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.
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$95,160 as of October 1, 2017.July 4, 2021. These leases extend through 2056.2045. We have not received any noticehad no judgments against us as guarantor of default related to these leases as of October 1, 2017.July 4, 2021. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations.
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.
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, 20173, 2021 (the “Form 10-K”). There have been no material changes as of October 1, 2017July 4, 2021 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 -II. Other Information” preceding Item 1 of Part II of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchisesis primarily engaged in the business of operating, developing and operates Wendy’s®franchising a system of distinctive quick-service restaurants throughout North America (defined asserving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the United States of America (“U.S.(the “U.S.”) based on traffic share, and Canada). Wendy’s also has franchisedthe third largest globally with 6,866 restaurants in 29the U.S. and 31 foreign countries and U.S. territories.territories as of July 4, 2021.
Each Wendy’s restaurants offerrestaurant offers an extensive menu specializing in hamburger sandwiches and featuring filletfilet 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, theWendy’s restaurants sell a variety of promotional products on a limited time basis. In March 2020, Wendy’s entered the breakfast daypart across the U.S. system. Wendy’s breakfast menu features a variety of breakfast sandwiches, biscuits and croissants, sides such as seasoned potatoes, oatmeal bars and seasonal fruit, and a beverage platform that includes hot coffee, cold brew iced coffee and our vanilla and chocolate Frosty-ccino iced coffee.
The Company managesis comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and internally reports its business geographically. The(3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in North America comprises virtually all of our current operationsthe U.S. and represents a single reportable segment. Thederives its revenues from sales at Company-operated restaurants and operating resultsroyalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the operation and franchising of Wendy’s restaurants outsidein countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of North America are not material. The resultsthe income of operations discussed below may not necessarily be indicativeour TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this Item 2. “Management’s Discussion and Analysis of future results.
TheFinancial Condition and Results of Operations,” the Company reports on athe segment profit for each of the three segments described above. The Company measures segment profit based on segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. See “Results of Operations” below and Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information.
The Company’s fiscal year consistingreporting periods consist of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and nine-monthsix-month periods presented herein contain 13 weeks and 3926 weeks, respectively. All references to years, quarters and quartersmonths relate to fiscal periods rather than calendar periods.
Executive Overview
Our Business
As of October 1, 2017,July 4, 2021, the Wendy’s restaurant system was comprised of 6,5866,866 restaurants, of which 333with 5,895 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 314 were owned and operated by the Company. AllCompany and 5,581 were operated by a total of 225 franchisees. In addition, at July 4, 2021, there were 971 Wendy’s restaurants in operation in 31 foreign countries and U.S. territories. Of the international restaurants, 970 were operated by franchisees and one was operated by the Company in the United Kingdom (the “U.K.”).
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants are located inand (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the U.S.total Wendy’s system as of July 4, 2021.
Wendy’s operating results are impacted by a number of external factors, including unemployment, general economic trends, intense price competition, commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather. The COVID-19 pandemic has had and may continue to have the effect of heightening the impact of many of these factors.
Wendy’s long-term growth opportunities will be driven by a combinationinclude investing in accelerated global growth through (1) building our breakfast daypart, (2) continued implementation of brand relevanceconsumer-facing digital platforms and economic relevance. Key components of growth include (1) systemwidetechnologies and (3) expanding the Company’s footprint through targeted U.S. expansion and accelerated international expansion through same-restaurant sales growth through continuing core menu improvement, product innovation and customer count growth, (2) investing in our Image Activation program, which includes innovative exterior and interiornew restaurant designs for our new and reimaged restaurants and focused execution of operational excellence, (3) growth in new restaurants,development, 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 atCompany’s plan to open additional Company-operated restaurants (2) $306.1 million of franchise royalty revenuein the U.K. during 2021 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.beyond.
Key Business Measures
We track our results of operations and manage our business using the following key business measures, which includeincludes a non-GAAP financial measures:measure:
•Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one fiscal week are excluded from same-restaurant sales. For fiscal 2020, same-restaurant sales excluded the impact of a 53rd operating week. In fiscal 2020, same-restaurant sales compared the 52 weeks from December 30, 2019 through December 27, 2020 to the 52 weeks from December 31, 2018 through December 29, 2019. For fiscal 2021, same-restaurant sales will compare the 52 weeks from January 4, 2021 through January 2, 2022 to the 52 weeks from January 6, 2020 through January 3, 2021. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes. 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 and advertising funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and therefore on the Company’s profitability.
The Company reviewscalculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.
Same-restaurant sales and systemwide sales exclude sales from Argentina and Venezuela due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.
The Company believes its presentation of same-restaurant sales, restaurant margin and systemwide sales provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales and systemwide sales, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand.
The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.
Second Quarter Financial Highlights
•Revenue increased 22.6% to $493.3 million in the second quarter of 2021 compared to $402.3 million in the second quarter of 2020;
•Global same-restaurant sales increased 17.4%, U.S. same-restaurant sales increased 16.1% and international same-restaurant sales increased 31.4% compared to the second quarter of 2020;
•Company-operated restaurant margin was 20.3% in the second quarter of 2021, an increase of 590 basis points from the second quarter of 2020; and
•Net income was $65.7 million in the second quarter of 2021 compared to $24.9 million in the second quarter of 2020.
Year-to-Date Financial Highlights
•Revenue increased 18.1% to $953.5 million in the first six months of 2021 compared to $807.3 million in the first six months of 2020;
•Global same-restaurant sales increased 15.2%, U.S. same-restaurant sales increased 14.9% and international same-restaurant sales increased 19.0% compared to the first six months of 2020;
•Company-operated restaurant margin was 18.7% in the first six months of 2021, an increase of 650 basis points from the first six months of 2020; and
•Net income was $107.1 million in the first six months of 2021 compared to $39.3 million in the first six months of 2020.
COVID-19 Update
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on our results of operations, financial condition and prospects.
In response to the pandemic, in March 2020, Wendy’s updated its brand standard to include the closure of all dining rooms except where there were specific needs, or a drive-thru or pick-up window option was not available, subject to applicable federal, state and local requirements. Substantially all Wendy’s restaurants continued to offer drive-thru and delivery service to our customers. During the second quarter of 2020, the Company began to implement its restaurant and dining room reopening process through a phased approach in accordance with federal, state and local requirements, with customer and team member
safety as its top priority. Dining rooms have been re-opening at each restaurant owner’s discretion, subject to applicable regulatory restrictions. As of July 4, 2021, approximately 95% of dining rooms were open across the Wendy’s system offering carryout and, in many cases, dine in services. Global systemwide same-restaurant sales during the first six months of 2021 increased 15.2%, in part due to a significant increase in customer count compared with the adversely impacted fiscal months of March through June 2020.
Breakfast
Wendy’s long-term growth opportunities include investing in accelerated global growth, which includes building upon our breakfast daypart. Since the launch of breakfast across the U.S. system on March 2, 2020, systemwide sales have benefited from this new daypart, with breakfast representing approximately 7.2% of U.S. systemwide sales during the six months ended July 4, 2021. Subsequent to July 4, 2021, the Company revised its planned 2021 advertising expenses to include an additional $10.0 million of incremental advertising to support the breakfast daypart, resulting in an expected total 2021 incremental Company investment of $25.0 million. The Company expects this incremental investment will continue to drive trial and acceleration of the Company’s breakfast offering.
Digital
Wendy’s long-term growth opportunities include accelerating same-restaurant sales through continued implementation of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program and establishing delivery agreements with third-party vendors. The Company’s digital business continues to grow and represented approximately 7.5% of U.S. systemwide sales during the six months ended July 4, 2021.
Debt Refinancing
In June 2021, the Company completed a refinancing transaction under which the Company issued fixed rate senior secured notes in the following 2021-1 series: Class A-2-I with an interest rate of 2.370% and initial principal amount of $450.0 million and Class A-2-II with an interest rate of 2.775% and initial principal amount of $650.0 million (collectively, the “Series 2021-1 Class A-2 Notes”). A portion of the net proceeds from the sale of the Series 2021-1 Class A-2 Notes were used to repay in full the Company’s outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes, including the payment of prepayment and transaction costs. The Company also entered into a revolving financing facility of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2021-1 Class A-1 Notes”), which allows for the drawing of up to $300.0 million on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2021-1 Class A-1 Notes during the three months ended July 4, 2021. The Series 2021-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2019-1 Class A-1 Notes and $100.0 million Series 2020-1 Class A-1 Notes, which were cancelled on the closing date. As a result of the refinancing transaction, the Company incurred a loss on the early extinguishment of debt of $17.9 million, which was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs of $8.3 million. See “Liquidity and Capital Resources” below and Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information on the Company’s debt refinancing transaction.
New Restaurant Development
REEF Kitchens Development Commitment
On August 11, 2021, the Company announced a development commitment by REEF Kitchens (“REEF”) to open and operate 700 delivery kitchens over the next five years across the U.S., Canada and the U.K. The Company expects that REEF will open approximately 50 delivery kitchens in 2021 with the remainder to be opened in 2022 through 2025.
Strategic Build to Suit Development Fund
On August 11, 2021, the Company announced the creation of a $100.0 million strategic build to suit development fund to drive additional new restaurant growth that is being funded by the additional cash that was obtained as part of the Company’s debt refinancing transaction completed in June 2021. The Company expects the development fund to drive approximately 80 to 90 new franchise restaurants from 2022 to 2025.
System Optimization Initiative
In July 2013, the Company announced aThe 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,Franchise Flips. As of January 1, 2017, the Company announced planscompleted its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system, whichsystem. While the Company completed as of January 1, 2017. Wendy’s willhas no plans to reduce its ownership below the approximately 5% level, the Company expects to continue to optimize itsthe Wendy’s 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.reimages.
During the first ninethree months of 2017,ended July 4, 2021, the Company recorded post-closing adjustments on sales of restaurants and completed the sale of other assets,47 Company-operated restaurants in New York (including Manhattan) to franchisees, resulting in net gains totaling $3.4$30.8 million. Gains and losses recognized on dispositions are recorded to “System optimization losses (gains),gains, net” in our condensed consolidated statements of operations. In addition,
NPC Quality Burgers, Inc. (“NPC”)
As previously announced, NPC, formerly the Company’s largest franchisee, filed for chapter 11 bankruptcy in July 2020 and commenced a process to sell all or substantially all of its assets, including its interest in approximately 393 Wendy’s restaurants across eight different markets, pursuant to a court-approved auction process. On November 18, 2020, the Company facilitatedsubmitted a consortium bid together with a group of pre-qualified franchisees to acquire NPC’s Wendy’s restaurants. Under the transferterms of 270 restaurants betweenthe consortium bid, several existing and new franchisees duringwould have been the first nine monthsultimate purchasers of 2017 (excludingseven of the DavCo and NPC transactions discussed below).
DavCo and NPC Transactions
As part of our system optimization initiative,markets, while the Company would have acquired 140one market.
During the three months ended April 4, 2021, following a court-approved mediation process, NPC and certain affiliates of Flynn Restaurant Group (“FRG”) and the Company entered into separate asset purchase agreements under which all of NPC’s Wendy’s restaurants 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”), anWendy’s approved franchisees. Under the transaction, FRG acquired approximately half of NPC’s Wendy’s restaurants in four markets, while several existing franchisee of the Company, for cash proceeds of $70.7 million (the “DavCo and NPC transactions”). AsWendy’s franchisees that were part of the transaction, NPC has agreed to remodel 90Company’s consortium bid acquired the other half of NPC’s Wendy’s restaurants in the Image Activation format by the end of 2021 and build 15 new Wendy’sother four markets. The Company did not acquire any restaurants by the end of 2022. Prior to closing the DavCo transaction, seven DavCo restaurants were closed. The acquisition of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such, the Company accounted for the 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.this transaction.
Costs related to our system optimization initiative were historically recorded to “ReorganizationOperations 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.
General and Administrative (“G&A”)Field Realignment
November 2014 Plan
In November 2014,September 2020, the Company initiated a plan to reduce its G&A expenses. The plan included a realignment and reinvestment ofreallocate resources to focus primarily on acceleratedbetter support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment Plan realigned the Company’s restaurant developmentoperations team, including transitioning from separate leaders of Company and consumer-facingfranchise operations to a single leader of all U.S. restaurant technology to drive long-term growth.operations. The Company achievedOperations and Field Realignment Plan also includes contract terminations, including the majorityclosure of the expense reductions through the realignment of its U.S.certain 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.offices. The Company expects to incur total costs aggregating approximately $28.0$6.0 million to $33.0$8.0 million, of which $23.0approximately $5.5 million to $27.0$7.5 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.Operations and Field Realignment Plan. Costs related to the planOperations and Field Realignment Plan are recorded to “Reorganization and realignment costs.” TheDuring the six months ended July 4, 2021, the Company recognized costs totaling $19.9$1.5 million, during the first nine months of 2017, which primarily included severancethird-party and related employee costs and share-based compensation.other costs. The Company expects to incur additional costs aggregating approximately $8.0$1.0 million to $13.0$3.0 million, comprised primarily of (1) severance and related employee costs of approximately $3.0 million, (2) recruitment and relocation costs of approximately $4.0 million, (3) third-party and other costs of approximately $1.0 million and (4) share-based compensation of approximately $3.0 million.costs. The Company expects to recognize the majority of the remaining costs to be recognizedand make the majority of the remaining cash expenditures associated with the Operations and Field Realignment Plan during the remainder of 2017 and continue into 2019, with approximately two-thirds to be recognized during 2017.2021.
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.”
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 for further information.
Results of Operations
The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the thirdsecond quarter and the first ninesix months of 20172021 and 2016.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Revenues: | | | | | | | | | | | |
| Sales | $ | 193.5 | | | $ | 164.2 | | | $ | 29.3 | | | $ | 382.6 | | | $ | 331.0 | | | $ | 51.6 | |
| Franchise royalty revenue and fees | 136.6 | | | 103.1 | | | 33.5 | | | 259.5 | | | 204.9 | | | 54.6 | |
| Franchise rental income | 60.9 | | | 56.9 | | | 4.0 | | | 119.7 | | | 114.7 | | | 5.0 | |
| Advertising funds revenue | 102.3 | | | 78.1 | | | 24.2 | | | 191.7 | | | 156.7 | | | 35.0 | |
| | 493.3 | | | 402.3 | | | 91.0 | | | 953.5 | | | 807.3 | | | 146.2 | |
| Costs and expenses: | | | | | | | | | | | |
| Cost of sales | 154.2 | | | 140.6 | | | 13.6 | | | 311.0 | | | 290.6 | | | 20.4 | |
| Franchise support and other costs | 8.9 | | | 5.5 | | | 3.4 | | | 16.6 | | | 13.5 | | | 3.1 | |
| Franchise rental expense | 34.1 | | | 31.3 | | | 2.8 | | | 66.6 | | | 60.6 | | | 6.0 | |
| Advertising funds expense | 107.9 | | | 81.3 | | | 26.6 | | | 202.1 | | | 161.3 | | | 40.8 | |
| General and administrative | 63.1 | | | 48.6 | | | 14.5 | | | 115.7 | | | 100.2 | | | 15.5 | |
| Depreciation and amortization | 30.8 | | | 34.7 | | | (3.9) | | | 62.3 | | | 65.8 | | | (3.5) | |
| System optimization gains, net | (30.8) | | | (2.0) | | | (28.8) | | | (31.3) | | | (2.3) | | | (29.0) | |
| Reorganization and realignment costs | 2.1 | | | 2.9 | | | (0.8) | | | 7.0 | | | 6.8 | | | 0.2 | |
| Impairment of long-lived assets | 0.6 | | | 0.1 | | | 0.5 | | | 1.3 | | | 4.7 | | | (3.4) | |
| Other operating income, net | (4.3) | | | (1.4) | | | (2.9) | | | (7.7) | | | (3.3) | | | (4.4) | |
| | 366.6 | | | 341.6 | | | 25.0 | | | 743.6 | | | 697.9 | | | 45.7 | |
| Operating profit | 126.7 | | | 60.7 | | | 66.0 | | | 209.9 | | | 109.4 | | | 100.5 | |
| Interest expense, net | (28.2) | | | (29.1) | | | 0.9 | | | (57.0) | | | (57.6) | | | 0.6 | |
| Loss on early extinguishment of debt | (17.9) | | | — | | | (17.9) | | | (17.9) | | | — | | | (17.9) | |
| Other income (expense), net | 0.2 | | | (0.2) | | | 0.4 | | | 0.3 | | | 0.9 | | | (0.6) | |
| Income before income taxes | 80.8 | | | 31.4 | | | 49.4 | | | 135.3 | | | 52.7 | | | 82.6 | |
| Provision for income taxes | (15.1) | | | (6.5) | | | (8.6) | | | (28.2) | | | (13.4) | | | (14.8) | |
| Net income | $ | 65.7 | | | $ | 24.9 | | | $ | 40.8 | | | $ | 107.1 | | | $ | 39.3 | | | $ | 67.8 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| Revenues: | | | | | | | | | | | |
| Sales | $ | 158.8 |
| | $ | 228.6 |
| | $ | (69.8 | ) | | $ | 467.9 |
| | $ | 747.2 |
| | $ | (279.3 | ) |
| Franchise royalty revenue and fees | 98.9 |
| | 98.0 |
| | 0.9 |
| | 306.1 |
| | 275.9 |
| | 30.2 |
|
| Franchise rental income | 50.3 |
| | 37.4 |
| | 12.9 |
| | 140.2 |
| | 102.4 |
| | 37.8 |
|
| | 308.0 |
| | 364.0 |
| | (56.0 | ) | | 914.2 |
| | 1,125.5 |
| | (211.3 | ) |
| Costs and expenses: | | | | | |
| | | | | | |
|
| Cost of sales | 132.4 |
| | 186.5 |
| | (54.1 | ) | | 385.2 |
| | 603.8 |
| | (218.6 | ) |
| Franchise rental expense | 24.1 |
| | 17.5 |
| | 6.6 |
| | 64.8 |
| | 49.7 |
| | 15.1 |
|
| General and administrative | 52.9 |
| | 58.9 |
| | (6.0 | ) | | 156.7 |
| | 184.7 |
| | (28.0 | ) |
| Depreciation and amortization | 31.2 |
| | 29.4 |
| | 1.8 |
| | 91.7 |
| | 92.4 |
| | (0.7 | ) |
| System optimization losses (gains), net | 0.1 |
| | (37.8 | ) | | 37.9 |
| | 39.7 |
| | (48.1 | ) | | 87.8 |
|
| Reorganization and realignment costs | 2.9 |
| | 2.1 |
| | 0.8 |
| | 20.8 |
| | 7.9 |
| | 12.9 |
|
| Impairment of long-lived assets | 1.0 |
| | 0.4 |
| | 0.6 |
| | 1.8 |
| | 13.0 |
| | (11.2 | ) |
| Other operating expense (income), net | 1.7 |
| | 0.9 |
| | 0.8 |
| | 5.3 |
| | (13.5 | ) | | 18.8 |
|
| | 246.3 |
| | 257.9 |
| | (11.6 | ) | | 766.0 |
| | 889.9 |
| | (123.9 | ) |
| Operating profit | 61.7 |
| | 106.1 |
| | (44.4 | ) | | 148.2 |
| | 235.6 |
| | (87.4 | ) |
| Interest expense | (30.0 | ) | | (28.7 | ) | | (1.3 | ) | | (87.9 | ) | | (85.5 | ) | | (2.4 | ) |
| Other (loss) income, net | (0.1 | ) | | 0.5 |
| | (0.6 | ) | | 3.1 |
| | 1.0 |
| | 2.1 |
|
| Income before income taxes | 31.6 |
| | 77.9 |
| | (46.3 | ) | | 63.4 |
| | 151.1 |
| | (87.7 | ) |
| Provision for income taxes | (17.3 | ) | | (29.0 | ) | | 11.7 |
| | (28.6 | ) | | (50.4 | ) | | 21.8 |
|
| Net income | $ | 14.3 |
| | $ | 48.9 |
| | $ | (34.6 | ) | | $ | 34.8 |
| | $ | 100.7 |
| | $ | (65.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| 2021 | | % of
Total Revenues | | 2020 | | % of
Total Revenues | | 2021 | | % of
Total Revenues | | 2020 | | % of
Total Revenues |
| Revenues: | | | | | | | | | | | | | | | |
| Sales | $ | 193.5 | | | 39.2 | % | | $ | 164.2 | | | 40.8 | % | | $ | 382.6 | | | 40.1 | % | | $ | 331.0 | | | 41.0 | % |
| Franchise royalty revenue and fees: | | | | | | | | | | | | | | | |
| Franchise royalty revenue | 119.5 | | | 24.2 | % | | 97.2 | | | 24.2 | % | | 227.9 | | | 23.9 | % | | 192.6 | | | 23.9 | % |
| Franchise fees | 17.1 | | | 3.5 | % | | 5.9 | | | 1.4 | % | | 31.6 | | | 3.3 | % | | 12.3 | | | 1.5 | % |
| Total franchise royalty revenue and fees | 136.6 | | | 27.7 | % | | 103.1 | | | 25.6 | % | | 259.5 | | | 27.2 | % | | 204.9 | | | 25.4 | % |
| Franchise rental income | 60.9 | | | 12.4 | % | | 56.9 | | | 14.2 | % | | 119.7 | | | 12.6 | % | | 114.7 | | | 14.2 | % |
| Advertising funds revenue | 102.3 | | | 20.7 | % | | 78.1 | | | 19.4 | % | | 191.7 | | | 20.1 | % | | 156.7 | | | 19.4 | % |
| Total revenues | $ | 493.3 | | | 100.0 | % | | $ | 402.3 | | | 100.0 | % | | $ | 953.5 | | | 100.0 | % | | $ | 807.3 | | | 100.0 | % |
| | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| 2021 | | % of
Sales | | 2020 | | % of
Sales | | 2021 | | % of
Sales | | 2020 | | % of
Sales |
| Cost of sales: | | | | | | | | | | | | | | | |
| Food and paper | $ | 55.8 | | | 28.9 | % | | $ | 49.3 | | | 30.0 | % | | $ | 110.7 | | | 28.9 | % | | $ | 101.8 | | | 30.8 | % |
| Restaurant labor | 58.7 | | | 30.3 | % | | 54.0 | | | 32.9 | % | | 118.7 | | | 31.0 | % | | 111.0 | | | 33.5 | % |
| Occupancy, advertising and other operating costs | 39.7 | | | 20.5 | % | | 37.3 | | | 22.7 | % | | 81.6 | | | 21.4 | % | | 77.8 | | | 23.5 | % |
| Total cost of sales | $ | 154.2 | | | 79.7 | % | | $ | 140.6 | | | 85.6 | % | | $ | 311.0 | | | 81.3 | % | | $ | 290.6 | | | 87.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| 2021 | | % of
Sales | | 2020 | | % of
Sales | | 2021 | | % of
Sales | | 2020 | | % of
Sales |
| Restaurant margin | $ | 39.3 | | | 20.3 | % | | $ | 23.6 | | | 14.4 | % | | $ | 71.6 | | | 18.7 | % | | $ | 40.4 | | | 12.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | % of Total Revenues | | 2016 | | % of Total Revenues | | 2017 | | % of Total Revenues | | 2016 | | % of Total Revenues |
| Revenues: | | | | | | | | | | | | | | | |
| Sales | $ | 158.8 |
| | 51.6 | % | | $ | 228.6 |
| | 62.8 | % | | $ | 467.9 |
| | 51.2 | % | | $ | 747.2 |
| | 66.4 | % |
| Franchise royalty revenue and fees: | | | | | | | | | | | | | | | |
| Royalty revenue | 93.7 |
| | 30.4 | % | | 87.9 |
| | 24.1 | % | | 275.0 |
| | 30.1 | % | | 255.0 |
| | 22.6 | % |
| Franchise fees | 5.2 |
| | 1.7 | % | | 10.1 |
| | 2.8 | % | | 31.1 |
| | 3.4 | % | | 20.9 |
| | 1.9 | % |
| Total franchise royalty revenue and fees | 98.9 |
| | 32.1 | % | | 98.0 |
| | 26.9 | % | | 306.1 |
| | 33.5 | % | | 275.9 |
| | 24.5 | % |
| Franchise rental income | 50.3 |
| | 16.3 | % | | 37.4 |
| | 10.3 | % | | 140.2 |
| | 15.3 | % | | 102.4 |
| | 9.1 | % |
| Total revenues | $ | 308.0 |
| | 100.0 | % | | $ | 364.0 |
| | 100.0 | % | | $ | 914.2 |
| | 100.0 | % | | $ | 1,125.5 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | % of
Sales | | 2016 | | % of
Sales | | 2017 | | % of
Sales | | 2016 | | % of
Sales |
| Cost of sales: | | | | | | | | | | | | | | | |
| Food and paper | $ | 51.8 |
| | 32.6 | % | | $ | 69.3 |
| | 30.3 | % | | $ | 147.1 |
| | 31.4 | % | | $ | 226.9 |
| | 30.4 | % |
| Restaurant labor | 45.6 |
| | 28.7 | % | | 64.8 |
| | 28.4 | % | | 135.8 |
| | 29.0 | % | | 211.7 |
| | 28.3 | % |
| Occupancy, advertising and other operating costs | 35.0 |
| | 22.0 | % | | 52.4 |
| | 22.9 | % | | 102.3 |
| | 21.9 | % | | 165.2 |
| | 22.1 | % |
| Total cost of sales | $ | 132.4 |
| | 83.3 | % | | $ | 186.5 |
| | 81.6 | % | | $ | 385.2 |
| | 82.3 | % | | $ | 603.8 |
| | 80.8 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
| | | | Third Quarter | | Nine Months | | Second Quarter | | Six Months |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2021 | | 2020 | | 2021 | | 2020 |
| Key business measures: | | | | | | | | Key business measures: | | | | | | | |
| North America same-restaurant sales: | | | | | | | | |
| U.S. same-restaurant sales: | | U.S. same-restaurant sales: | | | |
| Company-operated | (0.5 | )% | | 2.7 | % | | 0.7 | % | | 2.9 | % | Company-operated | 23.9 | % | | (10.0) | % | | 18.3 | % | | (5.5) | % |
| Franchised | 2.1 | % | | 1.2 | % | | 2.4 | % | | 1.7 | % | Franchised | 15.6 | % | | (4.0) | % | | 14.6 | % | | (2.0) | % |
| Systemwide | 2.0 | % | | 1.4 | % | | 2.3 | % | | 1.8 | % | Systemwide | 16.1 | % | | (4.4) | % | | 14.9 | % | | (2.3) | % |
| | | | | | | | | | | | |
| Total same-restaurant sales: | | | | | | | | |
| International same-restaurant sales (a) | | International same-restaurant sales (a) | 31.4 | % | | (18.4) | % | | 19.0 | % | | (10.1) | % |
| | Global same-restaurant sales: | | Global same-restaurant sales: | | | |
| Company-operated | (0.5 | )% | | 2.7 | % | | 0.7 | % | | 2.9 | % | Company-operated | 23.9 | % | | (10.0) | % | | 18.3 | % | | (5.5) | % |
| Franchised (a) | 2.1 | % | | 1.3 | % | | 2.4 | % | | 1.6 | % | Franchised (a) | 17.0 | % | | (5.5) | % | | 15.0 | % | | (2.9) | % |
| Systemwide (a) | 1.9 | % | | 1.4 | % | | 2.3 | % | | 1.7 | % | Systemwide (a) | 17.4 | % | | (5.8) | % | | 15.2 | % | | (3.1) | % |
| | Systemwide sales: (b) | | Systemwide sales: (b) | |
| U.S. Company-operated | | U.S. Company-operated | $ | 193.3 | | | $ | 164.2 | | | $ | 382.4 | | | $ | 331.0 | |
| U.S. franchised | | U.S. franchised | 2,704.1 | | | 2,239.2 | | | 5,162.4 | | | 4,413.4 | |
| U.S. systemwide | | U.S. systemwide | 2,897.4 | | | 2,403.4 | | | 5,544.8 | | | 4,744.4 | |
| International Company-operated | | International Company-operated | 0.2 | | | — | | | 0.2 | | | — | |
| International franchised (a) | | International franchised (a) | 353.4 | | | 220.2 | | | 657.0 | | | 492.8 | |
| International systemwide (a) | | International systemwide (a) | 353.6 | | | 220.2 | | | 657.2 | | | 492.8 | |
| Global systemwide (a) | | Global systemwide (a) | $ | 3,251.0 | | | $ | 2,623.6 | | | $ | 6,202.0 | | | $ | 5,237.2 | |
________________
(a) Includes international franchised same-restaurant sales (excludingExcludes Argentina and Venezuela due to the impact of Venezuela’sthe highly inflationary economy).economies of those countries.
(b)During the second quarter of 2021 and 2020, global systemwide sales increased 22.9% and decreased 6.2%, respectively, U.S. systemwide sales increased 20.6% and decreased 4.0%, respectively, and international systemwide sales increased 48.2% and decreased 24.5%, respectively, on a constant currency basis. During the first six months of 2021 and 2020, global systemwide sales increased 17.7% and decreased 2.7%, respectively, U.S. systemwide sales increased 16.9% and decreased 1.6%, respectively, and international systemwide sales increased 25.6% and decreased 12.4%, respectively, on a constant currency basis.
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Key business measures (continued): | | | | | | | |
| Systemwide sales: (a) | | | | | | | |
| Company-operated | $ | 158.8 |
| | $ | 228.6 |
| | $ | 467.9 |
| | $ | 747.2 |
|
| North America franchised | 2,347.2 |
| | 2,198.2 |
| | 6,897.4 |
| | 6,381.8 |
|
| International franchised (b) | 119.4 |
| | 106.9 |
| | 351.6 |
| | 309.6 |
|
| Global systemwide sales | $ | 2,625.4 |
| | $ | 2,533.7 |
| | $ | 7,716.9 |
| | $ | 7,438.6 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter |
| U.S. Company-operated | | U.S. Franchised | | International Company-operated | | International Franchised | | Systemwide |
| Restaurant count: | | | | | | | | | |
| Restaurant count at April 4, 2021 | 362 | | | 5,523 | | | — | | | 953 | | | 6,838 | |
| Opened | 1 | | | 21 | | | 1 | | | 20 | | | 43 | |
| Closed (a) | (1) | | | (11) | | | — | | | (3) | | | (15) | |
| Net (sold to) purchased by franchisees | (48) | | | 48 | | | — | | | — | | | — | |
| Restaurant count at July 4, 2021 | 314 | | | 5,581 | | | 1 | | | 970 | | | 6,866 | |
| | | | | | | | | |
| Six Months |
| U.S. Company-operated | | U.S. Franchised | | International Company-operated | | International Franchised | | Systemwide |
| | | | | | | | | |
| Restaurant count at January 3, 2021 | 361 | | | 5,520 | | | — | | | 947 | | | 6,828 | |
| Opened | 3 | | | 39 | | | 1 | | | 38 | | | 81 | |
| Closed (a) | (2) | | | (26) | | | — | | | (15) | | | (43) | |
| Net (sold to) purchased by franchisees | (48) | | | 48 | | | — | | | — | | | — | |
| Restaurant count at July 4, 2021 | 314 | | | 5,581 | | | 1 | | | 970 | | | 6,866 | |
________________
| |
(a) | During the third quarter of 2017 and 2016, North America systemwide sales increased 3.0% and 1.8%, respectively, international franchised sales increased 13.4% and 9.0%, 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% and 3.0%, respectively, on a constant currency basis. |
| |
(b) | Excludes Venezuela due to the impact of Venezuela’s highly inflationary economy. |
|
| | | | | | | | | | | |
| | Third Quarter |
| | Company-operated | | North America Franchised | | International Franchised | | Systemwide |
| Restaurant count: | | | | | | | |
| Restaurant count at July 2, 2017 | 331 |
| | 5,762 |
| | 471 |
| | 6,564 |
|
| Opened | 4 |
| | 25 |
| | 13 |
| | 42 |
|
| Closed | (2 | ) | | (15 | ) | | (3 | ) | | (20 | ) |
| 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 |
|
|
| | | | | | | |
| Sales | Change |
| | Third
Quarter | | Nine
Months |
| Sales | $ | (69.8 | ) | | $ | (279.3 | ) |
The decrease in sales for both the third quarter and the first nine months of 2017 was primarily(a)Excludes restaurants temporarily closed due to the impact of Wendy’s Company-operated restaurants sold under our system optimization initiative, which resulted in a reductionthe COVID-19 pandemic.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Sales | $ | 193.5 | | | $ | 164.2 | | | $ | 29.3 | | | $ | 382.6 | | | $ | 331.0 | | | $ | 51.6 | |
The increase in sales of $74.1 million and $295.9 million duringfor the thirdsecond quarter and the first ninesix months of 2017, respectively. For the third quarter of 2017,2021 was primarily due to a 23.9% and 18.3% increase in Company-operated same-restaurant sales, declinedrespectively, partially offset by the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021. Company-operated same-restaurant sales increased due to a decrease(1) an increase in customer count, which was partially offset by an increase in our average per customer check amount. A portionreflecting the prior year impact 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,COVID-19 pandemic, and (2) higher average check. 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 ninesix months of 2017 primarily due to benefits from strategic price increases on our menu items and changes in product mix. Sales2021 also benefited from higher sales growth at our new(1) government stimulus payments to consumers during the first quarter of 2021 and remodeled Image Activation restaurants.(2) the positive impact from the breakfast daypart.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Franchise Royalty Revenue and Fees | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Franchise royalty revenue | $ | 119.5 | | | $ | 97.2 | | | $ | 22.3 | | | $ | 227.9 | | | $ | 192.6 | | | $ | 35.3 | |
| Franchise fees | 17.1 | | | 5.9 | | | 11.2 | | | 31.6 | | | 12.3 | | | 19.3 | |
| $ | 136.6 | | | $ | 103.1 | | | $ | 33.5 | | | $ | 259.5 | | | $ | 204.9 | | | $ | 54.6 | |
|
| | | | | | | |
| Franchise Royalty Revenue and Fees | Change |
| | Third
Quarter | | Nine
Months |
| Royalty revenue | $ | 5.8 |
| | $ | 20.0 |
|
| Franchise fees | (4.9 | ) | | 10.2 |
|
| | $ | 0.9 |
| | $ | 30.2 |
|
The increase in franchise royalty revenue and fees during the thirdsecond quarter and the first six months of 20172021 was primarily due to (1) a 17.0% and 15.0% increase in global franchise same-restaurant sales, respectively, and (2) a net increase in the number of franchise restaurants in operation during 2021 compared to 2020. Franchise same-restaurant sales increased due to (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (2) higher royalty revenue resulting fromaverage check. Franchise same-restaurant sales during the first six months of Company-operated restaurants to franchisees under our system optimization initiative. Royalty revenue2021 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(1) government stimulus payments to consumers during the thirdfirst quarter of 2017.2021 and (2) the positive impact from the breakfast daypart.
The increase in franchise royalty revenuefees during the second quarter and the first six months of 2021 was primarily due to an increase in fees for providing information technology services to franchisees. Franchise fees during the first ninesix 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 revenue2021 also
benefited from the accelerated recognition of fees associated with development agreements that were canceled primarily as a 2.4% increase in franchise same-restaurant sales.result of the NPC bankruptcy sale process.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Franchise Rental Income | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Franchise rental income | $ | 60.9 | | | $ | 56.9 | | | $ | 4.0 | | | $ | 119.7 | | | $ | 114.7 | | | $ | 5.0 | |
|
| | | | | | | |
| Franchise Rental Income | Change |
| | Third
Quarter | | Nine
Months |
| Franchise rental income | $ | 12.9 |
| | $ | 37.8 |
|
The increase in franchise rental income during the thirdsecond quarter and the first ninesix months of 20172021 was primarily due to leasing and/or subleasing properties to franchisees(1) an increase in connectionpercent rent, reflecting higher systemwide sales compared with 2020, and (2) the impact of the sale of 47 Company-operated restaurants and facilitating franchisee-to-franchisee restaurant transfers.in New York during the second quarter of 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advertising Funds Revenue | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Advertising funds revenue | $ | 102.3 | | | $ | 78.1 | | | $ | 24.2 | | | $ | 191.7 | | | $ | 156.7 | | | $ | 35.0 | |
|
| | | | | |
| 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 | % |
The Company maintains two national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales of the franchised restaurants. The increase in advertising funds revenue during the second quarter and the first six months of 2021 was primarily due to (1) an increase in franchise same-restaurant sales in the U.S. and Canada and (2) the prior year abatement of national advertising fund contributions on breakfast sales.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of Sales, as a Percent of Sales | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Food and paper | 28.9 | % | | 30.0 | % | | (1.1) | % | | 28.9 | % | | 30.8 | % | | (1.9) | % |
| Restaurant labor | 30.3 | % | | 32.9 | % | | (2.6) | % | | 31.0 | % | | 33.5 | % | | (2.5) | % |
| Occupancy, advertising and other operating costs | 20.5 | % | | 22.7 | % | | (2.2) | % | | 21.4 | % | | 23.5 | % | | (2.1) | % |
| 79.7 | % | | 85.6 | % | | (5.9) | % | | 81.3 | % | | 87.8 | % | | (6.5) | % |
The decrease in cost of sales, as a percent of sales, during the thirdsecond quarter and the first six months of 20172021 was primarily due to (1) an increase in commodity costs,customer count, reflecting the prior year impact of the COVID-19 pandemic, (2) higher beefaverage check and bacon costs.
The increase in(3) incremental recognition pay during April and May of 2020. These impacts were partially offset by restaurant labor rate increases. In addition, cost of sales, as a percent of sales, during the second quarter of 2021 was negatively impacted by higher commodity costs.
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| Franchise Support and Other Costs | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Franchise support and other costs | $ | 8.9 | | | $ | 5.5 | | | $ | 3.4 | | | $ | 16.6 | | | $ | 13.5 | | | $ | 3.1 | |
The increase in franchise support and other costs during the second quarter and the first ninesix months of 20172021 was primarily due to an increase in commodity costs reflecting higher chickenincurred to provide information technology and bacon costs. Theother services to our franchisees. These increases were partially offset by investments made during the first ninesix months of 2017 were also negatively impacted by increased restaurant labor rates.2020 to support U.S. franchisees in preparation of the national launch of breakfast on March 2, 2020.
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| Franchise Rental Expense | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Franchise rental expense | $ | 34.1 | | | $ | 31.3 | | | $ | 2.8 | | | $ | 66.6 | | | $ | 60.6 | | | $ | 6.0 | |
|
| | | | | | | |
| Franchise Rental Expense | Change |
| | Third
Quarter | | Nine
Months |
| Franchise rental expense | $ | 6.6 |
| | $ | 15.1 |
|
The increase in franchise rental expense during the thirdsecond quarter and the first ninesix months of 20172021 was primarily due to subleasing properties to franchisees that were previously Company-operated restaurants and as such, had been previously recordedan increase in costpercent rent, reflecting higher systemwide sales compared with 2020. Franchise rental expense for the first six months of sales. Rental expense2021 also increased as a result of entering into new leases in connection with facilitating franchisee-to-franchisee restaurant transfers for purposes of subleasing such propertiesdue to the franchisee.
impact of assigning certain leases to a franchisee in 2020.
|
| | | | | | | |
| 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 | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Advertising funds expense | $ | 107.9 | | | $ | 81.3 | | | $ | 26.6 | | | $ | 202.1 | | | $ | 161.3 | | | $ | 40.8 | |
On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. As of July 4, 2021, the Company expected advertising funds expense to exceed advertising funds revenue by approximately $21.0 million for 2021, which includes (1) the Company’s decision to fund up to $15.0 million of incremental advertising and (2) the amount by which advertising funds revenue exceeded advertising funds expense in 2020 (excluding the Company’s funding of $14.6 million of incremental advertising) and 2019 of approximately $6.0 million. During the second quarter and the first six months of 2021, advertising funds expense increased due to (1) an increase in franchise same-restaurant sales in the U.S. and Canada and (2) the recognition of $5.6 million and $10.4 million, respectively, of the expected advertising spend in excess of advertising funds revenue. Subsequent to July 4, 2021, the Company revised its planned 2021 advertising expenses to include an additional $10.0 million of incremental advertising, resulting in an expected total 2021 incremental Company investment of $25.0 million.
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| General and Administrative | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Incentive compensation | $ | 15.1 | | | $ | 6.0 | | | $ | 9.1 | | | 22.5 | | | 9.0 | | | 13.5 | |
| Professional fees | 9.1 | | | 6.5 | | | 2.6 | | | 17.8 | | | 12.8 | | | 5.0 | |
| Share-based compensation | 5.9 | | | 4.7 | | | 1.2 | | | 11.0 | | | 9.2 | | | 1.8 | |
| Travel-related expenses | 1.5 | | | 0.8 | | | 0.7 | | | 2.0 | | | 3.9 | | | (1.9) | |
| Other, net | 31.5 | | | 30.6 | | | 0.9 | | | 62.4 | | | 65.3 | | | (2.9) | |
| $ | 63.1 | | | $ | 48.6 | | | $ | 14.5 | | | $ | 115.7 | | | $ | 100.2 | | | $ | 15.5 | |
The decreaseincrease in general and administrative expenses during the thirdsecond quarter and the first six months of 20172021 was primarily due to decreases(1) an increase in (1) professional services due to legalincentive compensation accruals and other costs associated withhigher share-based compensation, reflecting higher operating performance in the cybersecurity incident recognized during the third quarterfirst six months of 2016 (see “Item 1 - Financial Statements,” Note 142021 compared to the Condensed Consolidated Financial Statements for further information)first six months of 2020, and (2) employee compensation and related expenseshigher professional fees, primarily as a result of changes in staffing driven by our system optimization initiative.
The decrease in general and administrative expenses during the first nine months of 2017 was primarily due to decreases in (1) professional services due to legal and other costs associated with the cybersecurity incident recognized duringCompany’s enterprise resource planning implementation. During the first ninesix months of 2016 (see “Item 1 - Financial Statements,” Note 14 to the Condensed Consolidated Financial Statements for further information), (2) employee compensation and related2021, these increases were partially offset by a decrease in travel-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.reduced travel.
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| Depreciation and Amortization | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Restaurants | $ | 18.7 | | | $ | 23.0 | | | $ | (4.3) | | | $ | 38.1 | | | $ | 42.5 | | | $ | (4.4) | |
| Technology support, corporate and other | 12.1 | | | 11.7 | | | 0.4 | | | 24.2 | | | 23.3 | | | 0.9 | |
| $ | 30.8 | | | $ | 34.7 | | | $ | (3.9) | | | $ | 62.3 | | | $ | 65.8 | | | $ | (3.5) | |
|
| | | | | | | |
| Depreciation and Amortization | Change |
| | Third
Quarter | | Nine
Months |
| Restaurants | $ | (0.1 | ) | | $ | (4.7 | ) |
| Corporate and other | 1.9 |
| | 4.0 |
|
| | $ | 1.8 |
| | $ | (0.7 | ) |
The decrease in restaurant depreciation and amortization during the thirdsecond quarter and the first ninesix months of 20172021 was primarily due to (1) assets becoming fully depreciated and (2) the impact of a decreaseprior year change in depreciation on assets sold under our system optimization initiative of $0.2 million and $3.9 million, respectively. Corporate and other depreciation expense increased due touseful lives for certain asset categories. These decreases were partially offset by an increase in depreciation and amortization for technology investments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| System Optimization Gains, Net | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| System optimization gains, net | $ | (30.8) | | | $ | (2.0) | | | $ | (28.8) | | | $ | (31.3) | | | $ | (2.3) | | | $ | (29.0) | |
|
| | | | | | | | | | | | | | | |
| System Optimization Losses (Gains), Net | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| System optimization losses (gains), net | $ | 0.1 |
| | $ | (37.8 | ) | | $ | 39.7 |
| | $ | (48.1 | ) |
The change in systemSystem optimization losses (gains),gains, net was because no salesfor the second quarter and the first six months of Company-operated restaurants occurred during the third quarter2021 were primarily comprised of 2017, compared witha gain on the sale of 15647 Company-operated restaurants duringin New York. System optimization gains, net for the thirdsecond quarter and first six months of 2016.2020 were primarily comprised of gains on the sale of surplus and other properties. See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information on the sale of the Company-operated restaurants in New York.
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| Reorganization and Realignment Costs | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Operations and field realignment | $ | 1.2 | | | $ | — | | | $ | 1.2 | | | $ | 1.5 | | | $ | — | | | $ | 1.5 | |
| IT realignment | — | | | 2.8 | | | (2.8) | | | — | | | 6.4 | | | (6.4) | |
| G&A realignment | — | | | 0.1 | | | (0.1) | | | — | | | 0.3 | | | (0.3) | |
| System optimization initiative | 0.9 | | | — | | | 0.9 | | | 5.5 | | | 0.1 | | | 5.4 | |
| $ | 2.1 | | | $ | 2.9 | | | $ | (0.8) | | | $ | 7.0 | | | $ | 6.8 | | | $ | 0.2 | |
In September 2020, the Company initiated the Operations and Field Realignment Plan. The change in system optimization losses (gains), net duringOperations and Field Realignment Plan realigned the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. The Operations and Field Realignment Plan also includes contract terminations, including the closure of certain field offices. During the second quarter and the first ninesix 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.
|
| | | | | | | | | | | | | | | |
| Reorganization and Realignment Costs | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| System optimization initiative | $ | 0.2 |
| | $ | 2.1 |
| | $ | 0.9 |
| | $ | 6.9 |
|
| 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 |
|
During the third quarter of 2017 and 2016,2021, the Company recognized costs totaling $1.2 million and $1.5 million, respectively, which primarily included third-party and other costs. The Company expects to incur additional costs aggregating approximately $1.0 million to $3.0 million, comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs associated with itsthe Operations and Field Realignment Plan during the remainder of 2021.
As part of the Company’s system optimization initiative, totaling $0.2 millionthe Company expects to continue to optimize the Wendy’s system through strategic restaurant acquisitions and $2.1 million, respectively. In bothdispositions, as well as by facilitating Franchise Flips. During the thirdsecond quarter of 2017 and 2016, costs primarily included professional fees.
During the first nine months of 2017 and 2016,2021, the Company recognized costs associated with its system optimization initiative totaling $0.9 million, and $6.9 million, respectively. In the first nine monthswhich were primarily comprised 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 and professional fees associated with the sale of $1.2 million, (2) share-based compensation of $0.8 million and (3) third-party and other costs of $0.5 million.
47 Company-operated restaurants in New York. During the first ninesix months of 2017,ended July 4, 2021, the Company recognized costs associated with its May 2017 plansystem optimization initiative totaling $19.9$5.5 million, which were primarily included (1) severancecomprised of the write-off of certain lease assets and lease termination fees associated with the NPC bankruptcy sale process. The Company expects to recognize a gain of approximately $1.0 million related employee coststo the write-off of $14.4 million, (2) share-based compensationcertain NPC-related lease liabilities upon final termination of $4.5 million and (3) third-party and other costs of $0.8 million.the leases.
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| Impairment of Long-Lived Assets | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Impairment of long-lived assets | $ | 0.6 | | | $ | 0.1 | | | $ | 0.5 | | | $ | 1.3 | | | $ | 4.7 | | | $ | (3.4) | |
|
| | | | | | | |
| Impairment of Long-Lived Assets | Change |
| | Third
Quarter | | Nine
Months |
| Impairment of long-lived assets | $ | 0.6 |
| | $ | (11.2 | ) |
Impairment of long-lived assets increasedThe change in impairment charges during the thirdsecond quarter of 20172021 was primarily due todriven by higher impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants andwhen compared to the second quarter of 2020. The change in impairment charges for capital improvements in previously impaired restaurants that did not subsequently recover.
Impairment of long-lived assets decreased during the first ninesix months of 20172021 was primarily due to lower impairment charges resulting fromdriven by 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 theexpected deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in previously impaired restaurants that did not subsequently recover.the first six months of 2020 as a result of the COVID-19 pandemic.
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| Other Operating Income, Net | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Gains on sales-type leases | $ | (1.6) | | | $ | (0.6) | | | $ | (1.0) | | | $ | (3.5) | | | $ | (1.2) | | | $ | (2.3) | |
| Lease buyout | (0.8) | | | 0.1 | | | (0.9) | | | (0.9) | | | 0.1 | | | (1.0) | |
| Equity in earnings in joint ventures, net | (1.7) | | | (0.9) | | | (0.8) | | | (3.3) | | | (2.4) | | | (0.9) | |
| | | | | | | | | | | |
| Other, net | (0.2) | | | — | | | (0.2) | | | — | | | 0.2 | | | (0.2) | |
| $ | (4.3) | | | $ | (1.4) | | | $ | (2.9) | | | $ | (7.7) | | | $ | (3.3) | | | $ | (4.4) | |
|
| | | | | | | | | | | | | | | |
| Other Operating Expense (Income), Net | Third Quarter | | Nine Months |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Lease buyout | $ | 0.2 |
| | $ | — |
| | $ | 0.1 |
| | $ | (11.6 | ) |
| Equity in earnings in joint ventures, net | (2.3 | ) | | (2.2 | ) | | (6.1 | ) | | (6.5 | ) |
| Other, net | 3.8 |
| | 3.1 |
| | 11.3 |
| | 4.6 |
|
| | $ | 1.7 |
| | $ | 0.9 |
| | $ | 5.3 |
| | $ | (13.5 | ) |
The change in other operating income, net during the second quarter and the first six months of 2021 was primarily due to (1) gains on new and modified sales-type leases, (2) lease buyout activity and (3) an increase in the equity in earnings from our TimWen joint venture.
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| Interest Expense, Net | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Interest expense, net | $ | 28.2 | | | $ | 29.1 | | | $ | (0.9) | | | $ | 57.0 | | | $ | 57.6 | | | $ | (0.6) | |
Interest expense, (income)net decreased during the second quarter and the first six months of 2021 primarily due to the impact of completing the refinancing of a portion of the Company’s securitized financing facility in the second quarter of 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss on Early Extinguishment of Debt | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Loss on early extinguishment of debt | $ | 17.9 | | | $ | — | | | $ | 17.9 | | | $ | 17.9 | | | $ | — | | | $ | 17.9 | |
During the second quarter of 2021, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of repaying the outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes with the proceeds from the issuance of its Series 2021-1 Class A-2 Notes. The loss on the early extinguishment of debt of $17.9 million was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs of $8.3 million.
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| Other Income (Expense), Net | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Other income (expense), net | $ | 0.2 | | | $ | (0.2) | | | $ | 0.4 | | | $ | 0.3 | | | $ | 0.9 | | | $ | (0.6) | |
The change in other income (expense), net during the thirdsecond quarter and the first six months of 20172021 was primarily due to costs incurred to provide information technology services tofluctuations in interest income earned on our franchisees, as well as costs related to facilitating franchisee-to-franchisee restaurant transfers.cash equivalents.
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 recognized on a lease buyout during the first quarter of 2016. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Provision for Income Taxes | Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Income before income taxes | $ | 80.8 | | | $ | 31.4 | | | $ | 49.4 | | | $ | 135.3 | | | $ | 52.7 | | | $ | 82.6 | |
| Provision for income taxes | (15.1) | | | (6.5) | | | (8.6) | | | (28.2) | | | (13.4) | | | (14.8) | |
| Effective tax rate on income | 18.6 | % | | 20.8 | % | | (2.2) | % | | 20.8 | % | | 25.4 | % | | (4.6) | % |
|
| | | | | | | |
| Interest Expense | Change |
| | Third
Quarter | | Nine
Months |
| Interest expense | $ | 1.3 |
| | $ | 2.4 |
|
Interest expense increased during the third quarter and the first nine months of 2017 primarily due to an increase in capital lease obligations resulting from facilitating franchisee-to-franchisee restaurant transfers and subleasing such properties to the franchisee.
|
| | | | | | | | | | | | | | | |
| Provision for Income 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 | % |
Our effective tax rates infor the thirdsecond quarter and the first six months of 20172021 and 20162020 were impacted by variations in income before income taxes, including uncertainty in 2020 income before income taxes arising from the COVID-19 pandemic, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occurThe decrease in any given year but are not consistent from yearthe effective tax rate for the second quarter of 2021 compared with the second quarter of 2020 was primarily due to year includean increase in the following: (1) our system optimization initiative, (2)benefit of share-based compensation, partially offset by an increase due to state income taxes, net of federal benefits, including non-recurringdiscrete changes to state deferred taxes. The decrease in the effective tax rate for the first six months of 2021 compared with the first six months of 2020 was primarily due to a decrease in the tax effects of our foreign operations, partially offset by an increase due to state income taxes, (3) the adoption of an amendment issued by the Financial Accounting Standards Board (“FASB”), which requires that excess tax benefits and tax deficiencies relatedincluding discrete changes to share-based payments be recognized in net income (see “Item 1 - Financial Statements,”state deferred taxes.
Segment Information
See Note 1517 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information)information regarding the Company’s segments.
Wendy’s U.S.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Sales | $ | 193.3 | | | $ | 164.2 | | | $ | 29.1 | | | $ | 382.4 | | | $ | 331.0 | | | $ | 51.4 | |
| Franchise royalty revenue | 106.0 | | | 88.1 | | | 17.9 | | | 202.8 | | | 173.0 | | | 29.8 | |
| Franchise fees | 14.3 | | | 5.4 | | | 8.9 | | | 26.2 | | | 10.6 | | | 15.6 | |
| Advertising fund revenue | 96.2 | | | 73.6 | | | 22.6 | | | 180.4 | | | 147.7 | | | 32.7 | |
| Total revenues | $ | 409.8 | | | $ | 331.3 | | | $ | 78.5 | | | $ | 791.8 | | | $ | 662.3 | | | $ | 129.5 | |
| Segment profit | $ | 126.7 | | | $ | 93.1 | | | $ | 33.6 | | | $ | 238.7 | | | $ | 175.0 | | | $ | 63.7 | |
The increase in Wendy’s U.S. revenues during the second quarter and (4) the rate differential between foreign and domestic taxes.
Our effective tax rates in the first ninesix months of 2017 and 2016 were impacted by variations2021 was primarily due to an increase 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 million and $7.1 million, respectively), (2) the adoption of an amendment issuedsystemwide same-restaurant sales, partially offset by the FASB, which requires that excess tax benefits and tax deficiencies related to share-based payments be recognized in net income, which resulted in a benefit of $5.2 million in the first nine months of 2017 (see “Item 1 - Financial Statements,” Note 15 to the Condensed Consolidated Financial Statements for further information), (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 effectssale of changes to our state deferred taxes and valuation allowances on state net operating losses caused by the shifting relative taxable presence47 Company-operated restaurants 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 millionNew York during the thirdsecond quarter of 20172021. Same-restaurant sales increased due to (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and 2016, respectively, and increased the provision for income taxes by $7.1 million and decreased the provision by $1.3 million(2) higher average check. Same-restaurant sales during the first ninesix months of 20172021 also benefited from the positive impact from the breakfast daypart. In addition, during the second quarter and 2016, respectively.the first six months of 2021, Wendy’s U.S. revenues benefited from higher franchise fees, primarily due to an increase in fees for providing information technology services to franchisees.
Deferred income taxes are not recordedThe increase in Wendy’s U.S. segment profit during the second quarter and the first six months of 2021 was primarily due to (1) higher revenues and (2) lower cost of sales, as a percent of sales, for temporary differences relatedCompany-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales.” These changes were partially offset by higher general and administrative expenses.
Wendy’s International
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Sales | $ | 0.2 | | | $ | — | | | $ | 0.2 | | | $ | 0.2 | | | $ | — | | | $ | 0.2 | |
| Franchise royalty revenue | 13.6 | | | 9.1 | | | 4.5 | | | 25.1 | | | 19.6 | | | 5.5 | |
| Franchise fees | 1.4 | | | 0.4 | | | 1.0 | | | 3.0 | | | 0.9 | | | 2.1 | |
| Advertising fund revenue | 6.1 | | | 4.5 | | | 1.6 | | | 11.3 | | | 9.0 | | | 2.3 | |
| Total revenues | $ | 21.3 | | | $ | 14.0 | | | $ | 7.3 | | | $ | 39.6 | | | $ | 29.5 | | | $ | 10.1 | |
| Segment profit | $ | 6.5 | | | $ | 3.6 | | | $ | 2.9 | | | $ | 14.2 | | | $ | 8.7 | | | $ | 5.5 | |
The increase in Wendy’s International revenues during the second quarter and the first six months of 2021 was primarily due to our investmentsan increase in non-U.S. subsidiaries that we consider permanently invested outsidesame-restaurant sales. Same-restaurant sales increased due to (1) an increase in customer count, reflecting the prior year impact of the U.S. At October 1, 2017, our cash balances held outsideCOVID-19 pandemic, and (2) higher average check. The increase in Wendy’s International segment profit during the second quarter and the first six months of 2021 was primarily due to higher revenues, partially offset by higher general and administrative expenses.
Global Real Estate & Development
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| Franchise fees | $ | 1.3 | | | $ | 0.1 | | | $ | 1.2 | | | $ | 2.5 | | | $ | 0.8 | | | $ | 1.7 | |
| Franchise rental income | 60.9 | | | 56.9 | | | 4.0 | | | 119.7 | | | 114.7 | | | 5.0 | |
| Total revenues | $ | 62.2 | | | $ | 57.0 | | | $ | 5.2 | | | $ | 122.2 | | | $ | 115.5 | | | $ | 6.7 | |
| Segment profit | $ | 26.6 | | | $ | 23.7 | | | $ | 2.9 | | | $ | 52.8 | | | $ | 50.2 | | | $ | 2.6 | |
The increase in Global Real Estate & Development revenues during the U.S. totaled $107.7 million.second quarter and the first six months of 2021 was primarily due to higher franchise rental income. See “Franchise Rental Income” above for further information.
The increase in Global Real Estate & Development segment profit during the second quarter and the first six months of 2021 was primarily due to (1) gains on new and modified sales-type leases, (2) lease buyout activity and (3) an increase in the equity in earnings from the TimWen joint venture. These increases were partially offset by higher general and administrative expenses.
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. PrincipalOur principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to shareholders.stockholders.
Our anticipated consolidated sources of cash and cash requirements for the remainder of 2017,2021, exclusive of operating cash flow requirements, consist principally of:
•capital expenditures of approximately $26.0$55.0 million to $31.0$65.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $80.0 million to $85.0 million.$90.0 million;
•cash dividends aggregating up to approximately $17.0$53.5 million as discussed below in “Dividends;” and
•potential stock repurchases of up to $59.1$104.4 million, of which $6.6$4.4 million was repurchased subsequent to October 1, 2017July 4, 2021 through November 2, 2017August 4, 2021, as discussed below in “Stock Repurchases.”
Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.
We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us.
The table below summarizes our cash flows from operating, investing and financing activities for the first ninesix months of 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | |
| Six Months |
| 2021 | | 2020 | | Change |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 158.8 | | | $ | 30.6 | | | $ | 128.2 | |
| Investing activities | 32.0 | | | (24.9) | | | 56.9 | |
| Financing activities | 28.9 | | | 48.3 | | | (19.4) | |
| Effect of exchange rate changes on cash | 2.2 | | | (3.2) | | | 5.4 | |
| Net increase in cash, cash equivalents and restricted cash | $ | 221.9 | | | $ | 50.8 | | | $ | 171.1 | |
|
| | | | | | | | | | | |
| | Nine Months |
| | 2017 | | 2016 | | Change |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 176.7 |
| | $ | 137.3 |
| | $ | 39.4 |
|
| Investing activities | (38.1 | ) | | 62.5 |
| | (100.6 | ) |
| Financing activities | (156.9 | ) | | (222.2 | ) | | 65.3 |
|
| Effect of exchange rate changes on cash | 6.7 |
| | 4.0 |
| | 2.7 |
|
| Net decrease in cash and cash equivalents | $ | (11.6 | ) | | $ | (18.4 | ) | | $ | 6.8 |
|
Operating Activities
Cash provided by operating activities was $176.7 and $137.3 in the first nine months of 2017 and 2016, respectively. Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities.
Cash provided by operating activities increased $39.4was $158.8 million duringand $30.6 million in the first ninesix months of 2017 as compared to the first nine months of 2016,2021 and 2020, respectively. The increase was primarily due to (1) an increase of $19.7 million inhigher net income, adjusted for non-cash expenses, (2) the prior year extension of payment terms for royalties beginning in April 2020 for a three month period, (3) a cash payment of $24.7 million related to the settlement of the financial institutions class action in January 2020, (4) the timing of receipt of franchisee rental payments and (2) a favorable change in operating assets and liabilities of $19.7 million. The favorable change in operating assets and liabilities resulted primarily from a decrease in income tax payments, net of refunds and(5) a decrease in payments for incentive compensation for the 20162020 fiscal year.year paid in 2021. These increases were partially offset by (1) the timing of payments for marketing expenses of the national advertising funds and (2) an increase in cash paid for income taxes.
Investing Activities
Cash used inprovided by (used in) investing activities increased $100.6was $32.0 million duringand $(24.9) million in the first ninesix months of 2017 as compared to the first nine months of 2016,2021 and 2020, respectively. The change was primarily due to (1) a decreasean increase in proceeds from dispositions of $46.2 million associated with the sale of 47 Company-operated restaurants in New York during the second quarter of 2021, (2) a decrease in capital expenditures of $5.3 million and other assets(3) the net settlement of $164.5deposits associated with the Company’s consortium bid to acquire NPC’s Wendy’s restaurants of $4.9 million in the first quarter of 2021.
Financing Activities
Cash provided by financing activities was $28.9 million and $48.3 million in the first six months of 2021 and 2020, respectively. The decrease was primarily due to (1) an increase in repurchases of common stock of $38.5 million and (2) net cash usedan increase in the DavCo and NPC transactionsdividends of $16.1$4.3 million. These unfavorable changes were partially offset by (1) a decreasean increase in proceeds from stock option exercises, net of $55.0payments related to tax withholding for share-based compensation, of $14.6 million in capital expenditures and (2) a decreasenet increase in cash provided by long-term debt activities of $21.7$11.0 million, reflecting the respective impacts of the completion of the Company’s debt refinancing transaction during the second quarter of 2021 and the draw downs under the 2019-1 Class A-1 Notes and the Company’s other lines of credit in restricted cashthe first quarter of 2020.
Long-Term Debt, Including Current Portion
Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. In June 2021, the Master Issuer completed a refinancing transaction with respect to this facility under which the Master Issuer issued the Series 2021-1 Class A-2 Notes with initial principal amounts totaling $1.1 billion. The net proceeds from the sale of the Series 2021-1 Class A-2 Notes were used to repay in full the Master Issuer’s outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes, including the payment of prepayment and transaction costs. The remaining funds will be used for general corporate purposes, which may include funding for growth initiatives, return of capital to shareholders, or additional debt retirement.
In connection with the issuance of the Series 2021-1 Class A-2 Notes, the Master Issuer also issued the Series 2021-1 Class A-1 Notes, which allow for the reinvestment in capital assetsdrawing of up to $300.0 million on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under our securitized financing facility.
Financing Activities
Cash used in financing activities decreased $65.3 millionthe Series 2021-1 Class A-1 Notes during the first ninethree months ended July 4, 2021. The Series 2021-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2019-1 Class A-1 Notes and $100.0 million Series 2020-1 Class A-1 Notes, which were cancelled on the closing date, and the letters of 2017 as comparedcredit outstanding against the Series 2019-1 Class A-1 Notes were transferred to the first nine monthsSeries 2021-1 Class A-1 Notes.
Except as described above, there were no material changes to the terms of 2016, primarily dueany debt obligations since January 3, 2021. The Company was in compliance with its debt covenants as of July 4, 2021. See Note 7 to a decreasethe Condensed Consolidated Financial Statements contained in repurchases of common stock of $71.1 million.Item 1 herein for further information related to our long-term debt obligations.
Dividends
On March 15, 2017,2021 and June 15, 2017 and September 15, 2017, The Wendy’s2021, the Company paid quarterly cash dividends of $0.07 per share on its common stock,of $.09 and $0.10, respectively, aggregating $51.5$42.3 million. On November 2, 2017, The Wendy’sAugust 11, 2021, the Company declaredannounced a dividend of $0.07$.12 per share to be paid on DecemberSeptember 15, 20172021 to shareholdersstockholders of record as of DecemberSeptember 1, 2017. As a result2021. If the Company pays regular quarterly cash dividends for the remainder of 2021 at the declaration, The Wendy’ssame rate as declared in the third quarter of 2021, the Company’s total cash requirementsrequirement for dividends for the fourth quarterremainder of 20172021 will be approximately $17.0$53.5 million based on the number of shares of its common stock outstanding at November 2, 2017.August 4, 2021. The Wendy’s Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid in the future or of the amount or timing of such dividends, if any.
Stock Repurchases
In February 2017,2020, our Board of Directors authorized a repurchase program for up to $150.0$100.0 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, 2017,28, 2021, when and if market conditions warranted and to the extent legally permissible. As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020. In addition, in May 2021, the Board of Directors approved an increase of $50.0 million to the February 2020 authorization, resulting in an aggregate authorization of $150.0 million that continues to expire on February 28, 2022. During the ninesix months ended October 2, 2016,July 4, 2021, the Company repurchased 16.04.0 million shares under the February 2020 repurchase authorization with an aggregate purchase price of $162.3$83.3 million, of which $3.0$0.4 million was accrued at October 2, 2016July 4, 2021, and excluding commissions of $0.2$0.1 million. As of July 4, 2021, the Company had $34.4 million of availability remaining under its February 2020 authorization. Subsequent to July 4, 2021 through August 4, 2021, the Company repurchased 0.2 million shares under the February 2020 authorization with an aggregate purchase price of $4.4 million, excluding commissions. In addition, in August 2021, the Board of Directors approved an increase of $70.0 million to the February 2020 authorization, resulting in an aggregate authorization of $220.0 million that continues to expire on February 28, 2022. The Company has availability of $100.0 million remaining under the authorization as of August 11, 2021.
General Inflation, Commodities and Changing Prices
We believe that general inflation did not have a significant effect on our condensed consolidated results of operations during the reporting periods.operations. We attempt to 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 cheesegrains, could have an unfavorablea significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and timing to increase food prices.selective menu price increases.
Seasonality
OurWendy’s restaurant operations are moderately impacted by seasonality;seasonal. Wendy’s average restaurant revenuessales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for any futurea particular quarter willare 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 January 3, 2021 (the “Form 10-K”).
As of October 1, 2017July 4, 2021, there were no material changes from the information contained in the Form 10-K, except as described below.
Interest Rate Risk
Following the Company’s debt refinancing transaction, our long-term debt, including the current portion, aggregated $2,451.6 million as of July 4, 2021 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure reduces its exposure to interest rate increases that could adversely affect its earnings and cash flows. The Company is exposed to interest rate increases under its Series 2021-1 Class A-1 Notes and other lines of credit; however, the Company had no outstanding borrowings under the 2021-1 Class A-1 Notes and other lines of credit as of July 4, 2021. See “Liquidity and Capital Resources” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the fiscal year ended January 1, 2017.Company’s debt refinancing transaction.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of itsthe Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of 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 1, 2017.July 4, 2021. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that as of October 1, 2017,July 4, 2021, 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 thirdsecond quarter of 20172021 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 errorserror or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Special Note Regarding Forward-Looking Statements and Projections
This Quarterly Report on Form 10-Q and oral statements made from time to time by representatives of the Company may contain or incorporate by reference certain statements that are not historical facts, including, most importantly, information concerning possible or assumed future results of operations of the Company. Those statements, as well as statements preceded by, followed by, or that include the words “may,” “believes,” “plans,” “expects,” “anticipates,” or the negation thereof, or similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). AllGenerally, forward-looking statements include the words “may,” “believes,” “plans,” “expects,” “anticipates,” “intends,” “estimate,” “goal,” “upcoming,” “outlook,” “guidance” or the negation thereof, or similar expressions. In addition, all statements that address future operating, financial or business performance;performance, strategies or initiatives, or expectations; future synergies, efficiencies or overhead savings;savings, anticipated costs or charges;charges, future capitalization; andcapitalization, anticipated financial impacts of recent or pending investments or transactions and statements expressing general views about future results or brand health are forward-looking statements within the meaning of the Reform Act. The forward-lookingForward-looking statements are based on our expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors. 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. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed in or implied by our forward-looking statements. Many important factors could affect our future results and could cause those results to differ materially from those expressed in or implied by theour forward-looking statements contained herein.statements. Such factors all of which are difficult or impossible to predict accurately, and many of which are beyond our control, include, but are not limited to, the following:
competition, including pricing pressures, couponing, aggressive marketing•the disruption to our business from the novel coronavirus (COVID-19) pandemic and the potential impact of competitors’ new unit 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 the pandemic on our results of operations, financial condition and prospects;
•the impact of competition or poor customer experiences at Wendy’s restaurants;
•economic conditions and increasesdisruptions, including in unemployment rates on consumer spending, particularly in geographic regions that containwith a high concentration of Wendy’s restaurants;
•changes in discretionary consumer spending and consumer tastes and preferences,preferences;
•impacts to our corporate reputation or the value 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 abilityperception of our franchisees to openbrand;
•the effectiveness of our marketing and advertising programs and new restaurants and remodel existing restaurants in accordance with their development and franchise commitments, including theirproduct development;
•our ability to financemanage the accelerated impact of social media;
•our ability to protect our intellectual property;
•food safety events or health concerns involving our products;
•our ability to achieve our growth strategy through new restaurant development and remodels;our Image Activation program;
increased labor costs due•our ability to competitioneffectively manage the acquisition and disposition of restaurants or increased minimum wage or employee benefit costs; successfully implement other
strategic initiatives;
•risks associated with leasing and owning significant amounts of real estate, including environmental matters;
•our ability to achieve and maintain market share in the breakfast daypart;
•risks associated with our international operations, including our ability to execute our international growth strategy;
•changes in commodity costs (including beef, chicken and corn), labor, supplies, fuel, utilities, distribution and other operating costs;
availability, location•shortages or interruptions in the supply or distribution of our products and termsother risks associated with our independent
supply chain purchasing co-op;
•the impact of sites for restaurant development by usincreased labor costs or labor shortages;
•the continued succession and retention of key personnel and the effectiveness of our franchisees;leadership structure;
•risks associated with our digital commerce strategy, platforms and technologies, including real estateour ability to adapt to changes in industry trends and construction costs;consumer preferences;
delays in opening new restaurants or completing reimages of existing restaurants,•our dependence on computer systems and information technology, including risks associated with the Image Activation program;
the timing and impactfailure, misuse, interruption or breach 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 ofother cyber incidents or a deficiency in cybersecurity that impacts the Company or its franchisees,deficiencies;
•risks associated with our securitized financing facility and other debt agreements, including the cybersecurity incident described in Item 1 below;
the difficulty in predictingcompliance with operational and financial covenants, restrictions on our ability to raise additional capital, the impact of the sale of Company-operated restaurants to franchisees on ongoing operations, any tax impact from the sale of restaurantsour overall debt levels and the future impact to the Company’s earnings, restaurant operating margins, cash flow and depreciation;
the difficulty in predicting the ultimate costs that will be incurred in connection with the Company’s plan to reduce its general and administrative expense, and the future impact on the Company’s earnings;
risks associated with the Company’s securitized financing facility, including theour ability to generate sufficient cash flow to meet increasedour debt service obligations compliance with operational and financial covenants, and restrictions on the Company’s ability to raise additional capital;operate our business;
•risks associated with our capital allocation policy, including the amount and timing of shareequity and debt repurchases underand
dividend payments;
•risks associated with complaints and litigation, compliance with legal and regulatory requirements and an increased focus on environmental, social and governance issues;
•risks associated with the $150.0 million share repurchase program approved byavailability and cost of insurance, changes in accounting standards, the Boardrecognition of Directors;impairment or other charges, the impact of realignment and reorganization initiatives, changes in tax rates or tax laws and fluctuations in foreign currency exchange rates;
•conditions beyond our control, such as adverse weather conditions, natural disasters, hostilities, social unrest, health epidemics or pandemics or other catastrophic events; and
•other risks and uncertainties affecting us and our subsidiaries referred to in our Annual Report on Form 10-K forfiled with the fiscal year ended January 1, 2017 (the “Form 10-K”)SEC on March 3, 2021 (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.
In addition to the factors described above, there are risks associated with our predominantly franchised business model that could impact our results, performance and achievements. Such risks include our ability to identify, attract and retain experienced and qualified franchisees, effectively manage the transfer of restaurants between and among franchisees, the business and financial health of franchisees, the ability of franchisees to meet their royalty, advertising, development, reimaging and other commitments, participation by franchisees in brand strategies and the fact that franchisees are independent third parties that own, operate and are responsible for overseeing the operations of their restaurants. Our predominantly franchised business model may also impact the ability of the Wendy’s system to effectively respond and adapt to market changes. Many of these risks have been or in the future may be heightened due to the business disruption and impact from the COVID-19 pandemic.
All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.above. New risks and uncertainties arise from time to time, and 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 generallylaws, although we may do so from time to time. We do not to endorse any projections regarding future performance that may be made by third parties.
Item 1. Legal Proceedings.
We areThe Company is involved in litigation and claims incidental to our current and prior businesses.business. 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 duefor our existing litigation and claims for various reasons, including, but not limited to, mostmany proceedings including those described below, being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur andand/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult. Based on our currently available information, including legal defenses availabledifficult and future developments could cause these actions or claims, individually or in aggregate, 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 adverse effect on our consolidatedthe Company’s financial position orcondition, results of operations.operations, or cash flows of a particular reporting period.
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 thirdsecond quarter of 2017:2021:
Issuer Repurchases of Equity Securities
| | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | Average
Price Paid
per Share | Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans | Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans (2) |
April 5, 2021
through
May 9, 2021 | 528,908 | | $22.08 | | 528,908 | | $38 | |
May 10, 2021
through
June 6, 2021 | 476,284 | | $23.43 | | 466,718 | | $39,065,340 | |
June 7, 2021
through
July 4, 2021 | 254,385 | | $24.38 | | 197,748 | | $34,395,558 | |
| Total | 1,259,577 | | $23.05 | | 1,193,374 | | $34,395,558 | |
|
| | | | | | | | | | |
| 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 |
|
| |
(1) | Includes 99,358 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 2020, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. As previously announced, in March 2020, the Company temporarily suspended all share repurchase activity in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020. In addition, in May 2021, the Board of Directors approved an increase of $50.0 million to the February 2020 authorization, resulting in an aggregate authorization of $150.0 million that continues to expire on February 28, 2022.
| |
(2) | In February 2017, our Board of Directors authorized the repurchase of up to $150 million of our common stock through March 4, 2018, when and if market conditions warrant and to the extent legally permissible. |
Subsequent to October 1, 2017July 4, 2021 through November 2, 2017,August 4, 2021, the Company repurchased 0.40.2 million shares under the February 2020 authorization with an aggregate purchase price of $6.6$4.4 million, excluding commissions.
In addition, in August 2021, the Board of Directors approved an increase of $70.0 million to the February 2020 authorization, resulting in an aggregate authorization of $220.0 million that continues to expire on February 28, 2022.
|
| | | | |
| EXHIBIT NO. | DESCRIPTION |
| |
10.14.1 | FormSeries 2021-1 Supplement to Base Indenture, dated as of Nonqualified Stock Option Award Agreement underJune 22, 2021, by and between Wendy’s Funding, LLC, as Master Issuer of the Series 2021-1 fixed rate senior secured notes, Class A-2, and Series 2021-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2021-1 Securities Intermediary, incorporated herein by reference to Exhibit 4.1 of The Wendy’s Company 2010 Omnibus Award Plan.* **Current Report on Form 8-K filed on June 23, 2021 (SEC file no. 001-02207). |
31.14.2 | Seventh Supplement to the Base Indenture, dated as of June 22, 2021, by and between Wendy’s Funding, LLC, as Master Issuer, and Citibank, N.A., as Trustee and Securities Intermediary, incorporated herein by reference to Exhibit 4.2 of The Wendy’s Company Current Report on Form 8-K filed on June 23, 2021 (SEC file no. 001-02207). |
| 10.1 | |
| 10.2 | Class A-1 Note Purchase Agreement, dated as of June 22, 2021, by and among Wendy’s Funding, LLC, as Master Issuer, each of Quality Is Our Recipe, LLC, Wendy’s Properties, LLC and Wendy’s SPV Guarantor, LLC, as Guarantors, Wendy’s International, LLC, as Manager, the conduit investors party thereto, the financial institutions party thereto, certain funding agents, and Coöperatieve Rabobank, U.A., New York Branch, as L/C Provider, Swingline Lender and Administrative Agent, incorporated herein by reference to Exhibit 10.1 of The Wendy’s Company Current Report on Form 8-K filed on June 23, 2021 (SEC file no. 001-02207). |
| 10.3 | Fourth Amendment to the Management Agreement, dated as of June 22, 2021, by and among Wendy’s Funding, LLC, as Master Issuer, certain subsidiaries of Wendy’s Funding, LLC party thereto, Wendy’s International, LLC, as Manager, and Citibank, N.A., as Trustee, incorporated herein by reference to Exhibit 10.2 of The Wendy’s Company Current Report on Form 8-K filed on June 23, 2021 (SEC file no. 001-02207). |
| 31.1 | |
| 31.2 | |
| 32.1 | |
101.INS101 | XBRL Instance Document*The following financial information from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2021 formatted in Inline eXtensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. |
101.SCH104 | The cover page from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2021, formatted in Inline XBRL Taxonomy Extension Schema Document* |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document*and contained in Exhibit 101. |
| | | | | |
| * | Filed herewith. |
| |
* | 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 8, 2017August 11, 2021 |
By: /s/ Gunther Plosch |
| Gunther Plosch |
| Chief Financial Officer |
| (On behalf of the Company)registrant) |
| |
Date: November 8, 2017August 11, 2021 | By: /s/ Leigh A. Burnside |
| Leigh A. Burnside |
| Senior Vice President, Finance and |
| Chief Accounting Officer |
| (Principal Accounting Officer) |