UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OctoberApril 2, 20162017

OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from ______________ to _______________

Commission file number: 1-2207
THE WENDY’S COMPANY
(Exact name of registrants as specified in its charter)

Delaware 38-0471180
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer Identification No.)
   
One Dave Thomas Blvd., Dublin, Ohio 43017
(Address of principal executive offices) (Zip Code)

(614) 764-3100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [x]                              Accelerated filer [ ]       
Non-accelerated filer [ ] (Do not check if a smaller reporting company)    Smaller reporting company [ ]
Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]

There were 257,028,237245,456,174 shares of The Wendy’s Company common stock outstanding as of November 3, 2016.May 4, 2017.

 


THE WENDY’S COMPANY AND SUBSIDIARIES
INDEX TO FORM 10-Q
 Page
PART I: FINANCIAL INFORMATION
 
Item 1. Financial Statements
3
Condensed Consolidated Balance Sheets as of OctoberApril 2, 20162017 (Unaudited) and January 3, 20161, 2017
3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended October
April 2, 20162017 and September 27, 2015April 3, 2016
4
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended OctoberApril 2, 20162017 and September 27, 2015April 3, 2016
5
Unaudited Condensed Consolidated Statements of Cash Flows for the ninethree months ended October
April 2, 20162017 and September 27, 2015April 3, 2016
6
Notes to Condensed Consolidated Financial Statements
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2622
Item 3. Quantitative and Qualitative Disclosures about Market Risk
4232
Item 4. Controls and Procedures
4232
  
PART II: OTHER INFORMATION
4334
Item 1. Legal Proceedings
4536
Item 1A. Risk Factors
4636
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
4737
Item 6. Exhibits
4838
Signatures
4939



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)Thousands Except Per Share Amounts)
October 2,
2016		 January 3,
2016		April 2,
2017		 January 1,
2017
ASSETS(Unaudited)  (Unaudited)  
Current assets:      
Cash and cash equivalents$308,784
 $327,216
$193,235
 $198,240
Restricted cash40,776
 42,869
49,339
 57,612
Accounts and notes receivable109,835
 104,854
Accounts and notes receivable, net90,324
 98,825
Inventories2,653
 4,312
2,721
 2,851
Prepaid expenses and other current assets60,026
 69,919
27,515
 19,244
Advertising funds restricted assets90,763
 67,399
75,396
 75,760
Total current assets612,837
 616,569
438,530
 452,532
Properties1,207,938
 1,227,944
1,190,550
 1,192,339
Goodwill742,234
 770,781
741,658
 741,410
Other intangible assets1,326,134
 1,339,587
1,314,540
 1,322,531
Investments59,687
 58,369
56,954
 56,981
Other assets165,594
 95,470
210,093
 173,521
Total assets$4,114,424
 $4,108,720
$3,952,325
 $3,939,314
      
LIABILITIES AND STOCKHOLDERS’ EQUITY 
  
 
  
Current liabilities: 
  
 
  
Current portion of long-term debt$23,830
 $23,290
$24,900
 $24,652
Accounts payable39,722
 53,681
21,852
 27,635
Accrued expenses and other current liabilities110,671
 124,404
86,466
 102,034
Advertising funds restricted liabilities90,763
 67,399
75,396
 75,760
Total current liabilities264,986
 268,774
208,614
 230,081
Long-term debt2,491,992
 2,402,823
2,527,819
 2,487,630
Deferred income taxes444,220
 459,713
444,084
 446,513
Other liabilities234,651
 224,496
246,959
 247,354
Total liabilities3,435,849
 3,355,806
3,427,476
 3,411,578
Commitments and contingencies

 



 

Stockholders’ equity:      
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued47,042
 47,042
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 246,202 and 246,574 shares outstanding, respectively47,042
 47,042
Additional paid-in capital2,875,203
 2,874,752
2,876,440
 2,878,589
Accumulated deficit(303,703) (356,632)(283,916) (290,857)
Common stock held in treasury, at cost; 211,531 and 198,109 shares, respectively(1,881,307) (1,741,425)
Common stock held in treasury, at cost; 224,222 and 223,850 shares, respectively(2,053,962) (2,043,797)
Accumulated other comprehensive loss(58,660) (70,823)(60,755) (63,241)
Total stockholders’ equity678,575
 752,914
524,849
 527,736
Total liabilities and stockholders’ equity$4,114,424
 $4,108,720
$3,952,325
 $3,939,314

See accompanying notes to condensed consolidated financial statements.


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Table of Contents
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)


Three Months Ended Nine Months EndedThree Months Ended
October 2,
2016		 September 27,
2015		 October 2,
2016		 September 27,
2015		April 2,
2017		 April 3,
2016
(Unaudited)(Unaudited)
Revenues:          
Sales$228,644
 $359,015
 $747,211
 $1,101,632
$148,212
 $259,332
Franchise revenues135,368
 105,614
 378,306
 304,300
Franchise royalty revenue and fees94,690
 88,895
Franchise rental income42,917
 30,560
364,012
 464,629
 1,125,517
 1,405,932
285,819
 378,787
Costs and expenses:          
Cost of sales186,546
 291,524
 603,836
 911,757
123,407
 214,736
Franchise rental expense18,868
 14,657
General and administrative58,938
 63,683
 184,708
 184,152
52,450
 64,646
Depreciation and amortization29,362
 36,420
 92,456
 111,300
29,165
 32,345
System optimization (gains) losses, net(37,756) 98
 (48,106) (14,751)
System optimization gains, net(1,407) (8,426)
Reorganization and realignment costs2,129
 5,754
 7,866
 16,646
181
 3,250
Impairment of long-lived assets361
 1,513
 12,991
 13,468
510
 7,105
Other operating expense, net18,344
 9,698
 36,201
 25,202
Other operating expense (income), net1,925
 (13,355)
257,924
 408,690
 889,952
 1,247,774
225,099
 314,958
Operating profit106,088
 55,939
 235,565
 158,158
60,720
 63,829
Interest expense(28,731) (27,938) (85,483) (57,882)(28,975) (28,109)
Loss on early extinguishment of debt—
 —
 —
 (7,295)
Other income, net498
 214
 1,036
 725
389
 262
Income from continuing operations before income taxes77,855
 28,215
 151,118
 93,706
Income before income taxes32,134
 35,982
Provision for income taxes(28,965) (19,892) (50,385) (42,408)(9,793) (10,619)
Income from continuing operations48,890
 8,323
 100,733
 51,298
Discontinued operations:       
(Loss) income from discontinued operations, net of income taxes—
 (417) —
 9,171
(Loss) gain on disposal of discontinued operations, net of income taxes—
 (322) —
 14,817
Net (loss) income from discontinued operations—
 (739) —
 23,988
Net income$48,890
 $7,584
 $100,733
 $75,286
$22,341
 $25,363
          
Basic income (loss) per share:       
Continuing operations$.19
 $.03
 $.38
 $.15
Discontinued operations—
 —
 —
 .07
Net income$.19
 $.03
 $.38
 $.22
       
Diluted income (loss) per share:       
Continuing operations$.18
 $.03
 $.37
 $.15
Discontinued operations—
 —
 —
 .07
Net income$.18
 $.03
 $.37
 $.22
Basic and diluted net income per share$.09
 $.09
          
Dividends per share$.06
 $.055
 $.18
 $.165
$.07
 $.06

See accompanying notes to condensed consolidated financial statements.

4
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THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)


 Three Months Ended Nine Months Ended
 October 2,
2016		 September 27,
2015		 October 2,
2016		 September 27,
2015
 (Unaudited)
        
Net income$48,890
 $7,584
 $100,733
 $75,286
Other comprehensive (loss) income, net:       
Foreign currency translation adjustment(3,369) (17,385) 10,887
 (29,879)
Change in unrecognized pension loss, net of income tax benefit of $34 and $124, respectively—
 —
 (56) (203)
Effect of cash flow hedges, net of income tax (provision) benefit of $(279) and $(273) for the three months and $(838) and $1,217 for the nine months ended October 2, 2016 and September 27, 2015, respectively444
 435
 1,332
 (2,007)
 Other comprehensive (loss) income, net(2,925) (16,950) 12,163
 (32,089)
 Comprehensive income (loss)$45,965
 $(9,366) $112,896
 $43,197
 Three Months Ended
 April 2,
2017		 April 3,
2016
 (Unaudited)
    
Net income$22,341
 $25,363
Other comprehensive income, net:   
Foreign currency translation adjustment1,945
 12,676
Change in unrecognized pension loss, net of income tax provision of $6096
 —
Effect of cash flow hedges, net of income tax provision of $278 for the three months ended April 2, 2017 and April 3, 2016445
 445
 Other comprehensive income, net2,486
 13,121
 Comprehensive income$24,827
 $38,484

See accompanying notes to condensed consolidated financial statements.

5
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THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

Nine Months EndedThree Months Ended
October 2,
2016		 September 27,
2015		April 2,
2017		 April 3,
2016
(Unaudited)(Unaudited)
Cash flows from operating activities:      
Net income$100,733
 $75,286
$22,341
 $25,363
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization94,056
 118,708
29,165
 33,290
Share-based compensation14,260
 18,784
3,559
 5,081
Impairment of long-lived assets12,991
 13,468
510
 7,105
Deferred income tax(17,024) 35,368
(938) (8,365)
Excess tax benefits from share-based compensation(2,376) (49,870)
Non-cash rent (income) expense, net(5,138) 2,792
Net receipt of deferred vendor incentives
4,110
 3,402
Non-cash rental income, net(2,728) (1,962)
Net receipt of deferred vendor incentives9,602
 12,810
System optimization gains, net(48,106) (14,783)(1,407) (8,426)
Gain on disposal of the Bakery—
 (27,526)
Distributions received from TimWen joint venture8,451
 9,198
2,439
 2,689
Equity in earnings in joint ventures, net(6,495) (6,968)(1,846) (1,899)
Long-term debt-related activities, net (see below)8,752
 4,972
Accretion of long-term debt308
 304
Amortization of deferred financing costs2,000
 1,869
Reclassification of unrealized losses on cash flow hedges723
 723
Other, net4,229
 307
1,590
 2,804
Changes in operating assets and liabilities:      
Restricted cash181
 (23,686)15
 42
Accounts and notes receivable(33,260) (29,046)
Accounts and notes receivable, net(1,818) 758
Inventories126
 203
130
 431
Prepaid expenses and other current assets(3,958) (6,530)(1,328) (3,665)
Accounts payable(6,412) 9,212
(2,485) 854
Accrued expenses and other current liabilities5,677
 (14,662)(21,180) (18,998)
Net cash provided by operating activities130,797
 118,629
38,652
 50,808
Cash flows from investing activities: 
  
 
  
Capital expenditures(108,744) (188,246)(14,811) (38,858)
Acquisitions(2,209) (1,232)—
 (2,209)
Dispositions173,849
 46,357
1,650
 41,185
Proceeds from sale of the Bakery—
 78,408
Payments for investments(172) (2,082)(58) (64)
Notes receivable, net(2,282) 2,631
(1,754) (1,327)
Changes in restricted cash1,912
 484
8,545
 1,045
Other, net103
 88
Net cash provided by (used in) investing activities62,457
 (63,592)
Net cash used in investing activities(6,428) (228)
Cash flows from financing activities: 
  
 
  
Proceeds from long-term debt—
 2,294,000
Repayments of long-term debt(18,678) (1,321,169)(6,159) (6,696)
Deferred financing costs(1,017) (42,098)(415) (138)
Change in restricted cash—
 (5,687)
Repurchases of common stock(161,194) (1,078,404)(16,026) (47,601)
Dividends(47,793) (55,414)(17,273) (16,214)
Proceeds from stock option exercises10,623
 22,419
4,459
 3,674
Excess tax benefits from share-based compensation2,376
 49,870
Payments related to tax withholding for share-based compensation(2,559) (2,601)
Net cash used in financing activities(215,683) (136,483)(37,973) (69,576)
Net cash used in operations before effect of exchange rate changes on cash(22,429) (81,446)(5,749) (18,996)
Effect of exchange rate changes on cash3,997
 (10,130)744
 4,703
Net decrease in cash and cash equivalents(18,432) (91,576)(5,005) (14,293)
Cash and cash equivalents at beginning of period327,216
 267,276
198,240
 327,216
Cash and cash equivalents at end of period$308,784
 $175,700
$193,235
 $312,923

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THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED
(In Thousands)

  Nine Months Ended
  October 2,
2016		 September 27,
2015
  (Unaudited)
Details of cash flows from operating activities:    
Long-term debt-related activities, net:    
Loss on early extinguishment of debt $—
 $7,295
Accretion of long-term debt 914
 890
Amortization of deferred financing costs 5,668
 3,416
Payments for termination of cash flow hedges —
 (7,337)
Reclassification of unrealized losses on cash flow hedges 2,170
 708
  $8,752
 $4,972
     
Supplemental cash flow information:    
Cash paid for:  
  
Interest $85,753
 $55,725
Income taxes, net of refunds 63,775
 16,401
     
Supplemental non-cash investing and financing activities:    
Capital expenditures included in accounts payable $20,108
 $25,970
Capitalized lease obligations 102,748
 25,657
Accrued debt issuance costs 472
 1,653
 Three Months Ended
 April 2,
2017		 April 3,
2016
 (Unaudited)
Supplemental cash flow information:   
Cash paid for: 
  
Interest$28,497
 $26,045
Income taxes, net of refunds792
 2,421
    
Supplemental non-cash investing and financing activities:   
Capital expenditures included in accounts payable$7,048
 $13,847
Capitalized lease obligations44,483
 79,946

See accompanying notes to condensed consolidated financial statements.



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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)




(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of OctoberApril 2, 20162017 and the results of our operations for the three and nine months ended October 2, 2016 and September 27, 2015 and cash flows for the ninethree months ended OctoberApril 2, 20162017 and September 27, 2015.April 3, 2016. The results of operations for the three and nine months ended OctoberApril 2, 20162017 are not necessarily indicative of the results to be expected for the full 20162017 fiscal year. These Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 3, 20161, 2017 (the “Form 10-K”).

The principal subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s® restaurants in North America (defined as the United States of America (“U.S.”) and Canada) comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material.

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three and nine monththree-month periods presented herein contain 13 weeks and 39 weeks, respectively.weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.

On May 31, 2015, Wendy’s completed the sale of its company-owned bakery, The New Bakery Company, LLC and its subsidiaries (collectively, the “Bakery”), a 100% owned subsidiary of Wendy’s. As a result of the sale of the Bakery, as further discussed in Note 2, the Bakery’s results of operations for the period from December 29, 2014 through May 31, 2015 and the gain on disposal have been included in “Net (loss) income from discontinued operations” in our condensed consolidated statements of operations.

The Company records rental income, including any related amortization of favorable and unfavorable lease balances, for properties leased or subleased to franchisees to “Franchise revenues.” Lease expense, including any related amortization, for leased properties that are subsequently subleased to franchisees is recorded to “Other operating expense, net.” We further describe our accounting for leases in our Form 10-K.

The following table presents the franchise rental income and lease expense included in our condensed consolidated statements of operations:
 Three Months Ended Nine Months Ended
 October 2,
2016		 September 27,
2015		 October 2,
2016		 September 27,
2015
Rental income$37,329
 $22,492
 $102,420
 $60,548
Lease expense17,534
 12,428
 49,684
 33,736

In connection with the reimaging of restaurants as part of our Image Activation program, we have recorded accelerated depreciation of $2,930 and $6,578 during the nine months ended October 2, 2016 and September 27, 2015, respectively, on certain long-lived assets to reflect their use over shortened estimated useful lives. We describe the circumstances under which we record accelerated depreciation for properties in our Form 10-K.

Certain reclassifications have been made to the prior year presentation to conform to the current year presentation.

(2) System Optimization Gains, Net

In July 2013, the Company announced a system optimization initiative, as part of its brand transformation, which 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. In February 2015, the Company announced plans to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system, which the Company completed as of January 1, 2017. Wendy’s will continue to optimize its system by facilitating franchisee-to-franchisee restaurant transfers, 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 Image Activation adoption.

During the three months ended April 2, 2017, the Company recorded post-closing adjustments on sales of restaurants and completed the sale of other assets, resulting in net gains totaling $1,407. In addition, the Company facilitated the transfer of 116 restaurants between franchisees during the three months ended April 2, 2017.

Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to our system optimization initiative were historically recorded to “Reorganization and realignment costs.” Costs incurred during 2017 in connection with an in-process transaction as of January 1, 2017 will continue to be recorded to “Reorganization and realignment costs.” All other costs incurred during 2017 related to facilitating franchisee-to-franchisee restaurant transfers will be recorded to “Other operating expense (income), net.” See Note 4 for further information.


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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
 Three Months Ended
 April 2,
2017		 April 3,
2016
Number of restaurants sold to franchisees—
 55
    
Proceeds from sales of restaurants$—
 $39,615
Net assets sold (a)—
 (17,055)
Goodwill related to sales of restaurants—
 (6,376)
Net unfavorable leases (b)—
 (4,906)
Other—
 (795)
 —
 10,483
Post-closing adjustments on sales of restaurants (c)900
 (2,135)
Gain on sales of restaurants, net900
 8,348
    
Gain on sales of other assets, net (d)507
 78
System optimization gains, net$1,407
 $8,426
_______________

(a)Net assets sold consisted primarily of equipment.

(b)During the three months ended April 3, 2016, the Company recorded favorable lease assets of $183 and unfavorable lease liabilities of $5,089 as a result of leasing and/or subleasing land, buildings and/or leasehold improvements to franchisees in connection with sales of restaurants.

(c)The three months ended April 2, 2017 includes the recognition of a deferred gain of $312 as a result of the resolution of certain contingencies related to the extension of lease terms for a Canadian restaurant.

(d)During the three months ended April 2, 2017 and April 3, 2016, the Company received cash proceeds of $1,650 and $1,570, respectively, primarily from the sale of surplus properties. The three months ended April 2, 2017 also includes the recognition of a deferred gain of $375 related to the sale of a share in an aircraft.

As of April 2, 2017 and January 1, 2017, the Company had assets held for sale of $4,110 and $4,800, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”


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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

(2) Discontinued Operations

On May 31, 2015, Wendy’s completed the sale of 100% of its membership interest in the Bakery to East Balt US, LLC (the “Buyer”) for $78,500 in cash (subject to customary purchase price adjustments). The Company also assigned certain capital leases for transportation equipment to the Buyer but retained the related obligation, which was settled during 2015. Pursuant to the sale agreement, the Company was obligated to continue to provide health insurance benefits to the Bakery’s employees at the Company’s expense through December 31, 2015. The Company recorded a pre-tax gain on the disposal of the Bakery of $27,526 during the nine months ended September 27, 2015, which included transaction closing costs and a reduction of goodwill. The Company recognized income tax expense associated with the gain on disposal of $12,709 during the nine months ended September 27, 2015, which included the impact of the disposal of non-deductible goodwill.

In conjunction with the Bakery sale, Wendy’s entered into a transition services agreement with the Buyer, pursuant to which Wendy’s provided certain continuing corporate and shared services to the Buyer through March 31, 2016 for no additional consideration. A purchasing cooperative, Quality Supply Chain Co-op, Inc. (“QSCC”), established by Wendy’s and its franchisees, agreed to continue to source sandwich buns from the Bakery for a specified time period following the sale of the Bakery. As a result, Wendy’s paid the Buyer $7,718 and $4,699 for the purchase of sandwich buns during the nine months ended October 2, 2016 and for the period from June 1, 2015 through September 27, 2015, respectively, which has been recorded to “Cost of sales.”

Information related to the Bakery has been reflected in the accompanying condensed consolidated financial statements as follows:

Balance sheets - As a result of our sale of the Bakery on May 31, 2015, there are no remaining Bakery assets and liabilities.

Statements of operations - The Bakery’s results of operations for the period from December 29, 2014 through May 31, 2015 have been presented as discontinued operations. In addition, the gain on disposal of the Bakery has been included in “Net (loss) income from discontinued operations” for the three and nine months ended September 27, 2015.

Statements of cash flows - The Bakery’s cash flows prior to its sale (for the period from December 29, 2014 through May 31, 2015) have been included in, and not separately reported from, our consolidated statement of cash flows. The consolidated statement of cash flows for the nine months ended September 27, 2015 also includes the effects of the sale of the Bakery.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)


The following table presents the Bakery’s results of operations and the gain on disposal, which have been included in discontinued operations:
 Three Months
Ended		 Nine Months Ended
 September 27, 2015 (e) September 27,
2015
Revenues (a)$—
 $25,885
Cost of sales (b)(207) (7,543)
 (207) 18,342
General and administrative4
 (1,093)
Depreciation and amortization (c)—
 (2,297)
Other income (expense), net (d)15
 (19)
(Loss) income from discontinued operations before income taxes(188) 14,933
Provision for income taxes(229) (5,762)
(Loss) income from discontinued operations, net of income taxes(417) 9,171
Gain on disposal of discontinued operations before income taxes188
 27,526
Provision for income taxes on gain on disposal(510) (12,709)
(Loss) gain on disposal of discontinued operations, net of income taxes(322) 14,817
Net (loss) income from discontinued operations$(739) $23,988
_______________

(a)Includes sales of sandwich buns and related products previously reported in “Sales” as well as rental income.

(b)The nine months ended September 27, 2015 includes employee separation costs of $791 as a result of the sale of the Bakery. In addition, the nine months ended September 27, 2015 includes a reduction to cost of sales of $12,486, as further described in the Form 10-K, resulting from the reversal of a liability recorded during 2013 associated with the Bakery’s withdrawal from a multiemployer pension plan.

(c)Included in “Depreciation and amortization” in our condensed consolidated statement of cash flows for the period presented.

(d)Includes net gains on sales of other assets.  During the nine months ended September 27, 2015, the Bakery received cash proceeds of $50 resulting in net gains on sales of other assets of $32.

(e)Represents post-closing adjustments recorded during the third quarter of 2015.

The Bakery’s capital expenditures were $2,693 for the nine months ended September 27, 2015, which are included in “Capital expenditures” in our condensed consolidated statement of cash flows.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

The following table summarizes the gain on the disposal of our Bakery, which has been included in discontinued operations:
 
Nine Months
Ended
 September 27,
2015
Proceeds from sale of the Bakery (a)$78,408
Net working capital (b)(5,655)
Net properties sold (c)(30,664)
Goodwill allocated to the sale of the Bakery(12,067)
Other (d)(2,684)
 27,338
Post-closing adjustments on the sale of the Bakery188
 27,526
Provision for income taxes (e)(12,709)
Gain on disposal of discontinued operations, net of income taxes$14,817
_______________

(a)Represents net proceeds received, which includes the purchase price of $78,500 less transaction closing costs paid directly by the Buyer on the Company’s behalf.

(b)Primarily represents accounts receivable, inventory, prepaid expenses and accounts payable.

(c)Net properties sold consisted primarily of buildings, equipment and capital leases for transportation equipment.

(d)Primarily includes the recognition of the Company’s obligation, pursuant to the sale agreement, to provide health insurance benefits to the Bakery’s employees through December 31, 2015 of $1,993 and transaction closing costs paid directly by the Company.

(e)Includes the impact of non-deductible goodwill disposed of as a result of the sale.

(3) System Optimization (Gains) Losses, Net

In July 2013, the Company announced a system optimization initiative, as part of its brand transformation, which includes a shift from company-owned restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers. In February 2015, the Company announced plans to sell approximately 540 additional restaurants to franchisees and reduce its ongoing company-owned restaurant ownership to approximately 5% of the total system by the end of 2016. During 2015, 2014 and 2013, the Company completed the sale of 327, 255 and 244 company-owned restaurants to franchisees, respectively, which included the sale of all of its company-owned restaurants in Canada.

During the nine months ended October 2, 2016 and September 27, 2015, the Company completed the sale of 211 and 109 company-owned restaurants to franchisees, respectively. The Company recognized net gains totaling $48,106 and $14,751 on the sale of company-owned restaurants and other assets during the nine months ended October 2, 2016 and September 27, 2015, respectively. In addition, the Company facilitated the transfer of 144 restaurants between franchisees during the nine months ended October 2, 2016. The Company expects to complete its plan to reduce company-owned restaurant ownership to approximately 5% of the total system with the sale of 98 restaurants during the remainder of 2016, all of which were classified as held for sale as of October 2, 2016.

Gains and losses recognized on dispositions are recorded to “System optimization (gains) losses, net” in our condensed consolidated statements of operations. Costs related to our system optimization initiative are recorded to “Reorganization and realignment costs,” and include severance and employee related costs, professional fees and other associated costs, which are further described in Note 5.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
 Three Months Ended Nine Months Ended
 October 2,
2016		 September 27,
2015		 October 2,
2016		 September 27,
2015
Number of restaurants sold to franchisees156
 9
 211
 109
        
Proceeds from sales of restaurants$124,765
 $3,084
 $164,380
 $39,133
Net assets sold (a)(58,227) (1,867) (75,282) (19,247)
Goodwill related to sales of restaurants(24,254) (483) (30,630) (8,346)
Net (unfavorable) favorable leases (b)(6,225) (1,506) (11,131) 5,889
Other (c)(726) —
 (1,521) (3,224)
 35,333
 (772) 45,816
 14,205
Post-closing adjustments on sales of restaurants (d)(120) (495) (1,710) (1,134)
Gain (loss) on sales of restaurants, net35,213
 (1,267) 44,106
 13,071
        
Gain on sales of other assets, net (e)2,543
 1,169
 4,000
 1,680
System optimization gains (losses), net$37,756
 $(98) $48,106
 $14,751
_______________

(a)Net assets sold consisted primarily of inventory and equipment.

(b)During the three and nine months ended October 2, 2016, the Company recorded favorable lease assets of $2,114 and $2,297, respectively, and unfavorable lease liabilities of $8,339 and $13,428, respectively, as a result of leasing and/or subleasing land, buildings and/or leasehold improvements to franchisees in connection with sales of restaurants. During the three and nine months ended September 27, 2015, the Company recorded favorable lease assets of $185 and $25,992, respectively, and unfavorable lease liabilities of $1,691and $20,103, respectively.

(c)The nine months ended September 27, 2015 includes a deferred gain of $2,658 related to the sale of 14 Canadian restaurants to a franchisee during the second quarter of 2015, as a result of certain contingencies related to the extension of lease terms. The deferred gain is included in “Other liabilities.” The nine months ended September 27, 2015 also includes a note receivable of $1,801 from a franchisee in connection with the sale of 16 Canadian restaurants, which was recognized as part of the overall loss on sale during the second quarter of 2015.

(d)The nine months ended September 27, 2015 includes the recognition of a gain on sale of $2,450 related to the repayment of notes receivable from franchisees in connection with sales of restaurants in 2014.

(e)During the three and nine months ended October 2, 2016, the Company received cash proceeds of $4,006 and $9,469, respectively, primarily from the sale of surplus properties. During the three and nine months ended September 27, 2015, the Company received cash proceeds of $4,576 and $7,174, respectively.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

Assets Held for Sale
 October 2,
2016		 January 3, 2016
Number of restaurants classified as held for sale98
 99
Net restaurant assets held for sale (a)$37,370
 $50,262
    
Other assets held for sale (a)$4,198
 $7,124
_______________

(a)Net restaurant assets held for sale include company-owned restaurants and consist primarily of cash, inventory, equipment and an estimate of allocable goodwill. Other assets held for sale primarily consist of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”

As part of our system optimization initiative, the Company completed sales of certain assets used in the operation of 52 Wendy’s company-owned restaurants subsequent to October 2, 2016 for cash proceeds of approximately $36,600, subject to customary purchase price adjustments.

(4) Acquisitions

The table below presents the allocation of the total purchase price to the fair value of assets acquired and liabilities assumed for acquisitions of franchised restaurants:
Nine Months EndedThree Months Ended
October 2,
2016		 September 27,
2015		April 2,
2017		 April 3,
2016
Restaurants acquired from franchisees2
 4
—
 2
      
Total consideration paid, net of cash received$2,209
 $1,232
$—
 $2,209
Identifiable assets acquired and liabilities assumed:      
Properties2,218
 1,303
—
 2,218
Acquired franchise rights—
 760
Other assets9
 —
—
 9
Capital lease obligations—
 (438)
Unfavorable leases—
 (440)
Other liabilities(18) (80)—
 (18)
Total identifiable net assets2,209 1,105—
 2,209
Goodwill$—
 $127
$—
 $—

(4) Reorganization and Realignment Costs

The following is a summary of the initiatives included in “Reorganization and realignment costs:”
 Three Months Ended
 April 2,
2017		 April 3,
2016
System optimization initiative$181
 $2,723
G&A realignment—
 527
Reorganization and realignment costs$181
 $3,250

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 franchisee-to-franchisee restaurant transfers. The Company expects to incur additional costs, primarily comprised of professional fees, of approximately $1,300 during 2017 in connection with an in-process transaction as of January 1, 2017. All other costs incurred during 2017 related to facilitating franchisee-to-franchisee restaurant transfers will be recorded to “Other operating expense (income), net.”

The following is a summary of the costs recorded as a result of our system optimization initiative:
 Three Months Ended 
Total
Incurred Since Inception
 April 2,
2017		 April 3,
2016		 
Severance and related employee costs$3
 $—
 $18,237
Professional fees130
 1,701
 16,740
Other48
 77
 5,791
 181
 1,778
 40,768
Accelerated depreciation and amortization (a)—
 945
 25,398
Share-based compensation (b)—
 —
 5,013
Total system optimization initiative$181
 $2,723
 $71,179
_______________


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(In Thousands Except Per Share Amounts)


(5) Reorganization and Realignment Costs
(a)Primarily includes accelerated amortization of previously acquired franchise rights related to Company-operated restaurants in territories that have been sold in connection with our system optimization initiative.

(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 followingtables below present a rollforward of our accrual for our system optimization initiative, which is a summary of the initiatives included in “Reorganization“Accrued expenses and realignment costs:other current liabilities.”
 Three Months Ended Nine Months Ended
 October 2,
2016		 September 27,
2015		 October 2,
2016		 September 27,
2015
G&A realignment$38
 $1,461
 $971
 $9,996
System optimization initiative2,091
 4,293
 6,895
 6,650
Reorganization and realignment costs$2,129
 $5,754
 $7,866
 $16,646
 
Balance
January 1,
2017
 Charges Payments 
Balance
April 2, 2017
Severance and related employee costs$—
 $3
 $(3) $—
Professional fees101
 130
 (143) 88
Other—
 48
 (48) —
 $101
 $181
 $(194) $88

 
Balance
January 3, 2016
 Charges Payments 
Balance
April 3,
2016
Severance and related employee costs$77
 $—
 $(16) $61
Professional fees708
 1,701
 (1,988) 421
Other90
 77
 (117) 50
 $875
 $1,778
 $(2,121) $532

General and Administrative (“G&A”) Realignment

In November 2014, the Company initiated a plan to reduce its general and administrative 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 costs totaling $971$527 during the ninethree months ended October 2,April 3, 2016 and $24,239$23,960 in aggregate since inception.  The Company expectsdid not incur any expenses during the three months ended April 2, 2017 and does not expect to incur additional costs aggregating approximately $350 duringrelated to the remainderplan. As of 2016, comprised primarily of recruitment and relocation costs for the reinvestment in resources to drive long-term growth.

The following is a summary of the activity recorded as a result of our G&A realignment plan:
 Three Months Ended Nine Months Ended 
Total
Incurred
Since
Inception
 October 2,
2016		 September 27,
2015		 October 2,
2016		 September 27,
2015		 
Severance and related employee costs (a)$—
 $513
 $11
 $3,132
 $14,939
Recruitment and relocation costs29
 270
 922
 1,254
 2,789
Other9
 2
 38
 43
 175
 38
 785
 971
 4,429
 17,903
Share-based compensation (b)—
 676
 —
 5,567
 6,336
   Total G&A realignment$38
 $1,461
 $971
 $9,996
 $24,239
_______________

(a)The nine months ended October 2, 2016 includes a reversal of an accrual of $32 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 our G&A realignment plan.

The tables below present a rollforward ofApril 2, 2017, our accruals for ourthe G&A realignment plan, which are included in “Accrued expenses and other current liabilities.liabilities,” totaled $76 and primarily related to severance and related employee costs.

 
Balance
January 3, 2016
 Charges Payments 
Balance
October 2, 2016
Severance and related employee costs$3,431
 $11
 $(2,642) $800
Recruitment and relocation costs144
 922
 (991) 75
Other—
 38
 (38) —
 $3,575
 $971
 $(3,671) $875
As previously announced in February 2017, the Company expects to reduce G&A expense to approximately 1.5 percent of global systemwide sales by 2020. On May 10, 2017, the Company announced that approximately three-quarters of the total G&A expense reduction of approximately $35,000 is expected to be realized by the end of 2018, with the remainder of the savings being realized in 2019. The Company expects to incur total costs aggregating approximately $28,000 to $33,000, of which $23,000 to $27,000 will be cash expenditures, related to such savings. The cash expenditures are expected to begin in the second half of 2017 and continue into 2019, with approximately half of the total cash expenditures occurring in 2018. The total costs expected to be incurred are comprised of (1) severance and related employee costs of approximately $17,000 to $19,000, (2) share-based compensation costs of approximately $5,000 to $6,000, (3) recruitment and relocation costs of approximately $4,000 to $5,000 and (4) third-party and other costs of approximately $2,000 to $3,000. The Company expects the costs to be recognized beginning in the second quarter of 2017 and continue into 2019, with approximately two-thirds to be recognized during 2017.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

  
Balance
December 28, 2014
 Charges Payments 
Balance
September 27,
2015
Severance and related employee costs $11,609
 $3,132
 $(9,256) $5,485
Recruitment and relocation costs 149
 1,254
 (1,238) 165
Other 5
 43
 (48) —
  $11,763
 $4,429
 $(10,542) $5,650

System Optimization Initiative

The Company has recognized costs related to its system optimization initiative, which includes a shift from company-owned restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers. The Company expects to incur additional costs of approximately $3,700 during the remainder of 2016, which are primarily comprised of professional fees.

The following is a summary of the costs recorded as a result of our system optimization initiative:
 Three Months Ended Nine Months Ended 
Total
Incurred Since Inception
 October 2,
2016		 September 27,
2015		 October 2,
2016		 September 27,
2015		 
Severance and related employee costs$28
 $225
 $46
 $854
 $18,198
Professional fees1,991
 242
 5,137
 393
 14,310
Other (a)72
 337
 112
 292
 5,583
 2,091
 804
 5,295
 1,539
 38,091
Accelerated depreciation and
   amortization (b)
—
 3,489
 1,600
 5,111
 25,398
Share-based compensation (c)—
 —
 —
 —
 5,013
Total system optimization initiative$2,091
 $4,293
 $6,895
 $6,650
 $68,502
_______________

(a)The nine months ended October 2, 2016 and September 27, 2015 include a reversal of an accrual of $50 and $210, respectively, as a result of a change in estimate.

(b)Primarily includes accelerated amortization of previously acquired franchise rights related to company-owned restaurants in territories that have been sold in connection with our system optimization initiative.

(c)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 accrual for our system optimization initiative, which is included in “Accrued expenses and other current liabilities.”
 
Balance
January 3,
2016
 Charges Payments 
Balance
October 2,
2016
Severance and related employee costs$77
 $46
 $(123) $—
Professional fees708
 5,137
 (5,740) 105
Other90
 112
 (202) —
 $875
 $5,295
 $(6,065) $105


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

 
Balance
December 28,
2014
 Charges Payments 
Balance
September 27,
2015
Severance and related employee costs$2,235
 $854
 $(3,003) $86
Professional fees146
 393
 (488) 51
Other423
 292
 (523) 192
 $2,804
 $1,539
 $(4,014) $329

(6)(5) Investments

Equity Investments

Wendy’s has a 50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand. (Tim Hortons™ is a registered trademark of Tim Hortons USA Inc.) In addition, 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 of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating expense (income), net.”

Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:
Nine Months EndedThree Months Ended
October 2,
2016		 September 27,
2015		April 2,
2017		 April 3,
2016
Balance at beginning of period$55,541
 $69,790
$54,545
 $55,541
      
Investment172
 —
58
 64
      
Equity in earnings for the period8,207
 8,689
2,415
 2,449
Amortization of purchase price adjustments (a)(1,712) (1,721)(569) (550)
6,495
 6,968
1,846
 1,899
Distributions received(8,451) (9,198)(2,439) (2,689)
Foreign currency translation adjustment included in “Other comprehensive (loss) income, net”3,204
 (8,928)
Foreign currency translation adjustment included in “Other comprehensive income, net”508
 3,609
Balance at end of period$56,961
 $58,632
$54,518
 $58,424
_______________

(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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

(7)(6) 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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
October 2,
2016		 January 3,
2016		 April 2,
2017		 January 1,
2017		 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Fair Value
Measurements
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Fair Value
Measurements
Financial assets                
Cash equivalents$88,247
 $88,247
 $45,339
 $45,339
 Level 1$2,341
 $2,341
 $5,335
 $5,335
 Level 1
Non-current cost method investments (a)2,726
 301,991
 2,828
 249,870
 Level 32,436
 325,361
 2,436
 326,283
 Level 3
                
Financial liabilities                
Series 2015-1 Class A-2-I Notes (b)866,250
 866,943
 872,813
 849,106
 Level 2861,875
 862,763
 864,063
 857,349
 Level 2
Series 2015-1 Class A-2-II Notes (b)891,000
 900,088
 897,750
 879,795
 Level 2886,500
 888,096
 888,750
 880,005
 Level 2
Series 2015-1 Class A-2-III Notes (b)495,000
 491,090
 498,750
 484,648
 Level 2492,500
 479,198
 493,750
 474,543
 Level 2
7% debentures, due in 2025 (b)87,971
 101,000
 87,057
 100,500
 Level 288,585
 101,500
 88,277
 99,750
 Level 2
Guarantees of franchisee loan obligations (c)301
 301
 851
 851
 Level 3267
 267
 280
 280
 Level 3
_______________

(a)The fair value of our indirect investment in Arby’s Restaurant Group, Inc. (“Arby’s”) is 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. 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.

(c)Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for new restaurant development and equipment financing. In addition, during 2012, Wendy’s provided a guarantee to a lender for a franchisee in connection with the refinancing of the franchisee’s debt. We have accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted average risk percentage established at inception and adjusted for a history of defaults.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

The carrying amounts of cash, accounts payable and accrued expenses approximated fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximated fair value due to the effect of the related allowance for doubtful accounts. Our cash and cash equivalents and guarantees are the only financial assets and liabilities measured and recorded at fair value on a recurring basis.

Derivative Instruments

The Company’s primary objective for entering into interest rate swap agreements was to manage its exposure to changes in interest rates, as well as to maintain an appropriate mix of fixed and variable rate debt.

Our derivative instruments for the nine months ended September 27, 2015 included seven forward-starting interest rate swaps designated as cash flow hedges to change the floating rate interest payments for $350,000 and $100,000 in borrowings associated with the Term A and Term B Loans, respectively, under the Company’s prior credit agreement, to fixed rate interest payments beginning June 30, 2015 and maturing on December 31, 2017. In May 2015, the Company terminated these interest rate swaps and paid $7,275, which was recorded against the derivative liability. The unrealized loss on the cash flow hedges at termination of $7,275 is being reclassified on a straight-line basis from “Accumulated other comprehensive loss” to “Interest expense” beginning June 30, 2015 (the original effective date of the interest rate swaps) through December 31, 2017 (the original maturity date of the interest rate swaps).

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Reclassifications of unrealized losses on cash flow hedges from “Accumulated other comprehensive loss” to “Interest expense” were $723 and $2,170 for the three and nine months ended October 2, 2016, respectively, and $708 for both the three and nine months ended September 27, 2015.

There was no hedge ineffectiveness from these cash flows hedges through their termination in May 2015.April 2, 2017 and April 3, 2016.

Non-Recurring Fair Value Measurements

Assets and liabilities remeasured to fair value on a non-recurring basis during the nine months ended October 2, 2016 and the year ended January 3, 2016 resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.

Total impairment losses for the nine months ended October 2, 2016 and the year ended January 3, 2016may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements and favorable lease assets) to fair value as a result of (1) 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 and (2) declines in operating performance at company-ownedCompany-operated restaurants. The fair value of long-lived assets held and used presented in the tables below represents the remaining carrying value and was estimated based on either discounted cash flows of future anticipated lease and sublease income or current market values.

Total impairment losses for the nine months ended October 2, 2016 and the year ended January 3, 2016may also include the impact of remeasuring long-lived assets held for sale, which primarily include surplus properties. The fair valuesvalue of long-lived assets held for sale presented in the tables below representrepresents the remaining carrying value and werewas estimated based on current market values. See Note 87 for more information on impairment of our long-lived assets.

  Fair Value Measurements 
Nine Months Ended
October 2, 2016
 Total Losses
  Fair Value Measurements
October 2,
2016		 Level 1 Level 2 Level 3 April 2,
2017		 Level 1 Level 2 Level 3
Held and used$5,471
 $—
 $—
 $5,471
 $12,768
$—
 $—
 $—
 $—
Held for sale1,642
 —
 —
 1,642
 223
1,074
 —
 —
 1,074
Total$7,113
 $—
 $—
 $7,113
 $12,991
$1,074
 $—
 $—
 $1,074

  Fair Value Measurements 
2015
Total Losses
  Fair Value Measurements
January 3, 2016 Level 1 Level 2 Level 3 January 1, 2017 Level 1 Level 2 Level 3
Held and used$10,244
 $—
 $—
 $10,244
 $22,346
$5,462
 $—
 $—
 $5,462
Held for sale4,328
 —
 —
 4,328
 2,655
1,552
 —
 —
 1,552
Total$14,572
 $—
 $—
 $14,572
 $25,001
$7,014
 $—
 $—
 $7,014

Total impairment losses for the three months ended April 2, 2017 and April 3, 2016 included remeasuring long-lived assets held and used of $17 and $7,001, respectively, and remeasuring long-lived assets held for sale of $493 and $104, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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(8)(7) Impairment of Long-Lived Assets

During the three and nine months ended OctoberApril 2, 20162017, the Company recorded impairment charges on long-lived assets as a result of (1) closing Company-operated restaurants and September 27, 2015,classifying such surplus properties as held for sale and (2) the deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in previously impaired restaurants that did not subsequently recover. 

During the three months ended April 3, 2016, the Company recorded impairment charges on long-lived assets as a result of (1) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of company-ownedCompany-operated restaurants and (2) closing company-ownedCompany-operated restaurants and classifying such surplus properties as held for sale and (3) the deterioration in operating performance of certain company-owned restaurants and charges for capital improvements in restaurants impaired in prior years which did not subsequently recover. sale.

The Company may recognize additional impairment charges resulting from leasing or subleasing additional properties to franchisees in connection with sales of company-ownedCompany-operated restaurants to franchisees.

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The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets.”

Three Months Ended Nine Months EndedThree Months Ended
October 2,
2016		 September 27,
2015		 October 2,
2016		 September 27,
2015		April 2,
2017		 April 3,
2016
Restaurants leased or subleased to franchisees$163
 $1,235
 $12,654
 $9,491
$—
 $7,001
Surplus properties119
 59
 223
 1,211
493
 104
Company-owned restaurants79
 219
 114
 2,766
Company-operated restaurants17
 —
$361
 $1,513
 $12,991
 $13,468
$510
 $7,105

(9)(8) Income Taxes

The Company’s effective tax rate on income from continuing operations for the three months ended OctoberApril 2, 2017 and April 3, 2016 was 30.5% and September 27, 2015 was 37.2% and 70.5%29.5%, respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 35% due to the effect of (1) non-deductible goodwill disposedthe adoption of an amendment issued by the Financial Accounting Standards Board (“FASB”), which requires that excess tax benefits and tax deficiencies related to share-based payments be recognized in connection with our system optimization initiative describednet income, which resulted in Note 3,a benefit of $2,122 in the first quarter of 2017, (2) state income taxes net of federal benefits, including non-recurring changes to state deferred taxes, (3) the rate differential between foreign and domestic taxes, (4) changes to valuation allowances on state net operating loss carryforwards due to changes in expected future state taxable income available to utilize certain state net operating loss carryforwards and (4) employment credits.

The Company’s effective tax rate on income from continuing operations for the nine months ended October 2, 2016 and September 27, 2015 was 33.3% and 45.3%, respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 35% due to the effect of (1) changes to valuation allowances on state net operating loss carryforwards due to the expected sale of restaurants under our system optimization initiative, including(including a correction to a prior year identified and recorded in the first quarter of 2016, which resulted in a benefit of $2,878, (2) state income taxes net$2,878) and (5) the disposition of federal benefits, including non-recurring changes to state deferred taxes, (3) non-deductible goodwill disposed of in connection with our system optimization initiative, including a correction to a prior year identified and recorded in the second quarter of 2016, which resulted in a benefit of $4,235 and (4) employment credits. The Company evaluated the corrections of the prior year errors in relation to the estimated income for the full fiscal year and to the trend on earnings. The Company concluded that correcting the errors did not materially affect the estimated 2016 full year income.2016.

There were no significant changes to unrecognized tax benefits or related interest and penalties for the Company for the ninethree months ended OctoberApril 2, 2016.2017. During the next twelve months, we believe that it is reasonably possible the Company will reduce its unrecognized tax benefits by up to $393$714, primarily due to expected settlements with taxing authorities.

The Company includescurrent portion of refundable income taxes was $8,339 and $18,111 as of April 2, 2017 and January 1, 2017, respectively, and is included in “Accounts and notes receivable”receivable, net” in the accompanying condensed consolidated balance sheets.  RefundableLong-term refundable income taxes were $22,411are included in “Other assets” and $23,508amounted to $951 and $239 as of OctoberApril 2, 20162017 and January 3, 2016,1, 2017, respectively.


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(10)(9) Net Income Per Share

Basic net income per share 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 net income per share were as follows:
Three Months Ended Nine Months EndedThree Months Ended
October 2,
2016		 September 27,
2015		 October 2,
2016		 September 27,
2015		April 2,
2017		 April 3,
2016
Common stock:          
Weighted average basic shares outstanding260,976
 292,256
 265,702
 340,869
246,606
 270,214
Dilutive effect of stock options and restricted shares3,832
 4,695
 4,239
 6,032
7,633
 4,536
Weighted average diluted shares outstanding264,808
 296,951
 269,941
 346,901
254,239
 274,750

Diluted net income per share for the three and nine months ended OctoberApril 2, 20162017 and September 27, 2015April 3, 2016 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 2,233132 and 2,0723,726 for the three and nine months ended OctoberApril 2, 2016, respectively,2017 and 3,118 and 1,439 for the three and nine months ended September 27, 2015,April 3, 2016, respectively, from our diluted net income per share calculation, as they would have had anti-dilutive effects.

(11) Stockholders’ Equity

Stockholders’ Equity

The following is a summary of the changes in stockholders’ equity:
 Nine Months Ended
 October 2,
2016		 September 27,
2015
Balance at beginning of period$752,914
 $1,717,576
Comprehensive income112,896
 43,197
Cash dividends(47,793) (55,414)
Repurchases of common stock(162,492) (1,078,404)
Share-based compensation14,260
 18,784
Exercises of stock options10,600
 17,996
Vesting of restricted shares(3,853) (7,323)
Tax benefit from share-based compensation1,898
 48,897
Other145
 148
Balance at end of period$678,575
 $705,457


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(10) Stockholders’ Equity

Stockholders’ Equity

The following is a summary of the changes in stockholders’ equity:
 Three Months Ended
 April 2,
2017		 April 3,
2016
Balance at beginning of period$527,736
 $752,914
Comprehensive income24,827
 38,484
Cash dividends(17,273) (16,214)
Repurchases of common stock(17,823) (48,268)
Share-based compensation3,559
 5,081
Exercises of stock options4,418
 3,216
Vesting of restricted shares(2,518) (2,378)
Cumulative effect of change in accounting principle (a)1,880
 —
Tax benefit from share-based compensation—
 708
Other43
 46
Balance at end of period$524,849
 $733,589
_______________

(a)During the three months ended April 2, 2017, the Company recognized a tax benefit as a reduction to the Company’s deferred tax liability with an equal offsetting increase to “Accumulated deficit.” The adjustment was recognized as a result of adoption of an amendment to the accounting for employee share-based payment transactions. See Note 15 for further information.

Repurchases of Common Stock

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 warrant and to the extent legally permissible. During the three months ended April 2, 2017, the Company repurchased 1,319 shares with an aggregate purchase price of $17,803, of which $1,797 was accrued at April 2, 2017 and excluding commissions of $20. Subsequent to April 2, 2017 through May 4, 2017, the Company repurchased 803 shares with an aggregate purchase price of $11,215, excluding commissions of $12.

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 warrantwarranted and to the extent legally permissible. During the first ninethree months ofended April 3, 2016, the Company repurchased 16,0344,885 shares with an aggregate purchase price of $162,252, of which $2,998 was accrued at October 2, 2016 and$48,195, excluding commissions of $240. As of October 2, 2016, the Company had $215,904 of availability remaining under its June 2015 authorization. Subsequent to October 2, 2016 through November 3, 2016, the Company repurchased 2,108 shares with an aggregate purchase price of $22,734, excluding commissions of $32. The Company announced its intention to complete substantially all of the $1,400,000 share repurchase program by entering into an accelerated share repurchase agreement for $150,000 during the fourth quarter of 2016.

Also as part of the June 2015 authorization, the Company commenced an $850,000 share repurchase program on June 3, 2015, which included (1) a modified Dutch auction tender offer to repurchase up to $639,000 of our common stock and (2) a separate stock purchase agreement to repurchase up to $211,000 of our common stock from Nelson Peltz, Peter W. May (Messrs. Peltz and May are members of the Company’s Board of Directors) and Edward P. Garden (who served on the Company’s Board of Directors until December 14, 2015) and certain of their family members and affiliates, investment funds managed by Trian Fund Management, L.P. (an investment management firm controlled by Messrs. Peltz, May and Garden, “TFM”) and the general partner of certain of those funds (together with Messrs. Peltz, May and Garden, certain of their family members and affiliates and TFM, the “Trian Group”). On June 30, 2015, the tender offer expired and on July 8, 2015, the Company repurchased 55,808 shares at $11.45 per share for an aggregate purchase price of $639,000. On July 17, 2015, the Company repurchased 18,416 shares at $11.45 per share, pursuant to the separate stock purchase agreement, for an aggregate purchase price of $210,867. As a result, the $850,000 share repurchase program that commenced on June 3, 2015 was completed during the third quarter of 2015. During the nine months ended September 27, 2015, the Company incurred costs of $2,288 in connection with the tender offer and Trian Group stock purchase agreement, which were recorded to treasury stock.

In August 2015, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase programs. Under the ASR Agreement, the Company paid the financial institution an initial purchase price of $164,500 in cash and received an initial delivery of 14,385 shares of common stock, representing an estimate of 85% of the total shares expected to be delivered under the ASR Agreement. The total number of shares of common stock ultimately purchased by the Company under the ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the ASR Agreement, less an agreed discount. On September 25, 2015, the Company completed the ASR Agreement and received an additional 3,551 shares of common stock. During the three and nine months ended September 27, 2015, the Company incurred costs of $32 in connection with the ASR Agreement, which were recorded to treasury stock.

In August 2014, our Board of Directors authorized a repurchase program for up to $100,000 of our common stock through December 31, 2015, when and if market conditions warrant and to the extent legally permissible. As part of the August 2014 authorization, $76,111 remained available as of December 28, 2014. During the first and second quarters of 2015, the Company repurchased 5,655 shares with an aggregate purchase price of $61,631, excluding commissions of $86. During the third quarter of 2015, the Company repurchased $14,480 through the accelerated share repurchase agreement described above. As a result, the $100,000 share repurchase program authorized in August 2014 was completed.$73.


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Accumulated Other Comprehensive Loss

The following table provides a rollforward of the components of accumulated other comprehensive loss, net of tax as applicable:
 Foreign Currency Translation Cash Flow Hedges (a) Pension Total
Balance at January 3, 2016$(66,163) $(3,571) $(1,089) $(70,823)
Current-period other comprehensive income (loss)10,887
 1,332
 (56) 12,163
Balance at October 2, 2016$(55,276) $(2,239) $(1,145) $(58,660)
        
Balance at December 28, 2014$(28,363) $(2,044) $(887) $(31,294)
Current-period other comprehensive loss(29,879) (2,007) (203) (32,089)
Balance at September 27, 2015$(58,242) $(4,051) $(1,090) $(63,383)
 Foreign Currency Translation Cash Flow Hedges (a) Pension Total
Balance at January 1, 2017$(60,299) $(1,797) $(1,145) $(63,241)
Current-period other comprehensive income1,945
 445
 96
 2,486
Balance at April 2, 2017$(58,354) $(1,352) $(1,049) $(60,755)
        
Balance at January 3, 2016$(66,163) $(3,571) $(1,089) $(70,823)
Current-period other comprehensive income12,676
 445
 —
 13,121
Balance at April 3, 2016$(53,487) $(3,126) $(1,089) $(57,702)
_______________

(a)Current-period other comprehensive income (loss) includes the reclassification of unrealized losses on cash flow hedges from “Accumulated other comprehensive loss” to our condensed consolidated statements of operations of $444 and $1,332 for the three and nine months ended October 2, 2016, respectively, and $435$445 for both the three and nine months ended September 27, 2015.April 2, 2017 and April 3, 2016. The reclassification of unrealized losses on cash flow hedges consists of $723 and $2,170 for the three and nine months ended October 2, 2016, respectively, and $708 for both the three and nine months ended September 27, 2015, recorded to “Interest expense,” net of the related income tax benefit of $279 and $838 for the three and nine months ended October 2, 2016, respectively, and $273 for both the three and nine months ended September 27, 2015,$278 recorded to “Provision for income taxes.” Current-period other comprehensive loss for the nine months ended September 27, 2015 also includes the effect of changes in unrealized losses on cash flow hedges, net of tax. See Note 76 for more information.

(11) Leases

At April 2, 2017, Wendy’s and its franchisees operated 6,551 Wendy’s restaurants. Of the 331 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 149 restaurants, owned the building and held long-term land leases for 132 restaurants and held leases covering land and building for 50 restaurants. Wendy’s also owned 520 and leased 1,050 properties that were either leased or subleased principally to franchisees.

Rental expense for operating leases consists of the following components:
 Three Months Ended
 April 2, 2017 April 3, 2016
Rental expense:   
Minimum rentals$19,918
 $19,490
Contingent rentals4,288
 3,782
Total rental expense (a)$24,206
 $23,272
_______________

(a)Amounts exclude sublease income of $26,563 and $19,732 recognized during the three months ended April 2, 2017 and April 3, 2016, respectively.

Rental income for operating leases and subleases consists of the following components:
 Three Months Ended
 April 2, 2017 April 3, 2016
Rental income:   
Minimum rentals$38,605
 $25,798
Contingent rentals4,312
 4,762
Total rental income$42,917
 $30,560


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



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 April 2, 2017. Rental receipts below are presented separately for owned properties and for leased properties based on the classification of the underlying lease.
 Rental Payments Rental Receipts
Fiscal Year
Capital
Leases
 
Operating
Leases
 
Capital
Leases
 
Operating
Leases
 
Owned
Properties
2017 (a)$21,798
 $59,696
 $30,085
 $49,375
 $40,056
201829,670
 77,201
 40,650
 65,444
 53,581
201928,738
 77,734
 40,832
 65,700
 54,553
202029,238
 77,107
 41,475
 65,438
 55,148
202130,634
 76,758
 42,913
 65,398
 56,732
Thereafter491,105
 1,049,312
 678,756
 867,957
 1,002,429
Total minimum payments$631,183
 $1,417,808
 $874,711
 $1,179,312
 $1,262,499
Less interest(375,357)        
Present value of minimum capital lease payments (b)$255,826
        
_______________

(a)Represents future minimum rental payments and rental receipts for non-cancelable leases and subleases for the remainder of our 2017 fiscal year.

(b)The present value of minimum capital lease payments of $2,150 and $253,676 are included in “Current portion of long-term debt” and “Long-term debt,” respectively.

Properties owned by the Company and leased to franchisees and other third parties under operating leases include:
 April 2, 2017 January 1, 2017
Land$271,700
 $271,160
Buildings and improvements312,150
 312,067
Office, restaurant and transportation equipment1,507
 1,507
 585,357
 584,734
Accumulated depreciation and amortization(114,389) (110,166)
 $470,968
 $474,568

Our net investment in direct financing leases is as follows:
 April 2, 2017 January 1, 2017
Future minimum rental receipts$461,756
 $401,452
Unearned interest income(307,610) (277,747)
Net investment in direct financing leases154,146
 123,705
Net current investment in direct financing leases (a)(135) (101)
Net non-current investment in direct financing leases (b)$154,011
 $123,604
_______________

(a)Included in “Accounts and notes receivable, net.”

(b)Included in “Other assets.”


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(12) Transactions with Related Parties

Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K.

Transactions with QSCC

Wendy’s received $76 and $138 of lease income from its purchasing cooperative, QSCC, during the nine months ended October 2, 2016 and September 27, 2015, respectively, which has been recorded as a reduction to “General and administrative.”

TimWen Lease and Management Fee Payments

A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. Prior to the second quarter of 2015, Wendy’s operated certain of the Wendy’s/Tim Hortons combo units in Canada and subleased some of the restaurant facilities to franchisees. As a result of the Company completing its plan to sell all of its company-owned restaurants in Canada to franchisees during the second quarter of 2015, all of the restaurant facilities are subleased to franchisees. During the ninethree months ended OctoberApril 2, 20162017 and September 27, 2015,April 3, 2016, Wendy’s paid TimWen $8,926$2,819 and $9,066,$2,636, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $156$52 and $164$50 during the ninethree months ended OctoberApril 2, 20162017 and September 27, 2015,April 3, 2016, respectively, which has been included as a reduction to “General and administrative.”


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(13) Guarantees and Other Commitments and Contingencies

The Company did not have any significant changes in guarantees and other commitments and contingencies during the current fiscal period since those reported in the Form 10-K. Refer to the Form 10-K for further information regarding the Company’s additional commitments and obligations.

Franchisee Image Activation Incentive Programs

In order to promote Image Activation new restaurant development, Wendy’s has an incentive program for franchisees that provides for reductions in royalty and national advertising payments for up to the first threetwo years of operation for qualifying new restaurants opened by January 1, 2017.

December 31, 2020, with the value of the incentives declining in the later years of the program. Wendy’s also has incentive programs for 2016 for2017 available to franchisees that commence Image Activation restaurant remodels during the year.by December 15, 2017. The remodel incentive programs provide for reductions in royalty payments for one year or two years after the completion of construction, depending on the type of remodel. In 2015, Wendy’s added an additional incentive to the 2016 program described above to include waiving the franchise agreement renewal fee for certain types of remodels.

In addition, Wendy’s had incentive programs in 2015 that included reductions in royalty payments for franchisees’ participation in the Image Activation program.

Franchisee Image Activation Financing Program

Wendy’s executed an agreement in 2013 to partner with a third-party lender to establish a financing program for franchisees that participate in our Image Activation program. Under the program, the lender agreed to provide loans to franchisees to be used for the reimaging of restaurants according to the guidelines and specifications under Wendy’s Image Activation program. To support the program, Wendy’s provided to the lender a $6,000 irrevocable stand-by letter of credit, which was issued on July 1, 2013 and was cash collateralized. During the three months ended April 3, 2016, the Company entered into an agreement to reduce the letter of credit from $6,000 to $1,000 due to franchisees successfully obtaining financing independently. During the three months ended July 3, 2016, the new irrevocable letter of credit of $1,000 was issued against the Company’s $2,275,000 securitized financing facility and the $6,000 letter of credit was terminated. During the three months ended October 2, 2016, the Company executed an agreement to terminate the letter of credit agreement that had been previously executed as part of the financing program and was fully released from the $1,000 letter of credit against the securitized financing facility.construction.

Lease Guarantees

Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former company-ownedCompany-operated restaurant locations now operated by franchisees, amounting to $32,922$59,623 as of OctoberApril 2, 2016.2017. These leases extend through 2050.2056. We have not received any notice of default related to these leases as of OctoberApril 2, 2016.2017. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations.

Wendy’s is contingently liable for certain other leases which have been assigned to unrelated third parties who have indemnified Wendy’s against future liabilities amounting to $974$663 as of OctoberApril 2, 2016.2017. These leases expire on various dates through 2021.

Letters of Credit

As of OctoberApril 2, 2016,2017, the Company had outstanding letters of credit with various parties totaling $33,961,$38,007, of which $6,165 were cash collateralized. The outstanding letters of credit include amounts outstanding against the securitized financing facility. The related cash collateral is classified as “Restricted cash” in the condensed consolidated balance sheets. We do not expect any material loss to result from these letters of credit.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



(14) Legal and Environmental Matters

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. As of OctoberApril 2, 20162017, the Company had accruals for all of its legal and environmental matters aggregating $1,508.$1,396. We cannot estimate the aggregate possible range of loss due to most proceedings, including those described below, 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 is thus inherently difficult. Based on

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

currently available information, including legal defenses available to us, and given the aforementioned accruals and our insurance coverage, we do not believe that the outcome of these legal and environmental matters will have a material effect on our consolidated financial position or results of operations.

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.  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. Certain financial institutions have also filed class actions lawsuits in the U.S. District Court for the Western District of Pennsylvania (the “FI cases”), which seek to certify a nationwide class financial institutions that issued payment cards that were allegedly impacted.  In the Torres case and the FI cases, the plaintiffs seek monetary damages, injunctive and equitable relief, attorneys’ fees and other costs. The Company’s motion to dismiss the amended complaint in the Torres case was denied in part and granted in part with leave to amend; the plaintiffs then filed the operative complaint referenced above. The Company’s motion to dismiss in the FI case was denied. The Company filed its answer in the Torres case in April 2017 and expects to file its answer in the FI case during the second quarter of 2017.

Certain of the Company’s present and former directors have been named in two putative shareholder derivative complaints arising out of the credit card incidents above.  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 one 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 Company’s motion to dismiss is pending in the Graham case and the Company has yet to respond to the Caracci case.

The Torres case, the FI cases and the Graham case were previously described in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2017.

(15) New Accounting Standards

New Accounting Standards

In August 2016,March 2017, the Financial Accounting Standards Board (“FASB”)FASB issued an amendmentnew guidance on the presentation of net periodic benefit costs that provides guidance for proper classificationrequires entities to disaggregate the current service cost component from the other components of certain cash receipts and paymentsnet benefit cost in the statement of cash flows.income statement. The company does not expect the amendment, which requires retrospective adoption for all periods presented in the statement of cash flows and is effective commencing with our 2018 fiscal year. We are currently evaluating theyear, to have a material impact of the adoption of this guidance 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.

In March 2016, the FASB issued an amendment that modifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as statement of cash flows presentation. The transition requirement is mostly modified retrospective, with the exception of recognition of excess tax benefits and tax deficiencies that requires prospective adoption. The amendment is effective commencing with our 2017 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

In March 2016, the FASB issued an amendment that clarifies the steps for assessing triggering events of embedded contingent put and call options within debt instruments. The amendment requires modified retrospective adoption and is effective commencing with our 2017 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

In March 2016, the FASB issued an amendment related to equity method accounting, which eliminates the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in level of ownership interest or degree of influence. The amendment requires prospective adoption and is effective commencing with our 2017 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

In February 2016, the FASB issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months. The amendment requires the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach and is effective commencing with our 2019 fiscal year.approach.  We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements butand plan to reflect adoption when effective in the first quarter of our 2019 fiscal year. As

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



shown in Note 11, there are $1,417,808 in future minimum rental payments for operating leases that are not currently on our balance sheet; therefore, we expect this will have a material effectimpact on our balance sheet since the Company has a significant amount of operating and capital lease arrangements.related disclosures.

In May 2014, the FASB issued amended guidance for revenue recognition. Subsequently, the FASB issued an amendment to defer for one year the effective date of the new guidance on revenue recognition, as well as issued additional clarifying amendments. 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 to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The new guidance supersedes most current revenue recognition guidance, including industry-specific guidance, and is now effective commencing with our 2018 fiscal year. The guidance allows for either a full retrospective or modified retrospective transition method. We are continuing to evaluate which transition method to use. We do not believe thisThis guidance will not impact our recognition of revenue from company-ownedCompany-operated restaurant sales or our recognition of continuing royalty revenues from franchisees, which are based on a percentage of franchise sales. We are continuing to evaluateanticipate recognizing the impact the adoption of this guidance will have on our business, including the recognition of transactions

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

such as franchise development fees, initial fees from franchisees over the life of the related franchise agreements and saleswe expect to consolidate the operations and cash flow results of company-owned restaurants to franchisees, as well as the accounting for our national advertising funds.funds, both of which will have a material impact on our consolidated financial statements.

New Accounting Standards Adopted

In September 2015,March 2016, the FASB issued an amendment related to equity method accounting, which eliminates the requirement to retrospectively apply the equity method to an investment that requiressubsequently qualifies for such accounting as a result of an acquirer to recognize adjustments to provisional amounts during the measurement period,increase in the period such adjustments are identified, rather than retrospectively adjusting previously reported amounts.level of ownership interest or degree of influence. The Company adopted this amendment, prospectively, during the first quarter of 2016.2017. The adoption of this guidance did not impact our consolidated financial statements.

In April 2015,March 2016, the FASB issued an amendment that clarifies the accountingsteps for fees paid in a cloud computing arrangement. The amendment provides guidance to customers about whether a cloud computing arrangement includes a software license.assessing triggering events of embedded contingent put and call options within debt instruments. The Company adopted this amendment prospectively, during the first quarter of 2016. The adoption of this guidance did not materially impact our consolidated financial statements.

In February 2015, the FASB issued an amendment that revises the consolidation requirements and significantly changes the consolidation analysis required under current guidance. The Company adopted this amendment, prospectively, during the first quarter of 2016.2017. The adoption of this guidance did not impact our consolidated financial statements.

In June 2014,March 2016, the FASB issued an amendment to clarify that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition and therefore should not be reflected in estimating the grant-date fair valuemodifies several aspects of the award.accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as statement of cash flows presentation. The transition requirement is generally modified retrospective, with the exception of recognition of excess tax benefits and tax deficiencies that requires prospective adoption. The Company adopted this amendment during the first quarter of 2016.2017. The cash flows used in financing activities related to the excess tax benefits from share-based compensation arrangements, which amounted to $933 during the first quarter of 2016, was reclassified retrospectively to cash flows provided by operating activities. Additionally, during the first quarter of 2016, $2,601 was paid to taxing authorities for withheld shares on share-based compensation arrangement activities, which was reclassified retrospectively from cash flows provided by operating activities to cash flows used in financing activities. Upon adopting the amendment in the first quarter of 2017, the Company recognized $1,880 in unrecognized tax benefits for deductions in excess of cumulative compensation costs relating to the exercise of stock options and vesting of restricted stock. This tax benefit was recognized as a reduction to the Company’s deferred tax liability with an equal offsetting increase to “Accumulated deficit.” The Company will continue to estimate forfeitures each period.

In July 2015, the FASB issued an amendment that requires entities to measure inventory at the lower of cost and net realizable value, rather than the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. The Company adopted this amendment during the first quarter of 2017. The adoption of this guidance did not impact our consolidated financial statements.



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 3, 20161, 2017 (the “Form 10-K”). There have been no material changes as of OctoberApril 2, 20162017 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II - Other Information” preceding Item 1 of Part II of this report. You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission.

The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchises and operates company-owned Wendy’s® quick-service restaurants throughout North America (defined as the United States of America (“U.S.”) and Canada). Wendy’s also has franchised restaurants in 2829 foreign countries and U.S. territories.

Wendy’s restaurants offer an extensive menu specializing in hamburger sandwiches and featuring fillet of chicken breast sandwiches, chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited basis.

The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s restaurants in North America comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material. The results of operations discussed below may not necessarily be indicative of future results.

The Company reports on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three and nine month periodsquarters presented herein contain 13 weeks and 39 weeks, respectively.weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.

Executive Overview

Sale of the Bakery

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”) to East Balt US, LLC (the “Buyer”) for $78.5 million in cash (subject to customary purchase price adjustments). The Company recorded a pre-tax gain on the disposal of the Bakery of $27.5 million during the first nine months of 2015, which included transaction closing costs and a reduction of goodwill. The Company recognized income tax expense associated with the gain on disposal of $12.7 million during the first nine months of 2015, which included the impact of the disposal of non-deductible goodwill. In conjunction with the Bakery sale, Wendy’s entered into a transition services agreement with the Buyer, pursuant to which Wendy’s provided certain continuing corporate and shared services to the Buyer through March 31, 2016 for no additional consideration. As a result of the sale of the Bakery, the Bakery’s results of operations for the period from December 29, 2014 through May 31, 2015 and the gain on disposal have been included in “Net income from discontinued operations” in our condensed consolidated statements of operations.

Our Continuing Business

As of OctoberApril 2, 2016,2017, the Wendy’s restaurant system was comprised of 6,5036,551 restaurants, of which 427331 were owned and operated by the Company. All of our company-ownedCompany-operated restaurants are located in the U.S. as a result of the Company completing its initiative during the second quarter of 2015 to sell all company-owned restaurants in Canada to franchisees.

Wendy’s operating results are impacted by a number of external factors, including unemployment, general economic trends, intense price competition, commodity costs, labor costs and weather.

Wendy’s long-term growth opportunities will be driven by a combination of brand relevance and economic relevance. Key components of growth include (1) North America systemwide same-restaurant sales growth through continuing core menu improvement, product innovation and customer count growth, (2) investing in our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants and focused execution of operational excellence, (3) growth in new restaurants, including global growth, (4) increased restaurant utilization in various dayparts and brand access utilizing mobile technology, (5) building shareholder value through financial management strategies and (6) our system optimization initiative.

Wendy’s revenues for the first nine monthsquarter of 20162017 include (1) $747.2$148.2 million of sales at company-ownedCompany-operated restaurants, and (2) $255.0 million of royalty revenue, $102.4 million of rental income and $20.9$94.7 million of franchise royalty revenue and fees from franchisees.and (3) $42.9 million of franchise rental income. Substantially all of our Wendy’s royalty agreements provide for royalties of 4.0% of franchisees’ revenues.


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 - Beginning with the first quarter of 2016, the Company revised its reporting methodology forWe report same-restaurant sales to simplify the reporting of its same-restaurant sales performance for reimaged restaurants and to better align with restaurant-industry practice. Under the new methodology, the Company includes restaurants in its comparable sales base as soon as reimaged restaurants reopen (the “New Method”). Reimaged restaurants previously entered the comparable sales basecommencing after they had been open for three continuous months (the “Old Method”). There was no change in the reporting methodology for new restaurants which will continue to be excluded from same-restaurant sales until they have been open for 15 continuous months. The tables summarizing the results of operations below provide the same-restaurant sales percent change using the New Method,months and as wellsoon as the Old Method. The New Methodreimaged restaurants reopen. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes. Same-restaurant sales exclude the impact of currency translation.

Restaurant Margin - We define restaurant margin as sales from company-ownedCompany-operated restaurants less cost of sales divided by sales from company-ownedCompany-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 restaurant openings, remodels and closures, price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, the level of our fixed and semi-variable costs and fluctuations in food and labor costs.

Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company believes systemwide sales data is useful in assessing consumer demand for the Company’s products, the overall success of the Wendy’s brand and, ultimately, the performance of the Company. The Company’s royalty revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty revenues and therefore on the Company’s profitability.
The Company reviews systemwide sales for its North America and international franchised restaurants 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.

System Optimization Initiative

In July 2013, the Company announced a system optimization initiative, as part of its brand transformation, which includes a shift from company-ownedCompany-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers. In February 2015, the Company announced plans to sell approximately 540 additional restaurants to franchisees and reduce its ongoing company-ownedCompany-operated restaurant ownership to approximately 5% of the total system, by the end of 2016. During 2015, 2014 and 2013,which the Company completed the saleas of 327, 255January 1, 2017. Wendy’s will continue to optimize its system by facilitating franchisee-to-franchisee restaurant transfers, as well as evaluating strategic acquisitions of franchised restaurants and 244 company-ownedstrategic dispositions of Company-operated restaurants to existing and new franchisees, respectively, which includedto further strengthen the sale of all its company-owned restaurants in Canada.franchisee base, drive new restaurant development and accelerate Image Activation adoption.

During the first nine monthsquarter of 2016 and 2015,2017, the Company recorded post-closing adjustments on sales of restaurants and completed the sale of 211 and 109 company-owned restaurants to franchisees, respectively. The Company recognizedother assets, resulting in net gains totaling $48.1 million$1.4 million. Gains and $14.8 millionlosses recognized on the sale of company-owned restaurants and other assets during the first nine months of 2016 and 2015, respectively, which weredispositions are recorded to “System optimization (gains) losses,gains, net” in our condensed consolidated statements of operations. In addition, the Company facilitated the transfer of 144116 restaurants between franchisees during the first nine monthsquarter of 2016. The Company expects to complete its plan to reduce company-owned restaurant ownership to approximately 5% of the total system with the sale of 98 restaurants during the remainder of 2016, all of which were classified as held for sale as of October 2, 2016.2017.

Costs related to our system optimization initiative arewere historically recorded to “Reorganization and realignment costs.” Costs incurred during 2017 in connection with an in-process transaction as of January 1, 2017 will continue to be recorded to “Reorganization and realignment costs.” All other costs incurred during 2017 related to facilitating franchisee-to-franchisee restaurant transfers will be recorded to “Other operating expense (income), net.” During the first nine monthsquarter of 2016 and 2015,2017, the Company recognized reorganization and realignment costs totaling $6.9$0.2 million, and $6.6 million, respectively, which primarily included professional fees in 2016 and accelerated amortization of previously acquired franchise rights in both 2016 and 2015.fees. The Company expects to incur additional reorganization and realignment costs, primarily comprised of professional fees, of approximately $3.7$1.3 million during the remainder of 2016 in connection with its system optimization initiative, which are primarily comprised of professional fees.2017.


General and Administrative (“(“G&A”&A”) Realignment

In November 2014, the Company initiated a plan to reduce its general and administrative 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.  Costs related to G&A realignment are recorded to “Reorganization and realignment costs.” The Company recognized costs totaling $1.0 million and $10.0$0.6 million during the first nine monthsquarter of 20162016. The Company did not incur any expenses during the first quarter of 2017 and 2015, respectively,does not expect to incur additional costs related to the plan.

As previously announced in February 2017, the Company expects to reduce G&A expense to approximately 1.5 percent of global systemwide sales by 2020. On May 10, 2017, the Company announced that approximately three-quarters of the total G&A expense reduction of approximately $35.0 million is expected to be realized by the end of 2018, with the remainder of the savings being realized in 2019. The Company expects to incur total costs aggregating approximately $28.0 million to $33.0 million, of which primarily included recruitment$23.0 million to $27.0 million will be cash expenditures, related to such savings. The cash expenditures are expected to begin in the second half of 2017 and relocationcontinue into 2019, with approximately half of the total cash expenditures occurring in 2018. The total costs in 2016 and share-based compensation andexpected to be incurred are comprised of (1) severance and related employee costs in 2015. The Company expectsof approximately $17.0 million to incur additional$19.0 million, (2) share-based compensation costs aggregatingof approximately $0.4$5.0 million during the remainder of 2016, comprised primarily ofto $6.0 million, (3) recruitment and relocation costs forof approximately $4.0 million to $5.0 million and (4) third-party and other costs of approximately $2.0 million to $3.0 million. The Company expects the reinvestmentcosts to be recognized beginning in resourcesthe second quarter of 2017 and continue into 2019, with approximately two-thirds to drive long-term growth.be recognized during 2017.

Related Party Transactions

TimWen Lease and Management Fees

A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. Prior to the second quarter of 2015, Wendy’s operated certain of the Wendy’s/Tim Hortons combo units in Canada and subleased some of the restaurant facilities to franchisees. As a result of the Company completing its plan to sell all of its company-owned restaurants in Canada to franchisees during the second quarter of 2015, all of the restaurant facilities are subleased to franchisees. During the first nine monthsquarter of 20162017 and 2015,2016, Wendy’s paid TimWen $8.9$2.8 million and $9.1$2.6 million, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $0.2$0.1 million during both the first nine monthsquarter of 20162017 and 2015,2016, which has been included as a reduction to “General and administrative.”

Franchisee Incentive Programs

Franchisee Image Activation Financing Program

Wendy’s executed an agreement in 2013 to partner with a third-party lender to establish a financing program for franchisees that participate in our Image Activation program. Under the program, the lender agreed to provide loans to franchisees to be used for the reimaging of restaurants according to the guidelines and specifications under Wendy’s Image Activation program. To support the program, Wendy’s provided to the lender a $6.0 million irrevocable stand-by letter of credit, which was issued on July 1, 2013 and was cash collateralized. During the first quarter of 2016, the Company entered into an agreement to reduce the letter of credit from $6.0 million to $1.0 million due to franchisees successfully obtaining financing independently. During the second quarter of 2016, the new irrevocable letter of credit of $1.0 million was issued against the Company’s $2,275.0 million securitized financing facility and the $6.0 million letter of credit was terminated. During the third quarter of 2016, the Company executed an agreement to terminate the letter of credit agreement that had been previously executed as part of the financing program and was fully released from the $1.0 million letter of credit against the securitized financing facility.

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. See “Item 1 - Legal Proceedings” and “Item 1A - Risk Factors” in “Part II - Other Information”Financial Statements,” Note 14 to the Condensed Consolidated Financial Statements for further information.




Results of Operations

The tables included throughout Results of Operations set forth in millions the Company’s consolidated results of operations for the thirdfirst quarter of 20162017 and 2015. As a result of the sale of the Bakery discussed above in “Executive Overview - Sale of the Bakery,” the Company recorded post-closing adjustments on the disposal of the Bakery during the third quarter of 2015, which have been included in “Net loss from discontinued operations” in the table below.2016.
Three Months Ended
October 2,
2016		 September 27,
2015		 ChangeFirst
Quarter
2017		 First
Quarter
2016		 Change
Revenues:          
Sales$228.6
 $359.0
 $(130.4)$148.2
 $259.3
 $(111.1)
Franchise revenues135.4
 105.6
 29.8
Franchise royalty revenues and fees94.7
 88.9
 5.8
Franchise rental income42.9
 30.6
 12.3
364.0
 464.6
 (100.6)285.8
 378.8
 (93.0)
Costs and expenses:     
     
Cost of sales186.5
 291.5
 (105.0)123.4
 214.7
 (91.3)
Franchise rental expense18.9
 14.7
 4.2
General and administrative58.9
 63.7
 (4.8)52.4
 64.7
 (12.3)
Depreciation and amortization29.4
 36.4
 (7.0)29.2
 32.3
 (3.1)
System optimization (gains) losses, net(37.8) 0.1
 (37.9)
System optimization gains, net(1.4) (8.4) 7.0
Reorganization and realignment costs2.1
 5.8
 (3.7)0.2
 3.3
 (3.1)
Impairment of long-lived assets0.4
 1.5
 (1.1)0.5
 7.1
 (6.6)
Other operating expense, net18.4
 9.7
 8.7
Other operating expense (income), net1.9
 (13.4) 15.3
257.9
 408.7
 (150.8)225.1
 315.0
 (89.9)
Operating profit106.1
 55.9
 50.2
60.7
 63.8
 (3.1)
Interest expense(28.7) (27.9) (0.8)(29.0) (28.1) (0.9)
Other income, net0.5
 0.2
 0.3
0.4
 0.3
 0.1
Income from continuing operations before income taxes77.9
 28.2
 49.7
Income before income taxes32.1
 36.0
 (3.9)
Provision for income taxes(29.0) (19.9) (9.1)(9.8) (10.6) 0.8
Income from continuing operations48.9
 8.3
 40.6
Discontinued operations:     
Loss from discontinued operations, net of income taxes—
 (0.4) 0.4
Loss on disposal of discontinued operations, net of income taxes—
 (0.3) 0.3
Net loss from discontinued operations—
 (0.7) 0.7
Net income$48.9
 $7.6
 $41.3
$22.3
 $25.4
 $(3.1)

Third
Quarter
2016		 Third
Quarter
2015		 First
Quarter
2017		 
% of
Total Revenues
 First
Quarter
2016		 
% of
Total Revenues
Revenues:              
Sales$228.6
   $359.0
  $148.2
 51.9% $259.3
 68.5%
Franchise revenues:    
Franchise royalty revenue and fees:       
Royalty revenue87.9
 80.9
 87.1
 30.5% 80.8
 21.3%
Rental income37.4
 22.5
 
Franchise fees10.1
 2.2
 7.6
 2.6% 8.1
 2.1%
Total franchise revenues135.4
 105.6
 
Total franchise royalty revenue and fees94.7
 33.1% 88.9
 23.4%
Franchise rental income42.9
 15.0% 30.6
 8.1%
Total revenues$364.0
 $464.6
 $285.8
 100.0% $378.8
 100.0%
           
Third
Quarter
2016		 % of 
Sales		 Third
Quarter
2015		 % of 
Sales		First
Quarter
2017		 % of 
Sales		 First
Quarter
2016		 % of 
Sales
Cost of sales:           
Food and paper$69.3
 30.3% $113.3
 31.5%$45.0
 30.4% $79.2
 30.5%
Restaurant labor64.8
 28.4% 99.0
 27.6%44.3
 29.9% 76.0
 29.3%
Occupancy, advertising and other operating costs52.4
 22.9% 79.2
 22.1%34.1
 23.0% 59.5
 23.0%
Total cost of sales$186.5
 81.6% $291.5
 81.2%$123.4
 83.3% $214.7
 82.8%

 Third
Quarter
2016		 
% of
Sales
 Third
Quarter
2015		 
% of
Sales
Restaurant margin$42.1
 18.4% $67.5
 18.8%
 First
Quarter
2017		 
% of
Sales
 First
Quarter
2016		 
% of
Sales
Restaurant margin$24.8
 16.7% $44.6
 17.2%

New Method Old MethodFirst
Quarter
2017		 First
Quarter
2016
Third
Quarter
2016		 Third
Quarter
2015		 Third
Quarter
2016		 Third
Quarter
2015
Same-restaurant sales:       
Key business measures:   
North America same-restaurant sales:          
Company-owned2.7% 2.0% 2.4% 1.7%
Company-operated0.8% 4.8%
Franchised1.2% 3.4% 1.2% 3.3%1.7% 3.5%
Systemwide1.4% 3.2% 1.3% 3.1%1.6% 3.6%
          
Total same-restaurant sales:          
Company-owned2.7% 2.0% 2.4% 1.7%
Company-operated0.8% 4.8%
Franchised (a)1.3% 3.1% 1.2% 3.1%1.8% 3.2%
Systemwide (a)1.4% 3.0% 1.3% 2.9%1.8% 3.4%
________________

(a) Includes international franchised same-restaurant sales (excluding Venezuela due to the impact of Venezuela’s highly inflationary economy).

 First
Quarter
2017		 First
Quarter
2016
Key business measures (continued):   
Systemwide sales: (a)   
Company-operated$148.2
 $259.3
North America franchised2,189.2
 2,016.3
International franchised (b)112.5
 99.3
Global systemwide sales$2,449.9
 $2,374.9
________________

(a)During the first quarter of 2017 and 2016, North America systemwide sales increased 2.5% and 5.4%, respectively, international franchised sales increased 14.1% and 1.0%, respectively, and global systemwide sales increased 3.0% and 5.2%, respectively, on a constant currency basis.
(b)Excludes Venezuela due to the impact of Venezuela's highly inflationary economy.

Company-owned Franchised SystemwideCompany-operated Franchised Systemwide
Restaurant count:          
Restaurant count at July 3, 2016582
 5,908
 6,490
Restaurant count at January 1, 2017330
 6,207
 6,537
Opened3
 30
 33
1
 32
 33
Closed(2) (18) (20)—
 (19) (19)
Net (sold to) purchased by franchisees(156) 156
 —
Restaurant count at October 2, 2016427
 6,076
 6,503
Restaurant count at April 2, 2017331
 6,220
 6,551

SalesChangeChange
Sales$(130.4)$(111.1)

The decrease in sales during the thirdfirst quarter of 20162017 was primarily due to the impact of Wendy’s company-ownedCompany-operated restaurants sold under our system optimization initiative, which resulted in a reduction in sales of $139.5$114.9 million. Company-owned same-restaurantThis decrease in sales during the third quarter of 2016 increased primarily due to an increase in customer count,was partially offset by a slight decrease in our average per customer check amount, primarily resulting from changes in product mix. Sales also benefited from higher sales growth at our new and remodeled Image Activation restaurants.restaurants and an increase in Company-operated same-restaurant sales. Company-operated same-restaurant sales benefited from 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 benefits from changes in product mix.

Franchise RevenuesChange
Franchise Royalty Revenue and FeesChange
Royalty revenue$7.0
$6.3
Rental income14.9
Franchise fees7.9
(0.5)
$29.8
$5.8

The increase in franchise revenues during the third quarter of 2016 was primarily due to increases in rental income, royalty revenue and initial franchise fees during the first quarter of 2017 was due to increased royalty revenue resulting primarily from sales of company-ownedCompany-operated restaurants to franchisees and facilitating franchisee-to-franchisee restaurant transfers under our system optimization initiative. Royalty revenue also benefited from a 1.3%1.8% increase in franchise same-restaurant sales.

Franchise Rental IncomeChange
Franchise rental income$12.3

The increase in franchise rental income during the first quarter of 2017 was primarily due to leasing and/or subleasing properties to franchisees in connection with the sale of Company-operated restaurants and facilitating franchisee-to-franchisee restaurant transfers.


Cost of Sales, as a Percent of SalesChange
Food and paper(1.20.1)%
Restaurant labor0.80.6 %
Occupancy, advertising and other operating costs0.8— %
 0.40.5 %

The increase in cost of sales, as a percent of sales, during the thirdfirst quarter of 20162017 was primarily due to (1) the negative impact of changes in product mix, (2) higher medical insurance costs and (3) increased restaurant labor rates at company-owned restaurants. These increasesrates. This increase in cost of sales, as a percent of sales, werewas partially offset by a decrease in commodity costs, reflecting lower beef prices. Cost of sales, as a percent of sales, also benefited from the increase in same-restaurant sales and higher sales at our new and remodeled Image Activation restaurants.


General and AdministrativeChange
Employee compensation and related expenses$(2.7)
Share-based compensation(1.5)
Incentive compensation(1.0)
Professional services2.1
Other, net(1.7)
 $(4.8)
Franchise Rental ExpenseChange
Franchise rental expense$4.2

The increase in franchise rental expense during the first quarter of 2017 was primarily due to subleasing properties to franchisees that were previously Company-operated restaurants and as such, had been previously recorded in cost of sales. Rental expense also increased as a result of entering into new leases in connection with facilitating franchisee-to-franchisee restaurant transfers for purposes of subleasing such properties to the franchisee.

General and AdministrativeChange
Professional services$(5.0)
Employee compensation and related expenses(2.5)
Incentive compensation(2.0)
Share-based compensation(1.5)
Legal reserves(1.2)
Other, net(0.1)
 $(12.3)

The decrease in general and administrative expenses during the thirdfirst quarter of 20162017 was primarily due to decreases in (1) professional services due to legal and other costs associated with the cybersecurity incident recognized during the first quarter of 2016 (see “Item 1 - Financial Statements,” Note 14 to the Condensed Consolidated Financial Statements for further information), (2) employee compensation and related expenses primarily as a result of changes in staffing driven by our ongoing system optimization initiative, (2) share-based compensation primarily as a result of awards granted and timing of expense recognition and (3) incentive compensation accruals due to a decrease in operating performance as compared to plan in 2017 versus 2016, versus 2015. These decreases in general(4) share-based compensation primarily as a result of awards granted and administrative expenses were partially offset by an increase in professional services due totiming of expense recognition and (5) legal and other costs associated with the cybersecurity incident (see “Item 1 - Legal Proceedings” and “Item 1A - Risk Factors” in “Part II - Other Information” for further information).reserves.

Depreciation and AmortizationChangeChange
Restaurants$(7.2)$(4.0)
Corporate and other0.2
0.9
$(7.0)$(3.1)

The decrease in restaurant depreciation and amortization during the thirdfirst quarter of 20162017 was primarily due to decreases(1) a decrease in depreciation on assets sold or classified as held for sale under our system optimization initiative of $6.5$2.5 million and (2) a decrease in accelerated depreciation on existing assets that are being replaced as part of our Image Activation program of $1.4 million.


System Optimization (Gains) Losses, NetThird Quarter
 2016 2015
System optimization (gains) losses, net$(37.8) $0.1
System Optimization Gains, NetFirst Quarter
 2017 2016
System optimization gains, net$(1.4) $(8.4)

The increasedecrease in system optimization (gains) losses,gains, net during the thirdfirst quarter of 20162017 was primarily due to increasedthe sale of 55 Company-operated restaurants in the first quarter of 2016. No restaurants were sold during the first quarter of 2017. System optimization gains, net during the first quarter of 2017 included post-closing adjustments on sales of company-owned restaurants to franchisees. The Company sold 156 restaurants during the third quarterand gains on sales of 2016 compared to nine restaurants in 2015.other assets.

Reorganization and Realignment CostsThird QuarterFirst Quarter
2016 20152017 2016
System optimization initiative$0.2
 $2.7
G&A realignment$—
 $1.5
—
 0.6
System optimization initiative2.1
 4.3
$2.1
 $5.8
$0.2
 $3.3

During the thirdfirst quarter of 2015,2017 and 2016, the Company recognized costs associated with its system optimization initiative totaling $0.2 million and $2.7 million, respectively. In the first quarter of 2017, costs primarily included professional fees. In the first quarter of 2016, costs primarily included professional fees of $1.7 million and accelerated amortization of previously acquired franchise rights of $0.9 million.

In November 2014, the Company initiated the realignment of its U.S. field operations and Restaurant Support Center in Dublin, Ohio to reduce its general and administrative expenses. During the first quarter of 2016, the Company recognized costs associated with its G&A realignment plan totaling $1.5$0.6 million, which primarily included share-based compensation expense of $0.7 millionrecruitment and severance and related employeerelocation costs. No additional costs of $0.5 million.

Duringare expected to be incurred under the third quarter of 2016 and 2015, the Company recognized costs associated with its system optimization initiative totaling $2.1 million and $4.3 million, respectively, which primarily included professional fees in 2016 and accelerated amortization of previously acquired franchise rights in 2015.

plan.

Impairment of Long-Lived AssetsChangeChange
Impairment of long-lived assets$(1.1)$(6.6)

Impairment of long-lived assets decreased during the thirdfirst quarter of 20162017 primarily due to lower impairment charges resulting 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-ownedCompany-operated restaurants.

Other Operating Expense, NetThird Quarter
Other Operating Expense (Income), NetFirst Quarter
2016 20152017 2016
Lease expense$17.5
 $12.4
Lease buyout$—
 $(11.6)
Equity in earnings in joint ventures, net(2.2) (2.4)(1.8) (1.9)
Other, net3.1
 (0.3)3.7
 0.1
$18.4
 $9.7
$1.9
 $(13.4)

The increasechange in other operating expense (income), net during the thirdfirst quarter of 20162017 was primarily due to an increase ina gain recognized on a lease expense resulting from (1) subleasing propertiesbuyout during the first quarter of 2016. In addition, the first quarter of 2017 includes costs incurred to provide information technology, customer care and help desk support services to our franchisees, that were previously operated as company-owned restaurants andwell as such, had been previously recorded in cost of sales and (2) entering into new leases in connection withcosts related to facilitating franchisee-to-franchisee restaurant transfers for purposes of subleasing such properties to the franchisee.transfers.

Interest ExpenseChangeChange
Interest expense$0.8
$0.9

Interest expense increased during the thirdfirst quarter of 20162017 primarily due to an increase in capital lease obligations resulting from facilitating franchisee-to-franchisee restaurant transfers and subleasing such properties to the franchisee.


Provision for Income TaxesChange
Federal and state provision on variance in income from continuing operations before income taxes$18.4
System optimization initiative(8.4)
State income taxes, net of federal benefits(0.8)
Other, net(0.1)
 $9.1
Provision for Income TaxesFirst Quarter
 2017 2016
Income before income taxes$32.1
 $36.0
Provision for income taxes9.8
 10.6
Effective tax rate on income30.5% 29.5%

Our income taxes duringeffective tax rates in the thirdfirst quarter of 20162017 and 20152016 were impacted by (1) variations in income from continuing operations before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year include the following: (1) the adoption of an amendment issued by the Financial Accounting Standards Board (“FASB”), which requires that excess tax benefits and tax deficiencies related to share-based payments be recognized in net income, which resulted in a benefit of $2.1 million in the first quarter of 2017 (see “Item 1 - Financial Statements,” Note 15 to the Condensed Consolidated Financial Statements for further information), (2) the disposal of non-deductible goodwillrate differential between foreign and changes to state deferreddomestic taxes, in connection with our system optimization initiative and (3) changes to valuation allowances on state net operating loss carryforwards.

Net Income from Discontinued Operations
Third
 Quarter
 2015
Loss from discontinued operations before income taxes$(0.2)
Provision for income taxes(0.2)
Loss from discontinued operations, net of income taxes(0.4)
Gain on disposal of discontinued operations before income taxes0.2
Provision for income taxes on gain on disposal(0.5)
Loss on disposal of discontinued operations, net of income taxes(0.3)
Net loss from discontinued operations$(0.7)

As discussed above in “Executive Overview - Sale of the Bakery,” Wendy’s completed the sale of the Bakery on May 31, 2015. During the third quarter of 2015, the Company recorded post-closing adjustments on the disposal of the Bakery.

Results of Operations

The following tables included throughout Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the nine months ended October 2, 2016 and September 27, 2015. As a result of the sale of the Bakery discussed above in “Executive Overview - Sale of the Bakery,” the Bakery’s results of operations for the period from December 29, 2014 through May 31, 2015 have been included in “Income from discontinued operations, net of income taxes” in the table below.
 Nine Months Ended
 October 2,
2016		 September 27,
2015		 Change
Revenues:     
Sales$747.2
 $1,101.6
 $(354.4)
Franchise revenues378.3
 304.3
 74.0
 1,125.5
 1,405.9
 (280.4)
Costs and expenses:     
Cost of sales603.8
 911.8
 (308.0)
General and administrative184.7
 184.1
 0.6
Depreciation and amortization92.4
 111.3
 (18.9)
System optimization gains, net(48.1) (14.8) (33.3)
Reorganization and realignment costs7.9
 16.6
 (8.7)
Impairment of long-lived assets13.0
 13.5
 (0.5)
Other operating expense, net36.2
 25.2
 11.0
 889.9
 1,247.7
 (357.8)
Operating profit235.6
 158.2
 77.4
Interest expense(85.5) (57.9) (27.6)
Loss on early extinguishment of debt—
 (7.3) 7.3
Other income, net1.0
 0.7
 0.3
Income from continuing operations before income taxes151.1
 93.7
 57.4
Provision for income taxes(50.4) (42.4) (8.0)
Income from continuing operations100.7
 51.3
 49.4
Discontinued operations:     
Income from discontinued operations, net of income taxes—
 9.2
 (9.2)
Gain on disposal of discontinued operations, net of income taxes—
 14.8
 (14.8)
Net income from discontinued operations—
 24.0
 (24.0)
Net income$100.7
 $75.3
 $25.4


 Nine Months 2016   Nine Months 2015  
Revenues:       
Sales$747.2
   $1,101.6
  
Franchise revenues:       
Royalty revenue255.0
   235.3
  
Rental income102.4
   60.5
  
Franchise fees20.9
   8.5
  
Total franchise revenues378.3
   304.3
  
Total revenues$1,125.5
   $1,405.9
  
        
        
 Nine Months 2016 % of 
Sales		 Nine Months 2015 % of 
Sales
Cost of sales:       
Food and paper$226.9
 30.4% $351.3
 31.9%
Restaurant labor211.7
 28.3% 311.3
 28.3%
Occupancy, advertising and other operating costs165.2
 22.1% 249.2
 22.6%
Total cost of sales$603.8
 80.8% $911.8
 82.8%

 Nine Months 2016 
% of
 Sales
 Nine Months 2015 
% of
 Sales
Restaurant margin$143.4
 19.2% $189.8
 17.2%

 New Method Old Method
 Nine Months 2016 Nine Months 2015 Nine Months 2016 Nine Months 2015
Same-restaurant sales:       
North America same-restaurant sales:       
Company-owned2.9% 2.4% 2.7% 2.2%
Franchised1.7% 3.0% 1.6% 2.9%
Systemwide1.8% 3.0% 1.7% 2.8%
        
Total same-restaurant sales:       
Company-owned2.9% 2.4% 2.7% 2.2%
Franchised (a)1.6% 2.9% 1.5% 2.8%
Systemwide (a)1.7% 2.8% 1.6% 2.7%
________________

(a) Includes international franchised same-restaurant sales (excluding Venezuela due to the impact of Venezuela’s highly inflationary economy).

 Company-owned Franchised Systemwide
Restaurant count:     
Restaurant count at January 3, 2016632
 5,847
 6,479
Opened9
 73
 82
Closed(5) (53) (58)
Net (sold to) purchased by franchisees(209) 209
 —
Restaurant count at October 2, 2016427
 6,076
 6,503

SalesChange
Sales$(354.4)

The decrease in sales during the first nine months of 2016 was primarily due to the impact of Wendy’s company-owned restaurants sold under our system optimization initiative, which resulted in a reduction in sales of $397.5 million. Company-owned same-restaurant sales during the first nine months of 2016 increased primarily due to an increase in customer count, partially offset by a slight decrease in our average per customer check amount, primarily resulting from changes in product mix. Sales also benefited from higher sales growth at our new and remodeled Image Activation restaurants.

Franchise RevenuesChange
Royalty revenue$19.7
Rental income41.9
Franchise fees12.4
 $74.0

The increase in franchise revenues during the first nine months of 2016 was primarily due to increases in rental income, royalty revenue and initial franchise fees resulting from sales of company-owned restaurants to franchisees and facilitating franchisee-to-franchisee restaurant transfers under our system optimization initiative. Royalty revenue also benefited from a 1.6% increase in franchise same-restaurant sales.

Cost of Sales, as a Percent of SalesChange
Food and paper(1.5)%
Restaurant labor— %
Occupancy, advertising and other operating costs(0.5)%
(2.0)%

The improvement in cost of sales, as a percent of sales, during the first nine months of 2016 was primarily due to a decrease in commodity costs, reflecting lower beef prices. In addition, the increase in same-restaurant sales and higher sales at our new and remodeled Image Activation restaurants contributed to the improvement in cost of sales, as a percent of sales. These decreases in cost of sales, as a percent of sales, were partially offset by the negative impact of changes in product mix.

General and AdministrativeChange
Legal reserves$2.9
Professional services2.6
Severance2.6
Employee compensation and related expenses(5.7)
Other(1.8)
 $0.6

The increase in general and administrative expenses during the first nine months of 2016 was primarily due to increases in (1) legal reserves, (2) professional services due to legal and other costs associated with the cybersecurity incident (see “Item 1 - Legal Proceedings” and “Item 1A - Risk Factors” in “Part II - Other Information” for further information) and (3) severance expense. These increases in general and administrative expenses were partially offset by a decrease in employee compensation and related expenses primarily as a result of changes in staffing driven by our ongoing system optimization initiative.


Depreciation and AmortizationChange
Restaurants$(19.0)
Corporate and other0.1
 $(18.9)

The decrease in restaurant depreciation and amortization during the nine months of 2016 was primarily due to decreases in (1) depreciation on assets sold or classified as held for sale under our system optimization initiative of $16.6 million and (2) accelerated depreciation on existing assets that are being replaced as part of our Image Activation program of $3.6 million.

System Optimization Gains, NetNine Months
 2016 2015
System optimization gains, net$(48.1) $(14.8)

The increase in system optimization gains, net during the first nine months of 2016 was primarily due to increased sales of company-owned restaurants to franchisees. The Company sold 211 restaurants during the first nine months of 2016 compared to 109 restaurants in 2015.

Reorganization and Realignment CostsNine Months
 2016 2015
G&A realignment$1.0
 $10.0
System optimization initiative6.9
 6.6
 $7.9
 $16.6

During the first nine months of 2016 and 2015, the Company recognized costs associated with its G&A realignment plan totaling $1.0 million and $10.0 million, respectively. During the first nine months of 2016, costs primarily included recruitment and relocation costs. During the first nine months of 2015, costs primarily included (1) share-based compensation expense of $5.6 million, (2) severance and related employee costs of $3.1 million and (3) recruitment and relocation costs of $1.3 million.

During the first nine months of 2016 and 2015, the Company recognized costs associated with its system optimization initiative totaling $6.9 million and $6.6 million, respectively. During the first nine months of 2016, costs primarily included (1) professional fees of $5.1 million and (2) accelerated amortization of previously acquired franchise rights of $1.6 million. During the first nine months of 2015, costs primarily included accelerated amortization of previously acquired franchise rights.

Impairment of Long-Lived AssetsChange
Impairment of long-lived assets$(0.5)

Impairment of long-lived assets decreased during the first nine months of 2016 due to lower impairment charges resulting from (1) the deterioration in operating performance of certain company-owned restaurants and charges for capital improvements in restaurants impaired in prior years which did not subsequently recover and (2) closing company-owned restaurants and classifying such properties as held for sale. These decreases were partially offset by higher impairment charges resulting 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-owned restaurants.




Other Operating Expense, NetNine Months
 2016 2015
Lease expense$49.7
 $33.7
Lease buyout(11.6) (2.0)
Equity in earnings in joint ventures, net(6.5) (7.0)
Other4.6
 0.5
 $36.2
 $25.2

The increase in other operating expense, net during the first nine months of 2016 was primarily due to an increase in lease expense resulting from (1) subleasing properties to franchisees that were previously operated as company-owned restaurants and as such, had been recorded to cost of sales and (2) entering into new leases in connection with facilitating franchisee-to-franchisee restaurant transfers for purposes of subleasing such properties to the franchisee. The increase in expense was partially offset by a gain recognized on a lease buyout during the first quarter of 2016.

Interest ExpenseChange
Interest expense$27.6

The increase in interest expense during the first nine months of 2016 was primarily a result of the Company completing a $2,275.0 million securitized financing facility on June 1, 2015. The principal amounts outstanding under the securitized financing facility significantly exceed the amounts that were outstanding under the Company’s prior credit agreement. In addition, the notes under the securitized financing facility bear fixed-rate interest at rates higher than our historical effective interest rates on our variable interest rate loans under the prior credit agreement.

Loss on Early Extinguishment of Debt

During the second quarter of 2015, the Company incurred a loss on the early extinguishment of debt as a result of repaying all amounts outstanding under the Company’s prior credit agreement with the proceeds from its securitized financing facility. The loss on the early extinguishment of debt was primarily comprised of the write-off of deferred costs associated with the prior credit agreement of $7.2 million and fees paid to terminate the related interest rate swaps of $0.1 million.

Provision for Income TaxesChange
Federal and state expense on variance in income from continuing operations before income taxes$22.1
Prior year tax matters, including changes to unrecognized tax benefits1.4
System optimization initiative(8.5)
State income taxes, net of federal benefits(7.2)
Other, net0.2
 $8.0

Our income taxes during the first nine months of 2016 and 2015 were impacted by (1) variations in income from continuing operations before income taxes, adjusted for recurring items, (2) adjustments related to prior year tax matters, including changes to unrecognized tax benefits, (3) the disposal of non-deductible goodwill and changes to state deferred taxes in connection with our system optimization initiative, including a correction to a prior year identified and recorded in the second quarter of 2016, which resulted in a benefit of $4.2 million and (4) changes to valuation allowances on state net operating loss carryforwards including(including a correction to a prior year identified and recorded in the first quarter of 2016, which resulted in a benefit of $2.9 million.million) and (4) our system optimization initiative.


Net Income from Discontinued OperationsNine Months
 2015
Income from discontinued operations before income taxes$14.9
Provision for income taxes(5.7)
Income from discontinued operations, net of income taxes9.2
Gain on disposal of discontinued operations before income taxes27.5
Provision for income taxes on gain on disposal(12.7)
Gain on disposal of discontinued operations, net of income taxes14.8
Net income from discontinued operations$24.0

As a resultThe impact of the sale of the Bakery during the second quarter of 2015, as discussed above in “Executive Overview - Sale of the Bakery,” the Bakery’s results of operations for the period from December 29, 2014 through May 31, 2015 have been included in “Income from discontinued operations, net of income taxes” in the table above. During the first nine months of 2015, the Company recognized a gainour system optimization initiative on the disposal of the Bakery of $14.8 million, net of income tax expense of $12.7 million, which has been included in net income from discontinued operations. The provision for income taxes included the effects of changes to our state deferred taxes and valuation allowances on state net operating losses caused by the gain on disposal includesshifting relative taxable presence in the impactvarious states as our system optimization initiative is executed, and the disposition of non-deductible goodwill disposedin 2016. These items, which are non-recurring, decreased the provision for income taxes by $0.1 million during the first quarter of as a result2017 and increased the provision for income taxes by $1.5 million during the first quarter of 2016.

Deferred income taxes are not recorded for temporary differences related to our investments in non-U.S. subsidiaries that we consider permanently invested outside of the sale.U.S. At April 2, 2017, our cash balances held outside of the U.S. totaled $98.0 million.


Liquidity and Capital Resources

SourcesThe tables included throughout Liquidity and Uses of CashCapital Resources present dollars in millions.

Cash provided by operating activities increased $12.2 million in the first nine months of 2016 as compared to the first nine months of 2015, primarily due to changes in our net income and non-cash items as well as the following:Flows

an increaseOur primary sources of $23.9 million as a resultliquidity and capital resources are cash flows from operations and borrowings under our securitized
financing facility. Principal uses of cash restricted for the payment of interest under our securitized financing facility during the second quarter of 2015; and

an increase of $7.3 million as a result of payments to terminate our cash flow hedges during the second quarter of 2015; partially offset by

an increase of $30.0 million in interest payments primarily resulting from the securitized financing facility;

a $47.4 million increase in income tax payments, net of refunds; and

an increase in payments for incentive compensation for the 2015 fiscal year.

Cash provided by investing activities increased $126.0 million in the first nine months of 2016 as compared to the first nine months of 2015, primarily due to the following:

an increase of $127.5 million in proceeds from dispositions related to our system optimization initiative; and

a decrease of $79.5 million inare operating expenses, capital expenditures; partially offset by

a decrease of $78.4 million in proceeds from the sale of the Bakery during the second quarter of 2015.

Cash used in financing activities increased $79.2 million in the first nine months of 2016 as compared to the first nine months of 2015, primarily due to non-cash items as well as the following:

a net decrease in cash provided by long-term debt activities of $950.4 million primarily from the Company’s $2,275.0 million securitized financing facility and the related repayment of debt under the Company’s prior credit agreement during the second quarter of 2015; partially offset by

a decrease inexpenditures, repurchases of common stock of $917.2 million.

The net cash used in our business before the effect of exchange rate changes on cash was approximately $22.4 million.

Sources and Uses of Cash for the Remainder of 2016dividends to shareholders.

Our anticipated consolidated sources of cash and cash requirements for the remainder of 2016,2017, exclusive of operating cash flow requirements, consist principally of:

capital expenditures of approximately $36.3$70.2 million, resulting in total anticipated cash capital expenditures for the year of approximately $145.0$85.0 million.

quarterly cash dividends aggregating up to approximately $15.9$51.5 million as discussed below in “Dividends;”

potential stock repurchases of up to $172.7$132.2 million, of which $22.7$11.2 million was repurchased subsequent to OctoberApril 2, 20162017 through November 3, 2016May 4, 2017 as discussed below in “Stock Repurchases;” and

consideration paid for restaurant acquisitions and proceeds from restaurant dispositions under our system optimization initiative.

Based on current levels of operations, the Company expects that available cash and cash flows from operations and available cash will provide sufficient liquidity to meet operating cash requirements for the next 12 months.

The table below summarizes our cash flows from operating, investing and financing activities for the first quarter of 2017 and 2016:
 First
Quarter
2017		 First
Quarter
2016		 Change
Net cash provided by (used in):     
Operating activities$38.7
 $50.8
 $(12.1)
Investing activities(6.4) (0.2) (6.2)
Financing activities(38.0) (69.6) 31.6
Effect of exchange rate changes on cash0.7
 4.7
 (4.0)
Net decrease in cash and cash equivalents$(5.0) $(14.3) $9.3

Operating Activities

Cash provided by operating activities was $38.7 and $50.8 in the first quarter of 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 $12.1 million during the first quarter of 2017 as compared to the first quarter of 2016, due to (1) a decrease of $6.0 million in net income adjusted for non-cash expenses, including a $3.2 million decrease in the net receipt of deferred vendor incentives, and (2) an unfavorable change in operating assets and liabilities of $6.1 million. The unfavorable change in operating assets and liabilities resulted primarily from the timing of receipt of rental payments from franchisees, largely offset by the favorable impact of a decrease in payments for incentive compensation for the 2016 fiscal year.

Investing Activities

Cash used in investing activities increased $6.2 million during the first quarter of 2017 as compared to the first quarter of 2016, primarily due to a decrease in proceeds from dispositions related to our system optimization initiative of $39.5 million, partially offset by (1) a decrease of $24.0 million in capital expenditures and (2) a decrease of $7.5 million in restricted cash for the reinvestment in capital assets under our securitized financing facility.

Financing Activities

Cash used in financing activities decreased $31.6 million during the first quarter of 2017 as compared to the first quarter of 2016, primarily due to a decrease in repurchases of common stock of $31.6 million.

Dividends

On March 15, 2016, June 15, 2016 and September 15, 2016,2017, The Wendy’s Company paid quarterly cash dividends of $0.06$0.07 per share on its common stock, aggregating $47.8$17.3 million. On November 9, 2016,May 10, 2017, The Wendy’s Company declared a dividend of $0.065$0.07 per share to be paid on DecemberJune 15, 20162017 to shareholders of record as of DecemberJune 1, 2016. As a result of the declaration,2017. If The Wendy’s Company’sCompany pays regular quarterly dividends for the remainder of 2017 at the same rate as declared in the second quarter of 2017, the total cash requirementsrequirement for the fourth quarter of 2016dividends will be approximately $15.9$51.5 million based on the estimated number of shares of common stock outstanding at December 1, 2016.May 4, 2017. The Wendy’s Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any quarterly dividends will be declared or paid in the future or of the amount or timing of such dividends, if any.


Stock Repurchases

In February 2017, our Board of Directors authorized a repurchase program for up to $150.0 million of our common stock through March 4, 2018, when and if market conditions warrant and to the extent legally permissible. During the three months ended April 2, 2017, the Company repurchased 1.3 million shares with an aggregate purchase price of $17.8 million, of which $1.8 million was accrued at April 2, 2017 and excluding commissions. Subsequent to April 2, 2017 through May 4, 2017, the Company repurchased 0.8 million shares with an aggregate purchase price of $11.2 million, excluding commissions.

On June 1, 2015, our Board of Directors authorized a repurchase program for up to $1.4 billion$1,400.0 million of our common stock through January 1, 2017, when and if market conditions warrantwarranted and to the extent legally permissible. During the first ninethree months ofended April 3, 2016, the Company repurchased 16.04.9 million shares with an aggregate purchase price of $162.3 million, of which $3.0 million was accrued at October 2, 2016 and excluding commissions of $0.2 million. As of October 2, 2016, the Company had $215.9 million of availability remaining under its June 2015 authorization. Subsequent to October 2, 2016 through November 3, 2016, the Company repurchased 2.1 million shares with an aggregate purchase price of $22.7 million, excluding commissions. The Company announced its intention to complete substantially all of the $1.4 billion share repurchase program by entering into an accelerated share repurchase agreement for $150.0 million during the fourth quarter of 2016.

Also as part of the June 2015 authorization, the Company commenced an $850.0 million share repurchase program on June 3, 2015, which included (1) a modified Dutch auction tender offer to repurchase up to $639.0 million of our common stock and (2) a separate stock purchase agreement to repurchase up to $211.0 million of our common stock from Nelson Peltz, Peter W. May (Messrs. Peltz and May are members of the Company’s Board of Directors) and Edward P. Garden (who served on the Company’s Board of Directors until December 14, 2015) and certain of their family members and affiliates, investment funds managed by Trian Fund Management, L.P. (an investment management firm controlled by Messrs. Peltz, May and Garden, “TFM”) and the general partner of certain of those funds (together with Messrs. Peltz, May and Garden, certain of their family members and affiliates and TFM, the “Trian Group”). On June 30, 2015, the tender offer expired and on July 8, 2015, the Company repurchased 55.8 million shares at $11.45 per share for an aggregate purchase price of $639.0 million. On July 17, 2015, the Company repurchased 18.4 million shares at $11.45 per share, pursuant to the separate stock purchase agreement, for an aggregate purchase price of $210.9 million. As a result, the $850.0 million share repurchase program that commenced on June 3, 2015 was completed during the third quarter of 2015. During the nine months ended September 27, 2015, the Company incurred costs of $2.3 million in connection with the tender offer and Trian Group stock purchase agreement, which were recorded to treasury stock.

In August 2015, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase programs. Under the ASR Agreement, the Company paid the financial institution an initial purchase price of $164.5 million in cash and received an initial delivery of 14.4 million shares of common stock, representing an estimate of 85% of the total shares expected to be delivered under the ASR Agreement. The total number of shares of common stock ultimately purchased by the Company under the ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the ASR Agreement, less an agreed discount. On September 25, 2015, the Company completed the ASR Agreement and received an additional 3.6 million shares of common stock.

In August 2014, our Board of Directors authorized a repurchase program for up to $100.0 million of our common stock through December 31, 2015, when and if market conditions warrant and to the extent legally permissible. As part of the August 2014 authorization, $76.1 million remained available as of December 28, 2014. During the first and second quarters of 2015, the Company repurchased 5.7 million shares with an aggregate purchase price of $61.6$48.2 million, excluding commissions of $0.1 million. During the third quarter of 2015, the Company repurchased $14.5 million through the accelerated share repurchase agreement described above. As a result, the $100.0 million share repurchase program authorized in August 2014 was completed.


General Inflation, Commodities and Changing Prices

We believe that general inflation did not have a significant effect on our condensed consolidated results of operations during the reporting periods. We manage any inflationary costs and commodity price increases primarily through selective menu price increases. Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, corn, pork and cheese could have an unfavorable effect on our results of operations in the future. The extent of any impact will depend on our ability and timing to increase food prices.

Seasonality

Our restaurant operations are moderately impacted by seasonality; Wendy’s restaurant revenues are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for any future quarter will not necessarily be indicative of the results that may be achieved for any other quarter or for the full fiscal year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

As of OctoberApril 2, 20162017 there were no material changes from the information contained in the Form 10-K for the fiscal year ended January 3, 2016.1, 2017.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The management of the Company, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of 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 OctoberApril 2, 20162017. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of OctoberApril 2, 2016,2017, the disclosure controls and procedures of the Company were effective at a reasonable assurance level in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the internal control over financial reporting of the Company during the thirdfirst quarter of 20162017 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, the management of the Company, including

its Chief Executive Officer and Chief Financial Officer, does not expect that the control system can prevent or detect all errors or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.

PART II. OTHER INFORMATION

Special Note Regarding Forward-Looking Statements and Projections

This Quarterly Report on Form 10-Q and oral statements made from time to time by representatives of the Company may contain or incorporate by reference certain statements that are not historical facts, including, most importantly, information concerning possible or assumed future results of operations of the Company. Those statements, as well as statements preceded by, followed by, or that include the words “may,” “believes,” “plans,” “expects,” “anticipates,” or the negation thereof, or similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). All statements that address future operating, financial or business performance; strategies, initiatives or expectations; future synergies, efficiencies or overhead savings; anticipated costs or charges; future capitalization; and anticipated financial impacts of recent or pending transactions are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are based on our expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed or implied by our forward-looking statements. For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Many important factors could affect our future results and could cause those results to differ materially from those expressed in or implied by the forward-looking statements contained herein. Such factors, all of which are difficult or impossible to predict accurately, and many of which are beyond our control, include, but are not limited to, the following:

competition, including pricing pressures, couponing, aggressive marketing and the potential impact of competitors’ new unit openings on sales of Wendy’s restaurants;

consumers’ perceptions of the relative quality, variety, affordability and value of the food products we offer;

food safety events, including instances of food-borne illness (such as salmonella or E. coli) involving Wendy’s or its supply chain;

consumer concerns over nutritional aspects of beef, poultry, french fries or other products we sell, concerns regarding the ingredients in our products and/or cooking processes used in our restaurants, or concerns regarding the effects of disease outbreaks, epidemics or pandemics impacting the Company’s customers or food supplies;

the effects of negative publicity that can occur from increased use of social media;

success of operating and marketing initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors;

the impact of general economic conditions and increases in unemployment rates on consumer spending, particularly in geographic regions that contain a high concentration of Wendy’s restaurants;

changes in consumer tastes and preferences, and in discretionary consumer spending;

changes in spending patterns and demographic trends, such as the extent to which consumers eat meals away from home;

certain factors affecting our franchisees, including the business and financial viability of franchisees, the timely payment of such franchisees’ obligations due to us or to national or local advertising organizations, and the ability of our franchisees to open new restaurants and remodel existing restaurants in accordance with their development and franchise commitments, including their ability to finance restaurant development and remodels;

increased labor costs due to competition or increased minimum wage or employee benefit costs;     

changes in commodity costs (including beef, chicken and corn), labor, supplies, fuel, utilities, distribution and other operating costs;

availability, location and terms of sites for restaurant development by us and our franchisees;

development costs, including real estate and construction costs;


delays in opening new restaurants or completing reimages of existing restaurants, including risks associated with the Image Activation program;

the timing and impact of acquisitions and dispositions of restaurants;

anticipated or unanticipated restaurant closures by us and our franchisees;

our ability to identify, attract and retain potential franchisees with sufficient experience and financial resources to develop and operate Wendy’s restaurants successfully;

availability of qualified restaurant personnel to us and to our franchisees, and the ability to retain such personnel;

our ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to Wendy’s restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;

availability and cost of insurance;

adverse weather conditions;

availability, terms (including changes in interest rates) and deployment of capital;

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, government-mandated health care benefits, tax legislation, federal ethanol policy and accounting standards;

the costs, uncertainties and other effects of legal, environmental and administrative proceedings;

the effects of charges for impairment of goodwill or for the impairment of other long-lived assets;

the effects of war or terrorist activities;

risks associated with failures, interruptions or security breaches of the Company’s computer systems or technology, or the occurrence of cyber incidents or a deficiency in cybersecurity that impacts the Company or its franchisees, including the cybersecurity incident described in Item 1A1 below;

the difficulty in predicting the ultimate costs associated with the sale of company-owned restaurants to franchisees, employee termination costs, the timing of payments made and received, the results of negotiations with landlords, the impact of the sale of Company-operated restaurants to franchisees on ongoing operations, any tax impact from the sale of restaurants and the future impact to the Company’s earnings, restaurant operating margins, cash flow and depreciation;

the difficulty in predicting the ultimate costs that will be incurred in connection with the Company’s plan to reduce its general and administrate expense, and the future impact on the Company’s earnings;

risks associated with the Company’s securitized financing facility, including the ability to generate sufficient cash flow to meet increased debt service obligations, compliance with operational and financial covenants, and restrictions on the Company’s ability to raise additional capital;

risks associated with the amount and timing of share repurchases under the $1.4 billion$150.0 million share repurchase program approved by the Board of Directors; and

other risks and uncertainties affecting us and our subsidiaries referred to in our Annual Report on Form 10-K for the fiscal year ended January 3, 20161, 2017 (the “Form 10-K”) (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the Securities and Exchange Commission.

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We assume no obligation to update

any forward-looking statements after the date of this Quarterly Report on Form 10-Q as a result of new information, future events

or developments, except as required by federal securities laws. In addition, it is our policy generally not to endorse any projections regarding future performance that may be made by third parties.

Item 1. Legal Proceedings.

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. The Company believes it has adequate accruals for continuing operations for all of its legal and environmental matters. We cannot estimate the aggregate possible range of loss due to most proceedings, including those described below, 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 is thus inherently difficult. Based on our currently available information, including legal defenses available to us, and given the aforementioned accruals and our insurance coverage, we do not believe that the outcome of these legal and environmental matters will have a material effect on our consolidated financial position or results of operations.

The Company washas been named as a defendant in a civil complaintputative class action lawsuits alleging, among other things, that wasthe Company failed to safeguard customer credit card information and failed to provide notice that credit card information had been compromised.  Jonathan Torres and other consumers filed an action in the U.S. District Court for the Middle District of Florida on February 8, 2016 by plaintiff Jonathan Torres.(the “Torres case”). The operative complaint asserted claims of breach of implied contract, negligence and violations of the Florida Unfair and Deceptive Trade Practices Act arising from the Company’s alleged failureseeks to safeguard customer credit card information and the alleged failure to provide notice that credit card information had been compromised. The complaint sought certification ofcertify a putative nationwide class of consumers, impacted by the alleged failures. The plaintiff sought monetary damages, injunctive and equitable relief, attorneys’ fees and other costs. The Company’s motion to dismiss the complaint was granted, without prejudice, on July 15, 2016.

An amended complaint was filed in the same court by plaintiff Jonathan Torres and six additional named plaintiffs on July 29, 2016. The amended complaint names the Company’s subsidiary, Wendy’s International, LLC (“Wendy’s International”), as the defendant and asserts claims of breach of implied contract, negligence and violations of state consumer protection or deceptive trade practices statutes in the states of Florida, New York, New Jersey, Mississippi, Tennessee and Texas arising from Wendy’s International’s alleged failure to safeguard customer credit card information and the alleged failure to provide notice that credit card information had been compromised. The amended complaint also asserts violations of state data breach statutes in Florida, New York, New Jersey, Tennessee and Texas based on Wendy’s International’s alleged failure to timely and fully disclose the alleged data breach. The amended complaint seeks certification of a putative nationwide class of consumers impacted by the alleged failures, or in the alternative, statewide classes of consumers for Florida, New York, New Jersey, Mississippi,Texas, and Tennessee, as well as statewide classes of consumers under those states’ consumer protection and Texas. Theunfair trade practices laws. Certain financial institutions have also filed class actions lawsuits in the U.S. District Court for the Western District of Pennsylvania (the “FI cases”), which seek to certify a nationwide class financial institutions that issued payment cards that were allegedly impacted.  In the Torres case and the FI cases, the plaintiffs seek monetary damages, injunctive and equitable relief, attorneys’ fees and other costs. The Company’s motion to dismiss the amended complaint is pending beforein the court.Torres case was denied in part and granted in part with leave to amend; the plaintiffs then filed the operative complaint referenced above. The Company’s motion to dismiss in the FI case was denied. The Company filed its answer in the Torres case in April 2017 and expects to file its answer in the FI case during the second quarter of 2017.

ThisCertain of the Company’s present and former directors have been named in two putative shareholder derivative complaints arising out of the credit card incidents above.  The first case, wasbrought 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 one 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 Company’s motion to dismiss is pending in the Graham case and the Company has yet to respond to the Caracci case.

The Torres case, the FI cases and the Graham case were previously described in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2016 and the Quarterly Reports on Form 10-Q filed on May 11, 2016 and August 10, 2016.

The Company was named as a defendant in a civil complaint that was filed in the U.S. District Court for the Western District of Pennsylvania on April 25, 2016 by plaintiff First Choice Federal Credit Union. The complaint asserts claims of common law negligence, negligence per se due to the alleged violation of section 5 of the Federal Trade Commission Act, and declaratory and injunctive relief. All of these claims are based on the allegations arising from the Company’s alleged failure to safeguard customer credit card information and the alleged failure to provide notice that credit card information had been compromised. The complaint sought certification of a putative nationwide class of banks, credit unions, financial institutions and other entities in the United States impacted by the alleged failures. The plaintiff sought monetary damages, a declaratory judgment, injunctive relief, attorneys’ fees and other costs.

The Company was named as a defendant in four other civil complaints filed by financial institutions in the U.S. District Court for the Western District of Pennsylvania based on the allegations arising from the Company’s alleged failure to safeguard customer credit card information and the alleged failure to provide notice that credit card information had been compromised. These cases were consolidated into the First Choice Federal Credit Union case.

An amended civil complaint was filed in the consolidated proceeding in the U.S. District Court for the Western District of Pennsylvania on July 22, 2016 naming the Company and two of its subsidiaries as defendants. The amended complaint was brought by 22 financial institutions and five association plaintiffs (representing members who are credit unions and other similar financial institutions). The amended complaint asserts claims of common law negligence, negligence per se due to the alleged violation of section 5 of the Federal Trade Commission Act, violation of the Ohio Deceptive Trade Practices Act, and declaratory and injunctive relief. The amended complaint also seeks certification of a putative nationwide class of banks, credit unions,

financial institutions and other entities in the United States impacted by the alleged failures. The plaintiffs seek monetary damages, a declaratory judgment, injunctive relief, attorneys’ fees and other costs. The Company’s motion to dismiss the amended complaint is pending before the court.

This case was previously described in the Company’s Quarterly Reports on Form 10-Q filed with the SEC on May 11, 2016 and August 10, 2016.

The Company believes it has meritorious defenses to each of the actions described above and intends to vigorously oppose the claims asserted in each of the complaints.2, 2017.

Item 1A. Risk Factors.

In addition to the information contained in this report, you should carefully consider the risk factors disclosed in our Form 10-K, which could materially affect our business, financial condition or future results. Except as set forth below or as may otherwise be described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K.

Certain of Our Franchisees have Experienced a 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.

Working closely with third-party forensic experts, federal law enforcement and payment card industry contacts as part of its ongoing 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 ongoing investigation that any company-owned restaurants were impacted by this activity.

The Company worked with investigators to disable the malware involved in the first attack earlier this year. Soon after detecting the malware variant involved in the latest attack, the Company identified a method of disabling it and thereafter disabled it in all franchisee restaurants where it was discovered. The investigation has 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. These class actions 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.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information with respect to repurchases of shares of our common stock by us and our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the thirdfirst quarter of 20162017:

Issuer Repurchases of Equity Securities

PeriodTotal Number of Shares Purchased (1)
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans (2)
July 4, 2016
through
August 7, 2016		2,183,280
$9.72
2,170,500
$247,904,938
August 8, 2016
through
September 4, 2016		1,531,513
$10.06
1,418,800
$233,662,763
September 5, 2016
through
October 2, 2016		1,678,100
$10.60
1,678,100
$215,903,649
Total5,392,893
$10.09
5,267,400
$215,903,649
PeriodTotal Number of Shares Purchased (1)
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans (2)
January 2, 2017
through
February 5, 2017		14,657
$13.74
—
$—
February 6, 2017
through
March 5, 2017		573,240
$13.82
380,680
$144,756,649
March 6, 2017
through
April 2, 2017		940,461
$13.40
938,000
$132,196,786
Total1,528,358
$13.56
1,318,680
$132,196,786

(1)Includes 125,493209,678 shares reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective awards. The shares were valued at the average of the high and low trading prices of our common stock on the vesting or exercise date of such awards.

(2)In June 2015,February 2017, our Board of Directors authorized the repurchase of up to $1.4 billion$150 million of our common stock through January 1, 2017,March 4, 2018, when and if market conditions warrant and to the extent legally permissible.

Subsequent to OctoberApril 2, 20162017 through November 3, 2016,May 4, 2017, the Company repurchased 2.10.8 million shares with an aggregate purchase price of $22.7$11.2 million, excluding commissions.

Item 6. Exhibits.
EXHIBIT NO.DESCRIPTION
  
10.1Employment Letter betweenForm of Long Term Performance Unit Award Agreement for 2017 under The Wendy’s Company and E.J. Wunsch executed on September 9, 2016.2010 Omnibus Award Plan.* **
31.1Certification of the Chief Executive Officer of The Wendy’s Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2Certification of the Chief Financial Officer of The Wendy’s Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1CertificationCertifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as an exhibit to this Form 10-Q.*
101.INSXBRL Instance Document*
101.SCHXBRL Taxonomy Extension Schema Document*
101.CALXBRL Taxonomy Extension Calculation Linkbase Document*
101.DEFXBRL Taxonomy Extension Definition Linkbase Document*
101.LABXBRL Taxonomy Extension Label Linkbase Document*
101.PREXBRL Taxonomy Extension Presentation Linkbase Document*
____________________
*Filed herewith.
**Identifies a management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
THE WENDY’S COMPANY
(Registrant)
Date: November 9, 2016May 10, 2017
 
 
By: /s/ Gunther Plosch                                                             
 Gunther Plosch
 Chief Financial Officer
 (On behalf of the Company)
  
Date: November 9, 2016May 10, 2017
 
By: /s/ Scott A. Kriss                                                                
 Scott A. Kriss
 
Senior Vice President,-
 Chief Accounting and Tax Officer
 (Principal Accounting Officer)












Exhibit Index
EXHIBIT NO.DESCRIPTION
  
10.1Employment Letter betweenForm of Long Term Performance Unit Award Agreement for 2017 under The Wendy’s Company and E.J. Wunsch executed on September 9, 2016.2010 Omnibus Award Plan.* **
31.1Certification of the Chief Executive Officer of The Wendy’s Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2Certification of the Chief Financial Officer of The Wendy’s Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1CertificationCertifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as an exhibit to this Form 10-Q.*
101.INSXBRL Instance Document*
101.SCHXBRL Taxonomy Extension Schema Document*
101.CALXBRL Taxonomy Extension Calculation Linkbase Document*
101.DEFXBRL Taxonomy Extension Definition Linkbase Document*
101.LABXBRL Taxonomy Extension Label Linkbase Document*
101.PREXBRL Taxonomy Extension Presentation Linkbase Document*
____________________
*Filed herewith.
**Identifies a management contract or compensatory plan or arrangement.

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