Wendy's Co [WEN] Filings

10-Q 1 wen-20220703.htm 10-Q wen-20220703

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 July 3, 2022


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

For the transition period from ______________ to _______________

Commission file number: 1-2207

THE WENDY’S COMPANY

(Exact name of registrant as specified in its charter)


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

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

(614) 764-3100

(Registrant’s telephone number, including area code)

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


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

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

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

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


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

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

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

Yes ☐ No ☒

There were 212,803,949 shares of The Wendy’s Company common stock outstanding as of August 3, 2022.

THE WENDY’S COMPANY AND SUBSIDIARIES

INDEX TO FORM 10-Q


			Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements			4
Unaudited Condensed Consolidated Balance Sheets as of July 3, 2022 and January 2, 2022			4
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended July 3, 2022 and July 4, 2021			5
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 3, 2022 and July 4, 2021			6
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended July 3, 2022 and July 4, 2021			7
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2022 and July 4, 2021			9
Notes to Condensed Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures about Market Risk			41
Item 4. Controls and Procedures			42

PART II: OTHER INFORMATION			43
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 6. Exhibits			46
Signatures			47

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands Except Par Value)


	July 3, 2022		January 2, 2022
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	700,813	$	249,438
Restricted cash	33,997		27,535
Accounts and notes receivable, net	115,367		119,540
Inventories	6,456		5,934
Prepaid expenses and other current assets	35,548		30,584
Advertising funds restricted assets	151,741		159,818
Total current assets	1,043,922		592,849
Properties	890,423		906,867
Finance lease assets	238,878		244,279
Operating lease assets	783,645		812,620
Goodwill	774,703		775,278
Other intangible assets	1,262,762		1,280,791
Investments	50,195		49,870
Net investment in sales-type and direct financing leases	312,376		299,707
Other assets	158,677		139,130
Total assets	$	5,515,581	$	5,101,391

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	29,250	$	24,250
Current portion of finance lease liabilities	17,034		15,513
Current portion of operating lease liabilities	47,482		47,315
Accounts payable	36,156		41,163
Accrued expenses and other current liabilities	112,144		140,783
Advertising funds restricted liabilities	156,757		157,901
Total current liabilities	398,823		426,925
Long-term debt	2,832,790		2,356,416
Long-term finance lease liabilities	567,082		559,587
Long-term operating lease liabilities	823,991		853,328
Deferred income taxes	274,511		267,710
Deferred franchise fees	89,246		88,102
Other liabilities	106,275		112,918
Total liabilities	5,092,718		4,664,986
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 212,781 and 215,849 shares outstanding, respectively	47,042		47,042
Additional paid-in capital	2,926,739		2,898,633
Retained earnings	376,187		344,198
Common stock held in treasury, at cost; 257,643 and 254,575 shares, respectively	(2,872,568)		(2,805,268)
Accumulated other comprehensive loss	(54,537)		(48,200)
Total stockholders’ equity	422,863		436,405
Total liabilities and stockholders’ equity	$	5,515,581	$	5,101,391

See accompanying notes to condensed consolidated financial statements.

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THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Amounts)


	Three Months Ended				Six Months Ended
	July 3, 2022		July 4, 2021		July 3, 2022		July 4, 2021
	(Unaudited)
Revenues:
Sales	$	230,869	$	193,525	$	440,144	$	382,582
Franchise royalty revenue and fees	143,436		136,661		272,412		259,491
Franchise rental income	58,610		60,868		116,481		119,744
Advertising funds revenue	104,868		102,283		197,389		191,723
	537,783		493,337		1,026,426		953,540
Costs and expenses:
Cost of sales	197,285		154,154		382,338		311,004
Franchise support and other costs	9,912		8,885		21,728		16,571
Franchise rental expense	32,076		34,068		61,012		66,634
Advertising funds expense	110,973		107,875		208,773		202,113
General and administrative	61,637		63,114		123,983		115,736
Depreciation and amortization	33,428		30,761		66,659		62,303
System optimization gains, net	(152)		(30,766)		(3,686)		(31,282)
Reorganization and realignment costs	156		2,102		620		7,036
Impairment of long-lived assets	1,860		630		2,476		1,265
Other operating income, net	(5,673)		(4,232)		(8,639)		(7,708)
	441,502		366,591		855,264		743,672
Operating profit	96,281		126,746		171,162		209,868
Interest expense, net	(32,125)		(28,204)		(58,490)		(56,990)
Loss on early extinguishment of debt	—		(17,917)		—		(17,917)
Investment (loss) income, net	(4)		3		2,107		6
Other income, net	1,238		158		1,445		284
Income before income taxes	65,390		80,786		116,224		135,251
Provision for income taxes	(17,239)		(15,062)		(30,671)		(28,161)
Net income	$	48,151	$	65,724	$	85,553	$	107,090

Net income per share:
Basic	$	.23	$	.30	$	.40	$	.48
Diluted	.22		.29		.39		.47

See accompanying notes to condensed consolidated financial statements.

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THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)


	Three Months Ended				Six Months Ended
	July 3, 2022		July 4, 2021		July 3, 2022		July 4, 2021
	(Unaudited)
Net income	$	48,151	$	65,724	$	85,553	$	107,090
Other comprehensive (loss) income:
Foreign currency translation adjustment	(7,455)		3,347		(6,337)		5,567
Other comprehensive (loss) income	(7,455)		3,347		(6,337)		5,567
Comprehensive income	$	40,696	$	69,071	$	79,216	$	112,657

See accompanying notes to condensed consolidated financial statements.

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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 2, 2022	$	47,042	$	2,898,633	$	344,198	$	(2,805,268)	$	(48,200)	$	436,405
Net income	—		—		37,402		—		—		37,402
Other comprehensive income	—		—		—		—		1,118		1,118
Cash dividends	—		—		(26,911)		—		—		(26,911)
Repurchases of common stock, including accelerated share repurchase	—		18,750		—		(18,750)		—		—
Share-based compensation	—		6,348		—		—		—		6,348
Common stock issued upon exercises of stock options	—		237		—		1,354		—		1,591
Common stock issued upon vesting of restricted shares	—		(1,989)		—		459		—		(1,530)
Other	—		63		(8)		57		—		112
Balance at April 3, 2022	$	47,042	$	2,922,042	$	354,681	$	(2,822,148)	$	(47,082)	$	454,535
Net income	—		—		48,151		—		—		48,151
Other comprehensive loss	—		—		—		—		(7,455)		(7,455)
Cash dividends	—		—		(26,635)		—		—		(26,635)
Repurchases of common stock	—		—		—		(51,950)		—		(51,950)
Share-based compensation	—		6,122		—		—		—		6,122
Common stock issued upon exercises of stock options	—		(300)		—		399		—		99
Common stock issued upon vesting of restricted shares	—		(1,178)		—		1,073		—		(105)
Other	—		53		(10)		58		—		101
Balance at July 3, 2022	$	47,042	$	2,926,739	$	376,187	$	(2,872,568)	$	(54,537)	$	422,863

See accompanying notes to condensed consolidated financial statements.

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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 3, 2021	$	47,042	$	2,899,276	$	238,674	$	(2,585,755)	$	(49,641)	$	549,596
Net income	—		—		41,366		—		—		41,366
Other comprehensive income	—		—		—		—		2,220		2,220
Cash dividends	—		—		(20,156)		—		—		(20,156)
Repurchases of common stock	—		—		—		(56,084)		—		(56,084)
Share-based compensation	—		5,151		—		—		—		5,151
Common stock issued upon exercises of stock options	—		(20)		—		683		—		663
Common stock issued upon vesting of restricted shares	—		(2,996)		—		817		—		(2,179)
Other	—		49		(5)		44		—		88
Balance at April 4, 2021	$	47,042	$	2,901,460	$	259,879	$	(2,640,295)	$	(47,421)	$	520,665
Net income	—		—		65,724		—		—		65,724
Other comprehensive income	—		—		—		—		3,347		3,347
Cash dividends	—		—		(22,123)		—		—		(22,123)
Repurchases of common stock	—		—		—		(27,291)		—		(27,291)
Share-based compensation	—		5,882		—		—		—		5,882
Common stock issued upon exercises of stock options	—		850		—		23,466		—		24,316
Common stock issued upon vesting of restricted shares	—		(959)		—		714		—		(245)
Other	—		41		(5)		45		—		81
Balance at July 4, 2021	$	47,042	$	2,907,274	$	303,475	$	(2,643,361)	$	(44,074)	$	570,356

See accompanying notes to condensed consolidated financial statements.

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THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Six Months Ended
	July 3, 2022		July 4, 2021
	(Unaudited)
Cash flows from operating activities:
Net income	$	85,553	$	107,090
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	66,659		62,303
Share-based compensation	12,470		11,033
Impairment of long-lived assets	2,476		1,265
Deferred income tax	7,306		(2,137)
Non-cash rental expense, net	16,684		20,075
Change in operating lease liabilities	(22,913)		(23,074)
Net receipt of deferred vendor incentives	5,039		3,332
System optimization gains, net	(3,686)		(31,282)
Distributions received from joint ventures, net of equity in earnings	1,108		2,354
Long-term debt-related activities, net	3,731		21,328
Cloud computing arrangements expenditures	(13,213)		(2,412)
Changes in operating assets and liabilities and other, net	(63,019)		(11,124)
Net cash provided by operating activities	98,195		158,751
Cash flows from investing activities:
Capital expenditures	(30,941)		(24,069)
Franchise development fund	(1,312)		—
Acquisitions	—		4,879
Dispositions	1,016		50,531

Notes receivable, net	2,445		611
Net cash (used in) provided by investing activities	(28,792)		31,952
Cash flows from financing activities:
Proceeds from long-term debt	500,000		1,100,000
Repayments of long-term debt	(12,125)		(941,220)
Repayments of finance lease liabilities	(9,495)		(5,777)
Deferred financing costs	(10,232)		(20,873)
Repurchases of common stock	(51,950)		(83,658)
Dividends	(53,546)		(42,279)
Proceeds from stock option exercises	1,959		25,933
Payments related to tax withholding for share-based compensation	(1,904)		(3,197)
Net cash provided by financing activities	362,707		28,929
Net cash provided by operations before effect of exchange rate changes on cash	432,110		219,632
Effect of exchange rate changes on cash	(2,428)		2,283
Net increase in cash, cash equivalents and restricted cash	429,682		221,915
Cash, cash equivalents and restricted cash at beginning of period	366,966		418,241
Cash, cash equivalents and restricted cash at end of period	$	796,648	$	640,156

See accompanying notes to condensed consolidated financial statements.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of July 3, 2022, the results of our operations for the three and six months ended July 3, 2022 and July 4, 2021 and cash flows for the six months ended July 3, 2022 and July 4, 2021. The results of operations for the six months ended July 3, 2022 are not necessarily indicative of the results to be expected for the full 2022 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 2, 2022 (the “Form 10-K”).

In March 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on our results of operations, financial condition and prospects.

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 18 for further information.

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and six-month periods presented herein contain 13 weeks and 26 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.

Reclassifications

The Company has reclassified payments for cloud computing arrangements to “Cloud computing arrangements expenditures,” which were previously recorded to “Changes in operating assets and liabilities and other, net.” The prior period amounts in the condensed consolidated statement of cash flows reflect the reclassification of these cash flows to conform to the current year presentation. There was no impact to “Net cash provided by operating activities.”

The following table illustrates the reclassifications made to the condensed consolidated statement of cash flows for the six months ended July 4, 2021:


	As Previously Reported		Reclassifications		As Currently Reported
Cloud computing arrangements expenditures	$	—	$	(2,412)	$	(2,412)
Changes in operating assets and liabilities and other, net	(13,536)		2,412		(11,124)

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(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 July 3, 2022
Sales at Company-operated restaurants	$	227,903	$	2,966	$	—	$	230,869
Franchise royalty revenue	108,872		16,141		—		125,013
Franchise fees	15,986		1,167		1,270		18,423
Franchise rental income	—		—		58,610		58,610
Advertising funds revenue	97,679		7,189		—		104,868
Total revenues	$	450,440	$	27,463	$	59,880	$	537,783

Six Months Ended July 3, 2022
Sales at Company-operated restaurants	$	434,404	$	5,740	$	—	$	440,144
Franchise royalty revenue	206,792		29,966		—		236,758
Franchise fees	31,391		2,438		1,825		35,654
Franchise rental income	—		—		116,481		116,481
Advertising funds revenue	185,164		12,225		—		197,389
Total revenues	$	857,751	$	50,369	$	118,306	$	1,026,426

Three Months Ended July 4, 2021
Sales at Company-operated restaurants	$	193,279	$	246	$	—	$	193,525
Franchise royalty revenue	106,006		13,560		—		119,566
Franchise fees	14,331		1,454		1,310		17,095
Franchise rental income	—		—		60,868		60,868
Advertising funds revenue	96,227		6,056		—		102,283
Total revenues	$	409,843	$	21,316	$	62,178	$	493,337

Six Months Ended July 4, 2021
Sales at Company-operated restaurants	$	382,336	$	246	$	—	$	382,582
Franchise royalty revenue	202,770		25,130		—		227,900
Franchise fees	26,261		2,897		2,433		31,591
Franchise rental income	—		—		119,744		119,744
Advertising funds revenue	180,430		11,293		—		191,723
Total revenues	$	791,797	$	39,566	$	122,177	$	953,540

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Contract Balances

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


	July 3, 2022 (a)		January 2, 2022 (a)
Receivables, which are included in “Accounts and notes receivable, net” (b)	$	57,838	$	49,168
Receivables, which are included in “Advertising funds restricted assets”	66,918		65,497
Deferred franchise fees (c)	99,108		97,186

_______________

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

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

(c)Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled $9,862 and $89,246, respectively, as of July 3, 2022, and $9,084 and $88,102, respectively, as of January 2, 2022.

Significant changes in deferred franchise fees are as follows:


	Six Months Ended
	July 3, 2022		July 4, 2021
Deferred franchise fees at beginning of period	$	97,186	$	97,785
Revenue recognized during the period	(5,037)		(6,845)
New deferrals due to cash received and other	6,959		7,469
Deferred franchise fees at end of period	$	99,108	$	98,409

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:
2022 (a)	$	6,831
2023	6,440
2024	6,260
2025	6,084
2026	5,975
Thereafter	67,518
	$	99,108

_______________

(a)Represents franchise fees expected to be recognized for the remainder of 2022, which includes development-related franchise fees expected to be recognized over a duration of one year or less.

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THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(3) Acquisitions

The Company completed no significant acquisitions of restaurants from franchisees during the six months ended July 3, 2022 and July 4, 2021.

During 2021, the Company acquired 93 restaurants from a franchisee for total net cash consideration of $127,948. The fair values of the identifiable net assets related to the acquisition were provisional amounts as of January 2, 2022, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended April 3, 2022, which resulted in no adjustments to the fair values of the identifiable net assets related to the acquisition.

(4) System Optimization Gains, Net

The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”). As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to 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, drive new restaurant development and accelerate reimages. During the six months ended July 3, 2022 and July 4, 2021, the Company facilitated 46 and 19 Franchise Flips, respectively. In addition, during the three months ended July 4, 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees. No Company-operated restaurants were sold to franchisees during the six months ended July 3, 2022.

Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”

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

Three Months Ended

Six Months Ended

July 3,
2022

July 4,
2021

July 3,
2022

July 4,
2021

Number of restaurants sold to franchisees

—