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2: EX-31.1 CEO 302 Certification HTML 26K
3: EX-31.2 CFO 302 Certification HTML 26K
4: EX-32.1 CEO & CFO 906 Certifications HTML 23K
10: R1 Document and Entity Information HTML 75K
11: R2 Condensed Consolidated Balance Sheets HTML 158K
12: R3 Condensed Consolidated Statements of Operations HTML 121K
13: R4 Condensed Consolidated Statements of Comprehensive HTML 46K
Income
14: R5 Condensed Consolidated Statements of Stockholders' HTML 82K
Equity
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16: R7 Basis of Presentation HTML 34K
17: R8 Revenue HTML 102K
18: R9 Acquisitions HTML 25K
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52: R43 Acquisitions (Details) HTML 31K
53: R44 System Optimization Gains, Net Summary of HTML 64K
Disposition Activity (Details)
54: R45 System Optimization Gains, Net Assets Held for HTML 27K
Sale (Details)
55: R46 Reorganization and Realignment Costs Summary HTML 30K
(Details)
56: R47 Reorganization and Realignment Costs System HTML 70K
Optimization Costs (Details)
57: R48 Reorganization and Realignment Costs System HTML 42K
Optimization Accrual Rollforward (Details)
58: R49 Investments Carrying Value of Investments HTML 29K
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59: R50 Investments Equity Method Investments (Details) HTML 51K
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(Exact name of registrant as specified in its charter)
iDelaware
i38-0471180
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
iOne Dave Thomas Blvd.
iDublin,
iOhio
i43017
(Address
of principal executive offices)
(Zip Code)
(i614) i764-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $.10 par value
iWEN
iThe
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒
No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐ No ☒
There were i212,803,949
shares of The Wendy’s Company common stock outstanding as of August 3, 2022.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(1) iBasis
of Presentation
The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,”“we,”“us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of July 3, 2022, the results of our operations for the
three and six months ended July 3, 2022 and July 4, 2021 and cash flows for the six months ended July 3, 2022 and July 4, 2021. The results of operations for the six months ended July 3, 2022 are not necessarily indicative of the results to be expected for the full 2022 fiscal year. The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 (the “Form 10-K”).
In March 2020, the World Health Organization declared
the novel strain of coronavirus (“COVID-19”) a global pandemic. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on our results of operations, financial condition and prospects.
The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business in the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate
& Development. See Note 18 for further information.
We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and six-month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years, quarters and months relate to fiscal periods rather than calendar periods.
Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.
Reclassifications
The Company has reclassified payments for cloud computing
arrangements to “Cloud computing arrangements expenditures,” which were previously recorded to “Changes in operating assets and liabilities and other, net.” The prior period amounts in the condensed consolidated statement of cash flows reflect the reclassification of these cash flows to conform to the current year presentation. There was no impact to “Net cash provided by operating activities.”
i
The following table illustrates the reclassifications made to the condensed consolidated
statement of cash flows for the six months ended July 4, 2021:
As Previously Reported
Reclassifications
As Currently Reported
Cloud computing arrangements expenditures
$
i—
$
(i2,412)
$
(i2,412)
Changes
in operating assets and liabilities and other, net
Receivables, which
are included in “Accounts and notes receivable, net” (b)
$
i57,838
$
i49,168
Receivables,
which are included in “Advertising funds restricted assets”
i66,918
i65,497
Deferred
franchise fees (c)
i99,108
i97,186
_______________
(a)Excludes
funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s condensed consolidated statements of operations.
(b)Includes receivables related to “Sales” and “Franchise royalty revenue and fees.”
(c)Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled $i9,862
and $i89,246, respectively, as of July 3, 2022, and $i9,084 and $i88,102,
respectively, as of January 2, 2022.
/
i
Significant changes in deferred franchise fees are as follows:
Anticipated
Future Recognition of Deferred Franchise Fees
i
The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
Estimate for fiscal year:
2022
(a)
$
i6,831
2023
i6,440
2024
i6,260
2025
i6,084
2026
i5,975
Thereafter
i67,518
$
i99,108
_______________
(a)Represents
franchise fees expected to be recognized for the remainder of 2022, which includes development-related franchise fees expected to be recognized over a duration of one year or less.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(3) iAcquisitions
The Company completed iino/
significant acquisitions of restaurants from franchisees during the six months ended July 3, 2022 and July 4, 2021.
During 2021, the Company acquired i93 restaurants from a franchisee for total net cash consideration of $i127,948. The
fair values of the identifiable net assets related to the acquisition were provisional amounts as of January 2, 2022, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended April 3, 2022, which resulted in ino
adjustments to the fair values of the identifiable net assets related to the acquisition.
(4) iSystem 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 i5% of the total system. While the Company has no plans to
move its ownership away from approximately i5% of the total system, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages. During the six months ended July 3, 2022
and July 4, 2021, the Company facilitated i46 and i19
Franchise Flips, respectively. In addition, during the three months ended July 4, 2021, the Company completed the sale of i47 Company-operated restaurants in New York (including Manhattan) to franchisees. iNo
Company-operated restaurants were sold to franchisees during the six months ended July 3, 2022.
Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”
i
The
following is a summary of the disposition activity recorded as a result of our system optimization initiative:
Post-closing
adjustments on sales of restaurants (e)
i75
i—
i3,522
i515
Gain
on sales of restaurants, net
i75
i30,801
i3,522
i31,316
Gain
(loss) on sales of other assets, net (f)
i77
(i35)
i164
(i34)
System
optimization gains, net
$
i152
$
i30,766
$
i3,686
$
i31,282
_______________
(a)In
addition to the proceeds noted herein, the Company received cash proceeds of $i63 and $i158
during the three and six months ended July 3, 2022, respectively, related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share
Amounts)
(b)Net assets sold consisted primarily of equipment.
(c)During the three and six months ended July 4, 2021, the Company recorded favorable lease assets of $i3,799
and unfavorable lease liabilities of $i6,738 as a result of leasing and/or subleasing land, buildings and/or leasehold improvements to franchisees, in connection with the sale of the New York Company-operated restaurants (including Manhattan).
(d)The three and six months ended July 4, 2021 include a deferred gain of $i3,500
as a result of certain contingencies related to the extension of lease terms.
(e)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.
(f)During the three and six months ended July 3, 2022, the Company received net cash proceeds of $i690
and $i858, respectively, primarily from the sale of surplus and other properties. During the three and six months ended July 4, 2021, the Company received net cash proceeds of $i10
and $i13, respectively, primarily from the sale of surplus and other properties.
Assets Held for Sale
As of July 3, 2022 and January 2, 2022, the Company had assets held for sale of $i3,754
and $i3,541, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”
(5) iReorganization
and Realignment Costs
i
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During the six months ended July 3, 2022, the Company recognized costs totaling $i541, which were primarily comprised of professional fees and other costs associated with the
Company’s acquisition of i93 franchise-operated restaurants in Florida during the fourth quarter of 2021. During the six months ended July 4, 2021, the Company recognized costs totaling $i5,575,
which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the bankruptcy sale process of NPC Quality Burgers, Inc. (“NPC”). As previously announced, NPC, formerly the Company’s largest franchisee, filed for chapter 11 bankruptcy in July 2020 and completed a process during the three months ended April 4, 2021 under which all of NPC’s Wendy’s restaurants were sold to Wendy’s approved franchisees. The Company expects to recognize a gain of approximately $i700,
primarily related to the write-off of certain NPC-related lease liabilities, upon final termination of the leases.
(a)The
six months ended July 4, 2021 includes transaction fees of $i1,350 associated with the NPC bankruptcy sale process.
(b)Primarily includes accelerated amortization of previously acquired franchise rights related to the Company-operated restaurants in territories that have been sold to franchisees in connection
with our system optimization initiative.
(c)The six months ended July 4, 2021 includes the write-off of lease assets of $i1,341 and lease termination fees paid of $i1,480.
(d)Represents
incremental share-based compensation resulting from the modification of stock options and performance-based awards in connection with the termination of employees under our system optimization initiative.
/
i
The tables below present a rollforward of our accruals for our system optimization initiative, which were included in “Accrued expenses and other current liabilities”
as of January 3, 2021.
Costs incurred under the Company’s other reorganization and realignment plans were not material during the six months ended July 3, 2022 and July 4, 2021. The Company does not expect to incur any material additional costs under these plans.
Wendy’s has a i50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand (Tim Hortonsis a registered trademark of Tim Hortons USA Inc.). In addition, the
Company has a i20% share in a joint venture in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.”
i
Presented
below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:
Foreign
currency translation adjustment included in “Other comprehensive (loss) income” and other
(i674)
i1,456
Balance
at end of period
$
i38,088
$
i43,676
_______________
(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 ii21/
years.
/
Other Investments in Equity Securities
During 2021, the Company made an investment in equity securities of $i10,000. During
the six months ended July 3, 2022, the Company recognized a gain of $i2,107 as a result of an observable price change for a similar investment of the same issuer.
i4.236%
Series 2022-1 Class A-2-I Notes, anticipated repayment date 2029
$
i100,000
$
—
i4.535%
Series 2022-1 Class A-2-II Notes, anticipated repayment date 2032
i400,000
—
Series 2021-1 Class A-2 Notes:
ii2.370/%
Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029
i445,500
i447,750
ii2.775/%
Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031
i643,500
i646,750
Series
2019-1 Class A-2 Notes:
ii3.783/%
Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026
i366,000
i368,000
ii4.080/%
Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029
i411,750
i414,000
Series
2018-1 Class A-2 Notes:
ii3.884/%
Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028
i453,625
i456,000
ii7/%
debentures, due in 2025
i85,770
i85,175
Unamortized
debt issuance costs
(i44,105)
(i37,009)
i2,862,040
i2,380,666
Less
amounts payable within one year
(i29,250)
(i24,250)
Total
long-term debt
$
i2,832,790
$
i2,356,416
/
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. On April 1, 2022, the Master Issuer completed a financing transaction with respect to this facility under which the Master Issuer issued fixed rate senior secured notes in the following 2022-1 series: Class A-2-I with an initial principal amount of $i100,000
and Class A-2-II with an initial principal amount of $i400,000 (collectively, the “Series 2022-1 Class A-2 Notes”). Interest and principal payments on the Series 2022-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series 2022-1 Class A-2 Notes is March 2052. If the Master Issuer has not repaid or refinanced the Series 2022-1 Class A-2 Notes prior to their respective anticipated repayment dates, additional interest will accrue pursuant to the indenture
governing the Series 2022-1 Class A-2 Notes. The net proceeds from the sale of the Series 2022-1 Class A-2 Notes will be used for general corporate purposes, which may include funding for growth initiatives, return of capital to shareholders and debt retirement. The Series 2022-1 Class A-2 Notes have scheduled principal payments of $i2,500 in 2022, $i5,000
annually from 2023 through 2028, $i97,500 in 2029, $i4,000
annually from 2030 through 2031 and $i362,000 in 2032.
The Series 2022-1 Class A-2 Notes are secured by a security interest in substantially all of the assets of the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the
Company that act as guarantors, except for certain real estate assets and subject to certain limitations. The Series 2022-1 Class A-2 Notes are subject to substantially the same series of covenants and restrictions as the Company’s outstanding Series 2021-1 Class A-2 Notes, Series 2019-1 Class A-2 Notes and Series 2018-1 Class A-2 Notes.
Under the securitized financing facility, the Master Issuer has issued outstanding Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Class A-1 Notes”), which allow for the drawing of up to $i300,000
on a revolving basis using various credit instruments, including a letter of credit facility. iNo amounts were borrowed under the Class A-1 Notes during the six months ended July 3, 2022.
During the six months ended July 3, 2022, the Company incurred debt issuance costs of $i10,232
in connection with the issuance of the Series 2022-1 Class A-2 Notes. The debt issuance costs will be amortized to “Interest expense, net” through the anticipated repayment dates of the Series 2022-1 Class A-2 Notes utilizing the effective interest rate method.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(8)
iFair 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.
Financial Instruments
i
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
(a)The fair value of our other investments in equity securities is based on our review of information provided by the investment manager, which is based on observable price changes in orderly transactions for a similar investment of the same issuer.
(b)The fair values were based on quoted market prices in markets that are not considered active markets.
/
The carrying amounts of cash, accounts payable and accrued expenses approximate fair value due to the short-term
nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximate fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents are the only financial assets measured and recorded at fair value on a recurring basis.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Non-Recurring
Fair Value Measurements
Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.
Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, favorable lease assets and right-of-use assets) to fair value as a result of (1) 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.
Total impairment losses may also include the impact of remeasuring long-lived assets held for sale. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 9 for further information on impairment of our long-lived assets.
The Company records impairment charges as a result of (1) the deterioration in operating performance of certain Company-operated restaurants, (2) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including
any subsequent lease modifications, and (3) closing Company-operated restaurants and classifying such surplus properties as held for sale.
i
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:”
The Company’s effective tax rate for the three months ended July 3, 2022 and July 4, 2021 was i26.4%
and i18.6%, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of ii21/%
for the three months ended July 3, 2022 primarily due to state income taxes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The
Company’s effective tax rate for the six months ended July 3, 2022 and July 4, 2021 was i26.4% and i20.8%,
respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of ii21/%
for the six months ended July 3, 2022 primarily due to state income taxes.
There were iiiino///
significant changes to the unrecognized tax benefits or related interest and penalties for the three and six months ended July 3, 2022. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $i936 due to lapses of statutes of limitations.
The current portion of refundable
income taxes was $i8,266 and $i11,901 as of July 3, 2022 and January 2, 2022, respectively, and is included in “Accounts
and notes receivable, net.” There were iino/
long-term refundable income taxes as of July 3, 2022 and January 2, 2022.
(11) iNet Income Per Share
i
The
calculation of basic and diluted net income per share was as follows:
Dilutive
effect of stock options and restricted shares
i1,569
i3,526
i2,058
i3,459
Weighted
average diluted shares outstanding
i215,242
i225,400
i216,704
i226,063
Net
income per share:
Basic
$
i.23
$
i.30
$
i.40
$
i.48
Diluted
$
i.22
$
i.29
$
i.39
$
i.47
/
Basic
net income per share for the three and six months ended July 3, 2022 and July 4, 2021 was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding. Diluted net income per share was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of i5,538
and i4,417 for the three and six months ended July 3, 2022, respectively, and i1,825
and i1,847 for the three and six months ended July 4, 2021, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
(12) iStockholders’
Equity
Dividends
During each of the first and second quarters of 2022, the Company paid quarterly dividends per share of $ii.125/. During
the first and second quarters of 2021, the Company paid dividends per share of $i.09 and $i.10,
respectively.
Repurchases of Common Stock
In February 2022, our Board of Directors authorized a repurchase program for up to $i100,000 of our common stock through February 28, 2023, when and if market conditions warrant and to the extent legally permissible (the “February 2022 Authorization”). On April
1, 2022, the Company’s Board of Directors approved an increase of $i150,000 to the February 2022 Authorization, resulting in an aggregate authorization of $i250,000
that continues to expire on February 28, 2023. During the six months ended July 3, 2022, the Company repurchased i2,759 shares under the February 2022 Authorization with an aggregate purchase price of $i51,911,
excluding commissions of $i39. As of July 3, 2022, the Company had $i198,089
of
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
availability remaining under its February 2022 authorization. Subsequent to July 3, 2022 through August 9, 2022, ino
shares were repurchased under the February 2022 Authorization.
In February 2020, our Board of Directors authorized a repurchase program for up to $i100,000 of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible (the “February 2020 Authorization”). In July 2020, the
Company’s Board of Directors approved an extension of the February 2020 Authorization by one year, through February 28, 2022. In addition, in May 2021, August 2021 and November 2021, the Board of Directors approved increases of $i50,000, $i70,000
and $i80,000, respectively, to the February 2020 Authorization, resulting in an aggregate authorization of $i300,000 that
continued to expire on February 28, 2022. In November 2021, the Company entered into an accelerated share repurchase agreement (the “2021 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the February 2020 Authorization. Under the 2021 ASR Agreement, the Company paid the financial institution an initial purchase price of $i125,000
in cash and received an initial delivery of i4,910 shares of common stock, representing an estimated i85% of the total shares expected to be delivered under
the 2021 ASR Agreement. In February 2022, the Company completed the 2021 ASR Agreement and received an additional i715 shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2021 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2021 ASR Agreement, less an agreed upon discount. In total, i5,625
shares were delivered under the 2021 ASR Agreement at an average purchase price of $i22.22 per share. With the completion of the 2021 ASR Agreement in February 2022 as described above, the Company completed the February 2020 Authorization.
During the six months ended July 4, 2021, the
Company repurchased i3,956 shares under the February 2020 Authorization with an aggregate purchase price of $i83,320,
of which $i440 was accrued at July 4, 2021, and excluding commissions of $i55.
Accumulated
Other Comprehensive Loss
i
The following table provides a rollforward of accumulated other comprehensive loss, which is entirely comprised of foreign currency translation:
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
July 3, 2022, Wendy’s and its franchisees operated i7,040 Wendy’s restaurants. Of the i411 Company-operated Wendy’s restaurants, Wendy’s owned the land and building
for i157 restaurants, owned the building and held long-term land leases for i143 restaurants and held leases covering the land and building for i111
restaurants. Wendy’s also owned i489 and leased i1,211 properties that were either leased or subleased principally to franchisees. The
Company also leases restaurant, office and transportation equipment.
(a)Includes
expenses for executory costs of $i9,245 and $i10,087 for the three months ended July 3, 2022 and July 4,
2021, respectively, and $i18,853 and $i20,150 for the six months ended July 3, 2022 and July 4, 2021,
respectively, for which the Company is reimbursed by sublessees.
(b)Includes $i32,071 and $i34,063
for the three months ended July 3, 2022 and July 4, 2021, respectively, and $i60,996 and $i66,615
for the six months ended July 3, 2022 and July 4, 2021, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $i7,479 and $i6,111
for the three months ended July 3, 2022 and July 4, 2021, respectively, and $i14,773 and $i12,792
for the six months ended July 3, 2022 and July 4, 2021, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.
(b)Includes sublease income of $i43,689 and $i45,245 recognized during
the three months ended July 3, 2022 and July 4, 2021, respectively, and $i86,854 and $i88,495 recognized during
the six months ended July 3, 2022 and July 4, 2021, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $i9,250 and $i10,195
for the three months ended July 3, 2022 and July 4, 2021, respectively, and $i18,785 and $i20,069
for the six months ended July 3, 2022 and July 4, 2021, respectively.
Reconciliation of cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents
$
i700,813
$
i249,438
Restricted
cash
i33,997
i27,535
Restricted
cash, included in Advertising funds restricted assets
i61,838
i89,993
Total
cash, cash equivalents and restricted cash
$
i796,648
$
i366,966
/
Franchise
Development Fund
In August 2021, the Company announced the creation of a $i100,000 strategic build to suit development fund to drive additional new restaurant growth. The Company expects the development fund to drive approximately i80
to i90 new franchise restaurants from 2022 to 2025. Capital expenditures related to the fund are included in “Franchise development fund” in the condensed consolidated statements of cash flows.
(15) iTransactions
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 July 3, 2022 and July 4, 2021, Wendy’s paid TimWen $i9,601
and $i8,817, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $i111
and $i110 during the six months ended July 3, 2022 and July 4, 2021, respectively, which has been included as a reduction to “General and administrative.”
Transactions with Yellow Cab
Certain family members and affiliates of Mr. Nelson Peltz,
our Chairman, and Mr. Peter May, our Senior Vice Chairman, as well as Mr. Matthew Peltz, our Vice Chairman, hold indirect, minority ownership interests in Yellow Cab Holdings, LLC (“Yellow Cab”) and operating companies managed by Yellow Cab, a Wendy’s franchisee, that as of July 3, 2022 owned and operated i82 Wendy’s restaurants. During the six months ended July 3, 2022 and July 4, 2021, the
Company recognized $i6,476 and $i4,353,
respectively, in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of July 3, 2022 and January 2, 2022, $i1,046 and $i974,
respectively, was due from Yellow Cab for such income, which is included in “Accounts and notes receivable, net” and “Advertising funds restricted assets.”
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(16)
iGuarantees 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 $i88,778 as of July 3, 2022. These leases extend through 2045. We have had no judgments against
us as guarantor of these leases as of July 3, 2022. In the event of default by a franchise owner where Wendy’s is called upon to perform under its guarantee, Wendy’s has the ability to pursue repayment from the franchise owner. The liability recorded for our probable exposure associated with these lease guarantees was not material as of July 3, 2022.
Letters of Credit
As of July 3, 2022, the Company had outstanding letters of credit with various parties totaling $i28,633. Substantially
all of the outstanding letters of credit include amounts outstanding against the 2021-1 Class A-1 Notes. See Note 7 for further information. We do not expect any material loss to result from these letters of credit.
(17) iLegal and Environmental Matters
The
Company is involved in litigation and claims incidental to our business. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate accruals for all of our legal and environmental matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims 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 July 3, 2022, there were no material developments in those legal proceedings.
(a)Wendy’s
U.S. includes advertising fund expense of $i2,766 and $i5,322 for the three and six months ended July 3,
2022, respectively, and $i3,990 and $i7,524 for the three and six months ended July 4,
2021, respectively, related to the Company’s funding of incremental advertising.
(b)Wendy’s International includes advertising fund expense of $i1,084 and $i1,922
for the three and six months ended July 3, 2022, respectively, related to the Company’s funding of incremental advertising. In addition, Wendy’s International includes other international-related advertising expense of $i880 and $i1,522
for the three and six months ended July 3, 2022, respectively.
(c)Includes corporate overhead costs, such as employee compensation and related benefits.
/
(19)iNew
Accounting Standards
Financial Instruments
In August 2020, the Financial Accounting Standards Board (“FASB”) issued an amendment that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendment simplifies accounting for convertible instruments by removing major separation models required under current accounting guidance. In addition, the amendment removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will
permit more equity contracts to qualify for the exception, and also simplifies the diluted earnings per share calculation in certain areas. The Company adopted this amendment during the first quarter of 2022. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
This
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,”“we,”“us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 (the “Form 10-K”). There have been no material changes as of July 3, 2022 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements
we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II. Other Information” of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International,
LLC (formerly known as Wendy’s International, Inc). Wendy’s International, LLC is the indirect parent company of (1) Quality Is Our Recipe, LLC (“Quality”), which is the owner and franchisor of the Wendy’s restaurant system in the United States (the “U.S.”) and all international jurisdictions except for Canada, and (2) Wendy’s Restaurants of Canada Inc., which is the owner and franchisor of the Wendy’s restaurant system in Canada. As used herein, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to the ownership or franchising of the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand.
Wendy’s
is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the U.S. based on traffic share, and the third largest globally with 7,040 restaurants in the U.S. and 31 foreign countries and U.S. territories as of July 3, 2022.
Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of toppings and condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty®
desserts and kids’ meals. In addition, Wendy’s restaurants sell a variety of promotional products on a limited time basis. Wendy’s also offers breakfast across the U.S. system and in Canada. Wendy’s breakfast menu features a variety of breakfast sandwiches such as the Breakfast Baconator®, sides such as seasoned potatoes, and a beverage platform that includes our vanilla and chocolate Frosty-ccinoTM 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 operation and franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,”the
Company reports on the segment profit for each of the three segments described above. The Company measures segment profit using segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. See “Results of Operations” below and Note 18 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information.
26
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, quarters and months relate to fiscal periods rather than calendar periods.
Executive Overview
Our Business
As of July 3, 2022, the Wendy’s restaurant system was comprised of 7,040 restaurants, with 5,983 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 403 were operated by the Company and 5,580 were operated by a total of 222 franchisees. In addition,
at July 3, 2022, there were 1,057 Wendy’s restaurants in operation in 31 foreign countries and U.S. territories. Of the international restaurants, 1,049 were operated by franchisees and eight were operated by the Company in the United Kingdom (the “U.K.”).
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of July 3, 2022.
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.
Wendy’s long-term growth opportunities include investing in accelerated global growth through (1) building our breakfast daypart, (2) accelerating our implementation of consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint through global restaurant expansion.
Key Business Measures
We
track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure:
•Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one week are excluded from same-restaurant sales. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes.
•Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor
and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.
•Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The
Company’s royalty and advertising funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and profitability.
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.
27
The Company believes its presentation of same-restaurant sales, restaurant margin and systemwide sales provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables
investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating
performance. With respect to same-restaurant sales and systemwide sales, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand.
The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.
Second
Quarter Financial Highlights
•Revenue increased 9.0% to $537.8 million in the second quarter of 2022 compared to $493.3 million in the second quarter of 2021;
•Global same-restaurant sales increased 3.7%, U.S. same-restaurant sales increased 2.3% and international same-restaurant sales increased 15.2% compared to the second quarter of 2021;
•Company-operated restaurant margin was 14.5% in the second quarter of 2022, a decrease of 580 basis points compared to the second quarter of 2021; and
•Net income decreased 26.7% to $48.2 million in the second
quarter of 2022 compared to $65.7 million in the second quarter of 2021.
Year-to-Date Financial Highlights
•Revenue increased 7.6% to $1.0 billion in the first six months of 2022 compared to $953.5 million in the first six months of 2021;
•Global same-restaurant sales increased 3.1%, U.S. same-restaurant sales increased 1.7% and international same-restaurant sales increased 14.7% compared to the first six months of 2021;
•Company-operated restaurant margin was 13.1% in the first six months of 2022, a decrease of 560 basis points from the first six months of 2021; and
•Net
income decreased 20.1% to $85.6 million in the first six months of 2022 compared to $107.1 million in the first six months of 2021.
Breakfast
Wendy’s long-term growth opportunities include investing in accelerated global growth, which includes building upon our breakfast daypart. Since the launch of breakfast across the U.S. system in March 2020, systemwide sales have benefited from this new daypart, with average weekly U.S. breakfast sales representing approximately $2,600 per restaurant during the six months ended July 3, 2022. The Company launched breakfast in Canada on May 2, 2022, which has increased the percentage of
global systemwide restaurants serving breakfast to approximately 95%. The Company expects to fund a total of $16.0 million of incremental advertising during 2022 to support the breakfast daypart, which the Company expects will continue to drive trial and acceleration of the Company’s breakfast offering in the U.S. and Canada.
28
Digital
Wendy’s long-term growth opportunities include accelerated implementation
of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program and establishing delivery agreements with third-party vendors. The Company’s digital business represented approximately 10.2% of global systemwide sales during the six months ended July 3, 2022. The Company is also partnering with key technology providers to help execute our digital, restaurant technology and enterprise technology initiatives and support our technology innovation and growth.
New
Restaurant Development
Wendy’s long-term growth opportunities include expanding the Company’s footprint through global restaurant expansion. To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants, including technical assistance fee waivers and reductions in royalty and national advertising payments. In addition, the Company has development agreements in place with a number of franchisees that contractually obligate such franchisees to open additional Wendy’s restaurants over a specified timeframe. During the six months ended July 3,
2022, the Company and its franchisees added 91 net new restaurants across the Wendy’s system.
During the second quarter of 2022, the Company reevaluated the development commitment by REEF Kitchens (“REEF”) and now anticipates that REEF will open 100 to 150 delivery kitchens by the end of 2025, primarily in Canada and the U.K. As a result, the Company now expects net new restaurant growth of 3% to 4% in 2022 and expects to reach 8,000 to 8,500 systemwide restaurants by the end of 2025.
Debt Financing
On
April 1, 2022, the Company completed a debt financing transaction under which the Company issued fixed rate senior secured notes in the following 2022-1 series: Class A-2-I with an interest rate of 4.236% and initial principal amount of $100.0 million (the “Class A-2-I Notes”) and Class A-2-II with an interest rate of 4.535% and initial principal amount of $400.0 million (the “Class A-2-II Notes” and, collectively, the “Series 2022-1 Class A-2 Notes”). The anticipated repayment dates of the Class A-2-I Notes and the Class A-2-II Notes will be March 2029 and March 2032, respectively. See “Liquidity and Capital Resources” below and Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further
information on the Company’s debt financing transaction.
29
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 2022 and 2021.
Second
Quarter
Six Months
2022
2021
Change
2022
2021
Change
Revenues:
Sales
$
230.9
$
193.5
$
37.4
$
440.1
$
382.6
$
57.5
Franchise
royalty revenue and fees
143.4
136.6
6.8
272.4
259.5
12.9
Franchise rental income
58.6
60.9
(2.3)
116.5
119.7
(3.2)
Advertising
funds revenue
104.9
102.3
2.6
197.4
191.7
5.7
537.8
493.3
44.5
1,026.4
953.5
72.9
Costs
and expenses:
Cost of sales
197.3
154.2
43.1
382.3
311.0
71.3
Franchise
support and other costs
9.9
8.9
1.0
21.7
16.6
5.1
Franchise rental expense
32.1
34.1
(2.0)
61.0
66.6
(5.6)
Advertising
funds expense
111.0
107.9
3.1
208.8
202.1
6.7
General and administrative
61.6
63.1
(1.5)
124.0
115.7
8.3
Depreciation
and amortization
33.4
30.8
2.6
66.7
62.3
4.4
System optimization gains, net
(0.2)
(30.8)
30.6
(3.7)
(31.3)
27.6
Reorganization
and realignment costs
0.2
2.1
(1.9)
0.6
7.0
(6.4)
Impairment of long-lived assets
1.9
0.6
1.3
2.5
1.3
1.2
Other
operating income, net
(5.7)
(4.3)
(1.4)
(8.7)
(7.7)
(1.0)
441.5
366.6
74.9
855.2
743.6
111.6
Operating
profit
96.3
126.7
(30.4)
171.2
209.9
(38.7)
Interest expense, net
(32.1)
(28.2)
(3.9)
(58.5)
(57.0)
(1.5)
Loss
on early extinguishment of debt
—
(17.9)
17.9
—
(17.9)
17.9
Investment income, net
—
—
—
2.1
—
2.1
Other
income, net
1.2
0.2
1.0
1.4
0.3
1.1
Income before income taxes
65.4
80.8
(15.4)
116.2
135.3
(19.1)
Provision
for income taxes
(17.2)
(15.1)
(2.1)
(30.6)
(28.2)
(2.4)
Net income
$
48.2
$
65.7
$
(17.5)
$
85.6
$
107.1
$
(21.5)
30
Second
Quarter
Six Months
2022
% of Total Revenues
2021
% of Total Revenues
2022
% of Total Revenues
2021
% of Total Revenues
Revenues:
Sales
$
230.9
42.9
%
$
193.5
39.2
%
$
440.1
42.9
%
$
382.6
40.1
%
Franchise
royalty revenue and fees:
Franchise royalty revenue
125.0
23.2
%
119.5
24.2
%
236.8
23.1
%
227.9
23.9
%
Franchise
fees
18.4
3.5
%
17.1
3.5
%
35.6
3.4
%
31.6
3.3
%
Total
franchise royalty revenue and fees
143.4
26.7
%
136.6
27.7
%
272.4
26.5
%
259.5
27.2
%
Franchise
rental income
58.6
10.9
%
60.9
12.4
%
116.5
11.4
%
119.7
12.6
%
Advertising
funds revenue
104.9
19.5
%
102.3
20.7
%
197.4
19.2
%
191.7
20.1
%
Total
revenues
$
537.8
100.0
%
$
493.3
100.0
%
$
1,026.4
100.0
%
$
953.5
100.0
%
Second
Quarter
Six Months
2022
% of Sales
2021
% of Sales
2022
% of Sales
2021
% of Sales
Cost of sales:
Food
and paper
$
76.3
33.0
%
$
55.8
28.9
%
$
144.6
32.9
%
$
110.7
28.9
%
Restaurant
labor
73.0
31.6
%
58.7
30.3
%
143.5
32.6
%
118.7
31.0
%
Occupancy,
advertising and other operating costs
48.0
20.9
%
39.7
20.5
%
94.2
21.4
%
81.6
21.4
%
Total
cost of sales
$
197.3
85.5
%
$
154.2
79.7
%
$
382.3
86.9
%
$
311.0
81.3
%
Second
Quarter
Six Months
2022
% of Sales
2021
% of Sales
2022
% of Sales
2021
% of Sales
Restaurant margin
$
33.6
14.5
%
$
39.3
20.3
%
$
57.8
13.1
%
$
71.6
18.7
%
31
The
table below presents certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.
Second Quarter
Six Months
2022
2021
2022
2021
Key
business measures:
U.S. same-restaurant sales:
Company-operated
2.9
%
23.9
%
2.9
%
18.3
%
Franchised
2.2
%
15.6
%
1.6
%
14.6
%
Systemwide
2.3
%
16.1
%
1.7
%
14.9
%
International
same-restaurant sales (a)
15.2
%
31.4
%
14.7
%
19.0
%
Global same-restaurant sales:
Company-operated
2.9
%
23.9
%
2.9
%
18.3
%
Franchised
(a)
3.7
%
17.0
%
3.1
%
15.0
%
Systemwide (a)
3.7
%
17.4
%
3.1
%
15.2
%
Systemwide
sales (b):
U.S. Company-operated
$
227.9
$
193.3
$
434.4
$
382.4
U.S. franchised
2,772.6
2,704.1
5,278.2
5,162.4
U.S.
systemwide
3,000.5
2,897.4
5,712.6
5,544.8
International Company-operated
3.0
0.2
5.7
0.2
International
franchised (a)
416.3
353.4
773.0
657.0
International systemwide (a)
419.3
353.6
778.7
657.2
Global
systemwide (a)
$
3,419.8
$
3,251.0
$
6,491.3
$
6,202.0
_______________
(a)Excludes Argentina and Venezuela due to the impact of the highly inflationary economies of those countries.
(b)During the second quarter
of 2022 and 2021, global systemwide sales increased 5.6% and 22.9%, respectively, U.S. systemwide sales increased 3.5% and 20.6%, respectively, and international systemwide sales increased 22.7% and 48.2%, respectively, on a constant currency basis. During the first six months of 2022 and 2021, global systemwide sales increased 4.9% and 17.7%, respectively, U.S. systemwide sales increased 3.0% and 16.9%, respectively, and international systemwide sales increased 21.1% and 25.6%, respectively, on a constant currency basis.
The
increase in sales for the second quarter and the first six months of 2022 was primarily due to (1) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021, (2) a 2.9% increase in Company-operated same-restaurant sales and (3) net new restaurant development. These increases were partially offset by the sale of 47 Company-operated restaurants in New York during the second quarter of 2021. Company-operated same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count. Company-operated same-restaurant sales during the first six months of 2021 benefited from government stimulus payments to consumers during the first quarter of 2021, which did not recur in the first six months of 2022.
Franchise
Royalty Revenue and Fees
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Franchise royalty revenue
$
125.0
$
119.5
$
5.5
$
236.8
$
227.9
$
8.9
Franchise
fees
18.4
17.1
1.3
35.6
31.6
4.0
$
143.4
$
136.6
$
6.8
$
272.4
$
259.5
$
12.9
The
increase in franchise royalty revenue during the second quarter and the first six months of 2022 was primarily due to (1) a 3.7% and 3.1% increase in global franchise same-restaurant sales, respectively, and (2) a net increase in the number of franchise restaurants in operation during 2022 compared to 2021. Franchise same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count. Franchise same-restaurant sales during the first six months of 2021 benefited from government stimulus payments to consumers during the first quarter of 2021, which did not recur in the first six months of 2022.
The increase in franchise fees during the second quarter and the first six months of 2022 was primarily due to higher fees for providing information technology services to franchisees. The increase in franchise fees during the first six months of 2022 reflects
the one-month waiver of technology fees during the first quarter of 2021, partially offset by the accelerated recognition of franchise fees associated with canceled development agreements during the first six months of 2021.
33
Franchise
Rental Income
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Franchise rental income
$
58.6
$
60.9
$
(2.3)
$
116.5
$
119.7
$
(3.2)
The
decrease in franchise rental income during the second quarter and the first six months of 2022 was primarily due to the impact of terminating existing leases where the Company was lessor in connection with the Company’s acquisition of franchise-operated restaurants in Florida during the fourth quarter of 2021. This decrease was partially offset by the impact of the sale of Company-operated restaurants in New York during the second quarter of 2021.
Advertising
Funds Revenue
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Advertising funds revenue
$
104.9
$
102.3
$
2.6
$
197.4
$
191.7
$
5.7
The
increase in advertising funds revenue during the second quarter and the first six months of 2022 was primarily due to an increase in franchise same-restaurant sales in the U.S. and Canada.
Cost
of Sales, as a Percent of Sales
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Food and paper
33.0
%
28.9
%
4.1
%
32.9
%
28.9
%
4.0
%
Restaurant
labor
31.6
%
30.3
%
1.3
%
32.6
%
31.0
%
1.6
%
Occupancy, advertising and other operating costs
20.9
%
20.5
%
0.4
%
21.4
%
21.4
%
—
%
85.5
%
79.7
%
5.8
%
86.9
%
81.3
%
5.6
%
The
increase in cost of sales, as a percent of sales, during the second quarter and the first six months of 2022 was primarily due to (1) higher commodity costs, (2) an increase in restaurant labor rates, (3) a decrease in customer count and (4) the impact of the Company’s investments to support the entry into the U.K. market. These impacts were partially offset by higher average check.
Franchise
Support and Other Costs
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Franchise support and other costs
$
9.9
$
8.9
$
1.0
$
21.7
$
16.6
$
5.1
The
increase in franchise support and other costs during the second quarter and the first six months of 2022 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees.
Franchise
Rental Expense
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Franchise rental expense
$
32.1
$
34.1
$
(2.0)
$
61.0
$
66.6
$
(5.6)
The
decrease in franchise rental expense during the second quarter and the first six months of 2022 was primarily due to (1) the impact of assigning certain leases to franchisees and (2) the impact of the Company’s acquisition of franchise-operated restaurants in Florida during the fourth quarter of 2021.
34
Advertising
Funds Expense
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Advertising funds expense
$
111.0
$
107.9
$
3.1
$
208.8
$
202.1
$
6.7
On
an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to exceed advertising funds revenue by approximately $21.0 million for 2022, which includes (1) the Company’s previously announced decision to fund up to $16.0 million of incremental advertising and (2) the amount by which advertising funds revenue exceeded advertising funds expense in prior years (excluding the Company’s funding of incremental advertising) of approximately $5.0 million. During the second quarter and the first six months of 2022, advertising funds expense increased due to an increase in franchise same-restaurant sales in the U.S. and Canada.
General
and Administrative
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Incentive compensation
$
6.7
$
15.1
$
(8.4)
$
12.9
$
22.5
$
(9.6)
Employee
compensation and benefits
30.6
28.3
2.3
63.6
57.0
6.6
Professional fees
14.4
11.4
3.0
27.2
21.9
5.3
Travel-related
expenses
3.0
1.5
1.5
5.2
2.0
3.2
Other, net
6.9
6.8
0.1
15.1
12.3
2.8
$
61.6
$
63.1
$
(1.5)
$
124.0
$
115.7
$
8.3
The
decrease in general and administrative expenses during the second quarter of 2022 was primarily due to a decrease in incentive compensation accruals, reflecting higher operating performance as compared to plan in the first six months of 2021 compared to the first six months of 2022. This decrease was partially offset by (1) an increase in employee compensation and related benefits, reflecting investments in resources to support the Company’s development and digital organizations, (2) higher professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning (“ERP”) implementation and (3) an increase in travel-related expenses.
The increase in general and administrative expenses
during the first six months of 2022 was primarily due to (1) an increase in employee compensation and related benefits, reflecting investments in resources to support the Company’s development and digital organizations, (2) higher professional fees, primarily as a result of costs associated with the Company’s ERP implementation and (3) an increase in travel-related expenses. These increases were partially offset by a decrease in incentive compensation accruals, reflecting higher operating performance as compared to plan in the first six months of 2021 compared to the first six months of 2022.
Depreciation
and Amortization
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Restaurants
$
21.3
$
18.7
$
2.6
$
43.1
$
38.1
$
5.0
Technology
support, corporate and other
12.1
12.1
—
23.6
24.2
(0.6)
$
33.4
$
30.8
$
2.6
$
66.7
$
62.3
$
4.4
The
increase in depreciation and amortization during the second quarter and the first six months of 2022 was primarily due to depreciation and amortization on assets acquired from a franchisee in Florida during the fourth quarter of 2021.
System
Optimization Gains, Net
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
System optimization gains, net
$
(0.2)
$
(30.8)
$
30.6
$
(3.7)
$
(31.3)
$
27.6
System
optimization gains, net for the first six months of 2022 were primarily comprised of post-closing adjustments on previous sales of restaurants. System optimization gains, net for the second quarter and the first six months of 2021 were primarily comprised of a gain on the sale of 47 Company-operated restaurants in New York. See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.
35
Reorganization
and Realignment Costs
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
System optimization initiative
$
0.2
$
0.9
$
(0.7)
$
0.5
$
5.5
$
(5.0)
Other
reorganization and realignment plans
—
1.2
(1.2)
0.1
1.5
(1.4)
$
0.2
$
2.1
$
(1.9)
$
0.6
$
7.0
$
(6.4)
As
part of the Company’s system optimization initiative, the Company expects to continue to optimize the Wendy’s system through strategic restaurant acquisitions and dispositions, as well as by facilitating Franchise Flips. During the six months ended July 3, 2022, the Company recognized costs associated with its system optimization initiative totaling $0.5 million, which were primarily comprised of professional fees and other costs associated with the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021. During the six months ended July 4,
2021, the Company recognized costs totaling $5.5 million, which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the bankruptcy sale process of NPC Quality Burgers, Inc. (“NPC”). The Company expects to recognize a gain of approximately $0.7 million, primarily related to the write-off of certain NPC-related lease liabilities upon final termination of the leases. See Note 5 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the NPC bankruptcy sale process.
Costs incurred under the Company’s other reorganization and
realignment plans were not material during the three and six months ended months ended July 3, 2022 and July 4, 2021. The Company does not expect to incur any material additional costs under these plans.
Impairment
of Long-Lived Assets
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Impairment of long-lived assets
$
1.9
$
0.6
$
1.3
$
2.5
$
1.3
$
1.2
The
change in impairment charges during the second quarter and the first six months of 2022 was primarily driven by higher impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants.
Other
Operating Income, Net
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Gains on sales-type leases
$
(1.7)
$
(1.6)
$
(0.1)
$
(2.2)
$
(3.5)
$
1.3
Lease
buyout
(1.3)
(0.8)
(0.5)
(2.1)
(0.9)
(1.2)
Equity in earnings in joint ventures, net
(2.5)
(1.7)
(0.8)
(4.3)
(3.3)
(1.0)
Other,
net
(0.2)
(0.2)
—
(0.1)
—
(0.1)
$
(5.7)
$
(4.3)
$
(1.4)
$
(8.7)
$
(7.7)
$
(1.0)
The
increase in other operating income, net during the second quarter and the first six months of 2022 was primarily due to (1) lease buyout activity and (2) an increase in the equity in earnings from our TimWen joint venture. During the first six months of 2022, these increases were partially offset by lower gains on new and modified sales-type leases.
Interest
Expense, Net
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Interest expense, net
$
32.1
$
28.2
$
3.9
$
58.5
$
57.0
$
1.5
The
increase in interest expense, net during the second quarter and the first six months of 2022 was primarily due to the impact of completing a debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022. This increase was partially offset by the impact of completing the refinancing of a portion of the Company’s securitized financing facility in the second quarter of 2021.
36
Loss
on Early Extinguishment of Debt
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Loss on early extinguishment of debt
$
—
$
17.9
$
(17.9)
$
—
$
17.9
$
(17.9)
During
the second quarter of 2021, 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 the outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes with the proceeds from the issuance of its Series 2021-1 Class A-2 Notes. The loss on the early extinguishment of debt of $17.9 million was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs of $8.3 million.
Investment
Income, Net
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Investment income, net
$
—
$
—
$
—
$
2.1
$
—
$
2.1
During
the first six months of 2022, the Company recognized a gain of $2.1 million on an investment in equity securities as a result of an observable price change.
Other
Income, Net
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Other income, net
$
1.2
$
0.2
$
1.0
$
1.4
$
0.3
$
1.1
The
change in other income, net during the second quarter and the first six months of 2022 was primarily due to interest income earned on our cash equivalents, which increased as a result of cash received from our debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.
Provision
for Income Taxes
Second Quarter
Six Months
2022
2021
Change
2022
2021
Change
Income before income taxes
$
65.4
$
80.8
$
(15.4)
$
116.2
$
135.3
$
(19.1)
Provision
for income taxes
(17.2)
(15.1)
(2.1)
(30.6)
(28.2)
(2.4)
Effective tax rate on income
26.4
%
18.6
%
7.8
%
26.4
%
20.8
%
5.6
%
Our
effective tax rates for the second quarter and the first six months of 2022 and 2021 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The increase in the effective tax rate for the second quarter and the first six months of 2022 was primarily due to a decrease in the benefit from share-based compensation.
Segment Information
See Note 18 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
2022
2021
Change
2022
2021
Change
Sales
$
227.9
$
193.3
$
34.6
$
434.4
$
382.4
$
52.0
Franchise
royalty revenue
108.9
106.0
2.9
206.8
202.8
4.0
Franchise fees
16.0
14.3
1.7
31.4
26.2
5.2
Advertising
fund revenue
97.6
96.2
1.4
185.2
180.4
4.8
Total revenues
$
450.4
$
409.8
$
40.6
$
857.8
$
791.8
$
66.0
Segment
profit
$
127.0
$
126.7
$
0.3
$
231.8
$
238.7
$
(6.9)
37
The
increase in Wendy’s U.S. revenues during the second quarter and the first six months of 2022 was primarily due to (1) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021 and (2) an increase in same-restaurant sales. The increase in Wendy’s U.S. revenues during the first six months of 2022 was also driven by higher fees for providing information technology services to franchisees, reflecting the one-month waiver of technology fees during the first quarter of 2021. Same-restaurant sales increased during the second quarter and the first six months of 2022 primarily due to higher average check, partially offset by a decrease in customer count. These increases were partially offset by the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.
The
decrease in Wendy’s U.S. segment profit during the first six months of 2022 was primarily due to 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” (excluding the impact of the U.K. market). These impacts were partially offset by higher revenues.
Wendy’s International
Second
Quarter
Six Months
2022
2021
Change
2022
2021
Change
Sales
$
3.0
$
0.2
$
2.8
$
5.7
$
0.2
$
5.5
Franchise
royalty revenue
16.1
13.6
2.5
30.0
25.1
4.9
Franchise fees
1.2
1.4
(0.2)
2.4
3.0
(0.6)
Advertising
fund revenue
7.2
6.1
1.1
12.3
11.3
1.0
Total revenues
$
27.5
$
21.3
$
6.2
$
50.4
$
39.6
$
10.8
Segment
profit
$
9.4
$
6.5
$
2.9
$
14.8
$
14.2
$
0.6
The increase in Wendy’s International revenues during the
second quarter and the first six months of 2022 was primarily due to (1) the opening of Company-operated restaurants in the U.K. beginning in the second quarter of 2021 and (2) an increase in same-restaurant sales. Same-restaurant sales increased during the second quarter and first six months of 2022 due to (1) an increase in customer count and (2) higher average check.
The increase in Wendy’s International segment profit during the second quarter and the first six months of 2022 was primarily due to higher revenues. This increase was partially offset by (1) the Company’s investments to support the entry into the U.K. market and (2) higher advertising fund expense, reflecting the Company’s funding of incremental advertising
to support the launch of breakfast in Canada on May 2, 2022.
Global Real Estate & Development
Second
Quarter
Six Months
2022
2021
Change
2022
2021
Change
Franchise fees
$
1.3
$
1.3
$
—
$
1.8
$
2.5
$
(0.7)
Franchise
rental income
58.6
60.9
(2.3)
116.5
119.7
(3.2)
Total revenues
$
59.9
$
62.2
$
(2.3)
$
118.3
$
122.2
$
(3.9)
Segment
profit
$
27.3
$
26.6
$
0.7
$
54.9
$
52.8
$
2.1
The decrease in Global Real Estate & Development revenues
during the second quarter and the first six months of 2022 was primarily due to lower franchise rental income. See “Franchise Rental Income” above for further information.
The increase in Global Real Estate & Development segment profit during the second quarter and the first six months of 2022 was primarily due to a decrease in franchise rental expense. See “Franchise Rental Expense” above for further information. This change was partially offset by lower revenues.
38
Liquidity and Capital Resources
Cash
Flows
Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized financing facility. Our principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to stockholders.
Our anticipated cash requirements for the remainder of 2022, exclusive of operating cash flow requirements, consist principally of:
•capital expenditures of approximately $60.0 million to $70.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $90.0 million to $100.0 million;
•cash
dividends aggregating approximately $53.2 million as discussed below in “Dividends;” and
•potential stock repurchases of up to $198.1 million, as discussed below in “Stock Repurchases.”
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 2022 and 2021:
Six Months
2022
2021
Change
Net
cash provided by (used in):
Operating activities
$
98.2
$
158.8
$
(60.6)
Investing activities
(28.8)
32.0
(60.8)
Financing
activities
362.7
28.9
333.8
Effect of exchange rate changes on cash
(2.4)
2.2
(4.6)
Net increase in cash, cash equivalents and restricted cash
$
429.7
$
221.9
$
207.8
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 $98.2 million and $158.8 million in the first six months of 2022 and 2021, respectively. The change was primarily due to (1) an increase in payments for incentive compensation for the 2021 fiscal year paid in 2022, (2) the timing of receipt of franchisee rental payments and (3) cash paid for cloud computing arrangements, primarily related to the Company’s ERP implementation. These changes were partially offset by the timing of payments for marketing expenses of the national advertising funds.
Investing
Activities
Cash (used in) provided by investing activities was $(28.8) million and $32.0 million in the first six months of 2022 and 2021, respectively. The change was primarily due to (1) a decrease in proceeds from dispositions of $49.5 million, reflecting the sale of 47 Company-operated restaurants in New York during the second quarter of 2021, (2) an increase in capital expenditures of $6.9 million and (3) the net settlement of deposits associated with the Company’s consortium bid to acquire NPC’s Wendy’s restaurants of $4.9 million in the first quarter of 2021.
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Financing
Activities
Cash provided by financing activities was $362.7 million and $28.9 million in the first six months of 2022 and 2021, respectively. The change was primarily due to (1) a net increase in cash provided by long-term debt activities of $339.7 million, reflecting the respective impacts of the completion of the Company’s debt financing transaction during the first quarter of 2022 and the debt refinancing transaction during the second quarter of 2021, and (2) a decrease in the repurchases of common stock of $31.7 million. These changes were partially offset by an (1) a decrease in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $22.7 million and (2) an increase in dividends of $11.3 million.
Long-Term
Debt, Including Current Portion
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. On April 1, 2022, the Master Issuer completed a financing transaction with respect to this facility under which the Master Issuer issued the Series 2022-1 Class A-2 Notes with initial principal amounts totaling $500.0 million. The net proceeds from the sale of the Series 2022-1 Class A-2 Notes will be used for general corporate purposes, which may include funding for growth initiatives, return of capital to shareholders and debt retirement.
Under the
securitized financing facility, the Master Issuer has issued outstanding Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Class A-1 Notes”), which allow for the drawing of up to $300.0 million on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Class A-1 Notes during the six months ended July 3, 2022.
Except as described above, there were no material changes to the terms of any debt obligations since January 2, 2022. The Company was in compliance with its debt covenants as of July 3, 2022. See Note 7 to the Condensed Consolidated Financial Statements contained
in Item 1 herein for further information related to our long-term debt obligations.
Dividends
On March 15, 2022 and June 15, 2022, the Company paid quarterly cash dividends per share of $.125, aggregating $53.5 million. On August 10, 2022, the Company announced a dividend of $.125 per share to be paid on September 15, 2022 to stockholders of record as of September 1, 2022. If the
Company pays regular quarterly cash dividends for the remainder of 2022 at the same rate as declared in the third quarter of 2022, the Company’s total cash requirement for dividends for the remainder of 2022 will be approximately $53.2 million based on the number of shares of its common stock outstanding at August 3, 2022. 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
2022, our Board of Directors authorized a repurchase program for up to $100.0 million of our common stock through February 28, 2023, when and if market conditions warrant and to the extent legally permissible (the “February 2022 Authorization”). On April 1, 2022, the Company’s Board of Directors approved an increase of $150.0 million to the February 2022 Authorization, resulting in an aggregate authorization of $250.0 million that continues to expire on February 28, 2023. During the six months ended July 3, 2022, the Company repurchased 2.8 million shares under the February 2022 Authorization with an
aggregate purchase price of $51.9 million, excluding commissions. As of July 3, 2022, the Company had $198.1 million of availability remaining under the February 2022 authorization. Subsequent to July 3, 2022 through August 9, 2022, no shares were repurchased under the February 2022 Authorization.
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 (the “February 2020 Authorization”). In July 2020, the
Company’s Board of Directors approved an extension of the February 2020 Authorization by one year, through February 28, 2022. In addition, in May 2021, August 2021 and November 2021, the Board of Directors approved increases of $50.0 million, $70.0 million and $80.0 million, respectively, to the February 2020 Authorization, resulting in an aggregate authorization of $300.0 million that continued to expire on February 28, 2022. In November 2021, the Company entered into an accelerated share repurchase agreement (the “2021 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the February 2020 Authorization. Under the 2021 ASR Agreement, the
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Company
paid the financial institution an initial purchase price of $125.0 million in cash and received an initial delivery of 4.9 million shares of common stock, representing an estimated 85% of the total shares expected to be delivered under the 2021 ASR Agreement. In February 2022, the Company completed the 2021 ASR Agreement and received an additional 0.7 million shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2021 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2021 ASR Agreement, less an agreed upon discount. In total, 5.6 million shares were delivered under the 2021 ASR Agreement at an average purchase price of $22.22 per share. With the completion of the 2021
ASR Agreement in February 2022 as described above, the Company completed the February 2020 Authorization.
Cloud Computing Arrangements
In addition to the anticipated cash requirements for capital expenditures noted above, the Company expects to spend approximately $30.0 million during 2022 on cloud computing arrangements (“CCA”), primarily related to the Company’s ERP implementation. The Company’s cash expenditures related to CCA amounted to $13.2 million during the six months
ended July 3, 2022.
General Inflation, Commodities and Changing Prices
Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the six months ended July 3, 2022, and we expect this to continue throughout the remainder of 2022. We attempt to manage any inflationary costs and commodity price increases through selective menu price increases and changes in product mix. Delays in implementing such menu price increases, competitive pressures, consumer spending levels and other factors may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken,
pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases.
Seasonality
Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Item
3. Quantitative and Qualitative Disclosures about Market Risk.
This “Quantitative and Qualitative Disclosures about Market Risk” should be read in conjunction with “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our annual report on Form 10-K for the fiscal year ended January 2, 2022 (the “Form 10-K”).
As of July 3, 2022, there were no material changes from the information contained in the Form 10-K, except as described below.
Interest Rate Risk
Following the
Company’s debt financing transaction that was completed on April 1, 2022, our long-term debt, including the current portion, aggregated $2,910.4 million as of July 3, 2022 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure reduces its exposure to interest rate increases that could adversely affect its earnings and cash flows. The Company is exposed to interest rate increases under its Series 2021-1 Class A-1 Notes and other lines of credit; however, the Company had no outstanding borrowings under the 2021-1 Class A-1 Notes
and other lines of credit as of July 3, 2022. See “Liquidity and Capital Resources” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s debt financing transaction.
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Item 4. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of July 3, 2022. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that as of July 3, 2022, the disclosure controls and procedures of the Company were effective at a reasonable assurance
level in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the internal control over financial reporting of the
Company during the second quarter of 2022 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, the management of the Company, including its Chief
Executive Officer and Chief Financial Officer, does not expect that the control system can prevent or detect all error or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.
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PART II. OTHER INFORMATION
Special Note Regarding Forward-Looking Statements and Projections
This
Quarterly Report on Form 10-Q and oral statements made from time to time by representatives of the Company may contain or incorporate by reference certain statements that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Generally, forward-looking statements include the words “may,”“believes,”“plans,”“expects,”“anticipates,”“intends,”“estimate,”“goal,”“upcoming,”“outlook,”“guidance” or the negation thereof, or similar expressions. In addition, all statements that address future operating, financial or business performance, strategies or initiatives, future efficiencies or savings, anticipated costs or charges, future capitalization, anticipated impacts of recent
or pending investments or transactions and statements expressing general views about future results or brand health are forward-looking statements within the meaning of the Reform Act. Forward-looking statements are based on our expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors. For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed or implied by our forward-looking statements. Many important factors could affect our future results and cause those results to differ materially from those expressed in or implied by our forward-looking statements. Such factors include, but are not limited to, the following:
•the
disruption to our business from the novel coronavirus (COVID-19) pandemic and the impact of the pandemic on our results of operations, financial condition and prospects;
•the impact of competition or poor customer experiences at Wendy’s restaurants;
•adverse economic conditions or disruptions, including in regions with a high concentration of Wendy’s restaurants;
•changes in discretionary consumer spending and consumer tastes and preferences;
•impacts to our corporate reputation or the value and perception of our brand;
•the
effectiveness of our marketing and advertising programs and new product development;
•our ability to manage the accelerated impact of social media;
•our ability to protect our intellectual property;
•food safety events or health concerns involving our products;
•our ability to achieve our growth strategy through new restaurant development and our Image Activation program;
•our ability to effectively manage the acquisition and disposition of
restaurants or successfully implement other
strategic initiatives;
•risks associated with leasing and owning significant amounts of real estate, including environmental matters;
•our ability to achieve and maintain market share in the breakfast daypart;
•risks associated with our international operations, including our ability to execute our international growth strategy;
•changes in commodity and other operating costs;
•shortages
or interruptions in the supply or distribution of our products and other risks associated with our independent
supply chain purchasing co-op;
•the impact of increased labor costs or labor shortages;
•the continued succession and retention of key personnel and the effectiveness of our leadership structure;
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•risks associated with our digital commerce strategy, platforms and technologies, including our ability to adapt to changes in industry trends
and consumer preferences;
•our dependence on computer systems and information technology, including risks associated with the failure, misuse, interruption or breach of our systems or technology or other cyber incidents or deficiencies;
•risks associated with our securitized financing facility and other debt agreements, including compliance with operational and financial covenants, restrictions on our ability to raise additional capital, the impact of our overall debt levels and our ability to generate sufficient cash flow to meet our debt service obligations and operate our business;
•risks associated with our capital allocation policy, including the
amount and timing of equity and debt repurchases and
dividend payments;
•risks associated with complaints and litigation, compliance with legal and regulatory requirements and an increased focus on environmental, social and governance issues;
•risks associated with the availability and cost of insurance, changes in accounting standards, the recognition of impairment or other charges, the impact of reorganization and realignment initiatives, changes in tax rates or tax laws and fluctuations in foreign currency exchange rates;
•conditions beyond our control, such as adverse weather conditions, natural disasters,
hostilities, social unrest, health epidemics or pandemics or other catastrophic events;
•Trian Fund Management, L.P. and certain of its affiliates filed a Schedule 13D/A with the Securities and Exchange Commission on May 24, 2022 indicating, among other things, that they intend to explore and evaluate the possibility of participating, alone or with third parties, in a potential transaction with respect to us to enhance stockholder value; there can be no assurance that (i) any such potential transaction will occur or result in additional value for our stockholders or (ii) that the exploration of a potential transaction will not have an adverse impact on our business; and
•other risks and uncertainties affecting
us and our subsidiaries referred to in our Annual Report on Form 10-K filed with the SEC on March 1, 2022 (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the SEC.
In addition to the factors described above, there are risks associated with our predominantly franchised business model that could impact our results, performance and achievements. Such risks include our ability to identify, attract and retain experienced and qualified franchisees, our ability to effectively manage the transfer of restaurants between and among franchisees, the business and financial health of franchisees, the ability
of franchisees to meet their royalty, advertising, development, reimaging and other commitments, participation by franchisees in brand strategies and the fact that franchisees are independent third parties that own, operate and are responsible for overseeing the operations of their restaurants. Our predominantly franchised business model may also impact the ability of the Wendy’s system to effectively respond and adapt to market changes. Many of these risks have been or in the future may be heightened due to the business disruption and impact from the COVID-19 pandemic.
All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. New risks and uncertainties arise from time to time, and factors that we currently deem immaterial may become
material, and it is impossible for us to predict these events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q as a result of new information, future events or developments, except as required by federal securities laws, although we may do so from time to time. We do not endorse any projections regarding future performance that may be made by third parties.
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Item 1. Legal Proceedings.
The
Company is involved in litigation and claims incidental to our business. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. The Company believes it has adequate accruals for all of its legal and environmental matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims 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.
Item 1A. Risk Factors.
In addition to the information contained in this report, you should carefully consider the risk factors disclosed in our Form 10-K, which could materially affect our business, financial condition or future results. Except as described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to repurchases of shares of our common stock by us and our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the second quarter of 2022:
Issuer Repurchases of Equity Securities
Period
Total
Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (2)
(1)Includes
44,160 shares of common stock reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective award. The shares were valued at the fair market value of the Company’s common stock on the vesting or exercise date of such awards, as set forth in the applicable plan document.
(2)In February 2022, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock through February 28, 2023, when and if market conditions warrant and to the extent legally permissible (the “February 2022 Authorization”). On April
1, 2022, our Board of Directors approved an increase of $150.0 million to the February 2022 Authorization, resulting in an aggregate authorization of $250.0 million that continues to expire on February 28, 2023.
Subsequent to July 3, 2022 through August 9, 2022, no shares were repurchased under the February 2022 Authorization.
The following financial information from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2022 formatted in Inline eXtensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements
of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
104
The cover page from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2022, formatted in Inline XBRL and contained in Exhibit 101.
Identifies
a management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
