Wendy's Co 10-Q

Item 1. Financial Statements. THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Par Value) July 4, 2021 January 3, 2021 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 568,139 $ 306,989 Restricted cash 37,792 33,973 Accounts and notes receivable, net 103,257 109,891 Inventories 4,261 4,732 Prepaid expenses and other current assets 24,219 89,732 Advertising funds restricted assets 101,858 142,306 Total current assets 839,526 687,623 Properties 881,798 915,889 Finance lease assets 206,586 206,153 Operating lease assets 791,924 821,480 Goodwill 752,552 751,049 Other intangible assets 1,217,275 1,224,960 Investments 43,676 44,574 Net investment in sales-type and direct financing leases 302,694 268,221 Other assets 130,843 120,057 Total assets $ 5,166,874 $ 5,040,006 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 32,750 $ 28,962 Current portion of finance lease liabilities 14,547 12,105 Current portion of operating lease liabilities 45,269 45,346 Accounts payable 32,430 31,063 Accrued expenses and other current liabilities 137,991 155,321 Advertising funds restricted liabilities 109,799 140,511 Total current liabilities 372,786 413,308 Long-term debt 2,373,610 2,218,163 Long-term finance lease liabilities 521,608 506,076 Long-term operating lease liabilities 838,585 865,325 Deferred income taxes 279,837 280,755 Deferred franchise fees 89,286 89,094 Other liabilities 120,806 117,689 Total liabilities 4,596,518 4,490,410 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 222,960 and 224,268 shares outstanding, respectively 47,042 47,042 Additional paid-in capital 2,907,274 2,899,276 Retained earnings 303,475 238,674 Common stock held in treasury, at cost; 247,464 and 246,156 shares, respectively ( 2,643,361 ) ( 2,585,755 ) Accumulated other comprehensive loss ( 44,074 ) ( 49,641 ) Total stockholders’ equity 570,356 549,596 Total liabilities and stockholders’ equity $ 5,166,874 $ 5,040,006 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Amounts) Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 (Unaudited) Revenues: Sales $ 193,525 $ 164,217 $ 382,582 $ 331,015 Franchise royalty revenue and fees 136,661 103,120 259,491 204,825 Franchise rental income 60,868 56,857 119,744 114,713 Advertising funds revenue 102,283 78,112 191,723 156,713 493,337 402,306 953,540 807,266 Costs and expenses: Cost of sales 154,154 140,626 311,004 290,625 Franchise support and other costs 8,885 5,454 16,571 13,467 Franchise rental expense 34,068 31,297 66,634 60,598 Advertising funds expense 107,875 81,317 202,113 161,305 General and administrative 63,114 48,592 115,736 100,231 Depreciation and amortization 30,761 34,714 62,303 65,760 System optimization gains, net ( 30,766 ) ( 1,987 ) ( 31,282 ) ( 2,310 ) Reorganization and realignment costs 2,102 2,911 7,036 6,821 Impairment of long-lived assets 630 117 1,265 4,704 Other operating income, net ( 4,232 ) ( 1,396 ) ( 7,708 ) ( 3,328 ) 366,591 341,645 743,672 697,873 Operating profit 126,746 60,661 209,868 109,393 Interest expense, net ( 28,204 ) ( 29,085 ) ( 56,990 ) ( 57,610 ) Loss on early extinguishment of debt ( 17,917 ) — ( 17,917 ) — Other income (expense), net 161 ( 144 ) 290 932 Income before income taxes 80,786 31,432 135,251 52,715 Provision for income taxes ( 15,062 ) ( 6,528 ) ( 28,161 ) ( 13,370 ) Net income $ 65,724 $ 24,904 $ 107,090 $ 39,345 Net income per share: Basic $ .30 $ .11 $ .48 $ .18 Diluted .29 .11 .47 .17 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 (Unaudited) Net income $ 65,724 $ 24,904 $ 107,090 $ 39,345 Other comprehensive income (loss): Foreign currency translation adjustment 3,347 4,149 5,567 ( 8,358 ) Other comprehensive income (loss) 3,347 4,149 5,567 ( 8,358 ) Comprehensive income $ 69,071 $ 29,053 $ 112,657 $ 30,987 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In Thousands) Common Stock Additional Paid-In Capital Retained Earnings Common Stock Held in Treasury Accumulated Other Comprehensive Loss Total (Unaudited) Balance at January 3, 2021 $ 47,042 $ 2,899,276 $ 238,674 $ ( 2,585,755 ) $ ( 49,641 ) $ 549,596 Net income — — 41,366 — — 41,366 Other comprehensive income — — — — 2,220 2,220 Cash dividends — — ( 20,156 ) — — ( 20,156 ) Repurchases of common stock — — — ( 56,084 ) — ( 56,084 ) Share-based compensation — 5,151 — — — 5,151 Common stock issued upon exercises of stock options — ( 20 ) — 683 — 663 Common stock issued upon vesting of restricted shares — ( 2,996 ) — 817 — ( 2,179 ) Other — 49 ( 5 ) 44 — 88 Balance at April 4, 2021 $ 47,042 $ 2,901,460 $ 259,879 $ ( 2,640,295 ) $ ( 47,421 ) $ 520,665 Net income — — 65,724 — — 65,724 Other comprehensive income — — — — 3,347 3,347 Cash dividends — — ( 22,123 ) — — ( 22,123 ) Repurchases of common stock — — — ( 27,291 ) — ( 27,291 ) Share-based compensation — 5,882 — — — 5,882 Common stock issued upon exercises of stock options — 850 — 23,466 — 24,316 Common stock issued upon vesting of restricted shares — ( 959 ) — 714 — ( 245 ) Other — 41 ( 5 ) 45 — 81 Balance at July 4, 2021 $ 47,042 $ 2,907,274 $ 303,475 $ ( 2,643,361 ) $ ( 44,074 ) $ 570,356 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED (In Thousands) Common Stock Additional Paid-In Capital Retained Earnings Common Stock Held in Treasury Accumulated Other Comprehensive Loss Total (Unaudited) Balance at December 29, 2019 $ 47,042 $ 2,874,001 $ 185,725 $ ( 2,536,581 ) $ ( 53,828 ) $ 516,359 Net income — — 14,441 — — 14,441 Other comprehensive loss — — — — ( 12,507 ) ( 12,507 ) Cash dividends — — ( 26,793 ) — — ( 26,793 ) Repurchases of common stock, including accelerated share repurchase — 15,000 — ( 58,336 ) — ( 43,336 ) Share-based compensation — 4,539 — — — 4,539 Common stock issued upon exercises of stock options — 280 — 1,330 — 1,610 Common stock issued upon vesting of restricted shares — ( 4,017 ) — 726 — ( 3,291 ) Other — 33 ( 7 ) 27 — 53 Balance at March 29, 2020 $ 47,042 $ 2,889,836 $ 173,366 $ ( 2,592,834 ) $ ( 66,335 ) $ 451,075 Net income — — 24,904 — — 24,904 Other comprehensive income — — — — 4,149 4,149 Cash dividends — — ( 11,181 ) — — ( 11,181 ) Share-based compensation — 4,787 — — — 4,787 Common stock issued upon exercises of stock options — ( 902 ) — 11,361 — 10,459 Common stock issued upon vesting of restricted shares — ( 1,041 ) — 773 — ( 268 ) Other — 19 ( 3 ) 42 — 58 Balance at June 28, 2020 $ 47,042 $ 2,892,699 $ 187,086 $ ( 2,580,658 ) $ ( 62,186 ) $ 483,983 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Six Months Ended July 4, 2021 June 28, 2020 (Unaudited) Cash flows from operating activities: Net income $ 107,090 $ 39,345 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 62,303 65,760 Share-based compensation 11,033 9,326 Impairment of long-lived assets 1,265 4,704 Deferred income tax ( 2,137 ) 1,920 Non-cash rental expense, net 20,075 12,251 Change in operating lease liabilities ( 23,074 ) ( 19,233 ) Net receipt of deferred vendor incentives 3,332 7,728 System optimization gains, net ( 31,282 ) ( 2,310 ) Distributions received from joint ventures, net of equity in earnings 2,354 1,262 Long-term debt-related activities, net 21,328 3,141 Changes in operating assets and liabilities and other, net ( 13,536 ) ( 93,332 ) Net cash provided by operating activities 158,751 30,562 Cash flows from investing activities: Capital expenditures ( 24,069 ) ( 29,402 ) Acquisitions 4,879 — Dispositions 50,531 4,320 Notes receivable, net 611 138 Net cash provided by (used in) investing activities 31,952 ( 24,944 ) Cash flows from financing activities: Proceeds from long-term debt 1,100,000 153,315 Repayments of long-term debt ( 941,220 ) ( 24,271 ) Repayments of finance lease liabilities ( 5,777 ) ( 3,707 ) Deferred financing costs ( 20,873 ) ( 2,122 ) Repurchases of common stock ( 83,658 ) ( 45,137 ) Dividends ( 42,279 ) ( 37,974 ) Proceeds from stock option exercises 25,933 11,865 Payments related to tax withholding for share-based compensation ( 3,197 ) ( 3,704 ) Net cash provided by financing activities 28,929 48,265 Net cash provided by operations before effect of exchange rate changes on cash 219,632 53,883 Effect of exchange rate changes on cash 2,283 ( 3,132 ) Net increase in cash, cash equivalents and restricted cash 221,915 50,751 Cash, cash equivalents and restricted cash at beginning of period 418,241 358,707 Cash, cash equivalents and restricted cash at end of period $ 640,156 $ 409,458 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable $ 7,242 $ 6,082 Finance leases 30,863 12,962 July 4, 2021 January 3, 2021 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 568,139 $ 306,989 Restricted cash 37,792 33,973 Restricted cash, included in Advertising funds restricted assets 34,225 77,279 Total cash, cash equivalents and restricted cash $ 640,156 $ 418,241 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of July 4, 2021, the results of our operations for the three and six months ended July 4, 2021 and June 28, 2020 and cash flows for the six months ended July 4, 2021 and June 28, 2020. The results of operations for the six months ended July 4, 2021 are not necessarily indicative of the results to be expected for the full 2021 fiscal year. The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021 (the “Form 10-K”). 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. The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). 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 17 for further information. We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and six-month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years, quarters and months relate to fiscal periods rather than calendar periods. Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue. (2) Revenue Disaggregation of Revenue The following tables disaggregate revenue by segment and source: Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Three Months Ended July 4, 2021 Sales at Company-operated restaurants $ 193,279 $ 246 $ — $ 193,525 Franchise royalty revenue 106,006 13,560 — 119,566 Franchise fees (a) 14,331 1,454 1,310 17,095 Franchise rental income — — 60,868 60,868 Advertising funds revenue 96,227 6,056 — 102,283 Total revenues $ 409,843 $ 21,316 $ 62,178 $ 493,337 10 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Six Months Ended July 4, 2021 Sales at Company-operated restaurants $ 382,336 $ 246 $ — $ 382,582 Franchise royalty revenue 202,770 25,130 — 227,900 Franchise fees (a) 26,261 2,897 2,433 31,591 Franchise rental income — — 119,744 119,744 Advertising funds revenue 180,430 11,293 — 191,723 Total revenues $ 791,797 $ 39,566 $ 122,177 $ 953,540 Three Months Ended June 28, 2020 Sales at Company-operated restaurants $ 164,217 $ — $ — $ 164,217 Franchise royalty revenue 88,121 9,070 — 97,191 Franchise fees (a) 5,308 433 188 5,929 Franchise rental income — — 56,857 56,857 Advertising funds revenue 73,612 4,500 — 78,112 Total revenues $ 331,258 $ 14,003 $ 57,045 $ 402,306 Six Months Ended June 28, 2020 Sales at Company-operated restaurants $ 331,015 $ — $ — $ 331,015 Franchise royalty revenue 172,954 19,593 — 192,547 Franchise fees (a) 10,593 906 779 12,278 Franchise rental income — — 114,713 114,713 Advertising funds revenue 147,737 8,976 — 156,713 Total revenues $ 662,299 $ 29,475 $ 115,492 $ 807,266 _______________ (a) Includes fees for providing information technology services to franchisees, which are recognized as revenue as earned. Contract Balances The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers: July 4, 2021 (a) January 3, 2021 (a) Receivables, which are included in “Accounts and notes receivable, net” (b) $ 51,005 $ 57,677 Receivables, which are included in “Advertising funds restricted assets” 62,468 63,252 Deferred franchise fees (c) 98,409 97,785 _______________ (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 condensed 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 $ 9,123 and $ 89,286 as of July 4, 2021, respectively, and $ 8,691 and $ 89,094 as of January 3, 2021, respectively. 11 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Significant changes in deferred franchise fees are as follows: Six Months Ended July 4, 2021 June 28, 2020 Deferred franchise fees at beginning of period $ 97,785 $ 100,689 Revenue recognized during the period ( 6,845 ) ( 3,898 ) New deferrals due to cash received and other 7,469 1,772 Deferred franchise fees at end of period $ 98,409 $ 98,563 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 (a) $ 6,073 2022 6,298 2023 6,126 2024 5,930 2025 5,746 Thereafter 68,236 $ 98,409 _______________ (a) Represents franchise fees expected to be recognized for the remainder of 2021, which includes development-related franchise fees expected to be recognized over a duration of one year or less. (3) Acquisitions No restaurants were acquired from franchisees during the six months ended July 4, 2021 and June 28, 2020. 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. As part of the consortium bid, the Company submitted a deposit of $ 43,240 , which was 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. 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. In addition, the deposits outstanding as of January 3, 2021 were settled during the three months ended April 4, 2021 upon resolution of the bankruptcy sale process. The net settlement of deposits of $ 4,879 is included in “Acquisitions” in the condensed consolidated statements of cash flows. 12 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (4) System Optimization Gains, Net The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“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 the six months ended July 4, 2021 and June 28, 2020, the Company facilitated 19 and three Franchise Flips, respectively. In addition, during the three months ended July 4, 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees. No Company-operated restaurants were sold to franchisees during the six months ended June 28, 2020. Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.” The following is a summary of the disposition activity recorded as a result of our system optimization initiative: Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Number of restaurants sold to franchisees 47 — 47 — Proceeds from sales of restaurants $ 50,518 $ — $ 50,518 $ — Net assets sold (a) ( 16,939 ) — ( 16,939 ) — Goodwill related to sales of restaurants ( 4,847 ) — ( 4,847 ) — Net unfavorable leases (b) ( 2,939 ) — ( 2,939 ) — Gain on sales-type leases 7,156 — 7,156 — Other (c) ( 2,148 ) — ( 2,148 ) — 30,801 — 30,801 — Post-closing adjustments on sales of restaurants (d) — — 515 345 Gain on sales of restaurants, net 30,801 — 31,316 345 (Loss) gain on sales of other assets, net (e) ( 35 ) 1,987 ( 34 ) 1,965 System optimization gains, net $ 30,766 $ 1,987 $ 31,282 $ 2,310 _______________ (a) Net assets sold consist primarily of equipment. (b) During the three and six months ended July 4, 2021, the Company recorded favorable lease assets of $ 3,799 and unfavorable lease liabilities of $ 6,738 as a result of leasing and/or subleasing land, buildings, and/or leasehold improvements to franchisees, in connection with the sale of the New York Company-operated restaurants (including Manhattan). (c) The three and six months ended July 4, 2021 include a deferred gain of $ 3,500 as a result of certain contingencies related to the extension of lease terms. (d) Represents the recognition of deferred gains as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. 13 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (e) During the three and six months ended July 4, 2021, the Company received net cash proceeds of $ 10 and $ 13 , respectively, primarily from the sale of surplus and other properties. During the three and six months ended June 28, 2020, the Company received net cash proceeds of $ 4,125 and $ 4,320 , respectively, primarily from the sale of surplus and other properties. Assets Held for Sale July 4, 2021 January 3, 2021 Number of restaurants classified as held for sale — 43 Net restaurant assets held for sale (a) $ — $ 20,587 Other assets held for sale (b) $ 2,318 $ 1,732 _______________ (a) Net restaurant assets held for sale as of January 3, 2021 included New York Company-operated restaurants (excluding Manhattan) and consisted primarily of cash, inventory, property and an estimate of allocable goodwill. During the three months ended April 4, 2021, the Company also classified its four Manhattan restaurants as held for sale. (b) Other assets held for sale primarily consist of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.” (5) Reorganization and Realignment Costs The following is a summary of the initiatives included in “Reorganization and realignment costs:” Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Operations and field realignment $ 1,215 $ — $ 1,489 $ — IT realignment 6 2,847 6 6,406 G&A realignment ( 16 ) 64 ( 34 ) 331 System optimization initiative 897 — 5,575 84 Reorganization and realignment costs $ 2,102 $ 2,911 $ 7,036 $ 6,821 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. The Operations and Field Realignment Plan also includes contract terminations, including the closure of certain field offices. The Company expects to incur total costs aggregating approximately $ 6,000 to $ 8,000 related to the Operations and Field Realignment Plan. During the three and six months ended July 4, 2021, the Company recognized costs totaling $ 1,215 and $ 1,489 , respectively, which primarily included third-party and other costs. The Company expects to incur additional costs aggregating approximately $ 1,000 to $ 3,000 , 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 the remainder of 2021. 14 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following is a summary of the activity recorded as a result of the Operations and Field Realignment Plan: Three Months Ended Six Months Ended Total Incurred Since Inception July 4, 2021 July 4, 2021 Severance and related employee costs $ 79 $ 333 $ 3,446 Third-party and other costs 1,136 1,156 1,223 1,215 1,489 4,669 Share-based compensation (a) — — 621 Total operations and field realignment $ 1,215 $ 1,489 $ 5,290 _______________ (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 table below presents a rollforward of our accruals for the Operations and Field Realignment Plan, which are included in “Accrued expenses and other current liabilities” as of July 4, 2021. Balance January 3, 2021 Charges Payments Balance July 4, 2021 Severance and related employee costs $ 2,600 $ 333 $ ( 1,924 ) $ 1,009 Third-party and other costs — 1,156 ( 1,156 ) — $ 2,600 $ 1,489 $ ( 3,080 ) $ 1,009 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, enabling 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 the three and six months ended June 28, 2020, the Company recognized costs totaling $ 2,847 and $ 6,406 , which primarily included third-party and other costs and severance and related employee costs. 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: Three Months Ended Six Months Ended Total Incurred Since Inception July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Severance and related employee costs (a) $ ( 8 ) $ 830 $ ( 119 ) $ 975 $ 8,272 Recruitment and relocation costs 13 143 121 314 1,417 Third-party and other costs 1 1,874 4 5,117 6,539 6 2,847 6 6,406 16,228 Share-based compensation (b) — — — — 193 Total IT realignment $ 6 $ 2,847 $ 6 $ 6,406 $ 16,421 _______________ (a) The three and six months ended July 4, 2021 include a reversal of an accrual as a result of a change in estimate. 15 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (b) 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. The accruals for the IT Realignment Plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 462 and $ 10 as of July 4, 2021 and $ 4,039 and $ 371 as of June 28, 2020, respectively. The tables below present a rollforward of our accruals for the IT Realignment Plan. Balance January 3, 2021 Charges Payments Balance July 4, 2021 Severance and related employee costs $ 1,508 $ ( 119 ) $ ( 917 ) $ 472 Recruitment and relocation costs — 121 ( 121 ) — Third-party and other costs — 4 ( 4 ) — $ 1,508 $ 6 $ ( 1,042 ) $ 472 Balance December 29, 2019 Charges Payments Balance June 28, 2020 Severance and related employee costs $ 7,548 $ 975 $ ( 4,113 ) $ 4,410 Recruitment and relocation costs — 314 ( 314 ) — Third-party and other costs 1,076 5,117 ( 6,193 ) — $ 8,624 $ 6,406 $ ( 10,620 ) $ 4,410 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 the six months ended June 28, 2020, the Company recognized costs totaling $ 331 , which primarily included share-based compensation and severance and related employee costs. 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: Three Months Ended Six Months Ended Total Incurred Since Inception July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Severance and related employee costs (a) $ ( 22 ) $ ( 6 ) $ ( 53 ) $ 146 $ 24,213 Recruitment and relocation costs ( 1 ) — — 15 2,876 Third-party and other costs ( 1 ) — — 1 2,223 ( 24 ) ( 6 ) ( 53 ) 162 29,312 Share-based compensation (b) 8 70 19 169 8,130 Termination of defined benefit plans — — — — 1,335 Total G&A realignment $ ( 16 ) $ 64 $ ( 34 ) $ 331 $ 38,777 _______________ (a) The three and six months ended July 4, 2021 and June 28, 2020 include a reversal of an accrual as a result of a change in estimate. (b) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our G&A Realignment Plan. 16 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) As of July 4, 2021, the accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities.” As of June 28, 2020, the accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled and $ 2,705 and $ 108 , respectively. The tables below present a rollforward of our accruals for the G&A Realignment Plan. Balance January 3, 2021 Charges Payments Balance July 4, 2021 Severance and related employee costs $ 932 $ ( 53 ) $ ( 738 ) $ 141 Recruitment and relocation costs — — — — Third-party and other costs — — — — $ 932 $ ( 53 ) $ ( 738 ) $ 141 Balance December 29, 2019 Charges Payments Balance June 28, 2020 Severance and related employee costs $ 5,276 $ 146 $ ( 2,671 ) $ 2,751 Recruitment and relocation costs 83 15 ( 36 ) 62 Third-party and other costs — 1 ( 1 ) — $ 5,359 $ 162 $ ( 2,708 ) $ 2,813 System Optimization Initiative The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During the six months ended July 4, 2021, the Company recognized costs totaling $ 5,575 , which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the NPC bankruptcy sale process. See Note 3 for further information. The Company expects to recognize a gain of approximately $ 1,000 related to the write-off of certain NPC-related lease liabilities upon final termination of the leases. The following is a summary of the costs recorded as a result of our system optimization initiative: Three Months Ended Six Months Ended Total Incurred Since Inception July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Severance and related employee costs $ 661 $ — $ 661 $ — $ 18,898 Professional fees 504 — 739 80 22,846 Other (a) — — 1,354 4 7,207 1,165 — 2,754 84 48,951 Accelerated depreciation and amortization (b) — — — — 25,398 NPC lease termination costs (c) ( 268 ) — 2,821 — 2,821 Share-based compensation (d) — — — — 5,013 Total system optimization initiative $ 897 $ — $ 5,575 $ 84 $ 82,183 _______________ (a) The six months ended July 4, 2021 includes transaction fees of $ 1,350 associated with the NPC bankruptcy sale process. (b) Primarily includes accelerated amortization of previously acquired franchise rights related to the Company-operated restaurants in territories that have been sold to franchisees in connection with our system optimization initiative. (c) The six months ended July 4, 2021 includes the write-off of lease assets of $ 1,341 and lease termination fees paid of $ 1,480 . 17 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (d) 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 were included in “Accrued expenses and other current liabilities” as of January 3, 2021. Balance January 3, 2021 Charges Payments Balance July 4, 2021 Severance and related employee costs $ — $ 661 $ ( 661 ) $ — Professional fees 1,230 739 ( 1,969 ) — Other — 1,354 ( 1,354 ) — $ 1,230 $ 2,754 $ ( 3,984 ) $ — (6) Investments Equity Investments Wendy’s 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, a wholly-owned subsidiary of Wendy’s has a 20 % share in a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments 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.” Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements: Six Months Ended July 4, 2021 June 28, 2020 Balance at beginning of period $ 44,574 $ 45,310 Equity in earnings for the period 4,921 3,455 Amortization of purchase price adjustments (a) ( 1,658 ) ( 1,105 ) 3,263 2,350 Distributions received ( 5,617 ) ( 3,612 ) Foreign currency translation adjustment included in “Other comprehensive income (loss)” and other 1,456 ( 1,631 ) Balance at end of period $ 43,676 $ 42,417 _______________ (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. 18 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (7) Long-Term Debt Long-term debt consisted of the following: July 4, 2021 January 3, 2021 Series 2021-1 Class A-2 Notes: 2.370 % Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029 $ 450,000 $ — 2.775 % Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 650,000 — Series 2019-1 Class A-2 Notes: 3.783 % Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 378,000 386,000 4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 425,250 434,250 Series 2018-1 Class A-2 Notes: 3.573 % Series 2018-1 Class A-2-I Notes, repaid in connection with the June 2021 refinancing — 436,500 3.884 % Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 458,375 460,750 Series 2015-1 Class A-2 Notes: 4.497 % Series 2015-1 Class A-2-III Notes, repaid in connection with the June 2021 refinancing — 473,750 Canadian revolving credit facility — 1,962 7 % debentures, due in 2025 84,585 83,998 Unamortized debt issuance costs ( 39,850 ) ( 30,085 ) 2,406,360 2,247,125 Less amounts payable within one year ( 32,750 ) ( 28,962 ) Total long-term debt $ 2,373,610 $ 2,218,163 Senior Notes Wendy’s Funding, LLC, 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. In June 2021, the Master Issuer completed a refinancing transaction with respect to this facility under which the Master Issuer issued fixed rate senior secured notes in the following 2021-1 series: Class A-2-I with an initial principal amount of $ 450,000 and Class A-2-II with an initial principal amount of $ 650,000 (collectively, the “Series 2021-1 Class A-2 Notes”). Interest and principal payments on the Series 2021-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series 2021-1 Class A-2 Notes is in June 2051. If the Master Issuer has not repaid or refinanced the Series 2021-1 Class A-2 Notes prior to their respective anticipated repayment dates, additional interest will accrue pursuant to the indenture governing the Series 2021-1 Class A-2 Notes. The net proceeds from the sale of the Series 2021-1 Class A-2 Notes were used to repay in full the Master Issuer’s outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes, including the payment of prepayment and transaction costs. The remaining funds will be used for general corporate purposes, which may include funding for growth initiatives, return of capital to shareholders, or additional debt retirement. As a result of the refinancing, the Company recorded a loss on early extinguishment of debt of $ 17,917 during the three months ended July 4, 2021, which was comprised of a specified make-whole payment of $ 9,632 and the write-off of certain unamortized deferred financing costs of $ 8,285 . The Series 2021-1 Class A-2 Notes have scheduled principal payments of $ 5,500 in 2021, $ 11,000 annually from 2022 through 2028, $ 422,750 in 2029, $ 6,500 in 2030 and $ 588,250 in 2031. In connection with the issuance of the Series 2021-1 Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2021-1 Class A-1 Notes” and, together with the Series 2021-1 Class A-2 Notes, the “Series 2021-1 Senior Notes”), which allows for the drawing of up to $ 300,000 on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2021-1 Class A-1 Notes during the three months ended July 4, 2021. The Series 2021-1 Class A-1 Notes replaced the Company’s $ 150,000 Series 2019-1 Class A-1 Notes and $ 100,000 Series 2020-1 Class A-1 Notes, which were canceled on the closing date, and the letters of credit outstanding against the Series 2019-1 Class A-1 Notes were transferred to the Series 2021-1 Class A-1 Notes. 19 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The Series 2021-1 Senior Notes are secured by 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, except for certain real estate assets and subject to certain limitations. The Series 2021-1 Senior Notes are subject to substantially the same series of covenants and restrictions as the Company’s outstanding Series 2019-1 Class A-2 Notes and Series 2018-1 Class A-2 Notes. During the three and six months ended July 4, 2021, the Company incurred debt issuance costs of $ 20,873 in connection with the issuance of the Series 2021-1 Senior Notes. The debt issuance costs will be amortized to “Interest expense, net” through the anticipated repayment dates of the Series 2021-1 Senior Notes utilizing the effective interest rate method. Other Long-Term Debt 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, which the Company fully repaid through repayments of C$ 3,000 in the fourth quarter of 2020 and C$ 2,500 in the first quarter of 2021. As a result, as of July 4, 2021, the Company had no outstanding borrowings under the Canadian revolving credit facility. (8) 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. 20 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED 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: July 4, 2021 January 3, 2021 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Measurements Financial assets Cash equivalents $ 125,037 $ 125,037 $ 75,067 $ 75,067 Level 1 Financial liabilities Series 2021-1 Class A-2-I Notes (a) 450,000 453,105 — — Level 2 Series 2021-1 Class A-2-II Notes (a) 650,000 658,190 — — Level 2 Series 2019-1 Class A-2-I Notes (a) 378,000 402,570 386,000 409,778 Level 2 Series 2019-1 Class A-2-II Notes (a) 425,250 466,669 434,250 469,555 Level 2 Series 2018-1 Class A-2-I Notes (a) — — 436,500 450,381 Level 2 Series 2018-1 Class A-2-II Notes (a) 458,375 489,407 460,750 491,021 Level 2 Series 2015-1 Class A-2-III Notes (a) — — 473,750 481,851 Level 2 Canadian revolving credit facility — — 1,962 1,962 Level 2 7 % debentures, due in 2025 (a) 84,585 101,250 83,998 98,775 Level 2 _______________ (a) 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 condensed 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 right-of-use 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. 21 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED 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. 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 9 for further information on impairment of our long-lived assets. Fair Value Measurements July 4, 2021 Level 1 Level 2 Level 3 Held and used $ 718 $ — $ — $ 718 Held for sale 340 — — 340 Total $ 1,058 $ — $ — $ 1,058 Fair Value Measurements January 3, 2021 Level 1 Level 2 Level 3 Held and used $ 2,653 $ — $ — $ 2,653 Held for sale 855 — — 855 Total $ 3,508 $ — $ — $ 3,508 (9) 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 the six months ended June 28, 2020 were primarily due to the expected deterioration in operating performance of certain Company-operated restaurants as a result of the COVID-19 pandemic. 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:” Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Company-operated restaurants $ 488 $ — $ 934 $ 4,395 Restaurants leased or subleased to franchisees — — 189 — Surplus properties 142 117 142 309 $ 630 $ 117 $ 1,265 $ 4,704 (10) Income Taxes The Company’s effective tax rate for the three months ended July 4, 2021 and June 28, 2020 was 18.6 % and 20.8 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the three months ended July 4, 2021 primarily due to a reduction for the benefit of share-based compensation, partially offset by an increase due to state income taxes. The Company’s effective tax rate for the six months ended July 4, 2021 and June 28, 2020 was 20.8 % and 25.4 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the six months ended July 4, 2021 primarily due to a reduction for the benefit of share-based compensation, partially offset by an increase due to state income taxes, including discrete changes to state deferred taxes. There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three and six months ended July 4, 2021. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $ 2,016 due primarily to the lapse of statutes of limitations and expected settlements. 22 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The current portion of refundable income taxes was $ 4,528 and $ 5,399 as of July 4, 2021 and January 3, 2021, respectively, and is included in “Accounts and notes receivable, net.” There were no long-term refundable income taxes as of July 4, 2021 and January 3, 2021. (11) Net Income Per Share The calculation of basic and diluted net income per share was as follows: Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Net income $ 65,724 $ 24,904 $ 107,090 $ 39,345 Common stock: Weighted average basic shares outstanding 221,874 223,123 222,604 223,329 Dilutive effect of stock options and restricted shares 3,526 4,051 3,459 4,262 Weighted average diluted shares outstanding 225,400 227,174 226,063 227,591 Net income per share: Basic $ .30 $ .11 $ .48 $ .18 Diluted $ .29 $ .11 $ .47 $ .17 Basic net income per share for the three and six months ended July 4, 2021 and June 28, 2020 was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding. Diluted net income per share for the three and six months ended July 4, 2021 and June 28, 2020 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 1,825 and 1,847 for the three and six months ended July 4, 2021, respectively, and 2,636 and 2,652 for the three and six months ended June 28, 2020, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. (12) Stockholders’ Equity Dividends During the first and second quarter of 2021, the Company paid dividends per share of $ .09 and $ .10 , respectively. During the first and second quarter of 2020, the Company paid dividends per share of $ .12 and $ .05 , respectively. 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. In addition, in May 2021, the Board of Directors approved an increase of $ 50,000 to the February 2020 authorization, resulting in an aggregate authorization of $ 150,000 that continues to expire on February 28, 2022. During the six months ended July 4, 2021, the Company repurchased 3,956 shares under the February 2020 repurchase authorization with an aggregate purchase price of $ 83,320 , of which $ 440 was accrued at July 4, 2021, and excluding commissions of $ 55 . As of July 4, 2021, the Company had $ 34,396 of availability remaining under its February 2020 authorization. Subsequent to July 4, 2021 through August 4, 2021, the Company repurchased 193 shares under the February 2020 authorization with an aggregate purchase price of $ 4,396 , excluding commissions of $ 2 . In addition, in August 2021, the Board of Directors approved an increase of $ 70,000 to the February 2020 authorization, resulting in an aggregate authorization of $ 220,000 that continues to 23 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) expire on February 28, 2022. The Company has availability of $ 100,000 remaining under the authorization as of August 11, 2021. 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 the six months ended June 28, 2020, the Company repurchased 2,091 shares with an aggregate purchase price of $ 43,307 , excluding commissions of $ 29 , under the February 2020 authorization and 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. Accumulated Other Comprehensive Loss The following table provides a rollforward of accumulated other comprehensive loss: Six Months Ended July 4, 2021 June 28, 2020 Balance at beginning of period $ ( 49,641 ) $ ( 53,828 ) Foreign currency translation 5,567 ( 8,358 ) Balance at end of period $ ( 44,074 ) $ ( 62,186 ) (13) 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 July 4, 2021, Wendy’s and its franchisees operated 6,866 Wendy’s restaurants. Of the 315 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 138 restaurants, owned the building and held long-term land leases for 120 restaurants and held leases covering the land and building for 57 restaurants. Wendy’s also owned 510 and leased 1,276 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment. 24 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Company as Lessee The components of lease cost are as follows: Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Finance lease cost: Amortization of finance lease assets $ 3,251 $ 3,338 $ 6,759 $ 6,524 Interest on finance lease liabilities 10,267 10,160 20,560 20,218 13,518 13,498 27,319 26,742 Operating lease cost 23,012 23,969 46,373 45,134 Variable lease cost (a) 16,583 13,848 31,771 28,218 Short-term lease cost 1,270 991 2,596 2,321 Total operating lease cost (b) 40,865 38,808 80,740 75,673 Total lease cost $ 54,383 $ 52,306 $ 108,059 $ 102,415 _______________ (a) Includes expenses for executory costs of $ 10,087 and $ 9,457 for the three months ended July 4, 2021 and June 28, 2020, respectively, and $ 20,150 and $ 19,200 for the six months ended July 4, 2021 and June 28, 2020, respectively, for which the Company is reimbursed by sublessees. (b) Includes $ 34,063 and $ 31,263 for the three months ended July 4, 2021 and June 28, 2020, respectively, and $ 66,615 and $ 60,554 for the six months ended July 4, 2021 and June 28, 2020, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 6,111 and $ 6,831 for the three months ended July 4, 2021 and June 28, 2020, respectively, and $ 12,792 and $ 13,664 for the six months ended July 4, 2021 and June 28, 2020, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. The following table includes supplemental cash flow and non-cash information related to leases: Six Months Ended July 4, 2021 June 28, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 20,957 $ 18,853 Operating cash flows from operating leases 46,879 40,582 Financing cash flows from finance leases 5,777 3,707 Right-of-use assets obtained in exchange for lease obligations: Finance lease liabilities 30,863 12,962 Operating lease liabilities 4,577 13,380 25 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table includes supplemental information related to leases: July 4, 2021 January 3, 2021 Weighted-average remaining lease term (years): Finance leases 16.0 16.2 Operating leases 14.3 14.6 Weighted average discount rate: Finance leases 9.29 % 9.54 % Operating leases 5.03 % 5.06 % Supplemental balance sheet information: Finance lease assets, gross $ 264,824 $ 261,308 Accumulated amortization ( 58,238 ) ( 55,155 ) Finance lease assets 206,586 206,153 Operating lease assets 791,924 821,480 The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of July 4, 2021: Finance Leases Operating Leases Fiscal Year Company-Operated Franchise and Other Company-Operated Franchise and Other 2021 (a) (b) $ 2,229 $ 25,786 $ 6,989 $ 36,993 2022 3,476 51,490 14,240 74,000 2023 3,422 53,175 14,401 73,794 2024 3,489 53,608 14,462 73,761 2025 3,564 54,098 14,357 73,455 Thereafter 42,705 671,835 133,387 733,429 Total minimum payments $ 58,885 $ 909,992 $ 197,836 $ 1,065,432 Less interest ( 21,909 ) ( 410,813 ) ( 57,308 ) ( 322,106 ) Present value of minimum lease payments (c) (d) $ 36,976 $ 499,179 $ 140,528 $ 743,326 _______________ (a) Represents future minimum rental payments for non-cancelable leases for the remainder of 2021. (b) In addition to the 2021 future minimum rental payments, the Company expects to pay $ 2,175 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.” (c) The present value of minimum finance lease payments of $ 14,547 and $ 521,608 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively. (d) The present value of minimum operating lease payments of $ 45,269 and $ 838,585 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively. 26 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Company as Lessor The components of lease income are as follows: Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Sales-type and direct-financing leases: Selling profit $ 1,627 $ 569 $ 3,539 $ 1,197 Interest income (a) 7,586 7,260 15,075 14,508 Operating lease income 44,356 43,052 88,478 87,004 Variable lease income 16,512 13,805 31,266 27,709 Franchise rental income (b) $ 60,868 $ 56,857 $ 119,744 $ 114,713 _______________ (a) Included in “Interest expense, net.” (b) Includes sublease income of $ 45,245 and $ 41,489 for the three months ended July 4, 2021 and June 28, 2020, respectively, and $ 88,495 and $ 83,531 for the six months ended July 4, 2021 and June 28, 2020, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 10,195 and $ 9,450 for the three months ended July 4, 2021 and June 28, 2020, respectively, and $ 20,069 and $ 19,159 for the six months ended July 4, 2021 and June 28, 2020, respectively. The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of July 4, 2021: Sales-Type and Direct Financing Leases Operating Leases Fiscal Year Subleases Owned Properties Subleases Owned Properties 2021 (a) (b) $ 16,720 $ 2,040 $ 57,923 $ 27,709 2022 33,942 2,612 116,647 56,397 2023 35,003 2,658 117,448 56,707 2024 37,004 2,669 117,667 57,816 2025 35,907 2,787 117,156 58,421 Thereafter 474,723 35,676 1,172,618 750,148 Total future minimum receipts 633,299 48,442 $ 1,699,459 $ 1,007,198 Unearned interest income ( 346,389 ) ( 26,004 ) Net investment in sales-type and direct financing leases (c) $ 286,910 $ 22,438 _______________ (a) Represents future minimum rental receipts for non-cancelable leases for the remainder of 2021. (b) In addition to the 2021 future minimum rental receipts, the Company expects to collect $ 1,088 primarily during 2021 related to its offer to franchisees to defer base rent payments in response to the COVID-19 pandemic. The related receivable is included in “Accounts and notes receivable, net.” (c) The present value of minimum direct financing rental receipts of $ 6,654 and $ 302,694 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 $ 521 . 27 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Properties owned by the Company and leased to franchisees and other third parties under operating leases include: July 4, 2021 January 3, 2021 Land $ 280,879 $ 279,956 Buildings and improvements 307,834 309,605 Restaurant equipment 1,701 1,701 590,414 591,262 Accumulated depreciation and amortization ( 176,125 ) ( 170,722 ) $ 414,289 $ 420,540 (14) Transactions with Related Parties Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K. TimWen Lease and Management Fee Payments 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. During the six months ended July 4, 2021 and June 28, 2020, Wendy’s paid TimWen $ 8,817 and $ 7,408 , respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $ 110 and $ 101 during the six months ended July 4, 2021 and June 28, 2020, respectively, which has been included as a reduction to “General and administrative.” Transactions with Yellow Cab 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 July 4, 2021 owned and operated 78 Wendy’s restaurants (including Wendy’s restaurants acquired from NPC during the first quarter of 2021 as described below). During the six months ended July 4, 2021, the Company recognized $ 4,353 in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of July 4, 2021, $ 883 was due from Yellow Cab for such income, which is included in “Accounts and notes receivable, net” and “Advertising funds restricted assets.” 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. 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. In March 2021, Yellow Cab closed on its acquisition of these restaurants and its deposit was applied against the purchase price for the restaurants. See Note 3 for further information. (15) Guarantees and Other Commitments and Contingencies Except as described below, the Company did not have any significant changes in guarantees and other commitments and contingencies during the current fiscal period since those reported in the Form 10-K. Refer to the Form 10-K for further information regarding the Company’s additional commitments and obligations. 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 $ 95,160 as of July 4, 2021. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of July 4, 2021. In the event of default by a franchise 28 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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 July 4, 2021. Letters of Credit As of July 4, 2021, the Company had outstanding letters of credit with various parties totaling $ 26,579 . Substantially all of the outstanding letters of credit include amounts outstanding against the 2021-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit. (16) 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 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 thus 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. We previously described certain legal proceedings in the Form 10-K. Except as set forth below, there were no material developments in those legal proceedings as of July 4, 2021. In a Form 8-K filed with the Securities and Exchange Commission on June 28, 2021 (the “Form 8-K”), the Company provided an update on the proposed settlement of the previously-disclosed shareholder derivative action arising out of the criminal cyberattacks that targeted the point of sale systems of certain Wendy’s franchisees in 2015 and 2016 (the “Derivative Lawsuit”). As described in the Form 8-K, on February 14, 2019, the Company entered into a Stipulation and Agreement of Settlement (the “Settlement”) to resolve the Derivative Lawsuit. On January 24, 2020, the United States District Court for the Southern District of Ohio (the “Court”) issued an order granting preliminary approval of the Settlement, which consists of certain corporate governance undertakings and the payment of plaintiffs’ attorneys’ fees and expenses up to $ 950 . Pursuant to an order issued by the Court on June 3, 2021, a hearing to determine whether the Court should issue a final order approving the Settlement has been scheduled for September 2, 2021. If the Settlement is approved by the Court, the Derivative Lawsuit will be dismissed with prejudice subject to any appeal, and the Company expects the monetary terms of the Settlement to be covered by applicable insurance. (17) Segment Information Revenues by segment were as follows: Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Wendy’s U.S. $ 409,843 $ 331,258 $ 791,797 $ 662,299 Wendy’s International 21,316 14,003 39,566 29,475 Global Real Estate & Development 62,178 57,045 122,177 115,492 Total revenues $ 493,337 $ 402,306 $ 953,540 $ 807,266 29 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table reconciles profit by segment to the Company’s consolidated income before income taxes: Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 Wendy’s U.S. (a) $ 126,650 $ 93,136 $ 238,737 $ 174,964 Wendy’s International 6,528 3,594 14,212 8,689 Global Real Estate & Development 26,569 23,711 52,822 50,201 Total segment profit $ 159,747 $ 120,441 $ 305,771 $ 233,854 Advertising funds deficit ( 1,602 ) ( 1,020 ) ( 2,866 ) ( 2,407 ) Unallocated general and administrative (b) ( 28,864 ) ( 23,051 ) ( 53,971 ) ( 47,170 ) Depreciation and amortization ( 30,761 ) ( 34,714 ) ( 62,303 ) ( 65,760 ) System optimization gains, net 30,766 1,987 31,282 2,310 Reorganization and realignment costs ( 2,102 ) ( 2,911 ) ( 7,036 ) ( 6,821 ) Impairment of long-lived assets ( 630 ) ( 117 ) ( 1,265 ) ( 4,704 ) Unallocated other operating income, net 192 46 256 91 Interest expense, net ( 28,204 ) ( 29,085 ) ( 56,990 ) ( 57,610 ) Loss on early extinguishment of debt ( 17,917 ) — ( 17,917 ) — Other income (expense), net 161 ( 144 ) 290 932 Income before income taxes $ 80,786 $ 31,432 $ 135,251 $ 52,715 _______________ (a) Includes advertising funds expense of $ 3,990 and $ 7,524 for the three and six months ended July 4, 2021, respectively, and $ 2,185 for the three and six months ended June 28, 2020 related to the Company funding of incremental advertising. (b) Includes corporate overhead costs, such as employee compensation and related benefits . (18) New Accounting Standards In July 2021, the Financial Accounting Standards Board issued an amendment that addresses an issue related to a lessor’s accounting for certain leases with variable lease payments that could result in the recognition of a selling loss at lease commencement even if the lessor expects the arrangement to be profitable overall. The amendment specifies lessors should classify and account for such a lease with variable lease payments as an operating lease, dependent upon meeting certain criteria, for which a selling profit or loss is not recognized. 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. 30