Enter Agreement, Leave Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K
2019-06-13
Enter Agreement, Other Events, Exhibits
8-K
2019-06-05
8-K
2019-06-04
Shareholder Vote
8-K
2019-05-06
Earnings, Officers, Exhibits
8-K
2019-02-21
Earnings, Exhibits
8-K
2019-02-13
Regulation FD, Exhibits
8-K
2018-12-20
Other Events
8-K
2018-11-15
Other Events
8-K
2018-11-06
Earnings, Exhibits
8-K
2018-08-16
Regulation FD, Exhibits
8-K
2018-08-07
Earnings, Exhibits
8-K
2018-06-05
Shareholder Vote
8-K
2018-02-22
Regulation FD, Exhibits
8-K
2018-02-21
Earnings, Exhibits
8-K
2018-01-17
Enter Agreement, Leave Agreement, Off-BS Arrangement, Other Events, Exhibits
Comparables
NTRS
Northern Trust
21,110
MGM
MGM Resorts
13,730
GLYC
Glycomimetics
534
CRCM
Care.com
485
MGIC
Magic Software Enterprises
440
SIBN
SI-BONE
414
DSPG
DSP Group
344
IMAC
IMAC Holdings
29
OSMU
Original Source Music
0
PGUS
Progreen
0
WEN 2019-03-31
Content
Part I. Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
Exhibits
EX-10.1
twc_ex101xq1-19.htm
EX-31.1
twc_ex311xq1-19.htm
EX-31.2
twc_ex312xq1-19.htm
EX-32.1
twc_ex321xq1-19.htm
Wendy's Earnings 2019-03-31
WEN 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 twc10qq12019.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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 registrants 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)
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 [x] 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 [x] 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 [x]
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 [x]
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
There were 230,724,058 shares of The Wendy’s Company common stock outstanding as of May 1, 2019.
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 March 31, 2019 and the results of our operations and cash flows for the three months ended March 31, 2019 and April 1, 2018. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full 2019 fiscal year. The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018 (the “Form 10-K”).
The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s® restaurants in North America (defined as the United States of America (“U.S.”) and Canada) comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material.
We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three-month periods presented herein contain 13 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.
Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.
Certain reclassifications have been made to the prior year presentation to conform to the current year presentation. See Note 2 for further information.
(2) New Accounting Standards
New Accounting Standards Adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance on accounting for implementation costs of a cloud computing arrangement that is a service contract. The new guidance aligns the accounting for such implementation costs of a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The Company adopted this amendment during the first quarter of 2019. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
In June 2018, the FASB issued new guidance on nonemployee share-based payment arrangements. The new guidance aligns the requirements for nonemployee share-based payments with the requirements for employee share-based payments. The Company adopted this amendment during the first quarter of 2019. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Leases
In February 2016, the FASB issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases. The Company adopted the new guidance during the first quarter of 2019 using the effective date as the date of initial application; therefore, the comparative period has not been adjusted and continues to be reported under the previous lease guidance.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did not recognize right-of-use (“ROU”) assets or liabilities, which included not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient for lessees to account for lease components and nonlease components as a single lease component for all underlying classes of assets. In addition, the Company elected the practical expedient for lessors to account for lease components and nonlease components as a single lease component in instances where the lease component is predominant, the timing and pattern of transfer for the lease component and nonlease component are the same and the lease component, if accounted for separately, would be classified as an operating lease. The Company did not elect the use-of-hindsight practical expedient.
The standard had a material impact on our condensed consolidated balance sheets and related disclosures. Upon adoption at the beginning of 2019, we recognized operating lease liabilities of $1,011,000 based on the present value of the remaining minimum rental payments, with corresponding ROU assets of $934,000. The measurement of the operating lease ROU assets included, among other items, favorable lease amounts of $23,000 and unfavorable lease amounts of $30,000, which were previously included in “Other intangible assets” and “Other liabilities,” respectively, as well as the excess of rent expense recognized on a straight-line basis over the minimum rents paid of $67,000, which was previously included in “Other liabilities.” In addition, the standard requires lessors to recognize lessees’ payments to the Company for executory costs on a gross basis as revenue with a corresponding expense, which we expect will result in an increase of approximately $40,000 to our 2019 franchise rental income and expense. The Company also recognized a decrease to retained earnings of $1,105 as a result of impairing newly recognized ROU assets upon transition to the new guidance. The adoption of the guidance did not have a material impact on our condensed consolidated statement of cash flows.
In connection with the adoption of the standard, the Company has reclassified finance lease ROU assets to “Finance lease assets,” which were previously recorded to “Properties.” The Company also reclassified the current and long-term finance lease liabilities to “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” which were previously recorded to “Current portion of long-term debt” and “Long-term debt,” respectively. The prior period reflects the reclassifications of these assets and liabilities to conform to the current year presentation.
The following table illustrates the reclassifications made to the condensed consolidated balance sheet as of December 30, 2018:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(3) Revenue
Disaggregation of Revenue
The following tables disaggregate revenue by primary geographical market and source:
Three Months Ended March 31, 2019
U.S.
Canada
Other International
Total
Sales at Company-operated restaurants
$
167,697
$
—
$
—
$
167,697
Franchise royalty revenue
84,378
5,508
4,957
94,843
Franchise fees
6,009
412
689
7,110
Franchise rental income
50,665
7,787
—
58,452
Advertising funds revenue
75,981
4,500
—
80,481
Total revenues
$
384,730
$
18,207
$
5,646
$
408,583
Three Months Ended April 1, 2018
Sales at Company-operated restaurants
$
153,649
$
—
$
—
$
153,649
Franchise royalty revenue
80,222
5,363
4,358
89,943
Franchise fees
7,085
646
234
7,965
Franchise rental income
44,265
5,842
—
50,107
Advertising funds revenue
74,414
4,486
—
78,900
Total revenues
$
359,635
$
16,337
$
4,592
$
380,564
Contract Balances
The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
March 31,
2019 (a)
December 30,
2018 (a)
Receivables, which are included in “Accounts and notes receivable, net” (b)
$
44,765
$
40,300
Receivables, which are included in “Advertising funds restricted assets”
47,056
47,332
Deferred franchise fees (c)
101,469
102,205
_______________
(a)
Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s statement 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 $9,142 and $92,327 as of March 31, 2019, respectively, and $9,973 and $92,232 as of December 30, 2018, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Significant changes in deferred franchise fees are as follows:
Three Months Ended
March 31, 2019
April 1, 2018
Deferred franchise fees at beginning of period
$
102,205
$
102,492
Revenue recognized during the period
(2,772
)
(2,688
)
New deferrals due to cash received and other
2,036
2,957
Deferred franchise fees at end of period
$
101,469
$
102,761
Anticipated Future Recognition of Deferred Franchise Fees
The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
Estimate for fiscal year:
2019 (a)
$
6,307
2020
6,482
2021
5,939
2022
5,725
2023
5,500
Thereafter
71,516
$
101,469
_______________
(a)
Represents franchise fees expected to be recognized for the remainder of 2019, which includes development-related franchise fees expected to be recognized over a duration of one year or less.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(4) Acquisitions
During the three months ended March 31, 2019, the Company acquired five restaurants from franchisees for total net cash consideration of $5,052. The Company did not incur any material acquisition-related costs associated with the acquisitions and such transactions were not significant to our condensed consolidated financial statements. The table below presents the allocation of the total purchase price to the fair value of assets acquired and liabilities assumed for restaurants acquired from the franchisees:
Three Months Ended
March 31, 2019
Restaurants acquired from franchisees
5
Total consideration paid, net of cash received
$
5,052
Identifiable assets acquired and liabilities assumed:
Properties
666
Acquired franchise rights
1,354
Finance lease assets
5,350
Finance lease liabilities
(4,084
)
Other
(2,316
)
Total identifiable net assets
970
Goodwill
$
4,082
During 2018, the Company acquired 16 restaurants from a franchisee for total net cash consideration of $21,401. The fair values of the identifiable intangible assets related to the acquisition were provisional amounts as of December 30, 2018, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended March 31, 2019, which resulted in a decrease in the fair value of acquired franchise rights of $2,989 and an increase in deferred tax assets of $140.
(5) System Optimization (Gains) Losses, Net
The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”). As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to reduce its ownership below the approximately 5% level, Wendy’s expects to continue to optimize its 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.
Gains and losses recognized on dispositions are recorded to “System optimization (gains) losses, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 6. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”
The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
Three Months Ended
March 31, 2019
April 1, 2018
Post-closing adjustments on sales of restaurants (a)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(a)
The three months ended April 1, 2018 includes cash proceeds, net of payments of $6.
(b)
During the three months ended April 1, 2018, the Company received cash proceeds of $345 primarily from the sale of surplus properties.
Assets Held for Sale
As of March 31, 2019 and December 30, 2018, the Company had assets held for sale of $4,470 and $2,435, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”
(6) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
Three Months Ended
March 31, 2019
April 1, 2018
G&A realignment
$
782
$
2,626
System optimization initiative
16
—
Reorganization and realignment costs
$
798
$
2,626
General and Administrative (“G&A”) Realignment
In May 2017, the Company initiated a plan to further reduce its G&A expenses. The Company expects to incur total costs aggregating approximately $32,000 to $35,000 related to the plan. The Company recognized costs totaling $782 and $2,626 during the three months ended March 31, 2019 and April 1, 2018, respectively, which primarily included severance and related employee costs. The Company expects to incur additional costs associated with our G&A realignment plan aggregating approximately $3,500, comprised of (1) severance and related employee costs of approximately $500, (2) recruitment and relocation costs of approximately $1,500, (3) third-party and other costs of approximately $500 and (4) share-based compensation of approximately $1,000. The Company expects to recognize the majority of the remaining costs associated with the plan during the remainder of 2019.
In May 2019, the Company announced changes to its leadership structure that includes the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer. The Company expects to incur incremental reorganization and realignment costs associated with these leadership changes of approximately $2,500, of which approximately $1,500 will be severance and related employee costs and approximately $1,000 will be share-based compensation. This will increase total reorganization and realignment costs to approximately $34,500 to $37,500. Also as a result of these changes, the Company’s chief operating decision maker is currently evaluating the Company’s management and operating structure and anticipates this evaluation will result in a change to its existing operating segment structure by the end of 2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the activity recorded as a result of the G&A realignment plan:
Three Months Ended
Total Incurred Since Inception
March 31, 2019
April 1, 2018
Severance and related employee costs
$
472
$
2,059
$
19,225
Recruitment and relocation costs
114
148
1,680
Third-party and other costs
16
328
2,126
602
2,535
23,031
Share-based compensation (a)
180
91
6,864
Termination of defined benefit plans
—
—
1,335
Total G&A realignment
$
782
$
2,626
$
31,230
_______________
(a)
Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our G&A realignment plan.
The accruals for our G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $4,730 and $765 as of March 31, 2019, respectively, and $8,781 and $2,731 as of April 1, 2018, respectively. The tables below present a rollforward of our accruals for the plan.
Balance
December 30,
2018
Charges
Payments
Balance
March 31, 2019
Severance and related employee costs
$
7,241
$
472
$
(2,218
)
$
5,495
Recruitment and relocation costs
83
114
(197
)
—
Third-party and other costs
—
16
(16
)
—
$
7,324
$
602
$
(2,431
)
$
5,495
Balance
December 31,
2017
Charges
Payments
Balance
April 1, 2018
Severance and related employee costs
$
12,093
$
2,059
$
(2,844
)
$
11,308
Recruitment and relocation costs
177
148
(121
)
204
Third-party and other costs
—
328
(328
)
—
$
12,270
$
2,535
$
(3,293
)
$
11,512
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $72,208 under the initiative since inception and expects to incur additional costs of approximately $500 during the remainder of 2019, which are primarily comprised of professional fees.
(7) Investments
Equity Investments
Wendy’s has a 50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand. (Tim Hortonsis a registered trademark of Tim Hortons USA Inc.) In addition, a wholly-owned subsidiary of Wendy’s has a 20% share in a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.”
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:
Three Months Ended
March 31, 2019
April 1, 2018
Balance at beginning of period
$
47,021
$
55,363
Investment
—
12
Equity in earnings for the period
2,397
2,420
Amortization of purchase price adjustments (a)
(566
)
(596
)
1,831
1,824
Distributions received
(2,246
)
(2,907
)
Foreign currency translation adjustment included in “Other comprehensive income (loss), net” and other
1,166
(1,262
)
Balance at end of period
$
47,772
$
53,030
_______________
(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.
(8) 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.
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:
March 31, 2019
December 30, 2018
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Fair Value
Measurements
Financial assets
Cash equivalents
$
205,393
$
205,393
$
222,228
$
222,228
Level 1
Other investments in equity securities (a)
639
2,179
639
2,181
Level 3
Financial liabilities
Series 2018-1 Class A-2-I Notes (b)
444,375
439,656
445,500
424,026
Level 2
Series 2018-1 Class A-2-II Notes (b)
469,063
461,952
470,250
439,353
Level 2
Series 2015-1 Class A-2-II Notes (b)
868,500
876,065
870,750
865,342
Level 2
Series 2015-1 Class A-2-III Notes (b)
482,500
495,711
483,750
482,522
Level 2
7% debentures, due in 2025 (b)
91,086
99,000
90,769
102,750
Level 2
Guarantees of franchisee loan obligations (c)
12
12
17
17
Level 3
_______________
(a)
The fair values of our investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments.
(b)
The fair values were based on quoted market prices in markets that are not considered active markets.
(c)
Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for equipment financing. We have accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted average risk percentage.
The carrying amounts of cash, accounts payable and accrued expenses approximated fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximated fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents and guarantees are the only financial assets and liabilities measured and recorded at fair value on a recurring basis.
Non-Recurring Fair Value Measurements
Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.
Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements and favorable lease assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below represents the remaining carrying value and were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance.
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, which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represents the remaining carrying value and were estimated based on current market values. See Note 9 for further information on impairment of our long-lived assets.
Fair Value Measurements
March 31, 2019
Level 1
Level 2
Level 3
Held and used
$
—
$
—
$
—
$
—
Held for sale
2,516
—
—
2,516
Total
$
2,516
$
—
$
—
$
2,516
Fair Value Measurements
December 30, 2018
Level 1
Level 2
Level 3
Held and used
$
462
$
—
$
—
$
462
Held for sale
1,031
—
—
1,031
Total
$
1,493
$
—
$
—
$
1,493
(9) Impairment of Long-Lived Assets
During the three months ended March 31, 2019 and April 1, 2018, the Company recorded impairment charges on long-lived assets as a result of closing Company-operated restaurants and classifying such surplus properties as held for sale.
During the three months ended March 31, 2019, the Company recorded impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants. Additionally, during the three months ended April 1, 2018, the Company recorded impairment charges as a result of 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.
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
March 31, 2019
April 1, 2018
Surplus properties
$
1,285
$
41
Company-operated restaurants
201
—
Restaurants leased or subleased to franchisees
—
165
$
1,486
$
206
(10) Income Taxes
The Company’s effective tax rate for the three months ended March 31, 2019 and April 1, 2018 was 20.0% and (40.5)% respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 21% primarily due to (1) net excess tax benefits related to share-based payments, which resulted in a benefit of $2,036 in the first quarter of 2019 and a benefit of $6,093 for the first quarter of 2018, (2) the impact of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) and (3) state income tax provision in 2019, including non-recurring changes to state deferred taxes net of federal benefits.
On December 22, 2017, the U.S. government enacted the Tax Act. In our continued analysis of the impact of the Tax Act in the first quarter of 2018 under Staff Accounting Bulletin 118, we adjusted our provisional amounts for a discrete net tax benefit of $3,623. This net benefit included $5,578 for the tax benefit of foreign tax credits, partially offset by a net expense of $1,955 related to the impact of the corporate rate reduction on our net deferred tax liabilities.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three months ended March 31, 2019. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $7,764 due to the lapse of statutes of limitations and expected settlements with taxing authorities.
The current portion of refundable income taxes was $9,560 and $14,475 as of March 31, 2019 and December 30, 2018, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. There were no long-term refundable income taxes as of March 31, 2019 and December 30, 2018.
(11) Net Income Per Share
Basic net income per share was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding.
The weighted average number of shares used to calculate basic and diluted net income per share were as follows:
Three Months Ended
March 31, 2019
April 1, 2018
Common stock:
Weighted average basic shares outstanding
230,584
239,928
Dilutive effect of stock options and restricted shares
5,310
8,491
Weighted average diluted shares outstanding
235,894
248,419
Diluted net income per share for the three months ended March 31, 2019 and April 1, 2018 was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of 2,158 and 2,711 for the three months ended March 31, 2019 and April 1, 2018, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
(12) Stockholders’ Equity
Dividends
During the first quarter of 2019 and 2018, the Company paid dividends per share of $.10 and $.085, respectively.
Repurchases of Common Stock
In February 2019, our Board of Directors authorized a repurchase program for up to $225,000 of our common stock through March 1, 2020, when and if market conditions warrant and to the extent legally permissible. In connection with the February 2019 authorization, the Company’s previous November 2018 repurchase authorization for up to $220,000 of our common stock was canceled. During the three months ended March 31, 2019, the Company repurchased 1,744 shares with an aggregate purchase price of $29,345, of which $268 was accrued at March 31, 2019, and excluding commissions of $25, under the November 2018 and February 2019 authorizations. As of March 31, 2019, the Company had $217,112 of availability remaining under its February 2019 authorization. Subsequent to March 31, 2019 through May 1, 2019, the Company repurchased 308 shares under the February 2019 authorization with an aggregate purchase price of $5,654, excluding commissions of $4.
In February 2018, our Board of Directors authorized a repurchase program for up to $175,000 of our common stock through March 3, 2019, when and if market conditions warranted and to the extent legally permissible. During the three months ended April 1, 2018, the Company repurchased 989 shares with an aggregate purchase price of $16,741, of which $1,294 was accrued at April 1, 2018, and excluding commissions of $14. Additionally, during the three months ended April 1, 2018, the Company completed its previous February 2017 repurchase authorization for up to $150,000 of our common stock with the repurchase of 1,385 shares with an aggregate purchase price of $22,633, and excluding commissions of $19.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Accumulated Other Comprehensive Loss
The following table provides a rollforward of the components of accumulated other comprehensive loss, net of tax as applicable:
Foreign Currency Translation
Pension
Total
Balance at December 30, 2018
$
(61,673
)
$
—
$
(61,673
)
Current-period other comprehensive income
6,025
—
6,025
Balance at March 31, 2019
$
(55,648
)
$
—
$
(55,648
)
Balance at December 31, 2017
$
(45,149
)
$
(1,049
)
$
(46,198
)
Current-period other comprehensive (loss) income
(6,044
)
117
(5,927
)
Balance at April 1, 2018
$
(51,193
)
$
(932
)
$
(52,125
)
(13) 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 March 31, 2019, Wendy’s and its franchisees operated 6,710 Wendy’s restaurants. Of the 358 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 144 restaurants, owned the building and held long-term land leases for 144 restaurants and held leases covering the land and building for 70 restaurants. Wendy’s also owned 513 and leased 1,275 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.
Determination of Whether a Contract Contains a Lease
The Company evaluates the contracts it enters into to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.
ROU Model and Determination of Lease Term
The Company uses the ROU model to account for leases where the Company is the lessee, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the initial measurement of the lease liability, adjusted for any favorable or unfavorable terms for leases acquired from franchisees, as well as payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, the Company includes option periods that it is reasonably certain to exercise as failure to renew the lease would impose a significant economic detriment. For properties used for Company-operated restaurants, the primary economic detriment relates to the existence of unamortized leasehold improvements which might be impaired if we choose not to exercise the available renewal options. The lease term for properties leased or subleased to franchisees is determined based upon the economic detriment to the franchisee and includes consideration of the length of the franchise agreement, historical performance of the restaurant and the existence of bargain renewal options. Lease terms for real estate are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Operating Leases
For operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are recognized as rent expense where the Company is a lessee, or income where the Company is a lessor, as applicable, on a straight-line basis (“Straight-Line Rent”) over the applicable lease terms. There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and ends on the rent commencement date. During a Rent Holiday, no cash rent payments are typically due under the terms of the lease; however, expense is recorded for that period on a straight-line basis. The excess of the Straight-Line Rent over the minimum rents paid is included in the ROU asset where the Company is a lessee. The excess of the Straight-Line Rent over the minimum rents received is recorded as a deferred lease asset and is included in “Other assets” where the Company is a lessor. Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or the asset is earned.
Lease cost for operating leases is recognized on a straight-line basis and includes the amortization of the ROU asset and interest expense related to the operating lease liability. Variable lease cost for operating leases includes Contingent Rent and payments for executory costs such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. Short-term lease cost for operating leases includes rental expense for leases with a term of less than 12 months. Lease costs are recorded in the condensed consolidated statements of operations based on the nature of the underlying lease as follows: (1) rental expense related to leases for Company-operated restaurants is recorded to “Cost of sales,” (2) rental expense for leased properties that are subsequently subleased to franchisees is recorded to “Franchise rental expense” and (3) rental expense related to leases for corporate offices and equipment is recorded to “General and administrative.”
Favorable and unfavorable lease amounts for operating leases where the Company is the lessor are recorded as components of “Other intangible assets” and “Other liabilities,” respectively. Favorable and unfavorable lease amounts are amortized on a straight-line basis over the term of the leases. When the expected term of a lease is determined to be shorter than the original amortization period, the favorable or unfavorable lease balance associated with the lease is adjusted to reflect the revised lease term.
Rental income and favorable and unfavorable lease amortization for operating leases on properties leased or subleased to franchisees is recorded to “Franchise rental income.” Lessees’ variable payments to the Company for executory costs under operating leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”
Finance Leases
Lease cost for finance leases includes the amortization of the ROU asset, which is amortized on a straight-line basis and recorded to “Depreciation and amortization,” and interest expense on the finance lease liability, which is calculated using the interest method and recorded to “Interest expense, net.”
Sales-Type and Direct Financing Leases
For sales-type and direct financing leases where the Company is the lessor, the Company records its investment in properties leased to franchisees on a net basis, which is comprised of the present value of the lease payments not yet received and the present value of the guaranteed and unguaranteed residual assets. The current and long-term portions of our net investment in sales-type and direct financing leases are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. Unearned income is recognized as interest income over the lease term and is included in “Interest expense, net.” Sales-type leases result in the recognition of gain or loss at the commencement of the lease, which is recorded to “Other operating income, net.” The gain or loss recognized upon commencement of the lease is directly affected by the Company’s estimate of the amount to be derived from the guaranteed and unguaranteed residual assets at the end of the lease term. The Company’s main component of this estimate is the expected fair value of the underlying assets, primarily the fair value of land. Lessees’ variable payments to the Company for executory costs under sales-type and direct financing leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Significant Assumptions and Judgments
Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, property lives, discount rates and probable term, all of which can impact (1) the classification and accounting for a lease or sublease as operating or finance, including sales-type and direct financing, (2) the Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent, (3) the term over which leasehold improvements for each restaurant are amortized and (4) the values and lives of adjustments to the initial ROU asset where the Company is the lessee, or favorable and unfavorable leases where the Company is the lessor. The amount of depreciation and amortization, interest and rent expense and income reported would vary if different estimates and assumptions were used.
Company as Lessee
The components of lease cost are as follows:
Three Months Ended
March 31, 2019
Finance lease cost:
Amortization of finance lease assets
$
3,117
Interest on finance lease liabilities
6,753
9,870
Operating lease cost
24,643
Variable lease cost (a)
14,104
Short-term lease cost
1,126
Total operating lease cost (b)
39,873
Total lease cost
$
49,743
_______________
(a)
Includes expenses for executory costs of $9,524, for which the Company is reimbursed by sublessees.
(b)
Includes $32,451 recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees and $6,593 recorded to “Cost of sales” for leases for Company-operated restaurants.
The following table includes supplemental cash flow and non-cash information related to leases:
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases
$
9,708
Operating cash flows from operating leases
23,312
Financing cash flows from finance leases
1,881
Right-of-use assets obtained in exchange for lease obligations:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table includes supplemental information related to leases:
March 31, 2019
Weighted-average remaining lease term (years):
Finance leases
17.8
Operating leases
15.9
Weighted average discount rate:
Finance leases
10.19
%
Operating leases
5.10
%
The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of March 31, 2019:
Finance
Leases
Operating
Leases
Fiscal Year
Company- Operated
Franchise
and Other
Company- Operated
Franchise
and Other
2019 (a)
$
1,917
$
34,251
$
15,168
$
54,760
2020
2,577
44,313
20,022
73,121
2021
2,687
45,706
19,764
73,067
2022
2,738
46,724
19,398
73,330
2023
2,690
48,389
19,376
73,407
Thereafter
34,441
688,400
200,962
853,051
Total minimum payments
$
47,050
$
907,783
$
294,690
$
1,200,736
Less interest
(22,400
)
(464,458
)
(93,278
)
(400,752
)
Present value of minimum lease payments (b) (c)
$
24,650
$
443,325
$
201,412
$
799,984
_______________
(a)
Represents future minimum rental payments for non-cancelable leases for the remainder of 2019.
(b)
The present value of minimum finance lease payments of $9,380 and $458,595 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively.
(c)
The present value of minimum operating lease payments of $43,657 and $957,739 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of December 30, 2018:
Finance
Leases
Operating
Leases
Fiscal Year
Company- Operated
Franchise
and Other
Company- Operated
Franchise
and Other
2019
$
1,962
$
45,125
$
20,174
$
75,703
2020
1,978
43,969
20,052
73,320
2021
2,082
45,522
19,820
73,167
2022
2,114
46,573
19,530
73,300
2023
2,084
48,109
19,430
73,377
Thereafter
23,558
676,139
203,073
854,964
Total minimum payments
$
33,778
$
905,437
$
302,079
$
1,223,831
Less interest
(16,874
)
(466,705
)
Present value of minimum lease payments (a)
$
16,904
$
438,732
_______________
(a)
The present value of minimum finance lease payments of $8,405 and $447,231 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively.
Company as Lessor
The components of lease income are as follows:
Three Months Ended
March 31, 2019
Sales-type and direct-financing leases:
Selling profit
$
1,934
Interest income
4,733
Operating lease income
$
45,205
Variable lease income
13,247
Franchise rental income (a)
$
58,452
_______________
(a)
Includes sublease income of $43,021 recognized during the three months ended March 31, 2019, of which $9,432 represents lessees’ variable payments to the Company for executory costs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of March 31, 2019:
Sales-Type and
Direct Financing Leases
Operating
Leases
Fiscal Year
Subleases
Owned Properties
Subleases
Owned Properties
2019 (a)
$
20,182
$
1,543
$
84,371
$
39,451
2020
27,484
2,130
113,275
52,990
2021
28,522
2,162
114,167
54,561
2022
29,159
2,243
115,363
56,034
2023
30,193
2,287
116,342
56,239
Thereafter
466,197
28,031
1,367,503
859,548
Total future minimum receipts
601,737
38,396
$
1,911,021
$
1,118,823
Unearned interest income
(380,607
)
(20,831
)
Net investment in sales-type and direct financing leases (b)
$
221,130
$
17,565
_______________
(a)
Represents future minimum rental receipts for non-cancelable leases for the remainder of 2019.
(b)
The present value of minimum direct financing rental receipts of $2,269 and $236,426 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. The present value of minimum direct financing rental receipts includes a net investment in unguaranteed residual assets of $233.
The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of December 30, 2018:
Sales-Type and
Direct Financing Leases
Operating
Leases
Fiscal Year
Subleases
Owned Properties
Subleases
Owned Properties
2019
$
26,239
$
1,937
$
113,180
$
52,527
2020
26,859
2,006
113,578
53,066
2021
27,904
2,043
114,447
54,615
2022
28,563
2,119
115,552
56,092
2023
29,512
2,159
116,463
56,284
Thereafter
448,851
26,404
1,372,646
858,755
Total future minimum receipts
587,928
36,668
$
1,945,866
$
1,131,339
Unearned interest income
(377,046
)
(20,338
)
Net investment in sales-type and direct financing leases (a)
$
210,882
$
16,330
_______________
(a)
The present value of minimum direct financing rental receipts of $735 and $226,477 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Properties owned by the Company and leased to franchisees and other third parties under operating leases include:
March 31, 2019
Land
$
281,571
Buildings and improvements
310,912
Restaurant equipment
2,120
594,603
Accumulated depreciation and amortization
(145,812
)
$
448,791
(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 for the operation of Wendy’s/Tim Hortons combo units in Canada. During the three months ended March 31, 2019 and April 1, 2018, Wendy’s paid TimWen $3,855 and $2,872, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $52 and $54 during the three months ended March 31, 2019 and April 1, 2018, respectively, which has been included as a reduction to “General and administrative.”
(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.
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 $69,753 as of March 31, 2019. These leases extend through 2056. We have not received any notice of default related to these leases as of March 31, 2019. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations.
Letters of Credit
As of March 31, 2019, the Company had outstanding letters of credit with various parties totaling $27,089. The outstanding letters of credit include amounts outstanding against the Series 2018-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Purchase and Capital Commitments
Beverage Agreement
The Company has an agreement with a beverage vendor, which provides fountain beverage products and certain marketing support funding to the Company and its franchisees. This agreement requires minimum purchases of certain fountain beverages (“Fountain Beverages”) by the Company and its franchisees at certain agreed upon prices until the total contractual gallon volume usage is reached. This agreement also provides for an annual advance to be paid to the Company based on the vendor’s expectation of the Company’s annual Fountain Beverages usage, which is amortized over actual usage during the year. In January 2019, the Company amended its contract with the beverage vendor, which now expires at the later of reaching a threshold usage requirement or December 31, 2025. Beverage purchases made by the Company under this agreement during the three months ended March 31, 2019 were $2,414. As of March 31, 2019, the Company estimates future purchases to be approximately $7,500 for the remainder of 2019, $10,600 in 2020, $11,100 in 2021, $11,900 in 2022 and $12,500 in 2023 based on current pricing and the expected ratio of usage at Company-operated restaurants to usage at franchised restaurants.
(16) Legal and Environmental Matters
The Company is involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate accruals for continuing operations for all of our legal and environmental matters. We cannot estimate the aggregate possible range of loss for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period.
We previously described certain legal proceedings in the Form 10-K. There were no material developments in those legal proceedings during the three months ended March 31, 2019.
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018 (the “Form 10-K”). There have been no material changes as of March 31, 2019 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II - Other Information” of this report. You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchises and operates Wendy’s® quick-service restaurants specializing in hamburger sandwiches throughout North America (defined as the United States of America (“U.S.”) and Canada). Wendy’s also has franchised restaurants in 29 foreign countries and U.S. territories.
Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited time basis. Wendy’s also offers breakfast in some restaurants in the United States.
The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s restaurants in North America comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material. The results of operations discussed below may not necessarily be indicative of future results.
The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three-month periods presented herein contain 13 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.
We adopted the new accounting guidance for leases effective December 31, 2018, which had a material impact on our condensed consolidated financial statements. Beginning with the first quarter of 2019, our financial condition and results of operations reflect adoption of the guidance; however, prior period results were not restated. See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
Executive Overview
Our Business
As of March 31, 2019, the Wendy’s restaurant system was comprised of 6,710 restaurants, of which 358 were owned and operated by the Company. All of our Company-operated restaurants are located in the United States.
Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and decreased consumer spending levels, general economic and market trends and weather.
Wendy’s long-term growth opportunities include (1) systemwide same-restaurant sales growth through continuing core menu improvement, product innovation, customer count growth and strategic price increases on our menu items, (2) system investment in our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants and focused execution of operational excellence, (3) growth in new restaurants, including global growth, (4) increased focus on consumer-facing digital platforms and technologies, (5) increased restaurant utilization in various dayparts, (6)
29
strengthening our operations through our system optimization initiative and (7) building stockholder value through financial management strategies.
Key Business Measures
We track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure:
•
Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes.
•
Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.
•
Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company believes systemwide sales data is useful in assessing consumer demand for the Company’s products, the overall success of the Wendy’s brand and, ultimately, the performance of the Company. The Company’s royalty revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty revenues and profitability.
The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.
Same-restaurant sales and systemwide sales exclude sales from Venezuela and, beginning in the third quarter of 2018, exclude sales from Argentina due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.
The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.
General and Administrative (“G&A”) Realignment
In May 2017, the Company initiated a plan to further reduce its G&A expenses. The Company expects to realize a total G&A expense reduction through the plan of approximately $35.0 million. The Company expects to incur total costs aggregating approximately $32.0 million to $35.0 million, of which $23.0 million to $27.0 million will be cash expenditures, related to such savings. Costs related to the plan are recorded to “Reorganization and realignment costs.” The Company recognized costs totaling $0.8 million and $2.6 million during the first quarter of 2019 and 2018, respectively, which primarily included severance and related employee costs. The Company expects to incur additional costs associated with our G&A realignment plan aggregating approximately $3.5 million, comprised of (1) severance and related employee costs of approximately $0.5 million, (2) recruitment and relocation costs of approximately $1.5 million, (3) third-party and other costs of approximately $0.5 million and (4) share-based compensation of approximately $1.0 million. The Company expects to recognize the majority of the remaining costs associated with the plan during the remainder of 2019.
In May 2019, the Company announced changes to its leadership structure that includes the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer. The Company expects to incur incremental reorganization and realignment costs associated with these leadership changes of approximately $2.5 million, of which approximately $1.5 million will be severance and related employee costs and approximately $1.0 million will be share-based compensation. This will increase total reorganization and realignment costs to approximately $34.5 million to $37.5 million. Also as a result of these changes, the Company’s chief operating decision maker is currently evaluating the Company’s management
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and operating structure and anticipates this evaluation will result in a change to its existing operating segment structure by the end of 2019.
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 first quarter of 2019 and 2018.