10-Q 1 twc10qq2-15.htm 10-Q TWC 10Q Q2-15

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(X)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2015

OR
( )
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from ______________ to _______________

Commission file number: 1-2207
THE WENDY’S COMPANY
(Exact name of registrants as specified in its charter)

Delaware
 
38-0471180
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Dave Thomas Blvd., Dublin, Ohio
 
43017
(Address of principal executive offices)
 
(Zip Code)

(614) 764-3100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

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

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

Large accelerated filer [x]      Accelerated filer [ ]       Non-accelerated filer [ ]      Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]

There were 290,282,990 shares of The Wendy’s Company common stock outstanding as of July 30, 2015.

 



THE WENDY’S COMPANY AND SUBSIDIARIES
INDEX TO FORM 10-Q
 
Page
 
 
 



2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
 
June 28,
2015
 
December 28,
2014
ASSETS
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
1,197,567

 
$
267,112

Accounts and notes receivable
70,515

 
68,211

Inventories
5,791

 
6,861

Prepaid expenses and other current assets
115,543

 
72,258

Deferred income tax benefit
81,720

 
73,661

Advertising funds restricted assets
82,783

 
65,308

Current assets of discontinued operations

 
8,691

Total current assets
1,553,919

 
562,102

Properties
1,254,489

 
1,241,170

Goodwill
795,737

 
822,562

Other intangible assets
1,359,485

 
1,351,307

Investments
70,715

 
74,054

Other assets
72,200

 
56,272

Noncurrent assets of discontinued operations

 
30,132

Total assets
$
5,106,545

 
$
4,137,599

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
17,595

 
$
53,202

Accounts payable
67,346

 
77,309

Accrued expenses and other current liabilities
130,176

 
125,880

Advertising funds restricted liabilities
82,783

 
65,308

Current liabilities of discontinued operations

 
18,525

Total current liabilities
297,900

 
340,224

Long-term debt
2,379,782

 
1,384,972

Deferred income taxes
473,450

 
493,843

Other liabilities
216,987

 
199,833

Noncurrent liabilities of discontinued operations

 
1,151

Total liabilities
3,368,119

 
2,420,023

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued
47,042

 
47,042

Additional paid-in capital
2,879,506

 
2,826,965

Accumulated deficit
(418,410
)
 
(445,917
)
Common stock held in treasury, at cost; 106,336 and 104,614
shares, respectively
(723,279
)
 
(679,220
)
Accumulated other comprehensive loss
(46,433
)
 
(31,294
)
Total stockholders’ equity
1,738,426

 
1,717,576

Total liabilities and stockholders’ equity
$
5,106,545

 
$
4,137,599


See accompanying notes to condensed consolidated financial statements.


3

THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)



 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Sales
$
385,048

 
$
407,651

 
$
742,617

 
$
825,722

Franchise revenues
104,486

 
98,428

 
198,686

 
188,807

 
489,534

 
506,079

 
941,303

 
1,014,529

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
315,122

 
335,141

 
620,233

 
698,506

General and administrative
60,771

 
66,433

 
120,469

 
136,044

Depreciation and amortization
39,335

 
37,998

 
74,880

 
78,578

System optimization gains, net
(15,654
)
 
(1,418
)
 
(14,849
)
 
(74,395
)
Reorganization and realignment costs
6,279

 
1,276

 
10,892

 
15,987

Impairment of long-lived assets
10,018

 
77

 
11,955

 
2,606

Other operating expense, net
9,355

 
5,403

 
15,504

 
8,760

 
425,226

 
444,910

 
839,084

 
866,086

Operating profit
64,308

 
61,169

 
102,219

 
148,443

Interest expense
(17,201
)
 
(13,083
)
 
(29,944
)
 
(26,025
)
Loss on early extinguishment of debt
(7,295
)
 

 
(7,295
)
 

Other income, net
272

 
856

 
511

 
1,377

Income from continuing operations before income taxes
40,084

 
48,942

 
65,491

 
123,795

Provision for income taxes
(15,259
)
 
(21,615
)
 
(22,516
)
 
(51,459
)
Income from continuing operations
24,825

 
27,327

 
42,975

 
72,336

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations, net of income taxes
231

 
1,680

 
9,588

 
2,974

Gain on disposal of discontinued operations, net of income taxes
15,139

 

 
15,139

 

Net income from discontinued operations
15,370

 
1,680

 
24,727

 
2,974

Net income
$
40,195

 
$
29,007

 
$
67,702


$
75,310

 
 
 
 
 
 
 
 
Basic net income per share:
 
 
 
 
 
 
 
Continuing operations
$
.07

 
$
.07

 
$
.12

 
$
.19

Discontinued operations
.04

 

 
.07

 
.01

Net income
$
.11

 
$
.08

 
$
.19

 
$
.20

 
 
 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
 
Continuing operations
$
.07

 
$
.07

 
$
.12

 
$
.19

Discontinued operations
.04

 

 
.07

 
.01

Net income
$
.11

 
$
.08

 
$
.18

 
$
.20

 
 
 
 
 
 
 
 
Dividends per share
$
.055

 
$
.05

 
$
.11

 
$
.10


See accompanying notes to condensed consolidated financial statements.

4

THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)



 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
(Unaudited)
 
 
 
 
 
 
 
 
Net income
$
40,195

 
$
29,007

 
$
67,702

 
$
75,310

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Foreign currency translation adjustment
4,901

 
8,195

 
(12,494
)
 
975

Change in unrecognized pension loss, net of income tax benefit (provision) of $124 and $(213), respectively

 

 
(203
)
 
338

Change in unrealized loss on cash flow hedges, net of income tax (provision) benefit of $(12) and $1,234 for the three months and $1,490 and $1,521 for the six months ended June 28, 2015 and June 29, 2014, respectively
24

 
(1,960
)
 
(2,442
)
 
(2,418
)
 Other comprehensive income (loss), net
4,925

 
6,235

 
(15,139
)
 
(1,105
)
 Comprehensive income
$
45,120

 
$
35,242

 
$
52,563

 
$
74,205


See accompanying notes to condensed consolidated financial statements.

5

THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

 
 
Six Months Ended
 
 
June 28,
2015
 
June 29,
2014
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
67,702

 
$
75,310

Adjustments to reconcile net income to net cash provided by
     operating activities:
 
 
 
 
Depreciation and amortization
 
78,799

 
81,991

Share-based compensation
 
12,242

 
15,158

Impairment of long-lived assets
 
11,955

 
2,606

Deferred income tax
 
19,730

 
47,855

Excess tax benefits from share-based compensation
 
(46,374
)
 
(17,667
)
Non-cash rent expense, net
 
2,607

 
2,528

Net receipt of deferred vendor incentives
 
8,396

 
13,882

System optimization gains, net
 
(14,881
)
 
(74,432
)
Gain on disposal of Bakery
 
(27,338
)
 

Distributions received from TimWen joint venture
 
5,825

 
6,443

Equity in earnings in joint venture, net
 
(4,545
)
 
(4,872
)
Payments for termination of cash flow hedges
 
(7,337
)
 

Loss on early extinguishment of debt
 
7,295

 

Accretion of long-term debt
 
600

 
592

Amortization of deferred financing costs
 
1,589

 
1,193

Other, net
 
1,060

 
(7,831
)
Changes in operating assets and liabilities:
 
 
 
 
Restricted cash
 
(27,190
)
 

Accounts and notes receivable
 
(14,876
)
 
(9,650
)
Inventories
 
168

 
1,200

Prepaid expenses and other current assets
 
(3,869
)
 
(7,197
)
Accounts payable
 
10,664

 
(3,699
)
Accrued expenses and other current liabilities
 
(29,108
)
 
(42,401
)
Net cash provided by operating activities
 
53,114

 
81,009

Cash flows from investing activities:
 
 

 
 

Capital expenditures
 
(130,548
)
 
(114,521
)
Acquisitions
 
(1,232
)
 
(2,335
)
Dispositions
 
38,697

 
116,204

Proceeds from sale of Bakery
 
78,408

 

Payments for cost method investments
 
(2,000
)
 
(400
)
Change in restricted cash
 
484

 
1,750

Other, net
 
919

 
1,441

Net cash (used in) provided by investing activities
 
(15,272
)
 
2,139

Cash flows from financing activities:
 
 

 
 

Proceeds from long-term debt
 
2,275,000

 

Repayments of long-term debt
 
(1,302,055
)
 
(19,486
)
Deferred financing costs
 
(39,374
)
 

Repurchases of common stock
 
(63,206
)
 
(277,275
)
Dividends
 
(40,189
)
 
(36,648
)
Proceeds from stock option exercises
 
19,688

 
23,800

Excess tax benefits from share-based compensation
 
46,374

 
17,667

Net cash provided by (used in) financing activities
 
896,238

 
(291,942
)
Net cash provided by (used in) operations before effect of exchange
     rate changes on cash
 
934,080

 
(208,794
)
Effect of exchange rate changes on cash
 
(3,789
)
 
302

Net increase (decrease) in cash and cash equivalents
 
930,291

 
(208,492
)
Cash and cash equivalents at beginning of period
 
267,276

 
580,152

Cash and cash equivalents at end of period
 
$
1,197,567

 
$
371,660


6

THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED
(In Thousands)


 
 
Six Months Ended
 
 
June 28,
2015
 
June 29,
2014
 
 
(Unaudited)
Supplemental cash flow information:
 
 
 
 
Cash paid for:
 
 

 
 

Interest
 
$
27,452

 
$
26,225

Income taxes, net of refunds
 
11,845

 
6,699

 
 
 
 
 
Supplemental non-cash investing and financing activities:
 
 
 
 
Capital expenditures included in accounts payable
 
$
30,927

 
$
39,273

Capitalized lease obligations
 
20,210

 
9,113

Notes receivable
 
2,023

 

Accrued debt issuance costs
 
3,720

 


See accompanying notes to condensed consolidated financial statements.



7

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)


(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments necessary to present fairly our financial position as of June 28, 2015 and the results of our operations for the three and six months ended June 28, 2015 and June 29, 2014 and cash flows for the six months ended June 28, 2015 and June 29, 2014. The results of operations for the three and six months ended June 28, 2015 are not necessarily indicative of the results to be expected for the full 2015 fiscal year. These Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 (the “Form 10-K”).

The principal subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s® restaurants in North America (defined as the United States of America (“U.S.”) and Canada) comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material.

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. All three month and six month periods presented herein contain 13 weeks and 26 weeks, respectively. Our current 2015 fiscal year, ending on January 3, 2016, will contain 53 weeks and, accordingly, our fourth quarter of 2015 will contain 14 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.

On May 31, 2015, Wendy’s completed the sale of its company-owned bakery, The New Bakery Company, LLC (the “Bakery”), a 100% owned subsidiary of Wendy’s. As a result of the sale of the Bakery, as further discussed in Note 2, the Bakery’s results of operations for all periods presented and the gain on disposal have been included in “Net income from discontinued operations” in our condensed consolidated statements of operations. Additionally, the Bakery’s assets and liabilities have been presented as discontinued operations in our condensed consolidated balance sheet as of December 28, 2014.

Certain reclassifications have been made to the prior year presentation to conform to the current year presentation. During the second quarter of 2015, the Company early adopted an amendment requiring debt issuance costs to be presented in the balance sheet as a direct reduction of the related debt liability rather than as an asset. The adoption of this guidance resulted in the reclassification of debt issuance costs of $8,243 from “Other assets” to “Long-term debt” in our condensed consolidated balance sheet as of December 28, 2014. Refer to Note 7 and Note 16 for further information.

Prior to fiscal 2015, the Company reported its system optimization initiative as a discrete event and separately included the related gain or loss on sales of restaurants, impairment losses and other associated costs, along with other restructuring initiatives, in “Facilities action charges (income), net.” In February 2015, the Company announced plans to reduce its ongoing company-owned restaurant ownership to approximately 5% of the total system and further emphasized that restaurant dispositions and acquisitions are a continuous and integrated part of the overall strategy to optimize its restaurant portfolio. As a result, commencing with the first quarter of 2015, all gains and losses on dispositions are included on a separate line in our condensed consolidated statements of operations, “System optimization gains, net” and impairment losses recorded in connection with the sale or anticipated sale of restaurants (“System Optimization Remeasurement”) are reclassified to “Impairment of long-lived assets.” In addition, the Company retitled the line, “Facilities action charges (income), net” to “Reorganization and realignment costs” in our condensed consolidated statements of operations to better describe the current and historical initiatives included given the reclassifications described above. The Company believes the new presentation will aid users in understanding its results of operations. The prior periods reflect reclassifications to conform to the current year presentation. All amounts being reclassified in our statements of operations were separately disclosed in the notes to our consolidated financial statements included in our Form 10-Q for the fiscal quarter ended June 29, 2014 and Form 10-K. Such reclassifications had no impact on operating profit, net income or net income per share.


8

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

The following table illustrates the reclassifications made to the condensed consolidated statements of operations for the three and six months ended June 29, 2014:
 
Three Months Ended
 
 
 
Reclassifications
 
 
 
As Previously Reported (b)
 
Gain on dispositions, net (c)
 
System Optimization Remeasurement (d)
 
As Currently Reported
System optimization gains, net
$

 
$
(1,418
)
 
$

 
$
(1,418
)
Reorganization and realignment costs (a)
883

 
470

 
(77
)
 
1,276

Impairment of long-lived assets

 

 
77

 
77

Other operating (income) expense, net
4,455

 
948

 

 
5,403

 
$
5,338

 
$

 
$

 
$
5,338

 
Six Months Ended
 
 
 
Reclassifications
 
 
 
As Previously Reported (b)
 
Gain on dispositions, net (c)
 
System Optimization Remeasurement (d)
 
As Currently Reported
System optimization gains, net
$

 
$
(74,395
)
 
$

 
$
(74,395
)
Reorganization and realignment costs (a)
(43,150
)
 
61,411

 
(2,274
)
 
15,987

Impairment of long-lived assets
332

 

 
2,274

 
2,606

Other operating (income) expense, net
(4,224
)
 
12,984

 

 
8,760

 
$
(47,042
)
 
$

 
$

 
$
(47,042
)
_______________

(a) Previously titled “Facilities action charges (income), net.”

(b)
“As Previously Reported,” reflects adjustments to reclassify the Bakery’s gain on disposal of assets of $22 and $37 for the three and six months ended June 29, 2014, respectively, from “Other operating (income) expense, net” to “Income from discontinued operations.”

(c) Reclassified the gain on sales of restaurants, net, previously included in “Facilities action charges (income), net” and the gain on disposal of assets, net, which included sales of restaurants and other assets, and was previously reported in “Other operating (income) expense, net” to a separate line in our condensed consolidated statements of operations, “System optimization gains, net.”

(d)
Reclassified impairment losses recorded in connection with the sale or anticipated sale of restaurants (“System Optimization Remeasurement”), previously included in “Facilities action charges (income), net” to “Impairment of long-lived assets.”



9

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

(2) Discontinued Operations

On May 31, 2015, Wendy’s completed the sale of 100% of its membership interest in The New Bakery Company, LLC (the “Bakery”), its 100% owned subsidiary, to East Balt US, LLC (the “Buyer”) for $78,500 in cash (subject to customary purchase price adjustments). The Company also assigned certain capital leases for transportation equipment to the Buyer but retained the related obligation. Pursuant to the sale agreement, the Company is obligated to continue to provide health insurance benefits to the Bakery’s employees at the Company’s expense through December 31, 2015. The Company recorded a pre-tax gain on the disposal of the Bakery of $27,338 in the second quarter of 2015 which included transaction closing costs and a reduction of goodwill. The Company recognized income tax expense associated with the gain on disposal of $12,199 during the second quarter of 2015 which included the impact of the disposal of non-deductible goodwill.

In conjunction with the Bakery sale, Wendy’s entered into a transition services agreement with the Buyer, pursuant to which Wendy’s will provide certain continuing corporate and shared services to the Buyer through March 31, 2016 for no additional consideration. A purchasing cooperative, Quality Supply Chain Co-op, Inc. (“QSCC”), established by Wendy’s and its franchisees, agreed to continue to source sandwich buns from the Bakery, for a specified time period in connection with the sale of the Bakery. As a result, Wendy’s paid the Buyer $996 for the purchase of sandwich buns during the period from June 1, 2015 through the end of the second quarter of 2015, which has been recorded to “Cost of sales.”

Information related to the Bakery has been reflected in the accompanying condensed consolidated financial statements as follows:

Balance sheets - As a result of our sale of the Bakery on May 31, 2015, there are no remaining Bakery assets and liabilities. The Bakery’s assets and liabilities as of December 28, 2014 have been presented as discontinued operations.

Statements of operations - The Bakery’s results of operations for the period from December 29, 2014 through May 31, 2015 and the three and six months ended June 29, 2014 have been presented as discontinued operations. In addition, the gain on disposal of the Bakery has been included in “Net income from discontinued operations” for the three and six months ended June 28, 2015.

Statements of cash flows - The Bakery’s cash flows prior to its sale (for the period from December 29, 2014 through May 31, 2015 and for the six months ended June 29, 2014) have been included in, and not separately reported from, our consolidated cash flows. The consolidated statement of cash flows for the six months ended June 28, 2015 also includes the effects of the sale of the Bakery.

10

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)


The following table presents the Bakery’s results of operations and the gain on disposal which have been included in discontinued operations:
 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Revenues (a)
$
11,408

 
$
17,348

 
$
25,885

 
$
32,094

Cost of sales (b)
(9,175
)
 
(12,639
)
 
(7,336
)
 
(23,464
)
 
2,233

 
4,709

 
18,549

 
8,630

General and administrative
(483
)
 
(549
)
 
(1,097
)
 
(1,304
)
Depreciation and amortization (c)
(962
)
 
(1,497
)
 
(2,297
)
 
(2,938
)
Other expense, net (d)
(12
)
 
(24
)
 
(34
)
 
(59
)
Income from discontinued operations before income taxes
776

 
2,639

 
15,121

 
4,329

Provision for income taxes
(545
)
 
(959
)
 
(5,533
)
 
(1,355
)
Income from discontinued operations, net of income taxes
231

 
1,680

 
9,588

 
2,974

Gain on disposal of discontinued operations before income taxes
27,338

 

 
27,338

 

Provision for income taxes on gain on disposal
(12,199
)
 

 
(12,199
)
 

Gain on disposal of discontinued operations, net of income taxes
15,139

 

 
15,139

 

Net income from discontinued operations
$
15,370

 
$
1,680

 
$
24,727

 
$
2,974

_______________

(a)
Includes sales of sandwich buns and related products previously reported in “Sales” as well as rental income.

(b)
The three and six months ended June 28, 2015 include employee separation related costs of $791 as a result of the sale of the Bakery. In addition, the six months ended June 28, 2015, includes a reduction to cost of sales of $12,486 resulting from the reversal of a liability associated with the Bakery’s withdrawal from a multiemployer pension plan. See Note 15 for further discussion.

(c)
Included in “Depreciation and amortization” in our condensed consolidated statements of cash flows for the periods presented.

(d)
Includes net gains on sales of other assets.  During the three and six months ended June 28, 2015, the Bakery received cash proceeds of $41 and $50, respectively, resulting in net gains on sales of other assets of $40 and $32, respectively. During the three and six months ended June 29, 2014, the Bakery received cash proceeds of $22 and $37, resulting in net gains on sales of other assets of $22 and $37, respectively.

The Bakery’s capital expenditures were $2,106 and $2,693 for the three and six months ended June 28, 2015, respectively, and $803 and $1,553 for the three and six months ended June 29, 2014, respectively, which are included in “Capital expenditures” in our condensed consolidated statements of cash flows.

11

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)


The following table summarizes the gain on the disposal of our Bakery, which has been included in discontinued operations:
 
Three and Six Months Ended
 
June 28,
2015
Proceeds from sale of the Bakery (a)
$
78,408

Net working capital (b)
(5,655
)
Net properties sold (c)
(30,664
)
Goodwill allocated to the sale of the Bakery
(12,067
)
Other (d)
(2,684
)
 
27,338

Provision for income taxes (e)
(12,199
)
Gain on disposal of discontinued operations, net of income taxes
$
15,139

_______________

(a)
Represents net proceeds received, which includes the purchase price of $78,500 less transaction closing costs paid directly by the Buyer on the Company’s behalf.

(b)
Primarily represents accounts receivable, inventory, prepaid expenses and accounts payable.

(c)
Net properties sold consisted primarily of buildings, equipment and capital leases for transportation equipment.

(d)
Primarily includes the recognition of the Company’s obligation, pursuant to the sale agreement, to provide health insurance benefits to the Bakery’s employees through December 31, 2015 of $1,993 and transaction closing costs paid directly by the Company.

(e)
Includes the impact of non-deductible goodwill disposed of as a result of the sale.

(3) System Optimization Gains, Net

In July 2013, the Company announced a system optimization initiative, as part of its brand transformation, which includes opportunistic acquisitions and dispositions, as well as a shift from company-owned restaurants to franchised restaurants over time. During 2013 and 2014, the Company completed the sale of 244 and 255 company-owned restaurants to franchisees, respectively. During the second quarter of 2015, the Company completed its plan to sell all of its company-owned restaurants in Canada to franchisees, with the sale of 83 Canadian restaurants, bringing the aggregate total of Canadian restaurants sold to franchisees to 129 during 2014 and 2015. In February 2015, the Company announced plans to sell approximately 540 additional restaurants to franchisees and reduce its ongoing company-owned restaurant ownership to approximately 5% of the total system by the middle of 2016.

Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to our system optimization initiative are recorded to “Reorganization and realignment costs,” and include severance and employee related costs, professional fees and other associated costs, which are further described in Note 5.


12

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014 (f)
 
June 28,
2015
 
June 29,
2014 (f)
Number of restaurants sold to franchisees
83

 

 
100

 
178

 
 
 
 
 
 
 
 
Proceeds from sales of restaurants
$
31,468

 
$

 
$
36,049

 
$
101,560

Net assets sold (a)
(15,158
)
 

 
(17,380
)
 
(42,016
)
Goodwill related to sales of restaurants
(6,840
)
 

 
(7,863
)
 
(13,658
)
Net (unfavorable) favorable leases (b)
7,923

 

 
7,395

 
24,981

Other (c)
(2,822
)
 

 
(3,224
)
 
300

 
14,571

 

 
14,977

 
71,167

Post-closing adjustments on sales of restaurants (d)
934

 
470

 
(639
)
 
(1,117
)
Gain on sales of restaurants, net
15,505

 
470

 
14,338

 
70,050

 
 
 
 
 
 
 
 
Gain on sales of other assets, net (e)
149

 
948

 
511

 
4,345

System optimization gains, net
$
15,654

 
$
1,418

 
$
14,849

 
$
74,395

_______________

(a)
Net assets sold consisted primarily of cash, inventory and equipment.

(b)
During the three and six months ended June 28, 2015, the Company recorded favorable lease assets of $23,428 and $25,807, respectively, and unfavorable lease liabilities of $15,505 and $18,412, respectively, as a result of leasing and/or subleasing land, buildings, and/or leasehold improvements to franchisees, in connection with sales of restaurants. During the first quarter of 2014, the Company recorded favorable lease assets of $47,392 and unfavorable lease liabilities of $22,411.

(c)
The three and six months ended June 28, 2015 includes a deferred gain of $2,387 related to the sale of 14 Canadian restaurants to a franchisee, as a result of certain contingencies related to the extension of lease terms. The deferred gain is included in “Other liabilities.” The three and six months ended June 28, 2015 also includes a note receivable of $1,801 from a franchisee in connection with the sale of 16 Canadian restaurants, which has been recognized as part of the overall loss on sale.

(d)
During the three months ended June 28, 2015, notes receivable from franchisees in connection with sales of restaurants in 2014 were repaid and as a result, we recognized the related gain on sale of $2,450.
    
(e)
During the three and six months ended June 28, 2015, Wendy’s received cash proceeds of $905 and $2,598, respectively, primarily from the sale of surplus properties. During the three and six months ended June 29, 2014, Wendy’s received cash proceeds of $7,725 and $14,607, respectively, primarily from the sale of surplus properties and the sale of a company-owned aircraft.

(f)
Reclassifications have been made to the prior year presentation to include sales of restaurants previously reported in “Other operating expense, net” to conform to the current year presentation. Reclassifications have also been made to reflect the Bakery’s gain on sales of other assets as discontinued operations. See Note 1 for further details.


13

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

Assets Held for Sale
 
June 28,
2015
 
December 28, 2014 (a)
Number of restaurants classified as held for sale
97

 
106

Net restaurant assets held for sale
$
37,050

 
$
25,266

 
 
 
 
Other assets held for sale
$
8,381

 
$
13,469

_______________

(a)
Reclassifications have been made to the prior year presentation to include restaurants previously excluded from our system optimization initiative to conform to the current year presentation. See Note 1 for further details.

Net restaurant assets held for sale include company-owned restaurants and consist primarily of cash, inventory, equipment and an estimate of allocable goodwill. Other assets held for sale primarily consist of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”

(4) Acquisitions

The following is a summary of the acquisition activity recorded for acquisitions of franchised restaurants during the periods presented and includes adjustments to the allocation of the purchase price for prior acquisitions within the one year measurement period:
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
Restaurants acquired from franchisees
4

 
3

 
 
 
 
Properties
$
1,303

 
$
1,791

Acquired franchise rights
760

 
1,200

Goodwill
395

 

Deferred taxes and other assets
(40
)
 
23

Capital leases obligations
(706
)
 

Unfavorable leases
(440
)
 

Other liabilities
(40
)
 
(63
)
Gain on acquisition of restaurants

 
(616
)
Total consideration paid, net of cash received
$
1,232

 
$
2,335



14

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

(5) Reorganization and Realignment Costs

The following is a summary of the initiatives included in “Reorganization and realignment costs:”
 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
G&A realignment
$
4,372

 
$

 
$
8,535

 
$

System optimization initiative
1,907

 
1,276

 
2,357

 
15,987

Reorganization and realignment costs
$
6,279

 
$
1,276

 
$
10,892

 
$
15,987


G&A Realignment

In November 2014, the Company initiated a plan to reduce its general and administrative expenses. The plan includes a realignment and reinvestment of resources to focus primarily on accelerated restaurant development and consumer-facing restaurant technology to drive long-term growth. The Company expects to achieve the majority of the expense reductions through the realignment of its U.S. field operations and savings at its Restaurant Support Center in Dublin, Ohio, which was substantially completed by the end of the second quarter of 2015. The Company recognized costs totaling $8,535 during the first six months of 2015 and $21,461 in aggregate since inception. The Company expects to incur additional costs aggregating approximately $4,500 during the remainder of 2015, comprised of recruitment and relocation costs of $3,500 for the reinvestment in resources to drive long-term growth and share-based compensation of $1,000.

The following is a summary of the activity recorded as a result of our G&A realignment plan:
 
Three Months Ended
 
Six Months Ended
 
Total
Incurred Since Inception
 
June 28,
2015
 
June 28,
2015
 
Severance and related employee costs
$
637

 
$
2,619

 
$
14,536

Recruitment and relocation costs
514

 
984

 
1,193

Other
9

 
41

 
129

 
1,160

 
3,644

 
15,858

Share-based compensation (a)
3,212

 
4,891

 
5,603

   Total G&A realignment
$
4,372

 
$
8,535

 
$
21,461

_______________

(a)
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 G&A realignment plan.

The table below presents a rollforward of our accruals for our G&A realignment plan, which are included in “Accrued expenses and other current liabilities” and “Other liabilities.”
 
Balance
December 28, 2014
 
Charges
 
Payments
 
Balance
June 28,
2015
Severance and related employee costs
$
11,609

 
$
2,619

 
$
(5,974
)
 
$
8,254

Recruitment and relocation costs
149

 
984

 
(902
)
 
231

Other
5

 
41

 
(46
)
 

 
$
11,763

 
$
3,644

 
$
(6,922
)
 
$
8,485


15

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)


System Optimization Initiative

The Company has recognized costs related to its system optimization initiative which includes the sale of restaurants to franchisees. In connection with reducing its ongoing company-owned restaurant ownership to approximately 5% of the total system, the Company expects to incur additional costs of approximately $11,000 in aggregate during the remainder of 2015 and 2016. Such costs are primarily comprised of accelerated amortization of previously acquired franchise rights related to company-owned restaurants in territories that will be sold to franchisees of approximately $7,000 and professional fees of approximately $4,000.

The following is a summary of the costs recorded as a result of our system optimization initiative:
 
Three Months Ended
 
Six Months Ended
 
Total
Incurred Since Inception
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
Severance and related employee costs
$
303

 
$
393

 
$
629

 
$
5,926

 
$
17,887

Professional fees
110

 
558

 
151

 
3,189

 
5,964

Other (a)
(128
)
 
325

 
(45
)
 
2,762

 
4,496

 
285

 
1,276

 
735

 
11,877

 
28,347

Accelerated depreciation and amortization (b)
1,622

 

 
1,622

 
475

 
19,036

Share-based compensation (c)

 

 

 
3,635

 
5,013

Total system optimization initiative
$
1,907

 
$
1,276

 
$
2,357

 
$
15,987

 
$
52,396

_______________

(a)
The three and six months ended June 28, 2015 includes a reversal of an accrual of $210 as a result of a change in estimate.

(b)
Primarily includes accelerated amortization of previously acquired franchise rights related to company-owned restaurants in territories that will be or have been sold in connection with our system optimization initiative.

(c)
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.

The table below presents a rollforward of our accrual for our system optimization initiative, which is included in “Accrued expenses and other current liabilities.”
 
Balance
December 28, 2014
 
Charges
 
Payments
 
Balance
June 28,
2015
Severance and related employee costs
$
2,235

 
$
629

 
$
(2,438
)
 
$
426

Professional fees
146

 
151

 
(159
)
 
138

Other
423

 
(45
)
 
(254
)
 
124

 
$
2,804

 
$
735

 
$
(2,851
)
 
$
688



16

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

(6) Investments

Investment in TimWen

Wendy’s is a partner in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand. (Tim Hortons is a registered trademark of The TDL Group Corp./Groupe TDL Corporation.) Wendy’s 50% share of the joint venture is accounted for using the equity method of accounting. Our equity in earnings from TimWen is included in “Other operating expense, net.” As described in Note 3, the Company completed its plan to sell all of its company-owned restaurants in Canada to franchisees during the second quarter of 2015; however the Company plans to retain its ownership in TimWen.

Presented below is an unaudited summary of activity related to our investment in TimWen included in “Investments” in our condensed consolidated financial statements:
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
Balance at beginning of period
$
69,790

 
$
79,810

 
 
 
 
Equity in earnings for the period
5,712

 
6,197

Amortization of purchase price adjustments (a)
(1,167
)
 
(1,325
)
 
4,545

 
4,872

Distributions received
(5,825
)
 
(6,443
)
Foreign currency translation adjustment included in “Other comprehensive income (loss), net”
(3,971
)
 
314

Balance at end of period
$
64,539

 
$
78,553

_______________

(a)
Based upon an average original aggregate life of 21 years.

(7) Long-Term Debt

Long-term debt consisted of the following:
 
June 28,
2015
 
December 28, 2014
Series 2015-1 Class A-2 Notes:
 
 
 
Series 2015-1 Class A-2-I Notes
$
875,000

 
$

Series 2015-1 Class A-2-II Notes
900,000

 

Series 2015-1 Class A-2-III Notes
500,000

 

Term A Loans, repaid in June 2015

 
541,733

Term B Loans, repaid in June 2015

 
759,758

7% debentures, due in 2025
86,453

 
85,853

Capital lease obligations, due through 2042 (a)
78,467

 
59,073

Unamortized debt issuance costs (b)
(42,543
)
 
(8,243
)
 
2,397,377

 
1,438,174

Less amounts payable within one year (a)
(17,595
)
 
(53,202
)
Total long-term debt
$
2,379,782

 
$
1,384,972

_______________

17

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)


(a)
Capital lease obligations as of December 28, 2014 and the related amounts payable within one year have been updated to exclude the Bakery’s capital lease obligations as a result of the sale of the Bakery during the second quarter of 2015 and the presentation as discontinued operations in our condensed consolidated balance sheet as of December 28, 2014.

(b)
During the second quarter of 2015, the Company early adopted an amendment requiring debt issuance costs be presented in the balance sheet as a direct reduction of the related debt liability rather than as an asset. The adoption of this guidance resulted in the reclassification of debt issuance costs of $8,243 from “Other assets” to “Long-term debt” in our condensed consolidated balance sheet as of December 28, 2014. See Note 1 and Note 16 for further information.

Aggregate annual maturities of long-term debt, excluding the effect of purchase accounting adjustments, as of June 28, 2015 were as follows:
Fiscal Year
 
 
2015 (a)
 
$
5,837

2016
 
23,229

2017
 
23,420

2018
 
24,532

2019
 
862,906

Thereafter
 
1,513,543

 
 
$
2,453,467

_______________

(a)
Represents maturities of long-term debt for the remainder of our 2015 fiscal year, from June 29, 2015 through January 3, 2016.

Except as described below, the Company did not have any significant changes to its long-term debt as disclosed in the notes to our consolidated financial statements included in the Form 10-K.

On June 1, 2015, Wendy’s Funding, LLC (“Wendy’s Funding” or the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued Series 2015-1 3.371% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) with an initial principal amount of $875,000, Series 2015-1 4.080% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes”) with an initial principal amount of $900,000 and the Series 2015-1 4.497% Fixed Rate Senior Secured Notes, Class A-2-III, (the “Class A-2-III Notes”) with an initial principal amount of $500,000 (collectively the “Series 2015-1 Class A-2 Notes”). In addition, the Master Issuer entered into a revolving financing facility of Series 2015-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2015-1 Class A-1 Notes” and, together with the Series 2015-1 Class A-2 Notes, the “Series 2015-1 Senior Notes”), which allows for the drawing of up to $150,000 under the Series 2015-1 Class A-1 Notes, which include certain credit instruments, including a letter of credit facility. The Series 2015-1 Class A-1 Notes were issued under the Indenture and allow for drawings on a revolving basis.

The Series 2015-1 Senior Notes were issued in a securitization transaction pursuant to which certain of the Company’s domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, were contributed or otherwise transferred to the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors (the “Guarantors”) of the Series 2015-1 Senior Notes and that have pledged substantially all of their assets, excluding certain real estate assets and subject to certain limitations, to secure the Series 2015-1 Senior Notes. The Company has guaranteed the obligations of the Master Issuer under the Indenture and the Series 2015-I Senior Notes and pledged substantially all of its assets to secure such obligations.

Interest and principal payments on the Series 2015-1 Class A-2 Notes are payable on a quarterly basis. The requirement to make such quarterly principal payments on the Series 2015-1 Class A-2 Notes is subject to certain financial conditions set forth in the Indenture. The legal final maturity date of the Series 2015-I Class A-2 Notes is in June 2045, but, unless earlier prepaid to

18

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

the extent permitted under the Indenture, the anticipated repayment dates of the Class A-2-I Notes, the Class A-2-II Notes and the Class A-2-III Notes will be 4.25, 7 and 10 years, respectively (the “Anticipated Repayment Dates”). If the Master Issuer has not repaid or refinanced the Series 2015-1 Class A-2 Notes prior to the respective Anticipated Repayment Dates, additional interest will accrue pursuant to the Indenture.

The Series 2015-1 Class A-1 Notes will accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the Series 2015-1 Class A-1 note agreement. There is a commitment fee on the unused portion of the Series 2015-1 Class A-1 Notes which ranges from 0.50% to 0.85% based on utilization. It is anticipated that the principal and interest on the Series 2015-1 Class A-1 Notes will be repaid in full on or prior to June 2020, subject to two additional one-year extensions. Following the anticipated repayment date (and any extensions thereof) additional interest will accrue on the Series 2015-1 Class A-1 Notes equal to 5.0% per year. As of June 28, 2015, $22,000 of letters of credit were outstanding against the Series 2015-1 Class A-1 Notes, which relate primarily to interest reserves required under the Indenture.

During the six months ended June 28, 2015, the Company incurred debt issuance costs of $43,094 in connection with the issuance of the Series 2015-1 Senior Notes. The debt issuance costs are being amortized to “Interest expense” through the Anticipated Repayment Dates of the Series 2015-1 Senior Notes utilizing the effective interest rate method. As of June 28, 2015, the effective interest rates, including the amortization of debt issuance costs, were 3.783%, 4.334% and 4.678% for the Class A-2-I Notes, Class A-2-II Notes and Class A-2-III Notes, respectively.

The Series 2015-1 Senior Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Series 2015-1 Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Series 2015-1 Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Series 2015-1 Senior Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Series 2015-1 Senior Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Series 2015-1 Class A-2 Notes on the applicable scheduled maturity date. The Series 2015-1 Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Series 2015-1 Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.

In accordance with the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the trustee and the noteholders, and are restricted in their use. As of June 28, 2015, Wendy’s Funding had restricted cash of $27,190, which primarily represented cash collections and interest and commitment fee reserves held by the trustee. Such restricted cash is included in “Prepaid expenses and other current assets” in the condensed consolidated balance sheet as of June 28, 2015. Changes in such restricted cash has been presented as a component of cash flows from operating activities in the condensed consolidated statement of cash flows since the cash is restricted to the payment of interest.

The proceeds from the issuance of the Series 2015-1 Class A-2 Notes, were used to repay all amounts outstanding on the Term A Loans and Term B Loans under the Company’s May 16, 2013 Restated Credit Agreement amended on September 24, 2013 (the “2013 Restated Credit Agreement”). In connection with the repayment of the Term A Loans and Term B Loans, Wendy’s terminated the related interest rate swaps with notional amounts totaling $350,000 and $100,000, respectively, which had been designated as cash flow hedges. See Note 8 for more information on the interest rate swaps. As a result, the Company recorded a loss on early extinguishment of debt of $7,295, primarily consisting of the write-off of deferred costs related to the 2013 Restated Credit Agreement and fees paid to terminate the related interest rate swaps of $62.


19

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

(8) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. These inputs are classified into the following hierarchy:

Level 1 Inputs - Quoted prices for identical assets or liabilities in active markets.

Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.

Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
 
June 28,
2015
 
December 28,
2014
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Fair Value
Measurements
Financial assets
 
 
 
 
 
 
 
 
 
Cash equivalents
$
124,214

 
$
124,214

 
$
61,450

 
$
61,450

 
Level 1
Non-current cost method investments (a)
6,176

 
154,324

 
4,264

 
147,760

 
Level 3
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Series 2015-1 Class A-2-I Notes (b)
875,000

 
868,875

 

 

 
Level 2
Series 2015-1 Class A-2-II Notes (b)
900,000

 
892,350

 

 

 
Level 2
Series 2015-1 Class A-2-III Notes (b)
500,000

 
491,150

 

 

 
Level 2
Term A Loans, repaid in June 2015 (b)

 

 
541,733

 
540,717

 
Level 2
Term B Loans, repaid in June 2015 (b)

 

 
759,758

 
752,160

 
Level 2
7% debentures, due in 2025 (b)
86,453

 
106,000

 
85,853

 
104,250

 
Level 2
Cash flow hedges (c)

 

 
3,343

 
3,343

 
Level 2
Guarantees of franchisee loan obligations (d)
1,028

 
1,028

 
968

 
968

 
Level 3
_______________

(a)
The fair value of our indirect investment in Arby’s Restaurant Group, Inc. (“Arby’s”) is based on applying a multiple to Arby’s earnings before income taxes, depreciation and amortization per its current unaudited financial information. The carrying value of our indirect investment in Arby’s was reduced to zero during 2013 in connection with the receipt of a dividend. The fair values of our remaining investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments.

(b)
The fair values were based on quoted market prices in markets that are not considered active markets.

(c)
The fair values were developed using market observable data for all significant inputs.


20

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

(d)
Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for new restaurant development and equipment financing. In addition during 2012, Wendy’s provided a guarantee to a lender for a franchisee in connection with the refinancing of the franchisee’s debt. We have accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted average risk percentage established at inception adjusted for a history of defaults.

The carrying amounts of cash, accounts payable and accrued expenses approximated fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable (both current and non-current) approximated fair value due to the effect of the related allowance for doubtful accounts. Our derivative instruments, cash and cash equivalents and guarantees are the only financial assets and liabilities measured and recorded at fair value on a recurring basis.

Derivative Instruments

The Company’s primary objective for entering into interest rate swap agreements is to manage its exposure to changes in interest rates, as well as to maintain an appropriate mix of fixed and variable rate debt.

Our derivative instruments for the periods presented included seven forward starting interest rate swaps designated as cash flow hedges to change the floating rate interest payments associated with $350,000 and $100,000 in borrowings under the Term A Loans and Term B Loans, respectively, to fixed rate interest payments beginning June 30, 2015 and maturing on December 31, 2017. In May 2015, the Company terminated these interest rate swaps and paid $7,275, which was recorded against the derivative liability. In addition, the Company incurred $62 in fees to terminate the interest rate swaps which was included in “Loss on early extinguishment of debt.” See Note 7 for further information. The unrealized loss on the cash flow hedges of $7,275 will be reclassified on a straight line basis from “Accumulated other comprehensive loss” to “Interest expense” beginning June 30, 2015, the original effective date of the interest rate swaps through December 31, 2017, the original maturity date of the interest rate swaps.

As of December 28, 2014, the fair value of the cash flow hedges of $3,343 was included in “Other liabilities” and a corresponding offset to “Accumulated other comprehensive loss.” All of the Company’s financial instruments were in a liability position as of December 28, 2014 and therefore presented gross in the condensed consolidated balance sheet. There was no hedge ineffectiveness from these cash flows hedges through their termination in May 2015.

Non-Recurring Fair Value Measurements

Assets and liabilities remeasured to fair value on a non-recurring basis during the six months ended June 28, 2015 and the year ended December 28, 2014 resulted in impairment which we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.

Total losses for the six months ended June 28, 2015 and the year ended December 28, 2014 reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements and favorable lease assets) to fair value as a result of (1) 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 and (2) declines in operating performance at company-owned restaurants. The fair value of long-lived assets held and used presented in the tables below represents the remaining carrying value and was estimated based on either discounted cash flows of future anticipated lease and sublease income or current market values.

Total losses for the six months ended June 28, 2015 and the year ended December 28, 2014 also include the impact of remeasuring long-lived assets held for sale which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 9 for more information on impairment of our long-lived assets.

 
 
 
Fair Value Measurements
 
Six Months Ended
June 28, 2015
 Total Losses
 
June 28, 2015
 
Level 1
 
Level 2
 
Level 3
 
Held and used
$
3,402

 
$

 
$

 
$
3,402

 
$
10,803

Held for sale
2,353

 

 

 
2,353

 
1,152

Total
$
5,755

 
$

 
$

 
$
5,755

 
$
11,955



21

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

 
 
 
Fair Value Measurements
 
2014
Total Losses
 
December 28, 2014
 
Level 1
 
Level 2
 
Level 3
 
Held and used
$
8,651

 
$

 
$

 
$
8,651

 
$
17,139

Held for sale
4,967

 

 

 
4,967

 
2,474

Total
$
13,618

 
$

 
$

 
$
13,618

 
$
19,613


(9) Impairment of Long-Lived Assets

During the three and six months ended June 28, 2015 and six months ended June 29, 2014, the Company recorded impairment charges on long-lived assets as a result of (1) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of company-owned restaurants and (2) closing company-owned restaurants and classifying such properties as held for sale. Additionally during the three and six months ended June 28, 2015, the Company recorded impairment charges resulting from the deterioration in operating performance of certain company-owned restaurants and charges for capital improvements in restaurants impaired in prior years which did not subsequently recover. The Company may recognize additional impairment charges resulting from leasing or subleasing additional properties to franchisees in connection with sales of company-owned restaurants to franchisees.

The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets.”

 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Restaurants leased or subleased to franchisees
$
7,551

 
$
77

 
$
8,256

 
$
2,274

Company-owned restaurants
2,073

 

 
2,547

 

Surplus properties
394

 

 
1,152

 
332

 
$
10,018

 
$
77

 
$
11,955

 
$
2,606


(10) Income Taxes

The Company’s effective tax rate on income from continuing operations for the three months ended June 28, 2015 and June 29, 2014 was 38.1% and 44.2%, respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 35% due to the effect of (1) state income taxes net of federal benefits, primarily resulting from changes to state deferred taxes, (2) changes to valuation allowances on state net operating loss carryforwards due to the expected sale of restaurants under our system optimization initiative, (3) the impact of non-deductible goodwill disposed of in connection with our system optimization initiative, (4) employment credits and (5) foreign rate differential. The changes to state deferred taxes during the three months ended June 28, 2015 was primarily due to the deferred tax impact of an internal restructuring required to complete the securitized financing facility discussed in Note 7, partially offset by the expected sale of restaurants under our system optimization initiative described in Note 3. The changes to state deferred taxes during the three months ended June 29, 2014 was primarily due to the enactment of a mandatory consolidated return filing requirement in New York.

The Company’s effective tax rate on income from continuing operations for the six months ended June 28, 2015 and June 29, 2014 was 34.4% and 41.6%, respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 35% due to the effect of (1) state income taxes net of federal benefits, primarily resulting from changes to state deferred taxes, (2) changes to valuation allowances on state net operating loss carryforwards due to the expected sale of restaurants under our system optimization initiative, (3) adjustments related to prior year tax matters including changes to unrecognized tax benefits, (4) the impact of non-deductible goodwill disposed of in connection with our system optimization initiative, (5) foreign rate differential and (6) employment credits. The changes to state deferred taxes during the six months ended June 28, 2015 was primarily due to the deferred tax impact of an internal restructuring required to complete the securitized financing facility discussed in Note 7, partially offset by the expected sale of restaurants under our system optimization initiative described in Note 3. The changes to state deferred taxes during the six months ended June 29, 2014 was primarily due to the enactment of a mandatory consolidated return filing requirement in New York.

22

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)


During the first quarter of 2015, we concluded two state income tax examinations which resulted in the recognition of a net tax benefit of $1,872 and the reduction of our unrecognized tax benefits by $3,686. Additionally, during the second quarter of 2015, unfavorable state court decisions and audit experience led us to abandon certain refund claims, which resulted in a reduction of our unrecognized tax benefits by $1,274. There were no other significant changes to unrecognized tax benefits or related interest and penalties for the Company during the six months ended June 28, 2015. During the next twelve months it is reasonably possible the Company will reduce its unrecognized tax benefits by up to $964, primarily due to the completion of state tax examinations.

(11) Net Income Per Share

Basic net income per share was computed by dividing net income amounts by the weighted average number of common shares outstanding.

The weighted average number of shares used to calculate basic and diluted net income per share were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Common stock:
 
 
 
 
 
 
 
Weighted average basic shares outstanding
363,766

 
366,712

 
365,175

 
374,132

Dilutive effect of stock options and restricted shares
6,776

 
5,460

 
6,700

 
6,630

Weighted average diluted shares outstanding
370,542

 
372,172

 
371,875

 
380,762


Diluted net income per share for the three and six months ended June 28, 2015 and June 29, 2014 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 434 and 599 for the three and six months ended June 28, 2015, respectively, and 4,758 and 5,306 for the three and six months ended June 29, 2014, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.

(12) Stockholders’ Equity

Stockholders’ Equity

The following is a summary of the changes in stockholders’ equity:
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
Balance at beginning of period
$
1,717,576

 
$
1,929,486

Comprehensive income
52,563

 
74,205

Dividends
(40,189
)
 
(36,648
)
Repurchases of common stock
(63,206
)
 
(277,275
)
Share-based compensation
12,242

 
15,158

Exercises of stock options
15,278

 
23,412

Vesting of restricted shares
(1,393
)
 
(1,397
)
Tax benefit from share-based compensation
45,452

 
17,338

Other
103

 
87

Balance at end of period
$
1,738,426

 
$
1,744,366


Repurchases of Common Stock

On June 1, 2015, our Board of Directors authorized a new repurchase program for up to $1,400,000 of our common stock through January 1, 2017, when and if market conditions warrant and to the extent legally permissible. As part of the authorization, the Company commenced an $850,000 share repurchase program on June 3, 2015, which included (1) a modified Dutch auction tender offer to repurchase up to $639,000 of our common stock and (2) a separate stock purchase agreement to repurchase up to $211,000 of our common stock from the Trian Group (as defined below in Note 13). For additional information on the separate stock purchase agreement see Note 13. During the second quarter of 2015, the Company incurred costs of $1,489 in connection with the tender offer, which were recorded to treasury stock. Subsequent to the second quarter of 2015, on June 30, 2015, the tender offer expired and on July 8, 2015, the Company repurchased 55,808 shares for an aggregate purchase price of $639,000.

23

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

On July 17, 2015, the Company repurchased 18,416 shares, pursuant to the separate purchase agreement, for an aggregate purchase price of $210,867. As a result, the $850,000 share repurchase program that commenced on June 3, 2015 was completed.
In August 2014, our Board of Directors authorized a repurchase program for up to $100,000 of our common stock through December 31, 2015, when and if market conditions warrant and to the extent legally permissible. For the six months ended June 28, 2015, the Company repurchased 5,655 shares with an aggregate purchase price of $61,631, excluding commissions of $86.
In January 2014, our Board of Directors authorized a repurchase program for up to $275,000 of our common stock through the end of fiscal year 2014. The Company utilized the full authorization upon completion of a modified Dutch auction tender offer on February 19, 2014 resulting in 29,730 shares repurchased for an aggregate purchase price of $275,000. The Company incurred costs of $2,275 in connection with the tender offer, which were recorded to treasury stock.
Accumulated Other Comprehensive Loss

The following table provides a rollforward of the components of accumulated other comprehensive loss, net of tax as applicable:
 
Foreign Currency Translation
 
Cash Flow Hedges
 
Pension
 
Total
Balance at December 28, 2014
$
(28,363
)
 
$
(2,044
)
 
$
(887
)
 
$
(31,294
)
Current-period other comprehensive loss
(12,494
)
 
(2,442
)
 
(203
)
 
(15,139
)
Balance at June 28, 2015
$
(40,857
)
 
$
(4,486
)
 
$
(1,090
)
 
$
(46,433
)
 
 
 
 
 
 
 
 
Balance at December 29, 2013
$
(9,803
)
 
$
744

 
$
(1,278
)
 
$
(10,337
)
Current-period other comprehensive income (loss)
975

 
(2,418
)
 
338

 
(1,105
)
Balance at June 29, 2014
$
(8,828
)
 
$
(1,674
)
 
$
(940
)
 
$
(11,442
)

The cumulative gains and losses on these items are included in “Accumulated other comprehensive loss” in the condensed consolidated balance sheets.

(13) Transactions with Related Parties

Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K.

Stock Purchase Agreement

On June 2, 2015, the Company entered into a stock purchase agreement to repurchase our common stock from Nelson Peltz, Peter W. May and Edward P. Garden (who are members of the Company’s Board of Directors) and certain of their family members and affiliates, investment funds managed by Trian Fund Management, L.P. (an investment management firm controlled by Messrs. Peltz, May and Garden, “TFM”) and the general partner of certain of those funds (together with Messrs. Peltz, May and Garden, certain of their family members and affiliates and TFM, the “Trian Group”), who in the aggregate owned approximately 24.8% of the Company’s outstanding shares as of May 29, 2015. Pursuant to the agreement, the Trian Group agreed not to tender or sell any of its shares in the modified Dutch auction tender offer the Company commenced on June 3, 2015. Also pursuant to the agreement, the Company agreed, following completion of the tender offer, to purchase from the Trian Group a pro rata amount of its shares based on the number of shares the Company purchases in the tender offer, at the same price received by shareholders who participated in the tender offer. On July 17, 2015, after completion of the modified Dutch auction tender offer, the Company repurchased 18,416 shares of its common stock from the Trian Group at the price paid in the tender offer of $11.45 per share, for an aggregate purchase price of $210,867.

Transactions with QSCC

Wendy’s received $92 of lease income from its purchasing cooperative, Quality Supply Chain Co-op, Inc. (“QSCC”) during both the six months ended June 28, 2015 and June 29, 2014, which has been recorded as a reduction of “General and administrative.”

24

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)


TimWen Lease and Management Fee Payments

A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. Wendy’s paid TimWen $4,015 and $3,127 under leases for the operation of company-owned restaurants during the six months ended June 28, 2015 and June 29, 2014, respectively, which have been included in “Cost of sales.” Wendy’s subleases some of the restaurant facilities to franchisees for which Wendy’s paid TimWen $1,877 during the six months ended June 28, 2015, which has been included in “Other operating expense, net.” Prior to 2015, franchisees paid TimWen directly for these subleases. TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $112 and $125 during the six months ended June 28, 2015 and June 29, 2014, respectively, which has been included as a reduction to “General and administrative.”

(14) Legal and Environmental Matters

We are involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. As of June 28, 2015, the Company had accruals for all of its legal and environmental matters aggregating $2,664. We cannot estimate the aggregate possible range of loss due to most proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur, and 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. Based on currently available information, including legal defenses available to us, and given the aforementioned accruals and our insurance coverage, we do not believe that the outcome of these legal and environmental matters will have a material effect on our consolidated financial position or results of operations.

(15) Multiemployer Pension Plan

As further described in the Form 10-K, in December 2013, The New Bakery Co. of Ohio, Inc. (the “Bakery Company”), a 100% owned subsidiary of Wendy’s, now known as The New Bakery Company, LLC, terminated its participation in the Bakery and Confectionery Union and Industry International Pension Fund (the “Union Pension Fund”) and formally notified the plan’s trustees of its withdrawal from the plan. The Union Pension Fund administrator acknowledged the withdrawal, which required Wendy’s to assume an estimated withdrawal liability of $13,500 based on the applicable requirements of the Employee Retirement Income Security Act, as amended, and which was included in “Cost of sales” during the fourth quarter of 2013. As a result, Wendy’s made payments to the Union Pension Fund aggregating $1,014 during 2014 and 2015 which were recorded as reductions to the withdrawal liability. The Bakers Local No. 57, Bakery, Confectionery, Tobacco Workers & Grain Millers International Union of America, AFL-CIO (the “Union”) filed a charge with the National Labor Relations Board (the “NLRB”) related to the Bakery Company’s withdrawal from the Union Pension Fund. On July 22, 2014, The New Bakery of Zanesville, LLC (“Zanesville”), a 100% owned subsidiary of Wendy’s, and the Union entered into a settlement agreement with the NLRB.  The terms of the settlement include an agreement by Zanesville and the Union to recommence negotiations. On March 27, 2015, Zanesville and the Union signed a memorandum of agreement outlining the terms for a new collective bargaining agreement, including re-entering the Union Pension Fund and signing the collective bargaining agreement on or about May 15, 2015. The terms of the collective bargaining agreement were ratified by the Union and became effective upon execution of the collective bargaining agreement. During the first quarter of 2015, the Company began negotiating the potential sale of the Bakery Company which would result in the buyer signing the collective bargaining agreement and re-entering the Union Pension Fund. As a result, the Company concluded that its loss contingency for the pension withdrawal payments was no longer probable and, as such, reversed $12,486 of the outstanding withdrawal liability to “Cost of sales” during the first quarter of 2015.

During the second quarter of 2015, with negotiations ongoing, Zanesville and the Union agreed to an extension of the May 15, 2015 deadline for re-entering the Union Pension Fund. On May 15, 2015, in preparation for the sale of the Bakery, Zanesville merged into the Bakery Company. The Bakery Company was sold on May 31, 2015 and subsequently the Bakery Company signed the collective bargaining agreement and re-entered the Union Pension Fund. As a result of the sale, Wendy’s no longer has any obligations related to the Union Pension Fund. See Note 2 for more information on the sale of the Bakery.


25

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

(16) New Accounting Standards

New Accounting Standards

In July 2015, the Financial Accounting Standards Board (the “FASB”) issued an amendment to defer for one year the effective date of the new standard on revenue recognition issued in May 2014. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new standard is now effective commencing with our 2018 fiscal year and requires enhanced disclosures. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In April 2015, the FASB issued an amendment that clarifies the accounting for fees paid in a cloud computing arrangement. The amendment provides guidance to customers about whether a cloud computing arrangement includes a software license. The amendment is effective commencing with our 2016 fiscal year. We are currently evaluating the impact of the adoption of this amendment on our consolidated financial statements.

In February 2015, the FASB issued an amendment which revises the consolidation requirements and significantly changes the consolidation analysis required under current guidance. The amendment is effective commencing with our 2016 fiscal year. We are currently evaluating the impact of the adoption of this amendment on our consolidated financial statements.

New Accounting Standards Adopted

In April 2015, the FASB issued an amendment that modifies the presentation of debt issuance costs. The amendment requires debt issuance costs be presented in the balance sheet as a direct reduction of the related debt liability rather than as an asset. The Company early adopted this amendment, which required retrospective application, during the second quarter of 2015. The adoption of this guidance resulted in the reclassification of debt issuance costs of $8,243 from “Other assets” to “Long-term debt” in our condensed consolidated balance sheet as of December 28, 2014. See Note 7 for more information.

In April 2014, the FASB issued an amendment that modifies the criteria for reporting a discontinued operation. The amendment changes the definition of a discontinued operation including the implementation guidance and requires expanded disclosures. The Company adopted this amendment, prospectively, during the first quarter of 2015.


26


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 (the “Form 10-K”). There have been no material changes as of June 28, 2015 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” preceding Item 1 of Part II. You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission.

The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchises and operates company-owned Wendy’s® quick-service restaurants throughout North America (defined as the United States of America (“U.S.”) and Canada). Wendy’s also has franchised restaurants in 27 foreign countries and U.S. territories.

Wendy’s restaurants offer an extensive menu specializing in hamburger sandwiches and featuring fillet of chicken breast sandwiches, chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited basis.

The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s restaurants in North America comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material. The results of operations discussed below may not necessarily be indicative of future results.

The Company reports on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. All three month and six month periods presented herein contain 13 weeks and 26 weeks, respectively. Our current fiscal year, ending on January 3, 2016, will contain 53 weeks and, accordingly, our fourth quarter of 2015 will contain 14 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.

On May 31, 2015, Wendy’s completed the sale of its company-owned bakery, The New Bakery Company, LLC (the “Bakery”), a 100% owned subsidiary of Wendy’s. As a result of the sale of the Bakery, as further discussed below in “Sale of the Bakery,” the Bakery’s results of operations for all periods presented and the gain on disposal have been included in “Net income from discontinued operations” in our condensed consolidated statements of operations.

Prior to fiscal 2015, the Company reported its system optimization initiative as a discrete event and separately included the related gain or loss on sales of restaurants, impairment losses and other associated costs, along with other restructuring initiatives, in “Facilities action charges (income), net.” In February 2015, the Company announced plans to reduce its ongoing company-owned restaurant ownership to approximately 5% of the total system and further emphasized that restaurant dispositions and acquisitions are a continuous and integrated part of the overall strategy to optimize its restaurant portfolio. As a result, commencing with the first quarter of 2015, all gains and losses on dispositions are included on a separate line in our condensed consolidated statements of operations, “System optimization gains, net” and impairment losses recorded in connection with the sale or anticipated sale of restaurants (“System Optimization Remeasurement”) are reclassified to “Impairment of long-lived assets.” In addition, the Company retitled the line, “Facilities action charges (income), net” to “Reorganization and realignment costs” in our condensed consolidated statements of operations to better describe the current and historical initiatives included given the reclassifications described above. The Company believes the new presentation will aid users in understanding its results of operations. The prior periods reflect reclassifications to conform to the current year presentation. All amounts being reclassified in our statements of operations were separately disclosed in the notes to our consolidated financial statements included in our Form 10-Q for the fiscal quarter ended June 29, 2014 and Form 10-K. Such reclassifications had no impact on operating profit, net income or net income per share. See Note 1 of the Financial Statements contained in Item 1 herein for a tabular illustration of the reclassifications.


27


Executive Overview

Sale of the Bakery

On May 31, 2015, Wendy’s completed the sale of 100% of its membership interest in The New Bakery Company, LLC (the “Bakery”), its 100% owned subsidiary, to East Balt US, LLC (the “Buyer”) for $78.5 million in cash (subject to customary purchase price adjustments). The Company recorded a pre-tax gain on the disposal of the Bakery of $27.3 million in the second quarter of 2015 which included transaction closing costs and a reduction of goodwill. The Company recognized income tax expense associated with the gain on disposal of $12.2 million during the second quarter of 2015 which included the impact of the disposal of non-deductible goodwill. In conjunction with the Bakery sale, Wendy’s entered into a transition services agreement with the Buyer, pursuant to which Wendy’s will provide certain continuing corporate and shared services to the Buyer through March 31, 2016 for no additional consideration.

Our Continuing Business

As of June 28, 2015, the Wendy’s restaurant system was comprised of 6,477 restaurants, of which 860 were owned and operated by the Company. As of June 28, 2015, all of our company-owned restaurants are located in the U.S. as a result of the Company completing its initiative during the second quarter of 2015 to sell all company-owned restaurants in Canada to franchisees.

Wendy’s operating results are impacted by a number of external factors, including unemployment, general economic trends, intense price competition, commodity costs and weather.

Wendy’s long-term growth opportunities will be driven by a combination of brand relevance and economic relevance. Key components of growth include (1) North America systemwide same-restaurant sales growth through continuing core menu improvement and product innovation, (2) investing in our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants and focused execution of operational excellence, (3) growth in new restaurants, including global growth, (4) increased restaurant utilization in various dayparts and brand access utilizing mobile technology, (5) building shareholder value through financial management strategies and (6) our system optimization initiative.

Wendy’s revenues for the first six months of 2015 include: (1) $742.6 million of sales at company-owned restaurants and (2) $154.3 million of royalty revenue, $38.1 million of rental income and $6.3 million of franchise fees from franchisees. Substantially all of our Wendy’s royalty agreements provide for royalties of 4.0% of franchisees’ revenues.

Key Business Measures

We track our results of operations and manage our business using the following key business measures:
 
Same-Restaurant Sales
We report Wendy’s same-restaurant sales commencing after new restaurants have been open for at least 15 continuous months and after remodeled restaurants have been reopened for three continuous months. This methodology is consistent with the metric used by our management for internal reporting and analysis. The tables summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes. Same-restaurant sales exclude the impact of currency translation.

Restaurant Margin
We define restaurant margin as sales from company-owned restaurants less cost of sales divided by sales from company-owned 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 restaurant openings and closures, price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, the level of our fixed and semi-variable costs and fluctuations in food and labor costs.

System Optimization Initiative

In July 2013, the Company announced a system optimization initiative, as part of its brand transformation, which includes opportunistic acquisitions and dispositions, as well as a shift from company-owned restaurants to franchised restaurants over time. During 2013 and 2014, the Company completed the sale of 244 and 255 company-owned restaurants to franchisees, respectively. During the second quarter of 2015, the Company completed its plan to sell all of its company-owned restaurants in Canada to franchisees, with the sale of 83 Canadian restaurants, bringing the aggregate total of Canadian restaurants sold to franchisees to 129 during 2014 and 2015. In February 2015, the Company announced plans to sell approximately 540 additional restaurants to

28


franchisees and reduce its ongoing company-owned restaurant ownership to approximately 5% of the total system by the middle of 2016.

Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. During the first six months of 2015 and 2014, the Company completed the sale of 100 and 178 company-owned restaurants to franchisees, respectively, as well as other assets, and recognized net gains totaling $14.9 million and $74.4 million, respectively.

Costs related to our system optimization initiative are recorded to “Reorganization and realignment costs.” During the first six months of 2015 and 2014, the Company recognized costs totaling $2.4 million and $16.0 million, respectively, which primarily included severance and related employee costs, share-based compensation expense and professional fees. In connection with reducing its ongoing company-owned restaurant ownership to approximately 5% of the total system, the Company expects to incur additional costs of approximately $11.0 million in aggregate during the remainder of 2015 and 2016. Such costs are primarily comprised of accelerated amortization of previously acquired franchise rights related to company-owned restaurants in territories that will be sold to franchisees of approximately $7.0 million and professional fees of approximately $4.0 million.

G&A Realignment

In November 2014, the Company initiated a plan to reduce its general and administrative expenses. The plan includes a realignment and reinvestment of resources to focus primarily on accelerated restaurant development and consumer-facing restaurant technology to drive long-term growth. The Company expects to achieve the majority of the expense reductions through the realignment of its U.S. field operations and savings at its Restaurant Support Center in Dublin, Ohio, which was substantially completed by the end of the second quarter of 2015. The Company recognized costs totaling $8.5 million in the first six months of 2015, which primarily included severance and related employee costs and share-based compensation and were recorded to “Reorganization and realignment costs.” The Company expects to incur additional costs aggregating approximately $4.5 million during the remainder of 2015, comprised of recruitment and relocation costs of $3.5 million for the reinvestment in resources to drive long-term growth and share-based compensation of $1.0 million.

Securitized Financing Facility

As further described below in “Liquidity and Capital Resources - Securitized Financing Facility,” on June 1, 2015, the Company completed a $2,275.0 million securitized financing facility, which consists of the following: $875.0 million of 3.371%, $900.0 million of 4.080% and $500.0 million of 4.497% Series 2015-1 fixed rate senior secured notes (collectively the “Series 2015-1 Class A-2 Notes”). In addition, the Company entered into a purchase agreement for the issuance of Series 2015-1 variable funding senior secured notes, Class A-1 (the “Series 2015-1 Class A-1 Notes” and, together with the Series 2015-1 Class A-2 Notes, the “Series 2015-1 Senior Notes”), which allows for the issuance of up to $150.0 million of variable funding notes and certain other credit instruments, including letters of credit. The proceeds from the issuance of the Series 2015-1 Class A-2 Notes, were used to repay all amounts outstanding on the Term A Loans and Term B Loans under the Company’s May 16, 2013 Restated Credit Agreement amended on September 24, 2013 (the “2013 Restated Credit Agreement”). In connection with the repayment of the Term A Loans and Term B Loans, the Company terminated the related interest rate swaps with notional amounts totaling $350.0 million and $100.0 million, respectively, which had been designated as cash flow hedges. As a result, the Company recorded a loss on early extinguishment of debt of $7.3 million, primarily consisting of the write-off of deferred costs related to the 2013 Restated Credit Agreement of $7.2 million and fees paid to terminate the related interest rate swaps of $0.1 million.

Related Party Transactions

Stock Purchase Agreement

On June 2, 2015, the Company entered into a stock purchase agreement to repurchase our common stock from Nelson Peltz, Peter W. May and Edward P. Garden (who are members of the Company’s Board of Directors) and certain of their family members and affiliates, investment funds managed by Trian Fund Management, L.P. (an investment management firm controlled by Messrs. Peltz, May and Garden, “TFM”) and the general partner of certain of those funds (together with Messrs. Peltz, May and Garden, certain of their family members and affiliates and TFM, the “Trian Group”), who in the aggregate owned approximately 24.8% of the Company’s outstanding shares as of May 29, 2015. Pursuant to the agreement, the Trian Group agreed not to tender or sell any of its shares in the modified Dutch auction tender offer the Company commenced on June 3, 2015. Also pursuant to the agreement, the Company agreed, following completion of the tender offer, to purchase from the Trian Group a pro rata amount of its shares based on the number of shares the Company purchases in the tender offer, at the same price received by shareholders who participated in the tender offer. On July 17, 2015, after completion of the modified Dutch auction tender offer, the Company

29


repurchased 18.4 million shares of its common stock from the Trian Group at the price paid in the tender offer of $11.45 per share, for an aggregate purchase price of $210.9 million.

TimWen Lease and Management Fees

A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. Wendy’s paid TimWen $4.0 million and $3.1 million under leases for the operation of company-owned restaurants during the first six months of 2015 and 2014, respectively, which have been included in “Cost of sales.” Wendy’s subleases some of the restaurant facilities to franchisees for which Wendy’s paid TimWen $1.9 million during the first six months of 2015, which has been included in “Other operating expense, net.” Prior to 2015, franchisees paid TimWen directly for these subleases. TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $0.1 million during both the first six months of 2015 and 2014, which have been included as a reduction to “General and administrative.”


30


Results of Operations

The tables included throughout Results of Operations, set forth in millions the Company’s consolidated results of operations for the three months ended June 28, 2015 and June 29, 2014. As a result of the sale of the Bakery discussed above in “Introduction - Sale of the Bakery,” the Bakery’s results of operations for the period from March 30, 2015 through May 31, 2015 and the three months ended June 29, 2014 have been included in “Income from discontinued operations, net of income taxes” in the table below.
 
Three Months Ended
 
June 28,
2015
 
June 29,
2014
 
Change
Revenues:
 
 
 
 
 
Sales
$
385.0

 
$
407.7

 
$
(22.7
)
Franchise revenues
104.5

 
98.4

 
6.1

 
489.5

 
506.1

 
(16.6
)
Costs and expenses:
 
 
 
 
 

Cost of sales
315.1

 
335.1

 
(20.0
)
General and administrative
60.8

 
66.4

 
(5.6
)
Depreciation and amortization
39.3

 
38.0

 
1.3

System optimization gains, net
(15.7
)
 
(1.4
)
 
(14.3
)
Reorganization and realignment costs
6.3

 
1.3

 
5.0

Impairment of long-lived assets
10.0

 
0.1

 
9.9

Other operating expense, net
9.4

 
5.4

 
4.0

 
425.2

 
444.9

 
(19.7
)
Operating profit
64.3

 
61.2

 
3.1

Interest expense
(17.2
)
 
(13.1
)
 
(4.1
)
Loss on early extinguishment of debt
(7.3
)
 

 
(7.3
)
Other income, net
0.3

 
0.8

 
(0.5
)
Income from continuing operations before income taxes
40.1

 
48.9

 
(8.8
)
Provision for income taxes
(15.3
)
 
(21.6
)
 
6.3

Income from continuing operations
24.8

 
27.3

 
(2.5
)
Discontinued operations:
 
 
 
 
 
Income from discontinued operations, net of income taxes
0.3

 
1.7

 
(1.4
)
Gain on disposal of discontinued operations, net of income taxes
15.1

 

 
15.1

Net income from discontinued operations
15.4

 
1.7

 
13.7

Net income
$
40.2

 
$
29.0

 
$
11.2




31


 
Second
Quarter
2015
 
 
 
Second
Quarter
2014
 
 
Sales:
 
 
 
 
 
 
 
Wendy’s
$
385.0

 
 
 
$
407.7

 
 
 
 
 
 
 
 
 
 
 
Second
Quarter
2015
 
 
 
Second
Quarter
2014
 
 
Franchise revenues:
 
 
 
 
 
 
 
Royalty revenue
$
80.7

 
 
 
$
81.3

 
 
Rental income
20.2

 
 
 
16.3

 
 
Franchise fees
3.6

 
 
 
0.8

 
 
Total franchise revenues
$
104.5

 
 
 
$
98.4