optimize itsthe Wendy’s system by facilitating franchisee-to-franchisee transfers of restaurants,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 adoption of Wendy’s Image Activation adoption.program. Wendy’s generally retains a right of first refusal in connection with any proposed sale or transfer of a franchisee’s interest.franchised restaurants.
North America Franchised Restaurants
The table below shows the number of restaurant acquisitions, restaurant dispositions and Franchise Flips completed in each of 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Restaurant acquisitions | 93 | | | — | | | 5 | |
| Restaurant dispositions | 47 | | | 1 | | | — | |
| Franchise Flips (a) | 34 | | | 54 | | | 37 | |
_______________
(a)Represents franchisee-to-franchisee restaurant transfers for which the Company received advisory fees, which include valuation services and fees for selecting pre-approved buyers.
Franchising
As of December 30, 2018,January 2, 2022, 228 Wendy’s U.S. franchisees operated 5,825 Wendy’s5,535 franchised restaurants in 50 states and the District of Columbia, and Canada.100 Wendy’s international franchisees operated 1,006 franchised restaurants in 31 foreign countries and U.S. territories.
U.S. Franchise Arrangements
The rights and obligations governing the majority of franchised restaurants operating in the United States are set forth in the Wendy’s current Unit Franchise Agreement (the “Current Franchise Agreement”) (non-traditional locations, including delivery kitchens, may operate under an amended agreement or alternate form of agreement). This documentagreement provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site accepted by Wendy’s and to use the Wendy’s system in connection with the operation of the restaurant at that site. The UnitCurrent Franchise Agreement provides for a 20-year term and a 10-yearten-year renewal subject to certain conditions. The initial term may be extended up to 25 years and the renewal extended up to 20 years for qualifying restaurants under the new restaurant development incentive and remodelreimage programs described below.below in “Franchise Development and Other Relationships”. Wendy’s has in the past franchised under different agreements on a multi-unit basis; however, Wendy’s now grants new Wendy’s franchises on a unit-by-unit basis.
The Wendy’s UnitCurrent Franchise Agreement requires that the franchisee pay a monthly royalty of 4%4.0% of sales, as defined in the agreement, from the operation of the restaurant. The agreement also typically requires that the franchisee pay Wendy’s an initial technical assistance fee. In the United States, the standard technical assistance fee required under a newly executed UnitCurrent Franchise Agreement is currently $50,000 for each new restaurant opened.
The technical assistance fee is used to defray some of the costs to Wendy’s for training, start-up and transitional services related to new and existing franchisees acquiring Company-operated restaurants and in the development and opening of new restaurants. In certain limited instances (such as the re-granting of franchise rights for a previously closed restaurant, a reduced franchise agreement term, development incentive programs or other unique circumstances), Wendy’s may charge a reduced technical assistance fee or may waive the technical assistance fee. Wendy’s does not select or employ personnel on behalf of franchisees.
International Franchise Arrangements
Wendy’s Restaurants of Canada Inc. (“WROC”), a 100% owned subsidiary of Wendy’s, holds master franchise rights for Canada. The rights and obligations governing the majority of franchised restaurants operating in Canada are set forth in a Single Unit Sub-Franchise Agreement (the “Single Unit Sub-Franchise Agreement”) (non-traditional locations, including delivery kitchens, may operate under an amended agreement or alternate form of agreement). This document provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site accepted by WROC and to use the Wendy’s system in connection with the operation of the restaurant at that site. The Single Unit Sub-Franchise Agreement provides for a 20-year term and a ten-year renewal subject to certain conditions. The sub-franchisee pays to WROC a monthly royalty of 4.0% of sales, as defined in the agreement, from the operation of the restaurant. The agreement also typically requires that the franchisee pay WROC an initial technical assistance fee. The standard technical assistance fee is currently C$50,000 for each new restaurant opened.
Franchisees who wish to operate Wendy’s restaurants outside of the United States and Canada enter into franchise or license agreements with Wendy’s that generally provide franchise rights for each restaurant for an initial term of ten years or 20 years, depending on the country, and typically include a ten-year renewal provision, subject to certain conditions. The agreements grant a license to the franchisee to use the Wendy’s trademarks and know-how in the operation of a Wendy’s restaurant at a specified location. Generally, the franchisee pays Wendy’s an initial technical assistance fee or other per restaurant fee and monthly fees based on a percentage of gross monthly sales of each restaurant. In certain foreign markets, Wendy’s may grant the franchisee exclusivity to develop a territory in exchange for the franchisee undertaking to develop a specified number of new Wendy’s restaurants in the territory based on a negotiated schedule. In these instances, the franchisee generally pays Wendy’s an upfront development fee, annual development fees or a per restaurant development fee. In certain circumstances, Wendy’s may grant a franchisee the right to sub-franchise in a stated territory, subject to certain conditions.
Non-Traditional Development
Non-traditional locations, such as fuel and transportation centers, food courts and other retail locations, military bases and delivery kitchens, represent an increasing component of Wendy’s development strategy. For example, in 2021, we announced a new development commitment with REEF Kitchens to open and operate up to 700 delivery kitchens over a five-year period across the United States, Canada and the United Kingdom. These delivery kitchens and other non-traditional locations may be subject to different rights and obligations than our traditional franchise arrangements, including with respect to initial and renewal franchise terms, technical assistance fees, monthly royalty rates and advertising contribution rates, and the sales levels at these locations may also differ from sales levels at traditional Wendy’s restaurants.
Franchise Development and Other Relationships
In addition to its franchise and license agreements, Wendy’s also enters into development and/or relationship agreements with certain franchisees. The development agreement provides the franchisee with the right to develop a specified number of new Wendy’s restaurants using the Image Activation program design within a stated, non-exclusive territory for a specified period, subject to the franchisee meeting interim new restaurant development requirements. The relationship agreement addresses other aspects of the franchisor-franchisee relationship, such as restrictions on operating competing restaurants, participation in brand initiatives such as the Image Activation program, employment of approved operators, confidentiality and restrictions on engaging in sale/leaseback or debt refinancing transactions without Wendy’s prior consent.
Wendy’s Restaurants of Canada Inc. (“WROC”), a 100% owned subsidiary of Wendy’s, holds master franchise rights for Canada. The rights and obligations governing the majority of franchised restaurants operating in Canada are set forth in a Single Unit Sub-Franchise Agreement. This document provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site accepted by WROC and to use the Wendy’s system in connection with the operation of the restaurant at that site. The Single Unit Sub-Franchise Agreement provides for a 20-year term and a 10-year renewal subject to certain conditions. The sub-franchisee pays to WROC a monthly royalty of 4% of sales, as defined in the agreement, from the operation of the restaurant. The agreement also typically requires that the franchisee pay WROC an initial technical assistance fee. The standard technical assistance fee is C$50,000 for each new restaurant opened.
In order to promote new restaurant development, Wendy’s has an incentive program for franchisees that provides for technical assistance fee waivers and reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants opened byprior to December 31, 2020, with the value of the incentives declining in the later years of the program.2022. In August 2018,addition, Wendy’s announcedhas a new restaurant development incentive program that provides for incremental reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants for existing franchisees that sign up for the program under a new development agreement, or through an extension of their existing development agreement, and commit to incremental development of new Wendy’s restaurants. Under any extended development agreements, franchisees are also eligible for technical assistance fee waivers for restaurants under a newopened one year in advance of their original development agreement by July 1, 2019.schedule so long as the restaurants are opened prior to December 31, 2022. Wendy’s also provides franchisees with the option of an early 20-year or 25-year renewal of their franchise agreement upon completion of reimaging utilizing certain approved Image Activation remodelreimage designs.
Franchised restaurants are required to be operated under uniform operating standards and specifications relating to the selection, quality and preparation of menu items, signage, decor, equipment, uniforms, suppliers, maintenance and cleanliness of premises and customer service. Wendy’s monitors franchisee operations and inspects restaurants periodically to ensure that required practices and procedures are being followed. See “The Wendy’s Restaurant System—Quality Assurance” above for additional information.
See Note 7 and Note 21 of the Financial Statements and Supplementary Data contained in Item 8 herein, and the information under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, for further information regarding certain guarantee obligations, reserves, commitments and contingencies involving franchisees.
Advertising and Marketing
In the United States and Canada, Wendy’s advertises nationally through national advertising funds on network and cable television programs, including nationally televised events. Locally in the United Statesevents, and Canada, Wendy’sadvertises locally primarily advertises through regional network and cable television, radio and social media. Wendy’s maintains two national advertising funds established to collect and administer
funds contributed for use in advertising through television, radio, the Internet and a variety of promotional campaigns, including the increasing use ofthrough digital and social media.media platforms. Separate national advertising funds are administered for Wendy’s United States and Canadian restaurant locations. Contributions to the national advertising funds are required to be made by both Company-operated and franchised restaurants and are based on a percentage of restaurant retail sales. In addition to the contributions to the national advertising funds, Wendy’s requires additional contributions to be made for both Company-operated and franchised restaurants based on a percentage of restaurant retail sales for the purpose of local and regional advertising programs. Required franchisee contributions to the national advertising funds and for local and regional advertising programs are governed by the Wendy’s UnitCurrent Franchise Agreement in the United States and by the Single Unit Sub-Franchise Agreement in Canada. Required contributions by Company-operated restaurants for advertising and promotional programs are at the same percentpercentage of retail sales as franchised restaurants within the Wendy’s system. As of December 30, 2018,January 2, 2022, the contribution rate for United StatesU.S. restaurants was generally 3.5% of retail sales for national advertising and 0.5% of retail sales for local and regional advertising. TheAs of January 2, 2022, the contribution rate for Canadian restaurants iswas generally 3%3.0% of retail sales for national advertising and 1%1.0% of retail sales for local and regional advertising, with the exception of Quebec, for which there is no national advertising contribution rate and the local and regional advertising contribution rate is 4%4.0% of retail sales. Non-traditional locations, including delivery kitchens, may be subject to adjusted requirements for national, local and regional advertising contributions. See Note 24 of the Financial Statements and Supplementary Data contained in Item 8 herein for furtheradditional information regarding advertising.
International OperationsHuman Capital
At Wendy’s, our vision is to become the world’s most thriving and Franchisingbeloved restaurant brand, and every day we strive to live our purpose of creating joy and opportunity through food, family and community. Our restaurants, our food and the value and service we provide to our customers are all integral to our long-term success, but ultimately it is our people that help us deliver our brand promise of “Fast Food Done Right” every single day.
We continue to invest in employees to ensure we are able to attract, hire, develop and retain great talent throughout our organization. We measure our effectiveness in these areas using various tools and metrics, including administering an employee engagement survey twice a year and tracking our employee turnover rates compared to others in the restaurant industry. During 2021, we continued to outperform our peer group and industry benchmarks in the areas of employee engagement and turnover.
Employees
As of December 30, 2018, Wendy’s had 533 franchised restaurantsJanuary 2, 2022, the Company was comprised of approximately 14,500 employees, of which nearly two-thirds were part-time, and one-third were full-time. The vast majority of our employees are located in 30 countries and territories other than the United States and Canada.work in our Company-operated restaurants within our Wendy’s intendsU.S. business segment. Outside of our Company-operated restaurants, our largest population of employees work in our field support organization or at our restaurant support center in Dublin, Ohio. We are proud to have a workforce with diverse backgrounds and experiences.
Respectful Workplace
From day one, the Wendy’s business has always been of, for and about people. Respect and fair treatment for our team members, franchisees, supplier partners and vendors is a central part of our business. So is staying true to the values established by our founder Dave Thomas more than 50 years ago, which include Doing the Right Thing, Treating People with Respect and Giving Something Back. Our commitment to these values is reflected in our Code of Business Conduct and Ethics, which applies to Company employees and directors, and in our Supplier Code of Conduct, which sets forth our expectations for suppliers to the Wendy’s system. We strive to bring our values to life through daily interactions with our team members, franchisees and customers and in the communities where we do business. We expect our employees to maintain respectful workplaces that support and protect the integrity of the Wendy’s brand and fuel our continued success.
Diversity, Equity and Inclusion
We believe our strategic focus on diversity, equity and inclusion (“DE&I”) has helped, and will continue to help, the Company remain true to our values as well as support our financial performance and global growth strategy. Creating and fostering inclusive work environments allows us to create an engaging and welcoming culture for our employees, which we believe positively affects the quality of products, service and experience we deliver to our customers. In 2021, we created an Office of DE&I and appointed Dr. Beverly Stallings-Johnson as our Chief DE&I Officer. Under her leadership, we strive to increase our knowledge and accountability and expect our DE&I strategy to continue to grow its international business aggressively, yet responsibly.and evolve. We also announced a
focus on five goals related to increasing diverse representation at multiple levels of our organization and among franchisee owners over a five-year period.
We are fortunate to have several thriving Employee Resource Groups (“ERGs”), which are voluntary employee-led groups, each sponsored by a Wendy’s senior leadership team member. Our ERGs serve an important role in support of our DE&I strategy, creating forums for learning and inclusion, providing opportunities to celebrate different backgrounds, empowering employees to bring their authentic self to work, and creating leadership and professional development opportunities. Our ERGs are open to all Company employees at our restaurant support center and focus on employees and allies who identify as Women (Women of Wendy’s), LGBTQ+ (WeQual), Military Veterans & Families (WeVets), Culturally Diverse (WCDN), Black (WeBERG) and Young Professionals (WenGEN).
Compensation and Benefits
We are committed to providing market-competitive pay and benefits to attract and retain great talent. We enable this by benchmarking and analyzing pay and benefits both externally and internally. In addition to new market expansion, further development within existing markets will continuereceiving competitive hourly rates and base salaries, all general managers and district managers of our Company-operated restaurants are eligible for performance-based cash incentive bonuses, along with all corporate management staff. For our restaurant-level employees, we offer the potential for raises based on individual performance reviews throughout the year. At Wendy’s, we are committed to be an important componentproviding pay equity for all employees, regardless of Wendy’s international strategy. In 2018, Wendy’s grew its internationalgender or ethnicity. We also offer a robust set of benefits to help eligible employees and their families stay healthy, manage spend related to health and financial wellbeing and effectively balance work and life. This includes insurance for medical, dental, vision and prescription drugs, telehealth access, 401(k) savings and retirement plans, health savings accounts, employee assistance program, paid sick leave, bonding leave and adoption assistance.
Safety and Well-Being
We are committed to providing our employees with safe and comfortable work environments and offering resources that our employees can use to help promote their well-being. Throughout 2021, we continued to evolve our approach to effectively manage the impact of COVID-19 on our business, by 29 net new restaurants. Wendy’s has granted development rightsrestaurants and employees, continuing some measures adopted in certain countries2020, such as enhanced safety training, and territories listed under “Item 2. Properties” herein.
Franchisees who wish to operate Wendy’s restaurants outsideevolving in other areas, such as expanding our paid sick time policy. As we have done since the onset of the United Statespandemic, we continued to monitor public health guidance and Canada enter into agreementsfollow federal, state/provincial and local laws, regulations, rules and requirements related to COVID-19. We are extremely proud of the work our employees have done to support our restaurants, employees, customers and communities that we serve throughout the pandemic and that commitment remains.
Talent Development
To set our employees up for success and help them achieve their personal development needs and career growth, we invest in training and development programs at all levels within the Company. We also leverage annual processes that support individual performance planning, individual professional development planning and a broad review of talent development throughout the Company. Restaurant-level employees have the opportunity to take advantage of an extensive online learning curriculum, as well as hands-on training led by crew trainers, managers and field support staff. Restaurant managers and multi-unit operators participate in Wendy’s University, which includes targeted training to develop management and leadership skills. Wendy’s University also provides targeted programming for corporate management staff, including diversity training, people manager training, leadership dialogues and the opportunity to participate in third-party conferences and training.
Community-Based Giving
Wendy’s maintains charitable giving programs that support four core categories: foster care adoption; hunger and food integrity; youth and families; and vibrant communities. In 2021, Wendy’s made charitable donations to a variety of organizations across the globe, highlighted by our continued support of the Dave Thomas Foundation for Adoption, a charitable foundation created by our founder, Dave Thomas, which has been our signature charitable cause for more than 25 years. In addition to corporate contributions, we also hosted an employee-driven Community Giving Program, in which employees from across the Wendy’s system nominated worthy charitable organizations to receive charitable grants from The Wendy’s Foundation. We also made grants available to charitable organizations chosen by each of our ERGs in support of their missions.
Additional information about our people and human capital initiatives is available on our website at www.wendys.com/what-we-value, in our annual Corporate Social Responsibility report and on The Square DealTM Wendy’s Blog at
www.squaredealblog.com. The contents of our website and these additional information sources are not incorporated by reference in this Form 10-K or any other report or document we file with Wendy’s that generally provide franchise rights for each restaurant for an initial term of 10 years or 20 years, depending on the country,Securities and typically include a 10-year renewal provision,Exchange Commission.
Governmental Regulations
U.S. Operations
The Company and our franchisees are subject to certain conditions. The agreements grant a license to the franchisee to use the Wendy’s trademarksvarious federal, state and know-how inlocal laws and regulations affecting the operation of aour respective businesses, including laws and regulations relating to building and zoning, health, fire and safety, sanitation, food preparation, nutritional content and menu labeling, advertising, information security, privacy and consumer protection, as well as laws, regulations, recommendations and guidelines related to the COVID-19 pandemic. Each Wendy’s restaurant atis subject to licensing and regulation by a specified location. Generally, the franchisee pays Wendy’s an initial technical assistance fee or other per restaurant fee and monthly fees based on a percentage of gross monthly sales of each restaurant. In certain foreign markets, Wendy’s may grant the franchisee exclusivity to develop a territory in exchange for the franchisee undertaking to develop a specified number of new Wendy’s restaurantsgovernmental authorities in the territory based on a negotiated schedule. In these instances,state or municipality in which the franchisee generally pays Wendy’s an upfront development fee, annual development fees or a per restaurant development fee. In certain circumstances, Wendy’s may grant a franchisee the right to sub-franchise in a stated territory,is located. The Company is also subject to certain conditions.federal, state and local laws governing labor and employment matters, including minimum wage requirements, overtime and other working conditions, family leave and health care mandates, union organizing, work authorization requirements, insurance and workers’ compensation rules and anti-discrimination and anti-harassment laws applicable to Company employees, and our franchisees are subject to labor and employment laws with respect to their employees. Additionally, the Company and our franchisees are subject to the Americans with Disabilities Act and other similar laws that provide civil rights protections to individuals with disabilities in the context of public accommodations and other areas.
Wendy’s also continually evaluates non-franchise opportunities for developmentThe Company’s franchising activities are subject to the rules and regulations of Wendy’s restaurants in other international markets, including through joint ventures with third parties and opening Company-operated restaurants.
General
Governmental Regulations
Various state laws and the Federal Trade Commission regulate Wendy’s franchising activities.(the “FTC”) and various state laws regulating the offer and sale of franchises. The Federal Trade CommissionFTC requires that franchisors make extensivefurnish a franchise disclosure document (“FDD”) containing certain information to prospective franchisees before the execution of a franchise agreement. Several states require registration and disclosure of the FDD in connection with franchise offers and sales and have “franchise relationship laws” thatlaws regulating the franchisor-franchisee relationship. These state laws often limit, among other things, the duration and scope of non-competition provisions and the ability of franchisors to terminate franchise agreements or withhold consent to the renewal or transfer of thesefranchise agreements. In addition, Wendy’sThe Company believes that our FDD, together with applicable state versions or supplements, and its franchisees mustfranchising procedures comply in all material respects with the federal Fair Labor Standards ActFTC’s franchise rules and similarapplicable state franchise laws.
International Operations
Internationally, the Company and our franchisees are subject to national, provincial and local laws and regulations that often are similar to those impacting us and our franchisees in the Americans with Disabilities Act (the “ADA”)U.S., which requires that all public accommodationsincluding laws and commercial facilities meet federal requirementsregulations concerning franchises, labor and employment, building and zoning, health, fire and safety, sanitation, food preparation, nutritional content, menu labeling, advertising, information security, privacy and consumer protection, as well as laws, regulations, recommendations and guidelines related to accessthe COVID-19 pandemic. Wendy’s restaurants outside the U.S. are also often subject to tariffs and use by disabled persons,regulations on imported commodities and various stateequipment and local laws governing mattersregulating foreign investment, as well as anti-bribery and anti-corruption laws. The Company believes that include, for example, the handling, preparationour international franchise disclosure documents and sale of food and beverages, the provision of nutritional information on menu boards, minimum wages, overtime and other working and safety conditions. Compliancefranchising procedures comply in all material respects with the ADA requirements could require removallaws of access barriers and non-compliance could result in imposition of fines by the United States government or an award of damages to private litigants. We do not believe that costs relating to compliance with the ADA will have a material adverse effect on the Company’s consolidated financial position or results of operations. We cannot predict the effect on our operations, particularly on our relationship with franchisees, of any pending or future legislation or regulations.applicable countries.
Legal and Environmental Matters
The Company’s pastoperations, including the selection and present operationsdevelopment of properties that we own or lease and any construction or improvements made at those properties, are governed bysubject to a variety of federal, state, local and localinternational environmental laws and regulations, including laws and regulations concerning the discharge, storage, handling and disposal of hazardous or toxic substances. TheseOur properties are sometimes located in developed commercial or industrial areas and might previously have been occupied by more environmentally significant operations, such as gas stations. Environmental laws and regulations provide forsometimes require owners or operators of contaminated property to remediate that property, regardless of fault, and could give rise to significant fines, penalties and liabilities, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. In addition, third parties may make claims against owners or operators of properties for personal injuries and property damage associated with releases of hazardous or toxic substances. We cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or interpreted. We similarly cannot predict the amount of future expendituresas well as third-party claims. The Company believes that may be required to comply with any environmental laws or regulations or to satisfy any claims relating to environmental laws or regulations. We believe that our restaurant operations comply substantially with all applicable environmental laws and regulations. Accordingly, the
Increased focus by governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in whichthe area of climate change. While we are involved generally relate either to propertiescannot predict the precise nature of these initiatives, we expect that they may impact our subsidiaries own, butbusiness both directly and indirectly. There is a possibility that government initiatives, or actual or perceived effects of changes in weather patterns, climate change or scarcity of energy and water resources, could have a direct impact on which they no longer have any operations, or propertiesour business in ways that we orcannot predict at this time.
Legal Matters
The Company is involved in litigation and claims incidental to our subsidiariesbusiness. We provide accruals for such litigation and claims when we determine it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We believe we have sold to third parties, butadequate accruals for which we orall of our subsidiaries remain liable or contingently liable for any related environmental costs. Our Company-operated restaurants have not been the subject of any materiallegal and environmental matters. Based on currently available information, including defenses available to us and/or our subsidiaries, and our current reserve levels, we doSee Item 3 “Legal Proceedings” for additional information.
The Company does not believe that compliance with applicable laws and regulations, including environmental laws and regulations, or the ultimate outcome of the environmentalany legal matters in which we are involved, will have a material adverse effect on our consolidated financial position or results of operations.
Theoperations, financial condition, capital expenditures, earnings or competitive position. However, the Company iscannot predict what laws or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or whether any legal matters in which we are involved could result in greater liabilities than we currently anticipate. See Item 1A “Risk Factors” for a discussion of certain risks relating to legal and regulatory requirements, litigation and claims incidentaland related matters affecting our business.
Available Information
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including exhibits and amendments to such reports, as well as our currentannual proxy statement, available, free of charge, on our Investor Relations website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate accruals for continuing operations for all of our legal and environmental matters, includingExchange Commission. These filings are also available to the accrual that we recorded for the legal proceedings related to a cybersecurity incident as described in Note 23 of the Financial Statements and Supplementary Data contained in Item 8 herein. See Note 11 of the Financial Statements and supplementary Data contained in Item 8 herein for further informationpublic on the accrual.Securities and Exchange Commission’s website at www.sec.gov. We cannot estimate the aggregate possible rangealso provide our Code of loss for various reasons, including, butBusiness Conduct and Ethics, free of charge, on our website. Our corporate website address is www.wendys.com and our Investor Relations website address is www.irwendys.com. Information contained on those websites is 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 amountpart 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 for a particular reporting period.this Form 10-K.
Employees
As of December 30, 2018, the Company had approximately 12,500 employees, including approximately 1,150 salaried employees and approximately 11,350 hourly employees. We believe that our employee relations are satisfactory.
Item 1A. Risk Factors.
We wish to caution readers that in addition to the important factors described elsewhere in this Form 10-K, we have included below the most significantcertain material factors that have affected, or in the future could affect, our actual results and could cause our actual consolidated results during fiscal 2019,2022, and beyond, to differ materially from those expressed in or implied by any forward-looking statements made by us or on our behalf.
Our success dependsRisks Related to Macroeconomic and Industry Conditions
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 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 implemented measures to reduce the spread of COVID-19. These measures adversely affected customers, workforces, economies and financial markets, and, along with decreased consumer spending, led to an economic downturn in part uponmany of our markets. Governmental restrictions and public perceptions of the risks associated with COVID-19 have caused consumers to avoid or limit 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, in March 2020, we updated our brand standard to include the closure of all dining rooms except where there were specific needs, or a drive-thru or pick-up window option was not available, subject to applicable federal, state and local requirements. Substantially all Wendy’s restaurants continued successionto offer drive-thru and retentiondelivery service to our customers. During the second quarter of 2020, we began implementing our restaurant and dining room reopening process through a phased approach in accordance with federal, state and local requirements, with customer and team member safety as our top priority. As of January 2, 2022, substantially all restaurants were open across the Wendy’s system, and the majority of restaurants had dining rooms open.
During the height of the COVID-19 pandemic, our customer counts and systemwide sales were significantly negatively impacted, and our customer counts continue to be negatively impacted. Even as mobility continues to increase, customers have been and may continue to be reluctant to return to in-restaurant dining, and consumer spending may continue to be adversely impacted for an extended period of time as a result of decreased consumer confidence and other macroeconomic factors.
The COVID-19 pandemic has had, and could again have, an adverse effect on new restaurant development and restaurant reimaging. For example, in 2020, due to the uncertain and challenging economic and market conditions, we delayed construction of certain key personnel.
We believe that over time our success has been dependent to a significant extent uponnew Company-operated restaurants and reimaging of existing Company-operated restaurants and also extended the effortsnew restaurant development and abilitiesImage Activation requirements of our senior management team. The failurefranchisees by us to retain members of our senior management team in the futureone year. These or similar delays could adversely affect our ability to build on the efforts we have undertaken to increase the efficiency and profitability ofdrive future growth in our business.
During 2018,The COVID-19 pandemic has had, and could again have, an adverse effect on our franchisees’ operations and financial condition. Following the onset of the pandemic, we took 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 Chief Information Officer David G. Trimm completed an effective succession processleased to franchisees. To the extent our franchisees experience financial distress, including as a result of the COVID-19 pandemic, it could negatively affect our results of operations, cash flows and financial condition through delayed or reduced payments of royalties, advertising fund contributions or rent.
The COVID-19 pandemic has led, and could again lead, to interruptions in connection with Mr. Trimm’s retirementthe 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 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. For example, we experienced disruptions to our beef supply beginning in early May 2020 as beef suppliers across North America faced production challenges. As a result, some menu items were occasionally in short supply at some Wendy’s system restaurants. While we and our supply chain partners effectively managed through this disruption and the beef supply subsequently returned to normal levels across the Wendy’s system, the pandemic has continued to impact our supply chain and there can be no assurances that we will not see similar disruptions in the future. 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 and transition the impacted business to alternative suppliers or distributors in a timely manner.
The COVID-19 pandemic has led, and could again lead, to labor shortages or increased labor costs. The risk or perceived risk of contracting the virus, as well as vaccine mandates or other governmental actions or restrictions, could continue to adversely affect restaurant operations, including the ability or cost of adequately staffing restaurants. If a significant percentage of our or our franchisees’ workforce is unable to work, whether because of illness, quarantine, travel limitations, vaccine mandates or other governmental actions or restrictions, our operations and the operations of our franchisees may be negatively impacted, which could materially affect our results of operations and financial condition. Following the onset of the pandemic, we took 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 contributed to increased operating costs.
The impacts from the Company. Mr. Trimm transitioned his restaurant technology responsibilitiesCOVID-19 pandemic could have a material adverse effect on our liquidity and capital resources. We currently believe we have the ability to Robert D. Wright, Executive Vice Presidentpursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us. If the disruptions caused by COVID-19 worsen, 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 Chief Operations Officer, his enterprise technology responsibilitiesour overall liquidity position and financial condition.
In addition to Gunther Plosch, Chief Financial Officer,the risks described above, the COVID-19 pandemic has had, and his digital technology responsibilitiescould continue to Laura Titas, Chief Digital Experience Officer. Ms. Titas joinedhave, the Companyeffect of heightening other risks disclosed in December 2018this risk factors section, including, but not limited to, those related to brand value and servesperception, consumer preferences and spending, commodity costs, labor, supply chain and purchasing, performance of the breakfast daypart and international operations. We cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on the Company’s senior leadership team, reporting to Kurt A. Kane, Executive Vice Presidentour results of operations, financial condition and Chief Concept and Marketing Officer.prospects.
Competition from other restaurant companies, as well as grocery chains and other retail food outlets, or poor customer experience at Wendy’s restaurants, could hurt our brand.
The market segments in which Company-operated and franchised Wendy’s restaurants compete are highly competitive with respect to, among other things, price, food quality and presentation, service, location, convenience, and the nature and condition of the restaurant facility. If customers have a poor experience at a Wendy’s restaurant, whether at a Company-operated or franchised restaurant, we may experience a decrease in guest traffic.customer counts. Further, Wendy’s restaurants compete with a variety of locally-ownedlocally owned restaurants, as well as competitive regional, national and national chains and franchises.global restaurant chains. Several of these chains compete by offering menu items that are targeted at certain consumer groups or dietary trends. Additionally, many of our competitors have introduced lower
cost value meal menu options and have employed marketing strategies that include frequent use of price discounting (including through the use of coupons and other offers), frequent promotions and heavy advertising expenditures. Our revenues and thoseSome of our franchiseescompetitors have substantially greater financial, marketing, personnel and other resources than we do, which may be hurt by thisallow them to react to changes in pricing and marketing strategies better than we can and drive higher levels of brand awareness among consumers. This product and price competition.competition could result in reduced revenues and loss of market share.
Moreover, new companies, including operators outside the quick-service restaurant industry, may enter our market areas in which Wendy’s restaurants operate and target our customer base. For example, additional competitive pressures for prepared food purchases have come from deli sections and in-store cafes of a number of major grocery store chains, as well as from convenience stores and casual dining outlets. Such competitors may have, among other things, lower operating costs, better locations, better facilities, better management, better products, more effective marketing and more efficient operations. Many of our competitors have substantially greater financial, marketing, personnel and other resources than we do, which may allow them to react to changes in pricing and marketing strategies in the quick-service restaurant industry better than we can. Many of our competitors spend significantly more on advertising and marketing than we do, which may give them a competitive advantage through higher levels of brand awareness among consumers.
Wendy’s also competes with grocery chains and other retail outlets whichthat sell food that willto be prepared at home. Competition with these chains and other outlets has increased ascould increase based on the gap between the price of food prepared at home compared to the price of food purchased at restaurants has widened.restaurants. This increased product and price competition could put deflationary pressure on the selling price of products offered at Wendy’s restaurants.
All such competition may adversely affect our revenues and profits by reducing revenues of Company-operated restaurants and royalty revenue from franchised restaurants.
Changes in consumer tastes and preferences, and in discretionary consumer spending, could result in a decline in sales at Company-operated restaurants and in the royalties that we receive from franchisees.
The quick-service restaurant industry is often affected by changes in consumer tastes, national, regional and local economic conditions, discretionary spending priorities, demographic trends, traffic patterns and the type, number and location of competing restaurants. Our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during economic downturns. Any material decline in the amount of discretionary spending or a decline in consumer food-away-from-
home spending could hurt our revenues,brand, business, results of operations business and financial condition. If Company-operated and franchised restaurants are unable to adapt to changes in consumer preferences and trends, Company-operated and franchised restaurants may lose customers and the resulting revenues from Company-operated restaurants and the royalties that we receive from franchisees may decline.
DisruptionsAdverse economic conditions or disruptions in the national and global economies, mayor in regions that have a high concentration of Wendy’s restaurants, could adversely impact our revenues,business, results of operations business and financial condition.
DisruptionsAdverse economic conditions or disruptions in the national and global economies could result in higher unemployment rates, labor shortages, increases in inflation and declines in consumer confidence and spending. If such disruptions occur, they may result in significant declines in consumer food-away-from-home spending and customer trafficcounts in our restaurants and those of our franchisees. There can be no assurance that government responses to economic disruptions will restore consumer confidence. Ongoing disruptions in the national and global economies may adversely impact our revenues,business, results of operations and financial condition. Additionally, adverse economic conditions in regions that contain a high concentration of Wendy’s restaurants, including markets in which our Company-operated restaurants are located, could also have a material adverse impact on our results of operations.
Changes in discretionary consumer spending, and in consumer tastes and preferences, could adversely affect our business, results of operations and financial condition.
ChangesThe success of the Wendy’s system depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Material declines in commodity costs (including beef, chicken, pork, cheesethe amount of discretionary spending or consumer food-away-from-home spending could hurt our business, results of operations and grains), supplies, fuel, utilities, distributionfinancial condition. Our success also depends to a large extent on continued consumer acceptance of our offerings, the success of our operating, promotional, marketing and new product development initiatives and the reputation of our brand. If we are unable to continue to achieve consumer acceptance or adapt to changes in consumer preferences, including with respect to nutrition, health or dietary trends or environmental or social concerns, Wendy’s restaurants may lose customers, and the resulting revenues from Company-operated restaurants and the royalties that we receive from franchisees may decline.
Risks Related to Brand Perception and Value
Our success depends substantially on our corporate reputation and on the value and perception of our brand.
Our success depends in large part upon our ability to maintain and enhance the value of our brand, our customers’ loyalty to our brand and a positive relationship with our franchisees and other operating costsbusiness partners. Brand value is based in part on consumer perceptions on a variety of subjective qualities. Business incidents, whether isolated or recurring, and whether originating from us, our franchisees or our business partners, can significantly reduce brand value and consumer trust, particularly if the incidents receive considerable publicity or result in litigation. For example, our brand could be damaged by claims or perceptions about the quality or safety of our products or the quality or reputation of our franchisees or other business partners, regardless of whether such claims or perceptions are true. Our brand could also be adversely impacted by other incidents described in this risk factors section, including incidents related to customer service, customer health or safety, a failure to attract and retain qualified employees, food safety or other health concerns regarding our products, the impact of social media, data privacy violations, cyber incidents, social and environmental sustainability matters or reports of our employees, franchisees or business partners taking controversial positions or acting in an unethical, illegal or socially irresponsible manner. Any such incidents could cause a decline in consumer confidence in our brand and reduce consumer
demand for our products, which could have a material adverse impact on our business, results of operations and financial condition.
Our results of operations depend in part on the effectiveness of our marketing and advertising programs and the successful development and launch of new products.
Our results of operations are heavily influenced by brand marketing and advertising and by our ability to develop and launch new and innovative products. Our marketing and advertising programs may not be successful, or we may fail to develop commercially successful new products, which may impact our ability to attract new customers and retain existing customers, which, in turn, could materially and adversely affect our results of operations. Moreover, because franchisees contribute to advertising funds based on a percentage of sales at their franchised restaurants, advertising fund expenditures are dependent upon sales volumes across the Wendy’s system. If systemwide sales decline, this could result in a reduced amount of funds available for our marketing and advertising programs. In addition, to the extent we use value offerings or other promotions or discounts in our marketing and advertising programs to drive customer counts, these actions may condition our customers to resist higher menu prices or result in reduced demand for premium products.
Our profitabilityinability or failure to recognize, respond to and effectively manage the accelerated impact of social media could adversely impact our brand, business and results of operations.
In recent years, there has been a significant increase in the use of social media platforms, including social media and news aggregation websites and other forms of internet-based communications that allow individuals access to a broad audience. The rising popularity of social media has increased the speed and accessibility of information dissemination and given users the ability to more effectively organize collective actions such as boycotts and other brand-damaging behaviors. The dissemination of information via social media, whether accurate or inaccurate, could harm our business, brand, reputation, results of operation and financial condition. This damage may be immediate, without an opportunity to correct inaccurate information or respond to or address particular issues. In addition, as part of our marketing efforts, we frequently use social media to communicate with consumers in order to build their awareness of, engagement with and loyalty to us. Failure to use social media effectively or appropriately, particularly as compared to our competitors, could lead to a decline in brand value, customer visits and revenues. Laws and regulations governing the use of social media continue to rapidly evolve. A failure by us, our employees, our franchisees or third parties acting on our behalf to abide by applicable laws and regulations in the use of social media could adversely impact our reputation, brand, results of operations and financial condition or subject us to litigation, fines or other penalties. Social media risks could also arise from employees not following defined policies for the use of social media during business operations, or actions taken by employees during personal activities outside of their employment, but which could still reflect negatively on the Wendy’s brand.
We may be unable to adequately protect our intellectual property, which could harm the value of our brand and hurt our business.
Our intellectual property is material to the conduct of our business. We rely on a combination of trademarks, copyrights, service marks, trade secrets and similar intellectual property rights to protect our brand and other intellectual property. The success of our business strategy depends, in part, on our continued ability to anticipateuse our trademarks and reactservice marks to changesincrease brand awareness and further develop our branded products in commodity costs (including beef, chicken, pork, cheeseexisting and grains), supplies, fuel, utilities, distributionnew markets. If our efforts to protect our intellectual property are not adequate, or if any third party misappropriates, infringes, dilutes or otherwise violates our intellectual property, the value of our brand may be harmed, which could have a material adverse effect on our business. While we try to ensure that the quality of our brand is maintained by our franchisees, we cannot ensure that franchisees will not take actions that hurt the value of our intellectual property or the reputation of the Wendy’s brand or restaurant system. Any damage or violation of our intellectual property could harm our image, brand or competitive position and other operating costs. Commodity cost pressures,cause us to incur significant legal fees and any increase in these costs, especially beefdiversion of resources. If we do not attempt or chicken prices,are unable to successfully protect, maintain or enforce our intellectual property rights, there could adversely affect future operating results. In addition,be a material adverse effect on our business is susceptible to increases in these costsor results of operations as a result of, among other factors beyond our control, such as weather conditions, global demand, food safety concerns, product recalls and government regulations. Further, prices for feed ingredients used to produce beef, chicken and pork could be adversely affected by changes in global weather patterns, which are inherently unpredictable, and by federal ethanol policy. Increases in gasoline prices could result in the impositionthings, consumer confusion, dilution of fuel surcharges by our distributors, which would increase our costs. Significant increases in expenses incurred by consumers, such as living expenses or gasoline prices, could also result in a decrease in customer traffic at our restaurants, which could adversely affect our business. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results. In addition, we may not seek to or be able to pass along price increases to our customers.
Shortages or interruptions in the supply or distribution of perishable food products could damage the Wendy’s brand reputation and adversely affect our sales and operating results.
Wendy’s and its franchisees are dependent on frequent deliveries of perishable food products that meet brand specifications. Shortages or interruptions in the supply of perishable food products caused by unanticipated demand, problems in production or distribution, disease or food-borne illnesses, inclement weather or other conditions could adversely affect the availability, quality and cost of ingredients, which could lower our revenues, increase operating costs, damage brand reputation and otherwise harm our business and the businessesincreased competition from unauthorized users of our franchisees.brand.
As of December 30, 2018, four independent processors (five total production facilities) supplied all of Wendy’s beefWe have registered certain trademarks and have other trademark registrations pending in the United States and six independent processors (12 total production facilities) suppliedcertain foreign jurisdictions. Not all of the trademarks that are used in the Wendy’s chickensystem have been registered in all of the countries in which we do business or may do business in the future, and some trademarks will never be registered in all of these countries. Some countries’ laws do not protect unregistered trademarks at all, or make them more difficult to enforce, and third parties have filed, or may in the future file, for “Wendy’s” or similar marks. Accordingly, we may not be able to adequately protect the Wendy’s brand everywhere in the world and use of the Wendy’s brand may result in liability for trademark infringement, trademark dilution or unfair competition. In addition, the laws of some foreign countries do not protect
intellectual property rights to the same extent as the laws of the United States. We cannot ensure that all of the steps we have taken to protect our intellectual property in the United States.States and foreign countries will be adequate.
We cannot ensure that third parties will not bring infringement claims against us in the future. Any such claim, whether or not it has merit, could be time-consuming, cause delays in introducing new menu items, require costly modifications to advertising and promotional materials, harm our brand, image, competitive position or ability to expand our operations into other jurisdictions, cause us to incur significant costs related to defense or settlement or require us to enter into royalty or licensing agreements. As a result, any such claim could harm our business and adversely impact our results of operations and financial condition. In addition, Wendy’s had one main in-line distributorthird parties may assert that certain of food, packaging and beverage products, excluding produce and breads, that serviced approximately 41% of its Company-operated and franchised restaurants and six additional in-line distributors that,our intellectual property, or our rights therein, are invalid or unenforceable. If our rights in the aggregate, serviced approximately 55% of its Company-operated and franchised restaurants.
Wendy’s and its franchisees have not experienced any material shortages of food, equipment, fixtures or other products that are necessary to maintain restaurant operations. Wendy’s anticipates no such shortages of products and believes that alternate suppliers and distribution sources are available. However, if a disruption of service from any of our key suppliersintellectual property were found to infringe third-party rights, or distributors wasportions thereof were deemed invalid or unenforceable, we may be forced to occur, wedefend or resolve related claims and incur related expenses. In addition, such loss of rights could experience short-term increasespermit competing uses of such intellectual property which, in turn, could harm our costs while supplybusiness and distribution channels were adjusted,adversely impact our results of operations and there can be no assurance that we will be able to identify or negotiate with such suppliers or distributors on terms that are commercially reasonable to us.financial condition.
Food safety events including instances of food-borne illness (such as salmonella or E. coli) involving Wendy’s, its supply chain or other food service companies,health concerns regarding our products could create negative publicity and adversely affect salesour brand, business and operating results.results of operations.
Food safety is a top priority for Wendy’s, and we dedicate substantial resources to food safety matters to ensure that our customers enjoy safe, quality food products. However, food safety events, including instances of food-borne illness (such as salmonella or E. coli), have occurred in the food industry in the past, and could occur in the future. Food safety events, whether or not involving Wendy’s restaurants or other restaurant companies, could adversely affect the price and availability of beef, chicken or other food products. As a result, Wendy’s restaurants could experience a significant increase in food costs if there are food safety events, whether or not such events involve Wendy’s restaurants or restaurants of competitors.
In addition, food safety events, whether or not involving Wendy’s, couldcertain products and result in negative publicity for Wendy’s or for the industry or market segments in which we operate.restaurant industry. This negative publicity as well as any other negative publicity concerning types of food products Wendy’s serves, may reduce demand for Wendy’s food and could result in a decrease in guest trafficcustomer counts to ourWendy’s restaurants as consumers shift their preferences to our competitors or to other products or food types. A decrease in guest traffic toAny report linking our restaurants as a resultor suppliers to food-borne illnesses, food tampering, contamination or mislabeling or other food-safety issues could damage the value of these health concernsour brand immediately and severely hurt sales of our products and possibly lead to product liability claims, litigation (including class actions) or negative publicity could result in a decline in sales and operating results at Company-operated restaurants or in royalties from sales at franchised restaurants.
Consumerother damages. The Wendy’s system may also be adversely impacted by consumer concerns regarding the nutritional aspects of beef, chicken, french fries or otherthe products we sell, concerns regarding the ingredients in our products and/or the cooking processes used in our restaurants,restaurants. These or similar concerns regarding the effects of disease outbreaks, epidemics or pandemics could affect demand for our products.
Consumer concerns regarding the nutritional aspects of beef, chicken, french fries or other products we sell, concerns regarding the ingredients in our products and/or the cooking processes used in our restaurants, or concerns regarding the effects of disease outbreaks, epidemics or pandemics could result in less demand for our products and a decline in sales at Company-operated restaurants and in royalties from sales at franchised restaurants.
Increased use of social media could create and/or amplify the effects of negative publicity and adversely affect sales and operating results.Risks Related to Our Business Strategy
Events reported in the media, including social media, whether or not accurate or involving Wendy’s, could create and/or amplify negative publicity for Wendy’s or for the industry or market segments in which we operate. These and other types of social media risks could reduce demand for Wendy’s food and result in a decrease in guest traffic to our restaurants as consumers shift their preferences to our competitors or to other products or food types. A decrease in guest traffic to our restaurants as a result of negative publicity created or amplified by social media could result in a decline in sales and operating results at Company-operated restaurants or in royalties from sales at franchised restaurants. Social media risks could also arise from Company or franchise employees not following defined policies for the use of social media during business operations, or actions taken by Company or franchise employees during personal activities outside of their employment, but which could still reflect negatively on the Wendy’s brand.
Growth of our restaurant business is dependent to a large extent on new restaurant openings, which may be affected by factors beyond our control.
Our restaurantpredominantly franchised business derives earnings from sales at Company-operated restaurants, franchise royalties received from franchised restaurants and franchise fees from franchise restaurant operators for each new unit opened. Growth in our restaurant revenues and earnings is dependent tomodel presents a large extent on new restaurant openings. Numerous factors beyond our control may affect restaurant openings. These factors include but are not limited to:number of risks.
our ability to attract new franchisees;
the availability of site locations for new restaurants;
the ability of potential restaurant owners to obtain financing;
the ability of restaurant owners to hire, train and retain qualified operating personnel;
construction and development costs of new restaurants, particularly in highly-competitive markets;
the ability of restaurant owners to secure required governmental approvals and permits in a timely manner, or at all; and
adverse weather conditions.
Wendy’s franchisees could take actions that could harm our business.
As of December 30, 2018,January 2, 2022, approximately 95% of restaurants in the Wendy’s system were operated by franchisees. Wendy’s franchisees are contractually obligated to operate their restaurants in accordance with the standards set forth in our franchise and other agreements with them. Wendy’s also provides training and support to franchisees. However, franchisees are independent third parties that we do not control, and franchisees own, operate and oversee the daily operations of their restaurants. Specifically, franchisees are solely responsible for developing and utilizing their own policies and procedures, making their own hiring, firing and disciplinary decisions, scheduling hours and establishing wages, and managing their day-to-day employment processes and procedures in accordance with applicable laws, rules and regulations, all of which is done independent of Wendy’s and in compliance with all applicable laws, rules or regulations.Wendy’s. Further, franchisees have discretion as to the prices charged to customers. As a result, the ultimate success and quality of any franchise restaurant rests with the franchisee. If franchisees do not successfully operate their restaurants in a manner consistent with required standards, thentheir royalty payments to us could be adversely affected and theour brand’s image and reputation could be harmed, both of which in turn could hurt our business and operating results.results of operations. In addition, the failure of franchisees to adequately engage in succession planning may adversely affect their restaurant operations and development of new Wendy’s restaurants, which in turn could hurt our business and operating results.results of operations.
Our success depends on franchisees’ participation in brand strategies and the ability of our system to respond and adapt to market changes.
Wendy’s franchisees are an integral part of our business. Wendy’sbusiness, growth and brand strategies. We may be unable to successfully implement theour growth strategies that we believe are necessary for future growth if franchisees do not participate in the implementation of those strategies. Our business and operating results of operations could be adversely affected if a significant number of franchisees do not participate in brand strategies, such as new restaurant development, Image Activation, and digital commerce platforms and technologies.technologies and execution of the breakfast daypart, which in turn may harm our business and financial condition. In addition, Wendy’s current franchise model, and the way our brand strategies are executed across the Wendy’s system, may make it difficult for the Wendy’sour brand to respond and adapt to the speed of change in technology, consumer preferences, the regulatory environment or other external factors as quickly as may be required to maintain and grow market share and remain competitive.
Our Image Activation program may not positively affect sales at Company-operated restaurants and franchised restaurants or improve our results of operations, and franchisees may not participate in the Image Activation program to the extent expected by the Company.
The Company and its franchisees reimaged 401 North America system restaurants and built 159 global restaurants in 2018. As of December 30, 2018, the global Wendy’s system had 50% of restaurants on the new image. The Company has plans for significantly more new and reimaged Company and franchisee restaurants in 2019 and beyond.
In order to promote new restaurant development, Wendy’s has an incentive program for franchisees that provides for reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants opened by December 31, 2020, with the value of the incentives declining in the later years of the program. In August 2018, Wendy’s announced a new restaurant development incentive program that provides for incremental reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants for existing franchisees that sign up for the program and commit to incremental development of new Wendy’s restaurants under a new development agreement by July 1, 2019. Wendy’s also provides franchisees with the option of an early 20-year renewal of their franchise agreement upon completion of reimaging utilizing certain approved Image Activation remodel designs.
The Company’s Image Activation program may not positively affect sales at Company-operated restaurants or improve our results of operations. There can be no assurance that sales at participating franchised restaurants will achieve or maintain projected levels or that after giving effect to the incentives provided to franchisees the Company’s results of operations will improve. There can also be no assurance that franchisees will participate in the Image Activation program to the extent expected by the Company.
Further, it is possible that Wendy’s may provide other financial incentives to franchisees to participate in the Image Activation program. These incentives could also result in additional expense and/or a reduction in royalties or other revenues received from franchisees in the future. If Wendy’s provides additional incentives to franchisees related to financing of the Image Activation program, Wendy’s may incur costs related to loan guarantees, interest rate subsidies and/or costs related to collectability of loans.
In addition, approximately 95% of the Wendy’s system consists of franchised restaurants. Many Certain of our franchisees will needcompetitors that have a significantly higher
percentage of company-operated restaurants than we do may have greater influence over their respective restaurant systems and greater ability to borrow funds in order to participate in the Image Activation program. Other than the incentive programs described above, Wendy’s generally does not provide franchisees with financing, although we continue to develop third-party financing sources for franchisees. If franchisees are unable to obtain financing at commercially reasonable rates, or at all, they may be unwilling orimplement operational initiatives and business strategies.
unable to invest in the reimaging of their existing restaurants and/or the development of new restaurants, and our future growth and results of operations could be adversely affected.
Our financial results are impacted to a large extent by the operating results of franchisees.
As of December 30, 2018, approximately 95% of the Wendy’s system consisted of franchised restaurants. We receive revenues in the form of royalties and national advertising funds contributions (both of which are generally based on a percentage of sales at franchised restaurants), as well as rent and fees from franchisees. Accordingly, a substantial portion of our financial results is to a large extent dependent upon the operational and financial success of our franchisees. If sales trends or economic conditions worsen for franchisees, or if the overall business or financial health of franchisees deteriorates, their results of operations or financial resultscondition may worsen and our royalty, national advertising funds, rent and other fee revenues may decline. In addition,decline and our accounts receivable and related allowance for doubtful accounts may increase. WhenAdditionally, when Company-operated restaurants with leased real estate are sold to franchisees, one of our subsidiaries iswe are often required to remain responsible for lease payments for these restaurants toin the extent thatevent the purchasing franchisees default on their leases. During periods of declining sales and profitability of franchisees, the incidence of franchisee defaults for these lease payments may increase and we may be required to make those payments and seek recourse against the franchisee or agree to repayment terms. Additionally, ifIf franchisees fail to renew their franchise agreements or fail to perform under or extend their leases or subleases with us, or if we decideare unable to restructure franchise agreements to induceidentify, attract and retain new franchisees to renew these agreements,who meet our criteria, then our royalty and rental revenues may decrease. Further,decrease and our future growth could be adversely affected.
The growth of our business is dependent on new restaurant openings, which could be affected by factors beyond our control.
Our business derives earnings from sales at Company-operated restaurants as well as royalties and other fees received from franchised restaurants. Growth in our revenues and earnings is dependent on new restaurant openings. Numerous factors beyond our control may adversely affect new restaurant openings, which in turn could hurt our business and results of operations. These factors include, among others, (i) our ability to attract new franchisees; (ii) the availability of site locations for new restaurants; (iii) the ability of restaurant owners to obtain financing; (iv) the ability of restaurant owners to attract, train and retain qualified operating personnel; (v) construction and development costs, particularly in highly competitive markets; (vi) the ability of restaurant owners to secure required governmental approvals and permits in a timely manner, or at all; and (vii) adverse weather conditions. Our inability to identify suitable locations, achieve consumer acceptance or otherwise execute our development strategy could have an adverse impact on our future growth, results of operation and financial condition.
Our growth strategy also includes an increased focus on non-traditional development, such as fuel and transportation centers, food courts and other retail locations, military bases and delivery kitchens. The inability of us or our franchisees to execute our non-traditional development strategy, including meeting development goals, achieving anticipated sales results and upholding the value of the Wendy’s brand, could have an adverse impact on our future growth, results of operations and financial condition.
Our Image Activation program may not positively affect sales or improve our results of operations, and franchisees may not participate in our Image Activation program to the extent expected by us.
We continue to implement our Image Activation program, which includes reimaging existing Wendy’s restaurants and building new Wendy’s restaurants with innovative exterior and interior restaurant designs. Our Image Activation program may not positively affect sales at Wendy’s restaurants or improve our results of operations. There can also be no assurance that franchisees will participate in the Image Activation program to the extent expected by the Company. In order to support our Image Activation program and promote new restaurant development, we have provided franchisees with certain incentive programs for qualifying new and reimaged restaurants, including reductions in royalty and national advertising payments and options for the early renewal of franchise agreements. It is possible we may decide from timeprovide additional financial incentives to timefranchisees, which could result in additional expenses, a reduction of royalties or other revenues or the incurrence of other costs or liabilities. Some franchisees may need to acquireborrow funds in order to participate in the Image Activation program. If franchisees are unable to obtain financing at commercially reasonable rates, or at all, they may be unwilling or unable to invest in the reimaging of their existing restaurants from franchisees that experience significant financial hardship, which may reduceor the development of new restaurants, and our cashfuture growth and cash equivalents.results of operations could be adversely affected.
Wendy’sWe may be unable to manage effectively the acquisition and disposition of restaurants, or successfully implement other strategic initiatives, which could adversely affect our business, results of operations and financial results.
Wendy’s has from time to time acquired Wendy’s restaurants from, and sold Wendy’s restaurants to, franchisees. Wendy’s will
We continue to evaluateoptimize the Wendy’s system through our system optimization initiative, which includes facilitating the transfer of restaurants between and among franchisees, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees.franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate adoption of our Image Activation program. The success of these transactionsthis initiative is dependent upon many factors, such as the availability of sellers and buyers, the availability of financing, and the ability to
negotiate transactions on terms deemed acceptable. In addition, the operations of restaurants that are acquired from or sold to franchisees may not be integrated successfully,acceptable and the intended benefits of such transactions may not be realized.ability to successfully transition and integrate restaurant operations. Acquisitions of franchised restaurants pose various risks to Wendy’s businessour operations, including:
including (i) diversion of management’s attention to the integration of acquired restaurant operations;
(ii) increased operating expenses and the inability to achieve expected cost savings and operating efficiencies;
(iii) exposure to liabilities arising out of prior operations of acquired restaurants; and
(iv) the assumption of long-term, non-cancelable leases.
Engaging in acquisitions and dispositions Our system optimization initiative also places increased demands on Wendy’sour operational and financial management resources and may require us to continue to expand these resources. If Wendy’s iswe are unable to execute our system optimization initiative or effectively manage the acquisition and disposition of restaurants, effectively, our business and financial results could be adversely affected.
In addition, Wendy’s from time to time evaluates and may pursue other opportunities for growth, including through new and existing franchise partners, joint venture investments, expansion of our brand through other opportunities and strategic mergers, acquisitions and divestitures. These strategic initiatives involve various inherent risks, including without limitation, general transaction and business risk, integration and synergy risk, market acceptance risk and risks associated with the potential distractiondiversion of management. Strategic transactions may not ultimately create value for us or our stockholders and may harm our reputation and materially adversely affect our business, financial condition and results of operations.operations and financial condition.
Current restaurant locations may become unattractive, and attractive new locations may not be available for a reasonable price, if at all.
The success of any restaurant depends in substantial part on its location. There can be no assurance that our current restaurant locations will continue to be attractive as demographic patterns change. Neighborhood or economic conditions where our restaurants are located could decline in the future, resulting in potentially reduced sales in those locations. In addition, rising real estate prices in some areas may restrict our ability and the ability of franchisees to purchase or lease new desirable locations. If desirable locations cannot be obtained at reasonable prices, or at all, Wendy’s ability to execute our growth strategies could be adversely affected.
Wendy’sOur leasing and ownership of significant amounts of real estate exposes itus to possible liabilities and losses, including liabilities associated with environmental matters.
As of December 30, 2018, Wendy’s leased or owned the land and/or the building for 353 Company-operated Wendy’s restaurants. Wendy’s also owned 516We have significant real estate operations in connection with our business and leased 1,279 properties that were either leased or subleased principally to franchisees as of December 30, 2018. Accordingly, we are subject to all of the normal risks associated with leasing and owning real estate. In particular,Our real estate values and the value ofcosts associated with our real property assets could decrease, and costs could increase, becauseestate operations are impacted by a variety of factors, including changes in the investment climate for real estate, macroeconomic trends, governmental regulations, insurance, demographic trends, supply orchain management, supply and demand for the ownership and operation of the restaurants (which may be impacted by competition from similar restaurants in the area) and liability for environmental matters. A significant change in real estate values, or an increase in costs as result of any of these factors, could adversely affect our results of operations and financial condition.
Wendy’s isWe are subject to federal, state and local environmental, health and safety laws and regulations concerning the discharge, storage, handling, release and disposal of hazardous or toxic substances. These environmental laws provide for significant fines, penalties and liabilities, sometimes without regard to whether the owner, operator or occupant of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. Third parties may also make claims against owners, operators or occupants of properties for personal injuries and property damage associated with releases of or actual or alleged exposure to such substances. A number of our restaurant sites were formerly gas stations or are adjacent to current or former gas stations or were used for other commercial activities that can create environmental impacts. We may also acquire or lease these types of sites in the future. We have not conducted a comprehensive environmental review of all of our properties. Weproperties and we may not have identified all of the potential environmental liabilities at our leased and owned properties, and any such liabilities identified in the future could cause us to incur significant costs, including costs associated with litigation, fines or clean-up responsibilities. In addition, we cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or interpreted. We cannot predict the amount of future expenditures that may be required in order to comply with any environmental laws or regulations or to satisfy any such claims. See “Item 1. Business - General - Legal
We generally secure long-term real estate interests for our leased restaurants and Environmental Matters” for additional information.
Wendy’s leaseshave limited flexibility to quickly alter our real property generally for initial terms of 15 to 20 years with one or more options to extend the term of the leases in consecutive five-year increments.estate portfolio. Many leases provide that the landlord may increase the rent over the term of the lease and any renewals of the term. Most leases require us to pay all of the costs of insurance, taxes, maintenance, utilities and utilities.capital repairs and replacements. We generally cannot cancel these leases prior to the expiration of their term. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent, taxes and maintenance costs for the balance of the lease term. In addition, as each lease expires, we may fail to negotiate additional renewals or renewal options, either on commercially acceptable terms or at all, which could cause us to close restaurants in desirable locations.locations, negatively impacting our results of operations.
DueThe breakfast daypart is competitive across the restaurant industry and we may be unable to achieve or maintain market share or reach targeted levels of breakfast sales and profits.
Wendy’s entered the concentrationbreakfast daypart across the U.S. system in March 2020 and recently announced plans to launch breakfast in Canada in the second quarter of Wendy’s restaurants2022. The Company and franchisee leadership worked closely to align on a breakfast program designed to drive incremental sales and profits through a strong economic model. However, we may be unable to achieve market share and reach targeted levels of breakfast sales and profits due to competitive pressures and responses from our competitors, some of whom are well-established in particular geographic regions,the breakfast daypart, or other factors, including operational complexity, food and labor costs, supply chain management, lack of consumer acceptance, discretionary spending patterns that differ from other dayparts and changes to customer mobility and daily routines, including as a result of the COVID-19 pandemic. In addition, breakfast sales could cannibalize sales during other parts of the day and may have negative
impacts on restaurant margins. The continued active support and engagement of our franchisees is also critical for the successful performance of the breakfast daypart. The breakfast daypart may require significant financial resources, including the Company’s plans to fund incremental marketing and advertising campaigns. Our inability to successfully execute on our strategy for the breakfast daypart could have a material adverse impact on our business, results couldof operations and financial condition.
Our international operations are subject to various risks and uncertainties and there is no assurance that our international operations will continue to be impacted byprofitable.
In addition to many of the adversefactors described in this risk factors section, our business outside of the United States is subject to a number of additional risks and uncertainties, including international economic and political conditions, prevailingrisk of corruption and violations of the U.S. Foreign Corrupt Practices Act or similar laws of other countries, the inability to adapt to differing cultures or consumer preferences, inadequate brand infrastructure to support our international activities, inability to obtain adequate supplies meeting our quality standards and product specifications or interruptions in those regions.
Asobtaining such supplies, challenges and risks associated with managing and monitoring suppliers, restrictions on our ability to move cash out of December 30, 2018, we and our franchisees operated Wendy’s restaurants in all 50 states, the District of Columbia and 31certain foreign countries, currency regulations and territories. Asfluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of December 30, 2018rights and as detailedobligations in “Item 2. Properties,”connection with international franchise agreements, the eight leading states by numbercollection of operating units were: Florida, Ohio, Texas, Georgia, California, Pennsylvania, North Carolinaroyalties and Michigan. This geographic concentration can cause economicother fees from international franchisees, the inability to protect technology, data or intellectual property rights, compliance with international privacy and information security laws and regulations, the availability and cost of land, construction costs, other legal, financial or regulatory impediments to the development or operation of restaurants, the inability to identify, attract and retain experienced management, qualified franchisees and joint venture partners and ongoing disruptions and impacts from the COVID-19 pandemic. Adverse conditions or unforeseen events in particular areas of the country to have a disproportionate impact on our overall results of operations, regardless of the state of the national economy as a whole. It is possible that adverse economic conditions in states or regionscountries that contain a high concentration of Wendy’s restaurants (including Canada, our largest international market), could have a material adverse impact on our international growth strategy and results of operations. In addition, to the extent we invest in international Company-operated restaurants or joint ventures, we would also have the risk of operating losses related to those restaurants, which could adversely affect our results of operations and financial condition. There can be no assurance that our international growth strategy will be successful or that our international operations will be profitable.
Wendy’s opened Company-operated and franchised restaurants in the future.United Kingdom in 2021 and plans to expand into other anchor markets in Europe utilizing a franchise model. New markets 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. Any of these risks and uncertainties, and other factors we cannot anticipate, could have a material adverse impact on our business, results of operations and financial condition.
Risks Related to Supply Chain and Labor
Changes in commodity costs and other operating costs could adversely affect our results of operations.
Our operationsprofitability depends in part on our ability to anticipate and react to changes in commodity costs (including beef, chicken, pork, dairy and grains), supplies, fuel, utilities, distribution and other operating costs, including labor costs. Increases in commodity costs, particularly beef or chicken prices, could adversely affect our future results of operations. Our business is susceptible to increases in commodity and other operating costs as a result of various factors beyond our control, such as general economic conditions, inflation, industry demand, energy costs, food safety concerns, animal disease outbreaks, product recalls and government regulations. Increasing weather volatility or other long-term changes in weather patterns, including related to climate change, could have a significant impact on the price or availability of some of our ingredients. In addition, our supply chain is subject to increased costs arising from actual or perceived effects of climate change, greenhouse gas emissions and scarcity of energy and water resources. The ongoing and long-term costs of these impacts could have a material adverse effect on our business if not properly mitigated. We could also be adversely impacted by the cost of products raised or grown in accordance with our responsible sourcing criteria, including those related to environmental sustainability and animal welfare, as availability of products that can be assured to meet those criteria are influencedgenerally smaller and more concentrated, and may be more costly, than the markets for conventionally raised or grown products that are not assured to meet those criteria. Significant increases in expenses incurred by adverse weather conditions.
Weather, which is unpredictable, can adversely impact Wendy’s restaurant operations. Harsh weather conditions that keep customers from dining out canconsumers, such as living expenses or gasoline prices, could also result in lost salesdecreased customer counts at our restaurants, which could adversely affect our business. We cannot predict whether we will be able to anticipate and revenuesreact to changing commodity costs by adjusting our purchasing practices and menu prices, and a failure to
do so could adversely affect our results of operations. In addition, we may not seek to or be able to pass along price increases to our customers. If increased costs were passed to our customers, demand for our restaurants. A heavy snowstormproducts may decrease, which in turn could adversely affect our results of operations.
Shortages or interruptions in the Northeastsupply or Midwestdistribution of perishable food products could damage our brand and adversely affect our business and results of operations.
Wendy’s and our franchisees are dependent on frequent deliveries of perishable food products that meet brand specifications. Shortages or a hurricaneinterruptions in the Southeast can shut down an entire metropolitan area, resultingsupply of perishable food products caused by unanticipated demand, problems in a reduction in sales in that area. Our first quarter includes winter monthsproduction or distribution, labor shortages, disease or food-borne illnesses, political unrest, health epidemics or pandemics, inclement weather or other calamities or conditions could adversely affect the availability, quality and historically has acost of ingredients, which could lower level of sales at Company-operated restaurants. Because a significant portionrevenues, increase operating costs, damage brand reputation and otherwise harm our business and the businesses of our franchisees. Certain of the products sold in our restaurants, such as beef and chicken, are sourced from a limited number of suppliers, which may increase our reliance on those suppliers. In addition, our system relies on a limited number of in-line distributors to deliver certain food, packaging and beverage products to our restaurants. If a disruption of service from any of our key suppliers or distributors was to occur, we could experience short-term increases in our costs while supply and distribution channels were adjusted, and we may be unable to identify or negotiate with new suppliers or distributors on terms that are commercially reasonable to us. As discussed above, the COVID-19 pandemic has led, and could again lead, to delays or interruptions in the delivery of food or other supplies to Wendy’s restaurants, which could impact the availability and cost of certain food items at Wendy’s restaurants.
We do not exercise ultimate control over purchasing for our restaurant system, which could harm our business, results of operations and financial condition.
While we require and seek to ensure that all suppliers to the Wendy’s system meet certain quality control standards, our franchisees ultimately control the purchasing of food, proprietary paper, equipment and other operating supplies from third party suppliers through QSCC, Wendy’s independent purchasing co-op. QSCC manages, for the Wendy’s system in the United States and Canada, contracts for the purchase and distribution of food, proprietary paper, equipment and other operating supplies under national agreements with pricing based on total system volume. We do not control the decisions and activities of QSCC. If QSCC does not properly estimate the product needs of the Wendy’s system, makes poor purchasing decisions or ceases its operations, or if our relationship with QSCC is terminated for any reason, system sales, operating costs is fixed or semi-fixed in nature, the lossand supply chain management could be adversely affected, which could harm our franchisees and have a material adverse impact on our business, results of sales during these periods hurts our operating marginsoperations and can result in restaurant operating losses. For these reasons, a quarter-to-quarter comparison may not be a good indication of Wendy’s performance or how we may perform in the future.financial condition.
Our business could be hurt by increased labor costs or labor shortages.
Labor is a primary component in the cost of operating our restaurants. We devote significant resources to recruiting and training our managers and hourly employees. Increased labor costs due to competition, increased minimum wagewages or employee benefits costs (including various federal, state and local actions to increase minimum wages), unionization activity or other factors would adversely impact our cost of sales and operating expenses. In addition, Wendy’s success depends on our ability to attract, motivate and retain qualified employees, including restaurant managers and staff as well as employees and key personnel at our restaurant support center, and our inability to do so could adversely affect our business and results of operations. Our business, results of operations and brand perception could also be adversely impacted by unionization efforts or other campaigns by labor organizations affecting our employees or the employees of our franchisees or by our responses to any such efforts or campaigns. As discussed above, the COVID-19 pandemic has led, and could again lead, to increased labor costs and labor shortages, which could materially affect our results of operations and financial condition.
Our success depends in part upon the continued succession and retention of certain key personnel and the effectiveness of our leadership structure.
We believe that over time our success has been dependent to a significant extent upon the efforts and abilities of our senior leadership team and other key personnel. Our failure to retain members of our senior leadership team or other key personnel could adversely affect our ability to build on the efforts we have undertaken to increase the efficiency and performance of our business. In addition, changes to our leadership and organizational structure can be inherently difficult to manage, and if we are unable to implement any such changes effectively, our business, results of operations and financial results could be adversely affected.
Risks Related to Technology and Cybersecurity
There are risks and uncertainties associated with our increasing dependence on digital commerce platforms and technologies and alternative methods of delivery.
Advances in technologies, including advances in digital food ordering and delivery technologies, and changes in consumer behavior driven by such advances could have a negative effect on our business. Technology and consumer offerings continue to develop and evolve, and we expect that new and enhanced technologies and consumer offerings will be available in the future, including those with a focus on restaurant modernization, restaurant technology, digital engagement, online ordering and delivery. Our inability to predict consumer acceptance of new technology or our failure to adequately invest in new technology or adapt to technological developments, industry trends and evolving legal and regulatory requirements could result in a loss of customers and related market share. In addition, our competitors, some of whom have greater resources than we do, may be able to benefit from changes in technologies or consumer acceptance of such changes, which could harm our competitive position and brand.
An increasing amount of our sales and revenues is derived from digital orders, which includes online ordering and delivery. We have implemented technology and targeted advertising and promotions to support the growth of our digital business. If we are unable to continue to grow our digital business, it may be difficult for us to achieve our planned sales growth. If our digital commerce platforms, including the Wendy’s mobile app and online ordering system, do not meet customers’ expectations in terms of security, privacy, speed, attractiveness or ease of use, customers may be less inclined to return to those platforms, which could negatively impact our business, results of operations and financial condition. Our business could also be negatively impacted if we are unable to successfully implement or execute other consumer-facing digital initiatives, such as mobile order pick-up and carryout. We rely on third-party delivery services to fulfill delivery orders, and errors or failures by those providers to make timely deliveries could cause customers to stop ordering from us. The third-party restaurant delivery business is intensely competitive, with a number of companies competing for capital, market share, online traffic and delivery drivers. If the third-party delivery services that we utilize cease or curtail their operations, increase their fees or give greater priority or promotions on their platforms to our competitors, our delivery business and our sales may be negatively impacted. If we are unable to successfully respond to the challenges arising from our increased reliance on our digital business, this could have a material adverse impact on our brand, business, results of operations and financial condition.
We are heavily dependent on computer systems and information technology and any material failure, misuse, interruption or breach of our systems or technology could adversely affect our business, results of operations and financial condition.
We are heavily dependent on our computer systems and information technology, including those controlled by third-party providers, to conduct our business, including point-of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of our systems and technology. The failure of our systems and technology to operate effectively, an interruption in our systems or technology or a breach in security of our systems or technology could be harmful and cause delays in customer service, result in the loss of data, reduce efficiency or cause delays in operations. Significant capital investments might be required to remediate any such problems or to maintain or upgrade our systems and technology or transition to replacement systems or technology. Additionally, the success of certain of our strategic initiatives, including the expansion and acceleration of our consumer-facing digital capabilities to connect with customers and drive growth, is highly dependent on our systems and technology. Any security breach involving our or our franchisees’ systems or technology could result in a loss of consumer confidence and potential costs associated with fraud. Also, despite our considerable efforts and resources to secure our systems and technology, security breaches, such as unauthorized access and computer viruses, may occur, resulting in system disruptions, shutdowns or unauthorized disclosure of confidential information, which in turn could adversely affect our business, results of operations and financial condition.
We are dependent to a significant extent on our ongoing relationship with key technology providers, including their personnel, resources, technological expertise, systems and technology and their ability to help execute our digital, restaurant technology and enterprise technology initiatives and support our technology innovation and growth. The inability of us or our providers to successfully execute our technology growth initiatives while maintaining our brand value and perception could have an adverse impact on our business, results of operations and financial condition.
The occurrence of cyber incidents, or a deficiency in cybersecurity, could negatively impact our brand, business, results of operations and financial condition.
A number of retailers and other companies have experienced serious cyber incidents and breaches of their information technology systems, such as unauthorized access, phishing attacks, account takeovers, denial of service, computer viruses, introduction of malware or ransomware and other disruptive problems caused by malicious actors. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those managed by third parties. Our business involves the collection and retention of customer data, including, in some instances, credit and debit card numbers and other personally identifiable information, in various information systems that we and our franchisees maintain and in those maintained by third parties with whom we and our franchisees contract to provide credit card processing, digital ordering and related services. We also maintain important internal data, such as personally identifiable information about our employees and franchisees and information relating to our operations. Our use of personally identifiable information is regulated by international, federal and state laws, as well as by certain third-party agreements. As privacy and information security laws and regulations change, we will likely incur additional costs to ensure that we remain in compliance with those laws and regulations. If our security and information systems are compromised or if our employees or franchisees fail to comply with these laws, regulations or contract terms, and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, disrupt our operations, damage our relationship with customers, franchisees or employees and result in costly litigation, judgments, or penalties resulting from violation of applicable laws and payment card industry regulations. A cyber incident could also require us to notify customers, employees or other groups, result in adverse publicity or a loss in consumer confidence, sales and profits, increase fees payable to third parties or cause us to incur penalties or remediation and other costs that could adversely affect our business, results of operations and financial condition. While we have implemented various processes, procedures and controls to help mitigate the risk of a cyber incident and maintain insurance coverage to address certain cyber incidents, these measures do not guarantee that a cyber incident could not occur or that our business, reputation and financial condition will not be adversely affected by such an incident.
As previously reported, in 2015 and 2016, certain of our franchisees experienced cybersecurity incidents. As a result of those incidents, the Company was named as a defendant in separate class actions brought by consumers and financial institutions, and certain of our directors and executive officers were named as defendants in a stockholder derivative action. These and any other claims or investigations related to cybersecurity incidents may adversely affect how we and our franchisees operate the business, divert the attention of management, have a negative effect on our reputation, and adversely affect our results of operations or financial condition.
Risks Related to Our Indebtedness
The Company and certain of our subsidiaries are subject to various restrictions, and substantially all of the assets of certain subsidiaries are security, under the terms of a securitized financing facility.
Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary of the Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility entered into in June 2015. Under the facility, the Master Issuer issued and has outstanding certain series of fixed rate and variable funding notes (collectively, the “Senior Notes”). The Senior Notes are secured by a security interest in 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 (collectively, the “Securitization Entities”), except for certain real estate assets and subject to certain limitations as set forth in the indenture governing the Senior Notes (the “Indenture”) and the related guarantee and collateral agreement. The assets of the Securitization Entities include most of the domestic and certain of the foreign revenue-generating assets of the Company and its subsidiaries, which principally consist of franchise-related agreements, certain Company-operated restaurants, intellectual property and license agreements for the use of intellectual property.
The Senior Notes are subject to a series of covenants and restrictions customary for transactions of this type, including that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Senior Notes, provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments under certain circumstances, certain indemnification payments in the event, among other things, the assets pledged as collateral for the Senior Notes are in stated ways defective or ineffective and covenants relating to recordkeeping, access to information and similar matters. The Senior Notes are subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default and the failure to repay or refinance on the applicable scheduled maturity date. The Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or
other amounts due on or with respect to the Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective and certain judgments. In the event that a rapid amortization event occurs under the Indenture (including, without limitation, upon an event of default under the Indenture or the failure to repay the securitized debt at the end of the applicable term), the funds available to the Company would be reduced or eliminated, which would in turn reduce our ability to operate or grow our business.
In addition, the Indenture and the related management agreement contain various covenants that limit the Company and its subsidiaries’ ability to engage in specified types of transactions, subject to certain exceptions, including, for example, to incur or guarantee additional indebtedness, sell certain assets, create or incur liens on certain assets to secure indebtedness or consolidate, merge, sell or otherwise dispose of all or substantially all of their assets. As a result of these restrictions, the Company may not have adequate resources or flexibility to continue to manage the business and provide for growth of the Wendy’s system, which could have a material adverse effect on the Company’s future growth prospects, results of operations, financial condition and liquidity.
We have a significant amount of debt outstanding, and such indebtedness could adversely affect our business, results of operations and financial condition.
As of January 2, 2022, the Company had approximately $2.4 billion of outstanding debt on its balance sheet. Additionally, a subsidiary of the Company has issued variable funding notes, which allows for the borrowing of up to $300.0 million from time to time on a revolving basis. This level of debt could have significant consequences on the Company’s future operations, including: (i) making it more difficult to meet payment and other obligations under outstanding debt; (ii) resulting in an event of default if the Company’s subsidiaries fail to comply with the financial and other restrictive covenants contained in debt agreements, which event of default could result in all of the Company’s subsidiaries’ debt becoming immediately due and payable; (iii) reducing the availability of the Company’s cash flow to fund working capital, capital expenditures, equity and debt repurchases, dividends, acquisitions and other general corporate purposes, and limiting the Company’s ability to obtain additional financing for these purposes; (iv) subjecting the Company to the risk of increased sensitivity to interest rate increases on indebtedness with variable interest rates; (v) limiting the Company’s flexibility in planning for or reacting to, and increasing its vulnerability to, changes in the Company’s business or industry or the general economy; and (vi) placing the Company at a competitive disadvantage compared to its competitors that are less leveraged. Further, the Company’s outstanding variable funding notes may accrue interest based on the London interbank offered rate (“LIBOR”), which is expected to be discontinued in 2023. 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.
The ability of the Company to make payments on, repay or refinance its debt, and any additional debt, and to fund planned capital expenditures, dividends and other cash needs will depend largely upon its future operating performance and ability to generate significant cash flows. In addition, the ability of the Company to borrow funds in the future to make payments on its debt will depend on the satisfaction of the covenants in the securitized financing facility and other debt agreements, and other agreements it may enter into in the future. There can be no assurance that the Company’s business will generate sufficient cash flow from operations or that future borrowings will be available under the Company’s securitized financing facility or other debt agreements or from other sources in an amount sufficient to enable the Company to pay its debt or to fund its dividend and other liquidity needs.
In addition to the Company’s outstanding indebtedness, the Company is subject to risks related to certain commitments, guarantees and other liabilities. For example, certain of the Company’s subsidiaries have significant contractual requirements for the purchase of soft drinks. If consumer preferences change and customers purchase fewer soft drinks than expected or estimated, such contractual commitments may adversely affect the financial condition of the Company. The Company has also provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for new restaurant development and equipment financing. In addition, certain of the Company’s subsidiaries also guarantee or are contingently liable for certain leases of their respective franchisees for which they have been indemnified. These commitments, guarantees and other liabilities could have an adverse effect on the Company’s liquidity and the ability of its subsidiaries to meet payment obligations.
The Company may incur additional indebtedness, guarantees, commitments or other liabilities in the future. If new debt, guarantees, commitments or other liabilities are added to the Company’s current consolidated debt levels, the related risks that the Company now faces could be amplified.
Risks Related to Our Common Stock
There can be no assurance regarding whether or to what extent we will pay dividends on our common stock in the future.
Holders of our common stock will only be entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Any dividends will be made at the discretion of our Board of Directors and will depend on our earnings, financial condition, cash requirements and such other factors as the Board may deem relevant from time to time. In addition, because Wendy’s is a holding company, its ability to declare and pay dividends is dependent upon cash, cash equivalents and short-term investments on hand and cash flows from its subsidiaries. The ability of our subsidiaries to pay cash dividends to the holding company is dependent upon their ability to achieve sufficient cash flows after satisfying their respective cash requirements, including the requirements and restrictions under our securitized financing facility and other debt agreements.
A substantial amount of our common stock is concentrated in the hands of certain stockholders.
Nelson Peltz, our Chairman, Peter May, our Senior Vice Chairman, Matthew Peltz, our Vice Chairman, and Edward Garden, a former director of the Company, beneficially own shares of our outstanding common stock that collectively constitute approximately 19% of the Company’s total voting power as of February 22, 2022. These individuals may, from time to time, acquire beneficial ownership of additional shares of common stock.
On December 1, 2011, the Company entered into an agreement (the “Trian Agreement”) with Messrs. N. Peltz, May and Garden, and several of their affiliates (the “Covered Persons”). Pursuant to the Trian Agreement, our Board of Directors, including a majority of the independent directors, approved, for purposes of Section 203 of the Delaware General Corporation Law, the Covered Persons becoming the owners (as defined in Section 203(c)(9)) of or acquiring an aggregate of up to (and including), but not more than, 32.5% (subject to certain adjustments set forth in the Trian Agreement) of the outstanding shares of the Company’s common stock, such that no such persons would be subject to the restrictions set forth in Section 203 solely as a result of such ownership. This concentration of ownership gives these individuals significant influence over the outcome of actions requiring stockholder approval, including the election of directors and the approval of mergers, consolidations and the sale of all or substantially all of the Company’s assets. They are also in a position to have significant influence to prevent or cause a change in control of the Company.
Our certificate of incorporation contains certain anti-takeover provisions and permits our Board of Directors to issue preferred stock without stockholder approval and limits our ability to raise capital from affiliates.
Certain provisions in our certificate of incorporation are intended to discourage or delay a hostile takeover of control of the Company. Our certificate of incorporation authorizes the issuance of shares of “blank check” preferred stock, which will have such designations, rights and preferences as may be determined from time to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power and other rights of the holders of our common stock. The preferred stock could be used to discourage, delay or prevent a change in control of the Company that is determined by the Board of Directors to be undesirable. Our certificate of incorporation prohibits the issuance of preferred stock to affiliates, unless offered ratably to the holders of our common stock, subject to an exception in the event that the Company is in financial distress and the issuance is approved by the Audit Committee of our Board of Directors. This prohibition limits our ability to raise capital from affiliates.
General Business Risks
Complaints or litigation maycould hurt the Wendy’s brand.our brand, business, results of operations and financial condition.
Wendy’s customers from time to timemay file complaints or lawsuits against us or our franchisees alleging that we are responsible for an illness or injury they suffered at or after a visit to a Wendy’s restaurant, or alleging that there was a problem with food quality or operations at a Wendy’s restaurant. We aremay also be subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims, claims from franchisees, intellectual property claims, data privacy claims and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters, including class action lawsuits related to these matters.lawsuits. Regardless of whether any claims against us are valid or whether we are found to be liable, claims may be expensive to defend and may divert management’s attention away from operations, and hurt our performance. Weperformance and have a negative impact on our brand. While we believe we have adequate accruals for continuing operations for all of our legal and environmental
matters, including the accrual that we recorded for the legal proceedings related to a cybersecurity incident as described in Note 23 of the Financial Statements and Supplementary Data contained in Item 8 herein. See Note 11 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information on the accrual. We cannot estimate the aggregate possible range of loss for our existing litigation and claims due to most proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur, and 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 are thus inherently difficult. Insurance policies contain customary limitations, conditions and exclusions that can affect the amount of insurance proceeds ultimately received. A judgment significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations. Further, adverse publicity resulting from these claims may hurt us and our franchisees.
operations or financial condition. Additionally, the restaurant industry has been subject to a number of claims alleging that the menus and actions of restaurant chains have contributed to the obesity or otherwise adversely impacted the health of certain of their customers. Adverse publicity resulting from these allegations may harm the reputation of our restaurants, even if the allegations are not directed against our restaurants or are not valid, and even if we are not found liable or the concerns relate only to a single restaurant or a limited number of restaurants.valid. Moreover, complaints, litigation or adverse publicity experienced by one or more of Wendy’sour franchisees could also hurt our brand or business as a whole.
Existing and changing legal and regulatory requirements, as well as an increasing focus on environmental, social and governance issues, could adversely affect our brand, business, results of operations and financial condition.
Each Wendy’s restaurant is subject to licensing and regulation by health, sanitation, safety and other agencies in the state or municipality in which the restaurant is located, as well as to federal laws, rules and regulations and requirements of non-governmental entities such as payment card industry rules. Governmental authorities may enact laws, rules or regulations that impact restaurant operations and the cost of conducting those operations. In addition, there can be no assurance that we and our franchisees will not experience material difficulties or failures in obtaining the necessary licenses or approvals for opening new restaurants. More stringent and varied requirements of local regulators with respect to tax, zoning, land use and environmental factors could also delay or prevent development of new restaurants in particular locations.
We are subject to various laws and regulations that govern the offer and sale of a franchise, including rules by the U.S. Federal Trade Commission. Various state, provincial and foreign laws regulate certain aspects of the franchise relationship, including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines and penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and results of operations. We could also face lawsuits by franchisees based upon alleged violations of these laws. We and our franchisees are each also subject to laws and regulations that govern employment matters at the federal/national, state/provincial and local levels. In the United States, this includes laws like the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions, Title VII, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the National Labor Relations Act, family leave, paid sick time and similar requirements and a variety of other laws, regulations and rules. Changes in laws, regulations, rules and governmental policies, including the interpretation thereof, could increase our costs, require modifications to our business practices, result in increased litigation, investigations, enforcement actions, fines or liabilities and adversely affect our business, results of operations and financial condition. For example, a California law enacted in 2019 adopted a worker classification test to be used when determining employee or independent contractor status. Although we do not believe this law applies to our franchisees or their employees, changes in the legal framework of employment or franchise liability could negatively impact our business, particularly if such changes result in any law, rule, regulation, governmental policy or interpretation or judicial decision determining that Wendy’s is an employer of its franchisees or a joint employer with our franchisees or otherwise imposing liability for employment-related claims or impacting our employment relationships based on theories of joint employer liability or other theories of vicarious liability. If we are unable to effectively manage the risks associated with our complex regulatory environment, it could have a material adverse effect on our business and financial condition.
We are also subject to legal and compliance risks related to privacy and data collection, protection and management of certain data and information associated with our technology-related services and platforms made available to customers, employees, franchisees, business partners or other third parties. We are subject to a variety of U.S. federal and state and foreign laws and regulations in this area. These laws and regulations have been subject to frequent change, and there may be unablejurisdictions that propose or enact new data privacy requirements in the future. Failure to adequately protect our intellectual property, whichmeet applicable data privacy requirements could harm the value of the Wendy’s brandresult in substantial penalties and hurt our business.
Our intellectual property is material to the conduct of our business. We rely on a combination of trademarks, copyrights, service marks, trade secrets and similar intellectual property rights to protect our brand and other intellectual property. The success ofadversely impact our business strategy depends,and financial condition. Additionally, evolving laws and regulations could require us and our franchisees to change or limit the way we collect or use information in part,operating our business, which may result in additional costs, limit our marketing or growth strategies and adversely affect our business and results of operations.
There has been increasing public focus by investors, environmental activists, the media and governmental and nongovernmental organizations on our continued abilitysocial and environmental sustainability matters, including packaging and waste, animal health and welfare, human rights, climate change, greenhouse gases and land, energy and water use. As a result, we have
experienced increased pressure and expectations to use our existing trademarksprovide expanded disclosure and service marksmake commitments, establish goals or set targets with respect to increase brand awarenessvarious environmental and further develop our branded products in both existingsocial issues and new markets.to take the actions necessary to meet those commitments, goals and targets. If our efforts to protect our intellectual propertywe are not adequate, or if any third party misappropriates or infringes on our intellectual property, the value ofeffective in addressing social and environmental sustainability matters, consumer trust in our brand may be harmed,suffer. In addition, the actions needed to achieve our commitments, goals and targets could result in market, operational, execution and other costs, which could have a material adverse effect on our business, including the failureresults of our brand to achieveoperation and maintain market acceptance. Thisfinancial condition. Our results of operation and financial condition could harm our image, brand or competitive position and,be adversely impacted if we commence litigationare unable to enforce our rights, causeeffectively manage the risks or costs to us, to incur significant legal fees.
We franchise the Wendy’s brand to various franchisees. While we try to ensure that the quality of our brand is maintained by all of our franchisees we cannot ensure that franchisees will not take actions that hurt the value ofand our intellectual property or the reputation of the Wendy’s brand or restaurant system.supply chain associated with social and environmental sustainability matters.
We have registered certain trademarks and have other trademark registrations pending in the United States and certain foreign jurisdictions. The trademarks that we currently use have not been registered in all of the countries outside of the United States in which we do business or may do business in the future and may never be registered in all of these countries. We cannot ensure that all of the steps we have taken to protect our intellectual property in the United States and foreign countries will be adequate. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
In addition, we cannot ensure that third parties will not bring infringement claims against us in the future. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items, require costly modifications to advertising and promotional materials or require us to enter into royalty or licensing agreements. As a result, any such claim could harm our business and cause a decline in our results of operations and financial condition.
Our current insurance may not provide adequate levels of coverage against claims that have been or may be filed.
We currently maintain insurance that we believe isto be adequate for businesses of our size and type. However, there are types of losses we may incurcould encounter that cannot be insured against or that we believe are not economically reasonable to insure, such as losses due to natural disasters, or acts of terrorism.terrorism or the declaration of war. In addition, we currently self-insure a significant portion of expected losses under workers’ compensation, general liability, products liability, auto liability and property insurance programs. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses could result in materially different amounts of expense, under these programs, which could harm our business and adversely affect our results of operations and financial condition.
The Company We also currently maintainsmaintain insurance coverage to address cyber incidents. Applicable insurance policies contain customary limitations, conditions and exclusions. Thereexclusions, and there can be no assurance that theour cyber insurance policies maintained by the Company will cover substantially all of the Company’s costs and expenses incurred related to any previous or future cybersecurity incidents, including those described below in this Item 1Acyber incidents. In addition, our future insurance premiums may increase, and in Note 23we may be unable to the Consolidated Financial Statements contained in Item 8 herein.
Changes in legalobtain similar levels of insurance on reasonable terms, or regulatory requirements, including licensing approvals, franchising laws, payment card industry rules, overtime rules, minimum wage rates, tax legislation, federal ethanol policy and accounting standards, may adversely affect our existing and future operations and results, including our abilityat all, due to open new restaurants.
Each Wendy’s restaurant is subject to licensing and regulation by health, sanitation, safety and other agencieschallenging conditions in the state and/insurance industry. Any inadequacy of, or municipality in which the restaurant is located, as well asinability to federal laws, rulesobtain, insurance coverage could have a material adverse effect on our results of operation and regulations and requirements of non-governmental entities such as payment card industry rules. State and local government authorities may enact laws, rules or regulations that impact restaurant operations and the cost of conducting those operations. There can be no assurance that we and/or our franchisees will not experience material difficulties or failures in obtaining the necessary licenses or approvals for new restaurants, which could delay the opening of such restaurants in the future. In addition, more stringent and varied requirements of local governmental bodies with respect to tax, zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations.financial condition.
Federal laws, rules and regulations address many aspects of our business, such as franchising, federal ethanol policy, minimum wages and taxes. We and our franchisees are also subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions, along with the ADA, family leave mandates and a variety of other state laws that govern these and other employment law matters. Changes in laws, rules, regulations and governmental policies, including the joint employer standard, could increase our costs and adversely affect our existing and future operations and results.
Changes in accounting standards, or the recognition of impairment or other charges, could adversely affect our future results of operations.
New accounting standards or changes in the interpretation of existing standards, applicablefinancial reporting requirements, accounting principles or practices, including with respect to usour critical accounting estimates, could alsoadversely affect our future results. See Note 1We may also be affected by the nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment or other charges that reduce our earnings. In assessing the recoverability of our long-lived assets, goodwill and intangible assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. These estimates are highly subjective and can be significantly impacted by many factors such as business and economic conditions, operating costs, inflation, competition, consumer and demographic trends and restructuring activities. If our estimates or underlying assumptions change in the future, or if the operating performance or cash flows of our business decline, we may be required to record impairment charges, which could have a significant adverse effect on our reported results for the Consolidated Financial Statements containedaffected periods.
Tax matters, including changes in Item 8 herein for a summarytax rates or laws, imposition of new or amended accounting standards applicable to us.
We do not exercise ultimate control over purchasing for our restaurant system, whichtaxes, disagreements with taxing authorities and unanticipated tax liabilities, could harm sales or profitability and the brand.
Although we seek to ensure that all suppliers to the Wendy’s system meet quality control standards, Wendy’s franchisees control the purchasing of food, proprietary paper, equipment and other operating supplies from such suppliers through QSCC, Wendy’s independent purchasing co-op. QSCC manages, for the Wendy’s system in the U.S. and Canada, contracts for the purchase and distribution of food, proprietary paper, operating supplies and equipment under national agreements with pricing based upon total system volume. We are entitled to appoint two representatives (of the total of 11) on the board of directors of QSCC and participate in QSCC through our Company-operated restaurants, but we do not control the decisions and activities of QSCC except to require that all suppliers satisfy our quality control standards. If QSCC does not properly estimate the product needs of the Wendy’s system, makes poor purchasing decisions or decides to cease its operations, system sales and operating costs could be adversely affected and the results of operations and financial condition of the Company and franchisees could be negatively impacted.
Our international operations are subject to various factors of uncertainty and there is no assurance that international operations will be profitable.
In addition to many of the risk factors described throughout this Item 1A, Wendy’s business outside of the United States is subject to a number of additional factors, including international economic and political conditions, risk of corruption and violations of the United States Foreign Corrupt Practices Act or similar laws of other countries, the inability to adapt to differing cultures or consumer preferences, inadequate brand infrastructure within foreign countries to support our international activities, inability to obtain adequate supplies meeting our quality standards and product specifications or interruptions in obtaining such supplies, restrictions on our ability to move cash out of certain foreign countries, currency regulations and fluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements, the collection of royalties and other fees from international franchisees, the inability to protect intellectual property rights, compliance with international privacy and information security laws and regulations, the availability and cost of land, construction costs, other legal, financial or regulatory impediments to the development and/or operation of new restaurants and the inability to identify, attract and retain experienced management, qualified franchisees and joint venture partners. Although we believe we have developed the support structure required for international growth, there is no assurance that such growth will occur or that international operations will be profitable. In addition, to the extent we invest in international Company-operated restaurants or joint ventures, we would also have the risk of operating losses related to those restaurants, which could adversely affectimpact our results of operations and financial condition.
ThereWe are risks associatedsubject to income and other taxes in the United States and foreign jurisdictions, and our operations, plans and results are affected by tax matters and initiatives around the world. In particular, we are affected by the impact of changes to tax rates, laws or policies or related authoritative interpretations. We are also impacted by the settlement of adjustments proposed by taxing and governmental authorities in connection with our increasing dependencetax reviews and audits, all of which will depend on digital commerce platformstheir timing, nature and technologies to maintain and grow sales, and we cannot predict the impact that these digital commerce platforms and technologies, other new or improved technologies or alternative methods of delivery may have on consumer behavior and our financial results.
Advances in technologies and changes in consumer behavior driven by such advances could have a negative effect on our business. Technology and consumer offerings continue to develop, and we expect that new and enhanced technologies and consumer offerings will be available in the future, including those with a focus on restaurant modernization, restaurant technology and digital engagement and ordering. We may pursue certain of those technologies and consumer offerings ifscope. While we believe they offer a sustainable guest proposition and can be successfully integrated into our business model. However, we cannot predict consumer acceptance of these digital platforms, delivery channels or other technologies or their impact on our business. In addition, our competitors, some of whom have greater resources than us, may be able to benefit from changes in technologies or consumer acceptance of such changes, which could harm our competitive position. Thererecorded provision for income taxes properly reflects all applicable tax laws as currently enacted, there can be no assurance that we will be able to successfully respond to changing consumer preferences, including with respect to new technologies, or to effectively adjust our product mix, service offerings and marketing initiatives for products and services that address, and anticipate advances in, technology and market trends. If we are not able to successfully respond to these challenges, our business, financial condition, and operating results could be adversely affected.
In addition, we anticipate that consumers will continue to have more options to place orders digitally, both domestically and internationally. Our failure to adequately invest in new technology or adapt to technological developments and industry trends, particularly with respect to digital commerce capabilities, could result in a loss of customers and related market share. If Wendy’s digital commerce platforms do not meet customers’ expectations in terms of security, speed, attractiveness or ease of use, customers may be less inclined to return to such digital commerce platforms, which could negatively impact our sales, results of operations and financial condition.
We are heavily dependent on computer systems and information technology and any material failure, misuse, interruption or security breach of our computer systems, technology or social media platforms could adversely affect our business.
We are significantly dependent upon our computer systems and information technology to properly conduct our business, including point-of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems and information technology. The failure of these systems and information technology to operate effectively, an interruption in such systems or technology, problems with maintenance, upgrading or transitioning to replacement systems, fraudulent manipulation of sales reporting from our franchised restaurants resulting in loss of sales and royalty payments, or a breach in security of these systems could be harmful and cause delays in customer service, result in the loss of data, reduce efficiency or cause delays in operations. Significant capital investments might be required to remediate any problems. Additionally, the success of certain of our strategic initiatives, including to expand our consumer-facing digital capabilities to connect with customers and drive growth, is highly dependent on our technology systems. Any security breach involving our or our franchisees’ point-of-sale or other systems could result in a loss of consumer confidence and potential costs associated with fraud. Also, despite our considerable efforts and technological resources to secure our computer systems and information technology, security breaches, such as unauthorized access and computer viruses, may occur, resulting in system disruptions, shutdowns or unauthorized disclosure of confidential information. A security breach of our computer systems or information technology could require us to notify customers, employees or other groups, result in adverse publicity or a loss in consumer confidence, sales and profits or cause us to incur penalties or other costs that could adversely affect the operation of our business and results of operations.
As part of our marketing efforts, we rely on search engine marketing and social media platforms to attract and retain customers. These efforts may notwould be successful and could pose a varietyin challenging adjustments by the relevant tax authorities. Any significant increases in income tax rates, changes in income tax laws or unfavorable resolution of other risks, including the improper disclosure of proprietary information, negative comments about the Wendy’s brand, exposure of personally identifiable information or fraud. The inappropriate use of social media vehicles by franchisees, customers or employees could increase our costs, lead to litigation or result in negative publicity that could damage the brand’s reputation. The occurrence of any such developmentstax matters could have ana material adverse effectimpact on our results of operations and financial condition.
The occurrenceOur operations are subject to fluctuations in foreign currency exchange rates.
Most of cyber incidents, or a deficiencyour revenues, costs and indebtedness is denominated in cybersecurity,U.S. dollars, which is also our reporting currency. Our international operations that are denominated in currencies other than the U.S. dollar are translated to U.S. dollars for our financial reporting purposes and are impacted by fluctuations in currency exchange rates and changes in currency regulations. Our exposures to foreign currency risk are primarily related to fluctuations in the Canadian dollar relative to the U.S. dollar for our Canadian operations. Unfavorable currency fluctuations could negatively impactreduce our business by causing a disruptionroyalty income and revenues. While we attempt to minimize our operations, a compromiseforeign currency risks, our risk management strategies may not be effective and our results of confidential information and/or damage to our employee and business relationships, all of which could subject us to loss and harm the Wendy’s brand.
A cyber incident includes any adverse event that threatens the confidentiality, integrity or availability of information resources. More specifically, a cyber incident is an intentional attack or unintentional event that can include gaining unauthorized access to systems to disrupt operations corrupt data or steal confidential information about customers, franchisees, vendors and employees. A number of retailers and other companies have recently experienced serious cyber incidents and breaches of their information technology systems. The Wendy’s system has also experienced unusual payment card activity at certain franchised restaurants, as further described below. As the Company’s reliance on technology has increased, so have the risks posed to its systems, both internal and those managed by third parties. Three primary risks that could result from a cyber incident include operational interruption, damage to our relationship with customers, franchisees and employees and exposure of private data. In addition to maintaining insurance coverage to address cyber incidents, the Company has also implemented processes, procedures and controls to help mitigate these risks. However, these measures, as well as the increased awareness of a risk of a cyber incident, do not guarantee that the Company’s reputation and financial condition could be adversely affected.
Our results will notcan be adversely affected by such an incident.
Because the Company and its franchisees accept electronic forms of payment from customers, the Company’s business requires the collection and retention of customer data, including credit and debit card numbers and other personally identifiable information, in various information systems that the Company and its franchisees maintain and in those maintained by third parties with whom the Company and its franchisees contract to provide credit card processing and related services. The Company also maintains important internal Company data,unforeseen events, such as personally identifiable information about its employeesadverse weather conditions, natural disasters, hostilities, social unrest, health epidemics or pandemics or other catastrophic events.
Unforeseen events, such as adverse weather conditions, natural disasters, hostilities (including acts of war, terrorist activities and franchisees and information relating to its operations. The Company’s use of personally identifiable information is regulated by international, federal and state laws, as well as by certain third-party agreements. As privacy and information security laws and regulations change, the Company may incur additional costs to ensure that it remains in compliance with those laws and regulations. If the Company’s security and information systems are compromisedpublic or if its employeesworkplace violence), social unrest, health epidemics or franchisees fail to comply with these laws, regulations,pandemics or contract terms, and this information is obtained by unauthorized persons or used inappropriately, it couldother catastrophic events can adversely affect the Company’s reputation, disrupt its operations and result in costly litigation, judgments, or penalties resulting from violation of applicable laws and payment card industry regulations. A cyber incident could also require the Company to notify customers, employees or other groups, result in adverse publicity, loss ofconsumer spending, consumer confidence, restaurant sales and profits, increase fees payable to third partiesoperations, supply chains and cause the Company to incur penalties or remediation and other costs that could adversely affect the operation of the Company’s business and results of operations.
Certain of our franchisees have experienced cybersecurity incidents.
The Company first reported unusual payment card activity affecting some franchise-owned restaurants in February 2016 and that malware had been discovered on certain systems. Subsequently, on June 9, 2016, the Company reported that an additional malware variant had been identified and disabled. On July 7, 2016, the Company, on behalf of affected franchise locations, provided information about specific restaurant locations that may have been impacted by these attacks, all of which are located in the United States, along with support for customers who may have been affected by the malware variants.
Working closely with third-party forensic experts, federal law enforcement and payment card industry contacts as part of its investigation, the Company determined that specific payment card information was targeted by the additional malware variant. This information included cardholder name, credit or debit card number, expiration date, cardholder verification value and service code. The Company believes the criminal cyberattacks resulted from service providers’ remote access credentials being compromised, allowing access, and the ability to deploy malware, to some franchisees’ point-of-sale systems. There has been no indication in the investigation that any Company-operated restaurants were impacted by this activity. The Company worked with investigators to disable the malware involved in the first attack in 2016. Soon after detecting the malware variant involved in the subsequent attack, the Company identified a method of disabling it and thereafter disabled it in all franchisee restaurants where it was discovered. The investigation confirmed that criminals used malware believed to have been effectively deployed on some Wendy’s franchisee systems starting in late fall 2015.
The Company has been named as a defendant in a putative class action filed in the United States on behalf of customers, as well as five class actions brought by financial institutions in the United States that have been consolidated into a single proceeding. In addition, certain of the Company’s present and former directors, and one non-director executive officer of the Company, were named as defendants in putative shareholder derivative complaints, which have been consolidated into one action, alleging breach of fiduciary duty, waste of corporate assets, unjust enrichment and gross mismanagement. These civil proceedings seek damages and other relief allegedly arising from the cybersecurity incident. In addition, claims may also be made by payment card networks against the affected franchisees. These claims and investigations may adversely affect how we or our franchisees operate the business, divert the attention of management from the operation of the business, have an adverse effect on our reputation, result in additional costs and adversely affect our results of operations.
We may be required to recognize additional asset impairment and other asset-related charges.
We have significant amounts of long-lived assets, goodwill and intangible assets and have incurred impairment charges in the past with respect to those assets. In accordance with applicable accounting standards, we test for impairment generally annually, or more frequently if there are indicators of impairment, such as:
significant adverse changes in the business climate;
current period operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with long-lived assets;
a current expectation that more-likely-than-not (i.e., a likelihood that is more than 50%) long-lived assets will be sold or otherwise disposed of significantly before the end of their previously estimated useful life; and
a significant drop in our stock price.
Based upon future economic and capital market conditions, as well as the operating performance of our business, future impairment charges could be incurred. Further, as a result of our system optimization initiative, the Company has recorded losses on remeasuring long-lived assets to fair value upon determination that the assets will be leased and/or subleased to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, and the Company may incur further losses as the Company sells additional restaurants from time to time.
The Company and certain of its subsidiaries are subject to various restrictions, and substantially all of the assets of certain subsidiaries are security, under the terms of a securitized financing facility.
On January 17, 2018, Wendy’s Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary of the Company, completed a refinancing transaction under which the Master Issuer issued Series 2018-1 3.573% Fixed Rate Senior Secured Notes, Class A-2-I (the “Series 2018-1 Class A-2-I Notes”) with an initial principal amount of $450.0 million and Series 2018-1 3.884% Fixed Rate Senior Secured Notes, Class A-2-II (the “Series 2018-1 Class A-2-II Notes”) with an initial principal amount of $475.0 million (collectively, the “Series 2018-1 Class A-2 Notes”). Interest payments on the Series 2018-1 Class A-2 Notes are payable on a quarterly basis. The net proceeds from the sale of the Series 2018-1 Class A-2
Notes were used to redeem the Master Issuer’s outstanding Series 2015-1 Class A-2-I Notes, to pay prepayment and transaction costs, and for general corporate purposes.
Concurrently, the Master Issuer entered into a revolving financing facility of Series 2018-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2018-1 Class A-1 Notes” and, together with the Series 2018-1 Class A-2 Notes, the “Series 2018-1 Senior Notes”), which allows for the drawing of up to $150.0 million under the Series 2018-1 Class A-1 Notes using various credit instruments, including a letter of credit facility. The Series 2015-1 Class A-1 Notes were canceled on the closing date and the letters of credit outstanding against the Series 2015-1 Class A-1 Notes were transferred to the Series 2018-1 Class A-1 Notes. The Company had no outstanding borrowings under its Series 2018-1 Class A-1 Notes as of December 30, 2018.
In addition to the Series 2018-1 Senior Notes, the Master Issuer also has outstanding the Series 2015-1 4.080% Fixed Rate Senior Secured Notes, Class A-2-II with an initial principal amount of $900.0 million (the “Class A-2-II Notes”) and the Series 2015-1 4.497% Fixed Rate Senior Secured Notes, Class A-2-III with an initial principal amount of $500.0 million (the “Class A-2-III Notes”) (collectively, the “remaining Series 2015-1 Class A-2 Notes”) that were issued on June 1, 2015. The Series 2018-1 Senior Notes and the remaining Series 2015-1 Class A-2 Notes are collectively the “Senior Notes.”
The Senior Notes are secured by a security interest in 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 (collectively, the “Securitization Entities”), except for certain real estate assets and subject to certain limitations as set forth in the Senior Notes Indenture (as amended and supplemented) and the Guarantee and Collateral Agreement. The assets of the Securitization Entities include most of the domestic and certain of the foreign revenue-generating assets of the Company and its subsidiaries, which principally consist of franchise-related agreements, certain Company-operated restaurants, intellectual property and license agreements for the use of intellectual property.
The Senior Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Senior Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Senior Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance on the applicable scheduled maturity date. The Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.
In the event that a rapid amortization event occurs under the Indenture (including, without limitation, upon an event of default under the Indenture or the failure to repay the securitized debt at the end of the applicable term), the funds available to the Company would be reduced or eliminated, which would in turn reduce our ability to operateperform corporate or growsupport functions at our business. If the Company’s subsidiaries are not able to generate sufficient cash flow to service their debt obligations, they may need to refinance or restructure debt, sell assets, reduce or delay capital investments or seek to raise additional capital. If the Company’s subsidiaries are unable to implement one or morerestaurant support center, any of these alternatives, they may not be able to meet debt payment and other obligations.
The Company has a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our subsidiaries,which could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to meet debt payment obligations.
As of December 30, 2018, the Company had approximately $2.8 billion of outstanding debt on its balance sheet. Additionally, a subsidiary of the Company has issued the Series 2018-1 Class A-1 Notes, which allows the subsidiary to borrow amounts from time to time on a revolving basis, up to an aggregate principal amount of $150.0 million.
This level of debt could have significant consequences on the Company’s future operations, including:
making it more difficult to meet payment and other obligations under outstanding debt;
resulting in an event of default if the Company’s subsidiaries fail to comply with the financial and other restrictive covenants contained in debt agreements, which event of default could result in all of the Company’s subsidiaries’ debt becoming immediately due and payable;
reducing the availability of the Company’s cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting the Company’s ability to obtain additional financing for these purposes;
subjecting the Company to the risk of increased sensitivity to interest rate increases on indebtedness with variable interest rates;
limiting the Company’s flexibility in planning for or reacting to, and increasing its vulnerability to, changes in the Company’s business, the industry in which it operates and the general economy; and
placing the Company at a competitive disadvantage compared to its competitors that are less leveraged.
In addition, certain of the Company’s subsidiaries also have significant contractual requirements for the purchase of soft drinks. If consumer preferences change and the Company’s customers purchase fewer soft drinks than expected or estimated, such contractual commitments may adversely affect the financial condition of the Company. The Company has also provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for new restaurant development and equipment financing. Certain subsidiaries also guarantee or are contingently liable for certain leases of their respective franchisees for which they have been indemnified. In addition, certain subsidiaries also guarantee or are contingently liable for certain leases of their respective franchisees for which they have not been indemnified. These commitments could have an adverse effect on the Company’s liquidity and the ability of its subsidiaries to meet payment obligations.
The ability to meet payment and other obligations under the debt instruments of the Company’s subsidiaries depends on their ability to generate significant cash flows in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control. There can be no assurance that the Company’s business will generate cash flows from operations, or that future borrowings will be available to the Company under existing or any future credit facilities or otherwise, in an amount sufficient to enable its subsidiaries to meet their debt payment obligations and to fund other liquidity needs. If the Company’s subsidiaries are not able to generate sufficient cash flow to service their debt obligations, they may need to refinance or restructure debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If the Company’s subsidiaries are unable to implement one or more of these alternatives, they may not be able to meet debt payment and other obligations.
In addition, the Company may incur additional indebtedness in the future. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that the Company now faces could be amplified.
The securitized financing facility imposes certain restrictions on the activities of the Company and its subsidiaries.
The Senior Notes Indenture and the management agreement entered into between a subsidiary of the Company and the Indenture trustee (the “Management Agreement”) contain various covenants that limit the Company’s and its subsidiaries’ ability to engage in specified types of transactions. For example, the Indenture and the Management Agreement contain covenants that, among other things, restrict, subject to certain exceptions, the ability of certain subsidiaries to:
incur or guarantee additional indebtedness;
sell certain assets;
create or incur liens on certain assets to secure indebtedness; or
consolidate, merge, sell or otherwise dispose of all or substantially all of their assets.
As a result of these restrictions, the Company may not have adequate resources or flexibility to continue to manage the business and provide for growth of the Wendy’s system, which could have a material adverse effect on the Company’s future growth prospects, financial condition, results of operations and liquidity.financial condition.
To service debt and meet its other cash needs, the Company will require a significant amount of cash, which may not be generated by its business or available under its existing debt agreements or other sources.
The ability of Wendy’s to make payments on, repay or refinance its debt, and any additional debt, and to fund planned capital expenditures, dividends and other cash needs will depend largely upon its future operating performance. Future performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, the ability of Wendy’s to borrow funds in the future to make payments on its debt will depend on the satisfaction of the covenants in the securitized financing facility and other debt agreements, and other agreements it may enter into in the future. Specifically, Wendy’s will need to maintain specified financial ratios and satisfy financial condition tests. There is no assurance that the Wendy’s business will generate sufficient cash flow from operations or that future borrowings will be available under the Company’s securitized financing facility or other debt agreements or from other sources in an amount sufficient to enable the Company to pay its debt or to fund its dividend and other liquidity needs.
There can be no assurance regarding whether or to what extent the Company will pay dividends on its common stock in the future.
Holders of the Company’s common stock will only be entitled to receive such dividends as the Company’s Board of Directors may declare out of funds legally available for such payments. Any dividends will be made at the discretion of the Board of Directors and will depend on the Company’s earnings, financial condition, cash requirements and such other factors as the Board of Directors may deem relevant from time to time.
Because the Company is a holding company, its ability to declare and pay dividends is dependent upon cash, cash equivalents and short-term investments on hand and cash flows from its subsidiaries. The ability of its subsidiaries to pay cash dividends and/or make loans or advances to the holding company will be dependent upon their respective abilities to achieve sufficient cash flows after satisfying their respective cash requirements, including the securitized financing facility and other debt agreements, to enable the payment of such dividends or the making of such loans or advances. The ability of any of its subsidiaries to pay cash dividends or other payments to the Company will also be limited by restrictions in debt instruments currently existing or subsequently entered into by such subsidiaries, which is described earlier in this Item 1A.
A substantial amount of the Company’s common stock is concentrated in the hands of certain stockholders.
Nelson Peltz, the Company’s Chairman and former Chief Executive Officer, Peter May, the Company’s Vice Chairman and former President and Chief Operating Officer, and Edward Garden, a former director of the Company, beneficially own shares of the Company’s outstanding common stock that collectively constitute approximately 20% of its total voting power as of February 19, 2019. Messrs. Peltz, May and Garden may, from time to time, acquire beneficial ownership of additional shares of common stock.
On December 1, 2011, the Company entered into an agreement (the “Trian Agreement”) with Messrs. Peltz, May and Garden, and several of their affiliates (the “Covered Persons”). Pursuant to the Trian Agreement, the Board of Directors, including a majority of the independent directors, approved, for purposes of Section 203 of the Delaware General Corporation Law (“Section 203”), the Covered Persons becoming the owners (as defined in Section 203(c)(9) of the DGCL) of or acquiring an aggregate of up to (and including), but not more than, 32.5% (subject to certain adjustments set forth in the Agreement) of the outstanding shares of the Company’s common stock, such that no such persons would be subject to the restrictions set forth in Section 203 solely as a result of such ownership. Certain other provisions of the Trian Agreement terminated when the Covered Persons’ beneficial ownership of the Company’s common stock decreased to less than 25% of the outstanding voting power of the Company in January 2014.
This concentration of ownership gives Messrs. Peltz, May and Garden significant influence over the outcome of actions requiring stockholder approval, including the election of directors and the approval of mergers, consolidations and the sale of all or substantially all of the Company’s assets. They are also in a position to have significant influence to prevent or cause a change in control of the Company. If in the future Messrs. Peltz, May and Garden were to acquire more than a majority of the Company’s outstanding voting power, they would be able to determine the outcome of the election of members of the Board of Directors and the outcome of corporate actions requiring majority stockholder approval, including mergers, consolidations and the sale of all or substantially all of the Company’s assets. They would also be in a position to prevent or cause a change in control of the Company.
The Company’s certificate of incorporation contains certain anti-takeover provisions and permits our Board of Directors to issue preferred stock without stockholder approval and limits our ability to raise capital from affiliates.
Certain provisions in the Company’s certificate of incorporation are intended to discourage or delay a hostile takeover of control of the Company. The Company’s certificate of incorporation authorizes the issuance of shares of “blank check” preferred stock, which will have such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power and other rights of the holders of its common stock. The preferred stock could be used to discourage, delay or prevent a change in control of the Company that is determined by the Board of Directors to be undesirable. Although the Company has no present intention to issue any shares of preferred stock, it cannot assure that it will not do so in the future.
The Company’s certificate of incorporation prohibits the issuance of preferred stock to affiliates, unless offered ratably to the holders of the Company’s common stock, subject to an exception in the event that the Company is in financial distress and the issuance is approved by the Audit Committee of the Board of Directors. This prohibition limits the ability to raise capital from affiliates.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We believe that our properties, taken as a whole, are generally well maintained and are adequate for our current and foreseeable business needs.
The following table contains information about our principal office facilities as of December 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | |
| ACTIVE FACILITIES | | FACILITIES LOCATION | | LAND TITLE | | APPROXIMATE SQ. FT. OF FLOOR SPACE |
| Corporate Headquarters | | Dublin, Ohio | | Owned | | 324,025 |
| * |
| Wendy’s Restaurants of Canada Inc. | | Burlington, Ontario, Canada | | Leased | | 8,917 |
| ** |
_____________________
| |
* | QSCC, the independent Wendy’s purchasing cooperative in which Wendy’s has non-controlling representation on the board of directors, leases 14,493 square feet of this space from Wendy’s. |
* QSCC, Wendy’s independent supply chain purchasing co-op, leases 18.774 square feet of this space from Wendy’s. The Corporate Headquarters serves all of our operating segments.
** The Wendy’s Restaurants of Canada Inc. facility primarily serves the International operating segment.
At December 30, 2018,January 2, 2022, Wendy’s and its franchisees operated 6,7116,949 Wendy’s restaurants. Of the 353403 Company-operated restaurants in the Wendy’s restaurants,U.S. segment, Wendy’s owned the land and building for 144159 restaurants, owned the building and held long-term land leases for 145141 restaurants and held leases covering the land and building for 64103 restaurants. Wendy’s also held leases covering the land and building for each of the five Company-operated restaurants in the Wendy’s International segment. Lease terms are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. Certain leases contain contingent rent provisions that require additional rental payments based upon restaurant sales volume in excess of specified amounts. As part of December 30, 2018,the Global Real Estate & Development segment, Wendy’s also owned 516485 and leased 1,2791,235 properties that were either leased or subleased principally to franchisees.franchisees as of January 2, 2022. Surplus land and buildings are generally held for sale and are not material to our financial condition or results of operations.
The location of Company-operated and franchised restaurants as of December 30, 2018 is set forth below.
|
| | | | | | |
| State | | Company | | Franchise |
| Alabama | | — |
| | 99 |
|
| Alaska | | — |
| | 8 |
|
| Arizona | | — |
| | 98 |
|
| Arkansas | | — |
| | 62 |
|
| California | | — |
| | 270 |
|
| Colorado | | 43 |
| | 85 |
|
| Connecticut | | — |
| | 50 |
|
| Delaware | | — |
| | 12 |
|
| Florida | | 104 |
| | 409 |
|
| Georgia | | — |
| | 284 |
|
| Hawaii | | — |
| | 9 |
|
| Idaho | | — |
| | 31 |
|
| Illinois | | 56 |
| | 138 |
|
| Indiana | | — |
| | 179 |
|
| Iowa | | — |
| | 42 |
|
| Kansas | | — |
| | 66 |
|
| Kentucky | | — |
| | 143 |
|
| Louisiana | | — |
| | 125 |
|
| Maine | | — |
| | 16 |
|
| Maryland | | — |
| | 100 |
|
| Massachusetts | | 46 |
| | 51 |
|
| Michigan | | — |
| | 250 |
|
| Minnesota | | — |
| | 59 |
|
| Mississippi | | — |
| | 95 |
|
| Missouri | | — |
| | 98 |
|
| Montana | | — |
| | 14 |
|
| Nebraska | | — |
| | 27 |
|
| Nevada | | — |
| | 42 |
|
| New Hampshire | | — |
| | 23 |
|
| New Jersey | | — |
| | 142 |
|
| New Mexico | | — |
| | 42 |
|
| New York | | 47 |
| | 169 |
|
| North Carolina | | — |
| | 258 |
|
| North Dakota | | — |
| | 8 |
|
| Ohio | | 49 |
| | 363 |
|
| Oklahoma | | — |
| | 42 |
|
| Oregon | | — |
| | 40 |
|
| Pennsylvania | | — |
| | 258 |
|
| Rhode Island | | 8 |
| | 11 |
|
| South Carolina | | — |
| | 128 |
|
| South Dakota | | — |
| | 8 |
|
| Tennessee | | — |
| | 176 |
|
| Texas | | — |
| | 399 |
|
| Utah | | — |
| | 83 |
|
| Vermont | | — |
| | 4 |
|
| Virginia | | — |
| | 221 |
|
| Washington | | — |
| | 79 |
|
| West Virginia | | — |
| | 69 |
|
| Wisconsin | | — |
| | 55 |
|
| Wyoming | | — |
| | 14 |
|
| District of Columbia | | — |
| | 3 |
|
| Domestic subtotal | | 353 |
| | 5,457 |
|
| Canada | | — |
| | 368 |
|
| North America subtotal | | 353 |
| | 5,825 |
|
|
| | | | | | |
| Country/Territory | | Company | | Franchise |
| Argentina | | — |
| | 8 |
|
| Aruba | | — |
| | 4 |
|
| Bahamas | | — |
| | 12 |
|
| Brazil | | — |
| | 5 |
|
| Chile | | — |
| | 17 |
|
| Curacao | | — |
| | 1 |
|
| Dominican Republic | | — |
| | 13 |
|
| Ecuador | | — |
| | 6 |
|
| El Salvador | | — |
| | 24 |
|
| Georgia | | — |
| | 10 |
|
| Grand Cayman Islands | | — |
| | 2 |
|
| Guam | | — |
| | 5 |
|
| Guatemala | | — |
| | 12 |
|
| Honduras | | — |
| | 24 |
|
| India | | — |
| | 2 |
|
| Indonesia | | — |
| | 80 |
|
| Jamaica | | — |
| | 7 |
|
| Japan | | — |
| | 41 |
|
| Kuwait | | — |
| | 7 |
|
| Malaysia | | — |
| | 14 |
|
| Mexico | | — |
| | 21 |
|
| New Zealand | | — |
| | 23 |
|
| Panama | | — |
| | 8 |
|
| Philippines | | — |
| | 50 |
|
| Puerto Rico | | — |
| | 76 |
|
| Qatar | | — |
| | 1 |
|
| Trinidad and Tobago | | — |
| | 6 |
|
| United Arab Emirates | | — |
| | 17 |
|
| Venezuela | | — |
| | 35 |
|
| U.S. Virgin Islands | | — |
| | 2 |
|
| International subtotal | | — |
| | 533 |
|
| Grand total | | 353 |
| | 6,358 |
|
Item 3. Legal Proceedings.
The Company is involved in litigation and claims incidental to our current and prior businesses.business. We provide accruals for such litigation and claims when paymentwe determine it is probable that a liability has been incurred and the loss is reasonably estimable. The Company believes it has adequate accruals for continuing operations for all of its legal and environmental matters, including the accrual that we recorded for the legal proceedings related to a cybersecurity incident as described in Note 23 of the Financial Statements and Supplementary Data contained in Item 8 herein. See Note 11 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information on the accrual.matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is traded on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “WEN.”
The Company’s common stock is entitled to one vote per share on all matters on which stockholders are entitled to vote. The Company has no class of equity securities currently issued and outstanding except for its common stock. However, itthe Company is currently authorized to issue up to 100 million shares of preferred stock.
During the 2017 fiscal year, theThe Company paid quarterly cash dividends of $0.12, $0.05, $0.05 and $0.07 per share of common stock. Duringstock during the 2018 fiscal year, thefirst, second, third and fourth quarters of 2020, respectively. The Company paid quarterly cash dividends of $0.085$0.09, $0.10, $0.12 and $0.12 per share of common stock.stock during the first, second, third and fourth quarters of 2021, respectively.
During the first quarter of 2019,2022, the Company declared a dividend of $0.10$0.125 per share of common stock to be paid on March 15, 20192022 to shareholdersstockholders of record as of March 1, 2019.7, 2022. Although the Company currently intends to continue to declare and pay quarterly cash dividends, there can be no assurance that any additional quarterly cash dividends will be declared or paid or as to the amount or timing of such dividends, if any. Future dividend payments, if any, will be made at the discretion of our Board of Directors and will be based on such factors as the Company’s earnings, financial condition and cash requirements and other factors.
As of February 19, 2019,22, 2022, there were approximately 24,40621,119 holders of record of the Company’s common stock.
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 fourth fiscal quarter of 2018:2021:
Issuer Repurchases of Equity Securities
| | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (2) |
October 4, 2021
through
November 7, 2021 | 701,581 | | $ | 22.23 | | 697,485 | | $ | 125,071,941 | |
November 8, 2021
through
December 5, 2021 (3) | 4,913,130 | | $ | 21.64 | | 4,913,130 | | $ | 18,750,022 | |
December 6, 2021
through
January 2, 2022 | 1,386 | | $ | 22.16 | | — | | $ | 18,750,022 | |
| Total | 5,616,097 | | $ | 21.71 | | 5,610,615 | | $ | 18,750,022 | |
(1)Includes 5,482 shares of common stock reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective award. The shares were valued at the fair market value of the Company’s common stock on the vesting or exercise date of such awards, as set forth in the applicable plan document.
(2)In February 2020, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. In July 2020, our Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022. In May 2021, August 2021, and November 2021, our Board of Directors approved increases of $50.0 million, $70.0 million and $80.0 million, respectively, to the February 2020 authorization, resulting in an aggregate authorization of $300.0 million that expired on February 28, 2022.
(3)In November 2021, the Company entered into an accelerated share repurchase agreement (the “2021 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2021 ASR Agreement, the Company paid the financial institution an initial
|
| | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (2) |
October 1, 2018
through
November 4, 2018 | 1,605,477 |
| $ | 17.11 |
| 1,595,900 |
| $ | 128,846,202 |
|
November 5, 2018
through
December 2, 2018 (3) | 4,709,606 |
| $ | 17.49 |
| 4,708,578 |
| $ | 166,511,724 |
|
December 3, 2018
through
December 30, 2018 (3) | 1,293,013 |
| $ | 15.68 |
| 1,222,554 |
| $ | 147,416,700 |
|
| Total | 7,608,096 |
| $ | 17.10 |
| 7,527,032 |
| $ | 147,416,700 |
|
| |
(1) | Includes 81,064 shares reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective award. The shares were valued at the average of the high and low trading prices of our common stock on the vesting or exercise date of such awards. |
| |
(2) | In February 2018, our Board of Directors authorized the repurchase of up to $175.0 million of our common stock through March 3, 2019, when and if market conditions warrant and to the extent legally permissible. As a result of the 2018 accelerated share repurchase agreement (the “2018 ASR Agreement”) described below, the February 2018 share repurchase authorization was completed. In August 2018, our Board of Directors authorized an additional share repurchase program for up to $100.0 million of our common stock through December 27, 2019, when and if market conditions warrant and to the extent legally permissible. In November 2018, the Board of Directors approved an increase of $120.0 million to the August 2018 authorization, resulting in a total authorization of $220.0 million. |
| |
(3) | In November 2018, the Company entered into an accelerated share repurchase agreement (the “2018 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase programs. Under the 2018 ASR Agreement, the Company paid the financial institution an initial purchase price of $75.0 million in cash and received an initial delivery of 3.6 million shares of common stock, representing an estimate of 85% |
purchase price of $125.0 million in cash and received an initial delivery of 4.9 million shares of common stock, representing an estimated 85% of the total shares expected to be delivered under the 20182021 ASR Agreement.
In February 2022, the Company completed the 2021 ASR Agreement and received an additional 0.7 million shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 20182021 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 20182021 ASR Agreement, less an agreed upon discount. On December 18, 2018, the Company completed the ASR Agreement and received an additional 0.7 million shares of common stock. In total, 4.45.6 million shares were delivered under the 2021 ASR Agreement at an average purchase price of $17.18$22.22 per share.
Subsequent to December 30, 2018 through February 19, 2019, With the completion of the 2021 ASR Agreement, the Company repurchased 1.3completed its $300.0 million shares with an aggregate purchase price of $21.5 million, excluding commissions. February 2020 authorization.
In February 2019,2022, our Board of Directors authorized the repurchase of up to $225.0$100.0 million of our common stock through March 1, 2020,February 28, 2023, when and if market conditions warrant and to the extent legally permissible. In connection with the February 2019 share repurchase authorization, the November 2018 authorization was canceled.
Item 6. Selected Financial Data.[Reserved]
The following selected financial data has been derived from our consolidated financial statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended (1) (2) (3) |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In millions, except per share amounts) |
| Sales (4) | $ | 651.6 |
| | $ | 622.8 |
| | $ | 920.8 |
| | $ | 1,438.8 |
| | $ | 1,608.5 |
|
| Franchise royalty revenue and fees (4) | 409.0 |
| | 410.5 |
| | 371.5 |
| | 344.5 |
| | 322 |
|
| Franchise rental income (4) | 203.3 |
| | 190.1 |
| | 143.1 |
| | 87.0 |
| | 68.0 |
|
| Advertising funds revenue | 326.0 |
| | — |
| | — |
| | — |
| | — |
|
| Revenues | 1,589.9 |
| | 1,223.4 |
| | 1,435.4 |
| | 1,870.3 |
| | 1,998.5 |
|
| Cost of sales (4) (5) | 548.6 |
| | 517.9 |
| | 752.1 |
| | 1,194.5 |
| | 1,364.4 |
|
| Advertising funds expense | 321.9 |
| | — |
| | — |
| | — |
| | — |
|
| System optimization losses (gains), net (6) | (0.5 | ) | | 39.1 |
| | (71.9 | ) | | (74.0 | ) | | (91.5 | ) |
| Reorganization and realignment costs (7) | 9.1 |
| | 22.6 |
| | 10.1 |
| | 21.9 |
| | 31.9 |
|
| Impairment of long-lived assets (8) | 4.7 |
| | 4.1 |
| | 16.2 |
| | 25.0 |
| | 19.6 |
|
| Operating profit | 249.9 |
| | 214.8 |
| | 314.8 |
| | 274.5 |
| | 242.6 |
|
| Loss on early extinguishment of debt (9) | (11.5 | ) | | — |
| | — |
| | (7.3 | ) | | — |
|
| Investment income, net (10) | 450.7 |
| | 2.7 |
| | 0.7 |
| | 52.2 |
| | 1.2 |
|
| (Provision for) benefit from income taxes (11) | (114.8 | ) | | 93.0 |
| | (72.1 | ) | | (94.1 | ) | | (76.1 | ) |
| Income from continuing operations | 460.1 |
| | 194.0 |
| | 129.6 |
| | 140.0 |
| | 116.4 |
|
| Net income from discontinued operations | — |
| | — |
| | — |
| | 21.1 |
| | 5.0 |
|
| Net income | $ | 460.1 |
| | $ | 194.0 |
| | $ | 129.6 |
| | $ | 161.1 |
| | $ | 121.4 |
|
| Basic income per share: | | | | | | | | | |
| Continuing operations | $ | 1.93 |
| | $ | .79 |
| | $ | .49 |
| | $ | .43 |
| | $ | .31 |
|
| Discontinued operations | — |
| | — |
| | — |
| | .07 |
| | .01 |
|
| Net income | $ | 1.93 |
| | $ | .79 |
| | $ | .49 |
| | $ | .50 |
| | $ | .33 |
|
| Diluted income per share: | | | | | | | | | |
| Continuing operations | $ | 1.88 |
| | $ | .77 |
| | $ | .49 |
| | $ | .43 |
| | $ | .31 |
|
| Discontinued operations | — |
| | — |
| | — |
| | .06 |
| | .01 |
|
| Net income | $ | 1.88 |
| | $ | .77 |
| | $ | .49 |
| | $ | .49 |
| | $ | .32 |
|
| Dividends per share | $ | .34 |
| | $ | .28 |
| | $ | .245 |
| | $ | .225 |
| | $ | .205 |
|
| Weighted average diluted shares outstanding | 245.0 |
| | 252.3 |
| | 266.7 |
| | 328.7 |
| | 376.2 |
|
| | | | | | | | | | |
| Net cash provided by operating activities (12) | $ | 224.2 |
| | $ | 238.8 |
| | $ | 193.8 |
| | $ | 296.2 |
| | $ | 260.1 |
|
| Capital expenditures | 69.9 |
| | 81.7 |
| | 150.0 |
| | 251.6 |
| | 298.5 |
|
| | | | | | | | | | |
| | December 30, 2018 | | December 31, 2017 | | January 1, 2017 | | January 3, 2016 | | December 28, 2014 (2) |
| | | | | | (In millions) | | | | |
| Total assets | $ | 4,292.0 |
| | $ | 4,096.9 |
| | $ | 3,939.3 |
| | $ | 4,108.7 |
| | $ | 4,137.6 |
|
| Long-term debt, including current portion | 2,784.4 |
| | 2,754.4 |
| | 2,512.3 |
| | 2,426.1 |
| | 1,438.2 |
|
| Stockholders’ equity | 648.4 |
| | 573.2 |
| | 527.7 |
| | 752.9 |
| | 1,717.6 |
|
_______________
| |
(1) | The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31 and are referred to herein as (1) “the year ended December 30, 2018” or “2018,” which consisted of 52 weeks, (2) “the year ended December 31, 2017” or “2017,” which consisted of 52 weeks, (3) “the year ended January 1, 2017” or “2016,” which consisted of 52 weeks, (4) “the year ended January 3, 2016” or “2015,” which consisted of 53 weeks and (5) “the year ended December 28, 2014” or “2014,” which consisted of 52 weeks. |
| |
(2) | On May 31, 2015, Wendy’s completed the sale of 100% of its membership interest in The New Bakery Company, LLC and its subsidiaries (collectively, the “Bakery”). The Bakery’s operating results for all periods presented through its May 31, 2015 date of sale are classified as discontinued operations. The Bakery’s assets and liabilities for all periods presented prior to January 3, 2016 have been classified as discontinued operations. |
| |
(3) | The Company applied the new revenue recognition guidance using the modified retrospective method, whereby the cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, periods prior to 2018 do not reflect adjustments for the guidance and are not comparable. See Note 1 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. |
| |
(4) | The decline in sales and cost of sales and the related increase in franchise royalty revenue and fees and franchise rental income is primarily a result of the sale of Wendy’s Company-operated restaurants to franchisees under our system optimization initiative, which began in 2013. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein for further discussion. |
| |
(5) | The Company reclassified certain restaurant operational costs from general and administrative expense to cost of sales. The prior periods reflect the reclassification of these expenses to conform to the current year presentation. See Note 1 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion.
|
| |
(6) | System optimization losses (gains), net includes all gains and losses recognized on dispositions of restaurants and other assets in connection with Wendy’s system optimization initiative. See Note 3 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. |
| |
(7) | Reorganization and realignment costs include the impact of (1) Wendy’s May 2017 general and administrative (“G&A”) realignment plan in 2017 and 2018, (2) costs related to Wendy’s system optimization initiative in 2014 through 2018 and (3) Wendy’s November 2014 G&A realignment plan in 2014 through 2016. See Note 5 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. |
| |
(8) | Impairment of long-lived assets primarily includes impairment charges on (1) restaurant-level assets resulting from the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications, and (2) restaurant-level assets resulting from the deterioration in operating performance of certain Company-operated restaurants, additional charges for capital improvements in restaurants impaired in prior years which did not subsequently recover and the closure of Company-operated restaurants. See Note 17 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. |
| |
(9) | Loss on early extinguishment of debt primarily relates to refinancings, redemptions and repayments of long-term debt. See Note 12 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. |
| |
(10) | Investment income, net includes (1) the gain on sale of our remaining ownership interest in Inspire Brands, Inc. (“Inspire Brands”) (formerly Arby’s) during 2018 and (2) the effect of dividends received from our investment in Inspire Brands during 2015. See Note 8 and Note 18 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. |
| |
(11) | The benefit from income taxes in 2017 includes the impact of the Tax Cuts and Jobs Act. See Note 14 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. |
| |
(12) | During 2018, the Company adopted new accounting guidance for the classification and presentation of restricted cash in our statement of cash flows. The prior periods reflect the adoption of this guidance. See Note 1 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. |
Item 7. 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 consolidated financial statements and the related notes that appear elsewhere within this report. Certain statements we make under this Item 7 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part I” preceding “Item 1 - Business.” You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in Item 1A above, as well as our consolidated financial statements, related notes and other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission.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 the parent company of Wendy’s International, LLC and its subsidiaries (“Wendy’s”)(formerly known as Wendy’s International, Inc). Wendy’s franchisesInternational, LLC is the indirect parent company of (1) Quality Is Our Recipe, LLC (“Quality”), which is the owner and operatesfranchisor of the Wendy’s® quick-service restaurants specializing restaurant system in hamburger sandwiches throughout North America (defined as the United States of America (the “U.S.”) and Canada).all international jurisdictions except for Canada, and (2) Wendy’s also has franchisedRestaurants of Canada Inc., which is the owner and franchisor of the Wendy’s restaurant system in Canada. As used herein, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to the ownership or franchising of the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand.
Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the U.S. based on traffic share, and the third largest globally with 6,949 restaurants in 30the U.S. and 31 foreign countries and U.S. territories.territories as of January 2, 2022.
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 operation and franchising of Wendy’s restaurants outsidein countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of 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 7. “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 using 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 indicativeand Note 26 of future results.the Financial Statements and Supplementary Data contained in Item 8 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 and are referred to herein as (1) “the year ended December 30, 2018”January 2, 2022” or “2018,“2021,” which consisted of 52 weeks, (2) “the year ended December 31, 2017”January 3, 2021” or “2017”“2020,” which consisted of 53 weeks, and (3) “the year ended January 3, 2016”December 29, 2019” or “2016,“2019,” all of which consisted of 52 weeks. All references to years, quarters and quartersmonths relate to fiscal periods rather than calendar periods.
We adopted the new accounting guidance for revenue recognition effective January 1, 2018, which had a material impact on our consolidated financial statements. Beginning with the first quarter of 2018, our financial results reflect adoption of the guidance; however, prior period results were not restated. See Note 1 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information.
Executive Overview
Our Business
As of December 30, 2018,January 2, 2022, the Wendy’s restaurant system was comprised of 6,7116,949 restaurants, of which 353with 5,938 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 403 were owned and operated by the Company. AllCompany and 5,535 were operated by a total of 228 franchisees. In addition, at January 2, 2022, there were 1,011 Wendy’s restaurants in operation in 31 foreign countries and U.S. territories. Of the international restaurants, 1,006 were operated by franchisees and five were operated by the Company in the United Kingdom (the “U.K.”).
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants 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 U.S.total Wendy’s system as of January 2, 2022.
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 and “Special Note Regarding Forward-Looking Statements and Projections” in “Part I” preceding “Item 1 - Business” for additional information.
Wendy’s long-term growth opportunities include (1) systemwide same-restaurant salesinvesting in accelerated global growth through continuing core menu improvement, product innovation, customer count growth and strategic price increases on(1) building our menu items,breakfast daypart, (2) system investment inaccelerating our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants and focused executionimplementation of operational excellence, (3) growth in new restaurants, including global growth, (4) increased focus on consumer-facing digital platforms and technologies (5) increasedand (3) expanding the Company’s footprint through targeted U.S. restaurant utilization in various dayparts, (6) building shareholder value through financial management strategiesexpansion and (7) strengthening our operations through our system optimization initiative.accelerated international restaurant expansion.
Key Business Measures
We track our results of operations and manage our business using the following key business measures, which include non-GAAP financial measures:
•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 week are excluded from same-restaurant sales. For 2020, same-restaurant sales excluded the impact of a 53rd operating week. For 2020, same-restaurant sales compared the 52 weeks from December 30, 2019 through December 27, 2020 to the 52 weeks from December 31, 2018 through December 29, 2019. For 2021, same-restaurant sales compared the 52 weeks from January 4, 2021 through January 2, 2022 to the 52 weeks from January 6, 2020 through January 3, 2021. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes.
•Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.
•Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company 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 and advertising
funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and profitability.
•Average Unit Volumes - We calculate Company-operated restaurant average unit volumes by summing the average weekly sales of all Company-operated restaurants which reported sales during the week. Average unit volumes exclude the impact of the 53rd week of 2020. For 2020, average unit volumes are calculated using the 52 weeks from December 30, 2019 through December 27, 2020.
Franchised restaurant average unit volumes is a non-GAAP financial measure, which includes sales by franchised restaurants, which 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 franchised restaurant average unit volumes is useful information for the same reasons described above for “Systemwide Sales.” We calculate franchised restaurant average unit volumes by summing the average weekly sales of all franchised restaurants which reported sales during the week.
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 ArgentinaVenezuela due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.
The Company believes its presentation of same-restaurant sales, restaurant margin, systemwide sales and average unit volumes, including franchised restaurant average unit volumes, provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales, systemwide sales and franchised restaurant average unit volumes, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand.
The non-GAAP financial measures discussed above do 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, these measures as used by other companies may not be consistent with the way the Company calculates such measures.
Indirect Investment2021 Financial Highlights
•Revenue increased 9.4% to $1.9 billion in Inspire Brands2021 compared to $1.7 billion in 2020;
•Global same-restaurant sales increased 10.0%, U.S. same-restaurant sales increased 9.2% and international same-restaurant sales increased 17.6% compared to 2020;
•Company-operated restaurant margin was 16.7% in 2021, an increase of 180 basis points compared to 2020; and
•Net income increased 70.1% to $200.4 million in 2021 compared to $117.8 million in 2020.
COVID-19 Update
In connectionMarch 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on our results of operations, financial condition and prospects.
In response to the pandemic, in March 2020, Wendy’s updated its brand standard to include the closure of all dining rooms except where there were specific needs, or a drive-thru or pick-up window option was not available, subject to applicable
federal, state and local requirements. Substantially all Wendy’s restaurants continued to offer drive-thru and delivery service to our customers. During the second quarter of 2020, the Company began to implement its restaurant and dining room reopening process through a phased approach in accordance with federal, state and local requirements, with customer and team member safety as its top priority. Dining rooms have been re-opening at each restaurant owner’s discretion, subject to applicable regulatory restrictions. During 2021, restaurant operations have been impacted by increased pressure on labor availability brought about by both the COVID-19 pandemic and other macroeconomic factors; however, as of January 2, 2022, substantially all restaurants were open across the Wendy’s system, and the majority of restaurants had dining rooms open. Global systemwide same-restaurant sales during 2021 increased 10.0%, in part due to a significant increase in customer count compared with the saleadversely impacted fiscal months of Arby’s Restaurant Group, Inc. (“Arby’s”)March through June 2020.
Breakfast
Wendy’s long-term growth opportunities include investing in accelerated global growth, which includes building upon our breakfast daypart. Since the launch of breakfast across the U.S. system in March 2020, systemwide sales have benefited from this new daypart, with breakfast representing approximately 7.3% of U.S. systemwide sales during 2011, Wendy’s Restaurants obtained an 18.5% equity interest in ARG Holding Corporation (“ARG Parent”) (through which Wendy’s Restaurants indirectly retained an 18.5% interest in Arby’s). The carrying value of our investment was reduced to zero during 2013 in connection with the receipt of a dividend.
Our 18.5% equity interest was diluted to 12.3% on February 5, 2018, when a subsidiary of ARG Parent acquired Buffalo Wild Wings, Inc. As a result, our diluted ownership interest included both the Arby’s2021 and Buffalo Wild Wings brands under the newly formed combined company, Inspire Brands, Inc. (“Inspire Brands”). On August 16, 2018, the Company sold its remaining 12.3% ownership interest to Inspire Brands for $450.0 million and incurred transaction costs of $0.1 million, which were recorded to “Investment income, net.” The Company recorded income tax expense of $97.5 million on the transaction, of which $95.0 million was paid7.8% during the fourth quarter of 2018.2021. The Company funded $25.0 million of incremental advertising to support the breakfast daypart during 2021, which continued to drive trial and acceleration of the Company’s breakfast offering. The Company recently announced plans to launch breakfast in Canada in the second quarter of 2022, which will increase the percentage of global systemwide restaurants serving breakfast to approximately 95%.
GeneralDigital
Wendy’s long-term growth opportunities include accelerated implementation of consumer-facing digital platforms and Administrative (“G&A”) Realignmenttechnologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program and establishing delivery agreements with third-party vendors. The Company’s digital business continues to grow and represented approximately 8.5% of global systemwide sales during 2021, with the fourth quarter of 2021 reaching approximately 9.5%. The Company is also partnering with key technology providers to help execute our digital, restaurant technology and enterprise technology initiatives and support our technology innovation and growth.
In May 2017,New Restaurant Development
Wendy’s long-term growth opportunities include expanding the Company’s footprint through targeted U.S. restaurant expansion and accelerated international restaurant expansion. To promote new restaurant development, the Company initiated a plan to further reducehas provided franchisees with certain incentive programs for qualifying new restaurants, including technical assistance fee waivers and reductions in royalty and national advertising payments. During 2021, the Company and its G&A expenses.franchisees added 121 net new restaurants across the Wendy’s system. The Company expects to realizereach 8,500 to 9,000 systemwide restaurants by the end of 2025.
REEF Kitchens Development Commitment
On August 11, 2021, the Company announced a total G&A expense reduction throughdevelopment commitment by REEF Kitchens (“REEF”) to open and operate 700 delivery kitchens over a five-year period across the plan of approximately $35.0U.S., Canada and the U.K.
Strategic Build to Suit Development Fund
On August 11, 2021, the Company announced the creation of a $100.0 million with approximately three-quartersstrategic build to suit development fund to drive additional new restaurant growth that is being funded by the additional cash that was obtained as part of the reduction realized as of December 30, 2018, and the remainder of the savings expected to be realizedCompany’s debt refinancing transaction completed in 2019.June 2021. The Company expects the development fund to incur total costs aggregatingdrive approximately $32.0 million80 to $35.0 million, of which $23.0 million90 new franchise restaurants from 2022 to $27.0 million will be cash expenditures, related to such savings. The cash expenditures are expected to continue into 2019, with approximately half of the total cash expenditures occurring in 2018. Costs related to the plan are recorded to “Reorganization and realignment costs.” The Company recognized costs totaling $8.8 million and $21.7 million during 2018 and 2017, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $4.5 million, comprised of (1) severance and related employee costs of approximately $1.0 million, (2) recruitment and relocation costs of approximately $1.5 million, (3) third-party and other costs of approximately $0.5 million and (4) share-based compensation of approximately $1.5 million. The Company expects to recognize the majority of the remaining costs associated with the plan during 2019.2025.
System Optimization Initiative
The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”).Flips. As of January 1, 2017, the Company completedachieved its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to reducemove its ownership below theaway from approximately 5% level, Wendy’sof the total system, the Company expects to continue to optimize itsthe Wendy’s system through Franchise Flips, as well as evaluating strategic
acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, and drive new restaurant development and accelerate reimages in the Image Activation format. reimages.
During 2018 and 2016,2021, the Company completed the sale of three and 31047 Company-operated restaurants in New York (including Manhattan) to franchisees, respectively. In addition, the Company facilitated 96, 400 and 144 Franchise Flips during 2018, 2017 and 2016, respectively (excluding the DavCo and NPC Transactions discussed below).
resulting in net gains totaling $30.8 million. Gains and losses recognized on dispositions are recorded to “System optimization (gains) losses,gains, net” in our consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs.”
DavCo and NPC Transactions
As part of our system optimization initiative, the Company acquired 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”) for total net cash consideration of $86.8 million, which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company, for cash proceeds of $70.7 million (collectively, the “DavCo and NPC Transactions”). As part of the NPC transaction, NPC agreed to remodel 90 acquired restaurants in the Image Activation format by the end of 2021 and build 15 new Wendy’s restaurants by the end of 2022. Prior to closing the DavCo transaction, seven DavCo restaurants were closed. The acquisition of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such, the Company accounted for the DavCo and NPC Transactions as an acquisition and subsequent disposition of a business. As part of the DavCo and NPC Transactions, the Company retained leases for purposes of subleasing such properties to NPC. As a result of the DavCo and NPC Transactions, the Company recognized a loss of $43.6 million during 2017.
Cybersecurity Incident
The Company first reported unusual payment card activity affecting some franchise-owned restaurants in February 2016 and that malware had been discovered on certain systems. Subsequently, on June 9, 2016, the Company reported that an additional malware variant had been identified and disabled. On July 7, 2016, the Company, on behalf of affected franchise locations, provided information about specific restaurant locations that may have been impacted by these attacks, all of which are located in the United States, along with support for customers who may have been affected by the malware variants.
In February 2019, the Company entered into a settlement agreement that, if approved and finalized, would result in a class-wide settlement of the class action lawsuits brought by financial institutions against the Company related to this incident. Under the terms of the settlement agreement, the Company and its franchisees will receive a full release of all claims that have or could have been brought by the financial institutions, and the financial institutions will receive $50.0 million, inclusive of attorneys’ fees and costs. After exhaustion of applicable insurance, the Company expects to pay approximately $27.5 million of this amount. The proposed settlement agreement is subject to court approval and, if approved, the Company anticipates that payment will not occur until late 2019 or early 2020. Accordingly, we recorded a liability of $50.0 million and insurance receivables of $22.5 million during 2018.
See “Item 1A. Risk Factors” and Note 234 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information.information on the dispositions.
In addition, during 2021, the Company completed a transaction to acquire 93 franchise-operated restaurants in Florida for $127.9 million. See Note 3 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information on the acquisition.
Debt Refinancing
In June 2021, the Company completed a refinancing transaction under which the Company issued fixed rate senior secured notes in the following 2021-1 series: Class A-2-I with an interest rate of 2.370% and initial principal amount of $450.0 million and Class A-2-II with an interest rate of 2.775% and initial principal amount of $650.0 million (collectively, the “Series 2021-1 Class A-2 Notes”). A portion of the net proceeds from the sale of the Series 2021-1 Class A-2 Notes were used to repay in full the Company’s outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes, including the payment of prepayment and transaction costs. The Company also entered into a revolving financing facility of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2021-1 Class A-1 Notes”), which allows for the drawing of up to $300.0 million on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2021-1 Class A-1 Notes during 2021. The Series 2021-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2019-1 Class A-1 Notes and $100.0 million Series 2020-1 Class A-1 Notes, which were cancelled on the closing date. As a result of the refinancing transaction, the Company incurred a loss on the early extinguishment of debt of $17.9 million, which was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs of $8.3 million. See Note 12 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information on the Company’s debt refinancing transaction.
This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. For discussion related to 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K, please refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K, filed with the United States Securities and Exchange Commission on March 3, 2021.
Results of Operations
The tables included throughout this Results of Operations section set forth in millions (except as otherwise indicated) the Company’s consolidated results of operations for the years ended January 2, 2022, January 3, 2021 and December 30, 2018, December 31, 2017 and January 1, 2017 (except average unit volumes, which are in thousands). The prior periods presented throughout Results29, 2019. Except as noted below, the Company’s consolidated results of Operations reflect certain reclassifications to conform tooperations described below includes the current year presentation. See Note 1benefit of the Financial Statements and Supplementary Data contained53rd week in Item 8 herein for further information.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Revenues: | | | | | | | | | |
| Sales | $ | 734.1 | | | $ | 11.3 | | | $ | 722.8 | | | $ | 15.3 | | | $ | 707.5 | |
| Franchise royalty revenue and fees | 536.7 | | | 92.0 | | | 444.7 | | | 15.7 | | | 429.0 | |
| Franchise rental income | 236.7 | | | 4.1 | | | 232.6 | | | (0.5) | | | 233.1 | |
| Advertising funds revenue | 389.5 | | | 55.8 | | | 333.7 | | | (5.7) | | | 339.4 | |
| 1,897.0 | | | 163.2 | | | 1,733.8 | | | 24.8 | | | 1,709.0 | |
| Costs and expenses: | | | | | | | | | |
| Cost of sales | 611.7 | | | (3.2) | | | 614.9 | | | 17.4 | | | 597.5 | |
| Franchise support and other costs | 42.9 | | | 16.4 | | | 26.5 | | | (17.2) | | | 43.7 | |
| Franchise rental expense | 132.4 | | | 6.8 | | | 125.6 | | | 1.7 | | | 123.9 | |
| Advertising funds expense | 411.8 | | | 66.4 | | | 345.4 | | | 7.3 | | | 338.1 | |
| General and administrative | 243.0 | | | 36.1 | | | 206.9 | | | 6.7 | | | 200.2 | |
| Depreciation and amortization | 125.5 | | | (7.3) | | | 132.8 | | | 1.1 | | | 131.7 | |
| System optimization gains, net | (33.5) | | | (30.4) | | | (3.1) | | | (1.8) | | | (1.3) | |
| Reorganization and realignment costs | 8.5 | | | (7.5) | | | 16.0 | | | (1.0) | | | 17.0 | |
| Impairment of long-lived assets | 2.3 | | | (5.7) | | | 8.0 | | | 1.0 | | | 7.0 | |
| Other operating income, net | (14.6) | | | (6.1) | | | (8.5) | | | 2.9 | | | (11.4) | |
| 1,530.0 | | | 65.5 | | | 1,464.5 | | | 18.1 | | | 1,446.4 | |
| Operating profit | 367.0 | | | 97.7 | | | 269.3 | | | 6.7 | | | 262.6 | |
| Interest expense, net | (109.2) | | | 8.5 | | | (117.7) | | | (1.7) | | | (116.0) | |
| Loss on early extinguishment of debt | (17.9) | | | (17.9) | | | — | | | 8.5 | | | (8.5) | |
| Investment income (loss), net | — | | | 0.2 | | | (0.2) | | | (25.8) | | | 25.6 | |
| Other income, net | 0.7 | | | (0.7) | | | 1.4 | | | (6.4) | | | 7.8 | |
| Income before income taxes | 240.6 | | | 87.8 | | | 152.8 | | | (18.7) | | | 171.5 | |
| Provision for income taxes | (40.2) | | | (5.2) | | | (35.0) | | | (0.4) | | | (34.6) | |
| Net income | $ | 200.4 | | | $ | 82.6 | | | $ | 117.8 | | | $ | (19.1) | | | $ | 136.9 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | Amount | | Change | | Amount | | Change | | Amount |
| Revenues: | | | | | | | | | |
| Sales | $ | 651.6 |
| | $ | 28.8 |
| | $ | 622.8 |
| | $ | (298.0 | ) | | $ | 920.8 |
|
| Franchise royalty revenue and fees | 409.0 |
| | (1.5 | ) | | 410.5 |
| | 39.0 |
| | 371.5 |
|
| Franchise rental income | 203.3 |
| | 13.2 |
| | 190.1 |
| | 47.0 |
| | 143.1 |
|
| Advertising funds revenue | 326.0 |
| | 326.0 |
| | — |
| | — |
| | — |
|
| | 1,589.9 |
| | 366.5 |
| | 1,223.4 |
| | (212.0 | ) | | 1,435.4 |
|
| Costs and expenses: | | | | | |
| | | | |
| Cost of sales | 548.6 |
| | 30.7 |
| | 517.9 |
| | (234.2 | ) | | 752.1 |
|
| Franchise support and other costs | 25.2 |
| | 8.9 |
| | 16.3 |
| | 9.4 |
| | 6.9 |
|
| Franchise rental expense | 91.1 |
| | 3.1 |
| | 88.0 |
| | 20.3 |
| | 67.7 |
|
| Advertising funds expense | 321.9 |
| | 321.9 |
| | — |
| | — |
| | — |
|
| General and administrative | 217.5 |
| | 13.9 |
| | 203.6 |
| | (33.2 | ) | | 236.8 |
|
| Depreciation and amortization | 128.9 |
| | 3.2 |
| | 125.7 |
| | 3.0 |
| | 122.7 |
|
| System optimization (gains) losses, net | (0.5 | ) | | (39.6 | ) | | 39.1 |
| | 111.0 |
| | (71.9 | ) |
| Reorganization and realignment costs | 9.1 |
| | (13.5 | ) | | 22.6 |
| | 12.5 |
| | 10.1 |
|
| Impairment of long-lived assets | 4.7 |
| | 0.6 |
| | 4.1 |
| | (12.1 | ) | | 16.2 |
|
| Other operating income, net | (6.5 | ) | | 2.2 |
| | (8.7 | ) | | 11.3 |
| | (20.0 | ) |
| | 1,340.0 |
| | 331.4 |
| | 1,008.6 |
| | (112.0 | ) | | 1,120.6 |
|
| Operating profit | 249.9 |
| | 35.1 |
| | 214.8 |
| | (100.0 | ) | | 314.8 |
|
| Interest expense, net | (119.6 | ) | | (1.5 | ) | | (118.1 | ) | | (3.3 | ) | | (114.8 | ) |
| Loss on early extinguishment of debt | (11.5 | ) | | (11.5 | ) | | — |
| | — |
| | — |
|
| Investment income, net | 450.7 |
| | 448.0 |
| | 2.7 |
| | 2.0 |
| | 0.7 |
|
| Other income, net | 5.4 |
| | 3.8 |
| | 1.6 |
| | 0.6 |
| | 1.0 |
|
| Income before income taxes | 574.9 |
| | 473.9 |
| | 101.0 |
| | (100.7 | ) | | 201.7 |
|
| (Provision for) benefit from income taxes | (114.8 | ) | | (207.8 | ) | | 93.0 |
| | 165.1 |
| | (72.1 | ) |
| Net income | $ | 460.1 |
| | $ | 266.1 |
| | $ | 194.0 |
| | $ | 64.4 |
| | $ | 129.6 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| 2021 | | % of Total Revenues | | 2020 | | % of Total Revenues | | 2019 | | % of Total Revenues |
| Revenues: | | | | | | | | | | | |
| Sales | $ | 734.1 | | | 38.7 | % | | $ | 722.8 | | | 41.7 | % | | $ | 707.5 | | | 41.4 | % |
| Franchise royalty revenue and fees: | | | | | | | | | | | |
| Franchise royalty revenue | 460.7 | | | 24.3 | % | | 416.5 | | | 24.0 | % | | 400.7 | | | 23.4 | % |
| Franchise fees | 76.0 | | | 4.0 | % | | 28.2 | | | 1.7 | % | | 28.3 | | | 1.7 | % |
| Total franchise royalty revenue and fees | 536.7 | | | 28.3 | % | | 444.7 | | | 25.7 | % | | 429.0 | | | 25.1 | % |
| Franchise rental income | 236.7 | | | 12.5 | % | | 232.6 | | | 13.4 | % | | 233.1 | | | 13.6 | % |
| Advertising funds revenue | 389.5 | | | 20.5 | % | | 333.7 | | | 19.2 | % | | 339.4 | | | 19.9 | % |
| Total revenues | $ | 1,897.0 | | | 100.0 | % | | $ | 1,733.8 | | | 100.0 | % | | $ | 1,709.0 | | | 100.0 | % |
| | | | | | | | | | | |
| 2021 | | % of
Sales | | 2020 | | % of
Sales | | 2019 | | % of
Sales |
| Cost of sales: | | | | | | | | | | | |
| Food and paper | $ | 224.1 | | | 30.5 | % | | $ | 221.8 | | | 30.7 | % | | $ | 222.8 | | | 31.5 | % |
| Restaurant labor | 231.5 | | | 31.5 | % | | 233.6 | | | 32.3 | % | | 214.7 | | | 30.3 | % |
| Occupancy, advertising and other operating costs | 156.1 | | | 21.3 | % | | 159.5 | | | 22.1 | % | | 160.0 | | | 22.7 | % |
| Total cost of sales | $ | 611.7 | | | 83.3 | % | | $ | 614.9 | | | 85.1 | % | | $ | 597.5 | | | 84.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | % of Sales | | 2020 | | % of Sales | | 2019 | | % of Sales |
| Restaurant margin | $ | 122.4 | | | 16.7 | % | | $ | 107.9 | | | 14.9 | % | | $ | 110.0 | | | 15.5 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2018 | | % of Total Revenues | | 2017 | | % of Total Revenues | | 2016 | | % of Total Revenues |
| Revenues: | | | | | | | | | | | |
| Sales | $ | 651.6 |
| | 41.0 | % | | $ | 622.8 |
| | 50.9 | % | | $ | 920.8 |
| | 64.1 | % |
| Franchise royalty revenue and fees: | | | | | | | | | | | |
| Royalty revenue | 377.9 |
| | 23.7 | % | | 366.0 |
| | 29.9 | % | | 342.2 |
| | 23.9 | % |
| Franchise fees | 31.1 |
| | 2.0 | % | | 44.5 |
| | 3.7 | % | | 29.3 |
| | 2.0 | % |
| Total franchise royalty revenue and fees | 409.0 |
| | 25.7 | % | | 410.5 |
| | 33.6 | % | | 371.5 |
| | 25.9 | % |
| Franchise rental income | 203.3 |
| | 12.8 | % | | 190.1 |
| | 15.5 | % | | 143.1 |
| | 10.0 | % |
| Advertising funds revenue | 326.0 |
| | 20.5 | % | | — |
| | — | % | | — |
| | — | % |
| Total revenues | $ | 1,589.9 |
| | 100.0 | % | | $ | 1,223.4 |
| | 100.0 | % | | $ | 1,435.4 |
| | 100.0 | % |
| | | | | | | | | | | | |
| | 2018 | | % of
Sales | | 2017 | | % of
Sales | | 2016 | | % of
Sales |
| Cost of sales: | | | | | | | | | | | |
| Food and paper | $ | 207.0 |
| | 31.8 | % | | $ | 196.4 |
| | 31.6 | % | | $ | 278.6 |
| | 30.3 | % |
| Restaurant labor | 194.4 |
| | 29.8 | % | | 183.8 |
| | 29.5 | % | | 265.6 |
| | 28.8 | % |
| Occupancy, advertising and other operating costs | 147.2 |
| | 22.6 | % | | 137.7 |
| | 22.1 | % | | 207.9 |
| | 22.6 | % |
| Total cost of sales | $ | 548.6 |
| | 84.2 | % | | $ | 517.9 |
| | 83.2 | % | | $ | 752.1 |
| | 81.7 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2018 | | % of Sales | | 2017 | | % of Sales | | 2016 | | % of Sales |
| Restaurant margin | $ | 103.0 |
| | 15.8 | % | | $ | 104.9 |
| | 16.8 | % | | $ | 168.7 |
| | 18.3 | % |
The tablestable below presentpresents certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.
|
| | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Key business measures: | | | | | |
| North America same-restaurant sales growth: | | | | | |
| Company-operated restaurants | 1.3 | % | | 0.2 | % | | 2.7 | % |
| Franchised restaurants | 0.8 | % | | 2.1 | % | | 1.4 | % |
| Systemwide | 0.9 | % | | 2.0 | % | | 1.6 | % |
| | | | | | |
| Global same-restaurant sales growth: | | | | | |
| Company-operated restaurants | 1.3 | % | | 0.2 | % | | 2.7 | % |
| Franchised restaurants (a) | 1.0 | % | | 2.2 | % | | 1.4 | % |
| Systemwide (a) | 1.0 | % | | 2.1 | % | | 1.5 | % |
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Key business measures: | | | | | |
| U.S. same-restaurant sales (a): | | | | | |
| Company-operated | 11.9 | % | | (0.7) | % | | 3.1 | % |
| Franchised | 9.0 | % | | 2.3 | % | | 2.9 | % |
| Systemwide | 9.2 | % | | 2.0 | % | | 2.9 | % |
| | | | | |
| International same-restaurant sales (a) (b) | 17.6 | % | | (6.0) | % | | 3.2 | % |
| | | | | |
| Global same-restaurant sales (a): | | | | | |
| Company-operated | 11.9 | % | | (0.7) | % | | 3.1 | % |
| Franchised (b) | 9.9 | % | | 1.4 | % | | 2.9 | % |
| Systemwide (b) | 10.0 | % | | 1.2 | % | | 2.9 | % |
| | | | | |
| Systemwide sales (c): | | | | | |
| U.S. Company-operated | $ | 730.4 | | | $ | 722.8 | | | $ | 707.5 | |
| U.S. franchised | 10,380.3 | | | 9,508.5 | | | 9,055.2 | |
| U.S. systemwide | 11,110.7 | | | 10,231.3 | | | 9,762.7 | |
| International Company-operated | 3.7 | | | — | | | — | |
| International franchised (b) | 1,392.9 | | | 1,107.2 | | | 1,181.6 | |
| International systemwide (b) | 1,396.6 | | | 1,107.2 | | | 1,181.6 | |
| Global systemwide (b) | $ | 12,507.3 | | | $ | 11,338.5 | | | $ | 10,944.3 | |
| | | | | |
| Restaurant average unit volumes (in thousands) (a): | | | | | |
| U.S. Company-operated | $ | 2,172.4 | | | $ | 1,978.5 | | | $ | 1,989.6 | |
| U.S. franchised | 1,878.4 | | | 1,708.9 | | | 1,664.1 | |
| U.S. systemwide | 1,895.3 | | | 1,725.5 | | | 1,684.0 | |
| | | | | |
| | | | | |
| International systemwide (b) | 1,448.1 | | | 1,199.5 | | | 1,357.5 | |
| Global systemwide (b) | $ | 1,832.1 | | | $ | 1,654.7 | | | $ | 1,641.4 | |
________________
| |
(a) | Includes international franchised restaurants same-restaurant sales (excluding Venezuela, and excluding Argentina beginning in the third quarter of 2018, due to the impact of the highly inflationary economies of those countries). |
(a)Excludes the impact of the 53rd week in 2020.
(b)Excludes Argentina and Venezuela due to the impact of the highly inflationary economies of those countries.
(c)During 2021 and 2020, global systemwide sales increased 9.8% and 3.7%, respectively, U.S. systemwide sales increased 8.6% and 4.8%, respectively, and international systemwide sales increased 20.7% and decreased 5.5%, respectively, on a constant currency basis. 2020 systemwide sales growth percentages included a positive impact of approximately 2% for the 53rd week in 2020.
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Key business measures (continued): | | | | | |
| Systemwide sales: (a) | | | | | |
| Company-operated | $ | 651.6 |
| | $ | 622.8 |
| | $ | 920.8 |
|
| North America franchised | 9,342.1 |
| | 9,183.1 |
| | 8,589.0 |
|
| North America systemwide | 9,993.7 |
| | 9,805.9 |
| | 9,509.8 |
|
| International franchised (b) | 518.9 |
| | 477.3 |
| | 420.4 |
|
| Global systemwide | $ | 10,512.6 |
| | $ | 10,283.2 |
| | $ | 9,930.2 |
|
| | | | | | |
| Restaurant average unit volumes (in thousands): | | | | | |
| Company-operated | $ | 1,918.0 |
| | $ | 1,876.8 |
| | $ | 1,783.4 |
|
| North America franchised | 1,619.9 |
| | 1,599.1 |
| | 1,551.1 |
|
| North America systemwide | 1,636.4 |
| | 1,614.2 |
| | 1,571.0 |
|
| International franchised (b) (c) | 1,082.7 |
| | 1,104.5 |
| | 1,137.9 |
|
| Global systemwide | $ | 1,596.1 |
| | $ | 1,580.4 |
| | $ | 1,545.9 |
|
________________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S.
Company-operated | | U.S. Franchised | | International Company-operated | | International Franchised | | Systemwide |
| Restaurant count: | | | | | | | | | |
| Restaurant count at December 29, 2019 | 357 | | | 5,495 | | | — | | | 936 | | | 6,788 | |
| Opened | 7 | | | 91 | | | — | | | 49 | | | 147 | |
| Closed (a) | (2) | | | (67) | | | — | | | (38) | | | (107) | |
| Net (sold to) purchased by franchisees | (1) | | | 1 | | | — | | | — | | | — | |
| Restaurant count at January 3, 2021 | 361 | | | 5,520 | | | — | | | 947 | | | 6,828 | |
| Opened | 7 | | | 116 | | | 5 | | | 82 | | | 210 | |
| Closed (a) | (8) | | | (58) | | | — | | | (23) | | | (89) | |
| Net purchased from (sold by) franchisees | 43 | | | (43) | | | — | | | — | | | — | |
| Restaurant count at January 2, 2022 | 403 | | | 5,535 | | | 5 | | | 1,006 | | | 6,949 | |
| |
(a) | During 2018 and 2017, North America systemwide sales increased 2.0% and 3.0%, respectively, international franchised sales increased 13.0% and 14.8%, respectively, and global systemwide sales increased 2.5% and 3.5%, respectively, on a constant currency basis. |
| |
(b) | Excludes Venezuela, and excludes Argentina beginning in the third quarter of 2018, due to the impact of the highly inflationary economies of those countries. |
| |
(c) | The decrease in average unit volumes for international franchised restaurants is primarily driven by changes in the countries and territories in which the franchised restaurants operate, as well as the impact of foreign currency translation. |
_______________
|
| | | | | | | | | | | |
| | Company-operated | | North America Franchised | | International Franchised | | Systemwide |
| Restaurant count: | | | | | | | |
| Restaurant count at January 1, 2017 | 330 |
| | 5,768 |
| | 439 |
| | 6,537 |
|
| Opened | 11 |
| | 86 |
| | 77 |
| | 174 |
|
| Closed | (4 | ) | | (61 | ) | | (12 | ) | | (77 | ) |
| Restaurant count at December 31, 2017 | 337 |
| | 5,793 |
| | 504 |
| | 6,634 |
|
| Opened | 7 |
| | 101 |
| | 51 |
| | 159 |
|
| Closed | (5 | ) | | (55 | ) | | (22 | ) | | (82 | ) |
| Net purchased from (sold by) franchisees | 14 |
| | (14 | ) | | — |
| | — |
|
| Restaurant count at December 30, 2018 | 353 |
| | 5,825 |
| | 533 |
| | 6,711 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Sales | $ | 734.1 | | | $ | 11.3 | | | $ | 722.8 | | | $ | 15.3 | | | $ | 707.5 | |
|
| | | | | | | |
| Sales | Change |
| | 2018 | | 2017 |
| Sales | $ | 28.8 |
| | $ | (298.0 | ) |
The increase in sales during 20182021 was primarily due to a 1.3%(1) an 11.9% increase in Company-operated same-restaurant sales, as well as a(2) net increase innew restaurant development and (3) the numberCompany’s acquisition of Company-operated93 franchise-operated restaurants in operationFlorida during 2018 compared to 2017. Company-operated same-restaurant sales improved due to an increase in our average per customer check amount, reflecting benefits from strategic pricethe fourth quarter of 2021. These increases on our menu items and changes in product mix. These benefits were partially offset by a decrease in customer count.
The decrease in sales during 2017 was primarily due to(1) the impact of sellingthe sale of 47 Company-operated restaurants to franchisees under our system optimization initiative, which resulted in a reduction inNew York during the second quarter of 2021 and (2) Company-operated sales during the 53rd week of $316.42020 of approximately $13.7 million. Company-operated same-restaurant sales during 2017 increased 0.2%, primarily due to (1) higher average check and (2) an increase in our average per customer check amount, which was
partially offset by a decrease in customer count. Our per customer check amount increased primarily due to benefitscount, reflecting the positive impact from changes in product mixthe breakfast daypart and strategic price increases on our menu items. Sales alsothe prior year impact of the COVID-19 pandemic. Company-operated same-restaurant sales during 2021 benefited from higher sales growth at our new and remodeled Image Activation restaurants.government stimulus payments to consumers during the first quarter of 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Franchise Royalty Revenue and Fees | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Franchise royalty revenue | $ | 460.7 | | | $ | 44.2 | | | $ | 416.5 | | | $ | 15.8 | | | $ | 400.7 | |
| Franchise fees | 76.0 | | | 47.8 | | | 28.2 | | | (0.1) | | | 28.3 | |
| $ | 536.7 | | | $ | 92.0 | | | $ | 444.7 | | | $ | 15.7 | | | $ | 429.0 | |
|
| | | | | | | |
| Franchise Royalty Revenue and Fees | Change |
| | 2018 | | 2017 |
| Royalty revenue | $ | 11.9 |
| | $ | 23.8 |
|
| Franchise fees | (13.4 | ) | | 15.2 |
|
| | $ | (1.5 | ) | | $ | 39.0 |
|
The increase in franchise royalty revenue during 20182021 was primarily due to the absence of one incentive program for Image Activation restaurant remodels that largely ended at December 31, 2017, as well as(1) a 9.9% increase in global franchise same-restaurant sales and (2) a net increase in the number of franchise restaurants in operation during 20182021 compared to 2017. Royalty revenue was also positively impacted2020. These increases were partially offset by a 1.0%royalties earned during the 53rd week of 2020 of approximately $7.8 million. Franchise same-restaurant sales increased due to (1) higher average check and (2) an increase in franchisecustomer count, reflecting the positive impact from the breakfast daypart and the prior year impact of the COVID-19 pandemic. Franchise same-restaurant sales.sales during 2021 benefited from government stimulus payments to consumers during the first quarter of 2021.
The decreaseincrease in franchise fees during 20182021 was primarily due to facilitating fewer Franchise Flips and the related impact of the new accounting guidance for revenue recognition effective January 1, 2018. The Company facilitated 96 and 400 Franchise Flips during 2018 and 2017, respectively (excluding the DavCo and NPC Transactions discussed above). Franchise Flip technical assistance fees are recognized as revenue over the contractual term of the franchise agreements under the new accounting guidance. Under previous guidance, technical assistance fees received in connection with Franchise Flips were recognized as revenue when the franchise agreements were signed and the restaurants opened. See Note 1 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information regarding the new accounting guidance for revenue recognition. This decrease in franchise fees during 2018 was partially offset by(1) an increase in fees for providing information technology services to franchisees and other miscellaneous(2) the accelerated recognition of franchise fees.agreement revenue as a result of franchisee-to-franchisee restaurant transfers.
The increase in franchise royalty revenue and fees during 2017 was primarily due to facilitating Franchise Flips and prior year sales of Company-operated restaurants to franchisees under our system optimization initiative. Royalty revenue also benefited from a 2.2% increase in franchise same-restaurant sales.
| | | Franchise Rental Income | Change | Franchise Rental Income | 2021 | | 2020 | | 2019 |
| | 2018 | | 2017 | | Amount | | Change | | Amount | | Change | | Amount |
| Franchise rental income | $ | 13.2 |
| | $ | 47.0 |
| Franchise rental income | $ | 236.7 | | | $ | 4.1 | | | $ | 232.6 | | | $ | (0.5) | | | $ | 233.1 | |
The increase in franchise rental income during 20182021 was primarily due to subleasing properties to franchisees in connection with facilitating Franchise Flips during 2017. The(1) an increase in franchise rental incomepercent rent, reflecting higher systemwide sales compared with 2020, and (2) the impact of the sale of 47 Company-operated restaurants in New York during 2017the second quarter of 2021. These increases were partially offset by the impact of terminating existing leases where the Company was primarily due to leasing and/or subleasing properties to franchiseeslessor in connection with the saleCompany’s acquisition of Company-operatedfranchise-operated restaurants in Florida during 2016 and facilitating Franchise Flips.the fourth quarter of 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advertising Funds Revenue | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Advertising funds revenue | $ | 389.5 | | | $ | 55.8 | | | $ | 333.7 | | | $ | (5.7) | | | $ | 339.4 | |
|
| | | | | | | |
| Advertising Funds Revenue | Change |
| | 2018 | | 2017 |
| Advertising funds revenue | $ | 326.0 |
| | $ | — |
|
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. UnderThe increase in advertising funds revenue during 2021 was primarily due to (1) an increase in franchise same-restaurant sales in the new accounting guidance for revenue recognition effective January 1, 2018,U.S. and Canada and (2) the revenueprior year abatement of the national advertising funds is fully consolidated intofund contributions on breakfast sales. These increases were partially offset by revenues earned during the Company’s consolidated statements53rd week of operations.2020 of approximately $6.4 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of Sales, as a Percent of Sales | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Food and paper | 30.5 | % | | (0.2) | % | | 30.7 | % | | (0.8) | % | | 31.5 | % |
| Restaurant labor | 31.5 | % | | (0.8) | % | | 32.3 | % | | 2.0 | % | | 30.3 | % |
| Occupancy, advertising and other operating costs | 21.3 | % | | (0.8) | % | | 22.1 | % | | (0.6) | % | | 22.7 | % |
| 83.3 | % | | (1.8) | % | | 85.1 | % | | 0.6 | % | | 84.5 | % |
|
| | | | | |
| Cost of Sales, as a Percent of Sales | Change |
| | 2018 | | 2017 |
| Food and paper | 0.2 | % | | 1.3 | % |
| Restaurant labor | 0.3 | % | | 0.7 | % |
| Occupancy, advertising and other operating costs | 0.5 | % | | (0.5 | )% |
| | 1.0 | % | | 1.5 | % |
The increasedecrease in cost of sales, as a percent of sales, during 20182021 was primarily due to (1) higher average check, (2) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (3) incremental recognition pay during April and May of 2020. These impacts were partially offset by (1) an increase in restaurant labor rates and (2) higher commodity costs and higher insurance costs, partially offset by benefits from strategic price increases on our menu items.costs.
The increase in cost of sales, as a percent of sales, during 2017 was primarily due to an increase in commodity costs, reflecting higher chicken, bacon and beef costs, as well as an increase in restaurant labor rates. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Franchise Support and Other Costs | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Franchise support and other costs | $ | 42.9 | | | $ | 16.4 | | | $ | 26.5 | | | $ | (17.2) | | | $ | 43.7 | |
|
| | | | | | | |
| Franchise Support and Other Costs | Change |
| | 2018 | | 2017 |
| Franchise support and other costs | $ | 8.9 |
| | $ | 9.4 |
|
The increase in franchise support and other costs during 2018 and 20172021 was primarily due to an increase in costs incurred to provide information technology and other services to our franchisees.franchisees, partially offset by investments made in 2020 to support U.S. franchisees in preparation of the national launch of breakfast in March 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Franchise Rental Expense | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Franchise rental expense | $ | 132.4 | | | $ | 6.8 | | | $ | 125.6 | | | $ | 1.7 | | | $ | 123.9 | |
|
| | | | | | | |
| Franchise Rental Expense | Change |
| | 2018 | | 2017 |
| Franchise rental expense | $ | 3.1 |
| | $ | 20.3 |
|
Franchise rental expense in 2018 and 2017 increased as a result of entering into new leases in connection with facilitating Franchise Flips for purposes of subleasing such properties to the franchisee. The increase in franchise rental expense during 2017 also increased2021 was primarily due to subleasing properties(1) an increase in percent rent, reflecting higher systemwide sales compared with 2020 and (2) the impact of the sale of 47 Company-operated restaurants in New York to franchisees that were previously Company-operated restaurants and as such, had been previously recorded in costduring the second quarter of sales.2021.
| | | Advertising Funds Expense | Change | Advertising Funds Expense | 2021 | | 2020 | | 2019 |
| | 2018 | | 2017 | | Amount | | Change | | Amount | | Change | | Amount |
| Advertising funds expense | $ | 321.9 |
| | $ | — |
| Advertising funds expense | $ | 411.8 | | | $ | 66.4 | | | $ | 345.4 | | | $ | 7.3 | | | $ | 338.1 | |
The expenses of the national advertising funds are now fully consolidated into the Company’s consolidated statements of operations under the new accounting guidance for revenue recognition effective January 1, 2018. During 2018, advertising funds revenue exceededincrease in advertising funds expense by $4.1 millionduring 2021 was primarily due to the timing ofsame factors as described above for “Advertising Funds Revenue.” Advertising funds expense also increased during 2021 due to the Company’s funding of $25.0 million of incremental advertising spend.to support the breakfast daypart, compared with the Company’s funding of $14.6 million in 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General and Administrative | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Incentive compensation | $ | 46.5 | | | $ | 23.5 | | | $ | 23.0 | | | $ | (3.0) | | | $ | 26.0 | |
| Professional fees | 41.0 | | | 8.7 | | | 32.3 | | | 12.8 | | | 19.5 | |
| Share-based compensation | 22.0 | | | 3.9 | | | 18.1 | | | 0.8 | | | 17.3 | |
| Travel-related expenses | 6.1 | | | 0.3 | | | 5.8 | | | (6.6) | | | 12.4 | |
| Other, net | 127.4 | | | (0.3) | | | 127.7 | | | 2.7 | | | 125.0 | |
| | $ | 243.0 | | | $ | 36.1 | | | $ | 206.9 | | | $ | 6.7 | | | $ | 200.2 | |
|
| | | | | | | |
| General and Administrative | Change |
| | 2018 | | 2017 |
| Legal reserves | $ | 26.9 |
| | $ | (1.9 | ) |
| Employee compensation and related expenses | (10.1 | ) | | (11.2 | ) |
| Professional services | (2.8 | ) | | (13.7 | ) |
| Severance | (0.1 | ) | | (4.7 | ) |
| Other, net | — |
| | (1.7 | ) |
| | $ | 13.9 |
| | $ | (33.2 | ) |
The increase in general and administrative expenses during 20182021 was primarily due to (1) an increase in legal reserves resulting from litigationincentive compensation accruals and higher share-based compensation, reflecting higher operating performance as compared to plan in 2021, and (2) higher professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning (“ERP”) implementation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and Amortization | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Restaurants | $ | 76.4 | | | $ | (8.5) | | | $ | 84.9 | | | $ | (0.9) | | | $ | 85.8 | |
| Technology support, corporate and other | 49.1 | | | 1.2 | | | 47.9 | | | 2.0 | | | 45.9 | |
| $ | 125.5 | | | $ | (7.3) | | | $ | 132.8 | | | $ | 1.1 | | | $ | 131.7 | |
The decrease in depreciation and amortization during 2021 was primarily due to (1) assets becoming fully depreciated and (2) the impact of a cybersecurity incident (seeprior year change in useful lives for certain asset categories. These decreases were partially offset by an increase in depreciation and amortization for technology investments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| System Optimization Gains, Net | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| System optimization gains, net | $ | (33.5) | | | $ | (30.4) | | | $ | (3.1) | | | $ | (1.8) | | | $ | (1.3) | |
System optimization gains, net during 2021 were primarily comprised of a gain on the sale of 47 Company-operated restaurants in New York. See Note 234 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information). This increase was partially offset by decreases in (1) employee compensation and related expenses, reflecting a decrease in incentive compensation accruals and changes in staffing driven by our G&A realignment plan and (2) professional services, including lower legal fees.
The decrease in general and administrative expenses during 2017 was primarily due to decreases in (1) professional services due to legal and other costs associated with a cybersecurity incident recognized during 2016 (see Note 23 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information), (2) employee compensation and related expenses, primarily as a result of changes in staffing driven by our system optimization initiative and a decrease in incentive compensation accruals, and (3) severance expense.
|
| | | | | | | |
| Depreciation and Amortization | Change |
| | 2018 | | 2017 |
| Restaurants | $ | (0.3 | ) | | $ | (1.9 | ) |
| Corporate and other | 3.5 |
| | 4.9 |
|
| | $ | 3.2 |
| | $ | 3.0 |
|
The decrease in restaurant depreciation and amortization during 2018 was primarily due to the assignment of certain leases to a franchisee, resulting in the write-off of the related net investment in the lease, partially offset by the impact of capital leases resulting from facilitating Franchise Flips during 2017. Corporate and other expense increased due to an increase in depreciation and amortization for technology investments.
The decrease in restaurant depreciation and amortization during 2017 was primarily due to a decrease in depreciation on assets sold under our system optimization initiative of $4.0 million, partially offset by the impact of capital leases resulting from facilitating Franchise Flips during 2017. Corporate and other expense increased due to an increase in depreciation and amortization for technology investments.
|
| | | | | | | | | | | |
| System Optimization (Gains) Losses, Net | Year Ended |
| | 2018 | | 2017 | | 2016 |
| System optimization (gains) losses, net | $ | (0.5 | ) | | $ | 39.1 |
| | $ | (71.9 | ) |
discussion. System optimization (gains) losses,gains, net during 20182020 were primarily comprised of post-closing adjustments on previous sales of restaurants, gains (losses) on the sale of surplus properties and other properties.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reorganization and Realignment Costs | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Operations and field realignment | $ | 1.7 | | | $ | (2.1) | | | $ | 3.8 | | | $ | 3.8 | | | $ | — | |
| IT realignment | — | | | (7.3) | | | 7.3 | | | (1.8) | | | 9.1 | |
| G&A realignment | (0.1) | | | (0.7) | | | 0.6 | | | (7.2) | | | 7.8 | |
| System optimization initiative | 6.9 | | | 2.6 | | | 4.3 | | | 4.2 | | | 0.1 | |
| $ | 8.5 | | | $ | (7.5) | | | $ | 16.0 | | | $ | (1.0) | | | $ | 17.0 | |
In September 2020, the Company initiated a plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment
Plan realigned the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. The Operations and Field Realignment Plan also included contract terminations, including the closure of certain field offices. During 2021, the Company recognized costs associated with the Operations and Field Realignment Plan totaling $1.7 million, which primarily included third-party and other costs. During 2020, the Company recognized costs associated with the Operations and Field Realignment Plan totaling $3.8 million, which included severance and related employee costs of $3.1 million and share-based compensation of $0.6 million. The Company does not expect to incur any material additional costs under the Operations and Field Realignment Plan.
In December 2019, the Company’s 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”). Additionally, in June 2020, the Company made changes to its leadership structure that included the elimination of the Chief Digital Experience Officer position and the creation of a Chief Information Officer position. During 2020, the Company recognized costs associated with the IT Realignment Plan totaling $7.3 million, which included third-party and other costs of $5.2 million, recruitment and relocation costs of $1.3 million and severance and related employee costs of $0.8 million. The Company does not expect to incur any material additional costs under the IT Realignment Plan.
In May 2017, the Company initiated a plan to reduce its general and administrative expenses (the “G&A Realignment Plan”). Additionally, in May 2019, the Company announced changes to its management and operating structure. G&A realignment costs for 2020 were primarily comprised of share-based compensation. The Company does not expect to incur any material additional costs under the G&A Realignment Plan.
As part of the Company’s system optimization initiative, the Company expects to continue to optimize the Wendy’s system through strategic restaurant acquisitions and dispositions, as well as by facilitating Franchise Flips. During 2021, the Company recognized costs associated with its system optimization initiative totaling $6.9 million, which were primarily comprised of the write-off of certain lease assets, lease termination fees and transaction fees associated with the NPC bankruptcy sale process, as well as professional fees and transaction fees associated with the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021. During 2020, the Company recognized costs associated with its system optimization initiative totaling $4.3 million, which primarily included professional fees related to the NPC bankruptcy sale process. The Company expects to recognize a gain onof approximately $0.8 million, primarily related to the salewrite-off of three Company-operated restaurants to a franchisee. During 2017, system optimization (gains) losses, net included a losscertain NPC-related lease liabilities upon final termination of $43.6 million resulting from the DavCo and NPC Transactions. During 2016, the Company sold 310 Company-operated restaurants to franchisees.leases. See Note 3 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information.information regarding the NPC bankruptcy sale process.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impairment of Long-Lived Assets | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Impairment of long-lived assets | $ | 2.3 | | | $ | (5.7) | | | $ | 8.0 | | | $ | 1.0 | | | $ | 7.0 | |
|
| | | | | | | | | | | |
| Reorganization and Realignment Costs | Year Ended |
| | 2018 | | 2017 | | 2016 |
| G&A realignment - May 2017 plan | $ | 8.8 |
| | $ | 21.7 |
| | $ | — |
|
| G&A realignment - November 2014 plan | — |
| | — |
| | 0.7 |
|
| System optimization initiative | 0.3 |
| | 0.9 |
| | 9.4 |
|
| | $ | 9.1 |
| | $ | 22.6 |
| | $ | 10.1 |
|
In May 2017, the Company initiated a G&A realignment plan to further reduce its G&A expenses following the November 2014 plan discussed below. During 2018, the Company recognized costs associated with this plan totaling $8.8 million, which primarily included (1) severance and related employee costs of $3.8 million, (2) third-party and other costs of $2.4 million and (3) share-based compensation of $1.6 million. During 2017, the Company recognized costs associated with this plan totaling $21.7 million, which primarily included (1) severance and related employee costs of $15.0 million, (2) share-based compensation of $5.1 million and (3) third-party and other costs of $1.1 million.
In November 2014, the Company initiated a plan to reduce its G&A expenses. The plan included a realignment and reinvestment of resources to focus primarily on accelerated restaurant development and consumer-facing restaurant technology to drive long-term growth. The Company achieved the majority of the expense reductions through the realignment of its U.S. field operations and savings at its Restaurant Support Center in Dublin, Ohio, which was substantially completed by the end of the second quarter of 2015. During 2016, costs primarily included recruitment and relocation costs. The Company did not incur any expenses during 2018 or 2017 related to the plan and does not expect to incur additional costs.
During 2018, 2017 and 2016, the Company recognized costs associated with its system optimization initiative totaling $0.3 million, $0.9 million and $9.4 million, respectively. During 2018 and 2017, costs primarily included professional fees. During 2016, costs primarily included professional fees of $7.4 million and accelerated amortization of previously acquired franchise rights of $1.6 million.
|
| | | | | | | |
| Impairment of Long-Lived Assets | Change |
| | 2018 | | 2017 |
| Impairment of long-lived assets | $ | 0.6 |
| | $ | (12.1 | ) |
The change in impairment charges during 20182021 was primarily driven by variations in losses resulting from the deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in previously impaired restaurants that did not subsequently recover. Such impairment charges totaled $4.1 million and $3.2 million during 2018 and 2017, respectively.2020 as a result of the COVID-19 pandemic.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Operating Income, Net | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Gains on sales-type leases | $ | (4.2) | | | $ | (2.2) | | | $ | (2.0) | | | $ | 0.3 | | | $ | (2.3) | |
| Equity in earnings in joint ventures, net | (11.2) | | | (5.1) | | | (6.1) | | | 2.6 | | | (8.7) | |
| Other, net | 0.8 | | | 1.2 | | | (0.4) | | | — | | | (0.4) | |
| $ | (14.6) | | | $ | (6.1) | | | $ | (8.5) | | | $ | 2.9 | | | $ | (11.4) | |
The change in impairment charges during 2017 was driven by variations in losses from the remeasurement of properties to fair value upon determination that the assets will be leased and/or subleased to franchisees in connection with the sale of Company-operated restaurants. Such impairment charges totaled $0.2 million and $14.0 million during 2017 and 2016, respectively.
|
| | | | | | | | | | | |
| Other Operating Income, Net | Year Ended |
| | 2018 | | 2017 | | 2016 |
| Lease buyout | $ | 0.8 |
| | $ | (1.4 | ) | | $ | (12.4 | ) |
| Equity in earnings in joint ventures, net | (8.1 | ) | | (7.6 | ) | | (8.4 | ) |
| Other | 0.8 |
| | 0.3 |
| | 0.8 |
|
| | $ | (6.5 | ) | | $ | (8.7 | ) | | $ | (20.0 | ) |
The changeincrease in other operating income, net during 2018 and 20172021 was primarily due to lease buyout activity and variations(1) an increase in incomethe equity in earnings from our equity method investments.TimWen joint venture, which included a gain on the sale of a parcel of land during 2021, and (2) gains on new and modified sales-type leases.
| | | Interest Expense, Net | Change | Interest Expense, Net | 2021 | | 2020 | | 2019 |
| | 2018 | | 2017 | | Amount | | Change | | Amount | | Change | | Amount |
| Interest expense, net | $ | 1.5 |
| | $ | 3.3 |
| Interest expense, net | $ | 109.2 | | | $ | (8.5) | | | $ | 117.7 | | | $ | 1.7 | | | $ | 116.0 | |
Interest expense, net increaseddecreased during 2018 and 20172021 primarily due to an increase(1) the impact of completing the refinancing of a portion of the Company’s securitized financing facility in capital lease obligations resulting from facilitating Franchise Flips during 2017the second quarter of 2021 and subleasing such properties to(2) the franchisee, partially offsetimpact of the 53rd week in 2018 by a decrease in amortization2020 of debt issuance costs.approximately $1.9 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss on Early Extinguishment of Debt | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Loss on early extinguishment of debt | $ | 17.9 | | | $ | 17.9 | | | $ | — | | | $ | (8.5) | | | $ | 8.5 | |
|
| | | | | | | |
| Loss on Early Extinguishment of Debt | Change |
| | 2018 | | 2017 |
| Loss on early extinguishment of debt | $ | 11.5 |
| | $ | — |
|
During the firstsecond quarter of 2018,2021, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of redeemingrepaying the outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes with the proceeds from the saleissuance of theits Series 2018-12021-1 Class A-2 Notes. The loss on the early extinguishment of debt of $11.5$17.9 million was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs and a specified make-whole payment.of $8.3 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Income, Net | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Other income, net | $ | 0.7 | | | $ | (0.7) | | | $ | 1.4 | | | $ | (6.4) | | | $ | 7.8 | |
|
| | | | | | | |
| Investment Income, Net | Change |
| | 2018 | | 2017 |
| Gain on sale of investments, net | $ | 447.4 |
| | $ | 2.1 |
|
| Other than temporary loss on investment | 0.3 |
| | (0.3 | ) |
| Other, net | 0.3 |
| | 0.2 |
|
| | $ | 448.0 |
| | $ | 2.0 |
|
InvestmentOther income, net increaseddecreased during 20182021 primarily due to fluctuations in interest income earned on our cash equivalents.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Provision for Income Taxes | 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Income before income taxes | $ | 240.6 | | | $ | 87.8 | | | $ | 152.8 | | | $ | (18.7) | | | $ | 171.5 | |
| Provision for income taxes | (40.2) | | | (5.2) | | | (35.0) | | | (0.4) | | | (34.6) | |
| Effective tax rate on income | 16.7 | % | | (6.2) | % | | 22.9 | % | | 2.8 | % | | 20.1 | % |
The increase in the provision for income taxes during 2021 was primarily due to higher income before income taxes in 2021, partially offset by (1) the tax benefit for changes in state deferred income taxes and (2) an increase in the tax benefit from share-based compensation. The 2021 tax benefit for changes in state deferred income taxes was primarily due to a 2021 change in tax law, which resulted in a one-time release of a previously recorded valuation allowance against our deferred tax assets. The decrease in the effective tax rate in 2021 was primarily due to the $450.0 million gain recorded ontax benefit for changes in state deferred income taxes described above and a decrease in the saletax effect of the Company’s remaining ownership interest in Inspire Brands on August 16, 2018. our foreign operations.
Segment Information
See Note 826 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. Investment income,information regarding the Company’s segments.
Wendy’s U.S.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Sales | $ | 730.4 | | | $ | 7.6 | | | $ | 722.8 | | | $ | 15.3 | | | $ | 707.5 | |
| Franchise royalty revenue | 407.3 | | | 34.1 | | | 373.2 | | | 17.5 | | | 355.7 | |
| Franchise fees | 64.2 | | | 42.1 | | | 22.1 | | | 0.2 | | | 21.9 | |
| Advertising fund revenue | 365.6 | | | 52.3 | | | 313.3 | | | (5.9) | | | 319.2 | |
| Total revenues | $ | 1,567.5 | | | $ | 136.1 | | | $ | 1,431.4 | | | $ | 27.1 | | | $ | 1,404.3 | |
| Segment profit | $ | 450.1 | | | $ | 56.8 | | | $ | 393.3 | | | $ | 24.1 | | | $ | 369.2 | |
The increase in Wendy’s U.S. revenues during 2021 was primarily due to (1) an increase in systemwide same-restaurant sales, (2) higher franchise fees, reflecting an increase in fees for providing information technology services to franchisees, (3) net new restaurant development and (4) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021. Same-restaurant sales increased during 20172021 primarily due to (1) higher average check and (2) an increase in customer count, reflecting the positive impact from the breakfast daypart and the prior year impact of the COVID-19 pandemic. These increases were partially offset by (1) the impact of the sale of certain47 Company-operated restaurants in New York during the second quarter of 2021 and (2) sales and royalty revenue during the 53rd week of 2020 of approximately $13.7 million and $7.0 million, respectively.
The increase in Wendy’s U.S. segment profit during 2021 was primarily due to (1) higher revenues and (2) lower cost method investments.of sales, as a percent of sales, for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales.” These changes were partially offset by (1) higher franchise support and other costs, (2) higher advertising fund expense, reflecting the Company’s funding of $25.0 million of incremental advertising to support the breakfast daypart, and (3) higher general and administrative expenses.
|
| | | | | | | | | | | |
| (Provision for) Benefit from Income Taxes | Year Ended |
| | 2018 | | 2017 | | 2016 |
| Income before income taxes | $ | 574.9 |
| | $ | 101.0 |
| | $ | 201.7 |
|
| (Provision for) benefit from income taxes | (114.8 | ) | | 93.0 |
| | (72.1 | ) |
| Effective tax rate on income | 20.0 | % | | (92.1 | )% | | 35.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Sales | $ | 3.7 | | | $ | 3.7 | | | $ | — | | | $ | — | | | $ | — | |
| Franchise royalty revenue | 53.4 | | | 10.1 | | | 43.3 | | | (1.7) | | | 45.0 | |
| Franchise fees | 5.4 | | | 3.4 | | | 2.0 | | | (1.0) | | | 3.0 | |
| Advertising fund revenue | 23.9 | | | 3.6 | | | 20.3 | | | 0.1 | | | 20.2 | |
| Total revenues | $ | 86.4 | | | $ | 20.8 | | | $ | 65.6 | | | $ | (2.6) | | | $ | 68.2 | |
| Segment profit | $ | 27.4 | | | $ | 7.3 | | | $ | 20.1 | | | $ | (0.1) | | | $ | 20.2 | |
Our effective tax ratesThe increase in 2018, 2017Wendy’s International revenues during 2021 was primarily due to (1) an increase in same-restaurant sales, (2) the opening of Company-operated restaurants in the U.K and 2016 were impacted(3) higher franchise fees, reflecting an increase in fees for providing information technology services to franchisees. Same-restaurant sales increased during 2021 due to (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (2) higher average check.
The increase in Wendy’s International segment profit during 2021 was primarily due to higher revenues, partially offset by variations in income before income taxes, adjusted for recurring items such as non-deductible(1) higher general and administrative expenses and state(2) higher franchise support and other costs.
Global Real Estate & Development
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Franchise fees | $ | 6.4 | | | $ | 2.2 | | | $ | 4.2 | | | $ | 0.8 | | | $ | 3.4 | |
| Franchise rental income | 236.7 | | | 4.1 | | | 232.6 | | | (0.5) | | | 233.1 | |
| Total revenues | $ | 243.1 | | | $ | 6.3 | | | $ | 236.8 | | | $ | 0.3 | | | $ | 236.5 | |
| Segment profit | $ | 106.1 | | | $ | 5.4 | | | $ | 100.7 | | | $ | (6.4) | | | $ | 107.1 | |
The increase in Global Real Estate & Development revenues during 2021 was primarily due to (1) higher franchise rental income taxes, as well as non-recurring discrete items. In 2018, our effective state income tax rate was favorably impacted by the sale of our remaining ownership interest in Inspire Brands, the gain on which is primarily allocable to a jurisdiction that does not tax such gains (see Note 8 of the Financial Statements and Supplementary Data contained in Item 8 herein“Franchise Rental Income” above for further discussion). Discrete items, which may occur in any given year but are not consistent from year to year includeinformation) and (2) the following: (1) on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), which resulted in a benefitaccelerated recognition of $140.4 million in 2017, which was subsequently adjusted in 2018 by recording an expense of $2.2 million (see below, as well as Note 14 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information), (2) our system optimization initiative (including corrections to prior years identified and recorded in 2017 and 2016, which resulted in a benefit of $2.2 million and $7.1 million, respectively), (3) valuation allowances (to the extent not reflected in the Tax Act amount), which decreased in 2018 and 2016 and increased in 2017 primarilyfranchise agreement revenue as a result of changesfranchisee-to-franchisee restaurant transfers.
The increase in expected future state taxable income availableGlobal Real Estate & Development segment profit during 2021 was primarily due to offset certain state net operating loss carryforwards,(1) an increase in the equity in earnings from the TimWen joint venture and (4) excess tax benefits(2) gains on new and tax deficiencies related to share-based payments, which resulted in a benefit of $10.2 million and $5.2 million in 2018 and 2017, respectively.
In our initial analysis of the impact of the Tax Act, we recorded a discrete net tax benefit of $140.4 million for the year ended December 31, 2017. This net benefit primarily consisted of a benefit of $164.9 million for the impact of the corporate rate reduction on our net deferred tax liabilities,modified sales-type leases. These increases were partially offset by a decrease in net expense of $22.2 million forrental income, reflecting the international-related provisions, including the transition tax (and the related impact to our recorded valuation allowance) and deferred taxes recorded on foreign earnings previously considered permanently reinvested. The Company recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and the transition tax and included these amounts in its consolidated financial statements for the year ended December 31, 2017. In 2018, subsequent guidance from the Internal Revenue Service on the international provisions of the Tax Act (such as the transition tax and the tax on global intangible low-taxed income (“GILTI”)) and on the limits on the deduction of certain executive compensation, in addition to adjusting estimates of deferred tax assets and liabilities to the actual amounts reported on our 2017 federal and state income tax returns, resulted in an adjustment to our provisional amounts. Accordingly, an expense of $2.2 million was recorded in 2018.
The impact of our system optimization initiative onterminating existing leases where the provision for income taxes includedCompany was lessor in connection with the effectsCompany’s acquisition of franchise-operated restaurants in Florida during the dispositionfourth quarter of non-deductible goodwill, and changes to our state deferred taxes and valuation allowances on state net operating losses caused by the shifting relative taxable presence in the various states as our system optimization initiative is executed. These items, which are non-recurring, (decreased) increased the provision for income taxes by ($1.1) million, $15.0 million and $2.8 million during 2018, 2017 and 2016, respectively.2021.
Based on certain provisions contained in the Tax Act, the unrepatriated earnings of foreign subsidiaries, primarily Canadian, are no longer considered permanently invested outside of the U.S. As of December 30, 2018, we have provided a deferred foreign tax provision of $2.0 million on these unrepatriated earnings.
Consolidated Outlook for 20192022
Sales
We expect sales willat our Company-operated restaurants to be favorably impacted primarily by improving(1) a net increase in the number of Company-operated restaurants, including the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021 and the Company’s continued expansion in the U.K., (2) continued growth of our North America business throughbreakfast daypart, (3) our “Fast Food Done Right” strategy, which includes continuing core menu improvement,improvements, product innovation and strategic price increases on our menu items to partially offset commodity and focused executionlabor inflation pressures, and (4) continued growth of operational excellence and brand positioning.our digital business. We also expect sales willthese favorable impacts to be favorably impactedpartially offset by increased investmentlapping the sale of 47 Company-operated restaurants in consumer-facing digital technology.New York during the second quarter of 2021.
Franchise Royalty Revenue and Fees
We expect the sales trends forat franchised restaurants to continue to be generally benefited bybenefit from many of the factors described above under “Sales” related to the improvements in the North America business.“Sales.” In addition, we expect franchise royalty revenue and fees willto be favorably impacted by an(1) a net increase in the number of franchise restaurants in operation.
Franchise Rental Incomeoperation due to net new restaurant development, (2) the sale of 47 Company-operated restaurants in New York during the second quarter of 2021 and Expense
(3) the Company’s recently announced plans to launch breakfast in Canada in the second quarter of 2022. We expect franchise rental income and franchise rental expensethese favorable impacts to increasebe partially offset by approximately $40.0 million, with no impact to net income, due to the new accounting guidance on leases, which requires lessors to recognize lessees’ payments toCompany’s acquisition of 93 franchise-owned restaurants in Florida during the Company for executory costs on a gross basis as revenue with a corresponding expense. See Note 1fourth quarter of the Financial Statements and Supplementary Data contained in Item 8 herein for further information regarding the new accounting guidance on leases.2021.
Cost of Sales
We expect cost of sales, as a percent of sales to be negatively impacted by (1) higher restaurant labor rates and (2) an increase in commodity costs. We expect cost of sales, as a percent of sales to be favorably impacted by many of the same factors described above under “Sales,” and to also benefit from productivity initiatives. We expect these favorable impacts on cost of sales, as a percent of sales, to be partially offset by higher restaurant labor due to increases in wages, as well as an increase in commodity costs.
Franchise SupportAdvertising Funds Revenue and Other CostsExpense
We expect franchise support and other costs will be unfavorably impacted by increased investmentadvertising funds expense to exceed advertising funds revenue due to the Company’s plans to fund $16.0 million of incremental advertising in consumer-facing digital technology2022 to continue to drive growth in franchised restaurants.our breakfast daypart.
General and Administrative
We expect general and administrative expenseexpenses to be negatively impacted by incentive compensation, as well as by adding additional resourceshigher primarily due to supportincreases in (1) IT-related costs, primarily related to our investment in consumer-facing digital technologyERP implementation, (2) IT and our international organization. These items are expecteddevelopment headcount investments and (3) travel-related expenses. We expect these increases to be partially offset by the favorable impact of the May 2017 G&A realignment plan.lower incentive compensation.
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. PrincipalOur principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to shareholders.stockholders.
Our anticipated cash requirements for 2019 exclusive of operating cash flow requirements consist principally of:
Cash Flows from Operating, Investing and Financing Activities
capital expenditures of approximately $75.0 million to $80.0 million as discussed below in “Capital Expenditures;”
quarterly cash dividends aggregating up to approximately $92.1 million as discussed below in “Dividends;” and
stock repurchases of $21.5 million under our November 2018 authorization and potential stock repurchases of up to $225.0 million under our February 2019 authorization as discussed below in “Stock Repurchases.”
Based upon current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.
The table below summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Amount | | Change | | Amount | | Change | | Amount |
| Net cash provided by (used in): | | | | | | | | | |
| Operating activities | $ | 345.8 | | | $ | 61.4 | | | $ | 284.4 | | | $ | (4.5) | | | $ | 288.9 | |
| Investing activities | (154.7) | | | (86.4) | | | (68.3) | | | (13.4) | | | (54.9) | |
| Financing activities | (242.7) | | | (84.8) | | | (157.9) | | | 207.4 | | | (365.3) | |
| Effect of exchange rate changes on cash | 0.3 | | | (1.0) | | | 1.3 | | | (2.2) | | | 3.5 | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (51.3) | | | $ | (110.8) | | | $ | 59.5 | | | $ | 187.3 | | | $ | (127.8) | |
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | Amount | | Change | | Amount | | Change | | Amount |
| Net cash provided by (used in): | | | | | | | | | |
| Operating activities | $ | 224.2 |
| | $ | (14.6 | ) | | $ | 238.8 |
| | $ | 45.0 |
| | $ | 193.8 |
|
| Investing activities | 362.9 |
| | 455.1 |
| | (92.2 | ) | | (199.3 | ) | | 107.1 |
|
| Financing activities | (305.7 | ) | | (89.9 | ) | | (215.8 | ) | | 196.2 |
| | (412.0 | ) |
| Effect of exchange rate changes on cash | (7.7 | ) | | (13.8 | ) | | 6.1 |
| | 4.0 |
| | 2.1 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 273.7 |
| | 336.8 |
| | $ | (63.1 | ) | | $ | 45.9 |
| | $ | (109.0 | ) |
Operating Activities
Cash provided by operating activities was $224.2 million, $238.8 million and $193.8 million in 2018, 2017 and 2016, respectively. Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities. Cash provided by operating activities decreased $14.6was $345.8 million during 2018 as compared to 2017,and $284.4 million in 2021 and 2020, respectively. The increase was primarily due to an increase in(1) higher net income, adjusted for non-cash expenses, (2) a cash paid for income taxes, reflecting the payment of income taxes associated with$24.7 million related to the gain on salesettlement of our remaining ownership interestthe financial institutions class action in Inspire Brands. This increaseJanuary 2020, (3) the timing of the collection of royalty receivables and (4) a decrease in cashpayments for incentive compensation for the 2020 fiscal year paid for income taxes was largelyin 2021. These increases were partially offset by a favorable change in operating assets and liabilities, which resulted primarily from (1) the timing of payments for marketing expenses of the national advertising funds, (2) the timing of collections of royalty receivablesan increase in cash paid for income taxes and (3) a decrease in paymentscash paid for incentive compensation.cloud computing arrangements, primarily related to the Company’s ERP implementation.
Investing Activities
Cash provided by operatingused in investing activities increased $45.0was $154.7 million during 2017 as compared to 2016,and $68.3 million in 2021 and 2020, respectively. The change was primarily due to (1) an increase in net income adjustedpayments for non-cash expenses,acquisitions of $118.2 million compared to the prior year, reflecting the impact of the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021, (2) a decreasepayment for an investment in income tax payments, netequity securities of refunds$10.0 million during 2021 and (3) a decreasean increase in payments for incentive compensation.capital expenditures of $9.0 million. These favorable changes were partially offset by the timing of payments for marketing expenses of the national advertising funds.
Investing Activities
Cash provided by investing activities increased $455.1 million during 2018 as compared to 2017, primarily due to (1) an increase in proceeds from salesdispositions of investments of $445.9$49.0 million, reflecting the impact of the sale of our remaining ownership interest in Inspire Brands during 2018, (2) net cash used in the DavCo and NPC Transactions during 2017 of $16.1 million, (3) a decrease in capital expenditures of $11.9 million and (4) an increase in proceeds from notes receivable, net of payments, of $10.0 million. These favorable changes were partially offset by (1) an increase in cash used for the acquisition of franchised restaurants of $21.4 million and (2) a decrease in proceeds from dispositions of $7.6 million.
Cash used in investing activities increased $199.3 million during 2017 as compared to 2016, primarily due to (1) a decrease in proceeds from dispositions of47 Company-operated restaurants and other assetsin New York during the second quarter of $251.3 million and (2) net cash used in the DavCo and NPC Transactions of $16.1 million. These unfavorable changes were partially offset by a decrease of $68.3 million in capital expenditures.2021.
Financing Activities
Cash used in financing activities increased $89.9was $242.7 million during 2018 as compared to 2017,and $157.9 million in 2021 and 2020, respectively. The change was primarily due to (1) an increase in repurchases of common stock of $143.6$206.4 million and (2) an increase in dividends of $12.2 million and (3) the settlement of a supplemental purchase price liability associated with the acquisition of DavCo of $6.3$30.0 million. These changes were partially offset by (1) a net increase in cash provided by long-term debt activities of $45.8$149.1 million, reflecting the impact of the completion of athe Company’s debt refinancing transaction during the firstsecond quarter of 2018,2021, and (2) an increase in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $26.3$7.7 million.
Material Cash usedRequirements
Our anticipated cash requirements for 2022, exclusive of operating cash flow requirements, consist principally of:
•capital expenditures of approximately $90.0 million to $100.0 million as discussed below in financing activities decreased $196.2“Capital Expenditures;”
•quarterly cash dividends aggregating approximately $107.6 million during 2017 as compared to 2016, primarily due to a decreasediscussed below in repurchases of common stock of $210.7 million.“Dividends;” and
Capitalization
|
| | | | | | | |
| | Year End |
| | 2018 | | 2017 |
| Long-term debt, including current portion | $ | 2,784.4 |
| | $ | 2,754.4 |
|
| Stockholders’ equity | 648.4 |
| | 573.2 |
|
| | $ | 3,432.8 |
| | $ | 3,327.6 |
|
The Company’s total capitalization at December 30, 2018 increased $105.2 million from $3,327.6 million at December 31, 2017 and was impacted principally by the following:
comprehensive income of $444.6 million;
treasury share issuances of $52.7 million for exercises and vestings of share-based compensation awards; and
a net increase in long-term debt, including current portion and unamortized debt issuance costs, of $30.0 million, primarily resulting from the completion of a refinancing transaction during the first quarter of 2018; partially offset by
•stock repurchases of $270.4 million;up to $100.0 million under our February 2022 authorization as discussed below in “Stock Repurchases.”
Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.
We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us. As previously announced, the Company is evaluating, subject to market and other conditions, a potential debt raise transaction within its securitized debt facility during 2022. If the Company proceeds with the transaction and the transaction is completed, the Company expects to use the net proceeds from the transaction in accordance with its capital allocation policy, including investments to support the growth of the Wendy’s brand or the return of capital to stockholders through dividends paidand share repurchases.
Capital Expenditures
In 2021, cash capital expenditures amounted to $78.0 million. In 2022, we expect that cash capital expenditures will amount to approximately $90.0 million to $100.0 million, principally relating to (1) the opening of $80.5 million;new Company-operated restaurants and the reimaging of existing Company-operated restaurants, (2) technology investments, including consumer-facing digital technology, (3) restaurant equipment investments, (4) maintenance capital expenditures for Company-operated restaurants and (5) various other capital projects.
In addition to the cumulative effect of changecapital expenditures noted above, the Company expects to spend approximately $30.0 million in accounting principle of $70.2 million2022 on cloud computing arrangements (“CCA”), primarily related to the adoption of the new accounting guidance for revenue recognition.
Long-Term Debt, Including Current Portion
|
| | | |
| | Year End |
| | 2018 |
| Series 2018-1 Class A-2-I Notes | $ | 445.5 |
|
| Series 2018-1 Class A-2-II Notes | 470.3 |
|
| Series 2015-1 Class A-2-II Notes | 870.7 |
|
| Series 2015-1 Class A-2-III Notes | 483.7 |
|
| 7% debentures | 90.8 |
|
| Capital lease obligations | 455.6 |
|
| Unamortized debt issuance costs | (32.2 | ) |
| Total long-term debt, including current portion | $ | 2,784.4 |
|
Except as described below, there were no material changes to the terms of any debt obligations since December 31, 2017. The Company was in compliance with its debt covenants as of December 30, 2018.Company’s ERP implementation. See Note 121 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information related to our long-term debt obligations.accounting policy for CCA.
On January 17, 2018, Wendy’s Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, completed a refinancing transaction under which the Master Issuer issued fixed rate senior secured notes in the following 2018-1 series: Class A-2-I with an interest rate of 3.573% and initial principal amount of $450.0 million and Class A-2-II with an interest rate of 3.884% and initial principal amount of $475.0 million (collectively, the “Series 2018-1 Class A-2 Notes”). The net proceeds from the sale of the Series 2018-1 Class A-2 Notes were used to redeem the Master Issuer’s outstanding Series 2015-1 Class A-2-I Notes, to pay prepayment and transaction costs and for general corporate purposes.
Concurrently, the Master Issuer entered into a revolving financing facility of Series 2018-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2018-1 Class A-1 Notes”), which allows for the drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2018-1 Class A-1 Notes during 2018. The Series 2015-1 Class A-1 Notes were canceled on the closing date and the letters of credit outstanding against the Series 2015-1 Class A-1 Notes were transferred to the Series 2018-1 Class A-1 Notes.
We may from time to time seek to repurchase a portion of our outstanding long-term debt, including our 7% debentures assumed in the Wendy’s Merger, through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Whether or not to repurchase any debt and the size and timing of any such repurchases will be determined at our discretion.
Contractual Obligations
The following table summarizes the expected payments under our outstanding contractual obligations at December 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| | | 2019 | | 2020-2021 | | 2022-2023 | | After 2023 | | Total |
| Long-term debt obligations (a) | | $ | 122.7 |
| | $ | 242.6 |
| | $ | 1,012.5 |
| | $ | 1,564.0 |
| | $ | 2,941.8 |
|
| Capital lease obligations (b) | | 47.1 |
| | 93.6 |
| | 98.9 |
| | 699.6 |
| | 939.2 |
|
| Operating lease obligations (c) | | 95.9 |
| | 186.4 |
| | 185.6 |
| | 1,058.0 |
| | 1,525.9 |
|
| Purchase obligations (d) | | 20.7 |
| | 13.0 |
| | — |
| | — |
| | 33.7 |
|
| Other | | 30.5 |
| | 8.8 |
| | — |
| | — |
| | 39.3 |
|
| Total (e) | | $ | 316.9 |
| | $ | 544.4 |
| | $ | 1,297.0 |
| | $ | 3,321.6 |
| | $ | 5,479.9 |
|
_______________
| |
(a) | Excludes capital lease obligations, which are shown separately in the table. The table includes interest of approximately $571.5 million. These amounts exclude the fair value adjustment related to Wendy’s 7% debentures assumed in the Wendy’s Merger. |
| |
(b) | Excludes related sublease rental receipts of $1,297.6 million on capital lease obligations. The table includes interest of approximately $483.6 million for capital lease obligations. |
| |
(c) | Represents the minimum lease cash payments for operating lease obligations. Excludes related sublease rental receipts of $1,236.2 million on operating lease obligations. |
| |
(d) | Includes (1) $22.1 million for the remaining beverage purchase requirement under a beverage agreement, (2) $6.5 million for capital expenditures, (3) $4.4 million for utility commitments and (4) $0.7 million of other purchase obligations. In January 2019, the Company amended its beverage agreement, which now expires at the later of reaching a minimum usage requirement or December 31, 2025. |
| |
(e) | Excludes obligation for unrecognized tax benefits, including interest and penalties, of $29.3 million. We are unable to predict when and if cash payments will be required. |
Capital Expenditures
In 2018, cash capital expenditures amounted to $69.9 million and non-cash capital expenditures, consisting of capitalized lease obligations, amounted to $6.6 million. In 2019, we expect that cash capital expenditures will amount to approximately $75.0 million to $80.0 million, principally relating to (1) technology investments, including consumer-facing digital technology, (2) reimaging existing Company-operated restaurants, (3) the opening of new Company-operated restaurants, (4) maintenance capital expenditures for our Company-operated restaurants and (5) various other capital projects. As of December 30, 2018, the Company had $6.5 million of outstanding commitments, included in “Accounts payable,” for capital expenditures expected to be paid in 2019.
Dividends
TheOn March 15, 2021, June 15, 2021, September 15, 2021 and December 15, 2021, the Company paid quarterly cash dividends of $0.085 per share on its common stockof $.09, $.10, $.12 and $.12, respectively, aggregating $80.5 million in 2018. During the first quarter of 2019,$94.8 million. On February 23, 2022, the Company declaredannounced a dividend of $0.10$0.125 per share to be paid on March 15, 20192022 to shareholdersstockholders of record as of March 1, 2019.7, 2022. If the Company pays regular quarterly cash dividends for the remainder of 20192022 at the same rate as declared in the first quarter of 2019,2022, the Company’s total cash requirement for dividends for all of 20192022 would be approximately $92.1$107.6 million based on the number of shares of its common stock outstanding at February 19, 2019.22, 2022. 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
The following table summarizes the Company’s repurchases of common stock for 2018, 2017 and 2016:
|
| | | | | | | | | | | |
| | Year Ended |
| | 2018 | | 2017 | | 2016 |
| Repurchases of common stock (a) | $ | 270.2 |
| | $ | 127.4 |
| | $ | 335.0 |
|
| Number of shares repurchased | 15.8 |
| | 8.6 |
| | 29.5 |
|
_______________
| |
(a) | Excludes commissions of $0.2 million, $0.1 million and $0.3 million for 2018, 2017 and 2016, respectively. |
In February 2018,2020, our Board of Directors authorized a repurchase program for up to $175.0 million of our common stock through March 3, 2019, when and if market conditions warrant and to the extent legally permissible. In August 2018, our Board of Directors authorized an additional share repurchase program for up to $100.0 million of our common stock through December 27, 2019 with a portion of the proceeds obtained through the sale of our remaining ownership interest in Inspire Brands,February 28, 2021, when and if market conditions warrantwarranted 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. The Company resumed share repurchases in August 2020. In addition, in May 2021, August 2021 and November 2018,2021 the Board of Directors approved an increaseincreases of $120.0$50.0 million, $70.0 million and $80.0 million, respectively, to the August 2018February 2020 authorization, resulting in a totalan aggregate authorization of $220.0 million.$300.0 million that continued to expire on February 28, 2022. In November 2018,2021, the Company entered into an accelerated share repurchase agreement (the “2018“2021 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase programs.program. Under the 20182021 ASR Agreement, the Company paid the financial institution an initial purchase price of $75.0$125.0 million in cash and received an initial delivery of 3.64.9 million shares of common stock, representing an estimate ofestimated 85% of the total shares expected to be delivered under the 20182021 ASR Agreement. In February 2022, the Company completed the 2021 ASR Agreement and received an additional 0.7 million shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 20182021 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 20182021 ASR Agreement, less an agreed upon discount. On December 18, 2018,In total, 5.6 million shares were delivered under the Company completed the 20182021 ASR Agreement and receivedat an additional 0.7 millionaverage purchase price of $22.22 per share.
In addition to the shares of common stock. Additionally,repurchased in connection with the 2021 ASR Agreement, during 2018,2021, the Company repurchased 10.16.6 million shares under the February 2018 and November 2018 authorizations with an aggregate purchase price of $172.6$142.7 million, of which $1.8 million was accrued at December 30, 2018, and excluding commissions of $0.1 million. Asmillion, under the February 2020 repurchase authorization. After taking into consideration these repurchases, with the completion of December 30, 2018,the 2021 ASR Agreement in February 2022 described above, the Company had completed itsthe February 2018 authorization and had $147.4 million of availability remaining under its November 20182020 authorization. Subsequent to December 30, 2018 through February 19, 2019, the Company repurchased 1.3 million shares under the November 2018 authorization with an aggregate purchase price of $21.5 million, excluding commissions.
In February 2019,2022, our Board of Directors authorized the repurchase of up to $225.0$100.0 million of our common stock through March 1, 2020,February 28, 2023, when and if market conditions warrant and to the extent legally permissible.
Long-Term Debt, Including Current Portion
As of January 2, 2022, the Company’s long-term debt obligations totaled $2,380.7 million, including $24.3 million payable within 12 months. In connection withaddition, the February 2019 authorization,Company is party to a revolving financing facility of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Class A-1 Notes”), which allows for the November 2018 authorization was canceled.
In February 2017, our Boarddrawing of Directors authorized a repurchase program for up to $150.0$300.0 million on a revolving basis using various credit instruments, including a letter of our common stock through March 4, 2018, when and if market conditions warranted and tocredit facility. No amounts were borrowed under the extent legally permissible. During 2018, the Company
completed the February 2017 authorization with the repurchase of 1.4 million shares with an aggregate purchase price of $22.6 million, excluding commissions.
Additionally, on June 1, 2015, our Board of Directors authorized a repurchase program for up to $1,400.0 million of our common stock through January 1, 2017, when and if market conditions warranted and to the extent legally permissible. The June 2015 share repurchase program was substantially completed by the expiration date.Class A-1 Notes during 2021. See Note 1512 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information related to our share repurchase programs.long-term debt obligations and the timing of expected payments.
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. The Company also leases restaurant, office and transportation equipment. As of January 2, 2022, the Company’s future minimum rental payments for non-cancelable leases were $2,280.6 million, including $148.3 million payable within 12 months. See Note 20 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information related to our finance and operating lease obligations and the timing of expected payments.
Purchase Obligations
The Company’s purchase obligations include payment obligations to a third-party global IT consultant, purchase requirements under a beverage agreement and other obligations related primarily to marketing and information technology. As of January 2, 2022, the Company’s purchase obligations were $210.1 million, including $68.0 million payable within 12 months.
Guarantees and Other Contingencies
|
| | | |
| | Year End |
| | 2018 |
| Lease guarantees (a) | $ | 66.3 |
|
| Letters of credit (b) | 27.1 |
|
| Recourse on loans | 0.1 |
|
| Total | $ | 93.5 |
|
_______________
| | | | | |
(a) | Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees. These leases extend through 2056.Year End |
| 2021 |
| Lease guarantees (a) | $ | 90.6 | |
(b) | The Company has outstanding lettersLetters of credit with various parties totaling $27.1 million. The Company does not expect any material loss to result from these letters of credit because we do not believe performance will be required.(b) | 22.3 | |
| Total | $ | 112.9 | |
_______________
(a)Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees. These leases extend through 2045.
(b)The Company has outstanding letters of credit with various parties. The Company does not expect any material loss to result from these letters of credit because we do not believe performance will be required.
General Inflation, Commodities and Changing Prices
We believe that general inflation did not have a significant effectInflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations.operations during 2021, and we expect this to continue into 2022. We attempt to manage any inflationary costs and commodity price increases through product mix and selective menu price increases.increases and product mix. 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 theour 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.
Off-Balance Sheet Arrangements
Other than the obligations for guarantees described above in “Guarantees and Other Contingencies,” we do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our financial condition or results of operations.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in applying our critical accounting policies that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Our estimates and assumptions affect, among other things, impairment of goodwill and indefinite-lived intangible assets, impairment of long-lived assets, realizability of deferred tax assets and federal and state income tax uncertainties and legal and environmental accruals.uncertainties. We evaluate those estimates and assumptions on an ongoing basis based on historical experience and on various other factors which we believe are reasonable under the circumstances.
We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements:
•Impairment of goodwill and indefinite-lived intangible assets:
ForOur goodwill impairment testing purposes, Wendy’s includes two reporting units comprisedtotaled $775.3 million as of its (1) North America (defined as the United StatesJanuary 2, 2022, of which $620.9 million, $31.9 million and Canada)$122.5 million was allocated to our U.S. Company-operated and franchise restaurants and (2) international franchise restaurants. As of December 30, 2018, all of Wendy’s goodwill of $747.9 million was associated with its North America restaurants since its internationalreporting unit, Canada franchise restaurants goodwill was determined to be fully impaired during the fourth quarter of 2013.reporting unit and global real estate and development operations reporting unit, respectively.
We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Our annual impairment test of goodwill may be completed through a qualitative assessment to determine if the fair value of the reporting unit is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment for any reporting units, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a two-step quantitative goodwill impairment test. Under the first step,quantitative test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the faircarrying value of the reporting unit is less thanexceeds its carrying value, an indication of goodwill impairment exists for the reporting unit and we must perform step two of the impairment test (measurement). Step two of the impairment test, if necessary, requires the estimation of the fair value, for the assets and liabilities of a reporting unit in order to calculate the implied fair value of the reporting unit’s goodwill. Under step two, an impairment loss is recognized in an amount equal to that excess, limited to the extent the carryingtotal amount of thegoodwill allocated to that reporting unit’s goodwill exceeds the implied fair value of goodwill.unit. The fair value of the reporting unit is determined by management and is based on the results of (1) estimates we made regarding the present value of the anticipated cash flows associated with each reporting unit (the “income approach”) andand/or (2) the indicated value of the reporting units based on a comparison and correlation of the Company and other similar companies (the “market approach”).
The income approach, which considers factors unique to each of our reporting units and related long range plans that may not be comparable to other companies and that are not yet publicly available, is dependent on several critical management assumptions. These assumptions include estimates of future sales growth, gross margins, operating costs,profit, income tax rates, terminal value growth rates, capital expenditures and the weighted average cost of capital (discount rate). Anticipated cash flows used under the income approach are developed every fourth quarter in conjunction with our annual budgeting process and also incorporate amounts and timing of future cash flows based on our long range plan.
The discount rates used in the income approach are an estimate of the rate of return that a market participant would expect of each reporting unit. To select an appropriate rate for discounting the future earnings stream, a review is made of short-term interest rate yields of long-term corporate and government bonds, as well as the typical capital structure of companies in the industry. The discount rates used for each reporting unit may vary depending on the risk inherent in the cash flow projections, as well as the risk level that would be perceived by a market participant. A terminal value is included at the end of the projection period used in our discounted cash flow analysis to reflect the remaining value that each reporting unit is expected to generate. The terminal value represents the present value in the last year of the projection period of all subsequent cash flows into perpetuity. The terminal value growth rate is a key assumption used in determining the terminal value as it represents the annual growth of all subsequent cash flows into perpetuity.
Under the market approach, we apply the guideline company method in estimating fair value. The guideline company method makes use of market price data of corporations whose stock is actively traded in a public market. The corporations we select as guideline companies are engaged in a similar line of business or are subject to similar financial and business risks, including the opportunity for growth. The guideline company method of the market approach provides an indication of value by relating the equity or invested capital (debt plus equity) of guideline companies to various measures of their earnings and cash flow, then applying such multiples to the business being valued. The result of applying the guideline company approach is adjusted based on the incremental value associated with a controlling interest in the business. This “control premium” represents the amount a new controlling shareholderstockholder would pay for the benefits resulting from synergies and other potential benefits derived from controlling the enterprise.
OurFor the annual goodwill impairment test was completed through a qualitative assessment performed in the fourth quarter of 2018, which2021, we elected to perform a qualitative assessment for the U.S. Company-operated and franchise restaurants and the Canada franchise restaurants, and we performed a quantitative goodwill impairment test for the global real estate and development operations. The qualitative assessment indicated the fair value of goodwill of our Wendy’s North AmericaU.S. Company-operated and franchise restaurants and our Canada franchise restaurants reporting units was more likely than not greater than the carrying amount. The Company last completed aOur quantitative assessment in the fourth quarter of
2015, whichgoodwill impairment test for our global real estate and development operations indicated that there had been no impairment and the fair value of goodwillthis reporting unit of our Wendy’s North America restaurants exceeded the$1,586.0 million was approximately 33% in excess of its carrying amount.value.
Our indefinite-lived intangible assets represent trademarks and totaled $903.0 million as of December 30, 2018.January 2, 2022. We test indefinite-lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired. Our annual impairment test may be completed through a qualitative assessment to determine if the fair value of the indefinite-lived intangible assets is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, we test for impairment using a quantitative process. Our quantitative process includes comparing the carrying value to the fair value of our indefinite-lived intangible assets, with any excess recognized as an impairment loss. Our critical estimates in the determination of the fair value of our indefinite-lived intangible assets include the anticipated future revenues of Company-operated and franchised restaurants and the resulting cash flows.
OurFor the annual impairment test forof our indefinite-lived intangible assets was completed through a qualitative assessment performed in the fourth quarter of 2018, which2021, we elected to perform a qualitative assessment. The qualitative assessment indicated the fair value of our indefinite-lived intangible assets was more likely than not greater than the carrying amount. The Company last completed a quantitative assessment in the fourth quarter of 2015, which indicated the fair value of indefinite-lived intangible assets exceeded the carrying amount.
The estimated fair values of our goodwill reporting units and indefinite-lived intangible assets are subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we use, we may be required to recognize impairment charges in future years.
•Impairment of long-lived assets:
As of December 30, 2018,January 2, 2022, the total net carrying value of our long-lived tangible and definite-lived intangible assets was $1,213.2 million and $391.2 million, respectively.$2,341.6 million. Our long-lived assets include (1) properties and related definite-lived intangible assets (e.g., favorable leases) that are leased and/or subleased to franchisees, and (2) Company-operated restaurant assets and related definite-lived intangible assets, which include favorable leases and reacquired rights under franchise agreements.agreements, and (3) finance and operating lease assets.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess the recoverability of our long-lived assets by comparing the carrying amount of the asset group to future undiscounted net cash flows expected to be generated through leases and/or subleases or by our individual Company-operated restaurants. If the carrying amount of the long-lived asset group is not recoverable on an undiscounted cash flow basis, then impairment is recognized to the extent that the carrying amount exceeds its fair value and is included in “Impairment of long-lived assets.” Our critical estimates in this review process include the anticipated future cash flows from leases and/or subleases or individual Company-operated restaurants, which is used in assessing the recoverability of the respective long-lived assets. Our impairment losses principally reflect impairment charges resulting from the deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in restaurants impaired in prior years which did not subsequently recover.restaurants.
Our fair value estimates are subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we used, we may be required to recognize additional impairment charges in future years.
•Our ability to realize deferred tax assets:
We account for income taxes under the asset and liability method. A deferred tax asset or liability is recognized whenever there are (1) future tax effects from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and (2) operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled.
Deferred tax assets are recognized to the extent the Company believes these assets will more likely than not be realized. In evaluating the realizability of deferred tax assets, the Company considers all available positive and negative evidence, including the interaction and the timing of future reversals of existing temporary differences, recent operating results, tax-planning strategies and projected future taxable income. In projecting future taxable income, we begin with historical results from continuing operations and incorporate assumptions including future operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment and are consistent with the plans and estimates we are using to manage our underlying business. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income.
When considered necessary, a valuation allowance is recorded to reduce the carrying amount of the deferred tax assets to their anticipated realizable value. Our evaluation of the realizability of our deferred tax assets is subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions, the competitive environment and the effect of future tax legislation. Should future taxable income vary from projected taxable income, we may be required to adjust our valuation allowance in future years.
Net operating loss and credit carryforwards are subject to various limitations and carryforward periods. As of December 30, 2018,January 2, 2022, we have foreign tax credits of $11.9$19.5 million and state tax credits of $0.6 million, both of which will begin to expire in 2022 and 2020, respectively.2022. In addition, as of December 30, 2018,January 2, 2022, we have deferred tax assets for foreign net operating loss carryforwards of $0.04$1.4 million, andas well as state and local net operating loss carryforwards of $47.1$39.1 million whichthat will begin to expire in 2023 and 2019, respectively.2022. We believe it is more likely than not that the benefit from certain net operating loss carryforwards and tax credits will not be realized. In recognition of this risk, we have provided a valuation allowance of $42.2$38.3 million.
•Income tax uncertainties:
We measure income tax uncertainties in accordance with a two-step process of evaluating a tax position. We first determine if it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is then measured, for purposes of financial statement recognition, as the largest amount that has a greater than 50% likelihood of being realized upon effective settlement. We have unrecognized tax benefits of $27.6$18.8 million, which if resolved favorably would reduce our tax expense by $23.5$14.9 million at December 30, 2018.as of January 2, 2022.
We accrue interest related to uncertain tax positions in “Interest expense, net” and penalties in “General and administrative.net.” At December 30, 2018,As of January 2, 2022, we had $1.4$1.0 million accrued for interest and $0.2 million accrued for penalties.interest.
The Company participates in the Internal Revenue Service (the “IRS”) Compliance Assurance Process (“CAP”). As part of CAP, tax years are examined on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. As such, our U.S. federal income tax returns for fiscal years 20102009 through 20162019 have been settled. CertainThe statute of limitations for the Company’s state tax returns vary, but generally the Company’s state income tax returns from its 20142018 fiscal year and forward remain subject to examination. We believe that adequate provisions have been made for any liabilities, including interest and penalties that may result from the completion of these examinations.
Legal and environmental accruals:
We are involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate accruals for continuing operations for all of our legal and environmental matters, including the accrual that we recorded for the legal proceedings related to a cybersecurity incident as described in Note 23 of the Financial Statements and Supplementary Data contained in Item 8 herein. See Note 11 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information on the accrual. 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 are thus inherently difficult. We review our assumptions and estimates each quarter based on new developments, changes in applicable law and other relevant factors and revise our accruals accordingly.
New Accounting Standards
See Note 1 of the Financial Statements and Supplementary Data contained in Item 8 herein for a summary of new or amended accounting standards applicable to us.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Certain statements the Company makes under this Item 7A constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part I” preceding “Item 1. Risk Factors.Business.”
We are exposed to the impact of interest rate changes, changes in commodity prices and foreign currency fluctuations primarily related to the Canadian dollar. In the normal course of business, we employ established policies and procedures to manage our exposure to these changes using financial instruments we deem appropriate.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit the impact on our earnings and cash flows. Our policies prohibit the use of derivative instruments for trading purposes, and we had no outstanding derivative instruments as of December 30, 2018.January 2, 2022.
As discussed in Note 12 of the Financial Statements and Supplementary Data contained in Item 8 herein, the Company completed a $2,275.0 million securitized financing facility on June 1, 2015. On January 17, 2018, the Company completed a $925.0 million refinancing transaction, the proceeds from which were used to repay all amounts outstanding on the Series 2015-1 Class A-2-I Notes, to pay prepayment and transaction costs, and for general corporate purposes. The Company’s outstanding Series 2015-1 Class A-2 Notes and Series 2018-1 Class A-2 Notes bear fixed interest rates. Concurrent with the refinancing transaction, the Company also entered into a revolving financing facility, the Series 2018-1 Class A-1 Notes, which allows for the drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. The Series 2015-1 Class A-1 Notes were canceled on the closing date.
Our long-term debt, including the current portion, aggregated $2,825.9$2,422.5 million and consisted of $2,370.3 million of fixed-rate debt and $455.6 million of capital lease obligations as of December 30, 2018January 2, 2022 (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 theits Series 2018-12021-1 Class A-1 Notes;Notes and other lines of credit; however, the Company had no outstanding borrowings under its Series 2018-1the 2021-1 Class A-1 Notes or its other lines of credit as of December 30, 2018.January 2, 2022. See Note 12 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information on the Company’s debt structure and its securitized financing facility.
In addition, certain of the Company’s loan documents determine interest based on LIBOR, and we currently intend to renegotiate such loan documents prior to LIBOR being discontinued in 2023. At this time, we cannot predict what alternative index would be negotiated with our lenders or the resulting impact on our interest expense.
Commodity Price Risk
Commodity price increases directly impacted our consolidated results of operations during 2021, and we expect this to continue into 2022. We purchase certain food products, such as beef, chicken, pork, cheese and grains, that are affected by changes in commodity prices and, as a result, we are subject to variability in our food costs. QSCC, our independent supply chain purchasing co-op, negotiates contracts with approved suppliers on behalf of the Wendy’s system in the U.S. and Canada to ensure favorable pricing for its major food products, as well as maintain an adequate supply of fresh food products. While price volatility can occur, which would impact profit margins, the purchasing contracts seek to limit the variability of these commodity costs without establishing any firm purchase commitments by us or our franchisees. In addition, we believe therethat alternative suppliers are generally alternative suppliers available. Our ability to recover increased commodity costs through higher pricing is, at times, limited by the competitive environment in which we operate.
Foreign Currency Risk
Our exposures to foreign currency risk are primarily related to fluctuations in the Canadian dollar relative to the U.S. dollar for our Canadian operations. We monitor these exposures and periodically determine our need for the use of strategies intended to lessen or limit our exposure to these fluctuations. We have exposure related to our investment in a Canadian subsidiary which is subject to foreign currency fluctuations. The exposure to Canadian dollar exchange rates on the Company’s cash flows primarily includes imports paid for by Canadian operations in U.S. dollars and payments from the Company’s Canadian operations to the Company’s U.S. operations in U.S. dollars. Revenues from our Canadian operations for the yearsyear ended December 30, 2018 and December 31, 2017January 2, 2022 represented approximately 5% and 4% of our total revenues, respectively. Accordingly, anrevenues. An immediate 10% change in Canadian dollar exchange rates versus the U.S. dollar from their levels at December 30, 2018 and December 31, 2017January 2, 2022 would not have a material effect on our consolidated financial position or results of operations.
Item 8. Financial Statements and Supplementary Data.
THE WENDY’S COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
| | | | |
| Page |
| Glossary of Defined Terms | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) | |
Consolidated Balance Sheets as of December 30, 2018January 2, 2022 and December 31, 2017January 3, 2021 | |
December 30, 2018, December 31, 2017 and January 1, 201729, 2019
| |
Consolidated Statements of Comprehensive Income for the years ended January 2, 2022, January 3, 2021 and December 30, 2018, December 31, 2017 and January 1, 201729, 2019 | |
Consolidated Statements of Stockholders’ Equity for the years ended January 2, 2022, January 3, 2021 and December 30, 2018, December 31, 2017 and January 1, 201729, 2019 | |
December 30, 2018, December 31, 2017 and January 1, 201729, 2019
| |
| |
| (1) Summary of Significant Accounting Policies | |
| (2) Revenue | |
| (3) Acquisitions | |
(4) System Optimization (Gains) Losses,Gains, Net | |
(4) Acquisitions | |
| (5) Reorganization and Realignment Costs | |
| (6) Net Income Per Share | |
| (7) Cash and Receivables | |
| (8) Investments | |
| (9) Properties | |
| (10) Goodwill and Other Intangible Assets | |
| (11) Accrued Expenses and Other Current Liabilities | |
| (12) Long-Term Debt | |
| (13) Fair Value Measurements | |
| (14) Income Taxes | |
| (15) Stockholders’ Equity | |
| (16) Share-Based Compensation | |
| (17) Impairment of Long-Lived Assets | |
| (18) Investment Income (Loss), Net | |
| (19) Retirement Benefit Plans | |
| (20) Leases | |
| (21) Guarantees and Other Commitments and Contingencies | |
| (22) Transactions with Related Parties | |
| (23) Legal and Environmental Matters | |
| (24) Advertising Costs and Funds | |
| (25) Geographic Information | |
(26) Quarterly FinancialSegment Information (Unaudited) | |
|
| | | | | | | |
| Defined Term | Footnote Where Defined |
| 2010 Plan | (16) | Share-Based Compensation |
20162019-1 Class A-1 Notes | (12) | Long-Term Debt |
| 2019 ASR Agreement | (15) | Stockholders’ Equity |
20182020-1 Class A-1 Notes | (12) | Long-Term Debt |
| 2020 Plan | (16) | Share-Based Compensation |
| 2021-1 Class A-1 Notes | (12) | Long-Term Debt |
| 2021 ASR Agreement | (15) | Stockholders’ Equity |
| 401(k) Plan | (19) | Retirement Benefit Plans |
| Advertising Funds | (1) | Summary of Significant Accounting Policies |
Anticipated Repayment Dates | (12) | Long-Term Debt |
Arby’s | (8) | Investments |
ARG Parent | (8) | Investments |
| Black-Scholes Model | (1) | Summary of Significant Accounting Policies |
| Brazil JV | (1) | Summary of Significant Accounting Policies |
| CAP | (14) | Income Taxes |
| Caracci Case | (23) | Legal and Environmental Matters |
CompanyClass A-2 Notes | (1)(12) | Long-Term Debt |
| Cloud Computing Arrangements | (1) | Summary of Significant Accounting Policies |
Contingent RentCompany | (1) | Summary of Significant Accounting Policies |
DavCoContingent Rent | (3)(1) | System Optimization (Gains) Losses, Net |
DavCo and NPC Transactions | (3) | System Optimization (Gains) Losses, Net |
Eligible Arby’s Employees | (19) | Retirement Benefit Plans |
Equity Plans | (1) | Summary of Significant Accounting Policies |
FASBCOVID-19 | (1) | Summary of Significant Accounting Policies |
FI CaseEBITDA | (23)(26) | Legal and Environmental MattersSegment Information |
| Equity Plans | (1) | Summary of Significant Accounting Policies |
| FASB | (1) | Summary of Significant Accounting Policies |
| Fountain Beverages | (21) | Guarantees and Other Commitments and Contingencies |
| Franchise Flip | (1) | Summary of Significant Accounting Policies |
| FRG | (3) | Acquisitions |
| G&A | (5) | Reorganization and Realignment Costs |
GAAPG&A Realignment Plan | (1)(5) | Reorganization and Realignment Costs |
| GAAP | (1) | Summary of Significant Accounting Policies |
GILTI | (14) | Income Taxes |
| Graham Case | (23) | Legal and Environmental Matters |
GuarantorsIndenture | (12) | Long-Term Debt |
IndentureIRS | (12)(14) | Long-Term DebtIncome Taxes |
Inspire BrandsIT | (8)(5) | InvestmentsReorganization and Realignment Costs |
IRSIT Realignment Plan | (14)(5) | Income TaxesReorganization and Realignment Costs |
Master IssuerLIBOR | (12) | Long-Term Debt |
NPCMaster Issuer | (3)(12) | System Optimization (Gains) Losses, NetLong-Term Debt |
QSCCNPC | (22)(3) | Acquisitions |
| Operations and Field Realignment Plan | (5) | Reorganization and Realignment Costs |
| QSCC | (22) | Transactions with Related Parties |
| Rent Holiday | (1) | Summary of Significant Accounting Policies |
| Restricted Shares | (16) | Share-Based Compensation |
| ROU | (1) | Summary of Significant Accounting Policies |
| RSAs | (1) | Summary of Significant Accounting Policies |
| RSUs | (1) | Summary of Significant Accounting Policies |
Senior NotesSecuritization Entities | (12) | Long-Term Debt |
Series 2015-1 Class A-1Senior Notes | (12) | Long-Term Debt |
Series 2015-1 Class A-2 NotesSERP | (12)(19) | Long-Term DebtRetirement Benefit Plans |
Series 2015-1 Class A-2-I NotesStraight-Line Rent | (12)(1) | Long-Term DebtSummary of Significant Accounting Policies |
Series 2015-1 Class A-2-II NotesTarget | (12)(16) | Long-Term Debt |
Series 2015-1 Class A-2-III Notes | (12) | Long-Term Debt |
Series 2015-1 Senior Notes | (12) | Long-Term DebtShare-Based Compensation |
|
| | | | | | | |
| Defined Term | Footnote Where Defined |
Series 2018-1 Class A-1 NotesThe Wendy’s Company | (12)(1) | Long-Term Debt |
Series 2018-1 Class A-2 Notes | (12) | Long-Term Debt |
Series 2018-1 Class A-2-I Notes | (12) | Long-Term Debt |
Series 2018-1 Class A-2-II Notes | (12) | Long-Term Debt |
Series 2018-1 Senior Notes | (12) | Long-Term Debt |
SERP | (19) | Retirement Benefit Plans |
Straight-Line Rent | (1) | Summary of Significant Accounting Policies |
TargetTimWen | (16)(1) | Share-Based Compensation |
Tax Act | (1) | Summary of Significant Accounting Policies |
The Wendy’s CompanyU.S. | (1) | Summary of Significant Accounting Policies |
TimWenVIE | (1) | Summary of Significant Accounting Policies |
Torres CaseWendy’s | (23)(1) | Legal and Environmental Matters |
U.S. | (1) | Summary of Significant Accounting Policies |
| Wendy’s Co-op | (1)(22) | Transactions with Related Parties |
| Wendy’s Funding | (12) | Long-Term Debt |
| Wendy’s Merger | (8) | Investments |
| Wendy’s Restaurants | (1) | Summary of Significant Accounting Policies |
Wendy’s Co-opYellow Cab | (22) | Transactions with Related Parties |
Wendy’s Funding | (12) | Long-Term Debt |
Wendy’s Merger | (8) | Investments |
Wendy’s Restaurants | (1) | Summary of Significant Accounting Policies |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Wendy’s Company
Dublin, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Wendy’s Company and subsidiaries (the “Company”) as of December 30, 2018January 2, 2022 and December 31, 2017,January 3, 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 30, 2018,January 2, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2018January 2, 2022 and December 31, 2017,January 3, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2018,January 2, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 30, 2018,January 2, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2019,March 1, 2022, expressed an unqualified opinion on the Company'sCompany’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue in 2018 due to the adoption of Accounting Standards Codification No. 606, Revenue from Contracts with Customers.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill - Global Real Estate and Development Operations Reporting Unit – Refer to Notes 1 and 10 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value.
The Company used both an income approach and a market approach to estimate fair value of the global real estate and development operations reporting unit. The income approach requires management to make significant estimates and assumptions including future sales growth, operating profit and the weighted average cost of capital (discount rate). The market approach requires use of market price data of guideline public companies to estimate the fair value of the reporting unit. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance was $775.3 million as of January 2, 2022, of which $122.5 million was allocated to the
global real estate and development operations reporting unit. The fair value of the global real estate and development operations reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized.
We identified the Company’s income approach in the impairment evaluation of goodwill for the global real estate and development operations reporting unit as a critical audit matter because of the significant judgments made by management to estimate the fair value of this reporting unit. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions, particularly related to future sales growth, operating profit and the selection of the discount rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the estimates of future sales growth, operating profit and discount rate used by management to estimate the fair value of the global real estate and development operations reporting unit included the following, among others:
•We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the global real estate and development operations reporting unit, such as controls related to management’s forecasts of future sales growth, operating profit and selection of the discount rate.
•We evaluated management’s ability to accurately forecast future sales growth and operating profit by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s sales and operating profit forecasts by comparing the forecasts to (1) historical sales and operating profit and (2) internal communications to management and the Board of Directors. We also considered the impact of changes in management’s forecasts from the annual measurement date in the fourth quarter to January 2, 2022.
•With the assistance of our fair value specialists, we evaluated the discount rate, including testing the underlying source information and the mathematical accuracy of the calculation, and by developing a range of independent estimates and comparing those to the discount rate selected by management.
/s/ Deloitte & Touche LLP
Columbus, Ohio
February 27, 2019March 1, 2022
We have served as the Company’s auditor since 1994.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Par Value)
| | | | December 30,
2018 | | December 31,
2017 | | January 2,
2022 | | January 3,
2021 |
| ASSETS | | | | ASSETS | | | |
| Current assets: | | | | Current assets: | | | |
| Cash and cash equivalents | $ | 431,405 |
| | $ | 171,447 |
| Cash and cash equivalents | $ | 249,438 | | | $ | 306,989 | |
| Restricted cash | 29,860 |
| | 32,633 |
| Restricted cash | 27,535 | | | 33,973 | |
| Accounts and notes receivable, net | 109,805 |
| | 114,390 |
| Accounts and notes receivable, net | 119,540 | | | 109,891 | |
| Inventories | 3,687 |
| | 3,156 |
| Inventories | 5,934 | | | 4,732 | |
| Prepaid expenses and other current assets | 14,452 |
| | 20,125 |
| Prepaid expenses and other current assets | 30,584 | | | 89,732 | |
| Advertising funds restricted assets | 76,509 |
| | 62,602 |
| Advertising funds restricted assets | 159,818 | | | 142,306 | |
| Total current assets | 665,718 |
| | 404,353 |
| Total current assets | 592,849 | | | 687,623 | |
| Properties | 1,213,236 |
| | 1,263,059 |
| Properties | 906,867 | | | 915,889 | |
| Finance lease assets | | Finance lease assets | 244,279 | | | 206,153 | |
| Operating lease assets | | Operating lease assets | 812,620 | | | 821,480 | |
| Goodwill | 747,884 |
| | 743,334 |
| Goodwill | 775,278 | | | 751,049 | |
| Other intangible assets | 1,294,153 |
| | 1,321,585 |
| Other intangible assets | 1,280,791 | | | 1,224,960 | |
| Investments | 47,660 |
| | 56,002 |
| Investments | 49,870 | | | 44,574 | |
| Net investment in direct financing leases | 226,477 |
| | 229,089 |
| |
| Net investment in sales-type and direct financing leases | | Net investment in sales-type and direct financing leases | 299,707 | | | 268,221 | |
| Other assets | 96,907 |
| | 79,516 |
| Other assets | 139,130 | | | 120,057 | |
| Total assets | $ | 4,292,035 |
| | $ | 4,096,938 |
| Total assets | $ | 5,101,391 | | | $ | 5,040,006 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | |
| | |
| Current liabilities: | | | |
| Current portion of long-term debt | $ | 31,655 |
| | $ | 30,172 |
| Current portion of long-term debt | $ | 24,250 | | | $ | 28,962 | |
| Current portion of finance lease liabilities | | Current portion of finance lease liabilities | 15,513 | | | 12,105 | |
| Current portion of operating lease liabilities | | Current portion of operating lease liabilities | 47,315 | | | 45,346 | |
| Accounts payable | 21,741 |
| | 22,764 |
| Accounts payable | 41,163 | | | 31,063 | |
| Accrued expenses and other current liabilities | 150,636 |
| | 111,624 |
| Accrued expenses and other current liabilities | 140,783 | | | 155,321 | |
| Advertising funds restricted liabilities | 80,153 |
| | 62,602 |
| Advertising funds restricted liabilities | 157,901 | | | 140,511 | |
| Total current liabilities | 284,185 |
| | 227,162 |
| Total current liabilities | 426,925 | | | 413,308 | |
| Long-term debt | 2,752,783 |
| | 2,724,230 |
| Long-term debt | 2,356,416 | | | 2,218,163 | |
| Long-term finance lease liabilities | | Long-term finance lease liabilities | 559,587 | | | 506,076 | |
| Long-term operating lease liabilities | | Long-term operating lease liabilities | 853,328 | | | 865,325 | |
| Deferred income taxes | 269,160 |
| | 299,053 |
| Deferred income taxes | 267,710 | | | 280,755 | |
| Deferred franchise fees | 92,232 |
| | 10,881 |
| Deferred franchise fees | 88,102 | | | 89,094 | |
| Other liabilities | 245,226 |
| | 262,409 |
| Other liabilities | 112,918 | | | 117,689 | |
| Total liabilities | 3,643,586 |
| | 3,523,735 |
| Total liabilities | 4,664,986 | | | 4,490,410 | |
| Commitments and contingencies |
|
| |
|
| Commitments and contingencies | 0 | | 0 |
| Stockholders’ equity: | |
| | |
| Stockholders’ equity: | | | |
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 231,233 and 240,512 shares outstanding, respectively | 47,042 |
| | 47,042 |
| |
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 215,849 and 224,268 shares outstanding, respectively | | Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 215,849 and 224,268 shares outstanding, respectively | 47,042 | | | 47,042 | |
| Additional paid-in capital | 2,884,696 |
| | 2,885,955 |
| Additional paid-in capital | 2,898,633 | | | 2,899,276 | |
| Retained earnings (accumulated deficit) | 146,277 |
| | (163,289 | ) | |
| Common stock held in treasury, at cost; 239,191 and 229,912 shares, respectively | (2,367,893 | ) | | (2,150,307 | ) | |
| Retained earnings | | Retained earnings | 344,198 | | | 238,674 | |
| Common stock held in treasury, at cost; 254,575 and 246,156 shares, respectively | | Common stock held in treasury, at cost; 254,575 and 246,156 shares, respectively | (2,805,268) | | | (2,585,755) | |
| Accumulated other comprehensive loss | (61,673 | ) | | (46,198 | ) | Accumulated other comprehensive loss | (48,200) | | | (49,641) | |
| Total stockholders’ equity | 648,449 |
| | 573,203 |
| Total stockholders’ equity | 436,405 | | | 549,596 | |
| Total liabilities and stockholders’ equity | $ | 4,292,035 |
| | $ | 4,096,938 |
| Total liabilities and stockholders’ equity | $ | 5,101,391 | | | $ | 5,040,006 | |
See accompanying notes to consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| January 2,
2022 | | January 3,
2021 | | December 29,
2019 |
| Revenues: | | | | | |
| Sales | $ | 734,074 | | | $ | 722,764 | | | $ | 707,485 | |
| Franchise royalty revenue and fees | 536,748 | | | 444,749 | | | 428,999 | |
| Franchise rental income | 236,655 | | | 232,648 | | | 233,065 | |
| Advertising funds revenue | 389,521 | | | 333,664 | | | 339,453 | |
| | 1,896,998 | | | 1,733,825 | | | 1,709,002 | |
| Costs and expenses: | | | | | |
| Cost of sales | 611,680 | | | 614,907 | | | 597,530 | |
| Franchise support and other costs | 42,900 | | | 26,464 | | | 43,686 | |
| Franchise rental expense | 132,411 | | | 125,613 | | | 123,929 | |
| Advertising funds expense | 411,751 | | | 345,360 | | | 338,116 | |
| General and administrative | 242,970 | | | 206,876 | | | 200,206 | |
| Depreciation and amortization | 125,540 | | | 132,775 | | | 131,693 | |
| System optimization gains, net | (33,545) | | | (3,148) | | | (1,283) | |
| Reorganization and realignment costs | 8,548 | | | 16,030 | | | 16,965 | |
| Impairment of long-lived assets | 2,251 | | | 8,037 | | | 6,999 | |
| Other operating income, net | (14,468) | | | (8,397) | | | (11,418) | |
| | 1,530,038 | | | 1,464,517 | | | 1,446,423 | |
| Operating profit | 366,960 | | | 269,308 | | | 262,579 | |
| Interest expense, net | (109,185) | | | (117,737) | | | (115,971) | |
| Loss on early extinguishment of debt | (17,917) | | | — | | | (8,496) | |
| Investment income (loss), net | 39 | | | (225) | | | 25,598 | |
| Other income, net | 681 | | | 1,449 | | | 7,771 | |
| Income before income taxes | 240,578 | | | 152,795 | | | 171,481 | |
| Provision for income taxes | (40,186) | | | (34,963) | | | (34,541) | |
| Net income | $ | 200,392 | | | $ | 117,832 | | | $ | 136,940 | |
| | | | | |
| Net income per share: | | | | | |
| Basic | $ | .91 | | | $ | .53 | | | $ | .60 | |
| Diluted | .89 | | | .52 | | | .58 | |
|
| | | | | | | | | | | |
| | Year Ended |
| | December 30,
2018 |
| December 31,
2017 |
| January 1,
2017 |
| Revenues: | | | | | |
| Sales | $ | 651,577 |
| | $ | 622,802 |
| | $ | 920,758 |
|
| Franchise royalty revenue and fees | 409,043 |
| | 410,503 |
| | 371,545 |
|
| Franchise rental income | 203,297 |
| | 190,103 |
| | 143,115 |
|
| Advertising funds revenue | 326,019 |
| | — |
| | — |
|
| | 1,589,936 |
| | 1,223,408 |
| | 1,435,418 |
|
| Costs and expenses: | | | | | |
| Cost of sales | 548,588 |
| | 517,935 |
| | 752,079 |
|
| Franchise support and other costs | 25,203 |
| | 16,325 |
| | 6,885 |
|
| Franchise rental expense | 91,104 |
| | 88,015 |
| | 67,760 |
|
| Advertising funds expense | 321,866 |
| | — |
| | — |
|
| General and administrative | 217,489 |
| | 203,593 |
| | 236,786 |
|
| Depreciation and amortization | 128,879 |
| | 125,687 |
| | 122,704 |
|
| System optimization (gains) losses, net | (463 | ) | | 39,076 |
| | (71,931 | ) |
| Reorganization and realignment costs | 9,068 |
| | 22,574 |
| | 10,083 |
|
| Impairment of long-lived assets | 4,697 |
| | 4,097 |
| | 16,241 |
|
| Other operating income, net | (6,387 | ) | | (8,652 | ) | | (19,969 | ) |
| | 1,340,044 |
| | 1,008,650 |
| | 1,120,638 |
|
| Operating profit | 249,892 |
| | 214,758 |
| | 314,780 |
|
| Interest expense, net | (119,618 | ) | | (118,059 | ) | | (114,802 | ) |
| Loss on early extinguishment of debt | (11,475 | ) | | — |
| | — |
|
| Investment income, net | 450,736 |
| | 2,703 |
| | 723 |
|
| Other income, net | 5,381 |
| | 1,617 |
| | 989 |
|
| Income before income taxes | 574,916 |
| | 101,019 |
| | 201,690 |
|
| (Provision for) benefit from income taxes | (114,801 | ) | | 93,010 |
| | (72,066 | ) |
| Net income | $ | 460,115 |
| | $ | 194,029 |
| | $ | 129,624 |
|
| | | | | | |
| Net income per share: | | | | | |
| Basic | $ | 1.93 |
| | $ | .79 |
| | $ | .49 |
|
| Diluted | 1.88 |
| | .77 |
| | .49 |
|
See accompanying notes to consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended |
| January 2,
2022 | | January 3,
2021 | | December 29, 2019 |
| | | | | |
| Net income | $ | 200,392 | | | $ | 117,832 | | | $ | 136,940 | |
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustment | 1,441 | | | 4,187 | | | 7,845 | |
| Other comprehensive income | 1,441 | | | 4,187 | | | 7,845 | |
| Comprehensive income | $ | 201,833 | | | $ | 122,019 | | | $ | 144,785 | |
|
| | | | | | | | | | | |
| | Year Ended |
| | December 30,
2018 | | December 31,
2017 | | January 1, 2017 |
| | | | | | |
| Net income | $ | 460,115 |
| | $ | 194,029 |
| | $ | 129,624 |
|
| Other comprehensive (loss) income, net: | | | | | |
| Foreign currency translation adjustment | (16,524 | ) | | 15,150 |
| | 5,864 |
|
| Change in unrecognized pension loss: | | | | | |
| Unrealized gains (losses) arising during the period | 156 |
| | 156 |
| | (90 | ) |
| Income tax (provision) benefit | (39 | ) | | (60 | ) | | 34 |
|
| Final settlement of pension liability | 932 |
| | — |
| | — |
|
| | 1,049 |
| | 96 |
| | (56 | ) |
| Effect of cash flow hedges: | | | | | |
| Reclassification of losses into Net income | — |
| | 2,894 |
| | 2,894 |
|
| Income tax provision | — |
| | (1,097 | ) | | (1,120 | ) |
| | — |
| | 1,797 |
| | 1,774 |
|
| Other comprehensive (loss) income, net | (15,475 | ) | | 17,043 |
| | 7,582 |
|
| Comprehensive income | $ | 444,640 |
| | $ | 211,072 |
| | $ | 137,206 |
|
See accompanying notes to consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
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 |
| | | | | |
| Balance at December 30, 2018 | $ | 47,042 | | | $ | 2,884,696 | | | $ | 146,277 | | | $ | (2,367,893) | | | $ | (61,673) | | | $ | 648,449 | |
| Net income | — | | | — | | | 136,940 | | | — | | | — | | | 136,940 | |
| Other comprehensive income, net | — | | | — | | | — | | | — | | | 7,845 | | | 7,845 | |
| Cash dividends | — | | | — | | | (96,364) | | | — | | | — | | | (96,364) | |
| Repurchases of common stock, including accelerated share repurchase | — | | | (15,000) | | | — | | | (202,771) | | | — | | | (217,771) | |
| Share-based compensation | — | | | 18,676 | | | — | | | — | | | — | | | 18,676 | |
| Common stock issued upon exercises of stock options | — | | | (808) | | | — | | | 28,944 | | | — | | | 28,136 | |
| Common stock issued upon vesting of restricted shares | — | | | (13,677) | | | — | | | 5,050 | | | — | | | (8,627) | |
| Cumulative effect of change in accounting principle | — | | | — | | | (1,105) | | | — | | | — | | | (1,105) | |
| Other | — | | | 114 | | | (23) | | | 89 | | | — | | | 180 | |
| Balance at December 29, 2019 | 47,042 | | | 2,874,001 | | | 185,725 | | | (2,536,581) | | | (53,828) | | | 516,359 | |
| Net income | — | | | — | | | 117,832 | | | — | | | — | | | 117,832 | |
| Other comprehensive income, net | — | | | — | | | — | | | — | | | 4,187 | | | 4,187 | |
| Cash dividends | — | | | — | | | (64,866) | | | — | | | — | | | (64,866) | |
| Repurchases of common stock, including accelerated share repurchase | — | | | 15,000 | | | — | | | (76,095) | | | — | | | (61,095) | |
| Share-based compensation | — | | | 18,930 | | | — | | | — | | | — | | | 18,930 | |
| Common stock issued upon exercises of stock options | — | | | (912) | | | — | | | 24,263 | | | — | | | 23,351 | |
| Common stock issued upon vesting of restricted shares | — | | | (7,889) | | | — | | | 2,500 | | | — | | | (5,389) | |
| Other | — | | | 146 | | | (17) | | | 158 | | | — | | | 287 | |
| Balance at January 3, 2021 | 47,042 | | | 2,899,276 | | | 238,674 | | | (2,585,755) | | | (49,641) | | | 549,596 | |
| Net income | — | | | — | | | 200,392 | | | — | | | — | | | 200,392 | |
| Other comprehensive income, net | — | | | — | | | — | | | — | | | 1,441 | | | 1,441 | |
| Cash dividends | — | | | — | | | (94,846) | | | — | | | — | | | (94,846) | |
| Repurchases of common stock, including accelerated share repurchase | — | | | (18,750) | | | — | | | (249,058) | | | — | | | (267,808) | |
| Share-based compensation | — | | | 22,019 | | | — | | | — | | | — | | | 22,019 | |
| Common stock issued upon exercises of stock options | — | | | 1,911 | | | — | | | 27,139 | | | — | | | 29,050 | |
| Common stock issued upon vesting of restricted shares | — | | | (6,023) | | | — | | | 2,285 | | | — | | | (3,738) | |
| Other | — | | | 200 | | | (22) | | | 121 | | | — | | | 299 | |
| Balance at January 2, 2022 | $ | 47,042 | | | $ | 2,898,633 | | | $ | 344,198 | | | $ | (2,805,268) | | | $ | (48,200) | | | $ | 436,405 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common
Stock | | Additional Paid-In
Capital | | Retained Earnings (Accumulated
Deficit) | | Common Stock Held in Treasury | | Accumulated Other Comprehensive Loss | | Total |
| | | | | | |
| Balance at January 3, 2016 | $ | 47,042 |
| | $ | 2,874,752 |
| | $ | (356,632 | ) | | $ | (1,741,425 | ) | | $ | (70,823 | ) | | 752,914 |
|
| Net income | — |
| | — |
| | 129,624 |
| | — |
| | — |
| | 129,624 |
|
| Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | 7,582 |
| | 7,582 |
|
| Cash dividends | — |
| | — |
| | (63,832 | ) | | — |
| | — |
| | (63,832 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | (335,258 | ) | | — |
| | (335,258 | ) |
| Share-based compensation | — |
| | 18,141 |
| | — |
| | — |
| | — |
| | 18,141 |
|
| Common stock issued upon exercises of stock options | — |
| | (6,395 | ) | | — |
| | 25,376 |
| | — |
| | 18,981 |
|
| Common stock issued upon vesting of restricted shares | — |
| | (11,195 | ) | | — |
| | 7,333 |
| | — |
| | (3,862 | ) |
| Tax benefit from share-based compensation | — |
| | 3,257 |
| | — |
| | — |
| | — |
| | 3,257 |
|
| Other | — |
| | 29 |
| | (17 | ) | | 177 |
| | — |
| | 189 |
|
| Balance at January 1, 2017 | 47,042 |
| | 2,878,589 |
| | (290,857 | ) | | (2,043,797 | ) | | (63,241 | ) | | 527,736 |
|
| Net income | — |
| | — |
| | 194,029 |
| | — |
| | — |
| | 194,029 |
|
| Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | 17,043 |
| | 17,043 |
|
| Cash dividends | — |
| | — |
| | (68,322 | ) | | — |
| | — |
| | (68,322 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | (127,490 | ) | | — |
| | (127,490 | ) |
| Share-based compensation | — |
| | 20,928 |
| | — |
| | — |
| | — |
| | 20,928 |
|
| Common stock issued upon exercises of stock options | — |
| | (3,959 | ) | | — |
| | 16,655 |
| | — |
| | 12,696 |
|
| Common stock issued upon vesting of restricted shares | — |
| | (9,683 | ) | | — |
| | 4,186 |
| | — |
| | (5,497 | ) |
| Cumulative effect of change in accounting principle | — |
| | — |
| | 1,880 |
| | — |
| | — |
| | 1,880 |
|
| Other | — |
| | 80 |
| | (19 | ) | | 139 |
| | — |
| | 200 |
|
| Balance at December 31, 2017 | 47,042 |
| | 2,885,955 |
| | (163,289 | ) | | (2,150,307 | ) | | (46,198 | ) | | 573,203 |
|
| Net income | — |
| | — |
| | 460,115 |
| | — |
| | — |
| | 460,115 |
|
| Other comprehensive loss, net | — |
| | — |
| | — |
| | — |
| | (15,475 | ) | | (15,475 | ) |
| Cash dividends | — |
| | — |
| | (80,532 | ) | | — |
| | — |
| | (80,532 | ) |
| Repurchases of common stock | — |
| | — |
| | — |
| | (270,377 | ) | | — |
| | (270,377 | ) |
| Share-based compensation | — |
| | 17,918 |
| | — |
| | — |
| | — |
| | 17,918 |
|
| Common stock issued upon exercises of stock options | — |
| | (9,582 | ) | | — |
| | 48,401 |
| | — |
| | 38,819 |
|
| Common stock issued upon vesting of restricted shares | — |
| | (9,711 | ) | | — |
| | 4,280 |
| | — |
| | (5,431 | ) |
| Cumulative effect of change in accounting principle | — |
| | — |
| | (70,210 | ) | | — |
| | — |
| | (70,210 | ) |
| Other | — |
| | 116 |
| | 193 |
| | 110 |
| | — |
| | 419 |
|
| Balance at December 30, 2018 | $ | 47,042 |
| | $ | 2,884,696 |
| | $ | 146,277 |
| | $ | (2,367,893 | ) | | $ | (61,673 | ) | | $ | 648,449 |
|
See accompanying notes to consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| January 2,
2022 | | January 3,
2021 | | December 29, 2019 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 200,392 | | | $ | 117,832 | | | $ | 136,940 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 125,540 | | | 132,775 | | | 131,693 | |
| Share-based compensation | 22,019 | | | 18,930 | | | 18,676 | |
| Impairment of long-lived assets | 2,251 | | | 8,037 | | | 6,999 | |
| Deferred income tax | (13,781) | | | 10,266 | | | 837 | |
| Non-cash rental expense, net | 40,596 | | | 28,937 | | | 28,202 | |
| Change in operating lease liabilities | (45,606) | | | (40,905) | | | (41,911) | |
| Net receipt (recognition) of deferred vendor incentives | 715 | | | 2,495 | | | (501) | |
| System optimization gains, net | (33,545) | | | (3,148) | | | (1,283) | |
| Gain on sale of investments, net | (63) | | | — | | | (24,496) | |
| Distributions received from TimWen joint venture | 16,337 | | | 8,376 | | | 13,400 | |
| Equity in earnings in joint ventures, net | (11,203) | | | (6,096) | | | (8,673) | |
| Long-term debt-related activities, net (see below) | 24,758 | | | 6,723 | | | 15,317 | |
| Other, net | (13,242) | | | (6,438) | | | (4,838) | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts and notes receivable, net | (5,613) | | | (16,243) | | | 16,935 | |
| Inventories | (872) | | | (841) | | | (163) | |
| Prepaid expenses and other current assets | (3,396) | | | (8,780) | | | (1,569) | |
| Advertising funds restricted assets and liabilities | 11,519 | | | 49,052 | | | (2,720) | |
| Accounts payable | 7,586 | | | 1,620 | | | 1,054 | |
| Accrued expenses and other current liabilities | 21,380 | | | (18,231) | | | 5,034 | |
| Net cash provided by operating activities | 345,772 | | | 284,361 | | | 288,933 | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (77,984) | | | (68,969) | | | (74,453) | |
| Acquisitions | (123,069) | | | (4,879) | | | (5,052) | |
| Dispositions | 55,118 | | | 6,091 | | | 3,448 | |
| Proceeds from sale of investments | 63 | | | 169 | | | 24,496 | |
| Notes receivable, net | 1,203 | | | (662) | | | (3,370) | |
| Payments for investments | (10,000) | | | — | | | — | |
| Net cash used in investing activities | (154,669) | | | (68,250) | | | (54,931) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from long-term debt | 1,100,000 | | | 153,315 | | | 850,000 | |
| Repayments of long-term debt | (970,344) | | | (191,462) | | | (899,800) | |
| Repayments of finance lease liabilities | (13,640) | | | (8,383) | | | (6,835) | |
| Deferred financing costs | (20,873) | | | (2,122) | | | (14,008) | |
| Repurchases of common stock, including accelerated share repurchase | (268,531) | | | (62,173) | | | (217,797) | |
| Dividends | (94,846) | | | (64,866) | | | (96,364) | |
| Proceeds from stock option exercises | 30,003 | | | 23,361 | | | 28,328 | |
| Payments related to tax withholding for share-based compensation | (4,511) | | | (5,577) | | | (8,820) | |
| Net cash used in financing activities | (242,742) | | | (157,907) | | | (365,296) | |
| Net cash (used in) provided by operations before effect of exchange rate changes on cash | (51,639) | | | 58,204 | | | (131,294) | |
| Effect of exchange rate changes on cash | 364 | | | 1,330 | | | 3,489 | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (51,275) | | | 59,534 | | | (127,805) | |
| Cash, cash equivalents and restricted cash at beginning of period | 418,241 | | | 358,707 | | | 486,512 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 366,966 | | | $ | 418,241 | | | $ | 358,707 | |
|
| | | | | | | | | | | |
| | Year Ended |
| | December 30,
2018 | | December 31,
2017 | | January 1, 2017 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 460,115 |
| | $ | 194,029 |
| | $ | 129,624 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 128,879 |
| | 125,687 |
| | 124,304 |
|
| Share-based compensation | 17,918 |
| | 20,928 |
| | 18,141 |
|
| Impairment of long-lived assets | 4,697 |
| | 4,097 |
| | 16,241 |
|
| Deferred income tax | (6,568 | ) | | (119,330 | ) | | (14,213 | ) |
| Non-cash rental income, net | (17,043 | ) | | (11,822 | ) | | (7,543 | ) |
| Net receipt of deferred vendor incentives | 139 |
| | 1,901 |
| | 959 |
|
| System optimization (gains) losses, net | (463 | ) | | 39,076 |
| | (71,931 | ) |
| Gain on sale of investments, net | (450,000 | ) | | (2,570 | ) | | (497 | ) |
| Distributions received from TimWen joint venture | 13,390 |
| | 11,713 |
| | 11,426 |
|
| Equity in earnings in joint ventures, net | (8,076 | ) | | (7,573 | ) | | (8,351 | ) |
| Long-term debt-related activities, net (see below) | 18,673 |
| | 12,075 |
| | 11,767 |
|
| Other, net | 5,178 |
| | 1,253 |
| | 3,719 |
|
| Changes in operating assets and liabilities: | | | | | |
| Accounts and notes receivable, net | 13,226 |
| | (17,340 | ) | | (34,213 | ) |
| Inventories | (434 | ) | | (305 | ) | | 34 |
|
| Prepaid expenses and other current assets | 6,824 |
| | (3,488 | ) | | (3,276 | ) |
| Advertising funds restricted assets and liabilities | 13,955 |
| | (12,230 | ) | | 5,572 |
|
| Accounts payable | (145 | ) | | (2,290 | ) | | (6,635 | ) |
| Accrued expenses and other current liabilities | 23,963 |
| | 4,982 |
| | 18,697 |
|
| Net cash provided by operating activities | 224,228 |
| | 238,793 |
| | 193,825 |
|
| Cash flows from investing activities: | |
| | | | |
| Capital expenditures | (69,857 | ) | | (81,710 | ) | | (150,023 | ) |
| Acquisitions | (21,401 | ) | | (86,788 | ) | | (2,209 | ) |
| Dispositions | 3,223 |
| | 81,516 |
| | 262,173 |
|
| Proceeds from sale of investments | 450,000 |
| | 4,111 |
| | 890 |
|
| Notes receivable, net | 959 |
| | (9,000 | ) | | (3,581 | ) |
| Payments for investments | (13 | ) | | (375 | ) | | (172 | ) |
| Net cash provided by (used in) investing activities | 362,911 |
| | (92,246 | ) | | 107,078 |
|
| Cash flows from financing activities: | |
| | | | |
| Proceeds from long-term debt | 934,837 |
| | 31,130 |
| | — |
|
| Repayments of long-term debt | (900,072 | ) | | (58,113 | ) | | (24,617 | ) |
| Deferred financing costs | (17,340 | ) | | (1,424 | ) | | (1,983 | ) |
| Repurchases of common stock | (269,809 | ) | | (126,231 | ) | | (336,958 | ) |
| Dividends | (80,532 | ) | | (68,322 | ) | | (63,832 | ) |
| Proceeds from stock option exercises | 45,228 |
| | 12,884 |
| | 19,773 |
|
| Payments related to tax withholding for share-based compensation | (11,805 | ) | | (5,721 | ) | | (4,444 | ) |
| Contingent consideration payment | (6,269 | ) | | — |
| | — |
|
| Net cash used in financing activities | (305,762 | ) | | (215,797 | ) | | (412,061 | ) |
| Net cash provided by (used in) operations before effect of exchange rate changes on cash | 281,377 |
| | (69,250 | ) | | (111,158 | ) |
| Effect of exchange rate changes on cash | (7,689 | ) | | 6,125 |
| | 2,127 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | 273,688 |
| | (63,125 | ) | | (109,031 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 212,824 |
| | 275,949 |
| | 384,980 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 486,512 |
| | $ | 212,824 |
| | $ | 275,949 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED
(In Thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| January 2,
2022 | | January 3,
2021 | | December 29,
2019 |
| Detail of cash flows from operating activities: | | | | | |
| Long-term debt-related activities, net: | | | | | |
| Loss on early extinguishment of debt | $ | 17,917 | | | $ | — | | | $ | 8,496 | |
| Accretion of long-term debt | 1,177 | | | 1,161 | | | 1,272 | |
| Amortization of deferred financing costs | 5,664 | | | 5,562 | | | 5,549 | |
| $ | 24,758 | | | $ | 6,723 | | | $ | 15,317 | |
| | | | | |
| Supplemental cash flow information: | | | | | |
| Cash paid for: | | | | | |
| Interest | $ | 133,284 | | | $ | 136,228 | | | $ | 138,270 | |
| Income taxes, net of refunds | 54,779 | | | 16,202 | | | 34,798 | |
| | | | | |
| Supplemental non-cash investing and financing activities: | | | | | |
| Capital expenditures included in accounts payable | $ | 6,158 | | | $ | 3,673 | | | $ | 6,026 | |
| Finance leases | 82,032 | | | 34,918 | | | 50,061 | |
| | | | | |
| January 2,
2022 | | January 3,
2021 | | December 29,
2019 |
| Reconciliation of cash, cash equivalents and restricted cash at end of period: | | | | | |
| Cash and cash equivalents | $ | 249,438 | | | $ | 306,989 | | | $ | 300,195 | |
| Restricted cash | 27,535 | | | 33,973 | | | 34,539 | |
| Restricted cash, included in Advertising funds restricted assets | 89,993 | | | 77,279 | | | 23,973 | |
| Total cash, cash equivalents and restricted cash | $ | 366,966 | | | $ | 418,241 | | | $ | 358,707 | |
|
| | | | | | | | | | | |
| | Year Ended |
| | December 30,
2018 | | December 31,
2017 | | January 1,
2017 |
| Detail of cash flows from operating activities: | | | | | |
| Long-term debt-related activities, net: | | | | | |
| Loss on early extinguishment of debt | $ | 11,475 |
| | $ | — |
| | $ | — |
|
| Accretion of long-term debt | 1,255 |
| | 1,237 |
| | 1,220 |
|
| Amortization of deferred financing costs | 5,943 |
| | 7,944 |
| | 7,653 |
|
| Reclassification of unrealized losses on cash flow hedges | — |
| | 2,894 |
| | 2,894 |
|
| | $ | 18,673 |
| | $ | 12,075 |
| | $ | 11,767 |
|
| | | | | | |
| Supplemental cash flow information: | |
| | |
| | |
| Cash paid for: | |
| | |
| | |
| Interest | $ | 137,607 |
| | $ | 128,989 |
| | $ | 117,583 |
|
| Income taxes, net of refunds | 102,827 |
| | 29,311 |
| | 77,620 |
|
| | | | | | |
| Supplemental non-cash investing and financing activities: | |
| | | | |
| Capital expenditures included in accounts payable | $ | 6,460 |
| | $ | 5,810 |
| | $ | 11,325 |
|
| Capitalized lease obligations | 6,569 |
| | 276,971 |
| | 104,119 |
|
| Accrued debt issuance costs | 240 |
| | — |
| | 512 |
|
| | | | | | |
| | December 30,
2018 | | December 31,
2017 | | January 1,
2017 |
| Reconciliation of cash, cash equivalents and restricted cash at end of period: | | | | | |
| Cash and cash equivalents | $ | 431,405 |
| | $ | 171,447 |
| | $ | 198,240 |
|
| Restricted cash | 29,860 |
| | 32,633 |
| | 57,612 |
|
| Restricted cash, included in Advertising funds restricted assets | 25,247 |
| | 8,579 |
| | 19,359 |
|
| Restricted cash, included in Other assets | — |
| | 165 |
| | 738 |
|
| Total cash, cash equivalents and restricted cash | $ | 486,512 |
| | $ | 212,824 |
| | $ | 275,949 |
|
See accompanying notes to consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(1) Summary of Significant Accounting Policies
Corporate Structure
The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchises and operates Wendy’s® quick-service restaurants specializing in hamburger sandwiches throughout North America (defined as the United States of America (“U.S.”) and Canada). Wendy’s also has franchised restaurants in 3031 foreign countries and U.S. territories. At December 30, 2018,January 2, 2022, Wendy’s operated and franchised 353408 and 6,3586,541 restaurants, respectively.
The Company manages and internally reports its business geographically. The operationin the following segments: (1) Wendy’s U.S., (2) Wendy’s International and franchising of Wendy’s restaurants in North America comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material.(3) Global Real Estate & Development. See Note 26 for further information.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all of the Company’s subsidiaries. We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. The principal entities in which we possess a variable interest include the Company’s national advertising funds for the U.S. and Canada (the “Advertising Funds”). All intercompany balances and transactions have been eliminated in consolidation.
The Company maintains two national advertising funds (the “Advertising Funds”) established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in North America.Prior to the adoption of new guidance for revenue recognition on January 1, 2018, the revenue, expenses and cash flows of the Advertising Funds were not included in the Company’s consolidated statements of operations or consolidated statements of cash flows because the contributions to the Advertising Funds were designated for specific purposes and the Company acted as an agent, in substance, with regard to these contributions. Under the new revenue recognition guidance, which supersedesprevious industry-specific guidance, the revenue, expenses and cash flows of the Advertising Funds are fully consolidated into the Company’s consolidated statements of operations and cash flows beginning January 1, 2018 on a prospective basis. See “New Accounting Standards Adopted” below for further information.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on our results of operations, financial condition and prospects.
Reclassifications
Certain reclassifications have been made to the prior year presentation to conform to the current year presentation.
Fiscal Year
The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31 and are referred to herein as (1) “the year ended December 30, 2018”January 2, 2022” or “2018,“2021,” which consisted of 52 weeks, (2) “the year ended December 31, 2017”January 3, 2021” or “2017”“2020,” which consisted of 53 weeks, and (3) “the year ended January 1, 2017”December 29, 2019” or “2016,“2019,” all of which consisted of 52 weeks. All references to years, quarters and months relate to fiscal periods rather than calendar periods.
Reclassifications
Certain reclassifications have been made to the prior year presentation to conform to the current year presentation.
The Company has reclassified certain costs associated with the Company’s franchise operations to “Franchise support and other costs,” which were previously recorded to “Other operating income, net” and “General and administrative.” The costs reclassified include costs incurred to provide direct support services to our franchisees, as well as certain other direct and incremental costs for the Company’s franchise operations. Also, the Company reclassified certain restaurant operational costs from “General and administrative” to “Cost of sales.” The Company believes this new presentation will aid users in understanding its results of operations. The prior periods reflect the reclassification of these expenses to conform to the current year presentation. There was no impact to operating profit, income before income taxes or net income as a result of these reclassifications.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following tables illustrate the expense reclassifications made to the consolidated statements of operations for the years ended December 31, 2017 and January 1, 2017:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | | | Reclassifications | | |
| | As Previously Reported | | Franchise support and other costs | | Restaurant operational costs | | As Currently Reported |
| Cost of sales | $ | 512,947 |
| | $ | — |
| | $ | 4,988 |
| | $ | 517,935 |
|
| Franchise support and other costs | — |
| | 16,325 |
| | — |
| | 16,325 |
|
| General and administrative | 208,581 |
| | — |
| | (4,988 | ) | | 203,593 |
|
| Other operating expense (income), net | 7,673 |
| | (16,325 | ) | | — |
| | (8,652 | ) |
| | $ | 729,201 |
| | $ | — |
| | $ | — |
| | $ | 729,201 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended January 1, 2017 |
| | | | Reclassifications | | |
| | As Previously Reported | | Franchise support and other costs | | Restaurant operational costs | | As Currently Reported |
| Cost of sales | $ | 744,701 |
| | $ | — |
| | $ | 7,378 |
| | $ | 752,079 |
|
| Franchise support and other costs | — |
| | 6,885 |
| | — |
| | 6,885 |
|
| General and administrative | 245,869 |
| | (1,705 | ) | | (7,378 | ) | | 236,786 |
|
| Other operating income, net | (14,789 | ) | | (5,180 | ) | | — |
| | (19,969 | ) |
| | $ | 975,781 |
| | $ | — |
| | $ | — |
| | $ | 975,781 |
|
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when acquired are considered cash equivalents. The Company’s cash and cash equivalents principally consist of cash in bank and money market mutual fund accounts and are primarily not in Federal Deposit Insurance Corporation insured accounts.
We believe that our vulnerability to risk concentrations in our cash equivalents is mitigated by (1) our policies restricting the eligibility, credit quality and concentration limits for our placements in cash equivalents and (2) insurance from the
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Securities Investor Protection Corporation of up to $500 per account, as well as supplemental private insurance coverage maintained by substantially all of our brokerage firms, to the extent our cash equivalents are held in brokerage accounts.
Restricted Cash
In accordance with the Company’s securitized financing facility, certain cash accounts have been established with the trustee for the benefit of the trustee and the noteholders and are restricted in their use. Such restricted cash primarily represents cash collections and cash reserves held by the trustee to be used for payments of principal, interest and commitment fees required for the Company’s senior secured notes. Furthermore, certain cash receipts from asset dispositions and insurance proceeds held by the trustee are restricted for reinvestment in capital assets useful to the Company’s operations in accordance with the securitized financing facility. In addition, the Company has outstanding letters of credit with various parties that are cash collateralized. The related cash collateral is classified as restricted cash in the consolidated balance sheets. Restricted cash also includes cash collected by the Advertising Funds, usage of which is restricted for advertising activities.activities and is included in “Advertising funds restricted assets.” Refer to Note 7 for further information.
Accounts and Notes Receivable, Net
Accounts and notes receivable, net, consist primarily of royalties, rents, property taxes and franchise fees due principally from franchisees, delivery-related receivables, credit card receivables, insurance receivables and refundable income taxes. 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 is reviewed on a specific identification basisits receivables based upon several key credit quality indicators such as outstanding past due balances, and the financial strength of the obligor.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. See Note 7 for further information.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Inventories
The Company’s inventories are stated at the lower of cost or net realizable value, with cost determined in accordance with the first-in, first-out method and consist primarily of restaurant food items and paper supplies.
Cloud Computing Arrangements (“CCA”)
The Company capitalizes implementation costs associated with its CCA consistent with costs capitalized for internal-use software. Capitalized CCA implementation costs are included in “Prepaid expenses and other current assets” and “Other assets.” The CCA implementation costs are amortized over the term of the related hosting agreement, including renewal periods that are reasonably certain to be exercised. Amortization expense of CCA implementation costs is recorded to “General and administrative.” The CCA implementation costs are included within operating activities in the Company’s consolidated statements of cash flows.
Properties and Depreciation and Amortization
Properties are stated at cost, including capitalized internal costs of employees to the extent such employees are dedicated to specific restaurant construction projects, less accumulated depreciation and amortization. Depreciation and amortization of properties is computed principally on the straight-line basis using the following estimated useful lives of the related major classes of properties: three3 to 20 years for office and restaurant equipment (including technology), three3 to 15 years for transportation equipment and seven7 to 30 years for buildings and improvements. When the Company commits to a plan to cease using certain properties before the end of their estimated useful lives, depreciation expense is accelerated to reflect the use of the assets over their shortened useful lives. Capital leases and leaseholdLeasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the respective leases, including periods covered by renewal options that the Company is reasonably assured of exercising.
The Company reviews properties for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. If such review indicates an asset group may not be recoverable, an impairment loss is recognized for the excess of the carrying amount over the fair value of an asset group to be held and used or over the fair value less cost to sell of an asset to be disposed. See “Impairment“Impairment of Long-Lived Assets”Assets” below for further information.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The Company classifies assets as held for sale and ceases depreciation of the assets when there is a plan for disposal of the assets and those assets meet the held for sale criteria. Assets held for sale are included in “Prepaid expenses and other current assets” in the consolidated balance sheets.
Goodwill
Goodwill, representing the excess of the cost of an acquired entity over the fair value of the acquired net assets, is not amortized. Goodwill associated with our Company-operated restaurants is reduced as a result of restaurant dispositions based on the relative fair values and is included in the carrying value of the restaurant in determining the gain or loss on disposal. If a Company-operated restaurant is sold within two years of being acquired from a franchisee, the goodwill associated with the acquisition is written off in its entirety. For goodwill impairment testing purposes, we include twoGoodwill has been assigned to reporting units comprisedfor purposes of our (1) North America Company-operated and franchise restaurants and (2) international franchise restaurants.impairment testing. The Company tests goodwill for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Our annual impairment test of goodwill may be completed through a qualitative assessment to determine if the fair value of the reporting unit is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment for any reporting units, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a two-step quantitative goodwill impairment test. Under the first step,quantitative test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the faircarrying value of the reporting unit is less thanexceeds its carrying value, an indication of goodwill impairment exists for the reporting unit and we must perform step two of the impairment test (measurement). Step two of the impairment test, if necessary, requires the estimation of the fair value, for the assets and liabilities of a reporting unit in order to calculate the implied fair value of the reporting unit’s goodwill. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.excess, limited to the total amount of goodwill allocated to that reporting unit. Our critical estimates in this impairment test include future sales growth, operating profit, income tax rates, terminal value growth rates, capital expenditures and the weighted average cost of capital (discount rate).
Our fair value estimates are subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we use, we may be required to recognize goodwill impairment charges in future years.
Impairment of Long-Lived Assets
Our long-lived assets include (1) properties and related definite-lived intangible assets (e.g., favorable leases) that are leased and/or subleased to franchisees, and (2) Company-operated restaurant assets and related definite-lived intangible assets, which include favorable leases and reacquired rights under franchise agreements.agreements, and (3) finance and operating lease assets.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess the recoverability of our long-lived assets by comparing the carrying amount of the asset group to future undiscounted net cash flows expected to be generated through leases and/or subleases or by our individual Company-operated restaurants. If the carrying amount of the long-lived asset group is not recoverable on an undiscounted cash flow basis, then impairment is recognized to the extent that the carrying amount exceeds its fair value and is included in “Impairment of long-lived assets.” Our critical estimates in this review process include the anticipated future cash flows from leases and/or subleases or individual Company-operated restaurants, which is used in assessing the recoverability of the respective long-lived assets.
Our fair value estimates are subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we used, we may be required to recognize additional impairment charges in future years.
Other Intangible Assets
Definite-lived intangible assets are amortized on a straight-line basis using the following estimated useful lives of the related classes of intangibles: for favorable leases, the terms of the respective leases, including periods covered by renewal options that the Company as lessor is reasonably assured of exercising; onecertain the tenant will exercise; 1 to five5 years for computer software; four4 to 20 years for reacquired rights under franchise agreements; and 20 years for franchise agreements. Trademarks have an indefinite life and are not amortized.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The Company reviews definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired. Our annual impairment test for indefinite-lived intangible assets may be completed through a qualitative assessment to determine if the fair value of the indefinite-lived intangible assets is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, we test for impairment using a quantitative process. If the Company determines that impairment of its intangible assets may exist, the amount of impairment loss is measured as the excess of carrying value over fair value. Our estimates in the determination of the fair value of indefinite-lived intangible assets include the anticipated future revenues of Company-operated and franchised restaurants and the resulting cash flows.
Investments
The Company 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 Hortonsis a registered trademark of Tim Hortons USA Inc.). In addition, the Company has a 20% share in a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.” Other investments in equity securities, including investments in limited partnerships, in which the Company does not have significant influence, and for which there is not a readily determinable fair value, are recorded at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Realized gains and losses are reported as income or loss in the period in which the securities are sold or otherwise disposed. Cash distributions and dividends received that are determined to be returns of capital are recorded as a reduction of the carrying value of our investments and returns on our investments are recorded to “Investment income (loss), net.”
The difference between the carrying value of our TimWen equity investment and the underlying equity in the historical net assets of the investee is accounted for as if the investee were a consolidated subsidiary. Accordingly, the carrying value difference is amortized over the estimated lives of the assets of the investee to which such difference would have been allocated if the equity investment were a consolidated subsidiary. To the extent the carrying value difference represents goodwill, it is not amortized.
Other investments in equity securities in which the Company does not have significant influence, and for which there is not a readily determinable fair value, are recorded at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Realized gains and losses are reported as income or loss in the period in which the securities are sold or otherwise disposed.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Share-Based Compensation
The Company has granted share-based compensation awards to certain employees under several equity plans (the “Equity Plans”). The Company measures the cost of employee services received in exchange for an equity award, which include grants of employee stock options and restricted shares, based on the fair value of the award at the date of grant. Share-based compensation expense is recognized net of estimated forfeitures, determined based on historical experience. The Company recognizes share-based compensation expense over the requisite service period unless the awards are subject to performance conditions, in which case we recognize compensation expense over the requisite service period to the extent performance conditions are considered probable. The Company determines the grant date fair value of stock options using a Black-Scholes-Merton option pricing model (the “Black-Scholes Model”). The grant date fair value of restricted share awards (“RSAs”), restricted share units (“RSUs”) and performance-based awards are determined using the averagefair market value of the high and low trading prices of ourCompany’s common stock on the date of grant, as set forth in the applicable plan document, unless the awards are subject to market conditions, in which case we use a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved.
Foreign Currency Translation
Substantially all of theThe Company’s primary foreign operations are in Canada where the functional currency is the Canadian dollar. Financial statements of foreign subsidiaries are prepared in their functional currency and then translated into U.S. dollars. Assets and liabilities are translated at the exchange rate as of the balance sheet date and revenues, costs and expenses are translated at a monthly average exchange rate. Net gains or losses resulting from the translation are recorded to the “Foreign currency translation adjustment” component of “Accumulated other comprehensive loss.” Gains and losses arising from the impact of foreign currency exchange rate fluctuations on transactions in foreign currency are included in “General and administrative.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Income Taxes
The Company accounts for income taxes under the asset and liability method. A deferred tax asset or liability is recognized whenever there are (1) future tax effects from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and (2) operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled.
Deferred tax assets are recognized to the extent the Company believes these assets will more likely than not be realized. In evaluating the realizability of deferred tax assets, the Company considers all available positive and negative evidence, including the interaction and the timing of future reversals of existing temporary differences, projected future taxable income, recent operating results and tax-planning strategies. When considered necessary, a valuation allowance is recorded to reduce the carrying amount of the deferred tax assets to their anticipated realizable value.
The Company records uncertain tax positions on the basis of a two-step process whereby we first determine if it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is then measured for purposes of financial statement recognition as the largest amount of benefit that is greater than 50% likely of being realized upon being effectively settled.
Interest accrued for uncertain tax positions is charged to “Interest expense, net.” Penalties accrued for uncertain tax positions are charged to “General and administrative.”
Restaurant Acquisitions and Dispositions
The Company accounts for the acquisition of restaurants from franchisees using the acquisition method of accounting for business combinations. The acquisition method of accounting involves the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process requires the use of estimates and assumptions to derive fair values and to complete the allocation. The excess of the purchase price over the fair values of the assets acquired and liabilities assumed represents goodwill derived from the acquisition. See “Goodwill”“Goodwill” above for further information.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
In connection with the sale of Company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise, development, relationship and lease agreements. The Company typically sells restaurants’ cash, inventory and equipment and retains ownership or the leasehold interest to the real estate to lease and/or sublease to the franchisee. The Company has determined that its restaurant dispositions usually represent multiple-element arrangements, and as such, the cash consideration received is allocated to the separate elements based on their relative selling price. Cash consideration generally includes up-front consideration for the sale of the restaurants, technical assistance fees and development fees and future cash consideration for royalties and lease payments. The Company considers the future lease payments in allocating the initial cash consideration received. The Company obtains third-party evidence to estimate the relative selling price of the stated rent under the lease and/or sublease agreements which is primarily based upon comparable market rents. Based on the Company’s review of the third-party evidence, the Company records favorable or unfavorable lease assets/liabilities with a corresponding offset to the gain or loss on the sale of the restaurants. The cash consideration per restaurant for technical assistance fees and development fees is consistent with the amounts stated in the related franchise agreements which are charged for separate standalone arrangements. Therefore, theThe Company recognizes the technical assistance and development fees when earned.over the contractual term of the franchise agreements. Future royalty income is also recognized in revenue as earned. See “Revenue Recognition”“Revenue Recognition” below for further information.
Revenue Recognition
“Sales” includes revenues recognized upon delivery of food to the customer at Company-operated restaurants. “Sales” excludes taxes collected from the Company’s customers. Revenue is recognized when the food is purchased by the customer, which is when our performance obligation is satisfied. “Sales” also includes income for gift cards. Gift card payments are recorded as deferred income when received and are recognized as revenue in proportion to actual gift card redemptions.upon redemption.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
“Franchise royalty revenue and fees” includes royalties, new build technical assistance fees, renewal fees, franchisee-to- franchisee restaurant transfer (“Franchise Flip”) technical assistance fees, Franchise Flip advisory fees, development fees and developmentinformation technology and other fees. Royalties from franchised restaurants are based on a percentage of sales of the franchised restaurant and are recognized as earned. New build technical assistance fees, renewal fees and Franchise Flip technical assistance fees are recorded as deferred revenue when received and recognized as revenue over the contractual term of the franchise agreements, once the restaurant has opened. Development fees are deferred when received, allocated to each agreed upon restaurant, and recognized as revenue over the contractual term of each respective franchise agreement, once the restaurant has opened. These franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. Franchise Flip advisory fees include valuation services and fees for selecting pre-approved buyers for Franchise Flips. Franchise Flip advisory fees are paid by the seller and are recognized as revenue at closing of the Franchise Flip transaction.
“Advertising funds revenue” includes contributions to the Advertising Funds by franchisees. Revenue related to these contributions is based on a percentage of sales of the franchised restaurants Information technology and isother fees are recognized as revenue as earned.
“Franchise rental income” includes rental income from properties owned and leased by the Company and leased or subleased to franchisees. Rental income is recognized on a straight-line basis over the respective operating lease terms. Favorable and unfavorable lease amounts related to the leased and/or subleased properties are amortized to rental income on a straight-line basis over the remaining term of the leases.
See “New Accounting Standards Adopted” below for“Advertising funds revenue” includes contributions to the Advertising Funds by franchisees. Revenue related to these contributions is based on a descriptionpercentage of changes to our revenue recognition policies resulting from the adoptionsales of the new accounting guidance for revenue recognition effective January 1, 2018.franchised restaurants and is recognized as earned.
Cost of Sales
Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs relating to Company-operated restaurants. Cost of sales excludes depreciation and amortization expense.
Vendor Incentives
The Company receives incentives from certain vendors. These incentives are recognized as earned and are classified as a reduction of “Cost of sales.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Advertising Costs
Advertising costs are expensed as incurred and are included in “Cost of sales” and “Advertising funds expense.” Production costs of advertising are expensed when the advertisement is first released.
Franchise Support and Other Costs
The Company incurs costs to provide direct support services to our franchisees, as well as certain other direct and incremental costs to the Company’s franchise operations. These costs primarily relate to franchise development services, facilitating Franchise Flips and information technology services, which are charged to “Franchise support and other costs,” as incurred.
Self-Insurance
The Company is self-insured for most workers’ compensation losses and health care claims and purchases insurance for general liability and automotive liability losses, all subject to a $500 per occurrence retention or deductible limit. The Company provides for their estimated cost to settle both known claims and claims incurred but not yet reported. Liabilities associated with these claims are estimated, in part, by considering the frequency and severity of historical claims, both specific to us, as well as industry-wide loss experience and other actuarial assumptions. We determine our insurance obligations with the assistance of actuarial firms. Since there are many estimates and assumptions involved in recording insurance liabilities and in the case of workers’ compensation a significant period of time elapses before the ultimate resolution of claims, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Leases
Determination of Whether a Contract Contains a Lease
The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition,evaluates the Company owns and leases sites from third parties, whichcontracts it leases and/or subleases to franchisees. At inception, each lease or sublease is evaluatedenters into to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease will be accountedare further evaluated for classification as an operating or capitalfinance lease includingwhere the determination ofCompany is a lessee, or as an operating, sales-type or direct financing leaseslease where the Company is a lessor, based on itstheir terms. Capital
ROU Model and Determination of Lease Term
The Company uses the right-of-use (“ROU”) model to account for leases where the Company is the lessee, which requires an entity to recognize a lease assetsliability and related obligations are recorded atROU asset on the lower oflease commencement date. A lease liability is measured equal to the present value of future minimumthe 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 fair market value atunfavorable terms for leases acquired from franchisees, as well as payments made before the commencement date, initial direct costs and lease inception.incentives earned. When determining the lease term, we includethe Company includes option periods for whichthat it is reasonably certain to exercise as failure to renew the lease imposeswould 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 and historical performance of the restaurantrestaurant. Lease terms for real estate are generally initially between 15 and the existence of bargain20 years and, in most cases, provide for rent escalations and renewal options.
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 linestraight-line basis (“Straight-Line Rent”) over the applicable lease terms. Lease terms are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. 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 or income, as applicable, is recorded for that period on a straight-line basis.
The excess of the Straight-Line Rent over the minimum rents paid oris 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 liability or asset whichand is included in “Other liabilities” or “Other assets,” as applicable.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.
For direct financingLease cost for operating leases includes the Company records its investmentamortization 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 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 leasedthat are subsequently subleased to franchisees on a net basis, which is comprised of its gross investment less unearned income. The currentrecorded to “Franchise rental expense” and long-term portions of our net investment in direct financing(3) rental expense related to leases are included in “Accountsfor corporate offices and notes receivable, net”equipment is recorded to “General and “Net investment in direct financing leases,” respectively. Unearned income is recognized as interest income over the lease term and is included in “Interest expense, net.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
Rental income and favorable orand unfavorable lease balance associated withamortization for operating leases on properties leased or subleased to franchisees is recorded to “Franchise rental income.” Lessees’ variable payments to the lease is adjusted to reflect the revised lease term.
Company for executory costs under
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Rental expense, rental income and favorable and unfavorable lease amortization for operating leases are recognized in the consolidated statements of operations based on the nature of the underlying lease. Amounts related to leases for Company-operated restaurants are recorded to “Cost of sales.” Rentala gross basis as “Franchise rental income” with a corresponding expense including any related amortization, for leased properties that are subsequently subleased to franchisees is recorded to “Franchise rental expense.” Rental income,
Finance Leases
Lease cost for finance leases where the Company is the lessee 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.” Finance lease ROU assets are amortized over the shorter of their estimated useful lives or the terms of the respective leases, including any related amortization, forperiods covered by renewal options that the Company is reasonably certain of exercising.
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 or subleased 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 income.expense.” Amounts related to leases for corporate offices
Significant Assumptions and equipment are recorded to “General and administrative.”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 capital,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.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.
Concentration of Risk
Wendy’s had no customers which accounted for 10% or more of consolidated revenues in 2018, 20172021, 2020 or 2016.2019. As of December 30, 2018,January 2, 2022, Wendy’s had one1 main in-line distributor of food, packaging and beverage products, excluding produce and breads, that serviced approximately 41%67% of its Company-operatedWendy’s restaurants in the U.S. and franchised restaurants and six4 additional in-line distributors that, in the aggregate, serviced approximately 55%32% of its Company-operated and franchised restaurants.Wendy’s restaurants in the U.S. We believe that our vulnerability to risk concentrations related to significant vendors and sources of our raw materials is mitigated as we believe that there are other vendors who would be able to service our requirements. However, if a disruption of service from any of our main in-line distributors was to occur, we could experience short-term increases in our costs while distribution channels were adjusted.
Wendy’s restaurants are principally located throughout the U.S. and to a lesser extent, in 31 foreign countries and U.S. territories with the largest number in Canada. Wendy’s U.S. restaurants are located in 50 states and the District of Columbia, with the largest number in Florida, Texas, Ohio, Texas, Georgia, California, Pennsylvania, North Carolina, Pennsylvania and Michigan. Because our restaurant operations are generally located throughout the U.S. and to a much lesser extent, Canada and other foreign countries and U. S.U.S. territories, we believe the risk of geographic concentration is not significant. We could be adversely affected by changing consumer preferences resulting from concerns over nutritional or safety aspects of beef, chicken, french fries or other products we sell or the effects of food safety events or disease outbreaks. Our exposure to foreign exchange risk is primarily related to fluctuations in the Canadian dollar relative to the U.S. dollar for our Canadian operations. However, our exposure to
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Canadian dollar foreign currency risk is mitigated by the fact that there are no Company-operated restaurants in Canada and less than 10% of Wendy’s franchised restaurants are in Canada.
The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees for royalties, franchise fees and rent. In addition, we have notes receivable from certain of our franchisees. The financial condition of these franchisees is largely dependent upon the underlying business trends of the Wendy’s brand and market conditions within the quick-service restaurant industry. This concentration of credit risk is mitigated, in part, by the number of franchisees and the short-term nature of the franchise receivables.
New Accounting Standards Adopted
Leases
In February 2018,July 2021, the Financial Accounting Standards Board (“FASB”) issued an amendment that allowsaddresses an issue related to a reclassification from accumulated other comprehensive incomelessor’s accounting for certain leases with variable lease payments that could result in the recognition of a selling loss at lease commencement even if the lessor expects the arrangement to retained earningsbe profitable overall. The amendment specifies lessors should classify and account for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”).such a lease with variable lease payments as an operating lease, dependent upon meeting certain criteria, for which a selling profit or loss is not recognized. The Company early adopted thethis amendment prospectively, during the fourththird quarter of 2018.2021 by applying the guidance prospectively to leases that commence or are modified on or after the date of adoption. The adoption of this guidance did not have a material impact on our consolidated financial statements.
New Accounting Standards
Business Combinations
In May 2017, the FASB issued new guidance on the scope of modification accounting for share-based payment arrangements. The new guidance provides relief to entities that make non-substantive changes to their share-based payment arrangements. The Company adopted this amendment, prospectively, during the first quarter of 2018. The adoption of this guidance did not impact our consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
In January 2017,October 2021, the FASB issued an amendment that clarifiesto improve the definition of a businessaccounting for revenue contracts with customers acquired in determining whether to account for a transaction as an asset acquisition or a business combination. The Company adopted this amendment prospectively, during the first quarter of 2018. The adoption of this guidance did not impact our consolidated financial statements.
In November 2016, the FASB issued an amendment that clarifies guidance for proper classificationrequires contract assets and presentation of restricted cashcontract liabilities acquired in the statement of cash flows. Accordingly, changes in restricted cash that have historically been included within operating, investing and financing activities have been eliminated, and restricted cash, including the restricted cash of the Advertising Funds, is combined with cash and cash equivalents when reconciling the beginning and end of period balances for all periods presented. The Company adopted this amendment during the first quarter of 2018. The adoption of the amendment resulted in an increase in net cash used in investing activities of $24,935 during 2017 and an increase in net cash provided by investing activities of $14,971 during 2016. Additionally, net cash provided by operating activities decreased $12,847 in 2017 and increased $4,891 in 2016. Because of the inclusion of restricted cash in the beginning and end of period balances, our cash, cash equivalents and restricted cash as presented in the statements of cash flows increased $41,377, $77,709 and $57,764 as of December 31, 2017, January 1, 2017 and January 3, 2016, respectively. This amendment did not impact the Company’s consolidated statements of operations or consolidated balance sheets.
In August 2016, the FASB issued an amendment that provides guidance for proper classification of certain cash receipts and payments in the statement of cash flows. Upon adoption in the first quarter of 2018, the Company elected to use the nature of distribution approach for all distributions it receives from its equity method investees. The adoption of this guidance did not impact our consolidated financial statements.
In March 2016, the FASB issued an amendment that provides guidance on extinguishing financial liabilities for certain prepaid stored-value products. The Company adopted this amendment during the first quarter of 2018. The adoption of this guidance did not impact our consolidated financial statements.
In January 2016, the FASB issued an amendment that revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The Company adopted this amendment during the first quarter of 2018. The adoption of this guidance did not impact our consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued amended guidance for revenue recognition. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsbusiness combination to be entitledrecognized and measured by the acquirer on the acquisition date in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. The Company adopted the new guidance on January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.
The Company applied the new guidance using the modified retrospective method, whereby the cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative periods have not been adjusted and continue to be reported under the previous revenue recognition guidance. The details of the significant changes and quantitative impact of the changes are discussed below.
Franchise Fees
Under previousaccordance with current revenue recognition guidance new build technical assistance fees and development fees were recognized as revenue when a franchised restaurant opened, as all material services and conditions related toif the franchise feeacquirer had been substantially performed uponoriginated the restaurant opening. In addition, under previous guidance, technical assistance fees received in connectioncontracts. The standard is effective beginning with sales of Company-operated restaurants to franchisees and facilitating Franchise Flips, as well as renewal fees, were recognized as revenue when the franchise agreements were signed and the restaurants opened. Under the new guidance, these franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
National Advertising Funds
Previously, the revenue, expenses and cash flows of the Advertising Funds were not included in the Company’s consolidated statements of operations and statements of cash flows because the contributions to the Advertising Funds were designated for specific purposes and the Company acted as an agent, in substance, with regard to these contributions as a result of industry-specific guidance. Under the new guidance, which superseded the previous industry-specific guidance, the revenue, expenses and cash flows of the Advertising Funds are fully consolidated into the Company’s consolidated statements of operations and statements of cash flows.
Impacts on Financial Statements
The following tables summarize the impacts of adopting the revenue recognition standard on the Company’s consolidated financial statements:
|
| | | | | | | | | | | | | | | |
| | | | Adjustments | | |
| | As Reported | | Franchise Fees | | Advertising Funds | | Balances Without Adoption |
| Consolidated Balance Sheet | | | | | | | |
| December 30, 2018 | | | | | | | |
| Accrued expenses and other current liabilities | $ | 150,636 |
| | $ | (3,079 | ) | | $ | — |
| | $ | 147,557 |
|
| Advertising funds restricted liabilities | 80,153 |
| | — |
| | (2,492 | ) | | 77,661 |
|
| Total current liabilities | 284,185 |
| | (3,079 | ) | | (2,492 | ) | | 278,614 |
|
| Deferred income taxes | 269,160 |
| | 21,861 |
| | — |
| | 291,021 |
|
| Deferred franchise fees | 92,232 |
| | (81,551 | ) | | — |
| | 10,681 |
|
| Total liabilities | 3,643,586 |
| | (62,769 | ) | | (2,492 | ) | | 3,578,325 |
|
| Retained earnings | 146,277 |
| | 63,174 |
| | 2,492 |
| | 211,943 |
|
| Accumulated other comprehensive loss | (61,673 | ) | | (405 | ) | | — |
| | (62,078 | ) |
| Total stockholders’ equity | 648,449 |
| | 62,769 |
| | 2,492 |
| | 713,710 |
|
| | | | | | | | |
| Consolidated Statement of Operations | | | | | | |
| Year Ended December 30, 2018 | | | | | | | |
| Franchise royalty revenue and fees (a) | $ | 409,043 |
| | $ | (525 | ) | | $ | — |
| | $ | 408,518 |
|
| Advertising funds revenue | 326,019 |
| | — |
| | (326,019 | ) | | — |
|
| Total revenues | 1,589,936 |
| | (525 | ) | | (326,019 | ) | | 1,263,392 |
|
| Advertising funds expense | 321,866 |
| | — |
| | (321,866 | ) | | — |
|
| Total costs and expenses | 1,340,044 |
| | — |
| | (321,866 | ) | | 1,018,178 |
|
| Operating profit | 249,892 |
| | (525 | ) | | (4,153 | ) | | 245,214 |
|
| Income before income taxes | 574,916 |
| | (525 | ) | | (4,153 | ) | | 570,238 |
|
| Provision for income taxes | (114,801 | ) | | 134 |
| | — |
| | (114,667 | ) |
| Net income | 460,115 |
| | (391 | ) | | (4,153 | ) | | 455,571 |
|
_______________
| |
(a) | The adjustments for 2018 include the reversal of franchise fees recognized over time under the new revenue recognition guidance of $9,641, as well as franchisee fees that would have been recognized under the previous revenue recognition guidance when the franchise agreements were signed and the restaurants opened of $9,116. See Note 2 for further information. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
|
| | | | | | | | | | | | | | | |
| | | | Adjustments | | |
| | As Reported | | Franchise Fees | | Advertising Funds | | Balances Without Adoption |
| Consolidated Statement of Cash Flows | | | | | | | |
| Year Ended December 30, 2018 | | | | | | | |
| Cash flows from operating activities: | | | | | | | |
| Net income | $ | 460,115 |
| | $ | (391 | ) | | $ | (4,153 | ) | | $ | 455,571 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Deferred income tax | (6,568 | ) | | (134 | ) | | — |
| | (6,702 | ) |
| Other, net | 5,178 |
| | (502 | ) | | — |
| | 4,676 |
|
| Changes in operating assets and liabilities: | | | | | | | |
| Advertising funds restricted assets and liabilities | 13,955 |
| | — |
| | 4,153 |
| | 18,108 |
|
| Accrued expenses and other current liabilities | 23,963 |
| | 1,027 |
| | — |
| | 24,990 |
|
New Accounting Standards
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.our 2023 fiscal year. The Company does not expect the amendment, which is effective beginning with our 2019 fiscal year,guidance to have a material impact on our consolidated financial statements.
Financial Instruments
In August 2018,2020, the FASB issued new guidancean amendment that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on disclosure requirementsan entity’s own equity. The amendment simplifies accounting for fair value measurements.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 objective of the new guidance, whichamendment is effective beginningcommencing with our 20202022 fiscal year, is to provide additional information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. New incremental disclosure requirements include the amount of fair value hierarchy level 3 changes in unrealized gains and losses and the range and weighted average used to develop significant unobservable inputs for level 3 fair value measurements.year. The Company does not expect the amendmentguidance to have a material impact on our consolidated financial statements.
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 does not expect the amendment, which is effective beginning with our 2019 fiscal year, to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued an amendment that simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. The Company does not expect the amendment, which requires prospective adoption and is effective commencing with our 2020 fiscal year, to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued an amendment that will require the Company to determine impairment of financial instruments based on expected losses rather than incurred losses. The transition method varies with the type of instrument; however, most debt instruments will be transitioned using a modified retrospective approach. The amendment is effective commencing with our 2020 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Leases
In February 2016, the FASB issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance, which is effective beginning with our 2019 fiscal year, requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months. The guidance allows an entity to choose either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We expect to adopt the standard using the effective date as our date of initial application and therefore we will not apply the standard to the comparative periods presented in our consolidated financial statements.
The new standard also provides a number of optional practical expedients in transition. The Company expects to elect the package of practical expedients, which, among other items, permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company also expects to elect the short-term lease recognition exemption for all leases that qualify. Under this practical expedient, for those leases that qualify, we will not recognize right-of-use (“ROU”) assets or lease liabilities, which includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also expects to elect the practical expedient to not separate lease and non-lease components for all of our leases. The Company does not expect to elect the use-of-hindsight practical expedient.
We have implemented a new lease management system to facilitate the adoption of this guidance. In addition, we have performed an analysis of the completeness of our lease portfolio and evaluated the impact of adoption on our financial statements, existing accounting policies and disclosures. We expect that this standard will have a material impact on our consolidated balance sheets and related disclosures. Upon adoption, we expect to recognize additional operating lease liabilities of approximately $1,000,000, with corresponding ROU assets based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. 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 will result in an increase in our annual revenues and expenses of approximately $40,000 after adoption. We do not expect the adoption of this guidance to have a material impact on our consolidated statements of cash flows.
(2) Revenue
NatureFinancial Instruments
In August 2020, the FASB issued an amendment that simplifies the accounting for certain financial instruments with characteristics of Goodsliabilities and Services
equity, including convertible instruments and contracts on an entity’s own equity. The Company generates revenues from sales at Company-operated restaurants and earns fees and rental income from franchised restaurants. Revenues are recognized upon delivery of food to the customer at Company-operated restaurants or upon the fulfillment of terms outlined in the franchise agreementamendment simplifies accounting for franchised restaurants. The franchise agreement provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site acceptedconvertible instruments by Wendy’s and to use the Wendy’s system in connection with the operation of the restaurant at that site. The franchise agreement generally provides for a 20-year term and a 10-year renewal subject to certain conditions. The initial term may be extended up to 25 years and the renewal extended up to 20 years for qualifying restaurantsremoving major separation models required under certain new restaurant development and reimaging programs.
The franchise agreement requires that the franchisee pay a royalty based on a percentage of sales at the franchised restaurant, as well as make contributions to the Advertising Funds based on a percentage of sales. Wendy’s may offer development incentive programs from time to time that provide for a discount or lesser royalty amount or Advertising Fund contribution for a limited period of time. The agreement also typically requires that the franchisee pay Wendy’s a technical assistance fee. The technical assistance fee is used to defray some of the costs to Wendy’s for training, start-up and transitional services related to new and existing franchisees acquiring restaurants and in the development and opening of new restaurants.
Wendy’s also enters into development agreements with certain franchisees. The development agreement generally provides the franchisee with the right to develop a specified number of new Wendy’s restaurants using the Image Activation design within a stated, non-exclusive territory for a specified period, subject to the franchisee meeting interim new restaurant development requirements.
Wendy’s owns and leases sites from third parties, which it leases and/or subleases to franchisees. Noncancelable lease terms are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. The initial lease term for properties leased or subleased to franchisees is generally set to be coterminous with the initial 20-year term of the related franchise agreement and any renewal term is coterminous with the 10-year renewal term of the related franchise agreement.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Royalties and contributions to the Advertising Funds are generally due within the month subsequent to which the revenue was generated through sales at the franchised restaurant. Technical assistance fees and renewal fees are generally due upon execution of the related franchise agreement. Rental income is due in accordance with the terms of each lease, which is generally at the beginning of each month.
Disaggregation of Revenue
The following table disaggregates revenue by primary geographical market and source for 2018:
|
| | | | | | | | | | | | | | | |
| | U.S. | | Canada | | Other International | | Total |
| Sales at Company-operated restaurants | $ | 651,577 |
| | $ | — |
| | $ | — |
| | $ | 651,577 |
|
| Franchise royalty revenue | 335,500 |
| | 23,629 |
| | 18,817 |
| | 377,946 |
|
| Franchise fees | 25,044 |
| | 5,199 |
| | 854 |
| | 31,097 |
|
| Franchise rental income | 177,076 |
| | 26,221 |
| | — |
| | 203,297 |
|
| Advertising funds revenue | 306,442 |
| | 19,577 |
| | — |
| | 326,019 |
|
| Total revenues | $ | 1,495,639 |
| | $ | 74,626 |
| | $ | 19,671 |
| | $ | 1,589,936 |
|
Contract Balances
The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
|
| | | |
| | December 30, 2018 (a) |
| Receivables, which are included in “Accounts and notes receivable, net” (b) | $ | 40,300 |
|
| Receivables, which are included in “Advertising funds restricted assets” | 47,332 |
|
| Deferred franchise fees (c) | 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 statement of operations. |
| |
(b) | Includes receivables related to “Sales” and “Franchise royalty revenue and fees.” |
| |
(c) | Deferred franchise fees of $9,973 and $92,232 are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees,” respectively. |
Significant changes in deferred franchise fees are as follows:
|
| | | |
| | 2018 |
| Deferred franchise fees at beginning of period | $ | 102,492 |
|
| Revenue recognized during the period | (9,641 | ) |
| New deferrals due to cash received and other | 9,354 |
|
| Deferred franchise fees at end of period | $ | 102,205 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO 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: | |
| 2019 | $ | 8,309 |
|
| 2020 | 6,304 |
|
| 2021 | 5,873 |
|
| 2022 | 5,672 |
|
| 2023 | 5,442 |
|
| Thereafter | 70,605 |
|
| | $ | 102,205 |
|
(3) System Optimization (Gains) Losses, 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 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, Wendy’s expects to continue to optimize its system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base and drive new restaurant development and accelerate reimages in the Image Activation format. During 2018 and 2016, the Company completed the sale of three and 310 Company-operated restaurants to franchisees, respectively.current accounting guidance. In addition, the Company facilitated 96, 400 and 144 Franchise Flips during 2018, 2017 and 2016, respectively (excluding the DavCo and NPC Transactions discussed below).
Gains and losses recognized on dispositionsamendment removes certain settlement conditions that are recordedrequired for equity contracts to “System optimization (gains) losses, net” in our consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5. All other costs incurred during 2018 and 2017 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:
|
| | | | | | | | | | | |
| | Year Ended |
| | 2018 | | 2017 | | 2016 |
| Number of restaurants sold to franchisees | 3 |
| | — |
| | 310 |
|
| | | | | | |
| Proceeds from sales of restaurants | $ | 1,436 |
| | $ | — |
| | $ | 251,446 |
|
| Net assets sold (a) | (1,370 | ) | | — |
| | (115,052 | ) |
| Goodwill related to sales of restaurants (b) | (208 | ) | | — |
| | (41,561 | ) |
| Net favorable (unfavorable) leases (c) | 220 |
| | — |
| | (24,592 | ) |
| Other | 11 |
| | — |
| | (3,103 | ) |
| | 89 |
| | — |
| | 67,138 |
|
| Post-closing adjustments on sales of restaurants (d) | 445 |
| | 2,541 |
| | (1,411 | ) |
| Gain on sales of restaurants, net | 534 |
| | 2,541 |
| | 65,727 |
|
| (Loss) gain on sales of other assets, net (e) | (71 | ) | | 2,018 |
| | 6,204 |
|
| Loss on DavCo and NPC Transactions | — |
| | (43,635 | ) | | — |
|
| System optimization gains (losses), net | $ | 463 |
| | $ | (39,076 | ) | | $ | 71,931 |
|
_______________
| |
(a) | Net assets sold consisted primarily of equipment. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| |
(b) | Goodwill disposed of as a result of the sale of Company-operated restaurants during 2016 included goodwill of $11,429 that had been reclassified to assets held for sale during 2015. See Note 10 for further information. |
| |
(c) | During 2016, the Company recorded favorable lease assets of $7,612 and unfavorable lease liabilities of $32,204 as a result of leasing and/or subleasing land, buildings and/or leasehold improvements to franchisees, in connection with sales of restaurants. |
| |
(d) | 2018 and 2017 include (1) cash proceeds, net of payments, of $6 and $294, respectively, related to post-closing reconciliations with franchisees and (2) the recognition of deferred gains of $1,029 and $312, respectively, as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. 2017 also includes the recognition of a deferred gain of $1,822 (C$2,300) resulting from the release of a guarantee provided by Wendy’s to a lender on behalf of a franchisee in connection with the sale of eight Canadian restaurants to the franchisee during 2014. |
| |
(e) | During 2018, 2017 and 2016, Wendy’s received cash proceeds of $1,781, $10,534 and $10,727, respectively, primarily from the sale of surplus properties. 2017 also includes the recognition of a deferred gain of $375 related to the sale of a share in an aircraft. |
DavCo and NPC Transactions
As part of our system optimization initiative, the Company acquired 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”) for total net cash consideration of $86,788, which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company, for cash proceeds of $70,688 (collectively, the “DavCo and NPC Transactions”). As part of the NPC transaction, NPC agreed to remodel 90 acquired restaurants in the Image Activation format by the end of 2021 and build 15 new Wendy’s restaurants by the end of 2022. Prior to closing the DavCo transaction, seven DavCo restaurants were closed. The acquisition of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such, the Company accountedqualify for the DavCoderivative scope exception, which will permit more equity contracts to qualify for the exception, and NPC Transactions as an acquisition and subsequent disposition of a business.also simplifies the diluted earnings per share calculation in certain areas. The total consideration paid to DavCo was allocated to net tangible and identifiable intangible assets acquired based on their estimated fair values. As part of the DavCo and NPC Transactions, the Company retained leases for purposes of subleasing such properties to NPC.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The followingamendment is a summary of the activity recorded as a result of the DavCo and NPC Transactions:
|
| | | |
| | Year Ended |
| | 2017 |
| Acquisition (a) | |
| Total consideration paid | $ | 86,788 |
|
| Identifiable assets and liabilities assumed: | |
| Net assets held for sale | 70,688 |
|
| Capital lease assets | 49,360 |
|
| Deferred taxes | 27,830 |
|
| Capital lease obligations | (97,797 | ) |
| Net unfavorable leases (b) | (22,330 | ) |
| Other liabilities (c) | (6,924 | ) |
| Total identifiable net assets | 20,827 |
|
| Goodwill (d) | $ | 65,961 |
|
| | |
| Disposition | |
| Proceeds | $ | 70,688 |
|
| Net assets sold | (70,688 | ) |
| Goodwill (d) | (65,961 | ) |
| Net favorable leases (e) | 24,034 |
|
| Other (f) | (1,708 | ) |
| Loss on DavCo and NPC Transactions | $ | (43,635 | ) |
_______________
| |
(a) | The fair values of the identifiable intangible assets and taxes related to the acquisition were provisional amounts as of December 31, 2017, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during 2018 with no differences from the provisional amounts previously reported. The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process. |
| |
(b) | Includes favorable lease assets of $1,229 and unfavorable lease liabilities of $23,559. |
| |
(c) | Includes a supplemental purchase price liability recorded to “Accrued expenses and other current liabilities” of $6,269, which was settled during 2018 upon the resolution of certain lease-related matters. |
| |
(d) | Includes tax deductible goodwill of $21,795. |
| |
(e) | The Company recorded favorable lease assets of $30,068 and unfavorable lease liabilities of $6,034 as a result of subleasing land, buildings and leasehold improvements to NPC. |
| |
(f) | Includes cash payments for selling and other costs associated with the transaction. |
Assets Held for Sale
As of December 30, 2018 and December 31, 2017, the Company had assets held for sale of $2,435 and $2,235, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(4) Acquisitions
During 2018 and 2016, the Company acquired 16 restaurants and two restaurants from franchisees, respectively.effective commencing with our 2022 fiscal year. The Company diddoes not incur anyexpect the guidance to have a material acquisition-related costs associated with the acquisitions and such transactions were not significant toimpact on our 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:
(2) Revenue
|
| | | | | | | | | | | |
| | Year Ended |
| | 2018 | | 2017 | | 2016 |
| Restaurants acquired from franchisees | 16 |
| | — |
| | 2 |
|
| | | | | | |
| Total consideration paid, net of cash received | $ | 21,401 |
| | $ | — |
| | $ | 2,209 |
|
| Identifiable assets acquired and liabilities assumed: | | | | | |
| Properties | 4,363 |
| | — |
| | 2,218 |
|
| Acquired franchise rights | 10,127 |
| | — |
| | — |
|
| Capital lease assets | 5,360 |
| | — |
| | — |
|
| Other assets | 621 |
| | — |
| | 9 |
|
| Capital leases obligations | (3,135 | ) | | — |
| | — |
|
| Unfavorable leases | (733 | ) | | — |
| | — |
|
| Other liabilities | (2,240 | ) | | — |
| | (18 | ) |
| Total identifiable net assets | 14,363 |
| | — |
| | 2,209 |
|
| Goodwill | $ | 7,038 |
| | $ | — |
| | $ | — |
|
On May 31, 2017, the Company also entered into the DavCo and NPC Transactions. See Note 3 for further information.
(5) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
|
| | | | | | | | | | | |
| | Year Ended |
| | 2018 | | 2017 | | 2016 |
| G&A realignment - May 2017 plan | $ | 8,785 |
| | $ | 21,663 |
| | $ | — |
|
| G&A realignment - November 2014 plan | — |
| | — |
| | 692 |
|
| System optimization initiative | 283 |
| | 911 |
| | 9,391 |
|
| Reorganization and realignment costs | $ | 9,068 |
| | $ | 22,574 |
| | $ | 10,083 |
|
General and Administrative (“G&A”) Realignment
May 2017 Plan
In May 2017, the Company initiated a plan to further reduce its G&A expenses following the November 2014 plan discussed below. The Company expects to incur total costs aggregating approximately $32,000 to $35,000 related to the plan. The Company recognized costs totaling $8,785 and $21,663 during 2018 and 2017, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $4,500, comprised of (1) severance and related employee costs of approximately $1,000, (2) recruitment and relocation costs of approximately $1,500, (3) third-party and other costs of approximately $500 and (4) share-based compensation of approximately $1,500. The Company expects to recognize the majority of the remaining costs associated with the plan during 2019.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the activity recorded as a result of the May 2017 plan:
|
| | | | | | | | | | | |
| | Year Ended | | Total Incurred Since Inception |
| | 2018 | | 2017 | |
| Severance and related employee costs | $ | 3,797 |
| | $ | 14,956 |
| | $ | 18,753 |
|
| Recruitment and relocation costs | 1,077 |
| | 489 |
| | 1,566 |
|
| Third-party and other costs | 1,019 |
| | 1,091 |
| | 2,110 |
|
| | 5,893 |
| | 16,536 |
| | 22,429 |
|
| Share-based compensation (a) | 1,557 |
| | 5,127 |
| | 6,684 |
|
| Termination of defined benefit plans (b) | 1,335 |
| | — |
| | 1,335 |
|
| Total G&A realignment - May 2017 plan | $ | 8,785 |
| | $ | 21,663 |
| | $ | 30,448 |
|
_______________
| |
(a) | Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the May 2017 plan. |
| |
(b) | During 2018, the Company terminated two frozen defined benefit plans. See Note 19 for further information. |
The accruals for our May 2017 plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $6,280 and $1,044 as of December 30, 2018, respectively, and $8,467 and $3,803 as of December 31, 2017, respectively. The tables below present a rollforward of our accruals for the May 2017 plan.
|
| | | | | | | | | | | | | | | |
| | Balance December 31, 2017 | | Charges | | Payments | | Balance December 30, 2018 |
| Severance and related employee costs | $ | 12,093 |
| | $ | 3,797 |
| | $ | (8,649 | ) | | $ | 7,241 |
|
| Recruitment and relocation costs | 177 |
| | 1,077 |
| | (1,171 | ) | | 83 |
|
| Third-party and other costs | — |
| | 1,019 |
| | (1,019 | ) | | — |
|
| | $ | 12,270 |
| | $ | 5,893 |
| | $ | (10,839 | ) | | $ | 7,324 |
|
|
| | | | | | | | | | | | | | | |
| | Balance January 1, 2017 | | Charges | | Payments | | Balance December 31, 2017 |
| Severance and related employee costs | $ | — |
| | $ | 14,956 |
| | (2,863 | ) | | $ | 12,093 |
|
| Recruitment and relocation costs | — |
| | 489 |
| | (312 | ) | | 177 |
|
| Third-party and other costs | — |
| | 1,091 |
| | (1,091 | ) | | — |
|
| | $ | — |
| | $ | 16,536 |
| | $ | (4,266 | ) | | $ | 12,270 |
|
November 2014 Plan
In November 2014, the Company initiated a plan to reduce its G&A expenses. The plan included a realignment and reinvestment of resources to focus primarily on accelerated restaurant development and consumer-facing restaurant technology to drive long-term growth. The Company achieved the majority of the expense reductions through the realignment of its U.S. field operations and savings at its Restaurant Support Center in Dublin, Ohio, which was substantially completed by the end of the second quarter of 2015. The Company recognized total costs of $23,960 since the inception of the November 2014 plan. The Company did not incur any expenses during 2018 or 2017 and does not expect to incur additional costs related to the plan.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the activity recorded as a result of the November 2014 plan:
|
| | | | | | | |
| | Year Ended | | Total Incurred Since Inception |
| | 2016 | |
| Severance and related employee costs (a) | $ | (344 | ) | | $ | 14,584 |
|
| Recruitment and relocation costs | 992 |
| | 2,859 |
|
| Other | 44 |
| | 181 |
|
| | 692 |
| | 17,624 |
|
| Share-based compensation (b) | — |
| | 6,336 |
|
| Total G&A realignment - November 2014 plan | $ | 692 |
| | $ | 23,960 |
|
_______________
| |
(a) | 2016 includes a reversal of an accrual of $387 as a result of a change in estimate. |
| |
(b) | Represents incremental share-based compensation resulting from the modification of stock options and performance-based awards in connection with the termination of employees under the November 2014 plan. |
The table below presents a rollforward of our accruals for the November 2014 plan during 2016, which were included in “Accrued expenses and other current liabilities” and “Other liabilities.” As of December 30, 2018 and December 31, 2017, no accrual remained.
|
| | | | | | | | | | | | | | | |
| | Balance January 3, 2016 | | Charges | | Payments | | Balance January 1, 2017 |
| Severance and related employee costs | $ | 3,431 |
| | $ | (344 | ) | | $ | (2,855 | ) | | $ | 232 |
|
| Recruitment and relocation costs | 144 |
| | 992 |
| | (1,136 | ) | | — |
|
| Other | — |
| | 44 |
| | (44 | ) | | — |
|
| | $ | 3,575 |
| | $ | 692 |
| | $ | (4,035 | ) | | $ | 232 |
|
System Optimization Initiative
The Company has recognized costs related to its system optimization initiative, which includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating Franchise Flips. During 2019, the Company expects to incur approximately $500 of additional costs in connection with dispositions under our system optimization initiative, which are primarily comprised of professional fees.
The following is a summary of the costs recorded as a result of our system optimization initiative:
|
| | | | | | | | | | | | | | | |
| | Year Ended | | Total Incurred Since Inception |
| | 2018 | | 2017 | | 2016 | |
| Severance and related employee costs | $ | — |
| | $ | 3 |
| | $ | 82 |
| | $ | 18,237 |
|
| Professional fees | 264 |
| | 838 |
| | 7,437 |
| | 17,712 |
|
| Other | 19 |
| | 70 |
| | 272 |
| | 5,832 |
|
| | 283 |
| | 911 |
| | 7,791 |
| | 41,781 |
|
| Accelerated depreciation and amortization (a) | — |
| | — |
| | 1,600 |
| | 25,398 |
|
| Share-based compensation (b) | — |
| | — |
| | — |
| | 5,013 |
|
| Total system optimization initiative | $ | 283 |
| | $ | 911 |
| | $ | 9,391 |
| | $ | 72,192 |
|
_______________
| |
(a) | Primarily includes accelerated amortization of previously acquired franchise rights related to Company-operated restaurants in territories that have been sold to franchisees in connection with our system optimization initiative. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| |
(b) | Represents incremental share-based compensation resulting from the modification of stock options and performance-based awards in connection with the termination of employees under our system optimization initiative. |
The tables below present a rollforward of our accruals for our system optimization initiative, which were included in “Accrued expenses and other current liabilities” and “Other liabilities.” As of December 30, 2018, no accrual remained.
|
| | | | | | | | | | | | | | | |
| | Balance January 1, 2017 | | Charges | | Payments | | Balance December 31, 2017 |
| Severance and related employee costs | $ | — |
| | $ | 3 |
| | $ | (3 | ) | | $ | — |
|
| Recruitment and relocation costs | 101 |
| | 838 |
| | (939 | ) | | — |
|
| Other | — |
| | 70 |
| | (70 | ) | | — |
|
| | $ | 101 |
| | $ | 911 |
| | $ | (1,012 | ) | | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | Balance January 3, 2016 | | Charges | | Payments | | Balance January 1, 2017 |
| Severance and related employee costs | $ | 77 |
| | $ | 82 |
| | $ | (159 | ) | | $ | — |
|
| Recruitment and relocation costs | 708 |
| | 7,437 |
| | (8,044 | ) | | 101 |
|
| Other | 90 |
| | 272 |
| | (362 | ) | | — |
|
| | $ | 875 |
| | $ | 7,791 |
| | $ | (8,565 | ) | | $ | 101 |
|
(6) Income Per Share
Basic income per share for 2018, 2017 and 2016 was computed by dividing net income amounts by the weighted average number of common shares outstanding.
The weighted average number of shares used to calculate basic and diluted income per share were as follows:
|
| | | | | | | | |
| | Year Ended |
| | 2018 | | 2017 | | 2016 |
| Common stock: | | | | | |
| Weighted average basic shares outstanding | 237,797 |
| | 244,179 |
| | 262,209 |
|
| Dilutive effect of stock options and restricted shares | 7,166 |
| | 8,110 |
| | 4,503 |
|
| Weighted average diluted shares outstanding | 244,963 |
| | 252,289 |
| | 266,712 |
|
Diluted net income per share 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 1,520, 1,168 and 1,558 for 2018, 2017 and 2016, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(7) Cash and Receivables
|
| | | | | | | |
| | Year End |
| | December 30, 2018 | | December 31, 2017 |
| Cash and cash equivalents | | | |
| Cash | $ | 209,177 |
| | $ | 171,109 |
|
| Cash equivalents | 222,228 |
| | 338 |
|
| | 431,405 |
| | 171,447 |
|
| Restricted cash | | | |
| Current | | | |
| Accounts held by trustee for the securitized financing facility | 29,538 |
| | 28,933 |
|
| Collateral supporting letters of credit | — |
| | 3,205 |
|
| Trust for termination costs for former Wendy’s executives | 109 |
| | 289 |
|
| Other | 213 |
| | 206 |
|
| | 29,860 |
| | 32,633 |
|
| Advertising Funds (a) | 25,247 |
| | 8,579 |
|
| | 55,107 |
| | 41,212 |
|
| Non-current | | | |
| Trust for termination costs for former Wendy’s executives (b) | — |
| | 165 |
|
| Total cash, cash equivalents and restricted cash | $ | 486,512 |
| | $ | 212,824 |
|
_______________
| |
(a) | Included in “Advertising funds restricted assets.” |
| |
(b) | Included in “Other assets.” |
|
| | | | | | | | |
| | | Year End |
| | | December 30, 2018 | | December 31, 2017 |
| Accounts and Notes Receivable, Net | | | | |
| Current | | | | |
| Accounts receivable: | | | | |
| Franchisees | | $ | 60,567 |
| | $ | 78,699 |
|
| Other (a) | | 51,320 |
| | 37,377 |
|
| | | 111,887 |
| | 116,076 |
|
| Notes receivable from franchisees (b) (c) | | 2,857 |
| | 2,860 |
|
| | | 114,744 |
| | 118,936 |
|
| Allowance for doubtful accounts | | (4,939 | ) | | (4,546 | ) |
| | | $ | 109,805 |
| | $ | 114,390 |
|
| | | | | |
| Non-current (d) | | | | |
| Notes receivable from franchisees (c) | | $ | 16,322 |
| | $ | 17,589 |
|
| Allowance for doubtful accounts (c) | | (2,000 | ) | | — |
|
| | | $ | 14,322 |
| | $ | 17,589 |
|
_______________
| |
(a) | Includes income tax refund receivables of $14,475 and $26,262 as of December 30, 2018 and December 31, 2017, respectively. Additionally, 2018 includes receivables of $22,500 related to insurance coverage for the FI Case. See Note 11 for further information on our legal reserves. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| |
(b) | Includes the current portion of direct financing lease receivables of $735 and $625 as of December 30, 2018 and December 31, 2017, respectively. See Note 20 for further information. |
| |
(c) | Includes a note receivable from a franchisee in Indonesia, of which $969 and $1,008 are included in current notes receivable and $2,522 and $3,789 are included in non-current notes receivable as of December 30, 2018 and December 31, 2017, respectively. |
Non-current notes receivable include notes receivable from the Brazil JV totaling $12,800 as of December 30, 2018 and December 31, 2017, respectively. During 2018, the Company recorded a reserve of $2,000 on the loans outstanding to the Brazil JV. See Note 8 for further information.
Non-current notes receivable include a note receivable from a franchisee in India of $1,000 as of December 30, 2018 and December 31, 2017, respectively.
| |
(d) | Included in “Other assets.” |
The following is an analysis of the allowance for doubtful accounts:
|
| | | | | | | | | | | |
| | Year Ended |
| | 2018 | | 2017 | | 2016 |
| Balance at beginning of year: | | | | | |
| Current | $ | 4,546 |
| | $ | 4,030 |
| | $ | 3,488 |
|
| Non-current | — |
| | 26 |
| | 257 |
|
| Provision for doubtful accounts: | | | | | |
| Franchisees and other | 2,562 |
| | 579 |
| | 390 |
|
| Uncollectible accounts written off, net of recoveries | (169 | ) | | (89 | ) | | (79 | ) |
| Balance at end of year: | | | | | |
| Current | 4,939 |
| | 4,546 |
| | 4,030 |
|
| Non-current | 2,000 |
| | — |
| | 26 |
|
| Total | $ | 6,939 |
| | $ | 4,546 |
| | $ | 4,056 |
|
(8) Investments
The following is a summary of the carrying value of our investments:
|
| | | | | | | |
| | Year End |
| | December 30,
2018 | | December 31,
2017 |
| Equity method investments | $ | 47,021 |
| | $ | 55,363 |
|
| Other investments in equity securities | 639 |
| | 639 |
|
| | $ | 47,660 |
| | $ | 56,002 |
|
Equity Method Investments
Wendy’s has a 50% share in the TimWen joint venture and a 20% share in the Brazil JV, both of which 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 CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
A wholly-owned subsidiary of Wendy’s entered into the Brazil JV during the second quarter of 2015 for the operation of Wendy’s restaurants in Brazil. Wendy’s, Starboard International Holdings B.V. and Infinity Holding E Participações Ltda. contributed $1, $2 and $2, respectively, each receiving proportionate equity interests of 20%, 40% and 40%, respectively. The Company did not receive any distributions and our share of the Brazil JV’s net losses was $1,344, $1,134 and $271 during 2018, 2017 and 2016, respectively. A wholly-owned subsidiary of Wendy’s has loans outstanding to the Brazil JV totaling $12,800 as of December 30, 2018 and December 31, 2017. The loans are denominated in U.S. Dollars, which is also the functional currency of the subsidiary; therefore, there is no exposure to changes in foreign currency rates. The loans are due October 20, 2020 and bear interest at 6.5% per year. During 2018, the Company recorded a reserve of $2,000 on the loans outstanding to the Brazil JV. See Note 7 for further discussion.
The carrying value of our investment in TimWen exceeded our interest in the underlying equity of the joint venture by $26,378 and $31,033 as of December 30, 2018 and December 31, 2017, respectively, primarily due to purchase price adjustments from the 2008 merger of Triarc Companies, Inc. and Wendy’s (the “Wendy’s Merger”).
Presented below is activity related to our portion of TimWen and the Brazil JV included in our consolidated balance sheets and consolidated statements of operations as of and for the years ended December 30, 2018, December 31, 2017 and January 1, 2017.
|
| | | | | | | | | | | |
| | Year Ended |
| | 2018 | | 2017 | | 2016 |
| Balance at beginning of period | $ | 55,363 |
| | $ | 54,545 |
| | $ | 55,541 |
|
| | | | | | |
| Investment | 13 |
| | 375 |
| | 172 |
|
| | | | | | |
| Equity in earnings for the period | 10,402 |
| | 9,897 |
| | 10,627 |
|
| Amortization of purchase price adjustments (a) | (2,326 | ) | | (2,324 | ) | | (2,276 | ) |
| | 8,076 |
| | 7,573 |
| | 8,351 |
|
| Distributions received | (13,390 | ) | | (11,713 | ) | | (11,426 | ) |
Foreign currency translation adjustment included in “Other comprehensive (loss) income, net” and other | (3,041 | ) | | 4,583 |
| | 1,907 |
|
| Balance at end of period | $ | 47,021 |
| | $ | 55,363 |
| | $ | 54,545 |
|
_______________
| |
(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. |
Indirect Investment in Inspire Brands
In connection with the sale of Arby’s Restaurant Group, Inc. (“Arby’s) during 2011, Wendy’s Restaurants obtained an 18.5% equity interest in ARG Holding Corporation (“ARG Parent”) (through which Wendy’s Restaurants indirectly retained an 18.5% interest in Arby’s), with a fair value of $19,000. The carrying value of our investment was reduced to zero during 2013 in connection with the receipt of a dividend that was determined to be a return of our investment.
Our 18.5% equity interest was diluted to 12.3% on February 5, 2018, when a subsidiary of ARG Parent acquired Buffalo Wild Wings, Inc. As a result, our diluted ownership interest included both the Arby’s and Buffalo Wild Wings brands under the newly formed combined company, Inspire Brands, Inc. (“Inspire Brands”). On August 16, 2018, the Company sold its remaining 12.3% ownership interest to Inspire Brands for $450,000 and incurred transaction costs of $55, which were recorded to “Investment income, net.” The Company recorded income tax expense of $97,501 on the transaction, of which $95,038 was paid during the fourth quarter of 2018.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(9) Properties
|
| | | | | | | |
| | Year End |
| | December 30, 2018 | | December 31, 2017 |
| Owned: | | | |
| Land | $ | 377,277 |
| | $ | 379,297 |
|
| Buildings and improvements | 507,219 |
| | 503,955 |
|
| Leasehold improvements | 403,896 |
| | 390,958 |
|
| Office, restaurant and transportation equipment | 266,030 |
| | 255,632 |
|
| Leased: | | | |
| Capital leases (a) | 223,156 |
| | 222,878 |
|
| | 1,777,578 |
| | 1,752,720 |
|
| Accumulated depreciation and amortization (b) | (564,342 | ) | | (489,661 | ) |
| | $ | 1,213,236 |
| | $ | 1,263,059 |
|
_______________
| |
(a) | These assets principally include buildings and improvements. |
| |
(b) | Includes $33,187 and $22,688 of accumulated amortization related to capital leases at December 30, 2018 and December 31, 2017, respectively. |
Depreciation and amortization expense related to properties was $90,612, $90,971 and $92,286 during 2018, 2017 and 2016, respectively.
(10) Goodwill and Other Intangible Assets
Goodwill activity for 2018 and 2017 was as follows:
|
| | | | | | | |
| | Year End |
| | December 30, 2018 | | December 31, 2017 |
| Balance at beginning of year: | | | |
| Goodwill, gross | $ | 752,731 |
| | $ | 750,807 |
|
| Accumulated impairment losses (a) | (9,397 | ) | | (9,397 | ) |
| Goodwill, net | 743,334 |
| | 741,410 |
|
| Changes in goodwill: | | | |
| Restaurant acquisitions (b) | 7,038 |
| | 65,961 |
|
| Restaurant dispositions (b) | (208 | ) | | (65,961 | ) |
| Currency translation adjustment | (2,280 | ) | | 1,924 |
|
| Balance at end of year: |
|
| |
|
|
| Goodwill, gross | 757,281 |
| | 752,731 |
|
| Accumulated impairment losses (a) | (9,397 | ) | | (9,397 | ) |
| Goodwill, net | $ | 747,884 |
| | $ | 743,334 |
|
_______________
| |
(a) | Accumulated impairment losses resulted from the full impairment of goodwill of the Wendy’s international franchise restaurants during the fourth quarter of 2013. |
| |
(b) | Goodwill acquired and disposed of during 2017 resulted from the DavCo and NPC Transactions. See Note 3 for further information. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Our annual goodwill impairment test was completed through a qualitative assessment performed in the fourth quarter of 2018, which indicated the fair value of goodwill of our Wendy’s North America restaurants was more likely than not greater than the carrying amount.
The following is a summary of the components of other intangible assets and the related amortization expense:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year End |
| | December 30, 2018 | | December 31, 2017 |
| | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| Indefinite-lived: | | | | | | | | | | | |
| Trademarks | $ | 903,000 |
| | $ | — |
| | $ | 903,000 |
| | $ | 903,000 |
| | $ | — |
| | $ | 903,000 |
|
| Definite-lived: | | | | | | | | | | | |
| Franchise agreements | 348,200 |
| | (170,134 | ) | | 178,066 |
| | 349,499 |
| | (154,140 | ) | | 195,359 |
|
| Favorable leases | 233,990 |
| | (79,776 | ) | | 154,214 |
| | 239,096 |
| | (69,128 | ) | | 169,968 |
|
| Reacquired rights under franchise agreements | 11,807 |
| | (1,971 | ) | | 9,836 |
| | 1,680 |
| | (1,589 | ) | | 91 |
|
| Software | 154,919 |
| | (105,882 | ) | | 49,037 |
| | 137,913 |
| | (84,746 | ) | | 53,167 |
|
| | $ | 1,651,916 |
| | $ | (357,763 | ) | | $ | 1,294,153 |
| | $ | 1,631,188 |
| | $ | (309,603 | ) | | $ | 1,321,585 |
|
|
| | | |
| Aggregate amortization expense: | |
| Actual for fiscal year: | |
| 2016 | $ | 48,824 |
|
| 2017 | 47,302 |
|
| 2018 | 52,064 |
|
| Estimate for fiscal year: | |
| 2019 | $ | 47,987 |
|
| 2020 | 43,247 |
|
| 2021 | 38,225 |
|
| 2022 | 33,701 |
|
| 2023 | 30,499 |
|
| Thereafter | 197,494 |
|
(11) Accrued Expenses and Other Current Liabilities
|
| | | | | | | |
| | Year End |
| | December 30, 2018 | | December 31, 2017 |
| Legal reserves (a) | $ | 55,883 |
| | $ | 1,597 |
|
| Accrued compensation and related benefits | 37,637 |
| | 49,541 |
|
| Accrued taxes | 20,811 |
| | 19,924 |
|
| Other | 36,305 |
| | 40,562 |
|
| | $ | 150,636 |
| | $ | 111,624 |
|
_______________
| |
(a) | During 2018, the Company recorded a legal reserve of $50,000 for a settlement in the FI Case. See Note 23 for further information. The Company maintains insurance coverage for legal settlements, receivables for which are included in “Accounts and notes receivable, net.” See Note 7 for further information. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(12) Long-Term Debt
Long-term debt consisted of the following:
|
| | | | | | | |
| | Year End |
| | December 30,
2018 | | December 31,
2017 |
| Series 2018-1 Class A-2 Notes: | | | |
| 3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025 | $ | 445,500 |
| | $ | — |
|
| 3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 | 470,250 |
| | — |
|
| Series 2015-1 Class A-2 Notes: | | | |
| 3.371% Series 2015-1 Class A-2-I Notes, repaid with 2018 refinancing | — |
| | 855,313 |
|
| 4.080% Series 2015-1 Class A-2-II Notes, anticipated repayment date 2022 | 870,750 |
| | 879,750 |
|
| 4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025 | 483,750 |
| | 488,750 |
|
| 7% debentures, due in 2025 | 90,769 |
| | 89,514 |
|
| Capital lease obligations, due through 2045 | 455,636 |
| | 467,964 |
|
| Unamortized debt issuance costs | (32,217 | ) | | (26,889 | ) |
| | 2,784,438 |
| | 2,754,402 |
|
| Less amounts payable within one year | (31,655 | ) | | (30,172 | ) |
| Total long-term debt | $ | 2,752,783 |
| | $ | 2,724,230 |
|
Aggregate annual maturities of long-term debt, excluding the effect of purchase accounting adjustments, as of December 30, 2018 were as follows:
|
| | | |
| Fiscal Year | |
| 2019 | $ | 31,655 |
|
| 2020 | 30,871 |
|
| 2021 | 33,051 |
|
| 2022 | 869,638 |
|
| 2023 | 28,328 |
|
| Thereafter | 1,832,343 |
|
| | $ | 2,825,886 |
|
On June 1, 2015, Wendy’s Funding, LLC (“Wendy’s Funding” or the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued fixed rate senior secured notes in the following 2015-1 series: Class A-2-I (the “Series 2015-1 Class A-2-I Notes”) with an initial principal amount of $875,000, Class A-2-II (the “Series 2015-1 Class A-2-II Notes”) with an initial principal amount of $900,000 and Class A-2-III (the “Series 2015-1 Class A-2-III Notes”) with an initial principal amount of $500,000 (collectively, the “Series 2015-1 Class A-2Notes”). In addition, the Master Issuer entered into a revolving financing facility of Series 2015-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2015-1 Class A-1 Notes” and, together with the Series 2015-1 Class A-2 Notes, the “Series 2015-1 Senior Notes”), which allowed for the drawing of up to $150,000 under the Series 2015-1 Class A-1 Notes, which included certain credit instruments, including a letter of credit facility. The Series 2015-1 Class A-1 Notes were issued under the Indenture and allowed for drawings on a revolving basis. No amounts were borrowed under the Series 2015-1 Class A-1 Notes during 2018, 2017 and 2016.
The Series 2015-1 Senior Notes were issued in a securitization transaction pursuant to which certain of the Company’s domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, were contributed or otherwise transferred to the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors (the “Guarantors”) of the Series 2015-1 Senior Notes and that have pledged substantially all of their assets, excluding certain real estate assets and subject to certain limitations, to secure the Series 2015-1 Senior Notes.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Interest and principal payments on the Series 2015-1 Class A-2Notes are payable on a quarterly basis. The requirement to make such quarterly principal payments on the Series 2015-1 Class A-2Notes is subject to certain financial conditions set forth in the Indenture. The legal final maturity date of the Series 2015-1 Class A-2 Notes is in June 2045, but, unless earlier prepaid to the extent permitted under the Indenture, the anticipated repayment dates of the Series 2015-1 Class A-2-II Notes and the Series 2015-1 Class A-2-III Notes will be seven and 10 years, respectively, from the date of issuance (the “Anticipated Repayment Dates”). If the Master Issuer has not repaid or refinanced the Series 2015-1 Class A-2Notes prior to the respective Anticipated Repayment Dates, additional interest will accrue pursuant to the Indenture. As further discussed below, on January 17, 2018, the Master Issuer completed a refinancing transaction under which the proceeds received were used to redeem the Master Issuer’s outstanding Series 2015-1 Class A-2-I Notes.
On January 17, 2018, Wendy’s Funding completed a refinancing transaction under which the Master Issuer issued fixed rate senior secured notes in the following 2018-1 series: Class A-2-I (the “Series 2018-1 Class A-2-I Notes”) with an initial principal amount of $450,000 and Class A-2-II (the “Series 2018-1 Class A-2-II Notes”) with an initial principal amount of $475,000 (collectively, the “Series 2018-1 Class A-2 Notes”). Interest payments on the Series 2018-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series 2018-1 Class A-2 Notes is in March 2048. The net proceeds from the sale of the Series 2018-1 Class A-2 Notes were used to redeem the Master Issuer’s outstanding Series 2015-1 Class A-2-I Notes, to pay prepayment and transaction costs and for general corporate purposes. As a result, the Company recorded a loss on early extinguishment of debt of $11,475 during 2018, which was comprised of the write-off of certain deferred financing costs and a specified make-whole payment. The Series 2018-1 Class A-2 Notes have scheduled principal payments of $9,250 annually from 2019 through 2024, $423,250 in 2025, $4,750 in each 2026 through 2027 and $427,500 in 2028.
Concurrently, the Master Issuer entered into a revolving financing facility of Series 2018-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2018-1 Class A-1 Notes” and, together with the Series 2018-1 Class A-2 Notes, the “Series 2018-1 Senior Notes”), which allows for the drawing of up to $150,000 using various credit instruments, including a letter of credit facility. The Series 2015-1 Class A-1 Notes were canceled on the closing date and the letters of credit outstanding against the Series 2015-1 Class A-1 Notes were transferred to the Series 2018-1 Class A-1 Notes. The Series 2018-1 Senior Notes are secured by substantially all of the assets of the Master Issuer and the Guarantors, excluding certain real estate assets and subject to certain limitations. The Series 2018-1 Senior Notes and the remaining Series 2015-1 Class A-2 Notes are collectively the “Senior Notes.”
The Series 2018-1 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 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 Series 2018-1 Class A-1 note agreement. There is a commitment fee on the unused portion of the Series 2018-1 Class A-1 Notes which ranges from 0.40% to 0.75% based on utilization. As of December 30, 2018, $26,746 of letters of credit were outstanding against the Series 2018-1 Class A-1 Notes which relate primarily to interest reserves required under the Indenture. No amounts were borrowed under the Series 2018-1 Class A-1 Notes during 2018.
During 2018 and 2017, the Company incurred debt issuance costs of $17,580 and $351, respectively, in connection with the issuance of the Series 2018-1 Senior Notes. During 2017, the Company also incurred debt issuance costs in connection with the issuance of the Series 2015-1 Senior Notes of $561. The debt issuance costs are being amortized to “Interest expense, net” through the Anticipated Repayment Dates of the Senior Notes utilizing the effective interest rate method. As of December 30, 2018, the effective interest rates, including the amortization of debt issuance costs, were 4.361%, 4.696%, 3.815% and 4.057% for the Series 2015-1 Class A-2-II Notes, Series 2015-1 Class A-2-III Notes, Series 2018-1 Class A-2-I Notes and Series 2018-1 Class A-2-II Notes, respectively.
The Senior Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Series 2015-1 Class A-2 Notes and Series 2018-1 Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Senior Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Senior Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Series 2015-1 Class A-2 Notes and Series 2018-1 Class A-2 Notes on the applicable scheduled maturity date. The
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.
In accordance with the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the trustee and the noteholders, and are restricted in their use. As of December 30, 2018 and December 31, 2017, Wendy’s Funding had restricted cash of $29,538 and $28,933, respectively, which primarily represents cash collections and cash reserves held by the trustee to be used for payments of principal, interest and commitment fees required for the Series 2015-1 Class A-2 Notes and Series 2018-1 Class A-2 Notes.
Wendy’s 7% debentures are unsecured and were reduced to fair value in connection with the Wendy’s Merger based on their outstanding principal of $100,000 and an effective interest rate of 8.6%. The fair value adjustment is being accreted and the related charge included in “Interest expense, net” until the debentures mature. These debentures contain covenants that restrict the incurrence of indebtedness secured by liens and certain capitalized lease transactions.
Wendy’s U.S. advertising fund has a revolving line of credit of $25,000. Neither the Company, nor Wendy’s, is the guarantor of the debt. The advertising fund facility was established to fund the advertising fund operations. During 2018, the Company borrowed and repaid $9,837 and $11,124, respectively, under the line of credit. The full amount of the line was available as of December 30, 2018. During 2017, the Company borrowed and repaid $31,130 and $29,843, respectively, under the line of credit.
At December 30, 2018, one of Wendy’s Canadian subsidiaries had a revolving credit facility of C$6,000 which bears interest at the Bank of Montreal Prime Rate. The debt is guaranteed by Wendy’s. The full amount of the line was available under this line of credit as of December 30, 2018.
The following is a summary of the Company’s assets pledged as collateral for certain debt:
|
| | | |
| | Year End |
| | December 30,
2018 |
| Cash and cash equivalents | $ | 32,213 |
|
| Restricted cash and other assets (including long-term) | 29,645 |
|
| Accounts and notes receivable, net | 35,799 |
|
| Inventories | 3,667 |
|
| Properties | 263,083 |
|
| Other intangible assets | 1,079,800 |
|
| | $ | 1,444,207 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(13) 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
In August 2020, the 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. The Company does not expect the guidance to have a material impact on our consolidated financial statements.
(2) Revenue
Nature of Goods and Services
The following table presentsCompany generates revenues from sales at Company-operated restaurants and earns fees and rental income from franchised restaurants. Revenues are recognized upon delivery of food to the carrying amountscustomer at Company-operated restaurants or upon the fulfillment of terms outlined in the franchise agreement for franchised restaurants. The franchise agreement provides the franchisee the right to construct, own and estimated fair valuesoperate a Wendy’s restaurant upon a site accepted by Wendy’s and to use the Wendy’s system in connection with the operation of the Company’s financial instruments:restaurant at that site. The franchise agreement generally provides for a 20-year term and a 10-year renewal subject to certain conditions. The initial term may be extended up to 25 years and the renewal extended up to 20 years for qualifying restaurants under certain new restaurant development and reimaging programs.
The franchise agreement requires that the franchisee pay a royalty based on a percentage of sales at the franchised restaurant, as well as make contributions to the Advertising Funds based on a percentage of sales. Wendy’s may offer development incentive programs from time to time that provide for a discount or lesser royalty amount or Advertising Fund
|
| | | | | | | | | | | | | | | | | |
| | December 30, 2018 | | December 31, 2017 | | |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Fair Value Measurements |
| Financial assets | | | | | | | | | |
| Cash equivalents | $ | 222,228 |
| | $ | 222,228 |
| | $ | 338 |
| | $ | 338 |
| | Level 1 |
| Other investments in equity securities (a) | 639 |
| | 2,181 |
| | 639 |
| | 327,710 |
| | Level 3 |
| | | | | | | | | | |
| Financial liabilities | | | | | | | | | |
| Series 2018-1 Class A-2-I Notes (b) | 445,500 |
| | 424,026 |
| | — |
| | — |
| | Level 2 |
| Series 2018-1 Class A-2-II Notes (b) | 470,250 |
| | 439,353 |
| | — |
| | — |
| | Level 2 |
| Series 2015-1 Class A-2-I Notes (b) | — |
| | — |
| | 855,313 |
| | 856,510 |
| | Level 2 |
| Series 2015-1 Class A-2-II Notes (b) | 870,750 |
| | 865,342 |
| | 879,750 |
| | 897,961 |
| | Level 2 |
| Series 2015-1 Class A-2-III Notes (b) | 483,750 |
| | 482,522 |
| | 488,750 |
| | 513,188 |
| | Level 2 |
| 7% debentures, due in 2025 (b) | 90,769 |
| | 102,750 |
| | 89,514 |
| | 107,000 |
| | Level 2 |
| Guarantees of franchisee loan obligations (c) | 17 |
| | 17 |
| | 37 |
| | 37 |
| | Level 3 |
_______________
| |
(a) | The fair value of our indirect investment in Arby’s as of December 31, 2017 was based on applying a multiple to Arby’s adjusted earnings before income taxes, depreciation and amortization per its current unaudited financial information. The carrying value of our indirect investment in Arby’s was reduced to zero during 2013 in connection with the receipt of a dividend. On February 5, 2018, a subsidiary of ARG Parent acquired Buffalo Wild Wings, Inc. As a result, our ownership interest included both the Arby’s and Buffalo Wild Wings brands under the newly formed combined company, Inspire Brands. On August 16, 2018, the Company sold its remaining ownership interest to Inspire Brands for $450,000. See Note 8 for further information. The fair values of our remaining investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments. |
| |
(b) | The fair values were based on quoted market prices in markets that are not considered active markets. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
contribution for a limited period of time. The agreement also typically requires that the franchisee pay Wendy’s a technical assistance fee. The technical assistance fee is used to defray some of the costs to Wendy’s for training, start-up and transitional services related to new and existing franchisees acquiring restaurants and in the development and opening of new restaurants. The franchise agreement also requires that the franchisee pay an annual fee for technology services. The technology fee is a flat fee dependent on each restaurant’s sales.
Wendy’s also enters into development agreements with certain franchisees. The development agreement generally provides the franchisee with the right to develop a specified number of new Wendy’s restaurants using the Image Activation design within a stated, non-exclusive territory for a specified period, subject to the franchisee meeting interim new restaurant development requirements.
Wendy’s owns and leases sites from third parties, which it leases and/or subleases to franchisees. Noncancelable lease terms are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. The initial lease term for properties leased or subleased to franchisees is generally set to be coterminous with the initial 20-year term of the related franchise agreement and any renewal term is coterminous with the 10-year renewal term of the related franchise agreement.
Royalties and contributions to the Advertising Funds are generally due within the month subsequent to which the revenue was generated through sales at the franchised restaurant. Technical assistance fees and renewal fees are generally due upon execution of the related franchise agreement. Annual technology fees are due in quarterly installments. Rental income is due in accordance with the terms of each lease, which is generally at the beginning of each month.
Disaggregation of Revenue
The following tables disaggregate revenue by segment and source for 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Wendy’s U.S. | | Wendy’s International | | Global Real Estate & Development | | Total |
| 2021 | | | | | | | |
| Sales at Company-operated restaurants | $ | 730,415 | | | $ | 3,659 | | | $ | — | | | $ | 734,074 | |
| Franchise royalty revenue | 407,317 | | | 53,392 | | | — | | | 460,709 | |
| Franchise fees | 64,170 | | | 5,391 | | | 6,478 | | | 76,039 | |
| Franchise rental income | — | | | — | | | 236,655 | | | 236,655 | |
| Advertising funds revenue | 365,594 | | | 23,927 | | | — | | | 389,521 | |
| Total revenues | $ | 1,567,496 | | | $ | 86,369 | | | $ | 243,133 | | | $ | 1,896,998 | |
| | | | | | | |
| 2020 | | | | | | | |
| | | | | | | |
| Sales at Company-operated restaurants | $ | 722,764 | | | $ | — | | | $ | — | | | $ | 722,764 | |
| Franchise royalty revenue | 373,162 | | | 43,346 | | | — | | | 416,508 | |
| Franchise fees | 22,126 | | | 1,962 | | | 4,153 | | | 28,241 | |
| Franchise rental income | — | | | — | | | 232,648 | | | 232,648 | |
| Advertising funds revenue | 313,330 | | | 20,334 | | | — | | | 333,664 | |
| Total revenues | $ | 1,431,382 | | | $ | 65,642 | | | $ | 236,801 | | | $ | 1,733,825 | |
| | | | | | | |
| 2019 | | | | | | | |
| Sales at Company-operated restaurants | $ | 707,485 | | | $ | — | | | $ | — | | | $ | 707,485 | |
| Franchise royalty revenue | 355,702 | | | 44,998 | | | — | | | 400,700 | |
| Franchise fees | 21,889 | | | 2,978 | | | 3,432 | | | 28,299 | |
| Franchise rental income | — | | | — | | | 233,065 | | | 233,065 | |
| Advertising funds revenue | 319,231 | | | 20,222 | | | — | | | 339,453 | |
| Total revenues | $ | 1,404,307 | | | $ | 68,198 | | | $ | 236,497 | | | $ | 1,709,002 | |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO 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:
| | | | | | | | | | | |
| Year End |
| January 2,
2022 (a) | | January 3, 2021 (a) |
| Receivables, which are included in “Accounts and notes receivable, net” (b) | $ | 49,168 | | | $ | 57,677 | |
| Receivables, which are included in “Advertising funds restricted assets” | 65,497 | | | 63,252 | |
| Deferred franchise fees (c) | 97,186 | | | 97,785 | |
_______________
(a)Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s 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 $9,084 and $88,102 as of January 2, 2022, respectively, and $8,691 and $89,094 as of January 3, 2021, respectively.
Significant changes in deferred franchise fees are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Deferred franchise fees at beginning of period | $ | 97,785 | | | $ | 100,689 | | | $ | 102,205 | |
| Revenue recognized during the period | (19,838) | | | (8,955) | | | (9,487) | |
| New deferrals due to cash received and other | 19,239 | | | 6,051 | | | 7,971 | |
| Deferred franchise fees at end of period | $ | 97,186 | | | $ | 97,785 | | | $ | 100,689 | |
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: | |
| 2022 | $ | 9,084 | |
| 2023 | 6,284 | |
| 2024 | 6,096 | |
| 2025 | 5,911 | |
| 2026 | 5,795 | |
| Thereafter | 64,016 | |
| $ | 97,186 | |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(3) Acquisitions
During 2021 and 2019, the Company acquired 93 restaurants and 5 restaurants from franchisees, respectively. No restaurants were acquired from franchisees during 2020. The Company did not incur any material acquisition-related costs associated with the acquisitions and such transactions were not significant to our 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:
| | | | | | | | | | | |
| Year Ended |
| 2021 (a) | | 2019 |
| Restaurants acquired from franchisees (b) | 93 | | | 5 | |
| | | |
| Total consideration paid, net of cash received | $ | 127,948 | | | $ | 5,052 | |
| Identifiable assets acquired and liabilities assumed: | | | |
| Properties | 21,984 | | | 666 | |
| Acquired franchise rights | 81,239 | | | 1,354 | |
| Finance lease assets | 25,547 | | | 5,350 | |
| Operating lease assets | 44,282 | | | — | |
| Finance lease liabilities | (25,059) | | | (4,084) | |
| Operating lease liabilities | (43,478) | | | — | |
| Other | (9) | | | (2,316) | |
| Total identifiable net assets | 104,506 | | | 970 | |
| Goodwill | $ | 23,442 | | | $ | 4,082 | |
_______________
(a)The fair value of the assets acquired are provisional amounts as of January 2, 2022, pending final purchase accounting adjustments. The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process.
(b)2021 includes 2 restaurants under construction and not operating as of January 2, 2022.
NPC Quality Burgers, Inc. (“NPC”)
As previously announced, NPC, formerly the Company’s largest franchisee, filed for chapter 11 bankruptcy in July 2020 and commenced a process to sell all or substantially all of its assets, including its interest in approximately 393 Wendy’s restaurants across 8 different markets, pursuant to a court-approved auction process. On November 18, 2020, the Company submitted a consortium bid together with a group of pre-qualified franchisees to acquire NPC’s Wendy’s restaurants. Under the terms of the consortium bid, several existing and new franchisees would have been the ultimate purchasers of 7 of the NPC markets, while the Company would have acquired 1 market. As part of the consortium bid, the Company submitted a deposit of $43,240, which was included in “Prepaid expenses and other current assets” as of January 3, 2021. The deposit included $38,361 received from the group of prequalified franchisees, which was payable to the franchisees and included in “Accrued expenses and other current liabilities” as of January 3, 2021 pending resolution of the bankruptcy sale process.
During the three months ended April 4, 2021, following a court-approved mediation process, NPC and certain affiliates of Flynn Restaurant Group (“FRG”) and the Company entered into separate asset purchase agreements under which all of NPC’s Wendy’s restaurants were sold to Wendy’s approved franchisees. Under the transaction, FRG acquired approximately half of NPC’s Wendy’s restaurants in 4 markets, while several existing Wendy’s franchisees that were part of the Company’s consortium bid acquired the other half of NPC’s Wendy’s restaurants in the other 4 markets. The Company did not acquire any restaurants as part of this transaction. In addition, the deposits outstanding as of January 3, 2021 were settled during the three months ended April 4, 2021 upon resolution of the bankruptcy sale process. The net settlement of deposits of $4,879 is included in “Acquisitions” in the consolidated statements of cash flows.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(4) System Optimization Gains, Net
The Company’s system optimization initiative included a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating Franchise Flips. As of January 1, 2017, the Company achieved its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to move its ownership away from approximately 5% of the total system, 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 2021, 2020 and 2019, the Company facilitated 34, 54 and 37 Franchise Flips, respectively. Additionally, during 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees and, during 2020, completed the sale of 1 Company-operated restaurant to a franchisee. No Company-operated restaurants were sold to franchisees during 2019.
Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”
The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Number of restaurants sold to franchisees | 47 | | | 1 | | | — | |
| | | | | |
| Proceeds from sales of restaurants (a) | $ | 50,518 | | | $ | 50 | | | $ | — | |
| Net assets sold (b) | (16,939) | | | (34) | | | — | |
| Goodwill related to sales of restaurants | (4,847) | | | — | | | — | |
| Net unfavorable leases (c) | (2,939) | | | — | | | — | |
| Gain on sales-type leases | 7,156 | | | — | | | — | |
| Other (d) | (2,148) | | | — | | | — | |
| 30,801 | | | 16 | | | — | |
| Post-closing adjustments on sales of restaurants (e) (f) | 1,218 | | | 362 | | | 1,087 | |
| Gain on sales of restaurants, net | 32,019 | | | 378 | | | 1,087 | |
| | | | | |
| Gain on sales of other assets, net (g) | 1,526 | | | 2,770 | | | 196 | |
| System optimization gains, net | $ | 33,545 | | | $ | 3,148 | | | $ | 1,283 | |
_______________
(a)In addition to the proceeds noted herein, the Company received cash proceeds of $39 during 2021 related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants.
(b)Net assets sold consisted primarily of equipment.
(c)During 2021, the Company recorded favorable lease assets of $3,799 and unfavorable lease liabilities of $6,738 as a result of leasing and/or subleasing land, buildings and/or leasehold improvements to franchisees, in connection with the sale of the New York Company-operated restaurants (including Manhattan).
(d)2021 includes a deferred gain of $3,500 as a result of certain contingencies related to the extension of lease terms.
(e)2021 includes a gain on sales-type leases of $1,625 and the write-off of certain lease assets of $927 as a result of an amendment to lease terms in connection with a Manhattan Company-operated restaurant previously sold to a franchisee.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(f)2021, 2020 and 2019 include the recognition of deferred gains of $515, $368 and $911, respectively, as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees.
(g)During 2021, 2020 and 2019, Wendy’s received cash proceeds of $4,561, $6,041 and $3,448, respectively, primarily from the sale of surplus and other properties.
Assets Held for Sale
| | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3, 2021 |
| Number of restaurants classified as held for sale | — | | | 43 | |
| Net restaurant assets held for sale (a) | $ | — | | | $ | 20,587 | |
| Other assets held for sale (b) | $ | 3,541 | | | $ | 1,732 | |
_______________
(a)Net restaurant assets held for sale as of January 3, 2021 included New York Company-operated restaurants (excluding Manhattan) and consisted primarily of cash, inventory, property and an estimate of allocable goodwill. During the three months ended April 4, 2021, the Company also classified its 4 Manhattan restaurants as held for sale.
(b)Other assets held for sale primarily consist of surplus properties.
Assets held for sale are included in “Prepaid expenses and other current assets.”
(5) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Operations and field realignment | $ | 1,758 | | | $ | 3,801 | | | $ | — | |
| IT realignment | (10) | | | 7,288 | | | 9,127 | |
| G&A realignment | (52) | | | 614 | | | 7,749 | |
| System optimization initiative | 6,852 | | | 4,327 | | | 89 | |
| Reorganization and realignment costs | $ | 8,548 | | | $ | 16,030 | | | $ | 16,965 | |
Operations and Field Realignment
In September 2020, the Company initiated a plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment Plan realigned the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. The Operations and Field Realignment Plan also included contract terminations, including the closure of certain field offices. During 2021 and 2020, the Company recognized costs totaling $1,758 and $3,801, respectively, which primarily included third-party and other costs in 2021 and severance and related employee costs and share-based compensation in 2020. The Company does not expect to incur any material additional costs under the Operations and Field Realignment Plan.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the activity recorded as a result of the Operations and Field Realignment Plan:
| | | | | | | | | | | | | | | | | |
| Year Ended | | Total Incurred Since Inception |
| 2021 | | 2020 | |
| Severance and related employee costs | $ | 270 | | | $ | 3,113 | | | $ | 3,383 | |
| Third-party and other costs | 1,488 | | | 67 | | | 1,555 | |
| 1,758 | | | 3,180 | | | 4,938 | |
| Share-based compensation (a) | — | | | 621 | | | 621 | |
| Total operations and field realignment | $ | 1,758 | | | $ | 3,801 | | | $ | 5,559 | |
_______________
(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.
As of January 2, 2022, the accruals for the Operations and Field Realignment Plan are included in “Accrued expenses and other current liabilities.” As of January 3, 2021, the accruals for the Operations and Field Realignment Plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $2,487 and $113, respectively. The tables below present a rollforward of our accruals for the Operations and Field Realignment Plan.
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance January 3, 2021 | | Charges | | Payments | | Balance January 2, 2022 |
| Severance and related employee costs | $ | 2,600 | | | $ | 270 | | | $ | (2,715) | | | $ | 155 | |
| Third-party and other costs | — | | | 1,488 | | | (1,477) | | | 11 | |
| $ | 2,600 | | | $ | 1,758 | | | $ | (4,192) | | | $ | 166 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 29, 2019 | | Charges | | Payments | | Balance January 3, 2021 |
| Severance and related employee costs | $ | — | | | $ | 3,113 | | | $ | (513) | | | $ | 2,600 | |
| Third-party and other costs | — | | | 67 | | | (67) | | | — | |
| $ | — | | | $ | 3,180 | | | $ | (580) | | | $ | 2,600 | |
Information Technology (“IT”) Realignment
In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth (the “IT Realignment Plan”). The Company has partnered with a third-party global IT consultant on this new structure to leverage their global capabilities, enabling a more seamless integration between its digital and corporate IT assets. The IT Realignment Plan has reduced certain employee compensation and other related costs that the Company has reinvested back into IT to drive additional capabilities and capacity across all of its technology platforms. Additionally, in June 2020, the Company made changes to its leadership structure that included the elimination of the Chief Digital Experience Officer position and the creation of a Chief Information Officer position, for which the Company completed the hiring process in October 2020. During 2020 and 2019, the Company recognized costs totaling $7,288 and $9,127, respectively, which primarily included third-party and other costs and recruitment and relocation costs in 2020 and severance and related employee costs and third-party and other costs in 2019. The Company does not expect to incur any material additional costs under the IT Realignment Plan.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the activity recorded as a result of the IT Realignment Plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Total Incurred Since Inception |
| 2021 | | 2020 | | 2019 | |
| Severance and related employee costs (a) | $ | (165) | | | $ | 843 | | | $ | 7,548 | | | $ | 8,226 | |
| Recruitment and relocation costs | 146 | | | 1,296 | | | — | | | 1,442 | |
| Third-party and other costs | 9 | | | 5,149 | | | 1,386 | | | 6,544 | |
| (10) | | | 7,288 | | | 8,934 | | | 16,212 | |
| Share-based compensation (b) | — | | | — | | | 193 | | | 193 | |
| Total IT realignment | $ | (10) | | | $ | 7,288 | | | $ | 9,127 | | | $ | 16,405 | |
_______________
(a)2021 includes a reversal of an accrual as a result of a change in estimate.
(b)Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the IT realignment plan.
The tables below present a rollforward of our accruals for the IT Realignment Plan, which are included in “Accrued expenses and other current liabilities” as of January 2, 2022 and January 3, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance January 3, 2021 | | Charges | | Payments | | Balance January 2, 2022 |
| Severance and related employee costs | $ | 1,508 | | | $ | (165) | | | $ | (1,250) | | | $ | 93 | |
| Recruitment and relocation costs | — | | | 146 | | | (146) | | | — | |
| Third-party and other costs | — | | | 9 | | | (9) | | | — | |
| $ | 1,508 | | | $ | (10) | | | $ | (1,405) | | | $ | 93 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 29, 2019 | | Charges | | Payments | | Balance January 3, 2021 |
| Severance and related employee costs | $ | 7,548 | | | $ | 843 | | | $ | (6,883) | | | $ | 1,508 | |
| Recruitment and relocation costs | — | | | 1,296 | | | (1,296) | | | — | |
| Third-party and other costs | 1,076 | | | 5,149 | | | (6,225) | | | — | |
| $ | 8,624 | | | $ | 7,288 | | | $ | (14,404) | | | $ | 1,508 | |
General and Administrative (“G&A”) Realignment
In May 2017, the Company initiated a plan to 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 2020 and 2019, the Company recognized costs totaling $614 and $7,749, respectively, which primarily included recruitment and relocation costs and share-based compensation in 2020 and severance and related employee costs and share-based compensation in 2019. The Company does not expect to incur any material additional costs under the G&A Realignment Plan.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the activity recorded as a result of the G&A Realignment Plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Total Incurred
Since Inception |
| 2021 | | 2020 | | 2019 | |
| Severance and related employee costs (a) | $ | (74) | | | $ | 28 | | | $ | 5,485 | | | $ | 24,192 | |
| Recruitment and relocation costs | 1 | | | 360 | | | 950 | | | 2,877 | |
| Third-party and other costs | 2 | | | 13 | | | 100 | | | 2,225 | |
| (71) | | | 401 | | | 6,535 | | | 29,294 | |
| Share-based compensation (b) | 19 | | | 213 | | | 1,214 | | | 8,130 | |
| Termination of defined benefit plans | — | | | — | | | — | | | 1,335 | |
| Total G&A realignment | $ | (52) | | | $ | 614 | | | $ | 7,749 | | | $ | 38,759 | |
_______________
(a)2021 includes a reversal of an accrual as a result of a change in estimate.
(b)Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the G&A Realignment Plan.
The tables below present a rollforward of our accruals for the G&A Realignment Plan, which are included in “Accrued expenses and other current liabilities” as of January 2, 2022 and January 3, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance
January 3,
2021 | | Charges | | Payments | | Balance
January 2,
2022 |
| Severance and related employee costs | $ | 932 | | | $ | (74) | | | $ | (847) | | | $ | 11 | |
| Recruitment and relocation costs | — | | | 1 | | | (1) | | | — | |
| Third-party and other costs | — | | | 2 | | | (2) | | | — | |
| $ | 932 | | | $ | (71) | | | $ | (850) | | | $ | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance
December 29,
2019 | | Charges | | Payments | | Balance
January 3,
2021 |
| Severance and related employee costs | $ | 5,276 | | | $ | 28 | | | $ | (4,372) | | | $ | 932 | |
| Recruitment and relocation costs | 83 | | | 360 | | | (443) | | | — | |
| Third-party and other costs | — | | | 13 | | | (13) | | | — | |
| $ | 5,359 | | | $ | 401 | | | $ | (4,828) | | | $ | 932 | |
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During 2021, the Company recognized costs totaling $6,852, which were primarily comprised of the write-off of certain lease assets, lease termination fees and transaction fees associated with the NPC bankruptcy sale process, as well as professional fees and transaction fees associated with the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021. During 2020, the Company recognized costs totaling $4,327, which primarily included professional fees related to the NPC bankruptcy sale process. See Note 3 for further information. The Company expects to recognize a gain of approximately $800, primarily related to the write-off of certain NPC-related lease liabilities upon final termination of the leases.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the costs recorded as a result of our system optimization initiative:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Total Incurred Since Inception |
| 2021 | | 2020 | | 2019 | |
| Severance and related employee costs | $ | 661 | | | $ | — | | | $ | — | | | $ | 18,898 | |
| Professional fees | 1,570 | | | 4,323 | | | 72 | | | 23,677 | |
| Other (a) | 1,765 | | | 4 | | | 17 | | | 7,618 | |
| 3,996 | | | 4,327 | | | 89 | | | 50,193 | |
| Accelerated depreciation and amortization (b) | — | | | — | | | — | | | 25,398 | |
| NPC lease termination costs (c) | 2,856 | | | — | | | — | | | 2,856 | |
| Share-based compensation (d) | — | | | — | | | — | | | 5,013 | |
| Total system optimization initiative | $ | 6,852 | | | $ | 4,327 | | | $ | 89 | | | $ | 83,460 | |
_______________
(a)2021 includes transaction fees of $1,350 associated with the NPC bankruptcy sale process.
(b)Primarily includes accelerated amortization of previously acquired franchise rights related to the Company-operated restaurants in territories that have been sold to franchisees in connection with our system optimization initiative.
(c)2021 includes the write-off of lease assets of $1,376 and lease termination fees paid of $1,480.
(d)Represents incremental share-based compensation resulting from the modification of stock options and performance-based awards in connection with the termination of employees under our system optimization initiative.
The tables below present a rollforward of our accruals for our system optimization initiative, which were included in “Accrued expenses and other current liabilities” as of January 3, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance
January 3, 2021 | | Charges | | Payments | | Balance
January 2, 2022 |
| Severance and related employee costs | $ | — | | | $ | 661 | | | $ | (661) | | | $ | — | |
| Professional fees | 1,230 | | | 1,570 | | | (2,800) | | | — | |
| Other | — | | | 1,765 | | | (1,765) | | | — | |
| $ | 1,230 | | | $ | 3,996 | | | $ | (5,226) | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance
December 29, 2019 | | Charges | | Payments | | Balance
January 3, 2021 |
| Professional fees | $ | — | | | $ | 4,323 | | | $ | (3,093) | | | $ | 1,230 | |
| Other | — | | | 4 | | | (4) | | | — | |
| $ | — | | | $ | 4,327 | | | $ | (3,097) | | | $ | 1,230 | |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(6) Net Income Per Share
The calculation of basic and diluted net income per share was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Net income | $ | 200,392 | | | $ | 117,832 | | | $ | 136,940 | |
| | | | | |
| Common stock: | | | | | |
| Weighted average basic shares outstanding | 221,375 | | | 223,684 | | | 229,944 | |
| Dilutive effect of stock options and restricted shares | 3,030 | | | 4,330 | | | 5,131 | |
| Weighted average diluted shares outstanding | 224,405 | | | 228,014 | | | 235,075 | |
| | | | | |
| Net income per share: | | | | | |
| Basic | $ | .91 | | | $ | .53 | | | $ | .60 | |
| Diluted | $ | .89 | | | $ | .52 | | | $ | .58 | |
Basic net income per share for 2021, 2020 and 2019 was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding. Diluted net income per share was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of 2,404, 2,064 and 2,518 for 2021, 2020 and 2019, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
(7) Cash and Receivables
| | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3, 2021 |
| Cash and cash equivalents | | | |
| Cash | $ | 249,438 | | | $ | 231,922 | |
| Cash equivalents | — | | | 75,067 | |
| 249,438 | | | 306,989 | |
| Restricted cash | | | |
| Accounts held by trustee for the securitized financing facility | 27,188 | | | 33,635 | |
| Other | 347 | | | 338 | |
| 27,535 | | | 33,973 | |
| Advertising Funds (a) | 89,993 | | | 77,279 | |
| 117,528 | | | 111,252 | |
| Total cash, cash equivalents and restricted cash | $ | 366,966 | | | $ | 418,241 | |
_______________
(a)Included in “Advertising funds restricted assets.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3, 2021 |
| Gross | | Allowance for Doubtful Accounts | | Net | | Gross | | Allowance for Doubtful Accounts | | Net |
| Accounts and Notes Receivable, Net | | | | | | | | | | | |
| Current | | | | | | | | | | | |
| Accounts receivable (a) (b) | $ | 104,744 | | | $ | (3,229) | | | $ | 101,515 | | | $ | 97,399 | | | $ | (3,739) | | | $ | 93,660 | |
| Notes receivable from franchisees (c) (d) | 23,000 | | | (4,975) | | | 18,025 | | | 21,227 | | | (4,996) | | | 16,231 | |
| $ | 127,744 | | | $ | (8,204) | | | $ | 119,540 | | | $ | 118,626 | | | $ | (8,735) | | | $ | 109,891 | |
| Non-current (e) | | | | | | | | | | | |
| Notes receivable from franchisees (d) | $ | 4,514 | | | $ | (315) | | | $ | 4,199 | | | $ | 6,759 | | | $ | (629) | | | $ | 6,130 | |
_______________
(a)Includes income tax refund receivables of $11,901 and $5,399 as of January 2, 2022 and January 3, 2021, respectively.
(b)As of January 3, 2021, included incremental rent receivables of $5,226 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 were substantially repaid over a 12 month period beginning in August 2020.
(c)Includes the current portion of sales-type and direct financing lease receivables of $6,266 and $5,965 as of January 2, 2022 and January 3, 2021, respectively. See Note 20 for further information.
(d)Includes a note receivable from a franchisee in India, of which $335 and $356 are included in current notes receivable and $315 and $629 are included in non-current notes receivable as of January 2, 2022 and January 3, 2021, respectively. As of January 2, 2022 and January 3, 2021, the Company had reserves of $650 and $985, respectively, on the loan outstanding to the franchisee in India.
Includes a note receivable from a franchisee in Indonesia, of which $1,795 and $831 are included in current notes receivable as of January 2, 2022 and January 3, 2021, respectively, and $1,780 which is included in non-current notes receivable as of January 3, 2021.
Includes notes receivable related to the Brazil JV, of which $12,925 and $12,775 are included in current notes receivable and $4,200 and $4,350 are included in non-current notes receivable as of January 2, 2022 and January 3, 2021, respectively. As of both January 2, 2022 and January 3, 2021, the Company had reserves of $4,640 on the loans outstanding related to the Brazil JV. See Note 8 for further information.
(e)Included in “Other assets.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is an analysis of the allowance for doubtful accounts:
| | | | | | | | | | | | | | | | | |
| Accounts Receivable | | Notes Receivable | | Total |
| 2021 | | | | | |
| Balance at January 3, 2021 | $ | 3,739 | | | $ | 5,625 | | | $ | 9,364 | |
| Provision for doubtful accounts | (148) | | | (335) | | | (483) | |
| Uncollectible accounts written off, net of recoveries | (362) | | | — | | | (362) | |
| Balance at January 2, 2022 | $ | 3,229 | | | $ | 5,290 | | | $ | 8,519 | |
| | | | | |
| 2020 | | | | | |
| Balance at December 29, 2019 | $ | 3,314 | | | $ | 6,705 | | | $ | 10,019 | |
| Provision for doubtful accounts | 647 | | | 206 | | | 853 | |
| Uncollectible accounts written off, net of recoveries | (222) | | | (1,286) | | | (1,508) | |
| Balance at January 3, 2021 | $ | 3,739 | | | $ | 5,625 | | | $ | 9,364 | |
| | | | | |
| 2019 | | | | | |
| Balance at December 30, 2018 | $ | 4,939 | | | $ | 2,000 | | | $ | 6,939 | |
| Provision for doubtful accounts | (1,618) | | | 4,912 | | | 3,294 | |
| Uncollectible accounts written off, net of recoveries | (7) | | | (207) | | | (214) | |
| Balance at December 29, 2019 | $ | 3,314 | | | $ | 6,705 | | | $ | 10,019 | |
(8) Investments
The following is a summary of the carrying value of our investments:
| | | | | | | | | | | |
| Year End |
| January 2,
2022 | | January 3,
2021 |
| Equity method investments | $ | 39,870 | | | $ | 44,574 | |
| Other investments in equity securities | 10,000 | | | — | |
| $ | 49,870 | | | $ | 44,574 | |
Equity Method Investments
Wendy’s has a 50% share in the TimWen real estate joint venture and a 20% share in the Brazil JV, both of which 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.”
A wholly-owned subsidiary of Wendy’s entered into the Brazil JV during the second quarter of 2015 for the operation of Wendy’s restaurants in Brazil. Wendy’s, Starboard International Holdings B.V. and Infinity Holding E Participações Ltda. contributed $1, $2 and $2, respectively, each receiving proportionate equity interests of 20%, 40% and 40%, respectively. The Company did not receive any distributions and our share of the Brazil JV’s net losses was $417 and $1,022 during 2020 and 2019, respectively. The Brazil JV has ceased operations and no income or loss was recorded during 2021. A wholly-owned subsidiary of Wendy’s has loans outstanding related to the Brazil JV totaling $17,125 as of both January 2, 2022 and January 3, 2021. The loans are denominated in U.S. Dollars, which is also the functional currency of the subsidiary; therefore, there is no exposure to changes in foreign currency rates. The loans bear interest at rates ranging from 3.25% to 6.5% per year. Of the total loans outstanding as of January 2, 2022, $12,775 was due primarily in the fourth quarter of 2020 and $4,350 is due primarily in 2024. As of January 2, 2022 and January 3, 2021, the Company had reserves of $4,640 on the past due loans related to the Brazil JV. The Company is currently pursuing collection of certain of the past due amounts. See Note 7 for further information.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The carrying value of our investment in TimWen exceeded our interest in the underlying equity of the joint venture by $20,532 and $23,433 as of January 2, 2022 and January 3, 2021, respectively, primarily due to purchase price adjustments from the 2008 merger of Triarc Companies, Inc. and Wendy’s International, Inc. (the “Wendy’s Merger”).
Presented below is activity related to our portion of TimWen and the Brazil JV included in our consolidated balance sheets and consolidated statements of operations as of and for the years ended January 2, 2022, January 3, 2021 and December 29, 2019.
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Balance at beginning of period | $ | 44,574 | | | $ | 45,310 | | | $ | 47,021 | |
| | | | | |
| Equity in earnings for the period | 14,329 | | | 8,389 | | | 10,943 | |
| Amortization of purchase price adjustments (a) | (3,126) | | | (2,293) | | | (2,270) | |
| 11,203 | | | 6,096 | | | 8,673 | |
| Distributions received | (16,337) | | | (8,376) | | | (13,400) | |
Foreign currency translation adjustment included in “Other comprehensive income” and other | 430 | | | 1,544 | | | 3,016 | |
| Balance at end of period | $ | 39,870 | | | $ | 44,574 | | | $ | 45,310 | |
_______________
(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
During 2021, the Company made an investment in equity securities of $10,000.
In October 2019, the Company received a $25,000 cash settlement related to a previously held investment. As a result, the Company recorded $24,366 to “Investment income (loss), net” and $634 to “General and administrative” for the reimbursement of related costs during the fourth quarter of 2019.
(9) Properties
| | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3, 2021 |
| Land | $ | 370,742 | | | $ | 372,473 | |
| Buildings and improvements | 504,462 | | | 504,504 | |
| Leasehold improvements | 422,094 | | | 409,306 | |
| Office, restaurant and transportation equipment | 282,770 | | | 255,469 | |
| 1,580,068 | | | 1,541,752 | |
| Accumulated depreciation and amortization | (673,201) | | | (625,863) | |
| $ | 906,867 | | | $ | 915,889 | |
Depreciation and amortization expense related to properties was $68,298, $77,656 and $81,219 during 2021, 2020 and 2019, respectively.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(10) Goodwill and Other Intangible Assets
Goodwill activity for 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Wendy’s U.S. | | Wendy’s
International | | Global Real Estate & Development | | Total |
| Balance at December 29, 2019: | | | | | | | |
| Goodwill, gross | $ | 602,491 | | | $ | 40,269 | | | $ | 122,548 | | | $ | 765,308 | |
| Accumulated impairment losses (a) | — | | | (9,397) | | | — | | | (9,397) | |
| Goodwill, net | 602,491 | | | 30,872 | | | 122,548 | | | 755,911 | |
| Changes in goodwill: | | | | | | | |
| Restaurant dispositions (b) | (5,394) | | | — | | | — | | | (5,394) | |
| Currency translation adjustment and other | (223) | | | 755 | | | — | | | 532 | |
| Balance at January 3, 2021: | | | | | | | |
| Goodwill, gross | 596,874 | | | 41,024 | | | 122,548 | | | 760,446 | |
| Accumulated impairment losses (a) | — | | | (9,397) | | | — | | | (9,397) | |
| Goodwill, net | 596,874 | | | 31,627 | | | 122,548 | | | 751,049 | |
| Changes in goodwill: | | | | | | | |
| Restaurant acquisitions | 23,442 | | | — | | | — | | | 23,442 | |
| Restaurant dispositions (b) | 547 | | | — | | | — | | | 547 | |
| Currency translation adjustment and other | — | | | 240 | | | — | | | 240 | |
| Balance at January 2, 2022: | | | | | | | |
| Goodwill, gross | 620,863 | | | 41,264 | | | 122,548 | | | 784,675 | |
| Accumulated impairment losses (a) | — | | | (9,397) | | | — | | | (9,397) | |
| Goodwill, net | $ | 620,863 | | | $ | 31,867 | | | $ | 122,548 | | | $ | 775,278 | |
_______________
(a)Accumulated impairment losses resulted from the full impairment of goodwill of the Wendy’s international franchise restaurants during the fourth quarter of 2013.
(b)During 2020, in connection with the Company’s plan to sell 43 Company-operated restaurants in New York (excluding Manhattan) in the second quarter of 2021, goodwill of $5,394 was reclassified to assets held for sale. The goodwill allocated to the sale was decreased by $568 during 2021 upon final disposition of the restaurants. In addition, during 2021, goodwill of $21 was reclassified to assets held for sale in connection with the Company’s sale of its 4 Manhattan restaurants. See Note 4 for further information.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the components of other intangible assets and the related amortization expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3, 2021 |
| Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| Indefinite-lived: | | | | | | | | | | | |
| Trademarks | $ | 903,000 | | | $ | — | | | $ | 903,000 | | | $ | 903,000 | | | $ | — | | | $ | 903,000 | |
| Definite-lived: | | | | | | | | | | | |
| Franchise agreements | 349,391 | | | (220,663) | | | 128,728 | | | 349,255 | | | (203,938) | | | 145,317 | |
| Favorable leases | 159,488 | | | (62,136) | | | 97,352 | | | 163,015 | | | (55,581) | | | 107,434 | |
| Reacquired rights under franchise agreements | 91,111 | | | (4,732) | | | 86,379 | | | 9,872 | | | (3,414) | | | 6,458 | |
| Software | 234,574 | | | (169,242) | | | 65,332 | | | 206,741 | | | (143,990) | | | 62,751 | |
| $ | 1,737,564 | | | $ | (456,773) | | | $ | 1,280,791 | | | $ | 1,631,883 | | | $ | (406,923) | | | $ | 1,224,960 | |
| | | | | |
| Aggregate amortization expense: | |
| Actual for fiscal year: | |
| 2019 | $ | 53,182 | |
| 2020 | 52,588 | |
| 2021 | 55,236 | |
| Estimate for fiscal year: | |
| 2022 | $ | 53,690 | |
| 2023 | 49,919 | |
| 2024 | 45,315 | |
| 2025 | 38,088 | |
| 2026 | 32,234 | |
| Thereafter | 158,545 | |
(11) Accrued Expenses and Other Current Liabilities
| | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3, 2021 |
| Accrued compensation and related benefits | $ | 63,835 | | | $ | 44,264 | |
| Accrued taxes | 28,142 | | | 27,162 | |
| NPC consortium bid (a) | — | | | 38,361 | |
| Other | 48,806 | | | 45,534 | |
| $ | 140,783 | | | $ | 155,321 | |
_______________
(a)Represented amounts received from franchisees as part of the consortium bid to acquire NPC’s Wendy’s restaurants. See Note 3 for further information.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(12) Long-Term Debt
Long-term debt consisted of the following:
| | | | | | | | | | | |
| Year End |
| January 2,
2022 | | January 3,
2021 |
| Series 2021-1 Class A-2 Notes: | | | |
| 2.370% Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029 | $ | 447,750 | | | $ | — | |
| 2.775% Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 | 646,750 | | | — | |
| Series 2019-1 Class A-2 Notes: | | | |
| 3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 | 368,000 | | | 386,000 | |
| 4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 | 414,000 | | | 434,250 | |
| Series 2018-1 Class A-2 Notes: | | | |
| 3.573% Series 2018-1 Class A-2-I Notes, repaid in connection with the June 2021 refinancing | — | | | 436,500 | |
| 3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 | 456,000 | | | 460,750 | |
| Series 2015-1 Class A-2 Notes: | | | |
| 4.497% Series 2015-1 Class A-2-III Notes, repaid in connection with the June 2021 refinancing | — | | | 473,750 | |
| Canadian revolving credit facility | — | | | 1,962 | |
| 7% debentures, due in 2025 | 85,175 | | | 83,998 | |
| Unamortized debt issuance costs | (37,009) | | | (30,085) | |
| 2,380,666 | | | 2,247,125 | |
| Less amounts payable within one year | (24,250) | | | (28,962) | |
| Total long-term debt | $ | 2,356,416 | | | $ | 2,218,163 | |
Aggregate annual maturities of long-term debt, excluding the effect of purchase accounting adjustments, as of January 2, 2022 were as follows:
| | | | | |
| Fiscal Year | |
| 2022 | $ | 24,250 | |
| 2023 | 24,250 | |
| 2024 | 24,250 | |
| 2025 | 114,250 | |
| 2026 | 372,250 | |
| Thereafter | 1,863,250 | |
| $ | 2,422,500 | |
Senior Notes
Wendy’s Funding, LLC (“Wendy’s Funding”), 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. As of January 2, 2022, the Master Issuer issued the following outstanding series of fixed rate senior secured notes: (i) 2021-1 Class A-2-I with an initial principal amount of $450,000; (ii) 2021-1 Class A-2-II with an initial principal amount of $650,000; (iii) 2019-1 Class A-2-I with an initial principal amount of $400,000; (iv) 2019-1 Class A-2-II with an initial principal amount of $450,000; and (v) 2018-1 Class A-2-II with an initial principal amount of $475,000 (collectively, the “Class A-2 Notes”). In connection with the issuance of the Series 2021-1 Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “2021-1 Class A-1 Notes”), which allows for the drawing of up to $300,000 on a revolving basis using various credit
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
instruments, including a letter of credit facility. No amounts were borrowed under the 2021-Class A-1 Notes during 2021. The Class A-2 Notes and the 2021-1 Class A-1 Notes are collectively referred to as the “Senior Notes.”
The Master Issuer’s issuance of the 2021-1 Class A-1 Notes in June 2021 replaced the Company’s previous $150,000 Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019-1 Class A-1 Notes”) and $100,000 Series 2020-1 Variable Funding Senior Secured Notes, Class A-1 (the “2020-1 Class A-1 Notes”). In March 2020, the Company drew down $120,000 under the Series 2019-1 Class A-1 Notes, which was fully repaid in July 2020. In June 2020, the Master Issuer issued the Series 2020-1 Class A-1 Notes.
The Senior Notes are secured by a security interest in 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 (collectively, the “Securitization Entities”), except for certain real estate assets and subject to certain limitations as set forth in the indenture governing the Senior Notes (the “Indenture”) and the related guarantee and collateral agreements. The assets of the Securitization Entities include most of the domestic and certain of the foreign revenue-generating assets of the Company and its subsidiaries, which principally consist of franchise-related agreements, certain Company-operated restaurants, intellectual property and license agreements for the use of intellectual property.
Interest and principal payments on the Class A-2 Notes are payable on a quarterly basis. The requirement to make such quarterly principal payments on the Class A-2 Notes is subject to certain financial conditions set forth in the Indenture. The legal final maturity dates for the Class A-2 Notes range from 2048 through 2051. If the Master Issuer has not repaid or refinanced the Class A-2 Notes prior to their respective anticipated repayment dates, which range from 2026 through 2031, additional interest will accrue pursuant to the Indenture.
The 2021-1 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 respective purchase agreements for the 2021-1 Class A-1 Notes. There is a commitment fee on the unused portions of the 2021-1 Class A-1 Notes, which ranges from 0.40% to 0.75% based on utilization. As of January 2, 2022, $21,888 of letters of credit were outstanding against the 2021-1 Class A-1 Notes, which relate primarily to interest reserves required under the Indenture.
Covenants and Restrictions
The Senior Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Senior Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Senior Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled maturity date. The Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. In addition, the Indenture and the related management agreement contain various covenants that limit the Company and its subsidiaries’ ability to engage in specified types of transactions, subject to certain exceptions, including, for example, to (i) incur or guarantee additional indebtedness, (ii) sell certain assets, (iii) create or incur liens on certain assets to secure indebtedness or (iv) consolidate, merge, sell or otherwise dispose of all or substantially all of their assets.
In accordance with the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the trustee and the noteholders, and are restricted in their use. As of January 2, 2022 and January 3, 2021, Wendy’s Funding had restricted cash of $27,188 and $33,635, respectively, which primarily represents cash collections and cash reserves held by the trustee to be used for payments of principal, interest and commitment fees required for the Class A-2 Notes.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Refinancing Transactions
In June 2021, the Master Issuer completed a refinancing transaction under which the Master Issuer issued the Series 2021-1 Class A-2-I Notes and the Series 2021-1 Class A-2-II Notes. A portion of the net proceeds from the sale of the Series 2021-1 Class A-2 Notes were used to repay in full the Master Issuer’s outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes, including the payment of prepayment and transaction costs. As a result of the refinancing, the Company recorded a loss on early extinguishment of debt of $17,917 during 2021, which was comprised of a specified make-whole payment of $9,632 and the write-off of certain unamortized deferred financing costs of $8,285. As part of the June 2021 refinancing transaction, the Master Issuer also issued the 2021-1 Class A-1 Notes. The Series 2021-1 Class A-1 Notes replaced the Company’s $150,000 Series 2019-1 Class A-1 Notes and $100,000 Series 2020-1 Class A-1 Notes, which were canceled on the closing date, and the letters of credit outstanding against the Series 2019-1 Class A-1 Notes were transferred to the Series 2021-1 Class A-1 Notes.
In June 2019, the Master Issuer completed a refinancing transaction under which the Master Issuer issued the Series 2019-1 Class A-2-I Notes and the Series 2019-1 Class A-2-II Notes. The Master Issuer’s outstanding Series 2015-1 Class A-2-II Notes were redeemed as part of the transaction. As a result, the Company recorded a loss on early extinguishment of debt of $7,150 during 2019, which was comprised of the write-off of certain unamortized deferred financing costs.
Debt Issuance Costs
During 2021, 2020 and 2019, the Company incurred debt issuance costs of $20,873, $2,122 and $14,008 in connection with the June 2021 refinancing transaction, the issuance of the 2020-1 Class A-1 Notes and the June 2019 refinancing transaction, respectively. The debt issuance costs are being amortized to “Interest expense, net” through the anticipated repayment dates of the Class A-2 Notes utilizing the effective interest rate method. As of January 2, 2022, the effective interest rates, including the amortization of debt issuance costs, were 4.1%, 4.0%, 4.2%, 2.6% and 2.9% for the Series 2018-1 Class A-2-II Notes, Series 2019-1 Class A-2-I Notes, Series 2019-1 Class A-2-II Notes, Series 2021-1 Class A-2-I Notes and Series 2021 Class A-2-II Notes, respectively.
Other Long-Term Debt
Wendy’s 7% debentures are unsecured and were reduced to fair value in connection with the Wendy’s Merger based on their outstanding principal of $100,000 and an effective interest rate of 8.6%. The fair value adjustment is being accreted and the related charge included in “Interest expense, net” until the debentures mature. These debentures contain covenants that restrict the incurrence of indebtedness secured by liens and certain finance lease transactions. In December 2019, Wendy’s repurchased $10,000 in principal of its 7% debentures for $10,550, including a premium of $500 and transaction fees of $50. As a result, the Company recognized a loss on early extinguishment of debt of $1,346 during the fourth quarter of 2019.
A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6,000, which bears interest at the Bank of Montreal Prime Rate. Borrowings under the facility are guaranteed by Wendy’s. In March 2020, the Company drew down C$5,500 under the revolving credit facility, which the Company fully repaid through repayments of C$3,000 in the fourth quarter of 2020 and C$2,500 in the first quarter of 2021. As of January 2, 2022, the Company had no outstanding borrowings under the Canadian 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. During 2020, the Company borrowed and repaid $29,397 under the revolving line of credit. There were no borrowings or repayments under the line of credit during 2021. As of January 2, 2022, the Company had no outstanding borrowings under the revolving line of credit.
The increased borrowings in 2020 were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic.
Interest Expense
Interest expense on the Company’s long-term debt was $98,356, $106,116 and $105,829 during 2021, 2020 and 2019, respectively, which was recorded to “Interest expense, net.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Pledged Assets
The following is a summary of the Company’s assets pledged as collateral for certain debt:
| | | | | |
(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.Year End |
| January 2,
2022 |
| Cash and cash equivalents | $ | 29,201 | |
| Restricted cash and other assets (including long-term) | 27,193 | |
| Accounts and notes receivable, net | 41,964 | |
| Inventories | 5,180 | |
| Properties | 59,717 | |
| Other intangible assets | 1,026,736 | |
| $ | 1,189,991 | |
(13) 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 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year End | | |
| January 2, 2022 | | January 3, 2021 | | |
| Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value | | Fair Value
Measurements |
| Financial assets | | | | | | | | | |
| Cash equivalents | $ | — | | | $ | — | | | $ | 75,067 | | | $ | 75,067 | | | Level 1 |
| Other investments in equity securities (a) | 10,000 | | | 10,000 | | | — | | | — | | | Level 2 |
| | | | | | | | | |
| Financial liabilities | | | | | | | | | |
| Series 2021-1 Class A-2-I Notes (b) | 447,750 | | | 439,283 | | | — | | | — | | | Level 2 |
| Series 2021-1 Class A-2-II Notes (b) | 646,750 | | | 642,352 | | | — | | | — | | | Level 2 |
| Series 2019-1 Class A-2-I Notes (b) | 368,000 | | | 381,579 | | | 386,000 | | | 409,778 | | | Level 2 |
| Series 2019-1 Class A-2-II Notes (b) | 414,000 | | | 439,792 | | | 434,250 | | | 469,555 | | | Level 2 |
| Series 2018-1 Class A-2-I Notes (b) | — | | | — | | | 436,500 | | | 450,381 | | | Level 2 |
| Series 2018-1 Class A-2-II Notes (b) | 456,000 | | | 473,693 | | | 460,750 | | | 491,021 | | | Level 2 |
| Series 2015-1 Class A-2-III Notes (b) | — | | | — | | | 473,750 | | | 481,851 | | | Level 2 |
| Canadian revolving credit facility | — | | | — | | | 1,962 | | | 1,962 | | | Level 2 |
| 7% debentures, due in 2025 (b) | 85,175 | | | 101,142 | | | 83,998 | | | 98,775 | | | Level 2 |
_______________
(a)The fair value of our other investments in equity securities is based on our review of information provided by the investment manager, which is based on observable price changes in orderly transactions for an identical or similar investment of the same issuer.
(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 approximatedapproximate 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 consolidated statements of operations.
Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, and favorable lease assets and ROU assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair valuevalues of long-lived assets held and used presented in the tables below representsrepresent the remaining carrying value and waswere estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO 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.sale. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 17 for morefurther information on impairment of our long-lived assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements | | 2021 Total Losses |
| January 2,
2022 | | Level 1 | | Level 2 | | Level 3 | |
| Held and used | $ | 1,618 | | | $ | — | | | $ | — | | | $ | 1,618 | | | $ | 2,051 | |
| Held for sale | 371 | | | — | | | — | | | 371 | | | 200 | |
| Total | $ | 1,989 | | | $ | — | | | $ | — | | | $ | 1,989 | | | $ | 2,251 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements | | 2020 Total Losses |
| January 3,
2021 | | Level 1 | | Level 2 | | Level 3 | |
| Held and used | $ | 2,653 | | | $ | — | | | $ | — | | | $ | 2,653 | | | $ | 7,586 | |
| Held for sale | 855 | | | — | | | — | | | 855 | | | 451 | |
| Total | $ | 3,508 | | | $ | — | | | $ | — | | | $ | 3,508 | | | $ | 8,037 | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements | | 2018 Total Losses |
| | December 30,
2018 | | Level 1 | | Level 2 | | Level 3 | |
| Held and used | $ | 462 |
| | $ | — |
| | $ | — |
| | $ | 462 |
| | $ | 4,343 |
|
| Held for sale | 1,031 |
| | — |
| | — |
| | 1,031 |
| | 354 |
|
| Total | $ | 1,493 |
| | $ | — |
| | $ | — |
| | $ | 1,493 |
| | $ | 4,697 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements | | 2017 Total Losses |
| | December 31,
2017 | | Level 1 | | Level 2 | | Level 3 | |
| Held and used | $ | 757 |
| | $ | — |
| | $ | — |
| | $ | 757 |
| | $ | 3,413 |
|
| Held for sale | 1,560 |
| | — |
| | — |
| | 1,560 |
| | 684 |
|
| Total | $ | 2,317 |
| | $ | — |
| | $ | — |
| | $ | 2,317 |
| | $ | 4,097 |
|
(14) Income Taxes
Income before income taxes is set forth below:
| | | | Year Ended | | Year Ended |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Domestic | $ | 560,776 |
| | $ | 86,892 |
| | $ | 192,082 |
| Domestic | $ | 228,756 | | | $ | 149,046 | | | $ | 160,474 | |
| Foreign (a) | 14,140 |
| | 14,127 |
| | 9,608 |
| Foreign (a) | 11,822 | | | 3,749 | | | 11,007 | |
| | $ | 574,916 |
| | $ | 101,019 |
| | $ | 201,690 |
| | $ | 240,578 | | | $ | 152,795 | | | $ | 171,481 | |
_______________
(a)Excludes foreign income of domestic subsidiaries.
The (provision for) benefit from income taxes is set forth below:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| U.S. federal | $ | (38,416) | | | $ | (16,176) | | | $ | (18,421) | |
| State | (7,039) | | | (3,723) | | | (6,093) | |
| Foreign | (8,512) | | | (4,798) | | | (9,190) | |
| Current tax provision | (53,967) | | | (24,697) | | | (33,704) | |
| Deferred: | | | | | |
| U.S. federal | (52) | | | (6,707) | | | 1,585 | |
| State | 15,993 | | | (3,185) | | | (2,449) | |
| Foreign | (2,160) | | | (374) | | | 27 | |
| Deferred tax (provision) benefit | 13,781 | | | (10,266) | | | (837) | |
| Income tax provision | $ | (40,186) | | | $ | (34,963) | | | $ | (34,541) | |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| |
(a) | Excludes foreign income of domestic subsidiaries. |
The (provision for) benefit from income taxes is set forth below:
|
| | | | | | | | | | | |
| | Year Ended |
| | 2018 | | 2017 | | 2016 |
| Current: | | | | | |
| U.S. federal | $ | (109,078 | ) | | $ | (13,092 | ) | | $ | (75,167 | ) |
| State | (2,661 | ) | | (4,055 | ) | | (5,805 | ) |
| Foreign | (9,630 | ) | | (9,173 | ) | | (5,307 | ) |
| Current tax provision | (121,369 | ) | | (26,320 | ) | | (86,279 | ) |
| Deferred: | | | | | |
| U.S. federal | 5,071 |
| | 127,592 |
| | 7,975 |
|
| State | 441 |
| | (7,729 | ) | | 6,733 |
|
| Foreign | 1,056 |
| | (533 | ) | | (495 | ) |
| Deferred tax benefit | 6,568 |
| | 119,330 |
| | 14,213 |
|
| Income tax (provision) benefit | $ | (114,801 | ) | | $ | 93,010 |
| | $ | (72,066 | ) |
Deferred tax assets (liabilities) are set forth below:
| | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3, 2021 |
| Deferred tax assets: | | | |
| Operating and finance lease liabilities | $ | 368,932 | | | $ | 365,005 | |
| Net operating loss and credit carryforwards | 60,620 | | | 62,210 | |
| Deferred revenue | 23,636 | | | 24,303 | |
| Unfavorable leases | 19,060 | | | 23,511 | |
| Accrued compensation and related benefits | 18,487 | | | 16,443 | |
| Accrued expenses and reserves | 6,763 | | | 7,673 | |
| Other | 7,586 | | | 5,869 | |
| Valuation allowances | (38,277) | | | (49,968) | |
| Total deferred tax assets | 466,807 | | | 455,046 | |
| Deferred tax liabilities: | | | |
| Operating and finance lease assets | (341,681) | | | (332,515) | |
| Intangible assets | (290,088) | | | (301,969) | |
| Fixed assets | (63,936) | | | (63,826) | |
| Other | (38,812) | | | (37,491) | |
| Total deferred tax liabilities | (734,517) | | | (735,801) | |
| $ | (267,710) | | | $ | (280,755) | |
|
| | | | | | | |
| | Year End |
| | December 30, 2018 | | December 31, 2017 |
| Deferred tax assets: | | | |
| Net operating loss and credit carryforwards | $ | 59,690 |
| | $ | 66,770 |
|
| Unfavorable leases | 35,801 |
| | 40,544 |
|
| Deferred revenue | 23,904 |
| | 328 |
|
| Deferred rent | 16,807 |
| | 14,862 |
|
| Accrued expenses and reserves | 14,840 |
| | 9,673 |
|
| Accrued compensation and related benefits | 14,804 |
| | 17,904 |
|
| Other | 5,016 |
| | 3,977 |
|
| Valuation allowances | (42,175 | ) | | (47,295 | ) |
| Total deferred tax assets | 128,687 |
| | 106,763 |
|
| Deferred tax liabilities: | | | |
| Intangible assets | (324,394 | ) | | (333,708 | ) |
| Owned and leased fixed assets, net of related obligations | (47,021 | ) | | (47,702 | ) |
| Other | (26,432 | ) | | (24,406 | ) |
| Total deferred tax liabilities | (397,847 | ) | | (405,816 | ) |
| | $ | (269,160 | ) | | $ | (299,053 | ) |
Changes in the Company’s deferred tax asset and liability balances were primarily the result of the adoption of new guidance for revenue recognition. See “New Accounting Standards Adopted” in Note 1 for further information.
Major Tax Legislation
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code that affected 2017, including but not limited to (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries and (2) bonus depreciation that will allow for full expensing of qualified property.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The Tax Act also establishes new tax laws that are effective for 2018, including but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21%, (2) a new provision designed to tax global intangible low-taxed income (“GILTI”), (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, (4) a limitation on deductible interest expense and (5) limitations on the deductibility of certain executive compensation.
The Securities and Exchange Commission issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting. In accordance with the guidance, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue its accounting on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In our initial analysis of the impact of the Tax Act, we recorded a discrete net tax benefit of $140,379 during 2017. This net benefit primarily consisted of a benefit of $164,893 for the impact of the corporate rate reduction on our net deferred tax liabilities, partially offset by a net expense of $22,209 for the international-related provisions, including the transition tax (and the related impact to our recorded valuation allowance) and deferred taxes recorded on foreign earnings previously considered permanently reinvested. The Company recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and the transition tax and included these amounts in its consolidated financial statements for 2017.
In our continued analysis of the Tax Act, we adjusted our provisional amounts and recorded a discrete net tax expense of $2,159 during 2018. This includes a net expense of $2,426 related to the impact of the corporate rate reduction on our net deferred tax liabilities, a net expense of $991 related to the limitations on the deductibility of certain executive compensation and $28 of state income tax, partially offset by $1,286 for the net benefit of foreign tax credits. At December 30, 2018, we finalized our policy and have elected to use the period cost method for GILTI provisions and therefore have not recorded deferred taxes for basis differences expected to reverse in future periods.
Based on certain provisions contained in the Tax Act, the unrepatriated earnings of foreign subsidiaries, primarily Canadian, are no longer considered permanently invested outside of the U.S. As of December 30, 2018, we have provided a deferred foreign tax provision of $1,985 on these unrepatriated earnings.
The amounts and expiration dates of net operating loss and tax credit carryforwards are as follows:
| | | | | | | | | | | |
| Amount | | Expiration |
| Tax credit carryforwards: | | | |
| U.S. federal foreign tax credits | $ | 15,309 | | | 2022-2032 |
| State tax credits | 593 | | | 2022-2023 |
| Foreign tax credits of non-U.S. subsidiaries | 4,159 | | | Indefinite |
| Total | $ | 20,061 | | | |
| | | |
| Net operating loss carryforwards (pre-tax): | | | |
| State and local net operating loss carryforwards | $ | 1,131,604 | | | 2022-Indefinite |
| Foreign net operating loss carryforwards | 6,962 | | | Indefinite |
| Total | $ | 1,138,566 | | | |
|
| | | | | |
| | Amount | | Expiration |
| Tax credit carryforwards: | | | |
| U.S. federal foreign tax credits | $ | 9,267 |
| | 2022-2029 |
| State tax credits | 559 |
| | 2020-2023 |
| Foreign tax credits of non-U.S. subsidiaries | 2,674 |
| | Not applicable |
| Total | $ | 12,500 |
| | |
| | | | |
| Net operating loss carryforwards: | | | |
| State and local net operating loss carryforwards | $ | 1,204,260 |
| | 2019-2035 |
| Foreign net operating loss carryforwards | 216 |
| | 2023-2026 |
| Total | $ | 1,204,476 |
| | |
The Company’s valuation allowances of $42,175$38,277 and $47,295$49,968 as of December 30, 2018January 2, 2022 and December 31, 2017,January 3, 2021, respectively, relate primarily to foreign and state tax credit carryforwards and net operating loss carryforwards. Valuation allowances decreased $5,120 and $5,697$11,691 during 2018 and 2016, respectively,2021 and increased $35,895$4,785 and $3,008 during 2017,2020 and 2019, respectively. The decrease in 2021 resulted primarily asfrom a result of the Tax Act and our system optimization initiative described2021 change in Note 3. Thestate tax law, which resulted in a one-time reduction in the U.S. corporate rate from 35% to 21% decreasespreviously recorded valuation allowances against our ability to utilize foreigndeferred state tax credit carryforwards after 2017 and we expect them to expire unused. Theassets of $12,606. Additionally, the relative presence of Company-operated restaurants in various states impacts expected future state taxable income available to utilize state net operating loss carryforwards.
The current portion of refundable income taxes was $11,901 and $5,399 as of January 2, 2022 and January 3, 2021, respectively, and is included in “Accounts and notes receivable, net.” There were no long-term refundable income taxes as of January 2, 2022 and January 3, 2021.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The current portion of refundable income taxes was $14,475 and $26,262 as of December 30, 2018 and December 31, 2017, respectively, and is included in “Accounts and notes receivable, net.” There were no long-term refundable income taxes as of December 30, 2018 and December 31, 2017.
The reconciliation of income tax computed at the U.S. federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 to reported income tax is set forth below:
|
| | | | | | | | | | | |
| | Year Ended |
| | 2018 (a) | | 2017 (a) | | 2016 |
| Income tax provision at the U.S. federal statutory rate | $ | (120,732 | ) | | $ | (35,357 | ) | | $ | (70,592 | ) |
| State income tax provision, net of U.S. federal income tax effect | (221 | ) | | (6,451 | ) | | (3,767 | ) |
| Federal rate change | — |
| | 164,893 |
| | — |
|
| Prior years’ tax matters (b) | (9,970 | ) | | 15,964 |
| | — |
|
| Excess tax benefits from share-based compensation | 10,250 |
| | 5,196 |
| | — |
|
| Domestic tax planning initiatives | — |
| | 4,282 |
| | — |
|
| Foreign and U.S. tax effects of foreign operations | (856 | ) | | 2,408 |
| | 2,278 |
|
| Valuation allowances (b) (c) | 5,120 |
| | (35,895 | ) | | 4,915 |
|
| Non-deductible goodwill (d) | (41 | ) | | (15,458 | ) | | (6,409 | ) |
| Transition tax | — |
| | (4,446 | ) | | — |
|
| Unrepatriated earnings | (326 | ) | | (1,801 | ) | | — |
|
| Non-deductible expenses and other | 1,975 |
| | (325 | ) | | 1,509 |
|
| | $ | (114,801 | ) | | $ | 93,010 |
| | $ | (72,066 | ) |
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Income tax provision at the U.S. federal statutory rate | $ | (50,521) | | | $ | (32,087) | | | $ | (36,011) | |
| State income tax provision, net of U.S. federal income tax effect | (6,256) | | | (4,664) | | | (6,470) | |
| Prior years’ tax matters (a) | 1,820 | | | 1,761 | | | 6,135 | |
| Excess federal tax benefits from share-based compensation | 7,160 | | | 5,338 | | | 5,841 | |
| Foreign and U.S. tax effects of foreign operations | (5) | | | (397) | | | 250 | |
| Valuation allowances (b) | 11,807 | | | (4,593) | | | (2,833) | |
| Non-deductible goodwill (c) | (947) | | | — | | | — | |
| Tax credits | 1,028 | | | 1,901 | | | 879 | |
| Non-deductible executive compensation | (3,810) | | | (1,973) | | | (1,925) | |
| Unrepatriated earnings | (282) | | | (283) | | | (402) | |
| Non-deductible expenses and other | (180) | | | 34 | | | (5) | |
| $ | (40,186) | | | $ | (34,963) | | | $ | (34,541) | |
_______________
| |
(a) | 2018 includes the following impacts associated with the Tax Act: (1) a net expense of $2,426 related to the impact of the corporate rate reduction on our net deferred tax liabilities, (2) a net expense of $991 related to the limitations on the deductibility of certain executive compensation, (3) a net expense of $28 of state income tax and (4) a net benefit of $1,286 related to foreign tax credits. 2017 includes the following impacts associated with the Tax Act: (1) the revaluation of our U.S. net deferred tax liability at 21% resulting in a benefit of $164,893, (2) a full valuation allowance of $15,962 on our U.S. foreign tax credit carryforwards due to the decrease in the U.S. federal tax rate, resulting in the Company concluding it is more likely than not that we will not be able to utilize our carryforwards before they expire, (3) a one-time transition tax of $4,446, (4) deferred tax on unrepatriated earnings of $1,801 and (5) other net expenses of $2,305. |
(a)2019 primarily relates to a reduction in unrecognized tax benefits due to a lapse of statute of limitations.
| |
(b) | In 2018, includes expense of $9,542 related to the Tax Act, which was partially offset by a $7,535 reduction in valuation allowances. In 2017, primarily related to certain state net operating loss carryforwards, previously considered worthless, that existed at the beginning of the year. The Company changed its judgment during 2017 regarding the likelihood of the utilization of these carryforwards. Because of this change, the Company recognized a deferred tax asset of $16,643, net of federal benefit, which was partially offset by an increase in valuation allowance of $13,667, net of federal benefit. |
| |
(c) | 2016 includes a $2,878 benefit related to the correction to a prior year identified and recorded in the first quarter of 2016. |
(b)2021 primarily relates to the $12,606 benefit resulting from the state tax law change described above. The effect of the tax law change also included $840 of additional deferred tax expense included in the State income tax provision line item, for a total of $11,766.
| |
(d) | Substantially all of the goodwill included in the net gain (loss) on sales of restaurants in 2018, 2017 and 2016 under our system optimization initiative was non-deductible for tax purposes. See Note 3 for further information. 2016 includes a $3,837 federal benefit related to the correction to a prior year identified and recorded in the second quarter of 2016. The corresponding state benefit correction of $398 is included in the state income tax provision amount above. |
(c)Related to the sale of the New York Company-operated restaurants (including Manhattan). See Note 4 for further information.
The Company participates in the Internal Revenue Service (the “IRS”) Compliance Assurance Process (“CAP”). As part of CAP, tax years are examined on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. As such, our tax returns for fiscal years 2009 through 20162019 have been settled. CertainThe statute of limitations for the Company’s state tax returns vary, but generally the Company’s state income tax returns from its 20142018 fiscal year and forward remain subject to examination. We believe that adequate provisions have been made for any liabilities, including interest and penalties that may result from the completion of these examinations.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Unrecognized Tax Benefits
As of December 30, 2018,January 2, 2022, the Company had unrecognized tax benefits of $27,632,$18,849, which, if resolved favorably would reduce income tax expense by $23,497.$14,890. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:
|
| | | | | | | | | | | |
| | Year End |
| | December 30,
2018 | | December 31,
2017 | | January 3,
2016 |
| Beginning balance | $ | 28,848 |
| | $ | 19,545 |
| | $ | 21,224 |
|
| Additions: | | | | | |
| Tax positions of current year | 3,874 |
| | 8,251 |
| | 306 |
|
| Tax positions of prior years | 2,598 |
| | 1,704 |
| | 440 |
|
| Reductions: | | | | | |
| Tax positions of prior years | (7,553 | ) | | (295 | ) | | (2,126 | ) |
| Settlements | (21 | ) | | (34 | ) | | (42 | ) |
| Lapse of statute of limitations | (114 | ) | | (323 | ) | | (257 | ) |
| Ending balance | $ | 27,632 |
| | $ | 28,848 |
| | $ | 19,545 |
|
The addition of unrecognized tax benefits in 2018 was primarily related to a position taken on state returns regarding the sale of Inspire Brands, and the reduction of unrecognized benefits in 2018 was primarily related to settlements with various taxing jurisdictions, including amended returns that were filed in 2017. The addition of unrecognized tax benefits in 2017 was primarily related to the filing of amended returns in various jurisdictions, as well as an unfavorable court decision which caused us to change our judgment about the technical merits of a filing position.
During 2019, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $7,731 due primarily to the lapse of statutes of limitations.
During 2018, 2017 and 2016, the Company recognized $(12), $161 and $75 of (income) expense for interest and $(309), $(106) and $25 of (income) expense for penalties, respectively, related to uncertain tax positions. The Company has $1,428 and $1,451 accrued for interest and $199 and $509 accrued for penalties as of December 30, 2018 and December 31, 2017, respectively.
(15) Stockholders’ Equity
Dividends
During 2018, 2017 and 2016, The Wendy’s Company paid dividends per share of $0.34, $0.28 and $0.245, respectively.
Treasury Stock
There were 470,424 shares of common stock issued at the beginning and end of 2018, 2017 and 2016. Treasury stock activity for 2018, 2017 and 2016 was as follows: | | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Beginning balance | $ | 20,973 | | | $ | 22,323 | | | $ | 27,632 | |
| Additions: | | | | | |
| Tax positions of current year | 157 | | | 322 | | | 1,356 | |
| Tax positions of prior years | — | | | — | | | — | |
| Reductions: | | | | | |
| Tax positions of prior years | (2,015) | | | (1,183) | | | (227) | |
| Settlements | (46) | | | (119) | | | — | |
| Lapse of statute of limitations | (220) | | | (370) | | | (6,438) | |
| Ending balance | $ | 18,849 | | | $ | 20,973 | | | $ | 22,323 | |
|
| | | | | | | | |
| | Treasury Stock |
| | 2018 | | 2017 | | 2016 |
| Number of shares at beginning of year | 229,912 |
| | 223,850 |
| | 198,109 |
|
| Repurchases of common stock | 15,808 |
| | 8,607 |
| | 29,545 |
|
| Common shares issued: | | | | | |
| Stock options, net | (5,824 | ) | | (1,853 | ) | | (2,914 | ) |
| Restricted stock, net | (627 | ) | | (612 | ) | | (796 | ) |
| Director fees | (15 | ) | | (15 | ) | | (20 | ) |
| Other | (63 | ) | | (65 | ) | | (74 | ) |
| Number of shares at end of year | 239,191 |
| | 229,912 |
| | 223,850 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The reductions in unrecognized tax benefits in 2021 and 2020 were primarily related to decreases as a result of settlements with various taxing jurisdictions. The additions in unrecognized tax benefits in 2019 was primarily related to the uncertainty of the income tax consequences of a cash settlement related to a previously held investment.
During 2022, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $98 due primarily to the lapse of statutes of limitations and expected settlements.
During 2021, 2020 and 2019, the Company recognized $138, $159 and $(489) of expense (income) for interest and $37, $81 and $81 of income for penalties, respectively, related to uncertain tax positions. The Company has $975 and $873 accrued for interest and $0 and $37 accrued for penalties as of January 2, 2022 and January 3, 2021, respectively.
(15) Stockholders’ Equity
Dividends
During 2021, 2020 and 2019, the Company paid dividends per share of $0.43, $0.29 and $0.42, respectively.
Treasury Stock
There were 470,424 shares of common stock issued at the beginning and end of 2021, 2020 and 2019. Treasury stock activity for 2021, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Number of shares at beginning of year | 246,156 | | | 245,535 | | | 239,191 | |
| Repurchases of common stock | 11,487 | | | 3,512 | | | 10,158 | |
| Common shares issued: | | | | | |
| Stock options, net | (2,657) | | | (2,358) | | | (2,912) | |
| Restricted stock, net | (337) | | | (465) | | | (834) | |
| Director fees | (17) | | | (15) | | | (14) | |
| Other | (57) | | | (53) | | | (54) | |
| Number of shares at end of year | 254,575 | | | 246,156 | | | 245,535 | |
Repurchases of Common Stock
In February 2018,2020, our Board of Directors authorized a repurchase program for up to $175,000$100,000 of our common stock through March 3, 2019,February 28, 2021, when and if market conditions warrantwarranted 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 August 2018, ourJuly 2020, the Company’s Board of Directors authorizedapproved an additional share repurchase program for up to $100,000 of our common stock through December 27, 2019 with a portionextension of the proceeds obtainedFebruary 2020 authorization by one year, through the sale of our remaining ownership interestFebruary 28, 2022. The Company resumed share repurchases in Inspire Brands, whenAugust 2020. In addition, in May 2021, August 2021, and if market conditions warrant and to the extent legally permissible. In November 2018,2021, the Board of Directors approved an increaseincreases of $120,000$50,000, $70,000 and $80,000, respectively, to the August 2018February 2020 authorization, resulting in a totalan aggregate authorization of $220,000.$300,000 that continued to expire on February 28, 2022. In November 2018,2021, the Company entered into an accelerated share repurchase agreement (the “2018“2021 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase programs.program. Under the 20182021 ASR Agreement, the Company paid the financial institution an initial purchase price of $75,000$125,000 in cash and received an initial delivery of 3,6454,910 shares of common stock, representing an estimate ofestimated 85% of the total shares expected to be delivered under the 20182021 ASR Agreement. In February 2022, the Company completed the 2021 ASR Agreement and received an additional 715 shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 20182021 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 20182021 ASR Agreement, less an agreed upon discount. On December 18, 2018,In total, 5,625 shares were delivered under the Company completed the 20182021 ASR Agreement and receivedat an additional 720average purchase price of $22.22 per share.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
In addition to the shares of common stock. Additionally,repurchased in connection with the 2021 ASR Agreement, during 2018,2021, the Company repurchased 10,0586,577 shares under the February 2018 and November 2018 authorizations with an aggregate purchase price of $172,584, of which $1,827 was accrued at December 30, 2018, and$142,715, excluding commissions of $141. As$93, under the February 2020 repurchase authorization. After taking into consideration these repurchases, with the completion of December 30, 2018,the 2021 ASR Agreement in February 2022 described above, the Company had completed itsthe February 2018 authorization and had $147,4172020 authorization.
In February 2022, our Board of availability remaining under its November 2018 authorization. SubsequentDirectors authorized the repurchase of up to December 30, 2018$100,000 of our common stock through February 19, 2019,28, 2023, when and if market conditions warrant and to the extent legally permissible.
During 2020, the Company repurchased 1,2771,572 shares under the November 2018February 2020 repurchase authorization with an aggregate purchase price of $21,457,$32,285, of which $723 was accrued at January 3, 2021, and excluding commissions of $18. $22.
In February 2019, our Board of Directors authorized thea repurchase ofprogram for up to $225,000 of our common stock through March 1, 2020, when and if market conditions warrant and to the extent legally permissible. In connection with the February 2019 authorization, the November 2018 authorization was canceled.
In February 2017, our Board of Directors authorized a repurchase program for up to $150,000 of our common stock through March 4, 2018, when and if market conditions warranted and to the extent legally permissible. During 2018, the Company completed the February 2017 authorization with the repurchase of 1,385 shares with an aggregate purchase price of $22,633, excluding commissions of $19. During 2017, the Company repurchased 8,607 shares under the February 2017 authorization with an aggregate purchase price of $127,367, of which $1,259 was accrued at December 31, 2017 and excluding commissions of $123.
On June 1, 2015, our Board of Directors authorized a repurchase program for up to $1,400,000 of our common stock through January 1, 2017, when and if market conditions warranted and to the extent legally permissible. In November 2016,2019, the Company entered into an accelerated share repurchase agreement (the “2016“2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing $1,400,000 share repurchase program. Under the 20162019 ASR Agreement, the Company paid the financial institution an initial purchase price of $150,000$100,000 in cash and received an initial delivery of 11,0874,051 shares of common stock, representing an estimate ofestimated 85% of the total shares expected to be delivered under the 20162019 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 20162019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 20162019 ASR Agreement, less an agreed upon discount. On December 27, 2016,In total, 4,679 shares were delivered under the Company completed the 20162019 ASR Agreement and receivedat an additional 316average purchase price of $21.37 per share.
In addition to the shares of common stock. Additionally,repurchased in connection with the 2019 ASR Agreement, during 2016,2020, the Company repurchased 18,1421,312 shares with an aggregate purchase price of $184,986,$28,770, excluding commissions of $272. As a result,$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 substantially allits February 2019 authorization.
In addition to the shares repurchased in connection with the 2019 ASR Agreement, during 2019, the Company repurchased 6,107 shares with an aggregate purchase price of $117,685, of which $1,801 was accrued at December 29, 2019, and excluding commissions of $86, under the $1,400,000 share repurchase program.February 2019 authorization and the Company’s November 2018 authorization for up to $220,000 of our common stock through December 27, 2019.
Preferred Stock
There were 100,000 shares authorized and no shares issued of preferred stock throughout 2018, 20172021, 2020 and 2016.2019.
Accumulated Other Comprehensive Loss
The following table provides a rollforward of accumulated other comprehensive loss, which is entirely comprised of foreign currency translation:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Balance at beginning of period | $ | (49,641) | | | $ | (53,828) | | | $ | (61,673) | |
| Foreign currency translation | 1,441 | | | 4,187 | | | 7,845 | |
| Balance at end of period | $ | (48,200) | | | $ | (49,641) | | | $ | (53,828) | |
(16) Share-Based Compensation
The Company has the ability to grant stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and performance compensation awards to current or prospective employees, directors, officers, consultants or advisors. During 2020, the Company’s Board of Directors and its stockholders approved the adoption of the 2020 Omnibus Award Plan (the “2020 Plan”) for the issuance of equity instruments as described above. The Company’s previous 2010 Omnibus Award Plan (as amended, the “2010 Plan”) expired in accordance with its terms in 2020. All equity grants in 2021
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Accumulated Other Comprehensive Loss
The following table provides a rollforward ofwere issued from the components of accumulated other comprehensive income (loss), net of tax as applicable:
|
| | | | | | | | | | | | | | | |
| | Foreign Currency Translation | | Cash Flow Hedges (a) | | Pension (b) | | Total |
| Balance at January 3, 2016 | $ | (66,163 | ) | | $ | (3,571 | ) | | $ | (1,089 | ) | | $ | (70,823 | ) |
| Current-period other comprehensive income (loss) | 5,864 |
| | 1,774 |
| | (56 | ) | | 7,582 |
|
| Balance at January 1, 2017 | (60,299 | ) | | (1,797 | ) | | (1,145 | ) | | (63,241 | ) |
| Current-period other comprehensive income | 15,150 |
| | 1,797 |
| | 96 |
| | 17,043 |
|
| Balance at December 31, 2017 | (45,149 | ) | | — |
| | (1,049 | ) | | (46,198 | ) |
| Current-period other comprehensive (loss) income | (16,524 | ) | | — |
| | 1,049 |
| | (15,475 | ) |
| Balance at December 30, 2018 | $ | (61,673 | ) | | $ | — |
| | $ | — |
| | $ | (61,673 | ) |
_______________
| |
(a) | During 2015, the Company terminated seven forward-starting interest rate swaps designated as cash flow hedges, which had an original maturity date of December 31, 2017. As a result, current-period other comprehensive income (loss) for 20172020 Plan. Equity grants in 2020 were issued from both the 2020 Plan and 2016 includes the reclassification of unrealized losses on cash flow hedges of $1,797 and $1,774, respectively, from “Accumulated other comprehensive loss” to our consolidated statements of operations consisting of $2,894 and $2,894, respectively, recorded to “Interest expense, net,” net of the related income tax benefit of $1,097 and $1,120, respectively, recorded to “(Provision for) benefit from income taxes.” |
(b) During 2018, the Company terminated two frozen defined benefit plans. See Note 19 for further information.
(16) Share-Based Compensation
The Company maintains several equity plans, which collectively provide or provided for the grant of stock options, restricted shares, tandem stock appreciation rights, restricted share units and performance shares to certain officers, other key employees, non-employee directors and consultants. The Company has not granted any tandem stock appreciation rights. During 2010, the Company implemented the 2010 Omnibus Award Plan (as amended, the “2010 Plan”) with shareholder approval for the issuance of equity awards as described above. In June 2015, the 2010 Plan was amended with shareholder approval, to increase the number of shares of common stock available for issuance under the plan by 20,000.Plan. All equity grants during 2018, 2017 and 20162019 were issued from the 2010 Plan and the 2010Plan. The 2020 Plan is currently the only equity plan from which future equity awards may be granted.granted, but outstanding awards granted under the 2010 Plan will continue to be governed by the terms of the 2010 Plan. As of December 30, 2018,January 2, 2022, there were approximately 26,13522,425 shares of common stock available for future grants under the 20102020 Plan. During the periods presented in the consolidated financial statements, the Company settled all exercises of stock options and vesting of restricted shares, including performance shares, with treasury shares.
Stock Options
The Company’s current outstanding stock options have maximum contractual terms of 10 years and vest ratably over three years or cliff vest after three years. The exercise price of options granted is equal to the market price of the Company’s common stock on the date of grant. The fair value of stock options on the date of grant is calculated using the Black-Scholes Model. The aggregate intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table summarizes stock option activity during 2018:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Life in Years | | Aggregate
Intrinsic
Value |
| Outstanding at January 3, 2021 | 11,242 | | | $ | 16.06 | | | | | |
| Granted | 1,435 | | | 23.70 | | | | | |
| Exercised | (2,746) | | | 11.38 | | | | | |
| Forfeited and/or expired | (73) | | | 21.27 | | | | | |
| Outstanding at January 2, 2022 | 9,858 | | | $ | 18.44 | | | 6.94 | | $ | 55,337 | |
| Vested or expected to vest at January 2, 2022 | 9,727 | | | $ | 18.38 | | | 6.91 | | $ | 53,197 | |
| Exercisable at January 2, 2022 | 6,514 | | | $ | 16.43 | | | 6.00 | | $ | 48,372 | |
|
| | | | | | | | | | | | |
| | Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life in Years | | Aggregate Intrinsic Value |
| Outstanding at December 31, 2017 | 17,325 |
| | $ | 9.56 |
| | | | |
| Granted | 2,225 |
| | 18.51 |
| | | | |
| Exercised | (6,736 | ) | | 8.12 |
| | | | |
| Forfeited and/or expired | (137 | ) | | 13.52 |
| | | | |
| Outstanding at December 30, 2018 | 12,677 |
| | $ | 11.86 |
| | 7.07 | | $ | 54,203 |
|
| Vested or expected to vest at December 30, 2018 | 12,563 |
| | $ | 11.82 |
| | 7.05 | | $ | 54,063 |
|
| Exercisable at December 30, 2018 | 7,827 |
| | $ | 9.47 |
| | 5.98 | | $ | 48,185 |
|
The total intrinsic value of options exercised during 2018, 20172021, 2020 and 20162019 was $62,744, $14,624$39,522, $28,111 and $12,594,$26,947, respectively. The weighted average grant date fair value of stock options granted during 2018, 20172021, 2020 and 20162019 was $4.12, $3.12$6.33, $6.02 and $2.12,$3.40, respectively.
The weighted average grant date fair value of stock options was determined using the following assumptions:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Risk-free interest rate | 0.70 | % | | 0.22 | % | | 1.57 | % |
| Expected option life in years | 4.50 | | 4.50 | | 4.50 |
| Expected volatility | 38.00 | % | | 38.02 | % | | 23.55 | % |
| Expected dividend yield | 2.03 | % | | 1.72 | % | | 2.03 | % |
|
| | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Risk-free interest rate | 2.77 | % | | 1.94 | % | | 1.28 | % |
| Expected option life in years | 5.62 |
| | 5.62 |
| | 5.62 |
|
| Expected volatility | 24.27 | % | | 23.88 | % | | 28.25 | % |
| Expected dividend yield | 1.84 | % | | 1.82 | % | | 2.38 | % |
The risk-free interest rate represents the U.S. Treasury zero-coupon bond yield correlating to the expected life of the stock options granted. The expected option life represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends for similar grants. The expected volatility is based on the historical market price volatility of the Company as well as our industry peer group.over a period equivalent to the expected option life. The expected dividend yield represents the Company’s annualized average yield for regular quarterly dividends declared prior to the respective stock option grant dates.
The Black-Scholes Model has limitations on its effectiveness including that it was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable and that the model requires the use of highly subjective assumptions, such as expected stock price volatility. Employee stock option awards have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimates.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Restricted Shares
The Company grants RSAs and RSUs, which primarily cliff vest after one1 to three3 years. For the purposes of our disclosures, the term “Restricted Shares” applies to RSAs and RSUs collectively unless otherwise noted. The fair value of Restricted Shares granted is determined using the averagefair market value of the high and low trading prices of ourCompany’s common stock on the date of grant.grant, as set forth in the applicable plan document.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table summarizes activity of Restricted Shares during 2018:2021:
| | | | | | | | | | | |
| Number of Restricted Shares | | Weighted
Average
Grant Date Fair Value |
| Non-vested at January 3, 2021 | 1,089 | | | $ | 19.01 | |
| Granted | 365 | | | 23.27 | |
| Vested | (304) | | | 18.69 | |
| Forfeited | (56) | | | 21.08 | |
| Non-vested at January 2, 2022 | 1,094 | | | $ | 20.09 | |
|
| | | | | | |
| | Number of Restricted Shares | | Weighted Average Grant Date Fair Value |
| Non-vested at December 31, 2017 | 1,595 |
| | $ | 11.36 |
|
| Granted | 430 |
| | 17.73 |
|
| Vested | (596 | ) | | 10.45 |
|
| Forfeited | (108 | ) | | 12.82 |
|
| Non-vested at December 30, 2018 | 1,321 |
| | $ | 13.65 |
|
The total fair value of Restricted Shares that vested in 2018, 20172021, 2020 and 20162019 was $10,060, $10,004$7,048, $8,634 and $6,339,$9,996, respectively.
Performance Shares
The Company grants performance-based awards to certain officers and key employees. The vesting of these awards is contingent upon meeting one or more defined operational or financial goals (a performance condition) or common stock share prices (a market condition). The quantity of shares awarded ranges from 0% to 200% of “Target,” as defined in the award agreement as the midpoint number of shares, based on the level of achievement of the performance and market conditions.
The fair values of the performance condition awards granted in 2018, 20172021, 2020 and 20162019 were determined using the averagefair market value of the high and low trading prices of ourCompany’s common stock on the date of grant.grant, as set forth in the applicable plan document. Share-based compensation expense recorded for performance condition awards is reevaluated at each reporting period based on the probability of the achievement of the goal.
The fair value of market condition awards granted in 2018, 20172021, 2020 and 20162019 were estimated using the Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that the market conditions will be achieved and is applied to the average of the high and low trading pricesprice of our common stock on the date of grant.
The input variables are noted in the table below:
| | | | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Risk-free interest rate | 2.38 | % | | 1.44 | % | | 0.82 | % | Risk-free interest rate | 0.20 | % | | 1.38 | % | | 2.51 | % |
| Expected life in years | 3.00 |
| | 3.00 |
| | 3.00 |
| Expected life in years | 3.00 | | 3.00 | | 3.00 |
| Expected volatility | 24.97 | % | | 25.06 | % | | 27.03 | % | Expected volatility | 49.47 | % | | 23.26 | % | | 23.19 | % |
| Expected dividend yield (a) | 0.00 | % | | 0.00 | % | | 0.00 | % | Expected dividend yield (a) | 0.00 | % | | 0.00 | % | | 0.00 | % |
_______________
| |
(a) | The Monte Carlo method assumes a reinvestment of dividends. |
(a)The Monte Carlo method assumes a reinvestment of dividends.
Share-based compensation expense is recorded ratably for market condition awards during the requisite service period and is not reversed, except for forfeitures, at the vesting date regardless of whether the market condition is met.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table summarizes activity of performance shares at Target during 2018:2021:
| | | | | | | | | | | Performance Condition Awards | | Market Condition Awards |
| | Performance Condition Awards | | Market Condition Awards | | Shares | | Weighted
Average
Grant Date Fair Value | | Shares | | Weighted
Average
Grant Date Fair Value |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | |
| Non-vested at December 31, 2017 | 604 |
| | $ | 11.13 |
| | 498 |
| | $ | 13.49 |
| |
| Non-vested at January 3, 2021 | | Non-vested at January 3, 2021 | 429 | | | $ | 19.06 | | | 346 | | | $ | 23.65 | |
| Granted | 157 |
| | 15.65 |
| | 128 |
| | 19.22 |
| Granted | 209 | | | 20.21 | | | 187 | | | 22.96 | |
| Dividend equivalent units issued (a) | 12 |
| | — |
| | 10 |
| | — |
| Dividend equivalent units issued (a) | 10 | | | 20.48 | | | 8 | | | 24.53 | |
| Vested (b) | (157 | ) | | 11.11 |
| | (103 | ) | | 17.08 |
| Vested (b) | (88) | | | 15.65 | | | (119) | | | 15.65 | |
| Forfeited | (18 | ) | | 12.88 |
| | (15 | ) | | 15.11 |
| Forfeited | (55) | | | 15.65 | | | — | | | — | |
| Non-vested at December 30, 2018 | 598 |
| | $ | 12.32 |
| | 518 |
| | $ | 14.22 |
| |
| Non-vested at January 2, 2022 | | Non-vested at January 2, 2022 | 505 | | | $ | 20.48 | | | 422 | | | $ | 24.52 | |
_______________
| |
(a) | Dividend equivalent units are issued in lieu of cash dividends for non-vested performance shares. There is no weighted average fair value associated with dividend equivalent units. |
(a)Dividend equivalent units are issued in lieu of cash dividends for non-vested performance shares. There is no weighted average fair value associated with dividend equivalent units.
| |
(b) | Performance condition awards and market condition awards exclude the vesting of an additional 71 and 93 shares, respectively, which resulted from the performance of the awards exceeding Target. |
(b)Market condition awards exclude the vesting of an additional 52 shares, which resulted from the performance of the awards exceeding Target.
The total fair value of performance condition awards that vested in 2018, 20172021, 2020 and 20162019 was $3,681, $5,666$1,784, $3,447 and $5,954,$7,720, respectively. The total fair value of market condition awards that vested in 20182021, 2020 and 2019 was $3,143. No market condition awards vested in 2017$3,498, $4,910 and 2016.$7,135, respectively.
Modifications of Share-Based Awards
During 20182020 and 2017,2019, the Company modified the terms of awards granted to eight7 and 3110 employees, respectively, in connection with its May 2017Operations and Field Realignment Plan, IT Realignment Plan and G&A realignment planRealignment Plan discussed in Note 5. These modifications resulted in the accelerated vesting of certain stock options in connection with the termination of such employees. As a result, during 20182020 and 2017,2019, the Company recognized an increase in share-based compensation of $1,238$621 and $4,930,$1,011, respectively, which was included in “Reorganization and realignment costs.” The Company did not modify the terms of any awards during 2021.
Share-Based Compensation
Total share-based compensation and the related income tax benefit recognized in the Company’s consolidated statements of operations were as follows:
| | | | Year Ended | | Year Ended |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Stock options | $ | 7,172 |
| | $ | 6,923 |
| | $ | 6,859 |
| Stock options | $ | 9,256 | | | $ | 8,499 | | | $ | 7,685 | |
| Restricted shares (a) | 6,030 |
| | 5,778 |
| | 5,051 |
| Restricted shares (a) | 6,677 | | | 6,507 | | | 5,762 | |
| Performance shares: | | | | | | Performance shares: | |
| Performance condition awards | 1,491 |
| | 1,764 |
| | 4,681 |
| Performance condition awards | 2,861 | | | 782 | | | 2,195 | |
| Market condition awards | 1,987 |
| | 1,533 |
| | 1,550 |
| Market condition awards | 3,225 | | | 2,521 | | | 2,023 | |
| Modifications, net | 1,238 |
| | 4,930 |
| | — |
| Modifications, net | — | | | 621 | | | 1,011 | |
| Share-based compensation | 17,918 |
| | 20,928 |
| | 18,141 |
| Share-based compensation | 22,019 | | | 18,930 | | | 18,676 | |
| Less: Income tax benefit | (3,418 | ) | | (4,985 | ) | | (6,520 | ) | Less: Income tax benefit | (2,790) | | | (2,958) | | | (2,990) | |
| Share-based compensation, net of income tax benefit | $ | 14,500 |
| | $ | 15,943 |
| | $ | 11,621 |
| Share-based compensation, net of income tax benefit | $ | 19,229 | | | $ | 15,972 | | | $ | 15,686 | |
_______________
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(a)2021, 2020 and 2019 include $19, $213 and $396, respectively, related to retention awards in connection with the Company’s G&A Realignment Plan, which is included in “Reorganization and realignment costs.” See Note 5 for further information.
| |
(a) | 2018 and 2017 include $319 and $197, respectively, related to retention awards in connection with the Company’s May 2017 G&A realignment plan, which was included in “Reorganization and realignment costs.” See Note 5 for further information. |
As of December 30, 2018,January 2, 2022, there was $22,022$29,337 of total unrecognized share-based compensation, which will be recognized over a weighted average amortization period of 2.122.06 years.
(17) Impairment of Long-Lived Assets
During 2018, 2017 and 2016, theThe Company recordedrecords impairment charges on long-lived assets as a result of (1) the deterioration in operating performance of certain Company-operated restaurants, (2) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications, (2) the deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in restaurants impaired in prior years which did not subsequently recover and (3) closing Company-operated restaurants and classifying such surplus properties as held for sale. Impairment charges during 2020 were primarily due to the deterioration in operating performance of certain Company-operated restaurants as a result of the COVID-19 pandemic.
The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:”
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Company-operated restaurants | $ | 1,862 | | | $ | 7,586 | | | $ | 294 | |
| Restaurants leased or subleased to franchisees | 189 | | | — | | | 5,308 | |
| Surplus properties | 200 | | | 451 | | | 1,397 | |
| $ | 2,251 | | | $ | 8,037 | | | $ | 6,999 | |
|
| | | | | | | | | | | | |
| | | Year Ended |
| | | 2018 | | 2017 | | 2016 |
| Restaurants leased or subleased to franchisees | | $ | 283 |
| | $ | 244 |
| | $ | 14,010 |
|
| Company-operated restaurants | | 4,060 |
| | 3,169 |
| | 1,918 |
|
| Surplus properties | | 354 |
| | 684 |
| | 313 |
|
| | | $ | 4,697 |
| | $ | 4,097 |
| | $ | 16,241 |
|
(18) Investment Income (Loss), Net
| | | | Year Ended | | Year Ended |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Gain on sale of investments, net (a) | $ | 450,000 |
| | $ | 2,570 |
| | $ | 497 |
| Gain on sale of investments, net (a) | $ | 63 | | | $ | — | | | $ | 24,496 | |
| Other than temporary loss on other investments in equity securities | — |
| | (258 | ) | | — |
| |
| Impairment loss on other investments in equity securities | | Impairment loss on other investments in equity securities | — | | | (471) | | | — | |
| Other, net | 736 |
| | 391 |
| | 226 |
| Other, net | (24) | | | 246 | | | 1,102 | |
| | $ | 450,736 |
| | $ | 2,703 |
| | $ | 723 |
| | $ | 39 | | | $ | (225) | | | $ | 25,598 | |
_______________
| |
(a) | During 2018, the Company sold its remaining ownership interest in Inspire Brands for $450,000. See Note 8 for further information. |
(a)In October 2019, the Company received a $25,000 cash settlement related to a previously held investment. As a result, the Company recorded $24,366 to “Investment income (loss), net” and $634 to “General and administrative” for the reimbursement of related costs.
(19) Retirement Benefit Plans
401(k) Plan
The Company has a 401(k) defined contribution plan (the “401(k) Plan”) for all of its employees who meet certain minimum requirements and elect to participate. The 401(k) Plan permits employees to contribute up to 75% of their compensation, subject to certain limitations, and provides for matching employee contributions up to 4% of compensation and for discretionary profit sharing contributions.
In connection with the matching and profit sharing contributions, the Company recognized compensation expense of $4,619, $4,704$4,583, $5,175 and $5,177$4,631 in 2018, 20172021, 2020 and 2016,2019, respectively.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Pension Plans
The Company maintained two domestic qualified defined benefit plans, the benefits under which were frozen in 1988 and for which the Company has no unrecognized prior service cost. Arby’s employees who were eligible to participate through 1988 (the “Eligible Arby’s Employees”) were covered under one of these plans. Pursuant to the terms of the Arby’s sale agreement, Wendy’s Restaurants retained the liabilities related to the Eligible Arby’s Employees under these plans and received $400 from the buyer for the unfunded liability related to the Eligible Arby’s Employees. The measurement date used by the Company in determining amounts related to its defined benefit plans was the same as the Company’s fiscal year end. During 2018, the Company terminated the defined benefit plans, resulting in a settlement loss of $1,335 recorded to “Reorganization and realignment costs.”
The balance of the accumulated benefit obligations and the fair value of the plans’ assets at December 31, 2017 were $3,402 and $2,649, respectively. As of December 31, 2017, each of the plans had accumulated benefit obligations in excess of the fair value of the assets of the respective plan. The Wendy’s Company recognized $159, $159 and $177 in benefit plan expenses in 2018, 2017 and 2016, respectively, which were included in “General and administrative.”
Wendy’s Executive Plans
In conjunction with the Wendy’s Merger, amounts due under supplemental executive retirement plans (collectively, the “SERP”) were funded into a restricted account. As of January 1, 2011, participation in the SERP was frozen to new entrants
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
and future contributions, and existing participants’ balances only earn annual interest. The corresponding SERP liabilities have beenare included in “Accrued expenses and other current liabilities” and “Other liabilities” and, in the aggregate, were $1,257$294 and $2,476$432 as of December 30, 2018January 2, 2022 and December 31, 2017,January 3, 2021, respectively.
Pursuant to the terms of the employment agreement that was entered into with our then Chief Executive Officer as of September 12, 2011, theThe Company implemented a non-qualified, unfunded, deferred compensation plan. The plan provided that the amount of the executive’s base salary in excess of $1,000 in a tax year would be deferred into the plan which accrued employer funded interest. The compensation deferred under the plan was distributed to our former Chief Executive Officer during 2016.
Effective January 1, 2017, the Company implementedhas a non-qualified, unfunded deferred compensation plan for management and highly compensated employees, whereby participants may defer all or a portion of their base compensation and certain incentive awards on a pre-tax basis. The Company credits the amounts deferred with earnings based on the investment options selected by the participants. The Company may also make discretionary contributions to the plan. The total of participant deferrals was $444$1,455 and $259$1,108 at December 30, 2018January 2, 2022 and December 31, 2017,January 3, 2021, respectively, which wereare included in “Other liabilities.”
(20) 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 December 30, 2018,January 2, 2022, Wendy’s and its franchisees operated 6,7116,949 Wendy’s restaurants. Of the 353408 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 144159 restaurants, owned the building and held long-term land leases for 145141 restaurants and held leases covering the land and building for 64108 restaurants. Lease terms are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. Certain leases contain contingent rent provisions that require additional rental payments based upon restaurant sales volume in excess of specified amounts. The Company also leases restaurant, office and transportation equipment. Certain leases also provide for payments of other costs such as real estate taxes, insurance and common area maintenance, which have been excluded from rental expense and future minimum rental payments set forth in the tables below.
As of December 30, 2018, Wendy’s also owned 516485 and leased 1,2791,235 properties that were either leased or subleased principally to franchisees. InitialThe Company also leases restaurant, office and transportation equipment.
Company as Lessee
The components of lease termscost for 2021, 2020 and 2019 are generally 20 yearsas follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Finance lease cost: | | | | | |
| Amortization of finance lease assets | $ | 13,992 | | | $ | 13,395 | | | $ | 11,241 | |
| Interest on finance lease liabilities | 41,419 | | | 40,682 | | | 37,012 | |
| 55,411 | | | 54,077 | | | 48,253 | |
| Operating lease cost | 89,283 | | | 91,475 | | | 90,537 | |
| Variable lease cost (a) | 63,853 | | | 59,076 | | | 58,978 | |
| Short-term lease cost | 5,102 | | | 4,641 | | | 4,717 | |
| Total operating lease cost (b) | 158,238 | | | 155,192 | | | 154,232 | |
| Total lease cost | $ | 213,649 | | | $ | 209,269 | | | $ | 202,485 | |
_______________
(a)Includes expenses for executory costs of $39,646, $38,652, and in most cases, provide$37,758 for rent escalations2021, 2020 and renewal options. Certain2019, respectively, for which the Company is reimbursed by sublessees.
(b)Includes $132,158, $125,553 and $123,899 for 2021, 2020 and 2019, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $23,558, $26,866 and $27,419 for 2021, 2020 and 2019, respectively, recorded to “Cost of sales” for leases to franchisees also include contingent rent provisions based on sales volume exceeding specified amounts. The lessee bears the cost of real estate taxes, insurance and common area maintenance, which have been excluded from rental income and future minimum rental receipts set forth in the tables below.for Company-operated restaurants.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table includes supplemental cash flow and non-cash information related to leases:
Rental expense for operating leases consists of the following components: | | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from finance leases | $ | 42,277 | | | $ | 39,349 | | | $ | 39,887 | |
| Operating cash flows from operating leases | 91,930 | | | 85,689 | | | 91,824 | |
| Financing cash flows from finance leases | 13,640 | | | 8,383 | | | 6,835 | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | |
| Finance lease liabilities | 82,032 | | | 34,918 | | | 50,061 | |
| Operating lease liabilities | 58,770 | | | 18,327 | | | 15,411 | |
|
| | | | | | | | | | | | |
| | | Year Ended |
| | | 2018 | | 2017 | | 2016 |
| Rental expense: | | | | | | |
| Minimum rentals | | $ | 95,749 |
| | $ | 90,889 |
| | $ | 77,952 |
|
| Contingent rentals | | 18,971 |
| | 19,021 |
| | 18,291 |
|
| Total rental expense (a) (b) | | $ | 114,720 |
| | $ | 109,910 |
| | $ | 96,243 |
|
_______________
| |
(a) | Amounts include rental expense related to (1) leases for Company-operated restaurants recorded to “Cost of sales,” (2) leased properties that are subsequently leased to franchisees recorded to “Franchise rental expense” and (3) leases for corporate offices and equipment recorded to “General and administrative.” |
| |
(b) | Amounts exclude sublease income of $138,363, $126,814 and $95,072 recognized during 2018, 2017 and 2016, respectively. |
Rental income for operating leases and subleases consists of the following components:
|
| | | | | | | | | | | | |
| | | Year Ended |
| | | 2018 | | 2017 | | 2016 |
| Rental income: | | | | | | |
| Minimum rentals | | $ | 184,154 |
| | $ | 169,857 |
| | $ | 123,171 |
|
| Contingent rentals | | 19,143 |
| | 20,246 |
| | 19,944 |
|
| Total rental income | | $ | 203,297 |
| | $ | 190,103 |
| | $ | 143,115 |
|
The following table illustrates the Company’s future minimum rental payments and rental receipts for non-cancelable leases and subleases, including rental receipts for direct financing leases, as of December 30, 2018. Rental receipts below are presented separately for owned properties and for leased properties based on the classification of the underlying lease.includes supplemental information related to leases:
| | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3,
2021 |
| Weighted-average remaining lease term (years): | | | |
| Finance leases | 15.8 | | 16.2 |
| Operating leases | 14.1 | | 14.6 |
| | | |
| Weighted average discount rate: | | | |
| Finance leases | 8.91 | % | | 9.54 | % |
| Operating leases | 4.94 | % | | 5.06 | % |
| | | |
| Supplemental balance sheet information: | | | |
| Finance lease assets, gross | $ | 307,965 | | | $ | 261,308 | |
| Accumulated amortization | (63,686) | | | (55,155) | |
| Finance lease assets | 244,279 | | | 206,153 | |
| Operating lease assets | 812,620 | | | 821,480 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Rental Payments | | Rental Receipts |
| Fiscal Year | Capital Leases | | Operating Leases | | Capital Leases | | Operating Leases | | Owned Properties |
| 2019 | $ | 47,087 |
| | $ | 95,877 |
| | $ | 64,117 |
| | $ | 75,302 |
| | $ | 54,464 |
|
| 2020 | 45,947 |
| | 93,372 |
| | 65,194 |
| | 75,243 |
| | 55,072 |
|
| 2021 | 47,604 |
| | 92,987 |
| | 67,001 |
| | 75,350 |
| | 56,658 |
|
| 2022 | 48,687 |
| | 92,830 |
| | 68,168 |
| | 75,947 |
| | 58,211 |
|
| 2023 | 50,193 |
| | 92,807 |
| | 69,812 |
| | 76,163 |
| | 58,443 |
|
| Thereafter | 699,697 |
| | 1,058,037 |
| | 963,329 |
| | 858,168 |
| | 885,159 |
|
| Total minimum payments | $ | 939,215 |
| | $ | 1,525,910 |
| | $ | 1,297,621 |
| | $ | 1,236,173 |
| | $ | 1,168,007 |
|
| Less interest | (483,579 | ) | | | | | | | | |
| Present value of minimum capital lease payments (a) | $ | 455,636 |
| | | | | | | | |
_______________
| |
(a) | The present value of minimum capital lease payments of $8,405 and $447,231 are included in “Current portion of long-term debt” and “Long-term debt,” respectively. |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO 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 January 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Finance
Leases | | Operating
Leases |
| Fiscal Year | Company-Operated | | Franchise
and Other | | Company-Operated | | Franchise
and Other |
| 2022 | $ | 6,361 | | | $ | 51,720 | | | $ | 20,521 | | | $ | 69,692 | |
| 2023 | 6,317 | | | 52,957 | | | 20,989 | | | 69,158 | |
| 2024 | 6,410 | | | 53,383 | | | 20,956 | | | 69,133 | |
| 2025 | 6,610 | | | 53,876 | | | 20,745 | | | 68,910 | |
| 2026 | 6,754 | | | 55,117 | | | 21,198 | | | 68,093 | |
| Thereafter | 84,693 | | | 624,335 | | | 192,250 | | | 630,404 | |
| Total minimum payments | $ | 117,145 | | | $ | 891,388 | | | $ | 296,659 | | | $ | 975,390 | |
| Less interest | (41,554) | | | (391,879) | | | (82,860) | | | (288,546) | |
| Present value of minimum lease payments (a) (b) | $ | 75,591 | | | $ | 499,509 | | | $ | 213,799 | | | $ | 686,844 | |
_______________
(a)The present value of minimum finance lease payments of $15,513 and $559,587 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively.
(b)The present value of minimum operating lease payments of $47,315 and $853,328 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively.
Company as Lessor
The components of lease income for 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Sales-type and direct-financing leases: | | | | | |
| Selling profit | $ | 4,244 | | | $ | 1,995 | | | $ | 2,285 | |
| Interest income (a) | 30,648 | | | 29,067 | | | 26,333 | |
| | | | | |
| Operating lease income | 173,442 | | | 174,452 | | | 176,629 | |
| Variable lease income | 63,213 | | | 58,196 | | | 56,436 | |
| Franchise rental income (b) | $ | 236,655 | | | $ | 232,648 | | | $ | 233,065 | |
_______________
(a)Included in “Interest expense, net.”
(b)Includes sublease income of $174,327, $169,921 and $171,126 recognized during 2021, 2020 and 2019, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $39,650, $38,636 and $37,739 for 2021, 2020 and 2019, respectively.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO 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 January 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Sales-Type and
Direct Financing Leases | | Operating
Leases |
| Fiscal Year | Subleases | | Owned Properties | | Subleases | | Owned Properties |
| 2022 | $ | 33,883 | | | $ | 2,543 | | | $ | 110,714 | | | $ | 53,076 | |
| 2023 | 34,933 | | | 2,589 | | | 111,330 | | | 53,384 | |
| 2024 | 36,929 | | | 2,599 | | | 111,591 | | | 54,490 | |
| 2025 | 35,803 | | | 2,717 | | | 111,102 | | | 55,086 | |
| 2026 | 36,950 | | | 2,887 | | | 110,537 | | | 56,845 | |
| Thereafter | 438,518 | | | 31,876 | | | 1,020,240 | | | 647,591 | |
| Total future minimum receipts | 617,016 | | | 45,211 | | | $ | 1,575,514 | | | $ | 920,472 | |
| Unearned interest income | (331,403) | | | (24,851) | | | | | |
| Net investment in sales-type and direct financing leases (a) | $ | 285,613 | | | $ | 20,360 | | | | | |
_______________
(a)The present value of minimum sales-type and direct financing rental receipts of $6,266 and $299,707 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. The present value of minimum sales-type and direct financing rental receipts includes a net investment in unguaranteed residual assets of $549.
Properties owned by the Company and leased to franchisees and other third parties under operating leases include:
| | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3, 2021 |
| Land | $ | 258,513 | | | $ | 279,956 | |
| Buildings and improvements | 288,782 | | | 309,605 | |
| Restaurant equipment | 1,701 | | | 1,701 | |
| 548,996 | | | 591,262 | |
| Accumulated depreciation and amortization | (173,243) | | | (170,722) | |
| $ | 375,753 | | | $ | 420,540 | |
|
| | | | | | | | |
| | | Year End |
| | | December 30, 2018 | | December 31, 2017 |
| Land | | $ | 272,234 |
| | $ | 272,411 |
|
| Buildings and improvements | | 312,672 |
| | 313,108 |
|
| Restaurant equipment | | 2,443 |
| | 2,444 |
|
| | | 587,349 |
| | 587,963 |
|
| Accumulated depreciation and amortization | | (143,313 | ) | | (128,003 | ) |
| | | $ | 444,036 |
| | $ | 459,960 |
|
Our net investment in direct financing leases is as follows:
|
| | | | | | | | |
| | | Year End |
| | | December 30, 2018 | | December 31, 2017 |
| Future minimum rental receipts | | $ | 624,596 |
| | $ | 662,889 |
|
| Unearned interest income | | (397,384 | ) | | (433,175 | ) |
| Net investment in direct financing leases | | 227,212 |
| | 229,714 |
|
| Net current investment in direct financing leases (a) | | (735 | ) | | (625 | ) |
| Net non-current investment in direct financing leases | | $ | 226,477 |
| | $ | 229,089 |
|
_______________
| |
(a) | Included in “Accounts and notes receivable, net.” |
During 2018, 2017 and 2016, the Company recognized $27,638, $22,869 and $14,630 in interest income related to our direct financing leases, respectively, which is included in “Interest expense, net.”
(21) Guarantees and Other Commitments and Contingencies
Guarantees and Contingent Liabilities
Franchisee Image Activation Incentive Programs
In order to promote new restaurant development, Wendy’s has an incentive program for franchisees that provides for technical assistance fee waivers and reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants opened byprior to December 31, 2020, with the value of the incentives declining in the later years of the program.2022. In August 2018,addition, Wendy’s announcedhas a new restaurant development incentive program that provides for incremental reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants for existing franchisees that sign up for the program under a new development agreement, or through an extension of their existing development agreement, and commit to incremental development of new Wendy’s restaurants. Under any extended development agreements, franchisees are also eligible for technical assistance fee waivers for restaurants under a newopened one year in advance of their original development agreement by July 1, 2019.schedule so long as the restaurants are opened prior to December 31, 2022. Wendy’s also provides franchisees with the option of an early 20-year or 25-year renewal of their franchise agreement upon completion of reimaging utilizing certain approved Image Activation remodelreimage designs.
Wendy’s also had incentive programs for 2017 available to franchisees that commenced Image Activation restaurant remodels by December 15, 2017. The remodel incentive programs provide for reductions in royalty payments for one year after the completion of construction. In addition, Wendy’s had incentive programs that included reductions in royalty payments in 2016 for franchisees’ participation in Wendy’s Image Activation program.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Other Loan Guarantees
Wendy’s provides loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for equipment financing. Wendy’s has accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted average risk percentage established at the inception of each program which has been adjusted for a history of defaults. Wendy’s potential recourse for the aggregate amount of these loans amounted to $144 as of December 30, 2018. As of December 30, 2018, the fair value of these guarantees totaled $17 and is included in “Other liabilities.”
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 $66,268$90,649 as of December 30, 2018.January 2, 2022. These leases extend through 2056.2045. We have not received any noticehad no judgments against us as guarantor of default related to these leases as of December 30, 2018.January 2, 2022. In the event of default by a franchise owner where Wendy’s generally retainsis called upon to perform under its guarantee, Wendy’s has the rightability to acquire possessionpursue repayment from the franchise owner. The liability recorded for our probable exposure associated with these lease guarantees was not material as of the related restaurant locations.January 2, 2022.
Insurance
Wendy’s is self-insured for most workers’ compensation losses and purchases insurance for general liability and automotive liability losses, all subject to a $500 per occurrence retention or deductible limit. Wendy’s determines its liability for claims incurred but not reported for the insurance liabilities on an actuarial basis. As of December 30, 2018,January 2, 2022, the Company had $22,129$18,590 recorded for these insurance liabilities. Wendy’s is self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations and determines its liability for health care claims incurred but not reported based on historical claims runoff data. As of December 30, 2018,January 2, 2022, the Company had $2,183$2,966 recorded for these health care insurance liabilities.
Letters of Credit
As of December 30, 2018,January 2, 2022, the Company had outstanding letters of credit with various parties totaling $27,082. The$22,251. Substantially all of the outstanding letters of credit include amounts outstanding against the Series 2018-12021-1 Class A-1 Notes. See Note 12 for further information. We do not expect any material loss to result from these letters of credit.
Purchase and Capital Commitments
Beverage Agreement
The Company has an agreement with a beverage vendor, which 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. As of December 30, 2018, the Company estimates future annual purchases to be approximately $10,800 in 2019 and $11,300 in 2020 based on current pricing and the expected ratio of usage at Company-operated restaurants to franchised restaurants.
Beverage purchases made by the Company under this agreement during 2018, 2017 and 2016 were $10,108, $9,370 and $12,839, respectively. As of December 30, 2018, $2,414 is due to the beverage vendor and is included in “Accounts payable,” principally for annual estimated payments that exceeded usage, under this agreement.
In January 2019, the Company amended its contract with the beverage vendor, which now expires at the later of reaching a minimum usage requirement or December 31, 2025. Beverage purchases made by the Company under this agreement during 2021, 2020 and 2019 were $9,709, $10,986 and $11,440, respectively. The Company estimates future annual purchases to be approximately $10,700 in 2022, $10,800 in 2023, $11,100 in 2024 and $11,400 in 2025 based on current pricing and the expected ratio of usage at Company-operated restaurants to franchised restaurants. As of January 2, 2022, $4,325 is due to the beverage vendor and is included in “Accounts payable,” principally for annual estimated payments that exceeded usage under this agreement.
IT Services Agreement
In December 2019, the Company entered into an agreement to partner with a third-party global IT consultant on the Company’s new IT organization structure to leverage the consultant’s global capabilities, which the Company believes will enable a more seamless integration between its digital and corporate IT assets. Costs incurred by the Company under this agreement were $20,053, $16,961 and $1,386 during 2021, 2020 and 2019, respectively. The Company’s unconditional purchase obligations under the agreement are approximately $17,100 in 2022, $14,700 in 2023, $13,800 in 2024 and $7,100 in 2025. As of January 2, 2022, $1,899 is due to the consultant and is included in “Accrued expenses and other current liabilities.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Marketing Agreement
The Company has an agreement with 2 national broadcasters that grants the Company certain marketing and media rights. Costs incurred by the Company under this agreement were approximately $15,000 and $11,000 in 2021 and 2019, respectively, which are included in “Advertising funds expense.” No costs were incurred under this agreement in 2020. The Company’s unconditional purchase obligations under the agreement are approximately $12,900 in 2022, $13,400 in 2023 and $12,700 in 2024.
(22) Transactions with Related Parties
The following is a summary of transactions between the Company and its related parties:
| | | | Year Ended | | Year Ended |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Transactions with QSCC: | | | | | | Transactions with QSCC: | | | | | |
| Wendy’s Co-Op (a) | $ | (470 | ) | | $ | (987 | ) | | $ | (890 | ) | |
| Lease income (b) | (215 | ) | | (217 | ) | | (193 | ) | |
| Wendy’s Co-op (a) | | Wendy’s Co-op (a) | $ | 279 | | | $ | — | | | $ | 504 | |
| Rental receipts (b) | | Rental receipts (b) | 217 | | | 217 | | | 217 | |
| TimWen lease and management fee payments (c) | $ | 13,044 |
| | $ | 12,360 |
| | $ | 11,602 |
| TimWen lease and management fee payments (c) | $ | 18,687 | | | $ | 16,130 | | | $ | 16,660 | |
| Yellow Cab royalty, advertising fund, lease and other income (d) | | Yellow Cab royalty, advertising fund, lease and other income (d) | $ | 9,869 | | | $ | 1,090 | | | $ | — | |
_______________
Transactions with QSCC
| |
(a) | Wendy’s has a purchasing co-op relationship agreement (the “Wendy’s Co-op”) with its franchisees which establishes Quality Supply Chain Co-op, Inc. (“QSCC”). QSCC manages, for the Wendy’s system in the U.S. and Canada, contracts for the purchase and distribution of food, proprietary paper, operating supplies and equipment under national agreements with pricing based upon total system volume. QSCC’s supply chain management facilitates continuity of supply and provides consolidated purchasing efficiencies while monitoring and seeking to minimize possible obsolete inventory throughout the Wendy’s supply chain in the U.S. and Canada. |
(a)Wendy’s has a purchasing co-op relationship structure (the “Wendy’s Co-op”) with its franchisees that establishes Quality Supply Chain Co-op, Inc. (“QSCC”). QSCC manages, for the Wendy’s system in the U.S. and Canada, contracts for the purchase and distribution of food, proprietary paper, operating supplies and equipment under national agreements with pricing based upon total system volume. QSCC’s supply chain management facilitates continuity of supply and provides consolidated purchasing efficiencies while monitoring and seeking to minimize possible obsolete inventory throughout the Wendy’s supply chain in the U.S. and Canada.
Wendy’s and its franchisees pay sourcing fees to third-party vendors on certain products sourced by QSCC. Such sourcing fees are remitted by these vendors to QSCC and are the primary means of funding QSCC’s operations. Should QSCC’s sourcing fees exceed its expected needs, QSCC’s board of directors may return some or all of the excess to its members in the form of a patronage dividend. Wendy’s recorded its share of patronage dividends of $470, $987$279 and $890$504 in 2018, 20172021 and 2016,2019, respectively, which are included as a reduction of “Cost of sales.” There were no patronage dividends recorded during 2020.
| |
(b) | Effective January 1, 2011, Wendy’s leased 14,333 square feet of office space to QSCC for an annual base rental of $176. The lease expired on December 31, 2016. A new lease agreement was signed effective January 1, 2017, expiring on December 31, 2020 for an annual base rental of $215. On November 27, 2018, the lease agreement was amended to increase the leased square footage to 14,493 and increase the annual base rental to $217. The Wendy’s Company received $215, $217 and $193 of lease income from QSCC during 2018, 2017 and 2016, respectively, which has been recorded to “Franchise rental income.” |
(b)Pursuant to a lease agreement, Wendy’s leased 14,493 square feet of office space to QSCC for an annual base rental of $217. The lease was amended in June 2021 to increase both the leased square footage to 18,774 and the annual base rental to $250, subject to annual increases, and to extend the lease term through January 31, 2027. The Company received $217 of lease payments from QSCC during each of 2021, 2020 and 2019, which has been recorded to “Franchise rental income.”
TimWen Lease and Management Fee Payments
(c)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. Wendy’s paid TimWen $18,906, $16,339 and $16,867 under these lease agreements during 2021, 2020 and 2019, respectively. In addition, TimWen paid Wendy’s a management fee paymentsunder the TimWen joint venture agreement of $219, $209 and $207 during 2021, 2020 and 2019, respectively, which has been included as a reduction to “General and administrative.”
| |
(c) | A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. Wendy’s paid TimWen $13,256, $12,572 and $11,806 under these lease agreements during 2018, 2017 and 2016, respectively. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $212, $212 and $204 during 2018, 2017 and 2016, respectively, which has been included as a reduction to “General and administrative.” |
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Transactions with Yellow Cab
(d)Certain family members and affiliates of Mr. Nelson Peltz, our Chairman, and Mr. Peter May, our Senior Vice Chairman, as well as Mr. Matthew Peltz, our Vice Chairman, hold indirect, minority ownership interests in operating companies managed by Yellow Cab Holdings, LLC (“Yellow Cab”), a Wendy’s franchisee, that as of January 2, 2022 owned and operated 84 Wendy’s restaurants (including 54 restaurants acquired from NPC during the first quarter of 2021 as described below). During 2021 and the fourth quarter of 2020, the Company recognized $9,869 and $1,090, respectively, in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of January 2, 2022, $974 was due from Yellow Cab for such income, which is included in “Accounts and notes receivable, net” and “Advertising funds restricted assets.”
In November 2020, the Company submitted a consortium bid together with a group of pre-qualified franchisees (of which Yellow Cab was a member) to acquire the Wendy’s restaurants owned by NPC, formerly the Company’s largest franchisee, which filed for chapter 11 bankruptcy in July 2020. As part of the consortium bid, in November 2020, the Company received deposits from each of the pre-qualified franchisees (including Yellow Cab), which amounts were transferred to a third-party escrow account pending resolution of the bankruptcy sale process. On January 7, 2021, following a court-approved mediation process, Yellow Cab was selected as the purchaser for 54 of NPC’s Wendy’s restaurants. In March 2021, Yellow Cab closed on its acquisition of these restaurants and its deposit was applied against the purchase price for the restaurants. See Note 3 for further information.
(23) Legal and Environmental Matters
The Company is involved in litigation and claims incidental to our current and prior businesses.business. We provide accruals for such litigation and claims when paymentwe determine it is probable that a liability has been incurred and the loss is reasonably estimable. We believe we have adequate accruals for continuing operations for all of our legal and environmental matters, including the accrual that we recorded for the legal proceedings related to a cybersecurity incident as described below. See Note 11 for further information on the accrual.matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period.
The Company has been 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 in connection with the cybersecurity incidents described herein. Jonathan Torres and other consumers filed an action in the U.S. District Court for the Middle District of Florida (the “Torres Case”). The operative complaint seeks to certify a nationwide class of consumers, or in the alternative, statewide classes of consumers for Florida, New York, New Jersey, Texas, and Tennessee, as well as statewide classes of consumers under those states’ consumer protection and unfair trade practices laws. The plaintiffs seek monetary damages, injunctive and equitable relief, attorneys’ fees and other costs. The Company filed its answer in 2017. On October 27, 2017, the Company moved for summary judgment to dismiss the operative complaint. On December 15, 2017, the plaintiffs moved for class certification. The Company filed its memorandum in opposition on January 16, 2018. On August 23, 2018, the court preliminarily approved a class-wide settlement. The claims and objection process is currently underway. 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.
Certain financial institutions have also filed class actions lawsuits in the U.S. District Court for the Western District of Pennsylvania, which seek 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”). The plaintiffs seek monetary damages, injunctive and equitable relief, attorneys’ fees and other costs. The Company filed its answer in 2017. On August 27, 2018, the Company filed a motion for judgment on the pleadings, seeking dismissal of the plaintiffs’ negligence and negligence per se claims under Ohio law. 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 expects to pay approximately $27,500 of this amount. In exchange, the Company and its franchisees will receive a full release of all claims that have or could have been brought by financial institutions who do not opt out of the settlement related to the cybersecurity incidents described herein. On 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 not occur until late 2019 or early 2020. Accordingly, we recorded a liability of $50,000 and insurance receivables of $22,500 during 2018. See Note 11 for further information.
Certain of the Company’s present and former directors have been named in two2 putative shareholderstockholder derivative complaints arising out of the cybersecurity incidents described herein.that affected certain of our franchisees in 2015 and 2016. The first case, brought by James Graham in the U.S. District Court for the Southern District of Ohio (the “Graham Case”), asserts claims of breach of fiduciary duty, waste of corporate assets, unjust enrichment and gross mismanagement, and additionally names one1 non-director executive officer of the Company. The second case, brought by Thomas Caracci in the U.S. District Court for the Southern District of Ohio (the “Caracci Case”), asserts claims of breach of fiduciary duty and violations of Section 14(a) and Rule 14a-9 of the Securities Exchange Act of 1934. Collectively, the plaintiffs seek a judgment on behalf of the Company for all damages incurred or that will be incurred as a result of the alleged wrongful acts or omissions, a judgment ordering disgorgement of all profits, benefits, and other compensation obtained by the named individual defendants, a judgment directing the Company to reform its governance and internal procedures, attorneys’ fees and other costs. The Graham Case and the Caracci Case have beenwere consolidated and on December 21, 2018, the court issued an order naming Graham and his counsel as lead in the case. On January 31, 2019, Graham filed a consolidated verified shareholderstockholder derivative complaint with the court. On January 24, 2020, the court issued an order granting preliminary approval of the settlement, which consists of certain corporate governance undertakings and the payment of plaintiffs’ attorneys’ fees and expenses up to $950 (covered by applicable insurance). On September 15, 2021, the court issued an order granting final approval of the settlement, with the final judgment entered on September 24, 2021. On October 20, 2021, Thomas Caracci filed a Notice of Appeal.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(24) Advertising Costs and Funds
We currently maintain twoU.S. and Canadian national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs. Contributions to the Advertising Funds are required from both Company-operated and franchised restaurants and are based on a percentage of restaurant sales. In addition to the contributions to the Advertising Funds, Company-operated and franchised restaurants make additional contributions to other local and regional advertising programs.
Restricted assets and related liabilities of the Advertising Funds at December 30, 2018 and December 31, 2017 were as follows:
|
| | | | | | | |
| | Year End |
| | December 30, 2018 | | December 31, 2017 |
| Cash and cash equivalents | $ | 25,247 |
| | $ | 8,579 |
|
| Accounts receivable, net | 47,332 |
| | 47,288 |
|
| Other assets | 3,930 |
| | 6,735 |
|
| Advertising funds restricted assets | $ | 76,509 |
| | $ | 62,602 |
|
| | | | |
| Total liabilities | $ | 80,153 |
| | $ | 69,247 |
|
| Member’s deficit (a) | — |
| | (6,645 | ) |
| Advertising funds restricted liabilities | $ | 80,153 |
| | $ | 62,602 |
|
_______________
| |
(a) | The Company reclassified the member’s deficit of the Advertising Funds from “Advertising funds restricted liabilities” to “Retained earnings (accumulated deficit)” upon the adoption of amended guidance for revenue recognition. See “New Accounting Standards Adopted” in Note 1 for further information.
|
Advertising expenses included in “Cost of sales” totaled $27,939, $27,921 and $41,064 in 2018, 2017 and 2016, respectively.
(25) Geographic Information
The table below presents revenues and properties information by geographic area:
|
| | | | | | | | | | | | | | | |
| | U.S. | | Canada | | Other International | | Total |
| 2018 | | | | | | | |
| Revenues | $ | 1,495,639 |
| | $ | 74,626 |
| | $ | 19,671 |
| | $ | 1,589,936 |
|
| Properties | 1,176,149 |
| | 36,967 |
| | 120 |
| | 1,213,236 |
|
| | | | | | | | |
| 2017 | | | | | | | |
| Revenues | $ | 1,154,873 |
| | $ | 50,431 |
| | $ | 18,104 |
| | $ | 1,223,408 |
|
| Properties | 1,226,714 |
| | 36,213 |
| | 132 |
| | 1,263,059 |
|
| | | | | | | | |
| 2016 | | | | | | | |
| Revenues | $ | 1,373,345 |
| | $ | 45,959 |
| | $ | 16,114 |
| | $ | 1,435,418 |
|
| Properties | 1,162,006 |
| | 30,257 |
| | 76 |
| | 1,192,339 |
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Restricted assets and related liabilities of the Advertising Funds at January 2, 2022 and January 3, 2021 are as follows:
| | | | | | | | | | | |
| Year End |
| January 2, 2022 | | January 3, 2021 |
| Cash and cash equivalents | $ | 89,993 | | | $ | 77,279 | |
| Accounts receivable, net | 65,497 | | | 63,252 | |
| Other assets | 4,328 | | | 1,775 | |
| Advertising funds restricted assets | $ | 159,818 | | | $ | 142,306 | |
| | | |
| Accounts payable | $ | 136,043 | | | $ | 123,064 | |
| Accrued expenses and other current liabilities | 21,858 | | | 17,447 | |
| Advertising funds restricted liabilities | $ | 157,901 | | | $ | 140,511 | |
Advertising expenses included in “Cost of sales” totaled $31,617, $29,671 and $29,954 in 2021, 2020 and 2019, respectively.
(25) Geographic Information
The table below presents revenues and properties information by geographic area:
| | | | | | | | | | | | | | | | | | | |
| U.S. | | | | International | | Total |
| 2021 | | | | | | | |
| Revenues | $ | 1,771,997 | | | | | $ | 125,001 | | | $ | 1,896,998 | |
| Properties | 856,841 | | | | | 50,026 | | | 906,867 | |
| | | | | | | |
| 2020 | | | | | | | |
| Revenues | $ | 1,635,696 | | | | | $ | 98,129 | | | $ | 1,733,825 | |
| Properties | 879,806 | | | | | 36,083 | | | 915,889 | |
| | | | | | | |
| 2019 | | | | | | | |
| Revenues | $ | 1,606,619 | | | | | $ | 102,383 | | | $ | 1,709,002 | |
| Properties | 941,607 | | | | | 35,393 | | | 977,000 | |
(26) Quarterly FinancialSegment Information (Unaudited)
The tables below set forth summary unaudited consolidated quarterly financial information for 2018 and 2017. The Company reports onis comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the operation and franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating Franchise Flips and providing other development-related services to franchisees. The Company measures segment profit using 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. When the Company’s chief operating decision maker reviews balance sheet information, it is at a fiscal year typically consisting of 52 or 53 weeks ending on the Sunday closest to December 31. Allconsolidated level. The accounting policies of the Company’s fiscal quarterssegments are the same as those described in 2018 and 2017 contained 13 weeks. Certain reclassifications have been madeNote 1.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Revenues by segment are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Wendy’s U.S. | $ | 1,567,496 | | | $ | 1,431,382 | | | $ | 1,404,307 | |
| Wendy’s International | 86,369 | | | 65,642 | | | 68,198 | |
| Global Real Estate & Development | 243,133 | | | 236,801 | | | 236,497 | |
| Total revenues | $ | 1,896,998 | | | $ | 1,733,825 | | | $ | 1,709,002 | |
The following table reconciles profit by segment to the prior year presentation to conformCompany’s consolidated income before income taxes:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Wendy’s U.S. (a) | $ | 450,117 | | | $ | 393,314 | | | $ | 369,193 | |
| Wendy’s International | 27,386 | | | 20,119 | | | 20,246 | |
| Global Real Estate & Development | 106,113 | | | 100,731 | | | 107,116 | |
| Total segment profit | 583,616 | | | 514,164 | | | 496,555 | |
| Unallocated franchise support and other costs | (753) | | | — | | | — | |
| Advertising funds surplus | 2,770 | | | 2,904 | | | 1,337 | |
| Unallocated general and administrative (b) | (116,273) | | | (94,256) | | | (81,230) | |
| Depreciation and amortization | (125,540) | | | (132,775) | | | (131,693) | |
| System optimization gains, net | 33,545 | | | 3,148 | | | 1,283 | |
| Reorganization and realignment costs | (8,548) | | | (16,030) | | | (16,965) | |
| Impairment of long-lived assets | (2,251) | | | (8,037) | | | (6,999) | |
| Unallocated other operating income, net | 394 | | | 190 | | | 291 | |
| Interest expense, net | (109,185) | | | (117,737) | | | (115,971) | |
| Loss on early extinguishment of debt | (17,917) | | | — | | | (8,496) | |
| Investment income (loss), net | 39 | | | (225) | | | 25,598 | |
| Other income, net | 681 | | | 1,449 | | | 7,771 | |
| Income before income taxes | $ | 240,578 | | | $ | 152,795 | | | $ | 171,481 | |
_______________
(a)Includes advertising funds expense of $25,000 and $14,600 for 2021 and 2020, respectively, related to the current year presentation. See Note 1Company funding of incremental advertising to support the breakfast daypart.
(b)Includes corporate overhead costs, such as employee compensation and related benefits.
Net income (loss) of our equity method investments for further information.the Brazil JV and TimWen are included in segment profit for the Wendy’s International and Global Real Estate & Development segments, respectively. Net income (loss) of equity method investments by segment was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| 2021 | | 2020 | | 2019 |
| Wendy’s International | $ | — | | | $ | (417) | | | $ | (1,022) | |
| Global Real Estate & Development | 11,203 | | | 6,513 | | | 9,695 | |
| Total net income of equity method investments | $ | 11,203 | | | $ | 6,096 | | | $ | 8,673 | |
|
| | | | | | | | | | | | | | | |
| | 2018 Quarter Ended (a) |
| | April 1 | | July 1 | | September 30 | | December 30 |
| Revenues | $ | 380,564 |
| | $ | 411,002 |
| | $ | 400,550 |
| | $ | 397,820 |
|
| Cost of sales | 132,219 |
| | 138,154 |
| | 139,348 |
| | 138,867 |
|
| Operating profit | 55,262 |
| | 71,483 |
| | 77,348 |
| | 45,799 |
|
| Net income | $ | 20,159 |
| | $ | 29,876 |
| | $ | 391,249 |
| | $ | 18,831 |
|
| Basic income per share | $ | .08 |
| | $ | .13 |
| | $ | 1.65 |
| | $ | .08 |
|
| Diluted income per share | $ | .08 |
| | $ | .12 |
| | $ | 1.60 |
| | $ | .08 |
|
|
| | | | | | | | | | | | | | | |
| | 2017 Quarter Ended (b) |
| | April 2 | | July 2 | | October 1 | | December 31 |
| Revenues | $ | 285,819 |
| | $ | 320,342 |
| | $ | 308,000 |
| | $ | 309,247 |
|
| Cost of sales | 124,543 |
| | 130,581 |
| | 133,631 |
| | 129,180 |
|
| Operating profit | 60,720 |
| | 25,794 |
| | 61,657 |
| | 66,587 |
|
| Net income (loss) | $ | 22,341 |
| | $ | (1,845 | ) | | $ | 14,257 |
| | $ | 159,276 |
|
| Basic income (loss) per share | $ | .09 |
| | $ | (.01 | ) | | $ | .06 |
| | $ | .66 |
|
| Diluted income (loss) per share | $ | .09 |
| | $ | (.01 | ) | | $ | .06 |
| | $ | .64 |
|
_______________
| |
(a) | The Company’s consolidated statements of operations in fiscal 2018 were materially impacted by investment income, net and reorganization and realignment costs. The pre-tax impact of investment income, net for the third quarter was $450,133 and included the sale of our remaining ownership interest in Inspire Brands (see Note 8 for further information). The pre-tax impact of reorganization and realignment costs for the first, second, third and fourth quarters was $2,626, $3,124, $941 and $2,377, respectively (see Note 5 for further information). |
| |
(b) | The Company’s consolidated statements of operations in fiscal 2017 were materially impacted by system optimization losses, net, reorganization and realignment costs and the benefit from income taxes. The pre-tax impact of system optimization losses, net for the second quarter was $41,050 (see Note 3 for additional information). The pre-tax impact of reorganization and realignment costs for the second, third and fourth quarters was $17,699, $2,888 and $1,806, respectively (see Note 5 for additional information). The benefit from income taxes for the fourth quarter was $121,649 and included the impact of the Tax Act (see Note 14 for additional information). |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 30, 2018.January 2, 2022. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that as of December 30, 2018,January 2, 2022, 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.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). The management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an assessment of the effectiveness of its internal control over financial reporting for the Company as of December 30, 2018.January 2, 2022. The assessment was performed using the criteria for effective internal control reflected in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the assessment of the system of internal control for the Company, the management of the Company believes that as of December 30, 2018,January 2, 2022, internal control over financial reporting of the Company was effective.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report dated February 27, 2019March 1, 2022 on the Company’s internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There were no changes in the internal control over financial reporting of the Company during the fourth quarter of 20182021 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, the management of the Company, including its Chief Executive Officer and Chief Financial Officer, does not expect that the control system can prevent or detect all error or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Wendy’s Company
Dublin, Ohio
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Wendy’s Company and subsidiaries (the “Company”) as of December 30, 2018,January 2, 2022, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2018,January 2, 2022, based on criteria established in Internal Control - Integrated Framework (2013)issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 30, 2018,January 2, 2022, of the Company and our report dated February 27, 2019,March 1, 2022, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding a change in accounting for revenue due to the adoption of Accounting Standards Codification No. 606, Revenue from Contracts with Customers.statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Columbus, Ohio
February 27, 2019March 1, 2022
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Items 10, 11, 12, 13 and 14.
The information required by Items 10 (Directors, Executive Officer and Corporate Governance), 11 (Executive Compensation), 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), 13 (Certain Relationships and Related Transactions, and Director Independence) and 14 (Principal Accountant Fees and Services) will be furnished on or prior to April 29, 2019May 2, 2022 (and is hereby incorporated by reference) by an amendment hereto or pursuant to a definitive proxy statement involving the election of directors pursuant to Regulation 14A that will contain such information. Notwithstanding the foregoing, information appearing in the sections “Compensation Committee Report” and “Audit Committee Report” shall not be deemed to be incorporated by reference in this Form 10-K.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) 1. Financial Statements:
See Index to Financial Statements (Item 8).
| |
2. | Financial Statement Schedules: |
2.Financial Statement Schedules:
All schedules have been omitted since they are either not applicable or the information is contained elsewhere in “Item 8. Financial Statements and Supplementary Data.”
3.Exhibits:
Exhibits that are incorporated by reference to documents filed previously by the Company under the Securities Exchange Act of 1934, as amended, are filed with the Securities and Exchange Commission under File No. 001-02207, or File No. 001-08116 for documents filed by Wendy’s International, Inc. We will furnish copies of any exhibit listed on the Exhibit Index upon written request to the Secretary of The Wendy’s Company at One Dave Thomas Boulevard, Dublin, Ohio 43017 for a reasonable fee to cover our expenses in furnishing such exhibits.
|
| | | | |
| EXHIBIT NO. | DESCRIPTION |
| |
| 2.1 | |
| 2.2 | Side Letter Agreement, dated August 14, 2008, by and among Triarc Companies, Inc., Green Merger Sub, Inc. and Wendy’s International, Inc., incorporated herein by reference to Exhibit 2.3 to Triarc’s Registration Statement on Form S-4, Amendment No. 3, filed on August 15, 2008 (Reg. no. and SEC file no. 333-151336). |
| 2.3 | Purchase and Sale Agreement, dated as of June 13, 2011, by and among Wendy’s/Arby’s Restaurants, LLC, ARG Holding Corporation and ARG IH Corporation, incorporated herein by reference to Exhibit 2.1 of the Wendy’s/Arby’s Group, Inc. and Wendy’s/Arby’s Restaurants, LLC Current Reports on Form 8-K filed on June 13, 2011 (SEC file nos. 001-02207 and 333-161613, respectively). |
| 2.4 | Closing letter dated as of July 1, 2011 by and among Wendy’s/Arby’s Restaurants, LLC, ARG Holding Corporation, ARG IH Corporation, and Roark Capital Partners II, LP, incorporated by reference to Exhibit 2.2 of the Wendy’s/Arby’s Group, Inc. and Wendy’s/Arby’s Restaurants, LLC Current Reports on Form 8-K filed on July 8, 2011 (SEC file nos. 001-02207 and 333-161613, respectively). |
| 3.1 | |
| 3.2 | |
| 4.1 | Base Indenture, dated as of June 1, 2015, by and between Wendy’s Funding, LLC, as Master Issuer, and Citibank, N.A., as Trustee and Securities Intermediary, incorporated herein by reference to Exhibit 4.1 of The Wendy’s Company Current Report on Form 8-K filed on June 2, 2015 (SEC file no. 001-02207). |
| 4.2 | Series 2015-1 Supplement to Base Indenture, dated as of June 1, 2015, by and between Wendy’s Funding, LLC, as Master Issuer of the Series 2015-1 fixed rate senior secured notes, Class A-2, and Series 2015-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2015-1 Securities Intermediary, incorporated herein by reference to Exhibit 4.2 of The Wendy’s Company Current Report on Form 8-K filed on June 2, 2015 (SEC file no. 001-02207). |
4.3 | Series 2018-1 Supplement to Base Indenture, dated as of January 17, 2018, by and between Wendy’s Funding, LLC, as Master Issuer of the Series 2018-1 fixed rate senior secured notes, Class A-2, and Series 2018-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2018-1 Securities Intermediary, incorporated herein by reference to Exhibit 4.1 of The Wendy’s Company Current Report on Form 8-K filed on January 17, 2018 (SEC file no. 001-02207). |
4.44.3 | Series 2019-1 Supplement to Base Indenture, dated as of June 26, 2019, by and between Wendy’s Funding, LLC, as Master Issuer of the Series 2019-1 fixed rate senior secured notes, Class A-2, and Series 2019-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2019-1 Securities Intermediary, incorporated herein by reference to Exhibit 4.1 of The Wendy’s Company Current Report on Form 8-K filed on June 26, 2019 (SEC file no. 001-02207). |
| 4.4 | Series 2020-1 Supplement to Base Indenture, dated as of June 17, 2020, by and between Wendy’s Funding, LLC, as Master Issuer of the Series 2020-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2020-1 Securities Intermediary, incorporated herein by reference to Exhibit 4.1 of The Wendy’s Company Current Report on Form 8-K filed on June 18, 2020 (SEC file no. 001-02207). |
| 4.5 | Series 2021-1 Supplement to Base Indenture, dated as of June 22, 2021, by and between Wendy’s Funding, LLC, as Master Issuer of the Series 2021-1 fixed rate senior secured notes, Class A-2, and Series 2021-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2021-1 Securities Intermediary, incorporated herein by reference to Exhibit 4.1 of The Wendy’s Company Current Report on Form 8-K filed on June 23, 2021 (SEC file no. 001-02207). |
| 4.6 | First Supplement, dated as of February 10, 2017, to the Base Indenture, dated as of June 1, 2015, by and between Wendy’s Funding, LLC, as Master Issuer, and Citibank, N.A., as Trustee and Securities Intermediary, incorporated herein by reference to Exhibit 4.3 of The Wendy’s Company Form 10-K for the fiscal year ended January 1, 2017 (SEC file no. 001-02207). |
4.54.7 | Second Supplement to Base Indenture, dated as of January 17, 2018, by and between Wendy’s Funding, LLC, as Master Issuer, and Citibank, N.A., as Trustee and Securities Intermediary, incorporated herein by reference to Exhibit 4.2 of The Wendy’s Company Current Report on Form 8-K filed on January 17, 2018 (SEC file no. 001-02207). |
| | | | | |
4.6EXHIBIT NO. | DESCRIPTION |
| 4.8 | |
10.1 | |
|
| |
EXHIBIT NO. | DESCRIPTION |
10.24.9 | FormFourth Supplement to the Base Indenture, dated as of Non-Incentive Stock Option Agreement under the Wendy’s/Arby’s Group, Inc. AmendedJune 26, 2019, by and Restated 2002 Equity Participation Plan,between Wendy’s Funding, LLC, as amended,Master Issuer, and Citibank, N.A., as Trustee, incorporated herein by reference to Exhibit 99.6 to Wendy’s/Arby’s Group’s4.2 of The Wendy’s Company Current Report on Form 8-K filed on December 22, 2008June 26, 2019 (SEC file no. 001-02207).** |
10.34.10 | FormFifth Supplement to the Base Indenture, dated as of Restricted Stock Agreement under the Wendy’s/Arby’s Group, Inc. AmendedJune 17, 2020, by and Restated 2002 Equity Participation Plan,between Wendy’s Funding, LLC, as amended,Master Issuer, and Citibank, N.A., as Trustee and Securities Intermediary, incorporated herein by reference to Exhibit 10.74.2 of The Wendy’s Company Current Report on Form 8-K filed on June 18, 2020 (SEC file no. 001-02207). |
| 4.11 | Sixth Supplement to Wendy’s/Arby’s Group’sthe Base Indenture, dated as of January 3, 2021, by and between Wendy’s Funding, LLC, as Master Issuer, and Citibank, N.A., as Trustee and Securities Intermediary, incorporated herein by reference to Exhibit 4.11 of The Wendy's Company Form 10-K for the fiscal year ended December 28, 2008January 3, 2021 (SEC file no. 001-02207).** |
10.44.12 | FormSeventh Supplement to the Base Indenture, dated as of Non-Employee Director Restricted Stock Award Agreement under the Wendy’s/Arby’s Group, Inc. AmendedJune 22, 2021, by and Restated 2002 Equity Participation Plan,between Wendy’s Funding, LLC, as Master Issuer, and Citibank, N.A., as Trustee and Securities Intermediary, incorporated herein by reference to Exhibit 10.7 to Wendy’s/Arby’s Group’s4.2 of The Wendy’s Company Current Report on Form 10-Q for the quarter ended8-K filed on June 28, 200923, 2021 (SEC file no. 001-02207).** |
10.54.13 | |
10.610.1 | |
10.710.2 | |
10.810.3 | |
10.910.4 | |
10.1010.5 | |
10.1110.6 | |
10.12 | |
10.1310.7 | |
10.1410.8 | |
| 10.9 | |
| 10.10 | |
| 10.11 | |
| 10.12 | |
| 10.13 | |
| | | | | |
| EXHIBIT NO. | DESCRIPTION |
| 10.14 | |
| 10.15 | |
10.16 | |
10.17 | |
10.18 | |
10.19 | |
10.20 | |
|
| |
EXHIBIT NO. | DESCRIPTION |
10.21 | |
10.22 | |
10.23 | |
10.24 | |
10.25 | |
10.26 | |
10.27 | |
10.28 | |
10.29 | |
10.30 | |
10.3110.16 | |
10.3210.17 | |
10.3310.18 | |
10.3410.19 | |
10.3510.20 | 2015-1 Class A-2 Note Purchase Agreement, dated as of May 19, 2015, by and among The Wendy’s Company,Amendment No. 3 to the subsidiaries of The Wendy’s Company party thereto and Guggenheim Securities, LLC, acting on behalf of itself and as the representative of the initial purchasers,Wendy’s/Arby’s Group, Inc. 2009 Directors’ Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.1 of10.7 to The Wendy’s Company Current Report on Form 8-K filed on May 20, 201510-Q for the quarter ended June 28, 2020 (SEC file no. 001-02207).** |
10.3610.21 | |
|
| 10.22 | |
EXHIBIT NO.10.23 | DESCRIPTION |
10.3710.24 | Class A-1 Note Purchase Agreement, dated as of June 1, 2015,22, 2021, by and among Wendy’s Funding, LLC, as Master Issuer, each of Quality Is Our Recipe, LLC, Wendy’s Properties, LLC and Wendy’s SPV Guarantor, LLC, as Guarantor, Wendy’s International, LLC, as Manager, the conduit investors party thereto, the financial institutions party thereto, certain funding agents, and Coöperatieve Centrale Raiffeisen-Boerenleenbank, B.A., “Rabobank Nederland,” New York Branch, as L/C Provider, Swingline Lender and Administrative Agent, incorporated herein by reference to Exhibit 10.1 of The Wendy’s Company Current Report on Form 8-K filed on June 2, 2015 (SEC file no. 001-02207). |
10.38 | Class A-1 Note Purchase Agreement, dated as of January 17, 2018, by and between Wendy’s Funding, LLC, as Master Issuer, each of Quality Is Our Recipe, LLC, Wendy’s Properties, LLC, Wendy’s SPV Guarantor, LLC, as Guarantor,Guarantors, Wendy’s International, LLC, as Manager, the conduit investors party thereto, the financial institutions party thereto, certain funding agents, and Coöperatieve Rabobank, U.A., New York Branch, as L/C Provider, Swingline Lender and Administrative Agent, incorporated herein by reference to Exhibit 10.1 of The Wendy’s Company Current Report on Form 8-K filed on January 17, 2018June 23, 2021 (SEC file no. 001-02207). |
10.3910.25 | Guarantee and Collateral Agreement, dated as of June 1, 2015, by and among Quality Is Our Recipe, LLC, Wendy’s Properties, LLC, Wendy’s SPV Guarantor, LLC, each as a Guarantor, in favor of Citibank, N.A., as Trustee, incorporated herein by reference to Exhibit 10.2 to The Wendy’s Company Current Report on Form 8-K filed on June 2, 2015 (SEC file no. 001-02207). |
10.4010.26 | Management Agreement, dated as of June 1, 2015, by and among Wendy’s Funding, LLC, Quality Is Our Recipe, LLC, Wendy’s Properties, LLC, Wendy’s SPV Guarantor, LLC, Wendy’s International, LLC, as Manager, and Citibank, N.A., as Trustee, incorporated herein by reference to Exhibit 10.3 to The Wendy’s Company Current Report on Form 8-K filed on June 2, 2015 (SEC file no. 001-02207). |
10.4110.27 | Management Agreement Amendment, dated as of January 17, 2018, by and among Wendy’s Funding, LLC, as Master Issuer, certain subsidiaries of Wendy’s Funding, LLC party thereto, Wendy’s International, LLC, as Manager, and Citibank, N.A., as Trustee, incorporated herein by reference to Exhibit 10.2 of The Wendy’s Company Current Report on Form 8-K filed on January 17, 2018 (SEC file no. 001-02207). |
10.4210.28 | Stock PurchaseSecond Amendment to the Management Agreement, dated as of June 2, 2015,26, 2019, by and between Theamong Wendy’s CompanyFunding, LLC, as Master Issuer, certain subsidiaries of Wendy’s Funding, LLC party thereto, Wendy’s International, LLC, as Manager, and the persons listed on Schedule I thereto,Citibank, N.A., as Trustee, incorporated herein by reference to Exhibit 10.1 to10.2 of The Wendy’s Company Current Report on Form 8-K filed on June 3, 201526, 2019 (SEC file no. 001-02207). |
| | | | | |
| EXHIBIT NO. | DESCRIPTION |
| 10.29 | Third Amendment to the Management Agreement, dated as of January 3, 2021, by and among Wendy’s Funding, LLC, as Master Issuer, certain subsidiaries of Wendy’s Funding, LLC party thereto, Wendy’s International, LLC, as Manager, and Citibank, N.A., as Trustee, incorporated herein by reference to Exhibit 10.31 of The Wendy's Company Form 10-K for the fiscal year ended January 3, 2021 (SEC file no. 001-02207). |
10.4310.30 | Fourth Amendment to the Management Agreement, dated as of June 22, 2021, by and among Wendy’s Funding, LLC, as Master Issuer, certain subsidiaries of Wendy’s Funding, LLC party thereto, Wendy’s International, LLC, as Manager, and Citibank, N.A., as Trustee, incorporated herein by reference to Exhibit 10.2 of The Wendy’s Company Current Report on Form 8-K filed on June 23, 2021 (SEC file no. 001-02207). |
| 10.31 | |
10.4410.32 | |
10.4510.33 | |
10.46 | |
10.4710.34 | |
10.4810.35 | |
10.4910.36 | |
10.5010.37 | |
10.51 | |
|
| |
EXHIBIT NO. | DESCRIPTION |
10.52 | |
10.53 | |
10.54 | |
10.55 | |
10.56 | |
10.57 | |
10.5810.38 | |
10.59 | Agreement dated November 5, 2008 by and between Wendy’s/Arby’s Group, Inc. and Trian Partners, L.P., Trian Partners Master Fund, L.P., Trian Partners Parallel Fund I, L.P., Trian Partners Parallel Fund II, L.P., Trian Fund Management, L.P., Nelson Peltz, Peter W. May and Edward P. Garden, incorporated herein by reference to Exhibit 10.1 to Wendy’s/Arby’s Group’s Current Report on Form 8-K filed on November 12, 2008 (SEC file no. 001-02207). |
10.60 | Amendment No. 1 to Agreement, dated as of April 1, 2009, among Wendy’s/Arby’s Group, Inc., Trian Partners, L.P., Trian Partners Master Fund, L.P., Trian Partners Parallel Fund I, L.P., Trian Partners Parallel Fund II, L.P., Trian Fund Management, L.P., Trian Fund Management GP, LLC, Nelson Peltz, Peter W. May and Edward P. Garden, incorporated herein by reference to Exhibit 10.2 to Wendy’s/Arby’s Group’s Current Report on Form 8-K filed on April 2, 2009 (SEC file no. 001-02207). |
10.61 | Agreement dated December 1, 2011 by and between The Wendy’s Company and Trian Partners, L.P., Trian Partners Master Fund, L.P., Trian Partners Parallel Fund I, L.P., Trian Partners GP, L.P., Trian Fund Management, L.P., the general partner of which is Trian Fund Management GP, LLC, Nelson Peltz, Peter W. May and Edward P. Garden, who, together with Nelson Peltz and Peter W. May, are the controlling members of Trian GP, Trian Partners Strategic Investment Fund, L.P. and Trian Partners Strategic Investment Fund-A, L.P., incorporated herein by reference to Exhibit 10.1 to The Wendy’s Company Current Report on Form 8-K filed on December 2, 2011 (SEC file no. 001-02207). |
10.6210.39 | |
10.63 | |
10.64 | |
10.65 | |
10.66 | |
10.6710.40 | |
|
| |
EXHIBIT NO. | DESCRIPTION |
10.68 | |
10.6910.41 | |
10.7010.42 | |
10.71 | |
10.7210.43 | |
10.7310.44 | |
10.7410.45 | |
| | | | | |
10.75EXHIBIT NO. | DESCRIPTION |
| 10.46 | |
10.7610.47 | |
| 10.48 | |
10.7710.49 | |
21.110.50 | |
| 10.51 | |
| 10.52 | |
| 21.1 | |
| 23.1 | |
| 31.1 | |
| 31.2 | |
| 32.1 | |
101.INS101 | XBRL Instance Document*The following financial information from The Wendy’s Company’s Annual Report on Form 10-K for the year ended January 2, 2022 formatted in Inline eXtensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. |
101.SCH104 | The cover page from The Wendy’s Company’s Annual Report on Form 10-K for the year ended January 2, 2022, formatted in Inline XBRL Taxonomy Extension Schema Document* |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document*and contained in Exhibit 101. |
|
| | | | |
| * | Filed herewith. |
| ** | Identifies a management contract or compensatory plan or arrangement. |
| |
| Instruments defining the rights of holders of certain issues of long-term debt of the Company and its consolidated subsidiaries have not been filed as exhibits to this Form 10-K because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of each of such instruments to the Commission upon request. |
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | |
| THE WENDY’S COMPANY (Registrant) |
February 27, 2019March 1, 2022 | By: /s/ TODD A. PENEGOR |
| Todd A. Penegor |
| President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 27, 2019March 1, 2022 by the following persons on behalf of the registrant and in the capacities indicated. |
| | | | | | | |
| Signature | | Titles |
| /s/ TODD A. PENEGOR | | President, Chief Executive Officer and Director |
| (Todd A. Penegor) | | (Principal Executive Officer) |
| /s/ GUNTHER PLOSCH | | Chief Financial Officer |
| (Gunther Plosch) | | (Principal Financial Officer) |
| /s/ LEIGH A. BURNSIDE | | Senior Vice President, Finance and Chief Accounting Officer |
| (Leigh A. Burnside) | | (Principal Accounting Officer) |
| /s/ NELSON PELTZ | | Chairman and Director |
| (Nelson Peltz) | | |
| /s/ PETER W. MAY | | Senior Vice Chairman and Director |
| (Peter W. May) | | |
| /s/ MATTHEW H. PELTZ | | Vice Chairman and Director |
| (Matthew H. Peltz) | | |
| /s/ KRISTIN A. DOLAN | | Director |
| (Kristin A. Dolan) | | |
| /s/ KENNETH W. GILBERT | | Director |
| (Kenneth W. Gilbert) | | |
| /s/ RICHARD H. GOMEZ | | Director |
| (Richard H. Gomez) | | |
| /s/ DENNIS M. KASS | | Director |
| (Dennis M. Kass) | | |
| /s/ JOSEPH A. LEVATO | | Director |
| (Joseph A. Levato) | | |
| /s/ MICHELLE J. MATHEWS-SPRADLIN | | Director |
| (Michelle J. Mathews-Spradlin) | | |
/s/ MATTHEW H. PELTZ | | Director |
(Matthew H. Peltz) | | |
| /s/ PETER H. ROTHSCHILD | | Director |
| (Peter H. Rothschild) | | |
| /s/ ARTHUR B. WINKLEBLACK | | Director |
| (Arthur B. Winkleblack) | | |