Wendy's Co 10-K

Item 8. Financial Statements and Supplementary Data. THE WENDY’S COMPANY AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Glossary of Defined Terms 61 Report of Independent Registered Public Accounting Firm 63 Consolidated Balance Sheets as of January 3, 2021 and December 29, 2019 65 Consolidated Statements of Operations for the years ended January 3, 2021, December 29, 2019 and December 30, 2018 66 Consolidated Statements of Comprehensive Income for the years ended January 3, 2021, December 29, 2019 and December 30, 2018 67 Consolidated Statements of Stockholders’ Equity for the years ended January 3, 2021, December 29, 2019 and December 30, 2018 68 Consolidated Statements of Cash Flows for the years ended January 3, 2021, December 29, 2019 and December 30, 2018 69 Notes to Consolidated Financial Statements 71 (1) Summary of Significant Accounting Policies 71 (2) Revenue 81 (3) System Optimization Gains, Net 83 (4) Acquisitions 85 (5) Reorganization and Realignment Costs 86 (6) Income Per Share 89 (7) Cash and Receivables 90 (8) Investments 92 (9) Properties 93 (10) Goodwill and Other Intangible Assets 94 (11) Accrued Expenses and Other Current Liabilities 95 (12) Long-Term Debt 96 (13) Fair Value Measurements 99 (14) Income Taxes 101 (15) Stockholders’ Equity 104 (16) Share-Based Compensation 106 (17) Impairment of Long-Lived Assets 110 (18) Investment (Loss) Income, Net 110 (19) Retirement Benefit Plans 110 (20) Leases 111 (21) Guarantees and Other Commitments and Contingencies 115 (22) Transactions with Related Parties 117 (23) Legal and Environmental Matters 118 (24) Advertising Costs and Funds 119 (25) Geographic Information 119 (26) Segment Information 120 (27) Quarterly Financial Information (Unaudited) 121 60 Defined Term Footnote Where Defined 2010 Plan (16) Share-Based Compensation 2018 ASR Agreement (15) Stockholders’ Equity 2019-1 Class A-1 Notes (12) Long-Term Debt 2019 ASR Agreement (15) Stockholders’ Equity 2020-1 Class A-1 Notes (12) Long-Term Debt 2020 Plan (16) Share-Based Compensation 401(k) Plan (19) Retirement Benefit Plans Advertising Funds (1) Summary of Significant Accounting Policies Arby’s (8) Investments ARG Parent (8) Investments Black-Scholes Model (1) Summary of Significant Accounting Policies Brazil JV (1) Summary of Significant Accounting Policies CAP (14) Income Taxes Caracci Case (23) Legal and Environmental Matters Class A-1 Notes (12) Long-Term Debt Class A-2 Notes (12) Long-Term Debt Company (1) Summary of Significant Accounting Policies Contingent Rent (1) Summary of Significant Accounting Policies COVID-19 (1) Summary of Significant Accounting Policies EBITDA (26) Segment Information Eligible Arby’s Employees (19) Retirement Benefit Plans Equity Plans (1) Summary of Significant Accounting Policies FASB (1) Summary of Significant Accounting Policies Fountain Beverages (21) Guarantees and Other Commitments and Contingencies Franchise Flip (1) Summary of Significant Accounting Policies FRG (4) Acquisitions G&A (5) Reorganization and Realignment Costs G&A Realignment Plan (5) Reorganization and Realignment Costs GAAP (1) Summary of Significant Accounting Policies GILTI (14) Income Taxes Graham Case (23) Legal and Environmental Matters Indenture (12) Long-Term Debt Inspire Brands (8) Investments IRS (14) Income Taxes IT (5) Reorganization and Realignment Costs IT Realignment Plan (5) Reorganization and Realignment Costs LIBOR (12) Long-Term Debt Master Issuer (12) Long-Term Debt NPC (4) Acquisitions Operations and Field Realignment Plan (5) Reorganization and Realignment Costs QSCC (22) Transactions with Related Parties Rent Holiday (1) Summary of Significant Accounting Policies Restricted Shares (16) Share-Based Compensation ROU (1) Summary of Significant Accounting Policies RSAs (1) Summary of Significant Accounting Policies RSUs (1) Summary of Significant Accounting Policies Securitization Entities (12) Long-Term Debt Senior Notes (12) Long-Term Debt 61 Defined Term Footnote Where Defined SERP (19) Retirement Benefit Plans Straight-Line Rent (1) Summary of Significant Accounting Policies Target (16) Share-Based Compensation Tax Act (14) Income Taxes The Wendy’s Company (1) Summary of Significant Accounting Policies TimWen (1) Summary of Significant Accounting Policies U.S. (1) Summary of Significant Accounting Policies VIE (1) Summary of Significant Accounting Policies Wendy’s (1) Summary of Significant Accounting Policies Wendy’s Co-op (22) Transactions with Related Parties Wendy’s Funding (12) Long-Term Debt Wendy’s Merger (8) Investments Wendy’s Restaurants (1) Summary of Significant Accounting Policies Yellow Cab (22) Transactions with Related Parties 62 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of The Wendy’s Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Wendy’s Company and subsidiaries (the “Company”) as of January 3, 2021 and December 29, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended January 3, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 3, 2021 and December 29, 2019, and the results of its operations and its cash flows for each of the three years in the period ended January 3, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 3, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the financial statements, during 2019, the Company adopted the Financial Accounting Standards Board’s (FASB) new standard related to leases using the modified retrospective approach. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill - Global Real Estate and Development Operations Reporting Unit – Refer to Notes 1 and 10 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. 63 The Company used an income approach to estimate fair value of the global real estate and development operations reporting unit, which requires management to make significant estimates and assumptions including future sales growth, operating profit and the weighted average cost of capital (discount rate). Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance was $751.0 million as of January 3, 2021, of which $122.5 million was allocated to the global real estate and development operations reporting unit. The fair value of the global real estate and development operations reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized. We identified the impairment evaluation of goodwill for the global real estate and development operations reporting unit as a critical audit matter because of the significant judgments made by management to estimate the fair value of this reporting unit. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions, particularly related to future sales growth, operating profit and the selection of the discount rate. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the estimates of future sales growth, operating profit and discount rate used by management to estimate the fair value of the global real estate and development operations reporting unit included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the global real estate and development operations reporting unit, such as controls related to management’s forecasts of future sales growth, operating profit and selection of the discount rate. • We evaluated management’s ability to accurately forecast future sales growth and operating profit by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s sales and operating profit forecasts by comparing the forecasts to (1) historical sales and operating profit and (2) internal communications to management and the Board of Directors. We also considered the impact of changes in management’s forecasts from the annual measurement date in the fourth quarter to January 3, 2021. • With the assistance of our fair value specialists, we evaluated the discount rate assumptions, including testing the underlying source information and the mathematical accuracy of the calculation, and by developing a range of independent estimates and comparing those to the discount rate selected by management. /s/ Deloitte & Touche LLP Columbus, Ohio March 3, 2021 We have served as the Company’s auditor since 1994. 64 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands Except Par Value) January 3, 2021 December 29, 2019 ASSETS Current assets: Cash and cash equivalents $ 306,989 $ 300,195 Restricted cash 33,973 34,539 Accounts and notes receivable, net 109,891 117,461 Inventories 4,732 3,891 Prepaid expenses and other current assets 89,732 15,585 Advertising funds restricted assets 142,306 82,376 Total current assets 687,623 554,047 Properties 915,889 977,000 Finance lease assets 206,153 200,144 Operating lease assets 821,480 857,199 Goodwill 751,049 755,911 Other intangible assets 1,224,960 1,247,212 Investments 44,574 45,949 Net investment in sales-type and direct financing leases 268,221 256,606 Other assets 120,057 100,461 Total assets $ 5,040,006 $ 4,994,529 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 28,962 $ 22,750 Current portion of finance lease liabilities 12,105 11,005 Current portion of operating lease liabilities 45,346 43,775 Accounts payable 31,063 22,701 Accrued expenses and other current liabilities 155,321 165,272 Advertising funds restricted liabilities 140,511 84,195 Total current liabilities 413,308 349,698 Long-term debt 2,218,163 2,257,561 Long-term finance lease liabilities 506,076 480,847 Long-term operating lease liabilities 865,325 897,737 Deferred income taxes 280,755 270,759 Deferred franchise fees 89,094 91,790 Other liabilities 117,689 129,778 Total liabilities 4,490,410 4,478,170 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 224,268 a nd 224,889 shares outstanding, respectively 47,042 47,042 Additional paid-in capital 2,899,276 2,874,001 Retained earnings 238,674 185,725 Common stock held in treasury, at cost; 246,156 and 245,535 shares, respectively ( 2,585,755 ) ( 2,536,581 ) Accumulated other comprehensive loss ( 49,641 ) ( 53,828 ) Total stockholders’ equity 549,596 516,359 Total liabilities and stockholders’ equity $ 5,040,006 $ 4,994,529 See accompanying notes to consolidated financial statements. 65 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Amounts) Year Ended January 3, 2021 December 29, 2019 December 30, 2018 Revenues: Sales $ 722,764 $ 707,485 $ 651,577 Franchise royalty revenue and fees 444,749 428,999 409,043 Franchise rental income 232,648 233,065 203,297 Advertising funds revenue 333,664 339,453 326,019 1,733,825 1,709,002 1,589,936 Costs and expenses: Cost of sales 614,907 597,530 548,588 Franchise support and other costs 26,464 43,686 25,203 Franchise rental expense 125,613 123,929 91,104 Advertising funds expense 345,360 338,116 321,866 General and administrative 206,876 200,206 217,489 Depreciation and amortization 132,775 131,693 128,879 System optimization gains, net ( 3,148 ) ( 1,283 ) ( 463 ) Reorganization and realignment costs 16,030 16,965 9,068 Impairment of long-lived assets 8,037 6,999 4,697 Other operating income, net ( 8,397 ) ( 11,418 ) ( 6,387 ) 1,464,517 1,446,423 1,340,044 Operating profit 269,308 262,579 249,892 Interest expense, net ( 117,737 ) ( 115,971 ) ( 119,618 ) Loss on early extinguishment of debt — ( 8,496 ) ( 11,475 ) Investment (loss) income, net ( 225 ) 25,598 450,736 Other income, net 1,449 7,771 5,381 Income before income taxes 152,795 171,481 574,916 Provision for income taxes ( 34,963 ) ( 34,541 ) ( 114,801 ) Net income $ 117,832 $ 136,940 $ 460,115 Net income per share: Basic $ .53 $ .60 $ 1.93 Diluted .52 .58 1.88 See accompanying notes to consolidated financial statements. 66 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) Year Ended January 3, 2021 December 29, 2019 December 30, 2018 Net income $ 117,832 $ 136,940 $ 460,115 Other comprehensive income (loss), net: Foreign currency translation adjustment 4,187 7,845 ( 16,524 ) Change in unrecognized pension loss: Unrealized gains arising during the period — — 156 Income tax provision — — ( 39 ) Final settlement of pension liability — — 932 — — 1,049 Other comprehensive income (loss), net 4,187 7,845 ( 15,475 ) Comprehensive income $ 122,019 $ 144,785 $ 444,640 See accompanying notes to consolidated financial statements. 67 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In Thousands) Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Common Stock Held in Treasury Accumulated Other Comprehensive Loss Total Balance at December 31, 2017 $ 47,042 $ 2,885,955 $ ( 163,289 ) $ ( 2,150,307 ) $ ( 46,198 ) $ 573,203 Net income — — 460,115 — — 460,115 Other comprehensive loss, net — — — — ( 15,475 ) ( 15,475 ) Cash dividends — — ( 80,532 ) — — ( 80,532 ) Repurchases of common stock, including accelerated share repurchase — — — ( 270,377 ) — ( 270,377 ) Share-based compensation — 17,918 — — — 17,918 Common stock issued upon exercises of stock options — ( 9,582 ) — 48,401 — 38,819 Common stock issued upon vesting of restricted shares — ( 9,711 ) — 4,280 — ( 5,431 ) Cumulative effect of change in accounting principle — — ( 70,210 ) — — ( 70,210 ) Other — 116 193 110 — 419 Balance at December 30, 2018 47,042 2,884,696 146,277 ( 2,367,893 ) ( 61,673 ) 648,449 Net income — — 136,940 — — 136,940 Other comprehensive income, net — — — — 7,845 7,845 Cash dividends — — ( 96,364 ) — — ( 96,364 ) Repurchases of common stock, including accelerated share repurchase — ( 15,000 ) — ( 202,771 ) — ( 217,771 ) Share-based compensation — 18,676 — — — 18,676 Common stock issued upon exercises of stock options — ( 808 ) — 28,944 — 28,136 Common stock issued upon vesting of restricted shares — ( 13,677 ) — 5,050 — ( 8,627 ) Cumulative effect of change in accounting principle — — ( 1,105 ) — — ( 1,105 ) Other — 114 ( 23 ) 89 — 180 Balance at December 29,2019 47,042 2,874,001 185,725 ( 2,536,581 ) ( 53,828 ) 516,359 Net income — — 117,832 — — 117,832 Other comprehensive income, net — — — — 4,187 4,187 Cash dividends — — ( 64,866 ) — — ( 64,866 ) Repurchases of common stock, including accelerated share repurchase — 15,000 — ( 76,095 ) — ( 61,095 ) Share-based compensation — 18,930 — — — 18,930 Common stock issued upon exercises of stock options — ( 912 ) — 24,263 — 23,351 Common stock issued upon vesting of restricted shares — ( 7,889 ) — 2,500 — ( 5,389 ) Other — 146 ( 17 ) 158 — 287 Balance at January 3, 2021 $ 47,042 $ 2,899,276 $ 238,674 $ ( 2,585,755 ) $ ( 49,641 ) $ 549,596 See accompanying notes to consolidated financial statements. 68 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Year Ended January 3, 2021 December 29, 2019 December 30, 2018 Cash flows from operating activities: Net income $ 117,832 $ 136,940 $ 460,115 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 132,775 131,693 128,879 Share-based compensation 18,930 18,676 17,918 Impairment of long-lived assets 8,037 6,999 4,697 Deferred income tax 10,266 837 ( 6,568 ) Non-cash rental expense (income), net 28,937 28,202 ( 17,043 ) Change in operating lease liabilities ( 40,905 ) ( 41,911 ) — Net receipt (recognition) of deferred vendor incentives 2,495 ( 501 ) 139 System optimization gains, net ( 3,148 ) ( 1,283 ) ( 463 ) Gain on sale of investments, net — ( 24,496 ) ( 450,000 ) Distributions received from TimWen joint venture 8,376 13,400 13,390 Equity in earnings in joint ventures, net ( 6,096 ) ( 8,673 ) ( 8,076 ) Long-term debt-related activities, net (see below) 6,723 15,317 18,673 Other, net ( 6,438 ) ( 4,838 ) 5,178 Changes in operating assets and liabilities: Accounts and notes receivable, net ( 16,243 ) 16,935 13,226 Inventories ( 841 ) ( 163 ) ( 434 ) Prepaid expenses and other current assets ( 8,780 ) ( 1,569 ) 6,824 Advertising funds restricted assets and liabilities 49,052 ( 2,720 ) 13,955 Accounts payable 1,620 1,054 ( 145 ) Accrued expenses and other current liabilities ( 18,231 ) 5,034 23,963 Net cash provided by operating activities 284,361 288,933 224,228 Cash flows from investing activities: Capital expenditures ( 68,969 ) ( 74,453 ) ( 69,857 ) Acquisitions ( 4,879 ) ( 5,052 ) ( 21,401 ) Dispositions 6,091 3,448 3,223 Proceeds from sale of investments 169 24,496 450,000 Notes receivable, net ( 662 ) ( 3,370 ) 959 Payments for investments — — ( 13 ) Net cash (used in) provided by investing activities ( 68,250 ) ( 54,931 ) 362,911 Cash flows from financing activities: Proceeds from long-term debt 153,315 850,000 934,837 Repayments of long-term debt ( 191,462 ) ( 899,800 ) ( 894,501 ) Repayments of finance lease liabilities ( 8,383 ) ( 6,835 ) ( 5,571 ) Deferred financing costs ( 2,122 ) ( 14,008 ) ( 17,340 ) Repurchases of common stock, including accelerated share repurchase ( 62,173 ) ( 217,797 ) ( 269,809 ) Dividends ( 64,866 ) ( 96,364 ) ( 80,532 ) Proceeds from stock option exercises 23,361 28,328 45,228 Payments related to tax withholding for share-based compensation ( 5,577 ) ( 8,820 ) ( 11,805 ) Contingent consideration payment — — ( 6,269 ) Net cash used in financing activities ( 157,907 ) ( 365,296 ) ( 305,762 ) Net cash provided by (used in) operations before effect of exchange rate changes on cash 58,204 ( 131,294 ) 281,377 Effect of exchange rate changes on cash 1,330 3,489 ( 7,689 ) Net increase (decrease) in cash, cash equivalents and restricted cash 59,534 ( 127,805 ) 273,688 Cash, cash equivalents and restricted cash at beginning of period 358,707 486,512 212,824 Cash, cash equivalents and restricted cash at end of period $ 418,241 $ 358,707 $ 486,512 69 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED (In Thousands) Year Ended January 3, 2021 December 29, 2019 December 30, 2018 Detail of cash flows from operating activities: Long-term debt-related activities, net: Loss on early extinguishment of debt $ — $ 8,496 $ 11,475 Accretion of long-term debt 1,161 1,272 1,255 Amortization of deferred financing costs 5,562 5,549 5,943 $ 6,723 $ 15,317 $ 18,673 Supplemental cash flow information: Cash paid for: Interest $ 136,228 $ 138,270 $ 137,607 Income taxes, net of refunds 16,202 34,798 102,827 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable $ 3,673 $ 6,026 $ 6,460 Finance leases 34,918 50,061 6,569 January 3, 2021 December 29, 2019 December 30, 2018 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 306,989 $ 300,195 $ 431,405 Restricted cash 33,973 34,539 29,860 Restricted cash, included in Advertising funds restricted assets 77,279 23,973 25,247 Total cash, cash equivalents and restricted cash $ 418,241 $ 358,707 $ 486,512 See accompanying notes to consolidated financial statements. 70 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (1) Summary of Significant Accounting Policies Corporate Structure The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchises and operates Wendy’s quick-service restaurants specializing in hamburger sandwiches throughout the United States of America (“U.S.”) and also franchises Wendy’s quick-service restaurants in 30 foreign countries and U.S. territories. At January 3, 2021, Wendy’s operated and franchised 361 and 6,467 restaurants, respectively. The Company manages and internally reports its business in the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. See Note 26 for further information. Principles of Consolidation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all of the Company’s subsidiaries. We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. The principal entities in which we possess a variable interest include the Company’s national advertising funds for the U.S. and Canada (the “Advertising Funds”). All intercompany balances and transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic and recommended containment and mitigation measures worldwide. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on our results of operations, financial condition and prospects. Reclassifications Certain reclassifications have been made to the prior year presentation to conform to the current year presentation. Fiscal Year The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31 and are referred to herein as (1) “the year ended January 3, 2021” or “2020,” which consisted of 53 weeks, (2) “the year ended December 29, 2019” or “2019,” which consisted of 52 weeks, and (3) “the year ended December 30, 2018” or “2018,” which consisted of 52 weeks. All references to years, quarters and months relate to fiscal periods rather than calendar periods. Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less when acquired are considered cash equivalents. The Company’s cash and cash equivalents principally consist of cash in bank and money market mutual fund accounts and are primarily not in Federal Deposit Insurance Corporation insured accounts. 71 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) We believe that our vulnerability to risk concentrations in our cash equivalents is mitigated by (1) our policies restricting the eligibility, credit quality and concentration limits for our placements in cash equivalents and (2) insurance from the Securities Investor Protection Corporation of up to $ 500 per account, as well as supplemental private insurance coverage maintained by substantially all of our brokerage firms, to the extent our cash equivalents are held in brokerage accounts. Restricted Cash In accordance with the Company’s securitized financing facility, certain cash accounts have been established with the trustee for the benefit of the trustee and the noteholders and are restricted in their use. Such restricted cash primarily represents cash collections and cash reserves held by the trustee to be used for payments of principal, interest and commitment fees required for the Company’s senior secured notes. Restricted cash also includes cash collected by the Advertising Funds, usage of which is restricted for advertising activities and is included in “Advertising funds restricted assets.” Refer to Note 7 for further information. Accounts and Notes Receivable, Net Accounts and notes receivable, net, consist primarily of royalties, rents, property taxes and franchise fees due principally from franchisees, credit card receivables, insurance receivables and refundable income taxes. Reserve estimates include consideration of the likelihood of default expected over the estimated life of the receivable. The Company periodically assesses the need for an allowance for doubtful accounts on its receivables based upon several key credit quality indicators such as outstanding past due balances, the financial strength of the obligor, the estimated fair value of any underlying collateral and agreement characteristics. We believe that our vulnerability to risk concentrations in our receivables is mitigated by (1) favorable historical collectability on past due balances, (2) recourse to the underlying collateral regarding sales-type and direct financing lease receivables, and (3) our expectations for fluctuations in general market conditions. Receivables are considered delinquent once they are contractually past due under the terms of the underlying agreements. As of January 3, 2021, there were no material receivables more than one year past due. Inventories The Company’s inventories are stated at the lower of cost or net realizable value, with cost determined in accordance with the first-in, first-out method and consist primarily of restaurant food items and paper supplies. Properties and Depreciation and Amortization Properties are stated at cost, including capitalized internal costs of employees to the extent such employees are dedicated to specific restaurant construction projects, less accumulated depreciation and amortization. Depreciation and amortization of properties is computed principally on the straight-line basis using the following estimated useful lives of the related major classes of properties: 3 to 20 years for office and restaurant equipment (including technology), 3 to 15 years for transportation equipment and 7 to 30 years for buildings and improvements. When the Company commits to a plan to cease using certain properties before the end of their estimated useful lives, depreciation expense is accelerated to reflect the use of the assets over their shortened useful lives. Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the respective leases, including periods covered by renewal options that the Company is reasonably assured of exercising. The Company reviews properties for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. If such review indicates an asset group may not be recoverable, an impairment loss is recognized for the excess of the carrying amount over the fair value of an asset group to be held and used or over the fair value less cost to sell of an asset to be disposed. See “Impairment of Long-Lived Assets” below for further information. The Company classifies assets as held for sale and ceases depreciation of the assets when there is a plan for disposal of the assets and those assets meet the held for sale criteria. Assets held for sale are included in “Prepaid expenses and other current assets” in the consolidated balance sheets. 72 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Goodwill Goodwill, representing the excess of the cost of an acquired entity over the fair value of the acquired net assets, is not amortized. Goodwill associated with our Company-operated restaurants is reduced as a result of restaurant dispositions based on the relative fair values and is included in the carrying value of the restaurant in determining the gain or loss on disposal. If a Company-operated restaurant is sold within two years of being acquired from a franchisee, the goodwill associated with the acquisition is written off in its entirety. Goodwill has been assigned to reporting units for purposes of impairment testing. The Company tests goodwill for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Our annual impairment test of goodwill may be completed through a qualitative assessment to determine if the fair value of the reporting unit is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment for any reporting units, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test. Under the quantitative test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Our critical estimates in this impairment test include future sales growth, operating profit, income tax rates, terminal value growth rates, capital expenditures and the weighted average cost of capital (discount rate). Our fair value estimates are subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we use, we may be required to recognize goodwill impairment charges in future years. Impairment of Long-Lived Assets Our long-lived assets include (1) properties and related definite-lived intangible assets (e.g., favorable leases) that are leased and/or subleased to franchisees, (2) Company-operated restaurant assets and related definite-lived intangible assets, which include reacquired rights under franchise agreements, and (3) finance and operating lease assets. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess the recoverability of our long-lived assets by comparing the carrying amount of the asset group to future undiscounted net cash flows expected to be generated through leases and/or subleases or by our individual Company-operated restaurants. If the carrying amount of the long-lived asset group is not recoverable on an undiscounted cash flow basis, then impairment is recognized to the extent that the carrying amount exceeds its fair value and is included in “Impairment of long-lived assets.” Our critical estimates in this review process include the anticipated future cash flows from leases and/or subleases or individual Company-operated restaurants, which is used in assessing the recoverability of the respective long-lived assets. Our fair value estimates are subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we used, we may be required to recognize additional impairment charges in future years. Other Intangible Assets Definite-lived intangible assets are amortized on a straight-line basis using the following estimated useful lives of the related classes of intangibles: for favorable leases, the terms of the respective leases, including periods covered by renewal options that the Company as lessor is reasonably certain the tenant will exercise; 1 to 5 years for computer software; 4 to 20 years for reacquired rights under franchise agreements; and 20 years for franchise agreements. Trademarks have an indefinite life and are not amortized. 73 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The Company reviews definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired. Our annual impairment test for indefinite-lived intangible assets may be completed through a qualitative assessment to determine if the fair value of the indefinite-lived intangible assets is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, we test for impairment using a quantitative process. If the Company determines that impairment of its intangible assets may exist, the amount of impairment loss is measured as the excess of carrying value over fair value. Our estimates in the determination of the fair value of indefinite-lived intangible assets include the anticipated future revenues of Company-operated and franchised restaurants and the resulting cash flows. Investments The Company has a 50 % share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons ® brand (Tim Hortons is a registered trademark of Tim Hortons USA Inc.). In addition, the Company has a 20 % share in a joint venture in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.” Other investments in equity securities, including investments in limited partnerships, in which the Company does not have significant influence, and for which there is not a readily determinable fair value, are recorded at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Realized gains and losses are reported as income or loss in the period in which the securities are sold or otherwise disposed. Cash distributions and dividends received that are determined to be returns of capital are recorded as a reduction of the carrying value of our investments and returns on our investments are recorded to “Investment (loss) income, net.” The difference between the carrying value of our TimWen equity investment and the underlying equity in the historical net assets of the investee is accounted for as if the investee were a consolidated subsidiary. Accordingly, the carrying value difference is amortized over the estimated lives of the assets of the investee to which such difference would have been allocated if the equity investment were a consolidated subsidiary. To the extent the carrying value difference represents goodwill, it is not amortized. Share-Based Compensation The Company has granted share-based compensation awards to certain employees under several equity plans (the “Equity Plans”). The Company measures the cost of employee services received in exchange for an equity award, which include grants of employee stock options and restricted shares, based on the fair value of the award at the date of grant. Share-based compensation expense is recognized net of estimated forfeitures, determined based on historical experience. The Company recognizes share-based compensation expense over the requisite service period unless the awards are subject to performance conditions, in which case we recognize compensation expense over the requisite service period to the extent performance conditions are considered probable. The Company determines the grant date fair value of stock options using a Black-Scholes-Merton option pricing model (the “Black-Scholes Model”). The grant date fair value of restricted share awards (“RSAs”), restricted share units (“RSUs”) and performance-based awards are determined using the fair market value of the Company’s common stock on the date of grant, as set forth in the applicable plan document, unless the awards are subject to market conditions, in which case we use a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. Foreign Currency Translation The Company’s primary foreign operations are in Canada where the functional currency is the Canadian dollar. Financial statements of foreign subsidiaries are prepared in their functional currency and then translated into U.S. dollars. Assets and liabilities are translated at the exchange rate as of the balance sheet date and revenues, costs and expenses are translated at a monthly average exchange rate. Net gains or losses resulting from the translation are recorded to the “Foreign currency translation adjustment” component of “Accumulated other comprehensive loss.” Gains and losses arising from the impact of foreign currency exchange rate fluctuations on transactions in foreign currency are included in “General and administrative.” 74 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Income Taxes The Company accounts for income taxes under the asset and liability method. A deferred tax asset or liability is recognized whenever there are (1) future tax effects from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and (2) operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled. Deferred tax assets are recognized to the extent the Company believes these assets will more likely than not be realized. In evaluating the realizability of deferred tax assets, the Company considers all available positive and negative evidence, including the interaction and the timing of future reversals of existing temporary differences, projected future taxable income, recent operating results and tax-planning strategies. When considered necessary, a valuation allowance is recorded to reduce the carrying amount of the deferred tax assets to their anticipated realizable value. The Company records uncertain tax positions on the basis of a two-step process whereby we first determine if it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is then measured for purposes of financial statement recognition as the largest amount of benefit that is greater than 50% likely of being realized upon being effectively settled. Interest accrued for uncertain tax positions is charged to “Interest expense, net.” Penalties accrued for uncertain tax positions are charged to “General and administrative.” Restaurant Acquisitions and Dispositions The Company accounts for the acquisition of restaurants from franchisees using the acquisition method of accounting for business combinations. The acquisition method of accounting involves the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process requires the use of estimates and assumptions to derive fair values and to complete the allocation. The excess of the purchase price over the fair values of the assets acquired and liabilities assumed represents goodwill derived from the acquisition. See “Goodwill” above for further information. In connection with the sale of Company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise, development, relationship and lease agreements. The Company typically sells restaurants’ cash, inventory and equipment and retains ownership or the leasehold interest to the real estate to lease and/or sublease to the franchisee. The Company has determined that its restaurant dispositions usually represent multiple-element arrangements, and as such, the cash consideration received is allocated to the separate elements based on their relative selling price. Cash consideration generally includes up-front consideration for the sale of the restaurants, technical assistance fees and development fees and future cash consideration for royalties and lease payments. The Company considers the future lease payments in allocating the initial cash consideration received. The Company obtains third-party evidence to estimate the relative selling price of the stated rent under the lease and/or sublease agreements which is primarily based upon comparable market rents. Based on the Company’s review of the third-party evidence, the Company records favorable or unfavorable lease assets/liabilities with a corresponding offset to the gain or loss on the sale of the restaurants. The cash consideration per restaurant for technical assistance fees and development fees is consistent with the amounts stated in the related franchise agreements which are charged for separate standalone arrangements. The Company recognizes the technical assistance and development fees over the contractual term of the franchise agreements. Future royalty income is also recognized in revenue as earned. See “Revenue Recognition” below for further information. Revenue Recognition “Sales” includes revenues recognized upon delivery of food to the customer at Company-operated restaurants. “Sales” excludes taxes collected from the Company’s customers. Revenue is recognized when the food is purchased by the customer, which is when our performance obligation is satisfied. “Sales” also includes income for gift cards. Gift card payments are recorded as deferred income when received and are recognized as revenue upon redemption. “Franchise royalty revenue and fees” includes royalties, new build technical assistance fees, renewal fees, franchisee-to- franchisee restaurant transfer (“Franchise Flip”) technical assistance fees, Franchise Flip advisory fees and development fees. 75 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Royalties from franchised restaurants are based on a percentage of sales of the franchised restaurant and are recognized as earned. New build technical assistance fees, renewal fees and Franchise Flip technical assistance fees are recorded as deferred revenue when received and recognized as revenue over the contractual term of the franchise agreements, once the restaurant has opened. Development fees are deferred when received, allocated to each agreed upon restaurant, and recognized as revenue over the contractual term of each respective franchise agreement, once the restaurant has opened. These franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. Franchise Flip advisory fees include valuation services and fees for selecting pre-approved buyers for Franchise Flips. Franchise Flip advisory fees are paid by the seller and are recognized as revenue at closing of the Franchise Flip transaction. “Franchise rental income” includes rental income from properties owned and leased by the Company and leased or subleased to franchisees. Rental income is recognized on a straight-line basis over the respective operating lease terms. Favorable and unfavorable lease amounts related to the leased and/or subleased properties are amortized to rental income on a straight-line basis over the remaining term of the leases. “Advertising funds revenue” includes contributions to the Advertising Funds by franchisees. Revenue related to these contributions is based on a percentage of sales of the franchised restaurants and is recognized as earned. Cost of Sales Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs relating to Company-operated restaurants. Cost of sales excludes depreciation and amortization expense. Vendor Incentives The Company receives incentives from certain vendors. These incentives are recognized as earned and are classified as a reduction of “Cost of sales.” Advertising Costs Advertising costs are expensed as incurred and are included in “Cost of sales” and “Advertising funds expense.” Production costs of advertising are expensed when the advertisement is first released. Franchise Support and Other Costs The Company incurs costs to provide direct support services to our franchisees, as well as certain other direct and incremental costs to the Company’s franchise operations. These costs primarily relate to franchise development services, facilitating Franchise Flips and information technology services, which are charged to “Franchise support and other costs,” as incurred. Self-Insurance The Company is self-insured for most workers’ compensation losses and health care claims and purchases insurance for general liability and automotive liability losses, all subject to a $ 500 per occurrence retention or deductible limit. The Company provides for their estimated cost to settle both known claims and claims incurred but not yet reported. Liabilities associated with these claims are estimated, in part, by considering the frequency and severity of historical claims, both specific to us, as well as industry-wide loss experience and other actuarial assumptions. We determine our insurance obligations with the assistance of actuarial firms. Since there are many estimates and assumptions involved in recording insurance liabilities and in the case of workers’ compensation a significant period of time elapses before the ultimate resolution of claims, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities. 76 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Leases Determination of Whether a Contract Contains a Lease The Company evaluates the contracts it enters into to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms. ROU Model and Determination of Lease Term The Company uses the right-of-use (“ROU”) model to account for leases where the Company is the lessee, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the initial measurement of the lease liability, adjusted for any favorable or unfavorable terms for leases acquired from franchisees, as well as payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, the Company includes option periods that it is reasonably certain to exercise as failure to renew the lease would impose a significant economic detriment. For properties used for Company-operated restaurants, the primary economic detriment relates to the existence of unamortized leasehold improvements which might be impaired if we choose not to exercise the available renewal options. The lease term for properties leased or subleased to franchisees is determined based upon the economic detriment to the franchisee and includes consideration of the length of the franchise agreement, historical performance of the restaurant and the existence of bargain renewal options. Lease terms for real estate are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. Operating Leases For operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are recognized as rent expense where the Company is a lessee, or income where the Company is a lessor, as applicable, on a straight-line basis (“Straight-Line Rent”) over the applicable lease terms. There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and ends on the rent commencement date. During a Rent Holiday, no cash rent payments are typically due under the terms of the lease; however, expense is recorded for that period on a straight-line basis. The excess of the Straight-Line Rent over the minimum rents paid is included in the ROU asset where the Company is a lessee. The excess of the Straight-Line Rent over the minimum rents received is recorded as a deferred lease asset and is included in “Other assets” where the Company is a lessor. Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or the asset is earned. Lease cost for operating leases includes the amortization of the ROU asset and interest expense related to the operating lease liability. Variable lease cost for operating leases includes Contingent Rent and payments for executory costs such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. Short-term lease cost for operating leases includes rental expense for leases with a term of less than 12 months. Lease costs are recorded in the consolidated statements of operations based on the nature of the underlying lease as follows: (1) rental expense related to leases for Company-operated restaurants is recorded to “Cost of sales,” (2) rental expense for leased properties that are subsequently subleased to franchisees is recorded to “Franchise rental expense” and (3) rental expense related to leases for corporate offices and equipment is recorded to “General and administrative.” 77 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Favorable and unfavorable lease amounts for operating leases where the Company is the lessor are recorded as components of “Other intangible assets” and “Other liabilities,” respectively. Favorable and unfavorable lease amounts are amortized on a straight-line basis over the term of the leases. When the expected term of a lease is determined to be shorter than the original amortization period, the favorable or unfavorable lease balance associated with the lease is adjusted to reflect the revised lease term. Rental income and favorable and unfavorable lease amortization for operating leases on properties leased or subleased to franchisees is recorded to “Franchise rental income.” Lessees’ variable payments to the Company for executory costs under operating leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.” Finance Leases Lease cost for finance leases where the Company is the lessee includes the amortization of the ROU asset, which is amortized on a straight-line basis and recorded to “Depreciation and amortization,” and interest expense on the finance lease liability, which is calculated using the interest method and recorded to “Interest expense, net.” Finance lease ROU assets are amortized over the shorter of their estimated useful lives or the terms of the respective leases, including periods covered by renewal options that the Company is reasonably certain of exercising. Sales-Type and Direct Financing Leases For sales-type and direct financing leases where the Company is the lessor, the Company records its investment in properties leased to franchisees on a net basis, which is comprised of the present value of the lease payments not yet received and the present value of the guaranteed and unguaranteed residual assets. The current and long-term portions of our net investment in sales-type and direct financing leases are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. Unearned income is recognized as interest income over the lease term and is included in “Interest expense, net.” Sales-type leases result in the recognition of gain or loss at the commencement of the lease, which is recorded to “Other operating income, net.” The gain or loss recognized upon commencement of the lease is directly affected by the Company’s estimate of the amount to be derived from the guaranteed and unguaranteed residual assets at the end of the lease term. The Company’s main component of this estimate is the expected fair value of the underlying assets, primarily the fair value of land. Lessees’ variable payments to the Company for executory costs under sales-type and direct financing leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.” Significant Assumptions and Judgments Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, property lives, discount rates and probable term, all of which can impact (1) the classification and accounting for a lease or sublease as operating or finance, including sales-type and direct financing, (2) the Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent, (3) the term over which leasehold improvements for each restaurant are amortized and (4) the values and lives of adjustments to the initial ROU asset where the Company is the lessee, or favorable and unfavorable leases where the Company is the lessor. The amount of depreciation and amortization, interest and rent expense and income reported would vary if different estimates and assumptions were used. Concentration of Risk Wendy’s had no customers which accounted for 10% or more of consolidated revenues in 2020, 2019 or 2018. As of January 3, 2021, Wendy’s had one main in-line distributor of food, packaging and beverage products, excluding breads, that serviced approximately 67 % of Wendy’s restaurants in the U.S. and four additional in-line distributors that, in the aggregate, serviced approximately 32 % of Wendy’s restaurants in the U.S. We believe that our vulnerability to risk concentrations related to significant vendors and sources of our raw materials is mitigated as we believe that there are other vendors who would be able to service our requirements. However, if a disruption of service from any of our main in-line distributors was to occur, we could experience short-term increases in our costs while distribution channels were adjusted. 78 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Wendy’s restaurants are principally located throughout the U.S. and to a lesser extent, in 30 foreign countries and U.S. territories with the largest number in Canada. Wendy’s U.S. restaurants are located in 50 states and the District of Columbia, with the largest number in Florida, Texas, Ohio, Georgia, California, North Carolina, Pennsylvania and Michigan. Because our restaurant operations are generally located throughout the U.S. and to a much lesser extent, Canada and other foreign countries and U.S. territories, we believe the risk of geographic concentration is not significant. We could be adversely affected by changing consumer preferences resulting from concerns over nutritional or safety aspects of beef, chicken, french fries or other products we sell or the effects of food safety events or disease outbreaks. Our exposure to foreign exchange risk is primarily related to fluctuations in the Canadian dollar relative to the U.S. dollar for our Canadian operations. However, our exposure to Canadian dollar foreign currency risk is mitigated by the fact that there are no Company-operated restaurants in Canada and less than 10 % of Wendy’s franchised restaurants are in Canada. The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees for royalties, franchise fees and rent. In addition, we have notes receivable from certain of our franchisees. The financial condition of these franchisees is largely dependent upon the underlying business trends of the Wendy’s brand and market conditions within the quick-service restaurant industry. This concentration of credit risk is mitigated, in part, by the number of franchisees and the short-term nature of the franchise receivables. New Accounting Standards Adopted Income Taxes In December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and the simplification of areas such as franchise taxes, transactions that result in a step-up in the tax basis of goodwill, separate entity financial statements and interim recognition of enactment of tax laws or tax rate changes. The Company early adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements. Fair Value Measurement In August 2018, the FASB issued new guidance on disclosure requirements for fair value measurements. The objective of the new guidance is to provide additional information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. New incremental disclosure requirements include the amount of fair value hierarchy level 3 changes in unrealized gains and losses and the range and weighted average used to develop significant unobservable inputs for level 3 fair value measurements. The Company adopted this guidance during the first quarter of 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements. Goodwill Impairment In January 2017, the FASB issued new guidance that simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. The Company adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements. Credit Losses In June 2016, the FASB issued an amendment that requires the Company to use a current expected credit loss model that results in the immediate recognition of an estimate of credit losses that are expected to occur over the life of the financial instruments that are within the scope of the guidance, including trade receivables. The Company adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements. 79 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Leases In February 2016, the FASB issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases. The Company adopted the new guidance during the first quarter of 2019 using the effective date as the date of initial application; therefore, the comparative periods have not been adjusted and continue to be reported under the previous lease guidance. The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did not recognize ROU assets or liabilities, which included not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient for lessees to account for lease components and nonlease components as a single lease component for all underlying classes of assets. In addition, the Company elected the practical expedient for lessors to account for lease components and nonlease components as a single lease component in instances where the lease component is predominant, the timing and pattern of transfer for the lease component and nonlease component are the same and the lease component, if accounted for separately, would be classified as an operating lease. The Company did not elect the use-of-hindsight practical expedient. The standard had a material impact on our consolidated balance sheets and related disclosures. Upon adoption at the beginning of 2019, we recognized operating lease liabilities of $ 1,011,000 based on the present value of the remaining minimum rental payments, with corresponding ROU assets of $ 934,000 . The measurement of the operating lease ROU assets included, among other items, favorable lease amounts of $ 23,000 and unfavorable lease amounts of $ 30,000 , which were previously included in “Other intangible assets” and “Other liabilities,” respectively, as well as the excess of rent expense recognized on a straight-line basis over the minimum rents paid of $ 67,000 , which was previously included in “Other liabilities.” In addition, the standard requires lessors to recognize lessees’ payments to the Company for executory costs on a gross basis as revenue with a corresponding expense, which resulted in an increase of approximately $ 38,000 to our 2019 franchise rental income and expense. The Company also recognized a decrease to retained earnings of $ 1,105 as a result of impairing newly recognized ROU assets upon transition to the new guidance. The adoption of the guidance did not have a material impact on our consolidated statement of cash flows. New Accounting Standards Financial Instruments In August 2020, the FASB issued an amendment that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendment simplifies accounting for convertible instruments by removing major separation models required under current accounting guidance. In addition, the amendment removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception, and also simplifies the diluted earnings per share calculation in certain areas. The amendment is effective commencing with our 2022 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements. 80 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (2) Revenue Nature of Goods and Services The Company generates revenues from sales at Company-operated restaurants and earns fees and rental income from franchised restaurants. Revenues are recognized upon delivery of food to the customer at Company-operated restaurants or upon the fulfillment of terms outlined in the franchise agreement for franchised restaurants. The franchise agreement provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site accepted by Wendy’s and to use the Wendy’s system in connection with the operation of the restaurant at that site. The franchise agreement generally provides for a 20 -year term and a 10 -year renewal subject to certain conditions. The initial term may be extended up to 25 years and the renewal extended up to 20 years for qualifying restaurants under certain new restaurant development and reimaging programs. The franchise agreement requires that the franchisee pay a royalty based on a percentage of sales at the franchised restaurant, as well as make contributions to the Advertising Funds based on a percentage of sales. Wendy’s may offer development incentive programs from time to time that provide for a discount or lesser royalty amount or Advertising Fund contribution for a limited period of time. The agreement also typically requires that the franchisee pay Wendy’s a technical assistance fee. The technical assistance fee is used to defray some of the costs to Wendy’s for training, start-up and transitional services related to new and existing franchisees acquiring restaurants and in the development and opening of new restaurants. Wendy’s also enters into development agreements with certain franchisees. The development agreement generally provides the franchisee with the right to develop a specified number of new Wendy’s restaurants using the Image Activation design within a stated, non-exclusive territory for a specified period, subject to the franchisee meeting interim new restaurant development requirements. Wendy’s owns and leases sites from third parties, which it leases and/or subleases to franchisees. Noncancelable lease terms are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options. The initial lease term for properties leased or subleased to franchisees is generally set to be coterminous with the initial 20 -year term of the related franchise agreement and any renewal term is coterminous with the 10 -year renewal term of the related franchise agreement. Royalties and contributions to the Advertising Funds are generally due within the month subsequent to which the revenue was generated through sales at the franchised restaurant. Technical assistance fees and renewal fees are generally due upon execution of the related franchise agreement. Rental income is due in accordance with the terms of each lease, which is generally at the beginning of each month. Disaggregation of Revenue The following tables disaggregate revenue by segment and source for 2020, 2019 and 2018: 2020 Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Sales at Company-operated restaurants $ 722,764 $ — $ — $ 722,764 Franchise royalty revenue 373,162 43,346 — 416,508 Franchise fees 22,126 1,962 4,153 28,241 Franchise rental income — — 232,648 232,648 Advertising funds revenue 313,330 20,334 — 333,664 Total revenues $ 1,431,382 $ 65,642 $ 236,801 $ 1,733,825 81 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 2019 Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Sales at Company-operated restaurants $ 707,485 $ — $ — $ 707,485 Franchise royalty revenue 355,702 44,998 — 400,700 Franchise fees 21,889 2,978 3,432 28,299 Franchise rental income — — 233,065 233,065 Advertising funds revenue 319,231 20,222 — 339,453 Total revenues $ 1,404,307 $ 68,198 $ 236,497 $ 1,709,002 2018 Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Sales at Company-operated restaurants $ 651,577 $ — $ — $ 651,577 Franchise royalty revenue 335,500 42,446 — 377,946 Franchise fees 18,972 5,607 6,518 31,097 Franchise rental income — — 203,297 203,297 Advertising funds revenue 306,442 19,577 — 326,019 Total revenues $ 1,312,491 $ 67,630 $ 209,815 $ 1,589,936 Contract Balances The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers: January 3, 2021 (a) December 29, 2019 (a) Receivables, which are included in “Accounts and notes receivable, net” (b) $ 57,677 $ 39,188 Receivables, which are included in “Advertising funds restricted assets” 63,252 54,394 Deferred franchise fees (c) 97,785 100,689 _______________ (a) Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s consolidated statements of operations. (b) Includes receivables related to “Sales” and “Franchise royalty revenue and fees.” (c) Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled $ 8,691 and $ 89,094 as of January 3, 2021, respectively, and $ 8,899 and $ 91,790 as of December 29, 2019, respectively. 82 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Significant changes in deferred franchise fees are as follows: 2020 2019 2018 Deferred franchise fees at beginning of period $ 100,689 $ 102,205 $ 102,492 Revenue recognized during the period ( 8,955 ) ( 9,487 ) ( 9,641 ) New deferrals due to cash received and other 6,051 7,971 9,354 Deferred franchise fees at end of period $ 97,785 $ 100,689 $ 102,205 Anticipated Future Recognition of Deferred Franchise Fees The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period: Estimate for fiscal year: 2021 $ 8,691 2022 6,140 2023 5,968 2024 5,770 2025 5,581 Thereafter 65,635 $ 97,785 (3) System Optimization Gains, Net The Company’s system optimization initiative included 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 2020, 2019 and 2018, the Company facilitated 54 , 37 and 96 Franchise Flips, respectively. Additionally, during 2020 and 2018, the Company completed the sale of one and three Company-operated restaurants to franchisees, respectively. No Company-operated restaurants were sold to franchisees during 2019. The Company expects to sell 43 Company-operated restaurants in New York to franchisees in the second quarter of 2021. Gains and losses recognized on dispositions are recorded to “System optimization gains, 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.” 83 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following is a summary of the disposition activity recorded as a result of our system optimization initiative: Year Ended 2020 2019 2018 Number of restaurants sold to franchisees 1 — 3 Proceeds from sales of restaurants $ 50 $ — $ 1,436 Net assets sold (a) ( 34 ) — ( 1,370 ) Goodwill related to sales of restaurants — — ( 208 ) Net favorable leases — — 220 Other — — 11 16 — 89 Post-closing adjustments on sales of restaurants (b) 362 1,087 445 Gain on sales of restaurants, net 378 1,087 534 Gain (loss) on sales of other assets, net (c) 2,770 196 ( 71 ) System optimization gains, net $ 3,148 $ 1,283 $ 463 _______________ (a) Net assets sold consisted primarily of equipment. (b) 2020, 2019 and 2018 include the recognition of deferred gains of $ 368 , $ 911 and $ 1,029 , respectively, as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. 2018 also includes cash proceeds, net of payments, of $ 6 related to post-closing reconciliations with franchisees. (c) During 2020, 2019 and 2018, Wendy’s received cash proceeds of $ 6,041 , $ 3,448 and $ 1,781 , respectively, primarily from the sale of surplus and other properties. Assets Held for Sale January 3, 2020 December 29, 2019 Number of restaurants classified as held for sale 43 — Net restaurant assets held for sale (a) $ 20,587 $ — Other assets held for sale (b) $ 1,732 $ 1,437 _______________ (a) Net restaurant assets held for sale include the New York Company-operated restaurants we expect to sell in the second quarter of 2021 and consist primarily of cash, inventory, property and an estimate of allocable goodwill. (b) Other assets held for sale primarily consist of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.” 84 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (4) Acquisitions No restaurants were acquired from franchisees during 2020. During 2019 and 2018, the Company acquired five restaurants and 16 restaurants from franchisees, respectively. The Company did not incur any material acquisition-related costs associated with the acquisitions and such transactions were not significant to our consolidated financial statements. The table below presents the allocation of the total purchase price to the fair value of assets acquired and liabilities assumed for restaurants acquired from franchisees: Year Ended 2019 2018 (a) Restaurants acquired from franchisees 5 16 Total consideration paid, net of cash received $ 5,052 $ 21,401 Identifiable assets acquired and liabilities assumed: Properties 666 4,363 Acquired franchise rights 1,354 10,127 Finance lease assets 5,350 5,360 Other assets — 621 Finance lease liabilities ( 4,084 ) ( 3,135 ) Unfavorable leases — ( 733 ) Other ( 2,316 ) ( 2,240 ) Total identifiable net assets 970 14,363 Goodwill $ 4,082 $ 7,038 _______________ (a) The fair values of the identifiable intangible assets related to restaurants acquired in 2018 were provisional amounts as of December 30, 2018, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended March 31, 2019, which resulted in a decrease in the fair value of acquired franchise rights of $ 2,989 and an increase in deferred tax assets of $ 140 . NPC Quality Burgers, Inc. (“NPC”) As previously announced, NPC, the Company’s largest franchisee, filed for chapter 11 bankruptcy in July 2020 and commenced a process to sell all or substantially all of its assets, including its interest in approximately 393 Wendy’s restaurants across eight different markets, pursuant to a court-approved auction process. On November 18, 2020, the Company submitted a consortium bid together with a group of pre-qualified franchisees to acquire NPC’s Wendy’s restaurants. Under the terms of the consortium bid, several existing and new franchisees would have been the ultimate purchasers of seven of the NPC markets, while the Company would have acquired one market. As part of the consortium bid, the Company submitted a deposit of $ 43,240 , which is included in “Prepaid expenses and other current assets” as of January 3, 2021. The deposit included $ 38,361 received from the group of prequalified franchisees, which was payable to the franchisees and included in “Accrued expenses and other current liabilities” as of January 3, 2021 pending resolution of the bankruptcy sale process. On January 7, 2021, following a court-approved mediation process, NPC and certain affiliates of Flynn Restaurant Group (“FRG”) and the Company entered into separate asset purchase agreements under which all of NPC’s Wendy’s restaurants will be sold to Wendy’s approved franchisees. Under the proposed transaction, FRG will acquire approximately half of NPC’s Wendy’s restaurants in four markets, while several existing Wendy’s franchisees that were part of the Company’s consortium bid will acquire the other half of NPC’s Wendy’s restaurants in the other four markets. The Company does not expect to acquire and operate any restaurants as part of this transaction. The Company expects that the sale of the restaurants will be completed in the late first quarter or early second quarter of 2021, subject to the satisfaction of various closing conditions specified in the asset purchase agreements. 85 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (5) Reorganization and Realignment Costs The following is a summary of the initiatives included in “Reorganization and realignment costs:” Year Ended 2020 2019 2018 Operations and field realignment $ 3,801 $ — $ — IT realignment 7,288 9,127 — G&A realignment 614 7,749 8,785 System optimization initiative 4,327 89 283 Reorganization and realignment costs $ 16,030 $ 16,965 $ 9,068 Operations and Field Realignment In September 2020, the Company initiated a plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment Plan realigns the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. We also expect to incur contract termination charges, including the planned closure of certain field offices. The Company expects to incur total costs aggregating approximately $ 7,000 to $ 9,000 related to the Operations and Field Realignment Plan. During 2020, the Company recognized costs totaling $ 3,801 , which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $ 3,000 to $ 5,000 , comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs associated with the Operations and Field Realignment Plan during 2021. The following is a summary of the activity recorded as a result of the Operations and Field Realignment Plan: Year Ended 2020 Severance and related employee costs $ 3,113 Third party and other costs 67 3,180 Share-based compensation (a) 621 Total operations and field realignment $ 3,801 _______________ (a) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the Operations and Field Realignment Plan. The accruals for the Operations and Field Realignment Plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 2,487 and $ 113 as of January 3, 2021. The table below presents a rollforward of our accruals for the Operations and Field Realignment Plan. Balance December 29, 2019 Charges Payments Balance January 3, 2021 Severance and related employee costs $ — $ 3,113 $ ( 513 ) $ 2,600 Third party and other costs — 67 ( 67 ) — $ — $ 3,180 $ ( 580 ) $ 2,600 86 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Information Technology ( “ IT ”) Realignment In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth (the “IT Realignment Plan”). The Company has partnered with a third-party global IT consultant on this new structure to leverage their global capabilities, which will enable a more seamless integration between its digital and corporate IT assets. The IT Realignment Plan has reduced certain employee compensation and other related costs that the Company has reinvested back into IT to drive additional capabilities and capacity across all of its technology platforms. Additionally, in June 2020, the Company made changes to its leadership structure that included the elimination of the Chief Digital Experience Officer position and the creation of a Chief Information Officer position, for which the Company completed the hiring process in October 2020. During 2020 and 2019, the Company recognized costs totaling $ 7,288 and $ 9,127 , respectively, which primarily included third-party and other costs and recruitment and relocation costs in 2020 and severance and related employee costs and third-party and other costs in 2019. The Company does not expect to incur any material additional costs under the IT Realignment Plan. The following is a summary of the activity recorded as a result of the IT Realignment Plan: Year Ended Total Incurred Since Inception 2020 2019 Severance and related employee costs $ 843 $ 7,548 $ 8,391 Recruitment and relocation costs 1,296 — 1,296 Third-party and other costs 5,149 1,386 6,535 7,288 8,934 16,222 Share-based compensation (a) — 193 193 Total IT realignment $ 7,288 $ 9,127 $ 16,415 _______________ (a) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the IT realignment plan. As of January 3, 2021, the accruals for our IT Realignment Plan are included in “Accrued expenses and other current liabilities.” As of December 29, 2019, the accruals for our IT Realignment Plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 8,025 and $ 599 , respectively. The tables below present a rollforward of our accruals for the IT Realignment Plan: Balance December 29, 2019 Charges Payments Balance January 3, 2021 Severance and related employee costs $ 7,548 $ 843 $ ( 6,883 ) $ 1,508 Recruitment and relocation costs — 1,296 ( 1,296 ) — Third-party and other costs 1,076 5,149 ( 6,225 ) — $ 8,624 $ 7,288 $ ( 14,404 ) $ 1,508 Balance December 30, 2018 Charges Payments Balance December 29, 2019 Severance and related employee costs $ — $ 7,548 $ — $ 7,548 Recruitment and relocation costs — — — — Third-party and other costs — 1,386 ( 310 ) 1,076 $ — $ 8,934 $ ( 310 ) $ 8,624 87 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) General and Administrative ( “ G&A ”) Realignment In May 2017, the Company initiated a plan to further reduce its G&A expenses (the “G&A Realignment Plan”). Additionally, in May 2019, the Company announced changes to its management and operating structure that included the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the Chief Operations Officer position. During 2020, 2019 and 2018, the Company recognized costs related to the plan totaling $ 614 , $ 7,749 and $ 8,785 , respectively, which primarily included recruitment and relocation costs and share-based compensation in 2020 and severance and related employee costs and share-based compensation in 2019 and 2018. The Company does not expect to incur any material additional costs under the G&A Realignment Plan. The following is a summary of the activity recorded as a result of the G&A Realignment Plan: Year Ended Total Incurred Since Inception 2020 2019 2018 Severance and related employee costs $ 28 $ 5,485 $ 3,797 $ 24,266 Recruitment and relocation costs 360 950 1,077 2,876 Third-party and other costs 13 100 1,019 2,223 401 6,535 5,893 29,365 Share-based compensation (a) 213 1,214 1,557 8,111 Termination of defined benefit plans (b) — — 1,335 1,335 Total G&A realignment $ 614 $ 7,749 $ 8,785 $ 38,811 _______________ (a) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the G&A Realignment Plan. (b) During 2018, the Company terminated two frozen defined benefit plans. See Note 19 for further information. As of January 3, 2021, the accruals for the G&A Realignment Plan are included in “Accrued expenses and other current liabilities.” As of December 29, 2019, the accruals for the G&A Realignment Plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 4,504 and $ 855 , respectively. The tables below present a rollforward of our accruals for the G&A Realignment Plan. Balance December 29, 2019 Charges Payments Balance January 3, 2021 Severance and related employee costs $ 5,276 $ 28 $ ( 4,372 ) $ 932 Recruitment and relocation costs 83 360 ( 443 ) — Third-party and other costs — 13 ( 13 ) — $ 5,359 $ 401 $ ( 4,828 ) $ 932 Balance December 30, 2018 Charges Payments Balance December 29, 2019 Severance and related employee costs $ 7,241 $ 5,485 $ ( 7,450 ) $ 5,276 Recruitment and relocation costs 83 950 ( 950 ) 83 Third-party and other costs — 100 ( 100 ) — $ 7,324 $ 6,535 $ ( 8,500 ) $ 5,359 88 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) System Optimization Initiative The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During 2020, the Company recognized costs totaling $ 4,327 , which were primarily comprised of professional fees related to the NPC bankruptcy sale process. See Note 4 for further information. The Company expects to incur additional costs of approximately $ 3,000 related to the NPC bankruptcy sale process during 2021. The following is a summary of the costs recorded as a result of our system optimization initiative: Year Ended Total Incurred Since Inception 2020 2019 2018 Severance and related employee costs $ — $ — $ — $ 18,237 Professional fees 4,323 72 264 22,107 Other 4 17 19 5,853 4,327 89 283 46,197 Accelerated depreciation and amortization (a) — — — 25,398 Share-based compensation (b) — — — 5,013 Total system optimization initiative $ 4,327 $ 89 $ 283 $ 76,608 _______________ (a) Primarily includes accelerated amortization of previously acquired franchise rights related to Company-operated restaurants in territories that have been sold to franchisees in connection with our system optimization initiative. (b) Represents incremental share-based compensation resulting from the modification of stock options and performance-based awards in connection with the termination of employees under our system optimization initiative. The table below presents a rollforward of our accruals for our system optimization initiative, which are included in “Accrued expenses and other current liabilities.” Balance December 29, 2019 Charges Payments Balance January 3, 2021 Professional fees $ — $ 4,323 $ ( 3,093 ) $ 1,230 Other — 4 ( 4 ) — $ — $ 4,327 $ ( 3,097 ) $ 1,230 (6) Income Per Share Basic income per share for 2020, 2019 and 2018 was computed by dividing net income amounts by the weighted average number of common shares outstanding. The weighted average number of shares used to calculate basic and diluted income per share were as follows: Year Ended 2020 2019 2018 Common stock: Weighted average basic shares outstanding 223,684 229,944 237,797 Dilutive effect of stock options and restricted shares 4,330 5,131 7,166 Weighted average diluted shares outstanding 228,014 235,075 244,963 89 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Diluted net income per share was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of 2,064 , 2,518 and 1,520 for 2020, 2019 and 2018, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. (7) Cash and Receivables Year End January 3, 2021 December 29, 2019 Cash and cash equivalents Cash $ 231,922 $ 185,203 Cash equivalents 75,067 114,992 306,989 300,195 Restricted cash Accounts held by trustee for the securitized financing facility 33,635 34,209 Other 338 330 33,973 34,539 Advertising Funds (a) 77,279 23,973 111,252 58,512 Total cash, cash equivalents and restricted cash $ 418,241 $ 358,707 _______________ (a) Included in “Advertising funds restricted assets.” January 3, 2021 December 29, 2019 Gross Allowance for Doubtful Accounts Net Gross Allowance for Doubtful Accounts Net Accounts and Notes Receivable, Net Current Accounts receivable (a) (b) $ 97,399 $ ( 3,739 ) $ 93,660 $ 103,852 $ ( 3,314 ) $ 100,538 Notes receivable from franchisees (c) (d) 21,227 ( 4,996 ) 16,231 23,628 ( 6,705 ) 16,923 $ 118,626 $ ( 8,735 ) $ 109,891 $ 127,480 $ ( 10,019 ) $ 117,461 Non-current (e) Notes receivable from franchisees (d) $ 6,759 $ ( 629 ) $ 6,130 $ 1,617 $ — $ 1,617 _______________ (a) Includes income tax refund receivables of $ 5,399 and $ 13,555 as of January 3, 2021 and December 29, 2019, respectively. Additionally, 2019 includes receivables of $ 25,350 related to insurance coverage for the financial institutions class action. See Note 11 for further information on our legal reserves. (b) During 2020, rent receivables increased by $ 5,226 due to actions taken by the Company in response to the COVID-19 pandemic, which included offering to defer base rent payments on properties owned by Wendy’s and leased to franchisees by 50% and offering to pass along any deferrals that were obtained on properties leased by Wendy’s and subleased to franchisees by up to 100%, beginning in May for a three month period, which are being repaid over a 12 month period beginning in August 2020. (c) Includes the current portion of sales-type and direct financing lease receivables of $ 5,965 and $ 3,146 as of January 3, 2021 and December 29, 2019, respectively. See Note 20 for further information. 90 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Included a note receivable from a U.S. franchisee totaling $ 1,000 as of December 29, 2019. The note was repaid during 2020. (d) Includes a note receivable from a franchisee in India, of which $ 356 and $ 1,000 are included in current notes receivable as of January 3, 2021 and December 29, 2019, respectively, and $ 629 which is included in non-current notes receivable as of January 3, 2021. As of January 3, 2021 and December 29, 2019, the Company had a reserve of $ 985 on the loan outstanding to the franchisee in India. Includes a note receivable from a franchisee in Indonesia, of which $ 831 and $ 1,262 are included in current notes receivable and $ 1,780 and $ 1,617 are included in non-current notes receivable as of January 3, 2021 and December 29, 2019, respectively. Includes notes receivable related to the Brazil JV, of which $ 12,775 and $ 15,920 are included in current notes receivable as of January 3, 2021 and December 29, 2019, respectively, and $ 4,350 is included in non-current notes receivable as of January 3, 2021. As of January 3, 2021 and December 29, 2019, the Company had reserves of $ 4,640 and $ 5,720 , respectively, on the loans outstanding related to the Brazil JV. See Note 8 for further information. (e) Included in “Other assets.” The following is an analysis of the allowance for doubtful accounts: Accounts Receivable Notes Receivable Total 2020 Balance at December 29, 2019 $ 3,314 $ 6,705 $ 10,019 Provision for doubtful accounts 647 206 853 Uncollectible accounts written off, net of recoveries ( 222 ) ( 1,286 ) ( 1,508 ) Balance at January 3, 2021 $ 3,739 $ 5,625 $ 9,364 2019 Balance at December 30, 2018 $ 4,939 $ 2,000 $ 6,939 Provision for doubtful accounts ( 1,618 ) 4,912 3,294 Uncollectible accounts written off, net of recoveries ( 7 ) ( 207 ) ( 214 ) Balance at December 29, 2019 $ 3,314 $ 6,705 $ 10,019 2018 Balance at December 31, 2017 $ 4,546 $ — $ 4,546 Provision for doubtful accounts 606 1,956 2,562 Uncollectible accounts written off, net of recoveries ( 213 ) 44 ( 169 ) Balance at December 30, 2018 $ 4,939 $ 2,000 $ 6,939 91 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (8) Investments The following is a summary of the carrying value of our investments: Year End January 3, 2021 December 29, 2019 Equity method investments $ 44,574 $ 45,310 Other investments in equity securities — 639 $ 44,574 $ 45,949 Equity Method Investments Wendy’s has a 50 % share in the TimWen real estate joint venture and a 20 % share in the Brazil JV, both of which are accounted for using the equity method of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.” A wholly-owned subsidiary of Wendy’s entered into the Brazil JV during the second quarter of 2015 for the operation of Wendy’s restaurants in Brazil. Wendy’s, Starboard International Holdings B.V. and Infinity Holding E Participações Ltda. contributed $ 1 , $ 2 and $ 2 , respectively, each receiving proportionate equity interests of 20 %, 40 % and 40 %, respectively. The Company did not receive any distributions and our share of the Brazil JV’s net losses was $ 417 , $ 1,022 and $ 1,344 during 2020, 2019 and 2018, respectively. A wholly-owned subsidiary of Wendy’s has loans outstanding related to the Brazil JV totaling $ 17,125 and $ 15,920 as of January 3, 2021 and December 29, 2019, respectively. The loans are denominated in U.S. Dollars, which is also the functional currency of the subsidiary; therefore, there is no exposure to changes in foreign currency rates. The loans bear interest at rates ranging from 3.25 % to 6.5 % per year. Of the total loans outstanding as of January 3, 2021, $ 12,775 was due primarily in the fourth quarter of 2020 and $ 4,350 is due in 2024. As of January 3, 2021 and December 29, 2019, the Company had reserves of $ 4,640 on the past due loans and $ 5,720 on the current loans outstanding, respectively, related to the Brazil JV. The Company is currently pursuing collection of certain of the past due amounts. See Note 7 for further information. The carrying value of our investment in TimWen exceeded our interest in the underlying equity of the joint venture by $ 23,433 and $ 25,160 as of January 3, 2021 and December 29, 2019, respectively, primarily due to purchase price adjustments from the 2008 merger of Triarc Companies, Inc. and Wendy’s International, Inc. (the “Wendy’s Merger”). Presented below is activity related to our portion of TimWen and the Brazil JV included in our consolidated balance sheets and consolidated statements of operations as of and for the years ended January 3, 2021, December 29, 2019 and December 30, 2018. Year Ended 2020 2019 2018 Balance at beginning of period $ 45,310 $ 47,021 $ 55,363 Investment — — 13 Equity in earnings for the period 8,389 10,943 10,402 Amortization of purchase price adjustments (a) ( 2,293 ) ( 2,270 ) ( 2,326 ) 6,096 8,673 8,076 Distributions received ( 8,376 ) ( 13,400 ) ( 13,390 ) Foreign currency translation adjustment included in “Other comprehensive income (loss), net” and other 1,544 3,016 ( 3,041 ) Balance at end of period $ 44,574 $ 45,310 $ 47,021 _______________ 92 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (a) Purchase price adjustments that impacted the carrying value of the Company’s investment in TimWen are being amortized over the average original aggregate life of 21 years. Indirect Investment in Inspire Brands In connection with the sale of Arby’s Restaurant Group, Inc. (“Arby’s”) during 2011, Wendy’s Restaurants obtained an 18.5 % equity interest in ARG Holding Corporation (“ARG Parent”) (through which Wendy’s Restaurants indirectly retained an 18.5 % interest in Arby’s). The carrying value of our investment was reduced to zero during 2013 in connection with the receipt of a dividend that was determined to be a return of our investment. Our 18.5 % equity interest was diluted to 12.3 % in February 2018, when a subsidiary of ARG Parent acquired Buffalo Wild Wings, Inc. As a result of the acquisition, our diluted ownership interest included both the Arby’s and Buffalo Wild Wings brands under the newly formed combined company, Inspire Brands, Inc. (“Inspire Brands”). In August 2018, the Company sold its remaining 12.3 % ownership interest to Inspire Brands for $ 450,000 and incurred transaction costs of $ 55 , which were recorded to “Investment (loss) income, net.” The Company recorded income tax expense of $ 97,501 on the transaction, of which $ 95,038 was paid during the fourth quarter of 2018. Other Investments in Equity Securities In October 2019, the Company received a $ 25,000 cash settlement related to a previously held investment. As a result, the Company recorded $ 24,366 to “Investment (loss) income, net” and $ 634 to “General and administrative” for the reimbursement of related costs during the fourth quarter of 2019. (9) Properties Year End January 3, 2021 December 29, 2019 Land $ 372,473 $ 375,109 Buildings and improvements 504,504 508,602 Leasehold improvements 409,306 405,158 Office, restaurant and transportation equipment 255,469 279,799 1,541,752 1,568,668 Accumulated depreciation and amortization ( 625,863 ) ( 591,668 ) $ 915,889 $ 977,000 Depreciation and amortization expense related to properties was $ 77,656 , $ 81,219 and $ 79,009 during 2020, 2019 and 2018, respectively. 93 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (10) Goodwill and Other Intangible Assets Goodwill activity for 2020 and 2019 was as follows: Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Balance at December 30, 2018: Goodwill, gross $ 595,560 $ 39,173 $ 122,548 $ 757,281 Accumulated impairment losses (a) — ( 9,397 ) — ( 9,397 ) Goodwill, net 595,560 29,776 122,548 747,884 Changes in goodwill: Restaurant acquisitions (b) 6,931 — — 6,931 Currency translation adjustment — 1,096 — 1,096 Balance at December 29, 2019: Goodwill, gross 602,491 40,269 122,548 765,308 Accumulated impairment losses (a) — ( 9,397 ) — ( 9,397 ) Goodwill, net 602,491 30,872 122,548 755,911 Changes in goodwill: Restaurant dispositions (c) ( 5,394 ) — — ( 5,394 ) Currency translation adjustment and other ( 223 ) 755 — 532 Balance at January 3, 2021: Goodwill, gross 596,874 41,024 122,548 760,446 Accumulated impairment losses (a) — ( 9,397 ) — ( 9,397 ) Goodwill, net $ 596,874 $ 31,627 $ 122,548 $ 751,049 _______________ (a) Accumulated impairment losses resulted from the full impairment of goodwill of the Wendy’s international franchise restaurants during the fourth quarter of 2013. (b) Includes an adjustment to the fair value of net assets acquired in connection with the acquisition of franchised restaurants during 2018. See Note 4 for further information. (c) During 2020, in connection with the Company’s plan to sell 43 Company-operated restaurants in New York in the second quarter of 2021, goodwill of $ 5,394 was reclassified to assets held for sale. See Note 3 for further information. 94 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following is a summary of the components of other intangible assets and the related amortization expense: Year End January 3, 2021 December 29, 2019 Cost Accumulated Amortization Net Cost Accumulated Amortization Net Indefinite-lived: Trademarks $ 903,000 $ — $ 903,000 $ 903,000 $ — $ 903,000 Definite-lived: Franchise agreements 349,255 ( 203,938 ) 145,317 348,825 ( 187,063 ) 161,762 Favorable leases 163,015 ( 55,581 ) 107,434 166,098 ( 47,695 ) 118,403 Reacquired rights under franchise agreements 9,872 ( 3,414 ) 6,458 10,172 ( 2,766 ) 7,406 Software 206,741 ( 143,990 ) 62,751 181,666 ( 125,025 ) 56,641 $ 1,631,883 $ ( 406,923 ) $ 1,224,960 $ 1,609,761 $ ( 362,549 ) $ 1,247,212 Aggregate amortization expense: Actual for fiscal year: 2018 $ 52,064 2019 53,182 2020 52,588 Estimate for fiscal year: 2021 $ 47,669 2022 42,612 2023 39,419 2024 34,889 2025 28,095 Thereafter 129,276 (11) Accrued Expenses and Other Current Liabilities Year End January 3, 2021 December 29, 2019 Legal reserves (a) $ 2,006 $ 52,272 Accrued compensation and related benefits 44,264 56,010 Accrued taxes 27,162 23,926 NPC consortium bid (b) 38,361 — Other 43,528 33,064 $ 155,321 $ 165,272 _______________ (a) Included a legal reserve of $ 50,000 as of December 29, 2019 for a settlement of the financial institutions class action. The Company maintains insurance coverage for legal settlements, receivables for which are included in “Accounts and notes receivable, net.” See Note 7 for further information. After exhaustion of applicable insurance receivables of $ 25,350 , the Company made a payment of $ 24,650 for the settlement of the financial institutions class action in January 2020. 95 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (b) Represents amounts received from franchisees as part of the consortium bid to acquire NPC’s Wendy’s restaurants. See Note 4 for further information. (12) Long-Term Debt Long-term debt consisted of the following: Year End January 3, 2021 December 29, 2019 Series 2019-1 Class A-2 Notes: 3.783 % Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 $ 386,000 $ 398,000 4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 434,250 447,750 Series 2018-1 Class A-2 Notes: 3.573 % Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025 436,500 441,000 3.884 % Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 460,750 465,500 Series 2015-1 Class A-2 Notes: 4.497 % Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025 473,750 478,750 Canadian revolving credit facility 1,962 — 7 % debentures, due in 2025 83,998 82,837 Unamortized debt issuance costs ( 30,085 ) ( 33,526 ) 2,247,125 2,280,311 Less amounts payable within one year ( 28,962 ) ( 22,750 ) Total long-term debt $ 2,218,163 $ 2,257,561 Aggregate annual maturities of long-term debt, excluding the effect of purchase accounting adjustments, as of January 3, 2021 were as follows: Fiscal Year 2021 $ 28,962 2022 22,750 2023 22,750 2024 22,750 2025 975,500 Thereafter 1,210,500 $ 2,283,212 Senior Notes Wendy’s Funding, LLC (“Wendy’s Funding”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. As of January 3, 2021, the Master Issuer issued the following outstanding series of fixed rate senior secured notes: (i) 2019-1 Class A-2-I with an initial principal amount of $ 400,000 ; (ii) 2019-1 Class A-2-II with an initial principal amount of $ 450,000 ; (iii) 2018-1 Class A-2-I with an initial principal amount of $ 450,000 ; (iv) 2018-1 Class A-2-II with an initial principal amount of $ 475,000 ; and (v) 2015-1 Class A-2-III with an initial principal amount of $ 500,000 (collectively, the “Class A-2 Notes”). The Master Issuer also issued outstanding Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019-1 Class A-1 Notes”), which allow for the borrowing of up to $ 150,000 from time to time on a revolving basis using various credit instruments, including a letter of credit facility. In March 2020, the Company drew down $ 120,000 under the 2019-1 Class A-1 Notes, which the Company fully repaid in July 2020. As a result, as of January 3, 2021, the Company had no outstanding borrowings under the 2019-1 Class A-1 Notes. In June 2020, the Master Issuer also issued outstanding Series 2020-1 Variable Funding Senior Secured Notes, Class A-1 (the “2020-1 Class A-1 Notes”), which allow for the borrowing of up to $ 100,000 from time to time on a revolving basis using various credit 96 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) instruments. The Company had no outstanding borrowings under the Series 2020-1 Class A-1 Notes as of January 3, 2021. The drawdown of the 2019-1 Class A-1 Notes in March 2020 and the issuance of the 2020-1 Class A-1 Notes in June 2020 were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic. The 2019-1 Class A-1 Notes and the 2020-1 Class A-1 Notes are collectively the “Class A-1 Notes,” and the Class A-1 Notes and the Class A-2 Notes are collectively the “Senior Notes.” The Senior Notes are secured by a security interest in substantially all of the assets of the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors (collectively, the “Securitization Entities”), except for certain real estate assets and subject to certain limitations as set forth in the indenture governing the Senior Notes (the “Indenture”) and the related guarantee and collateral agreements. The assets of the Securitization Entities include most of the domestic and certain of the foreign revenue-generating assets of the Company and its subsidiaries, which principally consist of franchise-related agreements, certain Company-operated restaurants, intellectual property and license agreements for the use of intellectual property. Interest and principal payments on the Class A-2 Notes are payable on a quarterly basis. The requirement to make such quarterly principal payments on the Class A-2 Notes is subject to certain financial conditions set forth in the Indenture. The legal final maturity dates for the Class A-2 Notes range from 2045 through 2049. If the Master Issuer has not repaid or refinanced the Class A-2 Notes prior to their respective anticipated repayment dates, which range from 2025 through 2029, additional interest will accrue pursuant to the Indenture. The Class A-1 Notes accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate (“LIBOR”) for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the respective purchase agreements for the Class A-1 Notes. There is a commitment fee on the unused portions of the Class A-1 Notes, which ranges from 0.40 % to 0.75 % based on utilization for the 2019-1 Class A-1 Notes, and is 1.50 % for the 2020-1 Class A-1 Notes. As of January 3, 2021, $ 26,228 of letters of credit were outstanding against the 2019-1 Class A-1 Notes, which relate primarily to interest reserves required under the Indenture governing the 2019-1 Class A-1 Notes. Covenants and Restrictions The Senior Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Senior Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Senior Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled maturity date. The Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. In addition, the Indenture and the related management agreement contain various covenants that limit the Company and its subsidiaries’ ability to engage in specified types of transactions, subject to certain exceptions, including, for example, to (i) incur or guarantee additional indebtedness, (ii) sell certain assets, (iii) create or incur liens on certain assets to secure indebtedness or (iv) consolidate, merge, sell or otherwise dispose of all or substantially all of their assets. In accordance with the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the trustee and the noteholders, and are restricted in their use. As of January 3, 2021 and December 29, 2019, Wendy’s Funding had restricted cash of $ 33,635 and $ 34,209 , respectively, which primarily represents cash collections and cash reserves held by the trustee to be used for payments of principal, interest and commitment fees required for the Class A-2 Notes. 97 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Refinancing Transactions In June 2019, the Master Issuer completed a refinancing transaction under which the Master Issuer issued the Series 2019-1 Class A-2-I Notes and the Series 2019-1 Class A-2-II Notes. The Master Issuer’s outstanding Series 2015-1 Class A-2-II Notes were redeemed as part of the transaction. As a result, the Company recorded a loss on early extinguishment of debt of $ 7,150 during 2019, which was comprised of the write-off of certain unamortized deferred financing costs. As part of the June 2019 refinancing transaction, the Master Issuer also issued the 2019-1 Class A-1 Notes. The Company’s previous Series 2018-1 Class A-1 Notes were canceled on the closing date and the letters of credit outstanding against the Series 2018-1 Class A-1 Notes were transferred to the 2019-1 Class A-1 Notes. In January 2018, the Master Issuer completed a refinancing transaction under which the Master Issuer issued the Series 2018-1 Class A-2-I Notes and the Series 2018-1 Class A-2-II Notes. The net proceeds from the sale of the notes were used to redeem the Master Issuer’s outstanding Series 2015-1 Class A-2-I Notes, to pay prepayment and transaction costs and for general corporate purposes. As a result, the Company recorded a loss on early extinguishment of debt of $ 11,475 during 2018, which was comprised of the write-off of certain deferred financing costs and a specified make-whole payment. Debt Issuance Costs During 2020, 2019 and 2018, the Company incurred debt issuance costs of $ 2,122 , $ 14,008 and $ 17,580 in connection with the issuance of the 2020-1 Class A-1 Notes and the June 2019 and January 2018 refinancing transactions, respectively. The debt issuance costs are being amortized to “Interest expense, net” through the anticipated repayment dates of the Class A-2 Notes utilizing the effective interest rate method. As of January 3, 2021, the effective interest rates, including the amortization of debt issuance costs, were 4.7 %, 3.9 %, 4.1 %, 4.0 % and 4.2 % for the Series 2015-1 Class A-2-III Notes, Series 2018-1 Class A-2-I Notes, Series 2018-1 Class A-2-II Notes, Series 2019-1 Class A-2-I Notes and Series 2019-1 Class A-2-II Notes, respectively. Other Long-Term Debt Wendy’s 7 % debentures are unsecured and were reduced to fair value in connection with the Wendy’s Merger based on their outstanding principal of $ 100,000 and an effective interest rate of 8.6 %. The fair value adjustment is being accreted and the related charge included in “Interest expense, net” until the debentures mature. These debentures contain covenants that restrict the incurrence of indebtedness secured by liens and certain finance lease transactions. In December 2019, Wendy’s repurchased $ 10,000 in principal of its 7 % debentures for $ 10,550 , including a premium of $ 500 and transaction fees of $ 50 . As a result, the Company recognized a loss on early extinguishment of debt of $ 1,346 during the fourth quarter of 2019. A Canadian subsidiary of Wendy’s has a revolving credit facility of C$ 6,000 , which bears interest at the Bank of Montreal Prime Rate. Borrowings under the facility are guaranteed by Wendy’s. In March 2020, the Company drew down C$ 5,500 under the revolving credit facility, of which the Company repaid C$ 1,000 in October 2020 and C$ 2,000 in December 2020. As a result, as of January 3, 2021, the Company had outstanding borrowings of C$ 2,500 under the revolving credit facility. Subsequent to January 3, 2021, the Company repaid the C$ 2,500 outstanding balance under the Canadian revolving credit facility. Wendy’s U.S. advertising fund has a revolving line of credit of $ 25,000 , which was established to support the advertising fund operations and bears interest at LIBOR plus 2.15 %. Borrowings under the line of credit are guaranteed by Wendy’s. In February 2020, the Company drew down $ 4,397 under the revolving line of credit, which the Company fully repaid in February 2020. In March 2020, the Company drew down $ 25,000 under the revolving line of credit, which the Company fully repaid in September 2020. As a result, as of January 3, 2021, the Company had no outstanding borrowings under the revolving line of credit. The increased borrowings were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic. Interest Expense Interest expense on the Company’s long-term debt was $ 106,116 , $ 105,829 and $ 107,929 during 2020, 2019 and 2018, respectively, which was recorded to “Interest expense, net.” 98 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Pledged Assets The following is a summary of the Company’s assets pledged as collateral for certain debt: Year End January 3, 2021 Cash and cash equivalents $ 27,962 Restricted cash and other assets (including long-term) 33,641 Accounts and notes receivable, net 40,389 Inventories 3,897 Properties 60,794 Other intangible assets 1,043,640 $ 1,210,323 (13) 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. 99 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments: January 3, 2021 December 29, 2019 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Measurements Financial assets Cash equivalents $ 75,067 $ 75,067 $ 114,992 $ 114,992 Level 1 Other investments in equity securities (a) — — 639 1,649 Level 3 Financial liabilities Series 2019-1 Class A-2-I Notes (b) 386,000 409,778 398,000 405,152 Level 2 Series 2019-1 Class A-2-II Notes (b) 434,250 469,555 447,750 459,136 Level 2 Series 2018-1 Class A-2-I Notes (b) 436,500 450,381 441,000 444,859 Level 2 Series 2018-1 Class A-2-II Notes (b) 460,750 491,021 465,500 475,718 Level 2 Series 2015-1 Class A-2-III Notes (b) 473,750 481,851 478,750 490,531 Level 2 Canadian revolving credit facility 1,962 1,962 — — Level 2 7% debentures, due in 2025 (b) 83,998 98,775 82,837 94,838 Level 2 _______________ (a) The fair values of our investments were not significant and 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. In June 2020, the Company impaired a miscellaneous investment due to the deterioration in operating performance of the underlying assets. In July 2020, the Company sold its remaining interest in this investment. (b) The fair values were based on quoted market prices in markets that are not considered active markets. The carrying amounts of cash, accounts payable and accrued expenses approximate fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximate fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents are the only financial assets measured and recorded at fair value on a recurring basis. Non-Recurring Fair Value Measurements Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our consolidated statements of operations. Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, favorable lease assets and ROU assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below represent the remaining carrying value and were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance. 100 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Total impairment losses may also include the impact of remeasuring long-lived assets held for sale, which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 17 for further information on impairment of our long-lived assets. Fair Value Measurements 2020 Total Losses January 3, 2021 Level 1 Level 2 Level 3 Held and used $ 2,653 $ — $ — $ 2,653 $ 7,586 Held for sale 855 — — 855 451 Total $ 3,508 $ — $ — $ 3,508 $ 8,037 Fair Value Measurements 2019 Total Losses December 29, 2019 Level 1 Level 2 Level 3 Held and used $ 3,582 $ — $ — $ 3,582 $ 5,602 Held for sale 988 — — 988 1,397 Total $ 4,570 $ — $ — $ 4,570 $ 6,999 (14) Income Taxes Income before income taxes is set forth below: Year Ended 2020 2019 2018 Domestic $ 149,046 $ 160,474 $ 560,776 Foreign (a) 3,749 11,007 14,140 $ 152,795 $ 171,481 $ 574,916 _______________ (a) Excludes foreign income of domestic subsidiaries. The (provision for) benefit from income taxes is set forth below: Year Ended 2020 2019 2018 Current: U.S. federal $ ( 16,176 ) $ ( 18,421 ) $ ( 109,078 ) State ( 3,723 ) ( 6,093 ) ( 2,661 ) Foreign ( 4,798 ) ( 9,190 ) ( 9,630 ) Current tax provision ( 24,697 ) ( 33,704 ) ( 121,369 ) Deferred: U.S. federal ( 6,707 ) 1,585 5,071 State ( 3,185 ) ( 2,449 ) 441 Foreign ( 374 ) 27 1,056 Deferred tax (provision) benefit ( 10,266 ) ( 837 ) 6,568 Income tax provision $ ( 34,963 ) $ ( 34,541 ) $ ( 114,801 ) 101 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Deferred tax assets (liabilities) are set forth below: Year End January 3, 2021 December 29, 2019 Deferred tax assets: Operating and finance lease liabilities $ 365,005 $ 345,173 Net operating loss and credit carryforwards 62,210 59,597 Unfavorable leases 23,511 26,020 Deferred revenue 24,303 23,907 Accrued compensation and related benefits 16,443 18,477 Accrued expenses and reserves 7,673 13,786 Deferred rent — 492 Other 5,869 3,757 Valuation allowances ( 49,968 ) ( 45,183 ) Total deferred tax assets 455,046 446,026 Deferred tax liabilities: Operating and finance lease assets ( 332,515 ) ( 313,803 ) Intangible assets ( 301,969 ) ( 311,596 ) Fixed assets ( 63,826 ) ( 60,788 ) Other ( 37,491 ) ( 30,598 ) Total deferred tax liabilities ( 735,801 ) ( 716,785 ) $ ( 280,755 ) $ ( 270,759 ) The amounts and expiration dates of net operating loss and tax credit carryforwards are as follows: Amount Expiration Tax credit carryforwards: U.S. federal foreign tax credits $ 13,681 2022-2030 State tax credits 708 2021-2023 Foreign tax credits of non-U.S. subsidiaries 4,125 Not applicable Total $ 18,514 Net operating loss carryforwards: State and local net operating loss carryforwards $ 1,182,774 2021-2035 Foreign net operating loss carryforwards 1,044 Not applicable Total $ 1,183,818 The Company’s valuation allowances of $ 49,968 and $ 45,183 as of January 3, 2021 and December 29, 2019, respectively, relate to foreign and state tax credit and net operating loss carryforwards. Valuation allowances increased $ 4,785 and $ 3,008 during 2020 and 2019, respectively, and decreased $ 5,120 during 2018. The relative presence of Company-operated restaurants in various states impacts expected future state taxable income available to utilize state net operating loss carryforwards. 102 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Major Tax Legislation On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affects 2017 and subsequent years, including but not limited to (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, (2) bonus depreciation that will allow for full expensing of qualified property, (3) reducing the U.S. federal corporate tax rate from 35 % to 21 % in years 2018 and forward, (4) a tax on global intangible low-taxed income (“GILTI”) and (5) limitations on the deductibility of certain executive compensation. In 2018, we recorded a net tax expense of $ 2,159 related to the Tax Act consisting of $ 2,454 related to the impact of the corporate rate reduction on our net deferred tax liabilities and state taxes and a net expense of $ 991 related to the limitations on the deductibility of certain executive compensation, partially offset by $ 1,286 for the net benefit of foreign tax credits. _______________ The current portion of refundable income taxes was $ 5,399 and $ 13,555 as of January 3, 2021 and December 29, 2019, respectively, and is included in “Accounts and notes receivable, net.” There were no long-term refundable income taxes as of January 3, 2021 and December 29, 2019. The reconciliation of income tax computed at the U.S. federal statutory rate of 21 % to reported income tax is set forth below: Year Ended 2020 2019 2018 (a) Income tax provision at the U.S. federal statutory rate $ ( 32,087 ) $ ( 36,011 ) $ ( 120,732 ) State income tax provision, net of U.S. federal income tax effect ( 4,664 ) ( 6,470 ) ( 221 ) Prior years’ tax matters (b) 1,761 6,135 ( 9,970 ) Excess federal tax benefits from share-based compensation 5,338 5,841 10,250 Foreign and U.S. tax effects of foreign operations ( 397 ) 250 ( 856 ) Valuation allowances ( 4,593 ) ( 2,833 ) 5,120 Non-deductible goodwill (c) — — ( 41 ) Tax credits 1,901 879 1,089 Non-deductible executive compensation ( 1,973 ) ( 1,925 ) ( 1,098 ) Unrepatriated earnings ( 283 ) ( 402 ) ( 326 ) Non-deductible expenses and other 34 ( 5 ) 1,984 $ ( 34,963 ) $ ( 34,541 ) $ ( 114,801 ) _______________ (a) 2018 includes the following impacts associated with the Tax Act: (1) a net expense of $ 2,426 related to the impact of the corporate rate reduction on our net deferred tax liabilities, (2) a net expense of $ 991 related to the limitations on the deductibility of certain executive compensation, (3) a net expense of $ 28 of state income tax and (4) a net benefit of $ 1,286 related to foreign tax credits. (b) 2019 primarily relates to a reduction in unrecognized tax benefits due to a lapse of statute of limitations. 2018 includes expense of $ 9,542 related to the Tax Act, which was partially offset by a $ 7,535 benefit reported in “Valuation allowances.” (c) Substantially all of the goodwill included in the net gain (loss) on sales of restaurants in 2018 under our system optimization initiative was non-deductible for tax purposes. See Note 3 for further information. The Company participates in the Internal Revenue Service (the “IRS”) Compliance Assurance Process (“CAP”). As part of CAP, tax years are examined on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. As such, our tax returns for fiscal years 2009 through 2018 have been settled. The statute of limitations for the Company’s state tax returns vary, but generally the Company’s state income tax returns from its 2017 fiscal year and forward 103 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) remain subject to examination. We believe that adequate provisions have been made for any liabilities, including interest and penalties that may result from the completion of these examinations. Unrecognized Tax Benefits As of January 3, 2021, the Company had unrecognized tax benefits of $ 20,973 , which, if resolved favorably would reduce income tax expense by $ 16,601 . A reconciliation of the beginning and ending amount of unrecognized tax benefits follows: Year End January 3, 2021 December 29, 2019 December 30, 2018 Beginning balance $ 22,323 $ 27,632 $ 28,848 Additions: Tax positions of current year 322 1,356 3,874 Tax positions of prior years — — 2,598 Reductions: Tax positions of prior years ( 1,183 ) ( 227 ) ( 7,553 ) Settlements ( 119 ) — ( 21 ) Lapse of statute of limitations ( 370 ) ( 6,438 ) ( 114 ) Ending balance $ 20,973 $ 22,323 $ 27,632 The reductions in unrecognized tax benefits in 2020 was primarily related to decreases as a result of settlements with various taxing jurisdictions. The additions in unrecognized tax benefits in 2019 was primarily related to the uncertainty of the income tax consequences of a cash settlement related to a previously held investment. The addition of unrecognized tax benefits in 2018 was primarily related to the sale of our ownership interest in Inspire Brands, and the reduction of unrecognized benefits in 2018 was primarily related to settlements with various taxing jurisdictions, including amended returns that were filed in 2017. During 2021, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $ 220 due primarily to the lapse of statutes of limitations and expected settlements. During 2020, 2019 and 2018, the Company recognized $ 159 , $( 489 ) and $( 12 ) of expense (income) for interest and $ 81 , $ 81 and $ 309 of income for penalties, respectively, related to uncertain tax positions. The Company has $ 873 and $ 946 accrued for interest and $ 37 and $ 118 accrued for penalties as of January 3, 2021 and December 29, 2019, respectively. (15) Stockholders’ Equity Dividends During 2020, 2019 and 2018, the Company paid dividends per share of $ 0.29 , $ 0.42 and $ 0.34 , respectively. 104 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Treasury Stock There were 470,424 shares of common stock issued at the beginning and end of 2020, 2019 and 2018. Treasury stock activity for 2020, 2019 and 2018 was as follows: Treasury Stock 2020 2019 2018 Number of shares at beginning of year 245,535 239,191 229,912 Repurchases of common stock 3,512 10,158 15,808 Common shares issued: Stock options, net ( 2,358 ) ( 2,912 ) ( 5,824 ) Restricted stock, net ( 465 ) ( 834 ) ( 627 ) Director fees ( 15 ) ( 14 ) ( 15 ) Other ( 53 ) ( 54 ) ( 63 ) Number of shares at end of year 246,156 245,535 239,191 Repurchases of Common Stock In February 2020, our Board of Directors authorized a repurchase program for up to $ 100,000 of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020. During 2020, the Company repurchased 1,572 shares under the February 2020 repurchase authorization with an aggregate purchase price of $ 32,285 , of which $ 723 was accrued at January 3, 2021, and excluding commissions of $ 22 . As of January 3, 2021, the Company had $ 67,715 of availability remaining under its February 2020 authorization. Subsequent to January 3, 2021 through February 23, 2021, the Company repurchased 457 shares under the February 2020 authorization with an aggregate purchase price of $ 9,570 , excluding commissions of $ 6 . In February 2019, our Board of Directors authorized a repurchase program for up to $ 225,000 of our common stock through March 1, 2020, when and if market conditions warranted and to the extent legally permissible. In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $ 100,000 in cash and received an initial delivery of 4,051 shares of common stock, representing an estimated 85 % of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 628 shares of common stock at an average purchase price of $ 23.89 . The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2019 ASR Agreement, less an agreed upon discount. In total, 4,679 shares were delivered under the 2019 ASR Agreement at an average purchase price of $ 21.37 per share. In addition to the shares repurchased in connection with the 2019 ASR Agreement, during 2020, the Company repurchased 1,312 shares with an aggregate purchase price of $ 28,770 , excluding commissions of $ 18 , under the February 2019 authorization. After taking into consideration these repurchases, with the completion of the 2019 ASR Agreement in February 2020, the Company completed its February 2019 authorization. In addition to the shares repurchased in connection with the 2019 ASR Agreement, during 2019, the Company repurchased 6,107 shares with an aggregate purchase price of $ 117,685 , of which $ 1,801 was accrued at December 29, 2019, and excluding commissions of $ 86 , under the February 2019 authorization and the Company’s November 2018 authorization referenced below. 105 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) In February 2018, our Board of Directors authorized a repurchase program for up to $ 175,000 of our common stock through March 3, 2019, when and if market conditions warranted and to the extent legally permissible. In November 2018, our Board of Directors approved an additional share repurchase program for up to $ 220,000 of our common stock through December 27, 2019, when and if market conditions warranted and to the extent legally permissible. In November 2018, the Company entered into an accelerated share repurchase agreement (the “2018 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase programs. Under the 2018 ASR Agreement, the Company paid the financial institution an initial purchase price of $ 75,000 in cash and received an initial delivery of 3,645 shares of common stock, representing an estimated 85 % of the total shares expected to be delivered under the 2018 ASR Agreement. In December 2018, the Company completed the 2018 ASR Agreement and received an additional 720 shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2018 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2018 ASR Agreement, less an agreed upon discount. In addition to the shares repurchased in connection with the 2018 ASR Agreement, during 2018, the Company repurchased 10,058 shares under the February 2018 and November 2018 authorizations with an aggregate purchase price of $ 172,584 , of which $ 1,827 was accrued at December 30, 2018, and excluding commissions of $ 141 . In February 2017, our Board of Directors authorized a repurchase program for up to $ 150,000 of our common stock through March 4, 2018, when and if market conditions warranted and to the extent legally permissible. The Company completed the February 2017 authorization during 2018 with the repurchase of 1,385 shares with an aggregate purchase price of $ 22,633 , excluding commissions of $ 19 . Preferred Stock There were 100,000 shares authorized and no shares issued of preferred stock throughout 2020, 2019 and 2018. Accumulated Other Comprehensive Loss The following table provides a rollforward of the components of accumulated other comprehensive income (loss), net of tax as applicable: Foreign Currency Translation Pension (a) Total Balance at December 31, 2017 $ ( 45,149 ) $ ( 1,049 ) $ ( 46,198 ) Current-period other comprehensive (loss) income ( 16,524 ) 1,049 ( 15,475 ) Balance at December 30, 2018 ( 61,673 ) — ( 61,673 ) Current-period other comprehensive income 7,845 — 7,845 Balance at December 29, 2019 ( 53,828 ) — ( 53,828 ) Current-period other comprehensive income 4,187 — 4,187 Balance at January 3, 2021 $ ( 49,641 ) $ — $ ( 49,641 ) _______________ (a) During 2018, the Company terminated two frozen defined benefit plans. See Note 19 for further information. (16) Share-Based Compensation The Company has the ability to grant stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and performance compensation awards to current or prospective employees, directors, officers, consultants or advisors. During 2020, the Company’s Board of Directors and its stockholders approved the adoption of the 2020 Omnibus Award Plan (the “2020 Plan”) for the issuance of equity instruments as described above. The Company’s previous 2010 Omnibus Award Plan (as amended, the “2010 Plan”) expired in accordance with its terms in 2020. Equity grants in 2020 were issued from both the 2020 Plan and the 2010 Plan. All equity grants during 2019 and 2018 were issued from the 2010 Plan. The 2020 Plan is currently the only equity plan from which future equity awards may be granted, but outstanding awards granted under the 2010 Plan will continue to be governed by the terms of the 2010 Plan. As of January 3, 2021, there were approximately 26,691 shares of common stock available for future grants under the 2020 Plan. During the periods presented in 106 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) the consolidated financial statements, the Company settled all exercises of stock options and vesting of restricted shares, including performance shares, with treasury shares. Stock Options The Company’s current outstanding stock options have maximum contractual terms of 10 years and vest ratably over three years or cliff vest after three years . The exercise price of options granted is equal to the market price of the Company’s common stock on the date of grant. The fair value of stock options on the date of grant is calculated using the Black-Scholes Model. The aggregate intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. The following table summarizes stock option activity during 2020: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value Outstanding at December 29, 2019 11,937 $ 13.92 Granted 1,807 22.48 Exercised ( 2,395 ) 10.09 Forfeited and/or expired ( 107 ) 19.48 Outstanding at January 3, 2021 11,242 $ 16.06 6.74 $ 66,853 Vested or expected to vest at January 3, 2021 11,115 $ 16.01 6.72 $ 66,676 Exercisable at January 3, 2021 7,240 $ 13.46 5.59 $ 61,278 The total intrinsic value of options exercised during 2020, 2019 and 2018 was $ 28,111 , $ 26,947 and $ 62,744 , respectively. The weighted average grant date fair value of stock options granted during 2020, 2019 and 2018 was $ 6.02 , $ 3.40 and $ 4.12 , respectively. The weighted average grant date fair value of stock options was determined using the following assumptions: 2020 2019 2018 Risk-free interest rate 0.22 % 1.57 % 2.77 % Expected option life in years 4.50 4.50 5.62 Expected volatility 38.02 % 23.55 % 24.27 % Expected dividend yield 1.72 % 2.03 % 1.84 % The risk-free interest rate represents the U.S. Treasury zero-coupon bond yield correlating to the expected life of the stock options granted. The expected option life represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends for similar grants. The expected volatility is based on the historical market price volatility of the Company over a period equivalent to the expected option life. The expected dividend yield represents the Company’s annualized average yield for regular quarterly dividends declared prior to the respective stock option grant dates. The Black-Scholes Model has limitations on its effectiveness including that it was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable and that the model requires the use of highly subjective assumptions, such as expected stock price volatility. Employee stock option awards have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimates. 107 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Restricted Shares The Company grants RSAs and RSUs, which primarily cliff vest after 1 to 3 years. For the purposes of our disclosures, the term “Restricted Shares” applies to RSAs and RSUs collectively unless otherwise noted. The fair value of Restricted Shares granted is determined using the fair market value of the Company’s common stock on the date of grant, as set forth in the applicable plan document. The following table summarizes activity of Restricted Shares during 2020: Number of Restricted Shares Weighted Average Grant Date Fair Value Non-vested at December 29, 2019 1,071 $ 16.46 Granted 458 22.39 Vested ( 401 ) 16.11 Forfeited ( 39 ) 18.37 Non-vested at January 3, 2021 1,089 $ 19.01 The total fair value of Restricted Shares that vested in 2020, 2019 and 2018 was $ 8,634 , $ 9,996 and $ 10,060 , respectively. Performance Shares The Company grants performance-based awards to certain officers and key employees. The vesting of these awards is contingent upon meeting one or more defined operational or financial goals (a performance condition) or common stock share prices (a market condition). The quantity of shares awarded ranges from 0 % to 200 % of “Target,” as defined in the award agreement as the midpoint number of shares, based on the level of achievement of the performance and market conditions. The fair values of the performance condition awards granted in 2020, 2019 and 2018 were determined using the fair market value of the Company’s common stock on the date of grant, as set forth in the applicable plan document. Share-based compensation expense recorded for performance condition awards is reevaluated at each reporting period based on the probability of the achievement of the goal. The fair value of market condition awards granted in 2020, 2019 and 2018 were estimated using the Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that the market conditions will be achieved and is applied to the trading price of our common stock on the date of grant. The input variables are noted in the table below: 2020 2019 2018 Risk-free interest rate 1.38 % 2.51 % 2.38 % Expected life in years 3.00 3.00 3.00 Expected volatility 23.26 % 23.19 % 24.97 % Expected dividend yield (a) 0.00 % 0.00 % 0.00 % _______________ (a) The Monte Carlo method assumes a reinvestment of dividends. Share-based compensation expense is recorded ratably for market condition awards during the requisite service period and is not reversed, except for forfeitures, at the vesting date regardless of whether the market condition is met. 108 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table summarizes activity of performance shares at Target during 2020: Performance Condition Awards Market Condition Awards Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Non-vested at December 29, 2019 439 $ 15.75 362 $ 19.09 Granted 149 23.37 115 30.31 Dividend equivalent units issued (a) 7 — 6 — Vested (b) ( 148 ) 13.87 ( 130 ) 16.81 Forfeited ( 18 ) 17.29 ( 7 ) 26.32 Non-vested at January 3, 2021 429 $ 19.06 346 $ 23.65 _______________ (a) Dividend equivalent units are issued in lieu of cash dividends for non-vested performance shares. There is no weighted average fair value associated with dividend equivalent units. (b) Market condition awards exclude the vesting of an additional 80 shares, which resulted from the performance of the awards exceeding Target. The total fair value of performance condition awards that vested in 2020, 2019 and 2018 was $ 3,447 , $ 7,720 and $ 3,681 , respectively. The total fair value of market condition awards that vested in 2020, 2019 and 2018 was $ 4,910 , $ 7,135 and $ 3,143 , respectively. Modifications of Share-Based Awards During 2020, 2019 and 2018, the Company modified the terms of awards granted to seven , ten and eight employees, respectively, in connection with its Operations and Field Realignment Plan, IT Realignment Plan and G&A Realignment Plan discussed in Note 5. These modifications resulted in the accelerated vesting of certain stock options in connection with the termination of such employees. As a result, during 2020, 2019 and 2018, the Company recognized an increase in share-based compensation of $ 621 , $ 1,011 and $ 1,238 , respectively, which was included in “Reorganization and realignment costs.” Share-Based Compensation Total share-based compensation and the related income tax benefit recognized in the Company’s consolidated statements of operations were as follows: Year Ended 2020 2019 2018 Stock options $ 8,499 $ 7,685 $ 7,172 Restricted shares (a) 6,507 5,762 6,030 Performance shares: Performance condition awards 782 2,195 1,491 Market condition awards 2,521 2,023 1,987 Modifications, net 621 1,011 1,238 Share-based compensation 18,930 18,676 17,918 Less: Income tax benefit ( 2,958 ) ( 2,990 ) ( 3,418 ) Share-based compensation, net of income tax benefit $ 15,972 $ 15,686 $ 14,500 _______________ 109 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (a) 2020, 2019 and 2018 include $ 213 , $ 396 and $ 319 , respectively, related to retention awards in connection with the Company’s G&A Realignment Plan, which is included in “Reorganization and realignment costs.” See Note 5 for further information. As of January 3, 2021, there was $ 25,156 of total unrecognized share-based compensation, which will be recognized over a weighted average amortization period of 2.16 years. (17) Impairment of Long-Lived Assets The Company records impairment charges as a result of (1) the deterioration in operating performance of certain Company-operated restaurants, (2) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications, and (3) closing Company-operated restaurants and classifying such surplus properties as held for sale. Impairment charges during 2020 were primarily due to the deterioration in operating performance of certain Company-operated restaurants as a result of the COVID-19 pandemic. Additional impairment charges may be recognized by the Company in the event of further deterioration in operating performance of Company-operated restaurants. The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:” Year Ended 2020 2019 2018 Company-operated restaurants $ 7,586 $ 294 $ 4,060 Restaurants leased or subleased to franchisees — 5,308 283 Surplus properties 451 1,397 354 $ 8,037 $ 6,999 $ 4,697 (18) Investment (Loss) Income, Net Year Ended 2020 2019 2018 Gain on sale of investments, net (a) (b) $ — $ 24,496 $ 450,000 Impairment loss on other investments in equity securities ( 471 ) — — Other, net 246 1,102 736 $ ( 225 ) $ 25,598 $ 450,736 _______________ (a) In October 2019, the Company received a $ 25,000 cash settlement related to a previously held investment. As a result, the Company recorded $ 24,366 to “Investment (loss) income, net” and $ 634 to “General and administrative” for the reimbursement of related costs. (b) During 2018, the Company sold its remaining ownership interest in Inspire Brands for $ 450,000 . See Note 8 for further information. (19) Retirement Benefit Plans 401(k) Plan The Company has a 401(k) defined contribution plan (the “401(k) Plan”) for employees who meet certain minimum requirements and elect to participate. The 401(k) Plan permits employees to contribute up to 75 % of their compensation, subject to certain limitations, and provides for matching employee contributions up to 4 % of compensation and for discretionary profit sharing contributions. In connection with the matching and profit sharing contributions, the Company recognized compensation expense of $ 5,175 , $ 4,631 and $ 4,619 in 2020, 2019 and 2018, respectively. 110 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Pension Plans The Company maintained two domestic qualified defined benefit plans, the benefits under which were frozen in 1988 and for which the Company had no unrecognized prior service cost. Arby’s employees who were eligible to participate through 1988 (the “Eligible Arby’s Employees”) were covered under one of these plans. Pursuant to the terms of the Arby’s sale agreement, Wendy’s Restaurants retained the liabilities related to the Eligible Arby’s Employees under these plans and received $ 400 from the buyer for the unfunded liability related to the Eligible Arby’s Employees. The measurement date used by the Company in determining amounts related to its defined benefit plans was the same as the Company’s fiscal year end. During 2018, the Company terminated the defined benefit plans, resulting in a settlement loss of $ 1,335 recorded to “Reorganization and realignment costs.” Wendy’s Executive Plans In conjunction with the Wendy’s Merger, amounts due under supplemental executive retirement plans (collectively, the “SERP”) were funded into a restricted account. As of January 1, 2011, participation in the SERP was frozen to new entrants and future contributions, and existing participants’ balances only earn annual interest. The corresponding SERP liabilities are included in “Accrued expenses and other current liabilities” and “Other liabilities” and, in the aggregate, were $ 432 and $ 662 as of January 3, 2021 and December 29, 2019, respectively. Effective January 1, 2017, the Company implemented a non-qualified, unfunded deferred compensation plan for management and highly compensated employees, whereby participants may defer all or a portion of their base compensation and certain incentive awards on a pre-tax basis. The Company credits the amounts deferred with earnings based on the investment options selected by the participants. The Company may also make discretionary contributions to the plan. The total of participant deferrals was $ 1,108 and $ 774 at January 3, 2021 and December 29, 2019, respectively, which are included in “Other liabilities.” (20) Leases Nature of Leases The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At January 3, 2021, Wendy’s and its franchisees operated 6,828 Wendy’s restaurants. Of the 361 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 142 restaurants, owned the building and held long-term land leases for 149 restaurants and held leases covering the land and building for 70 restaurants. Wendy’s also owned 509 and leased 1,245 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment. Company as Lessee The components of lease cost for 2020 and 2019 are as follows: Year Ended 2020 2019 Finance lease cost: Amortization of finance lease assets $ 13,395 $ 11,241 Interest on finance lease liabilities 40,682 37,012 54,077 48,253 Operating lease cost 91,475 90,537 Variable lease cost (a) 59,076 58,978 Short-term lease cost 4,641 4,717 Total operating lease cost (b) 155,192 154,232 Total lease cost $ 209,269 $ 202,485 _______________ 111 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (a) Includes expenses for executory costs of $ 38,652 and $ 37,758 for 2020 and 2019, respectively, for which the Company is reimbursed by sublessees. (b) Includes $ 125,553 and $ 123,899 for 2020 and 2019, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 26,866 and $ 27,419 for 2020 and 2019, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. The components of rental expense for operating leases for 2018, as accounted for under previous guidance, were as follows: Year Ended 2018 Rental expense: Minimum rentals $ 95,749 Contingent rentals 18,971 Total rental expense (a) $ 114,720 _______________ (a) Includes rental expense related to (1) leases for Company-operated restaurants recorded to “Cost of sales,” (2) leased properties that are subsequently leased to franchisees recorded to “Franchise rental expense” and (3) leases for corporate offices and equipment recorded to “General and administrative.” Amortization of finance lease assets was $ 11,603 for 2018. The following table includes supplemental cash flow and non-cash information related to leases: Year End 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 39,349 $ 39,887 Operating cash flows from operating leases 85,689 91,824 Financing cash flows from finance leases 8,383 6,835 Right-of-use assets obtained in exchange for lease obligations: Finance lease liabilities 34,918 50,061 Operating lease liabilities 18,327 15,411 112 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table includes supplemental information related to leases: Year End January 3, 2021 December 29, 2019 Weighted-average remaining lease term (years): Finance leases 16.2 17.1 Operating leases 14.6 15.4 Weighted average discount rate: Finance leases 9.54 % 9.87 % Operating leases 5.06 % 5.09 % Supplemental balance sheet information: Finance lease assets, gross $ 261,308 $ 242,889 Accumulated amortization ( 55,155 ) ( 42,745 ) Finance lease assets 206,153 200,144 Operating lease assets 821,480 857,199 The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of January 3, 2021: Finance Leases Operating Leases Fiscal Year Company-Operated Franchise and Other Company-Operated Franchise and Other 2021 (a) $ 4,779 $ 47,503 $ 19,195 $ 70,730 2022 4,963 49,000 19,010 70,633 2023 4,927 50,632 19,037 70,460 2024 5,045 51,007 19,111 70,328 2025 5,140 51,423 19,065 69,977 Thereafter 59,126 628,162 167,441 699,756 Total minimum payments $ 83,980 $ 877,727 $ 262,859 $ 1,051,884 Less interest ( 30,716 ) ( 412,810 ) ( 77,388 ) ( 326,684 ) Present value of minimum lease payments (b) (c) $ 53,264 $ 464,917 $ 185,471 $ 725,200 _______________ (a) In addition to the 2021 future minimum rental payments, the Company expects to pay $ 5,439 primarily during 2021 related to rent deferrals obtained due to the COVID-19 pandemic. The related payable is included in “Accrued expenses and other current liabilities.” See Note 7 for further information. (b) The present value of minimum finance lease payments of $ 12,105 and $ 506,076 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively. (c) The present value of minimum operating lease payments of $ 45,346 and $ 865,325 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively. 113 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Company as Lessor The components of lease income for 2020 and 2019 are as follows: Year Ended 2020 2019 Sales-type and direct-financing leases: Selling profit $ 1,995 $ 2,285 Interest income (a) 29,067 26,333 Operating lease income 174,452 176,629 Variable lease income 58,196 56,436 Franchise rental income (b) $ 232,648 $ 233,065 _______________ (a) Included in “Interest expense, net.” (b) Includes sublease income of $ 169,921 and $ 171,126 recognized during 2020 and 2019, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 38,636 and $ 37,739 for 2020 and 2019, respectively. The components of rental income for operating leases and subleases for 2018, as accounted for under previous guidance, were as follows: Year Ended 2018 Rental income: Minimum rentals $ 184,154 Contingent rentals 19,143 Total rental income (a) $ 203,297 _______________ (a) Includes sublease income of $ 138,363 . During 2018, the Company recognized $ 27,638 in interest income related to our direct financing leases, which is included in “Interest expense, net.” 114 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of January 3, 2021: Sales-Type and Direct Financing Leases Operating Leases Fiscal Year Subleases Owned Properties Subleases Owned Properties 2021 (a) $ 31,128 $ 3,573 $ 110,920 $ 54,543 2022 31,953 2,037 111,605 56,017 2023 32,994 2,081 112,498 56,220 2024 34,965 2,089 112,541 57,311 2025 33,844 2,196 111,953 57,904 Thereafter 440,802 21,231 1,115,693 743,814 Total future minimum receipts 605,686 33,207 $ 1,675,210 $ 1,025,809 Unearned interest income ( 348,692 ) ( 16,015 ) Net investment in sales-type and direct financing leases (b) $ 256,994 $ 17,192 _______________ (a) In addition to the 2021 future minimum rental receipts, the Company expects to collect $ 5,226 primarily during 2021 related to the offer to defer base rent payments in response to the COVID-19 pandemic. The related receivable is included in “Accounts and notes receivable, net.” See Note 7 for further information. (b) The present value of minimum direct financing rental receipts of $ 5,965 and $ 268,221 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. The present value of minimum direct financing rental receipts includes a net investment in unguaranteed residual assets of $ 215 . Properties owned by the Company and leased to franchisees and other third parties under operating leases include: Year End January 3, 2021 December 29, 2019 Land $ 279,956 $ 281,792 Buildings and improvements 309,605 311,047 Restaurant equipment 1,701 1,727 591,262 594,566 Accumulated depreciation and amortization ( 170,722 ) ( 157,130 ) $ 420,540 $ 437,436 (21) Guarantees and Other Commitments and Contingencies Guarantees and Contingent Liabilities Franchisee Image Activation Incentive Programs In order to promote new restaurant development, Wendy’s has an incentive program for franchisees that provides for technical assistance fee waivers and reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants opened prior to December 31, 2022. In addition, Wendy’s has a restaurant development incentive program that provides for incremental reductions in royalty and national advertising payments for up to the first two years of operation for qualifying new restaurants for existing franchisees that sign up for the program under a new development agreement, or through an extension of their existing development agreement, and commit to incremental development of new Wendy’s restaurants. Under any extended development agreements, franchisees are also eligible for technical assistance fee waivers for restaurants opened one year in advance of their original development schedule so long as 115 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) the restaurants are opened prior to December 31, 2022. Wendy’s also provides franchisees with the option of an early 20 -year or 25 -year renewal of their franchise agreement upon completion of reimaging utilizing certain approved Image Activation reimage designs. Wendy’s also had incentive programs for 2017 available to franchisees that commenced Image Activation restaurant remodels by December 15, 2017. The remodel incentive programs provided for reductions in royalty payments for one year after the completion of construction. Lease Guarantees Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees, amounting to $ 90,348 as of January 3, 2021. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of January 3, 2021. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations. The liability recorded for our probable exposure associated with these lease guarantees was not material as of January 3, 2021. Insurance Wendy’s is self-insured for most workers’ compensation losses and purchases insurance for general liability and automotive liability losses, all subject to a $ 500 per occurrence retention or deductible limit. Wendy’s determines its liability for claims incurred but not reported for the insurance liabilities on an actuarial basis. As of January 3, 2021, the Company had $ 18,687 recorded for these insurance liabilities. Wendy’s is self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations and determines its liability for health care claims incurred but not reported based on historical claims runoff data. As of January 3, 2021, the Company had $ 3,396 recorded for these health care insurance liabilities. Letters of Credit As of January 3, 2021, the Company had outstanding letters of credit with various parties totaling $ 26,587 . Substantially all of the outstanding letters of credit include amounts outstanding against the 2019-1 Class A-1 Notes. See Note 12 for further information. We do not expect any material loss to result from these letters of credit. Purchase and Capital Commitments Beverage Agreement The Company has an agreement with a beverage vendor, which provides fountain beverage products and certain marketing support funding to the Company and its franchisees. This agreement requires minimum purchases of certain fountain beverages (“Fountain Beverages”) by the Company and its franchisees at agreed upon prices until the total contractual gallon volume usage is reached. This agreement also provides for an annual advance to be paid to the Company based on the vendor’s expectation of the Company’s annual Fountain Beverages usage, which is amortized over actual usage during the year. In January 2019, the Company amended its contract with the beverage vendor, which now expires at the later of reaching a minimum usage requirement or December 31, 2025. Beverage purchases made by the Company under this agreement during 2020, 2019 and 2018 were $ 10,986 , $ 11,440 and $ 10,108 , respectively. The Company estimates future annual purchases to be approximately $ 10,000 in 2021, $ 10,500 in 2022, $ 11,000 in 2023, $ 11,400 in 2024 and $ 11,900 in 2025 based on current pricing and the expected ratio of usage at Company-operated restaurants to franchised restaurants. As of January 3, 2021, $ 2,509 is due to the beverage vendor and is included in “Accounts payable,” principally for annual estimated payments that exceeded usage under this agreement. 116 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) IT Services Agreement In December 2019, the Company entered into an agreement to partner with a third-party global IT consultant on the Company’s new IT organization structure to leverage the consultant’s global capabilities, which the Company believes will enable a more seamless integration between its digital and corporate IT assets. Costs incurred by the Company under this agreement were $ 16,961 and $ 1,386 during 2020 and 2019, respectively. The Company’s unconditional purchase obligations under the agreement are approximately $ 17,200 in 2021, $ 15,400 in 2022, $ 13,000 in 2023, $ 12,200 in 2024 and $ 6,600 in 2025. As of January 3, 2021, $ 448 is due to the consultant and is included in “Accrued expenses and other current liabilities.” Marketing Agreement The Company has an agreement with two national broadcasters that grants the Company certain marketing and media rights. Costs incurred by the Company under this agreement were approximately $ 11,000 in each of 2019 and 2018, which are included in “Advertising funds expense.” No costs were incurred under this agreement in 2020. The Company’s unconditional purchase obligations under the agreement are approximately $ 15,400 in 2021, $ 12,900 in 2022, $ 13,400 in 2023 and $ 12,700 in 2024. (22) Transactions with Related Parties The following is a summary of transactions between the Company and its related parties: Year Ended 2020 2019 2018 Transactions with QSCC: Wendy’s Co-Op (a) $ — $ ( 504 ) $ ( 470 ) Lease income (b) ( 217 ) ( 217 ) ( 215 ) TimWen lease and management fee payments (c) $ 16,130 $ 16,660 $ 13,044 Yellow Cab royalty, advertising fund, lease and other income (d) $ 1,090 $ — $ — _______________ Transactions with QSCC (a) Wendy’s has a purchasing co-op relationship structure (the “Wendy’s Co-op”) with its franchisees that establishes Quality Supply Chain Co-op, Inc. (“QSCC”). QSCC manages, for the Wendy’s system in the U.S. and Canada, contracts for the purchase and distribution of food, proprietary paper, operating supplies and equipment under national agreements with pricing based upon total system volume. QSCC’s supply chain management facilitates continuity of supply and provides consolidated purchasing efficiencies while monitoring and seeking to minimize possible obsolete inventory throughout the Wendy’s supply chain in the U.S. and Canada. Wendy’s and its franchisees pay sourcing fees to third-party vendors on certain products sourced by QSCC. Such sourcing fees are remitted by these vendors to QSCC and are the primary means of funding QSCC’s operations. Should QSCC’s sourcing fees exceed its expected needs, QSCC’s board of directors may return some or all of the excess to its members in the form of a patronage dividend. Wendy’s recorded its share of patronage dividends of $ 504 and $ 470 in 2019 and 2018, respectively, which are included as a reduction of “Cost of sales.” There were no patronage dividends recorded during 2020. (b) Pursuant to a lease agreement entered into on January 1, 2017, Wendy’s leased 14,333 square feet of office space to QSCC for an annual base rental of $ 215 . In November 2018, the lease agreement was amended to increase the leased square footage to 14,493 and to increase the annual base rental to $ 217 . The lease was further amended in December 2020 to extend the lease term by one year to December 31, 2021. The Company received $ 217 , $ 217 and $ 215 of lease income from QSCC during 2020, 2019 and 2018, respectively, which has been recorded to “Franchise rental income.” 117 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) TimWen lease and management fee payments (c) A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen, which are then subleased to franchisees for the operation of Wendy’s/Tim Hortons combo units in Canada. Wendy’s paid TimWen $ 16,339 , $ 16,867 and $ 13,256 under these lease agreements during 2020, 2019 and 2018, respectively. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $ 209 , $ 207 and $ 212 during 2020, 2019 and 2018, respectively, which has been included as a reduction to “General and administrative.” Transactions with Yellow Cab (d) Certain family members and affiliates of Mr. Nelson Peltz, our Chairman, and Mr. Peter May, our Vice Chairman, as well as Mr. Matthew Peltz, a director of the Company, hold indirect, minority ownership interests in operating companies managed by Yellow Cab Holdings, LLC (“Yellow Cab”), a Wendy’s franchisee, that as of January 3, 2021 owned and operated 24 Wendy’s restaurants. During the three months ended January 3, 2021, the Company recognized $ 1,090 in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of January 3, 2021, $ 298 was due from Yellow Cab for such payments, which is included in “Accounts and notes receivable, net.” In November 2020, the Company submitted a consortium bid together with a group of pre-qualified franchisees (of which Yellow Cab was a member) to acquire the Wendy’s restaurants owned by NPC, the Company’s largest franchisee, which filed for chapter 11 bankruptcy in July 2020. As part of the consortium bid, in November 2020, the Company received deposits from each of the pre-qualified franchisees (including Yellow Cab), which amounts were transferred to a third-party escrow account pending resolution of the bankruptcy sale process. The Yellow Cab deposit is included in “Accrued expenses and other current liabilities” and an amount equal to that deposit is being held in escrow and is included in “Prepaid expenses and other current assets” as of January 3, 2021. On January 7, 2021, following a court-approved mediation process, Yellow Cab was selected as the purchaser for 54 of NPC’s Wendy’s restaurants and, at closing, its deposit will be applied against the purchase price for the restaurants. See Note 4 for further information. (23) Legal and Environmental Matters The Company is involved in litigation and claims incidental to our business. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate accruals for continuing operations for all of our legal and environmental matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or 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 inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period. Certain of the Company’s present and former directors have been named in two putative shareholder derivative complaints arising out of the cybersecurity incidents that affected certain of our franchisees in 2015 and 2016. The first case, brought by James Graham in the U.S. District Court for the Southern District of Ohio (the “Graham Case”), asserts claims of breach of fiduciary duty, waste of corporate assets, unjust enrichment and gross mismanagement, and additionally names one non-director executive officer of the Company. The second case, brought by Thomas Caracci in the U.S. District Court for the Southern District of Ohio (the “Caracci Case”), asserts claims of breach of fiduciary duty and violations of Section 14(a) and Rule 14a-9 of the Securities Exchange Act of 1934. Collectively, the plaintiffs seek a judgment on behalf of the Company for all damages incurred or that will be incurred as a result of the alleged wrongful acts or omissions, a judgment ordering disgorgement of all profits, benefits, and other compensation obtained by the named individual defendants, a judgment directing the Company to reform its governance and internal procedures, attorneys’ fees and other costs. The Graham Case and the Caracci Case have been consolidated and on December 21, 2018, the court issued an order naming Graham and his counsel as lead in the case. On January 31, 2019, Graham filed a consolidated verified shareholder derivative complaint with the court. On January 24, 2020, the court granted preliminary approval of the settlement filed in this case. The settlement is subject to the notice and objection provisions set forth therein, and to final approval by the court. If approved, the settlement will resolve and dismiss the claims asserted in these actions. 118 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (24) Advertising Costs and Funds We maintain U.S. and Canadian national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs. Contributions to the Advertising Funds are required from both Company-operated and franchised restaurants and are based on a percentage of restaurant sales. In addition to the contributions to the Advertising Funds, Company-operated and franchised restaurants make additional contributions to other local and regional advertising programs. Restricted assets and related liabilities of the Advertising Funds at January 3, 2021 and December 29, 2019 are as follows: Year End January 3, 2021 December 29, 2019 Cash and cash equivalents (a) $ 77,279 $ 23,973 Accounts receivable, net 63,252 54,394 Other assets 1,775 4,009 Advertising funds restricted assets $ 142,306 $ 82,376 Accounts payable (a) $ 123,064 $ 66,749 Accrued expenses and other current liabilities 17,447 17,446 Advertising funds restricted liabilities $ 140,511 $ 84,195 _______________ (a) Increases during 2020 are due to the timing of payments to vendors. Advertising expenses included in “Cost of sales” totaled $ 29,671 , $ 29,954 and $ 27,939 in 2020, 2019 and 2018, respectively. (25) Geographic Information The table below presents revenues and properties information by geographic area: U.S. International Total 2020 Revenues $ 1,635,696 $ 98,129 $ 1,733,825 Properties 879,806 36,083 915,889 2019 Revenues $ 1,606,619 $ 102,383 $ 1,709,002 Properties 941,607 35,393 977,000 2018 Revenues $ 1,495,639 $ 94,297 $ 1,589,936 Properties 990,992 32,275 1,023,267 119 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (26) Segment Information The Company is comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating Franchise Flips and providing other development-related services to franchisees. The Company measures segment profit based on segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. When the Company’s chief operating decision maker reviews balance sheet information, it is at a consolidated level. The accounting policies of the Company’s segments are the same as those described in Note 1. Revenues by segment are as follows: Year Ended 2020 2019 2018 Wendy’s U.S. $ 1,431,382 $ 1,404,307 $ 1,312,491 Wendy’s International 65,642 68,198 67,630 Global Real Estate & Development 236,801 236,497 209,815 Total revenues $ 1,733,825 $ 1,709,002 $ 1,589,936 The following table reconciles profit by segment to the Company’s consolidated income before income taxes: Year Ended 2020 2019 2018 Wendy’s U.S. (a) $ 393,314 $ 369,193 $ 355,455 Wendy’s International 20,119 20,246 25,597 Global Real Estate & Development 100,731 107,116 110,632 Total segment profit 514,164 496,555 491,684 Advertising funds surplus 2,904 1,337 4,153 Unallocated general and administrative (b) ( 94,256 ) ( 81,230 ) ( 104,208 ) Depreciation and amortization ( 132,775 ) ( 131,693 ) ( 128,879 ) System optimization gains, net 3,148 1,283 463 Reorganization and realignment costs ( 16,030 ) ( 16,965 ) ( 9,068 ) Impairment of long-lived assets ( 8,037 ) ( 6,999 ) ( 4,697 ) Unallocated other operating income, net 190 291 444 Interest expense, net ( 117,737 ) ( 115,971 ) ( 119,618 ) Loss on early extinguishment of debt — ( 8,496 ) ( 11,475 ) Investment (loss) income, net ( 225 ) 25,598 450,736 Other income, net 1,449 7,771 5,381 Income before income taxes $ 152,795 $ 171,481 $ 574,916 _______________ (a) 2020 includes advertising funds expense of $ 14,600 related to the Company funding of incremental advertising. (b) Includes corporate overhead costs, such as employee compensation and related benefits. 2018 also includes the impact of legal reserves for a settlement of the financial institutions class action of $ 27,500 . 120 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Net income (loss) of our equity method investments for the Brazil JV and TimWen are included in segment profit for the Wendy’s International and Global Real Estate & Development segments, respectively. Net income (loss) of equity method investments by segment was as follows: Year Ended 2020 2019 2018 Wendy’s International $ ( 417 ) $ ( 1,022 ) $ ( 1,344 ) Global Real Estate & Development 6,513 9,695 9,420 Total net income of equity method investments $ 6,096 $ 8,673 $ 8,076 (27) Quarterly Financial Information (Unaudited) The tables below set forth summary unaudited consolidated quarterly financial information for 2020 and 2019. The Company reports on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. During 2020, the Company’s first, second and third fiscal quarters contained 13 weeks and the Company’s fourth quarter contained 14 weeks. All of the Company’s fiscal quarters in 2019 contained 13 weeks. 2020 Quarter Ended (a) March 29 June 28 September 27 January 3 Revenues $ 404,960 $ 402,306 $ 452,242 $ 474,317 Cost of sales 149,999 140,626 159,545 164,737 Operating profit 48,732 60,661 81,348 78,567 Net income $ 14,441 $ 24,904 $ 39,753 $ 38,734 Basic income per share $ .06 $ .11 $ .18 $ .17 Diluted income per share $ .06 $ .11 $ .17 $ .17 2019 Quarter Ended (b) March 31 June 30 September 29 December 29 Revenues $ 408,583 $ 435,348 $ 437,880 $ 427,191 Cost of sales 142,579 151,092 152,425 151,434 Operating profit 66,266 80,573 79,023 36,717 Net income $ 31,894 $ 32,386 $ 46,127 $ 26,533 Basic income per share $ .14 $ .14 $ .20 $ .12 Diluted income per share $ .14 $ .14 $ .20 $ .11 _______________ (a) The Company’s consolidated statements of operation in fiscal 2020 were significantly impacted by the advertising funds deficit and reorganization and realignment costs. The pre-tax impact of the advertising funds deficit for the first, second and third quarters was $ 1,387 , $ 3,205 and $ 7,293 , respectively. The pre-tax impact of reorganization and realignment costs for the first, second, third, and fourth quarters was $ 3,910 , $ 2,911 , $ 3,375 and $ 5,834 , respectively (see Note 5 for further information). (b) The Company’s consolidated statements of operations in fiscal 2019 were significantly impacted by investment income, net, franchise support and other costs, reorganization and realignment costs and loss on early extinguishment of debt. The pre-tax impact of investment income, net for the fourth quarter was $ 24,599 (see Note 8 for further information). The pre-tax impact of franchise support and other costs for the fourth quarter included approximately $ 16,400 to support U.S. franchisees in preparation for the launch of breakfast across the U.S. system on March 2, 2020. The pre-tax impact of reorganization and realignment costs for the fourth quarter was $ 12,194 (see Note 5 for further information). The pre-tax impact of loss on early extinguishment of debt for the second and fourth quarters was $ 7,150 and $ 1,346 , respectively (see Note 12 for further information). 121 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.