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 ~~October~~April 1, ~~2017~~2018



( )		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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [x] Accelerated filer [ ]

Non-accelerated filer [ ] (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 ~~242,196,738~~239,213,450 shares of The Wendy’s Company common stock outstanding as of ~~November~~May 2, ~~2017.~~2018.

THE WENDY’S COMPANY AND SUBSIDIARIES

INDEX TO FORM 10-Q



	Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements	3
Unaudited Condensed Consolidated Balance Sheets as of ~~October~~April 1, ~~2017~~2018 and ~~January 1,~~December 31, 2017	3
Unaudited Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016~~2017	4
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016~~2017	5
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016~~2017	6
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2427
Item 3. Quantitative and Qualitative Disclosures about Market Risk	3537
Item 4. Controls and Procedures	3638

PART II: OTHER INFORMATION	3739
Item 1. Legal Proceedings	3941
Item 1A. Risk Factors	3941
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4041
Item 6. Exhibits	4142
Signatures	4243

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands Except Per Share Amounts)


	October 1, 2017			January 1, 2017			April 1, 2018			December 31, 2017
ASSETS	(Unaudited)						(Unaudited)
Current assets:
Cash and cash equivalents	$	186,629		$	198,240		$	187,709		$	171,447
Restricted cash	34,042			57,612			30,113			32,633
Accounts and notes receivable, net	115,390			98,825			109,874			114,390
Inventories	2,895			2,851			3,149			3,156
Prepaid expenses and other current assets	23,762			19,244			20,086			20,125
Advertising funds restricted assets	58,163			75,760			91,483			62,602
Total current assets	420,881			452,532			442,414			404,353
Properties	1,252,246			1,192,339			1,245,377			1,263,059
Goodwill	743,508			741,410			742,555			743,334
Other intangible assets	1,332,130			1,322,531			1,311,217			1,321,585
Investments	58,171			56,981			53,669			56,002
Net investment in direct financing leases	213,649			123,604			229,600			229,089
Other assets	69,688			49,917			85,006			79,516
Total assets	$	4,090,273		$	3,939,314		$	4,109,838		$	4,096,938

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	29,359		$	24,652		$	30,838		$	30,172
Accounts payable	25,776			27,635			19,315			22,764
Accrued expenses and other current liabilities	121,124			102,034			99,307			111,624
Advertising funds restricted liabilities	58,163			75,760			100,646			62,602
Total current liabilities	234,422			230,081			250,106			227,162
Long-term debt	2,696,520			2,487,630			2,777,183			2,724,230
Deferred income taxes	419,293			446,513			267,156			299,053
Deferred franchise fees							92,727			10,881
Other liabilities	277,443			247,354			259,669			262,409
Total liabilities	3,627,678			3,411,578			3,646,841			3,523,735
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 242,565 and 246,574 shares outstanding, respectively	47,042			47,042
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 240,199 and 240,512 shares outstanding, respectively							47,042			47,042
Additional paid-in capital	2,883,504			2,878,589			2,878,804			2,885,955
Accumulated deficit	(305,703		)	(290,857		)	(233,700		)	(163,289		)
Common stock held in treasury, at cost; 227,859 and 223,850 shares, respectively	(2,117,232		)	(2,043,797		)
Common stock held in treasury, at cost; 230,225 and 229,912 shares, respectively							(2,177,024		)	(2,150,307		)
Accumulated other comprehensive loss	(45,016		)	(63,241		)	(52,125		)	(46,198		)
Total stockholders’ equity	462,595			527,736			462,997			573,203
Total liabilities and stockholders’ equity	$	4,090,273		$	3,939,314		$	4,109,838		$	4,096,938

See accompanying notes to condensed consolidated financial statements.

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 Ended						Three Months Ended
	October 1, 2017			October 2, 2016			October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
	(Unaudited)												(Unaudited)
Revenues:
Sales	$	158,843		$	228,644		$	467,914		$	747,211		$	153,649		$	148,212
Franchise royalty revenue and fees	98,882			98,039			306,120			275,886			97,908			94,690
Franchise rental income	50,275			37,329			140,127			102,420			50,107			42,917
Advertising funds revenue													78,900			—
	308,000			364,012			914,161			1,125,517			380,564			285,819
Costs and expenses:
Cost of sales	132,387			186,546			385,154			603,836			132,219			124,543
Franchise support and other costs													6,173			3,643
Franchise rental expense	24,076			17,534			64,841			49,684			23,263			18,868
Advertising funds expense													78,900			—
General and administrative	52,960			58,938			156,690			184,708			50,356			51,314
Depreciation and amortization	31,216			29,362			91,690			92,456			32,152			29,165
System optimization losses (gains), net	106			(37,756		)	39,749			(48,106		)	570			(1,407		)
Reorganization and realignment costs	2,888			2,129			20,768			7,866			2,626			181
Impairment of long-lived assets	1,041			361			1,804			12,991			206			510
Other operating expense (income), net	1,669			810			5,294			(13,483		)
Other operating income, net													(1,163		)	(1,718		)
	246,343			257,924			765,990			889,952			325,302			225,099
Operating profit	61,657			106,088			148,171			235,565			55,262			60,720
Interest expense	(29,977		)	(28,731		)	(87,887		)	(85,483		)
Other (expense) income, net	(125		)	498			3,108			1,036
Interest expense, net													(30,178		)	(28,975		)
Loss on early extinguishment of debt													(11,475		)	—
Other income, net													744			389
Income before income taxes	31,555			77,855			63,392			151,118			14,353			32,134
Provision for income taxes	(17,298		)	(28,965		)	(28,639		)	(50,385		)
Benefit from (provision for) income taxes													5,806			(9,793		)
Net income	$	14,257		$	48,890		$	34,753		$	100,733		$	20,159		$	22,341

Net income per share:
Basic	$	.06		$	.19		$	.14		$	.38
Diluted	.06			.18			.14			.37
Basic and diluted net income per share													$	.08		$	.09

Dividends per share	$	.07		$	.06		$	.21		$	.18		$	.085		$	.07

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

Three Months Ended Nine Months Ended
October 1,
2017 October 2,
2016 October 1,
2017 October 2,
2016
(Unaudited)

Net income $ 14,257
$ 48,890
$ 34,753
$ 100,733
Other comprehensive income (loss), net:
Foreign currency translation adjustment 8,787
(3,369 ) 16,797
10,887
Change in unrecognized pension loss, net of income tax (provision) benefit of $(60) and $34 for the nine months ended October 1, 2017 and October 2, 2016, respectively —
—
96
(56 )
Effect of cash flow hedges, net of income tax provision of $279 and $838 for both the three and nine months ended October 1, 2017 and October 2, 2016, respectively 444
444
1,332
1,332
Other comprehensive income (loss), net 9,231
(2,925 ) 18,225
12,163
Comprehensive income $ 23,488
$ 45,965
$ 52,978
$ 112,896



	Three Months Ended
	April 1, 2018			April 2, 2017
	(Unaudited)
Net income	$	20,159		$	22,341
Other comprehensive (loss) income, net:
Foreign currency translation adjustment	(6,044		)	1,945
Change in unrecognized pension loss:
Unrealized gains arising during the period	156			156
Income tax provision	(39		)	(60		)
	117			96
Effect of cash flow hedges:
Reclassification of losses into Net income	—			723
Income tax provision	—			(278		)
	—			445
Other comprehensive (loss) income, net	(5,927		)	2,486
Comprehensive income	$	14,232		$	24,827

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Nine Months Ended						Three Months Ended
	October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
	(Unaudited)						(Unaudited)
Cash flows from operating activities:
Net income	$	34,753		$	100,733		$	20,159		$	22,341
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	91,690			94,056			32,152			29,165
Share-based compensation	16,356			14,260			4,458			3,559
Impairment of long-lived assets	1,804			12,991			206			510
Deferred income tax	945			(17,024		)	(9,799		)	(938		)
Non-cash rental income, net	(8,348		)	(5,138		)	(3,239		)	(2,728		)
Net receipt of deferred vendor incentives	4,547			4,110			7,340			9,602
System optimization losses (gains), net	39,749			(48,106		)	570			(1,407		)
Gain on sale of investments, net	(1,807		)	—
Distributions received from TimWen joint venture	5,524			8,451			2,907			2,439
Equity in earnings in joint ventures, net	(6,113		)	(6,495		)	(1,824		)	(1,846		)
Loss on early extinguishment of debt							11,475			—
Accretion of long-term debt	927			914			313			308
Amortization of deferred financing costs	5,954			5,668			1,427			2,000
Reclassification of unrealized losses on cash flow hedges	2,170			2,170			—			723
Other, net	2,395			4,229			2,729			1,420
Changes in operating assets and liabilities:
Restricted cash	233			181
Accounts and notes receivable, net	(14,193		)	(29,118		)	2,934			(1,818		)
Inventories	(44		)	126			7			130
Prepaid expenses and other current assets	(1,281		)	(3,958		)	4			(1,328		)
Advertising funds restricted assets and liabilities							17,189			3,653
Accounts payable	(1,557		)	(6,412		)	146			(2,485		)
Accrued expenses and other current liabilities	3,039			5,677			(20,443		)	(21,180		)
Net cash provided by operating activities	176,743			137,315			68,711			42,120
Cash flows from investing activities:
Capital expenditures	(53,711		)	(108,744		)	(10,569		)	(14,811		)
Acquisitions	(86,788		)	(2,209		)
Dispositions	80,058			173,849			351			1,650
Proceeds from sale of investments	3,282			—
Notes receivable, net							(872		)	(1,754		)
Payments for investments	(375		)	(172		)	(12		)	(58		)
Notes receivable, net	(4,174		)	(2,282		)
Changes in restricted cash	23,624			1,912
Other, net	—			103
Net cash (used in) provided by investing activities	(38,084		)	62,457
Net cash used in investing activities							(11,102		)	(14,973		)
Cash flows from financing activities:
Proceeds from long-term debt							928,167			4,511
Repayments of long-term debt	(20,291		)	(18,678		)	(871,747		)	(10,670		)
Deferred financing costs	(1,069		)	(1,017		)	(17,340		)	(415		)
Repurchases of common stock	(90,065		)	(161,194		)	(39,372		)	(16,026		)
Dividends	(51,464		)	(47,793		)	(20,355		)	(17,273		)
Proceeds from stock option exercises	10,419			10,623			9,385			4,459
Payments related to tax withholding for share-based compensation	(4,484		)	(4,142		)	(8,321		)	(2,559		)
Contingent consideration payment							(6,100		)	—
Net cash used in financing activities	(156,954		)	(222,201		)	(25,683		)	(37,973		)
Net cash used in operations before effect of exchange rate changes on cash	(18,295		)	(22,429		)
Net cash provided by (used in) operations before effect of exchange rate changes on cash							31,926			(10,826		)
Effect of exchange rate changes on cash	6,684			3,997			(2,482		)	782
Net decrease in cash and cash equivalents	(11,611		)	(18,432		)
Cash and cash equivalents at beginning of period	198,240			327,216
Cash and cash equivalents at end of period	$	186,629		$	308,784
Net increase (decrease) in cash, cash equivalents and restricted cash							29,444			(10,044		)
Cash, cash equivalents and restricted cash at beginning of period							212,824			275,949
Cash, cash equivalents and restricted cash at end of period							$	242,268		$	265,905

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED

(In Thousands)


	Nine Months Ended				Three Months Ended
	October 1, 2017		October 2, 2016		April 1, 2018		April 2, 2017
	(Unaudited)				(Unaudited)
Supplemental cash flow information:
Cash paid for:
Interest	$	93,701	$	85,753	$	33,096	$	28,497
Income taxes, net of refunds	22,092		63,775		1,913		792

Supplemental non-cash investing and financing activities:
Capital expenditures included in accounts payable	$	9,621	$	20,108	$	6,466	$	7,048
Capitalized lease obligations	239,721		102,748		1,101		44,483
Accrued debt issuance costs					332		—

					April 1, 2018		December 31, 2017
Reconciliation of cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents					$	187,709	$	171,447
Restricted cash					30,113		32,633
Restricted cash, included in Advertising funds restricted assets					24,441		8,579
Restricted cash, included in Other assets					5		165
Total cash, cash equivalents and restricted cash					$	242,268	$	212,824

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 ~~October~~April 1, ~~2017~~2018 and the results of our operations ~~for the three and nine months ended October 1, 2017 and October 2, 2016~~ and cash flows for the ~~nine~~three months ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016.~~2017. The results of operations for the three ~~and nine~~ months ended ~~October~~April 1, ~~2017~~2018 are not necessarily indicative of the results to be expected for the full ~~2017~~2018 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 1,~~December 31, 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-month~~three-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.

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

The Company has reclassified certain costs associated with the Company’s franchise operations to “Franchise support and other costs,” which were previously recorded to “Other operating expense (income), net.” The costs reclassified include costs incurred to provide direct support services to our franchisees, as well as certain other direct and incremental costs for the Company’s franchise operations. Also, the Company reclassified certain restaurant operational costs from “General and administrative” to “Cost of sales.” The Company believes this new presentation will aid users in understanding its results of operations. The prior period reflects the reclassifications of these expenses to conform to the current year presentation. There was no impact to operating profit, income before income taxes or net income as a result of these reclassifications.

The following table illustrates the expense reclassifications made to the condensed consolidated statement of operations for the three months ended April 2, 2017:



			Reclassifications
	As Previously Reported		Franchise support and other costs			Restaurant operational costs			As Currently Reported
Cost of sales	$	123,407	$	—		$	1,136		$	124,543
Franchise support and other costs	—		3,643			—			3,643
General and administrative	52,450		—			(1,136		)	51,314
Other operating expense (income), net	1,925		(3,643		)	—			(1,718		)
	$	177,782	$	—		$	—		$	177,782

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(2) New Accounting Standards

New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance, which is effective beginning with our 2019 fiscal year, requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months. We are currently implementing a new lease management system to facilitate the adoption of this guidance. As shown in Note 13, there are $1,565,423 in future minimum rental payments for operating leases that are not currently on our balance sheet; therefore, we expect this will have a material impact on our consolidated balance sheets and related disclosures. We do not expect the adoption of this guidance to have a material impact on our consolidated statements of operations and statements of cash flows.

New Accounting Standards Adopted

In May 2017, the FASB issued new guidance on the scope of modification accounting for share-based payment arrangements. The new guidance provides relief to entities that make non-substantive changes to their share-based payment arrangements. The Company adopted this amendment, prospectively, during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.

In January 2017, the FASB issued an amendment that clarifies the definition of a business in determining whether to account for a transaction as an asset acquisition or a business combination. The Company adopted this amendment, prospectively, during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.

In November 2016, the FASB issued an amendment that clarifies guidance for proper classification and presentation of restricted cash in the statement of cash flows. Accordingly, changes in restricted cash that have historically been included within operating, investing and financing activities have been eliminated, and restricted cash, including the restricted cash of the national advertising funds, is combined with cash and cash equivalents when reconciling the beginning and end of period balances for all periods presented. The Company adopted this amendment during the first quarter of 2018. The adoption of the amendment resulted in an increase in net cash used in investing activities of $8,545 during the first quarter of 2017. In addition, net cash provided by operating activities during the first quarter of 2017 increased $3,468, primarily due to changes in restricted cash of the national advertising funds. Because of the inclusion of restricted cash in the beginning and end of period balances, cash, cash equivalents and restricted cash as presented in the statement of cash flows increased $72,670 and $77,709 as of April 2, 2017 and January 1, 2017, respectively. This amendment did not impact the Company’s condensed consolidated statements of operations and condensed consolidated balance sheets.

In August 2016, the FASB issued an amendment that provides guidance for proper classification of certain cash receipts and payments in the statement of cash flows. Upon adoption in the first quarter of 2018, the Company elected to use the nature of distribution approach for all distributions it receives from its equity method investees. The adoption of this guidance did not impact our condensed consolidated financial statements.

In March 2016, the FASB issued an amendment that provides guidance on extinguishing financial liabilities for certain prepaid stored-value products. The Company adopted this amendment during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.

In January 2016, the FASB issued an amendment that revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The Company adopted this amendment during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Revenue Recognition

In May 2014, the FASB issued amended guidance for revenue recognition. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. The Company adopted the new guidance on January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.

The Company applied the new guidance using the modified retrospective method, whereby the cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative period has not been adjusted and continues to be reported under the previous revenue recognition guidance. The details of the significant changes and quantitative impact of the changes are discussed below. See Note 3 for further information regarding our revenue policies and disaggregation of our sources of revenue.

Franchise Fees

Under previous revenue recognition guidance, new build technical assistance fees and development fees were recognized as revenue when a franchised restaurant opened, as all material services and conditions related to the franchise fee had been substantially performed upon the restaurant opening. In addition, under previous guidance, technical assistance fees received in connection with sales of Company-operated restaurants to franchisees and facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”), as well as renewal fees, were recognized as revenue when the license agreements were signed and the restaurant opened. Under the new guidance, these franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement.

National Advertising Funds

The Company maintains two national advertising funds (the “Advertising Funds”) established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Previously, the revenue, expenses and cash flows of such Advertising Funds were not included in the Company’s condensed consolidated statements of operations and statements of cash flows because the contributions to these Advertising Funds were designated for specific purposes and the Company acted as an agent, in substance, with regard to these contributions as a result of industry-specific guidance. Under the new guidance, which superseded the previous industry-specific guidance, the revenue, expenses and cash flows of the Advertising Funds are fully consolidated into the Company’s condensed consolidated statements of operations and statements of cash flows. In addition, the Company reclassified the total stockholders’ equity of the Advertising Funds from “Advertising funds restricted liabilities” to “Accumulated deficit” upon adoption of the guidance. Upon the full consolidation of the Advertising Funds, the Company also eliminated certain amounts due to and from affiliates from “Advertising funds restricted assets” and “Advertising funds restricted liabilities.” The Company allocates a portion of its advertising funds expense to “Cost of sales” based on a percentage of sales of Company-operated restaurants. Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Impacts on Financial Statements

The following table summarizes the impacts of adopting the revenue recognition standard on the Company’s condensed consolidated financial statements as of and for the three months ended April 1, 2018:



				Adjustments
	As Reported			Franchise Fees			Advertising Funds			Balances Without Adoption
Condensed Consolidated Balance Sheet
Accrued expenses and other current liabilities	$	99,307		$	(3,076	)	$	—		$	96,231
Advertising funds restricted liabilities	100,646			—			(6,645		)	94,001
Total current liabilities	250,106			(3,076		)	(6,645		)	240,385
Deferred income taxes	267,156			21,774			—			288,930
Deferred franchise fees	92,727			(81,482		)	—			11,245
Total liabilities	3,646,841			(62,784		)	(6,645		)	3,577,412
Accumulated deficit	(233,700		)	62,921			6,645			(164,134		)
Accumulated other comprehensive loss	(52,125		)	(137		)	—			(52,262		)
Total stockholders’ equity	462,997			62,784			6,645			532,426

Condensed Consolidated Statement of Operations
Franchise royalty revenue and fees (a)	$	97,908		$	(866	)	$	—		$	97,042
Advertising funds revenue	78,900			—			(78,900		)	—
Total revenues	380,564			(866		)	(78,900		)	300,798
Advertising funds expense	78,900			—			(78,900		)	—
Total costs and expenses	325,302			—			(78,900		)	246,402
Operating profit	55,262			(866		)	—			54,396
Income before income taxes	14,353			(866		)	—			13,487
Benefit from income taxes	5,806			222			—			6,028
Net income	20,159			(644		)	—			19,515

Condensed Consolidated Statement of Cash Flows
Cash flows from operating activities:
Net income	$	20,159		$	(644	)	$	—		$	19,515
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax	(9,799		)	(222		)	—			(10,021		)
Other, net	2,729			(337		)	—			2,392
Changes in operating assets and liabilities:
Accrued expenses and other current liabilities	(20,443		)	1,203			—			(19,240		)

_______________


(a)	Adjustment includes the reversal of franchise fees recognized over time under the new revenue recognition guidance of $2,688, as well as franchisee fees of $1,822 that would have been recognized under the previous revenue recognition guidance when the license agreements were signed and the restaurant opened. See Note 3 for further information.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(3) Revenue

Nature of Goods and Services

Wendy’s franchises and operates Wendy’s^® quick-service restaurants specializing in hamburger sandwiches throughout North America. Wendy’s also has franchised restaurants in 29 foreign countries and U.S. territories other than North America. At April 1, 2018, Wendy’s operated and franchised 337 and 6,296 restaurants, respectively. The following is a description of the principal activities from which revenue is generated.

Company-Operated

Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty^® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited time basis and some restaurants in the U.S. also offer breakfast.

Franchised

The rights and obligations governing franchised restaurants are set forth in the franchise agreement. The franchise agreement provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site accepted by Wendy’s and to use the Wendy’s system in connection with the operation of the restaurant at that site. The franchise agreement generally provides for a 20-year term and a 10-year renewal subject to certain conditions. The initial term may be extended up to 25 years and the renewal extended up to 20 years for qualifying restaurants under certain new restaurant development and remodel incentive programs.

The franchise agreement requires that the franchisee pay a royalty based on a percentage of sales of the franchised restaurant, as well as make contributions to the Advertising Funds based on a percentage of sales. The agreement also typically requires that the franchisee pay Wendy’s a technical assistance fee. The technical assistance fee is used to defray some of the costs to Wendy’s for training, start-up and transitional services related to new and existing franchisees acquiring restaurants and in the development and opening of new restaurants.

Wendy’s also enters into development agreements with certain franchisees. The development agreement provides the franchisee with the right to develop a specified number of new Wendy’s restaurants using the Image Activation design within a stated, non-exclusive territory for a specified period, subject to the franchisee meeting interim new restaurant development requirements.

Wendy’s owns and leases sites from third parties, which it leases and/or subleases to franchisees. Noncancelable lease terms are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. The lease term for properties leased or subleased to franchisees is determined based upon the economic detriment to the franchisee and includes consideration of the length of the franchise agreement, historical performance of the restaurant and the existence of bargain renewal options.

Royalties and contributions to the Advertising Funds are generally due within the month subsequent to which the revenue was generated through sales of the franchised restaurant. Technical assistance fees, renewal fees and development fees are generally due upon execution of the related franchise agreement. Rental income is due in accordance with the terms of each lease, which is generally at the beginning of each month.

Significant Accounting Policy

“Sales” includes revenues recognized upon delivery of food to the customer at Company-operated restaurants. “Sales” excludes taxes collected from the Company’s customers. Revenue is recognized when the performance obligation is satisfied, which occurs upon delivery of food to the customer. “Sales” also includes income for gift cards. Gift card payments are recorded as deferred income when received and are recognized as revenue in proportion to actual gift card redemptions.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

“Franchise royalty revenue and fees” includes royalties, new build technical assistance fees, renewal fees, Franchise Flip technical assistance fees, Franchise Flip advisory fees and development fees. Royalties from franchised restaurants are based on a percentage of sales of the franchised restaurant and are recognized as earned. New build technical assistance fees, renewal fees and Franchise Flip technical assistance fees are recorded as deferred revenue when received and recognized as revenue over the contractual term of the franchise agreements, once the restaurant has opened. Development fees are deferred when received, allocated to each agreed upon restaurant, and recognized as revenue over the contractual term of each respective franchise agreement, once the restaurant has opened. These franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. Franchise Flip advisory fees include valuation services and fees for selecting pre-approved buyers for Franchise Flips. Franchise Flip advisory fees are paid by the seller and are recognized as revenue at closing of the Franchise Flip transaction.

“Advertising funds revenue” includes contributions to the Advertising Funds by franchisees. Revenue related to these contributions is based on a percentage of sales of the franchised restaurants and is recognized as earned.

“Franchise rental income” includes rental income from properties owned and leased by the Company and leased or subleased to franchisees. Rental income is recognized on a straight-line basis over the respective operating lease terms. Favorable and unfavorable lease amounts related to the leased and/or subleased properties are amortized to rental income on a straight-line basis over the remaining term of the leases.

Disaggregation of Revenue

The following table disaggregates revenue by primary geographical market and source:



	Three Months Ended
	April 1, 2018
Primary geographical markets
United States	$	359,635
Canada	16,337
International	4,592
Total revenue	$	380,564

Sources of revenue
Sales at Company-operated restaurants	$	153,649
Franchise royalty revenue	89,943
Franchise fees	7,965
Franchise rental income	50,107
Advertising funds revenue	78,900
Total revenue	$	380,564

Contract Balances

The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:



	April 1, 2018
Receivables, which are included in “Accounts and notes receivable, net” (a)	$	47,762
Receivables, which are included in “Advertising funds restricted assets”	42,947
Deferred franchise fees (b)	102,761

_______________


(a)	Includes receivables related to “Sales” and “Franchise royalty revenue and fees.”

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)


(b)	Deferred franchise fees of $10,034 and $92,727 are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees,” respectively.

Significant changes in deferred franchise fees are as follows:



	Three Months Ended
	April 1, 2018
Deferred franchise fees at beginning of period	$	102,492
Revenue recognized during the period	(2,688		)
New deferrals due to cash received and other	2,957
Deferred franchise fees at end of period	$	102,761

Anticipated Future Recognition of Deferred Franchise Fees

The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:



Estimate for fiscal year:
2018 (a)	$	6,281
2019	6,629
2020	5,955
2021	5,590
2022	5,388
Thereafter	72,918
	$	102,761

_______________


(a)	Represents franchise fees expected to be recognized for the remainder of the 2018 fiscal year, which includes development-related franchise fees expected to be recognized over a duration of one year or less.

(4) System Optimization Losses (Gains), Net

~~In July 2013, the Company announced a~~The Company’s 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~~Franchise Flips. The Company ~~announced plans~~completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system ~~which the Company completed~~ as of January 1, 2017. While the Company has no plans to reduce its ownership below the 5% level, Wendy’s will continue to optimize its system ~~by facilitating franchisee-to-franchisee restaurant transfers,~~through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base and drive new restaurant development and accelerate reimages in the Image Activation format.

During the ~~nine~~three months ended ~~October 1,~~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 $3,385. In addition, the Company~~ facilitated ~~the transfer of 270 restaurants between franchisees~~116 Franchise Flips. No Franchise Flips occurred during the ~~nine~~three months ended ~~October~~April 1, ~~2017 (excluding the DavCo and NPC transactions discussed below).~~

~~DavCo and NPC Transactions~~2018.

As part of our system optimization initiative, the Company acquired 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”) ~~for total net cash consideration of $86,788,~~, which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the ~~Company, for cash proceeds of $70,688 (the “DavCo and NPC transactions”).~~Company. As part of the ~~transaction, NPC has agreed to remodel 90 acquired restaurants in the Image Activation format by the end of 2021 and build 15 new Wendy’s restaurants by the end of 2022. Prior to closing the~~ DavCo ~~transaction, seven DavCo restaurants were closed. The~~ acquisition, ~~of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such,~~ the Company ~~accounted for~~recognized a supplemental purchase price liability of $6,269, of which $6,100 was settled during the ~~transactions as an acquisition~~three months ended April 1, 2018.

Gains and ~~subsequent disposition~~losses recognized on dispositions are recorded to “System optimization losses (gains), net” in our condensed consolidated statements of ~~a business. The total consideration paid~~operations. Costs related to ~~DavCo was allocated~~dispositions under our system optimization initiative were recorded to ~~net tangible~~“Reorganization and ~~identifiable intangible assets acquired based on their estimated fair values. As part of the transactions, the Company retained leases for purposes of subleasing such properties~~realignment costs,” which are further described in Note 5. All other costs incurred related to ~~NPC.~~facilitating Franchise Flips are recorded to “Franchise support and other costs.”

814

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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
	April 1, 2018			April 2, 2017
Post-closing adjustments on sales of restaurants (a)	$	(212	)	$	900
(Loss) gain on sales of other assets, net (b)	(358		)	507
System optimization (losses) gains, net	$	(570	)	$	1,407

_______________


(a)	The three months ended April 1, 2018 includes cash proceeds, net of payments of $6. 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.


(b)	During the three months ended April 1, 2018 and April 2, 2017, the Company received cash proceeds of $345 and $1,650, 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 1, 2018 and December 31, 2017, the Company had assets held for sale of $2,437 and $2,235, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”

(5) Reorganization and Realignment Costs

The following is a summary of the initiatives included in “Reorganization and realignment costs:”



	Three Months Ended
	April 1, 2018		April 2, 2017
G&A realignment	$	2,626	$	—
System optimization initiative	—		181
Reorganization and realignment costs	$	2,626	$	181

General and Administrative (“G&A”) Realignment

In May 2017, the Company initiated a plan to further reduce its G&A expenses. The Company expects to incur total costs aggregating approximately $28,000 to $33,000 related to the plan. The Company recognized costs totaling $2,626 during the three months ended April 1, 2018, which primarily included severance and related employee costs. The Company expects to incur additional costs aggregating approximately $3,000 to $8,000, comprised of (1) severance and related employee costs of approximately $1,000, (2) recruitment and relocation costs of approximately $3,000, (3) third-party and other costs of approximately $1,000 and (4) share-based compensation of approximately $2,000. The Company expects to continue to recognize costs associated with the plan into 2019.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following is a summary of the activity recorded as a result of the ~~DavCo and NPC transactions:~~G&A realignment plan:

Nine Months Ended
October 1,
2017
Acquisition (a)
Total consideration paid $ 86,788
Identifiable assets and liabilities assumed:
Net assets held for sale 70,688
Capital lease assets 49,360
Deferred taxes 27,639
Capital lease obligations (97,046 )
Net unfavorable leases (b) (22,330 )
Other liabilities (c) (6,999 )
Total identifiable net assets 21,312
Goodwill (d) $ 65,476

Disposition
Proceeds $ 70,688
Net assets sold (70,688 )
Goodwill (d) (65,476 )
Net favorable leases (e) 24,034
Other (f) (1,692 )
Loss on DavCo and NPC transactions $ (43,134 )



	Three Months Ended		Total Incurred Since Inception
	April 1, 2018		Total Incurred Since Inception
Severance and related employee costs	$	2,059	$	17,015
Recruitment and relocation costs	148		637
Third-party and other costs	328		1,419
	2,535		19,071
Share-based compensation (a)	91		5,218
Total G&A realignment	$	2,626	$	24,289

_______________

(a)

~~The fair values~~Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the ~~identifiable intangible assets and taxes related to the acquisition are provisional amounts as~~termination of October 1, 2017, pending final valuations and purchase accounting adjustments. The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process. For the three months ended October 1, 2017, the Company recorded adjustments to the fair value of deferred taxes and net unfavorable leases, resulting in a decrease in goodwill of $27.employees under our G&A realignment plan.

As of April 1, 2018, the accruals for our G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $8,781 and $2,731, respectively. The table below presents a rollforward of our accruals for the plan.



	Balance December 31, 2017		Charges		Payments			Balance April 1, 2018
Severance and related employee costs	$	12,093	$	2,059	$	(2,844	)	$	11,308
Recruitment and relocation costs	177		148		(121		)	204
Third-party and other costs	—		328		(328		)	—
	$	12,270	$	2,535	$	(3,293	)	$	11,512

System Optimization Initiative

The Company recognized costs related to its system optimization initiative, which included a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating Franchise Flips.

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		Total Incurred Since Inception
Severance and related employee costs	$	3	$	18,237
Professional fees	130		17,448
Other	48		5,813
	181		41,498
Accelerated depreciation and amortization (a)	—		25,398
Share-based compensation (b)	—		5,013
Total system optimization initiative	$	181	$	71,909

_______________


~~(b)~~(a)	~~Includes favorable lease assets~~Primarily includes accelerated amortization of ~~$1,229 and unfavorable lease liabilities of $23,559.~~


~~(c)~~	~~Includes a supplemental purchase price estimated at $6,344~~previously acquired franchise rights related to ~~be paid to DavCo for the resolution of certain lease-related matters, which is included~~Company-operated restaurants in ~~“Accrued expenses and other current liabilities.”~~


~~(d)~~	~~Includes tax deductible goodwill of $21,870.~~


~~(e)~~	~~The Company recorded favorable lease assets of $30,068 and unfavorable lease liabilities of $6,034 as a result of subleasing land, buildings and leasehold improvements to NPC.~~


~~(f)~~	~~Includes cash payments for selling and other costs associated~~territories that have been sold in connection with ~~the transaction. For the three and nine months ended October 1, 2017, the Company recorded additional selling and other costs of $12.~~our system optimization initiative.

Gains and losses recognized on dispositions are recorded to “System optimization losses (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 the DavCo and NPC transactions continue to be recorded to “Reorganization and realignment costs.” All other costs incurred during 2017 related to facilitating franchisee-to-franchisee restaurant transfers are recorded to “Other operating expense (income), net.” See Note 4 for further information.

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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 1, 2017 October 2,
2016 October 1,
2017 October 2,
2016
Number of restaurants sold to franchisees —
156
—
211

Proceeds from sales of restaurants $ —
$ 124,765
$ —
$ 164,380
Net assets sold (a) —
(58,227 ) —
(75,282 )
Goodwill related to sales of restaurants —
(24,254 ) —
(30,630 )
Net unfavorable leases (b) —
(6,225 ) —
(11,131 )
Other —
(726 ) —
(1,521 )
—
35,333
—
45,816
Post-closing adjustments on sales of restaurants (c) 418
(120 ) 1,345
(1,710 )
Gain on sales of restaurants, net 418
35,213
1,345
44,106

(Loss) gain on sales of other assets, net (d) (539 ) 2,543
2,040
4,000
Gain (loss) on DavCo and NPC transactions 15
—
(43,134 ) —
System optimization (losses) gains, net $ (106 ) $ 37,756
$ (39,749 ) $ 48,106

~~_______________~~


~~(a)~~	~~Net assets sold consisted primarily of 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.

~~(c)~~

The three and nine months ended October 1, 2017 includes cash payments, net of proceeds received, of $333 and $33, respectively, related to post-closing reconciliations with franchisees. The nine months ended October 1, 2017 also 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 and nine months ended October 1, 2017, the Company received cash proceeds of $2,411 and $9,403, respectively, primarily from the sale of surplus properties. The nine months ended October 1, 2017 also includes the recognition of a deferred gain of $375 related to the sale of a share in an aircraft. 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.

As of October 1, 2017 and January 1, 2017, the Company had assets held for sale of $2,509 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)~~

~~(3) 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 Ended
October 1,
2017 October 2,
2016
Restaurants acquired from franchisees —
2

Total consideration paid, net of cash received $ —
$ 2,209
Identifiable assets acquired and liabilities assumed:
Properties —
2,218
Deferred taxes and other assets —
9
Other liabilities —
(18 )
Total identifiable net assets —
2,209
Goodwill $ —
$ —

~~On May 31, 2017, the Company also entered into the DavCo and NPC transactions. See Note 2 for further information.~~

~~(4) Reorganization and Realignment Costs~~

~~The following is a summary of the initiatives included in “Reorganization and realignment costs:”~~

Three Months Ended Nine Months Ended
October 1,
2017 October 2,
2016 October 1,
2017 October 2,
2016
System optimization initiative $ 232
$ 2,091
$ 867
$ 6,895
G&A realignment - November 2014 plan —
38
—
971
G&A realignment - May 2017 plan 2,656
—
19,901
—
Reorganization and realignment costs $ 2,888
$ 2,129
$ 20,768
$ 7,866

~~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 does not expect to incur additional costs during the remainder of 2017 in connection with the DavCo and NPC transactions. All other costs incurred during 2017 related to facilitating franchisee-to-franchisee restaurant transfers are recorded to “Other operating expense (income), net.”

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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 costs recorded as a result of our system optimization initiative:~~

Three Months Ended Nine Months Ended
Total
Incurred Since Inception
October 1,
2017 October 2,
2016 October 1,
2017 October 2,
2016
Severance and related employee costs $ —
$ 28
$ 3
$ 46
$ 18,237
Professional fees 232
1,991
794
5,137
17,404
Other (a) —
72
70
112
5,813
232
2,091
867
5,295
41,454
Accelerated depreciation and amortization (b) —
—
—
1,600
25,398
Share-based compensation (c) —
—
—
—
5,013
Total system optimization initiative $ 232
$ 2,091
$ 867
$ 6,895
$ 71,865

~~_______________~~


~~(a)~~	~~The nine months ended October 2, 2016 includes a reversal of an accrual of $50 as a result of a change in estimate.~~


~~(b)~~	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.


~~(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~~table below ~~present~~presents a rollforward of our accrual for our system optimization initiative, which is included in “Accrued expenses and other current liabilities.” As of April 1, 2018, no accrual remained.

Balance
January 1,
2017
Charges Payments
Balance
October 1, 2017
Severance and related employee costs $ —
$ 3
$ (3 ) $ —
Professional fees 101
794
(885 ) 10
Other —
70
(70 ) —
$ 101
$ 867
$ (958 ) $ 10

Balance
January 3, 2016
Charges Payments
Balance October 2,
2016
Severance and related employee costs $ 77
$ 46
$ (123 ) $ —
Professional fees 708
5,137
(5,740 ) 105
Other 90
112
(202 ) —
$ 875
$ 5,295
$ (6,065 ) $ 105

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

~~November 2014 Plan~~

In November 2014, the Company initiated a plan to reduce its G&A expenses. The plan included a realignment and reinvestment of resources to focus primarily on accelerated restaurant development and consumer-facing restaurant technology to drive long-term growth. The Company achieved the majority of the expense reductions through the realignment of its U.S. field operations and savings at its Restaurant Support Center in Dublin, Ohio, which was substantially completed by the end of the second quarter of 2015. The Company recognized costs totaling $38 and $971 during the three and nine months ended October 2, 2016, respectively, and $23,960 in aggregate since inception. The Company did not incur any expenses during the three and nine months ended October 1, 2017 and does not expect to incur additional costs related to the plan.

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In Thousands Except Per Share Amounts)~~

~~May 2017 Plan~~

In May 2017, the Company initiated a new plan to further reduce its G&A expenses. The Company expects to incur total costs aggregating approximately $28,000 to $33,000 related to the plan. The Company recognized costs totaling $2,656 and $19,901 during the three and nine months ended October 1, 2017, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $8,000 to $13,000, comprised of (1) severance and related employee costs of approximately $3,000, (2) recruitment and relocation costs of approximately $4,000, (3) third-party and other costs of approximately $1,000 and (4) share-based compensation of approximately $3,000. The Company expects costs to be recognized during the remainder of 2017 and continue into 2019, with approximately two-thirds to be recognized during 2017.

~~The following is a summary of the activity recorded as a result of the May 2017 plan:~~

Three Months Ended Nine Months Ended
October 1,
2017 October 1,
2017
Severance and related employee costs $ 1,210
$ 14,436
Recruitment and relocation costs 145
145
Third-party and other costs 496
821
1,851
15,402
Share-based compensation (a) 805
4,499
Total G&A realignment - May 2017 plan $ 2,656
$ 19,901

~~_______________~~


~~(a)~~	Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our May 2017 plan. The three and nine months ended October 1, 2017 includes incremental share-based compensation of $652 related to the modification of stock options granted during August 2017.

As of October 1, 2017, the accruals for our May 2017 plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $7,766 and $5,429, respectively. The table below presents a rollforward of our accruals for the May 2017 plan.

Balance
January 1,
2017
Charges Payments
Balance
October 1, 2017
Severance and related employee costs $ —
$ 14,436
$ (1,350 ) $ 13,086
Recruitment and relocation costs —
145
(36 ) 109
Third-party and other costs —
821
(821 ) —
$ —
$ 15,402
$ (2,207 ) $ 13,195



	Balance January 1, 2017		Charges		Payments			Balance April 2, 2017
Severance and related employee costs	$	—	$	3	$	(3	)	$	—
Professional fees	101		130		(143		)	88
Other	—		48		(48		)	—
	$	101	$	181	$	(194	)	$	88

~~(5)~~(6) Investments

Equity Investments

Wendy’s has a 50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons^® brand. (Tim Hortons^™is a registered trademark of Tim Hortons USA Inc.) In addition, a wholly-owned subsidiary of Wendy’s has a 20% share in a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating ~~expense (income),~~income, net.”

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~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In Thousands Except Per Share Amounts)~~

During the three months ended October 1, 2017, a wholly-owned subsidiary of Wendy’s agreed to lend the Brazil JV an aggregate amount up to, but not to exceed, $4,800, which is in addition to $8,000 previously loaned. During the three months ended October 1, 2017, $1,500 was loaned to the Brazil JV under this agreement. The loans are denominated in U.S. Dollars, which is also the functional currency of the subsidiary; therefore, there is no exposure to changes in foreign currency rates. The loans are due October 20, 2020 and bear interest at 6.5% per year.

Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:


	Nine Months Ended						Three Months Ended
	October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
Balance at beginning of period	$	54,545		$	55,541		$	55,363		$	54,545

Investment	375			172			12			58

Equity in earnings for the period	7,844			8,207			2,420			2,415
Amortization of purchase price adjustments (a)	(1,731		)	(1,712		)	(596		)	(569		)
	6,113			6,495			1,824			1,846
Distributions received ~~(b)~~	(8,128		)	(8,451		)	(2,907		)	(2,439		)
Foreign currency translation adjustment included in “Other comprehensive income, net”	4,304			3,204
Foreign currency translation adjustment included in “Other comprehensive (loss) income, net” and other							(1,262		)	508
Balance at end of period	$	57,209		$	56,961		$	53,030		$	54,518

_______________


(a)	Purchase price adjustments that impacted the carrying value of the Company’s investment in TimWen are being amortized over the average original aggregate life of 21 years.


~~(b)~~	~~The nine months ended October 1, 2017 includes a distribution receivable from TimWen of $2,604, which is included in “Accounts and notes receivable, net.”~~

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(7) Long-Term Debt

Long-term debt consisted of the following:



	April 1, 2018			December 31, 2017
Series 2018-1 Class A-2 Notes:
3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025	$	448,875		$	—
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028	473,813			—
Series 2015-1 Class A-2 Notes:
3.371% Series 2015-1 Class A-2-I Notes, repaid with 2018 refinancing	—			855,313
4.080% Series 2015-1 Class A-2-II Notes, anticipated repayment date 2022	877,500			879,750
4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025	487,500			488,750
7% debentures, due in 2025	89,827			89,514
Capital lease obligations, due through 2045	467,331			467,964
Unamortized debt issuance costs	(36,825		)	(26,889		)
	2,808,021			2,754,402
Less amounts payable within one year	(30,838		)	(30,172		)
Total long-term debt	$	2,777,183		$	2,724,230

On January 17, 2018, Wendy’s Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, completed a refinancing transaction under which the Master Issuer issued fixed rate senior secured notes in the following 2018-1 series: Class A-2-I with an initial principal amount of $450,000 and Class A-2-II with an initial principal amount of $475,000 (collectively, the “Series 2018-1 Class A-2 Notes”). Interest payments on the Series 2018-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series 2018-1 Class A-2 Notes is in March 2048. If the Master Issuer has not repaid or redeemed the Series 2018-1 Class A-2 Notes prior to the respective anticipated repayment date, additional interest will accrue on these notes equal to the greater of (1) 5.00% per annum and (2) a per annum interest rate equal to the excess, if any, by which the sum of (a) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on such anticipated repayment date of the United States Treasury Security having a term closest to 10 years, plus (b) 5.00%, plus (c) (i) with respect to the Series 2018-1 Class A-2-I Notes, 1.35%, and (ii) with respect to the Series 2018-1 Class A-2-II Notes, 1.58%, exceeds the original interest rate with respect to such tranche. The net proceeds from the sale of the Series 2018-1 Class A-2 Notes were used to redeem the Master Issuer’s outstanding Series 2015-1 Class A-2-I Notes, to pay prepayment and transaction costs, and for general corporate purposes. As a result, the Company recorded a loss on early extinguishment of debt of $11,475 during the three months ended April 1, 2018, which was comprised of the write-off of certain deferred financing costs and a specified make-whole payment. The Series 2018-1 Class A-2 Notes have scheduled principal payments of $9,250 annually from 2018 through 2024, $423,250 in 2025, $4,750 in each 2026 through 2027 and $427,500 in 2028.

Concurrently, the Master Issuer entered into a revolving financing facility of Series 2018-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2018-1 Class A-1 Notes” and, together with the Series 2018-1 Class A-2 Notes, the “Series 2018-1 Senior Notes”), which allows for the drawing of up to $150,000 using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2018-1 Class A-1 Notes during the three months ended April 1, 2018. The Series 2015-1 Class A-1 Notes were canceled on the closing date and the letters of credit outstanding against the Series 2015-1 Class A-1 Notes were transferred to the Series 2018-1 Class A-1 Notes.

The Series 2018-1 Senior Notes are secured by substantially all of the assets of the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors (the “Guarantors”), excluding certain real estate assets and subject to certain limitations. The Series 2018-1 Senior Notes are subject to the same series of covenants and restrictions as the Series 2015-1 Senior Notes.

During the three months ended April 1, 2018, the Company incurred debt issuance costs of $17,672 in connection with the issuance of the Series 2018-1 Senior Notes. The debt issuance costs will be amortized to “Interest expense, net” through the anticipated repayment dates of the Series 2018-1 SeniorNotes utilizing the effective interest rate method.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Wendy’s U.S. advertising fund has a revolving line of credit of $25,000. Neither the Company, nor Wendy’s, is the guarantor of the debt. The advertising fund facility was established to fund the advertising fund operations. During the three months ended April 1, 2018, the Company borrowed and repaid $3,167 and $4,454 under the line of credit, respectively. During the three months ended April 2, 2017, the Company borrowed and repaid $4,511 under the line of credit.

~~(6)~~(8) 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 1, 2017				January 1, 2017					April 1, 2018				December 31, 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	$	337	$	337	$	5,335	$	5,335	Level 1	$	19,495	$	19,495	$	338	$	338	Level 1
Non-current cost method investments (a)	962		325,869		2,436		326,283		Level 3	639		327,479		639		327,710		Level 3

Financial liabilities
Series 2018-1 Class A-2-I Notes (b)										448,875		440,167		—		—		Level 2
Series 2018-1 Class A-2-II Notes (b)										473,813		464,432		—		—		Level 2
Series 2015-1 Class A-2-I Notes (b)	857,500		863,417		864,063		857,349		Level 2	—		—		855,313		856,510		Level 2
Series 2015-1 Class A-2-II Notes (b)	882,000		900,169		888,750		880,005		Level 2	877,500		880,133		879,750		897,961		Level 2
Series 2015-1 Class A-2-III Notes (b)	490,000		504,112		493,750		474,543		Level 2	487,500		497,494		488,750		513,188		Level 2
7% debentures, due in 2025 (b)	89,204		106,000		88,277		99,750		Level 2	89,827		105,750		89,514		107,000		Level 2
Guarantees of franchisee loan obligations (c)	224		224		280		280		Level 3	32		32		37		37		Level 3

_______________

(a)

On February 5, 2018, a subsidiary of ARG Holding Corporation (“ARG Parent”) acquired Buffalo Wild Wings, Inc. As a result, our ownership interest was diluted to 12.3% and now includes both the Arby’s and Buffalo Wild Wings brands under the newly formed combined company, Inspire Brands. The fair value of our indirect investment in ~~Arby’s Restaurant Group, Inc. (“Arby’s”)~~Inspire Brands is based on a price per share that was determined at the time that ARG Parent financed the acquisition of Buffalo Wild Wings. In the future, the fair value is expected to be calculated by applying a multiple to ~~Arby’s~~Inspire Brand’s adjusted earnings before income taxes, depreciation and ~~amortization per its current unaudited financial information.~~amortization. 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

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.

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 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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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In Thousands Except Per Share Amounts)~~

Reclassifications of unrealized losses on cash flow hedges from “Accumulated other comprehensive loss” to “Interest expense” were $723 and $2,170 for both the three and nine months ended October 1, 2017 and October 2, 2016, respectively.

Non-Recurring Fair Value Measurements

Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.

Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements and favorable lease assets) 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-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.~~discounted cash flows of future Company-operated restaurant performance.

Total impairment losses may also include the impact of remeasuring long-lived assets held for sale, which primarily include surplus properties. The fair ~~value~~values of long-lived assets held for sale presented in the tables below represents the remaining carrying value and ~~was~~were estimated based on current market values. See Note 79 for further information on impairment of our long-lived assets.


			Fair Value Measurements								Fair Value Measurements
	October 1, 2017		Level 1		Level 2		Level 3		April 1, 2018		Level 1		Level 2		Level 3
Held and used	$	915	$	—	$	—	$	915	$	—	$	—	$	—	$	—
Held for sale	1,290		—		—		1,290		427		—		—		427
Total	$	2,205	$	—	$	—	$	2,205	$	427	$	—	$	—	$	427


			Fair Value Measurements								Fair Value Measurements
	January 1, 2017		Level 1		Level 2		Level 3		December 31, 2017		Level 1		Level 2		Level 3
Held and used	$	5,462	$	—	$	—	$	5,462	$	757	$	—	$	—	$	757
Held for sale	1,552		—		—		1,552		1,560		—		—		1,560
Total	$	7,014	$	—	$	—	$	7,014	$	2,317	$	—	$	—	$	2,317

Total impairment losses for the three ~~and nine~~ months ended ~~October~~April 1, 2018 and April 2, 2017, included remeasuring long-lived assets held and used of ~~$928~~$165 and ~~$1,146,~~$17, respectively, and remeasuring long-lived assets held for sale of ~~$113~~$41 and $658, respectively. Total impairment losses for the three and nine months ended October 2, 2016 included remeasuring long-lived assets held and used of $242 and $12,768, respectively, and remeasuring long-lived assets held for sale of $119 and $223,$493, respectively.

In addition, the Company measured assets acquired and liabilities assumed at fair value as part of the DavCo and NPC transactions during the three and nine months ended October 1, 2017. See Note 2 for further information.

~~(7) Impairment of Long-Lived Assets~~

During the three and nine months ended October 1, 2017 and October 2, 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-operated restaurants, (2) closing Company-operated restaurants and classifying such surplus properties as held for sale and (3) the deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in previously impaired restaurants that did not subsequently recover. The Company may recognize additional impairment charges resulting from leasing or subleasing additional properties to franchisees in connection with sales of Company-operated restaurants to franchisees.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(9) Impairment of Long-Lived Assets

During the three months ended April 1, 2018 and April 2, 2017, the Company recorded impairment charges on long-lived assets as a result of closing Company-operated restaurants and classifying such surplus properties as held for sale.

During the three months ended April 1, 2018, the Company recorded impairment charges on long-lived assets as a result of the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants. Additionally, during the three months ended April 2, 2017, the Company recorded impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in previously impaired restaurants that did not subsequently recover.

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016		April 1, 2018		April 2, 2017
Restaurants leased or subleased to franchisees	$	95	$	163	$	95	$	12,654	$	165	$	—
Surplus properties	113		119		658		223		41		493
Company-operated restaurants	833		79		1,051		114		—		17
	$	1,041	$	361	$	1,804	$	12,991	$	206	$	510

~~(8)~~(10) Income Taxes

The Company’s effective tax rate for the three months ended ~~October~~April 1, 2018 and April 2, 2017 was (40.5)% and ~~October 2, 2016 was 54.8% and 37.2%~~30.5%, respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 21% and 35% in the first quarter of 2018 and 2017, respectively, primarily due to ~~the effect of~~ (1) ~~the system optimization initiative provision of $5,019 and $2,332 in the third quarter of 2017 and 2016, respectively, reflecting goodwill adjustments, changes to valuation allowances on state~~ net operating loss carryforwards and state deferred taxes, (2) state income taxes net of federal benefits, including non-recurring changes to state deferred taxes, (3) 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 and (4) the rate differential between foreign and domestic taxes.~~

The Company’s effective tax rate for the nine months ended October 1, 2017 and October 2, 2016 was 45.2% and 33.3%, respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 35% due to the effect of (1) the system optimization initiative, reflecting goodwill adjustments, changes to valuation allowances on state net operating loss carryforwards and state deferred taxes (including corrections to prior years identified and recorded in the first nine months of 2017 and 2016, which resulted in a benefit of ~~$2,248 and $7,113, respectively),~~$6,093 in the first quarter of 2018, (2) the ~~adoption~~impact of ~~an amendment issued by~~ the ~~FASB, which requires that excess~~comprehensive tax ~~benefits~~legislation commonly referred to as the Tax Cuts and ~~tax deficiencies related to share-based payments be recognized in net income, which resulted in a benefit of $5,205 during the nine months ended October 1, 2017,~~Jobs Act (the “Tax Act”) and (3) state income ~~taxes net of federal benefits, including non-recurring changes to state deferred taxes, and (4) the rate differential between foreign and domestic~~ taxes.

~~During~~On December 22, 2017, the ~~next twelve months,~~U.S. government enacted the Tax Act. In our continued analysis of the impact of the Tax Act in the first quarter of 2018 under Staff Accounting Bulletin 118, we ~~believe that it is reasonably possible~~have adjusted our provisional amounts for a discrete net tax benefit of $3,623. This net benefit includes $5,578 for the tax benefit of foreign tax credits, partially offset by a net expense of $1,955 related to the impact of the corporate rate reduction on our net deferred tax liabilities. The ultimate impact of the Tax Act may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company ~~will reduce its~~has made and additional regulatory guidance that may be issued.

There were no significant changes to unrecognized tax benefits ~~by up to $7,030, primarily due to expected settlements with taxing authorities.~~or related interest and penalties for the Company for the three months ended April 1, 2018.

The current portion of refundable income taxes was ~~$16,165~~$24,697 and ~~$18,111~~$26,262 as of ~~October~~April 1, ~~2017~~2018 and ~~January 1,~~December 31, 2017, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. ~~Long-term refundable income taxes are included in “Other assets” and amounted to $960 and $239 as of October 1, 2017 and January 1, 2017, respectively.~~

~~(9)~~

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(11) 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 Ended
October 1,
2017 October 2,
2016 October 1,
2017 October 2,
2016
Common stock:
Weighted average basic shares outstanding 243,354
260,976
245,073
265,702
Dilutive effect of stock options and restricted shares 8,383
3,832
8,103
4,239
Weighted average diluted shares outstanding 251,737
264,808
253,176
269,941

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~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In Thousands Except Per Share Amounts)~~



	Three Months Ended
	April 1, 2018	April 2, 2017
Common stock:
Weighted average basic shares outstanding	239,928	246,606
Dilutive effect of stock options and restricted shares	8,491	7,633
Weighted average diluted shares outstanding	248,419	254,239

Diluted net income per share for the three ~~and nine~~ months ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016~~2017 was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of ~~1,617~~2,711 and ~~618~~132 for the three ~~and nine~~ months ended ~~October~~April 1, ~~2017, respectively,~~2018 and ~~2,233 and 2,072 for the three and nine months ended October~~April 2, ~~2016,~~2017, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.

~~(10)~~(12) Stockholders’ Equity

Stockholders’ Equity

The following is a summary of the changes in stockholders’ equity:


	Nine Months Ended						Three Months Ended
	October 1, 2017			October 2, 2016			April 1, 2018			April 2, 2017
Balance at beginning of period	$	527,736		$	752,914		$	573,203		$	527,736
Comprehensive income	52,978			112,896			14,232			24,827
Cash dividends	(51,464		)	(47,793		)	(20,355		)	(17,273		)
Repurchases of common stock	(90,964		)	(162,492		)	(39,407		)	(17,823		)
Share-based compensation	16,356			14,260			4,458			3,559
Exercises of stock options	10,194			10,600			3,578			4,418
Vesting of restricted shares	(4,260		)	(3,853		)	(2,550		)	(2,518		)
Cumulative effect of change in accounting principle (a)	1,880			—			(70,210		)	1,880
Tax benefit from share-based compensation	—			1,898
Other	139			145			48			43
Balance at end of period	$	462,595		$	678,575		$	462,997		$	524,849

_______________

(a)

During the ~~nine~~three months ended ~~October~~April 1, ~~2017,~~2018, the Company recognized a ~~tax benefit as a reduction to the Company’s deferred tax liability with an equal offsetting~~net increase to “Accumulated ~~deficit.”~~deficit” of $70,210 as a result of adoption of amended guidance for revenue recognition. The ~~adjustment~~net increase resulted from an increase to deferred franchise fees of $85,561 and a decrease to “Deferred income taxes” of $21,996 as a result of now deferring franchise fees over the contractual term of the franchise agreements. Additionally, a decrease to “Advertising funds restricted liabilities” of $6,645 was recognized as a result of ~~adoption~~a reclassification of ~~an amendment to~~ the ~~accounting for employee share-based payment transactions.~~total stockholders’ equity of the Advertising Funds as of December 31, 2017. See Note 152 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 ~~nine~~three months ended October 1, 2017, the Company repurchased 6,131 shares with an aggregate purchase price of $90,876, of which $899 was accrued at October 1, 2017 and excluding commissions of $88. As of October 1, 2017, the Company had $59,124 of availability remaining under its February 2017 authorization. Subsequent to October 1, 2017 through NovemberApril 2, 2017, the Company ~~repurchased 428 shares~~recognized a tax benefit as a reduction to the Company’s deferred tax liability with an ~~aggregate purchase price~~equal offsetting increase to “Accumulated deficit.” The adjustment was recognized as a result of ~~$6,628, excluding commissions~~adoption of ~~$6.~~

~~On June 1, 2015, our Board of Directors authorized a repurchase program for up to $1,400,000 of our common stock through January 1, 2017, when and if market conditions warranted and~~an amendment to the extent legally permissible. During the nine months ended October 2, 2016, the Company repurchased 16,034 shares with an aggregate purchase price of $162,252, of which $2,998 was accrued at October 2, 2016 and excluding commissions of $240.accounting for employee share-based payment transactions.

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(In Thousands Except Per Share Amounts)

Repurchases of Common Stock

In February 2018, our Board of Directors authorized a repurchase program for up to $175,000 of our common stock through March 3, 2019, when and if market conditions warrant and to the extent legally permissible. During the three months ended April 1, 2018, the Company repurchased 989 shares with an aggregate purchase price of $16,741, of which $1,294 was accrued at April 1, 2018, and excluding commissions of $14. Subsequent to April 1, 2018 through May 2, 2018, the Company repurchased 1,102 shares with an aggregate purchase price of $18,899, excluding commissions of $15.

In February 2017, our Board of Directors authorized a repurchase program for up to $150,000 of our common stock through March 4, 2018, when and if market conditions warranted and to the extent legally permissible. During the three months ended April 1, 2018, the Company completed the $150,000 program with the repurchase of 1,385 shares with an aggregate purchase price of $22,633, excluding commissions of $19. 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.

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 1, 2017 $ (60,299 ) $ (1,797 ) $ (1,145 ) $ (63,241 )
Current-period other comprehensive income 16,797
1,332
96
18,225
Balance at October 1, 2017 $ (43,502 ) $ (465 ) $ (1,049 ) $ (45,016 )

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 )



	Foreign Currency Translation			Cash Flow Hedges (a)			Pension			Total
Balance at December 31, 2017	$	(45,149	)	$	—		$	(1,049	)	$	(46,198	)
Current-period other comprehensive (loss) income	(6,044		)	—			117			(5,927		)
Balance at April 1, 2018	$	(51,193	)	$	—		$	(932	)	$	(52,125	)

Balance at January 1, 2017	$	(60,299	)	$	(1,797	)	$	(1,145	)	$	(63,241	)
Current-period other comprehensive income	1,945			445			96			2,486
Balance at April 2, 2017	$	(58,354	)	$	(1,352	)	$	(1,049	)	$	(60,755	)

_______________

(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~~$445 for ~~both~~ the three ~~and nine~~ months ended ~~October 1, 2017 and October~~April 2, ~~2016, respectively.~~2017. The reclassification of unrealized losses on cash flow hedges consists of $723 ~~and $2,170 for both the three and nine months ended October 1, 2017 and October 2, 2016, respectively,~~ recorded to “Interest expense,” net of the related income tax benefit of ~~$279 and $838 for both the three and nine months ended October 1, 2017 and October 2, 2016, respectively,~~$278 recorded to “Provision for income ~~taxes.” See Note 6~~taxes” for ~~further information.~~the three months ended April 2, 2017.

~~(11)~~(13) Leases

At ~~October~~April 1, ~~2017,~~2018, Wendy’s and its franchisees operated ~~6,586~~6,633 Wendy’s restaurants. Of the ~~333~~337 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for ~~146~~147 restaurants, owned the building and held long-term land leases for ~~137~~141 restaurants and held leases covering land and building for 5049 restaurants. Wendy’s also owned ~~521~~519 and leased ~~1,270~~1,294 properties that were either leased or subleased principally to franchisees.

~~Rental expense for operating leases consists of the following components:~~

Three Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
Rental expense:
Minimum rentals $ 23,997
$ 19,137
$ 66,701
$ 59,139
Contingent rentals 5,395
5,254
14,405
13,786
Total rental expense (a) $ 29,392
$ 24,391
$ 81,106
$ 72,925

~~_______________~~


~~(a)~~	Amounts exclude sublease income of $35,022 and $92,434 recognized during the three and nine months ended October 1, 2017, respectively, and $25,127 and $68,400 recognized during the three and nine months ended October 2, 2016, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Rental expense for operating leases consists of the following components:



	Three Months Ended
	April 1, 2018		April 2, 2017
Rental expense:
Minimum rentals	$	24,854	$	19,918
Contingent rentals	4,071		4,288
Total rental expense (a) (b)	$	28,925	$	24,206

_______________


(a)	Amounts include rental expense related to (1) leases for Company-operated restaurants recorded to “Cost of sales,” (2) leased properties that are subsequently leased to franchisees recorded to “Franchise rental expense” and (3) leases for corporate offices and equipment recorded to “General and administrative.”


(b)	Amounts exclude sublease income of $34,306 and $26,563 recognized during the three months ended April 1, 2018 and April 2, 2017, respectively.

Rental income for operating leases and subleases consists of the following components:


	Three Months Ended				Nine Months Ended				Three Months Ended
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016		April 1, 2018		April 2, 2017
Rental income:
Minimum rentals	$	44,682	$	31,902	$	124,847	$	87,409	$	46,327	$	38,605
Contingent rentals	5,593		5,427		15,280		15,011		3,780		4,312
Total rental income	$	50,275	$	37,329	$	140,127	$	102,420	$	50,107	$	42,917

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 ~~October~~April 1, ~~2017.~~2018. 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						Rental Payments					Rental Receipts
Fiscal Year	Capital Leases			Operating Leases		Capital Leases		Operating Leases		Owned Properties		Capital Leases			Operating Leases		Capital Leases		Operating Leases		Owned Properties
2017 (a)	$	11,989		$	24,894	$	15,868	$	18,782	$	13,436
2018	43,406			93,431		60,844		75,167		53,896
2018 (a)												$	35,711		$	72,222	$	48,894	$	56,676	$	40,282
2019	42,717			93,272		61,368		75,267		54,866		45,624			94,457		65,684		75,847		54,651
2020	43,660			92,434		62,469		74,983		55,489		46,552			93,419		66,780		75,515		55,260
2021	45,249			91,892		64,260		74,672		57,102		48,164			92,888		68,595		75,357		56,860
2022												49,272			92,576		69,793		75,721		58,433
Thereafter	748,736			1,188,165		1,045,693		973,428		1,008,243		760,722			1,119,861		1,057,539		916,592		946,056
Total minimum payments	$	935,757		$	1,584,088	$	1,310,502	$	1,292,299	$	1,243,032	$	986,045		$	1,565,423	$	1,377,285	$	1,275,708	$	1,211,542
Less interest	(499,703		)									(518,714		)
Present value of minimum capital lease payments (b)	$	436,054										$	467,331

_______________


(a)	Represents future minimum rental payments and rental receipts for non-cancelable leases and subleases for the remainder of ~~our 2017~~the 2018 fiscal year.


(b)	The present value of minimum capital lease payments of ~~$6,608~~$7,588 and ~~$429,446~~$459,743 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:~~

October 1, 2017 January 1, 2017
Land $ 271,840
$ 271,160
Buildings and improvements 312,796
312,067
Restaurant equipment 1,491
1,507
586,127
584,734
Accumulated depreciation and amortization (122,970 ) (110,166 )
$ 463,157
$ 474,568

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Properties owned by the Company and leased to franchisees and other third parties under operating leases include:



	April 1, 2018			December 31, 2017
Land	$	271,384		$	272,411
Buildings and improvements	312,296			313,108
Restaurant equipment	2,443			2,444
	586,123			587,963
Accumulated depreciation and amortization	(131,690		)	(128,003		)
	$	454,433		$	459,960

Our net investment in direct financing leases is as follows:


	October 1, 2017			January 1, 2017			April 1, 2018			December 31, 2017
Future minimum rental receipts	$	630,352		$	401,452		$	658,218		$	662,889
Unearned interest income	(416,221		)	(277,747		)	(427,984		)	(433,175		)
Net investment in direct financing leases	214,131			123,705			230,234			229,714
Net current investment in direct financing leases (a)	(482		)	(101		)	(634		)	(625		)
Net non-current investment in direct financing leases ~~(b)~~	$	213,649		$	123,604		$	229,600		$	229,089

_______________


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


~~(b)~~	~~Included in “Net investment in direct financing leases.”~~

During the three months ended April 1, 2018 and April 2, 2017, the Company recognized $7,041 and $4,456 in interest income related to our direct financing leases, respectively, which is included in “Interest expense, net.”

~~(12)~~(14) Transactions with Related Parties

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

TimWen Lease and Management Fee Payments

A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. During the ~~nine~~three months ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016,~~2017, Wendy’s paid TimWen ~~$9,362~~$2,872 and ~~$8,926,~~$2,819, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of ~~$158~~$54 and ~~$156~~$52 during the ~~nine~~three months ended ~~October~~April 1, ~~2017~~2018 and ~~October~~April 2, ~~2016,~~2017, respectively, which has been included as a reduction to “General and administrative.”

~~(13)~~(15) 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 two years of operation for qualifying new restaurants opened by December 31, 2020, with the value of the incentives declining in the later years of the program. Wendy’s also ~~has~~had incentive programs for 2017 available to franchisees that ~~commence~~commenced Image Activation restaurant remodels by December 15, 2017. The remodel incentive programs provide for reductions in royalty payments for one year after the completion of construction.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Lease Guarantees

Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees, amounting to ~~$56,299~~$56,677 as of ~~October~~April 1, ~~2017.~~2018. These leases extend through 2056. We have not received any notice of default related to these leases as of ~~October~~April 1, ~~2017.~~2018. 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 ~~$637~~$452 as of ~~October~~April 1, ~~2017.~~2018. These leases expire on various dates through 2021.

~~Table of Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In Thousands Except Per Share Amounts)~~

Letters of Credit

As of ~~October~~April 1, ~~2017,~~2018, the Company had outstanding letters of credit with various parties totaling ~~$32,575, of which $3,205 were cash collateralized.~~$31,601. 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.~~Series 2018-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.

~~(14)~~(16) 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 October 1, 2017, the Company had accruals for all of its legal and environmental matters aggregating $1,639.~~ 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 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.

We previously described certain legal proceedings ~~under Note 14 to our Condensed Consolidated Financial Statements~~ in ~~our Quarterly~~the Company’s Annual Report on Form ~~10-Q for the second quarter of 2017, as~~10-K filed with the SEC on ~~August 9, 2017. Except as set forth below, there~~February 28, 2018. There were no material developments in those legal proceedings during the ~~third quarter of 2017.~~

As previously reported, 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. On October 27, 2017, the Company moved to dismiss the operative complaint. The Company’s motion is pending before the court.

~~(15) New Accounting Standards~~

~~New Accounting Standards~~

In May 2017, the FASB issued new guidance on the scope of modification accounting for share-based payment arrangements. The new guidance will provide relief to entities that make non-substantive changes to their share-based payment arrangements. The Company does not expect the amendment, which requires prospective adoption and is effective commencing with our 2018 fiscal year, to have a material impact on our consolidated financial statements.

In March 2017, the FASB issued new guidance on the presentation of net periodic benefit costs that requires entities to disaggregate the current service cost component from the other components of net benefit cost in the income statement. The Company does not expect the amendment, which requires retrospective adoption and is effective commencing with our 2018 fiscal year, to have a material impact 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. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements and plan to reflect adoption when effective in the first quarter of our 2019 fiscal year. As shown in Note 11, there are $1,584,088 in future minimum rental payments for operating leases that are not currently on our balance sheet; therefore, we expect this will have a material impact on our balance sheet and related disclosures.

~~Table of Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In Thousands Except Per Share Amounts)~~

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 effective commencing with our 2018 fiscal year. The guidance allows for either a full retrospective or modified retrospective transition method. We currently expect to apply the modified retrospective method upon adoption. This guidance will not impact our recognition of revenue from Company-operated restaurant sales or our recognition of continuing royalty revenues from franchisees, which are based on a percentage of franchise sales. Under current guidance, we recognize initial fees from franchisees when we have performed all material obligations and services, which generally occurs when the franchised restaurant opens. Additionally, under current guidance, our advertising fund contributions from franchisees and the related advertising expenditures are reported on a net basis in our consolidated balance sheet as “Advertising funds restricted assets” and “Advertising funds restricted liabilities.” Under the new guidance, we anticipate recognizing the initial fees from franchisees over the life of the related franchise agreements and we expect to consolidate the operations and cash flow results of our national advertising funds, both of which will have a material impact on our consolidated financial statements.

~~New Accounting Standards Adopted~~

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 Company adopted this amendment, prospectively, during the first quarter of 2017. The adoption of this guidance did not impact 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 Company adopted this amendment during the first quarter of 2017. The adoption of this guidance did not impact 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 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 2017. The cash flows used in financing activities related to the excess tax benefits from share-based compensation arrangements, which amounted to $2,376 during the nine months ended October 2, 2016, was reclassified retrospectively to cash flows provided by operating activities. Additionally, during the nine months ended October 2, 2016, $4,142 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.

2018.

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 1,~~December 31, 2017 (the “Form 10-K”). There have been no material changes as of ~~October~~April 1, ~~2017~~2018 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II - Other Information” preceding Item 1 of Part II of this report. You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).

The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchises and operates Wendy’s^® quick-service restaurants throughout North America (defined as the United States of America (“U.S.”) and Canada). Wendy’s also has franchised restaurants in 29 foreign countries and U.S. territories.

Wendy’s restaurants offer an extensive menu specializing in hamburger sandwiches and featuring ~~fillet~~filet of chicken breast sandwiches, chicken nuggets, chicken tenders, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty^® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited 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~~three-month periods presented herein contain 13 ~~weeks and 39 weeks, respectively.~~weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.

We adopted the new accounting guidance for revenue recognition effective January 1, 2018, which had a material impact on our condensed consolidated financial statements. Beginning with the first quarter of 2018, our financial results reflect adoption of the guidance; however, prior period results were not restated. See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.

Executive Overview

Our Business

As of ~~October~~April 1, ~~2017,~~2018, the Wendy’s restaurant system was comprised of ~~6,586~~6,633 restaurants, of which ~~333~~337 were owned and operated by the Company. All of our Company-operated restaurants are located in the U.S.

Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, 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) systemwide same-restaurant sales growth through continuing core menu improvement, product innovation, ~~and~~ customer count growth and strategic price increases on our menu items, (2) ~~investing~~system investment in our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants and focused execution of operational excellence, (3) growth in new restaurants, including global growth, (4) increased 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 months of 2017 include (1) $467.9 million of sales at Company-operated restaurants, (2) $306.1 million of franchise royalty revenue and fees and (3) $140.2 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 - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes. Same-restaurant sales exclude the impact of currency translation.

Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as ~~restaurant openings, remodels and closures,~~ price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable ~~costs 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~~calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.

~~System Optimization Initiative~~

~~In July 2013,~~The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company 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 and drive new restaurant development and accelerate reimages in the Image Activation format.

During the first nine months of 2017, the Company recorded post-closing adjustments on sales of restaurants and completed the sale of other assets, resulting in net gains totaling $3.4 million. Gains and losses recognized on dispositions are recorded to “System optimization losses (gains), net” in our condensed consolidated statements of operations. In addition, the Company facilitated the transfer of 270 restaurants between franchisees during the first nine months of 2017 (excluding the DavCo and NPC transactions discussed below).

~~DavCo and NPC Transactions~~

As part of our system optimization initiative, the Company acquired 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”) for total net cash consideration of $86.8 million, which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company, for cash proceeds of $70.7 million (the “DavCo and NPC transactions”). As part of the transaction, NPC has agreed to remodel 90 acquired restaurants in the Image Activation format by the end of 2021 and build 15 new Wendy’s restaurants by the end of 2022. Prior to closing the DavCo transaction, seven DavCo restaurants were closed. The acquisition of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; ascalculates such the Company accounted for the transactions as an acquisition and subsequent disposition of a business. The total consideration paid to DavCo was allocated to net tangible and identifiable intangible assets acquired based on their estimated fair values. As part of the transactions, the Company retained leases for purposes of subleasing such properties to NPC. As a result of the transactions, the Company recognized a loss of $43.1 million during the first nine months of 2017.

Costs related to our system optimization initiative were historically recorded to “Reorganization and realignment costs.” Costs incurred during 2017 in connection with the DavCo and NPC transactions continue to be recorded to “Reorganization and realignment costs.” All other costs incurred during 2017 related to facilitating franchisee-to-franchisee restaurant transfers are recorded to “Other operating expense (income), net.” During the first nine months of 2017, the Company recognized reorganization and realignment costs totaling $0.9 million, which primarily included professional fees. The Company does not expect to incur additional costs during the remainder of 2017 in connection with the DavCo and NPC transactions.measure.

General and Administrative (“G&A”) Realignment

~~November 2014 Plan~~

In November 2014, the Company initiated a plan to reduce its G&A expenses. The plan included a realignment and reinvestment of resources to focus primarily on accelerated restaurant development and consumer-facing restaurant technology to drive long-term growth. The Company achieved the majority of the expense reductions through the realignment of its U.S. field operations and savings at its Restaurant Support Center in Dublin, Ohio, which was substantially completed by the end of the second quarter of 2015. Costs related to the plan are recorded to “Reorganization and realignment costs.” The Company recognized costs totaling $1.0 million during the first nine months of 2016 and $24.0 million in aggregate since inception. The Company did not incur any expenses during the first nine months of 2017 and does not expect to incur additional costs related to the plan.

~~May 2017 Plan~~

In May 2017, the Company initiated a ~~new~~ plan to further reduce its G&A expenses. The Company expects that approximately three-quarters of the total G&A expense reduction of approximately $35.0 million will 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 $23.0 million to $27.0 million will be cash expenditures, related to such savings. The cash expenditures are expected to continue into 2019, with approximately half of the total cash expenditures occurring in 2018. Costs related to the plan are recorded to “Reorganization and realignment costs.” The Company recognized costs totaling ~~$19.9~~$2.6 million during the first ~~nine months~~quarter of ~~2017,~~2018, which primarily included severance and related employee ~~costs and share-based compensation.~~costs. The Company expects to incur additional costs aggregating approximately ~~$8.0~~$3.0 million to ~~$13.0~~$8.0 million, comprised of (1) severance and related employee costs of approximately ~~$3.0~~$1.0 million, (2) recruitment and relocation costs of approximately ~~$4.0~~$3.0 million, (3) third-party and other costs of approximately $1.0 million and (4) share-based compensation of approximately ~~$3.0~~$2.0 million. The Company expects to continue to recognize costs ~~to be recognized during~~associated with the ~~remainder of 2017 and continue~~plan into ~~2019, with approximately two-thirds to be recognized during 2017.~~

~~Related Party Transactions~~

~~TimWen Lease and Management Fee Payments~~

A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. During the first nine months of 2017 and 2016, Wendy’s paid TimWen $9.4 million and $8.9 million, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $0.2 million during both the first nine months of 2017 and 2016, which has been included as a reduction to “General and administrative.”2019.

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 - Financial Statements,” Note 14 to~~ the ~~Condensed Consolidated Financial Statements~~Company’s Annual Report on Form 10-K for further information.

Results of Operations

The tables included throughout Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the ~~third~~first quarter of 2018 and ~~the first nine months of 2017 and 2016.~~2017.


	Third Quarter									Nine Months									First Quarter
	2017			2016			Change			2017			2016			Change			2018			2017			Change
Revenues:
Sales	$	158.8		$	228.6		$	(69.8	)	$	467.9		$	747.2		$	(279.3	)	$	153.7		$	148.2		$	5.5
Franchise royalty revenue and fees	98.9			98.0			0.9			306.1			275.9			30.2			97.9			94.7			3.2
Franchise rental income	50.3			37.4			12.9			140.2			102.4			37.8			50.1			42.9			7.2
Advertising funds revenue																			78.9			—			78.9
	308.0			364.0			(56.0		)	914.2			1,125.5			(211.3		)	380.6			285.8			94.8
Costs and expenses:
Cost of sales	132.4			186.5			(54.1		)	385.2			603.8			(218.6		)	132.2			124.5			7.7
Franchise support and other costs																			6.2			3.6			2.6
Franchise rental expense	24.1			17.5			6.6			64.8			49.7			15.1			23.3			18.9			4.4
Advertising funds expense																			78.9			—			78.9
General and administrative	52.9			58.9			(6.0		)	156.7			184.7			(28.0		)	50.4			51.3			(0.9		)
Depreciation and amortization	31.2			29.4			1.8			91.7			92.4			(0.7		)	32.1			29.2			2.9
System optimization losses (gains), net	0.1			(37.8		)	37.9			39.7			(48.1		)	87.8			0.6			(1.4		)	2.0
Reorganization and realignment costs	2.9			2.1			0.8			20.8			7.9			12.9			2.6			0.2			2.4
Impairment of long-lived assets	1.0			0.4			0.6			1.8			13.0			(11.2		)	0.2			0.5			(0.3		)
Other operating expense (income), net	1.7			0.9			0.8			5.3			(13.5		)	18.8
Other operating income, net																			(1.2		)	(1.7		)	0.5
	246.3			257.9			(11.6		)	766.0			889.9			(123.9		)	325.3			225.1			100.2
Operating profit	61.7			106.1			(44.4		)	148.2			235.6			(87.4		)	55.3			60.7			(5.4		)
Interest expense	(30.0		)	(28.7		)	(1.3		)	(87.9		)	(85.5		)	(2.4		)	(30.2		)	(29.0		)	(1.2		)
Other (loss) income, net	(0.1		)	0.5			(0.6		)	3.1			1.0			2.1
Loss on early extinguishment of debt																			(11.5		)	—			(11.5		)
Other income, net																			0.8			0.4			0.4
Income before income taxes	31.6			77.9			(46.3		)	63.4			151.1			(87.7		)	14.4			32.1			(17.7		)
Provision for income taxes	(17.3		)	(29.0		)	11.7			(28.6		)	(50.4		)	21.8
Benefit from (provision for) income taxes																			5.8			(9.8		)	15.6
Net income	$	14.3		$	48.9		$	(34.6	)	$	34.8		$	100.7		$	(65.9	)	$	20.2		$	22.3		$	(2.1	)


	Third Quarter								Nine Months								First Quarter
	2017		% of Total Revenues		2016		% of Total Revenues		2017		% of Total Revenues		2016		% of Total Revenues		2018		% of Total Revenues		2017		% of Total Revenues
Revenues:
Sales	$	158.8	51.6	%	$	228.6	62.8	%	$	467.9	51.2	%	$	747.2	66.4	%	$	153.7	40.4	%	$	148.2	51.9	%
Franchise royalty revenue and fees:
Royalty revenue	93.7		30.4	%	87.9		24.1	%	275.0		30.1	%	255.0		22.6	%	89.9		23.6	%	87.1		30.5	%
Franchise fees	5.2		1.7	%	10.1		2.8	%	31.1		3.4	%	20.9		1.9	%	8.0		2.1	%	7.6		2.6	%
Total franchise royalty revenue and fees	98.9		32.1	%	98.0		26.9	%	306.1		33.5	%	275.9		24.5	%	97.9		25.7	%	94.7		33.1	%
Franchise rental income	50.3		16.3	%	37.4		10.3	%	140.2		15.3	%	102.4		9.1	%	50.1		13.2	%	42.9		15.0	%
Advertising funds revenue																	78.9		20.7	%	—		—	%
Total revenues	$	308.0	100.0	%	$	364.0	100.0	%	$	914.2	100.0	%	$	1,125.5	100.0	%	$	380.6	100.0	%	$	285.8	100.0	%

	Third Quarter								Nine Months								First Quarter
	2017		% of Sales		2016		% of Sales		2017		% of Sales		2016		% of Sales		2018		% of Sales		2017		% of Sales
Cost of sales:
Food and paper	$	51.8	32.6	%	$	69.3	30.3	%	$	147.1	31.4	%	$	226.9	30.4	%	$	48.9	31.8	%	$	45.0	30.4	%
Restaurant labor	45.6		28.7	%	64.8		28.4	%	135.8		29.0	%	211.7		28.3	%	46.8		30.5	%	44.9		30.3	%
Occupancy, advertising and other operating costs	35.0		22.0	%	52.4		22.9	%	102.3		21.9	%	165.2		22.1	%	36.5		23.8	%	34.6		23.3	%
Total cost of sales	$	132.4	83.3	%	$	186.5	81.6	%	$	385.2	82.3	%	$	603.8	80.8	%	$	132.2	86.1	%	$	124.5	84.0	%

Third Quarter Nine Months
2017
% of
Sales
2016
% of
Sales
2017
% of
Sales
2016
% of
Sales
Restaurant margin $ 26.4
16.7 % $ 42.1
18.4 % $ 82.7
17.7 % $ 143.4
19.2 %



	First Quarter
	2018		% of Sales		2017		% of Sales
Restaurant margin	$	21.5	13.9	%	$	23.7	16.0	%


	Third Quarter				Nine Months				First Quarter
	2017		2016		2017		2016		2018		2017
Key business measures:
North America same-restaurant sales:
Company-operated	(0.5	)%	2.7	%	0.7	%	2.9	%	0.8	%	0.8	%
Franchised	2.1	%	1.2	%	2.4	%	1.7	%	1.7	%	1.7	%
Systemwide	2.0	%	1.4	%	2.3	%	1.8	%	1.6	%	1.6	%

Total same-restaurant sales:
Company-operated	(0.5	)%	2.7	%	0.7	%	2.9	%	0.8	%	0.8	%
Franchised (a)	2.1	%	1.3	%	2.4	%	1.6	%	1.8	%	1.8	%
Systemwide (a)	1.9	%	1.4	%	2.3	%	1.7	%	1.8	%	1.8	%

________________

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


	Third Quarter				Nine Months				First Quarter
	2017		2016		2017		2016		2018		2017
Key business measures (continued):
Systemwide sales: (a)
Company-operated	$	158.8	$	228.6	$	467.9	$	747.2	$	153.7	$	148.2
North America franchised	2,347.2		2,198.2		6,897.4		6,381.8		2,250.7		2,189.2
International franchised (b)	119.4		106.9		351.6		309.6		127.2		112.5
Global systemwide sales	$	2,625.4	$	2,533.7	$	7,716.9	$	7,438.6	$	2,531.6	$	2,449.9

________________

(a)

During the ~~third~~first quarter of ~~2017~~2018 and ~~2016,~~2017, North America systemwide sales increased ~~3.0%~~2.8% and ~~1.8%~~2.5%, respectively, international franchised sales increased ~~13.4%~~13.7% and ~~9.0%~~14.1%, respectively, and global systemwide sales increased 3.4% and 2.1%, respectively, on a constant currency basis. During the first nine months of 2017 and 2016, North America systemwide sales increased 3.2% and 2.9%, respectively, international franchised sales increased 15.0% and 4.1%, respectively, and global systemwide sales increased 3.7%3.3% and 3.0%, respectively, on a constant currency basis.


(b)	Excludes Venezuela due to the impact of Venezuela’s highly inflationary economy.


	Third Quarter								First Quarter
	Company-operated		North America Franchised		International Franchised		Systemwide		Company-operated		North America Franchised		International Franchised		Systemwide
Restaurant count:
Restaurant count at July 2, 2017	331		5,762		471		6,564
Restaurant count at December 31, 2017									337		5,793		504		6,634
Opened	4		25		13		42		—		16		17		33
Closed	(2	)	(15	)	(3	)	(20	)	(1	)	(24	)	(9	)	(34	)
Restaurant count at October 1, 2017	333		5,772		481		6,586

	Nine Months
	Company-operated		North America Franchised		International Franchised		Systemwide

Restaurant count at January 1, 2017	330		5,768		439		6,537
Opened	7		50		53		110
Closed	(4	)	(46	)	(11	)	(61	)
Restaurant count at October 1, 2017	333		5,772		481		6,586
Net purchased from (sold by) franchisees									1		(1	)	—		—
Restaurant count at April 1, 2018									337		5,784		512		6,633


Sales	Change						Change
	Third Quarter			Nine Months			First Quarter
Sales	$	(69.8	)	$	(279.3	)	$	5.5

The ~~decrease~~increase in sales for ~~both the third quarter and~~ the first ~~nine months~~quarter of ~~2017~~2018 was primarily due to ~~the impact of Wendy’s Company-operated restaurants sold under our system optimization initiative, which resulted~~a 0.8% increase in ~~a reduction in sales of $74.1 million and $295.9 million during the third quarter and the first nine months of 2017, respectively. For the third quarter of 2017,~~same-restaurant sales. Company-operated same-restaurant sales ~~declined~~improved due to a decrease in customer count, which was partially offset by an increase in our average per customer check amount. A portion of the customer count decline in the third quarter of 2017 resulted from the hurricanes in the U.S. For the first nine months of 2017, 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 during the third quarter and the first nine months of 2017 primarily due to~~reflecting benefits from strategic price increases on our menu ~~items and changes in product mix.~~items. Sales also benefited from higher sales growth at our new and remodeled Image Activation restaurants. These increases in same-restaurant sales were partially offset by the adverse impact of inclement weather in the northeastern U.S.


Franchise Royalty Revenue and Fees	Change					Change
	Third Quarter			Nine Months		First Quarter
Royalty revenue	$	5.8		$	20.0	$	2.8
Franchise fees	(4.9		)	10.2		0.4
	$	0.9		$	30.2	$	3.2

The increase in franchise royalty revenue ~~and fees~~ during the ~~third~~first quarter of ~~2017~~2018 was primarily due to ~~higher royalty revenue resulting from sales of Company-operated restaurants to franchisees under our system optimization initiative. Royalty revenue also benefited from~~ a 2.1% increase in franchise same-restaurant sales. These increases were largely offset by a decrease in franchise fees driven by lower initial franchise fees because no sales of Company-operated restaurants or franchisee-to-franchisee restaurant transfers occurred during the third quarter of 2017.

The increase in franchise royalty revenue and fees during the first nine months of 2017 was due to sales of Company-operated restaurants to franchisees and facilitating franchisee-to-franchisee restaurant transfers under our system optimization initiative. Royalty revenue also benefited from a 2.4%1.8% increase in franchise same-restaurant sales.

The increase in franchise fees during the first quarter of 2018 was primarily due to fees for providing information technology services to franchisees and other miscellaneous franchise fees, as well as the impact of the new accounting guidance for revenue recognition effective January 1, 2018. These increases were largely offset by technical assistance fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) recognized in the first quarter of 2017. Had the new accounting guidance for revenue recognition been applied on a consistent basis during both the first quarter of 2018 and 2017, franchise fees would have increased $3.4 million in the first quarter of 2018 compared with the first quarter of 2017, primarily due to fees for providing

information technology services to franchisees and other miscellaneous franchise fees. See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the new accounting guidance for revenue recognition.


Franchise Rental Income	Change				Change
	Third Quarter		Nine Months		First Quarter
Franchise rental income	$	12.9	$	37.8	$	7.2

The increase in franchise rental income during the ~~third~~first quarter ~~and the first nine months~~ of ~~2017~~2018 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.~~Franchise Flips during 2017.

Cost of Sales, as a Percent of Sales Change
Third
Quarter Nine
Months
Food and paper 2.3 % 1.0 %
Restaurant labor 0.3 % 0.7 %
Occupancy, advertising and other operating costs (0.9 )% (0.2 )%
1.7 % 1.5 %



Advertising Funds Revenue	Change
	First Quarter
Advertising funds revenue	$	78.9

The ~~increase~~Company maintains two national advertising funds established to collect and administer funds contributed for use in ~~cost~~advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales ~~as a percent~~ of ~~sales, during~~ the ~~third quarter~~franchised restaurants. Under the new accounting guidance for revenue recognition effective January 1, 2018, the revenue of ~~2017 was primarily due to an increase in commodity costs, reflecting higher beef and bacon costs.~~the national advertising funds is fully consolidated into the Company’s condensed consolidated statements of operations.



Cost of Sales, as a Percent of Sales	Change
	First Quarter
Food and paper	1.4	%
Restaurant labor	0.2	%
Occupancy, advertising and other operating costs	0.5	%
	2.1	%

The increase in cost of sales, as a percent of sales, during the first ~~nine months~~quarter of ~~2017~~2018 was primarily due to (1) an increase in commodity costs, ~~reflecting higher chicken~~(2) the adverse impact of inclement weather in the northeastern U.S. and ~~bacon costs. The first nine months of 2017 were also negatively impacted by increased~~(3) an increase in restaurant labor rates. These increases in cost of sales, as a percent of sales, were partially offset by benefits from strategic price increases on our menu items.

Franchise Rental Expense Change
Third
Quarter Nine
Months
Franchise rental expense $ 6.6
$ 15.1



Franchise Support and Other Costs	Change
	First Quarter
Franchise support and other costs	$	2.6

The increase in franchise support and other costs during the first quarter of 2018 was primarily due to information technology investments for franchised restaurants.



Franchise Rental Expense	Change
	First Quarter
Franchise rental expense	$	4.4

The increase in franchise rental expense during the ~~third~~first quarter ~~and the first nine months~~ of ~~2017~~2018 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~~leases entered into ~~new leases~~ in connection with facilitating ~~franchisee-to-franchisee restaurant transfers for purposes of subleasing such properties to the franchisee.~~Franchise Flips during 2017.

General and Administrative Change
Third
Quarter Nine
Months
Professional services $ (5.5 ) $ (11.7 )
Employee compensation and related expenses (2.2 ) (7.7 )
Severance (0.7 ) (3.5 )
Share-based compensation (0.2 ) (2.4 )
Incentive compensation 1.1
(2.0 )
Other, net 1.5
(0.7 )
$ (6.0 ) $ (28.0 )



Advertising Funds Expense	Change
	First Quarter
Advertising funds expense	$	78.9

The ~~decrease~~expenses of the national advertising funds are now fully consolidated into the Company’s condensed consolidated statements of operations under the new accounting guidance for revenue recognition effective January 1, 2018. On an interim basis, advertising funds expense is recognized in ~~general and administrative expenses during the third quarter of 2017 was primarily due~~proportion to decreases in (1) professional services due to legal and other costs associated with the cybersecurity incident recognized during the third quarter of 2016 (see “Item 1 - Financial Statements,” Note 14 to the Condensed Consolidated Financial Statements for further information) and (2) employee compensation and related expenses primarily as a result of changes in staffing driven by our system optimization initiative.advertising funds revenue.



General and Administrative	Change
	First Quarter
Professional services	$	(1.1	)
Other, net	0.2
	$	(0.9	)

The decrease in general and administrative expenses during the first ~~nine months~~quarter of ~~2017~~2018 was primarily due to decreases in (1) professional services due to legal and other costs associated with the cybersecurity incident recognized during the first nine months 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 system optimization initiative, (3) severance expense, (4) share-based compensation primarily as a result of awards granted and timing of expense recognition and (5) incentive compensation accruals due to a decrease in ~~operating performance as compared to plan in 2017 versus 2016.~~professional services, reflecting lower legal fees.


Depreciation and Amortization	Change						Change
	Third Quarter			Nine Months			First Quarter
Restaurants	$	(0.1	)	$	(4.7	)	$	0.9
Corporate and other	1.9			4.0			2.0
	$	1.8		$	(0.7	)	$	2.9

The ~~decrease~~increase in restaurant depreciation and amortization during the ~~third~~first quarter ~~and the first nine months~~ of ~~2017~~2018 was primarily due to ~~a decrease in depreciation on assets sold under our system optimization initiative~~the impact of ~~$0.2 million and $3.9 million, respectively.~~capital leases resulting from facilitating Franchise Flips during 2017. Corporate and other ~~depreciation~~ expense increased due to ~~an increase in~~ depreciation and amortization for technology investments.


System Optimization Losses (Gains), Net	Third Quarter					Nine Months					First Quarter
	2017		2016			2017		2016			2018		2017
System optimization losses (gains), net	$	0.1	$	(37.8	)	$	39.7	$	(48.1	)	$	0.6	$	(1.4	)

~~The change in system~~System optimization losses (gains), net ~~was because no~~for both the first quarter of 2018 and 2017 include post-closing adjustments on sales of ~~Company-operated~~ restaurants ~~occurred during the third quarter of 2017, compared with~~and the sale of ~~156 restaurants during the third quarter of 2016.~~

The change in system optimization losses (gains), net during the first nine months of 2017 was due to the DavCo and NPC transactions, which resulted in a loss of $43.1 million during the first nine months of 2017. During the first nine months of 2016, the Company sold 211 Company-operated restaurants to franchisees.

other assets, primarily surplus properties.


Reorganization and Realignment Costs	Third Quarter				Nine Months				First Quarter
	2017		2016		2017		2016		2018		2017
G&A realignment									$	2.6	$	—
System optimization initiative	$	0.2	$	2.1	$	0.9	$	6.9	—		0.2
G&A realignment - November 2014 plan	—		—		—		1.0
G&A realignment - May 2017 plan	2.7		—		19.9		—
	$	2.9	$	2.1	$	20.8	$	7.9	$	2.6	$	0.2

In May 2017, the Company initiated a plan to further reduce its G&A expenses. During the first quarter of 2018, the Company recognized costs associated with the plan totaling $2.6 million, which primarily included (1) severance and related employee costs of $2.1 million and (2) third-party and other costs of $0.3 million.

During the ~~third~~first quarter of 2017, ~~and 2016,~~ the Company recognized costs associated with its system optimization initiative totaling $0.2 million, ~~and $2.1 million, respectively. In both the third quarter of 2017 and 2016, costs~~which primarily included professional fees.

During the first nine months of 2017 and 2016, the Company recognized costs associated with its system optimization initiative totaling $0.9 million and $6.9 million, respectively. In the first nine months of 2017, costs primarily included professional fees. In the first nine months of 2016, costs primarily included professional fees of $5.1 million and accelerated amortization of previously acquired franchise rights of $1.6 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 G&A expenses. During the first nine months of 2016, the Company recognized costs associated with this plan totaling $1.0 million, which primarily included recruitment and relocation costs. The Company did not incur any expenses during the first nine months of 2017 and does not expect to incur additional costs related to the plan.

In May 2017, the Company initiated a new plan to further reduce its G&A expenses. During the third quarter of 2017, the Company recognized costs associated with this plan totaling $2.7 million, which primarily included (1) severance and related employee costs of $1.2 million, (2) share-based compensation of $0.8 million and (3) third-party and other costs of $0.5 million.

During the first nine months of 2017, the Company recognized costs associated with its May 2017 plan totaling $19.9 million, which primarily included (1) severance and related employee costs of $14.4 million, (2) share-based compensation of $4.5 million and (3) third-party and other costs of $0.8 million.

Impairment of Long-Lived Assets Change
Third
Quarter Nine
Months
Impairment of long-lived assets $ 0.6
$ (11.2 )

Impairment of long-lived assets increased during the third quarter of 2017 primarily due to the deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in previously impaired restaurants that did not subsequently recover.



Impairment of Long-Lived Assets	Change
	First Quarter
Impairment of long-lived assets	$	(0.3	)

Impairment of long-lived assets decreased during the first ~~nine months~~quarter of ~~2017~~2018 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-operated restaurants. This decrease was partially offset by higher impairment charges due to the deterioration in operating performance of certainclosing Company-operated restaurants and ~~charges~~classifying such surplus properties as held for ~~capital improvements in previously impaired restaurants that did not subsequently recover.~~sale.


Other Operating Expense (Income), Net	Third Quarter						Nine Months
Other Operating Income, Net													First Quarter
	2017			2016			2017			2016			2018			2017
Lease buyout	$	0.2		$	—		$	0.1		$	(11.6	)	$	0.6		$	—
Equity in earnings in joint ventures, net	(2.3		)	(2.2		)	(6.1		)	(6.5		)	(1.8		)	(1.8		)
Other, net	3.8			3.1			11.3			4.6			—			0.1
	$	1.7		$	0.9		$	5.3		$	(13.5	)	$	(1.2	)	$	(1.7	)

The change in other operating ~~expense (income),~~income, net ~~during the third quarter of 2017~~ was primarily due to ~~costs incurred to provide information technology services to our franchisees, as well as costs related to facilitating franchisee-to-franchisee restaurant transfers.~~

Other operating expense (income), net during the first nine months of 2017 includes costs incurred to provide information technology services to our franchisees, as well as costs related to facilitating franchisee-to-franchisee restaurant transfers. The first nine months of 2016 includes a ~~gain~~loss recognized on a lease buyout during the first quarter of ~~2016.~~2018.


Interest Expense	Change				Change
	Third Quarter		Nine Months		First Quarter
Interest expense	$	1.3	$	2.4	$	1.2

Interest expense increased during the ~~third~~first quarter ~~and the first nine months~~ of ~~2017~~2018 primarily due to an increase in capital lease obligations resulting from facilitating ~~franchisee-to-franchisee restaurant transfers and~~Franchise Flips for purposes of subleasing such properties to the ~~franchisee.~~franchisee during 2017.

Provision for Income Taxes Third Quarter Nine Months
2017 2016 2017 2016
Income before income taxes $ 31.6
$ 77.9
$ 63.4
$ 151.1
Provision for income taxes 17.3
29.0
28.6
50.4
Effective tax rate on income 54.8 % 37.2 % 45.2 % 33.3 %



Loss on Early Extinguishment of Debt	Change
	First Quarter
Loss on early extinguishment of debt	$	(11.5	)

During the first quarter of 2018, the Company incurred a loss on the early extinguishment of debt as a result of redeeming the outstanding Series 2015-1 Class A-2-I Notes with the proceeds from the sale of the Series 2018-1 Class A-2 Notes. The loss on the early extinguishment of debt of $11.5 million was comprised of the write-off of certain deferred financing costs and a specified make-whole payment.



Benefit from (Provision for) Income Taxes	First Quarter
	2018			2017
Income before income taxes	$	14.4		$	32.1
Benefit from (provision for) income taxes	5.8			(9.8		)
Effective tax rate on income	(40.5		)%	30.5		%

Our effective tax rates in the ~~third~~first quarter of ~~2017~~2018 and ~~2016~~2017 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year include the following: (1) ~~our system optimization initiative, (2) state income taxes~~ net ~~of federal benefits, including non-recurring changes to state deferred taxes, (3) 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 (see “Item 1 - Financial Statements,” Note 15 to the Condensed Consolidated Financial Statements for further information) and (4) the rate differential between foreign and domestic taxes.

Our effective tax rates in the first nine months of 2017 and 2016 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year include the following: (1) our system optimization initiative (including corrections to prior years identified and recorded in the first nine months of 2017 and 2016, which resulted in a benefit of ~~$2.2~~$6.1 million in the first quarter of 2018, (2) a change to our provisional amount, recorded in the fourth quarter of 2017, for the impact of the Tax Cuts and ~~$7.1 million, respectively), (2) the adoption of an amendment issued by the FASB, which requires that excess~~Jobs Act on our net deferred tax ~~benefits and tax deficiencies related to share-based payments be recognized in net income,~~liability, which resulted in a benefit of ~~$5.2~~$3.6 million, ~~in the first nine months of 2017 (see “Item 1 - Financial Statements,” Note 15 to the Condensed Consolidated Financial Statements for further information),~~and (3) state income ~~taxes net of federal benefits, including non-recurring changes to state deferred taxes, and (4) the rate differential between foreign and domestic~~ taxes.

The impact of our system optimization initiative on 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 shifting relative taxable presence in the various states as our system optimization initiative is executed, and the disposition of non-deductible goodwill. These items, which are non-recurring, increased the provision for income taxes by $5.0 million and $2.3 million during the third quarter of 2017 and 2016, respectively, and increased the provision for income taxes by $7.1 million and decreased the provision by $1.3 million during the first nine months of 2017 and 2016, respectively.

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 U.S. At October 1, 2017, our cash balances held outside of the U.S. totaled $107.7 million.

Liquidity and Capital Resources

~~The tables included throughout Liquidity and Capital Resources present dollars in millions.~~

Cash Flows

Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized

financing facility. Principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to shareholders.

Our anticipated consolidated sources of cash and cash requirements for the remainder of ~~2017,~~2018, exclusive of operating cash flow requirements, consist principally of:

capital expenditures of approximately ~~$26.0~~$65.0 million to ~~$31.0~~$70.0 million, resulting in total anticipated cash capital expenditures for the year of approximately ~~$80.0~~$75.0 million to ~~$85.0~~$80.0 million.

cash dividends aggregating up to approximately ~~$17.0~~$61.0 million as discussed below in “Dividends;” and

potential stock repurchases of up to ~~$59.1~~$158.3 million, of which ~~$6.6~~$18.9 million was repurchased subsequent to ~~October~~April 1, ~~2017~~2018 through ~~November~~May 2, ~~2017~~2018 as discussed below in “Stock Repurchases.”

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

The table below summarizes our cash flows from operating, investing and financing activities for the first ~~nine months~~quarter of ~~2017~~2018 and ~~2016:~~2017:


	Nine Months									First Quarter
	2017			2016			Change			2018			2017			Change
Net cash provided by (used in):
Operating activities	$	176.7		$	137.3		$	39.4		$	68.7		$	42.1		$	26.6
Investing activities	(38.1		)	62.5			(100.6		)	(11.1		)	(15.0		)	3.9
Financing activities	(156.9		)	(222.2		)	65.3			(25.7		)	(37.9		)	12.2
Effect of exchange rate changes on cash	6.7			4.0			2.7			(2.5		)	0.8			(3.3		)
Net decrease in cash and cash equivalents	$	(11.6	)	$	(18.4	)	$	6.8
Net increase (decrease) in cash, cash equivalents and restricted cash										$	29.4		$	(10.0	)	$	39.4

Operating Activities

Cash provided by operating activities was ~~$176.7~~$68.7 and ~~$137.3~~$42.1 in the first ~~nine months~~quarter of ~~2017~~2018 and ~~2016,~~2017, respectively. Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities.

Cash provided by operating activities increased ~~$39.4~~$26.6 million during the first ~~nine months~~quarter of ~~2017~~2018 as compared to the first ~~nine months~~quarter of ~~2016,~~2017, due to (1) an increase of ~~$19.7~~$3.7 million in net income adjusted for non-cash expenses and (2) a favorable change in operating assets and liabilities of ~~$19.7~~$22.9 million. The favorable change in operating assets and liabilities resulted primarily from ~~a decrease in income tax~~(1) the timing of payments ~~net~~for marketing expenses of ~~refunds~~the national advertising funds, (2) the timing of collections of royalty receivables and (3) a decrease in payments for incentive compensation for the ~~2016~~2017 fiscal year.

Investing Activities

Cash used in investing activities ~~increased $100.6~~decreased $3.9 million during the first ~~nine months~~quarter of ~~2017~~2018 as compared to the first ~~nine months~~quarter of ~~2016,~~2017, primarily due to ~~(1)~~ a decrease in proceeds from dispositions of Company-operated restaurants and other assets of $164.5 million and (2) net cash used in the DavCo and NPC transactions of $16.1 million. These unfavorable changes were partially offset by (1) a decrease of $55.0 million in capital expenditures ~~and (2) a decrease~~ of ~~$21.7 million in restricted cash for the reinvestment in capital assets under our securitized financing facility.~~

$4.2 million.

Financing Activities

Cash used in financing activities decreased ~~$65.3~~$12.2 million during the first ~~nine months~~quarter of ~~2017~~2018 as compared to the first ~~nine months~~quarter of ~~2016, primarily~~2017, due to a ~~decrease~~net increase in cash provided by long-term debt activities of $45.7 million reflecting the completion of a refinancing transaction during the first quarter of 2018. This favorable change was partially offset by (1) an increase in repurchases of common stock of ~~$71.1~~$23.3 million, (2) the settlement of a supplemental purchase price liability associated with the acquisition of DavCo Restaurants, LLC of $6.1 million and (3) an increase in dividends of $3.1 million.

Long-Term Debt, Including Current Portion

Except as described below, there were no material changes to the terms of any debt obligations since December 31, 2017. The Company was in compliance with its debt covenants as of April 1, 2018. See Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.

Concurrently, the Master Issuer entered into a revolving financing facility of Series 2018-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2018-1 Class A-1 Notes”), which allows for the drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2018-1 Class A-1 Notes during the three months ended April 1, 2018. The Series 2015-1 Class A-1 Notes were canceled on the closing date and the letters of credit outstanding against the Series 2015-1 Class A-1 Notes were transferred to the Series 2018-1 Class A-1 Notes.

Dividends

On March 15, ~~2017, June 15, 2017 and September 15, 2017, The Wendy’s~~2018, the Company paid quarterly cash dividends of ~~$0.07~~$0.085 per share on its common stock, aggregating ~~$51.5~~$20.4 million. On ~~November 2, 2017, The Wendy’s~~May 8th, 2018, the Company declared a dividend of ~~$0.07~~$0.085 per share to be paid on ~~December~~June 15, ~~2017~~2018 to shareholders of record as of ~~December~~June 1, ~~2017. As a result~~2018. If the Company pays regular quarterly dividends for the remainder of 2018 at the ~~declaration, The Wendy’s Company’s~~same rate as declared in the second quarter of 2018, the total cash ~~requirements~~requirement for ~~the fourth quarter of 2017~~dividends will be approximately ~~$17.0~~$61.0 million based on the estimated number of shares of common stock outstanding at ~~November~~May 2, ~~2017.~~2018. 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 2018, our Board of Directors authorized a repurchase program for up to $175.0 million of our common stock through March 3, 2019, when and if market conditions warrant and to the extent legally permissible. During the three months ended April 1, 2018, the Company repurchased 1.0 million shares with an aggregate purchase price of $16.7 million, of which $1.3 million was accrued at April 1, 2018, and excluding commissions. Subsequent to April 1, 2018 through May 2, 2018, the Company repurchased 1.1 million shares with an aggregate purchase price of $18.9 million, excluding commissions.

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 nine months ended October 1, 2017, the Company repurchased 6.1 million shares with an aggregate purchase price of $90.9 million, of which $0.9 million was accrued at October 1, 2017 and excluding commissions of $0.1 million. As of October 1, 2017, the Company had $59.1 million of availability remaining under its February 2017 authorization. Subsequent to October 1, 2017 through November 2, 2017, the Company repurchased 0.4 million shares with an aggregate purchase price of $6.6 million, excluding commissions.

~~On June 1, 2015, our Board of Directors authorized a repurchase program for up to $1,400.0 million of our common stock through January 1, 2017, when and if market conditions~~ warranted and to the extent legally permissible. During the ~~nine~~three months ended ~~October 2, 2016,~~April 1, 2018, the Company ~~repurchased 16.0~~completed the $150.0 million program with the repurchase of 1.4 million shares with an aggregate purchase price of ~~$162.3~~$22.6 million, excluding commissions. During the three months ended April 2, 2017, the Company repurchased 1.3 million shares with an aggregate purchase price of ~~which $3.0~~$17.8 million, ~~was accrued at October 2, 2016 and~~ excluding ~~commissions of $0.2 million.~~commissions.

General Inflation, Commodities and Changing Prices

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

Seasonality

~~Our~~Wendy’s restaurant operations are moderately ~~impacted by seasonality;~~seasonal. Wendy’s average restaurant ~~revenues~~sales are normally higher during the summer months than during the winter months. Because ~~our~~the business is moderately seasonal, results for any ~~future~~ quarter ~~will~~are 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.

This “Quantitative and Qualitative Disclosures about Market Risk” should be read in conjunction with “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our annual report on Form 10-K for the fiscal year ended December 31, 2017 (the “Form 10-K”).

As of ~~October~~April 1, ~~2017~~2018, there were no material changes from the information contained in the Form 10-K, except as described below.

Interest Rate Risk

As discussed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation” under “Liquidity and Capital Resources,” the Company completed a $925.0 million refinancing transaction on January 17, 2018. The proceeds were used to repay all amounts outstanding on the Series 2015-1 Class A-2-I Notes, to pay prepayment and transaction costs, and for general corporate purposes. The new notes bear fixed-rate interest at rates slightly higher than our historical effective rates on the Series 2015-1 Class A-2-I Notes. In addition, the principal amounts outstanding on the Series 2018-1 Class A-2 Notes exceed the amounts that were outstanding on the Series 2015-1 Class A-2-I Notes. The final legal maturity date of the Series 2018-1 Class A-2 Notes is in 2048; however, the anticipated repayment dates of the Series 2018-1 Class A-2 Notes range from 2025 through 2028, which is up to six years longer than the prior Series 2015-1 Class A-2-I Notes. Concurrently, the Company entered into a revolving financing facility, the Series 2018-1 Class A-1 Notes, which allows for the ~~fiscal year ended January~~drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. The Series 2015-1 Class A-1 Notes were canceled on the closing date.

Consequently, our long-term debt, including current portion, aggregated $2,855.0 million and consisted of $2,387.7 million of fixed-rate debt and $467.3 million of capital lease obligations as of April 1, ~~2017.~~

2018 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure has reduced its exposure to interest rate increases that could adversely affect its earnings and cash flows. The Company is exposed to interest rate increases under the Series 2018-1 Class A-1 Notes; however, the Company had no outstanding borrowings under its Series 2018-1 Class A-1 Notes as of April 1, 2018.

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 ~~October~~April 1, ~~2017~~2018. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of ~~October~~April 1, ~~2017,~~2018, the disclosure controls and procedures of the Company were effective at a reasonable assurance level in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the internal control over financial reporting of the Company during the ~~third~~first quarter of ~~2017~~2018 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, pork, cheese and ~~corn)~~grains), 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 (including ~~the amended guidance for revenue recognition that will become effective for the Company’s 2018 fiscal year and that may impact the Company’s adjusted EBITDA margin goal for 2020, as well as~~ the new guidance on leases that will become effective for fiscal year 2019);

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

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

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 1 ~~below;~~

the difficulty in predicting 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;above;

the difficulty in predicting the ultimate costs that will be incurred in connection with the Company’s plan to reduce its general and administrative 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 ~~$150.0~~$175.0 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 1,~~December 31, 2017 (the “Form 10-K”) (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the SEC.

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.~~businesses, including the legal proceedings related to a cybersecurity incident referenced in Note 16 of the Financial Statements contained in Item 1 herein. 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.

We previously described certain legal proceedings under Item 1 of Part II in our Quarterly Report on Form 10-Q for the second quarter of 2017, as filed with the SEC on August 9, 2017. Except as set forth below, there were no material developments in those legal proceedings during the third quarter of 2017.

As we previously reported, 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. On October 27, 2017, the Company moved to dismiss the operative complaint. The Company’s motion is pending before the court.

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 described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K.

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

The following table provides information with respect to repurchases of shares of our common stock by us and our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the ~~third~~first quarter of ~~2017~~2018:

Issuer Repurchases of Equity Securities

Period Total Number of Shares Purchased (1)
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans (2)
July 3, 2017
through
August 6, 2017 934,795

$15.64
917,452

$83,214,931
August 7, 2017
through
September 3, 2017 877,515

$15.11
795,500

$71,230,388
September 4, 2017
through
October 1, 2017 806,500

$15.03
806,500

$59,123,593
Total 2,618,810

$15.27
2,519,452

$59,123,593



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)
January 1, 2018 through February 4, 2018	905,781		$16.64	899,300		$7,684,271
February 5, 2018 through March 4, 2018	789,599		$15.95	634,256		$172,603,756
March 5, 2018 through April 1, 2018	1,548,902		$17.20	840,814		$158,259,509
Total	3,244,282		$16.74	2,374,370		$158,259,509


(1)	Includes ~~99,358~~869,912 shares reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective awards. The shares were valued at the average of the high and low trading prices of our common stock on the vesting or exercise date of such awards.

(2)

In February 2017, our Board of Directors authorized ~~the~~a repurchase ofprogram for up to $150 million of our common stock through March 4, 2018, when and if market conditions warranted and to the extent legally permissible. The Company completed the $150 million program prior to the expiration date of March 4, 2018. In February 2018, our Board of Directors authorized the repurchase of up to $175 million of our common stock through March 3, 2019, when and if market conditions warrant and to the extent legally permissible.

Subsequent to ~~October~~April 1, ~~2017~~2018 through ~~November~~May 2, ~~2017,~~2018, the Company repurchased ~~0.4~~1.1 million shares with an aggregate purchase price of ~~$6.6~~$18.9 million, excluding commissions.

Item 6. Exhibits.



EXHIBIT NO.	DESCRIPTION

10.1	Form of ~~Nonqualified Stock Option~~Long-Term Performance Unit Award Agreement for 2018 under The Wendy’s Company 2010 Omnibus Award Plan.* **
31.1	Certification of the Chief Executive Officer of The Wendy’s Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of the Chief Financial Officer of The Wendy’s Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

____________________



*	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~~May 8, ~~2017~~2018	By: /s/ Gunther Plosch
	Gunther Plosch
	Chief Financial Officer
	(On behalf of the Company)

Date: ~~November~~May 8, ~~2017~~2018	By: /s/ Leigh A. Burnside
	Leigh A. Burnside
	Chief Accounting Officer
	(Principal Accounting Officer)

4243



	Nine Months Ended
	October 1, 2017
Acquisition (a)
Total consideration paid	$	86,788
Identifiable assets and liabilities assumed:
Net assets held for sale	70,688
Capital lease assets	49,360
Deferred taxes	27,639
Capital lease obligations	(97,046		)
Net unfavorable leases (b)	(22,330		)
Other liabilities (c)	(6,999		)
Total identifiable net assets	21,312
Goodwill (d)	$	65,476

Disposition
Proceeds	$	70,688
Net assets sold	(70,688		)
Goodwill (d)	(65,476		)
Net favorable leases (e)	24,034
Other (f)	(1,692		)
Loss on DavCo and NPC transactions	$	(43,134	)



	Balance January 3, 2016		Charges		Payments			Balance October 2, 2016
Severance and related employee costs	$	77	$	46	$	(123	)	$	—
Professional fees	708		5,137		(5,740		)	105
Other	90		112		(202		)	—
	$	875	$	5,295	$	(6,065	)	$	105