UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



~~(X)~~☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR ~~15(D)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~July 1, 2018~~June 30, 2019

ORor



~~( )~~☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR ~~15(D)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission file number: 1-2207

THE ~~WENDY’S~~WENDY'S COMPANY

(Exact name of ~~registrants~~registrant as specified in its charter)



Delaware		38-0471180
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Dave Thomas Blvd.,
Dublin,	Ohio	43017
(Address of principal executive offices)		(Zip Code)

~~(614)~~ (614) 764-3100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.10 par value	WEN	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ~~[x]~~☒ No ~~[ ]~~☐

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

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

~~Large accelerated filer [x] Accelerated filer [ ]~~



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

~~Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]~~

~~Emerging growth company [ ]~~

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ~~[ ]~~☐ No ~~[x]~~☒

There were ~~236,991,883~~230,603,094 shares of The Wendy’s Company common stock outstanding as of ~~August 1, 2018.~~

July 31, 2019.

THE WENDY’S COMPANY AND SUBSIDIARIES

INDEX TO FORM 10-Q



	Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements	34
Unaudited Condensed Consolidated Balance Sheets as of ~~July 1, 2018~~June 30, 2019 and December ~~31, 2017~~30, 2018	34
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and July 1, 2018 ~~and July 2, 2017~~	45
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and July 1, 2018 ~~and July 2, 2017~~	56
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and July 1, 2018	7
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and July 1, 2018 ~~and July 2, 2017~~	69
Notes to Condensed Consolidated Financial Statements	811
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2932
Item 3. Quantitative and Qualitative Disclosures about Market Risk	4042
Item 4. Controls and Procedures	4043

PART II: OTHER INFORMATION	42
~~Item 1. Legal Proceedings~~	44
Item ~~1A. Risk Factors~~1. Legal Proceedings	4446
Item 1A. Risk Factors	46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4447
Item 6. Exhibits	4548
Signatures	4649

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands Except Par Value)


	July 1, 2018			December 31, 2017			June 30, 2019			December 30, 2018
ASSETS	(Unaudited)						(Unaudited)
Current assets:
Cash and cash equivalents	$	194,939		$	171,447		$	426,216		$	431,405
Restricted cash	30,000			32,633			29,494			29,860
Accounts and notes receivable, net	95,121			114,390			101,083			109,805
Inventories	3,283			3,156			3,546			3,687
Prepaid expenses and other current assets	22,414			20,125			18,622			14,452
Advertising funds restricted assets	87,688			62,602			93,422			76,509
Total current assets	433,445			404,353			672,383			665,718
Properties	1,226,961			1,263,059			992,302			1,023,267
Finance lease assets							197,691			189,969
Operating lease assets							895,280			—
Goodwill	741,783			743,334			755,887			747,884
Other intangible assets	1,301,463			1,321,585			1,257,323			1,294,153
Investments	52,144			56,002			47,920			47,660
Net investment in direct financing leases	228,838			229,089
Net investment in sales-type and direct financing leases							241,584			226,477
Other assets	95,545			79,516			103,523			96,907
Total assets	$	4,080,179		$	4,096,938		$	5,163,893		$	4,292,035

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	31,118		$	30,172		$	22,750		$	23,250
Current portion of finance lease liabilities							9,917			8,405
Current portion of operating lease liabilities							43,321			—
Accounts payable	21,321			22,764			17,315			21,741
Accrued expenses and other current liabilities	103,351			111,624			148,852			150,636
Advertising funds restricted liabilities	96,972			62,602			99,120			80,153
Total current liabilities	252,762			227,162			341,275			284,185
Long-term debt	2,771,660			2,724,230			2,274,967			2,305,552
Long-term finance lease liabilities							465,226			447,231
Long-term operating lease liabilities							931,033			—
Deferred income taxes	274,344			299,053			271,283			269,160
Deferred franchise fees	93,139			10,881			91,588			92,232
Other liabilities	257,735			262,409			140,473			245,226
Total liabilities	3,649,640			3,523,735			4,515,845			3,643,586
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 238,083 and 240,512 shares outstanding, respectively	47,042			47,042
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 231,092 and 231,233 shares outstanding, respectively							47,042			47,042
Additional paid-in capital	2,883,167			2,885,955			2,883,484			2,884,696
Accumulated deficit	(224,120		)	(163,289		)
Common stock held in treasury, at cost; 232,341 and 229,912 shares, respectively	(2,219,100		)	(2,150,307		)
Retained earnings							163,249			146,277
Common stock held in treasury, at cost; 239,332 and 239,191 shares, respectively							(2,393,914		)	(2,367,893		)
Accumulated other comprehensive loss	(56,450		)	(46,198		)	(51,813		)	(61,673		)
Total stockholders’ equity	430,539			573,203			648,048			648,449
Total liabilities and stockholders’ equity	$	4,080,179		$	4,096,938		$	5,163,893		$	4,292,035

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Amounts)


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	July 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017			June 30, 2019			July 1, 2018			June 30, 2019			July 1, 2018
	(Unaudited)												(Unaudited)
Revenues:
Sales	$	167,344		$	160,859		$	320,993		$	309,071		$	181,050		$	167,344		$	348,747		$	320,993
Franchise royalty revenue and fees	107,559			112,548			205,467			207,238			109,125			107,559			211,078			205,467
Franchise rental income	51,529			46,935			101,636			89,852			58,561			51,529			117,013			101,636
Advertising funds revenue	84,570			—			163,470			—			86,612			84,570			167,093			163,470
	411,002			320,342			791,566			606,161			435,348			411,002			843,931			791,566
Costs and expenses:
Cost of sales	138,154			130,581			270,373			255,124			151,092			138,154			293,671			270,373
Franchise support and other costs	7,031			3,789			13,204			7,432			4,066			7,031			10,084			13,204
Franchise rental expense	24,306			21,897			47,569			40,765			28,027			24,306			60,478			47,569
Advertising funds expense	84,570			—			163,470			—			88,667			84,570			169,148			163,470
General and administrative	49,163			50,059			99,519			101,373			50,784			49,163			100,097			99,519
Depreciation and amortization	33,427			31,309			65,579			60,474			31,484			33,427			64,669			65,579
System optimization (gains) losses, net	(92		)	41,050			478			39,643			(110		)	(92		)	(122		)	478
Reorganization and realignment costs	3,124			17,699			5,750			17,880			3,570			3,124			4,368			5,750
Impairment of long-lived assets	1,603			253			1,809			763			198			1,603			1,684			1,809
Other operating income, net	(1,767		)	(2,089		)	(2,930		)	(3,807		)	(3,003		)	(1,767		)	(6,985		)	(2,930		)
	339,519			294,548			664,821			519,647			354,775			339,519			697,092			664,821
Operating profit	71,483			25,794			126,745			86,514			80,573			71,483			146,839			126,745
Interest expense, net	(30,136		)	(28,935		)	(60,314		)	(57,910		)	(29,931		)	(30,136		)	(59,013		)	(60,314		)
Loss on early extinguishment of debt	—			—			(11,475		)	—			(7,150		)	—			(7,150		)	(11,475		)
Other income, net	917			2,844			1,661			3,233			2,247			917			4,947			1,661
Income (loss) before income taxes	42,264			(297		)	56,617			31,837
Income before income taxes													45,739			42,264			85,623			56,617
Provision for income taxes	(12,388		)	(1,548		)	(6,582		)	(11,341		)	(13,353		)	(12,388		)	(21,343		)	(6,582		)
Net income (loss)	$	29,876		$	(1,845	)	$	50,035		$	20,496
Net income													$	32,386		$	29,876		$	64,280		$	50,035

Net income (loss) per share
Net income per share
Basic	$	.13		$	(.01	)	$	.21		$	.08		$	.14		$	.13		$	.28		$	.21
Diluted	.12			(.01		)	.20			.08			$	.14		$	.12		$	.27		$	.20

Dividends per share	$	.085		$	.07		$	.17		$	.14

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)


	Three Months Ended						Six Months Ended						Three Months Ended					Six Months Ended
	July 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017			June 30, 2019		July 1, 2018			June 30, 2019		July 1, 2018
	(Unaudited)												(Unaudited)
Net income (loss)	$	29,876		$	(1,845	)	$	50,035		$	20,496
Other comprehensive (loss) income, net:
Net income													$	32,386	$	29,876		$	64,280	$	50,035
Other comprehensive income (loss), net:
Foreign currency translation adjustment	(4,325		)	6,065			(10,369		)	8,010			3,835		(4,325		)	9,860		(10,369		)
Change in unrecognized pension loss:
Unrealized gains arising during the period	—			—			156			156			—		—			—		156
Income tax provision	—			—			(39		)	(60		)	—		—			—		(39		)
	—			—			117			96			—		—			—		117
Effect of cash flow hedges:
Reclassification of losses into Net income (loss)	—			724			—			1,447
Income tax provision	—			(281		)	—			(559		)
	—			443			—			888
Other comprehensive (loss) income, net	(4,325		)	6,508			(10,252		)	8,994
Other comprehensive income (loss), net													3,835		(4,325		)	9,860		(10,252		)
Comprehensive income	$	25,551		$	4,663		$	39,783		$	29,490		$	36,221	$	25,551		$	74,140	$	39,783

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands)



	Common Stock		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Common Stock Held in Treasury			Accumulated Other Comprehensive Loss			Total
	Common Stock		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Common Stock Held in Treasury			Accumulated Other Comprehensive Loss			Total
	(Unaudited)
Balance at December 30, 2018	$	47,042	$	2,884,696		$	146,277		$	(2,367,893	)	$	(61,673	)	$	648,449
Net income	—		—			31,894			—			—			31,894
Other comprehensive income, net	—		—			—			—			6,025			6,025
Cash dividends	—		—			(23,069		)	—			—			(23,069		)
Repurchases of common stock	—		—			—			(29,370		)	—			(29,370		)
Share-based compensation	—		5,022			—			—			—			5,022
Common stock issued upon exercises of stock options	—		(205		)	—			9,053			—			8,848
Common stock issued upon vesting of restricted shares	—		(8,874		)	—			2,819			—			(6,055		)
Cumulative effect of change in accounting principle	—		—			(1,105		)	—			—			(1,105		)
Other	—		24			(6		)	37			—			55
Balance at March 31, 2019	$	47,042	$	2,880,663		$	153,991		$	(2,385,354	)	$	(55,648	)	$	640,694
Net income	—		—			32,386			—			—			32,386
Other comprehensive income, net	—		—			—			—			3,835			3,835
Cash dividends	—		—			(23,124		)	—			—			(23,124		)
Repurchases of common stock	—		—			—			(20,391		)	—			(20,391		)
Share-based compensation	—		4,986			—			—			—			4,986
Common stock issued upon exercises of stock options	—		(339		)	—			10,830			—			10,491
Common stock issued upon vesting of restricted shares	—		(1,852		)	—			964			—			(888		)
Other	—		26			(4		)	37			—			59
Balance at June 30, 2019	$	47,042	$	2,883,484		$	163,249		$	(2,393,914	)	$	(51,813	)	$	648,048

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED

(In Thousands)



	Common Stock		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Common Stock Held in Treasury			Accumulated Other Comprehensive Loss			Total
	Common Stock		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Common Stock Held in Treasury			Accumulated Other Comprehensive Loss			Total
	(Unaudited)
Balance at December 31, 2017	$	47,042	$	2,885,955		$	(163,289	)	$	(2,150,307	)	$	(46,198	)	$	573,203
Net income	—		—			20,159			—			—			20,159
Other comprehensive loss, net	—		—			—			—			(5,927		)	(5,927		)
Cash dividends	—		—			(20,355		)	—			—			(20,355		)
Repurchases of common stock	—		—			—			(39,407		)	—			(39,407		)
Share-based compensation	—		4,458			—			—			—			4,458
Common stock issued upon exercises of stock options	—		(7,460		)	—			11,038			—			3,578
Common stock issued upon vesting of restricted shares	—		(4,170		)	—			1,620			—			(2,550		)
Cumulative effect of change in accounting principle	—		—			(70,210		)	—			—			(70,210		)
Other	—		21			(5		)	32			—			48
Balance at April 1, 2018	$	47,042	$	2,878,804		$	(233,700	)	$	(2,177,024	)	$	(52,125	)	$	462,997
Net income	—		—			29,876			—			—			29,876
Other comprehensive loss, net	—		—			—			—			(4,325		)	(4,325		)
Cash dividends	—		—			(20,290		)	—			—			(20,290		)
Repurchases of common stock	—		—			—			(45,787		)	—			(45,787		)
Share-based compensation	—		5,133			—			—			—			5,133
Common stock issued upon exercises of stock options	—		396			—			2,840			—			3,236
Common stock issued upon vesting of restricted shares	—		(1,199		)	—			828			—			(371		)
Other	—		33			(6		)	43			—			70
Balance at July 1, 2018	$	47,042	$	2,883,167		$	(224,120	)	$	(2,219,100	)	$	(56,450	)	$	430,539

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Six Months Ended						Six Months Ended
	July 1, 2018			July 2, 2017			June 30, 2019			July 1, 2018
	(Unaudited)						(Unaudited)
Cash flows from operating activities:
Net income	$	50,035		$	20,496		$	64,280		$	50,035
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	65,579			60,474			64,669			65,579
Share-based compensation	9,591			11,372			10,008			9,591
Impairment of long-lived assets	1,809			763			1,684			1,809
Deferred income tax	(2,508		)	(2,496		)	3,422			(2,508		)
Non-cash rental income, net	(6,239		)	(5,286		)
Non-cash rental expense (income), net							11,519			(6,239		)
Change in operating lease liabilities							(20,983		)	—
Net receipt of deferred vendor incentives	4,904			7,077			5,312			4,904
System optimization losses, net	478			39,643
Gain on sale of investments, net	—			(2,553		)
Distributions received from TimWen joint venture	5,756			5,524
Equity in earnings in joint ventures, net	(3,648		)	(3,786		)
Long-term debt-related activities, net (see below)	15,036			6,038
Other, net	(1,093		)	3,296
Changes in operating assets and liabilities:
Accounts and notes receivable, net	8,315			(9,557		)
Inventories	(150		)	(71		)
Prepaid expenses and other current assets	(891		)	(2,116		)
Advertising funds restricted assets and liabilities	6,734			(14,522		)
Accounts payable	747			(4,484		)
Accrued expenses and other current liabilities	(6,034		)	(4,051		)
System optimization (gains) losses, net							(122		)	478
Distributions received from joint ventures, net of equity in earnings							2,099			2,108
Long-term debt-related activities, net							10,799			15,036
Changes in operating assets and liabilities and other, net							1,373			7,628
Net cash provided by operating activities	148,421			105,761			154,060			148,421
Cash flows from investing activities:
Capital expenditures	(23,898		)	(32,117		)	(25,484		)	(23,898		)
Acquisitions	—			(86,788		)	(5,052		)	—
Dispositions	1,814			77,980			1,240			1,814
Proceeds from sale of investments	—			3,282			130			—
Notes receivable, net	(538		)	(2,225		)	(750		)	(538		)
Payments for investments	(13		)	(375		)	—			(13		)
Net cash used in investing activities	(22,635		)	(40,243		)	(29,916		)	(22,635		)
Cash flows from financing activities:
Proceeds from long-term debt	930,809			6,359			850,000			930,809
Repayments of long-term debt	(881,633		)	(18,262		)	(877,876		)	(878,849		)
Repayments of finance lease liabilities							(3,521		)	(2,784		)
Deferred financing costs	(17,340		)	(740		)	(14,008		)	(17,340		)
Repurchases of common stock	(84,307		)	(50,527		)	(50,781		)	(84,307		)
Dividends	(40,645		)	(34,447		)	(46,193		)	(40,645		)
Proceeds from stock option exercises	13,197			6,385			19,160			13,197
Payments related to tax withholding for share-based compensation	(9,269		)	(2,956		)	(6,957		)	(9,269		)
Contingent consideration payment	(6,100		)	—			—			(6,100		)
Net cash used in financing activities	(95,288		)	(94,188		)	(130,176		)	(95,288		)
Net cash provided by (used in) operations before effect of exchange rate changes on cash	30,498			(28,670		)
Net cash (used in) provided by operations before effect of exchange rate changes on cash							(6,032		)	30,498
Effect of exchange rate changes on cash	(4,401		)	3,267			3,866			(4,401		)
Net increase (decrease) in cash, cash equivalents and restricted cash	26,097			(25,403		)
Net (decrease) increase in cash, cash equivalents and restricted cash							(2,166		)	26,097
Cash, cash equivalents and restricted cash at beginning of period	212,824			275,949			486,512			212,824
Cash, cash equivalents and restricted cash at end of period	$	238,921		$	250,546		$	484,346		$	238,921

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED

(In Thousands)

Six Months Ended
July 1,
2018 July 2,
2017
(Unaudited)
Detail of cash flows from operating activities:
Long-term debt-related activities, net:
Loss on early extinguishment of debt $ 11,475
$ —
Accretion of long-term debt 625
617
Amortization of deferred financing costs 2,936
3,974
Reclassification of unrealized losses on cash flow hedges —
1,447
$ 15,036
$ 6,038

Supplemental cash flow information:
Cash paid for:

Interest $ 70,005
$ 62,090
Income taxes, net of refunds 3,813
12,886

Supplemental non-cash investing and financing activities:
Capital expenditures included in accounts payable $ 7,463
$ 8,965
Capitalized lease obligations 1,904
238,201
Accrued debt issuance costs 332
—

July 1,
2018 December 31,
2017
Reconciliation of cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents $ 194,939
$ 171,447
Restricted cash 30,000
32,633
Restricted cash, included in Advertising funds restricted assets 13,982
8,579
Restricted cash, included in Other assets —
165
Total cash, cash equivalents and restricted cash $ 238,921
$ 212,824



	Six Months Ended
	June 30, 2019		July 1, 2018
	(Unaudited)
Supplemental non-cash investing and financing activities:
Capital expenditures included in accounts payable	$	5,398	$	7,463
Finance leases	23,534		1,904

	June 30, 2019		December 30, 2018
Reconciliation of cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents	$	426,216	$	431,405
Restricted cash	29,494		29,860
Restricted cash, included in Advertising funds restricted assets	28,636		25,247
Total cash, cash equivalents and restricted cash	$	484,346	$	486,512

See accompanying notes to condensed consolidated financial statements.

710

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of ~~July 1, 2018~~June 30, 2019, the results of our operations for the three and six months ended June 30, 2019 and July 1, 2018 ~~and July 2, 2017~~ and cash flows for the six months ended June 30, 2019 and July 1, ~~2018 and July 2, 2017.~~2018. The results of operations for the three and six months ended ~~July 1, 2018~~June 30, 2019 are not necessarily indicative of the results to be expected for the full ~~2018~~2019 fiscal year. ~~These~~The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December ~~31, 2017~~30, 2018 (the “Form 10-K”).

The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s^®restaurants in North America (defined as the United States of America (“U.S.”) and Canada) comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material.

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and six-month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.

Certain reclassifications have been made to the prior year presentation to conform to the current year presentation. See Note 2 for further information.

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

~~The following tables illustrate the expense reclassifications made to the condensed consolidated statements of operations for the three and six months ended July 2, 2017:~~

Three Months Ended
Reclassifications
As Previously Reported Franchise support and other costs Restaurant operational costs As Currently Reported
Cost of sales $ 129,360
$ —
$ 1,221
$ 130,581
Franchise support and other costs —
3,789
—
3,789
General and administrative 51,280
—
(1,221 ) 50,059
Other operating expense (income), net 1,700
(3,789 ) —
(2,089 )
$ 182,340
$ —
$ —
$ 182,340

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~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Six Months Ended
Reclassifications
As Previously Reported Franchise support and other costs Restaurant operational costs As Currently Reported
Cost of sales $ 252,767
$ —
$ 2,357
$ 255,124
Franchise support and other costs —
7,432
—
7,432
General and administrative 103,730
—
(2,357 ) 101,373
Other operating expense (income), net 3,625
(7,432 ) —
(3,807 )
$ 360,122
$ —
$ —
$ 360,122

(2) New Accounting Standards

New Accounting Standards Adopted

Cloud Computing

In ~~June~~August 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance on accounting for implementation costs of a cloud computing arrangement that is a service contract. The new guidance aligns the accounting for such implementation costs of a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The Company adopted this amendment during the first quarter of 2019. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Nonemployee Share-Based Payments

In June 2018, the FASB issued new guidance on nonemployee share-based payment arrangements. The new guidance aligns the requirements for nonemployee share-based payments with the requirements for employee share-based payments. The Company ~~does~~adopted this amendment during the first quarter of 2019. The adoption of this guidance did not ~~expect the amendment, which is effective beginning with our 2019 fiscal year, to~~ have a material impact on our condensed consolidated financial statements.

Leases

In February 2016, the FASB issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance ~~which is effective beginning with our 2019 fiscal year,~~ requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months. The guidance allows for either (1) a modified retrospective transition method under which the standard is applied at the beginning of the earliest period presented in the financial statements or (2) an alternative transition method under which the standard is applied at the adoption date and a cumulative-effect adjustment to the opening balance of retained earnings is recognized in the period of adoption. The Company is continuing to evaluate which transition method to use. We are currently implementing a new lease management system to facilitate the adoption of this guidance. As shown in Note 13, there are $1,544,785 in future minimum rental payments for operating leases that are not currently on our balance sheet; therefore, we expect this will have a material impact on our consolidated balance sheets and related disclosures. We do not expect the adoption of this guidance to have a material impact on our consolidated statements of operations and statements of cash flows.

~~New Accounting Standards Adopted~~

In May 2017, the FASB issued new guidance on the scope of modification accounting for share-based payment arrangements. The new guidance provides relief to entities that make non-substantive changes to their share-based payment arrangements.leases. The Company adopted ~~this amendment, prospectively,~~the new guidance during the first quarter of ~~2018. The adoption~~2019 using the effective date as the date of ~~this guidance did~~initial application; therefore, the comparative period has not ~~impact our condensed consolidated financial statements.~~been adjusted and continues to be reported under the previous lease guidance.

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

911

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

~~In November 2016,~~

The new standard provides a number of optional practical expedients in transition. The Company elected the ~~FASB issued an amendment that clarifies guidance for proper~~package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and ~~presentation~~initial direct costs. For those leases that fall under the definition of ~~restricted cash~~a short-term lease, the Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did not recognize right-of-use (“ROU”) assets or liabilities, which included not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient for lessees to account for lease components and nonlease components as a single lease component for all underlying classes of assets. In addition, the Company elected the practical expedient for lessors to account for lease components and nonlease components as a single lease component in instances where the lease component is predominant, the timing and pattern of transfer for the lease component and nonlease component are the same and the lease component, if accounted for separately, would be classified as an operating lease. The Company did not elect the use-of-hindsight practical expedient.

The standard had a material impact on our condensed consolidated balance sheets and related disclosures. Upon adoption at the beginning of 2019, we recognized operating lease liabilities of $1,011,000 based on the present value of the remaining minimum rental payments, with corresponding ROU assets of $934,000. The measurement of the operating lease ROU assets included, among other items, favorable lease amounts of $23,000 and unfavorable lease amounts of $30,000, which were previously included in “Other intangible assets” and “Other liabilities,” respectively, as well as the excess of rent expense recognized on a straight-line basis over the minimum rents paid of $67,000, which was previously included in “Other liabilities.” In addition, the standard requires lessors to recognize lessees’ payments to the Company for executory costs on a gross basis as revenue with a corresponding expense, which we expect will result in an increase of approximately $40,000 to our 2019 franchise rental income and expense. The Company also recognized a decrease to retained earnings of $1,105 as a result of impairing newly recognized ROU assets upon transition to the new guidance. The adoption of the guidance did not have a material impact on our condensed consolidated statement of cash flows. ~~Accordingly, changes in restricted cash that have historically been included within operating, investing and financing activities have been eliminated, and restricted cash, including~~

In connection with the restricted cash of the national advertising funds, is combined with cash and cash equivalents when reconciling the beginning and end of period balances for all periods presented. The Company adopted this amendment during the first quarter of 2018. The adoption of the ~~amendment resulted in an increase in net cash used in investing activities~~standard, the Company has reclassified finance lease ROU assets to “Finance lease assets,” which were previously recorded to “Properties.” The Company also reclassified the current and long-term finance lease liabilities to “Current portion of ~~$18,711 during~~finance lease liabilities” and “Long-term finance lease liabilities,” respectively, which were previously recorded to “Current portion of long-term debt” and “Long-term debt,” respectively. The prior period reflects the ~~six months ended July 2, 2017. In addition, during~~reclassifications of these assets and liabilities to conform to the ~~six months ended July 2, 2017, net cash provided by operating activities decreased $14,822 and net cash used in financing activities decreased $1,743, primarily due~~current year presentation.

The following table illustrates the reclassifications made to ~~changes in restricted cash of~~ the national advertising funds. Because of the inclusion of restricted cash in the beginning and end of period balances, our cash, cash equivalents and restricted cash as presented in the statement of cash flows increased $46,003 and $77,709 as of July 2, 2017 and January 1, 2017, respectively. This amendment did not impact the Company’s condensed consolidated statements of operations and condensed consolidated balance ~~sheets.~~

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

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

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

~~Revenue Recognition~~

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

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

~~Franchise Fees~~

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

December 30, 2018:



	As Previously Reported		Reclassifications			As Currently Reported
Properties	$	1,213,236	$	(189,969	)	$	1,023,267
Finance lease assets	—		189,969			189,969
Current portion of long-term debt	31,655		(8,405		)	23,250
Current portion of finance lease liabilities	—		8,405			8,405
Long-term debt	2,752,783		(447,231		)	2,305,552
Long-term finance lease liabilities	—		447,231			447,231

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

~~National Advertising Funds~~(3) Revenue

Disaggregation of Revenue

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

source:



	U.S.		Canada		Other International			Total
Three Months Ended June 30, 2019
Sales at Company-operated restaurants	$	181,050	$	—	$	—		$	181,050
Franchise royalty revenue	91,430		6,304		5,087			102,821
Franchise fees	5,716		708		(120		)	6,304
Franchise rental income	50,041		8,520		—			58,561
Advertising funds revenue	81,437		5,175		—			86,612
Total revenues	$	409,674	$	20,707	$	4,967		$	435,348

Six Months Ended June 30, 2019
Sales at Company-operated restaurants	$	348,747	$	—	$	—		$	348,747
Franchise royalty revenue	175,808		11,812		10,044			197,664
Franchise fees	11,725		1,120		569			13,414
Franchise rental income	100,706		16,307		—			117,013
Advertising funds revenue	157,418		9,675		—			167,093
Total revenues	$	794,404	$	38,914	$	10,613		$	843,931

Three Months Ended July 1, 2018
Sales at Company-operated restaurants	$	167,344	$	—	$	—		$	167,344
Franchise royalty revenue	87,224		6,073		4,861			98,158
Franchise fees	7,011		2,275		115			9,401
Franchise rental income	44,881		6,648		—			51,529
Advertising funds revenue	79,485		5,085		—			84,570
Total revenues	$	385,945	$	20,081	$	4,976		$	411,002

Six Months Ended July 1, 2018
Sales at Company-operated restaurants	$	320,993	$	—	$	—		$	320,993
Franchise royalty revenue	167,446		11,436		9,219			188,101
Franchise fees	14,096		2,921		349			17,366
Franchise rental income	89,146		12,490		—			101,636
Advertising funds revenue	153,899		9,571		—			163,470
Total revenues	$	745,580	$	36,418	$	9,568		$	791,566

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

~~Impacts on Financial Statements~~

~~The following tables summarize the impacts of adopting the revenue recognition standard on the Company’s condensed consolidated financial statements:~~

Adjustments
As Reported Franchise Fees Advertising Funds Balances Without Adoption
Condensed Consolidated Balance Sheet
July 1, 2018
Accrued expenses and other current liabilities $ 103,351
$ (1,733 ) $ —
$ 101,618
Advertising funds restricted liabilities 96,972
—
(6,645 ) 90,327
Total current liabilities 252,762
(1,733 ) (6,645 ) 244,384
Deferred income taxes 274,344
21,587
—
295,931
Deferred franchise fees 93,139
(81,999 ) —
11,140
Total liabilities 3,649,640
(62,145 ) (6,645 ) 3,580,850
Accumulated deficit (224,120 ) 62,384
6,645
(155,091 )
Accumulated other comprehensive loss (56,450 ) (239 ) —
(56,689 )
Total stockholders’ equity 430,539
62,145
6,645
499,329

Condensed Consolidated Statements of Operations
Three Months Ended July 1, 2018
Franchise royalty revenue and fees (a) $ 107,559
$ (724 ) $ —
$ 106,835
Advertising funds revenue 84,570
—
(84,570 ) —
Total revenues 411,002
(724 ) (84,570 ) 325,708
Advertising funds expense 84,570
—
(84,570 ) —
Total costs and expenses 339,519
—
(84,570 ) 254,949
Operating profit 71,483
(724 ) —
70,759
Income before income taxes 42,264
(724 ) —
41,540
Provision for income taxes (12,388 ) 187
—
(12,201 )
Net income 29,876
(537 ) —
29,339

Six Months Ended July 1, 2018
Franchise royalty revenue and fees (a) $ 205,467
$ (1,590 ) $ —
$ 203,877
Advertising funds revenue 163,470
—
(163,470 ) —
Total revenues 791,566
(1,590 ) (163,470 ) 626,506
Advertising funds expense 163,470
—
(163,470 ) —
Total costs and expenses 664,821
—
(163,470 ) 501,351
Operating profit 126,745
(1,590 ) —
125,155
Income before income taxes 56,617
(1,590 ) —
55,027
Provision for income taxes (6,582 ) 409
—
(6,173 )
Net income 50,035
(1,181 ) —
48,854

~~_______________~~

~~(a)~~

The adjustments for the three and six months ended July 1, 2018 include the reversal of franchise fees recognized over time under the new revenue recognition guidance of $2,439 and $5,127, respectively, as well as franchisee fees that would have been recognized under the previous revenue recognition guidance when the license agreements were signed and the restaurant opened of $1,715 and $3,537, respectively. See Note 3 for further information.

~~Table of Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Adjustments
As Reported Franchise Fees Advertising Funds Balances Without Adoption
Condensed Consolidated Statement of Cash Flows
Six Months Ended July 1, 2018
Cash flows from operating activities:
Net income $ 50,035
$ (1,181 ) $ —
$ 48,854
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax (2,508 ) (409 ) —
(2,917 )
Other, net (1,093 ) (309 ) —
(1,402 )
Changes in operating assets and liabilities:
Accrued expenses and other current liabilities (6,034 ) 1,899
—
(4,135 )

~~(3) Revenue~~

~~Nature of Goods and Services~~

~~Wendy’s franchises and operates Wendy’s~~^® quick-service restaurants specializing in hamburger sandwiches throughout North America. Wendy’s also has franchised restaurants in 30 foreign countries and U.S. territories other than North America. At July 1, 2018, Wendy’s operated and franchised 332 and 6,324 restaurants, respectively. The Company generates revenues from sales at Company-operated restaurants and earns fees and rental income from franchised restaurants.

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

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

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

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

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

~~Table of Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~Significant Accounting Policy~~

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

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

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

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

~~Disaggregation of Revenue~~

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

Three Months Ended Six Months Ended
July 1,
2018 July 1,
2018
Primary geographical markets
United States $ 385,945
$ 745,580
Canada 20,081
36,418
International 4,976
9,568
Total revenue $ 411,002
$ 791,566

Sources of revenue
Sales at Company-operated restaurants $ 167,344
$ 320,993
Franchise royalty revenue 98,158
188,101
Franchise fees 9,401
17,366
Franchise rental income 51,529
101,636
Advertising funds revenue 84,570
163,470
Total revenue $ 411,002
$ 791,566

~~Table of Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Contract Balances

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


	July 1, 2018 (a)		June 30, 2019 (a)		December 30, 2018 (a)
Receivables, which are included in “Accounts and notes receivable, net” (b)	$	45,040	$	43,398	$	40,300
Receivables, which are included in “Advertising funds restricted assets”	45,863		49,308		47,332
Deferred franchise fees (c)	103,723		101,267		102,205

_______________


(a)	Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s ~~statement~~condensed consolidated statements of operations.


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


(c)	Deferred franchise fees ~~of $10,584 and $93,139~~ are included in “Accrued expenses and other current liabilities” and “Deferred franchise ~~fees,”~~fees” and totaled $9,679 and $91,588 as of June 30, 2019, respectively, and $9,973 and $92,232 as of December 30, 2018, respectively.

Significant changes in deferred franchise fees are as follows:



	Six Months Ended
	June 30, 2019			July 1, 2018
Deferred franchise fees at beginning of period	$	102,205		$	102,492
Revenue recognized during the period	(4,609		)	(5,127		)
New deferrals due to cash received and other	3,671			6,358
Deferred franchise fees at end of period	$	101,267		$	103,723

Six Months Ended
July 1,
2018
Deferred franchise fees at beginning of period $ 102,492
Revenue recognized during the period (5,127 )
New deferrals due to cash received and other 6,358
Deferred franchise fees at end of period $ 103,723

Anticipated Future Recognition of Deferred Franchise Fees

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


Estimate for fiscal year:
2018 (a)	$	4,527
2019	7,423
2019 (a)			$	4,260
2020	6,169		7,025
2021	5,704		5,985
2022	5,506		5,782
2023			5,527
Thereafter	74,394		72,688
	$	103,723	$	101,267

_______________


(a)	Represents franchise fees expected to be recognized for the remainder of ~~the 2018 fiscal year,~~2019, which includes development-related franchise fees expected to be recognized over a duration of one year or less.

1514

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(4) Acquisitions

During the six months ended June 30, 2019, the Company acquired five restaurants from franchisees for total net cash consideration of $5,052. The Company did not incur any material acquisition-related costs associated with the acquisitions and such transactions were not significant to our condensed consolidated financial statements. The table below presents the allocation of the total purchase price to the fair value of assets acquired and liabilities assumed for restaurants acquired from franchisees:



	Six Months Ended
	June 30, 2019
Restaurants acquired from franchisees	5

Total consideration paid, net of cash received	$	5,052
Identifiable assets acquired and liabilities assumed:
Properties	666
Acquired franchise rights	1,354
Finance lease assets	5,350
Finance lease liabilities	(4,084		)
Other	(2,316		)
Total identifiable net assets	970
Goodwill	$	4,082

During 2018, the Company acquired 16 restaurants from a franchisee for total net cash consideration of $21,401. The fair values of the identifiable intangible assets related to the acquisition were provisional amounts as of December 30, 2018, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended March 31, 2019, which resulted in a decrease in the fair value of acquired franchise rights of $2,989 and an increase in deferred tax assets of $140.

(5) System Optimization (Gains) Losses, Net

The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise ~~Flips. The~~Flips”). As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total ~~system as of January 1, 2017.~~system. While the Company has no plans to reduce its ownership below the approximately 5% level, ~~Wendy’s will~~the Company expects to continue to optimize ~~its~~the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, ~~and~~ drive new restaurant development and accelerate ~~reimages in the Image Activation format.~~reimages.

During the six months ended July 1, 2018, the Company completed the sale of three Company-operated restaurants to a ~~franchisee. In addition, the Company~~franchisee and facilitated 64 ~~and 270~~ Franchise ~~Flips during~~Flips. During the six months ended ~~July 1, 2018~~June 30, 2019, no Company-operated restaurants were sold to franchisees and ~~July 2, 2017, respectively (excluding~~no Franchise Flips were facilitated by the ~~DavCo and NPC Transactions discussed below).~~Company.

Gains and losses recognized on dispositions are recorded to “System optimization (gains) losses, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5.6. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following is a summary of the disposition activity recorded as a result of our system optimization initiative:


	Three Months Ended						Six Months Ended						Three Months Ended					Six Months Ended
	July 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017			June 30, 2019		July 1, 2018			June 30, 2019		July 1, 2018
Gain on sale of restaurants, net (a)	$	89		$	—		$	89		$	—		$	—	$	89		$	—	$	89
Post-closing adjustments on sales of restaurants (b)	(13		)	27			(225		)	927			62		(13		)	54		(225		)
Gain (loss) on sales of other assets, net (c)	16			2,072			(342		)	2,579			48		16			68		(342		)
Loss on DavCo and NPC Transactions (d)	—			(43,149		)	—			(43,149		)
System optimization gains (losses), net	$	92		$	(41,050	)	$	(478	)	$	(39,643	)	$	110	$	92		$	122	$	(478	)

_______________


(a)	During the three and six months ended July 1, 2018, the Company received cash proceeds of $1,436 from the sale of three Company-operated restaurants. ~~Net~~The value of the net assets ~~sold~~that were included in the sale totaled $1,139 and consisted primarily of equipment. In addition, goodwill of $208 was written off in connection with the sale.

(b)

The six months ended July 1, 2018 includes cash proceeds, net of payments of $6. The three and six months ended July 2, 2017 includes cash proceeds of $300 related to post-closing reconciliations with franchisees. The six months ended July 2, 2017 also includes the recognition of a deferred gain of $312 as a result of the resolution of certain contingencies related to the extension of lease terms for a Canadian restaurant.

(c)

During the three and six months ended June 30, 2019, the Company received cash proceeds of $1,240, primarily from the sale of surplus properties. During the three and six months ended July 1, 2018, the Company received cash proceeds of $27 and $372, respectively, primarily from the sale of surplus properties, of $27 and $372, respectively, and received cash proceeds of $5,342 and $6,992 during the three and six months ended July 2, 2017, respectively. The six months ended July 2, 2017 also includes the recognition of a deferred gain of $375 related to the sale of a share in an aircraft.properties.

~~(d)~~

As part of our system optimization initiative, the Company acquired 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”) for total net cash consideration of $86,788, which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company, for cash proceeds of $70,688 (the “DavCo and NPC Transactions”). 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. As part of the transactions, the Company retained leases for purposes of subleasing such properties to NPC.

Assets Held for Sale

As of June 30, 2019 and December 30, 2018, the Company had assets held for sale of $2,952 and $2,435, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”

(6) Reorganization and Realignment Costs

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



	Three Months Ended				Six Months Ended
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018
G&A realignment	$	3,517	$	3,120	$	4,299	$	5,746
System optimization initiative	53		4		69		4
Reorganization and realignment costs	$	3,570	$	3,124	$	4,368	$	5,750

General and Administrative (“G&A”) Realignment

In May 2017, the Company initiated a plan to further reduce its G&A expenses. Additionally, the Company announced in May 2019 changes to its leadership structure that includes the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the Chief Operations Officer position. During the six months ended June 30, 2019 and July 1, 2018, the Company recognized costs related to the plan totaling $4,299 and $5,746, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $1,700, comprised of (1) severance and related employee costs of approximately $100, (2) recruitment and relocation costs of approximately $1,000, (3) third-party and other costs of approximately $100 and (4) share-based compensation of approximately $500, the majority of which the Company expects to recognize during the remainder of 2019. The Company expects to incur total costs aggregating approximately $35,000 to $38,000 related to the plan.

As a result of the leadership changes described above, the Company is currently evaluating its management and operating structure and anticipates this evaluation will result in a change to its existing operating segment structure by the end of 2019.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The total consideration paid to DavCo was allocated to net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. Refer to the Form 10-K for further information regarding the purchase price allocation. The Company finalized the purchase price allocation during 2018 with no differences from the provisional amounts previously reported. The loss on the DavCo and NPC Transactions was comprised of the write-off of goodwill of $65,503 and selling and other costs of $1,680, partially offset by the recognition of net favorable leases of $24,034.

~~As part of the DavCo acquisition, the Company recognized a supplemental purchase price liability of $6,269, of which $6,100 was settled during the six months ended July 1, 2018.~~

As of July 1, 2018 and December 31, 2017, the Company had assets held for sale of $3,579 and $2,235, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”

~~(5) Reorganization and Realignment Costs~~

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

Three Months Ended Six Months Ended
July 1,
2018 July 2,
2017 July 1,
2018 July 2,
2017
G&A realignment $ 3,120
$ 17,245
$ 5,746
$ 17,245
System optimization initiative 4
454
4
635
Reorganization and realignment costs $ 3,124
$ 17,699
$ 5,750
$ 17,880

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

In May 2017, the Company initiated a plan to further reduce its G&A expenses. The Company expects to incur total costs aggregating approximately $30,000 to $33,000 related to the plan. The Company recognized costs totaling $5,746 during the six months ended July 1, 2018, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $5,000, comprised of (1) severance and related employee costs of approximately $1,000, (2) recruitment and relocation costs of approximately $2,500, (3) third-party and other costs of approximately $500 and (4) share-based compensation of approximately $1,000. The Company expects to continue to recognize costs associated with the plan into 2019.

The following is a summary of the activity recorded as a result of the G&A realignment plan:


	Three Months Ended				Six Months Ended				Total Incurred Since Inception		Three Months Ended				Six Months Ended				Total Incurred Since Inception
	July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017		Total Incurred Since Inception		June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018		Total Incurred Since Inception
Severance and related employee costs	$	1,052	$	13,226	$	3,111	$	13,226	$	18,067	$	2,130	$	1,052	$	2,602	$	3,111	$	21,355
Recruitment and relocation costs	360		—		508		—		997		482		360		596		508		2,162
Third-party and other costs	604		325		932		325		2,023		71		604		87		932		2,197
	2,016		13,551		4,551		13,551		21,087		2,683		2,016		3,285		4,551		25,714
Share-based compensation (a)	1,104		3,694		1,195		3,694		6,322		834		1,104		1,014		1,195		7,698
Termination of defined benefit plans											—		—		—		—		1,335
Total G&A realignment	$	3,120	$	17,245	$	5,746	$	17,245	$	27,409	$	3,517	$	3,120	$	4,299	$	5,746	$	34,747

_______________


(a)	Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our G&A realignment plan.

The accruals for our G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $4,835 and $607 as of June 30, 2019, respectively, and $7,985 and $2,107 as of July 1, 2018, respectively. The tables below present a rollforward of our accruals for the plan.



	Balance December 30, 2018		Charges		Payments			Balance June 30, 2019
Severance and related employee costs	$	7,241	$	2,602	$	(4,724	)	$	5,119
Recruitment and relocation costs	83		596		(356		)	323
Third-party and other costs	—		87		(87		)	—
	$	7,324	$	3,285	$	(5,167	)	$	5,442



	Balance December 31, 2017		Charges		Payments			Balance July 1, 2018
Severance and related employee costs	$	12,093	$	3,111	$	(5,326	)	$	9,878
Recruitment and relocation costs	177		508		(471		)	214
Third-party and other costs	—		932		(932		)	—
	$	12,270	$	4,551	$	(6,729	)	$	10,092

System Optimization Initiative

The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $72,261 under the initiative since inception and expects to incur additional costs of approximately $500 during the remainder of 2019, which are primarily comprised of professional fees.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

As of July 1, 2018, the accruals for our G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $7,985 and $2,107, respectively. The tables below present a rollforward of our accruals for the plan.

Balance
December 31,
2017
Charges Payments
Balance
July 1, 2018
Severance and related employee costs $ 12,093
$ 3,111
$ (5,326 ) $ 9,878
Recruitment and relocation costs 177
508
(471 ) 214
Third-party and other costs —
932
(932 ) —
$ 12,270
$ 4,551
$ (6,729 ) $ 10,092

Balance
January 1,
2017
Charges Payments
Balance
July 2, 2017
Severance and related employee costs $ —
$ 13,226
$ (507 ) $ 12,719
Recruitment and relocation costs —
—
—
—
Third-party and other costs —
325
(246 ) 79
$ —
$ 13,551
$ (753 ) $ 12,798

~~System Optimization Initiative~~

The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company incurred costs of $71,913 since inception and expects to incur additional costs of approximately $300 during the remainder of 2018, which are primarily comprised of professional fees.

~~(6)~~(7) Investments

Equity Investments

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

~~Table of Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

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


	Six Months Ended						Six Months Ended
	July 1, 2018			July 2, 2017			June 30, 2019			July 1, 2018
Balance at beginning of period	$	55,363		$	54,545		$	47,021		$	55,363

Investment	13			375			—			13

Equity in earnings for the period	4,827			4,915			6,048			4,827
Amortization of purchase price adjustments (a)	(1,179		)	(1,129		)	(1,129		)	(1,179		)
	3,648			3,786			4,919			3,648
Distributions received	(5,756		)	(5,524		)	(7,018		)	(5,756		)
Foreign currency translation adjustment included in “Other comprehensive (loss) income, net” and other	(1,763		)	2,110
Foreign currency translation adjustment included in “Other comprehensive income (loss), net” and other							2,359			(1,763		)
Balance at end of period	$	51,505		$	55,292		$	47,281		$	51,505

_______________


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

~~(7) Long-Term Debt~~

~~Long-term debt consisted of the following:~~

July 1,
2018 December 31,
2017
Series 2018-1 Class A-2 Notes:
3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025 $ 447,750
$ —
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 472,625
—
Series 2015-1 Class A-2 Notes:
3.371% Series 2015-1 Class A-2-I Notes, repaid with 2018 refinancing —
855,313
4.080% Series 2015-1 Class A-2-II Notes, anticipated repayment date 2022 875,250
879,750
4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025 486,250
488,750
7% debentures, due in 2025 90,139
89,514
Capital lease obligations, due through 2045 466,080
467,964
Unamortized debt issuance costs (35,316 ) (26,889 )
2,802,778
2,754,402
Less amounts payable within one year (31,118 ) (30,172 )
Total long-term debt $ 2,771,660
$ 2,724,230

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(8) Long-Term Debt

Long-term debt consisted of the following:



	June 30, 2019			December 30, 2018
Series 2019-1 Class A-2 Notes:
3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026	$	400,000		$	—
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029	450,000			—
Series 2018-1 Class A-2 Notes:
3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025	443,250			445,500
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028	467,875			470,250
Series 2015-1 Class A-2 Notes:
4.080% Series 2015-1 Class A-2-II Notes, repaid in connection with the June 2019 refinancing	—			870,750
4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025	481,250			483,750
7% debentures, due in 2025	91,403			90,769
Unamortized debt issuance costs	(36,061		)	(32,217		)
	2,297,717			2,328,802
Less amounts payable within one year	(22,750		)	(23,250		)
Total long-term debt	$	2,274,967		$	2,305,552

On ~~January 17, 2018,~~June 26, 2019, Wendy’s Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, completed a debt refinancing transaction under which the Master Issuer issued fixed rate senior secured notes in the following ~~2018-1~~2019-1 series: Class A-2-I with an initial principal amount of ~~$450,000~~$400,000 and Class A-2-II with an initial principal amount of ~~$475,000~~$450,000 (collectively, the “Series ~~2018-1~~2019-1 Class A-2 Notes”). Interest payments on the Series ~~2018-1~~2019-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series ~~2018-1~~2019-1 Class A-2 Notes is in ~~March 2048.~~June 2049. If the Master Issuer has not repaid or ~~redeemed~~refinanced the Series ~~2018-1~~2019-1 Class A-2 Notes prior to the respective anticipated repayment date, additional interest will accrue on ~~these notes~~each tranche of the Series 2019-1 Class A-2 Notes at a rate equal to the greater of ~~(1)~~(A) 5.00% per annum and ~~(2)~~(B) a per annum interest rate equal to the ~~excess,~~amount, if any, by which the sum of ~~(a)~~(i) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on such anticipated repayment date of the United States Treasury Security having a term closest to 10 years, plus ~~(b)~~(ii) 5.00%, plus ~~(c) (i)~~(iii) (1) with respect to the Series ~~2018-1~~2019-1 Class A-2-I Notes, ~~1.35%~~1.863%, and ~~(ii)~~(2) with respect to the Series ~~2018-1~~2019-1 Class A-2-II Notes, ~~1.58%~~2.051%, exceeds the original interest rate with respect to such tranche. The ~~net proceeds from the sale of the Series 2018-1 Class A-2 Notes were used to redeem the~~ Master Issuer’s outstanding Series 2015-1 Class ~~A-2-I~~A-2-II Notes ~~to pay prepayment and transaction costs, and for general corporate purposes.~~were repaid as part of the refinancing transaction. As a result, the Company recorded a loss on early extinguishment of debt of ~~$11,475~~$7,150 during the ~~six~~three months ended ~~July 1, 2018,~~June 30, 2019, which was comprised of the write-off of certain unamortized deferred financing ~~costs and a specified make-whole payment.~~costs. The Series ~~2018-1~~2019-1 Class A-2 Notes have scheduled principal payments of ~~$9,250~~$4,250 in 2019, $8,500 annually from ~~2018~~2020 through ~~2024, $423,250~~2025, $378,500 in ~~2025, $4,750~~2026, $4,500 in each ~~2026 through~~of 2027 and ~~$427,500~~2028 and $407,250 in ~~2028.~~2029.

~~Concurrently,~~In connection with the issuance of the Series 2019-1 Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series ~~2018-1~~2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series ~~2018-1~~2019-1 Class A-1 Notes” and, together with the Series ~~2018-1~~2019-1 Class A-2 Notes, the “Series ~~2018-1~~2019-1 Senior Notes”), which allows for the drawing of up to $150,000 on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series ~~2018-1~~2019-1 Class A-1 Notes during the ~~six~~three months ended ~~July 1, 2018.~~June 30, 2019. The Series ~~2015-1~~2019-1 Class A-1 Notes replaced the Company’s $150,000 Series 2018-1 Class A-1 Notes, which were canceled on the closing date, and the letters of credit outstanding against the Series ~~2015-1~~2018-1 Class A-1 Notes were transferred to the Series ~~2018-1~~2019-1 Class A-1 Notes.

The Series ~~2018-1~~2019-1 Senior Notes are secured by substantially all of the assets of the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors (the “Guarantors”), excluding certain real estate assets and subject to certain limitations. The Series ~~2018-1~~2019-1 Senior Notes are subject to the same series of covenants and restrictions as the Company’s outstanding Series 2018-1 Class A-2 Notes and Series 2015-1 ~~Senior~~Class A-2 Notes.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

During the three and six months ended ~~July 1, 2018,~~June 30, 2019, the Company incurred debt issuance costs of ~~$17,672~~$14,008 in connection with the issuance of the Series ~~2018-1~~2019-1 Senior ~~Notes, respectively.~~Notes. The debt issuance costs will be amortized to “Interest expense, net” through the anticipated repayment dates of the Series ~~2018-1~~2019-1 SeniorNotes utilizing the effective interest rate method.

Wendy’s U.S. advertising fund has a revolving line of credit of $25,000. Neither the Company nor Wendy’s is the guarantor of the debt. The advertising fund facility was established to fund the advertising fund operations. During the six months ended July 1, 2018, the Company borrowed $5,809 and repaid ~~$5,809 and~~ $7,096 under the line of ~~credit, respectively. During the six months ended July 2, 2017, the Company borrowed and repaid $6,359 and $4,616~~credit. There were no borrowings or repayments under the line of credit ~~respectively.~~during the six months ended June 30, 2019.

~~(8)~~(9) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. These inputs are classified into the following hierarchy:

Level 1 Inputs - Quoted prices for identical assets or liabilities in active markets.

Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.

~~Table of Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:


	July 1, 2018				December 31, 2017					June 30, 2019				December 30, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Fair Value Measurements	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Fair Value Measurements
Financial assets
Cash equivalents	$	9,584	$	9,584	$	338	$	338	Level 1	$	221,818	$	221,818	$	222,228	$	222,228	Level 1
Non-current cost method investments (a)	639		327,477		639		327,710		Level 3
Other investments in equity securities (a)										639		1,945		639		2,181		Level 3

Financial liabilities
Series 2019-1 Class A-2-I Notes (b)										400,000		402,704		—		—		Level 2
Series 2019-1 Class A-2-II Notes (b)										450,000		453,146		—		—		Level 2
Series 2018-1 Class A-2-I Notes (b)	447,750		430,736		—		—		Level 2	443,250		446,747		445,500		424,026		Level 2
Series 2018-1 Class A-2-II Notes (b)	472,625		455,138		—		—		Level 2	467,875		469,756		470,250		439,353		Level 2
Series 2015-1 Class A-2-I Notes (b)	—		—		855,313		856,510		Level 2
Series 2015-1 Class A-2-II Notes (b)	875,250		876,038		879,750		897,961		Level 2	—		—		870,750		865,342		Level 2
Series 2015-1 Class A-2-III Notes (b)	486,250		487,368		488,750		513,188		Level 2	481,250		500,519		483,750		482,522		Level 2
7% debentures, due in 2025 (b)	90,139		104,750		89,514		107,000		Level 2	91,403		105,750		90,769		102,750		Level 2
Guarantees of franchisee loan obligations (c)	27		27		37		37		Level 3	9		9		17		17		Level 3

_______________

(a)

On February 5, 2018, a subsidiary of ARG Holding Corporation (“ARG Parent”) acquired Buffalo Wild Wings, Inc. As a result, our ownership interest was diluted to 12.3% and now includes both the Arby’s and Buffalo Wild Wings brands under the newly formed combined company, Inspire Brands. The fair value of our indirect investment in Inspire Brands is primarily based on a price per share that was determined at the time that ARG Parent financed the acquisition of Buffalo Wild Wings. In the future, the fair value is expected to be calculated by applying a multiple to Inspire Brand’s adjusted earnings before income taxes, depreciation and amortization. The carrying value of our indirect investment was reduced to zero during 2013 in connection with the receipt of a dividend. The fair values of our ~~remaining~~ investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)


(b)	The fair values were based on quoted market prices in markets that are not considered active markets.


(c)	Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for equipment financing. We have accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted average risk percentage.

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

~~Table of Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Non-Recurring Fair Value Measurements

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

Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, ~~and~~ favorable lease assets and ROU assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of ~~restaurants.~~restaurants, including any subsequent lease modifications. The fair ~~value~~values of long-lived assets held and used presented in the tables below represents the remaining carrying value and ~~was~~were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance.

Total impairment losses may also include the impact of remeasuring long-lived assets held for sale, which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represents the remaining carrying value and were estimated based on current market values. See Note 910 for further information on impairment of our long-lived assets.



			Fair Value Measurements
	June 30, 2019		Level 1		Level 2		Level 3
Held and used	$	2,112	$	—	$	—	$	2,112
Held for sale	1,215		—		—		1,215
Total	$	3,327	$	—	$	—	$	3,327

Fair Value Measurements
July 1,
2018 Level 1 Level 2 Level 3
Held and used $ 161
$ —
$ —
$ 161
Held for sale 427
—
—
427
Total $ 588
$ —
$ —
$ 588



			Fair Value Measurements
	December 30, 2018		Level 1		Level 2		Level 3
Held and used	$	462	$	—	$	—	$	462
Held for sale	1,031		—		—		1,031
Total	$	1,493	$	—	$	—	$	1,493

Fair Value Measurements
December 31,
2017 Level 1 Level 2 Level 3
Held and used $ 757
$ —
$ —
$ 757
Held for sale 1,560
—
—
1,560
Total $ 2,317
$ —
$ —
$ 2,317

~~Total~~(10) Impairment of Long-Lived Assets

The Company records impairment ~~losses included remeasuring long-lived assets held~~charges as a result of (1) the deterioration of operating performance of certain Company-operated restaurants, (2) closing Company-operated restaurants and ~~used for the three and six months ended July 1, 2018 of $1,603 and $1,768, respectively, and remeasuring long-lived assets~~classifying such surplus properties as held for sale ~~for~~and (3) the ~~six months ended July 1, 2018 of $41. Total impairment losses for~~Company’s decision to lease and/or sublease properties to franchisees in connection with the ~~three and six months ended July 2, 2017 included remeasuring long-lived assets held and used of $201 and $218, respectively, and remeasuring long-lived assets held for~~sale or anticipated sale of ~~$52 and $545, respectively.~~Company-operated restaurants, including any subsequent lease modifications.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

~~(9) Impairment of Long-Lived Assets~~

During the three and six months ended July 1, 2018 and July 2, 2017, the Company recorded impairment charges on long-lived assets as a result of the deterioration in operating performance of certain Company-operated restaurants and charges for capital improvements in previously impaired restaurants that did not subsequently recover.

During the six months ended July 1, 2018 and the three and six months ended July 2, 2017, the Company recorded impairment charges on long-lived assets as a result of closing Company-operated restaurants and classifying such surplus properties as held for sale. Additionally, during the six months ended July 1, 2018, the Company recorded impairment charges on long-lived assets as a result of the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants.

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



	Three Months Ended				Six Months Ended
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018
Surplus properties	$	112	$	—	$	1,397	$	41
Company-operated restaurants	86		1,603		287		1,603
Restaurants leased or subleased to franchisees	—		—		—		165
	$	198	$	1,603	$	1,684	$	1,809

Three Months Ended Six Months Ended
July 1,
2018 July 2,
2017 July 1,
2018 July 2,
2017
Company-operated restaurants $ 1,603
$ 201
$ 1,603
$ 218
Restaurants leased or subleased to franchisees —
—
165
—
Surplus properties —
52
41
545
$ 1,603
$ 253
$ 1,809
$ 763

~~(10)~~(11) Income Taxes

The Company’s effective tax rate for the three months ended June 30, 2019 and July 1, 2018 was ~~29.3%. For the three months ended July 2, 2017, the Company had a loss before income taxes of $297~~29.2% and ~~a provision for income taxes of $1,548; as such, our effective tax rate for the three months ended July 2, 2017 was not meaningful.~~29.3% respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 21% ~~and 35% in the second quarter of 2018 and 2017, respectively,~~ primarily due to (1) state income taxes, including non-recurring changes to state deferred taxes, (2) net excess tax benefits related to share-based payments, which resulted in a benefit of $889 and $798 for the three months ended June 30, 2019 and July 1, 2018, respectively, (3) valuation allowance changes, net of federal benefit, ~~(3)~~and (4) the impact of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), (4) net excess tax benefits related to share-based payments, which resulted in a benefit of $798 in the second quarter of 2018, and (5) the system optimization initiative provision of $2,166 in 2017, reflecting goodwill adjustments, changes to valuation allowances on state net operating loss carryforwards and state deferred taxes (including a correction to prior years identified and recorded in the second quarter of 2017, which resulted in a benefit of $2,248).

The Company’s effective tax rate for the six months ended June 30, 2019 and July 1, 2018 was 24.9% and ~~July 2, 2017 was~~ 11.6% ~~and 35.6%,~~ respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 21% ~~and 35% for the first six months of 2018 and 2017, respectively,~~ primarily due to (1) net excess tax benefits related to share-based payments, which resulted in a benefit of $2,925 and $6,891 infor the ~~first~~ six months ofended June 30, 2019 and July 1, 2018, respectively, (2) state income taxes, ~~and~~including non-recurring changes to state deferred taxes, (3) the impact of the Tax Act and (4) ~~the system optimization initiative in 2017, reflecting goodwill adjustments,~~valuation allowance changes, ~~to valuation allowances on state~~ net ~~operating loss carryforwards and state deferred taxes (including a correction to prior years identified and recorded in the first six months~~ of ~~2017, which resulted in a benefit of $2,248).~~federal benefit.

On December 22, 2017, the U.S. government enacted the Tax Act. In our continued analysis of the impact of the Tax Act in the first and second quarters of 2018 under Staff Accounting Bulletin 118, we ~~have~~ adjusted our provisional amounts for a discrete net tax benefit of $2,795. This net benefit ~~includes~~included $4,750 for the tax benefit of foreign tax credits, partially offset by a net expense of $1,955 related to the impact of the corporate rate reduction on our net deferred tax liabilities. The ultimate impact of the Tax Act may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made and additional regulatory guidance that may be issued.

There were no significant changes to the unrecognized tax benefits or related interest and penalties for the ~~Company during the~~ three and six months ended ~~July 1,~~June 30, 2019. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $7,760 due to the lapse of statutes of limitations and expected settlements with taxing authorities.

The current portion of refundable income taxes was $7,572 and $14,475 as of June 30, 2019 and December 30, 2018, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. There were no long-term refundable income taxes as of June 30, 2019 and December 30, 2018.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The current portion of refundable income taxes was $17,768 and $26,262 as of July 1, 2018 and December 31, 2017, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. Long-term refundable income taxes are included in “Other assets” and amounted to $5,523 as of July 1, 2018. There were no long-term refundable income taxes as of December 31, 2017.

~~(11)~~(12) Net Income ~~(Loss)~~ Per Share

Basic net income ~~(loss)~~ per share was computed by dividing net income ~~(loss)~~ amounts by the weighted average number of shares of common ~~shares~~stock outstanding.

The weighted average number of shares used to calculate basic and diluted net income ~~(loss)~~ per share were as follows:



	Three Months Ended		Six Months Ended
	June 30, 2019	July 1, 2018	June 30, 2019	July 1, 2018
Common stock:
Weighted average basic shares outstanding	231,029	238,991	230,807	239,459
Dilutive effect of stock options and restricted shares	5,064	7,161	5,186	7,826
Weighted average diluted shares outstanding	236,093	246,152	235,993	247,285

Three Months Ended Six Months Ended
July 1,
2018 July 2,
2017 July 1,
2018 July 2,
2017
Common stock:
Weighted average basic shares outstanding 238,991
245,261
239,459
245,933
Dilutive effect of stock options and restricted shares 7,161
—
7,826
7,963
Weighted average diluted shares outstanding 246,152
245,261
247,285
253,896

Diluted net income ~~(loss)~~ per share for the three and six months ended June 30, 2019 and July 1, 2018 ~~and July 2, 2017~~ was computed by dividing net income ~~(loss)~~ by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. ~~For~~We excluded potential common shares of 2,049 and 2,104 for the three and six months ended June 30, 2019, respectively, and 27 and 1,369 for the three and six months ended July 1, 2018, ~~we excluded potential common shares of 27 and 1,369,~~ respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. Diluted net loss per share for the three months ended July 2, 2017 was the same as basic net loss per share since the Company reported a net loss and, therefore, the effect of all potentially dilutive securities would have been anti-dilutive. For the six months ended July 2, 2017, we excluded potential common shares of 119 from our diluted net income per share calculation as they would have had anti-dilutive effects.

~~(12)~~(13) Stockholders’ Equity

~~Stockholders’ Equity~~Dividends

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

Six Months Ended
July 1,
2018 July 2,
2017
Balance at beginning of period $ 573,203
$ 527,736
Comprehensive income 39,783
29,490
Cash dividends (40,645 ) (34,447 )
Repurchases of common stock (85,194 ) (52,501 )
Share-based compensation 9,591
11,372
Exercises of stock options 6,814
6,161
Vesting of restricted shares (2,921 ) (2,732 )
Cumulative effect of change in accounting principle (a) (70,210 ) 1,880
Other 118
90
Balance at end of period $ 430,539
$ 487,049

~~_______________~~

~~Table~~first and second quarters of ~~Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(a)~~

During the six months ended July 1, 2018, the Company recognized a net increase to “Accumulated deficit” of $70,210 as a result of adoption of amended guidance for revenue recognition. The net increase resulted from an increase to deferred franchise fees of $85,561 and a decrease to “Deferred income taxes” of $21,996 as a result of now deferring franchise fees over the contractual term of the franchise agreements. Additionally, an increase to “Advertising funds restricted liabilities” of $6,645 was recognized as a result of a reclassification of the total stockholders’ deficit of the Advertising Funds as of December 31, 2017. See Note 2 for further information.

~~During the six months ended July 2, 2017,~~2019, the Company ~~recognized a tax benefit as a reduction to~~paid quarterly cash dividends of $.10 per share. During each of the ~~Company’s deferred tax liability with an equal offsetting increase to “Accumulated deficit.” The adjustment was recognized as a result~~first and second quarters of ~~adoption~~2018, the Company paid quarterly cash dividends of ~~an amendment to the accounting for employee share-based payment transactions.~~$.085 per share.

Repurchases of Common Stock

In February 2019, our Board of Directors authorized a repurchase program for up to $225,000 of our common stock through March 1, 2020, when and if market conditions warrant and to the extent legally permissible. In connection with the February 2019 authorization, the Company’s previous November 2018 repurchase authorization for up to $220,000 of our common stock was canceled. During the six months ended June 30, 2019, the Company repurchased 2,824 shares with an aggregate purchase price of $49,721, of which $807 was accrued at June 30, 2019, and excluding commissions of $40, under the November 2018 and February 2019 authorizations. As of June 30, 2019, the Company had $196,736 of availability remaining under its February 2019 authorization. Subsequent to June 30, 2019 through July 31, 2019, the Company repurchased 521 shares under the February 2019 authorization with an aggregate purchase price of $9,980, excluding commissions of $7.

In February 2018, our Board of Directors authorized a repurchase program for up to $175,000 of our common stock through March 3, 2019, when and if market conditions ~~warrant~~warranted and to the extent legally permissible. During the six months ended July 1, 2018, the Company repurchased 3,675 shares under the February 2018 repurchase authorization with an aggregate purchase price of $62,490, of which $2,146 was accrued at July 1, 2018, and excluding commissions of $52. As of July 1, 2018, the Company had $112,510 of availability remaining under its February 2018 authorization. Subsequent to July 1, 2018 through August 1, 2018, the Company repurchased 1,129 shares with an aggregate purchase price of $19,395, excluding commissions of $16.

In February 2017, our Board of Directors authorized a repurchase program for up to $150,000 of our common stock through March 4, 2018, when and if market conditions warranted and to the extent legally permissible. DuringAdditionally, during the six months ended July 1, 2018, the Company completed ~~the~~its previous February 2017 repurchase authorization for up to $150,000 ~~program~~of our common stock with the repurchase of 1,385 shares with an aggregate purchase price of $22,633, excluding commissions of $19. ~~During the six months ended July 2, 2017, the Company repurchased 3,611 shares with an aggregate purchase price~~

Table of ~~$52,448, of which $1,974 was accrued at July 2, 2017, and excluding commissions of $53.~~Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Accumulated Other Comprehensive Loss

The following table provides a rollforward of the components of accumulated other comprehensive loss, net of tax as applicable:



	Foreign Currency Translation			Pension			Total
Balance at December 30, 2018	$	(61,673	)	$	—		$	(61,673	)
Current-period other comprehensive income	9,860			—			9,860
Balance at June 30, 2019	$	(51,813	)	$	—		$	(51,813	)

Balance at December 31, 2017	$	(45,149	)	$	(1,049	)	$	(46,198	)
Current-period other comprehensive (loss) income	(10,369		)	117			(10,252		)
Balance at July 1, 2018	$	(55,518	)	$	(932	)	$	(56,450	)

Foreign Currency Translation Cash Flow Hedges (a) Pension Total
Balance at December 31, 2017 $ (45,149 ) $ —
$ (1,049 ) $ (46,198 )
Current-period other comprehensive (loss) income (10,369 ) —
117
(10,252 )
Balance at July 1, 2018 $ (55,518 ) $ —
$ (932 ) $ (56,450 )

Balance at January 1, 2017 $ (60,299 ) $ (1,797 ) $ (1,145 ) $ (63,241 )
Current-period other comprehensive income 8,010
888
96
8,994
Balance at July 2, 2017 $ (52,289 ) $ (909 ) $ (1,049 ) $ (54,247 )

~~_______________~~

~~(a)~~

Current-period other comprehensive income included the reclassification of unrealized losses on cash flow hedges from “Accumulated other comprehensive loss” to our condensed consolidated statements of operations of $443 and $888 for the three and six months ended July 2, 2017, respectively. The reclassification of unrealized losses on cash flow hedges consisted of $724 and $1,447 for the three and six months ended July 2, 2017, respectively, recorded to “Interest expense, net,” net of the related income tax benefit of $281 and $559 for the three and six months ended July 2, 2017, respectively, recorded to “Provision for income taxes.”

(14) Leases

~~Table~~

Nature of ~~Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(13)~~ Leases

The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At ~~July 1, 2018,~~June 30, 2019, Wendy’s and its franchisees operated ~~6,656~~6,719 Wendy’s restaurants. Of the ~~332~~358 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 144 restaurants, owned the building and held long-term land leases for ~~139~~144 restaurants and held leases covering the land and building for 4970 restaurants. Wendy’s also owned ~~520~~513 and leased ~~1,293~~1,264 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.

~~Rental expense~~Determination of Whether a Contract Contains a Lease

The Company evaluates the contracts it enters into to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.

ROU Model and Determination of Lease Term

The Company uses the ROU model to account for leases where the Company is the lessee, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the ~~following components:~~

Three Months Ended Six Months Ended
July 1,
2018 July 2,
2017 July 1,
2018 July 2,
2017
Rental expense:
Minimum rentals $ 25,070
$ 22,786
$ 49,924
$ 42,704
Contingent rentals 5,390
4,722
9,461
9,010
Total rental expense (a) (b) $ 30,460
$ 27,508
$ 59,385
$ 51,714

~~_______________~~


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


~~(b)~~	Amounts exclude sublease income of $34,950 and $69,256 recognized during the three and six months ended July 1, 2018, respectively, and $30,849 and $57,412 recognized during the three and six months ended July 2, 2017, respectively.

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

Three Months Ended Six Months Ended
July 1,
2018 July 2,
2017 July 1,
2018 July 2,
2017
Rental income:
Minimum rentals $ 45,930
$ 41,560
$ 92,258
$ 80,165
Contingent rentals 5,599
5,375
9,378
9,687
Total rental income $ 51,529
$ 46,935
$ 101,636
$ 89,852

lease liability, adjusted for any favorable or unfavorable terms for leases acquired from franchisees, as well as payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, the Company includes option periods that it is reasonably certain to exercise as failure to renew the lease would impose a significant economic detriment. For properties used for Company-operated restaurants, the primary economic detriment relates to the existence of unamortized leasehold improvements which might be impaired if we choose not to exercise the available renewal options. The ~~following table illustrates~~lease term for properties leased or subleased to franchisees is determined based upon the ~~Company’s future minimum rental payments~~economic detriment to the franchisee and rental receipts for non-cancelable leases and subleases, including rental receipts for direct financing leases as of July 1, 2018. Rental receipts below are presented separately for owned properties and for leased properties based on the classificationincludes consideration of the ~~underlying lease.~~length of the franchise agreement, historical performance of the restaurant and the existence of bargain renewal options. Lease terms for real estate are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options.

Rental Payments Rental Receipts
Fiscal Year
Capital
Leases

Operating
Leases

Capital
Leases

Operating
Leases

Owned
Properties
2018 (a) $ 24,412
$ 48,499
$ 32,627
$ 37,599
$ 26,980
2019 45,681
94,249
65,695
75,456
54,827
2020 46,610
93,136
66,792
75,213
55,435
2021 48,228
92,635
68,609
75,196
57,027
2022 49,339
92,355
69,810
75,652
58,600
Thereafter 760,160
1,123,911
1,056,005
919,959
948,646
Total minimum payments $ 974,430
$ 1,544,785
$ 1,359,538
$ 1,259,075
$ 1,201,515
Less interest (508,350 )
Present value of minimum capital lease payments (b) $ 466,080

~~_______________~~

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Operating Leases

For operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are recognized as rent expense where the Company is a lessee, or income where the Company is a lessor, as applicable, on a straight-line basis (“Straight-Line Rent”) over the applicable lease terms. There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and ends on the rent commencement date. During a Rent Holiday, no cash rent payments are typically due under the terms of the lease; however, expense is recorded for that period on a straight-line basis. The excess of the Straight-Line Rent over the minimum rents paid is included in the ROU asset where the Company is a lessee. The excess of the Straight-Line Rent over the minimum rents received is recorded as a deferred lease asset and is included in “Other assets” where the Company is a lessor. Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or the asset is earned.

Lease cost for operating leases is recognized on a straight-line basis and includes the amortization of the ROU asset and interest expense related to the operating lease liability. Variable lease cost for operating leases includes Contingent Rent and payments for executory costs such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. Short-term lease cost for operating leases includes rental expense for leases with a term of less than 12 months. Lease costs are recorded in the condensed consolidated statements of operations based on the nature of the underlying lease as follows: (1) rental expense related to leases for Company-operated restaurants is recorded to “Cost of sales,” (2) rental expense for leased properties that are subsequently subleased to franchisees is recorded to “Franchise rental expense” and (3) rental expense related to leases for corporate offices and equipment is recorded to “General and administrative.”

Favorable and unfavorable lease amounts for operating leases where the Company is the lessor are recorded as components of “Other intangible assets” and “Other liabilities,” respectively. Favorable and unfavorable lease amounts are amortized on a straight-line basis over the term of the leases. When the expected term of a lease is determined to be shorter than the original amortization period, the favorable or unfavorable lease balance associated with the lease is adjusted to reflect the revised lease term.

Rental income and favorable and unfavorable lease amortization for operating leases on properties leased or subleased to franchisees is recorded to “Franchise rental income.” Lessees’ variable payments to the Company for executory costs under operating leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”

Finance Leases

Lease cost for finance leases includes the amortization of the ROU asset, which is amortized on a straight-line basis and recorded to “Depreciation and amortization,” and interest expense on the finance lease liability, which is calculated using the interest method and recorded to “Interest expense, net.”

Sales-Type and Direct Financing Leases

For sales-type and direct financing leases where the Company is the lessor, the Company records its investment in properties leased to franchisees on a net basis, which is comprised of the present value of the lease payments not yet received and the present value of the guaranteed and unguaranteed residual assets. The current and long-term portions of our net investment in sales-type and direct financing leases are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. Unearned income is recognized as interest income over the lease term and is included in “Interest expense, net.” Sales-type leases result in the recognition of gain or loss at the commencement of the lease, which is recorded to “Other operating income, net.” The gain or loss recognized upon commencement of the lease is directly affected by the Company’s estimate of the amount to be derived from the guaranteed and unguaranteed residual assets at the end of the lease term. The Company’s main component of this estimate is the expected fair value of the underlying assets, primarily the fair value of land. Lessees’ variable payments to the Company for executory costs under sales-type and direct financing leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Significant Assumptions and Judgments

Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, property lives, discount rates and probable term, all of which can impact (1) the classification and accounting for a lease or sublease as operating or finance, including sales-type and direct financing, (2) the Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent, (3) the term over which leasehold improvements for each restaurant are amortized and (4) the values and lives of adjustments to the initial ROU asset where the Company is the lessee, or favorable and unfavorable leases where the Company is the lessor. The amount of depreciation and amortization, interest and rent expense and income reported would vary if different estimates and assumptions were used.

Company as Lessee

The components of lease cost are as follows:



	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Finance lease cost:
Amortization of finance lease assets	$	1,631	$	4,748
Interest on finance lease liabilities	9,939		16,692
	11,570		21,440
Operating lease cost	19,086		43,729
Variable lease cost (a)	15,371		29,475
Short-term lease cost	1,153		2,279
Total operating lease cost (b)	35,610		75,483
Total lease cost	$	47,180	$	96,923

_______________


(a)	The three and six months ended June 30, 2019 includes expenses for executory costs of $9,779 and $19,303, respectively, for which the Company is reimbursed by sublessees.


(b)	The three and six months ended June 30, 2019 includes $28,022 and $60,473, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees and $7,007 and $13,600, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.

The following table includes supplemental cash flow and non-cash information related to leases:



	Six Months Ended
	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	19,567
Operating cash flows from operating leases	46,425
Financing cash flows from finance leases	3,521
Right-of-use assets obtained in exchange for lease obligations:
Finance lease liabilities	23,534
Operating lease liabilities	5,677

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following table includes supplemental information related to leases:



	June 30, 2019
Weighted-average remaining lease term (years):
Finance leases	17.5
Operating leases	15.7

Weighted average discount rate:
Finance leases	10.11	%
Operating leases	5.10	%

The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of June 30, 2019:



	Finance Leases						Operating Leases
Fiscal Year	Company-Operated			Franchise and Other			Company-Operated			Franchise and Other
2019 (a)	$	1,338		$	23,714		$	10,072		$	35,660
2020	2,697			44,918			19,921			71,537
2021	2,808			46,315			19,733			71,433
2022	2,858			47,322			19,421			71,604
2023	2,810			48,988			19,400			71,571
Thereafter	37,034			695,753			201,762			836,750
Total minimum payments	$	49,545		$	907,010		$	290,309		$	1,158,555
Less interest	(23,169		)	(458,243		)	(91,101		)	(383,409		)
Present value of minimum lease payments (b) (c)	$	26,376		$	448,767		$	199,208		$	775,146

_______________


(a)	Represents future minimum rental payments ~~and rental receipts~~ for non-cancelable leases ~~and subleases~~ for the remainder of ~~the 2018 fiscal year.~~2019.


(b)	The present value of minimum ~~capital~~finance lease payments of ~~$7,868~~$9,917 and ~~$458,212~~$465,226 are included in “Current portion of ~~long-term debt”~~finance lease liabilities” and “Long-term ~~debt,~~finance lease liabilities,” respectively.


(c)	The present value of minimum operating lease payments of $43,321 and $931,033 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of December 30, 2018:



	Finance Leases						Operating Leases
Fiscal Year	Company-Operated			Franchise and Other			Company-Operated		Franchise and Other
2019	$	1,962		$	45,125		$	20,174	$	75,703
2020	1,978			43,969			20,052		73,320
2021	2,082			45,522			19,820		73,167
2022	2,114			46,573			19,530		73,300
2023	2,084			48,109			19,430		73,377
Thereafter	23,558			676,139			203,073		854,964
Total minimum payments	$	33,778		$	905,437		$	302,079	$	1,223,831
Less interest	(16,874		)	(466,705		)
Present value of minimum lease payments (a)	$	16,904		$	438,732

_______________


(a)	The present value of minimum finance lease payments of $8,405 and $447,231 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively.

Company as Lessor

The components of lease income are as follows:



	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Sales-type and direct-financing leases:
Selling profit	$	37	$	1,971
Interest income	7,072		11,805

Operating lease income	$	43,959	$	89,164
Variable lease income	14,602		27,849
Franchise rental income (a)	$	58,561	$	117,013

_______________


(a)	Includes sublease income of $42,921 and $85,942 recognized during the three and six months ended June 30, 2019, respectively, of which $9,779 and $19,211, respectively, represents lessees’ variable payments to the Company for executory costs.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of June 30, 2019:



	Sales-Type and Direct Financing Leases						Operating Leases
Fiscal Year	Subleases			Owned Properties			Subleases		Owned Properties
2019 (a)	$	13,661		$	1,028		$	55,839	$	26,240
2020	27,872			2,130			112,551		52,872
2021	28,910			2,162			113,162		54,661
2022	29,548			2,243			114,269		56,134
2023	30,587			2,287			115,190		56,339
Thereafter	473,264			28,037			1,355,212		861,139
Total future minimum receipts	603,842			37,887			$	1,866,223	$	1,107,385
Unearned interest income	(377,235		)	(20,405		)
Net investment in sales-type and direct financing leases (b)	$	226,607		$	17,482

_______________


(a)	Represents future minimum rental receipts for non-cancelable leases for the remainder of 2019.


(b)	The present value of minimum direct financing rental receipts of $2,505 and $241,584 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. The present value of minimum direct financing rental receipts includes a net investment in unguaranteed residual assets of $237.

The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of December 30, 2018:



	Sales-Type and Direct Financing Leases						Operating Leases
Fiscal Year	Subleases			Owned Properties			Subleases		Owned Properties
2019	$	26,239		$	1,937		$	113,180	$	52,527
2020	26,859			2,006			113,578		53,066
2021	27,904			2,043			114,447		54,615
2022	28,563			2,119			115,552		56,092
2023	29,512			2,159			116,463		56,284
Thereafter	448,851			26,404			1,372,646		858,755
Total future minimum receipts	587,928			36,668			$	1,945,866	$	1,131,339
Unearned interest income	(377,046		)	(20,338		)
Net investment in sales-type and direct financing leases (a)	$	210,882		$	16,330

_______________


(a)	The present value of minimum direct financing rental receipts of $735 and $226,477 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

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



	June 30, 2019
Land	$	281,650
Buildings and improvements	311,104
Restaurant equipment	2,251
	595,005
Accumulated depreciation and amortization	(149,931		)
	$	445,074

July 1,
2018 December 31, 2017
Land $ 272,626
$ 272,411
Buildings and improvements 313,470
313,108
Restaurant equipment 2,443
2,444
588,539
587,963
Accumulated depreciation and amortization (135,601 ) (128,003 )
$ 452,938
$ 459,960

~~Our net investment in direct financing leases is as follows:~~

July 1,
2018 December 31, 2017
Future minimum rental receipts $ 649,893
$ 662,889
Unearned interest income (420,417 ) (433,175 )
Net investment in direct financing leases 229,476
229,714
Net current investment in direct financing leases (a) (638 ) (625 )
Net non-current investment in direct financing leases $ 228,838
$ 229,089

~~_______________~~


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

During the three and six months ended July 1, 2018, the Company recognized $6,976 and $14,017 in interest income related to our direct financing leases, respectively, and $5,389 and $9,845 recognized during the three and six months ended July 2, 2017, respectively, which is included in “Interest expense, net,”

~~(14)~~(15) Transactions with Related Parties

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

TimWen Lease and Management Fee Payments

A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. During the six months ended June 30, 2019 and July 1, 2018, ~~and July 2, 2017,~~ Wendy’s paid TimWen ~~$6,504~~$8,140 and ~~$5,915,~~$6,504, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of ~~$108~~$103 and ~~$103~~$108 during the six months ended June 30, 2019 and July 1, 2018, ~~and July 2, 2017,~~ respectively, which has been included as a reduction to “General and administrative.”

~~Table of Contents~~

~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(15)~~(16) Guarantees and Other Commitments and Contingencies

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

~~Franchisee Image Activation Incentive Programs~~

In order to promote Image Activation new restaurant development, Wendy’s has an incentive program for franchisees that provides for reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants opened by December 31, 2020, with the value of the incentives declining in the later years of the program. Wendy’s also had incentive programs for 2017 available to franchisees that commenced Image Activation restaurant remodels by December 15, 2017. The remodel incentive programs provide for reductions in royalty payments for one year after the completion of construction.

Lease Guarantees

Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees, amounting to ~~$53,903~~$68,953 as of ~~July 1, 2018.~~June 30, 2019. These leases extend through 2056. We have not received any notice of default related to these leases as of ~~July 1, 2018.~~June 30, 2019. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations.

Wendy’s is contingently liable for certain other leases which have been assigned to unrelated third parties who have indemnified Wendy’s against future liabilities amounting to $398 as of July 1, 2018. These leases expire on various dates through 2021.

Letters of Credit

As of ~~July 1, 2018,~~June 30, 2019, the Company had outstanding letters of credit with various parties totaling ~~$27,094.~~$25,086. The outstanding letters of credit include amounts outstanding against the Series ~~2018-1~~2019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Purchase and Capital Commitments

Beverage Agreement

The Company has an agreement with a beverage vendor that provides fountain beverage products and certain marketing support funding to the Company and its franchisees. This agreement requires minimum purchases of certain fountain beverages (“Fountain Beverages”) by the Company and its franchisees at certain agreed upon prices until the total contractual gallon volume usage is reached. This agreement also provides for an annual advance to be paid to the Company based on the vendor’s expectation of the Company’s annual Fountain Beverages usage, which is amortized over actual usage during the year. In January 2019, the Company amended its contract with the beverage vendor, which now expires at the later of reaching a threshold usage requirement or December 31, 2025. Beverage purchases made by the Company under this agreement during the six months ended June 30, 2019 were $5,481. As of June 30, 2019, the Company estimates future purchases to be approximately $5,400 for the remainder of 2019, $11,600 in 2020, $12,100 in 2021, $13,000 in 2022 and $13,700 in 2023 based on current pricing and the expected ratio of usage at Company-operated restaurants to usage at franchised restaurants.

~~(16)~~(17) Legal and Environmental Matters

~~We are~~The Company is involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate accruals for continuing operations for all of our legal and environmental matters. We cannot estimate the aggregate possible range of loss ~~due~~for various reasons, including, but not limited to, ~~most~~many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur ~~and~~and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently ~~difficult. Based on currently available information, including legal defenses available~~difficult 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 consolidated~~the Company’s financial ~~position or~~condition, results of ~~operations.~~operations or cash flows of a particular reporting period.

We previously described certain legal proceedings in the ~~Company’s Annual Report on~~ Form ~~10-K filed with the SEC on February 28, 2018. There~~10-K. As of June 30, 2019, there were no material developments in those legal ~~proceedings during the three months ended July 1, 2018.~~proceedings.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations.~~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 December ~~31, 2017~~30, 2018 (the “Form 10-K”). There have been no material changes as of ~~July 1, 2018~~June 30, 2019 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II - Other Information” ~~preceding Item 1 of Part II~~ of this report. You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).

The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchises and operates Wendy’s^® quick-service restaurants specializing in hamburger sandwiches throughout North America (defined as the United States of America (“U.S.”) and Canada). Wendy’s also has franchised restaurants in 30 foreign countries and U.S. territories.

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

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

The ~~Company reports on a~~Company’s fiscal ~~year consisting~~reporting periods consist of 52 or 53 weeks ending on the Sunday closest to ~~or on~~ December 31. All three- and six-month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

We adopted the new accounting guidance for ~~revenue recognition~~leases effective ~~January 1,~~December 31, 2018, which had a material impact on our condensed consolidated financial statements. Beginning with the first quarter of ~~2018,~~2019, our financial condition and results of operations reflect adoption of the guidance; however, prior period results were not restated. See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.

Executive Overview

Our Business

As of ~~July 1, 2018,~~June 30, 2019, the Wendy’s restaurant system was comprised of ~~6,656~~6,719 restaurants, of which ~~332~~358 were owned and operated by the Company. All of our Company-operated restaurants are located in the United States.

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

Wendy’s long-term growth opportunities include (1) systemwide same-restaurant sales growth through continuing core menu improvement, product innovation, customer count growth and strategic price increases on our menu items, (2) system investment in our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants and focused execution of operational excellence, (3) growth in new restaurants, including global growth, (4) increased focus on consumer-facing digital platforms and technologies, (5) increased restaurant utilization in various dayparts, (6)

strengthening our operations through our system optimization initiative and ~~brand access utilizing mobile technology, (5)~~(7) building ~~shareholder~~stockholder value through financial management ~~strategies and (6) our system optimization initiative.~~strategies.

Key Business Measures

We track our results of operations and manage our business using the following key business ~~measures:~~measures, which includes a non-GAAP financial 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. 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 price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.

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

The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.

Same-restaurant sales and systemwide sales exclude sales from Venezuela and, beginning in the third quarter of 2018, exclude sales from Argentina, 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 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.

General and Administrative (“G&A”) Realignment

In May 2017, the Company initiated a plan to further reduce its G&A expenses. ~~The~~Additionally, the Company ~~expects~~announced in May 2019 changes to its leadership structure that ~~approximately three-quarters~~includes the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the ~~total G&A expense reduction of approximately $35.0 million will be realized by~~Chief Operations Officer position. During the ~~end of~~six months ended June 30, 2019 and July 1, 2018, ~~with~~ the ~~remainder of the savings being realized in 2019. The~~ Company ~~expects to incur total~~recognized costs aggregating approximately $30.0 million to $33.0 million, of which $23.0 million to $27.0 million will be cash expenditures, related to such savings. The cash expenditures are expected to continue into 2019, with approximately half of the total cash expenditures occurring in 2018. Costs related to the plan ~~are recorded to “Reorganization~~totaling $4.3 million and ~~realignment costs.” The Company recognized costs totaling~~ $5.7 million, ~~during the first six months of 2018,~~respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately ~~$5.0~~$1.7 million, comprised of (1) severance and related employee costs of approximately ~~$1.0~~$0.1 million, (2) recruitment and relocation costs of approximately ~~$2.5~~$1.0 million, (3) third-party and other costs of approximately ~~$0.5~~$0.1 million and (4) share-based compensation of approximately ~~$1.0 million.~~$0.5 million, the majority of which the Company expects to recognize during the remainder of 2019. The Company expects to ~~continue~~incur total costs aggregating approximately $35.0 million to ~~recognize costs associated with~~$38.0 million, of which $26.0 million to $29.0 million will be cash expenditures, related to the plan. The Company expects to realize a total G&A expense reduction through the plan ~~into~~of approximately $35.0 million.

~~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 the Company’s Annual Report on Form 10-K 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 second quarter and the first six months of ~~2018~~2019 and ~~2017.~~2018.


	Second Quarter									Six Months									Second Quarter									Six Months
	2018			2017			Change			2018			2017			Change			2019			2018			Change			2019			2018			Change
Revenues:
Sales	$	167.3		$	160.9		$	6.4		$	321.0		$	309.1		$	11.9		$	181.1		$	167.3		$	13.8		$	348.7		$	321.0		$	27.7
Franchise royalty revenue and fees	107.6			112.5			(4.9		)	205.5			207.2			(1.7		)	109.1			107.6			1.5			211.1			205.5			5.6
Franchise rental income	51.5			46.9			4.6			101.6			89.9			11.7			58.5			51.5			7.0			117.0			101.6			15.4
Advertising funds revenue	84.6			—			84.6			163.5			—			163.5			86.6			84.6			2.0			167.1			163.5			3.6
	411.0			320.3			90.7			791.6			606.2			185.4			435.3			411.0			24.3			843.9			791.6			52.3
Costs and expenses:
Cost of sales	138.2			130.6			7.6			270.4			255.1			15.3			151.1			138.2			12.9			293.7			270.4			23.3
Franchise support and other costs	7.0			3.8			3.2			13.2			7.4			5.8			4.0			7.0			(3.0		)	10.1			13.2			(3.1		)
Franchise rental expense	24.3			21.9			2.4			47.6			40.8			6.8			28.0			24.3			3.7			60.5			47.6			12.9
Advertising funds expense	84.6			—			84.6			163.5			—			163.5			88.7			84.6			4.1			169.1			163.5			5.6
General and administrative	49.2			50.1			(0.9		)	99.5			101.4			(1.9		)	50.8			49.2			1.6			100.1			99.5			0.6
Depreciation and amortization	33.4			31.3			2.1			65.6			60.5			5.1			31.5			33.4			(1.9		)	64.7			65.6			(0.9		)
System optimization (gains) losses, net	(0.1		)	41.0			(41.1		)	0.5			39.6			(39.1		)	(0.1		)	(0.1		)	—			(0.1		)	0.5			(0.6		)
Reorganization and realignment costs	3.1			17.7			(14.6		)	5.7			17.9			(12.2		)	3.6			3.1			0.5			4.4			5.7			(1.3		)
Impairment of long-lived assets	1.6			0.2			1.4			1.8			0.8			1.0			0.2			1.6			(1.4		)	1.7			1.8			(0.1		)
Other operating income, net	(1.8		)	(2.1		)	0.3			(2.9		)	(3.8		)	0.9			(3.1		)	(1.8		)	(1.3		)	(7.1		)	(2.9		)	(4.2		)
	339.5			294.5			45.0			664.9			519.7			145.2			354.7			339.5			15.2			697.1			664.9			32.2
Operating profit	71.5			25.8			45.7			126.7			86.5			40.2			80.6			71.5			9.1			146.8			126.7			20.1
Interest expense, net	(30.1		)	(28.9		)	(1.2		)	(60.3		)	(57.9		)	(2.4		)	(29.9		)	(30.1		)	0.2			(59.0		)	(60.3		)	1.3
Loss on early extinguishment of debt	—			—			—			(11.5		)	—			(11.5		)	(7.2		)	—			(7.2		)	(7.2		)	(11.5		)	4.3
Other income, net	0.9			2.8			(1.9		)	1.7			3.2			(1.5		)	2.2			0.9			1.3			5.0			1.7			3.3
Income (loss) before income taxes	42.3			(0.3		)	42.6			56.6			31.8			24.8
Income before income taxes																			45.7			42.3			3.4			85.6			56.6			29.0
Provision for income taxes	(12.4		)	(1.5		)	(10.9		)	(6.6		)	(11.3		)	4.7			(13.3		)	(12.4		)	(0.9		)	(21.3		)	(6.6		)	(14.7		)
Net income (loss)	$	29.9		$	(1.8	)	$	31.7		$	50.0		$	20.5		$	29.5
Net income																			$	32.4		$	29.9		$	2.5		$	64.3		$	50.0		$	14.3


	Second Quarter								Six Months								Second Quarter								Six Months
	2018		% of Total Revenues		2017		% of Total Revenues		2018		% of Total Revenues		2017		% of Total Revenues		2019		% of Total Revenues		2018		% of Total Revenues		2019		% of Total Revenues		2018		% of Total Revenues
Revenues:
Sales	$	167.3	40.7	%	$	160.9	50.2	%	$	321.0	40.5	%	$	309.1	51.0	%	$	181.1	41.6	%	$	167.3	40.7	%	$	348.7	41.3	%	$	321.0	40.5	%
Franchise royalty revenue and fees:
Royalty revenue	98.2		23.9	%	94.1		29.4	%	188.1		23.8	%	181.3		29.9	%	102.8		23.6	%	98.2		23.9	%	197.7		23.4	%	188.1		23.8	%
Franchise fees	9.4		2.3	%	18.4		5.7	%	17.4		2.2	%	25.9		4.3	%	6.3		1.5	%	9.4		2.3	%	13.4		1.6	%	17.4		2.2	%
Total franchise royalty revenue and fees	107.6		26.2	%	112.5		35.1	%	205.5		26.0	%	207.2		34.2	%	109.1		25.1	%	107.6		26.2	%	211.1		25.0	%	205.5		26.0	%
Franchise rental income	51.5		12.5	%	46.9		14.7	%	101.6		12.8	%	89.9		14.8	%	58.5		13.4	%	51.5		12.5	%	117.0		13.9	%	101.6		12.8	%
Advertising funds revenue	84.6		20.6	%	—		—	%	163.5		20.7	%	—		—	%	86.6		19.9	%	84.6		20.6	%	167.1		19.8	%	163.5		20.7	%
Total revenues	$	411.0	100.0	%	$	320.3	100.0	%	$	791.6	100.0	%	$	606.2	100.0	%	$	435.3	100.0	%	$	411.0	100.0	%	$	843.9	100.0	%	$	791.6	100.0	%

	Second Quarter								Six Months								Second Quarter								Six Months
	2018		% of Sales		2017		% of Sales		2018		% of Sales		2017		% of Sales		2019		% of Sales		2018		% of Sales		2019		% of Sales		2018		% of Sales
Cost of sales:
Food and paper	$	52.9	31.6	%	$	50.3	31.2	%	$	101.8	31.7	%	$	95.3	30.8	%	$	57.8	31.9	%	$	52.9	31.6	%	$	110.0	31.5	%	$	101.8	31.7	%
Restaurant labor	48.9		29.2	%	46.5		28.9	%	95.7		29.8	%	91.3		29.5	%	53.8		29.7	%	48.9		29.2	%	105.4		30.2	%	95.7		29.8	%
Occupancy, advertising and other operating costs	36.4		21.8	%	33.8		21.1	%	72.9		22.7	%	68.5		22.2	%	39.5		21.9	%	36.4		21.8	%	78.3		22.5	%	72.9		22.7	%
Total cost of sales	$	138.2	82.6	%	$	130.6	81.2	%	$	270.4	84.2	%	$	255.1	82.5	%	$	151.1	83.5	%	$	138.2	82.6	%	$	293.7	84.2	%	$	270.4	84.2	%

Second Quarter Six Months
2018
% of
Sales
2017
% of
Sales
2018
% of
Sales
2017
% of
Sales
Restaurant margin $ 29.1
17.4 % $ 30.3
18.8 % $ 50.6
15.8 % $ 54.0
17.5 %



	Second Quarter								Six Months
	2019		% of Sales		2018		% of Sales		2019		% of Sales		2018		% of Sales
Restaurant margin	$	30.0	16.5	%	$	29.1	17.4	%	$	55.0	15.8	%	$	50.6	15.8	%

The tables below present key business measures which are defined and further discussed in the “Executive Overview” section included herein.


	Second Quarter				Six Months				Second Quarter				Six Months
	2018		2017		2018		2017		2019		2018		2019		2018
Key business measures:
North America same-restaurant sales:
North America same-restaurant sales growth:
Company-operated	2.0	%	1.7	%	1.4	%	1.3	%	0.8	%	2.0	%	1.4	%	1.4	%
Franchised	1.9	%	3.3	%	1.8	%	2.5	%	1.5	%	1.9	%	1.4	%	1.8	%
Systemwide	1.9	%	3.2	%	1.8	%	2.4	%	1.4	%	1.9	%	1.4	%	1.8	%

Total same-restaurant sales:
Global same-restaurant sales growth:
Company-operated	2.0	%	1.7	%	1.4	%	1.3	%	0.8	%	2.0	%	1.4	%	1.4	%
Franchised (a)	2.1	%	3.3	%	1.9	%	2.6	%	1.6	%	2.1	%	1.5	%	1.9	%
Systemwide (a)	2.1	%	3.2	%	1.9	%	2.5	%	1.6	%	2.1	%	1.5	%	1.9	%

________________

(a) Includes international franchised same-restaurant sales (excluding Venezuela, and excluding Argentina in 2019, due to the impact of ~~Venezuela’s~~the highly inflationary ~~economy)~~economies of those countries).


	Second Quarter				Six Months				Second Quarter				Six Months
	2018		2017		2018		2017		2019		2018		2019		2018
Key business measures (continued):
Systemwide sales: (a)
Company-operated	$	167.3	$	160.9	$	321.0	$	309.1	$	181.1	$	167.3	$	348.7	$	321.0
North America franchised	2,434.2		2,360.3		4,684.9		4,549.8		2,482.5		2,434.2		4,773.2		4,684.9
North America systemwide									2,663.6		2,601.5		5,121.9		5,005.9
International franchised (b)	132.1		118.8		259.3		231.2		140.1		132.1		273.0		259.3
Global systemwide sales	$	2,733.6	$	2,640.0	$	5,265.2	$	5,090.1
Global systemwide									$	2,803.7	$	2,733.6	$	5,394.9	$	5,265.2

________________

(a)

During the second quarter of ~~2018~~2019 and ~~2017,~~2018, North America systemwide sales increased ~~2.7%~~3.0% and ~~4.1%~~2.7%, respectively, international franchised sales increased ~~12.8%~~10.4% and ~~16.4%~~12.8%, respectively, and global systemwide sales increased ~~3.1%~~3.3% and ~~4.6%~~3.1%, respectively, on a constant currency basis. During the first six months of ~~2018~~2019 and ~~2017,~~2018, North America systemwide sales increased ~~2.7%~~3.0% and ~~3.4%~~2.7%, respectively, international franchised sales increased ~~13.2%~~10.2% and ~~15.2%~~13.2%, respectively, and global systemwide sales increased ~~3.2%~~3.3% and ~~3.9%~~3.2%, respectively, on a constant currency basis.


(b)	Excludes Venezuela, and excludes Argentina in 2019, due to the impact of ~~Venezuela’s~~the highly inflationary ~~economy.~~economies of those countries.

Second Quarter
Company-operated North America Franchised International Franchised Systemwide
Restaurant count:
Restaurant count at April 1, 2018 337
5,784
512
6,633
Opened 1
24
11
36
Closed (3 ) (9 ) (1 ) (13 )
Net (sold to) purchased by franchisees (3 ) 3
—
—
Restaurant count at July 1, 2018 332
5,802
522
6,656

Six Months
Company-operated North America Franchised International Franchised Systemwide

Restaurant count at December 31, 2017 337
5,793
504
6,634
Opened 1
40
28
69
Closed (4 ) (33 ) (10 ) (47 )
Net (sold to) purchased by franchisees (2 ) 2
—
—
Restaurant count at July 1, 2018 332
5,802
522
6,656



	Second Quarter
	Company-operated	North America Franchised		International Franchised		Systemwide
Restaurant count:
Restaurant count at March 31, 2019	358	5,825		527		6,710
Opened	—	20		8		28
Closed	—	(17	)	(2	)	(19	)
Net purchased from (sold by) franchisees	—	—		—		—
Restaurant count at June 30, 2019	358	5,828		533		6,719

	Six Months
	Company-operated	North America Franchised		International Franchised		Systemwide

Restaurant count at December 30, 2018	353	5,825		533		6,711
Opened	—	49		22		71
Closed	—	(41	)	(22	)	(63	)
Net purchased from (sold by) franchisees	5	(5	)	—		—
Restaurant count at June 30, 2019	358	5,828		533		6,719


Sales	Change				Second Quarter						Six Months
	Second Quarter		Six Months		2019		2018		Change		2019		2018		Change
Sales	$	6.4	$	11.9	$	181.1	$	167.3	$	13.8	$	348.7	$	321.0	$	27.7

The increase in sales for the second quarter and the first six months of ~~2018~~2019 was primarily due to a ~~2.0%~~net increase in the number of Company-operated restaurants in operation during 2019 compared to 2018. In addition, sales for the second quarter and the first six months of 2019 benefited from a 0.8% and 1.4% increase in Company-operated same-restaurant sales, respectively. Company-operated same-restaurant sales improved due to an increase in our average per customer check amount, reflecting benefits from strategic price increases on our menu items and changes in product mix. These benefits were partially offset by a decrease in customer count. ~~In addition, same-restaurant sales for the first six months of 2018 were adversely impacted by inclement weather in the northeastern U.S. during the first quarter of 2018.~~


Franchise Royalty Revenue and Fees	Change						Second Quarter							Six Months
	Second Quarter			Six Months			2019		2018		Change			2019		2018		Change
Royalty revenue	$	4.1		$	6.8		$	102.8	$	98.2	$	4.6		$	197.7	$	188.1	$	9.6
Franchise fees	(9.0		)	(8.5		)	6.3		9.4		(3.1		)	13.4		17.4		(4.0		)
	$	(4.9	)	$	(1.7	)	$	109.1	$	107.6	$	1.5		$	211.1	$	205.5	$	5.6

The increase in franchise royalty revenue during the second quarter and the first six months of ~~2018~~2019 was primarily due to a ~~2.1%~~1.6% and ~~1.9%~~1.5% increase in franchise same-restaurant sales, respectively.

Royalty revenue was also positively impacted by a net increase in the number of franchise restaurants in operation. The decrease in franchise fees during the second quarter and the first six months of ~~2018~~2019 was primarily due to not facilitating ~~fewer~~any franchisee-to-franchisee restaurant transfers (“Franchise Flips”) in 2019 and the related impact of the new accounting guidance for revenue recognition effective January 1, 2018. The Company facilitated 64 and 154 Franchise Flips during the second quarter of 2018 and 2017, respectively, and 64 and 270 Franchise Flips during the first six months of 2018 and 2017, respectively (excluding the DavCo and NPC Transactions discussed below). Franchise Flip technical assistancelower other miscellaneous franchise fees, are recognized as revenue over the contractual term of the franchise agreements under the new accounting guidance. Under previous guidance, technical assistance fees received in connection with Franchise Flips were recognized as revenue when the license agreements were signed and the restaurant opened. See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the new accounting guidance for revenue recognition. This impact was partially offset by higher fees for providing information technology services ~~to franchisees~~ and other ~~miscellaneous franchise fees.~~services to franchisees.


Franchise Rental Income	Change				Second Quarter						Six Months
	Second Quarter		Six Months		2019		2018		Change		2019		2018		Change
Franchise rental income	$	4.6	$	11.7	$	58.5	$	51.5	$	7.0	$	117.0	$	101.6	$	15.4

The increase in franchise rental income during the second quarter and the first six months of ~~2018~~2019 was primarily due to ~~subleasing properties~~the adoption of new accounting guidance for leases. Under the new guidance, lessees’ payments to ~~franchisees in connection~~the Company for executory costs are recorded on a gross basis as revenue with ~~facilitating Franchise Flips during 2017.~~a corresponding expense. See “Franchise Rental Expense” below. This increase was partially offset by the assignment of certain leases to a franchisee.


Advertising Funds Revenue	Change				Second Quarter						Six Months
	Second Quarter		Six Months		2019		2018		Change		2019		2018		Change
Advertising funds revenue	$	84.6	$	163.5	$	86.6	$	84.6	$	2.0	$	167.1	$	163.5	$	3.6

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. ~~Under the new accounting guidance for revenue recognition effective January 1, 2018, the revenue of the national~~The increase in advertising funds ~~is fully consolidated into~~revenue during the second quarter and the first six months of 2019 was primarily due to an increase in North America franchise same-restaurant sales, as well as a net increase in the number of North America franchise restaurants in operation. These increases were partially offset by reductions in advertising receipts under the Company’s ~~condensed consolidated statements of operations.~~new restaurant development incentive program.


Cost of Sales, as a Percent of Sales	Change				Second Quarter						Six Months
	Second Quarter		Six Months		2019		2018		Change		2019		2018		Change
Food and paper	0.4	%	0.9	%	31.9	%	31.6	%	0.3	%	31.5	%	31.7	%	(0.2	)%
Restaurant labor	0.3	%	0.3	%	29.7	%	29.2	%	0.5	%	30.2	%	29.8	%	0.4	%
Occupancy, advertising and other operating costs	0.7	%	0.5	%	21.9	%	21.8	%	0.1	%	22.5	%	22.7	%	(0.2	)%
	1.4	%	1.7	%	83.5	%	82.6	%	0.9	%	84.2	%	84.2	%	—	%

~~The increase in cost~~Cost of sales, as a percent of sales, during the second quarter and the first six months of ~~2018~~2019 was ~~primarily due to~~impacted by (1) an increase in restaurant labor rates, (2) a decrease in customer count and (3) an increase in commodity ~~costs and (3) higher insurance~~ costs. ~~In addition, cost of sales, as a percent of sales, for the first six months of 2018 were adversely impacted by inclement weather in the northeastern U.S.~~ These ~~increases in cost of sales, as a percent of sales,~~impacts were partially offset by benefits from strategic price increases on certain of our menu items.


Franchise Support and Other Costs	Change				Second Quarter							Six Months
	Second Quarter		Six Months		2019		2018		Change			2019		2018		Change
Franchise support and other costs	$	3.2	$	5.8	$	4.0	$	7.0	$	(3.0	)	$	10.1	$	13.2	$	(3.1	)

The ~~increase~~decrease in franchise support and other costs during the second quarter and the first six months of ~~2018~~2019 was primarily due to lower costs incurred to provide information technology and other services to our franchisees.


Franchise Rental Expense	Change				Second Quarter						Six Months
	Second Quarter		Six Months		2019		2018		Change		2019		2018		Change
Franchise rental expense	$	2.4	$	6.8	$	28.0	$	24.3	$	3.7	$	60.5	$	47.6	$	12.9

The increase in franchise rental expense during the second quarter and the first six months of ~~2018~~2019 was primarily ~~a result~~due to the adoption of ~~leases entered into in connection with Franchise Flips during 2017.~~

Advertising Funds Expense Change
Second
Quarter Six
Months
Advertising funds expense $ 84.6
$ 163.5

~~The expenses of the national advertising funds are now fully consolidated into the Company’s condensed consolidated statements of operations under the~~ new accounting guidance for leases. Under the new guidance, lessees’ payments to the Company for executory costs are recorded on a gross basis as revenue ~~recognition effective January 1, 2018.~~with a corresponding expense. See “Franchise Rental Income” above. This increase was partially offset by the impact of assigning certain leases to a franchisee.



Advertising Funds Expense	Second Quarter						Six Months
	2019		2018		Change		2019		2018		Change
Advertising funds expense	$	88.7	$	84.6	$	4.1	$	169.1	$	163.5	$	5.6

The increase in advertising funds expense during the second quarter and the first six months of 2019 was primarily due to the same factors as described above for advertising funds revenue. On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. During the second quarter and the first six months of 2019, advertising funds expense exceeded advertising funds revenue by $2.1 million, reflecting a portion of the expected advertising spend in excess of advertising funds revenue for the remainder of 2019. This excess for 2019 is expected to approximate the amount by which advertising funds revenue exceeded advertising funds expense in 2018.


General and Administrative	Change						Second Quarter						Six Months
	Second Quarter			Six Months			2019		2018		Change		2019		2018		Change
Professional services	$	(0.8	)	$	(1.9	)
Employee compensation and related expenses	(0.5		)	(0.9		)	$	40.8	$	39.8	$	1.0	$	81.8	$	81.3	$	0.5
Other, net	0.4			0.9			10.0		9.4		0.6		18.3		18.2		0.1
	$	(0.9	)	$	(1.9	)	$	50.8	$	49.2	$	1.6	$	100.1	$	99.5	$	0.6

The ~~decrease~~increase in general and administrative expenses during the second quarter and the first six months of ~~2018~~2019 was primarily due to ~~decreases in (1) professional services, including lower legal fees and (2)~~higher employee compensation and related expenses, ~~primarily~~reflecting additional expenditures to support our digital experience and international organizations, as ~~a result~~well as timing of other employee-related expenses. These increases were partially offset by changes in staffing driven by our G&A realignment plan.


Depreciation and Amortization	Change				Second Quarter							Six Months
	Second Quarter		Six Months		2019		2018		Change			2019		2018		Change
Restaurants	$	1.5	$	2.5	$	20.0	$	22.2	$	(2.2	)	$	41.9	$	42.9	$	(1.0	)
Corporate and other	0.6		2.6		11.5		11.2		0.3			22.8		22.7		0.1
	$	2.1	$	5.1	$	31.5	$	33.4	$	(1.9	)	$	64.7	$	65.6	$	(0.9	)

The ~~increase~~decrease in restaurant depreciation and amortization during the second quarter and the first six months of ~~2018~~2019 was primarily due to the ~~impact~~assignment of ~~capital~~certain leases to a franchisee, resulting ~~from facilitating Franchise Flips during 2017.~~in the write-off of the related net investment in the leases. Corporate and other expense increased due to depreciation and amortization for technology investments.



System Optimization (Gains) Losses, Net	Second Quarter								Six Months
	2019			2018			Change		2019			2018		Change
System optimization (gains) losses, net	$	(0.1	)	$	(0.1	)	$	—	$	(0.1	)	$	0.5	$	(0.6	)

System optimization (gains) losses, net for the second quarter and the first six months of 2019 and 2018 were primarily comprised of post-closing adjustments on previous sales of restaurants and gains (losses) on the sale of surplus properties.

System Optimization (Gains) Losses, Net Second Quarter Six Months
2018 2017 2018 2017
System optimization (gains) losses, net $ (0.1 ) $ 41.0
$ 0.5
$ 39.6



Reorganization and Realignment Costs	Second Quarter						Six Months
	2019		2018		Change		2019		2018		Change
G&A realignment	$	3.5	$	3.1	$	0.4	$	4.3	$	5.7	(1.4		)
System optimization initiative	0.1		—		0.1		0.1		—		0.1
	$	3.6	$	3.1	$	0.5	$	4.4	$	5.7	$	(1.3	)

The change in system optimization (gains) losses, net was primarily due to the acquisition of 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”), which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company (the “DavCo and NPC Transactions”). The transactions resulted in a loss of $43.1 million during the second quarter of 2017.

Reorganization and Realignment Costs Second Quarter Six Months
2018 2017 2018 2017
G&A realignment $ 3.1
$ 17.2
$ 5.7
$ 17.2
System optimization initiative —
0.5
—
0.7
$ 3.1
$ 17.7
$ 5.7
$ 17.9

In May 2017, the Company initiated a G&A realignment plan to further reduce its G&A expenses. ~~During the second quarter of 2018,~~In addition, the Company ~~recognized~~announced changes to its leadership structure in May 2019. G&A realignment costs associated with the plan totaling $3.1 million, which primarily included (1) severance and related employee costs of $1.1 million, (2) share-based compensation of $1.1 million and (3) third-party and other costs of $0.6 million. During the first six months of 2018, the Company recognized costs totaling $5.7 million, which primarily included (1) severance and related employee costs of $3.1 million, (2) share-based compensation of $1.2 million and (3) third-party and other costs of $0.9 million. During bothfor the second quarter and the first six months of ~~2017, the Company recognized costs totaling $17.2 million, which~~2019 and 2018 were primarily ~~included (1)~~comprised of severance and related employee costs ~~of $13.2 million~~ and share-based ~~compensation of $3.7 million.~~compensation.

During the second quarter and the first six months of 2017, the Company recognized costs associated with its system optimization initiative totaling $0.5 million and $0.7 million, respectively, which primarily included professional fees.


Impairment of Long-Lived Assets	Change				Second Quarter							Six Months
	Second Quarter		Six Months		2019		2018		Change			2019		2018		Change
Impairment of long-lived assets	$	1.4	$	1.0	$	0.2	$	1.6	$	(1.4	)	$	1.7	$	1.8	$	(0.1	)

~~Impairment of long-lived assets increased~~The change in impairment charges during the second quarter and the first six months of ~~2018~~2019 was primarily ~~due to higher~~driven by lower impairment charges ~~resulting from~~as a result of the deterioration in operating performance of certain Company-operated restaurants when compared to the first six months of 2018. In addition, the change in impairment charges during the first six months of 2019 was offset by an increase in losses resulting from closing Company-operated restaurants and ~~charges~~classifying such surplus properties as held for ~~capital improvements in previously impaired restaurants that did not subsequently recover.~~sale.


Other Operating Income, Net	Second Quarter						Six Months						Second Quarter									Six Months
	2018			2017			2018			2017			2019			2018			Change			2019			2018			Change
Equity in earnings in joint ventures, net													$	(3.1	)	$	(1.8	)	$	(1.3	)	$	(4.9	)	$	(3.6	)	$	(1.3	)
Gains on sales-type leases													—			—			—			(2.0		)	$	—		(2.0		)
Lease buyout	$	—		$	(0.2	)	$	0.6		$	(0.2	)	—			—			—			(0.2		)	0.6			(0.8		)
Equity in earnings in joint ventures, net	(1.8		)	(1.9		)	(3.6		)	(3.8		)
Other, net	—			—			0.1			0.2			—			—			—			—			$	0.1		(0.1		)
	$	(1.8	)	$	(2.1	)	$	(2.9	)	$	(3.8	)	$	(3.1	)	$	(1.8	)	$	(1.3	)	$	(7.1	)	$	(2.9	)	$	(4.2	)

The change in other operating income, net during the second quarter ~~and~~of 2019 was due to an increase in the equity in earnings from our TimWen joint venture. The change in other operating income, net during the first six months of ~~2018~~2019 was primarily due to ~~lease buyout activity.~~gains on new and modified sales-type leases as a result of the new accounting guidance for leases, as well as an increase in the equity in earnings from our TimWen joint venture.


Interest Expense, Net	Change				Second Quarter							Six Months
	Second Quarter		Six Months		2019		2018		Change			2019		2018		Change
Interest expense, net	$	1.2	$	2.4	$	29.9	$	30.1	$	(0.2	)	$	59.0	$	60.3	$	(1.3	)

Interest expense, net ~~increased~~decreased during ~~the second quarter and~~ the first six months of ~~2018~~2019 primarily due to ~~an increase in capital~~the timing of interest expense on the Company’s finance lease ~~obligations resulting from facilitating Franchise Flips during 2017.~~obligations.


Loss on Early Extinguishment of Debt	Change				Second Quarter						Six Months
	Second Quarter		Six Months		2019		2018		Change		2019		2018		Change
Loss on early extinguishment of debt	$	—	$	11.5	$	7.2	$	—	$	7.2	$	7.2	$	11.5	$	(4.3	)

During the ~~first~~second quarter of ~~2018,~~2019, 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 ~~redeeming~~repaying its outstanding Series 2015-1 Class A-2-II Notes primarily with the proceeds from the issuance of its Series 2019-1 Class A-2 Notes. The loss on the early extinguishment of debt of $7.2 million was comprised of the write-off of certain deferred financing costs.

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

Provision for Income Taxes Second Quarter Six Months
2018 2017 2018 2017
Income (loss) before income taxes $ 42.3
$ (0.3 ) $ 56.6
$ 31.8
Provision for income taxes 12.4
1.5
6.6
11.3
Effective tax rate on income 29.3 % NM
11.6 % 35.6 %



Other Income, Net	Second Quarter						Six Months
	2019		2018		Change		2019		2018		Change
Other income, net	$	2.2	$	0.9	$	1.3	$	5.0	$	1.7	$	3.3

~~_______________~~

Other income, net increased during the second quarter and the first six months of 2019 primarily due to higher interest income earned on our cash equivalents.

~~(NM) Not meaningful.~~



Provision for Income Taxes	Second Quarter									Six Months
	2019			2018			Change			2019			2018			Change
Income before income taxes	$	45.7		$	42.3		$	3.4		$	85.6		$	56.6		$	29.0
Provision for income taxes	(13.3		)	(12.4		)	(0.9		)	(21.3		)	(6.6		)	(14.7		)
Effective tax rate on income	29.2		%	29.3		%	(0.1		)%	24.9		%	11.6		%	13.3		%

Our effective tax rates in the second quarter of ~~2018~~2019 and ~~2017~~2018 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year, include the following: (1) state income taxes, ~~(2) valuation allowance~~including non-recurring changes ~~net of federal benefit, (3) a change~~ to ~~our provisional amount, recorded in the second quarter of 2018, for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) on our net~~state deferred ~~tax liability, which resulted in a benefit of $0.8 million, (4)~~taxes, (2) net excess ~~tax~~ benefits related to share-based payments, which resulted in a benefit of $0.9 million and $0.8 million in the second quarter of 2019 and 2018, respectively, (3) valuation allowance changes, net of federal benefit, and ~~(5)~~(4) the ~~system optimization initiative in 2017, reflecting goodwill adjustments, changes~~impact of the comprehensive tax legislation commonly referred to ~~valuation allowances on state net operating loss carryforwards~~as the Tax Cuts and ~~state deferred taxes (including a correction to prior years identified and recorded in the second quarter of 2017, which resulted in a benefit of $2.2 million)~~Jobs Act (the “Tax Act”).

Our effective tax rates in the first six months of ~~2018~~2019 and ~~2017~~2018 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year include the following: (1) net excess tax benefits related to share-based payments, which resulted in a benefit of $2.9 million and $6.9 million in the first six months of 2019 and 2018, respectively, (2) state income taxes, ~~(3) a change~~including non-recurring changes to ~~our provisional amount, recorded in the first six months of 2018, for~~state deferred taxes, (3) the impact of the Tax Act ~~on our net deferred tax liability, which resulted in a benefit of $2.8 million,~~ and (4) ~~the system optimization initiative in 2017, reflecting goodwill adjustments,~~valuation allowance changes, ~~to valuation allowances on state~~ net ~~operating loss carryforwards and state deferred taxes (including a correction to prior years identified and recorded in the first six months~~ of ~~2017, which resulted in a benefit of $2.2 million).~~federal benefit.

Liquidity and Capital Resources

Cash Flows

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

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

Our anticipated cash requirements for the remainder of ~~2018,~~2019, exclusive of operating cash flow requirements, consist principally of:

capital expenditures of approximately ~~$51.0~~$50.0 million to ~~$56.0~~$55.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $75.0 million to $80.0 ~~million.~~million;

cash dividends aggregating up to approximately ~~$40.3~~$46.1 million as discussed below in “Dividends;” and

potential stock repurchases of up to ~~$112.5~~$196.7 million, of which ~~$19.4~~$10.0 million was repurchased subsequent to June 30, 2019 through July ~~1, 2018 through August 1, 2018~~31, 2019, as discussed below in “Stock Repurchases.”

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

The table below summarizes our cash flows from operating, investing and financing activities for the first six months of ~~2018~~2019 and ~~2017:~~2018:


	Six Months									Six Months
	2018			2017			Change			2019			2018			Change
Net cash provided by (used in):
Operating activities	$	148.4		$	105.8		$	42.6		$	154.1		$	148.4		$	5.7
Investing activities	(22.6		)	(40.2		)	17.6			(29.9		)	(22.6		)	(7.3		)
Financing activities	(95.3		)	(94.2		)	(1.1		)	(130.2		)	(95.3		)	(34.9		)
Effect of exchange rate changes on cash	(4.4		)	3.2			(7.6		)	3.8			(4.4		)	8.2
Net increase (decrease) in cash, cash equivalents and restricted cash	$	26.1		$	(25.4	)	$	51.5
Net (decrease) increase in cash, cash equivalents and restricted cash										$	(2.2	)	$	26.1		$	(28.3	)

Operating Activities

Cash provided by operating activities was ~~$148.4~~$154.1 million and ~~$105.8~~$148.4 million in the first six months of ~~2018~~2019 and ~~2017,~~2018, 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 ~~$42.6~~$5.7 million during the first six months of ~~2018~~2019 as compared to the first six months of ~~2017,~~2018, primarily due to ~~a favorable change in operating assets and liabilities of $43.5 million, partially offset by~~(1) a decrease ~~of $0.9 million~~ in payments for incentive compensation (2) higher net income, adjusted for non-cash ~~expenses. The~~expenses and (3) the timing of receipt of rental payments from franchisees. These favorable ~~change in operating assets~~changes were partially offset by (1) the timing of collections of royalty receivables and ~~liabilities resulted primarily from (1)~~(2) the timing of payments for marketing expenses of the national advertising ~~funds, (2) the timing of collections of royalty receivables and (3) a decrease in payments for incentive compensation for the 2017 fiscal year.~~funds.

Investing Activities

Cash used in investing activities ~~decreased $17.6~~increased $7.3 million during the first six months of ~~2018~~2019 as compared to the first six months of ~~2017,~~2018, primarily due to ~~(1) net~~an increase in cash used infor the ~~DavCo and NPC Transactions during 2017~~Company’s acquisition of ~~$16.1~~restaurants from franchisees of $5.1 million and ~~(2) a decrease~~an increase in capital expenditures of ~~$8.2 million. These favorable changes were partially offset by a decrease in proceeds from dispositions of surplus properties and other assets of $5.5~~$1.6 million.

Financing Activities

Cash used in financing activities increased ~~$1.1~~$34.9 million during the first six months of ~~2018~~2019 as compared to the first six months of ~~2017,~~2018, primarily due to (1) a net increase in cash used for long-term debt activities of $76.5 million, reflecting the respective impacts of the completion of debt refinancing transactions during the first six months of 2019 and 2018 and (2) an increase in dividends of $5.5 million. These changes were partially offset by (1) a decrease in repurchases of common stock of ~~$33.8~~$33.5 million, (2) an increase in ~~dividends~~proceeds from stock option exercises, net of ~~$6.2~~payments related to tax withholding for share-based compensation, of $8.3 million and (3) the settlement of a supplemental purchase price liability associated with the acquisition of 140 Wendy’s restaurants from DavCo Restaurants, LLC of $6.1 ~~million. These changes were partially offset by a net increase in cash provided by long-term debt activities of $44.5~~ million ~~reflecting the completion of a refinancing transaction~~ during the first ~~quarter~~six months of 2018.

Long-Term Debt, Including Current Portion

Except as described below, there were no material changes to the terms of any debt obligations since December ~~31, 2017.~~30, 2018. The Company was in compliance with its debt covenants as of ~~July 1, 2018.~~June 30, 2019. See Note 78 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.

Notes replaced the Company’s $150.0 million Series 2018-1 Class A-1 Notes, which were canceled on the closing date and the letters of credit outstanding against the Series ~~2015-1~~2018-1 Class A-1 Notes were transferred to the Series ~~2018-1~~2019-1 Class A-1 Notes.

Dividends

On March 15, ~~2018~~2019 and June ~~15, 2018,~~17, 2019, the Company paid quarterly cash dividends of ~~$0.085~~$.10 per share on its common stock, aggregating ~~$40.6~~$46.2 million. On August ~~2, 2018,~~1, 2019, the Company declared a dividend of ~~$0.085~~$.10 per share to be paid on September ~~18, 2018~~17, 2019 to ~~shareholders~~stockholders of record as of September ~~4, 2018.~~3, 2019. If the Company pays regular quarterly cash dividends for the remainder of ~~2018~~2019 at the same rate as declared in the ~~second~~third quarter of ~~2018,~~2019, the Company’s total cash requirement for dividends ~~will~~for the remainder of 2019 would be approximately ~~$40.3~~$46.1 million based on the ~~estimated~~ number of shares of its common stock outstanding at ~~August 1, 2018.~~July 31, 2019. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid ~~in the future~~ or of the amount or timing of such dividends, if any.

Stock Repurchases

In February 2019, our Board of Directors authorized a repurchase program for up to $225.0 million of our common stock through March 1, 2020, when and if market conditions warrant and to the extent legally permissible. In connection with the February 2019 authorization, the Company’s previous November 2018 repurchase authorization for up to $220.0 million of our common stock was canceled. During the six months ended June 30, 2019, the Company repurchased 2.8 million shares with an aggregate purchase price of $49.7 million, of which $0.8 million was accrued at June 30, 2019, and excluding commissions, under the November 2018 and February 2019 authorizations. As of June 30, 2019, the Company had $196.7 million of availability remaining under its February 2019 authorization. Subsequent to June 30, 2019 through July 31, 2019, the Company repurchased 0.5 million shares under the February 2019 authorization with an aggregate purchase price of $10.0 million, excluding commissions.

In February 2018, our Board of Directors authorized a repurchase program for up to $175.0 million of our common stock through March 3, 2019, when and if market conditions ~~warrant~~warranted and to the extent legally permissible. During the six months ended July 1, 2018, the Company repurchased 3.7 million shares under the February 2018 repurchase authorization with an aggregate purchase price of $62.5 million, of which $2.1 million was accrued at July 1, 2018, and excluding commissions of $0.1 million. As of July 1, 2018, the Company had $112.5 million of availability remaining under its February 2018 authorization. Subsequent to July 1, 2018 through August 1, 2018, the Company repurchased 1.1 million shares with an aggregate purchase price of $19.4 million, excluding commissions.

In February 2017, our Board of Directors authorized a repurchase program for up to $150.0 million of our common stock through March 4, 2018, when and if market conditions warranted and to the extent legally permissible. DuringAdditionally, during the six months ended July 1, 2018, the Company completed ~~the~~its previous February 2017 repurchase authorization for up to $150.0 million ~~program~~of our common stock with the repurchase of 1.4 million shares with an aggregate purchase price of $22.6 million, excluding commissions. During the six months ended July 2, 2017, the Company repurchased 3.6 million shares with an aggregate purchase price of $52.4 million, of which $2.0 million was accrued at July 2, 2017, and excluding commissions.

General Inflation, Commodities and Changing Prices

We believe that general inflation did not have a significant effect on our consolidated results of ~~operations, except as mentioned below for certain commodities, during the reporting periods.~~operations. We attempt to manage any inflationary costs and commodity price increases 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, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to ~~increase food prices.~~manage such volatility through product mix and selective menu price increases.

Seasonality

Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because ~~the~~our business is moderately seasonal, results for ~~any~~a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

This “Quantitative and Qualitative Disclosures about Market Risk” should be read in conjunction with “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our annual report on Form 10-K for the fiscal year ended December ~~31, 2017~~30, 2018 (the “Form 10-K”).

As of ~~July 1, 2018,~~June 30, 2019, there were no material changes from the information contained in the Form 10-K, except as described below.

Interest Rate Risk

As discussed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation” under “Liquidity and Capital Resources,” the Company completed ~~a $925.0~~an $850.0 million debt refinancing transaction on ~~January 17, 2018.~~June 26, 2019. The ~~proceeds were used to repay all amounts~~Company’s outstanding ~~on the~~ Series 2015-1 Class ~~A-2-I~~A-2-II Notes ~~to pay prepayment and transaction costs, and for general corporate purposes. The~~were repaid as part of the refinancing transaction. In aggregate, the Company’s new ~~notes~~Series 2019-1 Class A-2 Notes bear a weighted-average fixed-rate interest at rates slightly ~~higher~~lower than our historical effective rates on the Series 2015-1 Class ~~A-2-I~~A-2-II Notes. In addition, the principal amounts outstanding on the Series ~~2018-1~~2019-1 Class A-2 Notes ~~exceed~~are lower than the amounts that were outstanding on the Series 2015-1 Class ~~A-2-I~~A-2-II Notes. ~~The final legal maturity date~~In connection with the issuance of the Series ~~2018-1~~2019-1 Class A-2 Notes, ~~is in 2048; however, the anticipated repayment dates~~a wholly-owned subsidiary of the ~~Series 2018-1 Class A-2 Notes range from 2025 through 2028, which is up to six years longer than the prior Series 2015-1 Class A-2-I Notes. Concurrently, the~~ Company also entered into a revolving financing facility, the Series ~~2018-1~~2019-1 Class A-1 Notes, which allows for the drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. The Series ~~2015-1~~2019-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2018-1 Class A-1 Notes, which were canceled on the closing ~~date.~~date, and the letters of credit outstanding against the Series 2018-1 Class A-1 Notes were transferred to the Series 2019-1 Class A-1 Notes.

Consequently, our long-term debt, including the current portion, aggregated ~~$2,848.0~~$2,342.4 million ~~and consisted of $2,381.9 million of fixed-rate debt and $466.1 million of capital lease obligations~~ as of ~~July 1, 2018~~June 30, 2019 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure has reduced its exposure to interest rate increases that could adversely affect its earnings and cash flows. The Company is exposed to interest rate increases under the Series ~~2018-1~~2019-1 Class A-1 Notes; however, the Company had no outstanding borrowings under ~~its~~the Series ~~2018-1~~2019-1 Class A-1 Notes as of ~~July 1, 2018.~~June 30, 2019.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The management of the Company, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of ~~its~~the Company’s 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 ~~July 1, 2018~~.June 30, 2019. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of ~~July 1, 2018,~~June 30, 2019, 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 second quarter of ~~2018~~2019 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, the management of the Company, including its Chief Executive Officer and Chief Financial Officer, does not expect that the control system can prevent or detect all errors or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.

PART II. OTHER INFORMATION

Special Note Regarding Forward-Looking Statements and Projections

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

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

consumers’ perceptions of the relative quality, variety, affordability and value of the food products we ~~offer;~~offer, and changes in consumer tastes and preferences;

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

consumer concerns over nutritional aspects of beef, ~~poultry,~~chicken, french fries or other products we sell, ~~concerns regarding~~ the ingredients in our products and/or the cooking processes used in our ~~restaurants, or concerns regarding the effects of~~restaurants;

conditions beyond our control, such as weather, natural disasters, disease outbreaks, epidemics or pandemics impacting ~~the Company’s~~our customers or food ~~supplies;~~supplies, or acts of war or terrorism;

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

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

~~the impact of general~~prevailing economic, market and business conditions affecting us, including competition from other food service providers, unemployment and ~~increases in unemployment rates on~~decreased consumer spending levels, particularly in geographic regions that contain a high concentration of Wendy’s restaurants;

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

~~changes in~~the quick-service restaurant industry, spending patterns and demographic trends, such as ~~the extent to which consumers eat~~consumer trends toward value-oriented products and promotions or toward consuming fewer meals away from home;

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

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

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

the availability ~~location~~of suitable locations and terms ~~of sites~~ for restaurant development by us and our franchisees;

development costs, including real estate and construction costs;

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

the ~~timing~~ability to effectively manage the acquisition and ~~impact~~disposition of ~~acquisitions and dispositions of restaurants;~~restaurants or successfully implement other strategic initiatives;

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;~~capital, and changes in debt, equity and securities markets;

changes in, and our ability to comply with, legal, regulatory or similar requirements, including franchising laws, payment card industry rules, overtime rules, minimum wage rates, wage and hour laws, tax legislation, federal ethanol policy and accounting standards, ~~(including the new guidance on leases that will become effective for fiscal year 2019);~~policies and practices;

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~~our computer systems or technology, or the occurrence of cyber incidents or a deficiency in cybersecurity that impacts ~~the Company~~us or ~~its~~our franchisees, including the cybersecurity incident described in ~~Item 2 above;~~the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2019 (the “Form 10-K”);

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

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

risks associated with the amount and timing of share repurchases under ~~the $175.0 million~~ share repurchase ~~program~~programs approved by ~~the~~our Board of Directors;

risks associated with the proposed settlement of the Financial Institutions case described in the Form 10-K, including the timing and amount of payments;

risks associated with our digital commerce strategy, platforms and technologies, including our ability to adapt to changes in industry trends and consumer preferences;

risks associated with our evolving organizational and leadership structure; and

other risks and uncertainties affecting us and our subsidiaries referred to in ~~our Annual Report on~~the Form 10-K ~~for the fiscal year ended December 31, 2017 (the “Form 10-K”)~~ (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the ~~SEC.~~Securities and Exchange Commission.

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q as a result of new information, future events or developments, except as required by federal securities laws. In addition, ~~it is our policy generally~~we do not to endorse any projections regarding future performance that may be made by third parties.

Item 1. Legal Proceedings.

~~We are~~The Company is involved in litigation and claims incidental to our current and prior businesses, including the legal proceedings related to a cybersecurity incident referenced in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Item 2 herein.businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. The Company believes it has adequate accruals for continuing operations for all of its legal and environmental matters. We cannot estimate the aggregate possible range of loss ~~due~~for various reasons, including, but not limited to, ~~most~~many proceedings ~~including those described below,~~ being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur ~~and~~and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently ~~difficult. Based on our currently available information, including legal defenses available~~difficult 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 consolidated~~the Company’s financial ~~position or~~condition, results of ~~operations.~~operations or cash flows of a particular reporting period.

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 and our Quarterly Report on Form 10-Q for the period ended March 31, 2019, 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.~~10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2019.

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 second quarter of ~~2018~~2019:

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 2, 2018
through
May 6, 2018 1,304,514

$17.22
1,101,900

$139,360,027
May 7, 2018
through
June 3, 2018 685,810

$16.38
685,445

$128,142,649
June 4, 2018
through
July 1, 2018 907,529

$17.41
898,548

$112,509,718
Total 2,897,853

$17.08
2,685,893

$112,509,718



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 1, 2019 through May 5, 2019	349,393		$18.40	307,555		$211,458
May 6, 2019 through June 2, 2019	355,836		$18.69	352,527		$204,874
June 3, 2019 through June 30, 2019	424,461		$19.38	420,110		$196,736
Total	1,129,690		$18.86	1,080,192		$196,736


(1)	Includes ~~211,960~~49,498 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 ~~2018,~~2019, our Board of Directors authorized ~~the~~a repurchase ofprogram for up to ~~$175~~$225.0 million of our common stock through March ~~3, 2019,~~1, 2020, when and if market conditions warrant and to the extent legally permissible.

Subsequent to June 30, 2019 through July ~~1, 2018 through August 1, 2018,~~31, 2019, the Company repurchased ~~1.1~~0.5 million shares under the February 2019 authorization with an aggregate purchase price of ~~$19.4~~$10.0 million, excluding commissions.

Item 6. Exhibits.



EXHIBIT NO.	DESCRIPTION

4.1	Series 2019-1 Supplement to Base Indenture, dated as of June 26, 2019, by and between Wendy’s Funding, LLC, as Master Issuer of the Series 2019-1 fixed rate senior secured notes, Class A-2, and Series 2019-1 variable funding senior notes, Class A-1, and Citibank, N.A., as Trustee and Series 2019-1 Securities Intermediary, incorporated herein by reference to Exhibit 4.1 of The Wendy’s Company Current Report on Form 8-K filed on June 26,2019 (SEC file no. 001-02207).
4.2	Fourth Supplement to the Base Indenture, dated as of June 26, 2019, by and between Wendy’s Funding, LLC, as Master Issuer, and Citibank, N.A., as Trustee, incorporated herein by reference to Exhibit 4.2 of The Wendy’s Company Current Report on Form 8-K filed on June 26, 2019 (SEC file no. 001-02207).
10.1	2019-1 Class A-2 Note Purchase Agreement, dated as of June 13, 2019, by and among The Wendy’s Company, the subsidiaries of The Wendy’s Company party thereto and Guggenheim Securities, LLC and Citigroup Global Markets Inc., each acting on behalf of itself and as the representatives of the initial purchasers, incorporated herein by reference to Exhibit 10.1 of The Wendy’s Company Current Report on Form 8-K filed on June 13, 2019 (SEC file no. 001-02207).
10.2	Class A-1 Note Purchase Agreement, dated as of June 26, 2019, 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 26, 2019 (SEC file no. 001-02207).
10.3	Second Amendment to the Management Agreement, dated as of June 26, 2019, 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 26, 2019 (SEC file no. 001-02207).
31.1	Certification of the Chief Executive Officer of The Wendy’s Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of the Chief Financial Officer of The Wendy’s Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	XBRL Instance Document*Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

____________________



*	Filed herewith.

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: August 7, ~~2018~~2019	By: /s/ Gunther Plosch
	Gunther Plosch
	Chief Financial Officer
	(On behalf of the ~~Company)~~registrant)

Date: August 7, ~~2018~~2019	By: /s/ Leigh A. Burnside
	Leigh A. Burnside
	Senior Vice President, Finance and Chief Accounting Officer
	(Principal Accounting Officer)

4649



				Adjustments
	As Reported			Franchise Fees			Advertising Funds			Balances Without Adoption
Condensed Consolidated Balance Sheet
July 1, 2018
Accrued expenses and other current liabilities	$	103,351		$	(1,733	)	$	—		$	101,618
Advertising funds restricted liabilities	96,972			—			(6,645		)	90,327
Total current liabilities	252,762			(1,733		)	(6,645		)	244,384
Deferred income taxes	274,344			21,587			—			295,931
Deferred franchise fees	93,139			(81,999		)	—			11,140
Total liabilities	3,649,640			(62,145		)	(6,645		)	3,580,850
Accumulated deficit	(224,120		)	62,384			6,645			(155,091		)
Accumulated other comprehensive loss	(56,450		)	(239		)	—			(56,689		)
Total stockholders’ equity	430,539			62,145			6,645			499,329

Condensed Consolidated Statements of Operations
Three Months Ended July 1, 2018
Franchise royalty revenue and fees (a)	$	107,559		$	(724	)	$	—		$	106,835
Advertising funds revenue	84,570			—			(84,570		)	—
Total revenues	411,002			(724		)	(84,570		)	325,708
Advertising funds expense	84,570			—			(84,570		)	—
Total costs and expenses	339,519			—			(84,570		)	254,949
Operating profit	71,483			(724		)	—			70,759
Income before income taxes	42,264			(724		)	—			41,540
Provision for income taxes	(12,388		)	187			—			(12,201		)
Net income	29,876			(537		)	—			29,339

Six Months Ended July 1, 2018
Franchise royalty revenue and fees (a)	$	205,467		$	(1,590	)	$	—		$	203,877
Advertising funds revenue	163,470			—			(163,470		)	—
Total revenues	791,566			(1,590		)	(163,470		)	626,506
Advertising funds expense	163,470			—			(163,470		)	—
Total costs and expenses	664,821			—			(163,470		)	501,351
Operating profit	126,745			(1,590		)	—			125,155
Income before income taxes	56,617			(1,590		)	—			55,027
Provision for income taxes	(6,582		)	409			—			(6,173		)
Net income	50,035			(1,181		)	—			48,854



	Balance January 1, 2017		Charges		Payments			Balance July 2, 2017
Severance and related employee costs	$	—	$	13,226	$	(507	)	$	12,719
Recruitment and relocation costs	—		—		—			—
Third-party and other costs	—		325		(246		)	79
	$	—	$	13,551	$	(753	)	$	12,798



	Foreign Currency Translation			Cash Flow Hedges (a)			Pension			Total
Balance at December 31, 2017	$	(45,149	)	$	—		$	(1,049	)	$	(46,198	)
Current-period other comprehensive (loss) income	(10,369		)	—			117			(10,252		)
Balance at July 1, 2018	$	(55,518	)	$	—		$	(932	)	$	(56,450	)

Balance at January 1, 2017	$	(60,299	)	$	(1,797	)	$	(1,145	)	$	(63,241	)
Current-period other comprehensive income	8,010			888			96			8,994
Balance at July 2, 2017	$	(52,289	)	$	(909	)	$	(1,049	)	$	(54,247	)



	Rental Payments					Rental Receipts
Fiscal Year	Capital Leases			Operating Leases		Capital Leases		Operating Leases		Owned Properties
2018 (a)	$	24,412		$	48,499	$	32,627	$	37,599	$	26,980
2019	45,681			94,249		65,695		75,456		54,827
2020	46,610			93,136		66,792		75,213		55,435
2021	48,228			92,635		68,609		75,196		57,027
2022	49,339			92,355		69,810		75,652		58,600
Thereafter	760,160			1,123,911		1,056,005		919,959		948,646
Total minimum payments	$	974,430		$	1,544,785	$	1,359,538	$	1,259,075	$	1,201,515
Less interest	(508,350		)
Present value of minimum capital lease payments (b)	$	466,080



	July 1, 2018			December 31, 2017
Land	$	272,626		$	272,411
Buildings and improvements	313,470			313,108
Restaurant equipment	2,443			2,444
	588,539			587,963
Accumulated depreciation and amortization	(135,601		)	(128,003		)
	$	452,938		$	459,960



	July 1, 2018			December 31, 2017
Future minimum rental receipts	$	649,893		$	662,889
Unearned interest income	(420,417		)	(433,175		)
Net investment in direct financing leases	229,476			229,714
Net current investment in direct financing leases (a)	(638		)	(625		)
Net non-current investment in direct financing leases	$	228,838		$	229,089