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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
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 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
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 | $ | 598,025 | | | $ | 745,889 | |
Restricted cash | 36,727 | | | 35,203 | |
Accounts and notes receivable, net | 138,064 | | | 116,426 | |
Inventories | 6,813 | | | 7,129 | |
Prepaid expenses and other current assets | 33,311 | | | 26,963 | |
Advertising funds restricted assets | 113,112 | | | 126,673 | |
Total current assets | 926,052 | | | 1,058,283 | |
Properties | 886,792 | | | 895,778 | |
Finance lease assets | 227,289 | | | 234,570 | |
Operating lease assets | 718,387 | | | 754,498 | |
Goodwill | 773,187 | | | 773,088 | |
Other intangible assets | 1,225,290 | | | 1,248,800 | |
Investments | 34,441 | | | 46,028 | |
Net investment in sales-type and direct financing leases | 313,969 | | | 317,337 | |
Other assets | 185,041 | | | 170,962 | |
Total assets | $ | 5,290,448 | | | $ | 5,499,344 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 29,250 | | | $ | 29,250 | |
Current portion of finance lease liabilities | 19,734 | | | 18,316 | |
Current portion of operating lease liabilities | 49,155 | | | 48,120 | |
Accounts payable | 41,693 | | | 43,996 | |
Accrued expenses and other current liabilities | 148,936 | | | 116,010 | |
Advertising funds restricted liabilities | 116,432 | | | 132,307 | |
Total current liabilities | 405,200 | | | 387,999 | |
Long-term debt | 2,768,226 | | | 2,822,196 | |
Long-term finance lease liabilities | 566,739 | | | 571,877 | |
Long-term operating lease liabilities | 753,301 | | | 792,051 | |
Deferred income taxes | 270,614 | | | 270,421 | |
Deferred franchise fees | 89,363 | | | 90,231 | |
Other liabilities | 94,441 | | | 98,849 | |
Total liabilities | 4,947,884 | | | 5,033,624 | |
Commitments and contingencies | | | |
Stockholders’ equity: | | | |
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 207,468 and 213,101 shares outstanding, respectively | 47,042 | | | 47,042 | |
Additional paid-in capital | 2,950,916 | | | 2,937,885 | |
Retained earnings | 414,324 | | | 414,749 | |
Common stock held in treasury, at cost; 262,956 and 257,323 shares, respectively | (3,006,116) | | | (2,869,780) | |
Accumulated other comprehensive loss | (63,602) | | | (64,176) | |
Total stockholders’ equity | 342,564 | | | 465,720 | |
Total liabilities and stockholders’ equity | $ | 5,290,448 | | | $ | 5,499,344 | |
See accompanying notes to condensed consolidated financial statements.
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 | $ | 234,721 | | | $ | 228,786 | | | $ | 703,358 | | | $ | 668,930 | |
Franchise royalty revenue and fees | 149,345 | | | 141,733 | | | 444,070 | | | 414,145 | |
Franchise rental income | 57,567 | | | 58,463 | | | 173,407 | | | 174,944 | |
Advertising funds revenue | 108,922 | | | 103,587 | | | 320,092 | | | 300,976 | |
| 550,555 | | | 532,569 | | | 1,640,927 | | | 1,558,995 | |
Costs and expenses: | | | | | | | |
Cost of sales | 199,522 | | | 196,168 | | | 597,068 | | | 578,506 | |
Franchise support and other costs | 14,806 | | | 12,728 | | | 41,853 | | | 34,456 | |
Franchise rental expense | 31,876 | | | 31,687 | | | 94,901 | | | 92,699 | |
Advertising funds expense | 107,895 | | | 108,269 | | | 319,174 | | | 317,042 | |
General and administrative | 59,288 | | | 62,523 | | | 184,306 | | | 186,506 | |
Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) | 34,288 | | | 34,252 | | | 101,258 | | | 100,911 | |
Amortization of cloud computing arrangements | 3,844 | | | 888 | | | 7,692 | | | 888 | |
System optimization gains, net | (120) | | | (452) | | | (119) | | | (4,138) | |
Reorganization and realignment costs | 611 | | | 8 | | | 8,100 | | | 628 | |
Impairment of long-lived assets | 59 | | | 206 | | | 513 | | | 2,682 | |
Other operating income, net | (3,117) | | | (11,843) | | | (9,174) | | | (20,482) | |
| 448,952 | | | 434,434 | | | 1,345,572 | | | 1,289,698 | |
Operating profit | 101,603 | | | 98,135 | | | 295,355 | | | 269,297 | |
Interest expense, net | (30,957) | | | (31,916) | | | (93,798) | | | (90,406) | |
Loss on early extinguishment of debt | (319) | | | — | | | (1,585) | | | — | |
Investment (loss) income, net | — | | | — | | | (10,389) | | | 2,107 | |
Other income, net | 7,637 | | | 2,910 | | | 22,546 | | | 4,355 | |
Income before income taxes | 77,964 | | | 69,129 | | | 212,129 | | | 185,353 | |
Provision for income taxes | (19,915) | | | (18,587) | | | (54,627) | | | (49,258) | |
Net income | $ | 58,049 | | | $ | 50,542 | | | $ | 157,502 | | | $ | 136,095 | |
| | | | | | | |
Net income per share: | | | | | | | |
Basic | $ | .28 | | | $ | .24 | | | $ | .75 | | | $ | .64 | |
Diluted | .28 | | | .24 | | | .74 | | | .63 | |
See accompanying notes to condensed consolidated financial statements.
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 | $ | 58,049 | | | $ | 50,542 | | | $ | 157,502 | | | $ | 136,095 | |
Other comprehensive (loss) income: | | | | | | | |
Foreign currency translation adjustment | (4,533) | | | (14,183) | | | 574 | | | (20,520) | |
Other comprehensive (loss) income | (4,533) | | | (14,183) | | | 574 | | | (20,520) | |
Comprehensive income | $ | 53,516 | | | $ | 36,359 | | | $ | 158,076 | | | $ | 115,575 | |
See accompanying notes to condensed consolidated financial statements.
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 | $ | 47,042 | | | $ | 2,937,885 | | | $ | 414,749 | | | $ | (2,869,780) | | | $ | (64,176) | | | $ | 465,720 | |
Net income | — | | | — | | | 39,821 | | | — | | | — | | | 39,821 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 158 | | | 158 | |
Cash dividends | — | | | — | | | (53,103) | | | — | | | — | | | (53,103) | |
Repurchases of common stock | — | | | — | | | — | | | (38,810) | | | — | | | (38,810) | |
Share-based compensation | — | | | 4,609 | | | — | | | — | | | — | | | 4,609 | |
Common stock issued upon exercises of stock options | — | | | 808 | | | — | | | 1,808 | | | — | | | 2,616 | |
Common stock issued upon vesting of restricted shares | — | | | (2,222) | | | — | | | 678 | | | — | | | (1,544) | |
Other | — | | | 58 | | | (22) | | | 54 | | | — | | | 90 | |
Balance at April 2, 2023 | $ | 47,042 | | | $ | 2,941,138 | | | $ | 401,445 | | | $ | (2,906,050) | | | $ | (64,018) | | | $ | 419,557 | |
Net income | — | | | — | | | 59,632 | | | — | | | — | | | 59,632 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 4,949 | | | 4,949 | |
Cash dividends | — | | | — | | | (52,612) | | | — | | | — | | | (52,612) | |
Repurchases of common stock | — | | | — | | | — | | | (50,183) | | | — | | | (50,183) | |
Share-based compensation | — | | | 5,609 | | | — | | | — | | | — | | | 5,609 | |
Common stock issued upon exercises of stock options | — | | | 1,136 | | | — | | | 3,829 | | | — | | | 4,965 | |
Common stock issued upon vesting of restricted shares | — | | | (2,182) | | | — | | | 1,283 | | | — | | | (899) | |
Other | — | | | 53 | | | (16) | | | 60 | | | — | | | 97 | |
Balance at July 2, 2023 | $ | 47,042 | | | $ | 2,945,754 | | | $ | 408,449 | | | $ | (2,951,061) | | | $ | (59,069) | | | $ | 391,115 | |
Net income | — | | | — | | | 58,049 | | | — | | | — | | | 58,049 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (4,533) | | | (4,533) | |
Cash dividends | — | | | — | | | (52,156) | | | — | | | — | | | (52,156) | |
Repurchases of common stock | — | | | — | | | — | | | (56,714) | | | — | | | (56,714) | |
Share-based compensation | — | | | 6,551 | | | — | | | — | | | — | | | 6,551 | |
Common stock issued upon exercises of stock options | — | | | 210 | | | — | | | 894 | | | — | | | 1,104 | |
Common stock issued upon vesting of restricted shares | — | | | (1,658) | | | — | | | 702 | | | — | | | (956) | |
Other | — | | | 59 | | | (18) | | | 63 | | | — | | | 104 | |
Balance at October 1, 2023 | $ | 47,042 | | | $ | 2,950,916 | | | $ | 414,324 | | | $ | (3,006,116) | | | $ | (63,602) | | | $ | 342,564 | |
See accompanying notes to condensed consolidated financial statements.
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 | $ | 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 | |
Net income | — | | | — | | | 50,542 | | | — | | | — | | | 50,542 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (14,183) | | | (14,183) | |
Cash dividends | — | | | — | | | (26,607) | | | — | | | — | | | (26,607) | |
Share-based compensation | — | | | 5,027 | | | — | | | — | | | — | | | 5,027 | |
Common stock issued upon exercises of stock options | — | | | 450 | | | — | | | 241 | | | — | | | 691 | |
Common stock issued upon vesting of restricted shares | — | | | (1,876) | | | — | | | 817 | | | — | | | (1,059) | |
Other | — | | | 48 | | | (11) | | | 68 | | | — | | | 105 | |
Balance at October 2, 2022 | $ | 47,042 | | | $ | 2,930,388 | | | $ | 400,111 | | | $ | (2,871,442) | | | $ | (68,720) | | | $ | 437,379 | |
See accompanying notes to condensed consolidated financial statements.
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 | $ | 157,502 | | | $ | 136,095 | |
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) | 101,258 | | | 100,911 | |
Amortization of cloud computing arrangements | 7,692 | | | 888 | |
Share-based compensation | 16,769 | | | 17,497 | |
Impairment of long-lived assets | 513 | | | 2,682 | |
Deferred income tax | (502) | | | 10,214 | |
Non-cash rental expense, net | 30,724 | | | 26,164 | |
Change in operating lease liabilities | (35,319) | | | (34,241) | |
Net receipt of deferred vendor incentives | 4,007 | | | 1,884 | |
System optimization gains, net | (119) | | | (4,138) | |
Distributions received from joint ventures, net of equity in earnings | 1,349 | | | 3,468 | |
Long-term debt-related activities, net | 7,310 | | | 5,746 | |
Cloud computing arrangements expenditures | (25,154) | | | (22,685) | |
Changes in operating assets and liabilities and other, net | 3,495 | | | (61,846) | |
Net cash provided by operating activities | 269,525 | | | 182,639 | |
Cash flows from investing activities: | | | |
Capital expenditures | (55,689) | | | (50,036) | |
Franchise development fund | (1,947) | | | (2,484) | |
| | | |
Dispositions | 280 | | | 3,731 | |
| | | |
Notes receivable, net | 1,825 | | | 2,713 | |
Net cash used in investing activities | (55,531) | | | (46,076) | |
Cash flows from financing activities: | | | |
Proceeds from long-term debt | — | | | 500,000 | |
Repayments of long-term debt | (61,280) | | | (19,437) | |
Repayments of finance lease liabilities | (16,947) | | | (13,411) | |
Deferred financing costs | — | | | (10,232) | |
Repurchases of common stock | (142,413) | | | (51,950) | |
Dividends | (157,871) | | | (80,153) | |
Proceeds from stock option exercises | 9,113 | | | 2,668 | |
Payments related to tax withholding for share-based compensation | (3,827) | | | (2,980) | |
Net cash (used in) provided by financing activities | (373,225) | | | 324,505 | |
Net cash (used in) provided by operations before effect of exchange rate changes on cash | (159,231) | | | 461,068 | |
Effect of exchange rate changes on cash | 307 | | | (7,176) | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (158,924) | | | 453,892 | |
Cash, cash equivalents and restricted cash at beginning of period | 831,801 | | | 366,966 | |
Cash, cash equivalents and restricted cash at end of period | $ | 672,877 | | | $ | 820,858 | |
See accompanying notes to condensed consolidated financial statements.
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 | $ | 227,674 | | | $ | 7,047 | | | $ | — | | | $ | 234,721 | |
Franchise royalty revenue | 112,698 | | | 17,390 | | | — | | | 130,088 | |
Franchise fees | 17,079 | | | 1,597 | | | 581 | | | 19,257 | |
Franchise rental income | — | | | — | | | 57,567 | | | 57,567 | |
Advertising funds revenue | 99,789 | | | 9,133 | | | — | | | 108,922 | |
Total revenues | $ | 457,240 | | | $ | 35,167 | | | $ | 58,148 | | | $ | 550,555 | |
| | | | | | | |
Three Months Ended October 2, 2022 | | | | | | | |
Sales at Company-operated restaurants | $ | 225,245 | | | $ | 3,541 | | | $ | — | | | $ | 228,786 | |
Franchise royalty revenue | 108,780 | | | 15,777 | | | — | | | 124,557 | |
Franchise fees | 15,294 | | | 1,257 | | | 625 | | | 17,176 | |
Franchise rental income | — | | | — | | | 58,463 | | | 58,463 | |
Advertising funds revenue | 96,615 | | | 6,972 | | | — | | | 103,587 | |
Total revenues | $ | 445,934 | | | $ | 27,547 | | | $ | 59,088 | | | $ | 532,569 | |
| | | | | | | |
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 | $ | 685,168 | | | $ | 18,190 | | | $ | — | | | $ | 703,358 | |
Franchise royalty revenue | 333,958 | | | 50,408 | | | — | | | 384,366 | |
Franchise fees | 51,812 | | | 4,515 | | | 3,377 | | | 59,704 | |
Franchise rental income | — | | | — | | | 173,407 | | | 173,407 | |
Advertising funds revenue | 296,043 | | | 24,049 | | | — | | | 320,092 | |
Total revenues | $ | 1,366,981 | | | $ | 97,162 | | | $ | 176,784 | | | $ | 1,640,927 | |
| | | | | | | |
Nine Months Ended October 2, 2022 | | | | | | | |
Sales at Company-operated restaurants | $ | 659,649 | | | $ | 9,281 | | | $ | — | | | $ | 668,930 | |
Franchise royalty revenue | 315,572 | | | 45,743 | | | — | | | 361,315 | |
Franchise fees | 46,685 | | | 3,695 | | | 2,450 | | | 52,830 | |
Franchise rental income | — | | | — | | | 174,944 | | | 174,944 | |
Advertising funds revenue | 281,779 | | | 19,197 | | | — | | | 300,976 | |
Total revenues | $ | 1,303,685 | | | $ | 77,916 | | | $ | 177,394 | | | $ | 1,558,995 | |
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) | $ | 54,931 | | | $ | 54,497 | |
Receivables, which are included in “Advertising funds restricted assets” | 66,676 | | | 70,422 | |
Deferred franchise fees (c) | 99,889 | | | 99,208 | |
_______________
(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 | $ | 99,208 | | | $ | 97,186 | |
Revenue recognized during the period | (9,016) | | | (7,193) | |
New deferrals due to cash received and other | 9,697 | | | 10,143 | |
Deferred franchise fees at end of period | $ | 99,889 | | | $ | 100,136 | |
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) | $ | 6,332 | |
2024 | 6,090 | |
2025 | 5,908 | |
2026 | 5,797 | |
2027 | 5,689 | |
Thereafter | 70,073 | |
| $ | 99,889 | |
_______________
(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.”
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 | — | | 1 | | — | | 1 |
| | | | | | | |
Proceeds from sales of restaurants (a) | $ | — | | | $ | 79 | | | $ | — | | | $ | 79 | |
Net assets sold (b) | — | | | (141) | | | — | | | (141) | |
Net unfavorable leases | — | | | (360) | | | — | | | (360) | |
Other | — | | | 6 | | | — | | | 6 | |
| — | | | (416) | | | — | | | (416) | |
Post-closing adjustments on sales of restaurants (c) | 537 | | | — | | | 537 | | | 3,522 | |
Gain (loss) on sales of restaurants, net | 537 | | | (416) | | | 537 | | | 3,106 | |
| | | | | | | |
(Loss) gain on sales of other assets, net (d) | (417) | | | 868 | | | (418) | | | 1,032 | |
System optimization gains, net | $ | 120 | | | $ | 452 | | | $ | 119 | | | $ | 4,138 | |
_______________
(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 | $ | 579 | | | $ | — | | | $ | 7,986 | | | $ | — | |
| | | | | | | |
Other reorganization and realignment plans | 32 | | | 8 | | | 114 | | | 628 | |
Reorganization and realignment costs | $ | 611 | | | $ | 8 | | | $ | 8,100 | | | $ | 628 | |
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 | $ | 114 | | | $ | 5,674 | |
Recruitment and relocation costs | 140 | | | 304 | |
Third-party and other costs | 173 | | | 904 | |
| 427 | | | 6,882 | |
Share-based compensation (a) | 152 | | | 1,104 | |
Total organizational redesign | $ | 579 | | | $ | 7,986 | |
_______________
(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 | $ | — | | | $ | 5,674 | | | $ | (3,524) | | | $ | 2,150 | |
Recruitment and relocation costs | — | | | 304 | | | (304) | | | — | |
Third-party and other costs | — | | | 904 | | | (904) | | | — | |
| $ | — | | | $ | 6,882 | | | $ | (4,732) | | | $ | 2,150 | |
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.
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 | $ | 32,723 | | | $ | 33,921 | |
Other investments in equity securities | 1,718 | | | 12,107 | |
| $ | 34,441 | | | $ | 46,028 | |
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 | $ | 33,921 | | | $ | 39,870 | |
| | | |
Equity in earnings for the period | 10,012 | | | 9,091 | |
Amortization of purchase price adjustments (a) | (2,051) | | | (2,163) | |
| 7,961 | | | 6,928 | |
Distributions received | (9,310) | | | (10,396) | |
Foreign currency translation adjustment included in “Other comprehensive (loss) income” and other | 151 | | | (3,027) | |
Balance at end of period | $ | 32,723 | | | $ | 33,375 | |
_______________
(a)Purchase price adjustments that impacted the carrying value of the Company’s investment in TimWen are being amortized over the average original aggregate life of 21 years.
Other Investments in Equity Securities
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.
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): | | | |
4.236% Series 2022-1 Class A-2-I Notes, anticipated repayment date 2029 | $ | 98,750 | | | $ | 99,500 | |
4.535% Series 2022-1 Class A-2-II Notes, anticipated repayment date 2032 | 395,000 | | | 398,000 | |
2.370% Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029 | 439,875 | | | 443,250 | |
2.775% Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 | 635,375 | | | 640,250 | |
3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 | 361,000 | | | 364,000 | |
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 | 406,125 | | | 409,500 | |
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 | 447,688 | | | 451,250 | |
7% debentures, due in 2025 (b) | 49,190 | | | 86,369 | |
Unamortized debt issuance costs | (35,527) | | | (40,673) | |
| 2,797,476 | | | 2,851,446 | |
Less amounts payable within one year | (29,250) | | | (29,250) | |
Total long-term debt | $ | 2,768,226 | | | $ | 2,822,196 | |
_______________
(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.
(b)Wendy’s 7% debentures are unsecured and were reduced to fair value in connection with the 2008 merger of Triarc Companies, Inc. and Wendy’s International, Inc. (the “Wendy’s Merger”). The fair value adjustment is being accreted and the related charge included in “Interest expense, net” until the debentures mature. During the nine months ended October 1, 2023, Wendy’s repurchased $39,266 in principal of its 7% debentures for $39,343. As a result, the Company recognized a loss on early extinguishment of debt of $1,585 during the nine months ended October 1, 2023. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased $1,164 in principal of its 7% debentures for $1,174.
(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.
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 | $ | 419,744 | | | $ | 419,744 | | | $ | 560,682 | | | $ | 560,682 | | | Level 1 |
Other investments in equity securities (a) | 1,718 | | | 1,718 | | | 12,107 | | | 12,107 | | | Level 2 |
| | | | | | | | | |
Financial liabilities (b) | | | | | | | | | |
Series 2022-1 Class A-2-I Notes | 98,750 | | | 89,191 | | | 99,500 | | | 89,401 | | | Level 2 |
Series 2022-1 Class A-2-II Notes | 395,000 | | | 345,744 | | | 398,000 | | | 349,444 | | | Level 2 |
Series 2021-1 Class A-2-I Notes | 439,875 | | | 360,785 | | | 443,250 | | | 357,304 | | | Level 2 |
Series 2021-1 Class A-2-II Notes | 635,375 | | | 497,753 | | | 640,250 | | | 499,011 | | | Level 2 |
Series 2019-1 Class A-2-I Notes | 361,000 | | | 334,683 | | | 364,000 | | | 334,334 | | | Level 2 |
Series 2019-1 Class A-2-II Notes | 406,125 | | | 360,111 | | | 409,500 | | | 361,875 | | | Level 2 |
Series 2018-1 Class A-2-II Notes | 447,688 | | | 404,217 | | | 451,250 | | | 405,809 | | | Level 2 |
7% debentures, due in 2025 | 49,190 | | | 51,115 | | | 86,369 | | | 92,367 | | | 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.
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 | $ | 593 | | | $ | — | | | $ | — | | | $ | 593 | |
Held for sale | 1,044 | | | — | | | — | | | 1,044 | |
Total | $ | 1,637 | | | $ | — | | | $ | — | | | $ | 1,637 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements |
| January 1, 2023 | | Level 1 | | Level 2 | | Level 3 |
Held and used | $ | 4,590 | | | $ | — | | | $ | — | | | $ | 4,590 | |
Held for sale | 1,314 | | | — | | | — | | | 1,314 | |
Total | $ | 5,904 | | | $ | — | | | $ | — | | | $ | 5,904 | |
(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 | $ | — | | | $ | 159 | | | $ | |