Wendy's Co 10-Q for FY2020 Q3
Wendy's Co (WEN)
10-Q
2020-11-04
For: 2020-09-27
View Original
Added on
April 11, 2026
About this 10-Q
Wendy's Co filed this 10-Q on November 4, 2020, covering the quarter ended September 27, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 27, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $452.24M
- up 3.3% from $437.88M a year earlier
- Net income
- $39.75M
- down 13.8% from net income of $46.13M a year earlier
- Diluted EPS
- $0.17
- down 15.0% from $0.20 a year earlier
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 September 27, 2020
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the transition period from ______________ to _______________
Commission file number: 1-2207
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (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 | |||||||||
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.
☒ | 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 224,118,762 shares of The Wendy’s Company common stock outstanding as of October 28, 2020.
THE WENDY’S COMPANY AND SUBSIDIARIES
INDEX TO FORM 10-Q
| Page | |||||
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Par Value)
| September 27, 2020 | December 29, 2019 | ||||||||||
| ASSETS | (Unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts and notes receivable, net | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Advertising funds restricted assets | |||||||||||
| Total current assets | |||||||||||
| Properties | |||||||||||
| Finance lease assets | |||||||||||
| Operating lease assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets | |||||||||||
| Investments | |||||||||||
| Net investment in sales-type and direct financing leases | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Current portion of finance lease liabilities | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Advertising funds restricted liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Long-term finance lease liabilities | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Deferred franchise fees | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Common stock held in treasury, at cost; | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
4
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Franchise royalty revenue and fees | |||||||||||||||||||||||
| Franchise rental income | |||||||||||||||||||||||
| Advertising funds revenue | |||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Franchise support and other costs | |||||||||||||||||||||||
| Franchise rental expense | |||||||||||||||||||||||
| Advertising funds expense | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| System optimization gains, net | ( | ( | ( | ( | |||||||||||||||||||
| Reorganization and realignment costs | |||||||||||||||||||||||
| Impairment of long-lived assets | |||||||||||||||||||||||
| Other operating income, net | ( | ( | ( | ( | |||||||||||||||||||
| Operating profit | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss on early extinguishment of debt | ( | ||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Common Stock Held in Treasury | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Balance at December 29, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Cash dividends | ( | ( | |||||||||||||||||||||||||||||||||
Repurchases of common stock, including accelerated share repurchase | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | |||||||||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 29, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Cash dividends | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | ( | ||||||||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||||||||
| Balance at June 28, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Cash dividends | ( | ( | |||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | |||||||||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 27, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
7
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED
(In Thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Common Stock Held in Treasury | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Balance at December 30, 2018 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Cash dividends | ( | ( | |||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | ( | ||||||||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | ( | ( | |||||||||||||||||||||||||||||||||
Cumulative effect of change in accounting principle | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Cash dividends | ( | ( | |||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | ( | ||||||||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Cash dividends | ( | ( | |||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | |||||||||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 29, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
8
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| Nine Months Ended | |||||||||||
| September 27, 2020 | September 29, 2019 | ||||||||||
| (Unaudited) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Impairment of long-lived assets | |||||||||||
| Deferred income tax | |||||||||||
| Non-cash rental expense, net | |||||||||||
| Change in operating lease liabilities | ( | ( | |||||||||
| Net receipt of deferred vendor incentives | |||||||||||
| System optimization gains, net | ( | ( | |||||||||
| Distributions received from joint ventures, net of equity in earnings | |||||||||||
| Long-term debt-related activities, net | |||||||||||
| Changes in operating assets and liabilities and other, net | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Acquisitions | ( | ||||||||||
| Dispositions | |||||||||||
| Proceeds from sale of investments | |||||||||||
| Notes receivable, net | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt | |||||||||||
| Repayments of long-term debt | ( | ( | |||||||||
| Repayments of finance lease liabilities | ( | ( | |||||||||
| Deferred financing costs | ( | ( | |||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Dividends | ( | ( | |||||||||
| Proceeds from stock option exercises | |||||||||||
| Payments related to tax withholding for share-based compensation | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net cash provided by operations before effect of exchange rate changes on cash | |||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net increase in cash, cash equivalents and restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental non-cash investing and financing activities: | |||||||||||
| Capital expenditures included in accounts payable | $ | $ | |||||||||
| Finance leases | |||||||||||
| September 27, 2020 | December 29, 2019 | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash at end of period: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Restricted cash, included in Advertising funds restricted assets | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
9
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of September 27, 2020, the results of our operations for the three and nine months ended September 27, 2020 and September 29, 2019 and our cash flows for the nine months ended September 27, 2020 and September 29, 2019. 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 29, 2019 (the “Form 10-K”).
The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has materially affected and could continue to materially affect our financial condition and results of operations for an extended period of time. As such, the results of operations for the three and nine months ended September 27, 2020 are not necessarily indicative of the results to be expected for the full 2020 fiscal year. See Notes 7, 9, 11 and 14 for further information regarding actions taken by the Company in response to the COVID-19 pandemic and certain impacts of the COVID-19 pandemic on our condensed consolidated financial statements.
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 in the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Certain prior period financial information has been revised to align with this segment reporting structure. See Note 19 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 nine-month periods presented herein contain 13 weeks and 39 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.
(2) New Accounting Standards
New Accounting Standards
Financial Instruments
In August 2020, the Financial Accounting Standards Board (“FASB”) issued an amendment that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendment simplifies accounting for convertible instruments by removing major separation models required under current accounting guidance. In addition, the amendment removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception, and also simplifies the diluted earnings per share calculation in certain areas. The amendment is effective commencing with our 2022 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our condensed consolidated financial statements.
10
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
New Accounting Standards Adopted
Income Taxes
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and the simplification of areas such as franchise taxes, transactions that result in a step-up in the tax basis of goodwill, separate entity financial statements and interim recognition of enactment of tax laws or tax rate changes. The Company early adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued new guidance on disclosure requirements for fair value measurements. The objective of the new guidance is to provide additional information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. New incremental disclosure requirements include the amount of fair value hierarchy level 3 changes in unrealized gains and losses and the range and weighted average used to develop significant unobservable inputs for level 3 fair value measurements. The Company adopted this guidance during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Goodwill Impairment
In January 2017, the FASB issued new guidance that simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. The Company adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Credit Losses
In June 2016, the FASB issued an amendment that requires the Company to use a current expected credit loss model that results 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 Company adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
11
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(3) Revenue
Disaggregation of Revenue
The following tables disaggregate revenue by segment and source:
| Wendy’s U.S. | Wendy’s International | Global Real Estate & Development | Total | ||||||||||||||||||||
| Three Months Ended September 27, 2020 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | $ | $ | $ | |||||||||||||||||||
| Franchise royalty revenue | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Franchise rental income | |||||||||||||||||||||||
| Advertising funds revenue | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
| Nine Months Ended September 27, 2020 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | $ | $ | $ | |||||||||||||||||||
| Franchise royalty revenue | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Franchise rental income | |||||||||||||||||||||||
| Advertising funds revenue | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended September 29, 2019 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | $ | $ | $ | |||||||||||||||||||
| Franchise royalty revenue | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Franchise rental income | |||||||||||||||||||||||
| Advertising funds revenue | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
12
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| Wendy’s U.S. | Wendy’s International | Global Real Estate & Development | Total | ||||||||||||||||||||
| Nine Months Ended September 29, 2019 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | $ | $ | $ | |||||||||||||||||||
| Franchise royalty revenue | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Franchise rental income | |||||||||||||||||||||||
| Advertising funds revenue | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
| September 27, 2020 (a) | December 29, 2019 (a) | ||||||||||
| Receivables, which are included in “Accounts and notes receivable, net” (b) | $ | $ | |||||||||
Receivables, which are included in “Advertising funds restricted assets” | |||||||||||
| Deferred franchise fees (c) | |||||||||||
_______________
(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 $9,211 and $88,834 as of September 27, 2020, respectively, and $8,899 and $91,790 as of December 29, 2019, respectively.
Significant changes in deferred franchise fees are as follows:
| Nine Months Ended | |||||||||||
| September 27, 2020 | September 29, 2019 | ||||||||||
| Deferred franchise fees at beginning of period | $ | $ | |||||||||
Revenue recognized during the period | ( | ( | |||||||||
| New deferrals due to cash received and other | |||||||||||
| Deferred franchise fees at end of period | $ | $ | |||||||||
13
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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: | |||||
| 2020 (a) | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| Thereafter | |||||
| $ | |||||
_______________
(a)Represents franchise fees expected to be recognized for the remainder of 2020, which includes development-related franchise fees expected to be recognized over a duration of one year or less.
(4) Acquisitions
| Nine Months Ended | |||||
| September 29, 2019 | |||||
| Restaurants acquired from franchisees | |||||
| Total consideration paid, net of cash received | $ | ||||
| Identifiable assets acquired and liabilities assumed: | |||||
| Properties | |||||
| Acquired franchise rights | |||||
| Finance lease assets | |||||
| Finance lease liabilities | ( | ||||
| Other | ( | ||||
| Total identifiable net assets | |||||
| Goodwill | $ | ||||
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 .
14
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(5) System Optimization 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 nine months ended September 27, 2020 and September 29, 2019, the Company facilitated 22 and three Franchise Flips, respectively. The Company expects to sell 43 Company-operated restaurants in New York to franchisees in the first quarter of 2021. The Company expects to retain its Company-operated restaurants in Manhattan.
Gains and losses recognized on dispositions are recorded to “System optimization 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.”
The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Post-closing adjustments on sales of restaurants (a) | $ | $ | $ | $ | |||||||||||||||||||
| Gain on sales of other assets, net (b) | |||||||||||||||||||||||
| System optimization gains, net | $ | $ | $ | $ | |||||||||||||||||||
_______________
(a)The three and nine months ended September 27, 2020 represent the recognition of deferred gains as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. The three and nine months ended September 29, 2019 include the recognition of such deferred gains of $911
(b)During the nine months ended September 27, 2020, the Company received net cash proceeds of $3,570 , and during the three and nine months ended September 29, 2019, received cash proceeds of $798 and $2,038 , respectively, primarily from the sale of surplus and other properties.
Assets Held for Sale
| September 27, 2020 | December 29, 2019 | ||||||||||
| Number of restaurants classified as held for sale | |||||||||||
| Net restaurant assets held for sale (a) | $ | $ | |||||||||
| Other assets held for sale (b) | $ | $ | |||||||||
_______________
(a)Net restaurant assets held for sale include the New York Company-operated restaurants we expect to sell in the first quarter of 2021 and consist primarily of cash, inventory, property and an estimate of allocable goodwill.
(b)Other assets held for sale primarily consist of surplus properties.
15
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(6) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Operations and field realignment | $ | $ | $ | $ | |||||||||||||||||||
| IT realignment | |||||||||||||||||||||||
| G&A realignment | ( | ||||||||||||||||||||||
| System optimization initiative | |||||||||||||||||||||||
| Reorganization and realignment costs | $ | $ | $ | $ | |||||||||||||||||||
Operations and Field Realignment
In September 2020, the Company initiated a plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment Plan realigns the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. We also expect to incur contract termination charges, including the planned closure of certain field offices. The Company expects to incur total costs aggregating approximately $7,000 to $9,000 related to the Operations and Field Realignment Plan. During the nine months ended September 27, 2020, the Company recognized costs totaling $3,021 , which included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $4,000 to $6,000 , comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs associated with the Operations and Field Realignment Plan during the remainder of 2020 and 2021.
The following is a summary of the activity recorded as a result of the Operations and Field Realignment Plan:
| Three Months Ended | |||||
| September 27, 2020 | |||||
| Severance and related employee costs | $ | ||||
| Share-based compensation (a) | |||||
| Total operations and field realignment | $ | ||||
_______________
(a)Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the Operations and Field Realignment Plan.
The table below presents a rollforward of our accruals for the Operations and Field Realignment Plan, which are included in “Accrued expenses and other current liabilities” as of September 27, 2020.
| Balance December 29, 2019 | Charges | Payments | Balance September 27, 2020 | ||||||||||||||||||||
| Severance and related employee costs | $ | $ | $ | $ | |||||||||||||||||||
16
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Information Technology (“IT”) Realignment
In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth (the “IT Realignment Plan”). The Company has partnered with a third-party global IT consultant on this new structure to leverage their global capabilities, which will enable a more seamless integration between its digital and corporate IT assets. The IT Realignment Plan has reduced and will continue to reduce certain employee compensation and other related costs that the Company is reinvesting back into IT to drive additional capabilities and capacity across all of its technology platforms. Additionally, in June 2020, the Company made changes to its leadership structure that included the creation of a Chief Information Officer position and the elimination of the Chief Digital Experience Officer position. As a result, the Company expects to incur total costs aggregating approximately $16,000 to $17,000 related to the IT Realignment Plan. During the nine months ended September 27, 2020, the Company recognized costs totaling $6,809 , which primarily included third-party and other costs and severance and related employee costs. The Company expects to incur additional costs aggregating approximately $1,000 , comprised primarily of recruitment and relocation costs. The Company expects to recognize the majority of the remaining costs associated with the IT Realignment Plan during the remainder of 2020. Subsequent to September 27, 2020, the Company announced the appointment of its new Chief Information Officer.
The following is a summary of the activity recorded as a result of the IT Realignment Plan:
| Three Months Ended | Nine Months Ended | Total Incurred Since Inception | |||||||||||||||
| September 27, 2020 | September 27, 2020 | ||||||||||||||||
| Severance and related employee costs | $ | $ | $ | ||||||||||||||
| Recruitment and relocation costs | |||||||||||||||||
| Third-party and other costs | |||||||||||||||||
| Share-based compensation (a) | |||||||||||||||||
| Total IT realignment | $ | $ | $ | ||||||||||||||
_______________
(a)Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the IT Realignment Plan.
The table below presents a rollforward of our accruals for the IT Realignment Plan, which are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $2,739 and $178 as of September 27, 2020, respectively.
| Balance December 29, 2019 | Charges | Payments | Balance September 27, 2020 | ||||||||||||||||||||
| Severance and related employee costs | $ | $ | $ | ( | $ | ||||||||||||||||||
| Recruitment and relocation costs | ( | ||||||||||||||||||||||
| Third-party and other costs | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
17
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
General and Administrative (“G&A”) Realignment
In May 2017, the Company initiated a plan to further reduce its G&A expenses (the “G&A Realignment Plan”). Additionally, in May 2019, the Company announced changes to its management and operating structure that included 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 nine months ended September 27, 2020 and September 29, 2019, the Company recognized costs related to the G&A Realignment Plan totaling $282 and $4,695 , respectively, which primarily included share-based compensation for 2020 and severance and related employee costs and share-based compensation for 2019. The Company does not expect to incur any material additional costs under the G&A Realignment Plan.
The following is a summary of the activity recorded as a result of the G&A Realignment Plan:
| Three Months Ended | Nine Months Ended | Total Incurred Since Inception | |||||||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||||||||
| Severance and related employee costs (a) | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||
| Recruitment and relocation costs | |||||||||||||||||||||||||||||
| Third-party and other costs | |||||||||||||||||||||||||||||
| ( | |||||||||||||||||||||||||||||
| Share-based compensation (b) | |||||||||||||||||||||||||||||
| Termination of defined benefit plans | |||||||||||||||||||||||||||||
| Total G&A realignment | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||
_______________
(a)The three and nine months ended September 27, 2020 includes a reversal of an accrual as a result of a change in estimate.
(b)Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the G&A Realignment Plan.
The accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $1,705 and $18 as of September 27, 2020, respectively, and $3,491 and $507 as of September 29, 2019, respectively. The tables below present a rollforward of our accruals for the G&A Realignment Plan.
| Balance December 29, 2019 | Charges | Payments | Balance September 27, 2020 | ||||||||||||||||||||
| Severance and related employee costs | $ | $ | $ | ( | $ | ||||||||||||||||||
| Recruitment and relocation costs | ( | ||||||||||||||||||||||
| Third-party and other costs | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
| Balance December 30, 2018 | Charges | Payments | Balance September 29, 2019 | ||||||||||||||||||||
| Severance and related employee costs | $ | $ | $ | ( | $ | ||||||||||||||||||
| Recruitment and relocation costs | ( | ||||||||||||||||||||||
| Third-party and other costs | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
18
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $72,365 under the initiative since inception and does not expect to incur any material additional costs under the plan.
(7) Cash and Receivables
| September 27, 2020 | December 29, 2019 | ||||||||||
| Cash and cash equivalents | |||||||||||
| Cash | $ | $ | |||||||||
| Cash equivalents | |||||||||||
| Restricted cash | |||||||||||
| Accounts held by trustee for the securitized financing facility | |||||||||||
| Other | |||||||||||
| Advertising Funds (a) | |||||||||||
Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
_______________
(a)Included in “Advertising funds restricted assets.”
| September 27, 2020 | December 29, 2019 | |||||||||||||||||||||||||||||||||||||
| Gross | Allowance for Doubtful Accounts | Net | Gross | Allowance for Doubtful Accounts | Net | |||||||||||||||||||||||||||||||||
| Accounts and Notes Receivable, Net | ||||||||||||||||||||||||||||||||||||||
| Current | ||||||||||||||||||||||||||||||||||||||
| Accounts receivable (a) (b) | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
Notes receivable from franchisees (c) (d) | ( | ( | ||||||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
| Non-current (e) | ||||||||||||||||||||||||||||||||||||||
Notes receivable from franchisees (d) | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
_______________
(a)Includes income tax refund receivables of $7,089 and $13,555 as of September 27, 2020 and December 29, 2019, respectively. Additionally, 2019 includes receivables of $25,350 related to insurance coverage for the financial institutions class action.
(b)During the nine months ended September 27, 2020, rent receivables increased by $7,291 . This increase was primarily due to actions taken by the Company in response to the COVID-19 pandemic, which included offering to defer base rent payments on properties owned by Wendy’s and leased to franchisees by 50%, and offering to pass along any deferrals that were obtained on properties leased by Wendy’s and subleased to franchisees by up to 100%, beginning in May for a three month period, which are being repaid over a 12 month period beginning in August 2020.
19
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(c)Includes the current portion of sales-type and direct financing lease receivables of $4,054 and $3,146 as of September 27, 2020 and December 29, 2019, respectively.
Included a note receivable from a U.S. franchisee totaling $1,000 as of December 29, 2019. The note was repaid during the nine months ended September 27, 2020.
(d)Includes a note receivable from a franchisee in India totaling $985 and $1,000 as of September 27, 2020 and December 29, 2019, respectively, which is included in non-current notes receivable as of September 27, 2020 and is included in current notes receivable as of December 29, 2019. As of September 27, 2020 and December 29, 2019, the Company had a reserve of $985
Includes a note receivable from a franchisee in Indonesia, of which $1,643 and $1,262 are included in current notes receivable and $842 and $1,617 are included in non-current notes receivable as of September 27, 2020 and December 29, 2019, respectively.
Includes notes receivable related to a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”), of which $11,975 and $15,920 are included in current notes receivable as of September 27, 2020 and December 29, 2019, respectively, and $4,350 is included in non-current notes receivable as of September 27, 2020. As of September 27, 2020 and December 29, 2019, the Company had reserves of $4,520 and $5,720 , respectively, on the loans outstanding related to the Brazil JV.
(e)Included in “Other assets.”
Reserve estimates include consideration of the likelihood of default expected over the estimated life of the receivable. The Company periodically assesses the need for an allowance for doubtful accounts on its receivables based upon several key credit quality indicators such as outstanding past due balances, the financial strength of the obligor, the estimated fair value of any underlying collateral and agreement characteristics. We believe that our vulnerability to risk concentrations in our receivables is mitigated by (1) favorable historical collectability on past due balances, (2) recourse to the underlying collateral regarding sales-type and direct financing lease receivables, and (3) our expectations for fluctuations in general market conditions. Receivables are considered delinquent once they are contractually past due under the terms of the underlying agreements. As of September 27, 2020, there were no material receivables more than one year past due.
The following is an analysis of the allowance for doubtful accounts:
| Accounts Receivable | Notes Receivable | Total | |||||||||||||||
| Nine Months Ended September 27, 2020 | |||||||||||||||||
| Balance at December 29, 2019 | $ | $ | $ | ||||||||||||||
| Provision for doubtful accounts | ( | ||||||||||||||||
| Uncollectible accounts written off, net of recoveries | ( | ( | ( | ||||||||||||||
| Balance at September 27, 2020 | $ | $ | $ | ||||||||||||||
| Nine Months Ended September 29, 2019 | |||||||||||||||||
| Balance at December 30, 2018 | $ | $ | $ | ||||||||||||||
| Provision for doubtful accounts | ( | ||||||||||||||||
| Uncollectible accounts written off, net of recoveries | ( | ( | |||||||||||||||
| Balance at September 29, 2019 | $ | $ | $ | ||||||||||||||
20
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(8) Investments
Equity Investments
Wendy’s has a 50 % share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand. (Tim Hortons is a registered trademark of Tim Hortons USA Inc.) In addition, a wholly-owned subsidiary of Wendy’s has a 20 % share in 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:
| Nine Months Ended | |||||||||||
| September 27, 2020 | September 29, 2019 | ||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Equity in earnings for the period | |||||||||||
| Amortization of purchase price adjustments (a) | ( | ( | |||||||||
| Distributions received | ( | ( | |||||||||
Foreign currency translation adjustment included in “Other comprehensive income (loss)” and other | ( | ||||||||||
| Balance at end of period | $ | $ | |||||||||
_______________
(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
(9) Long-Term Debt
Long-term debt consisted of the following:
| September 27, 2020 | December 29, 2019 | ||||||||||
| Series 2019-1 Class A-2 Notes: | |||||||||||
| $ | $ | ||||||||||
| Series 2018-1 Class A-2 Notes: | |||||||||||
| Series 2015-1 Class A-2 Notes: | |||||||||||
| Canadian revolving credit facility | |||||||||||
| Unamortized debt issuance costs | ( | ( | |||||||||
| Less amounts payable within one year | ( | ( | |||||||||
| Total long-term debt | $ | $ | |||||||||
21
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Senior Notes
Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. Under this facility, in June 2019, the Master Issuer issued outstanding Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019-1 Class A-1 Notes”), which allow for the borrowing of up to $150,000 from time to time on a revolving basis using various credit instruments, including a letter of credit facility. In March 2020, the Company drew down $120,000 no outstanding borrowings under the 2019-1 Class A-1 Notes. In June 2020, the Master Issuer also issued outstanding Series 2020-1 Variable Funding Senior Secured Notes, Class A-1 (the “2020-1 Class A-1 Notes”), which allow for the borrowing of up to $100,000 from time to time on a revolving basis using various credit instruments. The Company had no outstanding borrowings under the Series 2020-1 Class A-1 Notes as of September 27, 2020. The drawdown of the 2019-1 Class A-1 Notes in March 2020 and the issuance of the 2020-1 Class A-1 Notes in June 2020 were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic.
The 2019-1 Class A-1 Notes and the 2020-1 Class A-1 Notes (collectively, the “Class A-1 Notes”) accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate (“LIBOR”) for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the respective purchase agreements for the Class A-1 Notes. There is a commitment fee on the unused portions of the Class A-1 Notes, which ranges from 0.40 % to 0.75 % based on utilization for the 2019-1 Class A-1 Notes, and is 1.50 % for the 2020-1 Class A-1 Notes. As of September 27, 2020, $26,040 of letters of credit were outstanding against the 2019-1 Class A-1 Notes, which relate primarily to interest reserves required under the indenture governing the 2019-1 Class A-1 Notes.
During the nine months ended September 27, 2020, the Company incurred debt issuance costs of $2,122 in connection with the issuance of the 2020-1 Class A-1 Notes. The debt issuance costs are being amortized to “Interest expense, net” utilizing the effective interest rate method.
Other Long-Term Debt
A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6,000 , which bears interest at the Bank of Montreal Prime Rate. Borrowings under the facility are guaranteed by Wendy’s. In March 2020, the Company drew down C$5,500 under the revolving credit facility. As a result, as of September 27, 2020, the Company had outstanding borrowings of C$5,500 under the revolving credit facility.
Wendy’s U.S. advertising fund has a revolving line of credit of $25,000 , which was established to support the advertising fund operations and bears interest at LIBOR plus 2.15 %. Borrowings under the line of credit are guaranteed by Wendy’s. In February 2020, the Company drew down $4,397 25,000 no outstanding borrowings under the revolving line of credit.
The increased borrowings were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic.
22
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(10) 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:
| September 27, 2020 | December 29, 2019 | ||||||||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Measurements | |||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | Level 1 | ||||||||||||||||||||||||
| Other investments in equity securities (a) | Level 3 | ||||||||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Series 2019-1 Class A-2-I Notes (b) | Level 2 | ||||||||||||||||||||||||||||
| Series 2019-1 Class A-2-II Notes (b) | Level 2 | ||||||||||||||||||||||||||||
| Series 2018-1 Class A-2-I Notes (b) | Level 2 | ||||||||||||||||||||||||||||
| Series 2018-1 Class A-2-II Notes (b) | Level 2 | ||||||||||||||||||||||||||||
Series 2015-1 Class A-2-III Notes (b) | Level 2 | ||||||||||||||||||||||||||||
| Canadian revolving credit facility | Level 2 | ||||||||||||||||||||||||||||
| 7% debentures, due in 2025 (b) | Level 2 | ||||||||||||||||||||||||||||
_______________
(a)The fair values of our investments were not significant and were 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. In June 2020, the Company impaired a miscellaneous investment due to the deterioration in operating performance of the underlying assets. In July 2020, the Company sold its remaining interest in this investment.
(b)The fair values were based on quoted market prices in markets that are not considered active markets.
The carrying amounts of cash, accounts payable and accrued expenses approximate 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) approximate fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents are the only financial assets measured and recorded at fair value on a recurring basis.
23
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Non-Recurring Fair Value Measurements
Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.
Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, favorable lease assets and right-of-use 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 represent 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 represent the remaining carrying value and were estimated based on current market values. See Note 11 for further information on impairment of our long-lived assets.
| Fair Value Measurements | |||||||||||||||||||||||
| September 27, 2020 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Held and used | $ | $ | $ | $ | |||||||||||||||||||
| Held for sale | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurements | |||||||||||||||||||||||
| December 29, 2019 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Held and used | $ | $ | $ | $ | |||||||||||||||||||
| Held for sale | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(11) Impairment of Long-Lived Assets
During the nine months ended September 27, 2020 and September 29, 2019, the Company recorded impairment charges as a result of (1) the deterioration of operating performance of certain Company-operated restaurants and (2) closing Company-operated restaurants and classifying such surplus properties as held for sale. Impairment charges during the nine months ended September 27, 2020 were primarily incurred in the first quarter of 2020 due to the expected deterioration in operating performance of certain Company-operated restaurants as a result of the COVID-19 pandemic. Additional impairment charges may be recognized by the Company in the event of further deterioration in operating performance of Company-operated restaurants.
The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:”
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Company-operated restaurants | $ | $ | $ | $ | |||||||||||||||||||
| Surplus properties | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
24
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(12) Income Taxes
The Company’s effective tax rate for the three months ended September 27, 2020 and September 29, 2019 was 24.2 % and 13.5 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21
The Company’s effective tax rate for the nine months ended September 27, 2020 and September 29, 2019 was 24.8 % and 20.5 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21
There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three and nine months ended September 27, 2020. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $1,344 due primarily to the lapse of statutes of limitations and expected settlements.
The current portion of refundable income taxes was $7,089 and $13,555 as of September 27, 2020 and December 29, 2019, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. There were no
(13) 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 | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Common stock: | |||||||||||||||||||||||
| Weighted average basic shares outstanding | |||||||||||||||||||||||
Dilutive effect of stock options and restricted shares | |||||||||||||||||||||||
| Weighted average diluted shares outstanding | |||||||||||||||||||||||
25
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(14) Stockholders’ Equity
Dividends
During the first, second, and third quarter of 2020, the Company paid dividends per share of $.12 , $.05 and $.05 , respectively. During each of the first three quarters of 2019, the Company paid dividends per share of $.10
Repurchases of Common Stock
In February 2020, our Board of Directors authorized a repurchase program for up to $100,000 of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020. During the nine months ended September 27, 2020, the Company repurchased 860 shares under the February 2020 repurchase authorization with an aggregate purchase price of $16,244 , of which $178 was accrued at September 27, 2020, and excluding commissions of $12 . As of September 27, 2020, the Company had $83,756 of availability remaining under its February 2020 authorization. Subsequent to September 27, 2020 through October 28, 2020, the Company repurchased 86 shares under the February 2020 authorization with an aggregate purchase price of $2,041 , excluding commissions of $1 .
In February 2019, our Board of Directors authorized a repurchase program for up to $225,000 of our common stock through March 1, 2020, when and if market conditions warranted and to the extent legally permissible. In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $100,000 in cash and received an initial delivery of 4,051 shares of common stock, representing an estimated 85 % of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 628 shares of common stock at an average purchase price of $23.89 . The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2019 ASR Agreement, less an agreed upon discount. In total, 4,679 shares were delivered under the 2019 ASR Agreement at an average purchase price of $21.37 per share.
In addition to the shares repurchased in connection with the 2019 ASR Agreement, during the nine months ended September 27, 2020, the Company repurchased 1,312 shares with an aggregate purchase price of $28,770 , excluding commissions of $18 , under the February 2019 authorization. After taking into consideration these repurchases, with the completion of the 2019 ASR Agreement in February 2020, the Company completed its February 2019 authorization.
During the nine months ended September 29, 2019, the Company repurchased 4,153 shares with an aggregate purchase price of $76,165 , of which $1,102 was accrued at September 29, 2019, and excluding commissions of $58 , under the February 2019 authorization and the Company’s previous November 2018 authorization to repurchase up to $220,000 of our common stock.
Accumulated Other Comprehensive Loss
The following table provides a rollforward of accumulated other comprehensive loss:
| Nine Months Ended | |||||||||||
| September 27, 2020 | September 29, 2019 | ||||||||||
| Balance at beginning of period | $ | ( | $ | ( | |||||||
Foreign currency translation | ( | ||||||||||
| Balance at end of period | $ | ( | $ | ( | |||||||
26
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(15) 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 September 27, 2020, Wendy’s and its franchisees operated 6,814 Wendy’s restaurants. Of the 360 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 142 restaurants, owned the building and held long-term land leases for 147 restaurants and held leases covering the land and building for 71 restaurants. Wendy’s also owned 510 and leased 1,244 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.
Company as Lessee
The components of lease cost are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of finance lease assets | $ | $ | $ | $ | |||||||||||||||||||
| Interest on finance lease liabilities | |||||||||||||||||||||||
| Operating lease cost | |||||||||||||||||||||||
| Variable lease cost (a) | |||||||||||||||||||||||
| Short-term lease cost | |||||||||||||||||||||||
| Total operating lease cost (b) | |||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||||||||
_______________
(a)Includes expenses for executory costs of $9,326 and $9,908 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $28,526 and $29,211 for the nine months ended September 27, 2020 and September 29, 2019, respectively, for which the Company is reimbursed by sublessees.
(b)Includes $32,421 and $32,342 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $92,975 and $92,815 for the nine months ended September 27, 2020 and September 29, 2019, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $6,651 and $6,892 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $20,315 and $20,492 for the nine months ended September 27, 2020 and September 29, 2019, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.
27
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Company as Lessor
The components of lease income are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Sales-type and direct-financing leases: | |||||||||||||||||||||||
| Selling profit (loss) | $ | $ | ( | $ | $ | ||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Operating lease income | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease income | |||||||||||||||||||||||
| Franchise rental income (a) | $ | $ | $ | $ | |||||||||||||||||||
_______________
(a)Includes sublease income of $43,122 and $44,821 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $126,653 and $130,763 for the nine months ended September 27, 2020 and September 29, 2019, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $9,379 and $9,683 for the three months ended September 27, 2020 and September 29, 2019, respectively, and $28,538 and $28,894 for the nine months ended September 27, 2020 and September 29, 2019, respectively.
(16) 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, which are then subleased to franchisees for the operation of Wendy’s/Tim Hortons combo units in Canada. During the nine months ended September 27, 2020 and September 29, 2019, Wendy’s paid TimWen $11,970 and $12,710 , respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $152 and $155 during the nine months ended September 27, 2020 and September 29, 2019, respectively, which has been included as a reduction to “General and administrative.”
(17) 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 $81,275 as of September 27, 2020. These leases extend through 2045. We have not received any notice of default related to these leases as of September 27, 2020. 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 September 27, 2020, the Company had outstanding letters of credit with various parties totaling $26,381 . Substantially all of the outstanding letters of credit include amounts outstanding against the 2019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.
28
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(18) 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, and we believe we have adequate accruals for continuing operations for all such 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 September 27, 2020, there were no material developments in those legal proceedings.
(19) Segment Information
Revenues by segment were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Wendy’s U.S. | $ | $ | $ | $ | |||||||||||||||||||
| Wendy’s International | |||||||||||||||||||||||
| Global Real Estate & Development | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
The following table reconciles profit by segment to the Company’s consolidated income before income taxes:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Wendy’s U.S. (a) | $ | $ | $ | $ | |||||||||||||||||||
| Wendy’s International | |||||||||||||||||||||||
| Global Real Estate & Development | |||||||||||||||||||||||
| Total segment profit | $ | $ | $ | $ | |||||||||||||||||||
| Advertising funds deficit | ( | ( | ( | ( | |||||||||||||||||||
| Unallocated general and administrative (b) | ( | ( | ( | ( | |||||||||||||||||||
| Depreciation and amortization | ( | ( | ( | ( | |||||||||||||||||||
| System optimization gains, net | |||||||||||||||||||||||
| Reorganization and realignment costs | ( | ( | ( | ( | |||||||||||||||||||
| Impairment of long-lived assets | ( | ( | ( | ||||||||||||||||||||
| Unallocated other operating income, net | ( | ||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss on early extinguishment of debt | ( | ||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | |||||||||||||||||||
_______________
29
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(a)For the three and nine months ended September 27, 2020, includes advertising funds expense of $6,153 and $8,338 , respectively, related to the expected Company funding of incremental advertising during 2020.
(b)Includes corporate overhead costs, such as employee compensation and related benefits.
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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 29, 2019 (the “Form 10-K”). There have been no material changes as of September 27, 2020 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 the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the world’s third largest quick-service restaurant company in the hamburger sandwich segment, with 6,814 restaurants in the United States (the “U.S.”) and 30 foreign countries and U.S. territories as of September 27, 2020.
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 entered the breakfast daypart across the U.S. system on March 2, 2020. Wendy’s breakfast menu features a variety of breakfast sandwiches, biscuits and croissants, sides such as seasoned potatoes, oatmeal bars and seasonal fruit, and a beverage platform that includes hot coffee, cold brew iced coffee and our vanilla and chocolate Frosty-ccino iced coffee.
The Company is comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company reports on the segment profit for each of the three segments described above. The Company measures segment profit based on segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. See “Results of Operations” below and Note 19 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information.
The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.
31
Executive Overview
Our Business
As of September 27, 2020, the Wendy’s restaurant system was comprised of 6,814 restaurants, with 5,874 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 360 were operated by the Company and 5,514 were operated by a total of 237 franchisees. In addition, at September 27, 2020, there were 940 Wendy’s restaurants in operation in 30 foreign countries and U.S. territories, all of which were franchised.
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of September 27, 2020.
Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather. The COVID-19 pandemic has had and may continue to have the effect of heightening the impact of many of these factors. See “COVID-19 Update” and “Special Note Regarding Forward-Looking Statements and Projections” below for additional information.
Wendy’s long-term growth opportunities include accelerating U.S. same-restaurant sales through (1) its “One More Visit, One More Dollar” strategy, which includes continuing core menu improvement, product innovation and strategic price increases on our menu items, (2) focused execution of operational excellence, (3) continued implementation of consumer-facing digital platforms and technologies and (4) increased restaurant utilization in various dayparts, including the Company’s launch of breakfast across the U.S. system on March 2, 2020. Wendy’s also expects growth in the number of new restaurants through targeted U.S. expansion and accelerated international expansion through same-restaurant sales growth and new restaurant development.
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. Restaurants temporarily closed for more than one fiscal week are excluded from same-restaurant sales. 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.
32
Same-restaurant sales and systemwide sales exclude sales from Argentina and Venezuela due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.
The 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.
COVID-19 Update
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict whether, when or the manner in which the conditions surrounding the pandemic will change and cannot currently estimate the impact on our business in the short or long-term.
In response to the pandemic, in March 2020, Wendy’s updated its brand standard to include the closure of all dining rooms except where there were specific needs, or a drive-thru or pick-up window option was not available, subject to applicable federal, state and local requirements. Substantially all Wendy’s restaurants continued to offer drive-thru and delivery service to our customers.
During the second quarter of 2020, the Company began to implement its restaurant and dining room reopening process through a phased approach in accordance with federal, state and local requirements, with customer and team member safety as its top priority. Dining rooms have been re-opening during the second and third quarters of 2020 at each restaurant owner’s discretion, subject to applicable regulatory restrictions. As of September 27, 2020, approximately 75% of dining rooms were open across the Wendy’s system offering carryout and, in some cases, dine in services.
The COVID-19 pandemic has resulted in the temporary closure of certain restaurants across the Wendy’s system. As of September 27, 2020, systemwide temporary restaurant closures totaled 17 and 52 in the U.S. and internationally, respectively, which represents approximately 1% of all system restaurants.
The following table shows same-restaurant sales for the fiscal months of January through June and the third quarter of 2020:
| January through February | March | April | May | June | Third Quarter | ||||||||||||||||||||||||||||||||||||
| Same-restaurant sales: | |||||||||||||||||||||||||||||||||||||||||
| U.S. systemwide | 3.7 | % | (7.7) | % | (14.0) | % | (1.9) | % | 5.1 | % | 7.0 | % | |||||||||||||||||||||||||||||
| International | 5.4 | % | (17.0) | % | (28.3) | % | (15.7) | % | (10.7) | % | (2.1) | % | |||||||||||||||||||||||||||||
| Global systemwide | 3.9 | % | (8.6) | % | (15.3) | % | (3.3) | % | 3.4 | % | 6.1 | % | |||||||||||||||||||||||||||||
As a result of the COVID-19 pandemic, global systemwide same-restaurant sales began to be materially adversely impacted in the fiscal month of March, with the fiscal month of April seeing the greatest impact. The decrease in same-restaurant sales was driven by a significant decline in customer count, partially offset by an increase in average check. Subsequently, global same-restaurant sales improved beginning in May, turned positive to 3.4% growth in June and improved to an increase of 6.1% during the third quarter. During the fiscal month of October, U.S. systemwide same-restaurant sales increased 6.6%. The improvement in same-restaurant sales has been primarily driven by a significant increase in customer traffic compared to the lows seen in March and April. Same-restaurant sales have benefited from the Company’s entry into the breakfast daypart across the U.S. system on March 2, 2020. Breakfast contributed 6.2% and 6.4% to U.S. systemwide same-restaurant sales during the second and third quarters of 2020, respectively.
Due to the current unprecedented market and economic conditions in the U.S. and internationally, the expected impact of the COVID-19 pandemic on the Company’s 2020 net income and cash flows cannot be reasonably estimated. Our net income and cash flows for the remainder of 2020 could continue to be materially affected by the pandemic. See “Item 1A. Risk Factors” in “Part II. Other Information” for further information regarding the risks associated with the COVID-19 pandemic
33
and the impact on our business, results and financial condition. Also, see “Liquidity and Capital Resources” below for certain actions taken by the Company in response to the COVID-19 pandemic.
Beef Supply Update
As previously disclosed, the Company experienced disruptions to its beef supply beginning in early May as beef suppliers across North America faced production challenges. As a result, some menu items were occasionally in short supply at some Wendy’s system restaurants. The Company and its supply chain partners effectively managed through this disruption by allocating beef to all Wendy’s system restaurants, with deliveries occurring two or three times a week, consistent with normal delivery schedules. The Company also shifted its marketing efforts in the short term to focus on chicken products in an effort to alleviate pressure on beef demand. Beef supply returned to normal levels across the Wendy’s system by the end of the second quarter of 2020.
Goodwill and Indefinite-Lived Intangible Assets
We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that it may be impaired. The negative impacts of the COVID-19 pandemic, including the decline in same-restaurant sales described above and the volatility in the price of our common stock, resulted in the Company testing its goodwill for impairment in March 2020. A goodwill impairment loss is recognized if the fair value of a reporting unit is less than its carrying value.
The Company’s goodwill impairment test in March 2020 included three reporting units, which were comprised of its (1) U.S. Company-operated and franchise restaurants, (2) Canada franchise restaurants and (3) global real estate and development operations. Based on the results of our goodwill impairment test, we determined the fair values of our U.S. Company-operated and franchise restaurants and our Canada franchise restaurants reporting units continued to significantly exceed their carrying values. The goodwill impairment test for our global real estate and development operations also indicated the fair value of the reporting unit exceeded its carrying value; however, the fair value exceeded the carrying value of the reporting unit by only a nominal amount. Given the limited excess of the fair value over carrying value, this reporting unit is more sensitive to changes in assumptions regarding its fair value. As of the date of our analysis in the first quarter of 2020, a 50 basis point increase in the discount rate, or a moderate decline in estimated future cash flows, would have resulted in the fair value of the reporting unit being less than its carrying value. As of September 27, 2020, the goodwill balance associated with our global real estate and development operations was $122.5 million.
The Company also tested our indefinite-lived intangible assets, which consist of our trademarks, for impairment in March 2020. Based on the results of our impairment test, we determined the fair value of our trademarks continued to significantly exceed their carrying value.
Further adverse changes as a result of the COVID-19 pandemic could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could result in future impairment charges of goodwill and indefinite-lived intangible assets.
Operations and Field Realignment
In September 2020, the Company initiated a plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment Plan realigns the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. We also expect to incur contract termination charges, including the planned closure of certain field offices. The Company expects to incur total costs aggregating approximately $7.0 million to $9.0 million, of which approximately $6.5 million to $8.5 million will be cash expenditures, related to the Operations and Field Realignment Plan. Costs related to the Operations and Field Realignment Plan are recorded to “Reorganization and realignment costs.” During the nine months ended September 27, 2020, the Company recognized costs totaling $3.0 million, which included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $4.0 million to $6.0 million, comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs associated with the Operations and Field Realignment Plan during the remainder of 2020 and 2021. The majority of the cash expenditures are expected during 2021.
34
Information Technology (“IT”) Realignment
In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth (the “IT Realignment Plan”). The Company has partnered with a third-party global IT consultant on this new structure to leverage their global capabilities, which will enable a more seamless integration between its digital and corporate IT assets. The IT Realignment Plan has reduced and will continue to reduce certain employee compensation and other related costs that the Company is reinvesting back into IT to drive additional capabilities and capacity across all of its technology platforms. Additionally, in June 2020, the Company made changes to its leadership structure that included the creation of a Chief Information Officer position and the elimination of the Chief Digital Experience Officer position. As a result, the Company expects to incur total costs aggregating approximately $16.0 million to $17.0 million related to the IT Realignment plan. Costs related to the IT Realignment Plan are recorded to “Reorganization and realignment costs.” During the nine months ended September 27, 2020, the Company recognized costs totaling $6.8 million, which primarily included third-party and other costs and severance and related employee costs. The Company expects to incur additional costs aggregating approximately $1.0 million, comprised primarily of recruitment and relocation costs. The Company expects to recognize the majority of the remaining costs associated with the IT Realignment Plan during the remainder of 2020. Subsequent to September 27, 2020, the Company announced the appointment of its new Chief Information Officer.
35
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 third quarter and the first nine months of 2020 and 2019.
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Sales | $ | 191.9 | $ | 182.0 | $ | 9.9 | $ | 523.0 | $ | 530.7 | $ | (7.7) | |||||||||||||||||||||||
| Franchise royalty revenue and fees | 116.8 | 109.2 | 7.6 | 321.6 | 320.3 | 1.3 | |||||||||||||||||||||||||||||
| Franchise rental income | 58.7 | 59.9 | (1.2) | 173.4 | 176.9 | (3.5) | |||||||||||||||||||||||||||||
| Advertising funds revenue | 84.8 | 86.8 | (2.0) | 241.5 | 253.9 | (12.4) | |||||||||||||||||||||||||||||
| 452.2 | 437.9 | 14.3 | 1,259.5 | 1,281.8 | (22.3) | ||||||||||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||||||||||||||
| Cost of sales | 159.5 | 152.4 | 7.1 | 450.2 | 446.1 | 4.1 | |||||||||||||||||||||||||||||
| Franchise support and other costs | 6.0 | 9.7 | (3.7) | 19.4 | 19.8 | (0.4) | |||||||||||||||||||||||||||||
| Franchise rental expense | 32.4 | 32.4 | — | 93.0 | 92.8 | 0.2 | |||||||||||||||||||||||||||||
| Advertising funds expense | 92.0 | 87.9 | 4.1 | 253.4 | 257.0 | (3.6) | |||||||||||||||||||||||||||||
| General and administrative | 47.3 | 46.2 | 1.1 | 147.6 | 146.3 | 1.3 | |||||||||||||||||||||||||||||
| Depreciation and amortization | 33.0 | 33.3 | (0.3) | 98.7 | 98.0 | 0.7 | |||||||||||||||||||||||||||||
| System optimization gains, net | — | (1.0) | 1.0 | (2.3) | (1.2) | (1.1) | |||||||||||||||||||||||||||||
| Reorganization and realignment costs | 3.4 | 0.4 | 3.0 | 10.2 | 4.8 | 5.4 | |||||||||||||||||||||||||||||
| Impairment of long-lived assets | — | — | — | 4.7 | 1.7 | 3.0 | |||||||||||||||||||||||||||||
| Other operating income, net | (2.7) | (2.4) | (0.3) | (6.1) | (9.4) | 3.3 | |||||||||||||||||||||||||||||
| 370.9 | 358.9 | 12.0 | 1,068.8 | 1,055.9 | 12.9 | ||||||||||||||||||||||||||||||
| Operating profit | 81.3 | 79.0 | 2.3 | 190.7 | 225.9 | (35.2) | |||||||||||||||||||||||||||||
| Interest expense, net | (29.1) | (27.9) | (1.2) | (86.7) | (86.9) | 0.2 | |||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | — | — | — | — | (7.2) | 7.2 | |||||||||||||||||||||||||||||
| Other income, net | 0.2 | 2.2 | (2.0) | 1.2 | 7.1 | (5.9) | |||||||||||||||||||||||||||||
| Income before income taxes | 52.4 | 53.3 | (0.9) | 105.2 | 138.9 | (33.7) | |||||||||||||||||||||||||||||
| Provision for income taxes | (12.6) | (7.2) | (5.4) | (26.1) | (28.5) | 2.4 | |||||||||||||||||||||||||||||
| Net income | $ | 39.8 | $ | 46.1 | $ | (6.3) | $ | 79.1 | $ | 110.4 | $ | (31.3) | |||||||||||||||||||||||
36
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | % of Total Revenues | 2019 | % of Total Revenues | 2020 | % of Total Revenues | 2019 | % of Total Revenues | ||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 191.9 | 42.4 | % | $ | 182.0 | 41.6 | % | $ | 523.0 | 41.5 | % | $ | 530.7 | 41.4 | % | |||||||||||||||||||||||||||||||
Franchise royalty revenue and fees: | |||||||||||||||||||||||||||||||||||||||||||||||
| Franchise royalty revenue | 109.3 | 24.2 | % | 102.3 | 23.4 | % | 301.9 | 24.0 | % | 300.0 | 23.4 | % | |||||||||||||||||||||||||||||||||||
| Franchise fees | 7.5 | 1.6 | % | 6.9 | 1.5 | % | 19.7 | 1.5 | % | 20.3 | 1.6 | % | |||||||||||||||||||||||||||||||||||
| Total franchise royalty revenue and fees | 116.8 | 25.8 | % | 109.2 | 24.9 | % | 321.6 | 25.5 | % | 320.3 | 25.0 | % | |||||||||||||||||||||||||||||||||||
Franchise rental income | 58.7 | 13.0 | % | 59.9 | 13.7 | % | 173.4 | 13.8 | % | 176.9 | 13.8 | % | |||||||||||||||||||||||||||||||||||
Advertising funds revenue | 84.8 | 18.8 | % | 86.8 | 19.8 | % | 241.5 | 19.2 | % | 253.9 | 19.8 | % | |||||||||||||||||||||||||||||||||||
Total revenues | $ | 452.2 | 100.0 | % | $ | 437.9 | 100.0 | % | $ | 1,259.5 | 100.0 | % | $ | 1,281.8 | 100.0 | % | |||||||||||||||||||||||||||||||
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | % of Sales | 2019 | % of Sales | 2020 | % of Sales | 2019 | % of Sales | ||||||||||||||||||||||||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||||||||||||||||||||||||||
| Food and paper | $ | 59.6 | 31.1 | % | $ | 57.2 | 31.4 | % | $ | 161.4 | 30.9 | % | $ | 167.3 | 31.5 | % | |||||||||||||||||||||||||||||||
| Restaurant labor | 59.4 | 30.9 | % | 54.7 | 30.1 | % | 170.3 | 32.6 | % | 160.1 | 30.2 | % | |||||||||||||||||||||||||||||||||||
Occupancy, advertising and other operating costs | 40.5 | 21.1 | % | 40.5 | 22.3 | % | 118.5 | 22.6 | % | 118.7 | 22.4 | % | |||||||||||||||||||||||||||||||||||
| Total cost of sales | $ | 159.5 | 83.1 | % | $ | 152.4 | 83.8 | % | $ | 450.2 | 86.1 | % | $ | 446.1 | 84.1 | % | |||||||||||||||||||||||||||||||
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | % of Sales | 2019 | % of Sales | 2020 | % of Sales | 2019 | % of Sales | ||||||||||||||||||||||||||||||||||||||||
| Restaurant margin | $ | 32.4 | 16.9 | % | $ | 29.6 | 16.2 | % | $ | 72.8 | 13.9 | % | $ | 84.6 | 15.9 | % | |||||||||||||||||||||||||||||||
37
The tables below present certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.
| Third Quarter | Nine Months | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Key business measures: | |||||||||||||||||||||||
U.S. same-restaurant sales: | |||||||||||||||||||||||
Company-operated restaurants | 4.2 | % | 4.7 | % | (2.2) | % | 2.5 | % | |||||||||||||||
Franchised restaurants | 7.2 | % | 4.5 | % | 1.1 | % | 2.4 | % | |||||||||||||||
Systemwide | 7.0 | % | 4.5 | % | 0.9 | % | 2.4 | % | |||||||||||||||
| International same-restaurant sales (a) | (2.1) | % | 3.3 | % | (7.3) | % | 3.3 | % | |||||||||||||||
Global same-restaurant sales: | |||||||||||||||||||||||
Company-operated restaurants | 4.2 | % | 4.7 | % | (2.2) | % | 2.5 | % | |||||||||||||||
Franchised restaurants (a) | 6.2 | % | 4.4 | % | 0.2 | % | 2.5 | % | |||||||||||||||
Systemwide (a) | 6.1 | % | 4.4 | % | — | % | 2.5 | % | |||||||||||||||
________________
(a)Includes international franchised restaurants same-restaurant sales (excluding Argentina and Venezuela due to the impact of the highly inflationary economies of those countries).
| Third Quarter | Nine Months | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Key business measures (continued): | |||||||||||||||||||||||
Systemwide sales: (a) | |||||||||||||||||||||||
Company-operated | $ | 191.9 | $ | 182.0 | $ | 523.0 | $ | 530.7 | |||||||||||||||
| U.S. franchised | 2,499.7 | 2,313.0 | 6,913.1 | 6,784.9 | |||||||||||||||||||
U.S. systemwide | 2,691.6 | 2,495.0 | 7,436.1 | 7,315.6 | |||||||||||||||||||
International franchised (b) | 291.3 | 303.0 | 784.1 | 877.3 | |||||||||||||||||||
Global systemwide | $ | 2,982.9 | $ | 2,798.0 | $ | 8,220.2 | $ | 8,192.9 | |||||||||||||||
________________
(a)During the third quarter of 2020 and 2019, global systemwide sales increased 6.7% and 5.7%, respectively, U.S. systemwide sales increased 7.9% and 5.8%, respectively, and international franchised sales decreased 3.5% and increased 4.6%, respectively, on a constant currency basis. During the first nine months of 2020 and 2019, global systemwide sales increased 0.5% and 4.1%, respectively, U.S. systemwide sales increased 1.6% and 3.6%, respectively, and international franchised sales decreased 9.3% and increased 8.3%, respectively, on a constant currency basis.
(b)Excludes Argentina and Venezuela due to the impact of the highly inflationary economies of those countries.
38
| Third Quarter | |||||||||||||||||||||||
| Company-operated | U.S. Franchised | International Franchised | Systemwide | ||||||||||||||||||||
| Restaurant count: | |||||||||||||||||||||||
| Restaurant count at June 28, 2020 | 358 | 5,504 | 944 | 6,806 | |||||||||||||||||||
| Opened | 2 | 25 | 6 | 33 | |||||||||||||||||||
| Closed (a) | — | (15) | (10) | (25) | |||||||||||||||||||
| Net purchased from (sold by) franchisees | — | — | — | — | |||||||||||||||||||
Restaurant count at September 27, 2020 | 360 | 5,514 | 940 | 6,814 | |||||||||||||||||||
| Nine Months | |||||||||||||||||||||||
| Company-operated | U.S. Franchised | International Franchised | Systemwide | ||||||||||||||||||||
| Restaurant count at December 29, 2019 | 357 | 5,495 | 936 | 6,788 | |||||||||||||||||||
| Opened | 5 | 68 | 23 | 96 | |||||||||||||||||||
| Closed (a) | (2) | (49) | (19) | (70) | |||||||||||||||||||
| Net purchased from (sold by) franchisees | — | — | — | — | |||||||||||||||||||
Restaurant count at September 27, 2020 | 360 | 5,514 | 940 | 6,814 | |||||||||||||||||||
________________
(a)Excludes restaurants temporarily closed due to the impact of the COVID-19 pandemic.
| Sales | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Sales | $ | 191.9 | $ | 182.0 | $ | 9.9 | $ | 523.0 | $ | 530.7 | $ | (7.7) | |||||||||||||||||||||||
The increase in sales for the third quarter of 2020 was primarily due to a 4.2% increase in Company-operated same-restaurant sales. Company-operated same-restaurant sales increased due to (1) the positive impact from the launch of breakfast on March 2, 2020 and (2) higher average check. These increases were partially offset by a decrease in customer count as a result of the COVID-19 pandemic.
The decrease in sales for the first nine months of 2020 was primarily due to a 2.2% decrease in Company-operated same-restaurant sales. Company-operated same-restaurant sales decreased due to a decrease in customer count as a result of the COVID-19 pandemic, partially offset by (1) the positive impact from the launch of breakfast on March 2, 2020 and (2) higher average check.
| Franchise Royalty Revenue and Fees | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Franchise royalty revenue | $ | 109.3 | $ | 102.3 | $ | 7.0 | $ | 301.9 | $ | 300.0 | $ | 1.9 | |||||||||||||||||||||||
| Franchise fees | 7.5 | 6.9 | 0.6 | 19.7 | 20.3 | (0.6) | |||||||||||||||||||||||||||||
| $ | 116.8 | $ | 109.2 | $ | 7.6 | $ | 321.6 | $ | 320.3 | $ | 1.3 | ||||||||||||||||||||||||
The increase in franchise royalty revenue during the third quarter and the first nine months of 2020 was primarily due to a 6.2% and 0.2% increase in franchise same-restaurant sales, respectively, which reflects the positive impact from the launch of breakfast on March 2, 2020, partially offset by a decrease in customer count as a result of the COVID-19 pandemic. The change in franchise fees during the third quarter and the first nine months of 2020 was primarily due to changes in other miscellaneous franchise fees.
39
| Franchise Rental Income | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Franchise rental income | $ | 58.7 | $ | 59.9 | $ | (1.2) | $ | 173.4 | $ | 176.9 | $ | (3.5) | |||||||||||||||||||||||
The decrease in franchise rental income during the third quarter and the first nine months of 2020 was primarily due to assigning certain leases to franchisees during 2019. Franchise rental income during the first nine months of 2020 also decreased due to amending certain existing leases.
| Advertising Funds Revenue | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Advertising funds revenue | $ | 84.8 | $ | 86.8 | $ | (2.0) | $ | 241.5 | $ | 253.9 | $ | (12.4) | |||||||||||||||||||||||
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 decrease in advertising funds revenue during the third quarter and the first nine months of 2020 was primarily due to the impact of the COVID-19 pandemic. The positive impact from the launch of breakfast has not impacted advertising funds revenue due to the Company’s decision in March 2020 to abate national advertising fund contributions on breakfast sales for the remainder of 2020 in response to the COVID-19 pandemic.
| Cost of Sales, as a Percent of Sales | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Food and paper | 31.1 | % | 31.4 | % | (0.3) | % | 30.9 | % | 31.5 | % | (0.6) | % | |||||||||||||||||||||||
| Restaurant labor | 30.9 | % | 30.1 | % | 0.8 | % | 32.6 | % | 30.2 | % | 2.4 | % | |||||||||||||||||||||||
| Occupancy, advertising and other operating costs | 21.1 | % | 22.3 | % | (1.2) | % | 22.6 | % | 22.4 | % | 0.2 | % | |||||||||||||||||||||||
| 83.1 | % | 83.8 | % | (0.7) | % | 86.1 | % | 84.1 | % | 2.0 | % | ||||||||||||||||||||||||
The decrease in cost of sales, as a percent of sales, during the third quarter of 2020 was primarily due to (1) higher average check and (2) lower than expected local advertising spend. These impacts were partially offset by (1) a decrease in customer count, reflecting the impact of the COVID-19 pandemic, (2) an increase in commodity costs and (3) restaurant labor rate increases.
The increase in cost of sales, as a percent of sales, during the first nine months of 2020 was primarily due to (1) a decrease in customer count, reflecting the impact of the COVID-19 pandemic, (2) restaurant labor rate increases, which included incremental recognition pay during April and May, and (3) an increase in commodity costs. These impacts were partially offset by higher average check.
| Franchise Support and Other Costs | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Franchise support and other costs | $ | 6.0 | $ | 9.7 | $ | (3.7) | $ | 19.4 | $ | 19.8 | $ | (0.4) | |||||||||||||||||||||||
The decrease in franchise support and other costs during the third quarter and the first nine months of 2020 was primarily due to the prior year purchase of digital scanning equipment for franchisees of $3.9 million. During the first nine months of 2020, this decrease was partially offset by investments to support U.S. franchisees in preparation of the launch of breakfast across the U.S. system on March 2, 2020.
40
| Franchise Rental Expense | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Franchise rental expense | $ | 32.4 | $ | 32.4 | $ | — | $ | 93.0 | $ | 92.8 | $ | 0.2 | |||||||||||||||||||||||
The increase in franchise rental expense during the first nine months of 2020 was primarily due to the impact of assigning certain leases to franchisees in 2019.
| Advertising Funds Expense | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Advertising funds expense | $ | 92.0 | $ | 87.9 | $ | 4.1 | $ | 253.4 | $ | 257.0 | $ | (3.6) | |||||||||||||||||||||||
On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to exceed advertising funds revenue by approximately $20.0 million for 2020, which includes (1) the Company’s decision in June 2020 to fund up to $15.0 million of incremental advertising and (2) the amount by which advertising funds revenue exceeded advertising funds expense in 2019 and 2018 of approximately $5.0 million. During the third quarter of 2020, advertising funds expense increased due to the Company recognizing $7.3 million of the expected advertising spend in excess of advertising funds revenue, which was partially offset by the decrease in advertising funds revenue due to the same factor as described above for “Advertising Funds Revenue.” During the first nine months of 2020, advertising funds expense decreased due to the same factor as described above for “Advertising Funds Revenue,” partially offset by the recognition of $11.9 million of the expected advertising spend in excess of advertising funds revenue.
| General and Administrative | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Professional fees | $ | 8.0 | $ | 4.4 | $ | 3.6 | $ | 20.8 | $ | 13.6 | $ | 7.2 | |||||||||||||||||||||||
| Legal reserves | 0.1 | (2.8) | 2.9 | 0.1 | (2.3) | 2.4 | |||||||||||||||||||||||||||||
| Incentive compensation | 4.2 | 7.6 | (3.4) | 13.2 | 18.3 | (5.1) | |||||||||||||||||||||||||||||
| Travel-related expenses | 0.8 | 3.7 | (2.9) | 4.7 | 9.6 | (4.9) | |||||||||||||||||||||||||||||
| Other, net | 34.2 | 33.3 | 0.9 | 108.8 | 107.1 | 1.7 | |||||||||||||||||||||||||||||
| $ | 47.3 | $ | 46.2 | $ | 1.1 | $ | 147.6 | $ | 146.3 | $ | 1.3 | ||||||||||||||||||||||||
The increase in general and administrative expenses during the third quarter and the first nine months of 2020 was primarily due to (1) an increase in professional fees, reflecting higher IT-related costs, and (2) the prior year reduction in legal reserves as a result of an increase in anticipated insurance proceeds available for use related to the settlement of the financial institutions class action. These increases were offset by (1) a decrease in incentive compensation accruals due to lower operating performance in the first nine months of 2020 versus the first nine months of 2019 and (2) a decrease in travel-related expenses as a result of reduced travel during the COVID-19 pandemic.
41
| Depreciation and Amortization | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Restaurants | $ | 21.2 | $ | 21.8 | $ | (0.6) | $ | 63.7 | $ | 63.7 | $ | — | |||||||||||||||||||||||
| Corporate and other | 11.8 | 11.5 | 0.3 | 35.0 | 34.3 | 0.7 | |||||||||||||||||||||||||||||
| $ | 33.0 | $ | 33.3 | $ | (0.3) | $ | 98.7 | $ | 98.0 | $ | 0.7 | ||||||||||||||||||||||||
The decrease in depreciation and amortization during the third quarter of 2020 was primarily due to a decrease in depreciation on assets classified as held for sale resulting from the expected sale of 43 restaurants in New York to franchisees in the first quarter of 2021.
The increase in depreciation and amortization during the first nine months of 2020 was primarily due to (1) changes in useful lives for certain asset categories, (2) the assignment of certain leases to a franchisee in 2019, resulting in the write-off of the related net investment in the leases, and (3) an increase in depreciation on assets newly added as part of our Image Activation program. These increases were partially offset by (1) assets becoming fully depreciated and (2) a decrease in depreciation on assets classified as held for sale resulting from the expected sale of 43 restaurants in New York to franchisees in the first quarter of 2021.
| System Optimization Gains, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| System optimization gains, net | $ | — | $ | (1.0) | $ | 1.0 | $ | (2.3) | $ | (1.2) | $ | (1.1) | |||||||||||||||||||||||
System optimization gains, net for the first nine months of 2020 were primarily comprised of gains on the sale of surplus and other properties. System optimization gains, net for the third quarter and first nine months of 2019 were primarily comprised of post-closing adjustments on previous sales of restaurants.
| Reorganization and Realignment Costs | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Operations and field realignment | $ | 3.0 | $ | — | $ | 3.0 | $ | 3.0 | $ | — | $ | 3.0 | |||||||||||||||||||||||
| IT realignment | 0.4 | — | 0.4 | 6.8 | — | 6.8 | |||||||||||||||||||||||||||||
| G&A realignment | — | 0.4 | (0.4) | 0.3 | 4.7 | (4.4) | |||||||||||||||||||||||||||||
| System optimization initiative | — | — | — | 0.1 | 0.1 | — | |||||||||||||||||||||||||||||
| $ | 3.4 | $ | 0.4 | $ | 3.0 | $ | 10.2 | $ | 4.8 | $ | 5.4 | ||||||||||||||||||||||||
In September 2020, the Company initiated the Operations and Field Realignment Plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations. During the third quarter and the first nine months of 2020, the Company recognized costs associated with the Operations and Field Realignment Plan totaling $3.0 million, which included severance and related employee costs of $2.5 million and share-based compensation of $0.5 million.
In December 2019, the Company’s Board of Directors approved the IT Realignment Plan to realign and reinvest resources in its IT organization to strengthen its ability to accelerate growth. Additionally, in June 2020, the Company made changes to its leadership structure that included the creation of a Chief Information Officer position and the elimination of the Chief Digital Experience Officer position. During the third quarter of 2020, the Company recognized costs associated with the IT Realignment Plan totaling $0.4 million, which primarily included recruitment and relocation costs of $0.3 million. During the first nine months of 2020, the Company recognized costs associated with the IT Realignment Plan totaling $6.8 million, which primarily included third-party and other costs of $5.1 million and severance and related employee costs of $1.0 million.
In May 2017, the Company initiated a plan to further reduce its G&A expenses (the “G&A Realignment Plan). In addition, in May 2019, the Company announced changes to its management and operating structure. G&A realignment costs for the first nine months of 2020 were primarily comprised of share-based compensation. G&A realignment costs for the first nine months of 2019 were primarily comprised of severance and related employee costs and share-based compensation. The Company does not expect to incur any material additional costs under the G&A Realignment Plan.
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| Impairment of Long-Lived Assets | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Impairment of long-lived assets | $ | — | $ | — | $ | — | $ | 4.7 | $ | 1.7 | $ | 3.0 | |||||||||||||||||||||||
The increase in impairment charges during the first nine months of 2020 was primarily driven by the Company testing its Company-operated restaurant long-lived assets for recoverability in March 2020 as a result of the adverse impacts of the COVID-19 pandemic. As a result of this analysis, the Company recorded impairment charges due primarily to the expected deterioration in operating performance of certain Company-operated restaurants.
| Other Operating Income, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Equity in earnings in joint ventures, net | $ | (2.1) | $ | (2.1) | $ | — | $ | (4.4) | $ | (7.0) | $ | 2.6 | |||||||||||||||||||||||
| (Gains) losses on sales-type leases | (0.2) | 0.1 | (0.3) | (1.4) | (1.9) | 0.5 | |||||||||||||||||||||||||||||
| Other, net | (0.4) | (0.4) | — | (0.3) | (0.5) | 0.2 | |||||||||||||||||||||||||||||
| $ | (2.7) | $ | (2.4) | $ | (0.3) | $ | (6.1) | $ | (9.4) | $ | 3.3 | ||||||||||||||||||||||||
The change in other operating income, net during the third quarter of 2020 was primarily due to gains on new and modified sales-type leases. The change in other operating income, net during the first nine months of 2020 was primarily due to a decrease in the equity in earnings from our TimWen joint venture.
| Interest Expense, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Interest expense, net | $ | 29.1 | $ | 27.9 | $ | 1.2 | $ | 86.7 | $ | 86.9 | $ | (0.2) | |||||||||||||||||||||||
Interest expense, net increased during the third quarter of 2020 primarily due to the prior year recognition of interest income related to uncertain tax positions.
Interest expense, net decreased during the first nine months of 2020 primarily due to the impact of the completion of refinancing a portion of the Company’s securitized financing facility in June 2019.
| Loss on Early Extinguishment of Debt | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | $ | — | $ | — | $ | — | $ | — | $ | 7.2 | $ | (7.2) | |||||||||||||||||||||||
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.
| Other Income, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Other income, net | $ | 0.2 | $ | 2.2 | $ | (2.0) | $ | 1.2 | $ | 7.1 | $ | (5.9) | |||||||||||||||||||||||
Other income, net decreased during the third quarter and the first nine months of 2020 primarily due to lower interest income earned on our cash equivalents.
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| Provision for Income Taxes | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Income before income taxes | $ | 52.4 | $ | 53.3 | $ | (0.9) | $ | 105.2 | $ | 138.9 | $ | (33.7) | |||||||||||||||||||||||
Provision for income taxes | (12.6) | (7.2) | (5.4) | (26.1) | (28.5) | 2.4 | |||||||||||||||||||||||||||||
Effective tax rate on income | 24.2 | % | 13.5 | % | 10.7 | % | 24.8 | % | 20.5 | % | 4.3 | % | |||||||||||||||||||||||
Our effective tax rates for the third quarter of 2020 and 2019 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. The increase in the effective tax rate for the third quarter of 2020 compared with the third quarter of 2019 was primarily due to (1) a decrease for a reduction in unrecognized tax benefits due to a lapse of statute of limitations during the three months ended September 29, 2019 and (2) an increase in state income taxes, including non-recurring changes to state deferred taxes net of federal benefits.
Our effective tax rates for the first nine months of 2020 and 2019 were impacted by variations in income before income taxes, including uncertainty in 2020 income before income taxes arising from the COVID-19 pandemic, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The increase in the effective tax rate for the first nine months of 2020 compared with the first nine months of 2019 was primarily due to a decrease for a reduction in unrecognized tax benefits due to a lapse of statute of limitations during the nine months ended September 29, 2019.
Segment Information
See Note 19 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments.
Wendy’s U.S.
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Sales | $ | 191.9 | $ | 182.0 | $ | 9.9 | $ | 523.0 | $ | 530.7 | $ | (7.7) | |||||||||||||||||||||||
| Franchise royalty revenue | 98.1 | 90.8 | 7.3 | 271.1 | 266.6 | 4.5 | |||||||||||||||||||||||||||||
| Franchise fees | 5.7 | 5.2 | 0.5 | 16.2 | 15.9 | 0.3 | |||||||||||||||||||||||||||||
| Advertising fund revenue | 79.2 | 81.4 | (2.2) | 226.9 | 238.8 | (11.9) | |||||||||||||||||||||||||||||
| Total revenues | $ | 374.9 | $ | 359.4 | $ | 15.5 | $ | 1,037.2 | $ | 1,052.0 | $ | (14.8) | |||||||||||||||||||||||
| Segment profit | $ | 108.3 | $ | 98.3 | $ | 10.0 | $ | 283.3 | $ | 291.0 | $ | (7.7) | |||||||||||||||||||||||
The increase in Wendy’s U.S. revenues during the third quarter was primarily due to an increase in same-restaurant sales, reflecting the positive impact from the launch of breakfast on March 2, 2020 and higher average check, partially offset by a decrease in customer count as a result of the COVID-19 pandemic. The decrease in Wendy’s U.S. revenues during the first nine months of 2020 was primarily due to the impact of the COVID-19 pandemic, partially offset by (1) the positive impact from the launch of breakfast on March 2, 2020 and (2) higher average check.
The increase in Wendy’s U.S. segment profit during the third quarter was primarily due to (1) higher revenues and (2) lower cost of sales, as a percent of sales, for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales.” The decrease in Wendy’s U.S. segment profit during the first nine months of 2020 was primarily due to (1) lower revenues and (2) higher cost of sales, as a percent of sales, for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales.”
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Wendy’s International
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Franchise royalty revenue | $ | 11.2 | $ | 11.5 | $ | (0.3) | $ | 30.8 | $ | 33.3 | $ | (2.5) | |||||||||||||||||||||||
| Franchise fees | 0.5 | 1.0 | (0.5) | 1.3 | 2.6 | (1.3) | |||||||||||||||||||||||||||||
| Advertising fund revenue | 5.6 | 5.4 | 0.2 | 14.6 | 15.1 | (0.5) | |||||||||||||||||||||||||||||
| Total revenues | $ | 17.3 | $ | 17.9 | $ | (0.6) | $ | 46.7 | $ | 51.0 | $ | (4.3) | |||||||||||||||||||||||
| Segment profit | $ | 6.6 | $ | 6.3 | $ | 0.3 | $ | 15.3 | $ | 17.5 | $ | (2.2) | |||||||||||||||||||||||
The decrease in Wendy’s International revenues during the third quarter and the first nine months of 2020 was primarily due to a decrease in same-restaurant sales and the temporary closure of restaurants resulting from the impact of the COVID-19 pandemic. The decrease in same-restaurant sales was driven by a decrease in customer count, partially offset by higher average check.
The increase in Wendy’s International segment profit during the third quarter was primarily due to a decrease in travel-related expenses as a result of reduced travel during the COVID-19 pandemic, partially offset by lower revenues. The decrease in Wendy’s International segment profit during the first nine months of 2020 was primarily due to lower revenues, partially offset by a decrease in travel-related expenses as a result of reduced travel during the COVID-19 pandemic.
Global Real Estate & Development
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Franchise fees | $ | 1.4 | $ | 0.7 | $ | 0.7 | $ | 2.2 | $ | 2.0 | $ | 0.2 | |||||||||||||||||||||||
| Franchise rental income | 58.7 | 59.9 | (1.2) | 173.4 | 176.9 | (3.5) | |||||||||||||||||||||||||||||
| Total revenues | $ | 60.1 | $ | 60.6 | $ | (0.5) | $ | 175.6 | $ | 178.9 | $ | (3.3) | |||||||||||||||||||||||
| Segment profit | $ | 25.3 | $ | 26.4 | $ | (1.1) | $ | 75.5 | $ | 83.3 | $ | (7.8) | |||||||||||||||||||||||
The decrease in Global Real Estate & Development revenues during the third quarter and the first nine months of 2020 was primarily due to lower franchise rental income. See “Franchise Rental Income” above for further information.
The decrease in Global Real Estate & Development segment profit during the third quarter and the first nine months of 2020 was primarily due to a decrease in net rental income, reflecting the impact of assigning certain leases to franchisees during 2019. Global Real Estate & Development segment profit during the first nine months of 2020 was also negatively impacted by a decrease in the equity in earnings from the TimWen joint venture.
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. Our principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to stockholders.
During the nine months ended September 27, 2020, the Company made a payment of $24.7 million related to the settlement of the financial institutions class action (see Note 23 of the Financial Statements and Supplementary Data contained in Item 8 of the Form 10-K for further information).
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COVID-19 Actions
In response to the COVID-19 pandemic, the Company has taken the following actions impacting its liquidity and capital resources during the nine months ended September 27, 2020:
Long-Term Debt. The Company increased its cash position in March 2020 by drawdowns of its Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019-1 Class A-1 Notes”), its U.S. advertising fund revolving line of credit and its Canadian revolving credit facility. The Company fully repaid the drawdowns of the 2019-1 Class A-1 Notes and the U.S. advertising fund revolving line of credit in July 2020 and September 2020, respectively. In addition, the Company enhanced its debt capacity in June 2020 by issuing $100.0 million of Series 2020-1 Variable Funding Senior Secured Notes, Class A-1 (the “2020-1 Class A-1 Notes”). See “Long-Term Debt, Including Current Portion” below for additional information.
Dividends. The Company reduced its quarterly cash dividend from $.12 per share in the first quarter of 2020 to $.05 per share in the second and third quarters of 2020. The Company announced a dividend of $.07 per share to be paid in the fourth quarter of 2020. See “Dividends” below for additional information.
Stock Repurchases. The Company temporarily suspended all share repurchase activity beginning in March 2020 under the February 2020 share repurchase authorization. The Company resumed share repurchases in August 2020 as discussed below in “Stock Repurchases.”
G&A and Capital Expenditures. In the first quarter of 2020, the Company evaluated its planned 2020 general and administrative expenses and capital expenditures and identified savings of approximately $10.0 million and $20.0 million, respectively, for a total of $30.0 million in savings. The Company now expects to realize approximately $5.0 million of the previously identified general and administrative expense savings, primarily as a result of a higher incentive compensation accrual, and approximately $5.0 million of the previously identified capital expenditures savings, primarily due to a decision to increase capital expenditures for new and existing Company-operated restaurants.
Advertising Expenditures. The Company revised its planned 2020 advertising expenses in March 2020 to eliminate Company funding of incremental advertising. In June 2020, the Company reevaluated its marketing plans and made a decision to fund up to $15.0 million of incremental advertising during the remainder of 2020 to drive additional growth.
Franchise and System Support. To support the franchise system, the Company (1) extended payment terms for royalties and national advertising funds contributions by 45 days beginning in April for a three month period, (2) abated national advertising fund contributions on breakfast sales for the remainder of 2020, (3) offered to defer base rent payments on properties owned by Wendy’s and leased to franchisees by 50% beginning in May for a three month period, which are being repaid over a 12 month period beginning in August 2020, and (4) extended Image Activation and new restaurant development requirements by one year. As of September 27, 2020, substantially all franchisees are current on royalties and national advertising funds contributions due to the Company.
To support Company-operated restaurant employees, the Company (1) implemented a new emergency paid sick leave policy with up to 14 days paid leave in the event an employee is unable to work as a result of the COVID-19 pandemic and (2) increased hourly pay by 10% for the months of April and May for hourly crew members, shift managers and assistant general managers, and protected part of the monthly bonus through September for general managers and district managers.
CARES Act. The Company deferred payment of the Company’s share of Social Security payroll taxes as permitted under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which allows for the deferral of these payments through the end of 2020 and requires repayment of the deferred amounts in 2021 and 2022. The Company ceased the deferral of payments in August 2020 and plans to fully repay the deferred amounts during the fourth quarter of 2020.
In addition, the Company expects to benefit from the technical amendments under the CARES Act by treating qualified improvement property (“QIP”) as 15-year property and allowing such property to be eligible for the 100 percent bonus depreciation for QIP placed in service after December 31, 2017.
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.
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We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us.
The table below summarizes our cash flows from operating, investing and financing activities for the first nine months of 2020 and 2019:
| Nine Months | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 205.8 | $ | 237.5 | $ | (31.7) | |||||||||||
| Investing activities | (41.0) | (45.7) | 4.7 | ||||||||||||||
| Financing activities | (115.3) | (183.4) | 68.1 | ||||||||||||||
| Effect of exchange rate changes on cash | (1.8) | 2.8 | (4.6) | ||||||||||||||
| Net increase in cash, cash equivalents and restricted cash | $ | 47.7 | $ | 11.2 | $ | 36.5 | |||||||||||
Operating Activities
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 was $205.8 million and $237.5 million in the first nine months of 2020 and 2019, respectively. The change was primarily due to (1) lower net income, adjusted for non-cash expenses, (2) a cash payment of $24.7 million related to the settlement of the financial institutions class action in January 2020 and (3) an increase in payments for incentive compensation for the 2019 fiscal year paid in 2020. These changes were partially offset by the timing of payments for marketing expenses of the national advertising funds.
Investing Activities
Cash used in investing activities was $41.0 million and $45.7 million in the first nine months of 2020 and 2019, respectively. The change was primarily due to (1) no acquisitions of restaurants from franchisees in the first nine months of 2020 compared with cash used for acquisitions of $5.1 million in the first nine months of 2019, (2) a decrease in new notes receivable to franchisees of $2.0 million and (3) an increase in proceeds from dispositions of $1.5 million. These changes were partially offset by an increase in capital expenditures of $3.9 million.
Financing Activities
Cash used in financing activities was $115.3 million and $183.4 million in the first nine months of 2020 and 2019, respectively. The change was primarily due to (1) a decrease in repurchases of common stock of $30.3 million, (2) a net decrease in cash used in long-term debt activities of $23.8 million, reflecting the impact of the completion of a debt refinancing transaction during 2019, and (3) a decrease in dividends of $20.1 million. These changes were partially offset by a decrease in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $5.5 million.
Long-Term Debt, Including Current Portion
Except as described below, there were no material changes to the terms of any debt obligations since December 29, 2019. The Company was in compliance with its debt covenants as of September 27, 2020. See Note 9 of the Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.
Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. Under this facility, in June 2019, the Master Issuer issued outstanding 2019-1 Class A-1 Notes, which allow for the borrowing of up to $150.0 million from time to time on a revolving basis using various credit instruments, including a letter of credit facility. In March 2020, the Company drew down $120.0 million under the 2019-1 Class A-1 Notes, which the Company fully repaid in July 2020. As a result, as of September 27, 2020, the Company had no outstanding borrowings under the 2019-1 Class A-1 Notes. In June 2020, the Master Issuer also issued outstanding 2020-1 Class A-1 Notes, which allow for the borrowing of up to $100.0 million from time to time on a revolving basis using various credit instruments. The Company had no outstanding borrowings under the 2020-1 Class A-1 Notes as of September 27, 2020.
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A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6.0 million. In March 2020, the Company drew down C$5.5 million under the revolving credit facility. As a result, as of September 27, 2020, the Company had outstanding borrowings of C$5.5 million under the revolving credit facility.
Wendy’s U.S. advertising fund has a revolving line of credit of $25.0 million, which was established to support the advertising fund operations. Borrowings under the line of credit are guaranteed by Wendy’s. In February 2020, the Company drew down $4.4 million under the revolving line of credit, which the Company fully repaid in February 2020. In March 2020, the Company drew down $25.0 million under the revolving line of credit, which the Company fully repaid in September 2020. As a result, as of September 27, 2020, the Company had no outstanding borrowings under the revolving line of credit.
The increased borrowings and other actions described above were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic.
Dividends
On March 16, 2020, June 15, 2020 and September 15, 2020, the Company paid quarterly cash dividends per share of $.12, $.05 and $.05, respectively, aggregating $49.2 million. On November 4, 2020, the Company announced a dividend of $.07 per share to be paid on December 15, 2020 to stockholders of record as of December 1, 2020. As a result of the November 4 announcement, the Company expects that its total cash requirements for the fourth quarter of 2020 will be approximately $15.7 million based on the number of shares of its common stock outstanding at October 28, 2020. 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 2020, our Board of Directors authorized a repurchase program for up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020. During the nine months ended September 27, 2020, the Company repurchased 0.9 million shares under the February 2020 repurchase authorization with an aggregate purchase price of $16.2 million, of which $0.2 million was accrued at September 27, 2020, and excluding commissions. As of September 27, 2020, the Company had $83.8 million of availability remaining under its February 2020 authorization. Subsequent to September 27, 2020 through October 28, 2020, the Company repurchased 0.1 million shares under the February 2020 authorization with an aggregate purchase price of $2.0 million, excluding commissions.
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 warranted and to the extent legally permissible. In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $100.0 million in cash and received an initial delivery of 4.1 million shares of common stock, representing an estimated 85% of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 0.6 million shares of common stock at an average purchase price of $23.89. The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2019 ASR Agreement, less an agreed upon discount. In total, 4.7 million shares were delivered under the 2019 ASR Agreement at an average purchase price of $21.37 per share.
In addition to the shares repurchased in connection with the 2019 ASR Agreement, during the nine months ended September 27, 2020, the Company repurchased 1.3 million shares with an aggregate purchase price of $28.8 million, excluding commissions, under the February 2019 authorization. After taking into consideration these repurchases, with the completion of the 2019 ASR Agreement in February 2020, the Company completed its February 2019 authorization.
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During the nine months ended September 29, 2019, the Company repurchased 4.2 million shares with an aggregate purchase price of $76.2 million, of which $1.1 million was accrued at September 29, 2019, and excluding commissions of $0.1 million, under the February 2019 authorization and the Company’s previous November 2018 authorization to repurchase up to $220.0 million of our common stock.
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. Currently, we are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business.
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 the Form 10-K.
As of September 27, 2020, there were no material changes from the information contained in the Form 10-K, except as described below.
Interest Rate Risk
Our long-term debt, including the current portion, aggregated $2,299.5 million as of September 27, 2020 (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 its 2019-1 Class A-1 Notes and its 2020-1 Class A-1 Notes (collectively, the “Class A-1 Notes”), as well as its U.S. advertising fund revolving line of credit; however, the Company had no outstanding borrowings under the Class A-1 Notes or U.S. advertising fund revolving line of credit as of September 27, 2020. The Company has outstanding borrowings of C$5.5 million under a Canadian subsidiary’s revolving credit facility as of September 27, 2020, which bears interest at the Bank of Montreal Prime Rate. An increase or decrease of 1.0% in the effective interest rate applied to the outstanding borrowings under our Canadian subsidiary’s revolving credit facility would result in a pre-tax interest expense fluctuation of approximately C$0.1 million on an annualized basis.
In addition, LIBOR is expected to be discontinued after 2021. If LIBOR is discontinued, we may need to renegotiate certain loan documents and we cannot predict what alternative index would be negotiated with our lenders or the resulting impact on our interest expense.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 27, 2020. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 27, 2020, the disclosure controls and procedures of the Company were effective at a reasonable assurance level in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the internal control over financial reporting of the Company during the third quarter of 2020 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 error 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 “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Generally, forward-looking statements include the words “may,” “believes,” “plans,” “expects,” “anticipates,” “intends,” “estimate,” “goal,” “upcoming,” “outlook,” “guidance” or the negation thereof, or similar expressions. In addition, all statements that address future operating, financial or business performance, strategies or initiatives, future efficiencies or savings, anticipated costs or charges, future capitalization, anticipated impacts of recent or pending investments or transactions and statements expressing general views about future results or brand health are forward-looking statements within the meaning of the Reform Act. 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. For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed in or implied by our forward-looking statements. Many important factors could affect our future results and cause those results to differ materially from those expressed in or implied by our forward-looking statements. Such factors include, but are not limited to, the following:
•the disruption to our business from the novel coronavirus (COVID-19) pandemic and the impact of the pandemic on our results of operations, financial condition and prospects;
•the impact of competition, including from outside the quick-service restaurant industry;
•changes in consumer tastes and preferences, unemployment and discretionary consumer spending;
•prevailing conditions and disruptions in the national and global economies, including areas with a high concentration of Wendy’s restaurants;
•food safety events, including instances of food-borne illness, involving Wendy’s, its supply chain or other food service companies;
•the success of our operating, promotional, marketing or new product development initiatives, including risks associated with our entry into the breakfast daypart across the U.S. system;
•our ability to achieve our growth strategy through net new restaurant development, including the availability of suitable locations and terms, and the success of our Image Activation program, including the ability of reimaged restaurants to positively affect sales;
•changes in commodity and other operating costs, including supply, distribution and labor costs;
•our ability to attract and retain qualified restaurant personnel;
•shortages or interruptions in the supply or distribution of food or other products and other risks associated with our independent supply chain purchasing co-op;
•consumer concerns regarding the nutritional aspects of our products;
•the effects of disease outbreaks, epidemics or pandemics;
•the effects of negative publicity that can occur from socially relevant issues or from increased use of social media;
•risks associated with our international operations, including our ability to achieve our international growth strategy;
•risks associated with our digital commerce strategy, platforms and technologies, including our ability to adapt to changes in industry trends and consumer preferences;
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•our dependence on computer systems and information technology, including risks associated with the failure, interruption or breach of our systems or technology or other cyber incidents or deficiencies;
•risks associated with the realignment and reinvestment of resources in our IT organization to accelerate growth and the realignment and reallocation of resources to better support long-term growth strategies for Company and franchise operations;
•our ability to effectively manage the acquisition and disposition of restaurants or successfully implement other strategic initiatives;
•conditions beyond our control, such as adverse weather conditions, natural disasters, hostilities, social unrest or other catastrophic events;
•the availability and cost of insurance;
•our ability to protect our intellectual property;
•the continued succession and retention of key personnel and the effectiveness of our leadership structure;
•compliance with legal or regulatory requirements, the impact of legal or regulatory proceedings and risks associated with an increased focus on environmental, social and governance issues;
•risks associated with leasing and owning significant amounts of real estate, including a decline in the value of our real estate assets or liability for environmental matters;
•the effects of charges for impairment of goodwill or other long-lived assets;
•risks associated with our securitized financing facility and other debt agreements, including our overall debt levels and our 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;
•the availability, terms and deployment of capital, including the amount and timing of equity and debt repurchases;
•risks and uncertainties associated with the bankruptcy of the Company’s largest franchisee, NPC Quality Burgers, Inc.; and
•other risks and uncertainties affecting us and our subsidiaries referred to in this Quarterly Report on Form 10-Q (see especially Part II, “Item 1A. Risk Factors”), our Annual Report on Form 10-K filed with the SEC on February 26, 2020 (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.
In addition to the factors described above, there are risks associated with our predominantly franchised business model that could impact our results, performance and achievements. Such risks include our ability to identify, attract and retain experienced and qualified franchisees and effectively manage the transfer of restaurants between and among franchisees, the business and financial health of franchisees, the ability of franchisees to meet their royalty, advertising, development, reimaging and other commitments, participation by franchisees in brand strategies and the fact that franchisees are independent third parties that own, operate and are responsible for overseeing the operations of their restaurants. Our predominantly franchised business model may also impact the ability of the Wendy’s system to effectively respond and adapt to market changes. Many of these risks have been or in the future may be heightened due to the business disruption and impact from the COVID-19 pandemic.
All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us.
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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, although we may do so from time to time. 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, and the Company believes it has adequate accruals for continuing operations for all such 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.
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 Reports on Form 10-Q for the periods ended March 29, 2020 and June 28, 2020, 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 Reports on Form 10-Q for the periods ended March 29, 2020 and June 28, 2020.
The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has materially affected and could continue to materially affect our results of operations, financial condition and prospects for an extended period of time.
In March 2020, the World Health Organization declared the novel coronavirus (COVID-19) a global pandemic, and governmental authorities around the world implemented measures to reduce the spread of COVID-19. These measures adversely affected customers, workforces, economies and financial markets, and, along with decreased consumer spending, led to an economic downturn in many of our markets. Governmental restrictions and public perceptions of the risks associated with COVID-19 have caused consumers to avoid or limit travel, gatherings in public places and other social interactions, which has adversely affected, and could continue to adversely affect, our business.
In response to the COVID-19 pandemic, in March 2020, we updated our brand standard to include the closure of all dining rooms except where there were specific needs, or a drive-thru or pick-up window option was not available, subject to applicable federal, state and local requirements. Substantially all Wendy’s restaurants continued to offer drive-thru and delivery service to our customers. During the second quarter of 2020, we began implementing our restaurant and dining room reopening process through a phased approach in accordance with federal, state and local requirements, with customer and team member safety as our top priority. Dining rooms have been re-opening at each restaurant owner’s discretion, subject to applicable regulatory restrictions. As of September 27, 2020, approximately 75% of dining rooms were open across the Wendy’s system offering carryout and, in some cases, dine in services. The COVID-19 pandemic has also resulted in the temporary closure of certain restaurants across the Wendy’s system. As of September 27, 2020, approximately 99% of our global systemwide restaurants were operating.
As a result of the COVID-19 pandemic, our restaurant traffic and systemwide sales have been significantly negatively impacted. Even as mobility continues to increase, customers have been and may continue to be reluctant to return to in-restaurant dining, and consumer spending may continue to be adversely impacted for an extended period of time as a result of decreased consumer confidence and the impact of lost wages due to increased unemployment. During the third quarter and first nine months of 2020, global same-restaurant sales increased 6.1% and were flat, respectively, primarily driven by the positive impact of our new breakfast daypart in the U.S. and higher average check, partially offset by a decline in customer counts.
The COVID-19 pandemic has also adversely affected new restaurant development and restaurant reimaging. Due to the uncertain and challenging economic and market conditions, we delayed construction of certain new Company-operated restaurants and reimaging of existing Company-operated restaurants and also delayed the 2020 new restaurant development and Image Activation requirements of our franchisees. These delays could affect our ability to drive future growth in our business.
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Our operating results and financial condition are impacted to a large extent by the operational and financial success of our franchisees. The impact of the COVID-19 pandemic has had, and could continue to have, an adverse effect on our franchisees’ operations and financial condition. As previously announced, we took certain actions to support our franchisees, including extending payment terms for royalties, extending or abating payment terms for advertising fund contributions and offering to defer base rent payments on properties owned by the Company and leased to franchisees. To the extent our franchisees experience financial distress, including as a result of the COVID-19 pandemic, it could negatively affect our results of operations, cash flows and financial condition through delayed or reduced payments of royalties, advertising fund contributions or rent. In addition, in the event our franchisees institute insolvency or bankruptcy proceedings, we could be prevented from collecting or retaining certain payments or exercising certain rights under the related franchise, development or other agreements.
The COVID-19 pandemic led, and could again lead, to interruptions in the delivery of food or other supplies to Wendy’s restaurants arising from delays or restrictions on shipping or manufacturing, closures of supplier or distributor facilities or financial distress or insolvency of suppliers or distributors. These delays or interruptions could impact the availability of certain food items at Wendy’s restaurants, including beef, chicken, pork and other core menu products. For example, as previously disclosed, we experienced disruptions to our beef supply beginning in early May 2020 as beef suppliers across North America faced production challenges. As a result, some menu items were occasionally in short supply at some Wendy’s system restaurants. While we and our supply chain partners effectively managed through this disruption and the beef supply subsequently returned to normal levels across the Wendy’s system, there can be no assurances that we will not see similar disruptions in the future. Our results of operations and those of our franchisees could be adversely affected if our key suppliers or distributors are unable to fulfill their responsibilities and we are unable to identify alternative suppliers or distributors in a timely manner or effectively transition the impacted business to new suppliers or distributors.
The COVID-19 pandemic could also lead to labor shortages or increased labor costs. Because COVID-19 can be transmitted through human contact, the risk or perceived risk of contracting the virus could adversely affect the ability or cost of adequately staffing restaurants, which could be exacerbated to the extent that the Company or franchisees have employees who test positive for the virus. If a significant percentage of our or our franchisees’ workforce is unable to work, whether because of illness, quarantine, travel limitations or other governmental actions or restrictions, our operations and the operations of our franchisees may be negatively impacted, which could materially affect our results of operations and financial condition. As previously disclosed, we took several actions to help support our employees and protect the health and safety of our employees and customers, such as implementing a new emergency sick leave policy, providing temporary wage increases to restaurant employees in April and May 2020 and purchasing additional sanitation supplies and personal protective materials, which have contributed to increased operating costs.
The impacts from the COVID-19 pandemic could have a material adverse effect on our liquidity and capital resources. We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us. If the disruptions caused by COVID-19 worsen or last longer than we currently expect, our ability to comply with certain debt covenants under our securitized financing facility could be adversely affected. Additionally, negative changes to our credit ratings due to the impact or expected impact of COVID-19 could have an adverse effect on our existing indebtedness, our ability to access additional capital, our cost of borrowing and our overall liquidity position and financial condition.
We cannot predict the duration, scope or severity of the COVID-19 pandemic. COVID-19 has disrupted and is expected to continue to disrupt our business, which has materially affected and could continue to materially affect our results of operations, financial condition and prospects for an extended period of time.
In addition to the risks described above, the COVID-19 pandemic has had, and could continue to have, the effect of heightening other risks disclosed in the “Risk Factors” section of our Form 10-K, including, but not limited to, risks related to competition, consumer preferences and spending, economic conditions and disruptions, labor, supply chain and purchasing, new restaurant development and reimaging, performance of the breakfast daypart, franchisee actions, results and financial condition, leasing and ownership of real estate, complaints or litigation, legal or regulatory requirements, international operations and expansion, digital commerce and technology, cybersecurity, asset impairments, our securitized financing facility and levels of indebtedness, and payment of future dividends. Because the COVID-19 pandemic is unprecedented and continuously evolving, the potential impacts to the risk factors that are further described in the Form 10-K remain uncertain.
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There are risks associated with the bankruptcy of our largest franchisee, NPC Quality Burgers, Inc., including the contemplated sale of its Wendy’s restaurants.
On July 1, 2020, our largest franchisee, NPC Quality Burgers, Inc. (“NPC”) filed for chapter 11 bankruptcy and commenced a process to sell all or substantially all of its assets, including its interests in approximately 393 Wendy’s restaurants across eight different markets, pursuant to a court-approved auction process. As of the date of this report, all of NPC’s Wendy’s restaurants remain open, and NPC has remained current with its continuing obligations to us and the Wendy’s system, except for certain obligations that were not yet due and payable as of the bankruptcy filing date that we expect to be paid upon the closing of the contemplated sale.
We are actively participating in the chapter 11 proceedings and continue to evaluate our strategic alternatives in connection with the sale process. This includes, among other things, asserting various consent rights under franchise-related agreements as well as the possibility of submitting a consortium bid together with a group of pre-qualified franchisees to acquire NPC’s Wendy’s restaurants. No final decision has been made by the Company as to whether we will submit any such consortium bid, but if we were to do so, we expect that several existing and new franchisees would be the ultimate purchasers of most of the NPC markets, with the Company acquiring at most one or two markets. We remain committed to maintaining our ownership level of approximately 5% of the total Wendy’s system.
There can be no assurances regarding the outcome of NPC’s chapter 11 proceedings, including whether the Company will submit a consortium bid to acquire NPC’s Wendy’s restaurants or whether the consortium bid or any other sale will be successful. In addition, there can be no assurances that NPC’s bankruptcy, including the contemplated sale of its Wendy’s restaurants, will not have an adverse impact on our results of operations, cash flows or financial condition or on the performance of the Wendy’s system.
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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 third quarter of 2020:
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) | ||||||||||
| June 29, 2020 through August 2, 2020 | 8,087 | $21.66 | — | $85,462,519 | ||||||||||
| August 3, 2020 through August 30, 2020 | 90,703 | $21.82 | 21,202 | $85,012,494 | ||||||||||
| August 31, 2020 through September 27, 2020 | 60,811 | $21.00 | 59,900 | $83,755,990 | ||||||||||
| Total | 159,601 | $21.50 | 81,102 | $83,755,990 | ||||||||||
(1)Includes 78,499 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 fair market value of the Company’s common stock on the vesting or exercise date of such awards, as set forth in the applicable plan document.
(2)In February 2020, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. As previously announced, in March 2020, the Company temporarily suspended all share repurchase activity in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020.
Subsequent to September 27, 2020 through October 28, 2020, the Company repurchased 0.1 million shares under the February 2020 authorization with an aggregate purchase price of $2.0 million, excluding commissions.
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Item 6. Exhibits.
| EXHIBIT NO. | DESCRIPTION | ||||
| 10.1 | |||||
| 10.2 | |||||
| 10.3 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 101 | The following financial information from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2020 formatted in Inline eXtensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. | ||||
| 104 | The cover page from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2020, formatted in Inline XBRL and contained in Exhibit 101. | ||||
____________________
| * | Filed herewith. | ||||
| ** | Identifies a management contract or compensatory plan or arrangement. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE WENDY’S COMPANY (Registrant) | |||||
| Date: November 4, 2020 | By: /s/ Gunther Plosch | ||||
| Gunther Plosch | |||||
| Chief Financial Officer | |||||
| (On behalf of the registrant) | |||||
| Date: November 4, 2020 | By: /s/ Leigh A. Burnside | ||||
| Leigh A. Burnside | |||||
| Senior Vice President, Finance and | |||||
| Chief Accounting Officer | |||||
| (Principal Accounting Officer) | |||||
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