What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-10 compared with 2021-08-11 · 143 added, 145 removed, 352 unchanged (45% of the section changed)

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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 July 4, 2021 to the application of our critical accounting policies as described in Item 7 of the Form 10-K.

There have been no material changes as of October 3, 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.

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and 31 foreign countries and U.S.

territories as of July 4, 2021.

territories as of October 3, 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.

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The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31.

All three- and six-month periods presented herein contain 13 weeks and 26 weeks, respectively.

All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively.

All references to years, quarters and months relate to fiscal periods rather than calendar periods.

Executive Overview

As of July 4, 2021, the Wendy’s restaurant system was comprised of 6,866 restaurants, with 5,895 Wendy’s restaurants in operation in the U.S.

As of October 3, 2021, the Wendy’s restaurant system was comprised of 6,891 restaurants, with 5,901 Wendy’s restaurants in operation in the U.S.

restaurants, 311 were operated by the Company and 5,590 were operated by a total of 225 franchisees.

In addition, at July 4, 2021, there were 971 Wendy’s restaurants in operation in 31 foreign countries and U.S.

Of the international restaurants, 970 were operated by franchisees and one was operated by the Company in the United Kingdom (the “U.K.”).

In addition, at October 3, 2021, there were 990 Wendy’s restaurants in operation in 31 foreign countries and U.S.

Of the international restaurants, 988 were operated by franchisees and two were operated by the Company in the United Kingdom (the “U.K.”).

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 July 4, 2021.

Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of October 3, 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.

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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 additional Company-operated restaurants in the U.K.

during 2021 and beyond.

expansion and accelerated international expansion through same-restaurant sales growth and net new restaurant development.

Key Business Measures

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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.

Second Quarter Financial Highlights

• Revenue increased 22.6% to $493.3 million in the second quarter of 2021 compared to $402.3 million in the second quarter of 2020;

Third Quarter Financial Highlights

• Revenue increased 4.0% to $470.3 million in the third quarter of 2021 compared to $452.2 million in the third quarter of 2020;

• Global same-restaurant sales increased 3.3%, U.S.

same-restaurant sales increased 16.1% and international same-restaurant sales increased 31.4% compared to the second quarter of 2020;

• Company-operated restaurant margin was 20.3% in the second quarter of 2021, an increase of 590 basis points from the second quarter of 2020;

• Net income was $65.7 million in the second quarter of 2021 compared to $24.9 million in the second quarter of 2020.

same-restaurant sales increased 2.1% and international same-restaurant sales increased 14.7% compared to the third quarter of 2020;

• Company-operated restaurant margin was 14.4% in the third quarter of 2021, a decrease of 250 basis points from the third quarter of 2020;

• Net income increased 3.6% to $41.2 million in the third quarter of 2021 compared to $39.8 million in the third quarter of 2020.

Year-to-Date Financial Highlights

• Revenue increased 18.1% to $953.5 million in the first six months of 2021 compared to $807.3 million in the first six months of 2020;

• Revenue increased 13.0% to $1.4 billion in the first nine months of 2021 compared to $1.3 billion in the first nine months of 2020;

• Global same-restaurant sales increased 10.9%, U.S.

same-restaurant sales increased 14.9% and international same-restaurant sales increased 19.0% compared to the first six months of 2020;

• Company-operated restaurant margin was 18.7% in the first six months of 2021, an increase of 650 basis points from the first six months of 2020;

• Net income was $107.1 million in the first six months of 2021 compared to $39.3 million in the first six months of 2020.

same-restaurant sales increased 10.2% and international same-restaurant sales increased 17.4% compared to the first nine months of 2020;

• Company-operated restaurant margin was 17.4% in the first nine months of 2021, an increase of 350 basis points from the first nine months of 2020;

• Net income increased 87.4% to $148.3 million in the first nine months of 2021 compared to $79.1 million in the first nine months of 2020.

COVID-19 Update

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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.

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 July 4, 2021, approximately 95% of dining rooms were open across the Wendy’s system offering carryout and, in many cases, dine in services.

Global systemwide same-restaurant sales during the first six months of 2021 increased 15.2%, in part due to a significant increase in customer count compared with the adversely impacted fiscal months of March through June 2020.

During the third quarter and the first nine months of 2021, restaurant operations have been impacted by increased pressure on labor availability brought about by both the COVID-19 pandemic and other macroeconomic factors;

however, as of October 3, 2021, substantially all restaurants were open across the Wendy’s system, and the majority of restaurants had dining rooms open.

Global systemwide same-restaurant sales during the first nine months of 2021 increased 10.9%, in part due to a significant increase in customer count compared with the adversely impacted fiscal months of March through June 2020.

Wendy’s long-term growth opportunities include investing in accelerated global growth, which includes building upon our breakfast daypart.

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system on March 2, 2020, systemwide sales have benefited from this new daypart, with breakfast representing approximately 7.2% of U.S.

systemwide sales during the six months ended July 4, 2021.

Subsequent to July 4, 2021, the Company revised its planned 2021 advertising expenses to include an additional $10.0 million of incremental advertising to support the breakfast daypart, resulting in an expected total 2021 incremental Company investment of $25.0 million.

The Company expects this incremental investment will continue to drive trial and acceleration of the Company’s breakfast offering.

systemwide sales during the nine months ended October 3, 2021.

As previously disclosed, the Company expects to fund a total of $25.0 million of incremental advertising to support the breakfast daypart during 2021, which the Company expects will continue to drive trial and acceleration of the Company’s breakfast offering.

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 six months ended July 4, 2021.

The Company’s digital business continues to grow and represented approximately 8.0% of global systemwide sales during the nine months ended October 3, 2021.

Debt Refinancing

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The Company 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”), which allows for the drawing of up to $300.0 million 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.

No amounts were borrowed under the Series 2021-1 Class A-1 Notes during the nine months ended October 3, 2021.

The Series 2021-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2019-1 Class A-1 Notes and $100.0 million Series 2020-1 Class A-1 Notes, which were cancelled on the closing date.

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On August 11, 2021, the Company announced a development commitment by REEF Kitchens (“REEF”) to open and operate 700 delivery kitchens over the next five years across the U.S., Canada and the U.K.

The Company expects that REEF will open approximately 50 delivery kitchens in 2021 with the remainder to be opened in 2022 through 2025.

Strategic Build to Suit Development Fund

On August 11, 2021, the Company announced the creation o f a $100.0 million strategic build to suit development fund to drive additional new restaurant growth that is being funded by the additional cash that was obtained as part of the Company’s debt refinancing transaction completed in June 2021.

The Company expects the development fund to drive approximately 80 to 90 new franchise restaurants from 2022 to 2025.

The Company expects the development fund to drive approximately 80 to 90 new franchise restaur ants from 2022 to 2025.

System Optimization Initiative

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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 three months ended July 4, 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees, resulting in net gains totaling $30.8 million.

During the nine months ended October 3, 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees, resulting in net gains totaling $30.8 million.

Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations.

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The Company expects to incur total costs aggregating approximately $5.5 million to $6.0 million, of which approximately $5.0 million to $5.5 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 six months ended July 4, 2021, the Company recognized costs totaling $1.5 million, which primarily included third-party and other costs.

The Company expects to incur additional costs aggregating approximately $1.0 million to $3.0 million, comprised primarily of third-party and other costs.

Costs related to the Operations and Field Realignment Plan are recorded to “Reorganization and realignment costs.” During the nine months ended October 3, 2021, the Company recognized costs totaling $1.6 million, which primarily included third-party and other costs.

The Company expects to incur additional costs aggregating up to approximately $0.5 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.

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 second quarter and the first six months of 2021 and 2020.

Second Quarter Six Months

The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the third quarter and the first nine months of 2021 and 2020.

Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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Loss on early extinguishment of debt — — — (17.9) — (17.9)

Other income (expense), net 0.2 (0.2) 0.4 0.3 0.9 (0.6)

Other income, net 0.2 0.2 — 0.4 1.2 (0.8)

Income before income taxes 54.4 52.4 2.0 189.6 105.2 84.4

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Net income $ 41.2 $ 39.8 $ 1.4 $ 148.3 $ 79.1 $ 69.2

Second Quarter Six Months

Third Quarter Nine Months

Total Revenues 2020 % of

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$ 470.3 100.0 % $ 452.2 100.0 % $ 1,423.8 100.0 % $ 1,259.5 100.0 %

Second Quarter Six Months

Third Quarter Nine Months

Sales 2020 % of

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Total cost of sales $ 146.4 85.6 % $ 159.5 83.1 % $ 457.4 82.6 % $ 450.2 86.1 %

Second Quarter Six Months

Third Quarter Nine Months

Sales 2020 % of

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The table below presents certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.

Second Quarter Six Months

Third Quarter Nine Months

2021 2020 2021 2020

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(a) Excludes Argentina and Venezuela due to the impact of the highly inflationary economies of those countries.

(b) During the second quarter of 2021 and 2020, global systemwide sales increased 22.9% and decreased 6.2%, respectively, U.S.

systemwide sales increased 20.6% and decreased 4.0%, respectively, and international systemwide sales increased 48.2% and decreased 24.5%, respectively, on a constant currency basis.

During the first six months of 2021 and 2020, global systemwide sales increased 17.7% and decreased 2.7%, respectively, U.S.

systemwide sales increased 16.9% and decreased 1.6%, respectively, and international systemwide sales increased 25.6% and decreased 12.4%, respectively, on a constant currency basis.

Second Quarter

(b) During the third quarter of 2021 and 2020, global systemwide sales increased 5.3% and 6.7%, respectively, U.S.

systemwide sales increased 3.7% and 7.9%, respectively, and international systemwide sales increased 20.2% and decreased 3.5%, respectively, on a constant currency basis.

During the first nine months of 2021 and 2020, global systemwide sales increased 13.2% and 0.5%, respectively, U.S.

systemwide sales increased 12.1% and 1.6%, respectively, and international systemwide sales increased 23.6% and decreased 9.3%, respectively, on a constant currency basis.

Third Quarter

Company-operated U.S.

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Restaurant count:

Restaurant count at April 4, 2021 362 5,523 — 953 6,838

Restaurant count at July 4, 2021 314 5,581 1 970 6,866

Opened 1 26 1 20 48

Closed (a) (4) (17) — (2) (23)

Net (sold to) purchased by franchisees (48) 48 — — —

Restaurant count at July 4, 2021

Restaurant count at October 3, 2021

311 5,590 2 988 6,891

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Net (sold to) purchased by franchisees (48) 48 — — —

Restaurant count at July 4, 2021

Restaurant count at October 3, 2021

311 5,590 2 988 6,891

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(a) Excludes restaurants temporarily closed due to the impact of the COVID-19 pandemic.

Sales Second Quarter Six Months

Sales Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

Sales $ 171.1 $ 191.9 $ (20.8) $ 553.7 $ 523.0 $ 30.7

The increase in sales for the second quarter and the first six months of 2021 was primarily due to a 23.9% and 18.3% increase in Company-operated same-restaurant sales, respectively, partially offset by the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.

Company-operated same-restaurant sales increased due to (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (2) higher average check.

Company-operated same-restaurant sales during the first six months of 2021 also benefited from (1) government stimulus payments to consumers during the first quarter of 2021 and (2) the positive impact from the breakfast daypart.

Franchise Royalty Revenue and Fees Second Quarter Six Months

The decrease in sales for the third quarter of 2021 was primarily due to the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021, partially offset by a 3.4% increase in Company-operated same-restaurant sales.

Company-operated same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count.

The increase in sales for the first nine months of 2021 was primarily due to a 13.2% increase in Company-operated same-restaurant sales, partially offset by the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.

Company-operated same-restaurant sales increased due to (1) higher average check and (2) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic.

Company-operated same-restaurant sales during the first nine months of 2021 benefited from (1) government stimulus payments to consumers during the first quarter of 2021 and (2) the positive impact from the breakfast daypart.

Franchise Royalty Revenue and Fees Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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$ 138.8 $ 116.8 $ 22.0 $ 398.2 $ 321.6 $ 76.6

The increase in franchise royalty revenue during the second quarter and the first six months of 2021 was primarily due to (1) a 17.0% and 15.0% increase in global franchise same-restaurant sales, respectively, and (2) a net increase in the number of franchise restaurants in operation during 2021 compared to 2020.

Franchise same-restaurant sales increased due to (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (2) higher average check.

Franchise same-restaurant sales during the first six months of 2021 also benefited from (1) government stimulus payments to consumers during the first quarter of 2021 and (2) the positive impact from the breakfast daypart.

The increase in franchise fees during the second quarter and the first six months of 2021 was primarily due to an increase in fees for providing information technology services to franchisees.

Franchise fees during the first six months of 2021 also

benefited from 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 Second Quarter Six Months

The increase in franchise royalty revenue during the third quarter and the first nine months of 2021 was primarily due to (1) a 3.3% and 10.8% increase in global franchise same-restaurant sales, respectively, and (2) a net increase in the number of franchise restaurants in operation during 2021 compared to 2020.

Franchise same-restaurant sales during the third quarter of 2021 increased due to higher average check, partially offset by a decrease in customer count.

Franchise same-restaurant sales during the first nine months of 2021 increased due to (1) higher average check and (2) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic.

Franchise same-restaurant sales during the first nine months of 2021

benefited from (1) government stimulus payments to consumers during the first quarter of 2021 and (2) the positive impact from the breakfast daypart.

The increase in franchise fees during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in fees for providing information technology services to franchisees and (2) the accelerated recognition of franchise agreement revenue as a result of franchisee-to-franchisee restaurant transfers.

Franchise Rental Income Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

Franchise rental income $ 62.4 $ 58.7 $ 3.7 $ 182.2 $ 173.4 $ 8.8

The increase in franchise rental income during the second quarter and the first six months of 2021 was primarily due to (1) an increase in percent rent, reflecting higher systemwide sales compared with 2020, and (2) the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.

Advertising Funds Revenue Second Quarter Six Months

The increase in franchise rental income during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in percent rent, reflecting higher systemwide sales compared with 2020, and (2) the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.

Advertising Funds Revenue Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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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 second quarter and the first six months of 2021 was primarily due to (1) an increase in franchise same-restaurant sales in the U.S.

The increase in advertising funds revenue during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in franchise same-restaurant sales in the U.S.

and Canada and (2) the prior year abatement of national advertising fund contributions on breakfast sales.

Cost of Sales, as a Percent of Sales Second Quarter Six Months

Cost of Sales, as a Percent of Sales Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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85.6 % 83.1 % 2.5 % 82.6 % 86.1 % (3.5) %

The decrease in cost of sales, as a percent of sales, during the second quarter and the first six months of 2021 was primarily due to (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, (2) higher average check and (3) incremental recognition pay during April and May of 2020.

These impacts were partially offset by restaurant labor rate increases.

In addition, cost of sales, as a percent of sales, during the second quarter of 2021 was negatively impacted by higher commodity costs.

Franchise Support and Other Costs Second Quarter Six Months

The increase in cost of sales, as a percent of sales, during the third quarter of 2021 was primarily due to (1) an increase in restaurant labor rates, (2) higher commodity costs, (3) lower local advertising spend during 2020 and (4) a decrease in customer count.

These impacts were partially offset by higher average check.

The decrease in cost of sales, as a percent of sales, during the first nine months of 2021 was primarily due to (1) higher average check, (2) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (3) incremental recognition pay during April and May of 2020.

These impacts were partially offset by (1) an increase in restaurant labor rates and (2) higher commodity costs.

Franchise Support and Other Costs Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

Franchise support and other costs $ 10.5 $ 6.0 $ 4.5 $ 27.1 $ 19.4 $ 7.7

The increase in franchise support and other costs during the second quarter and the first six months of 2021 was primarily due to an increase in costs incurred to provide information technology and other services to our franchisees.

These increases were partially offset by investments made during the first six months of 2020 to support U.S.

The increase in franchise support and other costs during the third quarter and the first nine months of 2021 was primarily due to an increase in costs incurred to provide information technology and other services to our franchisees.

The increases in the first nine months were partially offset by investments made in 2020 to support U.S.

franchisees in preparation of the national launch of breakfast on March 2, 2020.

Franchise Rental Expense Second Quarter Six Months

Franchise Rental Expense Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

Franchise rental expense $ 34.4 $ 32.4 $ 2.0 $ 101.1 $ 93.0 $ 8.1

The increase in franchise rental expense during the second quarter and the first six months of 2021 was primarily due to an increase in percent rent, reflecting higher systemwide sales compared with 2020.

Franchise rental expense for the first six months of 2021 also increased due to the impact of assigning certain leases to a franchisee in 2020.

Advertising Funds Expense Second Quarter Six Months

The increase in franchise rental expense during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in percent rent, reflecting higher systemwide sales compared with 2020 and (2) the impact of the sale of 47 Company-operated restaurants in New York to franchisees during the second quarter of 2021.

Franchise rental expense for the first nine months of 2021 also increased due to the impact of assigning certain leases to a franchisee in 2020.

Advertising Funds Expense Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue.

As of July 4, 2021, the Company expected 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 second quarter and the first six months 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 $5.6 million and $10.4 million, respectively, of the expected advertising spend in excess of advertising funds revenue.

Subsequent to July 4, 2021, the Company revised its planned 2021 advertising expenses to include an additional $10.0 million of incremental advertising, resulting in an expected total 2021 incremental Company investment of $25.0 million.

General and Administrative Second Quarter Six Months

The Company expects advertising funds expense to exceed advertising funds revenue by approximately $31.0 million for 2021, which includes (1) the Company’s previously announced decision to fund up to $25.0 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 third quarter and the first nine months of 2021, advertising funds expense increased due to (1) an increase in franchise same-restaurant sales in the U.S.

and Canada and (2) an increase of $3.3 million and $9.0 million, respectively, in the recognition of the expected advertising spend in excess of advertising funds revenue compared with the prior year.

General and Administrative Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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$ 62.8 $ 47.3 $ 15.5 $ 178.6 $ 147.6 $ 31.0

The increase in general and administrative expenses during the second quarter and the first six months of 2021 was primarily due to (1) an increase in incentive compensation accruals and higher share-based compensation, reflecting higher operating performance in the first six months of 2021 compared to the first six months of 2020, and (2) higher professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning implementation.

During the first six months of 2021, these increases were partially offset by a decrease in travel-related expenses as a result of reduced travel.

Depreciation and Amortization Second Quarter Six Months

The increase in general and administrative expenses during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in incentive compensation accruals and higher share-based compensation, reflecting higher operating performance as compared to plan in the first nine months of 2021 versus the first nine months of 2020, and (2) higher professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning implementation.

General and administrative expenses also increased during the third quarter of 2021 due to higher travel-related expenses.

Depreciation and Amortization Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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$ 30.9 $ 33.0 $ (2.1) $ 93.2 $ 98.7 $ (5.5)

The decrease in depreciation and amortization during the second quarter and the first six months of 2021 was primarily due to (1) assets becoming fully depreciated and (2) the impact of a prior year change in useful lives for certain asset categories.

These decreases were partially offset by an increase in depreciation and amortization for technology investments.

System Optimization Gains, Net Second Quarter Six Months

The decrease in depreciation and amortization during the third quarter and the first nine months of 2021 was primarily due to assets becoming fully depreciated, partially offset by an increase in depreciation and amortization for technology investments.

Depreciation and amortization during the first nine months of 2021 also decreased due to the impact of a prior year change in useful lives for certain asset categories.

System Optimization Gains, Net Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

System optimization gains, net $ (1.4) $ — $ (1.4) $ (32.7) $ (2.3) $ (30.4)

System optimization gains, net for the second quarter and the first six months of 2021 were primarily comprised of a gain on the sale of 47 Company-operated restaurants in New York.

System optimization gains, net for the second quarter and first six months of 2020 were primarily comprised of gains on the sale of surplus and other properties.

System optimization gains, net for the third quarter of 2021 were primarily comprised of gains on the sale of surplus and other properties.

System optimization gains, net for the first nine months of 2021 were primarily comprised of a gain on the sale of 47 Company-operated restaurants in New York.

See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information on the sale of the Company-operated restaurants in New York.

Reorganization and Realignment Costs Second Quarter Six Months

Reorganization and Realignment Costs Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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The Operations and Field Realignment Plan also includes contract terminations, including the closure of certain field offices.

During the second quarter and the first six months of 2021, the Company recognized costs totaling $1.2 million and $1.5 million, respectively, which primarily included third-party and other costs.

The Company expects to incur additional costs aggregating approximately $1.0 million to $3.0 million, comprised primarily of third-party and other costs.

During the first nine months of 2021, the Company recognized costs totaling $1.6 million, which primarily included third-party and other costs.

The Company expects to incur additional costs aggregating up to approximately $0.5 million, 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.

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 Franchise Flips.

During the second quarter of 2021, the Company recognized costs associated with its system optimization initiative totaling $0.9 million, which were primarily comprised of severance and related employee costs and professional fees associated with the sale of 47 Company-operated restaurants in New York.

During the six months ended July 4, 2021, the Company recognized costs associated with its system optimization initiative totaling $5.5 million, which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the NPC bankruptcy sale process.

During the nine months ended October 3, 2021, the Company recognized costs associated with its system optimization initiative totaling $5.8 million, which were primarily comprised of the write-off of certain lease assets, lease termination fees and transaction fees associated with the NPC bankruptcy sale process.

The Company expects to recognize a gain of approximately $1.0 million related to the write-off of certain NPC-related lease liabilities upon final termination of the leases.

Impairment of Long-Lived Assets Second Quarter Six Months

Impairment of Long-Lived Assets Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

Impairment of long-lived assets $ 0.6 $ — $ 0.6 $ 1.8 $ 4.7 $ (2.9)

The change in impairment charges during the second quarter of 2021 was primarily driven by higher impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants when compared to the second quarter of 2020.

The change in impairment charges during the first six months of 2021 was primarily driven by the expected deterioration in operating performance of certain Company-operated restaurants in the first six months of 2020 as a result of the COVID-19 pandemic.

Other Operating Income, Net Second Quarter Six Months

The change in impairment charges during the third quarter of 2021 was primarily driven by impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants when compared to the third quarter of 2020.

The change in impairment charges during the first nine months of 2021 was primarily driven by the expected deterioration in operating performance of certain Company-operated restaurants in the first nine months of 2020 as a result of the COVID-19 pandemic.

Other Operating Income, Net Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

Gains on sales-type leases $ (0.7) $ (0.2) $ (0.5) $ (4.2) $ (1.4) $ (2.8)

Lease buyout (0.8) 0.1 (0.9) (0.9) 0.1 (1.0)

Equity in earnings in joint ventures, net (2.3) (2.1) (0.2) (5.6) (4.4) (1.2)

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$ (3.0) $ (2.7) $ (0.3) $ (10.8) $ (6.1) $ (4.7)

The change in other operating income, net during the second quarter and the first six months of 2021 was primarily due to (1) gains on new and modified sales-type leases, (2) lease buyout activity and (3) an increase in the equity in earnings from our TimWen joint venture.

Interest Expense, Net Second Quarter Six Months

The change in other operating income, net during the third quarter and the first nine months of 2021 was primarily due to (1) gains on new and modified sales-type leases and (2) an increase in the equity in earnings from our TimWen joint venture.

Interest Expense, Net Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

Interest expense, net $ 26.0 $ 29.1 $ (3.1) $ 83.0 $ 86.7 $ (3.7)

Interest expense, net decreased during the second quarter and the first six months of 2021 primarily due to the impact of completing the refinancing of a portion of the Company’s securitized financing facility in the second quarter of 2021.

Loss on Early Extinguishment of Debt Second Quarter Six Months

Interest expense, net decreased during the third quarter and the first nine months of 2021 primarily due to the impact of completing the refinancing of a portion of the Company’s securitized financing facility in the second quarter of 2021.

Loss on Early Extinguishment of Debt Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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The loss on the early extinguishment of debt of $17.9 million was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs of $8.3 million.

Other Income (Expense), Net Second Quarter Six Months

Other Income, Net Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

Other income (expense), net $ 0.2 $ (0.2) $ 0.4 $ 0.3 $ 0.9 $ (0.6)

The change in other income (expense), net during the second quarter and the first six months of 2021 was primarily due to fluctuations in interest income earned on our cash equivalents.

Provision for Income Taxes Second Quarter Six Months

Other income, net $ 0.2 $ 0.2 $ — $ 0.4 $ 1.2 $ (0.8)

The change in other income, net during the first nine months of 2021 was primarily due to fluctuations in interest income earned on our cash equivalents.

Provision for Income Taxes Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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24.3 % 24.2 % 0.1 % 21.8 % 24.8 % (3.0) %

Our effective tax rates for the second quarter and the first six months 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 second quarter of 2021 compared with the second quarter of 2020 was primarily due to an increase in the benefit of share-based compensation, partially offset by an increase due to state income taxes, including discrete changes to state deferred taxes.

The decrease in the effective tax rate for the first six months of 2021 compared with the first six months of 2020 was primarily due to a decrease in the tax effects of our foreign operations, partially offset by an increase due to state income taxes, including discrete changes to state deferred taxes.

Our effective tax rates for the third quarter and the first nine months 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 increase in the effective tax rate for the third quarter of 2021 compared with the third quarter of 2020 was primarily due to a decrease in the tax benefit from share-based compensation.

The decrease in the effective tax rate for the first nine months of 2021 compared with the first nine months of 2020 was primarily due to a decrease in the tax effects of our foreign operations and an increase in the tax benefit from 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.

Second Quarter Six Months

Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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The increase in Wendy’s U.S.

revenues during the second quarter and the first six months of 2021 was primarily due to an increase in systemwide same-restaurant sales, partially offset by the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.

Same-restaurant sales increased due to (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (2) higher average check.

Same-restaurant sales during the first six months of 2021 also benefited from the positive impact from the breakfast daypart.

In addition, during the second quarter and the first six months of 2021, Wendy’s U.S.

revenues benefited from higher franchise fees, primarily due to an increase in fees for providing information technology services to franchisees.

revenues during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in systemwide same-restaurant sales and (2) higher franchise fees, reflecting an increase in fees for providing information technology services to franchisees.

Same-restaurant sales increased during the third quarter and the first nine months of 2021 primarily due to higher average check.

Same-restaurant sales during the first nine months of 2021 also benefited from (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (2) the positive impact from the breakfast daypart.

These increases were partially offset by the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.

The increase in Wendy’s U.S.

segment profit during the second quarter and the first six months 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 higher general and administrative expenses.

segment profit during the third quarter of 2021 was primarily due to higher revenues, partially offset by (1) higher 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,” (2) higher franchise support and other costs, (3) higher general and administrative expenses and (4) higher advertising fund expense, reflecting the Company’s decision to fund incremental advertising to support the breakfast daypart.

The increase in Wendy’s U.S.

segment profit during the first nine months 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 (1) higher general and administrative expenses, (2) higher advertising fund expense, reflecting the Company’s decision to fund incremental advertising to support the breakfast daypart and (3) higher franchise support and other costs.

Wendy’s International

Second Quarter Six Months

Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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Segment profit $ 6.9 $ 6.6 $ 0.3 $ 21.2 $ 15.3 $ 5.9

The increase in Wendy’s International revenues during the second quarter and the first six months of 2021 was primarily due to an increase in same-restaurant sales.

Same-restaurant sales increased due to (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (2) higher average check.

The increase in Wendy’s International segment profit during the second quarter and the first six months of 2021 was primarily due to higher revenues, partially offset by higher general and administrative expenses.

The increase in Wendy’s International revenues during the third quarter and the first nine months of 2021 was primarily due to an increase in same-restaurant sales.

Same-restaurant sales increased during the third quarter and the first nine months of 2021 due to an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic.

The increase in Wendy’s International segment profit during the third quarter and the first nine months of 2021 was primarily due to higher revenues, partially offset by higher general and administrative expenses.

Global Real Estate & Development

Second Quarter Six Months

Third Quarter Nine Months

2021 2020 Change 2021 2020 Change

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Segment profit $ 27.0 $ 25.3 $ 1.7 $ 79.8 $ 75.5 $ 4.3

The increase in Global Real Estate & Development revenues during the second quarter and the first six months of 2021 was primarily due to higher franchise rental income.

The increase in Global Real Estate & Development revenues during the third quarter and the first nine months of 2021 was primarily due to higher franchise rental income.

See “Franchise Rental Income” above for further information.

The increase in Global Real Estate & Development segment profit during the second quarter and the first six months of 2021 was primarily due to (1) gains on new and modified sales-type leases, (2) lease buyout activity and (3) an increase in the equity in earnings from the TimWen joint venture.

These increases were partially offset by higher general and administrative expenses.

The increase in Global Real Estate & Development segment profit during the third quarter of 2021 was primarily due to an increase in net rental income, reflecting the impact of the sale of 47 Company-operated restaurants in New York to franchisees during the second quarter of 2021.

The increase in Global Real Estate & Development segment profit during the first nine months of 2021 was primarily due to (1) gains on new and modified sales-type leases and (2) an increase in the equity in earnings from the TimWen joint venture.

Liquidity and Capital Resources

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• cash dividends aggregating approximately $26.5 million as discussed below in “Dividends;” and

• potential stock repurchases of up to $104.4 million, of which $4.4 million was repurchased subsequent to July 4, 2021 through August 4, 2021, as discussed below in “Stock Repurchases.”

• potential stock repurchases of up to $140.6 million, of which $15.5 million was repurchased subsequent to October 3, 2021 through November 3, 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.

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However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us.

The table below summarizes our cash flows from operating, investing and financing activities for the first six months of 2021 and 2020:

The table below summarizes our cash flows from operating, investing and financing activities for the first nine months of 2021 and 2020:

2021 2020 Change

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Cash provided by 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 operating activities was $158.8 million and $30.6 million in the first six months of 2021 and 2020, respectively.

The increase was primarily due to (1) higher net income, adjusted for non-cash expenses, (2) the prior year extension of payment terms for royalties beginning in April 2020 for a three month period, (3) a cash payment of $24.7 million related to the settlement of the financial institutions class action in January 2020, (4) the timing of receipt of franchisee rental payments and (5) a decrease in payments for incentive compensation for the 2020 fiscal year paid in 2021.

Cash provided by operating activities was $276.7 million and $205.8 million in the first nine months of 2021 and 2020, respectively.

The increase 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 and (4) a decrease in payments for incentive compensation for the 2020 fiscal year paid in 2021.

These increases were partially offset by (1) the timing of payments for marketing expenses of the national advertising funds and (2) an increase in cash paid for income taxes.

Investing Activities

Cash provided by (used in) investing activities was $32.0 million and $(24.9) million in the first six months of 2021 and 2020, respectively.

The change was primarily due to (1) an increase in proceeds from dispositions of $46.2 million associated with the sale of 47 Company-operated restaurants in New York during the second quarter of 2021, (2) a decrease in capital expenditures of $5.3 million and (3) 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.

Cash provided by (used in) investing activities was $15.0 million and $(41.0) million in the first nine months of 2021 and 2020, respectively.

The change was primarily due to (1) an increase in proceeds from dispositions of $49.1 million, reflecting the sale of 47 Company-operated restaurants in New York during the second quarter of 2021, (2) 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 (3) a decrease in capital expenditures of $1.5 million.

Financing Activities

Cash provided by financing activities was $28.9 million and $48.3 million in the first six months of 2021 and 2020, respectively.

The decrease was primarily due to (1) an increase in repurchases of common stock of $38.5 million and (2) an increase in dividends of $4.3 million.

These changes were partially offset by (1) an increase in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $14.6 million and (2) a net increase in cash provided by long-term debt activities of $11.0 million, reflecting the respective impacts of the completion of the Company’s debt refinancing transaction during the second quarter of 2021 and 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.

Cash used in financing activities was $57.5 million and $115.3 million in the first nine months of 2021 and 2020, respectively.

The change was primarily due to (1) a net increase in cash provided by long-term debt activities of $147.1 million, reflecting the impact of the completion of the Company’s debt refinancing transaction during the second quarter of 2021, and (2) an increase in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $12.7 million.

These changes were partially offset by (1) an increase in repurchases of common stock of $79.0 million and (2) an increase in dividends of $19.8 million.

Long-Term Debt, Including Current Portion

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In connection with the issuance of the Series 2021-1 Class A-2 Notes, the Master Issuer also issued the Series 2021-1 Class A-1 Notes, which allow for the drawing of up to $300.0 million 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.

No amounts were borrowed under the Series 2021-1 Class A-1 Notes during the nine months ended October 3, 2021.

The Series 2021-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2019-1 Class A-1 Notes and $100.0 million Series 2020-1 Class A-1 Notes, which were cancelled 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.

Except as described above, 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 July 4, 2021.

The Company was in compliance with its debt covenants as of October 3, 2021.

See Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.

On March 15, 2021 and June 15, 2021, the Company paid quarterly cash dividends per share of $.09 and $0.10, respectively, aggregating $42.3 million.

On August 11, 2021, the Company announced a dividend of $.12 per share to be paid on September 15, 2021 to stockholders of record as of September 1, 2021.

If the Company pays regular quarterly cash dividends for the remainder of 2021 at the same rate as declared in the third quarter of 2021, the Company’s total cash requirement for dividends for the remainder of 2021 will be approximately $53.5 million based on the number of shares of its common stock outstanding at August 4, 2021.

On March 15, 2021, June 15, 2021 and September 15, 2021, the Company paid quarterly cash dividends per share of $.09, $0.10 and $.12, respectively, aggregating $69.0 million.

On November 10, 2021, the Company announced a dividend of $.12 per share to be paid on December 15, 2021 to stockholders of record as of December 1, 2021.

As a result of the November 10 announcement, the Company expects that its total cash requirement for the fourth quarter of 2021 will be approximately $26.5 million based on the number of shares of its common stock outstanding at November 3, 2021.

The Company currently intends to continue to declare and pay quarterly cash dividends;

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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.

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The Company resumed share repurchases in August 2020.

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.

During the six months ended July 4, 2021, the Company repurchased 4.0 million shares under the February 2020 repurchase authorization with an aggregate purchase price of $83.3 million, of which $0.4 million was accrued at July 4, 2021, and excluding commissions of $0.1 million.

As of July 4, 2021, the Company had $34.4 million of availability remaining under its February 2020 authorization.

Subsequent to July 4, 2021 through August 4, 2021, the Company repurchased 0.2 million shares under the February 2020 authorization with an aggregate purchase price of $4.4 million, excluding commissions.

In addition, in August 2021, the Board of Directors approved an increase of $70.0 million to the February 2020 authorization, resulting in an aggregate authorization of $220.0 million that continues to expire on February 28, 2022.

The Company has availability of $100.0 million remaining under the authorization as of August 11, 2021.

In addition, in May 2021 and August 2021, the Board of Directors approved increases of $50.0 million and $70.0 million, respectively, to the February 2020 authorization, resulting in an aggregate authorization of $220.0 million that continues to expire on February 28, 2022.

During the nine months ended October 3, 2021, the Company repurchased 5.9 million shares under the February 2020 authorization with an aggregate purchase price of $127.2 million, of which $2.3 million was accrued at October 3, 2021, and excluding commissions of $0.1 million.

As of October 3, 2021, the Company had $60.6 million of availability remaining under the February 2020 authorization.

Subsequent to October 3, 2021 through November 3, 2021, the Company repurchased 0.7 million shares under the February 2020 authorization with an aggregate purchase price of $15.5 million, excluding commissions.

In addition, in November 2021, the Board of Directors approved an increase of $80.0 million to the February 2020 authorization, resulting in an aggregate authorization of $300.0 million that continues to expire on February 28, 2022.

The Company also announced in November 2021 its intention to launch a $125.0 million accelerated share repurchase transaction during the fourth quarter of 2021 as part of the February 2020 authorization.

The Company has availability of $125.1 million remaining under the February 2020 authorization as of November 10, 2021.

General Inflation, Commodities and Changing Prices

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis