XNAS:WEN Wendy's Co Class A Quarterly Report 10-Q Filing - 7/1/2012

Effective Date 7/1/2012

XNAS:WEN (Wendy's Co Class A): Fair Value Estimate
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XNAS:WEN (Wendy's Co Class A): Consider Buying
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XNAS:WEN (Wendy's Co Class A): Consider Selling
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XNAS:WEN (Wendy's Co Class A): Fair Value Uncertainty
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XNAS:WEN (Wendy's Co Class A): Economic Moat
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XNAS:WEN (Wendy's Co Class A): Stewardship
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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 July 1, 2012

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

There were 390,735,791 shares of The Wendy’s Company common stock outstanding as of August 1, 2012.

 



Explanatory Note

Wendy’s Restaurants, LLC (“Wendy's Restaurants”) is a wholly-owned subsidiary of The Wendy’s Company. Wendy’s Restaurants was obligated to file periodic reports with the Securities and Exchange Commission (“SEC”) pursuant to the terms of the indenture governing the Wendy’s Restaurants’ 10.00% Senior Notes due 2016 (the “Senior Notes”). Following the redemption of the Senior Notes by Wendy’s Restaurants on July 16, 2012, there were no longer any Senior Notes outstanding. As a result of the redemption and the termination of the indenture governing the Senior Notes pursuant to its terms, Wendy’s Restaurants is no longer filing reports with the SEC.


2



THE WENDY’S COMPANY AND SUBSIDIARIES
INDEX TO FORM 10-Q
 
Page
 
     July 3, 2011
 
 



3



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.


THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

 
July 1,
2012
 
January 1,
2012
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
435,100

 
$
475,231

Accounts and notes receivable
72,976

 
68,349

Inventories
12,322

 
12,903

Prepaid expenses and other current assets
39,425

 
27,397

Deferred income tax benefit
84,285

 
93,384

Advertising funds restricted assets
85,868

 
69,672

Total current assets
729,976

 
746,936

Properties
1,205,883

 
1,192,200

Goodwill
873,786

 
870,431

Other intangible assets
1,313,552

 
1,304,288

Investments
115,863

 
119,271

Deferred costs and other assets
71,421

 
67,542

Total assets
$
4,310,481

 
$
4,300,668

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
9,905

 
$
6,597

Accounts payable
53,081

 
81,301

Accrued expenses and other current liabilities
199,599

 
210,698

Advertising funds restricted liabilities
85,868

 
69,672

Total current liabilities
348,453

 
368,268

Long-term debt
1,384,373

 
1,350,402

Deferred income
19,123

 
6,523

Deferred income taxes
457,529

 
470,521

Other liabilities
107,429

 
108,885

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Common stock
47,042

 
47,042

Additional paid-in capital
2,781,266

 
2,779,871

Accumulated deficit
(443,762
)
 
(434,999
)
Common stock held in treasury, at cost
(392,246
)
 
(395,947
)
Accumulated other comprehensive income
1,274

 
102

Total stockholders’ equity
1,993,574

 
1,996,069

Total liabilities and stockholders’ equity
$
4,310,481

 
$
4,300,668


See accompanying notes to condensed consolidated financial statements.


4


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

 
Three Months Ended
 
Six Months Ended
 
July 1,
2012

July 3,
2011
 
July 1,
2012
 
July 3,
2011
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Sales
$
566,116

 
$
544,237

 
$
1,086,045

 
$
1,053,523

Franchise revenues
79,752

 
78,222

 
153,010

 
151,401

 
645,868

 
622,459

 
1,239,055

 
1,204,924

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
483,080

 
464,798

 
938,547

 
903,669

General and administrative
73,345

 
74,456

 
145,649

 
149,141

Depreciation and amortization
35,947

 
29,842

 
68,258

 
60,156

Impairment of long-lived assets
3,270

 
365

 
7,781

 
8,262

Facilities relocation and other transition costs
9,426

 

 
14,957

 

Transaction related costs
562

 
5,039

 
1,174

 
6,923

Other operating expense, net
1,847

 
525

 
3,382

 
1,322

 
607,477

 
575,025

 
1,179,748

 
1,129,473

Operating profit
38,391

 
47,434

 
59,307

 
75,451

Interest expense
(28,002
)
 
(28,089
)
 
(56,237
)
 
(57,531
)
Loss on early extinguishment of debt
(25,195
)
 

 
(25,195
)
 

Gain on sale of investment, net

 

 
27,407

 

Other income, net
640

 
337

 
2,164

 
590

(Loss) income from continuing operations before
      income taxes and noncontrolling interests
(14,166
)
 
19,682

 
7,446

 
18,510

Benefit from (provision for) income taxes
8,673

 
(8,308
)
 
1,795

 
(7,432
)
(Loss) income from continuing operations
(5,493
)
 
11,374

 
9,241

 
11,078

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

 
3,672

 

 
2,559

Loss on disposal of discontinued operations, net of income
tax benefit

 
(3,780
)
 

 
(3,780
)
Net loss from discontinued operations

 
(108
)
 


(1,221
)
Net (loss) income
(5,493
)
 
11,266

 
9,241

 
9,857

Net income attributable to noncontrolling
     interests

 

 
(2,384
)
 

Net (loss) income attributable to
    The Wendy’s Company
$
(5,493
)
 
$
11,266

 
$
6,857

 
$
9,857

 
 
 
 
 
 
 
 
Basic and diluted (loss) income per share attributable to
    The Wendy’s Company:
 
 
 
 
 
 
 
Continuing operations
$
(.01
)
 
$
.03

 
$
.02

 
$
.03

Discontinued operations

 

 

 
(.01
)
Net (loss) income
$
(.01
)
 
$
.03

 
$
.02

 
$
.02

 
 
 
 
 
 
 
 
Dividends per share
$
.02

 
$
.02

 
$
.04

 
$
.04


See accompanying notes to condensed consolidated financial statements.

5


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

 
Three Months Ended
 
Six Months Ended
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
 
(Unaudited)
 
 
 
 
 
 
 
 
Net (loss) income
$
(5,493
)
 
$
11,266

 
$
9,241

 
$
9,857

Other comprehensive (loss) income, net:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(3,353
)
 
269

 
1,389

 
7,918

Change in unrecognized pension loss, net of income tax
   benefit (provision) of $127 and $(21), respectively

 

 
(217
)
 
(46
)
Other comprehensive (loss) income, net
(3,353
)
 
269

 
1,172

 
7,872

Comprehensive (loss) income
(8,846
)
 
11,535

 
10,413

 
17,729

Comprehensive income attributable to noncontrolling
   interests

 

 
(2,384
)
 

Comprehensive (loss) income attributable to
  The Wendy’s Company
$
(8,846
)
 
$
11,535

 
$
8,029

 
$
17,729


See accompanying notes to condensed consolidated financial statements.

6


  
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
                                    
 
Six Months Ended
 
July 1,
2012
 
July 3,
2011
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
9,241

 
$
9,857

Adjustments to reconcile net income to net cash provided by
    operating activities:
 

 
 

Depreciation and amortization
69,558

 
82,269

Loss on early extinguishment of debt
25,195

 

Amortization of deferred financing costs
2,718

 
3,509

Net receipt of deferred vendor incentives
12,486

 
19,764

Accretion of long-term debt
4,148

 
4,163

Impairment of long-lived assets
7,781

 
9,820

Distributions received from joint venture
6,694

 
6,501

Share-based compensation provision
5,164

 
6,660

Non-cash rent expense
874

 
4,114

Deferred income tax (benefit) provision, net
(3,586
)
 
3,601

Equity in earnings in joint ventures, net
(4,914
)
 
(5,100
)
Gain on sale of investment, net
(27,407
)
 

Other, net
1,747

 
(75
)
Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
(3,115
)
 
(5,575
)
Inventories
730

 
(750
)
Prepaid expenses and other current assets
(6,740
)
 
(12,147
)
Accounts payable
(7,140
)
 
14,604

Accrued expenses and other current liabilities
(24,904
)
 
(8,616
)
Net cash provided by operating activities
68,530

 
132,599

Cash flows from investing activities:
 

 
 

Capital expenditures
(84,079
)
 
(55,966
)
Restaurant acquisitions
(21,779
)
 
(6,613
)
Franchise incentive loans, net
(1,001
)
 

Proceeds from sale of investment
24,374

 

Investment in joint venture

 
(1,183
)
Proceeds from dispositions
907

 
2,565

Other, net
(564
)
 
147

Net cash used in investing activities
(82,142
)
 
(61,050
)
Cash flows from financing activities:
 

 
 

Proceeds from long-term debt
619,437

 

Repayments of long-term debt
(602,823
)
 
(34,768
)
Deferred financing costs
(15,602
)
 
(36
)
Premium payment on redemption of Senior Notes
(10,093
)
 

Repurchases of common stock

 
(37,400
)
Dividends paid
(15,597
)
 
(16,750
)
Distributions to noncontrolling interests
(3,667
)
 

Proceeds from stock option exercises
1,544

 
3,340

Other, net
52

 
(119
)
Net cash used in financing activities
(26,749
)
 
(85,733
)
Net cash used in operations before effect of exchange rate
    changes on cash
(40,361
)
 
(14,184
)
Effect of exchange rate changes on cash
230

 
1,200

Net decrease in cash and cash equivalents
(40,131
)
 
(12,984
)
Cash and cash equivalents at beginning of period
475,231

 
512,508

Cash and cash equivalents at end of period
$
435,100

 
$
499,524


7



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

 
Six Months Ended
 
July 1,
2012
 
July 3,
2011
 
(Unaudited)
Supplemental cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
51,678

 
$
61,050

Income taxes, net of refunds
$
8,271

 
$
7,018

 
 
 
 
Supplemental non-cash investing and financing activities:
 

 
 
Total capital expenditures
$
99,040

 
$
57,055

Cash capital expenditures
(84,079
)
 
(55,966
)
Non-cash capitalized lease and certain sales-leaseback obligations (1)
$
14,961

 
$
1,089

 
 
 
 
(1) Includes $14,771 of capitalized lease obligations related to the acquisition of
      Wendy’s franchised restaurants during the second quarter of 2012 as further
      discussed in Note 3.
 
 
 

See accompanying notes to condensed consolidated financial statements.




8

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 July 1, 2012 and the results of our operations for the three and six months ended July 1, 2012 and July 3, 2011 and our cash flows for the six months ended July 1, 2012 and July 3, 2011. The results of operations for the three and six months ended July 1, 2012 are not necessarily indicative of the results to be expected for the full 2012 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 January 1, 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 (including through our joint venture in Japan (the “Japan JV”)) are not material. References herein to The Wendy’s Company corporate (“Corporate”) represent The Wendy’s Company parent company only functions and their effect on the Company’s consolidated results of operations and financial condition.

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. All three month and six month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

(2) Discontinued Operations
 
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. Information related to Arby’s has been reflected in the accompanying unaudited condensed consolidated financial statements as follows:
Statements of operations - Arby’s income from operations for the three months and six months ended July 3, 2011 have been classified as discontinued operations.
Statement of cash flows - Arby’s cash flows for the six months ended July 3, 2011 have been included in, and not separately reported from, our consolidated cash flows.
Our unaudited condensed consolidated statements of operations for the three months and six months ended July 3, 2011 (prior to the sale of Arby’s) includes certain indirect corporate overhead costs in “General and administrative,” which, for segment reporting purposes, had previously been allocated to Arby’s. These indirect corporate overhead costs do not qualify for classification within discontinued operations, and therefore are included in “General and administrative” in continuing operations. Interest expense on Arby’s debt that was assumed by the buyer in the sale has been included in discontinued operations; however, interest expense on Wendy’s Restaurants’ credit agreement, which was not required to be repaid as a result of the sale, continued to be included in “Interest expense” in continuing operations.

We incurred “Transaction related costs” resulting from the sale of Arby’s of $562 and $1,174 during the three and six months ended July 1, 2012, respectively, and $5,039 and $6,923 during the three and six months ended July 3, 2011, respectively.


9

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

The following table details Arby’s revenues and income from operations for the three months and six months ended July 3, 2011, which have been reported in discontinued operations:
 
 
Three Months Ended
July 3,
2011
 
Six Months Ended
July 3,
2011
Revenues
 
$
281,094

 
$
546,453

 
 
 
 
 
Income from discontinued operations, net of
     income taxes:
 
 
 
 
Income from discontinued operations before
     income taxes
 
$
6,472

 
$
4,279

Provision for income taxes
 
(2,800
)
 
(1,720
)
 
 
3,672

 
2,559

Loss on disposal of discontinued operations,
     net of income tax benefit
 
(3,780
)
 
(3,780
)
Net loss from discontinued operations
 
$
(108
)
 
$
(1,221
)

(3) Acquisitions and Other Dispositions

On June 11, 2012, Wendy’s acquired 30 Wendy's franchised restaurants in the Austin, Texas area from Pisces Foods, L.P. (“Pisces”) and Near Holdings, L.P., pursuant to the terms of an Asset Purchase Agreement dated as of June 5, 2012 (the “Pisces Acquisition”). The purchase price was $19,243 in cash, including closing adjustments. Further adjustments will occur in the future as provided in the Asset Purchase Agreement. Wendy’s also agreed to lease the real estate, buildings and improvements related to 23 of the acquired restaurants from Pisces which were considered part of the purchase transaction and to assume ground leases for five of the acquired restaurants and building leases for two of the acquired restaurants. Wendy’s did not incur any material acquisition-related costs associated with the Pisces Acquisition.

The operating results of the 30 Wendy’s franchised restaurants acquired have been included in our condensed consolidated financial statements beginning on the acquisition date. Such results were not material to our condensed consolidated financial statements. In accordance with GAAP, the Pisces Acquisition is being accounted for using the acquisition method.

10

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

The table below presents the preliminary computation of total purchase price and fair value of assets acquired and liabilities assumed at the acquisition date. The amounts remain subject to finalization during the measurement period, not to exceed one year.
Total purchase price paid in cash
 
$
19,243

Identifiable assets acquired and liabilities assumed:
 
 
Cash
 
58

Inventories
 
149

Properties
 
12,983

Deferred taxes and other assets
 
1,627

Acquired territory rights
 
18,480

Favorable ground leases
 
170

Capitalized lease obligations
(14,771
)
Deferred vendor incentives (a)
(332
)
Unfavorable leases
(823
)
Other liabilities
(952
)
Total identifiable net assets
16,589

Goodwill (preliminary) (b)
 
$
2,654

_________________________

(a)
Included in “Deferred income.”

(b)
This goodwill is not deductible or amortizable for income tax purposes.

The preliminary fair values of the identifiable assets acquired were determined using one of the valuation approaches: market, income and cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset.

The pro forma revenue and earnings of the combined companies had the acquisition date been January 3, 2011 are as follows:
 
Three Months Ended July 1, 2012
 
Three Months Ended July 3, 2011
 
As Reported
 
As Adjusted
 
As Reported
 
As Adjusted
Revenues:
 
 
 
 
 
 
 
Sales
$
566,116

 
$
574,881

 
$
544,237

 
$
555,673

Franchise revenues
79,752

 
79,400

 
78,222

 
77,762

Total revenues
$
645,868

 
$
654,281

 
$
622,459

 
$
633,435

Operating profit
$
38,391

 
$
38,777

 
$
47,434

 
$
48,000

Net (loss) income
(5,493
)
 
(5,188
)
 
11,266

 
11,735

Net (loss) income attributable to
    The Wendy’s Company
(5,493
)
 
(5,188
)
 
11,266

 
11,735

Basic and diluted (loss) income per share
$
(.01
)
 
$
(.01
)
 
$
.03

 
$
.03



11

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

 
Six Months Ended July 1, 2012
 
Six Months Ended July 3, 2011
 
As Reported
 
As Adjusted
 
As Reported
 
As Adjusted
Revenues:
 

 
 

 
 

 
 

Sales
$
1,086,045

 
$
1,105,921

 
$
1,053,523

 
$
1,076,339

Franchise revenues
153,010

 
152,213

 
151,401

 
150,492

Total revenues
$
1,239,055

 
$
1,258,134

 
$
1,204,924

 
$
1,226,831

Operating profit
$
59,307

 
$
60,383

 
$
75,451

 
$
76,901

Net income
9,241

 
10,117

 
9,857

 
11,035

Net income attributable to
    The Wendy’s Company
6,857

 
7,733

 
9,857

 
11,035

Basic and diluted income per share
$
.02

 
$
.02

 
$
.02

 
$
.03


This As Adjusted data is presented for comparative purposes only and does not purport to be indicative of the Company’s actual results of operations had the Pisces Acquisition actually occurred as of January 3, 2011 or of the Company's future results of operations. Wendy’s did not have any material non-recurring adjustments associated with the Pisces Acquisition.

Other acquisitions and other dispositions
    
During the first quarter of 2012, the Company also acquired two Wendy’s 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.

During the first half of 2011, the Company acquired nine Wendy’s franchised restaurants in three separate acquisitions. The total consideration for these acquisitions was $7,673, consisting of (1) $6,613 of cash, net of $55 of cash acquired, and (2) the issuance of a note payable of $1,060. 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 $3,689 recognized as goodwill.

During the first half of 2012, one other restaurant disposition by the Company was not significant. During first half of 2011, two other restaurant acquisitions by the Company were not significant.

(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 expense, net.”


12

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

Presented below is an unaudited summary of activity related to our investment in TimWen included in our condensed consolidated balance sheets and condensed consolidated statements of operations:
 
 
Six Months Ended
 
 
July 1,
2012
 
July 3,
2011
Balance at beginning of period
 
$
91,742

 
$
98,631

Equity in earnings for the period
 
6,545

 
6,588

Amortization of purchase price adjustments (a)
 
(1,554
)
 
(1,371
)
 
 
4,991

 
5,217

Distributions received
 
(6,694
)
 
(6,501
)
Foreign currency translation adjustment included in
    “Other comprehensive (loss) income, net”
 
475

 
3,990

Balance at end of period (b)
 
$
90,514

 
$
101,337

_____________________

(a)
Based upon an original average aggregate life of 21 years.
(b)
Included in “Investments.”

Presented below is a summary of unaudited financial information of TimWen as of and for the six months ended July 1, 2012 and July 3, 2011, respectively, in Canadian dollars. The summary balance sheet financial information does not distinguish between current and long-term assets and liabilities.
 
 
July 1,
2012
 
July 3,
2011
Balance sheet information:
 
 
 
 
Properties
 
C$
72,981

 
C$
76,837

Cash and cash equivalents
 
2,719

 
2,503

Accounts receivable
 
4,624

 
5,103

Other
 
2,654

 
2,755

 
 
C$
82,978

 
C$
87,198

 
 
 
 
 
Accounts payable and accrued liabilities
 
C$
1,270

 
C$
951

Other liabilities
 
8,556

 
9,100

Partners’ equity
 
73,152

 
77,147

 
 
C$
82,978

 
C$
87,198


 
 
Six Months Ended
 
 
July 1,
2012
 
July 3,
2011
Income statement information:
 
 
 
 
Revenues
 
C$
19,401

 
C$
18,985

Income before income taxes and net income
 
13,177

 
13,219



13

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

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. The amount held in escrow as of July 1, 2012 was $3,327, which was adjusted for foreign currency translation, and was included in “Deferred costs and other assets.” In connection with the anticipated proceeds of the sale and in order to protect ourselves from a decrease in the Australian dollar through the closing date, we entered into a foreign currency related derivative transaction for an equivalent notional amount in U.S. dollars of the expected proceeds of $28,500 Australian dollars. We recorded a “Gain on sale of investment, net” of $27,407, which included a loss of $2,913 on the settlement of the derivative transaction discussed above.

We have reflected net income attributable to noncontrolling interests of $2,384, net of income tax benefit of $1,283, in the six months ended July 1, 2012 in connection with the equity and profit interests discussed below. The net assets and liabilities of the subsidiary that held the investment were not material to the consolidated financial statements. Therefore, the noncontrolling interest in those assets and liabilities was not previously reported separately. As a result of this sale and distributions to the minority shareholders, there are no remaining noncontrolling interests in this consolidated subsidiary.

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 profits 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

Long-term debt consisted of the following:
 
July 1,
2012
 
January 1,
2012
Term Loan, due in 2019
$
619,691

 
$

Senior Notes, repaid in July 2012
433,598

 
554,901

Term Loan, repaid in May 2012

 
466,062

6.20% senior notes, due in 2014
225,600

 
224,643

7% debentures, due in 2025
1,462

 
1,466

Capitalized lease obligations, due through 2040
30,303

 
15,222

Sale-leaseback obligations, due through 2029
82,917

 
82,342

6.54% aircraft term loan, repaid in June 2012
707

 
1,060

Other

 
11,303

 
1,394,278

 
1,356,999

Less amounts payable within one year
(9,905
)
 
(6,597
)
Total long-term debt
$
1,384,373

 
$
1,350,402


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.


14

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

Credit Agreement

On May 15, 2012, Wendy’s entered into a Credit Agreement (the “Credit Agreement”), which includes a senior secured term loan facility (the “Term Loan”) of $1,125,000 and a senior secured revolving credit facility of $200,000 and contains provisions for an uncommitted increase of up to $275,000 principal amount of the revolving credit facility and/or Term Loan subject to the satisfaction of certain conditions. The revolving credit facility includes a sub-facility for the issuance of up to $70,000 of letters of credit. The obligations under the Credit Agreement are secured by substantially all of the non-real estate assets and stock of Wendy’s and its domestic subsidiaries (other than certain unrestricted subsidiaries), and 65% of the stock of certain of its foreign subsidiaries in each case subject to certain limitations and exceptions.

The Term Loan was issued at 99.0% of the principal amount, representing an original issue discount of 1.0% resulting in net proceeds of $1,113,750 with draws on May 15, 2012 and July 16, 2012 (subsequent to the end of our second quarter). The discount of $11,250 will be accreted and the related charge included in “Interest expense” through the maturity of the Term Loan.

The net proceeds and respective discounts for draws under the Term Loan are as follows:
 
May 15, 2012
 
Subsequent Event
 
Total
Net proceeds
$
619,437

 
$
494,313

 
$
1,113,750

Discount
6,257

 
4,993

 
11,250

Total
$
625,694

 
$
499,306

 
$
1,125,000


The Term Loan is due not later than May 15, 2019 and amortizes in an amount equal to 1% per annum of the total principal amount outstanding, payable in quarterly installments beginning in the fourth quarter of 2012, with the remaining balance payable on the maturity date. In addition, the Term Loan requires prepayments of principal amounts resulting from certain events and excess cash flow on an annual basis from Wendy’s as defined under the Credit Agreement. The revolving credit facility expires not later than May 15, 2017. An unused commitment fee of 50 basis points per annum is payable quarterly on the average unused amount of the revolving credit facility until the maturity date. As of July 1, 2012, there were no amounts outstanding under the revolving credit facility, except for $19,000 of letters of credit issued in the normal course of business.

The interest rate on the Term Loan and amounts borrowed under the revolving credit facility is based on the Eurodollar Rate as defined in the Credit Agreement (but not less than 1.25%), plus 3.50%, or a Base Rate, as defined in the Credit Agreement plus 2.50%. Since the inception of the Term Loan, we have elected to use the Eurodollar Rate, which resulted in an interest rate on the Term Loan of 4.75% as of July 1, 2012.

Wendy’s incurred $15,602 in costs related to the Credit Agreement, which are being amortized to “Interest expense” through the maturity of the Term Loan utilizing the effective interest rate method. No costs related to the Credit Agreement were incurred from the Term Loan draw on July 16, 2012.

Proceeds from the Term Loan draw on May 15, 2012 were used (1) to repay all amounts outstanding under the prior credit agreement, (2) to purchase $124,225 aggregate principal amount of Wendy’s Restaurants’ 10.00% Senior Notes due 2016 (the “Senior Notes”) at a redemption price of 108.125% of the principal amount plus accrued and unpaid interest and (3) to pay fees and expenses. Proceeds from the Term Loan draw on July 16, 2012, subsequent to the end of our second quarter, were used to purchase $440,775 aggregate principal amount of remaining Senior Notes outstanding at a redemption price of 107.5% of the principal amount plus accrued and unpaid interest.


15

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

The Company incurred a loss on the early extinguishment of debt for the draws on the Term Loan, as described above, as follows:
 
Three Months Ended
July 1,
 2012
 
Subsequent Event
Premium payment to redeem Senior Notes
$
10,093

 
$
33,058

Unaccreted discount on Senior Notes
2,086

 
7,186

Deferred costs associated with the Senior Notes
2,796

 
9,562

Unaccreted discount on prior credit agreement
1,695

 

Deferred costs associated with the prior credit agreement
8,525

 

Loss on early extinguishment of debt
$
25,195

 
$
49,806


The affirmative and negative covenants in the Credit Agreement include, among others, preservation of corporate existence; payment of taxes; maintenance of insurance; and limitations on: indebtedness (including guarantee obligations of other indebtedness); liens; mergers, consolidations, liquidations and dissolutions; sales of assets; dividends and other payments in respect of capital stock; investments; payments of certain indebtedness; transactions with affiliates; changes in fiscal year; negative pledge clauses and clauses restricting subsidiary distributions; and material changes in lines of business. The financial covenants contained in the Credit Agreement are (1) a consolidated interest coverage ratio and (2) a consolidated senior secured leverage ratio. Wendy’s was in compliance with all covenants of the Credit Agreement as of July 1, 2012.

Aircraft Term Loan

During the first quarter of 2012, the Company made a $3,911 prepayment on its aircraft financing facility to comply with a requirement that the outstanding principal balance be no more than 85% of the appraised value of the aircraft. On June 25, 2012, the Company voluntarily repaid the remaining outstanding principal, including accrued interest thereon related to this facility, totaling $6,656.

(6) Fair Value of Financial Instruments

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.


16

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

As of July 1, 2012, the carrying amounts and estimated fair values of The Wendy’s Company’s financial instruments, for which the disclosure of fair values is required, are as follows:
 
Carrying
Amount
 
Fair
Value
 
Fair Value
Measurements
Financial assets
 
 
 
 
 
Non-current cost investments (a)
$
25,349

 
$
34,993

 
Level 3
Interest rate swaps (b)
10,254

 
10,254

 
Level 2
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
Long-term debt, including current portion:
 
 
 
 
 
Term Loan, due in 2019
$
619,691

 
$
621,941

 
Level 2
Senior Notes, repaid in July 2012
433,598

 
469,425

 
Level 2
6.20% senior notes, due in 2014
225,600

 
248,529

 
Level 2
7% debentures, due in 2025
82,917

 
89,300

 
Level 2
Capitalized lease obligations (c)
30,303

 
31,277

 
Level 3
Sale-leaseback obligations (c)
1,462

 
1,528

 
Level 3
Other
707

 
707

 
Level 3
Total long-term debt, including current portion
$
1,394,278

 
$
1,462,707

 
 
Guarantees of:
 
 
 
 
 
Franchisee loans obligations (d)
$
740

 
$
740

 
Level 3
_______________

(a)
The fair value of our indirect investment in Arby’s is based on its sale in July 2011 and our subsequent review of Arby’s current unaudited financial information. The fair value of the remaining investments were principally based on quoted market or broker/dealer prices. To the extent that some of these investments, including the underlying investments in investment limited partnerships, do not have available quoted market or broker/dealer prices, we relied on our review of valuations performed by the investment managers or investees or third-party appraisals.

(b)
The interest rate swaps (and cash and cash equivalents as described below) are the only financial assets and liabilities measured and recorded at fair value on a recurring basis.

(c)
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.

(d)
Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into pooled debt facility arrangements for new store development and equipment financing. Wendy’s has accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted average risk percentage established at the inception of each program adjusted for a history of defaults.

The carrying amounts of cash and cash equivalents, accounts payable and accrued expenses approximated fair value due to the short-term maturities of those items. The carrying amounts of accounts and notes receivable (both current and non-current) approximated fair value due to the effect of related allowances for doubtful accounts and notes receivable.


17

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

The following table presents the fair values for those assets and liabilities of continuing operations measured at fair value during the six months ended July 1, 2012 on a non-recurring basis. Total losses include losses recognized from all non-recurring fair value measurements during the six months ended July 1, 2012. See Note 7 for more information on the impairment of our long-lived assets.
 
 
 
Fair Value Measurements
 
 
 
July 1,
2012
 
Level 1
 
Level 2
 
Level 3
 
Six Months Ended
 July 1, 2012
Total Losses
Properties (a)
$
4,604

 
$

 
$

 
$
4,604

 
$
6,150

Other intangible assets

 

 

 

 
3

Aircraft (b)
6,741

 

 

 
6,741

 
1,628

Total
$
11,345

 
$

 
$

 
$
11,345

 
$
7,781

_______________

(a)
The fair values of impaired assets were generally estimated based on the present values of the associated cash flows and market values with respect to land. The impaired assets consist of land and buildings, are classified as held-for-sale and included in “Prepaid expenses and other current assets.”

(b)
The carrying value of the aircraft, which reflects current market conditions, approximated its fair value.

Interest rate swaps

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. At July 1, 2012 and January 1, 2012, the fair value of these interest rate swaps of $10,254 and $11,695, respectively, was 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 $1,404 and $2,730 for the three and six months ended July 1, 2012, respectively, and $1,435 and $2,848 for the three and six months ended July 3, 2011, respectively.

(7) Impairment of Long-Lived Assets

During the second quarter of 2012, we closed 15 company-owned restaurants in connection with our review of certain underperforming locations. The closing of these restaurants 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 expense, net.”

Our company-owned restaurant impairment losses in the first quarter of 2012 and for the three and six months ended July 3, 2011, predominantly reflect 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.

Also, during the second quarter of 2012, we reclassified our company-owned aircraft as held and used from its previous held-for-sale classification. In the first half of 2012, the Company recorded an impairment charge of $1,628 on the company-owned aircraft. As of July 1, 2012, the carrying value of the aircraft, which reflects current market conditions, approximated its fair value and is included in “Properties.” See Note 13 for information regarding an amended and restated lease agreement for the company-owned aircraft.


18

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

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
 
Six Months Ended
 
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Impairment of company-owned restaurants:
 
 
 
 
 
 
 
 
Properties
 
$
3,270

 
$
365

 
$
6,150

 
$
6,449

Intangible assets
 

 

 
3

 
1,813

Aircraft
 

 

 
1,628

 

Total
 
$
3,270

 
$
365

 
$
7,781

 
$
8,262


Arby’s impairment losses for the six months ended July 3, 2011 were not significant and are included in discontinued operations and are not included in the table above. See Note 2 for more information on discontinued operations.

(8) Facilities Relocation and Other Transition Costs

As announced in December 2011, we are relocating the Company’s Atlanta restaurant support center to Ohio. The Company expects to expense costs aggregating approximately $28,000 in 2012 and $2,600 in 2013 related to its relocation and other transition activities which are expected to be substantially completed during the third quarter of 2012. The costs expected to be expensed in 2013 primarily relate to severance and other costs for employees who will be assisting in the transition activities through the early part of 2013.

The components of “Facilities relocation and other transition costs” for the three and six months ended July 1, 2012, as well as the total expected to be incurred and total incurred since inception are presented in the table below:
 
 
Three Months Ended
July 1,
2012

 
Six Months Ended
July 1,
2012

 
Total Incurred Since Inception
 
Total Expected to be Incurred
Severance, retention and other payroll costs
 
$
4,317

 
$
7,316

 
$
12,661

 
$
12,849

Relocation costs
 
1,505

 
2,081

 
2,081

 
6,652

Existing facilities closure costs
 
133

 
177

 
177

 
5,537

Consulting and professional fees
 
1,933

 
2,818

 
2,818

 
6,042

Other
 
879

 
1,265

 
1,250

 
3,090

 
 
8,767

 
13,657

 
18,987

 
34,170

Accelerated depreciation
 
659

 
1,300

 
1,497

 
1,925

   Total
 
$
9,426

 
$
14,957

 
$
20,484

 
$
36,095


The increase in the Total Expected to be Incurred noted above as compared to our 2011 year end estimate relates primarily to additional professional fees that became determinable during our 2012 first quarter.


19

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

An analysis of related activity in the facilities relocation and other transition costs accrual which is included in “Accrued expenses and other current liabilities” is as follows:
 
 
Balance
 
 
 
 
 
Balance
 
 
January 1,
2012
 
Charges
 
Payments
 
July 1,
2012
Severance, retention and other payroll costs
 
$
5,345

 
$
7,316

 
$
(4,862
)
 
$
7,799

Relocation costs
 

 
2,081

 
(1,035
)
 
1,046

Existing facilities closure costs
 

 
177

 
(177
)
 

Consulting and professional fees
 

 
2,818

 
(1,939
)
 
879

Other
 

 
1,265

 
(1,124
)
 
141

 
 
$
5,345

 
$
13,657

 
$
(9,137
)
 
$
9,865


(9) Income Taxes

The Company’s effective tax rate benefit for the three months ended July 1, 2012 and effective tax rate for the three months ended July 3, 2011 was 61.2% and 42.2%, respectively, on (loss) income from continuing operations. 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 income tax benefit, (2) tax credits, (3) a net reduction in deferred state taxes related to the Company’s debt refinancing and related corporate activities, (4) adjustments related to prior year tax matters, and (5) changes in our estimated full year tax rates.
The Company’s effective tax rate benefit for the six months ended July 1, 2012 and effective tax rate for the six months ended July 3, 2011 was 24.1% and 40.2%, respectively, on income from continuing operations. 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 income tax benefit, (2) tax credits, (3) a net reduction in deferred state taxes related to the Company’s debt refinancing and related corporate activities, and (4) adjustments related to prior year tax matters.
There were no significant changes to unrecognized tax benefits or related interest and penalties for the Company for the six month periods ended July 1, 2012 and July 3, 2011.
The Company participates in the Internal Revenue Service Compliance Assurance Process. During the six months ended July 1, 2012, we concluded without adjustment the examination of our tax year ended January 2, 2011.
(10) (Loss) Income Per Share

Basic (loss) income per share for the three and six months ended July 1, 2012 and July 3, 2011 was computed by dividing 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
 
Six Months Ended
 
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Amounts attributable to The Wendy’s Company:
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
$
(5,493
)
 
$
11,374

 
$
6,857

 
$
11,078

Net loss from discontinued operations
 

 
(108
)
 

 
(1,221
)
Net (loss) income
 
$
(5,493
)
 
$
11,266

 
$
6,857

 
$
9,857



20

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

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

 
 
Three Months Ended
 
Six Months Ended
 
 
July 1,
2012
 
July 3,
2011
 
July 1,
2012
 
July 3,
2011
Common stock:
 
 
 
 
 
 
 
 
Weighted average basic shares outstanding
 
389,978

 
417,676

 
389,840

 
418,098

Dilutive effect of stock options and restricted
     shares
 

 
1,563

 
2,161

 
1,317

Weighted average diluted shares outstanding
 
389,978

 
419,239

 
392,001

 
419,415


Diluted (loss) income per share for the three months and six months ended July 1, 2012 and July 3, 2011 was computed by dividing income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares, computed using the treasury stock method. Diluted loss per share for the three months ended July 1, 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 antidilutive. For the six months ended July 1, 2012, we excluded 19,541 of potential common shares from our diluted income per share calculation as they would have had anti-dilutive effects. For the three months and six months ended July 3, 2011, we excluded 15,250 and 18,295, respectively, of potential common shares from our diluted income per share calculation as they would have had anti-dilutive effects.

(11) Equity

Stockholders’ Equity

The following is a summary of the changes in stockholders’ equity:
 
Six Months Ended
 
July 1,
2012
 
July 3,
2011
Balance, beginning of year
$
1,996,069

 
$
2,163,174

Comprehensive income
8,029

 
17,729

Share-based compensation
5,164

 
6,660

Exercises of stock options
1,062

 
3,283

Dividends paid
(15,597
)
 
(16,750
)
Tax charge from share-based compensation
(1,186
)
 

Repurchases of common stock for treasury

 
(46,622
)
Other
33

 
(52
)
Balance, end of the period
$
1,993,574

 
$
2,127,422


(12) 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.

Japan Joint Venture Guarantee

In 2012, the Company (1) provided a guarantee to certain lenders to the Japan JV for which our joint venture partners have agreed, should it become necessary, to reimburse and otherwise indemnify us for their 51% share of the guarantee and (2) agreed to reimburse and otherwise indemnify our joint venture partners for our 49% share of the guarantee by our joint venture partners of a line of credit granted by a different lender to the Japan JV to fund working capital requirements. As of July 1, 2012, our portion of these contingent obligations totaled approximately $4,200 (¥350,100) based upon then current rates of exchange. The

21

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

fair value of our guarantees is immaterial. The Company anticipates that our share of any additional guarantees, after the agreement of our joint venture partners to reimburse and otherwise indemnify us for their 51% share of the guarantee, of up to $3,300 may be necessary in 2012.

Capital Expenditures Commitments

As of July 1, 2012, the Company had approximately $7,422 of outstanding commitments for capital expenditures expected to be paid in the third quarter of 2012.

(13) Transactions with Related Parties

The following is a summary of ongoing transactions between the Company and its related parties, which are included in continuing operations and includes any updates and amendments since those reported in the Form 10-K:
 
Six Months Ended
 
July 1,
2012
 
July 3,
2011
SSG agreement (a)
$

 
$
(2,275
)
Subleases with related parties (b)
(95
)
 
(82
)
Transactions with the Management Company (c):
 
 
 
Advisory fees
$

 
$
500

Sublease income
(683
)
 
(818
)
Use of company-owned aircraft (d)
(92
)
 
(60
)
Liquidation services agreement

 
220

Distributions of proceeds to noncontrolling interests (see Note 4)
3,667

 

___________________

Transactions with Purchasing Cooperatives
 
(a)
In anticipation of the sale of Arby’s, effective April 2011, the activities of Strategic Sourcing Group Co-op, LLC (“SSG”) were transferred to Quality Supply Chain Co-op, Inc. (“QSCC”) and Arby’s independent purchasing cooperative (“ARCOP”). Wendy’s Restaurants had committed to pay approximately $5,145 of SSG expenses, which were expensed in 2010 and included in “General and administrative.” During the first quarter of 2011, the remaining accrued commitment of $2,275 was reversed and credited to “General and administrative.”

(b)
The Company received $95 and $59 of sublease income from QSCC during the first half of 2012 and 2011, respectively, and $23 of sublease income from SSG during the first half 2011, both of which have been recorded as reductions of “General and administrative.”

Transactions with the Management Company

(c)
The Company had the following transactions with a management company that was formed by the Former Executives and a director, who was our former Vice Chairman (the “Management Company”): (1) paid service fees of $500 in connection with a services agreement that expired on June 30, 2011, and recorded amortization of $220 related to fees paid for assistance in the sale, liquidation or other disposition of certain of our investments under a liquidation services agreement, which also expired on June 30, 2011, both of which are included in “General and administrative” in the first half of 2011, and (2) recorded income of $683 and $818 during the first six months of 2012 and 2011, respectively, under an office sublease agreement, which expired in May 2012 and has been recorded as a reduction of “General and administrative.”

22

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


(d)
The company-owned aircraft was being leased under an aircraft lease agreement with TASCO, LLC (an affiliate of the Management Company) (“TASCO”), which expired on June 30, 2012. The Company and TASCO entered into an extension of that lease agreement that extended the lease term to July 31, 2012, and effective as of August 1, 2012, entered into an amended and restated lease agreement that will expire on January 5, 2014. Under the amended and restated lease agreement, TASCO will pay all costs associated with the operation, maintenance and insurance of the aircraft. The Company recorded lease income of $92 and $60 during the first six months of 2012 and 2011, respectively, as a reduction of “General and administrative.”

(14) Legal, Environmental and Other Matters

We are involved in litigation and claims incidental to our current and prior businesses. We provide reserves for such litigation and claims when payment is probable and reasonably estimable. As of July 1, 2012, the Company had reserves for continuing operations for all of its legal and environmental matters aggregating $2,351. 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 reserves 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 a dispute between Wendy’s and Tim Hortons Inc. in the Form 10-K and in the Company’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2012. There have been no material developments on this matter.

(15) 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 expires on March 31, 2013. The cost of this pension plan is determined in accordance with the provisions of the CBA. As of January 1, 2012, the Union Pension Fund was in Green Zone Status, as defined in the Pension Protection Act of 2006 (the “PPA”) and had been operating under a Rehabilitation Plan.
In April 2012, we received a Notice of Critical Status from the Union Pension Fund which sets forth that the plan was considered to be in Red Zone Status for the 2012 Plan Year due to funding problems. As the fund is in critical status, all contributing employers, including Wendy’s, will be required to pay a 5% surcharge on contributions for all hours worked from June 1, 2012 through December 31, 2012 and a 10% surcharge on contributions for all hours worked on and after January 1, 2013 until a contribution rate is negotiated at the expiration of the CBA that will be consistent with a revised Rehabilitation Plan which must be adopted by the Union Pension Fund in accordance with the provisions of the PPA.
The surcharges and the possible effect of the revised Rehabilitation Plan to be adopted by the Union Pension Fund as described above are not anticipated to have a material effect on the Company's results of operations.

(16) Accounting Standards Not Yet Adopted

In July 2012, the Financial Accounting Standards Board (the “FASB”) issued an amendment that permits a company to make an assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted.

23


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”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements 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 January 1, 2012 (the “Form 10-K”). There have been no material changes as of July 1, 2012 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 combined 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”). On July 4, 2011, Wendy’s Restaurants 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. Arby’s operating results for the three and six months ended July 3, 2011 are classified as discontinued operations in the accompanying unaudited condensed consolidated statements of operations. After this sale, the principal subsidiary of The Wendy’s Company is Wendy’s International, Inc. (“Wendy’s”) and its subsidiaries. Wendy’s franchises and operates company-owned Wendy’s® quick service restaurants throughout the United States of America (the “U.S.”). 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 filet of chicken breast sandwiches, chicken nuggets, chili, side dishes, 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 (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 (including through our joint venture in Japan (the “Japan JV”) are not material. References herein to The Wendy’s Company corporate (“Corporate”) represent The Wendy’s Company parent company only functions and their effect on the Company’s consolidated results of operations and financial condition. The results of operations discussed below may not necessarily be indicative of future results.

Executive Overview

Our Continuing Business

As of July 1, 2012, the Wendy’s restaurant system was comprised of 6,547 restaurants, of which 1,425 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.

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 increased commodity costs in the first half of 2012. These increased costs negatively affected cost of sales and restaurant margins.

Wendy’s long-term growth opportunities include (1) improving our North America business by elevating the total customer experience through core menu improvement, step-change product innovation and focused execution of operational excellence and brand positioning and which will be supported by (2) investing in an Image Activation program, which includes innovative exterior and interior restaurant designs, for our new and remodeled restaurants, (3) improving restaurant utilization through daypart expansion, (4) employing financial strategies to improve our net income and (5) building the brand worldwide.

Wendy’s revenues for the first six months of 2012 include: (1) $1,049.7 million of sales at company-owned restaurants, (2) $36.3 million from the sale of bakery items, (3) $141.4 million of royalty income from franchisees, and (4) $11.7 million of other franchise-related revenue and other revenues. Substantially all of our Wendy’s royalty agreements provided for royalties of 4.0% of franchise revenues for the six months ended July 1, 2012.


24


Key Business Measures

We track our results of operations and manage our business using the following key business measures:
 
Same-Store Sales
Since the 2012 first quarter, we have been reporting Wendy’s 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 (the “New Method”). Prior thereto, the calculation of same-store sales commenced after a restaurant had been open for at least 15 continuous months and as of the beginning of the previous fiscal year (the “Old Method”). The tables summarizing the results of operations below provide the same-store sales percent change using the New Method, as well as the Old Method. 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 bakery and other.  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.
    
Credit Agreement

As further described in “Liquidity and Capital Resources - Credit Agreement,” below, on May 15, 2012, Wendy’s entered into a Credit Agreement (the “Credit Agreement”) which includes a senior secured term loan facility (the “Term Loan”) of $1,125.0 million and a senior secured revolving credit facility of $200.0 million. The Company recognized a loss on the early extinguishment of debt of $25.2 million in the second quarter of 2012 related to the use of proceeds from the Term Loan draw on May 15, 2012. Subsequent to the end of our second quarter and as a result of the use of proceeds from the Term Loan draw on July 16, 2012, the Company will recognize a loss on early extinguishment of debt of $49.8 million in the third quarter of 2012.

Related Party Transactions

The Company has entered into the following transactions with related parties since those reported in our Form 10-K:

Noncontrolling Interests in Jurl Holdings, LLC
 
Jurl Holdings, LLC’s (“Jurl”), a 99.7% owned subsidiary, completed the sale of our investment in Jurlique International Pty Ltd. (“Jurlique”) in February 2012. 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 profits interests in Jurl. In connection with the sale of Jurlique, we distributed approximately $3.7 million to Jurl’s minority shareholders, including approximately $2.3 million to the Former Executives in the six months ended July 1, 2012.

Aircraft Lease Agreement

The company-owned aircraft was being leased under an aircraft lease agreement with TASCO, LLC (an affiliate of a company that was formed by the Former Executives and a director, who was our former Vice Chairman (the “Management Company”)) (“TASCO”), which expired on June 30, 2012. The Company and TASCO entered into an extension of that lease agreement that extended the lease term to July 31, 2012, and effective as of August 1, 2012, entered into an amended and restated lease agreement that will expire on January 5, 2014. Under the amended and restated lease agreement, TASCO will pay all costs associated with the operation, maintenance and insurance of the aircraft. At the expiration of the term of the amended and restated lease agreement, the Company will evaluate all options for the aircraft, including a possible sale.


25


Japan Joint Venture Guarantee

In 2012, Wendy’s (1) provided a guarantee to certain lenders to the Japan JV for which our joint venture partners have agreed to reimburse and otherwise indemnify us for their 51% share of the guarantee and (2) agreed to reimburse and otherwise indemnify our joint venture partners for our 49% share of the guarantee by our joint venture partners of a line of credit granted by a different lender to the Japan JV to fund working capital requirements. As of July 1, 2012, our portion of these contingent obligations totaled approximately $4.2 million (¥350.1 million) based upon then current rates of exchange. The fair value of our guarantees is immaterial. The Company anticipates that our share of additional guarantees, after the agreement of our joint venture partners to reimburse and otherwise indemnify us for their 51% share of the guarantee, of up to $3.3 million may be necessary in 2012.

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 these years are considered not measurable or not meaningful (“n/m”).

As a result of the sale of Arby’s as discussed above in “Introduction,” Arby’s results of operations for the quarter ended July 3, 2011 have been included in “Income from discontinued operations, net of income taxes” in the tables below.

26


Results of Operations

The following tables included throughout this Results of Operations set forth the Company’s consolidated results of operations for the three months ended July 1, 2012 and July 3, 2011 (dollars in millions):
 
Three Months Ended
 
July 1, 2012
 
July 3, 2011
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
Sales
$
566.1

 
$
544.3

 
$
21.8

 
4.0
 %
Franchise revenues
79.8

 
78.2

 
1.6

 
2.0

 
645.9

 
622.5

 
23.4

 
3.8

Costs and expenses:
 
 
 
 
 

 
 
Cost of sales
483.1

 
464.8

 
18.3

 
3.9

General and administrative
73.3

 
74.5

 
(1.2
)
 
(1.6
)
Depreciation and amortization
35.9

 
29.8

 
6.1

 
20.5

Impairment of long-lived assets
3.3

 
0.4

 
2.9

 
n/m
Facilities relocation and other transition costs
9.4

 

 
9.4

 
100.0

Transaction related costs
0.6

 
5.0

 
(4.4
)
 
(88.0
)
Other operating expense, net
1.9

 
0.6

 
1.3

 
n/m
 
607.5

 
575.1

 
32.4

 
5.6

Operating profit
38.4

 
47.4

 
(9.0
)
 
(19.0
)
Interest expense
(28.0
)
 
(28.1
)
 
0.1

 
(0.4
)
Loss on early extinguishment of debt
(25.2
)
 

 
(25.2
)
 
100.0

Other income, net
0.6

 
0.4

 
0.2

 
50.0

(Loss) income from continuing operations before
     income taxes and noncontrolling interests
(14.2
)
 
19.7

 
(33.9
)
 
n/m
Benefit from (provision for) income taxes
8.7

 
(8.3
)
 
17.0

 
n/m
(Loss) income from continuing operations
(5.5
)
 
11.4

 
(16.9
)
 
n/m
Discontinued operations:
 
 
 
 
 
 


Income from discontinued operations, net of income taxes

 
3.7

 
(3.7
)
 
(100.0
)
Loss on disposal of discontinued operations, net of income
     tax benefit

 
(3.8
)
 
3.8

 
(100.0
)
Net loss from discontinued operations

 
(0.1
)
 
0.1

 
(100.0
)%
Net (loss) income
$
(5.5
)
 
$
11.3

 
$
(16.8
)
 
n/m

27



 
Second Quarter
 
 
 
Second Quarter
 
 
 
2012
 
 
 
2011
 
 
Sales:
 
 
 
 
 
 
 
Wendy’s
$
547.9

 
 
 
$
525.7

 
 
Bakery and other
18.2

 
 
 
18.6

 
 
Total sales
$
566.1

 
 
 
$
544.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% of 
Sales
 
 
 
% of 
Sales
Cost of sales:
 
 
 
 
 
 
 
Wendy’s
 
 
 
 
 
 
 
Food and paper
$
181.4

 
33.1%
 
$
176.3

 
33.5%
Restaurant labor
162.9

 
29.7%
 
155.4

 
29.6%
Occupancy, advertising and other operating costs
126.4

 
23.1%
 
120.9

 
23.0%
Total cost of sales
470.7

 
85.9%
 
452.6

 
86.1%
Bakery and other
12.4

 
n/m 
 
12.2

 
n/m 
Total cost of sales
$
483.1

 
85.3%
 
$
464.8

 
85.4%

 
Second Quarter
 
 
 
Second Quarter
 
 
 
2012
 
 
 
2011
 
 
Margin $:
 
 
 
 
 
 
 
Wendy’s
$
77.2

 
 
 
$
73.1

 
 
Bakery and other
5.8

 
 
 
6.4

 
 
Total margin
$
83.0

 
 
 
$
79.5

 
 

 
 
 
 
 
 
 
Wendy’s restaurant margin %
14.1
%
 
 
 
13.9
%
 
 

 
 
New Method
 
Old Method
 
 
Second Quarter
 
Second Quarter
 
Second Quarter
 
Second Quarter
 
 
2012
 
2011
 
2012
 
2011
Wendy’s restaurant statistics:
 
 
 
 
 
 
 
 
North America same-store sales:
 
 
 
 
 
 
 
 
Company-owned restaurants
 
3.2
%
 
2.3
%
 
3.1
%
 
2.3
%
Franchised restaurants
 
3.2
%
 
2.3
%
 
3.2
%
 
2.3
%
Systemwide
 
3.2
%
 
2.3
%
 
3.2
%
 
2.3
%
 
 
 
 
 
 
 
 
 
Total same-store sales:
 
 
 
 
 
 
 
 
Company-owned restaurants
 
3.2
%
 
2.3
%
 
3.1
%
 
2.3
%
Franchised restaurants (a)
 
3.3
%
 
2.3
%
 
3.3
%
 
2.3
%
Systemwide (a)
 
3.3
%
 
2.3
%
 
3.2
%
 
2.3
%
________________
(a) Includes international franchised restaurants same-store sales.

28


Restaurant count:
Company-owned
 
Franchised
 
Systemwide
Restaurant count at April 1, 2012
1,414

 
5,167

 
6,581

Opened

 
13

 
13

Closed
(19
)
 
(28
)
 
(47
)
Net purchased from (sold by) franchisees
30

 
(30
)
 

Restaurant count at July 1, 2012
1,425

 
5,122

 
6,547


Sales
Change
Wendy’s
$
22.2

Bakery and other
(0.4
)
 
$
21.8


The increase in sales in the second quarter of 2012 was due in large part to an increase in our average per customer check amount, primarily due to strategic price increases taken on our menu items. Sales were also impacted by a $2.6 million decrease in the benefit from Canadian foreign currency rates. Wendy’s company-owned restaurants opened or acquired subsequent to the second quarter of 2011 resulted in incremental sales of $16.8 million in the second quarter of 2012, which were partially offset by a reduction in sales of $6.8 million from locations sold or closed after the second quarter of 2011.
 
Wendy's Cost of Sales
Change
Food and paper
(0.4
)%
points
Restaurant labor
0.1
 %
points
Occupancy, advertising and other operating costs
0.1
 %
points
 
(0.2
)%
points

As a percent of sales in the second quarter of 2012, increases in food and paper costs, which were primarily related to a 0.7% increase in commodity costs, and increased labor and controllable costs were more than offset by the effect of strategic price increases on our menu items as well as favorable impact of product mix.

General and Administrative
Change
Professional services
$
(2.1
)
Legal fees
0.8

Other, net
0.1

 
$
(1.2
)

The decrease in general and administrative expenses in the second quarter of 2012 was primarily due to decreases in professional fees primarily related to the design and implementation of our employee retention plan in the prior year quarter that did not recur and in contract services for information technology. These decreases were partially offset by an increase in legal fees related to certain legal matters during the second quarter of 2012.

29



Depreciation and Amortization
Change
Restaurants
$
5.1

Aircraft
0.4

Other
0.6

Total
$
6.1


The increase in restaurant depreciation and amortization in the second quarter of 2012 was primarily for (1) capital expenditures for operating initiatives, (2) new restaurants opened and restaurants acquired from franchisees subsequent to the second quarter of 2011, primarily related to equipment and leasehold improvements and (3) point-of-sale system hardware. In addition, depreciation increased as compared to the second quarter of 2011 as a result of the reclassification of the company-owned aircraft to held and used from its previous held-for-sale classification.

Impairment of Long-Lived Assets
Change
Properties
$
2.9


The increase in impairment was due to the closing of 15 company-owned restaurants during the second quarter of 2012 in connection with our review of certain underperforming locations, which resulted in an impairment charge of $3.3 million.

Facilities Relocation and Other Transition Costs
Change
Severance, retention and other payroll costs
$
4.3

Consulting and professional fees
1.9

Relocation costs
1.5

Accelerated depreciation expense
0.7

Other
1.0

 
$
9.4


During the second quarter of 2012, the Company incurred “Facilities relocation and other transition costs” aggregating $9.4 million, which are related to the ongoing relocation of the Atlanta restaurant support center to Ohio which is expected to be substantially completed during the third quarter of 2012.

Transaction Related Costs

During the three months ended July 1, 2012 and July 3, 2011, we incurred “Transaction related costs” of $0.6 million and $5.0 million, respectively, resulting from the sale of Arby’s.
  
Interest Expense
Change