Wendy's Co 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Introduction This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021 (the “Form 10-K”). There have been no material changes as of April 4, 2021 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II. Other Information” of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”). The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the United States (the “U.S.”) based on traffic share, and the third largest globally with 6,838 restaurants in the U.S. and 30 foreign countries and U.S. territories as of April 4, 2021. Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty ® desserts and kids’ meals. In addition, Wendy’s restaurants sell a variety of promotional products on a limited time basis. In March 2020, Wendy’s entered the breakfast daypart across the U.S. system. Wendy’s breakfast menu features a variety of breakfast sandwiches, biscuits and croissants, sides such as seasoned potatoes, oatmeal bars and seasonal fruit, and a beverage platform that includes hot coffee, cold brew iced coffee and our vanilla and chocolate Frosty-ccino iced coffee. 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 franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company reports on the segment profit for each of the three segments described above. 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. See “Results of Operations” below and Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information. The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three-month periods presented herein contain 13 weeks. All references to years, quarters and months relate to fiscal periods rather than calendar periods. 25 Executive Overview Our Business As of April 4, 2021, the Wendy’s restaurant system was comprised of 6,838 restaurants, with 5,885 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 362 were operated by the Company and 5,523 were operated by a total of 228 franchisees. In addition, at April 4, 2021, there were 953 Wendy’s restaurants in operation in 30 foreign countries and U.S. territories, all of which were franchised. The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of April 4, 2021. Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather. The COVID-19 pandemic has had and may continue to have the effect of heightening the impact of many of these factors. Wendy’s long-term growth opportunities include investing in accelerated global growth through (1) building our breakfast daypart, (2) continued implementation of consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint through targeted U.S. expansion and accelerated international expansion through same-restaurant sales growth and new restaurant development, including the Company’s plan to open Company-operated restaurants in the United Kingdom (“U.K.”) in early June of 2021. Key Business Measures We track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure: • Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one fiscal week are excluded from same-restaurant sales. For fiscal 2020, same-restaurant sales excluded the impact of a 53rd operating week. In fiscal 2020, same-restaurant sales compared the 52 weeks from December 30, 2019 through December 27, 2020 to the 52 weeks from December 31, 2018 through December 29, 2019. For fiscal 2021, same-restaurant sales will compare the 52 weeks from January 4, 2021 through January 2, 2022 to the 52 weeks from January 6, 2020 through January 3, 2021. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes. • Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs. • Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company’s royalty and advertising funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and profitability. The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability. 26 Same-restaurant sales and systemwide sales exclude sales from Argentina and Venezuela due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary. The Company believes its presentation of same-restaurant sales, restaurant margin and systemwide sales provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales and systemwide sales, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand. The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure. First Quarter 2021 Financial Highlights • Revenue increased 13.6% to $460.2 million in the first quarter of 2021 compared to $405.0 million in the first quarter of 2020; • Global same-restaurant sales increased 13.0%, U.S. same-restaurant sales increased 13.5% and international same-restaurant sales increased 7.9%; • Company-operated restaurant margin was 17.0% in the first quarter of 2021, an increase of 690 basis points; and • Net income was $41.4 million in the first quarter of 2021 compared to $14.4 million in the first quarter of 2020. COVID-19 Update On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic. 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. In response to the pandemic, in March 2020, Wendy’s updated its brand standard to include the closure of all dining rooms except where there were specific needs, or a drive-thru or pick-up window option was not available, subject to applicable federal, state and local requirements. Substantially all Wendy’s restaurants continued to offer drive-thru and delivery service to our customers. During the second quarter of 2020, the Company began to implement its restaurant and dining room reopening process through a phased approach in accordance with federal, state and local requirements, with customer and team member safety as its top priority. Dining rooms have been re-opening at each restaurant owner’s discretion, subject to applicable regulatory restrictions. As of April 4, 2021, approximately 85% of dining rooms were open across the Wendy’s system offering carryout and, in some cases, dine in services. Global systemwide same-restaurant sales during the first quarter of 2021 increased 13.0%, in part due to a significant increase in customer count compared with the adversely impacted fiscal month of March 2020. Breakfast Wendy’s long-term growth opportunities include investing in accelerated global growth, which includes building upon our breakfast daypart. Since the launch of breakfast across the U.S. system on March 2, 2020, same-restaurant sales have benefited from this new daypart, with breakfast contributing 3.7% to U.S. same-restaurant sales during the first quarter of 2021. The Company expects to fund $15.0 million of incremental advertising to support the breakfast daypart during 2021. 27 Digital Wendy’s long-term growth opportunities include accelerating same-restaurant sales through continued implementation of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program and establishing delivery agreements with third-party vendors. The Company’s digital business continues to grow and represented approximately 7.5% of U.S. systemwide sales during the first quarter of 2021, which is more than double the amount in the first quarter of 2020. 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 realigned 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 $7.0 million to $9.0 million, of which approximately $6.5 million to $8.5 million will be cash expenditures, related to the Operations and Field Realignment Plan. Costs related to the Operations and Field Realignment Plan are recorded to “Reorganization and realignment costs.” During the three months ended April 4, 2021, the Company recognized costs totaling $0.3 million, which primarily included severance and related employee costs. The Company expects to incur additional costs aggregating approximately $3.0 million to $5.0 million, comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs and make the majority of the remaining cash expenditures associated with the Operations and Field Realignment Plan during the remainder of 2021. NPC Quality Burgers, Inc. (“NPC”) As previously announced, NPC, formerly 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. During the three months ended April 4, 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 were sold to Wendy’s approved franchisees. Under the transaction, FRG acquired 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 acquired the other half of NPC’s Wendy’s restaurants in the other four markets. The Company did not acquire any restaurants as part of this transaction. 28 Results of Operations The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the first quarter of 2021 and 2020. First Quarter 2021 2020 Change Revenues: Sales $ 189.1 $ 166.8 $ 22.3 Franchise royalty revenue and fees 122.8 101.7 21.1 Franchise rental income 58.9 57.9 1.0 Advertising funds revenue 89.4 78.6 10.8 460.2 405.0 55.2 Costs and expenses: Cost of sales 156.9 150.0 6.9 Franchise support and other costs 7.7 8.0 (0.3) Franchise rental expense 32.6 29.3 3.3 Advertising funds expense 94.2 80.0 14.2 General and administrative 52.6 51.6 1.0 Depreciation and amortization 31.5 31.0 0.5 System optimization gains, net (0.5) (0.3) (0.2) Reorganization and realignment costs 4.9 3.9 1.0 Impairment of long-lived assets 0.6 4.6 (4.0) Other operating income, net (3.4) (1.8) (1.6) 377.1 356.3 20.8 Operating profit 83.1 48.7 34.4 Interest expense, net (28.8) (28.5) (0.3) Other income, net 0.2 1.1 (0.9) Income before income taxes 54.5 21.3 33.2 Provision for income taxes (13.1) (6.9) (6.2) Net income $ 41.4 $ 14.4 $ 27.0 29 First Quarter 2021 % of Total Revenues 2020 % of Total Revenues Revenues: Sales $ 189.1 41.1 % $ 166.8 41.2 % Franchise royalty revenue and fees: Franchise royalty revenue 108.3 23.5 % 95.4 23.6 % Franchise fees 14.5 3.2 % 6.3 1.5 % Total franchise royalty revenue and fees 122.8 26.7 % 101.7 25.1 % Franchise rental income 58.9 12.8 % 57.9 14.3 % Advertising funds revenue 89.4 19.4 % 78.6 19.4 % Total revenues $ 460.2 100.0 % $ 405.0 100.0 % First Quarter 2021 % of Sales 2020 % of Sales Cost of sales: Food and paper $ 54.8 29.0 % $ 52.5 31.5 % Restaurant labor 60.1 31.8 % 57.0 34.2 % Occupancy, advertising and other operating costs 42.0 22.2 % 40.5 24.2 % Total cost of sales $ 156.9 83.0 % $ 150.0 89.9 % First Quarter 2021 % of Sales 2020 % of Sales Restaurant margin $ 32.2 17.0 % $ 16.8 10.1 % The tables below present certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein. First Quarter 2021 2020 Key business measures: U.S. same-restaurant sales: Company-operated restaurants 13.0 % (0.7) % Franchised restaurants 13.6 % 0.1 % Systemwide 13.5 % 0.0 % International same-restaurant sales (a) 7.9 % (1.6) % Global same-restaurant sales: Company-operated restaurants 13.0 % (0.7) % Franchised restaurants (a) 13.0 % (0.1) % Systemwide (a) 13.0 % (0.2) % ________________ (a) Includes international franchised restaurants same-restaurant sales (excluding Argentina and Venezuela due to the impact of the highly inflationary economies of those countries). 30 First Quarter 2021 2020 Key business measures (continued): Systemwide sales: (a) Company-operated $ 189.1 $ 166.8 U.S. franchised 2,458.3 2,174.2 U.S. systemwide 2,647.4 2,341.0 International franchised (b) 303.6 272.6 Global systemwide $ 2,951.0 $ 2,613.6 ________________ (a) During the first quarter of 2021 and 2020, global systemwide sales increased 12.5% and 1.0%, respectively, U.S. systemwide sales increased 13.1% and 1.0%, respectively, and international franchised sales increased 7.3% and 1.0%, respectively, on a constant currency basis. (b) Excludes Argentina and Venezuela due to the impact of the highly inflationary economies of those countries. First Quarter Company-operated U.S. Franchised International Franchised Systemwide Restaurant count: Restaurant count at January 3, 2021 361 5,520 947 6,828 Opened 2 18 18 38 Closed (a) (1) (15) (12) (28) Restaurant count at April 4, 2021 362 5,523 953 6,838 ________________ (a) Excludes restaurants temporarily closed due to the impact of the COVID-19 pandemic. Sales First Quarter 2021 2020 Change Sales $ 189.1 $ 166.8 $ 22.3 The increase in sales for the first quarter of 2021 was primarily due to a 13.0% increase in Company-operated same-restaurant sales. Company-operated same-restaurant sales increased due to (1) higher average check and (2) the positive impact from the breakfast daypart, partially offset by a decrease in customer count. Company-operated same-restaurant sales benefited from government stimulus payments to consumers during the first quarter of 2021. Franchise Royalty Revenue and Fees First Quarter 2021 2020 Change Franchise royalty revenue $ 108.3 $ 95.4 $ 12.9 Franchise fees 14.5 6.3 8.2 $ 122.8 $ 101.7 $ 21.1 The increase in franchise royalty revenue during the first quarter of 2021 was primarily due to a 13.0% increase in global franchise same-restaurant sales. Franchise same-restaurant sales increased due to (1) higher average check and (2) the positive impact from the breakfast daypart, partially offset by a decrease in customer count. Franchise same-restaurant sales benefited from government stimulus payments to consumers during the first quarter of 2021. 31 The increase in franchise fees during the first quarter of 2021 was primarily due to (1) an increase in fees for providing information technology services to franchisees and (2) the accelerated recognition of fees associated with development agreements that were canceled primarily as a result of the NPC bankruptcy sale process. Franchise Rental Income First Quarter 2021 2020 Change Franchise rental income $ 58.9 $ 57.9 $ 1.0 The increase in franchise rental income during the first quarter of 2021 was primarily due to assigning certain leases to a franchisee during 2020. Advertising Funds Revenue First Quarter 2021 2020 Change Advertising funds revenue $ 89.4 $ 78.6 $ 10.8 The Company maintains two national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales of the franchised restaurants. The increase in advertising funds revenue during the first quarter of 2021 was primarily due to an increase in franchise same-restaurant sales in the U.S. and Canada. Cost of Sales, as a Percent of Sales First Quarter 2021 2020 Change Food and paper 29.0 % 31.5 % (2.5) % Restaurant labor 31.8 % 34.2 % (2.4) % Occupancy, advertising and other operating costs 22.2 % 24.2 % (2.0) % 83.0 % 89.9 % (6.9) % The decrease in cost of sales, as a percent of sales, during the first quarter of 2021 was primarily due to (1) higher average check and (2) lower commodity costs. These impacts were partially offset by (1) restaurant labor rate increases and (2) a decrease in customer count. Franchise Support and Other Costs First Quarter 2021 2020 Change Franchise support and other costs $ 7.7 $ 8.0 $ (0.3) The decrease in franchise support and other costs during the first quarter of 2021 was primarily due to investments made during the first quarter of 2020 to support U.S. franchisees in preparation of the national launch of breakfast on March 2, 2020. This decrease was partially offset by an increase in costs incurred to provide information technology services to our franchisees. Franchise Rental Expense First Quarter 2021 2020 Change Franchise rental expense $ 32.6 $ 29.3 $ 3.3 The increase in franchise rental expense during the first quarter of 2021 was primarily due to the impact of assigning certain leases to a franchisee in 2020. 32 Advertising Funds Expense First Quarter 2021 2020 Change Advertising funds expense $ 94.2 $ 80.0 $ 14.2 On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to exceed advertising funds revenue by approximately $21.0 million for 2021, which includes (1) the Company’s decision to fund up to $15.0 million of incremental advertising and (2) the amount by which advertising funds revenue exceeded advertising funds expense in 2020 (excluding the Company’s funding of $14.6 million of incremental advertising) and 2019 of approximately $6.0 million. During the first quarter of 2021, advertising funds expense increased due to (1) an increase in franchise same-restaurant sales in the U.S. and Canada and (2) the recognition of $4.8 million of the expected advertising spend in excess of advertising funds revenue. General and Administrative First Quarter 2021 2020 Change Incentive compensation $ 7.4 $ 3.0 $ 4.4 Travel-related expenses 0.5 3.1 (2.6) Other, net 44.7 45.5 (0.8) $ 52.6 $ 51.6 $ 1.0 The increase in general and administrative expenses during the first quarter of 2021 was primarily due to an increase in incentive compensation accruals due to higher operating performance in the first quarter of 2021 versus the first quarter of 2020, partially offset by a decrease in travel-related expenses as a result of reduced travel. Depreciation and Amortization First Quarter 2021 2020 Change Restaurants $ 19.4 $ 19.5 $ (0.1) Technology support, corporate and other 12.1 11.5 0.6 $ 31.5 $ 31.0 $ 0.5 The increase in depreciation and amortization during the first quarter of 2021 was primarily due to an increase in depreciation and amortization for technology investments. System Optimization Gains, Net First Quarter 2021 2020 Change System optimization gains, net $ (0.5) $ (0.3) $ (0.2) System optimization gains, net for the first quarter of 2021 and 2020 were primarily comprised of post-closing adjustments on previous sales of restaurants. 33 Reorganization and Realignment Costs First Quarter 2021 2020 Change Operations and field realignment $ 0.2 $ — $ 0.2 IT realignment — 3.5 (3.5) G&A realignment — 0.3 (0.3) System optimization initiative 4.7 0.1 4.6 $ 4.9 $ 3.9 $ 1.0 In December 2019, the Company’s Board of Directors approved the IT Realignment Plan to realign and reinvest resources in its IT organization to strengthen its ability to accelerate growth. 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. During the first quarter of 2020, the Company recognized costs associated with the IT Realignment Plan totaling $3.5 million, which primarily included third-party and other costs. The Company does not expect to incur any material additional costs under the IT Realignment Plan. As part of the Company’s system optimization initiative, the Company expects to continue to optimize the Wendy’s system through strategic restaurant acquisitions and dispositions, as well as by facilitating franchisee-to-franchisee restaurant transfers. During the first quarter of 2021, the Company recognized costs associated with its system optimization initiative totaling $4.7 million, which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the NPC bankruptcy sale process. The Company expects to recognize a gain of approximately $1.4 million related to the write-off of certain NPC-related lease liabilities upon final termination of the leases. Impairment of Long-Lived Assets First Quarter 2021 2020 Change Impairment of long-lived assets $ 0.6 $ 4.6 $ (4.0) The decrease in impairment charges during the first quarter of 2021 was primarily driven by the expected deterioration in operating performance of certain Company-operated restaurants in the first quarter of 2020 as a result of the COVID-19 pandemic. Other Operating Income, Net First Quarter 2021 2020 Change Gains on sales-type leases $ (1.9) $ (0.6) $ (1.3) Equity in earnings in joint ventures, net (1.6) (1.4) (0.2) Other, net 0.1 0.2 (0.1) $ (3.4) $ (1.8) $ (1.6) The change in other operating income, net during the first quarter of 2021 was primarily due to gains on new and modified sales-type leases. Interest Expense, Net First Quarter 2021 2020 Change Interest expense, net $ 28.8 $ 28.5 $ 0.3 Interest expense, net increased during the first quarter of 2021 primarily due to higher commitment fees on our Class A-1 Notes. 34 Other Income, Net First Quarter 2021 2020 Change Other income, net $ 0.2 $ 1.1 $ (0.9) Other income, net decreased during the first quarter of 2021 primarily due to lower interest income earned on our cash equivalents. Provision for Income Taxes First Quarter 2021 2020 Change Income before income taxes $ 54.5 $ 21.3 $ 33.2 Provision for income taxes (13.1) (6.9) (6.2) Effective tax rate on income 24.1 % 32.1 % (8.0) % Our effective tax rates for the first quarter of 2021 and 2020 were impacted by variations in income before income taxes, including uncertainty in 2020 income before income taxes arising from the COVID-19 pandemic, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The decrease in the effective tax rate for the first quarter of 2021 compared with the first quarter of 2020 was primarily due to a decrease in the tax effect of our foreign operations, partially offset by a reduction in the benefit of share-based compensation. Segment Information See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments. Wendy’s U.S. First Quarter 2021 2020 Change Sales $ 189.1 $ 166.8 $ 22.3 Franchise royalty revenue 96.8 84.8 12.0 Franchise fees 11.9 5.3 6.6 Advertising fund revenue 84.2 74.1 10.1 Total revenues $ 382.0 $ 331.0 $ 51.0 Segment profit $ 112.1 $ 81.8 $ 30.3 The increase in Wendy’s U.S. revenues during the first quarter of 2021 was primarily due to an increase in systemwide same-restaurant sales. Same-restaurant sales increased due to (1) higher average check and (2) the positive impact from the breakfast daypart, partially offset by a decrease in customer count. Wendy’s U.S. revenues also benefited from higher franchise fees, primarily due to an increase in fees for providing information technology services to franchisees. The increase in Wendy’s U.S. segment profit during the first quarter of 2021 was primarily due to (1) higher revenues and (2) lower cost of sales, as a percent of sales, for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales.” These changes were partially offset by advertising funds expense of $3.5 million related to the expected Company funding of incremental advertising during 2021. 35 Wendy’s International First Quarter 2021 2020 Change Franchise royalty revenue $ 11.6 $ 10.5 $ 1.1 Franchise fees 1.4 0.5 0.9 Advertising fund revenue 5.2 4.5 0.7 Total revenues $ 18.2 $ 15.5 $ 2.7 Segment profit $ 7.7 $ 5.1 $ 2.6 The increase in Wendy’s International revenues during the first quarter of 2021 was primarily due to an increase in same-restaurant sales. Same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count. The increase in Wendy’s International segment profit during the first quarter of 2021 was primarily due to higher revenues. Global Real Estate & Development First Quarter 2021 2020 Change Franchise fees $ 1.1 $ 0.5 $ 0.6 Franchise rental income 58.9 57.9 1.0 Total revenues $ 60.0 $ 58.4 $ 1.6 Segment profit $ 26.3 $ 26.5 $ (0.2) The increase in Global Real Estate & Development revenues during the first quarter of 2021 was primarily due to higher franchise rental income. See “Franchise Rental Income” above for further information. The decrease in Global Real Estate & Development segment profit during the first quarter of 2021 was primarily due to a decrease in net rental income, reflecting the impact of assigning certain leases to a franchisee during 2020, partially offset by gains on new and modified sales-type leases. Liquidity and Capital Resources Cash Flows Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized financing facility. Our principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to stockholders. Our anticipated cash requirements for the remainder of 2021, exclusive of operating cash flow requirements, consist principally of: • capital expenditures of approximately $70.0 million to $80.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $80.0 million to $90.0 million; • cash dividends aggregating approximately $66.4 million as discussed below in “Dividends;” and • potential stock repurchases of up to $61.7 million, of which $11.7 million was repurchased subsequent to April 4, 2021 through May 5, 2021, as discussed below in “Stock Repurchases.” Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months. We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us. 36 The table below summarizes our cash flows from operating, investing and financing activities for the first three months of 2021 and 2020: First Quarter 2021 2020 Change Net cash provided by (used in): Operating activities $ 85.8 $ (19.4) $ 105.2 Investing activities (5.1) (12.1) 7.0 Financing activities (91.7) 63.4 (155.1) Effect of exchange rate changes on cash 0.9 (5.1) 6.0 Net (decrease) increase in cash, cash equivalents and restricted cash $ (10.1) $ 26.8 $ (36.9) Operating Activities Cash provided by (used in) operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities. Cash provided by (used in) operating activities was $85.8 million and $(19.4) million in the first quarter of 2021 and 2020, respectively. The change was primarily due to (1) higher net income, adjusted for non-cash expenses, (2) a cash payment of $24.7 million related to the settlement of the financial institutions class action in January 2020, (3) the timing of receipt of franchisee rental payments, (4) the timing of receipt of vendor incentives and (5) a decrease in payments for incentive compensation for the 2020 fiscal year paid in 2021. These changes were partially offset by the timing of payments for marketing expenses of the national advertising funds. Investing Activities Cash used in investing activities was $5.1 million and $12.1 million in the first quarter of 2021 and 2020, respectively. The change was primarily due to (1) the net settlement of deposits associated with the Company’s consortium bid to acquire NPC’s Wendy’s restaurants of $4.9 million in the first quarter of 2021 and (2) a decrease in capital expenditures of $2.3 million. Financing Activities Cash (used in) provided by financing activities was $(91.7) million and $63.4 million in the first quarter of 2021 and 2020, respectively. The change was primarily due to (1) the impact of the draw downs under the 2019-1 Class A-1 Notes and the Company’s other lines of credit in the first quarter of 2020 of $153.3 million and (2) an increase in repurchases of common stock of $10.5 million. These changes were partially offset by a decrease in dividends of $6.6 million. Long-Term Debt, Including Current Portion Except as described below, there were no material changes to the terms of any debt obligations since January 3, 2021. The Company was in compliance with its debt covenants as of April 4, 2021. See Note 7 of the Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations. A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6.0 million. In March 2020, the Company drew down C$5.5 million under the revolving credit facility, which the Company fully repaid through repayments of C$3.0 million in the fourth quarter of 2020 and C$2.5 million in the first quarter of 2021. As a result, as of April 4, 2021, the Company had no outstanding borrowings under the Canadian revolving credit facility. Dividends On March 15, 2021, the Company paid quarterly cash dividends per share of $.09, aggregating $20.2 million. On May 12, 2021, the Company announced a dividend of $.10 per share to be paid on June 15, 2021 to stockholders of record as of June 1, 2021. If the Company pays regular quarterly cash dividends for the remainder of 2021 at the same rate as declared in the second quarter of 2021, the Company’s total cash requirement for dividends for the remainder of 2021 will be approximately $66.4 million based on the number of shares of its common stock outstanding at May 5, 2021. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any. 37 Stock Repurchases In February 2020, our Board of Directors authorized a repurchase program for up to $100.0 million 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 the three months ended April 4, 2021, the Company repurchased 2.8 million shares under the February 2020 repurchase authorization with an aggregate purchase price of $56.0 million, of which $1.2 million was accrued at April 4, 2021, and excluding commissions. As of April 4, 2021, the Company had $11.7 million of availability remaining under its February 2020 authorization. Subsequent to April 4, 2021 through May 5, 2021, the Company repurchased 0.5 million shares under the February 2020 authorization with an aggregate purchase price of $11.7 million, excluding commissions. In addition, in May 2021, the Board of Directors approved an increase of $50.0 million to the February 2020 authorization, resulting in an aggregate authorization of $150.0 million that continues to expire on February 28, 2022. The Company has $50.0 million of availability remaining under the authorization as of May 12, 2021. General Inflation, Commodities and Changing Prices We believe that general inflation did not have a significant effect on our consolidated results of operations. We attempt to manage any inflationary costs and commodity price increases through product mix and selective menu price increases. Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases. Seasonality Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year. Item 3. Quantitative and Qualitative Disclosures about Market Risk. As of April 4, 2021, there were no material changes from the information contained in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in the Form 10-K.