UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~June 30,~~September 29, 2019



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

For the transition period from ______________ to _______________

Commission file number: 1-2207

THE ~~WENDY~~'SWENDY’S COMPANY

(Exact name of 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) 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 ☒ 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 ☒ 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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

Yes ☐ No ☒

There were ~~230,603,094~~230,047,087 shares of The Wendy’s Company common stock outstanding as of ~~July 31,~~October 30, 2019.

THE WENDY’S COMPANY AND SUBSIDIARIES

INDEX TO FORM 10-Q



	Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements	4
Unaudited Condensed Consolidated Balance Sheets as of ~~June 30,~~September 29, 2019 and December 30, 2018	4
Unaudited Condensed Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018	5
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018	6
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018	7
Unaudited Condensed Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June 30,~~ September 29, 2019 and ~~July 1,~~September 30, 2018	9
Notes to Condensed Consolidated Financial Statements	11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3233
Item 3. Quantitative and Qualitative Disclosures about Market Risk	4245
Item 4. Controls and Procedures	4346

PART II: OTHER INFORMATION	4447
Item 1. Legal Proceedings	4649
Item 1A. Risk Factors	4649
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4751
Item 6. Exhibits	4852
Signatures	4953

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands Except Par Value)


	June 30, 2019			December 30, 2018			September 29, 2019			December 30, 2018
ASSETS	(Unaudited)						(Unaudited)
Current assets:
Cash and cash equivalents	$	426,216		$	431,405		$	439,421		$	431,405
Restricted cash	29,494			29,860			28,769			29,860
Accounts and notes receivable, net	101,083			109,805			105,017			109,805
Inventories	3,546			3,687			3,549			3,687
Prepaid expenses and other current assets	18,622			14,452			12,638			14,452
Advertising funds restricted assets	93,422			76,509			84,380			76,509
Total current assets	672,383			665,718			673,774			665,718
Properties	992,302			1,023,267			980,872			1,023,267
Finance lease assets	197,691			189,969			198,415			189,969
Operating lease assets	895,280			—			871,108			—
Goodwill	755,887			747,884			755,588			747,884
Other intangible assets	1,257,323			1,294,153			1,251,699			1,294,153
Investments	47,920			47,660			46,898			47,660
Net investment in sales-type and direct financing leases	241,584			226,477			250,602			226,477
Other assets	103,523			96,907			107,264			96,907
Total assets	$	5,163,893		$	4,292,035		$	5,136,220		$	4,292,035

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	22,750		$	23,250		$	22,750		$	23,250
Current portion of finance lease liabilities	9,917			8,405			10,584			8,405
Current portion of operating lease liabilities	43,321			—			43,474			—
Accounts payable	17,315			21,741			23,793			21,741
Accrued expenses and other current liabilities	148,852			150,636			146,693			150,636
Advertising funds restricted liabilities	99,120			80,153			90,152			80,153
Total current liabilities	341,275			284,185			337,446			284,185
Long-term debt	2,274,967			2,305,552			2,270,866			2,305,552
Long-term finance lease liabilities	465,226			447,231			471,704			447,231
Long-term operating lease liabilities	931,033			—			911,213			—
Deferred income taxes	271,283			269,160			273,097			269,160
Deferred franchise fees	91,588			92,232			91,437			92,232
Other liabilities	140,473			245,226			130,866			245,226
Total liabilities	4,515,845			3,643,586			4,486,629			3,643,586
Commitments and contingencies
Stockholders’ equity:
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
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 230,371 and 231,233 shares outstanding, respectively							47,042			47,042
Additional paid-in capital	2,883,484			2,884,696			2,885,404			2,884,696
Retained earnings	163,249			146,277			186,282			146,277
Common stock held in treasury, at cost; 239,332 and 239,191 shares, respectively	(2,393,914		)	(2,367,893		)
Common stock held in treasury, at cost; 240,053 and 239,191 shares, respectively							(2,415,027		)	(2,367,893		)
Accumulated other comprehensive loss	(51,813		)	(61,673		)	(54,110		)	(61,673		)
Total stockholders’ equity	648,048			648,449			649,591			648,449
Total liabilities and stockholders’ equity	$	5,163,893		$	4,292,035		$	5,136,220		$	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						Nine Months Ended
	June 30, 2019			July 1, 2018			June 30, 2019			July 1, 2018			September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018
	(Unaudited)												(Unaudited)
Revenues:
Sales	$	181,050		$	167,344		$	348,747		$	320,993		$	181,977		$	165,323		$	530,724		$	486,316
Franchise royalty revenue and fees	109,125			107,559			211,078			205,467			109,155			103,212			320,233			308,679
Franchise rental income	58,561			51,529			117,013			101,636			59,918			50,474			176,931			152,110
Advertising funds revenue	86,612			84,570			167,093			163,470			86,830			81,541			253,923			245,011
	435,348			411,002			843,931			791,566			437,880			400,550			1,281,811			1,192,116
Costs and expenses:
Cost of sales	151,092			138,154			293,671			270,373			152,425			139,348			446,096			409,721
Franchise support and other costs	4,066			7,031			10,084			13,204			9,739			5,349			19,823			18,553
Franchise rental expense	28,027			24,306			60,478			47,569			32,364			22,260			92,842			69,829
Advertising funds expense	88,667			84,570			169,148			163,470			87,883			81,541			257,031			245,011
General and administrative	50,784			49,163			100,097			99,519			46,169			46,545			146,266			146,064
Depreciation and amortization	31,484			33,427			64,669			65,579			33,306			29,070			97,975			94,649
System optimization (gains) losses, net	(110		)	(92		)	(122		)	478
System optimization gains, net													(1,040		)	(486		)	(1,162		)	(8		)
Reorganization and realignment costs	3,570			3,124			4,368			5,750			403			941			4,771			6,691
Impairment of long-lived assets	198			1,603			1,684			1,809			—			347			1,684			2,156
Other operating income, net	(3,003		)	(1,767		)	(6,985		)	(2,930		)	(2,392		)	(1,713		)	(9,377		)	(4,643		)
	354,775			339,519			697,092			664,821			358,857			323,202			1,055,949			988,023
Operating profit	80,573			71,483			146,839			126,745			79,023			77,348			225,862			204,093
Interest expense, net	(29,931		)	(30,136		)	(59,013		)	(60,314		)	(27,930		)	(29,625		)	(86,943		)	(89,939		)
Loss on early extinguishment of debt	(7,150		)	—			(7,150		)	(11,475		)	—			—			(7,150		)	(11,475		)
Investment income, net													340			450,133			999			450,432
Other income, net	2,247			917			4,947			1,661			1,878			1,061			6,166			2,423
Income before income taxes	45,739			42,264			85,623			56,617			53,311			498,917			138,934			555,534
Provision for income taxes	(13,353		)	(12,388		)	(21,343		)	(6,582		)	(7,184		)	(107,668		)	(28,527		)	(114,250		)
Net income	$	32,386		$	29,876		$	64,280		$	50,035		$	46,127		$	391,249		$	110,407		$	441,284

Net income per share
Net income per share:
Basic	$	.14		$	.13		$	.28		$	.21		$	.20		$	1.65		$	.48		$	1.85
Diluted	$	.14		$	.12		$	.27		$	.20		.20			1.60			.47			1.79

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					Nine Months Ended
	June 30, 2019		July 1, 2018			June 30, 2019		July 1, 2018			September 29, 2019			September 30, 2018		September 29, 2019		September 30, 2018
	(Unaudited)										(Unaudited)
Net income	$	32,386	$	29,876		$	64,280	$	50,035		$	46,127		$	391,249	$	110,407	$	441,284
Other comprehensive income (loss), net:
Other comprehensive (loss) income, net:
Foreign currency translation adjustment	3,835		(4,325		)	9,860		(10,369		)	(2,297		)	5,315		7,563		(5,054		)
Change in unrecognized pension loss:
Unrealized gains arising during the period	—		—			—		156			—			—		—		156
Income tax provision	—		—			—		(39		)	—			—		—		(39		)
	—		—			—		117			—			—		—		117
Other comprehensive income (loss), net	3,835		(4,325		)	9,860		(10,252		)
Other comprehensive (loss) income, net											(2,297		)	5,315		7,563		(4,937		)
Comprehensive income	$	36,221	$	25,551		$	74,140	$	39,783		$	43,830		$	396,564	$	117,970	$	436,347

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
	Common Stock						Retained Earnings (Accumulated Deficit)								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)																					(Unaudited)
Balance at December 30, 2018	$	47,042	Additional Paid-In Capital			$	2,884,696			$	Common Stock Held in Treasury			146,277			$	(2,367,893	)		$	(61,673	)	$	648,449		$	47,042			$	2,884,696			$	146,277			$	(2,367,893	)		$	(61,673	)	$	648,449
Net income	—		—				31,894				—				—				31,894			—			—				31,894				—				—				31,894
Other comprehensive income, net	—		—				—				—				6,025				6,025			—			—				—				—				6,025				6,025
Cash dividends	—		—				(23,069		)		—				—				(23,069		)	—			—				(23,069		)		—				—				(23,069		)
Repurchases of common stock	—		—				—				(29,370		)		—				(29,370		)	—			—				—				(29,370		)		—				(29,370		)
Share-based compensation	—		5,022				—				—				—				5,022			—			5,022				—				—				—				5,022
Common stock issued upon exercises of stock options	—		(205		)		—				9,053				—				8,848			—			(205		)		—				9,053				—				8,848
Common stock issued upon vesting of restricted shares	—		(8,874		)		—				2,819				—				(6,055		)	—			(8,874		)		—				2,819				—				(6,055		)
Cumulative effect of change in accounting principle	—		—				(1,105		)		—				—				(1,105		)	—			—				(1,105		)		—				—				(1,105		)
Other	—		24				(6		)		37				—				55			—			24				(6		)		37				—				55
Balance at March 31, 2019	$	47,042	$	2,880,663			$	153,991			$	(2,385,354	)		$	(55,648	)		$	640,694		$	47,042		$	2,880,663			$	153,991			$	(2,385,354	)		$	(55,648	)		$	640,694
Net income	—		—				32,386				—				—				32,386			—			—				32,386				—				—				32,386
Other comprehensive income, net	—		—				—				—				3,835				3,835			—			—				—				—				3,835				3,835
Cash dividends	—		—				(23,124		)		—				—				(23,124		)	—			—				(23,124		)		—				—				(23,124		)
Repurchases of common stock	—		—				—				(20,391		)		—				(20,391		)	—			—				—				(20,391		)		—				(20,391		)
Share-based compensation	—		4,986				—				—				—				4,986			—			4,986				—				—				—				4,986
Common stock issued upon exercises of stock options	—		(339		)		—				10,830				—				10,491			—			(339		)		—				10,830				—				10,491
Common stock issued upon vesting of restricted shares	—		(1,852		)		—				964				—				(888		)	—			(1,852		)		—				964				—				(888		)
Other	—		26				(4		)		37				—				59			—			26				(4		)		37				—				59
Balance at June 30, 2019	$	47,042	$	2,883,484			$	163,249			$	(2,393,914	)		$	(51,813	)		$	648,048		$	47,042		$	2,883,484			$	163,249			$	(2,393,914	)		$	(51,813	)		$	648,048
Net income																						—			—				46,127				—				—				46,127
Other comprehensive loss, net																						—			—				—				—				(2,297		)		(2,297		)
Cash dividends																						—			—				(23,087		)		—				—				(23,087		)
Repurchases of common stock																						—			—				—				(26,462		)		—				(26,462		)
Share-based compensation																						—			3,981				—				—				—				3,981
Common stock issued upon exercises of stock options																						—			545				—				4,171				—				4,716
Common stock issued upon vesting of restricted shares																						—			(2,636		)		—				1,147				—				(1,489		)
Other																						—			30				(7		)		31				—				54
Balance at September 29, 2019																						$	47,042		$	2,885,404			$	186,282			$	(2,415,027	)		$	(54,110	)		$	649,591

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
	Common Stock						Retained Earnings (Accumulated Deficit)								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)																					(Unaudited)
Balance at December 31, 2017	$	47,042	Additional Paid-In Capital			$	2,885,955			$	Common Stock Held in Treasury			(163,289	)		$	(2,150,307	)		$	(46,198	)	$	573,203		$	47,042			$	2,885,955			$	(163,289	)		$	(2,150,307	)		$	(46,198	)	$	573,203
Net income	—		—				20,159				—				—				20,159			—			—				20,159				—				—				20,159
Other comprehensive loss, net	—		—				—				—				(5,927		)		(5,927		)	—			—				—				—				(5,927		)		(5,927		)
Cash dividends	—		—				(20,355		)		—				—				(20,355		)	—			—				(20,355		)		—				—				(20,355		)
Repurchases of common stock	—		—				—				(39,407		)		—				(39,407		)	—			—				—				(39,407		)		—				(39,407		)
Share-based compensation	—		4,458				—				—				—				4,458			—			4,458				—				—				—				4,458
Common stock issued upon exercises of stock options	—		(7,460		)		—				11,038				—				3,578			—			(7,460		)		—				11,038				—				3,578
Common stock issued upon vesting of restricted shares	—		(4,170		)		—				1,620				—				(2,550		)	—			(4,170		)		—				1,620				—				(2,550		)
Cumulative effect of change in accounting principle	—		—				(70,210		)		—				—				(70,210		)	—			—				(70,210		)		—				—				(70,210		)
Other	—		21				(5		)		32				—				48			—			21				(5		)		32				—				48
Balance at April 1, 2018	$	47,042	$	2,878,804			$	(233,700	)		$	(2,177,024	)		$	(52,125	)		$	462,997		$	47,042		$	2,878,804			$	(233,700	)		$	(2,177,024	)		$	(52,125	)		$	462,997
Net income	—		—				29,876				—				—				29,876			—			—				29,876				—				—				29,876
Other comprehensive loss, net	—		—				—				—				(4,325		)		(4,325		)	—			—				—				—				(4,325		)		(4,325		)
Cash dividends	—		—				(20,290		)		—				—				(20,290		)	—			—				(20,290		)		—				—				(20,290		)
Repurchases of common stock	—		—				—				(45,787		)		—				(45,787		)	—			—				—				(45,787		)		—				(45,787		)
Share-based compensation	—		5,133				—				—				—				5,133			—			5,133				—				—				—				5,133
Common stock issued upon exercises of stock options	—		396				—				2,840				—				3,236			—			396				—				2,840				—				3,236
Common stock issued upon vesting of restricted shares	—		(1,199		)		—				828				—				(371		)	—			(1,199		)		—				828				—				(371		)
Other	—		33				(6		)		43				—				70			—			33				(6		)		43				—				70
Balance at July 1, 2018	$	47,042	$	2,883,167			$	(224,120	)		$	(2,219,100	)		$	(56,450	)		$	430,539		$	47,042		$	2,883,167			$	(224,120	)		$	(2,219,100	)		$	(56,450	)		$	430,539
Net income																						—			—				391,249				—				—				391,249
Other comprehensive income, net																						—			—				—				—				5,315				5,315
Cash dividends																						—			—				(20,141		)		—				—				(20,141		)
Repurchases of common stock																						—			—				—				(56,421		)		—				(56,421		)
Share-based compensation																						—			4,810				—				—				—				4,810
Common stock issued upon exercises of stock options																						—			(2,409		)		—				31,484				—				29,075
Common stock issued upon vesting of restricted shares																						—			(2,300		)		—				1,132				—				(1,168		)
Other																						—			30				(5		)		35				—				60
Balance at September 30, 2018																						$	47,042		$	2,883,298			$	146,983			$	(2,242,870	)		$	(51,135	)		$	783,318

See accompanying notes to condensed consolidated financial statements.

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THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Six Months Ended						Nine Months Ended
	June 30, 2019			July 1, 2018			September 29, 2019			September 30, 2018
	(Unaudited)						(Unaudited)
Cash flows from operating activities:
Net income	$	64,280		$	50,035		$	110,407		$	441,284
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	64,669			65,579			97,975			94,649
Share-based compensation	10,008			9,591			13,989			14,401
Impairment of long-lived assets	1,684			1,809			1,684			2,156
Deferred income tax	3,422			(2,508		)	5,524			(1,527		)
Non-cash rental expense (income), net	11,519			(6,239		)	18,722			(10,868		)
Change in operating lease liabilities	(20,983		)	—			(31,481		)	—
Net receipt of deferred vendor incentives	5,312			4,904			2,269			2,689
System optimization (gains) losses, net	(122		)	478
System optimization gains, net							(1,162		)	(8		)
Gain on sale of investments, net							(130		)	(450,000		)
Distributions received from joint ventures, net of equity in earnings	2,099			2,108			2,926			3,250
Long-term debt-related activities, net	10,799			15,036			12,386			16,860
Changes in operating assets and liabilities and other, net	1,373			7,628			4,391			116,776
Net cash provided by operating activities	154,060			148,421			237,500			229,662
Cash flows from investing activities:
Capital expenditures	(25,484		)	(23,898		)	(40,984		)	(39,717		)
Acquisitions	(5,052		)	—			(5,052		)	(21,401		)
Dispositions	1,240			1,814			2,038			2,863
Proceeds from sale of investments	130			—			130			450,000
Notes receivable, net	(750		)	(538		)	(1,834		)	(283		)
Payments for investments	—			(13		)	—			(13		)
Net cash used in investing activities	(29,916		)	(22,635		)
Net cash (used in) provided by investing activities							(45,702		)	391,449
Cash flows from financing activities:
Proceeds from long-term debt	850,000			930,809			850,000			934,837
Repayments of long-term debt	(877,876		)	(878,849		)	(883,564		)	(888,689		)
Repayments of finance lease liabilities	(3,521		)	(2,784		)	(5,178		)	(4,350		)
Deferred financing costs	(14,008		)	(17,340		)	(14,008		)	(17,340		)
Repurchases of common stock	(50,781		)	(84,307		)	(76,948		)	(140,199		)
Dividends	(46,193		)	(40,645		)	(69,280		)	(60,786		)
Proceeds from stock option exercises	19,160			13,197			24,069			42,299
Payments related to tax withholding for share-based compensation	(6,957		)	(9,269		)	(8,447		)	(10,464		)
Contingent consideration payment	—			(6,100		)	—			(6,269		)
Net cash used in financing activities	(130,176		)	(95,288		)	(183,356		)	(150,961		)
Net cash (used in) provided by operations before effect of exchange rate changes on cash	(6,032		)	30,498
Net cash provided by operations before effect of exchange rate changes on cash							8,442			470,150
Effect of exchange rate changes on cash	3,866			(4,401		)	2,755			(2,195		)
Net (decrease) increase in cash, cash equivalents and restricted cash	(2,166		)	26,097
Net increase in cash, cash equivalents and restricted cash							11,197			467,955
Cash, cash equivalents and restricted cash at beginning of period	486,512			212,824			486,512			212,824
Cash, cash equivalents and restricted cash at end of period	$	484,346		$	238,921		$	497,709		$	680,779

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THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED

(In Thousands)


	Six Months Ended				Nine Months Ended
	June 30, 2019		July 1, 2018		September 29, 2019		September 30, 2018
	(Unaudited)				(Unaudited)
Supplemental non-cash investing and financing activities:
Capital expenditures included in accounts payable	$	5,398	$	7,463	$	7,582	$	9,588
Finance leases	23,534		1,904		34,084		6,569

	June 30, 2019		December 30, 2018		September 29, 2019		December 30, 2018
Reconciliation of cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents	$	426,216	$	431,405	$	439,421	$	431,405
Restricted cash	29,494		29,860		28,769		29,860
Restricted cash, included in Advertising funds restricted assets	28,636		25,247		29,519		25,247
Total cash, cash equivalents and restricted cash	$	484,346	$	486,512	$	497,709	$	486,512

See accompanying notes to condensed consolidated financial statements.

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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 ~~June 30,~~September 29, 2019, the results of our operations for the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018 and cash flows for the ~~six~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018. The results of operations for the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019 are not necessarily indicative of the results to be expected for the full 2019 fiscal year. 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 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. As a result of the realignment of our management and operating structure in May 2019, the Company is continuing to evaluate the impact these changes will have on its existing operating segment structure. The Company currently expects to report its results in the following three segments beginning with our Annual Report on Form 10-K for the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. See Note 6 for further information.

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~~nine-month periods presented herein contain 13 weeks and 2639 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.

(2) New Accounting Standards

New Accounting Standards

Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an amendment that will require the Company to use a current expected credit loss model that will result in the immediate recognition of an estimate of credit losses that are expected to occur over the life of the financial instruments that are within the scope of the guidance, including trade receivables. The amendment is effective commencing with our 2020 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our condensed consolidated financial statements.

New Accounting Standards Adopted

Cloud Computing

In August 2018, the ~~Financial Accounting Standards Board (“FASB”)~~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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

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 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.

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 requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases. The Company adopted the new guidance during the first quarter of 2019 using the effective date as the date of initial application; therefore, the comparative period has not been adjusted and continues to be reported under the previous lease guidance.

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~~THE WENDY’S COMPANY AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases that fall under the definition of 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.

In connection with the adoption of the 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 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 reclassifications of these assets and liabilities to conform to the current year presentation.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following table illustrates the reclassifications made to the condensed consolidated balance sheet as of 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

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(In Thousands Except Per Share Amounts)

(3) Revenue

Disaggregation of Revenue

The following tables disaggregate revenue by primary geographical market and source:


	U.S.		Canada		Other International			Total		U.S.		Canada		Other International		Total
Three Months Ended June 30, 2019
Three Months Ended September 29, 2019
Sales at Company-operated restaurants	$	181,050	$	—	$	—		$	181,050	$	181,977	$	—	$	—	$	181,977
Franchise royalty revenue	91,430		6,304		5,087			102,821		90,791		6,529		4,947		102,267
Franchise fees	5,716		708		(120		)	6,304		5,838		877		173		6,888
Franchise rental income	50,041		8,520		—			58,561		50,987		8,931		—		59,918
Advertising funds revenue	81,437		5,175		—			86,612		81,386		5,444		—		86,830
Total revenues	$	409,674	$	20,707	$	4,967		$	435,348	$	410,979	$	21,781	$	5,120	$	437,880

Six Months Ended June 30, 2019
Nine Months Ended September 29, 2019
Sales at Company-operated restaurants	$	348,747	$	—	$	—		$	348,747	$	530,724	$	—	$	—	$	530,724
Franchise royalty revenue	175,808		11,812		10,044			197,664		266,599		18,341		14,991		299,931
Franchise fees	11,725		1,120		569			13,414		17,563		1,997		742		20,302
Franchise rental income	100,706		16,307		—			117,013		151,693		25,238		—		176,931
Advertising funds revenue	157,418		9,675		—			167,093		238,804		15,119		—		253,923
Total revenues	$	794,404	$	38,914	$	10,613		$	843,931	$	1,205,383	$	60,695	$	15,733	$	1,281,811

Three Months Ended July 1, 2018
Three Months Ended September 30, 2018
Sales at Company-operated restaurants	$	167,344	$	—	$	—		$	167,344	$	165,323	$	—	$	—	$	165,323
Franchise royalty revenue	87,224		6,073		4,861			98,158		84,648		6,260		4,593		95,501
Franchise fees	7,011		2,275		115			9,401		5,575		1,855		281		7,711
Franchise rental income	44,881		6,648		—			51,529		43,900		6,574		—		50,474
Advertising funds revenue	79,485		5,085		—			84,570		76,492		5,049		—		81,541
Total revenues	$	385,945	$	20,081	$	4,976		$	411,002	$	375,938	$	19,738	$	4,874	$	400,550

Six Months Ended July 1, 2018
Nine Months Ended September 30, 2018
Sales at Company-operated restaurants	$	320,993	$	—	$	—		$	320,993	$	486,316	$	—	$	—	$	486,316
Franchise royalty revenue	167,446		11,436		9,219			188,101		252,094		17,696		13,812		283,602
Franchise fees	14,096		2,921		349			17,366		19,671		4,776		630		25,077
Franchise rental income	89,146		12,490		—			101,636		133,046		19,064		—		152,110
Advertising funds revenue	153,899		9,571		—			163,470		230,391		14,620		—		245,011
Total revenues	$	745,580	$	36,418	$	9,568		$	791,566	$	1,121,518	$	56,156	$	14,442	$	1,192,116

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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:


	June 30, 2019 (a)		December 30, 2018 (a)		September 29, 2019 (a)		December 30, 2018 (a)
Receivables, which are included in “Accounts and notes receivable, net” (b)	$	43,398	$	40,300	$	39,669	$	40,300
Receivables, which are included in “Advertising funds restricted assets”	49,308		47,332		49,102		47,332
Deferred franchise fees (c)	101,267		102,205		100,751		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 condensed consolidated statements of operations.


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


(c)	Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled ~~$9,679~~$9,314 and ~~$91,588~~$91,437 as of ~~June 30,~~September 29, 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						Nine Months Ended
	June 30, 2019			July 1, 2018			September 29, 2019			September 30, 2018
Deferred franchise fees at beginning of period	$	102,205		$	102,492		$	102,205		$	102,492
Revenue recognized during the period	(4,609		)	(5,127		)	(6,635		)	(7,393		)
New deferrals due to cash received and other	3,671			6,358			5,181			7,913
Deferred franchise fees at end of period	$	101,267		$	103,723		$	100,751		$	103,012

Anticipated Future Recognition of Deferred Franchise Fees

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


Estimate for fiscal year:
2019 (a)	$	4,260	$	2,164
2020	7,025		7,399
2021	5,985		6,118
2022	5,782		5,858
2023	5,527		5,633
Thereafter	72,688		73,579
	$	101,267	$	100,751

_______________


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

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(In Thousands Except Per Share Amounts)

(4) Acquisitions

During the ~~six~~nine months ended ~~June 30,~~September 29, 2019, the Company acquired ~~five~~5 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			Nine Months Ended
	June 30, 2019			September 29, 2019
Restaurants acquired from franchisees	5			5

Total consideration paid, net of cash received	$	5,052		$	5,052
Identifiable assets acquired and liabilities assumed:
Properties	666			666
Acquired franchise rights	1,354			1,354
Finance lease assets	5,350			5,350
Finance lease liabilities	(4,084		)	(4,084		)
Other	(2,316		)	(2,316		)
Total identifiable net assets	970			970
Goodwill	$	4,082		$	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,~~Gains, 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”). As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to reduce its ownership below the approximately 5% level, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages.

During the ~~six~~nine months ended ~~July 1,~~September 29, 2019 and September 30, 2018, the Company facilitated 3 and 73 Franchise Flips, respectively. Additionally, during the nine months ended September 30, 2018, the Company completed the sale of ~~three~~3 Company-operated restaurants to a ~~franchisee and facilitated 64 Franchise Flips. During the six months ended June 30, 2019, no~~franchisee. NaN Company-operated restaurants were sold to franchisees ~~and no Franchise Flips were facilitated by~~during the ~~Company.~~nine months ended September 29, 2019.

Gains and losses recognized on dispositions are recorded to “System optimization ~~(gains) losses,~~gains, 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 6. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

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


	Three Months Ended					Six Months Ended					Three Months Ended				Nine Months Ended
	June 30, 2019		July 1, 2018			June 30, 2019		July 1, 2018			September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Gain on sale of restaurants, net (a)	$	—	$	89		$	—	$	89		$	—	$	—	$	—	$	89
Post-closing adjustments on sales of restaurants (b)	62		(13		)	54		(225		)	1,033		279		1,087		54
Gain (loss) on sales of other assets, net (c)	48		16			68		(342		)	7		207		75		(135		)
System optimization gains (losses), net	$	110	$	92		$	122	$	(478	)
System optimization gains, net											$	1,040	$	486	$	1,162	$	8

_______________


(a)	During the ~~three and six~~nine months ended ~~July 1,~~September 30, 2018, the Company received cash proceeds of $1,436 from the sale of ~~three~~3 Company-operated restaurants. The value of the net assets 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~~three and nine months ended ~~July 1,~~September 29, 2019 and September 30, 2018 include the recognition of deferred gains of $911 and $503, respectively, as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. The nine months ended September 30, 2018 also includes cash proceeds, net of payments of $6.

(c)

During the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019, the Company received cash proceeds of ~~$1,240, primarily from the sale of surplus properties. During~~$798 and $2,038, respectively, and during the three and ~~six~~nine months ended ~~July 1,~~September 30, 2018 ~~the Company~~ received cash proceeds of ~~$27~~$1,049 and ~~$372,~~$1,421, respectively, primarily from the sale of surplus properties.

Assets Held for Sale

As of ~~June 30,~~September 29, 2019 and December 30, 2018, the Company had assets held for sale of ~~$2,952~~$2,391 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				Three Months Ended				Nine Months Ended
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018		September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
G&A realignment	$	3,517	$	3,120	$	4,299	$	5,746	$	396	$	629	$	4,695	$	6,375
System optimization initiative	53		4		69		4		7		312		76		316
Reorganization and realignment costs	$	3,570	$	3,124	$	4,368	$	5,750	$	403	$	941	$	4,771	$	6,691

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~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018, the Company recognized costs related to the plan totaling ~~$4,299~~$4,695 and ~~$5,746,~~$6,375, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately ~~$1,700,~~$2,700, comprised of (1) severance and related employee costs of approximately ~~$100,~~$1,900, (2) recruitment and relocation costs of approximately ~~$1,000,~~$450, (3) third-party and other costs of approximately ~~$100~~$50 and (4) share-based compensation of approximately ~~$500, the majority of which the Company expects to recognize during the remainder of 2019.~~$300. 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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

As a result of the realignment of our management and operating structure as described above, the Company is continuing to evaluate the impact these changes will have on its existing operating segment structure. The Company currently expects to report its results in the following three segments beginning with our Annual Report on Form 10-K for the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development.

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				Nine Months Ended				Total Incurred Since Inception
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018		Total Incurred Since Inception		September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018		Total Incurred Since Inception
Severance and related employee costs	$	2,130	$	1,052	$	2,602	$	3,111	$	21,355	$	214	$	57	$	2,816	$	3,168	$	21,569
Recruitment and relocation costs	482		360		596		508		2,162		58		200		654		708		2,220
Third-party and other costs	71		604		87		932		2,197		25		39		112		971		2,222
	2,683		2,016		3,285		4,551		25,714		297		296		3,582		4,847		26,011
Share-based compensation (a)	834		1,104		1,014		1,195		7,698		99		333		1,113		1,528		7,797
Termination of defined benefit plans	—		—		—		—		1,335		—		—		—		—		1,335
Total G&A realignment	$	3,517	$	3,120	$	4,299	$	5,746	$	34,747	$	396	$	629	$	4,695	$	6,375	$	35,143

_______________


(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~~$3,491 and ~~$607~~$507 as of ~~June 30,~~September 29, 2019, respectively, and ~~$7,985~~$6,817 and ~~$2,107~~$1,432 as of ~~July 1,~~September 30, 2018, respectively. The tables below present a rollforward of our accruals for the plan.


	Balance December 30, 2018		Charges		Payments			Balance June 30, 2019		Balance December 30, 2018		Charges		Payments			Balance September 29, 2019
Severance and related employee costs	$	7,241	$	2,602	$	(4,724	)	$	5,119	$	7,241	$	2,816	$	(6,216	)	$	3,841
Recruitment and relocation costs	83		596		(356		)	323		83		654		(580		)	157
Third-party and other costs	—		87		(87		)	—		—		112		(112		)	—
	$	7,324	$	3,285	$	(5,167	)	$	5,442	$	7,324	$	3,582	$	(6,908	)	$	3,998


	Balance December 31, 2017		Charges		Payments			Balance July 1, 2018		Balance December 31, 2017		Charges		Payments			Balance September 30, 2018
Severance and related employee costs	$	12,093	$	3,111	$	(5,326	)	$	9,878	$	12,093	$	3,168	$	(7,103	)	$	8,158
Recruitment and relocation costs	177		508		(471		)	214		177		708		(794		)	91
Third-party and other costs	—		932		(932		)	—		—		971		(971		)	—
	$	12,270	$	4,551	$	(6,729	)	$	10,092	$	12,270	$	4,847	$	(8,868	)	$	8,249

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~~$72,268 under the initiative since inception and ~~expects~~does not expect to incur any additional costs ~~of approximately $500~~ during the remainder of ~~2019, which are primarily comprised of professional fees.~~2019.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(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.”

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


	Six Months Ended						Nine Months Ended
	June 30, 2019			July 1, 2018			September 29, 2019			September 30, 2018
Balance at beginning of period	$	47,021		$	55,363		$	47,021		$	55,363

Investment	—			13			—			13

Equity in earnings for the period	6,048			4,827			8,812			7,566
Amortization of purchase price adjustments (a)	(1,129		)	(1,179		)	(1,700		)	(1,756		)
	4,919			3,648			7,112			5,810
Distributions received	(7,018		)	(5,756		)	(10,038		)	(9,060		)
Foreign currency translation adjustment included in “Other comprehensive income (loss), net” and other	2,359			(1,763		)
Foreign currency translation adjustment included in “Other comprehensive (loss) income, net” and other							2,164			(191		)
Balance at end of period	$	47,281		$	51,505		$	46,259		$	51,935

_______________


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

Other Investments in Equity Securities

On October 11, 2019, the Company received a $25,000 cash settlement related to a previously held investment.

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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			September 29, 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		$	—		$	399,000		$	—
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029	450,000			—			448,875			—
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			442,125			445,500
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028	467,875			470,250			466,688			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			—			870,750
4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025	481,250			483,750			480,000			483,750
7% debentures, due in 2025	91,403			90,769			91,722			90,769
Unamortized debt issuance costs	(36,061		)	(32,217		)	(34,794		)	(32,217		)
	2,297,717			2,328,802			2,293,616			2,328,802
Less amounts payable within one year	(22,750		)	(23,250		)	(22,750		)	(23,250		)
Total long-term debt	$	2,274,967		$	2,305,552		$	2,270,866		$	2,305,552

On 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 2019-1 series: Class A-2-I with an initial principal amount of $400,000 and Class A-2-II with an initial principal amount of $450,000 (collectively, the “Series 2019-1 Class A-2 Notes”). Interest payments on the Series 2019-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series 2019-1 Class A-2 Notes is in June 2049. If the Master Issuer has not repaid or refinanced the Series 2019-1 Class A-2 Notes prior to the respective anticipated repayment date, additional interest will accrue on each tranche of the Series 2019-1 Class A-2 Notes at a rate equal to the greater of (A) 5.00% per annum and (B) a per annum interest rate equal to the amount, if any, by which the sum of (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 (ii) 5.00%, plus (iii) (1) with respect to the Series 2019-1 Class A-2-I Notes, 1.863%, and (2) with respect to the Series 2019-1 Class A-2-II Notes, 2.051%, exceeds the original interest rate with respect to such tranche. The Master Issuer’s outstanding Series 2015-1 Class A-2-II Notes were repaid as part of the refinancing transaction. As a result, the Company recorded a loss on early extinguishment of debt of $7,150 during the ~~three~~nine months ended ~~June 30,~~September 29, 2019, which was comprised of the write-off of certain unamortized deferred financing costs. The Series 2019-1 Class A-2 Notes have scheduled principal payments of $4,250 in 2019, $8,500 annually from 2020 through 2025, $378,500 in 2026, $4,500 in each of 2027 and 2028 and $407,250 in 2029.

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 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2019-1 Class A-1 Notes” and, together with the Series 2019-1 Class A-2 Notes, the “Series 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. NoNaN amounts were borrowed under the Series 2019-1 Class A-1 Notes during the ~~three~~nine months ended ~~June 30,~~September 29, 2019. The Series 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 2018-1 Class A-1 Notes were transferred to the Series 2019-1 Class A-1 Notes.

The Series 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 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 Class A-2 Notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

During the ~~three and six~~nine months ended ~~June 30,~~September 29, 2019, the Company incurred debt issuance costs of $14,008 in connection with the issuance of the Series 2019-1 Senior Notes. The debt issuance costs will be amortized to “Interest expense, net” through the anticipated repayment dates of the Series 2019-1 Senior Notes 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~~nine months ended ~~July 1,~~September 30, 2018, the Company borrowed ~~$5,809~~$9,837 and repaid ~~$7,096~~$11,124 under the line of credit. There were no0 borrowings or repayments under the line of credit during the ~~six~~nine months ended ~~June 30,~~September 29, 2019.

(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.

Financial Instruments

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


	June 30, 2019				December 30, 2018					September 29, 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	$	221,818	$	221,818	$	222,228	$	222,228	Level 1	$	206,094	$	206,094	$	222,228	$	222,228	Level 1
Other investments in equity securities (a)	639		1,945		639		2,181		Level 3	639		1,818		639		2,181		Level 3

Financial liabilities
Series 2019-1 Class A-2-I Notes (b)	400,000		402,704		—		—		Level 2	399,000		405,863		—		—		Level 2
Series 2019-1 Class A-2-II Notes (b)	450,000		453,146		—		—		Level 2	448,875		463,598		—		—		Level 2
Series 2018-1 Class A-2-I Notes (b)	443,250		446,747		445,500		424,026		Level 2	442,125		448,580		445,500		424,026		Level 2
Series 2018-1 Class A-2-II Notes (b)	467,875		469,756		470,250		439,353		Level 2	466,688		476,208		470,250		439,353		Level 2
Series 2015-1 Class A-2-II Notes (b)	—		—		870,750		865,342		Level 2	—		—		870,750		865,342		Level 2
Series 2015-1 Class A-2-III Notes (b)	481,250		500,519		483,750		482,522		Level 2	480,000		492,624		483,750		482,522		Level 2
7% debentures, due in 2025 (b)	91,403		105,750		90,769		102,750		Level 2	91,722		107,500		90,769		102,750		Level 2
Guarantees of franchisee loan obligations (c)	9		9		17		17		Level 3	2		2		17		17		Level 3

_______________

(a)

The fair values of our investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)


(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 equivalents and guarantees are the only financial assets and liabilities measured and recorded at fair value on a recurring basis.

Non-Recurring Fair Value Measurements

Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our 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, favorable lease assets and ROU assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below represents the remaining carrying value and 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 10 for further information on impairment of our long-lived assets.


			Fair Value Measurements								Fair Value Measurements
	June 30, 2019		Level 1		Level 2		Level 3		September 29, 2019		Level 1		Level 2		Level 3
Held and used	$	2,112	$	—	$	—	$	2,112	$	1,866	$	—	$	—	$	1,866
Held for sale	1,215		—		—		1,215		988		—		—		988
Total	$	3,327	$	—	$	—	$	3,327	$	2,854	$	—	$	—	$	2,854



			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

(10) Impairment of Long-Lived Assets

The Company records impairment charges as a result of (1) ~~the deterioration of operating performance of certain Company-operated restaurants, (2)~~ closing Company-operated restaurants and classifying such surplus properties as held for sale, (2) the deterioration of operating performance of certain Company-operated restaurants and (3) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

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


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018		September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Surplus properties	$	112	$	—	$	1,397	$	41	$	—	$	229	$	1,397	$	270
Company-operated restaurants	86		1,603		287		1,603		—		—		287		1,603
Restaurants leased or subleased to franchisees	—		—		—		165		—		118		—		283
	$	198	$	1,603	$	1,684	$	1,809	$	—	$	347	$	1,684	$	2,156

(11) Income Taxes

The Company’s effective tax rate for the three months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018 was ~~29.2%~~13.5% and ~~29.3%~~21.6% respectively. The Company’s effective tax rate ~~varies~~varied from the U.S. federal statutory rate of 21% primarily due to (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the three months ended September 29, 2019, (2) a reduction for stock-based compensation, which included net excess tax benefits of $1,103 and $5,251 for the three months ended September 29, 2019 and September 30, 2018, respectively, and (3) an increase due to 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, and (4) the impact of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).~~benefits.

The Company’s effective tax rate for the ~~six~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018 was ~~24.9%~~20.5% and ~~11.6%~~20.6% respectively. The Company’s effective tax rate ~~varies~~varied immaterially from the U.S. federal statutory rate of 21% primarily due to (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the nine months ended September 29, 2019, (2) a reduction for stock-based compensation, which included net excess tax benefits ~~related to share-based payments, which resulted in a benefit~~ of ~~$2,925~~$4,028 and ~~$6,891~~$12,142 for the ~~six~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018, respectively, ~~(2)~~and (3) an increase due to state income taxes, including non-recurring changes to state deferred taxes ~~(3) the impact of the Tax Act and (4) valuation allowance changes,~~ net of federal ~~benefit.~~benefits.

On December 22, 2017, the U.S. government enacted the Tax Act. In our continued analysis of the impact of the Tax Act induring the first ~~and second quarters~~nine months of 2018 under Staff Accounting Bulletin 118, we adjusted our provisional amounts for a discrete net tax ~~benefit~~expense of ~~$2,795.~~$2,076. This ~~net benefit~~ included ~~$4,750 for the tax benefit of foreign tax credits, partially offset by~~ a net expense of ~~$1,955~~$2,426 related to the impact of the corporate rate reduction on our net deferred tax ~~liabilities.~~liabilities and a net expense of $991 related to limitations on the deductibility of certain executive compensation, partially offset by $1,341 for the tax benefit of foreign tax credits.

~~There were no significant changes to the unrecognized~~Unrecognized tax benefits ~~or related interest~~for the Company decreased by $5,639 and ~~penalties for~~$6,475 during the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019, respectively. The decrease was primarily related to the lapse of statutes of limitations during the third quarter of 2019. During the next twelve months, we believe it is reasonably possible the ~~Company will reduce~~Company’s unrecognized tax benefits will decrease by up to ~~$7,760~~$2,081 due to the lapse of statutes of limitations and expected settlements with taxing authorities.

The current portion of refundable income taxes was ~~$7,572~~$6,719 and $14,475 as of ~~June 30,~~September 29, 2019 and December 30, 2018, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. There were no0 long-term refundable income taxes as of ~~June 30,~~September 29, 2019 and December 30, 2018.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(12) Net Income Per Share

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

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


	Three Months Ended		Six Months Ended		Three Months Ended		Nine Months Ended
	June 30, 2019	July 1, 2018	June 30, 2019	July 1, 2018	September 29, 2019	September 30, 2018	September 29, 2019	September 30, 2018
Common stock:
Weighted average basic shares outstanding	231,029	238,991	230,807	239,459	230,723	237,696	230,779	238,872
Dilutive effect of stock options and restricted shares	5,064	7,161	5,186	7,826	4,995	7,070	5,122	7,574
Weighted average diluted shares outstanding	236,093	246,152	235,993	247,285	235,718	244,766	235,901	246,446

Diluted net income per share for the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018 was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of ~~2,049~~3,257 and ~~2,104~~2,488 for the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019, respectively, and 271,121 and ~~1,369~~1,287 for the three and ~~six~~nine months ended ~~July 1,~~September 30, 2018, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.

(13) Stockholders’ Equity

Dividends

During each of the first ~~and second~~three quarters of 2019, the Company paid quarterly cash dividends of $.10 per share. During each of the first ~~and second~~three quarters of 2018, the Company paid quarterly cash dividends of $.085 per share.

Repurchases of Common Stock

In February 2019, our Board of Directors authorized a repurchase program for up to ~~$225,000~~$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~~nine months ended ~~June 30,~~September 29, 2019, the Company repurchased ~~2,824~~4,153 shares with an aggregate purchase price of ~~$49,721,~~$76,165, of which ~~$807~~$1,102 was accrued at ~~June 30,~~September 29, 2019, and excluding commissions of ~~$40,~~$58, under the November 2018 and February 2019 authorizations. As of ~~June 30,~~September 29, 2019, the Company had ~~$196,736~~$170,292 of availability remaining under its February 2019 authorization. Subsequent to ~~June 30,~~September 29, 2019 through ~~July 31,~~October 30, 2019, the Company repurchased ~~521~~443 shares under the February 2019 authorization with an aggregate purchase price of ~~$9,980,~~$9,190, excluding commissions of ~~$7.~~$6. As part of the February 2019 authorization, the Company announced on October 11, 2019 its intention to launch a $100,000 accelerated share repurchase program during the fourth quarter of 2019.

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 warranted and to the extent legally permissible. During the ~~six~~nine months ended ~~July 1,~~September 30, 2018, the Company repurchased ~~3,675~~6,896 shares under the February 2018 repurchase authorization with an aggregate purchase price of ~~$62,490,~~$118,866, of which ~~$2,146~~$2,675 was accrued at ~~July 1,~~September 30, 2018, and excluding commissions of ~~$52.~~$97. Additionally, during the ~~six~~nine months ended ~~July 1,~~September 30, 2018, the Company completed its previous February 2017 repurchase authorization for up to $150,000 of our common stock with the repurchase of 1,385 shares with an aggregate purchase price of $22,633, excluding commissions of $19.

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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			Foreign Currency Translation			Pension			Total
Balance at December 30, 2018	$	(61,673	)	$	—		$	(61,673	)	$	(61,673	)	$	—		$	(61,673	)
Current-period other comprehensive income	9,860			—			9,860			7,563			—			7,563
Balance at June 30, 2019	$	(51,813	)	$	—		$	(51,813	)
Balance at September 29, 2019										$	(54,110	)	$	—		$	(54,110	)

Balance at December 31, 2017	$	(45,149	)	$	(1,049	)	$	(46,198	)	$	(45,149	)	$	(1,049	)	$	(46,198	)
Current-period other comprehensive (loss) income	(10,369		)	117			(10,252		)	(5,054		)	117			(4,937		)
Balance at July 1, 2018	$	(55,518	)	$	(932	)	$	(56,450	)
Balance at September 30, 2018										$	(50,203	)	$	(932	)	$	(51,135	)

(14) Leases

Nature of Leases

The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At ~~June 30,~~September 29, 2019, Wendy’s and its franchisees operated ~~6,719~~6,743 Wendy’s restaurants. Of the ~~358~~356 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for ~~144~~143 restaurants, owned the building and held long-term land leases for 144 restaurants and held leases covering the land and building for 7069 restaurants. Wendy’s also owned ~~513~~512 and leased ~~1,264~~1,255 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.

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 initial measurement of the 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 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. Lease terms for real estate are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options.

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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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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		Three Months Ended		Nine Months Ended
	June 30, 2019		June 30, 2019		September 29, 2019		September 29, 2019
Finance lease cost:
Amortization of finance lease assets	$	1,631	$	4,748	$	3,201	$	7,949
Interest on finance lease liabilities	9,939		16,692		10,116		26,808
	11,570		21,440		13,317		34,757
Operating lease cost	19,086		43,729		23,358		67,087
Variable lease cost (a)	15,371		29,475		15,435		44,910
Short-term lease cost	1,153		2,279		1,141		3,420
Total operating lease cost (b)	35,610		75,483		39,934		115,417
Total lease cost	$	47,180	$	96,923	$	53,251	$	150,174

_______________


(a)	The three and ~~six~~nine months ended ~~June 30,~~September 29, 2019 includes expenses for executory costs of ~~$9,779~~$9,908 and ~~$19,303,~~$29,211, respectively, for which the Company is reimbursed by sublessees.


(b)	The three and ~~six~~nine months ended ~~June 30,~~September 29, 2019 includes ~~$28,022~~$32,342 and ~~$60,473,~~$92,815, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees and ~~$7,007~~$6,892 and ~~$13,600,~~$20,492, 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		Nine Months Ended
	June 30, 2019		September 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	19,567	$	29,683
Operating cash flows from operating leases	46,425		69,277
Financing cash flows from finance leases	3,521		5,178
Right-of-use assets obtained in exchange for lease obligations:
Finance lease liabilities	23,534		34,084
Operating lease liabilities	5,677		8,212

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following table includes supplemental information related to leases:



	~~June 30,~~September 29, 2019
Weighted-average remaining lease term (years):
Finance leases	~~17.5~~17.3
Operating leases	~~15.7~~15.5

Weighted average discount rate:
Finance leases	~~10.11~~10.03	%
Operating leases	5.10	%

The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of ~~June 30,~~September 29, 2019:


	Finance Leases						Operating Leases						Finance Leases						Operating Leases
Fiscal Year	Company-Operated			Franchise and Other			Company-Operated			Franchise and Other			Company-Operated			Franchise and Other			Company-Operated			Franchise and Other
2019 (a)	$	1,338		$	23,714		$	10,072		$	35,660		$	707		$	12,759		$	5,001		$	17,602
2020	2,697			44,918			19,921			71,537			2,862			45,340			19,921			70,690
2021	2,808			46,315			19,733			71,433			2,973			46,826			19,733			70,540
2022	2,858			47,322			19,421			71,604			3,023			47,830			19,421			70,696
2023	2,810			48,988			19,400			71,571			2,975			49,504			19,400			70,655
Thereafter	37,034			695,753			201,762			836,750			39,104			704,276			201,762			827,387
Total minimum payments	$	49,545		$	907,010		$	290,309		$	1,158,555		$	51,644		$	906,535		$	285,238		$	1,127,570
Less interest	(23,169		)	(458,243		)	(91,101		)	(383,409		)	(23,407		)	(452,484		)	(88,577		)	(369,544		)
Present value of minimum lease payments (b) (c)	$	26,376		$	448,767		$	199,208		$	775,146		$	28,237		$	454,051		$	196,661		$	758,026

_______________


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


(b)	The present value of minimum finance lease payments of ~~$9,917~~$10,584 and ~~$465,226~~$471,704 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively.


(c)	The present value of minimum operating lease payments of ~~$43,321~~$43,474 and ~~$931,033~~$911,213 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following table illustrates the Company’s future minimum rental payments 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		Three Months Ended			Nine Months Ended
	June 30, 2019		June 30, 2019		September 29, 2019			September 29, 2019
Sales-type and direct-financing leases:
Selling profit	$	37	$	1,971
Selling (loss) profit					$	(97	)	$	1,874
Interest income	7,072		11,805		7,240			19,045

Operating lease income	$	43,959	$	89,164	$	44,892		$	134,056
Variable lease income	14,602		27,849		15,026			42,875
Franchise rental income (a)	$	58,561	$	117,013	$	59,918		$	176,931

_______________


(a)	Includes sublease income of ~~$42,921~~$44,821 and ~~$85,942~~$130,763 recognized during the three and ~~six~~nine months ended ~~June 30,~~September 29, 2019, respectively, of which ~~$9,779~~$9,683 and ~~$19,211,~~$28,894, respectively, represents lessees’ variable payments to the Company for executory costs.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of ~~June 30,~~September 29, 2019:


	Sales-Type and Direct Financing Leases						Operating Leases				Sales-Type and Direct Financing Leases						Operating Leases
Fiscal Year	Subleases			Owned Properties			Subleases		Owned Properties		Subleases			Owned Properties			Subleases		Owned Properties
2019 (a)	$	13,661		$	1,028		$	55,839	$	26,240	$	6,953		$	489		$	27,614	$	13,129
2020	27,872			2,130			112,551		52,872		28,528			2,036			111,227		52,912
2021	28,910			2,162			113,162		54,661		29,668			2,068			111,946		54,700
2022	29,548			2,243			114,269		56,134		30,342			2,148			113,017		56,173
2023	30,587			2,287			115,190		56,339		31,381			2,192			114,021		56,378
Thereafter	473,264			28,037			1,355,212		861,139		486,141			27,115			1,339,940		861,865
Total future minimum receipts	603,842			37,887			$	1,866,223	$	1,107,385	613,013			36,048			$	1,817,765	$	1,095,157
Unearned interest income	(377,235		)	(20,405		)					(376,192		)	(19,472		)
Net investment in sales-type and direct financing leases (b)	$	226,607		$	17,482						$	236,821		$	16,576

_______________


(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~~$2,795 and ~~$241,584~~$250,602 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.~~$195.

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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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			September 29, 2019
Land	$	281,650		$	281,744
Buildings and improvements	311,104			310,936
Restaurant equipment	2,251			1,726
	595,005			594,406
Accumulated depreciation and amortization	(149,931		)	(153,379		)
	$	445,074		$	441,027

(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~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018, Wendy’s paid TimWen ~~$8,140~~$12,710 and ~~$6,504,~~$9,967, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of ~~$103~~$155 and ~~$108~~$161 during the ~~six~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018, respectively, which has been included as a reduction to “General and administrative.”

(16) Guarantees and Other Commitments and Contingencies

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.

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 ~~$68,953~~$74,898 as of ~~June 30,~~September 29, 2019. These leases extend through 2056. We have not received any notice of default related to these leases as of ~~June 30,~~September 29, 2019. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations.

Letters of Credit

As of ~~June 30,~~September 29, 2019, the Company had outstanding letters of credit with various parties totaling ~~$25,086.~~$25,082. The outstanding letters of credit include amounts outstanding against the Series 2019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

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~~nine months ended ~~June 30,~~September 29, 2019 were ~~$5,481.~~$8,417. As of ~~June 30,~~September 29, 2019, the Company estimates future purchases to be approximately ~~$5,400~~$2,700 for the remainder of 2019, ~~$11,600~~$10,800 in 2020, ~~$12,100~~$11,100 in 2021, ~~$13,000~~$11,600 in 2022 and ~~$13,700~~$12,100 in 2023 based on current pricing and the expected ratio of usage at Company-operated restaurants to usage at franchised restaurants.

(17) Legal and Environmental Matters

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 for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period.

We previously described certain legal proceedings in the Form 10-K. ~~As of June 30, 2019,~~Except as set forth below, there were no material developments in those legal ~~proceedings.~~proceedings as of September 29, 2019.

As previously reported, the Company was named as a defendant in putative class action lawsuits alleging, among other things, that the Company failed to safeguard customer credit card information and failed to provide notice that credit card information had been compromised. Jonathan Torres and other consumers filed an action in the U.S. District Court for the Middle District of Florida (the “Torres Case”). On August 23, 2018, the court preliminarily approved a class-wide settlement. A final approval hearing of the settlement of the Torres Case was held on February 26, 2019, and final approval was granted by the court. At this time, the action has been dismissed with prejudice (with no appeal taken), all claims and other amounts payable per the terms of the settlement agreement have been paid, and the matter is considered closed.

Also as previously reported, certain financial institutions have also filed class actions lawsuits in the U.S. District Court for the Western District of Pennsylvania, which sought to certify a nationwide class of financial institutions that issued payment cards that were allegedly impacted. Those cases were consolidated into a single case (the “FI Case”). On February 13, 2019, the Company and the plaintiffs filed a settlement agreement and a motion for preliminary approval of a class-wide settlement of the FI Case with the court. Under the terms of the settlement agreement, if approved and finalized, a settlement class of financial institutions will receive $50,000, inclusive of attorneys’ fees and costs. After exhaustion of applicable insurance, the Company now expects to pay approximately $25,000 of this amount. In exchange, the Company and its franchisees will receive a full release of all claims that have or could have been brought by financial institutions who do not opt out of the settlement related to the cybersecurity incidents described herein. On February 26, 2019, the court preliminarily approved the settlement agreement and scheduled a final approval hearing for November 6, 2019. The settlement agreement remains subject to a notice and objection process and final court approval. If approved, the Company anticipates that payment will occur in early 2020. The Company recorded a liability of $50,000 and insurance receivables of $22,500 for the FI case during 2018. As a result of cost savings related to the settlement of the Torres Case in the three months ended September 29, 2019, the Company adjusted its insurance receivables for the FI case to approximately $25,000.

3132

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

Introduction

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018 (the “Form 10-K”). There have been no material changes as of ~~June 30,~~September 29, 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” 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 restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty^® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited time basis. Wendy’s also currently offers breakfast in ~~some~~more than 300 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’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three- and ~~six-month~~nine-month periods presented herein contain 13 weeks and 2639 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

We adopted the new accounting guidance for leases effective December 31, 2018, which had a material impact on our condensed consolidated financial statements. Beginning with the first quarter of 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 ~~June 30,~~September 29, 2019, the Wendy’s restaurant system was comprised of ~~6,719~~6,743 restaurants, of which ~~358~~356 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, including the Company’s recent announcement of its plan to launch breakfast across the U.S. system in the first quarter of 2020 (see “Breakfast Launch” below), (6)

strengthening our operations through our system optimization initiative and (7) building stockholder value through financial management strategies.

Key Business Measures

We track our results of operations and manage our business using the following key business 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.

Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.

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

Breakfast Launch

In September 2019, the Company announced that it plans to launch breakfast across the U.S. system in the first quarter of 2020. The Company expects to make one-time investments during 2019 of approximately $20.0 million to support the U.S. system in preparation of the national launch. The 2019 investments are primarily comprised of (1) the purchase of smallwares and menuboards for franchisees and (2) a national recruiting advertising campaign and other talent acquisition costs.

Other Investments in Equity Securities

On October 11, 2019, the Company received a $25.0 million cash settlement related to a previously held investment.

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~~nine months ended ~~June 30,~~September 29, 2019 and ~~July 1,~~September 30, 2018, the Company recognized costs related to the plan totaling ~~$4.3~~$4.7 million and ~~$5.7~~$6.4 million, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately ~~$1.7~~$2.7 million, comprised of (1) severance and related employee costs of approximately ~~$0.1~~$1.9 million, (2) recruitment and relocation costs of approximately ~~$1.0~~$0.4 million, (3) third-party and other costs of approximately $0.1 million and (4) share-based compensation of approximately ~~$0.5 million, the majority of which the Company expects to recognize during the remainder of 2019.~~$0.3 million. The Company expects to incur total costs aggregating approximately $35.0 million to $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 of approximately $35.0 million.

As a result of the ~~leadership changes~~realignment of our management and operating structure as described above, the Company is ~~currently evaluating its management and operating structure and anticipates this evaluation~~continuing to evaluate the impact these changes will ~~result in a change to~~have on its existing operating segment ~~structure by~~structure. The Company currently expects to report its results in the ~~end of 2019.~~

following three segments beginning with our Annual Report on Form 10-K for the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development.

3335

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~~third quarter and the first ~~six~~nine months of 2019 and 2018.


	Second Quarter									Six Months									Third Quarter									Nine Months
	2019			2018			Change			2019			2018			Change			2019			2018			Change			2019			2018			Change
Revenues:
Sales	$	181.1		$	167.3		$	13.8		$	348.7		$	321.0		$	27.7		$	182.0		$	165.3		$	16.7		$	530.7		$	486.3		$	44.4
Franchise royalty revenue and fees	109.1			107.6			1.5			211.1			205.5			5.6			109.2			103.2			6.0			320.3			308.7			11.6
Franchise rental income	58.5			51.5			7.0			117.0			101.6			15.4			59.9			50.5			9.4			176.9			152.1			24.8
Advertising funds revenue	86.6			84.6			2.0			167.1			163.5			3.6			86.8			81.6			5.2			253.9			245.0			8.9
	435.3			411.0			24.3			843.9			791.6			52.3			437.9			400.6			37.3			1,281.8			1,192.1			89.7
Costs and expenses:
Cost of sales	151.1			138.2			12.9			293.7			270.4			23.3			152.4			139.3			13.1			446.1			409.7			36.4
Franchise support and other costs	4.0			7.0			(3.0		)	10.1			13.2			(3.1		)	9.7			5.4			4.3			19.8			18.6			1.2
Franchise rental expense	28.0			24.3			3.7			60.5			47.6			12.9			32.4			22.3			10.1			92.8			69.8			23.0
Advertising funds expense	88.7			84.6			4.1			169.1			163.5			5.6			87.9			81.6			6.3			257.0			245.0			12.0
General and administrative	50.8			49.2			1.6			100.1			99.5			0.6			46.2			46.5			(0.3		)	146.3			146.1			0.2
Depreciation and amortization	31.5			33.4			(1.9		)	64.7			65.6			(0.9		)	33.3			29.1			4.2			98.0			94.6			3.4
System optimization (gains) losses, net	(0.1		)	(0.1		)	—			(0.1		)	0.5			(0.6		)
System optimization gains, net																			(1.0		)	(0.5		)	(0.5		)	(1.2		)	—			(1.2		)
Reorganization and realignment costs	3.6			3.1			0.5			4.4			5.7			(1.3		)	0.4			0.9			(0.5		)	4.8			6.7			(1.9		)
Impairment of long-lived assets	0.2			1.6			(1.4		)	1.7			1.8			(0.1		)	—			0.3			(0.3		)	1.7			2.2			(0.5		)
Other operating income, net	(3.1		)	(1.8		)	(1.3		)	(7.1		)	(2.9		)	(4.2		)	(2.4		)	(1.6		)	(0.8		)	(9.4		)	(4.7		)	(4.7		)
	354.7			339.5			15.2			697.1			664.9			32.2			358.9			323.3			35.6			1,055.9			988.0			67.9
Operating profit	80.6			71.5			9.1			146.8			126.7			20.1			79.0			77.3			1.7			225.9			204.1			21.8
Interest expense, net	(29.9		)	(30.1		)	0.2			(59.0		)	(60.3		)	1.3			(27.9		)	(29.6		)	1.7			(86.9		)	(89.9		)	3.0
Loss on early extinguishment of debt	(7.2		)	—			(7.2		)	(7.2		)	(11.5		)	4.3			—			—			—			(7.2		)	(11.5		)	4.3
Investment income, net																			0.3			450.1			(449.8		)	1.0			450.4			(449.4		)
Other income, net	2.2			0.9			1.3			5.0			1.7			3.3			1.9			1.1			0.8			6.1			2.4			3.7
Income before income taxes	45.7			42.3			3.4			85.6			56.6			29.0			53.3			498.9			(445.6		)	138.9			555.5			(416.6		)
Provision for income taxes	(13.3		)	(12.4		)	(0.9		)	(21.3		)	(6.6		)	(14.7		)	(7.2		)	(107.7		)	100.5			(28.5		)	(114.2		)	85.7
Net income	$	32.4		$	29.9		$	2.5		$	64.3		$	50.0		$	14.3		$	46.1		$	391.2		$	(345.1	)	$	110.4		$	441.3		$	(330.9	)


	Second Quarter								Six Months								Third Quarter								Nine Months
	2019		% of Total Revenues		2018		% of Total Revenues		2019		% of Total Revenues		2018		% of Total Revenues		2019		% of Total Revenues		2018		% of Total Revenues		2019		% of Total Revenues		2018		% of Total Revenues
Revenues:
Sales	$	181.1	41.6	%	$	167.3	40.7	%	$	348.7	41.3	%	$	321.0	40.5	%	$	182.0	41.6	%	$	165.3	41.3	%	$	530.7	41.4	%	$	486.3	40.8	%
Franchise royalty revenue and fees:
Royalty revenue	102.8		23.6	%	98.2		23.9	%	197.7		23.4	%	188.1		23.8	%	102.3		23.4	%	95.5		23.8	%	300.0		23.4	%	283.6		23.8	%
Franchise fees	6.3		1.5	%	9.4		2.3	%	13.4		1.6	%	17.4		2.2	%	6.9		1.5	%	7.7		1.9	%	20.3		1.6	%	25.1		2.1	%
Total franchise royalty revenue and fees	109.1		25.1	%	107.6		26.2	%	211.1		25.0	%	205.5		26.0	%	109.2		24.9	%	103.2		25.7	%	320.3		25.0	%	308.7		25.9	%
Franchise rental income	58.5		13.4	%	51.5		12.5	%	117.0		13.9	%	101.6		12.8	%	59.9		13.7	%	50.5		12.6	%	176.9		13.8	%	152.1		12.8	%
Advertising funds revenue	86.6		19.9	%	84.6		20.6	%	167.1		19.8	%	163.5		20.7	%	86.8		19.8	%	81.6		20.4	%	253.9		19.8	%	245.0		20.5	%
Total revenues	$	435.3	100.0	%	$	411.0	100.0	%	$	843.9	100.0	%	$	791.6	100.0	%	$	437.9	100.0	%	$	400.6	100.0	%	$	1,281.8	100.0	%	$	1,192.1	100.0	%

	Second Quarter								Six Months								Third Quarter								Nine Months
	2019		% of Sales		2018		% of Sales		2019		% of Sales		2018		% of Sales		2019		% of Sales		2018		% of Sales		2019		% of Sales		2018		% of Sales
Cost of sales:
Food and paper	$	57.8	31.9	%	$	52.9	31.6	%	$	110.0	31.5	%	$	101.8	31.7	%	$	57.2	31.4	%	$	53.0	32.1	%	$	167.3	31.5	%	$	154.8	31.8	%
Restaurant labor	53.8		29.7	%	48.9		29.2	%	105.4		30.2	%	95.7		29.8	%	54.7		30.1	%	48.4		29.3	%	160.1		30.2	%	144.1		29.6	%
Occupancy, advertising and other operating costs	39.5		21.9	%	36.4		21.8	%	78.3		22.5	%	72.9		22.7	%	40.5		22.3	%	37.9		22.9	%	118.7		22.4	%	110.8		22.8	%
Total cost of sales	$	151.1	83.5	%	$	138.2	82.6	%	$	293.7	84.2	%	$	270.4	84.2	%	$	152.4	83.8	%	$	139.3	84.3	%	$	446.1	84.1	%	$	409.7	84.2	%

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 %



	Third Quarter								Nine Months
	2019		% of Sales		2018		% of Sales		2019		% of Sales		2018		% of Sales
Restaurant margin	$	29.6	16.2	%	$	26.0	15.7	%	$	84.6	15.9	%	$	76.6	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				Third Quarter				Nine Months
	2019		2018		2019		2018		2019		2018		2019		2018
Key business measures:
North America same-restaurant sales growth:
Company-operated	0.8	%	2.0	%	1.4	%	1.4	%	4.7	%	1.2	%	2.5	%	1.4	%
Franchised	1.5	%	1.9	%	1.4	%	1.8	%	4.3	%	(0.3	)%	2.4	%	1.1	%
Systemwide	1.4	%	1.9	%	1.4	%	1.8	%	4.4	%	(0.2	)%	2.4	%	1.1	%

Global same-restaurant sales growth:
Company-operated	0.8	%	2.0	%	1.4	%	1.4	%	4.7	%	1.2	%	2.5	%	1.4	%
Franchised (a)	1.6	%	2.1	%	1.5	%	1.9	%	4.4	%	(0.1	)%	2.5	%	1.3	%
Systemwide (a)	1.6	%	2.1	%	1.5	%	1.9	%	4.4	%	0.0	%	2.5	%	1.3	%

________________

(a) Includes international franchised same-restaurant sales (excluding Venezuela, and excluding Argentina beginning in ~~2019,~~the third quarter of 2018, due to the impact of the highly inflationary economies of those countries).


	Second Quarter				Six Months				Third Quarter				Nine Months
	2019		2018		2019		2018		2019		2018		2019		2018
Key business measures (continued):
Systemwide sales: (a)
Company-operated	$	181.1	$	167.3	$	348.7	$	321.0	$	182.0	$	165.3	$	530.7	$	486.3
North America franchised	2,482.5		2,434.2		4,773.2		4,684.9		2,478.2		2,358.5		7,251.4		7,043.4
North America systemwide	2,663.6		2,601.5		5,121.9		5,005.9		2,660.2		2,523.8		7,782.1		7,529.7
International franchised (b)	140.1		132.1		273.0		259.3		137.8		126.5		410.8		385.8
Global systemwide	$	2,803.7	$	2,733.6	$	5,394.9	$	5,265.2	$	2,798.0	$	2,650.3	$	8,192.9	$	7,915.5

________________

(a)

During the ~~second~~third quarter of 2019 and 2018, global systemwide sales increased 5.7% and 1.7%, respectively, North America systemwide sales increased ~~3.0%~~5.5% and ~~2.7%~~1.2%, respectively, and international franchised sales increased ~~10.4%~~9.2% and ~~12.8%, respectively, and global systemwide sales increased 3.3% and 3.1%~~13.2%, respectively, on a constant currency basis. During the first ~~six~~nine months of 2019 and 2018, global systemwide sales increased 4.1% and 2.7%, respectively, North America systemwide sales increased ~~3.0%~~3.8% and ~~2.7%~~2.2%, respectively, and international franchised sales increased ~~10.2%~~9.8% and 13.2%~~, respectively, and global systemwide sales increased 3.3% and 3.2%~~, respectively, on a constant currency basis.


(b)	Excludes Venezuela, and excludes Argentina beginning in ~~2019,~~the third quarter of 2018, due to the impact of the highly inflationary economies of those countries.


	Second Quarter							Third Quarter
	Company-operated	North America Franchised		International Franchised		Systemwide		Company-operated		North America Franchised		International Franchised		Systemwide
Restaurant count:
Restaurant count at March 31, 2019	358	5,825		527		6,710
Restaurant count at June 30, 2019								358		5,828		533		6,719
Opened	—	20		8		28		—		27		13		40
Closed	—	(17	)	(2	)	(19	)	(2	)	(10	)	(4	)	(16	)
Net purchased from (sold by) franchisees	—	—		—		—		—		—		—		—
Restaurant count at June 30, 2019	358	5,828		533		6,719
Restaurant count at September 29, 2019								356		5,845		542		6,743

	Six Months							Nine Months
	Company-operated	North America Franchised		International Franchised		Systemwide		Company-operated		North America Franchised		International Franchised		Systemwide

Restaurant count:
Restaurant count at December 30, 2018	353	5,825		533		6,711		353		5,825		533		6,711
Opened	—	49		22		71		—		76		35		111
Closed	—	(41	)	(22	)	(63	)	(2	)	(51	)	(26	)	(79	)
Net purchased from (sold by) franchisees	5	(5	)	—		—		5		(5	)	—		—
Restaurant count at June 30, 2019	358	5,828		533		6,719
Restaurant count at September 29, 2019								356		5,845		542		6,743


Sales	Second Quarter						Six Months						Third Quarter						Nine Months
	2019		2018		Change		2019		2018		Change		2019		2018		Change		2019		2018		Change
Sales	$	181.1	$	167.3	$	13.8	$	348.7	$	321.0	$	27.7	$	182.0	$	165.3	$	16.7	$	530.7	$	486.3	$	44.4

The increase in sales for the ~~second~~third quarter and the first ~~six~~nine months of 2019 was primarily due to a net increase in the number of Company-operated restaurants in operation during 2019 compared to 2018. In addition, sales for the ~~second~~third quarter and the first ~~six~~nine months of 2019 benefited from a ~~0.8%~~4.7% and ~~1.4%~~2.5% 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.


Franchise Royalty Revenue and Fees	Second Quarter							Six Months							Third Quarter							Nine Months
	2019		2018		Change			2019		2018		Change			2019		2018		Change			2019		2018		Change
Royalty revenue	$	102.8	$	98.2	$	4.6		$	197.7	$	188.1	$	9.6		$	102.3	$	95.5	$	6.8		$	300.0	$	283.6	$	16.4
Franchise fees	6.3		9.4		(3.1		)	13.4		17.4		(4.0		)	6.9		7.7		(0.8		)	20.3		25.1		(4.8		)
	$	109.1	$	107.6	$	1.5		$	211.1	$	205.5	$	5.6		$	109.2	$	103.2	$	6.0		$	320.3	$	308.7	$	11.6

The increase in franchise royalty revenue during the ~~second~~third quarter and the first ~~six~~nine months of 2019 was primarily due to a ~~1.6%~~4.4% and ~~1.5%~~2.5% 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~~third quarter ~~and the first six months~~ of 2019 was primarily due to ~~not facilitating any franchisee-to-franchisee restaurant transfers (“Franchise Flips”) in 2019 and~~ lower other miscellaneous franchise fees, partially offset by higher fees for providing information technology and other services to franchisees. The decrease in franchise fees during the first nine months of 2019 was primarily due to lower other miscellaneous franchise fees and facilitating fewer franchisee-to-franchisee restaurant transfers (“Franchise Flips”) in 2019, partially offset by higher fees for providing information technology and other services to franchisees.


Franchise Rental Income	Second Quarter						Six Months						Third Quarter						Nine Months
	2019		2018		Change		2019		2018		Change		2019		2018		Change		2019		2018		Change
Franchise rental income	$	58.5	$	51.5	$	7.0	$	117.0	$	101.6	$	15.4	$	59.9	$	50.5	$	9.4	$	176.9	$	152.1	$	24.8

The increase in franchise rental income during the ~~second~~third quarter and the first ~~six~~nine months of 2019 was primarily due to the adoption of 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 with a corresponding expense. See “Franchise Rental Expense” below. ~~This~~The increase during the first nine months of 2019 was partially offset by the assignment of certain leases to a franchisee.


Advertising Funds Revenue	Second Quarter						Six Months						Third Quarter						Nine Months
	2019		2018		Change		2019		2018		Change		2019		2018		Change		2019		2018		Change
Advertising funds revenue	$	86.6	$	84.6	$	2.0	$	167.1	$	163.5	$	3.6	$	86.8	$	81.6	$	5.2	$	253.9	$	245.0	$	8.9

The Company maintains two national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales of the franchised restaurants. The increase in advertising funds revenue during the ~~second~~third quarter and the first ~~six~~nine 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 ~~new~~ restaurant development incentive program.


Cost of Sales, as a Percent of Sales	Second Quarter						Six Months						Third Quarter						Nine Months
	2019		2018		Change		2019		2018		Change		2019		2018		Change		2019		2018		Change
Food and paper	31.9	%	31.6	%	0.3	%	31.5	%	31.7	%	(0.2	)%	31.4	%	32.1	%	(0.7	)%	31.5	%	31.8	%	(0.3	)%
Restaurant labor	29.7	%	29.2	%	0.5	%	30.2	%	29.8	%	0.4	%	30.1	%	29.3	%	0.8	%	30.2	%	29.6	%	0.6	%
Occupancy, advertising and other operating costs	21.9	%	21.8	%	0.1	%	22.5	%	22.7	%	(0.2	)%	22.3	%	22.9	%	(0.6	)%	22.4	%	22.8	%	(0.4	)%
	83.5	%	82.6	%	0.9	%	84.2	%	84.2	%	—	%	83.8	%	84.3	%	(0.5	)%	84.1	%	84.2	%	(0.1	)%

~~Cost~~The decrease in cost of sales, as a percent of sales, during the ~~second~~third quarter and the first ~~six~~nine months of 2019 was ~~impacted by (1) an increase in restaurant labor rates, (2) a decrease in customer count and (3) an increase in commodity costs. These impacts were partially offset by~~primarily due to benefits from strategic price increases on certain of our menu ~~items.~~items and changes in product mix. This decrease was partially offset by an increase in restaurant labor rates and commodity costs.


Franchise Support and Other Costs	Second Quarter							Six Months							Third Quarter						Nine Months
	2019		2018		Change			2019		2018		Change			2019		2018		Change		2019		2018		Change
Franchise support and other costs	$	4.0	$	7.0	$	(3.0	)	$	10.1	$	13.2	$	(3.1	)	$	9.7	$	5.4	$	4.3	$	19.8	$	18.6	$	1.2

The ~~decrease~~increase in franchise support and other costs during the ~~second~~third quarter and the first ~~six~~nine months of 2019 was primarily due to the purchase of digital scanning equipment for franchisees of $3.9 million, partially offset by lower costs incurred to provide information technology and other services to our franchisees.


Franchise Rental Expense	Second Quarter						Six Months						Third Quarter						Nine Months
	2019		2018		Change		2019		2018		Change		2019		2018		Change		2019		2018		Change
Franchise rental expense	$	28.0	$	24.3	$	3.7	$	60.5	$	47.6	$	12.9	$	32.4	$	22.3	$	10.1	$	92.8	$	69.8	$	23.0

The increase in franchise rental expense during the ~~second~~third quarter and the first ~~six~~nine months of 2019 was primarily due to the adoption of 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 with a corresponding expense. See “Franchise Rental Income” above. ~~This~~The increase during the first nine months of 2019 was partially offset by the impact of assigning certain leases to a franchisee.


Advertising Funds Expense	Second Quarter						Six Months						Third Quarter						Nine Months
	2019		2018		Change		2019		2018		Change		2019		2018		Change		2019		2018		Change
Advertising funds expense	$	88.7	$	84.6	$	4.1	$	169.1	$	163.5	$	5.6	$	87.9	$	81.6	$	6.3	$	257.0	$	245.0	$	12.0

The increase in advertising funds expense during the ~~second~~third quarter and the first ~~six~~nine 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~~third quarter and the first ~~six~~nine months of 2019, advertising funds expense exceeded advertising funds revenue by ~~$2.1~~$1.1 million and $3.1 million, respectively, 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	Second Quarter						Six Months						Third Quarter								Nine Months
	2019		2018		Change		2019		2018		Change		2019			2018		Change			2019			2018		Change
Employee compensation and related expenses	$	40.8	$	39.8	$	1.0	$	81.8	$	81.3	$	0.5	$	43.4		$	39.4	$	4.0		$	125.3		$	120.7	$	4.6
Legal reserves													(2.8		)	—		(2.8		)	(2.3		)	0.1		(2.4		)
Other, net	10.0		9.4		0.6		18.3		18.2		0.1		5.6			7.1		(1.5		)	23.3			25.3		(2.0		)
	$	50.8	$	49.2	$	1.6	$	100.1	$	99.5	$	0.6	$	46.2		$	46.5	$	(0.3	)	$	146.3		$	146.1	$	0.2

The decrease in general and administrative expenses during the third quarter of 2019 was primarily due to a reduction in legal reserves as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the Financial Institutions case (see Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information). This decrease was offset by higher employee compensation and related expenses, reflecting an increase in incentive compensation accruals.

The increase in general and administrative expenses during the ~~second quarter and the~~ first ~~six~~nine months of 2019 was primarily due to higher employee compensation and related expenses, reflecting an increase in incentive compensation accruals and additional expenditures to support our digital experience and international ~~organizations, as well as timing of other employee-related expenses. These increases were~~organizations. This increase was partially offset by (1) a reduction in legal reserves as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the Financial Institutions case (see Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information) and (2) changes in staffing driven by our G&A realignment plan.


Depreciation and Amortization	Second Quarter							Six Months							Third Quarter							Nine Months
	2019		2018		Change			2019		2018		Change			2019		2018		Change			2019		2018		Change
Restaurants	$	20.0	$	22.2	$	(2.2	)	$	41.9	$	42.9	$	(1.0	)	$	21.8	$	17.4	$	4.4		$	63.7	$	60.3	$	3.4
Corporate and other	11.5		11.2		0.3			22.8		22.7		0.1			11.5		11.7		(0.2		)	34.3		34.3		—
	$	31.5	$	33.4	$	(1.9	)	$	64.7	$	65.6	$	(0.9	)	$	33.3	$	29.1	$	4.2		$	98.0	$	94.6	$	3.4

The ~~decrease~~increase in restaurant depreciation and amortization during the ~~second~~third quarter and the first ~~six~~nine months of 2019 was primarily due to the assignment of certain leases to a franchisee in 2018, resulting 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, Net	Third Quarter									Nine Months
	2019			2018			Change			2019			2018		Change
System optimization gains, net	$	(1.0	)	$	(0.5	)	$	(0.5	)	$	(1.2	)	$	—	$	(1.2	)

System optimization ~~(gains) losses,~~gains, net for the ~~second~~third quarter and the first ~~six~~nine 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.~~restaurants.


Reorganization and Realignment Costs	Second Quarter						Six Months							Third Quarter							Nine Months
	2019		2018		Change		2019		2018		Change			2019		2018		Change			2019		2018		Change
G&A realignment	$	3.5	$	3.1	$	0.4	$	4.3	$	5.7	(1.4		)	$	0.4	$	0.6	$	(0.2	)	$	4.7	$	6.4	(1.7		)
System optimization initiative	0.1		—		0.1		0.1		—		0.1			—		0.3		(0.3		)	0.1		0.3		(0.2		)
	$	3.6	$	3.1	$	0.5	$	4.4	$	5.7	$	(1.3	)	$	0.4	$	0.9	$	(0.5	)	$	4.8	$	6.7	$	(1.9	)

In May 2017, the Company initiated a G&A realignment plan to further reduce its G&A expenses. In addition, the Company announced changes to its leadership structure in May 2019. G&A realignment costs for the ~~second~~third quarter and the first ~~six~~nine months of 2019 and 2018 were primarily comprised of severance and related employee costs and share-based compensation.


Impairment of Long-Lived Assets	Second Quarter							Six Months							Third Quarter							Nine Months
	2019		2018		Change			2019		2018		Change			2019		2018		Change			2019		2018		Change
Impairment of long-lived assets	$	0.2	$	1.6	$	(1.4	)	$	1.7	$	1.8	$	(0.1	)	$	—	$	0.3	$	(0.3	)	$	1.7	$	2.2	$	(0.5	)

The change in impairment charges during the ~~second~~third quarter of 2019 was primarily driven by lower impairment charges as a result of closing Company-operated restaurants and classifying such surplus properties as held for sale when compared to the third quarter of 2018. The change in impairment charges during the first ~~six~~nine months of 2019 was primarily driven by lower impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants when compared to the first ~~six~~nine months of ~~2018. In addition, the change in~~2018, partially offset by higher impairment charges ~~during the first six months~~as a result of ~~2019 was offset by an increase in losses resulting from~~ closing Company-operated restaurants and classifying such surplus properties as held for sale.


Other Operating Income, Net	Second Quarter									Six Months									Third Quarter									Nine Months
	2019			2018			Change			2019			2018			Change			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	)	$	(2.1	)	$	(2.2	)	$	0.1		$	(7.0	)	$	(5.8	)	$	(1.2	)
Gains on sales-type leases	—			—			—			(2.0		)	$	—		(2.0		)
Losses (gains) on sales-type leases																			0.1			—			0.1			(1.9		)	—			(1.9		)
Lease buyout	—			—			—			(0.2		)	0.6			(0.8		)	(0.4		)	0.3			(0.7		)	(0.6		)	0.9			(1.5		)
Other, net	—			—			—			—			$	0.1		(0.1		)	—			0.3			(0.3		)	0.1			0.2			(0.1		)
	$	(3.1	)	$	(1.8	)	$	(1.3	)	$	(7.1	)	$	(2.9	)	$	(4.2	)	$	(2.4	)	$	(1.6	)	$	(0.8	)	$	(9.4	)	$	(4.7	)	$	(4.7	)

The change in other operating income, net during the ~~second~~third quarter of 2019 was primarily due to ~~an increase in the equity in earnings from our TimWen joint venture.~~lease buyout activity. The change in other operating income, net during the first ~~six~~nine months of 2019 was ~~primarily~~ due to (1) gains on new and modified sales-type leases as a result of the new accounting guidance for leases, ~~as well as~~(2) lease buyout activity and (3) an increase in the equity in earnings from our TimWen joint venture.


Interest Expense, Net	Second Quarter							Six Months							Third Quarter							Nine Months
	2019		2018		Change			2019		2018		Change			2019		2018		Change			2019		2018		Change
Interest expense, net	$	29.9	$	30.1	$	(0.2	)	$	59.0	$	60.3	$	(1.3	)	$	27.9	$	29.6	$	(1.7	)	$	86.9	$	89.9	$	(3.0	)

Interest expense, net decreased during the third quarter and the first ~~six~~nine months of 2019 primarily due to lower outstanding principal amounts of long-term debt, reflecting the impact of the completion of refinancing a portion of the Company’s securitized financing facility during the first nine months of 2019. Interest expense, net also decreased during the first nine months of 2019 due to the timing of interest expense on the Company’s finance lease obligations.


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

During the second quarter of 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 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 issuance of 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.

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



Investment Income, Net	Third Quarter							Nine Months
	2019		2018		Change			2019		2018		Change
Investment income, net	$	0.3	$	450.1	$	(449.8	)	$	1.0	$	450.4	$	(449.4	)

Investment income, net decreased during the third quarter and the first nine months of 2019 due to the $450.0 million gain recorded on the sale of the Company’s ownership interest in Inspire Brands, Inc. (“Inspire Brands”) on August 16, 2018.



Other Income, Net	Third Quarter						Nine Months
	2019		2018		Change		2019		2018		Change
Other income, net	$	1.9	$	1.1	$	0.8	$	6.1	$	2.4	$	3.7

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


Provision for Income Taxes	Second Quarter									Six Months									Third Quarter									Nine Months
	2019			2018			Change			2019			2018			Change			2019			2018			Change			2019			2018			Change
Income before income taxes	$	45.7		$	42.3		$	3.4		$	85.6		$	56.6		$	29.0		$	53.3		$	498.9		$	(445.6	)	$	138.9		$	555.5		$	(416.6	)
Provision for income taxes	(13.3		)	(12.4		)	(0.9		)	(21.3		)	(6.6		)	(14.7		)	(7.2		)	(107.7		)	100.5			(28.5		)	(114.2		)	85.7
Effective tax rate on income	29.2		%	29.3		%	(0.1		)%	24.9		%	11.6		%	13.3		%	13.5		%	21.6		%	(8.1		)%	20.5		%	20.6		%	(0.1		)%

Our effective tax rates infor the ~~second~~third quarter of 2019 and 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, including non-recurring changes~~a reduction in unrecognized tax benefits due to ~~state deferred taxes,~~a lapse of statute of limitations in the third quarter of 2019, (2) a reduction for the impact of stock-based compensation, which included net excess tax benefits ~~related to share-based payments, which resulted in a benefit~~ of ~~$0.9~~$1.1 million and ~~$0.8~~$5.3 million infor the ~~second~~third quarter of 2019 and 2018, respectively, and (3) ~~valuation allowance~~an increase due to non-recurring changes ~~net of federal benefit, and (4) the impact of the comprehensive tax legislation commonly referred~~ to ~~as the Tax Cuts and Jobs Act (the “Tax Act”).~~state deferred taxes.

Our effective tax rates infor the first ~~six~~nine months of 2019 and 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) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the first nine months of 2019, (2) a reduction for the impact of stock-based compensation, which included net excess tax benefits ~~related to share-based payments, which resulted in a benefit~~ of ~~$2.9~~$4.0 million and ~~$6.9~~$12.1 million infor the first ~~six~~nine months of 2019 and 2018, respectively, ~~(2) state income taxes, including~~and (3) an increase due to non-recurring changes to state deferred ~~taxes, (3) the impact of the Tax Act and (4) valuation allowance changes, net of federal benefit.~~taxes.

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 stockholders.

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

capital expenditures of approximately ~~$50.0~~$34.0 million to ~~$55.0~~$39.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $75.0 million to $80.0 million;

cash dividends aggregating up to approximately ~~$46.1~~$27.6 million as discussed below in “Dividends;” and

potential stock repurchases of up to ~~$196.7~~$170.3 million, of which ~~$10.0~~$9.2 million was repurchased subsequent to ~~June 30,~~September 29, 2019 through ~~July 31,~~October 30, 2019, as discussed below in “Stock Repurchases.”

In addition to the anticipated cash requirements above, the Company expects to make one-time investments during 2019 of approximately $20.0 million to support the U.S. system in preparation of the launch of breakfast in the first quarter of 2020.

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~~nine months of 2019 and 2018:


	Six Months									Nine Months
	2019			2018			Change			2019			2018			Change
Net cash provided by (used in):
Operating activities	$	154.1		$	148.4		$	5.7		$	237.5		$	229.7		$	7.8
Investing activities	(29.9		)	(22.6		)	(7.3		)	(45.7		)	391.4			(437.1		)
Financing activities	(130.2		)	(95.3		)	(34.9		)	(183.4		)	(151.0		)	(32.4		)
Effect of exchange rate changes on cash	3.8			(4.4		)	8.2			2.8			(2.1		)	4.9
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(2.2	)	$	26.1		$	(28.3	)
Net increase in cash, cash equivalents and restricted cash										$	11.2		$	468.0		$	(456.8	)

Operating Activities

Cash provided by operating activities was ~~$154.1~~$237.5 million and ~~$148.4~~$229.7 million in the first ~~six~~nine months of 2019 and 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 ~~$5.7~~$7.8 million during the first ~~six~~nine months of 2019 as compared to the first ~~six~~nine months of 2018, primarily due to (1) higher net income from operations, adjusted for non-cash expenses and (2) a decrease in payments for incentive ~~compensation (2) higher net income, adjusted for non-cash expenses and (3) the timing of receipt of rental payments from franchisees.~~compensation. These favorable changes were partially offset by (1) the timing of collections of royalty receivables and (2) changes in receivables for income tax refunds. Further, income taxes payable decreased significantly in the ~~timing~~first nine months of ~~payments~~2019 as compared to the first nine months of 2018 due to income taxes associated with the gain on sale of our ownership interest in Inspire Brands during the first nine months of 2018 (which offset the income tax expense recognized in net income for ~~marketing expenses~~the first nine months of ~~the national advertising funds.~~2018).

Investing Activities

Cash used in investing activities increased ~~$7.3~~$437.1 million during the first ~~six~~nine months of 2019 as compared to the first ~~six~~nine months of 2018, primarily due to ~~an increase~~the proceeds from the sale of our ownership interest in Inspire Brands during the first nine months of 2018 of $450.0 million. This change was partially offset by a decrease in cash used for the Company’s acquisition of restaurants from franchisees of ~~$5.1 million and an increase in capital expenditures of $1.6~~$16.3 million.

Financing Activities

Cash used in financing activities increased ~~$34.9~~$32.4 million during the first ~~six~~nine months of 2019 as compared to the first ~~six~~nine months of 2018, primarily due to (1) a net increase in cash used for long-term debt activities of ~~$76.5~~$76.4 million, reflecting the respective impacts of the completion of debt refinancing transactions during the first ~~six~~nine 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 $33.5 million, (2) an increase~~ in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of ~~$8.3~~$16.2 million, and (3) an increase in dividends of $8.5 million. These changes were partially offset by (1) a decrease in repurchases of common stock of $63.3 million and (2) the settlement of a supplemental purchase price liability associated with the acquisition of 140 Wendy’s restaurants from DavCo Restaurants, LLC of ~~$6.1~~$6.3 million during the first ~~six~~nine 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 30, 2018. The Company was in compliance with its debt covenants as of ~~June 30,~~September 29, 2019. See Note 8 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.

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 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 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. No amounts were borrowed under the Series 2019-1 Class A-1 Notes during the ~~three~~nine months ended ~~June 30,~~September 29, 2019. The Series 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 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.

Dividends

On March 15, 2019, June 17, 2019 and ~~June~~September 17, 2019, the Company paid quarterly cash dividends of $.10 per share on its common stock, aggregating ~~$46.2~~$69.3 million. On ~~August 1,~~October 11, 2019, the Company declared a dividend of ~~$.10~~$.12 per share to be paid on ~~September 17,~~December 16, 2019 to stockholders of record as of ~~September 3,~~December 2, 2019. IfAs a result of the October 11 declaration, the Company ~~pays regular quarterly~~expects that its total cash ~~dividends~~requirements for the ~~remainder of 2019 at the same rate as declared in the third~~fourth quarter of 2019 ~~the Company’s total cash requirement for dividends for the remainder of 2019 would~~will be approximately ~~$46.1~~$27.6 million based on the number of shares of its common stock outstanding at ~~July 31,~~October 30, 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 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~~nine months ended ~~June 30,~~September 29, 2019, the Company repurchased ~~2.8~~4.2 million shares with an aggregate purchase price of ~~$49.7~~$76.2 million, of which ~~$0.8~~$1.1 million was accrued at ~~June 30,~~September 29, 2019, and excluding commissions of $0.1 million, under the November 2018 and February 2019 authorizations. As of ~~June 30,~~September 29, 2019, the Company had ~~$196.7~~$170.3 million of availability remaining under its February 2019 authorization. Subsequent to ~~June 30,~~September 29, 2019 through ~~July 31,~~October 30, 2019, the Company repurchased ~~0.5~~0.4 million shares under the February 2019 authorization with an aggregate purchase price of ~~$10.0~~$9.2 million, excluding commissions. As part of the February 2019 authorization, the Company

announced on October 11, 2019 its intention to launch a $100.0 million accelerated share repurchase program during the fourth quarter of 2019.

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 warranted and to the extent legally permissible. During the ~~six~~nine months ended ~~July 1,~~September 30, 2018, the Company repurchased ~~3.7~~6.9 million shares under the February 2018 repurchase authorization with an aggregate purchase price of ~~$62.5~~$118.9 million, of which ~~$2.1~~$2.7 million was accrued at ~~July 1,~~September 30, 2018, and excluding commissions of $0.1 million. Additionally, during the ~~six~~nine months ended ~~July 1,~~September 30, 2018, the Company completed its previous February 2017 repurchase authorization for up to $150.0 million of our common stock with the repurchase of 1.4 million shares with an aggregate purchase price of $22.6 million, 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. 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 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 our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

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 30, 2018 (the “Form 10-K”).

As of ~~June 30,~~September 29, 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 an $850.0 million debt refinancing transaction on June 26, 2019. The Company’s outstanding Series 2015-1 Class A-2-II Notes were repaid as part of the refinancing transaction. In aggregate, the Company’s new Series 2019-1 Class A-2 Notes bear a weighted-average fixed-rate interest at rates slightly lower than our historical effective rates on the Series 2015-1 Class A-2-II Notes. In addition, the principal amounts outstanding on the Series 2019-1 Class A-2 Notes are lower than the amounts that were outstanding on the Series 2015-1 Class A-2-II Notes. In connection with the issuance of the Series 2019-1 Class A-2 Notes, a wholly-owned subsidiary of the Company also entered into a revolving financing facility, the Series 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 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, 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 ~~$2,342.4~~$2,336.7 million as of ~~June 30,~~September 29, 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 2019-1 Class A-1 Notes; however, the Company had no outstanding borrowings under the Series 2019-1 Class A-1 Notes as of ~~June 30,~~September 29, 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 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 ~~June 30,~~September 29, 2019. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of ~~June 30,~~September 29, 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~~third quarter of 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.

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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 in 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, 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, chicken, french fries or other products we sell, the ingredients in our products and/or the cooking processes used in our restaurants;

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

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

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

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

changes in the quick-service restaurant industry, spending patterns and demographic trends, such as 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 franchisees’ obligations due to us or to national or local advertising organizations, and the ability of franchisees to open new restaurants and reimage existing restaurants in accordance with their development and franchise commitments, including their ability to finance restaurant development and reimages;

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

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

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

development costs, including real estate and construction costs;

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

the ability to effectively manage the acquisition and disposition of restaurants or successfully implement other strategic initiatives;

anticipated or unanticipated restaurant closures by us and our franchisees;

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

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

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

availability and cost of insurance;

availability, terms (including changes in interest rates) and deployment of capital, and changes in debt, equity and securities markets;

changes in, and our ability to comply with, legal, regulatory or similar requirements, including franchising laws, payment card industry rules, overtime rules, minimum wage rates, wage and hour laws, tax legislation, federal ethanol policy and accounting standards, policies and practices;

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

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

risks associated with failures, interruptions or security breaches of our computer systems or technology, or the occurrence of cyber incidents or a deficiency in cybersecurity that impacts us or our franchisees, including the cybersecurity incident described in 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 our plan to reduce general and administrative expense, and the future impact on our earnings;

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

risks associated with the amount and timing of share repurchases under share repurchase programs approved by 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;

risks associated with our plans to enter the breakfast daypart across the U.S. system in 2020, including related investments;

risks associated with our international growth strategy, including related investments; and

other risks and uncertainties affecting us and our subsidiaries referred to in the Form 10-K (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the Securities and Exchange Commission.

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

Item 1. Legal Proceedings.

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. 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 for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period.

See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information regarding certain legal proceedings in which we are involved.

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 set forth below or as may otherwise be described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2019.

Wendy’s plans to launch breakfast across the U.S. system in 2020. The breakfast daypart is competitive across the restaurant industry and it may prove difficult to achieve market share and reach targeted levels of breakfast sales and profits.

As previously announced, Wendy’s plans to enter the breakfast daypart across the U.S. system in the first quarter of 2020. The Company and franchisee leadership have worked closely to align with the U.S. system on a breakfast program that the Company believes will drive incremental sales and profits through a strong economic model. However, previous breakfast initiatives were accompanied by competitive pressures and responses from our competitors, some of whom are well-established in the breakfast daypart, operational complexity, challenging food and labor costs, varied consumer acceptance and discretionary spending patterns that differ from other dayparts, and these factors could again impact our ability to achieve market share and reach targeted levels of breakfast sales and profits. In addition, breakfast sales could cannibalize sales during other parts of the day and may have negative impacts on restaurant margins. The continued active support and engagement of our franchisees is also critical for the successful launch and execution of breakfast. The Company and its franchisees plan to hire approximately 20,000 crew members across the country to support the breakfast initiative. Qualified individuals needed to fill these positions are in short supply in some geographic areas and our inability to successfully recruit, hire, train, motivate and retain qualified employees could adversely affect our operations. The launch of breakfast will also require significant financial resources, including the Company’s plans to support the system by investing approximately $20 million in 2019 to offset certain start-up costs and by reinvesting royalties from breakfast sales beginning in 2020 to fund incremental marketing and advertising campaigns. Our strategy to launch breakfast across the U.S. system may expose us to additional risks and our inability to successfully execute on our strategy could have a material adverse impact on our business, financial condition and results of operations.

Wendy’s planned expansion into the United Kingdom and other European markets may present increased risks due to low brand awareness, geopolitical risks and other factors.

As previously announced, Wendy’s intends to open Company-operated restaurants in the United Kingdom beginning in the next 12 to 18 months and, if successful, plans to expand into other anchor markets in Europe utilizing a franchise model. New markets, such as the United Kingdom, may have low brand awareness as well as competitive conditions, consumer tastes, discretionary spending patterns and social and cultural differences that are more difficult to predict or satisfy than our existing markets. We may need to make greater investments than we originally planned in advertising and promotional activity to build brand awareness, which could negatively impact the profitability of our operations. In addition, we may be unable to obtain desirable locations for new restaurants at reasonable prices, or at all, and restaurants may have higher construction, occupancy, food and labor costs than we currently anticipate. Geopolitical risks, including the United Kingdom’s decision to leave the European Union through a negotiated exit over a period of time, may result in increased regulatory complexities and economic uncertainty. Any of these risks and uncertainties, and other factors we cannot anticipate, could have a material adverse impact on our business, financial condition and results of operations.

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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~~third quarter of 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 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



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)
July 1, 2019 through August 4, 2019	525,920		$19.19	520,672		$186,755
August 5, 2019 through September 1, 2019	317,484		$20.50	253,946		$181,515
September 2, 2019 through September 29, 2019	560,105		$20.30	553,750		$170,292
Total	1,403,509		$19.93	1,328,368		$170,292


(1)	Includes ~~49,498~~75,141 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 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.

Subsequent to ~~June 30,~~September 29, 2019 through ~~July 31,~~October 30, 2019, the Company repurchased ~~0.5~~0.4 million shares under the February 2019 authorization with an aggregate purchase price of ~~$10.0~~$9.2 million, excluding commissions.

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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~~101	~~XBRL Instance Document -~~The following financial information from The Wendy’s Company’s Quarterly Report on Form 10-Q for the ~~instance document does not appear~~quarter ended September 29, 2019 formatted in Inline eXtensible Business Reporting Language: (i) the ~~Interactive Data File because its XBRL tags are embedded within~~Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
104	The cover page from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2019, formatted in 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*and contained in Exhibit 101.

____________________



*	Filed herewith.

4852

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,~~November 6, 2019	By: /s/ Gunther Plosch
	Gunther Plosch
	Chief Financial Officer
	(On behalf of the registrant)

Date: ~~August 7,~~November 6, 2019	By: /s/ Leigh A. Burnside
	Leigh A. Burnside
	Senior Vice President, Finance and Chief Accounting Officer
	(Principal Accounting Officer)

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