System Optimization (Gains) Losses, Net

12 Months Ended

Dec. 29, 2019

Property, Plant and Equipment

System Optimization (Gains) (Losses), Net

Properties

	Year End
	December 29, 2019			December 30, 2018
Land	$	375,109		$	377,277
Buildings and improvements	508,602			507,219
Leasehold improvements	405,158			403,896
Office, restaurant and transportation equipment	279,799			266,030
	1,568,668			1,554,422
Accumulated depreciation and amortization	(591,668		)	(531,155		)
	$	977,000		$	1,023,267

Depreciation and amortization expense related to properties was $81,219, $79,009 and $81,946 during 2019, 2018 and 2017, respectively.

System Optimization

Property, Plant and Equipment

System Optimization (Gains) (Losses), Net

System Optimization (Gains) Losses, Net

The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating Franchise Flips. As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to reduce its ownership below the approximately 5% level, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages. During 2019, 2018 and 2017, the Company facilitated 37, 96 and 400 Franchise Flips, respectively (excluding the DavCo and NPC Transactions discussed below). Additionally, during 2018, the Company completed the sale of three Company-operated restaurants to franchisees. No Company-operated restaurants were sold to franchisees during 2019 or 2017. During 2020, the Company expects to sell 43 Company-operated restaurants in New York to franchisees. The Company expects to retain its Company-operated restaurants in Manhattan.

Gains and losses recognized on dispositions are recorded to “System optimization (gains) losses, net” in our consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”

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

	Year Ended
	2019		2018			2017
Number of restaurants sold to franchisees	—		3			—
Proceeds from sales of restaurants	$	—	$	1,436		$	—
Net assets sold (a)	—		(1,370		)	—
Goodwill related to sales of restaurants	—		(208		)	—
Net favorable leases	—		220			—
Other	—		11			—
	—		89			—
Post-closing adjustments on sales of restaurants (b)	1,087		445			2,541
Gain on sales of restaurants, net	1,087		534			2,541
Gain (loss) on sales of other assets, net (c)	196		(71		)	2,018
Loss on DavCo and NPC Transactions	—		—			(43,635		)
System optimization gains (losses), net	$	1,283	$	463		$	(39,076	)

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(a) Net assets sold consisted primarily of equipment.

(b) 2019, 2018 and 2017 include the recognition of deferred gains of $911, $1,029 and $312, respectively, as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. 2018 and 2017 also include cash proceeds, net of payments, of $6 and $294, respectively, related to post-closing reconciliations with franchisees. Additionally, 2017 includes the recognition of a deferred gain of $1,822 (C$2,300) resulting from the release of a guarantee provided by Wendy’s to a lender on behalf of a franchisee in connection with the sale of eight Canadian restaurants to the franchisee during 2014.

(c) During 2019, 2018 and 2017, Wendy’s received cash proceeds of $3,448, $1,781 and $10,534, respectively, primarily from the sale of surplus properties. 2017 also includes the recognition of a deferred gain of $375 related to the sale of a share in an aircraft.

DavCo and NPC Transactions

As part of our system optimization initiative, the Company acquired 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”) for total net cash consideration of $86,788, which restaurants were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company, for cash proceeds of $70,688 (collectively, the “DavCo and NPC Transactions”). As part of the NPC transaction, NPC agreed to remodel 90 acquired restaurants in the Image Activation format by the end of 2021 and build 15 new Wendy’s restaurants by the end of 2022. Prior to closing the DavCo transaction, seven DavCo restaurants were closed. The acquisition of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such, the Company accounted for the DavCo and NPC Transactions as an acquisition and subsequent disposition of a business. The total consideration paid to DavCo was allocated to net tangible and identifiable intangible assets acquired based on their estimated fair values. As part of the DavCo and NPC Transactions, the Company retained leases for purposes of subleasing such properties to NPC.

The following is a summary of the activity recorded as a result of the DavCo and NPC Transactions:

	Year Ended
	2017
Acquisition (a)
Total consideration paid	$	86,788
Identifiable assets and liabilities assumed:
Net assets held for sale	70,688
Finance lease assets	49,360
Deferred taxes	27,830
Finance lease obligations	(97,797		)
Net unfavorable leases (b)	(22,330		)
Other liabilities (c)	(6,924		)
Total identifiable net assets	20,827
Goodwill (d)	$	65,961
Disposition
Proceeds	$	70,688
Net assets sold	(70,688		)
Goodwill (d)	(65,961		)
Net favorable leases (e)	24,034
Other (f)	(1,708		)
Loss on DavCo and NPC Transactions	$	(43,635	)

_______________

(a) The fair values of the identifiable intangible assets and taxes related to the acquisition were provisional amounts as of December 31, 2017, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during 2018 with no differences from the provisional amounts previously reported. The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process.

(b) Includes favorable lease assets of $1,229 and unfavorable lease liabilities of $23,559.

(c) Includes a supplemental purchase price liability recorded to “Accrued expenses and other current liabilities” of $6,269, which was settled during 2018 upon the resolution of certain lease-related matters.

(d) Includes tax deductible goodwill of $21,795.

(e) The Company recorded favorable lease assets of $30,068 and unfavorable lease liabilities of $6,034 as a result of subleasing land, buildings and leasehold improvements to NPC.

(f) Includes cash payments for selling and other costs associated with the transaction.

Assets Held for Sale

As of December 29, 2019 and December 30, 2018, the Company had assets held for sale of $1,437 and $2,435, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”