Edgar Filing: Wendy's Co

TWC 10Q Q3-13

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 29, 2013



( )		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 391,675,340 shares of The Wendy’s Company common stock outstanding as of November 1, 2013.

THE WENDY’S COMPANY AND SUBSIDIARIES

INDEX TO FORM 10-Q



	Page
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets as of September 29, 2013 (Unaudited) and December 30, 2012	3
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 29, 2013 and September 30, 2012	4
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 29, 2013 and September 30, 2012	5
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2013 and September 30, 2012	6
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures about Market Risk	41
Item 4. Controls and Procedures	41

Part II: OTHER INFORMATION	42
Item 1. Legal Proceedings	43
Item 1A. Risk Factors	44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6. Exhibits	45
Signatures	46

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)



	September 29, 2013			December 30, 2012
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	513,431		$	453,361
Accounts and notes receivable	62,620			61,164
Inventories	9,127			13,805
Prepaid expenses and other current assets	118,680			24,231
Deferred income tax benefit	86,173			91,489
Advertising funds restricted assets	68,768			65,777
Total current assets	858,799			709,827
Properties	1,156,320			1,250,338
Goodwill	868,057			876,201
Other intangible assets	1,300,035			1,301,537
Investments	106,636			113,283
Deferred costs and other assets	34,108			52,013
Total assets	$	4,323,955		$	4,303,199

LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	38,260		$	12,911
Accounts payable	89,743			70,826
Accrued expenses and other current liabilities	156,075			137,348
Advertising funds restricted liabilities	68,768			65,777
Total current liabilities	352,846			286,862
Long-term debt	1,433,662			1,444,651
Deferred income taxes	454,524			438,217
Other liabilities	161,614			147,614
Commitments and contingencies

Equity:
The Wendy’s Company 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	2,788,479			2,782,765
Accumulated deficit	(505,657		)	(467,007		)
Common stock held in treasury, at cost; 78,853 and 78,051 shares	(404,484		)	(382,926		)
Accumulated other comprehensive (loss) income	(1,658		)	5,981
Total stockholders’ equity	1,923,722			1,985,855
Noncontrolling interests	(2,413		)	—
Total equity	1,921,309			1,985,855
Total liabilities and equity	$	4,323,955		$	4,303,199

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Amounts)



	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
	(Unaudited)
Revenues:
Sales	$	558,029		$	558,335		$	1,659,900		$	1,644,380
Franchise revenues	82,750			77,973			235,105			230,983
	640,779			636,308			1,895,005			1,875,363
Costs and expenses:
Cost of sales	469,177			478,425			1,403,303			1,416,972
General and administrative	76,518			72,175			216,623			217,824
Depreciation and amortization	44,325			41,878			134,841			110,136
Impairment of long-lived assets	5,327			—			5,327			7,781
Facilities action charges, net	22,275			11,430			31,690			27,561
Other operating (income) expense, net	(3,653		)	1,217			(3,043		)	4,599
	613,969			605,125			1,788,741			1,784,873
Operating profit	26,810			31,183			106,264			90,490
Interest expense	(15,620		)	(21,566		)	(55,548		)	(77,803		)
Loss on early extinguishment of debt	—			(49,881		)	(21,019		)	(75,076		)
Investment income and other income (expense), net	2,273			900			50			30,471
Income (loss) from continuing operations before income taxes and noncontrolling interests	13,463			(39,364		)	29,747			(31,918		)
(Provision for) benefit from income taxes	(15,625		)	12,672			(17,774		)	14,467
(Loss) income from continuing operations	(2,162		)	(26,692		)	11,973			(17,451		)
Discontinued operations:
Income from discontinued operations, net of income taxes	—			784			—			784
Loss on disposal of discontinued operations, net of income taxes	—			(254		)	—			(254		)
Net income from discontinued operations	—			530			—			530
Net (loss) income	(2,162		)	(26,162		)	11,973			(16,921		)
Net loss (income) attributable to noncontrolling interests	223			—			445			(2,384		)
Net (loss) income attributable to The Wendy’s Company	$	(1,939	)	$	(26,162	)	$	12,418		$	(19,305	)

Basic and diluted (loss) income per share attributable to The Wendy’s Company:
Continuing operations	$	—		$	(.07	)	$	.03		$	(.05	)
Discontinued operations	—			—			—			—
Net (loss) income	$	—		$	(.07	)	$	.03		$	(.05	)

Dividends per share	$	.05		$	.02		$	.13		$	.06

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)



	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
	(Unaudited)

Net (loss) income	$	(2,162	)	$	(26,162	)	$	11,973		$	(16,921	)
Other comprehensive income (loss), net:
Foreign currency translation adjustment	4,851			7,920			(7,029		)	9,309
Change in unrecognized pension loss, net of income tax benefits of $37 and $127, respectively	—			—			(62		)	(217		)
Other comprehensive income (loss), net	4,851			7,920			(7,091		)	9,092
Comprehensive income (loss)	2,689			(18,242		)	4,882			(7,829		)
Comprehensive loss (income) attributable to noncontrolling interests	301			—			(103		)	(2,384		)
Comprehensive income (loss) attributable to The Wendy’s Company	$	2,990		$	(18,242	)	$	4,779		$	(10,213	)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



	Nine Months Ended
	September 29, 2013			September 30, 2012
	(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	11,973		$	(16,921	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	138,924			112,057
Loss on early extinguishment of debt	21,019			75,076
Distributions received from TimWen joint venture	10,148			10,760
Share-based compensation	11,564			8,330
Impairment of long-lived assets	5,327			7,781
System Optimization Remeasurement	18,359			—
Net receipt of deferred vendor incentives	14,731			6,239
Accretion of long-term debt	5,281			6,060
Amortization of deferred financing costs	1,893			3,477
Non-cash rent expense	6,506			2,934
Equity in earnings in joint ventures, net	(6,980		)	(7,836		)
Deferred income tax	19,292			(19,809		)
Loss (gain) on sale of investment, net	799			(27,407		)
(Gain) loss on dispositions, net (see below)	(7,712		)	254
Other, net	(795		)	5,882
Changes in operating assets and liabilities:
Accounts and notes receivable	(1,643		)	3,447
Inventories	2,237			965
Prepaid expenses and other current assets	(5,962		)	(4,219		)
Accounts payable	(2,715		)	850
Accrued expenses and other current liabilities	10,445			(43,289		)
Net cash provided by operating activities	252,691			124,631
Cash flows from investing activities:
Capital expenditures	(130,802		)	(126,325		)
Acquisitions	(1,812		)	(40,594		)
Dispositions	44,055			6,273
Franchise loans, net	2,757			2,048
Proceeds from sales of investments	2,680			24,374
Change in restricted cash	(22,593		)	—
Other, net	—			(374		)
Net cash used in investing activities	(105,715		)	(134,598		)
Cash flows from financing activities:
Proceeds from long-term debt	350,000			1,113,750
Repayments of long-term debt	(358,364		)	(1,044,011		)
Deferred financing costs	(5,827		)	(15,511		)
Premium payment on redemption of Senior Notes	—			(43,151		)
Dividends	(51,065		)	(23,406		)
Repurchase of common stock	(41,469		)	—
Distribution to noncontrolling interests	—			(3,667		)
Proceeds from stock option exercises	20,950			2,526
Other, net	438			52
Net cash used in financing activities	(85,337		)	(13,418		)
Net cash provided by (used in) operations before effect of exchange rate changes on cash	61,639			(23,385		)
Effect of exchange rate changes on cash	(1,569		)	1,746
Net increase (decrease) in cash and cash equivalents	60,070			(21,639		)
Cash and cash equivalents at beginning of period	453,361			475,231
Cash and cash equivalents at end of period	$	513,431		$	453,592

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED

(In Thousands)



	Nine Months Ended
	September 29, 2013			September 30, 2012
	(Unaudited)
Detail of cash flows related to dispositions:
(Gain) loss on dispositions, net:
Gain on sales of restaurants, net	$	(2,941	)	$	—
Gain on disposal of assets, net	(4,771		)	—
Loss on disposal of Arby’s	—			254
	$	(7,712	)	$	254

Supplemental cash flow information:
Cash paid for:
Interest	$	46,931		$	90,893
Income taxes, net of refunds	$	1,484		$	9,593

Supplemental non-cash investing and financing activities:
Capital expenditures included in accounts payable	$	45,566		$	21,532
Capitalized lease obligations	$	5,891		$	16,317

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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 29, 2013 and the results of our operations for the three and nine months ended September 29, 2013 and September 30, 2012 and our cash flows for the nine months ended September 29, 2013 and September 30, 2012. The results of operations for the three and nine months ended September 29, 2013 are not necessarily indicative of the results to be expected for the full 2013 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 30, 2012 (the “Form 10-K”).

The principal subsidiary of the Company is Wendy’s International, Inc. (“Wendy’s”) and its subsidiaries. The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s^®restaurants in North America (defined as the 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 and nine month periods presented herein contain 13 and 39 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

Certain reclassifications have been made to prior year presentation to conform to the current year presentation.

In connection with the reimaging of restaurants as part of our Image Activation program, we have recorded $5,755 and $24,509 of accelerated depreciation and amortization during the three and nine months ended September 29, 2013, 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.

On July 4, 2011, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”), a direct 100% owned subsidiary holding company of the Company, completed the sale of 100% of the common stock of its then wholly-owned subsidiary, Arby’s Restaurant Group, Inc. (“Arby’s”) (while indirectly retaining an 18.5% interest in Arby’s), as described in the Form 10-K. Net income from discontinued operations for the three and nine months ended September 30, 2012 includes certain post-closing Arby’s related transactions.

(2) Facilities Action Charges, Net



	Three Months Ended				Nine Months Ended
	September 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
System optimization initiative	$	21,557	$	—	$	26,356	$	—
Facilities relocation and other transition costs	632		11,285		3,956		26,242
Breakfast discontinuation	86		—		1,115		—
Arby’s transaction related costs	—		145		263		1,319
	$	22,275	$	11,430	$	31,690	$	27,561

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

System Optimization Initiative

In July 2013, the Company announced a system optimization initiative, as part of its brand transformation, which includes a plan to sell approximately 425 company-owned restaurants to franchisees by mid-year 2014. The Company’s system optimization initiative also includes the consolidation of regional and divisional territories. As a result of the system optimization initiative, the Company has recorded losses on remeasuring long-lived assets to fair value upon determination that the assets will be leased and/or subleased to franchisees in connection with the sale or anticipated sale of restaurants (“System Optimization Remeasurement”). The Company does not anticipate significant changes to the System Optimization Remeasurement through the completion of the initiative, although such changes could occur if actual future rental payments differ substantially from estimated payments. In addition, the Company anticipates recognizing the following costs related to the system optimization initiative during 2013 and 2014: (1) accelerated depreciation and amortization, (2) severance and related employee costs, (3) share-based compensation, (4) professional fees and (5) other costs. These costs, as well as gains or losses recognized on sales of restaurants under the system optimization initiative will be recorded to “Facilities action charges, net” in our condensed consolidated statements of operations. The Company’s estimate for costs to be incurred under the system optimization initiative during the remainder of 2013 and 2014 totals approximately $25,900 and includes: (1) accelerated amortization of previously acquired franchise rights in territories being sold of $14,300, (2) severance and employee related costs of $7,000, (3) professional fees of $3,000 and (4) share-based compensation of $1,600. The Company cannot reasonably estimate the gains or losses resulting from future sales of restaurants.

The following is a summary of the activity recorded under our system optimization initiative:



	Three Months Ended			Nine Months Ended
	September 29, 2013			September 29, 2013
Gain on sales of restaurants, net	$	(1,665	)	$	(2,941	)
System Optimization Remeasurement (a)	12,421			18,359
Accelerated amortization (b)	3,130			3,130
Severance and related employee costs	6,131			6,131
Share-based compensation (c)	755			755
Professional fees	704			829
Other	81			93
Total system optimization initiative	$	21,557		$	26,356

_______________


(a)	Includes remeasurement of land, buildings, leasehold improvements and favorable lease assets at all company-owned restaurants included in our system optimization initiative. See Note 6 for more information on non-recurring fair value measurements.


(b)	Includes accelerated amortization of previously acquired franchise rights related to company-owned restaurants in territories that are being 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.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Gain on Sales of Restaurants



	Three Months Ended			Nine Months Ended
	September 29, 2013			September 29, 2013
Number of restaurants sold to franchisees	53			61

Proceeds from sales of restaurants	$	22,871		$	25,671
Net assets sold (a)	(13,646		)	(14,489		)
Goodwill related to sales of restaurants	(5,621		)	(6,302		)
Net unfavorable lease liabilities (b)	(1,884		)	(1,884		)
Other	(22		)	(22		)
	1,698			2,974
Post-closing adjustments on prior sales of restaurants	(33		)	(33		)
Gain on sales of restaurants, net	$	1,665		$	2,941

_______________


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


(b)	The Company recorded favorable lease assets of $8,789 and unfavorable lease liabilities of $10,673 as a result of the lease and/or sublease of land, buildings, and/or leasehold improvements to franchisees, in connection with sales of restaurants.

Restaurant Assets Held for Sale



	September 29, 2013
Number of restaurants classified as held for sale	367

Restaurant net assets held for sale	$	56,569

As of September 29, 2013, the Company determined that all of the remaining restaurants which are part of the system optimization initiative meet the criteria to be classified as held for sale. Restaurant net assets held for sale consist primarily of cash, inventory and property and are included in “Prepaid expenses and other current assets” as of September 29, 2013.

Subsequent Events

Subsequent to the end of the third quarter of 2013, the Company completed the sale of certain assets used in the operation of 37 Wendy’s restaurants for cash proceeds of approximately $25,685, subject to customary purchase price adjustments. These sales are expected to result in an estimated pre-tax gain of approximately $4,047.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Facilities Relocation and Other Transition Costs

The relocation of the Company’s Atlanta restaurant support center to Ohio was substantially completed during 2012. All of the remaining costs related to the relocation, which are anticipated to aggregate approximately $800, will be recorded during the fourth quarter of 2013.



	Three Months Ended					Nine Months Ended				Total Incurred Since Inception		Total Expected to be Incurred
	September 29, 2013			September 30, 2012		September 29, 2013		September 30, 2012		Total Incurred Since Inception		Total Expected to be Incurred
Severance, retention and other payroll costs	$	394		$	2,236	$	1,760	$	9,552	$	17,057	$	17,176
Relocation costs	303			1,776		1,564		3,857		6,786		7,447
Atlanta facility closure costs	(92		)	4,224		303		4,401		4,844		4,844
Consulting and professional fees	—			1,676		128		4,494		5,056		5,056
Other	27			752		201		2,017		2,341		2,359
	632			10,664		3,956		24,321		36,084		36,882
Accelerated depreciation expense	—			621		—		1,921		2,118		2,118
Share-based compensation	—			—		—		—		271		271
Total	$	632		$	11,285	$	3,956	$	26,242	$	38,473	$	39,271

The table below presents a rollforward of our accruals for facility relocation costs, which are included in “Accrued expenses and other current liabilities” and “Other liabilities.”



	Balance December 30, 2012		Charges		Payments			Balance September 29, 2013
Severance, retention and other payroll costs	$	4,121	$	1,760	$	(4,114	)	$	1,767
Relocation costs	500		1,564		(2,064		)	—
Atlanta facility closure costs	4,170		303		(1,287		)	3,186
Consulting and professional fees	80		128		(208		)	—
Other	9		201		(210		)	—
	$	8,880	$	3,956	$	(7,883	)	$	4,953

Breakfast Discontinuation

In January 2013, Wendy’s announced that it was discontinuing the breakfast daypart at certain restaurants. During the three and nine months ended September 29, 2013, we reflected $86 and $1,115, respectively, of costs for such discontinuance, primarily representing the remaining carrying value of breakfast related equipment no longer being used.

Arby’s Transaction Related Costs

As disclosed in our Form 10-K, the remaining Arby’s transaction related costs were associated with the relocation of a corporate executive that were being expensed over the three year period following the executive’s relocation in accordance with the terms of the agreement. In accordance with the terms of a separation agreement with such executive, the remaining unamortized costs were recorded to severance expense and included in “General and administrative” during the second quarter of 2013. The Company does not expect to incur additional costs related to the sale of Arby’s.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(3) Acquisitions and Dispositions

Consolidation of a Joint Venture in Japan

A wholly-owned subsidiary of Wendy’s owned a 49% share in a joint venture for the operation of Wendy’s restaurants in Japan (the “Japan JV”) with Ernest M. Higa and Higa Industries, Ltd., a corporation organized under the laws of Japan (collectively, the “Higa Partners”). In January 2013, Wendy’s and the Higa Partners agreed to fund approximately $3,000 and $657, respectively, of future anticipated cash requirements of the Japan JV, of which $1,000 and $219, respectively, were contributed in April 2013. In conjunction with the additional capital contributions in April 2013, the partners executed an amendment to the original joint venture agreement which includes revised rights and obligations of the partners and changes to the ownership and profit distribution percentages. In August 2013, additional contributions of $1,000 and $219 were made by Wendy’s and the Higa Partners, respectively. The ownership and profit distribution percentages, as defined, are 66.8% and 62.2% and 33.2% and 37.8%, respectively for Wendy’s and the Higa Partners as of September 29, 2013 and will change as future contributions are made to fund the Japan JV. As a result of the changes in the ownership rights and obligations of the partners in April 2013, Wendy’s consolidated the Japan JV beginning in the second quarter of 2013 and we have reflected our capital contributions of $2,000, net of cash acquired of $188, in “Acquisitions” in our condensed consolidated statements of cash flows. Prior to our acquisition of this additional interest, the Japan JV was accounted for as an unconsolidated affiliate under the equity method of accounting.

Under the equity method of accounting, we previously reported our 49% share of the net loss of the Japan JV in “Other operating (income) expense, net.” Beginning in the second quarter of 2013, we have reported the Japan JV’s results of operations in the appropriate line items in our condensed consolidated statements of operations. Net loss attributable to the Higa Partners’ ownership percentage is recorded in “Net loss (income) attributable to noncontrolling interests.” The consolidation of the Japan JV’s existing three restaurants did not have a material impact on our condensed consolidated financial statements.

Acquisitions

During the nine months ended September 29, 2013, Wendy’s acquired one franchised restaurant; such transaction was not significant.

On June 11, 2012, Wendy’s acquired 30 franchised restaurants in the Austin, Texas area from Pisces Foods, L.P. and Near Holdings, L.P. The allocation of the total purchase price of $18,915, including closing adjustments, to the fair value of assets acquired and liabilities assumed was finalized during the first quarter of 2013 and unchanged from our Form 10-K disclosure.

On July 13, 2012, Wendy’s acquired 24 franchised restaurants in the Albuquerque, New Mexico area from Double Cheese Corporation and Double Cheese Realty Corporation (collectively “Double Cheese”), pursuant to the terms of an Asset Purchase Agreement dated as of July 6, 2012 (the “Double Cheese Acquisition”). The allocation of the total purchase price of $19,181, including closing adjustments, to the fair value of assets acquired and liabilities assumed, was finalized during the fourth quarter of 2012.

In addition, during the nine months ended September 30, 2012, Wendy’s acquired two franchised restaurants along with certain other equipment and franchise rights. The total net cash consideration for this acquisition was $2,594. The total consideration was allocated to net tangible and identifiable intangible assets acquired, primarily properties, and liabilities assumed based on their estimated fair values, with the excess of $485 recognized as goodwill.

Dispositions

During the nine months ended September 29, 2013, Wendy’s received cash proceeds of $18,384 from dispositions, consisting of (1) $9,731 primarily from the sale of surplus properties and (2) $8,653 resulting from franchisees exercising options to purchase previously leased properties. These sales resulted in a net gain of $4,771 which is included in “Other operating (income) expense, net.” See Note 2 for discussion of restaurant dispositions in connection with our system optimization initiative.

During the nine months ended September 30, 2012, Wendy’s received cash proceeds of $6,273 and $400 in promissory notes from dispositions, consisting of (1) $2,293 from the sale of three company-owned restaurants to franchisees, (2) $1,874 from the sale of a restaurant to an unrelated third party, (3) $1,591 resulting from franchisees exercising options to purchase previously subleased properties and (4) $515, as well as $400 in promissory notes, from the sale of surplus properties and other equipment. These sales resulted in a net gain of $974.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(4) Investments

Investment in Joint Venture with Tim Hortons Inc.

Wendy’s is a partner in a Canadian restaurant real estate joint venture (“TimWen”) with Tim Hortons Inc. 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 (income) expense, net.”

Presented below is an unaudited summary of activity related to our investment in TimWen included in our unaudited condensed consolidated financial statements:



	Nine Months Ended
	September 29, 2013			September 30, 2012
Balance at beginning of period	$	89,370		$	91,742

Equity in earnings for the period	10,357			10,254
Amortization of purchase price adjustments (a)	(2,288		)	(2,340		)
	8,069			7,914
Distributions received	(10,148		)	(10,760		)
Foreign currency translation adjustment included in “Other comprehensive income (loss), net”	(3,052		)	3,570
Balance at end of period (b)	$	84,239		$	92,466

_____________________


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


(b)	Included in “Investments.”

Presented below is a summary of certain unaudited interim income statement information of TimWen:



	Nine Months Ended
	September 29, 2013		September 30, 2012
Revenues	$	29,113	$	29,655
Income before income taxes and net income	20,714		20,508

Sale of Investment in Jurlique International Pty Ltd.

On February 2, 2012, Jurl Holdings, LLC (“Jurl”), a 99.7% owned subsidiary, completed the sale of our investment in Jurlique International Pty Ltd. (“Jurlique”) for which we received proceeds of $27,287, net of the amount held in escrow and recorded a gain on sale of this investment of $27,407, which included a loss of $2,913 on the settlement of a related derivative transaction. The gain was included in “Investment income and other income (expense), net” in our condensed consolidated statement of operations for the nine months ended September 30, 2012. During the three months ended September 29, 2013, $1,166 of the escrow from the sale was collected. In addition, we determined that $799 of the remaining escrow would not be received and as a result recorded the reduction of our receivable to “Investment income and other income (expense), net.” The remaining escrow of $1,012, as of September 29, 2013, is included in “Deferred costs and other assets” and has been adjusted for foreign currency translation.

We have reflected net income attributable to noncontrolling interests of $2,384, net of an income tax benefit of $1,283, for the nine months ended September 30, 2012 in connection with the equity and profit interests discussed below. As a result of this sale and the distributions to the minority shareholders, there are no remaining noncontrolling interests in this consolidated subsidiary.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Prior to 2009 when our predecessor entity was a diversified company active in investments, we had provided our Chairman, who was also our then Chief Executive Officer, and our Vice Chairman, who was our then President and Chief Operating Officer (the “Former Executives”), and certain other former employees, equity and profit interests in Jurl. In connection with the gain on sale of Jurlique, we distributed, based on the related agreement, approximately $3,667 to Jurl’s minority shareholders, including approximately $2,296 to the Former Executives.

(5) Long-Term Debt

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.

Long-term debt consisted of the following:



	September 29, 2013			December 30, 2012
Term A Loan, due in 2018	$	350,000		$	—
Term B Loan, due in 2019	769,375			1,114,826
6.20% Senior Notes, due in 2014	225,586			225,940
7% debentures, due in 2025	84,373			83,496
Capital lease obligations, due through 2040	37,538			32,594
Other (a)	5,050			706
	1,471,922			1,457,562
Less amounts payable within one year	(38,260		)	(12,911		)
Total long-term debt	$	1,433,662		$	1,444,651

_______________

(a) Other includes $4,696 of debt resulting from the consolidation of the Japan JV in the second quarter of 2013. The carrying amount of the long-term debt approximates fair value.

Refinancings of the Credit Agreement and Other Indebtedness

On May 16, 2013, Wendy’s amended and restated (the “Restated Credit Agreement”) its Credit Agreement, dated as of May 15, 2012 (the “Credit Agreement”). The Restated Credit Agreement is comprised of (1) a $350,000 senior secured term loan facility (“Term A Loan”) which will mature on May 15, 2018 and bears interest at the Eurodollar Rate (as defined in the Restated Credit Agreement) plus 2.25%, (2) a $769,375 senior secured term loan facility (“Term B Loan”) which will mature on May 15, 2019 and bears interest at the Eurodollar Rate plus 2.50% with a floor of 0.75% and (3) a $200,000 senior secured revolving credit facility which will mature on May 15, 2018. The proceeds from the Term A Loan were used to refinance a portion of our existing Term B Loan (formerly described in our Form 10-K as the “Term Loan”). The terms and amounts of the senior secured revolving credit facility are unchanged with the exception of the maturity date which was extended from May 15, 2017.

During the three months ended June 30, 2013, Wendy’s incurred $5,579 in fees related to refinancing activities, which are being amortized to “Interest expense” utilizing the effective interest rate method through the maturities of the related debt instruments.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

As a result of the refinancing of its existing Credit Agreement, described above, Wendy’s incurred a loss on the early extinguishment of debt as follows:



	Three Months Ended		Nine Months Ended
	September 29, 2013		September 29, 2013
Unaccreted discount on Term B Loan	$	—	$	9,561
Deferred costs associated with the Credit Agreement	—		11,458
Loss on early extinguishment of debt	$	—	$	21,019

The Company incurred a loss on the early extinguishment of debt in 2012 related to the repayment of debt from the proceeds of the 2012 term loan under the May 15, 2012 Credit Agreement, as follows:



	Three Months Ended		Nine Months Ended
	September 30, 2012		September 30, 2012
Premium payment to redeem/purchase Wendy’s Restaurants 10.00% Senior Notes due in 2016 (the “Senior Notes”)	$	33,058	$	43,151
Unaccreted discount on the Senior Notes	7,186		9,272
Deferred costs associated with the Senior Notes	9,637		12,433
Unaccreted discount on the 2010 term loan	—		1,695
Deferred costs associated with the 2010 term loan	—		8,525
Loss on early extinguishment of debt	$	49,881	$	75,076

The Credit Agreement includes a revolving credit facility which includes a sub-facility for the issuance of up to $70,000 of letters of credit. The Restated Credit Agreement also allows Wendy’s to have liens in the form of cash collateralized letters of credit up to an additional $40,000. During the three months ended September 29, 2013, Wendy’s transitioned the security for all of its outstanding letters of credit from the revolving credit facility to cash collateral. As of September 29, 2013, Wendy’s had outstanding cash collateralized letters of credit of $22,593. The related cash collateral is classified as restricted cash and included in “Prepaid expenses and other current assets” in the condensed consolidated balance sheet as of September 29, 2013.

On September 24, 2013, Wendy’s entered into an amendment (the “Amendment”) to its Restated Credit Agreement to borrow additional Term A Loans (“Incremental Term Loans”) in an aggregate principal amount up to $225,000. As a result of the execution of the Amendment, the outstanding Wendy’s 6.20% Senior Notes due in 2014 (the “6.20% Senior Notes”) have been classified as long-term debt in our condensed consolidated balance sheet as of September 29, 2013. The Amendment does not contain any material changes to existing covenants or other terms of the Restated Credit Agreement, except as described above. During the three months ended September 29, 2013, Wendy’s incurred $2,293 in fees related to the refinancing, which have been capitalized and included in “Deferred costs and other assets” in the condensed consolidated balance sheet. The interest rates on Term A Loan and Term B Loan were 2.43% and 3.25%, respectively, as of September 29, 2013.

Subsequent Events

On October 24, 2013, Wendy’s borrowed $225,000 of Incremental Term Loans under the Amendment, further described above. Proceeds from the Incremental Term Loans, plus cash on hand, were used to redeem all amounts outstanding on the aggregate principal amount of the 6.20% Senior Notes at a price equal to 103.8%, as defined in the 6.20% Senior Notes and accrued and unpaid interest to the redemption date. In connection with the redemption of the 6.20% Senior Notes, during the fourth quarter we terminated the related interest rate swaps with notional amounts totaling $225,000 which had been designated as fair value hedges. Consequently, during the fourth quarter of 2013, Wendy’s will recognize a loss on the early extinguishment of debt of approximately $7,544 which will primarily include (1) a premium payment, as defined in the 6.20% Senior Notes, totaling $8,439, (2) the remaining $3,168 of the fair value adjustment previously recorded in connection with the Wendy’s merger, partially offset by (3) a $4,063 benefit from the cumulative effect of our fair value hedges.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(6) 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 at September 29, 2013 and December 30, 2012:



	September 29, 2013				December 30, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Fair Value Measurements
Financial assets
Cash equivalents	$	317,058	$	317,058	$	264,925	$	264,925	Level 1
Non-current cost method investments (a)	22,397		47,121		23,913		50,761		Level 3
Interest rate swaps (b)	4,123		4,123		8,169		8,169		Level 2

Financial liabilities
Term A Loan, due in 2018 (c)	350,000		349,563		—		—		Level 2
Term B Loan, due in 2019 (c)	769,375		766,490		1,114,826		1,130,434		Level 2
6.20% Senior Notes, due in 2014 (c)	225,586		233,438		225,940		240,750		Level 2
7% debentures, due in 2025 (c)	84,373		97,750		83,496		99,900		Level 2
Capital lease obligations (d)	37,538		36,080		32,594		33,299		Level 3
Guarantees of franchisee loan obligations (e)	892		892		940		940		Level 3

_______________

(a)

The fair value of our indirect investment in Arby’s is based on a review of its most recent unaudited financial information. The fair values of our remaining investments were 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 information provided by the bank counterparties that is model-driven and where inputs were observable or where significant value drivers were observable.


(c)	The fair values were based on quoted market prices in markets that are not considered active markets. See Note 5 for information on the redemption of the 6.20% Senior Notes subsequent to the third quarter of 2013.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)


(d)	The fair values were determined by discounting the future scheduled principal payments using an interest rate assuming the same original issuance spread over a current U.S. Treasury bond yield for securities with similar durations.

(e)

Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into pooled debt facility arrangements for new restaurant development and equipment financing. In 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.

Derivative Instruments

Our derivative instruments for the periods presented included interest rate swaps on our 6.20% Senior Notes with notional amounts totaling $225,000 that were all designated as fair value hedges. The fair value of our interest rate swaps of $4,123 and $8,169 at September 29, 2013 and December 30, 2012, respectively, are included in “Deferred costs and other assets” and as an adjustment to the carrying amount of our 6.20% Senior Notes. Interest income on the interest rate swaps was $1,429 and $4,319 for the three and nine months ended September 29, 2013, respectively, and $1,283 and $4,013 for the three and nine months ended September 30, 2012, respectively. No ineffectiveness has been recorded to net income related to our fair value hedges for the nine months ended September 29, 2013 and September 30, 2012.

In connection with the redemption of the 6.20% Senior Notes on October 24, 2013, during the fourth quarter we terminated the related interest rate swaps with notional amounts totaling $225,000. See Note 5 for more information on our redemption of the 6.20% Senior Notes and the termination of the interest rate swaps.

Non-Recurring Fair Value Measurements

The following tables present the fair values for those assets and liabilities measured at fair value on a non-recurring basis during the nine months ended September 29, 2013 and the year ended December 30, 2012 and the resulting impact on the consolidated statements of operations.

Total losses for the nine months ended September 29, 2013 reflect the impact of remeasuring long-lived assets (including land, buildings, leasehold improvements and favorable lease assets) at certain company-owned restaurants to fair value as a result of the Company’s decision to lease and/or sublease the land and/or buildings and sell certain other restaurant assets to franchisees. Such losses totaling $18,359 have been presented as System Optimization Remeasurement and included in “Facilities action charges, net” in our condensed consolidated statement of operations for the nine months ended September 29, 2013. The fair value of long-lived assets presented in the table below represents the remaining carrying value of the long-lived assets discussed above and was based upon discounted cash flows of future anticipated lease and sublease income. See Note 2 for more information on our system optimization initiative and the related activity included in “Facilities action charges, net” including System Optimization Remeasurement.

Total losses for the nine months ended September 29, 2013 also includes the impact of remeasuring our company-owned aircraft to fair value as a result of the Company’s decision to sell these aircraft and classify them as held for sale. Additionally, total losses includes $500 resulting from remeasuring land and buildings to fair value in connection with closing company-owned restaurants and classifying such properties as held for sale. Such losses have been presented as “Impairment of long-lived assets” in our condensed consolidated statements of operations. The fair values of long-lived assets and the aircraft presented in the table below represent the remaining carrying value and were estimated based on current market values. See Note 7 for more information on the impairment of our long-lived assets.

Total losses for the year ended December 30, 2012 reflect the impact of remeasuring long-lived assets at company-owned restaurants and a company-owned aircraft to fair value and were recorded to “Impairment of long-lived assets” in the consolidated statements of operations. The fair value of long-lived assets presented in the table below substantially represents the remaining carrying value of land for Wendy’s properties that were impaired in 2012 and were estimated based on current market values as determined by sales prices of comparable properties and current market trends. As of December 30, 2012, the carrying value of the aircraft, which reflected current market conditions, approximated its fair value.

Table of Contents

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 29, 2013 Total Losses
	September 29, 2013		Level 1		Level 2		Level 3		Nine Months Ended September 29, 2013 Total Losses
Long-lived assets	$	7,803	$	—	$	—	$	7,803	$	18,859
Aircraft	9,000		—		—		9,000		4,827
Total	$	16,803	$	—	$	—	$	16,803	$	23,686



			Fair Value Measurements						2012 Total Losses
	December 30, 2012		Level 1		Level 2		Level 3		2012 Total Losses
Long-lived assets	$	7,311	$	—	$	—	$	7,311	$	19,469
Aircraft	5,926		—		—		5,926		1,628
Total	$	13,237	$	—	$	—	$	13,237	$	21,097

(7) Impairment of Long-Lived Assets

During the three months ended September 29, 2013, the Company decided to sell its company-owned aircraft and recorded an impairment charge of $4,827 to reflect the aircraft at fair value based on current market values. The aircraft are classified as held for sale and included in “Prepaid expenses and other current assets” in our condensed consolidated balance sheet as of September 29, 2013. Additionally, our impairment losses include $500 resulting from remeasuring land and buildings to fair value in connection with closing company-owned restaurants and classifying such properties as held for sale.

During the three months ended July 1, 2012, we closed 15 company-owned restaurants in connection with our review of certain underperforming locations, which resulted in an impairment charge of $3,270. In addition, we incurred costs related to these restaurant closings of $1,477, primarily for continuing lease obligations, which are included in “Other operating (income) expense, net.” Our company-owned restaurant impairment losses of $2,883 during the three months ended April 1, 2012 predominantly reflected impairment charges on restaurant-level assets resulting from the deterioration in operating performance of certain restaurants and additional charges for capital improvements in restaurants impaired in prior years which did not subsequently recover. In addition, during the three months ended April 1, 2012, we recorded an impairment charge of $1,628 to reflect a company-owned aircraft at fair value as a result of classifying the aircraft as held for sale. During the three months ended July 1, 2012, the Company decided to lease the aircraft and as a result reclassified the aircraft to held and used.

These impairment losses, as detailed in the following table, represented 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 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
Properties and intangible assets	$	500	$	—	$	500	$	6,153
Aircraft	4,827		—		4,827		1,628
	$	5,327	$	—	$	5,327	$	7,781

(8) Income Taxes

The Company’s effective tax rate and effective tax rate benefit for the three months ended September 29, 2013 and September 30, 2012 was 116.1% and 32.2%, respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 35% due to the effect of (1) the system optimization initiative described in Note 2 above, (2) employment tax credits, (3) foreign rate differential, (4) state income taxes net of federal benefit and (5) corrections related to prior year tax matters which were identified and recorded during the three months ended September 30, 2012.

The Company’s effective tax rate and effective tax rate benefit for the nine months ended September 29, 2013 and September 30, 2012 was 59.8% and 45.3%, respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 35% due to the effect of (1) the system optimization initiative described in Note 2 above, (2) employment tax credits, (3) foreign rate

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

differential, (4) the reversal of deferred tax liabilities on temporary differences related to investments in foreign subsidiaries which the Company now considers permanently invested outside of the U.S. and (5) corrections related to prior year tax matters which were identified and recorded during the nine months ended September 30, 2012.

In connection with the Company’s system optimization initiative described in Note 2 above, the Company recorded a tax provision of $14,183 during the third quarter of 2013 for (1) the effect of goodwill included in the gain on sales of restaurants which is not deductible for tax purposes and (2) an increase in net deferred state taxes due to changes in the Company’s expected future state taxes.

During the first quarter of 2013, the Company finalized its long-term investment plan with respect to the Company’s non-U.S. earnings. There are no plans to repatriate cash from, and Wendy’s intends to indefinitely reinvest undistributed earnings of, its non-U.S. subsidiaries. As such, the Company reversed $1,934 of deferred tax liabilities during the first quarter of 2013 relating to investments in foreign subsidiaries which the Company now considers permanently invested outside of the U.S. During the third quarter of 2013, $102 of the first quarter reversal was restored as a result of the completion of the Company’s U.S. tax return.

There were no significant changes to unrecognized tax benefits or related interest and penalties for the Company during the nine months ended September 29, 2013 and September 30, 2012.

The Company participates in the Internal Revenue Service Compliance Assurance Process. During the first quarter of 2013, we concluded, without adjustment, the examination of our January 1, 2012 tax return.

(9) (Loss) Income Per Share

Basic (loss) income per share for the three and nine months ended September 29, 2013 and September 30, 2012 was computed by dividing (loss) income amounts attributable to The Wendy’s Company by the weighted average number of common shares outstanding. (Loss) income amounts attributable to The Wendy’s Company used to calculate basic and diluted (loss) income per share were as follows:



	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013		September 30, 2012
Amounts attributable to The Wendy’s Company:
(Loss) income from continuing operations	$	(1,939	)	$	(26,692	)	$	12,418	$	(19,835	)
Net income from discontinued operations	—			530			—		530
Net (loss) income	$	(1,939	)	$	(26,162	)	$	12,418	$	(19,305	)

The weighted average number of shares used to calculate basic and diluted (loss) income per share were as follows:



	Three Months Ended		Nine Months Ended
	September 29, 2013	September 30, 2012	September 29, 2013	September 30, 2012
Common stock:
Weighted average basic shares outstanding	392,579	390,406	392,750	390,028
Dilutive effect of stock options and restricted shares	—	—	5,351	—
Weighted average diluted shares outstanding	392,579	390,406	398,101	390,028

Diluted income per share for the nine months ended September 29, 2013 was computed by dividing income attributable to The Wendy’s Company by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. For the nine months ended September 29, 2013, we excluded 12,103 of potential common shares from our diluted income per share calculation as they would have had anti-dilutive effects. Diluted loss per share for the three months ended September 29, 2013 and the three and nine months ended September 30, 2012 was the same as basic loss per share since the Company reported a loss from continuing operations and therefore, the effect of all potentially dilutive securities would have been anti-dilutive.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(10) Equity

The following tables present the changes in equity attributable to The Wendy’s Company and noncontrolling interest for the nine months ended September 29, 2013 and September 30, 2012:



	Attributable to The Wendy’s Company
	Common Stock		Additional Paid-In Capital			Accumulated Deficit			Common Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
Balance at December 30, 2012	$	47,042	$	2,782,765		$	(467,007	)	$	(382,926	)	$	5,981		$	—		$	1,985,855
Consolidation of the Japan JV	—		—			—			—			—			(2,735		)	(2,735		)
Net income (loss)	—		—			12,418			—			—			(445		)	11,973
Foreign currency translation adjustment	—		—			—			—			(7,577		)	548			(7,029		)
Unrecognized pension loss	—		—			—			—			(62		)	—			(62		)
Cash dividends	—		—			(51,065		)	—			—			—			(51,065		)
Share-based compensation expense	—		11,564			—			—			—			—			11,564
Common stock issued related to share-based compensation	—		(2,895		)	—			19,772			—			—			16,877
Tax charge from share-based compensation	—		(2,967		)	—			—			—			—			(2,967		)
Repurchases of common stock	—		—			—			(41,469		)	—			—			(41,469		)
Contribution from non-controlling interests	—		—			—			—			—			219			219
Other	—		12			(3		)	139			—			—			148
Balance at September 29, 2013	$	47,042	$	2,788,479		$	(505,657	)	$	(404,484	)	$	(1,658	)	$	(2,413	)	$	1,921,309



	Attributable to The Wendy’s Company
	Common Stock		Additional Paid-In Capital			Accumulated Deficit			Common Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
Balance at January 1, 2012	$	47,042	$	2,779,871		$	(434,999	)	$	(395,947	)	$	102		$	—		$	1,996,069
Net (loss) income	—		—			(19,305		)	—			—			2,384			(16,921		)
Distribution to noncontrolling interests	—		—			—			—			—			(2,384		)	(2,384		)
Foreign currency translation adjustment	—		—			—			—			9,309			—			9,309
Unrecognized pension loss	—		—			—			—			(217		)	—			(217		)
Cash dividends	—		—			(23,406		)	—			—			—			(23,406		)
Share-based compensation expense	—		8,330			—			—			—			—			8,330
Common stock issued related to share-based compensation	—		(4,337		)	—			5,874			—			—			1,537
Tax charge from share-based compensation	—		(676		)	—			—			—			—			(676		)
Other	—		(26		)	(32		)	161			—			—			103
Balance at September 30, 2012	$	47,042	$	2,783,162		$	(477,742	)	$	(389,912	)	$	9,194		$	—		$	1,971,744

Repurchases of Common Stock

In November 2012, our Board of Directors authorized the repurchase of up to $100,000 of our common stock through December 29, 2013, when and if market conditions warrant and to the extent legally permissible. During the third quarter of 2013, the Company repurchased 5,482 shares with an aggregate purchase price of $41,373, excluding commissions of $96. No repurchases were made subsequent to the third quarter through November 1, 2013.

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(11) Guarantees and Other Commitments and Contingencies

Except as described below, the Company did not have any significant changes to its guarantees, other commitments and contingencies as disclosed in the notes to our consolidated financial statements included in the Form 10-K.

Franchise Image Activation Incentive Program

As disclosed in our Form 10-K, Wendy’s initiated a cash incentive program to encourage franchisees to participate in Wendy’s Image Activation program, which includes innovative exterior and interior restaurant designs for new and reimaged restaurants. The cash incentive program is for the reimaging of restaurants commenced in 2013 and totals up to $10,000. The Company has recognized expense for such incentives of $3,775 and $5,075 in general and administrative during the three and nine months ended September 29, 2013, respectively.

Franchisee Image Activation Financing Program

In order to encourage franchisees to participate in our Image Activation program, Wendy’s has executed an agreement to partner with a third party lender to establish a financing program. Under the program, the lender will provide loans to franchisees to be used for the reimaging of restaurants according to the guidelines and specifications under the Image Activation initiative. To support the program, Wendy’s has provided to the lender a $6,000 irrevocable stand-by letter of credit, which was issued on July 1, 2013.

Japan JV Guarantee

Wendy’s and the Higa Partners have provided guarantees to certain lenders to the Japan JV. Both Wendy’s and Higa Partners have agreed to reimburse and indemnify the other party, should it become necessary, for their respective share of each other’s guarantees. Wendy’s and the Higa Partners’ share of each guarantee is based upon ownership percentages in effect at the time of the agreement. As of September 29, 2013, our portion of these contingent obligations totaled approximately $2,800 based upon then current rates of exchange. The fair value of our guarantees is immaterial.

In January 2013, Wendy’s and the Higa Partners agreed to finance approximately $3,000 and $657, respectively, of future anticipated cash requirements of the Japan JV, of which $1,000 and $219, respectively, were contributed in April 2013. In August 2013, additional contributions of $1,000 and $219 were made by Wendy’s and the Higa Partners, respectively.

Our obligations, including the remaining funding of anticipated future cash requirements of the Japan JV of approximately $1,000, could total up to approximately $5,700 if the Higa Partners are unable to perform their reimbursement and indemnify obligations to us.

(12) Transactions with Related Parties

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

Transactions with Purchasing Cooperative

Wendy’s received $142 and $145 of lease income from its purchasing cooperative, Quality Supply Chain Co-op, Inc. (“QSCC”) during the nine months ended September 29, 2013 and September 30, 2012, respectively, which has been recorded as a reduction of “General and administrative.”

Transactions with a Management Company

Table of Contents

THE WENDY’S COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

negotiated fee to the Company based on the number of hours that the corporate aircraft is used by Jet Card members. This fee is reduced based on the number of hours that (1) the Company uses other aircraft in the Jet Card program fleet and (2) Jet Card members who are affiliated with the Company use the corporate aircraft or other aircraft in the Jet Card program fleet. The Company’s participation in the aircraft management and lease agreement reduces the aggregate costs that the Company would otherwise incur in connection with owning and operating the corporate aircraft. Under the terms of the lease agreement, the Company’s directors have the opportunity to become Jet Card members and to use aircraft in the Jet Card program fleet at the same negotiated fee paid by the Company as provided for under the lease agreement. During the nine months ended September 29, 2013 and September 30, 2012, the Former Executives and a director, who was our former Vice Chairman, and members of their immediate families, used their Jet Card agreements for business and personal travel on aircraft in the Jet Card program fleet. A management company formed by the Former Executives and a director, who was our former Vice Chairman, paid CitationAir directly, and the Company received credit from CitationAir for charges related to such travel of approximately $1,195 and $730 during the nine months ended September 29, 2013 and September 30, 2012, respectively.

(13) Legal, Environmental and Other 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 29, 2013, the Company had accruals for all of its legal and environmental matters aggregating $3,783. 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.

The Company had previously described in the Form 10-K a dispute between Wendy’s and Tim Hortons Inc. related to a tax sharing agreement entered into in 2006. As described in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, the dispute was resolved by mutual agreement of the parties on April 25, 2013 and was recorded in the first quarter of 2013. The terms of the agreement were not material to the Company.

(14) Multiemployer Pension Plan

As further described in the Form 10-K, the unionized employees at The New Bakery Co. of Ohio, Inc. (the “Bakery”), a 100% owned subsidiary of Wendy’s, are covered by the Bakery and Confectionery Union and Industry International Pension Fund (the “Union Pension Fund”), a multiemployer pension plan with a plan year end of December 31 that provides defined benefits to certain employees covered by a collective bargaining agreement (the “CBA”) which expired on March 31, 2013. The completion of the current negotiations for a new CBA will determine our future pension costs.

There have been no changes to the critical status of the Union Pension Fund as further described in the Form 10-K.

(15) Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board issued an amendment that requires companies to present unrecognized tax benefits as a reduction to deferred tax assets when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists, with limited exceptions. The amendment is effective commencing with our 2014 fiscal year. The Company does not expect the adoption to have a material impact on the consolidated financial statements.

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 herein 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 30, 2012 (the “Form 10-K”). There have been no material changes as of September 29, 2013 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.” 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, Inc. (“Wendy’s”) and its subsidiaries. Wendy’s franchises and operates company-owned Wendy’s^® quick service restaurants throughout North America (defined as the United States of America (the “U.S.”) and Canada) as well as Japan through our joint venture (the “Japan JV”). Wendy’s also has franchised restaurants in 26 foreign countries and U.S. territories.

Wendy’s restaurants offer an extensive menu specializing in hamburger sandwiches and featuring filet 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, including the three restaurants operated by the Japan JV, are not material. The results of operations discussed below may not necessarily be indicative of future results.

Executive Overview

System Optimization Initiative

In July 2013, the Company announced a system optimization initiative, as part of its brand transformation, which includes a plan to sell approximately 425 company-owned restaurants to franchisees by mid-year 2014. The Company’s system optimization initiative also includes the consolidation of regional and divisional territories. As a result of the system optimization initiative, the Company has recorded losses on remeasuring long-lived assets to fair value upon determination that the assets will be leased and/or subleased to franchisees in connection with the sale or anticipated sale of restaurants (“System Optimization Remeasurement”). The Company does not anticipate significant changes to the System Optimization Remeasurement through the completion of the initiative, although such changes could occur if actual future rental payments differ substantially from estimated payments. In addition, the Company anticipates recognizing the following costs related to the system optimization initiative during 2013 and 2014: (1) accelerated depreciation and amortization, (2) severance and related employee costs, (3) share-based compensation, (4) professional fees and (5) other costs. These costs, as well as gains or losses recognized on sales of restaurants under the system optimization initiative will be recorded to “Facilities action charges, net” in our condensed consolidated statements of operations. The Company’s estimate for costs to be incurred under the system optimization initiative during the remainder of 2013 and 2014 totals approximately $25.9 million and includes: (1) accelerated amortization of previously acquired franchise rights in territories being sold of $14.3 million, (2) severance and employee related costs of $7.0 million, (3) professional fees of $3.0 million and (4) share-based compensation of $1.6 million. The Company cannot reasonably estimate the gains or losses resulting from future sales of restaurants.

Our Business

As of September 29, 2013, the Wendy’s restaurant system was comprised of 6,539 restaurants, of which 1,369 were owned and operated by the Company. Our company-owned restaurants are located principally in the U.S. and to a lesser extent in Canada and Japan through the Japan JV.

Wendy’s operating results have been impacted by a number of external factors, including high unemployment, negative general economic trends and intense price competition, as well as continued increases in commodity costs through the third quarter of 2013.

Wendy’s long-term growth opportunities, which in part will result from our system optimization initiative and as part of our brand transformation, include improving our North America business by elevating the total customer experience through continuing core menu improvement, step-change product innovation and focused execution of operational excellence and brand positioning, which will be supported by (1) investing in our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants, (2) employing financial strategies to improve our net income and earnings per share and (3) building the brand worldwide.

Wendy’s revenues for the first nine months of 2013 include: (1) $1,611.9 million of sales at company-owned restaurants, (2) $48.0 million from our company-owned bakery, (3) $213.7 million of royalty revenue from franchisees and (4) $21.4 million of other franchise-related revenue and other revenues. Substantially all of our royalty agreements provide for royalties of 4.0% of franchisees’ sales.

Key Business Measures

We track our results of operations and manage our business using the following key business measures:


•	Same-Store Sales

We report same-store 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. Same-store 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. Sales and cost of sales exclude amounts related to our company-owned bakery. 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.

Refinancings of the Credit Agreement and Other Indebtedness

As further described in “Liquidity and Capital Resources - Refinancings of the Credit Agreement and Other Indebtedness,” below, on May 16, 2013, Wendy’s amended and restated (the “Restated Credit Agreement”) its Credit Agreement, dated May 15, 2012 (the “Credit Agreement”). The Restated Credit Agreement, among other things, (1) lowered the interest rate margin and floor applicable to the existing term loan, (2) provided for a partial refinancing of the existing term loan with a new tranche of a term loan in an aggregate principal of $350.0 million and (3) extended the maturity date of the revolving credit facility by one year. Wendy’s recognized a loss on the early extinguishment of debt of $21.0 million in the second quarter of 2013 in connection with this refinancing.

The Restated Credit Agreement also allows Wendy’s to have liens in the form of cash collateralized letters of credit up to $40.0 million, in addition to the $70.0 million of letters of credit allowed under the revolving credit facility. During the three months ended September 29, 2013, Wendy’s transitioned the security for all of its outstanding letters of credit from the revolving credit facility to cash collateral.

On September 24, 2013, Wendy’s entered into an amendment (the “Amendment”) to its Restated Credit Agreement to borrow additional Term A Loans (“Incremental Term Loans”) in an aggregate principal amount up to $225.0 million. On October 24, 2013, Wendy’s borrowed $225.0 million of Incremental Term Loans under the Amendment. Proceeds from the Incremental Term Loans, plus cash on hand, were used to redeem Wendy’s 6.20% Senior Notes due in 2014 (the “6.20% Senior Notes”). See “Liquidity and Capital Resources - Refinancings of the Credit Agreement and Other Indebtedness,” below for further discussion of the Amendment and related subsequent events.

Guarantees and Other Commitments

Franchise Image Activation Incentive Program

As disclosed in our Form 10-K, Wendy’s initiated a cash incentive program to encourage franchisees to participate in Wendy’s Image Activation program, which includes innovative exterior and interior restaurant designs for new and reimaged restaurants. The cash incentive program is for the reimaging of restaurants commenced in 2013 and totals up to $10.0 million. The Company has recognized expense for such incentives of $3.8 million and $5.1 million in general and administrative during the three and nine months ended September 29, 2013, respectively.

Franchisee Image Activation Financing Program

In order to encourage franchisees to participate in our Image Activation program, Wendy’s has executed an agreement to partner with a third party lender to establish a financing program. Under the program, the lender will provide loans to franchisees to be used for the reimaging of restaurants according to the guidelines and specifications under the Image Activation initiative. To support the program, Wendy’s has provided to the lender a $6.0 million irrevocable stand-by letter of credit, which was issued on July 1, 2013.

Japan JV Guarantee

Wendy’s and Ernest M. Higa and Higa Industries, Ltd., a corporation organized under the laws of Japan (collectively, the “Higa Partners”) have provided guarantees to certain lenders to the Japan JV. Both Wendy’s and Higa Partners have agreed to reimburse and indemnify the other party, should it become necessary, for their respective share of each other’s guarantees. Wendy’s and the Higa Partners’ share of each guarantee is based upon ownership percentages in effect at the time of the agreement. As of September 29, 2013, our portion of these contingent obligations totaled approximately $2.8 million based upon then current rates of exchange. The fair value of our guarantees is immaterial.

In January 2013, Wendy’s and the Higa Partners agreed to finance approximately $3.0 million and $0.7 million, respectively, of future anticipated cash requirements of the Japan JV, of which $1.0 million and $0.2 million, respectively, were contributed in April 2013. In August 2013, additional contributions of $1.0 million and $0.2 million were made by Wendy’s and the Higa Partners, respectively.

Our obligations, including the remaining funding of anticipated future cash requirements of the Japan JV of approximately $1.0 million, could total up to approximately $5.7 million if the Higa Partners are unable to perform their reimbursement and indemnify obligations to us.

Related Party Transactions

Transactions with a Management Company

The Wendy’s Company, through a wholly-owned subsidiary, is party to an aircraft management and lease agreement, which is expected to expire in March 2014, with CitationAir, a subsidiary of Cessna Aircraft Company, pursuant to which the Company leases a corporate aircraft to CitationAir to use as part of its Jet Card program fleet. The Company entered into the lease agreement as a means of offsetting the cost of owning and operating the corporate aircraft by receiving revenue from third parties’ use of such aircraft. Under the terms of the lease agreement, the Company pays annual management and flight crew fees to CitationAir and reimburses CitationAir for maintenance costs and fuel usage related to the corporate aircraft. In return, CitationAir pays a negotiated fee to the Company based on the number of hours that the corporate aircraft is used by Jet Card members. This fee is reduced based on the number of hours that (1) the Company uses other aircraft in the Jet Card program fleet and (2) Jet Card members who are affiliated with the Company use the corporate aircraft or other aircraft in the Jet Card program fleet. The Company’s participation in the aircraft management and lease agreement reduces the aggregate costs that the Company would otherwise incur in connection with owning and operating the corporate aircraft. Under the terms of the lease agreement, the Company’s directors have the opportunity to become Jet Card members and to use aircraft in the Jet Card program fleet at the same negotiated fee paid by the Company as provided for under the lease agreement. During the first nine months of 2013 and 2012, our Chairman, who was our former Chief Executive Officer, and our Vice Chairman, who was our former President and Chief Operating Officer (the “Former Executives”) and a director, who was our former Vice Chairman, and members of their immediate families, used their Jet Card agreements for business and personal travel on aircraft in the Jet Card program fleet. A management company formed by the Former Executives and a director, who was our former Vice Chairman, paid CitationAir directly, and the Company received credit from CitationAir for charges related to such travel of approximately $1.2 million and $0.7 million during the first nine months of 2013 and 2012, respectively.

Presentation of Financial Information

The Company reports on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. All quarters presented contain 13 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods. Certain percent changes between fiscal periods are considered not measurable or not meaningful (“n/m”).

Results of Operations

The following tables included throughout Results of Operations set forth in millions the Company’s consolidated results of operations for the three months ended September 29, 2013 and September 30, 2012:



	Three Months Ended
	September 29, 2013			September 30, 2012			$ Change			% Change
Revenues:
Sales	$	558.0		$	558.3		$	(0.3	)	(0.1	)%
Franchise revenues	82.8			78.0			4.8			6.2
	640.8			636.3			4.5			0.7
Costs and expenses:
Cost of sales	469.2			478.4			(9.2		)	(1.9	)
General and administrative	76.5			72.2			4.3			6.0
Depreciation and amortization	44.3			41.9			2.4			5.7
Impairment of long-lived assets	5.3			—			5.3			n/m
Facilities action charges, net	22.3			11.4			10.9			95.6
Other operating (income) expense, net	(3.6		)	1.2			(4.8		)	n/m
	614.0			605.1			8.9			1.5
Operating profit	26.8			31.2			(4.4		)	(14.1	)
Interest expense	(15.6		)	(21.6		)	6.0			(27.8	)
Loss on early extinguishment of debt	—			(49.9		)	49.9			n/m
Investment income and other income, net	2.3			0.9			1.4			n/m
Income (loss) from continuing operations before income taxes and noncontrolling interests	13.5			(39.4		)	52.9			n/m
(Provision for) benefit from income taxes	(15.6		)	12.7			(28.3		)	n/m
Loss from continuing operations	(2.1		)	(26.7		)	24.6			(92.1	)
Net income from discontinued operations	—			0.5			(0.5		)	n/m
Net loss	(2.1		)	(26.2		)	24.1			(92.0	)
Net loss attributable to noncontrolling interests	0.2			—			0.2			n/m
Net loss attributable to The Wendy’s Company	$	(1.9	)	$	(26.2	)	$	24.3		(92.7	)%



	Third Quarter 2013			Third Quarter 2012
Sales:
Wendy’s	$	541.3		$	542.4
Bakery	16.7			15.9
Total sales	$	558.0		$	558.3

			% of Sales			% of Sales
Cost of sales:
Wendy’s
Food and paper	$	178.0	32.9%	$	179.8	33.1%
Restaurant labor	157.8		29.1%	162.7		30.0%
Occupancy, advertising and other operating costs	121.6		22.5%	124.3		23.0%
Total cost of sales	457.4		84.5%	466.8		86.1%
Bakery	11.8		n/m	11.6		n/m
Total cost of sales	$	469.2	84.1%	$	478.4	85.7%



	Third Quarter 2013			Third Quarter 2012
Margin $:
Wendy’s	$	83.9		$	75.6
Bakery	4.9			4.3
Total margin	$	88.8		$	79.9

Wendy’s restaurant margin %	15.5		%	13.9		%



	Third Quarter 2013		Third Quarter 2012
Wendy’s restaurant statistics:
North America same-store sales:
Company-owned restaurants	3.2	%	2.7	%
Franchised restaurants	3.1	%	2.9	%
Systemwide	3.1	%	2.8	%