10-Q 1 twc10qq3-15.htm 10-Q 10-Q

 
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 September 27, 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 273,479,452 shares of The Wendy’s Company common stock outstanding as of October 29, 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)
 
September 27,
2015
 
December 28,
2014
ASSETS
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
175,700

 
$
267,112

Accounts and notes receivable
77,078

 
68,211

Inventories
4,204

 
6,861

Prepaid expenses and other current assets
178,484

 
72,258

Deferred income tax benefit
73,132

 
73,661

Advertising funds restricted assets
86,444

 
65,308

Current assets of discontinued operations

 
8,691

Total current assets
595,042

 
562,102

Properties
1,226,383

 
1,241,170

Goodwill
775,633

 
822,562

Other intangible assets
1,343,197

 
1,351,307

Investments
64,890

 
74,054

Other assets
75,637

 
56,272

Noncurrent assets of discontinued operations

 
30,132

Total assets
$
4,080,782

 
$
4,137,599

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
23,198

 
$
53,202

Accounts payable
60,691

 
77,309

Accrued expenses and other current liabilities
134,574

 
125,880

Advertising funds restricted liabilities
86,444

 
65,308

Current liabilities of discontinued operations

 
18,525

Total current liabilities
304,907

 
340,224

Long-term debt
2,379,934

 
1,384,972

Deferred income taxes
476,513

 
493,843

Other liabilities
213,971

 
199,833

Noncurrent liabilities of discontinued operations

 
1,151

Total liabilities
3,375,325

 
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
2,876,188

 
2,826,965

Accumulated deficit
(426,054
)
 
(445,917
)
Common stock held in treasury, at cost; 197,090 and 104,614
shares, respectively
(1,728,336
)
 
(679,220
)
Accumulated other comprehensive loss
(63,383
)
 
(31,294
)
Total stockholders’ equity
705,457

 
1,717,576

Total liabilities and stockholders’ equity
$
4,080,782

 
$
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
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Sales
$
359,015

 
$
393,444

 
$
1,101,632

 
$
1,219,166

Franchise revenues
105,614

 
103,226

 
304,300

 
292,033

 
464,629

 
496,670

 
1,405,932

 
1,511,199

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
291,524

 
332,645

 
911,757

 
1,031,151

General and administrative
63,683

 
65,173

 
184,152

 
201,217

Depreciation and amortization
36,420

 
34,873

 
111,300

 
113,451

System optimization losses (gains), net
98

 
368

 
(14,751
)
 
(74,027
)
Reorganization and realignment costs
5,754

 
1,389

 
16,646

 
17,376

Impairment of long-lived assets
1,513

 
8,618

 
13,468

 
11,224

Other operating expense, net
9,698

 
9,360

 
25,202

 
18,120

 
408,690

 
452,426

 
1,247,774

 
1,318,512

Operating profit
55,939

 
44,244

 
158,158

 
192,687

Interest expense
(27,938
)
 
(13,148
)
 
(57,882
)
 
(39,173
)
Loss on early extinguishment of debt

 

 
(7,295
)
 

Other income, net
214

 
371

 
725

 
1,748

Income from continuing operations before income taxes
28,215

 
31,467

 
93,706

 
155,262

Provision for income taxes
(19,892
)
 
(10,334
)
 
(42,408
)
 
(61,793
)
Income from continuing operations
8,323

 
21,133

 
51,298

 
93,469

Discontinued operations:
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of income taxes
(417
)
 
1,697

 
9,171

 
4,671

(Loss) gain on disposal of discontinued operations, net of income taxes
(322
)
 

 
14,817

 

Net (loss) income from discontinued operations
(739
)
 
1,697

 
23,988

 
4,671

Net income
$
7,584

 
$
22,830

 
$
75,286


$
98,140

 
 
 
 
 
 
 
 
Basic and diluted income (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
.03

 
$
.06

 
$
.15

 
$
.25

Discontinued operations

 

 
.07

 
.01

Net income
$
.03

 
$
.06

 
$
.22

 
$
.26

 
 
 
 
 
 
 
 
Dividends per share
$
.055

 
$
.05

 
$
.165

 
$
.15


See accompanying notes to condensed consolidated financial statements.

4

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



 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
 
(Unaudited)
 
 
 
 
 
 
 
 
Net income
$
7,584

 
$
22,830

 
$
75,286

 
$
98,140

Other comprehensive loss, net:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(17,385
)
 
(10,213
)
 
(29,879
)
 
(9,238
)
Change in unrecognized pension loss, net of income tax benefit (provision) of $124 and $(213), respectively

 

 
(203
)
 
338

Effect of cash flow hedges, net of income tax (provision) benefit of $(273) and $(549) for the three months and $1,217 and $972 for the nine months ended September 27, 2015 and September 28, 2014, respectively
435

 
885

 
(2,007
)
 
(1,533
)
 Other comprehensive loss, net
(16,950
)
 
(9,328
)
 
(32,089
)
 
(10,433
)
 Comprehensive (loss) income
$
(9,366
)
 
$
13,502

 
$
43,197

 
$
87,707


See accompanying notes to condensed consolidated financial statements.

5

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

 
 
Nine Months Ended
 
 
September 27,
2015
 
September 28,
2014
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
75,286

 
$
98,140

Adjustments to reconcile net income to net cash provided by
     operating activities:
 
 
 
 
Depreciation and amortization
 
118,708

 
118,265

Share-based compensation
 
18,784

 
25,208

Impairment of long-lived assets
 
13,468

 
11,224

Deferred income tax
 
35,368

 
59,597

Excess tax benefits from share-based compensation
 
(49,870
)
 
(11,979
)
Non-cash rent expense, net
 
2,792

 
6,239

Net receipt of deferred vendor incentives
 
3,402

 
9,160

System optimization gains, net
 
(14,783
)
 
(74,092
)
Gain on disposal of the Bakery
 
(27,526
)
 

Gain on sales of investments, net
 

 
(690
)
Distributions received from TimWen joint venture
 
9,198

 
10,028

Equity in earnings in joint venture, net
 
(6,968
)
 
(7,659
)
Long-term debt-related activities, net (see below)
 
4,972

 
2,708

Other, net
 
307

 
(5,553
)
Changes in operating assets and liabilities:
 
 
 
 
Restricted cash
 
(23,686
)
 

Accounts and notes receivable
 
(29,046
)
 
(6,074
)
Inventories
 
203

 
925

Prepaid expenses and other current assets
 
(6,530
)
 
(8,889
)
Accounts payable
 
9,212

 
(3,347
)
Accrued expenses and other current liabilities
 
(14,662
)
 
(40,615
)
Net cash provided by operating activities
 
118,629

 
182,596

Cash flows from investing activities:
 
 

 
 

Capital expenditures
 
(188,246
)
 
(197,886
)
Acquisitions
 
(1,232
)
 
(5,949
)
Dispositions
 
46,357

 
119,892

Proceeds from sale of the Bakery
 
78,408

 

Proceeds from sales of investments
 

 
2,189

Payments for investments
 
(2,082
)
 
(400
)
Notes receivable from franchisees, net
 
2,631

 
434

Changes in restricted cash
 
484

 
1,750

Other, net
 
88

 

Net cash used in investing activities
 
(63,592
)
 
(79,970
)
Cash flows from financing activities:
 
 

 
 

Proceeds from long-term debt
 
2,294,000

 

Repayments of long-term debt
 
(1,321,169
)
 
(28,983
)
Deferred financing costs
 
(42,098
)
 

Change in restricted cash
 
(5,687
)
 

Repurchases of common stock
 
(1,078,404
)
 
(291,240
)
Dividends
 
(55,414
)
 
(55,012
)
Proceeds from stock option exercises
 
22,419

 
25,254

Excess tax benefits from share-based compensation
 
49,870

 
11,979

Net cash used in financing activities
 
(136,483
)
 
(338,002
)
Net cash used in operations before effect of exchange rate changes on cash
 
(81,446
)
 
(235,376
)
Effect of exchange rate changes on cash
 
(10,130
)
 
(2,330
)
Net decrease in cash and cash equivalents
 
(91,576
)
 
(237,706
)
Cash and cash equivalents at beginning of period
 
267,276

 
580,152

Cash and cash equivalents at end of period
 
$
175,700

 
$
342,446


6

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


 
 
Nine Months Ended
 
 
September 27,
2015
 
September 28,
2014
 
 
(Unaudited)
Details of cash flows from operating activities:
 
 
 
 
Long-term debt-related activities, net:
 
 
 
 
Loss on early extinguishment of debt
 
$
7,295

 
$

Accretion of long-term debt
 
890

 
890

Amortization of deferred financing costs
 
3,416

 
1,818

Payments for termination of cash flow hedges
 
(7,337
)
 

Reclassification of unrealized losses on cash flow hedges
 
708

 

 
 
$
4,972

 
$
2,708

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid for:
 
 

 
 

Interest
 
$
55,725

 
$
37,507

Income taxes, net of refunds
 
16,401

 
11,231

 
 
 
 
 
Supplemental non-cash investing and financing activities:
 
 
 
 
Capital expenditures included in accounts payable
 
$
25,970

 
$
58,629

Capitalized lease obligations
 
25,657

 
11,223

Accrued debt issuance costs
 
1,653

 


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 September 27, 2015 and the results of our operations for the three and nine months ended September 27, 2015 and September 28, 2014 and cash flows for the nine months ended September 27, 2015 and September 28, 2014. The results of operations for the three and nine months ended September 27, 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 nine month periods presented herein contain 13 weeks and 39 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 (loss) gain on disposal have been included in “Net (loss) 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.

In connection with the reimaging of restaurants as part of our Image Activation program, we have recorded $2,475 and $6,578 of accelerated depreciation and amortization during the three and nine months ended September 27, 2015, respectively, and $1,180 and $16,199 during the three and nine months ended September 28, 2014, respectively, on certain long-lived assets to reflect their use over shortened estimated useful lives. We describe the circumstances under which we record accelerated depreciation and amortization for properties in our Form 10-K.

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 losses (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

8

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

10-Q for the fiscal quarter ended September 28, 2014 and Form 10-K. Such reclassifications had no impact on operating profit, net income or net income per share.

The following table illustrates the reclassifications made to the condensed consolidated statements of operations for the three and nine months ended September 28, 2014:
 
Three Months Ended
 
 
 
Reclassifications
 
 
 
As Previously Reported (b)
 
Gain on dispositions, net (c)
 
System Optimization Remeasurement (d)
 
As Currently Reported
System optimization losses, net
$

 
$
368

 
$

 
$
368

Reorganization and realignment costs (a)
7,520

 
(921
)
 
(5,210
)
 
1,389

Impairment of long-lived assets
3,408

 

 
5,210

 
8,618

Other operating expense, net
8,807

 
553

 

 
9,360

 
$
19,735

 
$

 
$

 
$
19,735

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

 
$
(74,027
)
 
$

 
$
(74,027
)
Reorganization and realignment costs (a)
(35,630
)
 
60,490

 
(7,484
)
 
17,376

Impairment of long-lived assets
3,740

 

 
7,484

 
11,224

Other operating expense, net
4,583

 
13,537

 

 
18,120

 
$
(27,307
)
 
$

 
$

 
$
(27,307
)
_______________

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

(b)
“As Previously Reported,” reflects adjustments to reclassify the Bakery’s other operating income, net of $24 and $61 for the three and nine months ended September 28, 2014, respectively, from “Other operating expense, net” to “(Loss) income from discontinued operations, net of income taxes.”

(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 expense, net” to a separate line in our condensed consolidated statements of operations, “System optimization losses (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 $27,526 during the nine months ended September 27, 2015, which included transaction closing costs and a reduction of goodwill. The Company recognized income tax expense associated with the gain on disposal of $12,709 during the nine months ended September 27, 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 following the sale of the Bakery. As a result, Wendy’s paid the Buyer $4,699 for the purchase of sandwich buns during the period from June 1, 2015 through the end of the third 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 nine months ended September 28, 2014 have been presented as discontinued operations. In addition, the (loss) gain on disposal of the Bakery has been included in “Net (loss) income from discontinued operations” for the three and nine months ended September 27, 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 nine months ended September 28, 2014) have been included in, and not separately reported from, our consolidated cash flows. The consolidated statement of cash flows for the nine months ended September 27, 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 (loss) gain on disposal which have been included in discontinued operations:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2015 (e)
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Revenues (a)
$

 
$
15,819

 
$
25,885

 
$
47,913

Cost of sales (b)
(207
)
 
(11,162
)
 
(7,543
)
 
(34,626
)
 
(207
)
 
4,657

 
18,342

 
13,287

General and administrative
4

 
(601
)
 
(1,093
)
 
(1,905
)
Depreciation and amortization (c)

 
(1,401
)
 
(2,297
)
 
(4,339
)
Other income (expense), net (d)
15

 
(30
)
 
(19
)
 
(89
)
(Loss) income from discontinued operations before income taxes
(188
)
 
2,625

 
14,933

 
6,954

Provision for income taxes
(229
)
 
(928
)
 
(5,762
)
 
(2,283
)
(Loss) income from discontinued operations, net of income taxes
(417
)
 
1,697

 
9,171

 
4,671

Gain on disposal of discontinued operations before income taxes
188

 

 
27,526

 

Provision for income taxes on gain on disposal
(510
)
 

 
(12,709
)
 

(Loss) gain on disposal of discontinued operations, net of income taxes
(322
)
 

 
14,817

 

Net (loss) income from discontinued operations
$
(739
)
 
$
1,697

 
$
23,988

 
$
4,671

_______________

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

(b)
The nine months ended September 27, 2015 include employee separation-related costs of $791 as a result of the sale of the Bakery. In addition, the nine months ended September 27, 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 nine months ended September 27, 2015, the Bakery received cash proceeds of $50 resulting in net gains on sales of other assets of $32. During the three and nine months ended September 28, 2014, the Bakery received cash proceeds of $10 and $47, resulting in net gains on sales of other assets of $28 and $65, respectively.

(e)
Represents post-closing adjustments recorded during the third quarter of 2015.

The Bakery’s capital expenditures were $2,693 for the nine months ended September 27, 2015, and $808 and $2,361 for the three and nine months ended September 28, 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:
 
Nine Months Ended
 
September 27,
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

Post-closing adjustments on the sale of the Bakery
188

 
27,526

Provision for income taxes (e)
(12,709
)
Gain on disposal of discontinued operations, net of income taxes
$
14,817

_______________

(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 Losses (Gains), Net

In July 2013, the Company announced a system optimization initiative, as part of its brand transformation, which includes a shift from company-owned restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as helping to facilitate franchisee-to-franchisee restaurant transfers. 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 end of 2016. During the third quarter of 2015, the Company completed the sale of nine restaurants. As of September 27, 2015, the company had classified 274 restaurants as held for sale.

Gains and losses recognized on dispositions are recorded to “System optimization losses (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
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014 (f)
 
September 27,
2015
 
September 28,
2014 (f)
Number of restaurants sold to franchisees
9

 
12

 
109

 
190

 
 
 
 
 
 
 
 
Proceeds from sales of restaurants
$
3,084

 
$
2,689

 
$
39,133

 
$
104,249

Net assets sold (a)
(1,867
)
 
(1,301
)
 
(19,247
)
 
(43,317
)
Goodwill related to sales of restaurants
(483
)
 
(478
)
 
(8,346
)
 
(14,136
)
Net (unfavorable) favorable leases (b)
(1,506
)
 
(1,080
)
 
5,889

 
23,901

Other (c)

 
(84
)
 
(3,224
)
 
216

 
(772
)
 
(254
)
 
14,205

 
70,913

Post-closing adjustments on sales of restaurants (d)
(495
)
 
(421
)
 
(1,134
)
 
(1,538
)
(Loss) gain on sales of restaurants, net
(1,267
)
 
(675
)
 
13,071

 
69,375

 
 
 
 
 
 
 
 
Gain on sales of other assets, net (e)
1,169

 
307

 
1,680

 
4,652

System optimization (losses) gains, net
$
(98
)
 
$
(368
)
 
$
14,751

 
$
74,027

_______________

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

(b)
During the three and nine months ended September 27, 2015, the Company recorded favorable lease assets of $185 and $25,992, respectively, and unfavorable lease liabilities of $1,691 and $20,103, 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 three and nine months ended September 28, 2014, the Company recorded favorable lease assets of $1,814 and $49,206, respectively, and unfavorable lease liabilities of $2,894 and $25,305, respectively.

(c)
The nine months ended September 27, 2015 includes a deferred gain of $2,658 related to the sale of 14 Canadian restaurants to a franchisee during the second quarter of 2015, as a result of certain contingencies related to the extension of lease terms. The deferred gain is included in “Other liabilities.” The nine months ended September 27, 2015 also includes a note receivable of $1,801 from a franchisee in connection with the sale of 16 Canadian restaurants, which was recognized as part of the overall loss on sale during the second quarter of 2015.

(d)
During the nine months ended September 27, 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 nine months ended September 27, 2015, Wendy’s received cash proceeds of $4,576 and $7,174, respectively, primarily from the sale of surplus properties. During the three and nine months ended September 28, 2014, Wendy’s received cash proceeds of $989 and $15,596, 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
 
September 27,
2015
 
December 28, 2014 (a)
Number of restaurants classified as held for sale
274

 
106

Net restaurant assets held for sale (b)
$
103,561

 
$
25,266

 
 
 
 
Other assets held for sale (b)
$
5,144

 
$
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.

(b) 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:
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
Restaurants acquired from franchisees
4

 
6

 
 
 
 
Properties
$
1,303

 
$
3,870

Acquired franchise rights
760

 
2,000

Goodwill
127

 
720

Deferred taxes and other assets
(40
)
 
46

Capital leases obligations
(438
)
 

Unfavorable leases
(440
)
 

Deferred taxes and other liabilities
(40
)
 
(338
)
Gain on acquisition of restaurants

 
(349
)
Total consideration paid, net of cash received
$
1,232

 
$
5,949



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
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
G&A realignment
$
1,461

 
$

 
$
9,996

 
$

System optimization initiative
4,293

 
1,389

 
6,650

 
17,376

Reorganization and realignment costs
$
5,754

 
$
1,389

 
$
16,646

 
$
17,376


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 $9,996 during the first nine months of 2015 and $22,922 in aggregate since inception. The Company expects to incur additional costs aggregating approximately $3,000 during the remainder of 2015 and 2016, comprised primarily of recruitment and relocation costs for the reinvestment in resources to drive long-term growth.

The following is a summary of the activity recorded as a result of our G&A realignment plan:
 
Three Months Ended
 
Nine Months Ended
 
Total
Incurred Since Inception
 
September 27,
2015
 
September 27,
2015
 
Severance and related employee costs
$
513

 
$
3,132

 
$
15,049

Recruitment and relocation costs
270

 
1,254

 
1,463

Other
2

 
43

 
131

 
785

 
4,429

 
16,643

Share-based compensation (a)
676

 
5,567

 
6,279

   Total G&A realignment
$
1,461

 
$
9,996

 
$
22,922

_______________

(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
September 27,
2015
Severance and related employee costs
$
11,609

 
$
3,132

 
$
(9,256
)
 
$
5,485

Recruitment and relocation costs
149

 
1,254

 
(1,238
)
 
165

Other
5

 
43

 
(48
)
 

 
$
11,763

 
$
4,429

 
$
(10,542
)
 
$
5,650


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 a shift from company-owned restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as helping to facilitate franchisee-to-franchisee restaurant transfers. In connection with its system optimization initiative, the Company expects to incur additional costs of approximately $10,000 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 $3,000 and professional fees of approximately $7,000.

The following is a summary of the costs recorded as a result of our system optimization initiative:
 
Three Months Ended
 
Nine Months Ended
 
Total
Incurred Since Inception
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
 
Severance and related employee costs
$
225

 
$
715

 
$
854

 
$
6,641

 
$
18,112

Professional fees
242

 
38

 
393

 
3,227

 
6,206

Other (a)
337

 
511

 
292

 
3,273

 
4,833

 
804

 
1,264

 
1,539

 
13,141

 
29,151

Accelerated depreciation and
amortization (b)
3,489

 

 
5,111

 
475

 
22,525

Share-based compensation (c)

 
125

 

 
3,760

 
5,013

Total system optimization initiative
$
4,293

 
$
1,389

 
$
6,650

 
$
17,376

 
$
56,689

_______________

(a)
The nine months ended September 27, 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
September 27,
2015
Severance and related employee costs
$
2,235

 
$
854

 
$
(3,003
)
 
$
86

Professional fees
146

 
393

 
(488
)
 
51

Other
423

 
292

 
(523
)
 
192

 
$
2,804

 
$
1,539

 
$
(4,014
)
 
$
329



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:
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
Balance at beginning of period
$
69,790

 
$
79,810

 
 
 
 
Equity in earnings for the period
8,689

 
9,651

Amortization of purchase price adjustments (a)
(1,721
)
 
(1,992
)
 
6,968

 
7,659

Distributions received
(9,198
)
 
(10,028
)
Foreign currency translation adjustment included in “Other comprehensive loss, net”
(8,928
)
 
(3,187
)
Balance at end of period
$
58,632

 
$
74,254

_______________

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

(7) Long-Term Debt

Long-term debt consisted of the following:
 
September 27,
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
86,743

 
85,853

Capital lease obligations, due through 2045 (a)
82,763

 
59,073

Unamortized debt issuance costs (b)
(41,374
)
 
(8,243
)
 
2,403,132

 
1,438,174

Less amounts payable within one year (a)
(23,198
)
 
(53,202
)
Total long-term debt
$
2,379,934

 
$
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 September 27, 2015 were as follows:
Fiscal Year
 
 
2015 (a)
 
$
5,773

2016
 
23,193

2017
 
23,373

2018
 
24,482

2019
 
862,857

Thereafter
 
1,518,085

 
 
$
2,457,763

_______________

(a)
Represents maturities of long-term debt for the remainder of our 2015 fiscal year, from September 28, 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. During the third quarter of 2015, the Company borrowed and repaid $19,000 under the Series 2015-1 Class A-1 Notes.

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

18

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

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 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, from the date of issuance (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 September 27, 2015, $22,052 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 nine months ended September 27, 2015, the Company incurred debt issuance costs of $43,751 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 September 27, 2015, the effective interest rates, including the amortization of debt issuance costs, were 3.789%, 4.338% and 4.681% 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 September 27, 2015, Wendy’s Funding had restricted cash of $29,373, which primarily represented cash collections and cash reserves held by the trustee to be used for payments of principal, interest and commitment fees required for the Series 2015-1 Class A-2 Notes. Such restricted cash is included in “Prepaid expenses and other current assets” in the condensed consolidated balance sheet as of September 27, 2015. Changes in such restricted cash have been presented as a component of cash flows from operating and financing activities in the condensed consolidated statement of cash flows since the cash is restricted to the payment of interest and principal, respectively.

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 during the second quarter of 2015, primarily consisting of the write-off of deferred costs related to the 2013 Restated Credit Agreement of $7,233 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:
 
September 27,
2015
 
December 28,
2014
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Fair Value
Measurements
Financial assets
 
 
 
 
 
 
 
 
 
Cash equivalents
$
346

 
$
346

 
$
61,450

 
$
61,450

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

 
169,614

 
4,264

 
147,760

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

 
876,575

 

 

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

 
909,720

 

 

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

 
500,950

 

 

 
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)
86,743

 
105,625

 
85,853

 
104,250

 
Level 2
Cash flow hedges (c)

 

 
3,343

 
3,343

 
Level 2
Guarantees of franchisee loan obligations (d)
979

 
979

 
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 was 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 at termination of $7,275 is being 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 a result, the three and nine months ended September 27, 2015 include the reclassification of unrealized losses on the cash flow hedges of $708 from “Accumulated other comprehensive loss” to “Interest expense.”

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 nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 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.


21

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

 
 
 
Fair Value Measurements
 
Nine Months Ended
September 27, 2015
 Total Losses
 
September 27, 2015
 
Level 1
 
Level 2
 
Level 3
 
Held and used
$
5,060

 
$

 
$

 
$
5,060

 
$
12,257

Held for sale
2,663

 

 

 
2,663

 
1,211

Total
$
7,723

 
$

 
$

 
$
7,723

 
$
13,468


 
 
 
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 nine months ended September 27, 2015 and September 28, 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, (2) closing company-owned restaurants and classifying such properties as held for sale and (3) 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
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Restaurants leased or subleased to franchisees
$
1,235

 
$
5,460

 
$
9,491

 
$
7,734

Company-owned restaurants
219

 
2,027

 
2,766

 
2,027

Surplus properties
59

 
1,131

 
1,211

 
1,463

 
$
1,513

 
$
8,618

 
$
13,468

 
$
11,224


(10) Income Taxes

The Company’s effective tax rate on income from continuing operations for the three months ended September 27, 2015 and September 28, 2014 was 70.5% and 32.8%, respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 35% due to the effect of (1) changes to valuation allowances on state net operating loss carryforwards due primarily to the expected sale of restaurants in certain states, which have been classified as held for sale under our system optimization initiative, (2) the impact of non-deductible goodwill disposed of in connection with our system optimization initiative, (3) state income taxes net of federal benefits, (4) employment credits and (5) foreign rate differential.

The Company’s effective tax rate on income from continuing operations for the nine months ended September 27, 2015 and September 28, 2014 was 45.3% and 39.8%, 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, partially resulting from changes to state deferred taxes, (2) changes to valuation allowances on state net operating loss carryforwards due primarily to the expected sale of restaurants classified as held for sale under our system optimization initiative, (3) the impact of non-deductible goodwill disposed of in connection with our system optimization initiative, (4) foreign rate differential, (5) adjustments related to prior year tax matters including changes to unrecognized tax benefits and (6) employment credits. The changes to state deferred taxes during the nine months ended September 27, 2015 were primarily due to the deferred tax impact of an internal restructuring required to complete

22

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

the securitized financing facility discussed in Note 7, and the expected sale of restaurants under our system optimization initiative described in Note 3. The changes to state deferred taxes during the nine months ended September 28, 2014 were primarily due to the enactment of a mandatory consolidated return filing requirement in New York.

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 nine months ended September 27, 2015. During the next twelve months it is reasonably possible the Company will reduce its unrecognized tax benefits by up to $620, 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
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Common stock:
 
 
 
 
 
 
 
Weighted average basic shares outstanding
292,256

 
366,880

 
340,869

 
371,714

Dilutive effect of stock options and restricted shares
4,695

 
5,272

 
6,032

 
6,178

Weighted average diluted shares outstanding
296,951

 
372,152

 
346,901

 
377,892


Diluted net income per share for the three and nine months ended September 27, 2015 and September 28, 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 3,118 and 1,439 for the three and nine months ended September 27, 2015, respectively, and 3,886 and 4,833 for the three and nine months ended September 28, 2014, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.


23

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

(12) Stockholders’ Equity

Stockholders’ Equity

The following is a summary of the changes in stockholders’ equity:
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
Balance at beginning of period
$
1,717,576

 
$
1,929,486

Comprehensive income
43,197

 
87,707

Dividends
(55,414
)
 
(55,012
)
Repurchases of common stock
(1,078,404
)
 
(291,240
)
Share-based compensation
18,784

 
25,208

Exercises of stock options
17,996

 
24,839

Vesting of restricted shares
(7,323
)
 
(3,666
)
Tax benefit from share-based compensation
48,897

 
11,254

Other
148

 
139

Balance at end of period
$
705,457

 
$
1,728,715


Repurchases of Common Stock

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. 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 August 2014 authorization, $76,111 remained available as of December 28, 2014. During the first and second quarters of 2015, the Company repurchased 5,655 shares with an aggregate purchase price of $61,631, excluding commissions of $86. During the third quarter of 2015, the Company repurchased $14,480 through the accelerated share repurchase agreement described below. As a result, the $100,000 share repurchase program authorized in August 2014 was completed.

As part of the June 2015 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. On June 30, 2015, the tender offer expired and on July 8, 2015, the Company repurchased 55,808 shares at $11.45 per share for an aggregate purchase price of $639,000. On July 17, 2015, the Company repurchased 18,416 shares, pursuant to the separate stock 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 during the third quarter of 2015. During the nine months ended September 27, 2015, the Company incurred costs of $2,288 in connection with the tender offer and Trian Group stock purchase agreement, which were recorded to treasury stock.

In August 2015, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase programs. Under the ASR Agreement, the Company paid the financial institution an initial purchase price of $164,500 in cash and received an initial delivery of 14,385 shares of common stock, representing an estimate of 85% of the total shares expected to be delivered under the ASR Agreement. The total number of shares of common stock ultimately purchased by the Company under the ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the ASR Agreement, less an agreed discount. On September 25, 2015, the Company completed the ASR Agreement and received an additional 3,551 shares of common stock. After the completion of the ASR Agreement, the Company had $400,114 remaining availability under its June 2015 authorization. During the three and nine months ended September 27, 2015, the Company incurred costs of $32 in connection with the ASR Agreement, which were recorded to treasury stock.


24

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

During the nine months ended September 28, 2014, the Company repurchased 1,739 shares with an aggregate purchase price of $13,935, excluding commissions of $30, as part of the August 2014 authorization. In January 2014, our Board of Directors authorized a repurchase program, which the Company fully utilized through 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 (a)
 
Pension
 
Total
Balance at December 28, 2014
$
(28,363
)
 
$
(2,044
)
 
$
(887
)
 
$
(31,294
)
Current-period other comprehensive loss
(29,879
)
 
(2,007
)
 
(203
)
 
(32,089
)
Balance at September 27, 2015
$
(58,242
)
 
$
(4,051
)
 
$
(1,090
)
 
$
(63,383
)
 
 
 
 
 
 
 
 
Balance at December 29, 2013
$
(9,803
)
 
$
744

 
$
(1,278
)
 
$
(10,337
)
Current-period other comprehensive (loss) income
(9,238
)
 
(1,533
)
 
338

 
(10,433
)
Balance at September 28, 2014
$
(19,041
)
 
$
(789
)
 
$
(940
)
 
$
(20,770
)
_______________

(a)
Current-period other comprehensive (loss) income for the nine months ended September 27, 2015 and September 28, 2014 includes the effect of changes in unrealized losses on cash flow hedges, net of tax. The three and nine months ended September 27, 2015 also include the reclassification of unrealized losses on cash flow hedges of $435 from “Accumulated other comprehensive loss” to our condensed consolidated statements of operations consisting of $708 recorded to “Interest expense,” net of the related income tax benefit of $273 recorded to “Provision for income taxes.” See Note 8 for more information.

The cumulative 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.

25

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


Transactions with QSCC

Wendy’s received $138 of lease income from its purchasing cooperative, Quality Supply Chain Co-op, Inc. (“QSCC”) during both the nine months ended September 27, 2015 and September 28, 2014, respectively, which has been recorded as a reduction to “General and administrative.”

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. Prior to the second quarter of 2015, Wendy’s operated certain of the Wendy’s/Tim Hortons combo units in Canada and subleased some of the restaurant facilities to franchisees. As a result of the Company completing its plan to sell all of its company-owned restaurants in Canada to franchisees during the second quarter of 2015, all of the restaurant facilities are subleased to franchisees. During the nine months ended September 27, 2015 and September 28, 2014, Wendy’s paid TimWen $9,066 and $4,843, respectively, under these lease agreements. Prior to 2015, franchisees paid TimWen directly for these subleases. TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $164 and $189 during the nine months ended September 27, 2015 and September 28, 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 September 27, 2015, the Company had accruals for all of its legal and environmental matters aggregating $2,425. 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

26

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

the collective bargaining agreement and re-entered the Union Pension Fund. As a result of the sale of its membership interest in the Bakery Company, 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.

(16) New Accounting Standards

New Accounting Standards

In September 2015, the Financial Accounting Standards Board (the “FASB”) issued an amendment that requires an acquirer to recognize adjustments to provisional amounts during the measurement period, in the period such adjustments are identified, rather than retrospectively adjusting previously reported amounts. The Company does not expect the amendment, which is effective commencing with our 2016 fiscal year, to have a material impact on our consolidated financial statements.

In August 2015, 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 July 2015, the FASB issued an amendment that requires entities to measure inventory at the lower of cost and net realizable value, rather than the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. The Company does not expect the amendment, which is effective commencing with our 2017 fiscal year, to have a material impact 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.


27


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 September 27, 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 nine month periods presented herein contain 13 weeks and 39 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 (loss) gain on disposal have been included in “Net (loss) 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 losses (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 September 28, 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.


28


Executive Overview

Sale of the Bakery

On May 31, 2015, Wendy’s completed the sale of 100% of its membership interest in the Bakery 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 $27.5 million during the nine months ended September 27, 2015, which included transaction closing costs and a reduction of goodwill. The Company recognized income tax expense associated with the gain on disposal of $12.7 million during the nine months ended September 27, 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 September 27, 2015, the Wendy’s restaurant system was comprised of 6,487 restaurants, of which 852 were owned and operated by the Company. 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 nine months of 2015 include: (1) $1,101.6 million of sales at company-owned restaurants and (2) $235.3 million of royalty revenue, $60.5 million of rental income and $8.5 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 a shift from company-owned restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as helping to facilitate franchisee-to-franchisee restaurant transfers. 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

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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 end of 2016. During the third quarter of 2015, the Company completed the sale of nine restaurants. As of September 27, 2015, the company had classified 274 restaurants as held for sale.

Gains and losses recognized on dispositions are recorded to “System optimization losses (gains), net” in our condensed consolidated statements of operations. During the first nine months of 2015 and 2014, the Company completed the sale of 109 and 190 company-owned restaurants to franchisees, respectively, as well as other assets, and recognized net gains totaling $14.8 million and $74.0 million, respectively.

Costs related to our system optimization initiative are recorded to “Reorganization and realignment costs.” During the first nine months of 2015 and 2014, the Company recognized costs totaling $6.6 million and $17.4 million, respectively, which primarily included severance and related employee costs, accelerated depreciation and amortization, share-based compensation expense and professional fees. The Company expects to incur additional costs of approximately $10.0 million in aggregate during the remainder of 2015 and 2016 in connection with its system optimization initiative. 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 $3.0 million and professional fees of approximately $7.0 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 $10.0 million in the first nine 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 $3.0 million during the remainder of 2015 and 2016, comprised primarily of recruitment and relocation costs for the reinvestment in resources to drive long-term growth.

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 during the second quarter of 2015, 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

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who participated in the tender offer. On July 17, 2015, after completion of the modified Dutch auction tender offer, the Company 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. Prior to the second quarter of 2015, Wendy’s operated certain of the Wendy’s/Tim Hortons combo units in Canada and subleased some of the restaurant facilities to franchisees. As a result of the Company completing its plan to sell all of its company-owned restaurants in Canada to franchisees during the second quarter of 2015, all of the restaurant facilities are subleased to franchisees. During the nine months ended September 27, 2015 and September 28, 2014, Wendy’s paid TimWen $9.1 million and $4.8 million, respectively, under these lease agreements. Prior to 2015, franchisees paid TimWen directly for these subleases. TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $0.2 million during both the nine months ended September 27, 2015 and September 28, 2014, which has been included as a reduction to “General and administrative.”

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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 September 27, 2015 and September 28, 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 three months ended September 28, 2014 have been included in “(Loss) income from discontinued operations, net of income taxes” in the table below.
 
Three Months Ended
 
September 27,
2015
 
September 28,
2014
 
Change
Revenues:
 
 
 
 
 
Sales
$
359.0

 
$
393.5

 
$
(34.5
)
Franchise revenues
105.6

 
103.2

 
2.4

 
464.6

 
496.7

 
(32.1
)
Costs and expenses:
 
 
 
 
 

Cost of sales
291.5

 
332.6

 
(41.1
)
General and administrative
63.7

 
65.2

 
(1.5
)
Depreciation and amortization
36.4

 
34.9

 
1.5

System optimization losses, net
0.1

 
0.4

 
(0.3
)
Reorganization and realignment costs
5.8

 
1.4

 
4.4

Impairment of long-lived assets
1.5

 
8.6

 
(7.1
)
Other operating expense, net
9.7

 
9.4

 
0.3

 
408.7

 
452.5

 
(43.8
)
Operating profit
55.9

 
44.2

 
11.7

Interest expense
(27.9
)
 
(13.1
)
 
(14.8
)
Other income, net
0.2

 
0.4

 
(0.2
)
Income from continuing operations before income taxes
28.2

 
31.5

 
(3.3
)
Provision for income taxes
(19.9
)
 
(10.4
)
 
(9.5
)
Income from continuing operations
8.3

 
21.1

 
(12.8
)
Discontinued operations:
 
 
 
 
 
(Loss) income from discontinued operations, net of income taxes
(0.4
)
 
1.7

 
(2.1
)
(Loss) gain on disposal of discontinued operations, net of income
taxes
(0.3
)
 

 
(0.3
)
Net (loss) income from discontinued operations
(0.7
)
 
1.7

 
(2.4
)
Net income
$
7.6

 
$
22.8

 
$
(15.2
)



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Third
Quarter
2015
 
 
 
Third
Quarter
2014
 
 
Sales:
 
 
 
 
 
 
 
Wendy’s
$
359.0

 
 
 
$
393.5

 
 
 
 
 
 
 
 
 
 
 
Third
Quarter
2015