Item 1. Financial Statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Par Value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28,
2020
|
|
December 29,
2019
|
|
ASSETS
|
(Unaudited)
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
338,002
|
|
|
$
|
300,195
|
|
|
Restricted cash
|
30,606
|
|
|
34,539
|
|
|
Accounts and notes receivable, net
|
134,519
|
|
|
117,461
|
|
|
Inventories
|
4,411
|
|
|
3,891
|
|
|
Prepaid expenses and other current assets
|
36,003
|
|
|
15,585
|
|
|
Advertising funds restricted assets
|
154,367
|
|
|
82,376
|
|
|
Total current assets
|
697,908
|
|
|
554,047
|
|
|
Properties
|
934,980
|
|
|
977,000
|
|
|
Finance lease assets
|
201,418
|
|
|
200,144
|
|
|
Operating lease assets
|
839,276
|
|
|
857,199
|
|
|
Goodwill
|
749,080
|
|
|
755,911
|
|
|
Other intangible assets
|
1,234,065
|
|
|
1,247,212
|
|
|
Investments
|
42,592
|
|
|
45,949
|
|
|
Net investment in sales-type and direct financing leases
|
258,798
|
|
|
256,606
|
|
|
Other assets
|
112,239
|
|
|
100,461
|
|
|
Total assets
|
$
|
5,070,356
|
|
|
$
|
4,994,529
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Current portion of long-term debt
|
$
|
146,769
|
|
|
$
|
22,750
|
|
|
Current portion of finance lease liabilities
|
10,552
|
|
|
11,005
|
|
|
Current portion of operating lease liabilities
|
44,246
|
|
|
43,775
|
|
|
Accounts payable
|
20,597
|
|
|
22,701
|
|
|
Accrued expenses and other current liabilities
|
113,209
|
|
|
165,272
|
|
|
Advertising funds restricted liabilities
|
157,262
|
|
|
84,195
|
|
|
Total current liabilities
|
492,635
|
|
|
349,698
|
|
|
Long-term debt
|
2,238,705
|
|
|
2,257,561
|
|
|
Long-term finance lease liabilities
|
489,340
|
|
|
480,847
|
|
|
Long-term operating lease liabilities
|
880,745
|
|
|
897,737
|
|
|
Deferred income taxes
|
271,490
|
|
|
270,759
|
|
|
Deferred franchise fees
|
89,384
|
|
|
91,790
|
|
|
Other liabilities
|
124,074
|
|
|
129,778
|
|
|
Total liabilities
|
4,586,373
|
|
|
4,478,170
|
|
|
Commitments and contingencies
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Common stock, $0.10 par value; 1,500,000 shares authorized;
470,424 shares issued; 223,749 and 224,889 shares outstanding, respectively
|
47,042
|
|
|
47,042
|
|
|
Additional paid-in capital
|
2,892,699
|
|
|
2,874,001
|
|
|
Retained earnings
|
187,086
|
|
|
185,725
|
|
|
Common stock held in treasury, at cost; 246,675 and 245,535 shares, respectively
|
(2,580,658)
|
|
|
(2,536,581)
|
|
|
Accumulated other comprehensive loss
|
(62,186)
|
|
|
(53,828)
|
|
|
Total stockholders’ equity
|
483,983
|
|
|
516,359
|
|
|
Total liabilities and stockholders’ equity
|
$
|
5,070,356
|
|
|
$
|
4,994,529
|
|
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
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Sales
|
$
|
164,217
|
|
|
$
|
181,050
|
|
|
$
|
331,015
|
|
|
$
|
348,747
|
|
|
Franchise royalty revenue and fees
|
103,120
|
|
|
109,125
|
|
|
204,825
|
|
|
211,078
|
|
|
Franchise rental income
|
56,857
|
|
|
58,561
|
|
|
114,713
|
|
|
117,013
|
|
|
Advertising funds revenue
|
78,112
|
|
|
86,612
|
|
|
156,713
|
|
|
167,093
|
|
|
|
402,306
|
|
|
435,348
|
|
|
807,266
|
|
|
843,931
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
140,626
|
|
|
151,092
|
|
|
290,625
|
|
|
293,671
|
|
|
Franchise support and other costs
|
5,454
|
|
|
4,066
|
|
|
13,467
|
|
|
10,084
|
|
|
Franchise rental expense
|
31,297
|
|
|
28,027
|
|
|
60,598
|
|
|
60,478
|
|
|
Advertising funds expense
|
81,317
|
|
|
88,667
|
|
|
161,305
|
|
|
169,148
|
|
|
General and administrative
|
48,592
|
|
|
50,784
|
|
|
100,231
|
|
|
100,097
|
|
|
Depreciation and amortization
|
34,714
|
|
|
31,484
|
|
|
65,760
|
|
|
64,669
|
|
|
System optimization gains, net
|
(1,987)
|
|
|
(110)
|
|
|
(2,310)
|
|
|
(122)
|
|
|
Reorganization and realignment costs
|
2,911
|
|
|
3,570
|
|
|
6,821
|
|
|
4,368
|
|
|
Impairment of long-lived assets
|
117
|
|
|
198
|
|
|
4,704
|
|
|
1,684
|
|
|
Other operating income, net
|
(1,396)
|
|
|
(3,003)
|
|
|
(3,328)
|
|
|
(6,985)
|
|
|
|
341,645
|
|
|
354,775
|
|
|
697,873
|
|
|
697,092
|
|
|
Operating profit
|
60,661
|
|
|
80,573
|
|
|
109,393
|
|
|
146,839
|
|
|
Interest expense, net
|
(29,085)
|
|
|
(29,931)
|
|
|
(57,610)
|
|
|
(59,013)
|
|
|
Loss on early extinguishment of debt
|
—
|
|
|
(7,150)
|
|
|
—
|
|
|
(7,150)
|
|
|
Other (expense) income, net
|
(144)
|
|
|
2,247
|
|
|
932
|
|
|
4,947
|
|
|
Income before income taxes
|
31,432
|
|
|
45,739
|
|
|
52,715
|
|
|
85,623
|
|
|
Provision for income taxes
|
(6,528)
|
|
|
(13,353)
|
|
|
(13,370)
|
|
|
(21,343)
|
|
|
Net income
|
$
|
24,904
|
|
|
$
|
32,386
|
|
|
$
|
39,345
|
|
|
$
|
64,280
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
.11
|
|
|
$
|
.14
|
|
|
$
|
.18
|
|
|
$
|
.28
|
|
|
Diluted
|
.11
|
|
|
.14
|
|
|
.17
|
|
|
.27
|
|
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
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net income
|
$
|
24,904
|
|
|
$
|
32,386
|
|
|
$
|
39,345
|
|
|
$
|
64,280
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
4,149
|
|
|
3,835
|
|
|
(8,358)
|
|
|
9,860
|
|
|
Other comprehensive income (loss)
|
4,149
|
|
|
3,835
|
|
|
(8,358)
|
|
|
9,860
|
|
|
Comprehensive income
|
$
|
29,053
|
|
|
$
|
36,221
|
|
|
$
|
30,987
|
|
|
$
|
74,140
|
|
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 December 29, 2019
|
$
|
47,042
|
|
|
$
|
2,874,001
|
|
|
$
|
185,725
|
|
|
$
|
(2,536,581)
|
|
|
$
|
(53,828)
|
|
|
$
|
516,359
|
|
|
Net income
|
—
|
|
|
—
|
|
|
14,441
|
|
|
—
|
|
|
—
|
|
|
14,441
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,507)
|
|
|
(12,507)
|
|
|
Cash dividends
|
—
|
|
|
—
|
|
|
(26,793)
|
|
|
—
|
|
|
—
|
|
|
(26,793)
|
|
|
Repurchases of common stock, including accelerated share repurchase
|
—
|
|
|
15,000
|
|
|
—
|
|
|
(58,336)
|
|
|
—
|
|
|
(43,336)
|
|
|
Share-based compensation
|
—
|
|
|
4,539
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,539
|
|
|
Common stock issued upon exercises of stock options
|
—
|
|
|
280
|
|
|
—
|
|
|
1,330
|
|
|
—
|
|
|
1,610
|
|
|
Common stock issued upon vesting of restricted shares
|
—
|
|
|
(4,017)
|
|
|
—
|
|
|
726
|
|
|
—
|
|
|
(3,291)
|
|
|
Other
|
—
|
|
|
33
|
|
|
(7)
|
|
|
27
|
|
|
—
|
|
|
53
|
|
|
Balance at March 29, 2020
|
$
|
47,042
|
|
|
$
|
2,889,836
|
|
|
$
|
173,366
|
|
|
$
|
(2,592,834)
|
|
|
$
|
(66,335)
|
|
|
$
|
451,075
|
|
|
Net income
|
—
|
|
|
—
|
|
|
24,904
|
|
|
—
|
|
|
—
|
|
|
24,904
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,149
|
|
|
4,149
|
|
|
Cash dividends
|
—
|
|
|
—
|
|
|
(11,181)
|
|
|
—
|
|
|
—
|
|
|
(11,181)
|
|
|
Share-based compensation
|
—
|
|
|
4,787
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,787
|
|
|
Common stock issued upon exercises of stock options
|
—
|
|
|
(902)
|
|
|
—
|
|
|
11,361
|
|
|
—
|
|
|
10,459
|
|
|
Common stock issued upon vesting of restricted shares
|
—
|
|
|
(1,041)
|
|
|
—
|
|
|
773
|
|
|
—
|
|
|
(268)
|
|
|
Other
|
—
|
|
|
19
|
|
|
(3)
|
|
|
42
|
|
|
—
|
|
|
58
|
|
|
Balance at June 28, 2020
|
$
|
47,042
|
|
|
$
|
2,892,699
|
|
|
$
|
187,086
|
|
|
$
|
(2,580,658)
|
|
|
$
|
(62,186)
|
|
|
$
|
483,983
|
|
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 December 30, 2018
|
$
|
47,042
|
|
|
$
|
2,884,696
|
|
|
$
|
146,277
|
|
|
$
|
(2,367,893)
|
|
|
$
|
(61,673)
|
|
|
$
|
648,449
|
|
|
Net income
|
—
|
|
|
—
|
|
|
31,894
|
|
|
—
|
|
|
—
|
|
|
31,894
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,025
|
|
|
6,025
|
|
|
Cash dividends
|
—
|
|
|
—
|
|
|
(23,069)
|
|
|
—
|
|
|
—
|
|
|
(23,069)
|
|
|
Repurchases of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,370)
|
|
|
—
|
|
|
(29,370)
|
|
|
Share-based compensation
|
—
|
|
|
5,022
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,022
|
|
|
Common stock issued upon exercises of stock options
|
—
|
|
|
(205)
|
|
|
—
|
|
|
9,053
|
|
|
—
|
|
|
8,848
|
|
|
Common stock issued upon vesting of restricted shares
|
—
|
|
|
(8,874)
|
|
|
—
|
|
|
2,819
|
|
|
—
|
|
|
(6,055)
|
|
|
Cumulative effect of change in accounting principle
|
—
|
|
|
—
|
|
|
(1,105)
|
|
|
—
|
|
|
—
|
|
|
(1,105)
|
|
|
Other
|
—
|
|
|
24
|
|
|
(6)
|
|
|
37
|
|
|
—
|
|
|
55
|
|
|
Balance at March 31, 2019
|
$
|
47,042
|
|
|
$
|
2,880,663
|
|
|
$
|
153,991
|
|
|
$
|
(2,385,354)
|
|
|
$
|
(55,648)
|
|
|
$
|
640,694
|
|
|
Net income
|
—
|
|
|
—
|
|
|
32,386
|
|
|
—
|
|
|
—
|
|
|
32,386
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,835
|
|
|
3,835
|
|
|
Cash dividends
|
—
|
|
|
—
|
|
|
(23,124)
|
|
|
—
|
|
|
—
|
|
|
(23,124)
|
|
|
Repurchases of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,391)
|
|
|
—
|
|
|
(20,391)
|
|
|
Share-based compensation
|
—
|
|
|
4,986
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,986
|
|
|
Common stock issued upon exercises of stock options
|
—
|
|
|
(339)
|
|
|
—
|
|
|
10,830
|
|
|
—
|
|
|
10,491
|
|
|
Common stock issued upon vesting of restricted shares
|
—
|
|
|
(1,852)
|
|
|
—
|
|
|
964
|
|
|
—
|
|
|
(888)
|
|
|
Other
|
—
|
|
|
26
|
|
|
(4)
|
|
|
37
|
|
|
—
|
|
|
59
|
|
|
Balance at June 30, 2019
|
$
|
47,042
|
|
|
$
|
2,883,484
|
|
|
$
|
163,249
|
|
|
$
|
(2,393,914)
|
|
|
$
|
(51,813)
|
|
|
$
|
648,048
|
|
See accompanying notes to condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
|
(Unaudited)
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
$
|
39,345
|
|
|
$
|
64,280
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
65,760
|
|
|
64,669
|
|
|
Share-based compensation
|
9,326
|
|
|
10,008
|
|
|
Impairment of long-lived assets
|
4,704
|
|
|
1,684
|
|
|
Deferred income tax
|
1,920
|
|
|
3,422
|
|
|
Non-cash rental expense, net
|
12,251
|
|
|
11,519
|
|
|
Change in operating lease liabilities
|
(19,233)
|
|
|
(20,983)
|
|
|
Net receipt of deferred vendor incentives
|
7,728
|
|
|
5,312
|
|
|
System optimization gains, net
|
(2,310)
|
|
|
(122)
|
|
|
Distributions received from joint ventures, net of equity in earnings
|
1,262
|
|
|
2,099
|
|
|
Long-term debt-related activities, net
|
3,141
|
|
|
10,799
|
|
|
Changes in operating assets and liabilities and other, net
|
(93,332)
|
|
|
1,373
|
|
|
Net cash provided by operating activities
|
30,562
|
|
|
154,060
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Capital expenditures
|
(29,402)
|
|
|
(25,484)
|
|
|
Acquisitions
|
—
|
|
|
(5,052)
|
|
|
Dispositions
|
4,320
|
|
|
1,240
|
|
|
Proceeds from sale of investments
|
—
|
|
|
130
|
|
|
Notes receivable, net
|
138
|
|
|
(750)
|
|
|
Net cash used in investing activities
|
(24,944)
|
|
|
(29,916)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from long-term debt
|
153,315
|
|
|
850,000
|
|
|
Repayments of long-term debt
|
(24,271)
|
|
|
(877,876)
|
|
|
Repayments of finance lease liabilities
|
(3,707)
|
|
|
(3,521)
|
|
|
Deferred financing costs
|
(2,122)
|
|
|
(14,008)
|
|
|
Repurchases of common stock
|
(45,137)
|
|
|
(50,781)
|
|
|
Dividends
|
(37,974)
|
|
|
(46,193)
|
|
|
Proceeds from stock option exercises
|
11,865
|
|
|
19,160
|
|
|
Payments related to tax withholding for share-based compensation
|
(3,704)
|
|
|
(6,957)
|
|
|
Net cash provided by (used in) financing activities
|
48,265
|
|
|
(130,176)
|
|
|
Net cash provided by (used in) operations before effect of exchange rate changes on cash
|
53,883
|
|
|
(6,032)
|
|
|
Effect of exchange rate changes on cash
|
(3,132)
|
|
|
3,866
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
50,751
|
|
|
(2,166)
|
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
358,707
|
|
|
486,512
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
409,458
|
|
|
$
|
484,346
|
|
|
|
|
|
|
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
Capital expenditures included in accounts payable
|
$
|
6,082
|
|
|
$
|
5,398
|
|
|
Finance leases
|
12,962
|
|
|
23,534
|
|
|
|
|
|
|
|
|
June 28,
2020
|
|
December 29,
2019
|
|
Reconciliation of cash, cash equivalents and restricted cash at end of period:
|
|
|
|
|
Cash and cash equivalents
|
$
|
338,002
|
|
|
$
|
300,195
|
|
|
Restricted cash
|
30,606
|
|
|
34,539
|
|
|
Restricted cash, included in Advertising funds restricted assets
|
40,850
|
|
|
23,973
|
|
|
Total cash, cash equivalents and restricted cash
|
$
|
409,458
|
|
|
$
|
358,707
|
|
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 June 28, 2020, the results of our operations for the three and six months ended June 28, 2020 and June 30, 2019 and cash flows for the six months ended June 28, 2020 and June 30, 2019. The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019 (the “Form 10-K”).
The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has materially affected and could continue to materially affect our financial condition and results of operations for an extended period of time. As such, the results of operations for the three and six months ended June 28, 2020 are not necessarily indicative of the results to be expected for the full 2020 fiscal year. See Notes 3, 7, 9, 11 and 14 for further information regarding actions taken by the Company in response to the COVID-19 pandemic and certain impacts of the COVID-19 pandemic on our condensed consolidated financial statements.
The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business in the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Certain prior period financial information has been revised to align with this segment reporting structure. See Note 19 for further information.
We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and six-month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.
Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.
(2) New Accounting Standards
New Accounting Standards Adopted
Income Taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and the simplification of areas such as franchise taxes, transactions that result in a step-up in the tax basis of goodwill, separate entity financial statements and interim recognition of enactment of tax laws or tax rate changes. The Company early adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued new guidance on disclosure requirements for fair value measurements. The objective of the new guidance is to provide additional information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. New incremental disclosure requirements include the amount of fair value hierarchy level 3 changes in unrealized gains and losses and the range and weighted average used to develop significant unobservable inputs for level 3 fair value measurements. The Company adopted this guidance during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Goodwill Impairment
In January 2017, the FASB issued new guidance that simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. The Company adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Credit Losses
In June 2016, the FASB issued an amendment that requires the Company to use a current expected credit loss model that results in the immediate recognition of an estimate of credit losses that are expected to occur over the life of the financial instruments that are within the scope of the guidance, including trade receivables. The Company adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
(3) Revenue
Disaggregation of Revenue
The following tables disaggregate revenue by segment and source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s U.S.
|
|
Wendy’s International
|
|
Global Real Estate & Development
|
|
Total
|
|
Three Months Ended June 28, 2020
|
|
|
|
|
|
|
|
|
Sales at Company-operated restaurants
|
$
|
164,217
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
164,217
|
|
|
Franchise royalty revenue
|
88,121
|
|
|
9,070
|
|
|
—
|
|
|
97,191
|
|
|
Franchise fees
|
5,308
|
|
|
433
|
|
|
188
|
|
|
5,929
|
|
|
Franchise rental income
|
—
|
|
|
—
|
|
|
56,857
|
|
|
56,857
|
|
|
Advertising funds revenue
|
73,612
|
|
|
4,500
|
|
|
—
|
|
|
78,112
|
|
|
Total revenues
|
$
|
331,258
|
|
|
$
|
14,003
|
|
|
$
|
57,045
|
|
|
$
|
402,306
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 28, 2020
|
|
|
|
|
|
|
|
|
Sales at Company-operated restaurants
|
$
|
331,015
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
331,015
|
|
|
Franchise royalty revenue
|
172,954
|
|
|
19,593
|
|
|
—
|
|
|
192,547
|
|
|
Franchise fees
|
10,593
|
|
|
906
|
|
|
779
|
|
|
12,278
|
|
|
Franchise rental income
|
—
|
|
|
—
|
|
|
114,713
|
|
|
114,713
|
|
|
Advertising funds revenue
|
147,737
|
|
|
8,976
|
|
|
—
|
|
|
156,713
|
|
|
Total revenues
|
$
|
662,299
|
|
|
$
|
29,475
|
|
|
$
|
115,492
|
|
|
$
|
807,266
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
Sales at Company-operated restaurants
|
$
|
181,050
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181,050
|
|
|
Franchise royalty revenue
|
91,430
|
|
|
11,391
|
|
|
—
|
|
|
102,821
|
|
|
Franchise fees
|
5,238
|
|
|
464
|
|
|
602
|
|
|
6,304
|
|
|
Franchise rental income
|
—
|
|
|
—
|
|
|
58,561
|
|
|
58,561
|
|
|
Advertising funds revenue
|
81,437
|
|
|
5,175
|
|
|
—
|
|
|
86,612
|
|
|
Total revenues
|
$
|
359,155
|
|
|
$
|
17,030
|
|
|
$
|
59,163
|
|
|
$
|
435,348
|
|
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
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
Sales at Company-operated restaurants
|
$
|
348,747
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
348,747
|
|
|
Franchise royalty revenue
|
175,808
|
|
|
21,856
|
|
|
—
|
|
|
197,664
|
|
|
Franchise fees
|
10,668
|
|
|
1,497
|
|
|
1,249
|
|
|
13,414
|
|
|
Franchise rental income
|
—
|
|
|
—
|
|
|
117,013
|
|
|
117,013
|
|
|
Advertising funds revenue
|
157,418
|
|
|
9,675
|
|
|
—
|
|
|
167,093
|
|
|
Total revenues
|
$
|
692,641
|
|
|
$
|
33,028
|
|
|
$
|
118,262
|
|
|
$
|
843,931
|
|
Contract Balances
The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28,
2020 (a)
|
|
December 29,
2019 (a)
|
|
Receivables, which are included in “Accounts and notes receivable, net” (b) (c)
|
$
|
86,834
|
|
|
$
|
39,188
|
|
|
Receivables, which are included in “Advertising funds restricted assets” (c)
|
83,891
|
|
|
54,394
|
|
|
Deferred franchise fees (d)
|
98,563
|
|
|
100,689
|
|
_______________
(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 increase in receivables as of June 28, 2020 was primarily due to extending payment terms for royalties and national advertising funds contributions by 45 days beginning in April for a three month period in response to the COVID-19 pandemic. See Note 7 for further information.
(d) Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled $9,179 and $89,384 as of June 28, 2020, respectively, and $8,899 and $91,790 as of December 29, 2019, respectively.
Significant changes in deferred franchise fees are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Deferred franchise fees at beginning of period
|
$
|
100,689
|
|
|
$
|
102,205
|
|
|
Revenue recognized during the period
|
(3,898)
|
|
|
(4,609)
|
|
|
New deferrals due to cash received and other
|
1,772
|
|
|
3,671
|
|
|
Deferred franchise fees at end of period
|
$
|
98,563
|
|
|
$
|
101,267
|
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Anticipated Future Recognition of Deferred Franchise Fees
The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
|
|
|
|
|
|
|
|
Estimate for fiscal year:
|
|
|
2020 (a)
|
$
|
6,091
|
|
|
2021
|
6,195
|
|
|
2022
|
5,991
|
|
|
2023
|
5,819
|
|
|
2024
|
5,616
|
|
|
Thereafter
|
68,851
|
|
|
|
$
|
98,563
|
|
_______________
(a) Represents franchise fees expected to be recognized for the remainder of 2020, which includes development-related franchise fees expected to be recognized over a duration of one year or less.
(4) Acquisitions
No restaurants were acquired from franchisees during the six months ended June 28, 2020. During the six months ended June 30, 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 during the six months ended June 30, 2019 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 franchisees:
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
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.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(5) System Optimization Gains, Net
The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”). As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to reduce its ownership below the approximately 5% level, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages. During the six months ended June 28, 2020, the Company facilitated three Franchise Flips. No Franchise Flips were facilitated by the Company during the six months ended June 30, 2019. The Company expects to sell 43 Company-operated restaurants in New York to franchisees in the first quarter of 2021. The Company expects to retain its Company-operated restaurants in Manhattan.
Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 6. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”
The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Post-closing adjustments on sales of restaurants (a)
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
345
|
|
|
$
|
54
|
|
|
Gain on sales of other assets, net (b)
|
1,987
|
|
|
48
|
|
|
1,965
|
|
|
68
|
|
|
System optimization gains, net
|
$
|
1,987
|
|
|
$
|
110
|
|
|
$
|
2,310
|
|
|
$
|
122
|
|
_______________
(a) The six months ended June 28, 2020 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.
(b) During the three and six months ended June 28, 2020, the Company received cash proceeds of $4,125 and $4,320, respectively, primarily from the sale of surplus and other properties. During the three and six months ended June 30, 2019, the Company received cash proceeds of $1,240, primarily from the sale of surplus properties.
Assets Held for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28,
2020
|
|
December 29,
2019
|
|
Number of restaurants classified as held for sale
|
43
|
|
|
—
|
|
|
Net restaurant assets held for sale (a)
|
$
|
20,468
|
|
|
$
|
—
|
|
|
Other assets held for sale (b)
|
$
|
2,317
|
|
|
$
|
1,437
|
|
_______________
(a) Net restaurant assets held for sale include the New York Company-operated restaurants we expect to sell in the first quarter of 2021 and consist primarily of cash, inventory, property and an estimate of allocable goodwill.
(b) Other assets held for sale primarily consist of surplus properties.
Assets held for sale are included in “Prepaid expenses and other current assets.”
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(6) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
IT realignment
|
$
|
2,847
|
|
|
$
|
—
|
|
|
$
|
6,406
|
|
|
$
|
—
|
|
|
G&A realignment
|
64
|
|
|
3,517
|
|
|
331
|
|
|
4,299
|
|
|
System optimization initiative
|
—
|
|
|
53
|
|
|
84
|
|
|
69
|
|
|
Reorganization and realignment costs
|
$
|
2,911
|
|
|
$
|
3,570
|
|
|
$
|
6,821
|
|
|
$
|
4,368
|
|
Information Technology (“IT”) Realignment
In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth. The Company is partnering with a third-party global IT consultant on this new structure to leverage their global capabilities, which the Company believes will enable a more seamless integration between its digital and corporate IT assets. The Company expects that the realignment plan will reduce certain employee compensation and other related costs that the Company intends to reinvest back into IT to drive additional capabilities and capacity across all of its technology platforms. Additionally, in June 2020, the Company made changes to its leadership structure that included the creation of a Chief Information Officer position and the elimination of the Chief Digital Experience Officer position. As a result, the Company now expects to incur total costs aggregating approximately $16,000 to $17,000 related to the plan. During the six months ended June 28, 2020, the Company recognized costs totaling $6,406, which primarily included third-party and other costs and severance and related employee costs. The Company expects to incur additional costs aggregating approximately $1,000, comprised primarily of recruitment and relocation costs. The Company expects to recognize the majority of the remaining costs associated with the plan during the remainder of 2020.
The following is a summary of the activity recorded as a result of the IT realignment plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Total
Incurred Since Inception
|
|
|
June 28,
2020
|
|
June 28,
2020
|
|
|
|
Severance and related employee costs
|
$
|
830
|
|
|
$
|
975
|
|
|
$
|
8,523
|
|
|
Recruitment and relocation costs
|
143
|
|
|
314
|
|
|
314
|
|
|
Third-party and other costs
|
1,874
|
|
|
5,117
|
|
|
6,503
|
|
|
|
2,847
|
|
|
6,406
|
|
|
15,340
|
|
|
Share-based compensation (a)
|
—
|
|
|
—
|
|
|
193
|
|
|
Total IT realignment
|
$
|
2,847
|
|
|
$
|
6,406
|
|
|
$
|
15,533
|
|
_______________
(a) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our IT realignment plan.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The table below presents a rollforward of our accruals for the IT realignment plan, which are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $4,039 and $371 as of June 28, 2020, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 29, 2019
|
|
Charges
|
|
Payments
|
|
Balance
June 28,
2020
|
|
Severance and related employee costs
|
$
|
7,548
|
|
|
$
|
975
|
|
|
$
|
(4,113)
|
|
|
$
|
4,410
|
|
|
Recruitment and relocation costs
|
—
|
|
|
314
|
|
|
(314)
|
|
|
—
|
|
|
Third-party and other costs
|
1,076
|
|
|
5,117
|
|
|
(6,193)
|
|
|
—
|
|
|
|
$
|
8,624
|
|
|
$
|
6,406
|
|
|
$
|
(10,620)
|
|
|
$
|
4,410
|
|
General and Administrative (“G&A”) Realignment
In May 2017, the Company initiated a plan to further reduce its G&A expenses. Additionally, in May 2019, the Company announced changes to its management and operating structure that included the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the Chief Operations Officer position. During the six months ended June 28, 2020 and June 30, 2019, the Company recognized costs related to the plan totaling $331 and $4,299, respectively, which primarily included severance and related employee costs and share-based compensation. The Company does not expect to incur any additional material costs under the plan.
The following is a summary of the activity recorded as a result of the G&A realignment plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
Total
Incurred Since Inception
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
|
|
Severance and related employee costs (a)
|
$
|
(6)
|
|
|
$
|
2,130
|
|
|
$
|
146
|
|
|
$
|
2,602
|
|
|
$
|
24,384
|
|
|
Recruitment and relocation costs
|
—
|
|
|
482
|
|
|
15
|
|
|
596
|
|
|
2,531
|
|
|
Third-party and other costs
|
—
|
|
|
71
|
|
|
1
|
|
|
87
|
|
|
2,211
|
|
|
|
(6)
|
|
|
2,683
|
|
|
162
|
|
|
3,285
|
|
|
29,126
|
|
|
Share-based compensation (b)
|
70
|
|
|
834
|
|
|
169
|
|
|
1,014
|
|
|
8,067
|
|
|
Termination of defined benefit plans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,335
|
|
|
Total G&A realignment
|
$
|
64
|
|
|
$
|
3,517
|
|
|
$
|
331
|
|
|
$
|
4,299
|
|
|
$
|
38,528
|
|
_______________
(a) The three and six months ended June 28, 2020 includes a reversal of an accrual as a result of a change in estimate.
(b) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under 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 $2,705 and $108 as of June 28, 2020, respectively, and $4,835 and $607 as of June 30, 2019, respectively. The tables below present a rollforward of our accruals for the plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 29,
2019
|
|
Charges
|
|
Payments
|
|
Balance
June 28,
2020
|
|
Severance and related employee costs
|
$
|
5,276
|
|
|
$
|
146
|
|
|
$
|
(2,671)
|
|
|
$
|
2,751
|
|
|
Recruitment and relocation costs
|
83
|
|
|
15
|
|
|
(36)
|
|
|
62
|
|
|
Third-party and other costs
|
—
|
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
|
$
|
5,359
|
|
|
$
|
162
|
|
|
$
|
(2,708)
|
|
|
$
|
2,813
|
|
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 30,
2018
|
|
Charges
|
|
Payments
|
|
Balance
June 30,
2019
|
|
Severance and related employee costs
|
$
|
7,241
|
|
|
$
|
2,602
|
|
|
$
|
(4,724)
|
|
|
$
|
5,119
|
|
|
Recruitment and relocation costs
|
83
|
|
|
596
|
|
|
(356)
|
|
|
323
|
|
|
Third-party and other costs
|
—
|
|
|
87
|
|
|
(87)
|
|
|
—
|
|
|
|
$
|
7,324
|
|
|
$
|
3,285
|
|
|
$
|
(5,167)
|
|
|
$
|
5,442
|
|
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $72,365 under the initiative since inception and does not expect to incur any material additional costs under the plan.
(7) Cash and Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28,
2020
|
|
December 29, 2019
|
|
Cash and cash equivalents
|
|
|
|
|
Cash
|
$
|
202,939
|
|
|
$
|
185,203
|
|
|
Cash equivalents
|
135,063
|
|
|
114,992
|
|
|
|
338,002
|
|
|
300,195
|
|
|
Restricted cash
|
|
|
|
|
Accounts held by trustee for the securitized financing facility
|
30,274
|
|
|
34,209
|
|
|
Other
|
332
|
|
|
330
|
|
|
|
30,606
|
|
|
34,539
|
|
|
Advertising Funds (a)
|
40,850
|
|
|
23,973
|
|
|
|
71,456
|
|
|
58,512
|
|
|
Total cash, cash equivalents and restricted cash
|
$
|
409,458
|
|
|
$
|
358,707
|
|
_______________
(a)Included in “Advertising funds restricted assets.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2020
|
|
|
|
|
|
December 29, 2019
|
|
|
|
|
|
|
|
Gross
|
|
Allowance for Doubtful Accounts
|
|
Net
|
|
Gross
|
|
Allowance for Doubtful Accounts
|
|
Net
|
|
Accounts and Notes Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable (a) (b)
|
|
$
|
125,021
|
|
|
$
|
(4,404)
|
|
|
$
|
120,617
|
|
|
$
|
103,852
|
|
|
$
|
(3,314)
|
|
|
$
|
100,538
|
|
|
Notes receivable from franchisees (c) (d)
|
|
18,572
|
|
|
(4,670)
|
|
|
13,902
|
|
|
23,628
|
|
|
(6,705)
|
|
|
16,923
|
|
|
|
|
$
|
143,593
|
|
|
$
|
(9,074)
|
|
|
$
|
134,519
|
|
|
$
|
127,480
|
|
|
$
|
(10,019)
|
|
|
$
|
117,461
|
|
|
Non-current (e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable from franchisees (d)
|
|
$
|
6,425
|
|
|
$
|
(835)
|
|
|
$
|
5,590
|
|
|
$
|
1,617
|
|
|
$
|
—
|
|
|
$
|
1,617
|
|
_______________
(a)Includes income tax refund receivables of $5,933 and $13,555 as of June 28, 2020 and December 29, 2019, respectively. Additionally, 2019 includes receivables of $25,350 related to insurance coverage for the financial institutions class action.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(b)During the six months ended June 28, 2020, royalty receivables increased by $47,740 and rent receivables increased by $6,111. These increases were primarily due to actions taken by the Company in response to the COVID-19 pandemic, which included (1) extending payment terms for royalties by 45 days beginning in April for a three month period and (2) offering to defer base rent payments on properties owned by Wendy’s and leased to franchisees by 50%, and offering to pass along any deferrals that were obtained on properties leased by Wendy’s and subleased to franchisees by up to 100%, beginning in May for a three month period, which will be repaid over 12 months beginning in August.
(c)Includes the current portion of sales-type and direct financing lease receivables of $3,780 and $3,146 as of June 28, 2020 and December 29, 2019, respectively.
Included a note receivable from a U.S. franchisee totaling $1,000 as of December 29, 2019. The note was repaid during the six months ended June 28, 2020.
(d)Includes a note receivable from a franchisee in India, of which $150 and $1,000 are included in current notes receivable as of June 28, 2020 and December 29, 2019, respectively, and $1,010 is included in non-current notes receivable as of June 28, 2020. As of June 28, 2020 and December 29, 2019, the Company had a reserve of $985 on the loan outstanding to the franchisee in India.
Includes a note receivable from a franchisee in Indonesia, of which $1,367 and $1,262 are included in current notes receivable and $1,065 and $1,617 are included in non-current notes receivable as of June 28, 2020 and December 29, 2019, respectively.
Includes notes receivable related to a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”), of which $11,975 and $15,920 are included in current notes receivable as of June 28, 2020 and December 29, 2019, respectively, and $4,350 is included in non-current notes receivable as of June 28, 2020. As of June 28, 2020 and December 29, 2019, the Company had reserves of $4,520 and $5,720, respectively, on the loans outstanding related to the Brazil JV.
(e)Included in “Other assets.”
Reserve estimates include consideration of the likelihood of default expected over the estimated life of the receivable. The Company periodically assesses the need for an allowance for doubtful accounts on its receivables based upon several key credit quality indicators such as outstanding past due balances, the financial strength of the obligor, the estimated fair value of any underlying collateral and agreement characteristics. We believe that our vulnerability to risk concentrations in our receivables is mitigated by (1) favorable historical collectability on past due balances, (2) recourse to the underlying collateral regarding sales-type and direct financing lease receivables, and (3) our expectations for fluctuations in general market conditions. Receivables are considered delinquent once they are contractually past due under the terms of the underlying agreements. As of June 28, 2020, there were no material receivables more than one year past due.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is an analysis of the allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
Notes Receivable
|
|
Total
|
|
Six Months Ended June 28, 2020
|
|
|
|
|
|
|
Balance at December 29, 2019
|
$
|
3,314
|
|
|
$
|
6,705
|
|
|
$
|
10,019
|
|
|
Provision for doubtful accounts
|
1,156
|
|
|
(8)
|
|
|
1,148
|
|
|
Uncollectible accounts written off, net of recoveries
|
(66)
|
|
|
(1,192)
|
|
|
(1,258)
|
|
|
Balance at June 28, 2020
|
$
|
4,404
|
|
|
$
|
5,505
|
|
|
$
|
9,909
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
Balance at December 30, 2018
|
$
|
4,940
|
|
|
$
|
2,000
|
|
|
$
|
6,940
|
|
|
Provision for doubtful accounts
|
(754)
|
|
|
1,843
|
|
|
1,089
|
|
|
Uncollectible accounts written off, net of recoveries
|
(139)
|
|
|
7
|
|
|
(132)
|
|
|
Balance at June 30, 2019
|
$
|
4,047
|
|
|
$
|
3,850
|
|
|
$
|
7,897
|
|
(8) Investments
Equity Investments
Wendy’s has a 50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand. (Tim Hortons is a registered trademark of Tim Hortons USA Inc.) In addition, a wholly-owned subsidiary of Wendy’s has a 20% share in the Brazil JV. The Company has significant influence over these investees. Such investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.”
Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Balance at beginning of period
|
$
|
45,310
|
|
|
$
|
47,021
|
|
|
|
|
|
|
|
Equity in earnings for the period
|
3,455
|
|
|
6,048
|
|
|
Amortization of purchase price adjustments (a)
|
(1,105)
|
|
|
(1,129)
|
|
|
|
2,350
|
|
|
4,919
|
|
|
Distributions received
|
(3,612)
|
|
|
(7,018)
|
|
|
Foreign currency translation adjustment included in “Other comprehensive income (loss)” and other
|
(1,631)
|
|
|
2,359
|
|
|
Balance at end of period
|
$
|
42,417
|
|
|
$
|
47,281
|
|
_______________
(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.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(9) Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28,
2020
|
|
December 29,
2019
|
|
Series 2019-1 Class A-2 Notes:
|
|
|
|
|
3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026
|
$
|
392,000
|
|
|
$
|
398,000
|
|
|
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029
|
441,000
|
|
|
447,750
|
|
|
Series 2018-1 Class A-2 Notes:
|
|
|
|
|
3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025
|
438,750
|
|
|
441,000
|
|
|
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028
|
463,125
|
|
|
465,500
|
|
|
Series 2015-1 Class A-2 Notes:
|
|
|
|
|
4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025
|
476,250
|
|
|
478,750
|
|
|
Series 2019-1 Class A-1 Variable Funding Senior Secured Notes
|
120,000
|
|
|
—
|
|
|
Canadian revolving credit facility
|
4,019
|
|
|
—
|
|
|
7% debentures, due in 2025
|
83,415
|
|
|
82,837
|
|
|
Unamortized debt issuance costs
|
(33,085)
|
|
|
(33,526)
|
|
|
|
2,385,474
|
|
|
2,280,311
|
|
|
Less amounts payable within one year
|
(146,769)
|
|
|
(22,750)
|
|
|
Total long-term debt
|
$
|
2,238,705
|
|
|
$
|
2,257,561
|
|
Senior Notes
Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. Under this facility, in June 2019, the Master Issuer also issued outstanding Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019-1 Class A-1 Notes”), which allow for the borrowing of up to $150,000 from time to time on a revolving basis using various credit instruments, including a letter of credit facility. In March 2020, the Company drew down $120,000 under the 2019-1 Class A-1 Notes. As a result, as of June 28, 2020, the Company had outstanding borrowings of $120,000 under the 2019-1 Class A-1 Notes. Subsequent to June 28, 2020, the Company repaid the $120,000 outstanding balance under the 2019-1 Class A-1 Notes. In June 2020, the Master Issuer also issued outstanding Series 2020-1 Variable Funding Senior Secured Notes, Class A-1 (the “2020-1 Class A-1 Notes”), which allow for the borrowing of up to $100,000 from time to time on a revolving basis using various credit instruments. The Company had no outstanding borrowings under the Series 2020-1 Class A-1 Notes as of June 28, 2020. The borrowing under the 2019-1 Class A-1 Notes in March 2020 and the issuance of the 2020-1 Class A-1 Notes in June 2020 were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic.
The 2019-1 Class A-1 Notes and the 2020-1 Class A-1 Notes (collectively, the “Class A-1 Notes”) accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate (“LIBOR”) for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the respective purchase agreements for the Class A-1 Notes. There is a commitment fee on the unused portions of the Class A-1 Notes, which ranges from 0.40% to 0.75% based on utilization for the 2019-1 Class A-1 Notes, and is 1.50% for the 2020-1 Class A-1 Notes. As of June 28, 2020, $26,040 of letters of credit were outstanding against the 2019-1 Class A-1 Notes, which relate primarily to interest reserves required under the indenture governing the 2019-1 Class A-1 Notes.
During the three and six months ended June 28, 2020, the Company incurred debt issuance costs of $2,122 in connection with the issuance of the 2020-1 Class A-1 Notes. The debt issuance costs are being amortized to “Interest expense, net” utilizing the effective interest rate method.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Other Long-Term Debt
A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6,000, which bears interest at the Bank of Montreal Prime Rate. The debt is guaranteed by Wendy’s. In March 2020, the Company drew down C$5,500 under the revolving credit facility. As a result, as of June 28, 2020, the Company had outstanding borrowings of C$5,500 under the revolving credit facility.
Wendy’s U.S. advertising fund has a revolving line of credit of $25,000, which was established to support the advertising fund operations and bears interest at LIBOR plus 2.75%. In February 2020, the Company drew down $4,397 under the revolving line of credit, which the Company repaid in February 2020. In March 2020, the Company drew down $25,000 under the revolving line of credit. As a result, as of June 28, 2020, the Company had outstanding borrowings of $25,000 under the revolving line of credit, which is included in “Advertising funds restricted liabilities.” Subsequent to June 28, 2020, the Company renewed the revolving line of credit, which is now guaranteed by Wendy’s.
The increased borrowings were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic.
(10) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. These inputs are classified into the following hierarchy:
•Level 1 Inputs - Quoted prices for identical assets or liabilities in active markets.
•Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 Inputs - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28,
2020
|
|
|
|
December 29,
2019
|
|
|
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Fair Value
Measurements
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
135,063
|
|
|
$
|
135,063
|
|
|
$
|
114,992
|
|
|
$
|
114,992
|
|
|
Level 1
|
|
Other investments in equity securities (a)
|
175
|
|
|
175
|
|
|
639
|
|
|
1,649
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
Series 2019-1 Class A-2-I Notes (b)
|
392,000
|
|
|
410,071
|
|
|
398,000
|
|
|
405,152
|
|
|
Level 2
|
|
Series 2019-1 Class A-2-II Notes (b)
|
441,000
|
|
|
468,518
|
|
|
447,750
|
|
|
459,136
|
|
|
Level 2
|
|
Series 2018-1 Class A-2-I Notes (b)
|
438,750
|
|
|
451,298
|
|
|
441,000
|
|
|
444,859
|
|
|
Level 2
|
|
Series 2018-1 Class A-2-II Notes (b)
|
463,125
|
|
|
487,624
|
|
|
465,500
|
|
|
475,718
|
|
|
Level 2
|
|
Series 2015-1 Class A-2-III Notes (b)
|
476,250
|
|
|
488,490
|
|
|
478,750
|
|
|
490,531
|
|
|
Level 2
|
|
Series 2019-1 Class A-1 Notes (b)
|
120,000
|
|
|
116,100
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
U.S. advertising fund revolving line of credit
|
25,000
|
|
|
25,000
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
Canadian revolving credit facility
|
4,019
|
|
|
4,019
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
7% debentures, due in 2025 (b)
|
83,415
|
|
|
83,415
|
|
|
82,837
|
|
|
94,838
|
|
|
Level 2
|
_______________
(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. During the three months ended June 28, 2020, the Company impaired a miscellaneous investment due to the deterioration in operating performance of the underlying assets. Subsequent to June 28, 2020, the Company sold its remaining interest in this investment.
(b)The fair values were based on quoted market prices in markets that are not considered active markets.
The carrying amounts of cash, accounts payable, accrued expenses and lines of credit 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 ROU assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below represent the remaining carrying value and were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance.
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, which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 11 for further information on impairment of our long-lived assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
June 28,
2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Held and used
|
$
|
341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
341
|
|
|
Held for sale
|
1,440
|
|
|
—
|
|
|
—
|
|
|
1,440
|
|
|
Total
|
$
|
1,781
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
December 29,
2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Held and used
|
$
|
3,582
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,582
|
|
|
Held for sale
|
988
|
|
|
—
|
|
|
—
|
|
|
988
|
|
|
Total
|
$
|
4,570
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,570
|
|
(11) Impairment of Long-Lived Assets
During the six months ended June 28, 2020 and June 30, 2019, the Company recorded impairment charges as a result of (1) the deterioration of operating performance of certain Company-operated restaurants and (2) closing Company-operated restaurants and classifying such surplus properties as held for sale. Impairment charges during the six months ended June 28, 2020 were primarily due to the expected deterioration in operating performance of certain Company-operated restaurants as a result of the COVID-19 pandemic. Additional impairment charges may be recognized by the Company in the event of further deterioration in operating performance of Company-operated restaurants.
The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Company-operated restaurants
|
$
|
—
|
|
|
$
|
86
|
|
|
$
|
4,395
|
|
|
$
|
287
|
|
|
Surplus properties
|
117
|
|
|
112
|
|
|
309
|
|
|
1,397
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117
|
|
|
$
|
198
|
|
|
$
|
4,704
|
|
|
$
|
1,684
|
|
(12) Income Taxes
The Company’s effective tax rate for the three months ended June 28, 2020 and June 30, 2019 was 20.8% and 29.2%, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to a reduction for the benefit of share-based compensation, partially offset by an increase due to state income taxes.
The Company’s effective tax rate for the six months ended June 28, 2020 and June 30, 2019 was 25.4% and 24.9%, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to (1) a reduction for the benefit of share-based compensation, (2) an increase due to state income taxes and (3) an increase for tax on our foreign operations.
There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three and six months ended June 28, 2020. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $1,319 due primarily to the lapse of statutes of limitations and expected settlements.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The current portion of refundable income taxes was $5,933 and $13,555 as of June 28, 2020 and December 29, 2019, 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 June 28, 2020 and December 29, 2019.
(13) Net Income Per Share
Basic net income per share was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding.
The weighted average number of shares used to calculate basic and diluted net income per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
223,123
|
|
|
231,029
|
|
|
223,329
|
|
|
230,807
|
|
|
Dilutive effect of stock options and restricted shares
|
4,051
|
|
|
5,064
|
|
|
4,262
|
|
|
5,186
|
|
|
Weighted average diluted shares outstanding
|
227,174
|
|
|
236,093
|
|
|
227,591
|
|
|
235,993
|
|
Diluted net income per share for the three and six months ended June 28, 2020 and June 30, 2019 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 2,636 and 2,652 for the three and six months ended June 28, 2020, respectively, and 2,049 and 2,104 for the three and six months ended June 30, 2019, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
(14) Stockholders’ Equity
Dividends
During the first and second quarter of 2020, the Company paid dividends per share of $.12 and $.05, respectively. During each of the first and second quarters of 2019, the Company paid dividends per share of $.10.
Repurchases of Common Stock
In February 2020, our Board of Directors authorized a repurchase program for up to $100,000 of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. During the six months ended June 28, 2020, the Company repurchased 779 shares under the February 2020 repurchase authorization with an aggregate purchase price of $14,537, excluding commissions of $11. As of June 28, 2020, the Company had $85,463 of availability remaining under its February 2020 authorization. As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. The Company now intends to resume share repurchases in 2020, subject to market conditions and prevailing economic factors.
In February 2019, our Board of Directors authorized a repurchase program for up to $225,000 of our common stock through March 1, 2020, when and if market conditions warranted and to the extent legally permissible. In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $100,000 in cash and received an initial delivery of 4,051 shares of common stock, representing an estimated 85% of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 628 shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
the 2019 ASR Agreement, less an agreed upon discount. In total, 4,679 shares were delivered under the 2019 ASR Agreement at an average purchase price of $21.37 per share.
In addition to the shares repurchased in connection with the 2019 ASR Agreement, during the six months ended June 28, 2020, the Company repurchased 1,312 shares with an aggregate purchase price of $28,770, excluding commissions of $18, under the February 2019 authorization. After taking into consideration these repurchases, with the completion of the 2019 ASR Agreement in February 2020, the Company completed its February 2019 authorization.
During the six months ended June 30, 2019, the Company repurchased 2,824 shares with an aggregate purchase price of $49,721, of which $807 was accrued at June 30, 2019, and excluding commissions of $40, under the February 2019 authorization and the Company’s previous November 2018 authorization to repurchase up to $220,000 of our common stock.
Accumulated Other Comprehensive Loss
The following table provides a rollforward of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Balance at beginning of period
|
$
|
(53,828)
|
|
|
$
|
(61,673)
|
|
|
Foreign currency translation
|
(8,358)
|
|
|
9,860
|
|
|
Balance at end of period
|
$
|
(62,186)
|
|
|
$
|
(51,813)
|
|
(15) Leases
Nature of Leases
The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At June 28, 2020, Wendy’s and its franchisees operated 6,806 Wendy’s restaurants. Of the 358 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 142 restaurants, owned the building and held long-term land leases for 146 restaurants and held leases covering the land and building for 70 restaurants. Wendy’s also owned 510 and leased 1,243 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Company as Lessee
The components of lease cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of finance lease assets
|
$
|
3,338
|
|
|
$
|
1,631
|
|
|
$
|
6,524
|
|
|
$
|
4,748
|
|
|
Interest on finance lease liabilities
|
10,160
|
|
|
9,939
|
|
|
20,218
|
|
|
16,692
|
|
|
|
13,498
|
|
|
11,570
|
|
|
26,742
|
|
|
21,440
|
|
|
Operating lease cost
|
23,969
|
|
|
19,086
|
|
|
45,134
|
|
|
43,729
|
|
|
Variable lease cost (a)
|
13,848
|
|
|
15,371
|
|
|
28,218
|
|
|
29,475
|
|
|
Short-term lease cost
|
991
|
|
|
1,153
|
|
|
2,321
|
|
|
2,279
|
|
|
Total operating lease cost (b)
|
38,808
|
|
|
35,610
|
|
|
75,673
|
|
|
75,483
|
|
|
Total lease cost
|
$
|
52,306
|
|
|
$
|
47,180
|
|
|
$
|
102,415
|
|
|
$
|
96,923
|
|
_______________
(a)Includes expenses for executory costs of $9,457 and $9,779 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $19,200 and $19,303 for the six months ended June 28, 2020 and June 30, 2019, respectively, for which the Company is reimbursed by sublessees.
(b)Includes $31,263 and $28,022 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $60,554 and $60,473 for the six months ended June 28, 2020 and June 30, 2019, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $6,831 and $7,007 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $13,664 and $13,600 for the six months ended June 28, 2020 and June 30, 2019, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.
Company as Lessor
The components of lease income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Sales-type and direct-financing leases:
|
|
|
|
|
|
|
|
|
Selling profit
|
$
|
569
|
|
|
$
|
37
|
|
|
$
|
1,197
|
|
|
$
|
1,971
|
|
|
Interest income
|
7,260
|
|
|
7,072
|
|
|
14,508
|
|
|
11,805
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease income
|
$
|
43,052
|
|
|
$
|
43,959
|
|
|
$
|
87,004
|
|
|
$
|
89,164
|
|
|
Variable lease income
|
13,805
|
|
|
14,602
|
|
|
27,709
|
|
|
27,849
|
|
|
Franchise rental income (a)
|
$
|
56,857
|
|
|
$
|
58,561
|
|
|
$
|
114,713
|
|
|
$
|
117,013
|
|
_______________
(a)Includes sublease income of $41,489 and $42,921 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $83,531 and $85,942 for the six months ended June 28, 2020 and June 30, 2019, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $9,450 and $9,779 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $19,159 and $19,211 for the six months ended June 28, 2020 and June 30, 2019, respectively.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(16) Transactions with Related Parties
Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K.
TimWen Lease and Management Fee Payments
A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen, which are then subleased to franchisees for the operation of Wendy’s/Tim Hortons combo units in Canada. During the six months ended June 28, 2020 and June 30, 2019, Wendy’s paid TimWen $7,408 and $8,140, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $101 and $103 during the six months ended June 28, 2020 and June 30, 2019, respectively, which has been included as a reduction to “General and administrative.”
(17) Guarantees and Other Commitments and Contingencies
Except as described below, the Company did not have any significant changes in guarantees and other commitments and contingencies during the current fiscal period since those reported in the Form 10-K. Refer to the Form 10-K for further information regarding the Company’s additional commitments and obligations.
Lease Guarantees
Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees, amounting to $74,538 as of June 28, 2020. These leases extend through 2045. We have not received any notice of default related to these leases as of June 28, 2020. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations.
Letters of Credit
As of June 28, 2020, the Company had outstanding letters of credit with various parties totaling $26,374. Substantially all of the outstanding letters of credit include amounts outstanding against the 2019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.
(18) Legal and Environmental Matters
The Company is involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable, and we believe we have adequate accruals for continuing operations for all such matters. We cannot estimate the aggregate possible range of loss for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period.
We previously described certain legal proceedings in the Form 10-K. As of June 28, 2020, there were no material developments in those legal proceedings.
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(19) Segment Information
Revenues by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Wendy’s U.S.
|
$
|
331,258
|
|
|
$
|
359,155
|
|
|
$
|
662,299
|
|
|
$
|
692,641
|
|
|
Wendy’s International
|
14,003
|
|
|
17,030
|
|
|
29,475
|
|
|
33,028
|
|
|
Global Real Estate & Development
|
57,045
|
|
|
59,163
|
|
|
115,492
|
|
|
118,262
|
|
|
Total revenues
|
$
|
402,306
|
|
|
$
|
435,348
|
|
|
$
|
807,266
|
|
|
$
|
843,931
|
|
The following table reconciles profit by segment to the Company’s consolidated income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 28,
2020
|
|
June 30,
2019
|
|
June 28,
2020
|
|
June 30,
2019
|
|
Wendy’s U.S. (a)
|
$
|
93,136
|
|
|
$
|
102,973
|
|
|
$
|
174,964
|
|
|
$
|
192,627
|
|
|
Wendy’s International
|
3,594
|
|
|
5,482
|
|
|
8,689
|
|
|
11,229
|
|
|
Global Real Estate & Development
|
23,711
|
|
|
29,899
|
|
|
50,201
|
|
|
56,852
|
|
|
Total segment profit
|
$
|
120,441
|
|
|
$
|
138,354
|
|
|
$
|
233,854
|
|
|
$
|
260,708
|
|
|
Advertising funds deficit
|
(1,020)
|
|
|
(2,055)
|
|
|
(2,407)
|
|
|
(2,055)
|
|
|
Unallocated general and administrative (b)
|
(23,051)
|
|
|
(20,610)
|
|
|
(47,170)
|
|
|
(41,352)
|
|
|
Depreciation and amortization
|
(34,714)
|
|
|
(31,484)
|
|
|
(65,760)
|
|
|
(64,669)
|
|
|
System optimization gains, net
|
1,987
|
|
|
110
|
|
|
2,310
|
|
|
122
|
|
|
Reorganization and realignment costs
|
(2,911)
|
|
|
(3,570)
|
|
|
(6,821)
|
|
|
(4,368)
|
|
|
Impairment of long-lived assets
|
(117)
|
|
|
(198)
|
|
|
(4,704)
|
|
|
(1,684)
|
|
|
Unallocated other operating income, net
|
46
|
|
|
26
|
|
|
91
|
|
|
137
|
|
|
Interest expense, net
|
(29,085)
|
|
|
(29,931)
|
|
|
(57,610)
|
|
|
(59,013)
|
|
|
Loss on early extinguishment of debt
|
—
|
|
|
(7,150)
|
|
|
—
|
|
|
(7,150)
|
|
|
Other (expense) income, net
|
(144)
|
|
|
2,247
|
|
|
932
|
|
|
4,947
|
|
|
Income before income taxes
|
$
|
31,432
|
|
|
$
|
45,739
|
|
|
$
|
52,715
|
|
|
$
|
85,623
|
|
(a) For the three and six months ended June 28, 2020, includes advertising funds expense of $2,185 related to the expected Company funding of incremental advertising during 2020.
(b) Includes corporate overhead costs, such as employee compensation and related benefits.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019 (the “Form 10-K”). There have been no material changes as of June 28, 2020 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II. Other Information” of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the world’s third largest quick-service restaurant company in the hamburger sandwich segment, with 6,806 restaurants in the United States (the “U.S.”) and 30 foreign countries and U.S. territories as of June 28, 2020.
Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited time basis. Wendy’s also entered the breakfast daypart across the U.S. system on March 2, 2020. Wendy’s breakfast menu features a variety of breakfast sandwiches, biscuits and croissants, sides such as seasoned potatoes, oatmeal bars and seasonal fruit, and a beverage platform that includes hot coffee, cold brew iced coffee and our vanilla and chocolate Frosty-ccino iced coffee.
The Company is comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company reports on the segment profit for each of the three segments described above. The Company measures segment profit based on segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. See “Results of Operations” below and Note 19 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information.
The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three- and six-month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.
Executive Overview
Our Business
As of June 28, 2020, the Wendy’s restaurant system was comprised of 6,806 restaurants, with 5,862 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 358 were operated by the Company and 5,504 were operated by a total of 239 franchisees. In addition, at June 28, 2020, there were 944 Wendy’s restaurants in operation in 30 foreign countries and U.S. territories, all of which were franchised.
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of June 28, 2020.
Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather. The COVID-19 pandemic has had and may continue to have the effect of heightening the impact of many of these factors. See “COVID-19 Update” and “Special Note Regarding Forward-Looking Statements and Projections” below for additional information.
Wendy’s long-term growth opportunities include accelerating U.S. same-restaurant sales through (1) its “One More Visit, One More Dollar” strategy, which includes continuing core menu improvement, product innovation and strategic price increases on our menu items, (2) focused execution of operational excellence, (3) continued implementation of consumer-facing digital platforms and technologies and (4) increased restaurant utilization in various dayparts, including the Company’s launch of breakfast across the U.S. system on March 2, 2020. Wendy’s also expects growth in the number of new restaurants through targeted U.S. expansion and accelerated international expansion through same-restaurant sales growth and new restaurant development.
Key Business Measures
We track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure:
•Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one fiscal week are excluded from same-restaurant sales. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes.
•Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.
•Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company believes systemwide sales data is useful in assessing consumer demand for the Company’s products, the overall success of the Wendy’s brand and, ultimately, the performance of the Company. The Company’s royalty revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty revenues and profitability.
The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.
Same-restaurant sales and systemwide sales exclude sales from Argentina and Venezuela due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.
The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.
COVID-19 Update
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict whether, when or the manner in which the conditions surrounding the pandemic will change and cannot currently estimate the impact on our business in the short or long-term.
In response to the pandemic, in March 2020, Wendy’s updated its brand standard to include the closure of all dining rooms except where there were specific needs, or a drive-thru or pick-up window option was not available, subject to applicable federal, state and local requirements. Substantially all Wendy’s restaurants continued to offer drive-thru and delivery service to our customers.
During the second quarter of 2020, the Company began to implement its restaurant and dining room reopening process through a phased approach in accordance with federal, state and local requirements, with customer and team member safety as its top priority. Dining rooms have been re-opening at each restaurant owner’s discretion, subject to applicable regulatory restrictions. As of August 2, 2020, over 70% of dining rooms were open across the Wendy’s system offering carryout and, in some cases, dine in services.
The COVID-19 pandemic has resulted in the temporary closure of certain restaurants across the Wendy’s system. As of August 2, 2020, systemwide temporary restaurant closures totaled 34 and 93 in the U.S. and internationally, respectively, which represents approximately 2% of all system restaurants.
The following table shows same-restaurant sales for the fiscal months of January through June 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January through February
|
|
March
|
|
|
|
April
|
|
May
|
|
June
|
|
Same-restaurant sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. systemwide
|
3.7
|
%
|
|
(7.7)
|
%
|
|
|
|
(14.0)
|
%
|
|
(1.9)
|
%
|
|
5.1
|
%
|
|
International
|
5.4
|
%
|
|
(17.0)
|
%
|
|
|
|
(28.3)
|
%
|
|
(15.7)
|
%
|
|
(10.7)
|
%
|
|
Global systemwide
|
3.9
|
%
|
|
(8.6)
|
%
|
|
|
|
(15.3)
|
%
|
|
(3.3)
|
%
|
|
3.4
|
%
|
As a result of the COVID-19 pandemic, global systemwide same-restaurant sales began to be materially adversely impacted in the fiscal month of March, with the fiscal month of April seeing the greatest impact. The decrease in same-restaurant sales was driven by a significant decline in customer count, partially offset by an increase in average check. Subsequently, global same-restaurant sales improved during the fiscal months of May and June, despite being impacted by the previously disclosed disruption in beef supply at the beginning of May (see “Beef Supply Update” below for further information). The improvement in same-restaurant sales was primarily driven by a significant increase in customer traffic compared to the lows seen in March and April. Global same-restaurant sales continued to improve during the fiscal month of July, with U.S. systemwide same-restaurant sales increasing 8.2%.
The negative impact of the COVID-19 pandemic on same-restaurant sales has been partially offset by the Company’s entry into the breakfast daypart across the U.S. system on March 2, 2020. Breakfast represented approximately 8% of U.S. systemwide sales in the second quarter of 2020.
Due to the current unprecedented market and economic conditions in the U.S. and internationally, the expected impact of the COVID-19 pandemic on the Company’s 2020 net income and cash flows cannot be reasonably estimated. Our net income and cash flows for the remainder of 2020 could continue to be materially affected by the pandemic. See “Item 1A. Risk
Factors” in “Part II. Other Information” for further information regarding the risks associated with the COVID-19 pandemic and the impact on our business, results and financial condition. Also, see “Liquidity and Capital Resources” below for certain actions taken by the Company in response to the COVID-19 pandemic.
Beef Supply Update
As previously disclosed, the Company experienced disruptions to its beef supply beginning in early May as beef suppliers across North America faced production challenges. As a result, some menu items were occasionally in short supply at some Wendy’s system restaurants. The Company and its supply chain partners effectively managed through this disruption by allocating beef to all Wendy’s system restaurants, with deliveries occurring two or three times a week, consistent with normal delivery schedules. The Company also shifted its marketing efforts in the short term to focus on chicken products in an effort to alleviate pressure on beef demand. Beef supply has returned to normal levels across the Wendy’s system as of June 28, 2020.
Goodwill and Indefinite-Lived Intangible Assets
We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that it may be impaired. The negative impacts of the COVID-19 pandemic, including the decline in same-restaurant sales described above and the volatility in the price of our common stock, resulted in the Company testing its goodwill for impairment in March 2020. A goodwill impairment loss is recognized if the fair value of a reporting unit is less than its carrying value.
The Company’s goodwill impairment test in March 2020 included three reporting units, which were comprised of its (1) U.S. Company-operated and franchise restaurants, (2) Canada franchise restaurants and (3) global real estate and development operations. Based on the results of our goodwill impairment test, we determined the fair values of our U.S. Company-operated and franchise restaurants and our Canada franchise restaurants reporting units continued to significantly exceed their carrying values. The goodwill impairment test for our global real estate and development operations also indicated the fair value of the reporting unit exceeded its carrying value; however, the fair value exceeded the carrying value of the reporting unit by only a nominal amount. Given the limited excess of the fair value over carrying value, this reporting unit is more sensitive to changes in assumptions regarding its fair value. As of the date of our analysis in the first quarter of 2020, a 50 basis point increase in the discount rate, or a moderate decline in estimated future cash flows, would result in the fair value of the reporting unit being less than its carrying value. As of June 28, 2020, the goodwill balance associated with our global real estate and development operations was $122.5 million.
The Company also tested our indefinite-lived intangible assets, which represent trademarks, for impairment in March 2020. Based on the results of our impairment test, we determined the fair value of our trademarks continued to significantly exceed their carrying value.
Further adverse changes as a result of the COVID-19 pandemic could further reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could result in future impairment charges of goodwill and indefinite-lived intangible assets.
Information Technology (“IT”) Realignment
In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth. The Company is partnering with a third-party global IT consultant on this new structure to leverage their global capabilities, which the Company believes will enable a more seamless integration between its digital and corporate IT assets. The Company expects that the realignment plan will reduce certain employee compensation and other related costs that the Company intends to reinvest back into IT to drive additional capabilities and capacity across all of its technology platforms. Additionally, in June 2020, the Company made changes to its leadership structure that included the creation of a Chief Information Officer position and the elimination of the Chief Digital Experience Officer position. As a result, the Company now expects to incur total costs aggregating approximately $16.0 million to $17.0 million related to the plan. During the six months ended June 28, 2020, the Company recognized costs totaling $6.4 million, which primarily included third-party and other costs and severance and related employee costs. The Company expects to incur additional costs aggregating approximately $1.0 million, comprised primarily of recruitment and relocation costs. The Company expects to recognize the majority of the remaining costs associated with the plan during the remainder of 2020.
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 second quarter and the first six months of 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
164.2
|
|
|
$
|
181.1
|
|
|
$
|
(16.9)
|
|
|
$
|
331.0
|
|
|
$
|
348.7
|
|
|
$
|
(17.7)
|
|
|
Franchise royalty revenue and fees
|
103.1
|
|
|
109.1
|
|
|
(6.0)
|
|
|
204.9
|
|
|
211.1
|
|
|
(6.2)
|
|
|
Franchise rental income
|
56.9
|
|
|
58.5
|
|
|
(1.6)
|
|
|
114.7
|
|
|
117.0
|
|
|
(2.3)
|
|
|
Advertising funds revenue
|
78.1
|
|
|
86.6
|
|
|
(8.5)
|
|
|
156.7
|
|
|
167.1
|
|
|
(10.4)
|
|
|
|
402.3
|
|
|
435.3
|
|
|
(33.0)
|
|
|
807.3
|
|
|
843.9
|
|
|
(36.6)
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
140.6
|
|
|
151.1
|
|
|
(10.5)
|
|
|
290.6
|
|
|
293.7
|
|
|
(3.1)
|
|
|
Franchise support and other costs
|
5.5
|
|
|
4.0
|
|
|
1.5
|
|
|
13.5
|
|
|
10.1
|
|
|
3.4
|
|
|
Franchise rental expense
|
31.3
|
|
|
28.0
|
|
|
3.3
|
|
|
60.6
|
|
|
60.5
|
|
|
0.1
|
|
|
Advertising funds expense
|
81.3
|
|
|
88.7
|
|
|
(7.4)
|
|
|
161.3
|
|
|
169.1
|
|
|
(7.8)
|
|
|
General and administrative
|
48.6
|
|
|
50.8
|
|
|
(2.2)
|
|
|
100.2
|
|
|
100.1
|
|
|
0.1
|
|
|
Depreciation and amortization
|
34.7
|
|
|
31.5
|
|
|
3.2
|
|
|
65.8
|
|
|
64.7
|
|
|
1.1
|
|
|
System optimization gains, net
|
(2.0)
|
|
|
(0.1)
|
|
|
(1.9)
|
|
|
(2.3)
|
|
|
(0.1)
|
|
|
(2.2)
|
|
|
Reorganization and realignment costs
|
2.9
|
|
|
3.6
|
|
|
(0.7)
|
|
|
6.8
|
|
|
4.4
|
|
|
2.4
|
|
|
Impairment of long-lived assets
|
0.1
|
|
|
0.2
|
|
|
(0.1)
|
|
|
4.7
|
|
|
1.7
|
|
|
3.0
|
|
|
Other operating income, net
|
(1.4)
|
|
|
(3.1)
|
|
|
1.7
|
|
|
(3.3)
|
|
|
(7.1)
|
|
|
3.8
|
|
|
|
341.6
|
|
|
354.7
|
|
|
(13.1)
|
|
|
697.9
|
|
|
697.1
|
|
|
0.8
|
|
|
Operating profit
|
60.7
|
|
|
80.6
|
|
|
(19.9)
|
|
|
109.4
|
|
|
146.8
|
|
|
(37.4)
|
|
|
Interest expense, net
|
(29.1)
|
|
|
(29.9)
|
|
|
0.8
|
|
|
(57.6)
|
|
|
(59.0)
|
|
|
1.4
|
|
|
Loss on early extinguishment of debt
|
—
|
|
|
(7.2)
|
|
|
7.2
|
|
|
—
|
|
|
(7.2)
|
|
|
7.2
|
|
|
Other (expense) income, net
|
(0.2)
|
|
|
2.2
|
|
|
(2.4)
|
|
|
0.9
|
|
|
5.0
|
|
|
(4.1)
|
|
|
Income before income taxes
|
31.4
|
|
|
45.7
|
|
|
(14.3)
|
|
|
52.7
|
|
|
85.6
|
|
|
(32.9)
|
|
|
Provision for income taxes
|
(6.5)
|
|
|
(13.3)
|
|
|
6.8
|
|
|
(13.4)
|
|
|
(21.3)
|
|
|
7.9
|
|
|
Net income
|
$
|
24.9
|
|
|
$
|
32.4
|
|
|
$
|
(7.5)
|
|
|
$
|
39.3
|
|
|
$
|
64.3
|
|
|
$
|
(25.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Total Revenues
|
|
2019
|
|
% of
Total Revenues
|
|
2020
|
|
% of
Total Revenues
|
|
2019
|
|
% of
Total Revenues
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
164.2
|
|
|
40.8
|
%
|
|
$
|
181.1
|
|
|
41.6
|
%
|
|
$
|
331.0
|
|
|
41.0
|
%
|
|
$
|
348.7
|
|
|
41.3
|
%
|
|
Franchise royalty revenue and fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue
|
97.2
|
|
|
24.2
|
%
|
|
102.8
|
|
|
23.6
|
%
|
|
192.6
|
|
|
23.9
|
%
|
|
197.7
|
|
|
23.4
|
%
|
|
Franchise fees
|
5.9
|
|
|
1.4
|
%
|
|
6.3
|
|
|
1.5
|
%
|
|
12.3
|
|
|
1.5
|
%
|
|
13.4
|
|
|
1.6
|
%
|
|
Total franchise royalty revenue and fees
|
103.1
|
|
|
25.6
|
%
|
|
109.1
|
|
|
25.1
|
%
|
|
204.9
|
|
|
25.4
|
%
|
|
211.1
|
|
|
25.0
|
%
|
|
Franchise rental income
|
56.9
|
|
|
14.2
|
%
|
|
58.5
|
|
|
13.4
|
%
|
|
114.7
|
|
|
14.2
|
%
|
|
117.0
|
|
|
13.9
|
%
|
|
Advertising funds revenue
|
78.1
|
|
|
19.4
|
%
|
|
86.6
|
|
|
19.9
|
%
|
|
156.7
|
|
|
19.4
|
%
|
|
167.1
|
|
|
19.8
|
%
|
|
Total revenues
|
$
|
402.3
|
|
|
100.0
|
%
|
|
$
|
435.3
|
|
|
100.0
|
%
|
|
$
|
807.3
|
|
|
100.0
|
%
|
|
$
|
843.9
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Sales
|
|
2019
|
|
% of
Sales
|
|
2020
|
|
% of
Sales
|
|
2019
|
|
% of
Sales
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and paper
|
$
|
49.3
|
|
|
30.0
|
%
|
|
$
|
57.8
|
|
|
31.9
|
%
|
|
$
|
101.8
|
|
|
30.8
|
%
|
|
$
|
110.0
|
|
|
31.5
|
%
|
|
Restaurant labor
|
54.0
|
|
|
32.9
|
%
|
|
53.8
|
|
|
29.7
|
%
|
|
111.0
|
|
|
33.5
|
%
|
|
105.4
|
|
|
30.2
|
%
|
|
Occupancy, advertising and other operating costs
|
37.3
|
|
|
22.7
|
%
|
|
39.5
|
|
|
21.9
|
%
|
|
77.8
|
|
|
23.5
|
%
|
|
78.3
|
|
|
22.5
|
%
|
|
Total cost of sales
|
$
|
140.6
|
|
|
85.6
|
%
|
|
$
|
151.1
|
|
|
83.5
|
%
|
|
$
|
290.6
|
|
|
87.8
|
%
|
|
$
|
293.7
|
|
|
84.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Sales
|
|
2019
|
|
% of
Sales
|
|
2020
|
|
% of
Sales
|
|
2019
|
|
% of
Sales
|
|
Restaurant margin
|
$
|
23.6
|
|
|
14.4
|
%
|
|
$
|
30.0
|
|
|
16.5
|
%
|
|
$
|
40.4
|
|
|
12.2
|
%
|
|
$
|
55.0
|
|
|
15.8
|
%
|
The tables below present certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
Six Months
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Key business measures:
|
|
|
|
|
|
|
|
|
U.S. same-restaurant sales:
|
|
|
|
|
|
|
|
|
Company-operated restaurants
|
(10.0)
|
%
|
|
0.8
|
%
|
|
(5.5)
|
%
|
|
1.4
|
%
|
|
Franchised restaurants
|
(4.0)
|
%
|
|
1.4
|
%
|
|
(2.0)
|
%
|
|
1.3
|
%
|
|
Systemwide
|
(4.4)
|
%
|
|
1.3
|
%
|
|
(2.3)
|
%
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
International same-restaurant sales (a)
|
(18.4)
|
%
|
|
3.9
|
%
|
|
(10.1)
|
%
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Global same-restaurant sales:
|
|
|
|
|
|
|
|
|
Company-operated restaurants
|
(10.0)
|
%
|
|
0.8
|
%
|
|
(5.5)
|
%
|
|
1.4
|
%
|
|
Franchised restaurants (a)
|
(5.5)
|
%
|
|
1.6
|
%
|
|
(2.9)
|
%
|
|
1.5
|
%
|
|
Systemwide (a)
|
(5.8)
|
%
|
|
1.6
|
%
|
|
(3.1)
|
%
|
|
1.5
|
%
|
________________
(a) Includes international franchised restaurants same-restaurant sales (excluding Argentina and Venezuela due to the impact of the highly inflationary economies of those countries).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
Six Months
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Key business measures (continued):
|
|
|
|
|
|
|
|
|
Systemwide sales: (a)
|
|
|
|
|
|
|
|
|
Company-operated
|
$
|
164.2
|
|
|
$
|
181.1
|
|
|
$
|
331.0
|
|
|
$
|
348.7
|
|
|
U.S. franchised
|
2,239.2
|
|
|
2,321.6
|
|
|
4,413.4
|
|
|
4,471.9
|
|
|
U.S. systemwide
|
2,403.4
|
|
|
2,502.7
|
|
|
4,744.4
|
|
|
4,820.6
|
|
|
International franchised (b)
|
220.2
|
|
|
301.0
|
|
|
492.8
|
|
|
574.3
|
|
|
Global systemwide
|
$
|
2,623.6
|
|
|
$
|
2,803.7
|
|
|
$
|
5,237.2
|
|
|
$
|
5,394.9
|
|
________________
(a) During the second quarter of 2020 and 2019, global systemwide sales decreased 6.2% and increased 3.3%, respectively, U.S. systemwide sales decreased 4.0% and increased 2.5%, respectively, and international franchised sales decreased 24.5% and increased 10.4%, respectively, on a constant currency basis. During the first six months of 2020 and 2019, global systemwide sales decreased 2.7% and increased 3.3%, respectively, U.S. systemwide sales decreased 1.6% and increased 2.5%, respectively, and international franchised sales decreased 12.4% and increased 10.3%, respectively, on a constant currency basis.
(b) Excludes Argentina and Venezuela due to the impact of the highly inflationary economies of those countries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
|
|
|
|
Company-operated
|
|
U.S. Franchised
|
|
International Franchised
|
|
Systemwide
|
|
Restaurant count:
|
|
|
|
|
|
|
|
|
Restaurant count at March 29, 2020
|
358
|
|
|
5,503
|
|
|
944
|
|
|
6,805
|
|
|
Opened
|
2
|
|
|
17
|
|
|
3
|
|
|
22
|
|
|
Closed (a)
|
(2)
|
|
|
(16)
|
|
|
(3)
|
|
|
(21)
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant count at June 28, 2020
|
358
|
|
|
5,504
|
|
|
944
|
|
|
6,806
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
Company-operated
|
|
U.S. Franchised
|
|
International Franchised
|
|
Systemwide
|
|
|
|
|
|
|
|
|
|
|
Restaurant count at December 29, 2019
|
357
|
|
|
5,495
|
|
|
936
|
|
|
6,788
|
|
|
Opened
|
3
|
|
|
43
|
|
|
17
|
|
|
63
|
|
|
Closed (a)
|
(2)
|
|
|
(34)
|
|
|
(9)
|
|
|
(45)
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant count at June 28, 2020
|
358
|
|
|
5,504
|
|
|
944
|
|
|
6,806
|
|
________________
(a) Excludes restaurants temporarily closed due to the impact of the COVID-19 pandemic.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Sales
|
$
|
164.2
|
|
|
$
|
181.1
|
|
|
$
|
(16.9)
|
|
|
$
|
331.0
|
|
|
$
|
348.7
|
|
|
$
|
(17.7)
|
|
The decrease in sales for the second quarter and the first six months of 2020 was primarily due to a 10.0% and 5.5% decrease in Company-operated same-restaurant sales, respectively. Company-operated same-restaurant sales decreased due to a decrease in customer count as a result of the COVID-19 pandemic, partially offset by (1) higher average check and (2) the positive impact from the launch of breakfast on March 2, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Royalty Revenue and Fees
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Royalty revenue
|
$
|
97.2
|
|
|
$
|
102.8
|
|
|
$
|
(5.6)
|
|
|
$
|
192.6
|
|
|
$
|
197.7
|
|
|
$
|
(5.1)
|
|
|
Franchise fees
|
5.9
|
|
|
6.3
|
|
|
(0.4)
|
|
|
12.3
|
|
|
13.4
|
|
|
(1.1)
|
|
|
|
$
|
103.1
|
|
|
$
|
109.1
|
|
|
$
|
(6.0)
|
|
|
$
|
204.9
|
|
|
$
|
211.1
|
|
|
$
|
(6.2)
|
|
The decrease in franchise royalty revenue during the second quarter and the first six months of 2020 was primarily due to a 5.5% and 2.9% decrease in franchise same-restaurant sales, respectively, which reflects the impact of the COVID-19 pandemic, partially offset by the positive impact from the launch of breakfast on March 2, 2020. The decrease in franchise fees during the second quarter and the first six months of 2020 was primarily due to lower other miscellaneous franchise fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Rental Income
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Franchise rental income
|
$
|
56.9
|
|
|
$
|
58.5
|
|
|
$
|
(1.6)
|
|
|
$
|
114.7
|
|
|
$
|
117.0
|
|
|
$
|
(2.3)
|
|
The decrease in franchise rental income during the second quarter was primarily due to amending certain existing leases, partially offset by the impact of assigning certain leases to a franchisee during the second quarter of 2019. The decrease in franchise rental income during the first six months of 2020 was primarily due to amending certain existing leases and the impact of assigning certain leases to a franchisee.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising Funds Revenue
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Advertising funds revenue
|
$
|
78.1
|
|
|
$
|
86.6
|
|
|
$
|
(8.5)
|
|
|
$
|
156.7
|
|
|
$
|
167.1
|
|
|
$
|
(10.4)
|
|
The Company maintains two national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales of the franchised restaurants. The decrease in advertising funds revenue during the second quarter and the first six months of 2020 was primarily due to a decrease in franchise same-restaurant sales as a result of the COVID-19 pandemic.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales, as a Percent of Sales
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Food and paper
|
30.0
|
%
|
|
31.9
|
%
|
|
(1.9)
|
%
|
|
30.8
|
%
|
|
31.5
|
%
|
|
(0.7)
|
%
|
|
Restaurant labor
|
32.9
|
%
|
|
29.7
|
%
|
|
3.2
|
%
|
|
33.5
|
%
|
|
30.2
|
%
|
|
3.3
|
%
|
|
Occupancy, advertising and other operating costs
|
22.7
|
%
|
|
21.9
|
%
|
|
0.8
|
%
|
|
23.5
|
%
|
|
22.5
|
%
|
|
1.0
|
%
|
|
|
85.6
|
%
|
|
83.5
|
%
|
|
2.1
|
%
|
|
87.8
|
%
|
|
84.2
|
%
|
|
3.6
|
%
|
The increase in cost of sales, as a percent of sales, during the second quarter and the first six months of 2020 was primarily due to (1) a decrease in customer count, reflecting the impact of the COVID-19 pandemic, and (2) restaurant labor rate increases, which included incremental recognition pay during April and May. These impacts were partially offset by (1) higher average check and (2) labor efficiencies and other dining room closure related efficiencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Support and Other Costs
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Franchise support and other costs
|
$
|
5.5
|
|
|
$
|
4.0
|
|
|
$
|
1.5
|
|
|
$
|
13.5
|
|
|
$
|
10.1
|
|
|
$
|
3.4
|
|
The increase in franchise support and other costs during the second quarter was primarily due to higher costs incurred to provide information technology and other services to our franchisees. The increase in franchise support and other costs during the first six months of 2020 was primarily due to (1) investments to support U.S. franchisees in preparation of the launch of breakfast across the U.S. system on March 2, 2020 and (2) higher costs incurred to provide information technology and other services to our franchisees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Rental Expense
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Franchise rental expense
|
$
|
31.3
|
|
|
$
|
28.0
|
|
|
$
|
3.3
|
|
|
$
|
60.6
|
|
|
$
|
60.5
|
|
|
$
|
0.1
|
|
The increase in franchise rental expense during the second quarter and the first six months of 2020 was primarily due to the impact of assigning certain leases to a franchisee in 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising Funds Expense
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Advertising funds expense
|
$
|
81.3
|
|
|
$
|
88.7
|
|
|
$
|
(7.4)
|
|
|
$
|
161.3
|
|
|
$
|
169.1
|
|
|
$
|
(7.8)
|
|
The decrease in advertising funds expense during the second quarter and the first six months of 2020 was primarily due to the same factor as described above for “Advertising Funds Revenue.” On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. During the second quarter and the first six months of 2020, advertising funds expense exceeded advertising funds revenue by $3.2 million and $4.6 million, respectively, reflecting a portion of the expected advertising spend in excess of advertising funds revenue for 2020. The second quarter and the first six months of 2020 include $2.2 million related to the Company’s decision in June to fund incremental advertising during 2020. The excess of advertising funds expense over advertising funds revenue for 2020 is expected to be approximately $20.0 million, which includes (1) up to $15.0 million of Company funding of incremental advertising and (2) the amount by which advertising funds revenue exceeded advertising funds expense in 2019 and 2018 of approximately $5.0 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Employee compensation and related benefits
|
$
|
26.9
|
|
|
$
|
27.7
|
|
|
$
|
(0.8)
|
|
|
$
|
57.2
|
|
|
$
|
56.2
|
|
|
$
|
1.0
|
|
|
Severance expense
|
—
|
|
|
0.3
|
|
|
(0.3)
|
|
|
1.2
|
|
|
0.4
|
|
|
0.8
|
|
|
Travel-related expenses
|
0.8
|
|
|
3.2
|
|
|
(2.4)
|
|
|
3.9
|
|
|
5.8
|
|
|
(1.9)
|
|
|
Other, net
|
20.9
|
|
|
19.6
|
|
|
1.3
|
|
|
37.9
|
|
|
37.7
|
|
|
0.2
|
|
|
|
$
|
48.6
|
|
|
$
|
50.8
|
|
|
(2.2)
|
|
|
$
|
100.2
|
|
|
$
|
100.1
|
|
|
0.1
|
|
The decrease in general and administrative expenses during the second quarter of 2020 was primarily due to a decrease in travel-related expenses as a result of reduced travel during the COVID-19 pandemic. The increase in general and administrative expenses during the first six months of 2020 was primarily due to increases in (1) employee compensation and related benefits and (2) severance expense. These increases were offset by a decrease in travel-related expenses as a result of reduced travel during the COVID-19 pandemic.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Restaurants
|
$
|
23.0
|
|
|
$
|
20.0
|
|
|
$
|
3.0
|
|
|
$
|
42.5
|
|
|
$
|
41.9
|
|
|
$
|
0.6
|
|
|
Corporate and other
|
11.7
|
|
|
11.5
|
|
|
0.2
|
|
|
23.3
|
|
|
22.8
|
|
|
0.5
|
|
|
|
$
|
34.7
|
|
|
$
|
31.5
|
|
|
$
|
3.2
|
|
|
$
|
65.8
|
|
|
$
|
64.7
|
|
|
$
|
1.1
|
|
The increase in depreciation and amortization during the second quarter and the first six months of 2020 was primarily due to (1) changes in useful lives for certain asset categories and (2) the assignment of certain leases to a franchisee in 2019, resulting in the write-off of the related net investment in the leases. These increases were partially offset by (1) assets becoming fully depreciated and (2) a decrease in depreciation on assets classified as held for sale resulting from the expected sale of 43 restaurants in New York to franchisees in the first quarter of 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System Optimization Gains, Net
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
System optimization gains, net
|
$
|
(2.0)
|
|
|
$
|
(0.1)
|
|
|
$
|
(1.9)
|
|
|
$
|
(2.3)
|
|
|
$
|
(0.1)
|
|
|
$
|
(2.2)
|
|
System optimization gains, net for the second quarter and the first six months of 2020 were primarily comprised of gains on the sale of surplus and other properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization and Realignment Costs
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
IT realignment
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
6.4
|
|
|
G&A realignment
|
0.1
|
|
|
3.5
|
|
|
(3.4)
|
|
|
0.3
|
|
|
4.3
|
|
|
(4.0)
|
|
|
System optimization initiative
|
—
|
|
|
0.1
|
|
|
(0.1)
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
|
$
|
2.9
|
|
|
$
|
3.6
|
|
|
$
|
(0.7)
|
|
|
$
|
6.8
|
|
|
$
|
4.4
|
|
|
$
|
2.4
|
|
In December 2019, the Company’s Board of Directors approved a plan to realign and reinvest resources in its IT organization to strengthen its ability to accelerate growth. Additionally, in June 2020, the Company made changes to its leadership structure that included the creation of a Chief Information Officer position and the elimination of the Chief Digital Experience Officer position. During the second quarter and the first six months of 2020, the Company recognized costs associated with this plan totaling $2.8 million and $6.4 million, respectively, which primarily included third-party and other costs of $1.9 million and $5.1 million, respectively, and severance and related employee costs of $0.8 million and $1.0 million, respectively.
In May 2017, the Company initiated a plan to further reduce its G&A expenses. In addition, in May 2019, the Company announced changes to its management and operating structure. G&A realignment costs for the second quarter and the first six months of 2020 were primarily comprised of share-based compensation. G&A realignment costs for the second quarter and the first six months 2019 were primarily comprised of severance and related employee costs and share-based compensation. The Company does not expect to incur any additional material costs under the plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of Long-Lived Assets
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Impairment of long-lived assets
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
(0.1)
|
|
|
$
|
4.7
|
|
|
$
|
1.7
|
|
|
$
|
3.0
|
|
The increase in impairment charges during the first six months of 2020 was primarily driven by the Company testing its Company-operated restaurant long-lived assets for recoverability as a result of the adverse impacts of the COVID-19 pandemic. As a result of this analysis, the Company recorded impairment charges due primarily to the expected deterioration in operating performance of certain Company-operated restaurants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Income, Net
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Equity in earnings in joint ventures, net
|
$
|
(0.9)
|
|
|
$
|
(3.1)
|
|
|
$
|
2.2
|
|
|
$
|
(2.4)
|
|
|
$
|
(4.9)
|
|
|
$
|
2.5
|
|
|
Gains on sales-type leases
|
(0.6)
|
|
|
—
|
|
|
(0.6)
|
|
|
(1.2)
|
|
|
(2.0)
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.3
|
|
|
(0.2)
|
|
|
0.5
|
|
|
|
$
|
(1.4)
|
|
|
$
|
(3.1)
|
|
|
$
|
1.7
|
|
|
$
|
(3.3)
|
|
|
$
|
(7.1)
|
|
|
$
|
3.8
|
|
The change in other operating income, net during the second quarter and the first six months of 2020 was primarily due to a decrease in the equity in earnings from our TimWen joint venture.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, Net
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Interest expense, net
|
$
|
29.1
|
|
|
$
|
29.9
|
|
|
$
|
(0.8)
|
|
|
$
|
57.6
|
|
|
$
|
59.0
|
|
|
$
|
(1.4)
|
|
Interest expense, net decreased during the second quarter and the first six months of 2020 primarily due to the impact of the completion of refinancing a portion of the Company’s securitized financing facility in June 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Early Extinguishment of Debt
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Loss on early extinguishment of debt
|
$
|
—
|
|
|
$
|
7.2
|
|
|
$
|
(7.2)
|
|
|
$
|
—
|
|
|
$
|
7.2
|
|
|
$
|
(7.2)
|
|
During the second quarter of 2019, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of repaying its outstanding Series 2015-1 Class A-2-II Notes primarily with the proceeds from the issuance of its Series 2019-1 Class A-2 Notes. The loss on the early extinguishment of debt of $7.2 million was comprised of the write-off of certain deferred financing costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income, Net
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Other (expense) income, net
|
$
|
(0.2)
|
|
|
$
|
2.2
|
|
|
$
|
(2.4)
|
|
|
$
|
0.9
|
|
|
$
|
5.0
|
|
|
$
|
(4.1)
|
|
Other (expense) income, net decreased during the second quarter and the first six months of 2020 primarily due to lower interest income earned on our cash equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Income before income taxes
|
$
|
31.4
|
|
|
$
|
45.7
|
|
|
$
|
(14.3)
|
|
|
$
|
52.7
|
|
|
$
|
85.6
|
|
|
$
|
(32.9)
|
|
|
Provision for income taxes
|
(6.5)
|
|
|
(13.3)
|
|
|
6.8
|
|
|
(13.4)
|
|
|
(21.3)
|
|
|
7.9
|
|
|
Effective tax rate on income
|
20.8
|
%
|
|
29.2
|
%
|
|
(8.4)
|
%
|
|
25.4
|
%
|
|
24.9
|
%
|
|
0.5
|
%
|
Our effective tax rates for the second quarter of 2020 and 2019 were impacted by variations in income before income taxes, including uncertainty in 2020 income before income taxes arising from the COVID-19 pandemic, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The decrease in the effective tax rate for the second quarter of 2020 compared with the second quarter of 2019 was primarily due to (1) an increase in the benefit of share-based compensation and (2) a reduction in state income taxes, including non-recurring changes to state deferred taxes net of federal benefits.
Our effective tax rates for the first six months of 2020 and 2019 were impacted by variations in income before income taxes, including uncertainty in 2020 income before income taxes arising from the COVID-19 pandemic, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The increase in the effective tax rate for the first six months of 2020 compared with the first six months of 2019 was primarily due to an increase in tax on our foreign operations, offset by (1) an increase in the benefit of share-based compensation and (2) a reduction in state income taxes, including non-recurring changes to state deferred taxes net of federal benefits.
Segment Information
See Note 19 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments.
Wendy’s U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Sales
|
$
|
164.2
|
|
|
$
|
181.1
|
|
|
$
|
(16.9)
|
|
|
$
|
331.0
|
|
|
$
|
348.7
|
|
|
$
|
(17.7)
|
|
|
Franchise royalty revenue
|
88.1
|
|
|
91.5
|
|
|
(3.4)
|
|
|
173.0
|
|
|
175.8
|
|
|
(2.8)
|
|
|
Franchise fees
|
5.4
|
|
|
5.2
|
|
|
0.2
|
|
|
10.6
|
|
|
10.7
|
|
|
(0.1)
|
|
|
Advertising fund revenue
|
73.6
|
|
|
81.4
|
|
|
(7.8)
|
|
|
147.7
|
|
|
157.4
|
|
|
(9.7)
|
|
|
Total revenues
|
$
|
331.3
|
|
|
$
|
359.2
|
|
|
$
|
(27.9)
|
|
|
$
|
662.3
|
|
|
$
|
692.6
|
|
|
$
|
(30.3)
|
|
|
Segment profit
|
$
|
93.1
|
|
|
$
|
103.0
|
|
|
$
|
(9.9)
|
|
|
$
|
175.0
|
|
|
$
|
192.6
|
|
|
$
|
(17.6)
|
|
The decrease in Wendy’s U.S. revenues during the second quarter and the first six months of 2020 was primarily due to a decrease in same-restaurant sales resulting from the impact of the COVID-19 pandemic. This decrease in same-restaurant sales was driven by a decrease in customer count, partially offset by (1) higher average check and (2) the positive impact from the launch of breakfast on March 2, 2020.
The decrease in Wendy’s U.S. segment profit during the second quarter and the first six months of 2020 was primarily due to (1) lower revenues and (2) higher cost of sales, as a percent of sales, for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales.”
Wendy’s International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Franchise royalty revenue
|
$
|
9.1
|
|
|
$
|
11.4
|
|
|
$
|
(2.3)
|
|
|
$
|
19.6
|
|
|
$
|
21.8
|
|
|
$
|
(2.2)
|
|
|
Franchise fees
|
0.4
|
|
|
0.4
|
|
|
—
|
|
|
0.9
|
|
|
1.5
|
|
|
(0.6)
|
|
|
Advertising fund revenue
|
4.5
|
|
|
5.2
|
|
|
(0.7)
|
|
|
9.0
|
|
|
9.7
|
|
|
(0.7)
|
|
|
Total revenues
|
$
|
14.0
|
|
|
$
|
17.0
|
|
|
$
|
(3.0)
|
|
|
$
|
29.5
|
|
|
$
|
33.0
|
|
|
$
|
(3.5)
|
|
|
Segment profit
|
$
|
3.6
|
|
|
$
|
5.5
|
|
|
$
|
(1.9)
|
|
|
$
|
8.7
|
|
|
$
|
11.2
|
|
|
$
|
(2.5)
|
|
The decrease in Wendy’s International revenues during the second quarter and the first six months of 2020 was primarily due to a decrease in same-restaurant sales resulting from the impact of the COVID-19 pandemic.
The decrease in Wendy’s International segment profit during the second quarter and the first six months of 2020 was primarily due to lower revenues, partially offset by a decrease in travel-related expenses as a result of reduced travel during the COVID-19 pandemic.
Global Real Estate & Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
2020
|
|
2019
|
|
Change
|
|
Franchise fees
|
$
|
0.1
|
|
|
$
|
0.7
|
|
|
$
|
(0.6)
|
|
|
$
|
0.8
|
|
|
$
|
1.3
|
|
|
$
|
(0.5)
|
|
|
Franchise rental income
|
56.9
|
|
|
58.5
|
|
|
(1.6)
|
|
|
114.7
|
|
|
117.0
|
|
|
(2.3)
|
|
|
Total revenues
|
$
|
57.0
|
|
|
$
|
59.2
|
|
|
$
|
(2.2)
|
|
|
$
|
115.5
|
|
|
$
|
118.3
|
|
|
$
|
(2.8)
|
|
|
Segment profit
|
$
|
23.7
|
|
|
$
|
29.9
|
|
|
$
|
(6.2)
|
|
|
$
|
50.2
|
|
|
$
|
56.9
|
|
|
$
|
(6.7)
|
|
The decrease in Global Real Estate & Development revenues during the second quarter and the first six months of 2020 was primarily due to lower franchise rental income. See “Franchise Rental Income” above for further information.
The decrease in Global Real Estate & Development segment profit during the second quarter and the first six months of 2020 was primarily due to (1) a decrease in net rental income, reflecting the impact of assigning certain leases to a franchisee during 2019 and (2) a decrease in the equity in earnings from the TimWen joint venture.
Liquidity and Capital Resources
Cash Flows
Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized
financing facility. Principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to stockholders.
During the six months ended June 28, 2020, the Company made a payment of $24.7 million related to the settlement of the financial institutions class action (the “FI Case”) (see Note 23 of the Financial Statements and Supplementary Data contained in Item 8 of the Form 10-K for further information).
In response to the COVID-19 pandemic, the Company has taken the following actions impacting its liquidity and capital resources during and subsequent to the six months ended June 28, 2020:
•increased its cash position by draw downs of its Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019-1 Class A-1 Notes”), which was repaid subsequent to June 28, 2020, and the Company’s other lines of credit in March 2020, as discussed below in “Long-Term Debt, Including Current Portion;”
•enhanced its debt capacity by issuing $100.0 million of Series 2020-1 Variable Funding Senior Secured Notes, Class A-1 (the “2020-1 Class A-1 Notes”) in June 2020, which remain undrawn as of the date of this report, as discussed below in “Long-Term Debt, Including Current Portion;”
•reduced its quarterly cash dividend from $.12 per share in the first quarter of 2020 to $.05 per share in the second and third quarters of 2020, as discussed below in “Dividends;”
•temporarily suspended all share repurchase activity under the February 2020 share repurchase authorization. The Company now intends to resume share repurchases in 2020, subject to market conditions and prevailing economic factors, as discussed below in “Stock Repurchases;”
•evaluated its planned 2020 general and administrative expenses and capital plan and identified approximately $10.0 million and $20.0 million, respectively, for a total of $30.0 million in savings. The Company now expects to realize approximately $5.0 million of the previously identified general and administrative expense savings, primarily as a result of a higher incentive compensation accrual;
•revised its planned 2020 advertising expenses in March 2020 to eliminate Company funding of incremental advertising. In June 2020, the Company reevaluated its marketing plans and now plans to fund up to $15.0 million of incremental advertising during the remainder of 2020;
•deferred payment of the Company’s share of Social Security payroll taxes as permitted under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which allows for the deferral of these payments through the end of 2020 and requires repayment of the deferred amounts in 2021 and 2022;
•to support the franchise system, (1) extended payment terms for royalties and national advertising funds contributions by 45 days beginning in April for a three month period, (2) abated national advertising fund contributions on breakfast sales for the remainder of 2020, (3) offered to defer base rent payments on properties owned by Wendy’s and leased to franchisees by 50% beginning in May for a three month period, which will be repaid over 12 months beginning in August, and (4) extended Image Activation and new restaurant development requirements by one year; and
•to support Company-operated restaurant employees, (1) implemented a new emergency paid sick leave policy with up to 14 days paid leave in the event an employee is unable to work as a result of the COVID-19 pandemic and (2) increased hourly pay by 10% for the months of April and May for hourly crew members, shift managers and assistant general managers, and protected part of the monthly bonus through May for general managers and district managers.
In addition, the Company expects to benefit from the technical amendments under the CARES Act by treating qualified improvement property (“QIP”) as 15-year property and allowing such property to be eligible for the 100 percent bonus depreciation for QIP placed in service after December 31, 2017.
Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.
We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us.
The table below summarizes our cash flows from operating, investing and financing activities for the first six months of 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
$
|
30.6
|
|
|
$
|
154.1
|
|
|
$
|
(123.5)
|
|
|
Investing activities
|
(24.9)
|
|
|
(29.9)
|
|
|
5.0
|
|
|
Financing activities
|
48.3
|
|
|
(130.2)
|
|
|
178.5
|
|
|
Effect of exchange rate changes on cash
|
(3.2)
|
|
|
3.8
|
|
|
(7.0)
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
$
|
50.8
|
|
|
$
|
(2.2)
|
|
|
$
|
53.0
|
|
Operating Activities
Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities. Cash provided by operating activities was $30.6 million and $154.1 million in the first six months of 2020 and 2019, respectively. The change was primarily due to (1) the extension of payment terms for royalties beginning in April 2020 for a three month period, (2) lower net income, adjusted for non-cash expenses, (3) a cash payment of $24.7 million related to the settlement of the FI Case in January 2020 and (4) an increase in payments for incentive compensation for the 2019 fiscal year paid in 2020.
Investing Activities
Cash used in investing activities was $24.9 million and $29.9 million in the first six months of 2020 and 2019, respectively. The change was primarily due to (1) no acquisitions of restaurants from franchisees in the first six months of 2020 compared with cash used for acquisitions of $5.1 million in the first six months of 2019 and (2) an increase in proceeds from dispositions of $3.1 million. These changes were partially offset by an increase in capital expenditures of $3.9 million.
Financing Activities
Cash provided by (used in) financing activities was $48.3 million and $(130.2) million in the first six months of 2020 and 2019, respectively. The change was primarily due to (1) a net increase in cash provided by long-term debt activities of $168.8 million, reflecting the impact of the draw downs under the 2019-1 Class A-1 Notes and certain other lines of credit, (2) a decrease in dividends of $8.2 million and (3) a decrease in repurchases of common stock of $5.6 million. These changes were partially offset by a decrease in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $4.0 million.
Long-Term Debt, Including Current Portion
Except as described below, there were no material changes to the terms of any debt obligations since December 29, 2019. The Company was in compliance with its debt covenants as of June 28, 2020. See Note 9 of the Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.
Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. Under this facility, in June 2019, the Master Issuer also issued outstanding 2019-1 Class A-1 Notes, which allow for the borrowing of up to $150.0 million from time to time on a revolving basis using various credit instruments, including a letter of credit facility. In March 2020, the Company drew down $120.0 million under the 2019-1 Class A-1 Notes. As a result, as of June 28, 2020, the Company had outstanding borrowings of $120.0 million under the 2019-1 Class A-1 Notes. Subsequent to June 28, 2020, the Company repaid the $120.0 million outstanding balance under the 2019-1 Class A-1 Notes. In June 2020, the Master Issuer also issued outstanding 2020-1 Class A-1 Notes, which allow for the borrowing of up to $100.0 million from time to time on a revolving basis using various credit instruments. The Company had no outstanding borrowings under the 2020-1 Class A-1 Notes as of June 28, 2020.
A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6.0 million. In March 2020, the Company drew down C$5.5 million under the revolving credit facility. As a result, as of June 28, 2020, the Company had outstanding borrowings of C$5.5 million under the revolving credit facility.
Wendy’s U.S. advertising fund has a revolving line of credit of $25.0 million, which was established to support the advertising fund operations. In February 2020, the Company drew down $4.4 million under the revolving line of credit, which the Company repaid in February 2020. In March 2020, the Company drew down $25.0 million under the revolving line of credit. As a result, as of June 28, 2020, the Company had outstanding borrowings of $25.0 million under the revolving line of credit. Subsequent to June 28, 2020, the Company renewed the revolving line of credit, which is now guaranteed by Wendy’s.
The increased borrowings were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic.
Dividends
On March 16, 2020 and June 15, 2020, the Company paid quarterly cash dividends per share of $.12 and $.05, respectively, aggregating $38.0 million. On August 5, 2020, the Company announced a dividend of $.05 per share to be paid on September 15, 2020 to stockholders of record as of September 1, 2020. If the Company pays regular quarterly cash dividends for the remainder of 2020 at the same rate as declared in the third quarter of 2020, the Company’s total cash requirement for dividends for the remainder of 2020 will be approximately $22.4 million based on the number of shares of its common stock outstanding at July 29, 2020. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any.
Stock Repurchases
In February 2020, our Board of Directors authorized a repurchase program for up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. During the six months ended June 28, 2020, the Company repurchased 0.8 million shares under the February 2020 repurchase authorization with an aggregate purchase price of $14.5 million, excluding commissions. As of June 28, 2020, the Company had $85.5 million of availability remaining under its February 2020 authorization. As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. The Company now intends to resume share repurchases in 2020, subject to market conditions and prevailing economic factors.
In February 2019, our Board of Directors authorized a repurchase program for up to $225.0 million of our common stock through March 1, 2020, when and if market conditions warranted and to the extent legally permissible. In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $100.0 million in cash and received an initial delivery of 4.1 million shares of common stock, representing an estimated 85% of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 0.6 million shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2019 ASR Agreement, less an agreed upon discount. In total, 4.7 million shares were delivered under the 2019 ASR Agreement at an average purchase price of $21.37 per share.
In addition to the shares repurchased in connection with the 2019 ASR Agreement, during the six months ended June 28, 2020, the Company repurchased 1.3 million shares with an aggregate purchase price of $28.8 million, excluding commissions, under the February 2019 authorization. After taking into consideration these repurchases, with the completion of the 2019 ASR Agreement in February 2020, the Company completed its February 2019 authorization.
During the six months ended June 30, 2019, the Company repurchased 2.8 million shares with an aggregate purchase price of $49.7 million, of which $0.8 million was accrued at June 30, 2019, and excluding commissions, under the February 2019 authorization and the Company’s previous November 2018 authorization to repurchase up to $220.0 million of our common stock.
General Inflation, Commodities and Changing Prices
We believe that general inflation did not have a significant effect on our consolidated results of operations. We attempt to manage any inflationary costs and commodity price increases through product mix and selective menu price increases. Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases.
Seasonality
Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year. Currently, we are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business.