Wendy's 2011 Annual Report Download - page 106

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
Changes in the Companies’ deferred tax asset and liability balances were primarily the result of the sale of
Arby’s described in Note 2 and the recognition of a capital gain resulting from a reorganization of our business entity
structure outside of the U.S. during the fourth quarter of 2011. This reorganization related capital gain of
approximately $186,000 for U.S. income tax purposes was offset by existing capital loss carryforwards. This capital
gain was eliminated in our consolidation of the Companies’ financial statements.
The Wendy’s Company’s net operating loss and credit carryforwards have limited carryforward periods and will
expire if unused. U.S. Federal net operating loss carryforwards of approximately $282,736 at January 1, 2012, which
included $119,073 of share-based compensation deductions not yet recognized as discussed below, expire beginning
in 2024. The utilization of these losses is limited, but the 2011 limitation exceeded the remaining net operating loss
carryforward. Tax credits of $83,708 at January 1, 2012, principally consisting of foreign tax credits and jobs credits,
expire beginning in 2015. State net operating loss carryforwards are subject to various limitations including
carryforward periods and begin expiring in 2012. As of January 1, 2012, the Company has a deferred tax asset, net of
U.S. Federal taxes, of $42,244 related to state net operating losses.
Wendy’s Restaurants’ carryforwards at January 1, 2012 consist of U.S. Federal net operating loss carryforwards
of approximately $164,770 which will expire in 2031, a capital loss carryforward of $15,406 which will expire in
2014, tax credits of $31,018 principally consisting of foreign tax credits which expire beginning in 2018 and state net
operating loss carryforwards subject to various limitations including carryforward periods which begin expiring in
2012. As of January 1, 2012, Wendy’s Restaurants has a deferred tax asset, net of U.S. Federal taxes, of $33,871
related to state net operating losses.
The Wendy’s Company’s valuation allowances of $17,397 and $88,363 as of January 1, 2012 and January 2,
2011, respectively, relate to state net operating loss and capital loss carryforwards. Valuation allowances decreased
$70,966 in 2011 substantially as a result of a $65,105 reduction related to capital losses utilized to offset 2011 capital
gains, primarily as a result of the reorganization described above, and a $4,565 reduction related to expiring capital
losses.
Wendy’s Restaurants valuation allowances of $21,059, and $95,850 as of January 1, 2012 and January 2, 2011,
respectively, relate to capital loss and state net operating loss carryforwards. Valuation allowances decreased $74,791
in 2011 principally as a result of a $65,105 reduction related to capital losses utilized to offset 2011 capital gains,
primarily as a result of the reorganization described above, and a $7,794 reduction related to expiring capital losses.
In 2011 and prior years, we deducted $119,073 relating to the exercise of stock options and vesting of restricted
stock. The Company has not recognized the $43,092 tax benefit relating to these deductions because it has no income
taxes currently payable against which the benefits can be realized as a result of its net operating loss and credit
carryforwards. When such benefits are realized against future income taxes payable, the Company will recognize them
in future periods as a reduction of current income taxes payable with an equal offsetting increase in “Additional
paid-in capital.”
The unremitted earnings of foreign subsidiaries, primarily Canadian, are not essentially permanent in duration.
Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other
circumstances. As of January 1, 2012, the Companies’ tax basis in its only significant foreign subsidiary (Canada)
exceeded its financial reporting basis and no deferred tax liability was required.
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