System Optimization (Gains) Losses, Net

The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating Franchise Flips. The Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system as of January 1, 2017. While the Company has no plans to reduce its ownership below the approximately 5% level, Wendy’s will continue to optimize its system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base and drive new restaurant development and accelerate reimages in the Image Activation format.

During the nine months ended September 30, 2018, the Company completed the sale of three Company-operated restaurants to a franchisee. In addition, the Company facilitated 73 and 270 Franchise Flips during the nine months ended September 30, 2018 and October 1, 2017, respectively (excluding the DavCo and NPC Transactions discussed below).

Gains and losses recognized on dispositions are recorded to “System optimization (gains) losses, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 6. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”

The following is a summary of the disposition activity recorded as a result of our system optimization initiative:



	Three Months Ended					Nine Months Ended
	September 30, 2018		October 1, 2017			September 30, 2018			October 1, 2017
Gain on sale of restaurants, net (a)	$	—	$	—		$	89		$	—
Post-closing adjustments on sales of restaurants (b)	279		418			54			1,345
Gain (loss) on sales of other assets, net (c)	207		(539		)	(135		)	2,040
Gain (loss) on DavCo and NPC Transactions (d)	—		15			—			(43,134		)
System optimization gains (losses), net	$	486	$	(106	)	$	8		$	(39,749	)

_______________


(a)	During the nine months ended September 30, 2018, the Company received cash proceeds of $1,436 from the sale of three Company-operated restaurants. Net assets sold totaled $1,139 and consisted primarily of equipment. In addition, goodwill of $208 was written off in connection with the sale.

(b)

The nine months ended September 30, 2018 includes cash proceeds, net of payments of $6. The three and nine months ended October 1, 2017 includes cash payments, net of proceeds received, of $333 and $33, respectively, related to post-closing reconciliations with franchisees. The three and nine months ended September 30, 2018 and the nine months ended October 1, 2017 include the recognition of deferred gains of $503 and $312, respectively, as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees.

(c)

During the three and nine months ended September 30, 2018, the Company received cash proceeds, primarily from the sale of surplus properties, of $1,049 and $1,421, respectively, and received cash proceeds of $2,411 and $9,403 during the three and nine months ended October 1, 2017, respectively. The nine months ended October 1, 2017 also includes the recognition of a deferred gain of $375 related to the sale of a share in an aircraft.

(d)

As part of our system optimization initiative, the Company acquired 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”) for total net cash consideration of $86,788, which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company, for cash proceeds of $70,688 (the “DavCo and NPC Transactions”). The acquisition of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such, the Company accounted for the transactions as an acquisition and subsequent disposition of a business. As part of the transactions, the Company retained leases for purposes of subleasing such properties to NPC.

The total consideration paid to DavCo was allocated to net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. Refer to the Form 10-K for further information regarding the purchase price allocation. The Company finalized the purchase price allocation during 2018 with no differences from the provisional amounts previously reported. The gain on the DavCo and NPC Transactions during the three months ended October 1, 2017 was comprised of a decrease in goodwill of $27 related to adjustments in the fair value of deferred taxes and net unfavorable leases, partially offset by additional selling and other costs of $12. The loss on the DavCo and NPC Transactions during the nine months ended October 1, 2017 was comprised of the write-off of goodwill of $65,476 and selling and other costs of $1,692, partially offset by the recognition of net favorable leases of $24,034.

As part of the DavCo acquisition, the Company recognized a supplemental purchase price liability of $6,269, which was settled during the nine months ended September 30, 2018.

As of September 30, 2018 and December 31, 2017, the Company had assets held for sale of $2,519 and $2,235, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”