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 June 29, 2014 and December 29, 2013:



	June 29, 2014				December 29, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Fair Value Measurements
Financial assets
Cash equivalents	$	174,717	$	174,717	$	405,874	$	405,874	Level 1
Non-current cost method investments (a)	3,510		134,452		3,387		130,433		Level 3
Cash flow hedges (b)	—		—		1,212		1,212		Level 2

Financial liabilities
Cash flow hedges (b)	2,727		2,727		—		—		Level 2
Term A Loans, due in 2018 (c)	556,179		555,484		570,625		569,555		Level 2
Term B Loans, due in 2019 (c)	763,605		764,392		767,452		767,452		Level 2
7% debentures, due in 2025 (c)	85,258		107,250		84,666		98,250		Level 2
Capital lease obligations (d)	49,049		51,320		40,732		38,716		Level 3
Guarantees of franchisee loan obligations (e)	889		889		884		884		Level 3

_______________

(a)

The fair value of our indirect investment in Arby’s Restaurant Group, Inc. (“Arby’s”) is based on applying a multiple to Arby’s earnings before income taxes, depreciation and amortization per its current unaudited financial information. The carrying value of our indirect investment in Arby’s was reduced to zero during 2013 in connection with the receipt of a dividend. The fair values of our remaining investments 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 developed using market observable data for all significant inputs.


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


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

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

Derivative Instruments

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

Our derivative instruments as of June 29, 2014 and December 29, 2013 consist of seven forward starting interest rate swap agreements to change the floating rate interest payments associated with $350,000 and $100,000 in borrowings expected to be outstanding under our Term A Loans and Term B Loans, respectively, to fixed interest rate obligations beginning on June 30, 2015 and maturing on December 31, 2017. At inception, the forward starting swap agreements were designated as cash flow hedges and are evaluated for effectiveness quarterly.

As of June 29, 2014 and December 29, 2013, the fair value of the cash flow hedges resulted in a liability of $2,727 and an asset of $1,212, respectively, which was included in “Other liabilities” and “Deferred costs and other assets,” respectively and as an adjustment to “Accumulated other comprehensive loss.” Through June 29, 2014, no hedge ineffectiveness has occurred relating to these cash flow hedges.

Our derivative instruments for the six months ended June 30, 2013 included interest rate swaps on our 6.20% Senior Notes with notional amounts totaling $225,000 that were all designated as fair value hedges. Interest income on the interest rate swaps was $1,455 and $2,890 for the three and six months ended June 30, 2013, respectively. There was no ineffectiveness through their termination in October 2013, in connection with the redemption of the 6.20% Senior Notes.

The Company may be exposed to credit losses in the event of nonperformance by the counterparties to its derivative financial instrument contracts. We anticipate that the counterparties will be able to fully satisfy their obligations under the contracts. We do not obtain collateral or other security to support derivative financial instruments subject to credit risk and our interest rate swaps are not cleared through a central clearinghouse; however we do monitor the credit standing of the counterparties. All of the Company’s financial instruments were in a liability position as of June 29, 2014 and therefore presented gross in the condensed consolidated balance sheet.

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 six months ended June 29, 2014 and the year ended December 29, 2013 and the resulting impact on the condensed consolidated statements of operations.

Total losses for the six months ended June 29, 2014 and the year ended December 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 $2,274 and $20,506 have been presented as System Optimization Remeasurement and included in “Facilities action charges (income), net” in our condensed consolidated statement of operations for the six months ended June 29, 2014 and the year ended December 29, 2013, respectively. 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 (income), net” including System Optimization Remeasurement.

Total losses for the six months ended June 29, 2014 also include $332 from remeasuring land and buildings to fair value in connection with closing company-owned restaurants and classifying such properties as held for sale. Total losses for the year ended December 29, 2013 also include the impact of remeasuring the following to fair value (1) long-lived assets at company-owned restaurants of $9,094, (2) certain surplus properties and properties held for sale of $1,458 and (3) company-owned aircraft of $5,327 as a result of the Company’s decision to sell the aircraft and classify them as held for sale. Such losses have been presented as “Impairment of long-lived assets” in our 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. During the six months ended June 29, 2014, the aircraft were sold resulting in a net loss of $274.

Total losses for the year ended December 29, 2013 also include the impact of remeasuring goodwill associated with our international franchise restaurants reporting unit in connection with our annual goodwill impairment test. Such losses totaling $9,397 represent the total amount of goodwill recorded for our international franchise restaurants reporting unit and were presented as “Impairment of goodwill” in our consolidated statement of operations for the year ended December 29, 2013.



			Fair Value Measurements						Six Months Ended June 29, 2014 Total Losses
	June 29, 2014		Level 1		Level 2		Level 3		Six Months Ended June 29, 2014 Total Losses
Long-lived assets	$	1,511	$	—	$	—	$	1,511	$	2,606
Total	$	1,511	$	—	$	—	$	1,511	$	2,606



			Fair Value Measurements						2013 Total Losses
	December 29, 2013		Level 1		Level 2		Level 3		2013 Total Losses
Long-lived assets	$	14,788	$	—	$	—	$	14,788	$	31,058
Goodwill	—		—		—		—		9,397
Aircraft	8,500		—		—		8,500		5,327
Total	$	23,288	$	—	$	—	$	23,288	$	45,782