Wendy's Co 10-Q for FY2023 Q3
Wendy's Co (WEN)
10-Q
2023-11-02
For: 2023-10-01
View Original
Added on
April 11, 2026
About this 10-Q
Wendy's Co filed this 10-Q on November 2, 2023, covering the quarter ended October 1, 2023 (FY2023 Q3).
Headline figures
Quarter ended October 1, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $550.56M
- up 3.4% from $532.57M a year earlier
- Net income
- $58.05M
- up 14.9% from net income of $50.54M a year earlier
- Diluted EPS
- $0.28
- up 16.7% from $0.24 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 October 1, 2023
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 206,259,422 shares of The Wendy’s Company common stock outstanding as of October 26, 2023.
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)
| October 1, 2023 | January 1, 2023 | ||||||||||
| 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 | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| (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 (exclusive of amortization of cloud computing arrangements shown separately below) | |||||||||||||||||||||||
| Amortization of cloud computing arrangements | |||||||||||||||||||||||
| 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 | ( | ( | |||||||||||||||||||||
| Investment (loss) income, net | ( | ||||||||||||||||||||||
| 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 | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive (loss) income | ( | ( | ( | ||||||||||||||||||||
| 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 January 1, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| 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 April 2, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| 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 July 2, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| 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 October 1, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
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 January 2, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| 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 April 3, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| 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 July 3, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Cash dividends | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | |||||||||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||||||||
| Balance at October 2, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
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 | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| (Unaudited) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) | |||||||||||
| Amortization of cloud computing arrangements | |||||||||||
| 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 | |||||||||||
| Cloud computing arrangements expenditures | ( | ( | |||||||||
| Changes in operating assets and liabilities and other, net | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Franchise development fund | ( | ( | |||||||||
| Dispositions | |||||||||||
| 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) provided by financing activities | ( | ||||||||||
| Net cash (used in) provided by operations before effect of exchange rate changes on cash | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net (decrease) 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 | $ | $ | |||||||||
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 October 1, 2023, the results of our operations for the three and nine months ended October 1, 2023 and October 2, 2022 and cash flows for the nine months ended October 1, 2023 and October 2, 2022. The results of operations for the nine months ended October 1, 2023 are not necessarily indicative of the results to be expected for the full 2023 fiscal year. The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023 (the “Form 10-K”).
The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business in the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. See Note 17 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, quarters and months 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) 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 October 1, 2023 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | $ | $ | $ | |||||||||||||||||||
| Franchise royalty revenue | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Franchise rental income | |||||||||||||||||||||||
| Advertising funds revenue | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
Three Months Ended October 2, 2022 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | $ | $ | $ | |||||||||||||||||||
| Franchise royalty revenue | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Franchise rental income | |||||||||||||||||||||||
| Advertising funds revenue | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
10
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 October 1, 2023 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | $ | $ | $ | |||||||||||||||||||
| Franchise royalty revenue | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Franchise rental income | |||||||||||||||||||||||
| Advertising funds revenue | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
Nine Months Ended October 2, 2022 | |||||||||||||||||||||||
| 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:
| October 1, 2023 (a) | January 1, 2023 (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)The current portion of deferred franchise fees is included in “Accrued expenses and other current liabilities” and the long-term portion of deferred franchise fees is included in “Deferred franchise fees” and totaled $10,526 and $89,363 , respectively, as of October 1, 2023, and $8,977 and $90,231 , respectively, as of January 1, 2023.
Significant changes in deferred franchise fees are as follows:
| Nine Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| 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 | $ | $ | |||||||||
11
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: | |||||
| 2023 (a) | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| $ | |||||
_______________
(a)Represents franchise fees expected to be recognized for the remainder of 2023, which includes development-related franchise fees expected to be recognized over a duration of one year or less.
(3) System Optimization Gains, Net
The Company’s system optimization initiative included 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 achieved its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5 % of the total system. While the Company has no plans to move its ownership away from approximately 5 % of the total system, 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 and drive new restaurant development. During the nine months ended October 1, 2023 and October 2, 2022, the Company facilitated 88 and 54 Franchise Flips, respectively. Additionally, during the nine months ended October 2, 2022, the Company completed the sale of 1 Company-operated restaurant to a franchisee. No Company-operated restaurants were sold to franchisees during the nine months ended October 1, 2023.
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.” All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”
12
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| Number of restaurants sold to franchisees | |||||||||||||||||||||||
| Proceeds from sales of restaurants (a) | $ | $ | $ | $ | |||||||||||||||||||
| Net assets sold (b) | ( | ( | |||||||||||||||||||||
| Net unfavorable leases | ( | ( | |||||||||||||||||||||
| Other | |||||||||||||||||||||||
| ( | ( | ||||||||||||||||||||||
| Post-closing adjustments on sales of restaurants (c) | |||||||||||||||||||||||
| Gain (loss) on sales of restaurants, net | ( | ||||||||||||||||||||||
| (Loss) gain on sales of other assets, net (d) | ( | ( | |||||||||||||||||||||
| System optimization gains, net | $ | $ | $ | $ | |||||||||||||||||||
_______________
(a)In addition to the proceeds noted herein, the Company received cash proceeds of $126 and $284 during the three and nine months ended October 2, 2022, respectively, related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants.
(b)Net assets sold consisted primarily of equipment.
(c)Represents 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.
(d)During the nine months ended October 1, 2023, the Company received net cash proceeds of $280 primarily from the sale of surplus and other properties. During the three and nine months ended October 2, 2022, the Company received net cash proceeds of $2,510 and $3,368 , respectively, primarily from the sale of surplus and other properties.
Assets Held for Sale
As of October 1, 2023 and January 1, 2023, the Company had assets held for sale of $1,320 and $1,661 , respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”
(4) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| Organizational redesign | $ | $ | $ | $ | |||||||||||||||||||
| Other reorganization and realignment plans | |||||||||||||||||||||||
| Reorganization and realignment costs | $ | $ | $ | $ | |||||||||||||||||||
13
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Organizational Redesign
In February 2023, the Board of Directors approved a plan to redesign the Company’s organizational structure to better support the execution of the Company’s long-term growth strategy by maximizing organizational efficiency and streamlining decision making (the “Organizational Redesign Plan”). As a result of the Organizational Redesign Plan, the Company expects to hold its general and administrative expense in 2023 and 2024 relatively flat compared with 2022. The Company expects to incur total costs of approximately $11,000 to $13,000 related to the Organizational Redesign Plan. During the nine months ended October 1, 2023, the Company recognized costs totaling $7,986 , which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $3,000 to $5,000 , comprised of (1) severance and related employee costs of approximately $1,500 , (2) recruitment and relocation costs of approximately $500 , (3) third-party and other costs of approximately $500 and (4) share-based compensation of approximately $1,500 . The Company expects costs related to the Organizational Redesign Plan to continue into 2026, with approximately three-fourths of the total costs to be recognized during 2023.
The following is a summary of the costs recorded as a result of the Organizational Redesign Plan:
| Three Months Ended | Nine Months Ended | ||||||||||
| October 1, 2023 | October 1, 2023 | ||||||||||
| Severance and related employee costs | $ | $ | |||||||||
| Recruitment and relocation costs | |||||||||||
| Third-party and other costs | |||||||||||
| Share-based compensation (a) | |||||||||||
| Total organizational redesign | $ | $ | |||||||||
_______________
(a)Primarily represents the accelerated recognition of share-based compensation resulting from the termination of employees under the Organizational Redesign Plan.
As of October 1, 2023, the accruals for the Organizational Redesign Plan are included in “Accrued expenses and other current liabilities”. The table below presents a rollforward of our accruals for the Organizational Redesign Plan.
Balance January 1, 2023 | Charges | Payments | Balance October 1, 2023 | ||||||||||||||||||||
| Severance and related employee costs | $ | $ | $ | ( | $ | ||||||||||||||||||
| Recruitment and relocation costs | ( | ||||||||||||||||||||||
| Third-party and other costs | ( | ||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
Other Reorganization and Realignment Plans
Costs incurred under the Company’s other reorganization and realignment plans were not material during the nine months ended October 1, 2023 and October 2, 2022. The Company does not expect to incur any material additional costs under these plans.
14
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(5) Investments
The following is a summary of the carrying value of our investments:
| October 1, 2023 | January 1, 2023 | ||||||||||
| Equity method investments | $ | $ | |||||||||
| Other investments in equity securities | |||||||||||
| $ | $ | ||||||||||
Equity Method 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.). The Company has significant influence over this investee. Such investment is accounted for using the equity method, under which our results of operations include our share of the income of the investee in “Other operating income, net.”
Presented below is activity related to our investment in TimWen included in our condensed consolidated financial statements:
| Nine Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| 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 (loss) income” 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
Other Investments in Equity Securities
During 2021, the Company made an investment in equity securities of $10,000 and, during the nine months ended October 2, 2022, recognized a gain of $2,107 as a result of an observable price change for a similar investment of the same issuer. During the nine months ended October 1, 2023, the Company recorded impairment charges of $10,389 for the difference between the estimated fair value and the carrying value of the investment.
15
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(6) Long-Term Debt
Long-term debt consisted of the following:
| October 1, 2023 | January 1, 2023 | ||||||||||
| Class A-2 Notes (a): | |||||||||||
| $ | $ | ||||||||||
| Unamortized debt issuance costs | ( | ( | |||||||||
| Less amounts payable within one year | ( | ( | |||||||||
| Total long-term debt | $ | $ | |||||||||
_______________
(a)Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased $29,171 in principal of its Class A-2 senior secured notes for $24,935 .
(7) 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.
16
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
| October 1, 2023 | January 1, 2023 | ||||||||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Measurements | |||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | Level 1 | ||||||||||||||||||||||||
| Other investments in equity securities (a) | Level 2 | ||||||||||||||||||||||||||||
| Financial liabilities (b) | |||||||||||||||||||||||||||||
| Series 2022-1 Class A-2-I Notes | Level 2 | ||||||||||||||||||||||||||||
| Series 2022-1 Class A-2-II Notes | Level 2 | ||||||||||||||||||||||||||||
| Series 2021-1 Class A-2-I Notes | Level 2 | ||||||||||||||||||||||||||||
| Series 2021-1 Class A-2-II Notes | Level 2 | ||||||||||||||||||||||||||||
| Series 2019-1 Class A-2-I Notes | Level 2 | ||||||||||||||||||||||||||||
| Series 2019-1 Class A-2-II Notes | Level 2 | ||||||||||||||||||||||||||||
| Series 2018-1 Class A-2-II Notes | Level 2 | ||||||||||||||||||||||||||||
| Level 2 | |||||||||||||||||||||||||||||
_______________
(a)The fair value of our other investments in equity securities is based on our review of information provided by the investment manager, which was based on observable price changes.
(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.
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) the deterioration in operating performance of certain 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.
17
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Total impairment losses may also include the impact of remeasuring long-lived assets held for sale. 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 8 for further information on impairment of our long-lived assets.
| Fair Value Measurements | |||||||||||||||||||||||
| October 1, 2023 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Held and used | $ | $ | $ | $ | |||||||||||||||||||
| Held for sale | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurements | |||||||||||||||||||||||
| January 1, 2023 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Held and used | $ | $ | $ | $ | |||||||||||||||||||
| Held for sale | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(8) Impairment of Long-Lived Assets
The Company records impairment charges as a result of (1) the deterioration in operating performance of certain Company-operated restaurants, (2) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications and (3) closing Company-operated restaurants and classifying such surplus properties as held for sale.
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 | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| Company-operated restaurants | $ | $ | $ | $ | |||||||||||||||||||
| Restaurants leased or subleased to franchisees | |||||||||||||||||||||||
| Surplus properties | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
(9) Income Taxes
The Company’s effective tax rate for the three months ended October 1, 2023 and October 2, 2022 was 25.5 % and 26.9 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the three months ended October 1, 2023 primarily due to state income taxes, including discrete changes to state deferred income taxes.
The Company’s effective tax rate for the nine months ended October 1, 2023 and October 2, 2022 was 25.8 % and 26.6 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the nine months ended October 1, 2023 primarily due to state income taxes, including discrete changes to state deferred income taxes, and a one-time adjustment to our foreign deferred income taxes related to prior periods.
There were no 582 due to lapses of statutes of limitations.
The current portion of refundable income taxes was $8,062 and $3,236 as of October 1, 2023 and January 1, 2023, respectively, and is included in “Accounts and notes receivable, net.” There were no
18
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(10) Net Income Per Share
The calculation of basic and diluted net income per share was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Common stock: | |||||||||||||||||||||||
| Weighted average basic shares outstanding | |||||||||||||||||||||||
Dilutive effect of stock options and restricted shares | |||||||||||||||||||||||
| Weighted average diluted shares outstanding | |||||||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Basic net income per share for the three and nine months ended October 1, 2023 and October 2, 2022 was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding. Diluted net income per share was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of 5,204 and 4,719 for the three and nine months ended October 1, 2023, respectively, and 4,298 and 4,377 for the three and nine months ended October 2, 2022, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
(11) Stockholders’ Equity
Dividends
During each of the first, second and third quarters of 2023, the Company paid dividends per share of $.25 .125
Repurchases of Common Stock
In January 2023, our Board of Directors authorized a repurchase program for up to $500,000 of our common stock through February 28, 2027, when and if market conditions warrant and to the extent legally permissible (the “January 2023 Authorization”). During the nine months ended October 1, 2023, the Company repurchased 6,730 shares under the January 2023 Authorization with an aggregate purchase price of $144,320 , of which $2,001 was accrued as of October 1, 2023, and excluding excise tax of $1,293 and commissions of $94 . As of October 1, 2023, the Company had $355,680 of availability remaining under the January 2023 Authorization. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased 1,232 shares under the January 2023 Authorization with an aggregate purchase price of $23,596 , excluding applicable excise tax and commissions.
In February 2022, our Board of Directors authorized a repurchase program for up to $100,000 of our common stock through February 28, 2023, when and if market conditions warranted and to the extent legally permissible (the “February 2022 Authorization”). In April 2022, the Company’s Board of Directors approved an increase of $150,000 to the February 2022 Authorization, resulting in an aggregate authorization of $250,000 that was set to expire on February 28, 2023. During the nine months ended October 2, 2022, the Company repurchased 2,759 shares under the February 2022 Authorization with an aggregate purchase price of $51,911 , excluding commissions of $39 . In connection with the January 2023 Authorization, the remaining portion of the February 2022 Authorization was canceled.
19
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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 (the “February 2020 Authorization”). In July 2020, the Company’s Board of Directors approved an extension of the February 2020 Authorization by one year, through February 28, 2022. In addition, the Board of Directors approved increases totaling $200,000 to the February 2020 Authorization, resulting in an aggregate authorization of $300,000 that continued to expire on February 28, 2022. In November 2021, the Company entered into an accelerated share repurchase agreement (the “2021 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the February 2020 Authorization. Under the 2021 ASR Agreement, the Company paid the financial institution an initial purchase price of $125,000 in cash and received an initial delivery of 4,910 shares of common stock, representing an estimated 85 % of the total shares expected to be delivered under the 2021 ASR Agreement. In February 2022, the Company completed the 2021 ASR Agreement and received an additional 715 shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2021 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2021 ASR Agreement, less an agreed upon discount. In total, 5,625 shares were delivered under the 2021 ASR Agreement at an average purchase price of $22.22 per share. With the completion of the 2021 ASR Agreement in February 2022 as described above, the Company completed the February 2020 Authorization.
Accumulated Other Comprehensive Loss
The following table provides a rollforward of accumulated other comprehensive loss, which is entirely comprised of foreign currency translation:
| Nine Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| Balance at beginning of period | $ | ( | $ | ( | |||||||
Foreign currency translation | ( | ||||||||||
| Balance at end of period | $ | ( | $ | ( | |||||||
(12) 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 October 1, 2023, Wendy’s and its franchisees operated 7,166 Wendy’s restaurants. Of the 415 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 159 restaurants, owned the building and held long-term land leases for 144 restaurants and held leases covering the land and building for 112 restaurants. Wendy’s also owned 488 and leased 1,186 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.
20
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Company as Lessee
The components of lease cost are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| 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 $9,777 and $8,943 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $29,797 and $27,796 for the nine months ended October 1, 2023 and October 2, 2022, respectively, for which the Company is reimbursed by sublessees.
(b)Includes $31,824 and $31,559 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $94,751 and $92,555 for the nine months ended October 1, 2023 and October 2, 2022, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $7,570 and $7,357 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $22,981 and $22,130 for the nine months ended October 1, 2023 and October 2, 2022, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.
Company as Lessor
The components of lease income are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| Sales-type and direct-financing leases: | |||||||||||||||||||||||
| Selling profit | $ | $ | $ | $ | |||||||||||||||||||
| Interest income (a) | |||||||||||||||||||||||
| Operating lease income | |||||||||||||||||||||||
| Variable lease income | |||||||||||||||||||||||
| Franchise rental income (b) | $ | $ | $ | $ | |||||||||||||||||||
_______________
(a)Included in “Interest expense, net.”
(b)Includes sublease income of $42,545 and $43,540 recognized during the three months ended October 1, 2023 and October 2, 2022, respectively, and $128,457 and $130,394 recognized during the nine months ended October 1, 2023 and October 2, 2022, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $9,811 and $8,947 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $29,704 and $27,732 for the nine months ended October 1, 2023 and October 2, 2022, respectively.
21
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(13) Supplemental Cash Flow Information
The following table includes supplemental non-cash investing and financing activities:
| Nine Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| Supplemental non-cash investing and financing activities: | |||||||||||
| Capital expenditures included in accounts payable | $ | $ | |||||||||
| Finance leases | |||||||||||
The following table includes a reconciliation of cash, cash equivalents and restricted cash:
| October 1, 2023 | January 1, 2023 | ||||||||||
| 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 | $ | $ | |||||||||
(14) Transactions with Related Parties
Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K.
TimWen Lease and Management Fee Payments
A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen, which are then subleased to franchisees for the operation of Wendy’s/Tim Hortons combo units in Canada. Wendy’s paid TimWen $15,713 and $15,148 under these lease agreements during the nine months ended October 1, 2023 and October 2, 2022, respectively, which has been recorded to “Franchise rental expense.” In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $181 and $166 during the nine months ended October 1, 2023 and October 2, 2022, respectively, which has been included as a reduction to “General and administrative.”
Transactions with Yellow Cab
Certain family members and affiliates of Mr. Nelson Peltz, our Chairman, and Mr. Peter May, our Senior Vice Chairman, as well as Mr. Matthew Peltz, our Vice Chairman, hold indirect, minority ownership interests in Yellow Cab Holdings, LLC (“Yellow Cab”) and operating companies managed by Yellow Cab, a Wendy’s franchisee, that as of October 1, 2023 owned and operated 83 Wendy’s restaurants. During the nine months ended October 1, 2023 and October 2, 2022, the Company recognized $11,143 and $9,942 , respectively, in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of October 1, 2023 and January 1, 2023, $1,116 and $1,125 , respectively, was due from Yellow Cab for such income, which is included in “Accounts and notes receivable, net” and “Advertising funds restricted assets.”
Transactions with AMC
In February 2023, Ms. Kristin Dolan, a director of the Company, was appointed as the Chief Executive Officer of AMC Networks Inc. (“AMC”). During the nine months ended October 1, 2023, the Company purchased approximately $1,800 of advertising time from a subsidiary of AMC. As of October 1, 2023, approximately $16 was due to AMC for advertising time, which is included in “Advertising funds restricted liabilities.”
22
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(15) 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.
Franchisee Image Activation Incentive Programs
To promote new restaurant development, Wendy’s has provided franchisees with certain incentive programs for qualifying new restaurants. In February 2023, Wendy’s announced a new restaurant development incentive program in the U.S. and Canada that provides for waivers of royalty, national advertising and technical assistance fees for up to the first three years of operation for qualifying new restaurants (referred to as the “Pacesetter” program). Wendy’s previously offered and will continue to offer a restaurant development incentive program that provides for reductions in royalty and national advertising fees for up to the first two years of operation for qualifying new restaurants (referred to as the “Groundbreaker” program). Wendy’s U.S. and Canadian franchisees may elect either the Pacesetter program or the Groundbreaker program when committing to new multi-unit development agreements or adding incremental commitments to existing development agreements. Wendy’s also provides franchisees with the option of an early 20 -year or 25 -year renewal of their franchise agreement upon completion of reimaging utilizing certain approved Image Activation reimage designs.
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 $92,673 as of October 1, 2023. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of October 1, 2023. In the event of default by a franchise owner where Wendy’s is called upon to perform under its guarantee, Wendy’s has the ability to pursue repayment from the franchise owner. The liability recorded for our probable exposure associated with these lease guarantees was not material as of October 1, 2023.
Letters of Credit
As of October 1, 2023, the Company had outstanding letters of credit with various parties totaling $28,843 . Substantially all of the outstanding letters of credit include amounts outstanding against the 2021-1 Variable Funding Senior Secured Notes, Class A-1. We do not expect any material loss to result from these letters of credit.
(16) Legal and Environmental Matters
23
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(17) Segment Information
Revenues by segment are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| 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 | ||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | ||||||||||||||||||||
| Wendy’s U.S. (a) | $ | $ | $ | $ | |||||||||||||||||||
| Wendy’s International (b) | |||||||||||||||||||||||
| Global Real Estate & Development | |||||||||||||||||||||||
| Total segment profit | $ | $ | |||||||||||||||||||||
| Unallocated franchise support and other costs | ( | ( | ( | ( | |||||||||||||||||||
| Advertising funds surplus (deficit) | ( | ( | |||||||||||||||||||||
| Unallocated general and administrative (c) | ( | ( | ( | ( | |||||||||||||||||||
| Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of cloud computing arrangements | ( | ( | ( | ( | |||||||||||||||||||
| 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 | ( | ( | |||||||||||||||||||||
| Investment (loss) income, net | ( | ||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | |||||||||||||||||||
_______________
(a)Wendy’s U.S. includes advertising funds expense of $2,779 and $8,101 for the three and nine months ended October 2, 2022, respectively, related to the Company’s funding of incremental advertising.
(b)Wendy’s International includes advertising funds expense of $596 and $1,802 for the three and nine months ended October 1, 2023, respectively, and $1,002 and $2,924 for the three and nine months ended October 2, 2022, respectively, related to the Company’s funding of incremental advertising in Canada. In addition, Wendy’s International includes other international-related advertising surplus (deficit) of $535 and $(789 ) for the three and nine months ended October 1, 2023, respectively, and $538 and $(984 ) for the three and nine months ended October 2, 2022, respectively.
(c)Includes corporate overhead costs, such as employee compensation and related benefits.
24
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(18) New Accounting Standards
New Accounting Standards
Common-Control Lease Arrangements
In March 2023, the Financial Accounting Standards Board (“FASB”) issued an update to amend certain lease accounting guidance that applies to arrangements between related parties under common control. The amendment requires a lessee in a common-control lease arrangement to amortize leasehold improvements that it owns over the useful life of the improvements to the common-control group, regardless of the lease term, if the lessee continues to control the use of the underlying asset through a lease. The standard is effective beginning with our 2024 fiscal year. The Company does not expect the guidance to have a material impact on our condensed consolidated financial statements.
New Accounting Standards Adopted
Reference Rate Reform
In March 2020, the FASB issued guidance to provide temporary optional expedients and exceptions to current reference rate reform guidance to ease the financial reporting burdens related to the market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. During the nine months ended October 1, 2023, certain of the Company’s subsidiaries executed amendments to the 2021-1 Variable Funding Senior Secured Notes, Class A-1 and the U.S. advertising fund revolving line of credit to transition from LIBOR to the Secured Overnight Financing Rate (“SOFR”), plus any applicable margin. In connection with these contract amendments, the Company adopted the reference rate reform guidance during the second quarter of 2023. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Business Combinations
In October 2021, the FASB issued an amendment to improve the accounting for revenue contracts with customers acquired in a business combination. The amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with current revenue recognition guidance as if the acquirer had originated the contracts. The Company adopted this amendment during the first quarter of 2023. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
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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 January 1, 2023 (the “Form 10-K”). There have been no material changes as of October 1, 2023 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”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC (formerly known as Wendy’s International, Inc). Wendy’s International, LLC is the indirect parent company of (1) Quality Is Our Recipe, LLC (“Quality”), which is the owner and franchisor of the Wendy’s restaurant system in the United States (the “U.S.”) and all international jurisdictions except for Canada, and (2) Wendy’s Restaurants of Canada Inc., which is the owner and franchisor of the Wendy’s restaurant system in Canada. As used herein, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to the ownership or franchising of the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand.
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 second largest quick-service restaurant company in the hamburger sandwich segment in the U.S. based on traffic share, and the third largest globally with 7,166 restaurants in the U.S. and 32 foreign countries and U.S. territories as of October 1, 2023.
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 toppings and 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, Wendy’s restaurants sell a variety of promotional products on a limited time basis. Wendy’s also offers breakfast across the U.S. system and in Canada. Wendy’s breakfast menu features a variety of breakfast sandwiches such as the Breakfast Baconator® and sides such as seasoned potatoes.
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 operation and franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of 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 using 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
26
the Company’s core operating performance. See “Results of Operations” below and Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information.
The Company’s fiscal 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, quarters and months relate to fiscal periods rather than calendar periods.
Executive Overview
Our Business
As of October 1, 2023, the Wendy’s restaurant system was comprised of 7,166 restaurants, with 6,010 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 403 were operated by the Company and 5,607 were operated by a total of 215 franchisees. In addition, at October 1, 2023, there were 1,156 Wendy’s restaurants in operation in 32 foreign countries and U.S. territories. Of the international restaurants, 1,144 were operated by a total of 106 franchisees and 12 were operated by the Company in the United Kingdom (the “U.K.”).
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants 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 October 1, 2023.
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.
Wendy’s long-term growth opportunities include delivering accelerated global growth through (1) driving strong same-restaurant sales momentum across all dayparts, (2) accelerating our implementation of consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint through global restaurant expansion.
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 week are excluded from same-restaurant sales. 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. Cost of sales excludes certain costs that support restaurant operations that are not allocated to individual restaurants, which are included in “General and administrative.” Cost of sales also excludes depreciation and amortization expense and impairment of long-lived assets. Therefore, as restaurant margin as presented excludes certain costs as described above, its usefulness may be limited and may not be comparable to other similarly titled measures of other companies in our industry.
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’s royalty and advertising funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and profitability.
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The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.
Same-restaurant sales and systemwide sales exclude sales from Argentina due to that country’s highly inflationary economy. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.
The Company believes its presentation of same-restaurant sales, restaurant margin and systemwide sales provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales and systemwide sales, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand.
The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.
Third Quarter Financial Highlights
•Revenue increased 3.4% to $550.6 million in the third quarter of 2023 compared with $532.6 million in the third quarter of 2022;
•Global same-restaurant sales increased 2.8%, U.S. same-restaurant sales increased 2.2% and international same-restaurant sales increased 7.8% compared with the third quarter of 2022. On a two-year basis, global same-restaurant sales increased 9.7%;
•Global Company-operated restaurant margin was 15.0% in the third quarter of 2023, an increase of 70 basis points compared with the third quarter of 2022; and
•Net income increased 14.9% to $58.0 million in the third quarter of 2023 compared with $50.5 million in the third quarter of 2022.
Year-to-Date Financial Highlights
•Revenue increased 5.3% to $1.64 billion in the first nine months of 2023 compared with $1.56 billion in the first nine months of 2022;
•Global same-restaurant sales increased 5.2%, U.S. same-restaurant sales increased 4.7% and international same-restaurant sales increased 9.4% compared with the first nine months of 2022. On a two-year basis, global same-restaurant sales increased 9.6%;
•Global Company-operated restaurant margin was 15.1% in the first nine months of 2023, an increase of 160 basis points compared with the first nine months of 2022; and
•Net income increased 15.7% to $157.5 million in the first nine months of 2023 compared with $136.1 million in the first nine months of 2022.
Global Same-Restaurant Sales
Wendy’s long-term growth opportunities include driving strong same-restaurant sales momentum across all dayparts through our ownable core products, exciting menu innovation, compelling value offerings and improvements in speed, consistency and accuracy in our restaurants. Global same-restaurant sales increased 2.8% in the third quarter of 2023 and
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increased 9.7% on a two-year basis. Global same-restaurant sales increased 5.2% in the first nine months of 2023 and increased 9.6% on a two-year basis.
Digital
Wendy’s long-term growth opportunities include accelerated implementation of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program in the U.S. and Canada and establishing delivery agreements with third-party vendors. The Company is also partnering with key technology providers to help execute our digital, restaurant technology and enterprise technology initiatives and support our technology innovation and growth. During the second quarter of 2023, the Company revised its definition of digital sales to reflect our full digital portfolio by including in-restaurant mobile scans, in addition to our previously included delivery, mobile order and kiosk digital channels. Under the revised definition, the Company’s digital business represented approximately 12.8% and 10.7% of global systemwide sales during the nine months ended October 1, 2023 and October 2, 2022, respectively.
New Restaurant Development
Wendy’s long-term growth opportunities include expanding the Company’s footprint through global restaurant expansion. To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants, in addition to our $100.0 million build to suit development fund. In February 2023, the Company announced a new restaurant development incentive program in the U.S. and Canada that provides for waivers of royalty, national advertising and technical assistance fees for up to the first three years of operation for qualifying new restaurants. In addition, the Company has development agreements in place with a number of franchisees that contractually obligate such franchisees to open additional Wendy’s restaurants over a specified timeframe. During the nine months ended October 1, 2023, the Company and its franchisees added 71 net new restaurants across the Wendy’s system.
Organizational Redesign
In February 2023, the Board of Directors approved a plan to redesign the Company’s organizational structure to better support the execution of the Company’s long-term growth strategy by maximizing organizational efficiency and streamlining decision making (the “Organizational Redesign Plan”). As a result of the Organizational Redesign Plan, the Company expects to hold its general and administrative expense in 2023 and 2024 relatively flat compared with 2022. The Company expects to incur total costs of approximately $11 million to $13 million related to the Organizational Redesign Plan, of which approximately $9 million to $11 million will be cash expenditures. The cash expenditures are expected to continue into 2025, with approximately two-thirds of the total cash expenditures occurring in 2023. Costs related to the Organizational Redesign Plan are recorded to “Reorganization and realignment costs.” During the nine months ended October 1, 2023, the Company recognized costs totaling $8.0 million, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $3 million to $5 million, comprised of (1) severance and related employee costs of approximately $1.5 million, (2) recruitment and relocation costs of approximately $0.5 million, (3) third-party and other costs of approximately $0.5 million and (4) share-based compensation of approximately $1.5 million. The Company expects costs related to the Organizational Redesign Plan to continue into 2026, with approximately three-fourths of the total costs to be recognized during 2023.
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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 2023 and 2022.
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Sales | $ | 234.7 | $ | 228.8 | $ | 5.9 | $ | 703.4 | $ | 668.9 | $ | 34.5 | |||||||||||||||||||||||
| Franchise royalty revenue and fees | 149.4 | 141.7 | 7.7 | 444.0 | 414.2 | 29.8 | |||||||||||||||||||||||||||||
| Franchise rental income | 57.6 | 58.5 | (0.9) | 173.4 | 174.9 | (1.5) | |||||||||||||||||||||||||||||
| Advertising funds revenue | 108.9 | 103.6 | 5.3 | 320.1 | 301.0 | 19.1 | |||||||||||||||||||||||||||||
| 550.6 | 532.6 | 18.0 | 1,640.9 | 1,559.0 | 81.9 | ||||||||||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||||||||||||||
| Cost of sales | 199.5 | 196.2 | 3.3 | 597.1 | 578.5 | 18.6 | |||||||||||||||||||||||||||||
| Franchise support and other costs | 14.8 | 12.7 | 2.1 | 41.9 | 34.5 | 7.4 | |||||||||||||||||||||||||||||
| Franchise rental expense | 31.9 | 31.7 | 0.2 | 94.9 | 92.7 | 2.2 | |||||||||||||||||||||||||||||
| Advertising funds expense | 107.9 | 108.3 | (0.4) | 319.2 | 317.0 | 2.2 | |||||||||||||||||||||||||||||
| General and administrative | 59.3 | 62.5 | (3.2) | 184.3 | 186.5 | (2.2) | |||||||||||||||||||||||||||||
| Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) | 34.3 | 34.3 | — | 101.3 | 100.9 | 0.4 | |||||||||||||||||||||||||||||
| Amortization of cloud computing arrangements | 3.8 | 0.9 | 2.9 | 7.7 | 0.9 | 6.8 | |||||||||||||||||||||||||||||
| System optimization gains, net | (0.1) | (0.5) | 0.4 | (0.1) | (4.1) | 4.0 | |||||||||||||||||||||||||||||
| Reorganization and realignment costs | 0.6 | — | 0.6 | 8.1 | 0.6 | 7.5 | |||||||||||||||||||||||||||||
| Impairment of long-lived assets | 0.1 | 0.2 | (0.1) | 0.5 | 2.7 | (2.2) | |||||||||||||||||||||||||||||
| Other operating income, net | (3.1) | (11.8) | 8.7 | (9.4) | (20.5) | 11.1 | |||||||||||||||||||||||||||||
| 449.0 | 434.5 | 14.5 | 1,345.5 | 1,289.7 | 55.8 | ||||||||||||||||||||||||||||||
| Operating profit | 101.6 | 98.1 | 3.5 | 295.4 | 269.3 | 26.1 | |||||||||||||||||||||||||||||
| Interest expense, net | (31.0) | (31.9) | 0.9 | (93.8) | (90.4) | (3.4) | |||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | (0.3) | — | (0.3) | (1.6) | — | (1.6) | |||||||||||||||||||||||||||||
| Investment (loss) income, net | — | — | — | (10.4) | 2.1 | (12.5) | |||||||||||||||||||||||||||||
| Other income, net | 7.7 | 2.9 | 4.8 | 22.5 | 4.4 | 18.1 | |||||||||||||||||||||||||||||
| Income before income taxes | 78.0 | 69.1 | 8.9 | 212.1 | 185.4 | 26.7 | |||||||||||||||||||||||||||||
| Provision for income taxes | (20.0) | (18.6) | (1.4) | (54.6) | (49.3) | (5.3) | |||||||||||||||||||||||||||||
| Net income | $ | 58.0 | $ | 50.5 | $ | 7.5 | $ | 157.5 | $ | 136.1 | $ | 21.4 | |||||||||||||||||||||||
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| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | % of Total Revenues | 2022 | % of Total Revenues | 2023 | % of Total Revenues | 2022 | % of Total Revenues | ||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 234.7 | 42.6 | % | $ | 228.8 | 43.0 | % | $ | 703.4 | 42.9 | % | $ | 668.9 | 42.9 | % | |||||||||||||||||||||||||||||||
Franchise royalty revenue and fees: | |||||||||||||||||||||||||||||||||||||||||||||||
| Franchise royalty revenue | 130.1 | 23.6 | % | 124.5 | 23.4 | % | 384.3 | 23.5 | % | 361.4 | 23.2 | % | |||||||||||||||||||||||||||||||||||
| Franchise fees | 19.3 | 3.5 | % | 17.2 | 3.2 | % | 59.7 | 3.6 | % | 52.8 | 3.4 | % | |||||||||||||||||||||||||||||||||||
| Total franchise royalty revenue and fees | 149.4 | 27.1 | % | 141.7 | 26.6 | % | 444.0 | 27.1 | % | 414.2 | 26.6 | % | |||||||||||||||||||||||||||||||||||
Franchise rental income | 57.6 | 10.5 | % | 58.5 | 11.0 | % | 173.4 | 10.6 | % | 174.9 | 11.2 | % | |||||||||||||||||||||||||||||||||||
Advertising funds revenue | 108.9 | 19.8 | % | 103.6 | 19.4 | % | 320.1 | 19.5 | % | 301.0 | 19.3 | % | |||||||||||||||||||||||||||||||||||
Total revenues | $ | 550.6 | 100.0 | % | $ | 532.6 | 100.0 | % | $ | 1,640.9 | 100.0 | % | $ | 1,559.0 | 100.0 | % | |||||||||||||||||||||||||||||||
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | % of Sales | 2022 | % of Sales | 2023 | % of Sales | 2022 | % of Sales | ||||||||||||||||||||||||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||||||||||||||||||||||||||
| Food and paper | $ | 74.5 | 31.7 | % | $ | 75.0 | 32.8 | % | $ | 224.1 | 31.9 | % | $ | 219.6 | 32.8 | % | |||||||||||||||||||||||||||||||
| Restaurant labor | 74.9 | 31.9 | % | 72.8 | 31.8 | % | 223.8 | 31.8 | % | 216.3 | 32.3 | % | |||||||||||||||||||||||||||||||||||
Occupancy, advertising and other operating costs | 50.1 | 21.4 | % | 48.4 | 21.1 | % | 149.2 | 21.2 | % | 142.6 | 21.4 | % | |||||||||||||||||||||||||||||||||||
| Total cost of sales | $ | 199.5 | 85.0 | % | $ | 196.2 | 85.7 | % | $ | 597.1 | 84.9 | % | $ | 578.5 | 86.5 | % | |||||||||||||||||||||||||||||||
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | % of Sales | 2022 | % of Sales | 2023 | % of Sales | 2022 | % of Sales | ||||||||||||||||||||||||||||||||||||||||
| Company-operated restaurant margin: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. | $ | 35.5 | 15.6 | % | $ | 33.3 | 14.8 | % | $ | 108.8 | 15.9 | % | $ | 92.2 | 14.0 | % | |||||||||||||||||||||||||||||||
| Global | 35.2 | 15.0 | % | 32.6 | 14.3 | % | 106.3 | 15.1 | % | 90.4 | 13.5 | % | |||||||||||||||||||||||||||||||||||
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The table below presents 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 | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Key business measures: | |||||||||||||||||||||||
U.S. same-restaurant sales: | |||||||||||||||||||||||
| Company-operated | 0.7 | % | 6.8 | % | 3.6 | % | 4.2 | % | |||||||||||||||
| Franchised | 2.3 | % | 6.3 | % | 4.8 | % | 3.2 | % | |||||||||||||||
Systemwide | 2.2 | % | 6.4 | % | 4.7 | % | 3.3 | % | |||||||||||||||
| International same-restaurant sales (a) | 7.8 | % | 10.8 | % | 9.4 | % | 13.3 | % | |||||||||||||||
Global same-restaurant sales: | |||||||||||||||||||||||
| Company-operated | 1.0 | % | 6.8 | % | 3.8 | % | 4.2 | % | |||||||||||||||
| Franchised (a) | 3.0 | % | 6.9 | % | 5.4 | % | 4.4 | % | |||||||||||||||
| Systemwide (a) | 2.8 | % | 6.9 | % | 5.2 | % | 4.4 | % | |||||||||||||||
| Systemwide sales (b): | |||||||||||||||||||||||
| U.S. Company-operated | $ | 227.7 | $ | 225.2 | $ | 685.2 | $ | 659.6 | |||||||||||||||
| U.S. franchised | 2,885.3 | 2,780.6 | 8,557.2 | 8,058.9 | |||||||||||||||||||
U.S. systemwide | 3,113.0 | 3,005.8 | 9,242.4 | 8,718.5 | |||||||||||||||||||
| International Company-operated | 7.1 | 3.6 | 18.2 | 9.3 | |||||||||||||||||||
| International franchised (a) | 460.3 | 409.7 | 1,328.6 | 1,182.7 | |||||||||||||||||||
| International systemwide (a) | 467.4 | 413.3 | 1,346.8 | 1,192.0 | |||||||||||||||||||
| Global systemwide (a) | $ | 3,580.4 | $ | 3,419.1 | $ | 10,589.2 | $ | 9,910.5 | |||||||||||||||
_______________
(a)Excludes Argentina due to the impact of that country’s highly inflationary economy.
(b)During the third quarter of 2023 and 2022, global systemwide sales increased 4.8% and 8.9%, respectively, U.S. systemwide sales increased 3.6% and 7.7%, respectively, and international systemwide sales increased 13.6% and 18.3%, respectively, on a constant currency basis. During the first nine months of 2023 and 2022, global systemwide sales increased 7.2% and 6.3%, respectively, U.S. systemwide sales increased 6.0% and 4.6%, respectively, and international systemwide sales increased 15.6% and 20.1%, respectively, on a constant currency basis.
32
| Third Quarter | |||||||||||||||||||||||||||||
| U.S. Company-operated | U.S. Franchised | International Company-operated | International Franchised | Systemwide | |||||||||||||||||||||||||
| Restaurant count: | |||||||||||||||||||||||||||||
Restaurant count at July 2, 2023 | 403 | 5,590 | 11 | 1,111 | 7,115 | ||||||||||||||||||||||||
| Opened | — | 27 | 1 | 44 | 72 | ||||||||||||||||||||||||
| Closed | — | (10) | — | (11) | (21) | ||||||||||||||||||||||||
Restaurant count at October 1, 2023 | 403 | 5,607 | 12 | 1,144 | 7,166 | ||||||||||||||||||||||||
| Nine Months | |||||||||||||||||||||||||||||
| U.S. Company-operated | U.S. Franchised | International Company-operated | International Franchised | Systemwide | |||||||||||||||||||||||||
Restaurant count at January 1, 2023 | 403 | 5,591 | 12 | 1,089 | 7,095 | ||||||||||||||||||||||||
| Opened | 2 | 64 | 1 | 85 | 152 | ||||||||||||||||||||||||
| Closed | (2) | (48) | (1) | (30) | (81) | ||||||||||||||||||||||||
Restaurant count at October 1, 2023 | 403 | 5,607 | 12 | 1,144 | 7,166 | ||||||||||||||||||||||||
| Sales | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Sales | $ | 234.7 | $ | 228.8 | $ | 5.9 | $ | 703.4 | $ | 668.9 | $ | 34.5 | |||||||||||||||||||||||
The increase in sales during the third quarter and the first nine months of 2023 was primarily due to (1) a 1.0% and 3.8% increase in global Company-operated same-restaurant sales of $3.5 million and $25.4 million, respectively, and (2) net new restaurant development of $2.5 million and $10.2 million, respectively. Company-operated same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count.
| Franchise Royalty Revenue and Fees | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Franchise royalty revenue | $ | 130.1 | $ | 124.5 | $ | 5.6 | $ | 384.3 | $ | 361.4 | $ | 22.9 | |||||||||||||||||||||||
| Franchise fees | 19.3 | 17.2 | 2.1 | 59.7 | 52.8 | 6.9 | |||||||||||||||||||||||||||||
| $ | 149.4 | $ | 141.7 | $ | 7.7 | $ | 444.0 | $ | 414.2 | $ | 29.8 | ||||||||||||||||||||||||
Franchise royalty revenue during the third quarter of 2023 increased $5.6 million, of which (1) $3.2 million was due to net new restaurant development and (2) $2.4 million was due to a 3.0% increase in global franchise same-restaurant sales. Franchise royalty revenue during the first nine months of 2023 increased $22.9 million, of which (1) $14.8 million was due to a 5.4% increase in global franchise same-restaurant sales and (2) $9.4 million was due to net new restaurant development. Franchise same-restaurant sales during the third quarter and the first nine months of 2023 increased due to higher average check, partially offset by a decrease in customer count.
The increase in franchise fees during the third quarter of 2023 was primarily due to higher fees for providing information technology services to franchisees of $1.9 million. The increase in franchise fees during the first nine months of 2023 was primarily due to (1) higher fees for providing information technology services to franchisees of $3.8 million and (2) an increase in fees as a result of Franchise Flips and other miscellaneous fees of $3.0 million.
33
| Franchise Rental Income | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Franchise rental income | $ | 57.6 | $ | 58.5 | $ | (0.9) | $ | 173.4 | $ | 174.9 | $ | (1.5) | |||||||||||||||||||||||
The decrease in franchise rental income during the third quarter and the first nine months of 2023 was primarily due to the impact of assigning certain leases to franchisees, partially offset by an increase in executory costs. See Note 12 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
| Advertising Funds Revenue | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Advertising funds revenue | $ | 108.9 | $ | 103.6 | $ | 5.3 | $ | 320.1 | $ | 301.0 | $ | 19.1 | |||||||||||||||||||||||
The increase in advertising funds revenue during the third quarter and the first nine months of 2023 was primarily due to an increase in franchise same-restaurant sales in the U.S. and Canada.
| Cost of Sales, as a Percent of Sales | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Food and paper | 31.7 | % | 32.8 | % | (1.1) | % | 31.9 | % | 32.8 | % | (0.9) | % | |||||||||||||||||||||||
| Restaurant labor | 31.9 | % | 31.8 | % | 0.1 | % | 31.8 | % | 32.3 | % | (0.5) | % | |||||||||||||||||||||||
| Occupancy, advertising and other operating costs | 21.4 | % | 21.1 | % | 0.3 | % | 21.2 | % | 21.4 | % | (0.2) | % | |||||||||||||||||||||||
| 85.0 | % | 85.7 | % | (0.7) | % | 84.9 | % | 86.5 | % | (1.6) | % | ||||||||||||||||||||||||
The decrease in cost of sales, as a percent of sales, during the third quarter and the first nine months of 2023 was primarily due to higher average check. This impact was partially offset by (1) an increase in restaurant labor rates, (2) a decrease in customer count, (3) higher commodity costs and (4) the impact of the Company’s investments to support the entry into the U.K. market and additional inflationary pressures in the U.K.
| Franchise Support and Other Costs | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Franchise support and other costs | $ | 14.8 | $ | 12.7 | $ | 2.1 | $ | 41.9 | $ | 34.5 | $ | 7.4 | |||||||||||||||||||||||
The increase in franchise support and other costs during the third quarter and the first nine months of 2023 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees.
| Franchise Rental Expense | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Franchise rental expense | $ | 31.9 | $ | 31.7 | $ | 0.2 | $ | 94.9 | $ | 92.7 | $ | 2.2 | |||||||||||||||||||||||
The increase in franchise rental expense during the third quarter and the first nine months of 2023 was primarily due to an increase in executory costs. See Note 12 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
| Advertising Funds Expense | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Advertising funds expense | $ | 107.9 | $ | 108.3 | $ | (0.4) | $ | 319.2 | $ | 317.0 | $ | 2.2 | |||||||||||||||||||||||
On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to be lower than advertising funds revenue by approximately $3.0 million for 2023, which includes the amount by which advertising funds expense exceeded advertising funds revenue in prior years (excluding the Company’s funding of incremental advertising) of approximately $5.0 million, partially offset by the Company’s incremental funding of advertising in Canada of approximately $2.0 million.
34
The decrease in advertising funds expense during the third quarter of 2023 was due to a decrease in the Company’s funding of incremental advertising, partially offset by an increase in franchise same-restaurant sales in the U.S. and Canada. The increase in advertising funds expense during the first nine months of 2023 was due to an increase in franchise same-restaurant sales in the U.S. and Canada, partially offset by a decrease in the Company’s funding of incremental advertising.
| General and Administrative | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 (a) | Change | 2023 | 2022 (a) | Change | ||||||||||||||||||||||||||||||
| Share-based compensation | $ | 6.4 | $ | 5.0 | $ | 1.4 | $ | 15.7 | $ | 17.5 | $ | (1.8) | |||||||||||||||||||||||
| Professional fees | 13.2 | 15.7 | (2.5) | 42.8 | 44.2 | (1.4) | |||||||||||||||||||||||||||||
| Incentive compensation | 5.4 | 6.4 | (1.0) | 20.4 | 19.2 | 1.2 | |||||||||||||||||||||||||||||
| Other, net | 34.3 | 35.4 | (1.1) | 105.4 | 105.6 | (0.2) | |||||||||||||||||||||||||||||
| $ | 59.3 | $ | 62.5 | $ | (3.2) | $ | 184.3 | $ | 186.5 | $ | (2.2) | ||||||||||||||||||||||||
_______________
(a)Certain reclassifications have been made to the prior year presentation to conform to the current year presentation.
The decrease in general and administrative expenses during the third quarter of 2023 was primarily due to a decrease in professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning (“ERP”) system implementation during the third quarter of 2022.
The decrease in general and administrative expenses during the first nine months of 2023 was primarily due to (1) a decrease in share-based compensation and (2) lower professional fees, primarily as a result of costs associated with the Company’s ERP system implementation during the first nine months of 2022. These decreases were partially offset by an increase in incentive compensation accruals, reflecting higher operating performance as compared to plan in 2023 versus 2022.
| Depreciation and Amortization (exclusive of amortization of cloud computing arrangements shown separately below) | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Restaurants | $ | 21.9 | $ | 21.2 | $ | 0.7 | $ | 63.9 | $ | 64.3 | $ | (0.4) | |||||||||||||||||||||||
| Technology support, corporate and other | 12.4 | 13.1 | (0.7) | 37.4 | 36.6 | 0.8 | |||||||||||||||||||||||||||||
| $ | 34.3 | $ | 34.3 | $ | — | $ | 101.3 | $ | 100.9 | $ | 0.4 | ||||||||||||||||||||||||
The increase in depreciation and amortization during the first nine months of 2023 was primarily due to depreciation and amortization for technology investments and new restaurant assets, partially offset by assets becoming fully depreciated.
| Amortization of Cloud Computing Arrangements | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Amortization of cloud computing arrangements | $ | 3.8 | $ | 0.9 | $ | 2.9 | $ | 7.7 | $ | 0.9 | $ | 6.8 | |||||||||||||||||||||||
Amortization of cloud computing arrangements primarily represents amortization of assets associated with the Company’s ERP system implementation completed in the third quarter of 2022.
| System Optimization Gains, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| System optimization gains, net | $ | (0.1) | $ | (0.5) | $ | 0.4 | $ | (0.1) | $ | (4.1) | $ | 4.0 | |||||||||||||||||||||||
System optimization gains, net for the first nine months of 2022 were primarily comprised of post-closing adjustments on previous sales of restaurants. See Note 3 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
35
| Reorganization and Realignment Costs | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Organizational redesign | $ | 0.6 | $ | — | $ | 0.6 | $ | 8.0 | $ | — | $ | 8.0 | |||||||||||||||||||||||
| Other reorganization and realignment plans | — | — | — | 0.1 | 0.6 | (0.5) | |||||||||||||||||||||||||||||
| $ | 0.6 | $ | — | $ | 0.6 | $ | 8.1 | $ | 0.6 | $ | 7.5 | ||||||||||||||||||||||||
During the first nine months of 2023, the Company recognized costs totaling $8.0 million under the Organizational Redesign Plan, which primarily included severance and related employee costs of $5.7 million and share-based compensation of $1.1 million. See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
Costs incurred under the Company’s other reorganization and realignment plans were not material during the three and nine months ended October 1, 2023 and October 2, 2022. The Company does not expect to incur any material additional costs under these plans.
| Impairment of Long-Lived Assets | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Impairment of long-lived assets | $ | 0.1 | $ | 0.2 | $ | (0.1) | $ | 0.5 | $ | 2.7 | $ | (2.2) | |||||||||||||||||||||||
The decrease in impairment of long-lived assets during the first nine months of 2023 was primarily due to higher impairment charges in the prior year as a result of the deterioration in operating performance of certain Company-operated restaurants.
| Other Operating Income, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Gain from insurance recoveries | $ | — | $ | (8.6) | $ | 8.6 | $ | — | $ | (8.6) | $ | 8.6 | |||||||||||||||||||||||
| Lease buyout | 0.2 | — | 0.2 | 0.2 | (2.1) | 2.3 | |||||||||||||||||||||||||||||
| Other, net | (3.3) | (3.2) | (0.1) | (9.6) | (9.8) | 0.2 | |||||||||||||||||||||||||||||
| $ | (3.1) | $ | (11.8) | $ | 8.7 | $ | (9.4) | $ | (20.5) | $ | 11.1 | ||||||||||||||||||||||||
The decrease in other operating income, net during the third quarter and the first nine months of 2023 was primarily due to a gain from insurance recoveries during the third quarter of 2022. Other operating income, net during the first nine months of 2023 also decreased due to prior year lease buyout activity.
| Interest Expense, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Interest expense, net | $ | 31.0 | $ | 31.9 | $ | (0.9) | $ | 93.8 | $ | 90.4 | $ | 3.4 | |||||||||||||||||||||||
The decrease in interest expense, net during the third quarter of 2023 was primarily due to the impact of repurchasing $39.3 million in principal of the Company’s 7% debentures during the first nine months of 2023. The increase in interest expense, net during the first nine months of 2023 was primarily due to the impact of completing a debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022, partially offset by the impact of repurchasing $39.3 million in principal of the Company’s 7% debentures during the first nine months of 2023.
36
| Loss on Early Extinguishment of Debt | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | $ | 0.3 | $ | — | $ | 0.3 | $ | 1.6 | $ | — | $ | 1.6 | |||||||||||||||||||||||
During the first nine months of 2023, the Company incurred a loss on early extinguishment of debt of $1.6 million due to the repurchase of $39.3 million in principal of the Company’s 7% debentures.
| Investment (Loss) Income, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Investment (loss) income, net | $ | — | $ | — | $ | — | $ | (10.4) | $ | 2.1 | $ | (12.5) | |||||||||||||||||||||||
During the first nine months of 2023, the Company recorded a loss of $10.4 million due to impairment charges for the difference between the estimated fair value and the carrying value of an investment in equity securities. During the first nine months of 2022, the Company recognized a gain of $2.1 million on an investment in equity securities as a result of an observable price change.
| Other Income, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Other income, net | $ | 7.7 | $ | 2.9 | $ | 4.8 | $ | 22.5 | $ | 4.4 | $ | 18.1 | |||||||||||||||||||||||
The increase in other income, net during the third quarter and the first nine months of 2023 was primarily due to interest income earned on our cash equivalents, which increased as a result of cash received from our debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.
| Provision for Income Taxes | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Income before income taxes | $ | 78.0 | $ | 69.1 | $ | 8.9 | $ | 212.1 | $ | 185.4 | $ | 26.7 | |||||||||||||||||||||||
Provision for income taxes | (20.0) | (18.6) | (1.4) | (54.6) | (49.3) | (5.3) | |||||||||||||||||||||||||||||
Effective tax rate on income | 25.5 | % | 26.9 | % | (1.4) | % | 25.8 | % | 26.6 | % | (0.8) | % | |||||||||||||||||||||||
Our effective tax rates for the third quarter and the first nine months of 2023 and 2022 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 decrease in the effective tax rate for the third quarter of 2023 compared with the third quarter of 2022 was primarily due to (1) a decrease in the tax effects of our foreign operations and (2) additional net income from our national advertising funds, which are not subject to tax. These decreases were partially offset by an increase in state income taxes, including discrete changes to state deferred income taxes. The decrease in the effective tax rate for the first nine months of 2023 compared with the first nine months of 2022 was primarily due to additional net income from our advertising funds, which are not subject to tax, partially offset by an increase in the tax effects of our foreign operations.
37
Segment Information
See Note 17 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 | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Sales | $ | 227.7 | $ | 225.2 | $ | 2.5 | $ | 685.2 | $ | 659.6 | $ | 25.6 | |||||||||||||||||||||||
| Franchise royalty revenue | 112.7 | 108.8 | 3.9 | 334.0 | 315.6 | 18.4 | |||||||||||||||||||||||||||||
| Franchise fees | 17.0 | 15.3 | 1.7 | 51.8 | 46.7 | 5.1 | |||||||||||||||||||||||||||||
| Advertising fund revenue | 99.8 | 96.6 | 3.2 | 296.0 | 281.8 | 14.2 | |||||||||||||||||||||||||||||
| Total revenues | $ | 457.2 | $ | 445.9 | $ | 11.3 | $ | 1,367.0 | $ | 1,303.7 | $ | 63.3 | |||||||||||||||||||||||
| Segment profit | $ | 134.9 | $ | 123.7 | $ | 11.2 | $ | 403.1 | $ | 355.5 | $ | 47.6 | |||||||||||||||||||||||
The increase in Wendy’s U.S. revenues during the third quarter and the first nine months of 2023 was primarily due to an increase in same-restaurant sales. Same-restaurant sales increased during the third quarter and the first nine months of 2023 primarily due to higher average check, partially offset by a decrease in customer count.
The increase in Wendy’s U.S. segment profit during the third quarter and the first nine months of 2023 was primarily due to (1) higher revenues, (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” (excluding the impact of the U.K. market) and (3) a decrease in the recognition of the Company’s funding of incremental advertising.
Wendy’s International
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Sales | $ | 7.1 | $ | 3.5 | $ | 3.6 | $ | 18.2 | $ | 9.3 | $ | 8.9 | |||||||||||||||||||||||
| Franchise royalty revenue | 17.4 | 15.8 | 1.6 | 50.4 | 45.7 | 4.7 | |||||||||||||||||||||||||||||
| Franchise fees | 1.6 | 1.3 | 0.3 | 4.5 | 3.7 | 0.8 | |||||||||||||||||||||||||||||
| Advertising fund revenue | 9.1 | 6.9 | 2.2 | 24.1 | 19.2 | 4.9 | |||||||||||||||||||||||||||||
| Total revenues | $ | 35.2 | $ | 27.5 | $ | 7.7 | $ | 97.2 | $ | 77.9 | $ | 19.3 | |||||||||||||||||||||||
| Segment profit | $ | 10.8 | $ | 8.6 | $ | 2.2 | $ | 26.8 | $ | 23.4 | $ | 3.4 | |||||||||||||||||||||||
The increase in Wendy’s International revenues during the third quarter and the first nine months of 2023 was primarily due to (1) net new restaurant development in the U.K. and (2) an increase in same-restaurant sales. Same-restaurant sales increased during the third quarter and the first nine months of 2023 due to (1) higher average check and (2) an increase in customer count.
The increase in Wendy’s International segment profit during the third quarter and the first nine months of 2023 was primarily due to higher revenues. This increase was partially offset by (1) higher franchise support and other costs, (2) the Company’s investments to support the entry into the U.K. market and inflationary pressures in the U.K and (3) other international advertising expenses.
38
Global Real Estate & Development
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Franchise fees | $ | 0.6 | $ | 0.6 | $ | — | $ | 3.4 | $ | 2.5 | $ | 0.9 | |||||||||||||||||||||||
| Franchise rental income | 57.5 | 58.5 | (1.0) | 173.4 | 174.9 | (1.5) | |||||||||||||||||||||||||||||
| Total revenues | $ | 58.1 | $ | 59.1 | $ | (1.0) | $ | 176.8 | $ | 177.4 | $ | (0.6) | |||||||||||||||||||||||
| Segment profit | $ | 24.4 | $ | 25.9 | $ | (1.5) | $ | 76.0 | $ | 80.8 | $ | (4.8) | |||||||||||||||||||||||
The decrease in Global Real Estate & Development revenues during the third quarter and the first nine months of 2023 was primarily due to the impact of assigning certain leases to franchisees, partially offset by an increase in executory costs.
The decrease in Global Real Estate & Development segment profit during the third quarter and the first nine months of 2023 was primarily due to (1) a decrease in franchise rental income, reflecting the impact of assigning certain leases to franchisees, and (2) lower gains on sales-type leases.
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, dividends to stockholders and repurchases of debt.
Our anticipated cash requirements for the remainder of 2023, exclusive of operating cash flow requirements, consist principally of:
•capital expenditures of approximately $25.0 million to $30.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $80.0 million to $85.0 million;
•cash dividends aggregating approximately $51.6 million as discussed below in “Dividends;”
•stock repurchases under the Company’s January 2023 Authorization as discussed below in “Stock Repurchases;” and
•debt repurchases under the Company’s February 2023 Authorization as discussed below in “Long-Term Debt, Including Current Portion.”
Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.
We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us.
The table below summarizes our cash flows from operating, investing and financing activities for the first nine months of 2023 and 2022:
| Nine Months | |||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 269.5 | $ | 182.6 | $ | 86.9 | |||||||||||
| Investing activities | (55.5) | (46.1) | (9.4) | ||||||||||||||
| Financing activities | (373.2) | 324.5 | (697.7) | ||||||||||||||
| Effect of exchange rate changes on cash | 0.3 | (7.1) | 7.4 | ||||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (158.9) | $ | 453.9 | $ | (612.8) | |||||||||||
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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 $269.5 million and $182.6 million in the first nine months of 2023 and 2022, respectively. The change was primarily due to (1) higher net income, adjusted for non-cash expenses, and (2) a decrease in payments for incentive compensation.
Investing Activities
Cash used in investing activities was $55.5 million and $46.1 million in the first nine months of 2023 and 2022, respectively. The change was primarily due to (1) an increase in capital expenditures of $5.7 million and (2) a decrease in proceeds from dispositions of $3.5 million.
Financing Activities
Cash (used in) provided by financing activities was $(373.2) million and $324.5 million in the first nine months of 2023 and 2022, respectively. The first nine months of 2023 was primarily comprised of (1) dividends of $157.9 million, (2) repurchases of common stock of $142.4 million and (3) long-term debt activities of $61.3 million, including the impact of repurchases of the Company’s 7% debentures during the first nine months of 2023. The first nine months of 2022 was primarily comprised of long-term debt activities of $470.3 million, reflecting the impact of the completion of the Company’s debt financing transaction during the first quarter of 2022, partially offset by (1) dividends of $80.2 million and (2) repurchases of common stock of $52.0 million.
Long-Term Debt, Including Current Portion
During the nine months ended October 1, 2023, Wendy’s repurchased $39.3 million in principal of its 7% debentures for $39.3 million.
We may from time to time seek to repurchase additional portions of our outstanding long-term debt, including our 7% debentures and/or our senior secured notes, through open market purchases, privately negotiated transactions or otherwise. In December 2022, our Board of Directors authorized debt repurchases of up to $25.0 million and, in February 2023, our Board of Directors authorized additional debt repurchases of up to $50.0 million through February 2024 (the “February 2023 Authorization”), resulting in total debt repurchase authorizations of up to $75.0 million. As of October 1, 2023, the Company had completed the December 2022 debt repurchase authorization and had $35.7 million remaining under the February 2023 Authorization. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased $29.2 million and $1.2 million in principal of its Class A-2 senior secured notes and 7% debentures, respectively, for a total of $26.1 million. In addition, in October 2023, our Board of Directors approved an increase of $10.0 million to the February 2023 Authorization, which continues to expire in February 2024. Further repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Whether or not to repurchase any additional debt and the size and timing of any such repurchases will be determined at our discretion.
Except as described above, there were no material changes to the Company’s debt obligations since January 1, 2023. The Company was in compliance with its debt covenants as of October 1, 2023. See Note 6 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.
Dividends
On March 15, 2023, June 15, 2023 and September 15, 2023, the Company paid quarterly cash dividends per share of $.25, aggregating $157.9 million. On November 2, 2023, the Company announced a dividend of $.25 per share to be paid on December 15, 2023 to stockholders of record as of December 1, 2023. As a result, the Company expects that its total cash requirement for the fourth quarter of 2023 will be approximately $51.6 million based on the number of shares of its common stock outstanding at October 26, 2023. 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.
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Stock Repurchases
In January 2023, our Board of Directors authorized a repurchase program for up to $500.0 million of our common stock through February 28, 2027, when and if market conditions warrant and to the extent legally permissible (the “January 2023 Authorization”). In connection with the January 2023 Authorization, the remaining portion of the previous February 2022 authorization for $250.0 million was canceled. During the nine months ended October 1, 2023, the Company repurchased 6.7 million shares under the January 2023 Authorization with an aggregate purchase price of $144.3 million, of which $2.0 million was accrued as of October 1, 2023, and excluding excise tax of $1.3 million and commissions of $0.1 million. As of October 1, 2023, the Company had $355.7 million of availability remaining under the January 2023 Authorization. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased 1.2 million shares under the January 2023 Authorization with an aggregate purchase price of $23.6 million, excluding applicable excise tax and commissions.
Cloud Computing Arrangements
In addition to the anticipated cash requirements for capital expenditures noted above in “Cash Flows,” the Company expects to spend approximately $30.0 million during 2023 on cloud computing arrangements (“CCA”), primarily related to the Company’s human capital management system implementation. The Company’s cash expenditures related to CCA amounted to $25.2 million during the nine months ended October 1, 2023.
General Inflation, Commodities and Changing Prices
Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the nine months ended October 1, 2023, and we expect this to continue throughout the remainder of 2023. We attempt to manage any inflationary costs and commodity price increases through selective menu price increases and product mix. Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases.
Seasonality
Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
During the nine months ended October 1, 2023, certain of the Company’s subsidiaries executed amendments to the 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Class A-1 Notes”) and the U.S. advertising fund revolving line of credit to transition from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”), plus any applicable margin. The Company continues to be exposed to interest rate increases under its Class A-1 Notes, its U.S. advertising fund revolving line of credit and certain other lines of credit; however, the Company had no outstanding borrowings under such lines of credit as of October 1, 2023.
Except as described above, there were no significant changes from the information contained in the Company’s Form 10-K for the fiscal year ended January 1, 2023.
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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 October 1, 2023. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that as of October 1, 2023, 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 2023 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 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 impact of competition or poor customer experiences at Wendy’s restaurants;
•adverse economic conditions or disruptions, including in regions with a high concentration of Wendy’s restaurants;
•changes in discretionary consumer spending and consumer tastes and preferences;
•the disruption to our business from the COVID-19 pandemic and the impact of the pandemic on our results of operations, financial condition and prospects;
•impacts to our corporate reputation or the value and perception of our brand;
•the effectiveness of our marketing and advertising programs and new product development;
•our ability to manage the accelerated impact of social media;
•our ability to protect our intellectual property;
•food safety events or health concerns involving our products;
•our ability to deliver accelerated global sales growth and achieve or maintain market share across our dayparts;
•our ability to achieve our growth strategy through new restaurant development and our Image Activation program;
•our ability to effectively manage the acquisition and disposition of restaurants or successfully implement other strategic initiatives;
•risks associated with leasing and owning significant amounts of real estate, including environmental matters;
•risks associated with our international operations, including our ability to execute our international growth strategy;
•changes in commodity and other operating costs;
•shortages or interruptions in the supply or distribution of our products and other risks associated with our independent supply chain purchasing co-op;
•the impact of increased labor costs or labor shortages;
•the continued succession and retention of key personnel and the effectiveness of our leadership and organizational structure;
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•risks associated with our digital commerce strategy, platforms and technologies, including our ability to adapt to changes in industry trends and consumer preferences;
•our dependence on computer systems and information technology, including risks associated with the failure or interruption of our systems or technology or the occurrence of cyber incidents or deficiencies;
•risks associated with our securitized financing facility and other debt agreements, including compliance with operational and financial covenants, restrictions on our ability to raise additional capital, the impact of our overall debt levels and our ability to generate sufficient cash flow to meet our debt service obligations and operate our business;
•risks associated with our capital allocation policy, including the amount and timing of equity and debt repurchases and dividend payments;
•risks associated with complaints and litigation, compliance with legal and regulatory requirements and an increased focus on environmental, social and governance issues;
•risks associated with the availability and cost of insurance, changes in accounting standards, the recognition of impairment or other charges, changes in tax rates or tax laws and fluctuations in foreign currency exchange rates;
•conditions beyond our control, such as adverse weather conditions, natural disasters, hostilities, social unrest, health epidemics or pandemics or other catastrophic events;
•risks associated with our organizational redesign; and
•other risks and uncertainties affecting us and our subsidiaries referred to in our Annual Report on Form 10-K filed with the SEC on March 1, 2023 (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the SEC.
In addition to the factors described above, there are risks associated with our predominantly franchised business model that could impact our results, performance and achievements. Such risks include our ability to identify, attract and retain experienced and qualified franchisees, our ability to 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.
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 factors that we currently deem immaterial may become material, and it is impossible for us to predict these events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q as a result of new information, future events or developments, except as required by federal securities laws, 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 business. We provide accruals for such litigation and claims when we determine it is probable that a liability has been incurred and the loss is reasonably estimable. The Company believes it has adequate accruals for all of its legal and environmental matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims due to 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 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.
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Item 1A. Risk Factors.
In addition to the information contained in this report, you should carefully consider the risk factors disclosed in our Form 10-K, which could materially affect our business, financial condition or future results. Except as described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to repurchases of shares of our common stock by us and our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the third quarter of 2023:
Issuer Repurchases of Equity Securities
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (2) | ||||||||||
| July 3, 2023 through August 6, 2023 | 794,383 | $21.49 | 770,260 | $395,203,847 | ||||||||||
| August 7, 2023 through September 3, 2023 | 967,313 | $20.66 | 925,891 | $376,132,409 | ||||||||||
| September 4, 2023 through October 1, 2023 | 1,011,562 | $20.25 | 1,010,791 | $355,679,841 | ||||||||||
| Total | 2,773,258 | $20.75 | 2,706,942 | $355,679,841 | ||||||||||
(1)Includes 66,316 shares of common stock reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective award. 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 January 2023, our Board of Directors authorized a repurchase program for up to $500.0 million of our common stock through February 28, 2027, when and if market conditions warrant and to the extent legally permissible.
Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased 1.2 million shares under the January 2023 Authorization with an aggregate purchase price of $23.6 million, excluding applicable excise tax and commissions.
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Item 6. Exhibits.
| EXHIBIT NO. | DESCRIPTION | ||||
| 10.1 | Second Amendment to the Class A-1 Note Purchase Agreement, dated as of September 22, 2023, by and among Wendy’s Funding, LLC as Master Issuer, each of Quality Is Our Recipe, LLC, Wendy’s Properties, LLC and Wendy’s SPV Guarantor, LLC, as Guarantors, Wendy’s International, LLC, as Manager, the conduit investors party thereto, the financial institutions party thereto, certain funding agents, and Coöperatieve Rabobank, U.A., New York Branch, as L/C Provider, Swingline Lender and Administrative Agent.* | ||||
| 10.2 | |||||
| 10.3 | |||||
| 10.4 | |||||
| 10.5 | |||||
| 10.6 | |||||
| 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 October 1, 2023 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 October 1, 2023, 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 2, 2023 | By: /s/ Gunther Plosch | ||||
| Gunther Plosch | |||||
| Chief Financial Officer | |||||
| (On behalf of the registrant) | |||||
| Date: November 2, 2023 | By: /s/ Suzanne M. Thuerk | ||||
| Suzanne M. Thuerk | |||||
| Chief Accounting Officer | |||||
| (Principal Accounting Officer) | |||||
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Exhibit 10.1
SECOND AMENDMENT TO CLASS A-1 NOTE PURCHASE AGREEMENT
This Second Amendment to the Class A-1 Note Purchase Agreement, dated as of September 22, 2023 (this “Amendment”), is by and among WENDY’S FUNDING, LLC, a Delaware limited liability company (the “Master Issuer”), QUALITY IS OUR RECIPE, LLC, WENDY’S PROPERTIES, LLC, WENDY’S SPV GUARANTOR, LLC, each as a guarantor (collectively, the “Guarantors” and each a “Guarantor”), WENDY’S INTERNATIONAL, LLC, as manager (the “Manager”), and COÖPERATIEVE RABOBANK U.A., NEW YORK BRANCH (the “Administrative Agent”) and acknowledged and agreed to by the Committed Note Purchasers, the Funding Agents, the Swingline Lender and the L/C Provider.
RECITALS
WHEREAS, Section 9.01 of the Class A-1 Note Purchase Agreement (as amended, restated, amended and restated, supplemented or otherwise modified prior to the date hereof, the “Existing Class A-1 NPA” and the Existing Class A-1 NPA, as amended by this Amendment, the “Amended Class A-1 NPA”), dated as of June 22, 2021, by and among the Master Issuer, the Guarantors, the Manager, the Conduit Investors thereto, the Committed Note Purchasers thereto, the Funding Agents thereto and the Administrative Agent, provides, among other things, that the parties may amend the Existing Class A-1 NPA in writing signed by the Manager, the Master Issuer and the Administrative Agent with the written consent of the Required Investor Groups (or, in the case of certain amendments, each Investor, the Funding Agents, the Swingline Lender and/or the L/C Provider);
WHEREAS, the parties hereto desire to amend the Existing Class A-1 NPA as set forth in this Amendment to clarify the calculation of interest with respect to Advances that bear interest at a rate based on Term SOFR; and
WHEREAS, the Master Issuer has authorized the execution and delivery of this Amendment.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and intending to be legally bound, the parties to this Amendment hereby agree as follows:
Section 1.1Amendments to the Existing Class A-1 NPA. With effect from June 30, 2023, the Existing Class A-1 NPA is hereby amended as follows:
(a)Section 1.01 of the of the Existing Class A-1 NPA is hereby amended by inserting the following definition in the appropriate alphabetical order:
““Term SOFR Rate” means a rate per annum equal to the sum of (a) Adjusted Term SOFR and (b) 1.50%.”
(b)Section 3.01 of the Existing Class A-1 NPA is hereby amended by deleting each reference to “Adjusted Term SOFR” and replacing it with “the Term SOFR Rate.”
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Section 1.2Effect on Class A-1 NPA. Upon the date hereof but with effect from June 30, 2023, (i) the Existing Class A-1 NPA shall be amended in accordance herewith and (ii) the parties shall be bound by the Amended Class A-1 NPA as so amended. Except as expressly set forth or contemplated in this Amendment, the terms and conditions of the Existing Class A-1 NPA shall remain in place and shall not be altered, amended, waived or changed in any manner whatsoever, except by any further amendment made in accordance with the terms of the Amended Class A-1 NPA.
Section 1.3Capitalized Terms. Capitalized terms used and not otherwise defined herein have the meanings set forth or incorporated by reference in the Amended Class A-1 NPA.
Section 1.4Representations and Warranties. Each of the Master Issuer, the Manager and each Guarantor hereby represents and warrants that: (a) this Amendment constitutes a legal, valid and binding obligation of such Person, enforceable against it in accordance with its terms, except as limited by debtor relief laws and equitable principles; (b) upon the date hereof (both before and after giving effect to this Amendment), no Event of Default or Default shall exist; (c) the representations and warranties set forth in the Existing Class A-1 NPA and the other Related Documents are true and correct (i) if not qualified as to materiality or Material Adverse Effect, in all material respects and (ii) if qualified as to materiality or Material Adverse Effect, in all respects as of the date originally made and as of the date hereof (unless stated to relate solely to an earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date); and (d) the execution, delivery and performance by the Master Issuer, the Manager and each Guarantor of this Amendment is within its limited liability company or corporate powers, have been duly authorized by all necessary actions, and do not and will not contravene (i) the organizational documents of the Master Issuer, the Manager or such Guarantor or (ii) any law or regulation or any contractual restriction binding on or affecting their respective assets or property.
Section 1.5Reaffirmation of Guarantees and Security Interests. The Master Issuer and each Guarantor hereby acknowledges its receipt of a copy of this Amendment and its review of the terms and conditions hereof and consents to the terms and conditions of this Amendment and the transactions contemplated thereby. The Master Issuer and each Guarantor hereby (a) affirms and confirms, as applicable, its guarantees, pledges, grants and other undertakings under the Amended Class A-1 NPA and (b) agrees that (i) the Amended Class A-1 NPA shall continue to be in full force and effect and (ii) all guarantees, pledges, grants and other undertakings thereunder shall continue to be in full force and effect and shall accrue to the benefit of the applicable secured party or parties thereunder.
Section 1.6Miscellaneous
(a)Survival and Interpretation of Existing Documents. Except as expressly provided in this Amendment, all of the terms, provisions, covenants, agreements, representations and warranties and conditions of the Existing Class A-1 NPA and the other Related Documents shall be and remain in full force and effect as written, unmodified hereby and are hereby ratified by the Master Issuer, the Manager and each Guarantor. In the event of any conflict between the
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terms, provisions, covenants, representations and warranties and conditions of this Amendment and the Existing Class A-1 NPA, this Amendment shall control.
(b)Further Assurances. The Master Issuer, the Manager and each Guarantor each agrees to execute such other documents, instruments and agreements and take such further actions reasonably requested by the Administrative Agent to effectuate the provisions of this Amendment.
(c)Severability. Any term or provision of this Amendment that is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without rendering invalid, illegal or unenforceable the remaining terms and provisions of this Amendment or affecting the validity, legality or enforceability of any of the terms or provisions of this Amendment in any other jurisdiction. If any provision of this Amendment is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as would be enforceable.
(d)Governing Law. This Amendment and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Amendment and the transactions contemplated hereby shall be governed by, and construed in accordance with, the laws of the jurisdiction that governs the Existing Class A-1 NPA in accordance with the terms thereof.
(e)Waiver of Jury Trial. AFTER REVIEWING THIS PROVISION SPECIFICALLY WITH ITS RESPECTIVE COUNSEL, EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AMENDMENT, THE OTHER AMENDED DOCUMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF PARTIES HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE COMMITTED NOTE PURCHASERS TO EXTEND CREDIT TO THE MASTER ISSUER.
(f)Entire Agreement. This Amendment and the Existing Class A-1 NPA (as amended hereby) and the other Related Documents embody the entire agreement and understanding between the parties and supersede all prior agreements and understandings relating to the subject matter hereof. Any exhibits or annexes attached hereto are hereby incorporated herein by reference and made a part hereof.
(g)Binding Effect, Beneficiaries. This Amendment shall be binding upon and inure to the benefit of the parties to the Existing Class A-1 NPA and each other applicable Related Document and their respective heirs, executors, administrators, successors, legal representatives and assigns, and no other party shall derive any rights or benefits herefrom.
(h)Construction. This Amendment shall be construed without regard to any presumption or other rule requiring construction against the party drafting this Amendment.
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(i)Notices. All notices relating to this Amendment shall be delivered in the manner and subject to the provisions set forth in the Existing Class A-1 NPA.
(j)Counterparts. This Amendment may be executed (by electronic mail, facsimile or otherwise) in any number of counterparts, all of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.
(k)Electronic Signatures and Transmission. For purposes of this Amendment, any reference to “written” or “in writing” means any form of written communication, including, without limitation, electronic signatures, and any such written communication may be transmitted by Electronic Transmission. “Electronic Transmission” means any form of communication not directly involving the physical transmission of paper, including the use of, or participation in, one or more electronic networks or databases (including one or more distributed electronic networks or databases), that creates a record that may be retained, retrieved and reviewed by a recipient thereof and that may be directly reproduced in paper form by such a recipient through an automated process. Any requirement in the Indenture that a document is to be signed or authenticated by “manual signature” or similar language shall not be deemed to prohibit signature to be by facsimile or electronic signature and shall not be deemed to prohibit delivery thereof by Electronic Transmission. The recipient of the Electronic Transmission will be required to complete a one-time registration process.
[Signature Page Follows]
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IN WITNESS WHEREOF, each of the parties hereto have caused this Amendment to be duly executed by its respective duly authorized officer as of the day and year first written above.
WENDY’S FUNDING, LLC, as Master Issuer
By: /s/ Trevor D. Morse
Name: Trevor D. Morse
Title: Senior Director – Treasurer
Name: Trevor D. Morse
Title: Senior Director – Treasurer
QUALITY IS OUR RECIPE, LLC, as Guarantor
By: /s/ Trevor D. Morse
Name: Trevor D. Morse
Title: Senior Director – Treasurer
Name: Trevor D. Morse
Title: Senior Director – Treasurer
WENDY’S PROPERTIES, LLC, as Guarantor
By: /s/ Trevor D. Morse
Name: Trevor D. Morse
Title: Senior Director – Treasurer
Name: Trevor D. Morse
Title: Senior Director – Treasurer
WENDY’S SPV GUARANTOR, LLC, as Guarantor
By: /s/ Trevor D. Morse
Name: Trevor D. Morse
Title: Senior Director – Treasurer
Name: Trevor D. Morse
Title: Senior Director – Treasurer
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WENDY’S INTERNATIONAL, LLC, as Manager
By: /s/ Trevor D. Morse
Name: Trevor D. Morse
Title: Senior Director – Treasurer
Name: Trevor D. Morse
Title: Senior Director – Treasurer
6
COÖPERATIEVE RABOBANK U.A., NEW YORK BRANCH, as Administrative Agent
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
By: /s/ Erin M. Scott
Name: Erin M. Scott
Title: Executive Director
Name: Erin M. Scott
Title: Executive Director
Acknowledged and Agreed to by:
COÖPERATIEVE RABOBANK U.A., NEW YORK BRANCH,
as Committed Note Purchaser
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
as Committed Note Purchaser
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
By:/s/ Erin M. Scott
Name: Erin M. Scott
Title: Executive Director
Name: Erin M. Scott
Title: Executive Director
COÖPERATIEVE RABOBANK U.A., NEW YORK BRANCH,
as related Funding Agent
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
as related Funding Agent
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
By:/s/ Erin M. Scott
Name: Erin M. Scott
Title: Executive Director
Name: Erin M. Scott
Title: Executive Director
7
COÖPERATIEVE RABOBANK U.A., NEW YORK BRANCH,
as Swingline Lender
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
as Swingline Lender
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
By: /s/ Erin M. Scott
Name: Erin M. Scott
Title: Executive Director
Name: Erin M. Scott
Title: Executive Director
COÖPERATIEVE RABOBANK U.A., NEW YORK BRANCH,
as L/C Provider
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
as L/C Provider
By: /s/ Jinyang Wang
Name: Jinyang Wang
Title: Executive Director
By: /s/ Erin M. Scott
Name: Erin M. Scott
Title: Executive Director
Name: Erin M. Scott
Title: Executive Director
8
EXHIBIT 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
OF THE WENDY’S COMPANY, PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Todd A. Penegor, certify that:
1.I have reviewed this quarterly report on Form 10-Q of The Wendy’s Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 2, 2023
/s/ Todd A. Penegor
Todd A. Penegor
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
OF THE WENDY’S COMPANY, PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Gunther Plosch, certify that:
1.I have reviewed this quarterly report on Form 10-Q of The Wendy’s Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 2, 2023
/s/ Gunther Plosch
Gunther Plosch
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of The Wendy’s Company, a Delaware corporation (the “Company”), does hereby certify, to the best of such officer’s knowledge, that in connection with the Quarterly Report on Form 10-Q of the Company for the quarter ended October 1, 2023 (the “Form 10-Q”):
1.the Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 2, 2023
/s/ Todd A. Penegor
Todd A. Penegor
President and Chief Executive Officer
Date: November 2, 2023
/s/ Gunther Plosch
Gunther Plosch
Chief Financial Officer