Wendy's Co 10-Q

Item 1. Financial Statements. THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Par Value) October 3, 2021 January 3, 2021 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 571,502 $ 306,989 Restricted cash 36,321 33,973 Accounts and notes receivable, net 100,265 109,891 Inventories 4,257 4,732 Prepaid expenses and other current assets 23,820 89,732 Advertising funds restricted assets 107,320 142,306 Total current assets 843,485 687,623 Properties 873,250 915,889 Finance lease assets 210,660 206,153 Operating lease assets 783,986 821,480 Goodwill 751,805 751,049 Other intangible assets 1,209,695 1,224,960 Investments 41,356 44,574 Net investment in sales-type and direct financing leases 305,242 268,221 Other assets 137,468 120,057 Total assets $ 5,156,947 $ 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 15,915 12,105 Current portion of operating lease liabilities 45,541 45,346 Accounts payable 26,506 31,063 Accrued expenses and other current liabilities 158,800 155,321 Advertising funds restricted liabilities 127,673 140,511 Total current liabilities 407,185 413,308 Long-term debt 2,360,763 2,218,163 Long-term finance lease liabilities 528,775 506,076 Long-term operating lease liabilities 830,488 865,325 Deferred income taxes 279,813 280,755 Deferred franchise fees 90,086 89,094 Other liabilities 117,083 117,689 Total liabilities 4,614,193 4,490,410 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 221,301 and 224,268 shares outstanding, respectively 47,042 47,042 Additional paid-in capital 2,911,552 2,899,276 Retained earnings 317,956 238,674 Common stock held in treasury, at cost; 249,123 and 246,156 shares, respectively ( 2,685,063 ) ( 2,585,755 ) Accumulated other comprehensive loss ( 48,733 ) ( 49,641 ) Total stockholders’ equity 542,754 549,596 Total liabilities and stockholders’ equity $ 5,156,947 $ 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 Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 (Unaudited) Revenues: Sales $ 171,078 $ 191,946 $ 553,660 $ 522,961 Franchise royalty revenue and fees 138,755 116,820 398,246 321,645 Franchise rental income 62,446 58,721 182,190 173,434 Advertising funds revenue 97,976 84,755 289,699 241,468 470,255 452,242 1,423,795 1,259,508 Costs and expenses: Cost of sales 146,436 159,545 457,440 450,170 Franchise support and other costs 10,509 5,960 27,080 19,427 Franchise rental expense 34,424 32,426 101,058 93,024 Advertising funds expense 108,529 92,048 310,642 253,353 General and administrative 62,840 47,322 178,576 147,553 Depreciation and amortization 30,940 32,966 93,243 98,726 System optimization gains, net ( 1,437 ) ( 23 ) ( 32,719 ) ( 2,333 ) Reorganization and realignment costs 345 3,375 7,381 10,196 Impairment of long-lived assets 566 23 1,831 4,727 Other operating income, net ( 3,092 ) ( 2,748 ) ( 10,800 ) ( 6,076 ) 390,060 370,894 1,133,732 1,068,767 Operating profit 80,195 81,348 290,063 190,741 Interest expense, net ( 26,000 ) ( 29,086 ) ( 82,990 ) ( 86,696 ) Loss on early extinguishment of debt — — ( 17,917 ) — Other income, net 171 181 461 1,113 Income before income taxes 54,366 52,443 189,617 105,158 Provision for income taxes ( 13,195 ) ( 12,690 ) ( 41,356 ) ( 26,060 ) Net income $ 41,171 $ 39,753 $ 148,261 $ 79,098 Net income per share: Basic $ .19 $ .18 $ .67 $ .35 Diluted .18 .17 .66 .35 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 Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 (Unaudited) Net income $ 41,171 $ 39,753 $ 148,261 $ 79,098 Other comprehensive (loss) income: Foreign currency translation adjustment ( 4,659 ) 3,220 908 ( 5,138 ) Other comprehensive (loss) income ( 4,659 ) 3,220 908 ( 5,138 ) Comprehensive income $ 36,512 $ 42,973 $ 149,169 $ 73,960 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 Net income — — 41,171 — — 41,171 Other comprehensive loss — — — — ( 4,659 ) ( 4,659 ) Cash dividends — — ( 26,684 ) — — ( 26,684 ) Repurchases of common stock — — — ( 43,857 ) — ( 43,857 ) Share-based compensation — 5,702 — — — 5,702 Common stock issued upon exercises of stock options — 351 — 1,465 — 1,816 Common stock issued upon vesting of restricted shares — ( 1,835 ) — 642 — ( 1,193 ) Other — 60 ( 6 ) 48 — 102 Balance at October 3, 2021 $ 47,042 $ 2,911,552 $ 317,956 $ ( 2,685,063 ) $ ( 48,733 ) $ 542,754 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 Net income — — 39,753 — — 39,753 Other comprehensive income — — — — 3,220 3,220 Cash dividends — — ( 11,202 ) — — ( 11,202 ) Repurchases of common stock — — — ( 1,708 ) — ( 1,708 ) Share-based compensation — 5,786 — — — 5,786 Common stock issued upon exercises of stock options — 838 — 2,465 — 3,303 Common stock issued upon vesting of restricted shares — ( 2,600 ) — 918 — ( 1,682 ) Other — 44 ( 2 ) 40 — 82 Balance at September 27, 2020 $ 47,042 $ 2,896,767 $ 215,635 $ ( 2,578,943 ) $ ( 58,966 ) $ 521,535 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) Nine Months Ended October 3, 2021 September 27, 2020 (Unaudited) Cash flows from operating activities: Net income $ 148,261 $ 79,098 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 93,243 98,726 Share-based compensation 16,735 15,112 Impairment of long-lived assets 1,831 4,727 Deferred income tax ( 25 ) 5,878 Non-cash rental expense, net 28,421 19,967 Change in operating lease liabilities ( 34,220 ) ( 29,539 ) Net receipt of deferred vendor incentives 1,906 5,061 System optimization gains, net ( 32,719 ) ( 2,333 ) Distributions received from joint ventures, net of equity in earnings 3,561 1,187 Long-term debt-related activities, net 23,043 4,866 Changes in operating assets and liabilities and other, net 26,636 3,009 Net cash provided by operating activities 276,673 205,759 Cash flows from investing activities: Capital expenditures ( 43,401 ) ( 44,876 ) Acquisitions 4,879 — Dispositions 52,657 3,570 Proceeds from sale of investments — 169 Notes receivable, net 907 138 Net cash provided by (used in) investing activities 15,042 ( 40,999 ) Cash flows from financing activities: Proceeds from long-term debt 1,100,000 153,315 Repayments of long-term debt ( 955,782 ) ( 174,959 ) Repayments of finance lease liabilities ( 9,021 ) ( 5,850 ) Deferred financing costs ( 20,873 ) ( 2,122 ) Repurchases of common stock ( 125,656 ) ( 46,667 ) Dividends ( 68,963 ) ( 49,176 ) Proceeds from stock option exercises 27,204 15,540 Payments related to tax withholding for share-based compensation ( 4,390 ) ( 5,409 ) Net cash used in financing activities ( 57,481 ) ( 115,328 ) Net cash provided by operations before effect of exchange rate changes on cash 234,234 49,432 Effect of exchange rate changes on cash 177 ( 1,715 ) Net increase in cash, cash equivalents and restricted cash 234,411 47,717 Cash, cash equivalents and restricted cash at beginning of period 418,241 358,707 Cash, cash equivalents and restricted cash at end of period $ 652,652 $ 406,424 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable $ 4,363 $ 4,789 Finance leases 43,277 24,617 October 3, 2021 January 3, 2021 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 571,502 $ 306,989 Restricted cash 36,321 33,973 Restricted cash, included in Advertising funds restricted assets 44,829 77,279 Total cash, cash equivalents and restricted cash $ 652,652 $ 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 October 3, 2021, the results of our operations for the three and nine months ended October 3, 2021 and September 27, 2020 and cash flows for the nine months ended October 3, 2021 and September 27, 2020. The results of operations for the nine months ended October 3, 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 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. 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 October 3, 2021 Sales at Company-operated restaurants $ 169,961 $ 1,117 $ — $ 171,078 Franchise royalty revenue 102,603 13,918 — 116,521 Franchise fees (a) 19,759 1,144 1,331 22,234 Franchise rental income — — 62,446 62,446 Advertising funds revenue 91,481 6,495 — 97,976 Total revenues $ 383,804 $ 22,674 $ 63,777 $ 470,255 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 Nine Months Ended October 3, 2021 Sales at Company-operated restaurants $ 552,297 $ 1,363 $ — $ 553,660 Franchise royalty revenue 305,373 39,048 — 344,421 Franchise fees (a) 46,020 4,041 3,764 53,825 Franchise rental income — — 182,190 182,190 Advertising funds revenue 271,911 17,788 — 289,699 Total revenues $ 1,175,601 $ 62,240 $ 185,954 $ 1,423,795 Three Months Ended September 27, 2020 Sales at Company-operated restaurants $ 191,946 $ — $ — $ 191,946 Franchise royalty revenue 98,128 11,216 — 109,344 Franchise fees (a) 5,651 463 1,362 7,476 Franchise rental income — — 58,721 58,721 Advertising funds revenue 79,170 5,585 — 84,755 Total revenues $ 374,895 $ 17,264 $ 60,083 $ 452,242 Nine Months Ended September 27, 2020 Sales at Company-operated restaurants $ 522,961 $ — $ — $ 522,961 Franchise royalty revenue 271,082 30,809 — 301,891 Franchise fees (a) 16,244 1,369 2,141 19,754 Franchise rental income — — 173,434 173,434 Advertising funds revenue 226,907 14,561 — 241,468 Total revenues $ 1,037,194 $ 46,739 $ 175,575 $ 1,259,508 _______________ (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: October 3, 2021 (a) January 3, 2021 (a) Receivables, which are included in “Accounts and notes receivable, net” (b) $ 46,747 $ 57,677 Receivables, which are included in “Advertising funds restricted assets” 57,222 63,252 Deferred franchise fees (c) 99,057 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 $ 8,971 and $ 90,086 as of October 3, 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: Nine Months Ended October 3, 2021 September 27, 2020 Deferred franchise fees at beginning of period $ 97,785 $ 100,689 Revenue recognized during the period ( 14,001 ) ( 6,286 ) New deferrals due to cash received and other 15,273 3,642 Deferred franchise fees at end of period $ 99,057 $ 98,045 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) $ 4,428 2022 6,293 2023 6,128 2024 5,938 2025 5,758 Thereafter 70,512 $ 99,057 _______________ (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 nine months ended October 3, 2021 and September 27, 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 nine months ended October 3, 2021 and September 27, 2020, the Company facilitated 34 and 22 Franchise Flips, respectively. In addition, 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. No Company-operated restaurants were sold to franchisees during the nine months ended September 27, 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 Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Number of restaurants sold to franchisees — — 47 — Proceeds from sales of restaurants (a) $ — $ — $ 50,518 $ — Net assets sold (b) — — ( 16,939 ) — Goodwill related to sales of restaurants — — ( 4,847 ) — Net unfavorable leases (c) — — ( 2,939 ) — Gain on sales-type leases — — 7,156 — Other (d) — — ( 2,148 ) — — — 30,801 — Post-closing adjustments on sales of restaurants (e) 5 23 520 368 Gain on sales of restaurants, net 5 23 31,321 368 (Loss) gain on sales of other assets, net (f) 1,432 — 1,398 1,965 System optimization gains, net $ 1,437 $ 23 $ 32,719 $ 2,333 _______________ (a) In addition to the proceeds noted herein, the Company received cash proceeds of $ 26 during the three and nine months ended October 3, 2021 related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants. (b) Net assets sold consist primarily of equipment. (c) During the nine months ended October 3, 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). (d) The nine months ended October 3, 2021 include a deferred gain of $ 3,500 as a result of certain contingencies related to the extension of lease terms. 13 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (e) The nine months ended October 3, 2021 includes the recognition of deferred gains of $ 515 as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. The three and nine months ended September 27, 2020 represent the recognition of such deferred gains. (f) During the three and nine months ended October 3, 2021, the Company received net cash proceeds of $ 2,100 and $ 2,113 , respectively, primarily from the sale of surplus and other properties. During the nine months ended September 27, 2020, the Company received net cash proceeds of $ 3,570 , primarily from the sale of surplus and other properties. Assets Held for Sale October 3, 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) $ 3,749 $ 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 Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Operations and field realignment $ 74 $ 3,021 $ 1,563 $ 3,021 IT realignment ( 17 ) 403 ( 11 ) 6,809 G&A realignment ( 7 ) ( 49 ) ( 41 ) 282 System optimization initiative 295 — 5,870 84 Reorganization and realignment costs $ 345 $ 3,375 $ 7,381 $ 10,196 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 $ 5,500 to $ 6,000 related to the Operations and Field Realignment Plan. During the nine months ended October 3, 2021, the Company recognized costs totaling $ 1,563 , which primarily included third-party and other costs. During the three and nine months ended September 27, 2020, the Company recognized costs totaling $ 3,021 , which included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating up to approximately $ 500 , 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 Nine Months Ended Total Incurred Since Inception October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Severance and related employee costs $ — $ 2,502 $ 333 $ 2,502 $ 3,446 Third-party and other costs 74 — 1,230 — 1,297 74 2,502 1,563 2,502 4,743 Share-based compensation (a) — 519 — 519 621 Total operations and field realignment $ 74 $ 3,021 $ 1,563 $ 3,021 $ 5,364 _______________ (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 October 3, 2021. Balance January 3, 2021 Charges Payments Balance October 3, 2021 Severance and related employee costs $ 2,600 $ 333 $ ( 2,377 ) $ 556 Third-party and other costs — 1,230 ( 1,230 ) — $ 2,600 $ 1,563 $ ( 3,607 ) $ 556 Balance December 29, 2019 Charges Payments Balance September 27, 2020 Severance and related employee costs $ — $ 2,502 $ — $ 2,502 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 nine months ended September 27, 2020, the Company recognized costs totaling $ 6,809 , 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. 15 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 IT Realignment Plan: Three Months Ended Nine Months Ended Total Incurred Since Inception October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Severance and related employee costs (a) $ ( 32 ) $ 34 $ ( 151 ) $ 1,009 $ 8,240 Recruitment and relocation costs 12 345 133 659 1,429 Third-party and other costs 3 24 7 5,141 6,542 ( 17 ) 403 ( 11 ) 6,809 16,211 Share-based compensation (b) — — — — 193 Total IT realignment $ ( 17 ) $ 403 $ ( 11 ) $ 6,809 $ 16,404 _______________ (a) The three and nine months ended October 3, 2021 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 the IT Realignment Plan. As of October 3, 2021, the accruals for the IT Realignment Plan are included in “Accrued expenses and other current liabilities.” As of September 27, 2020, the accruals for the IT Realignment Plan were included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 2,739 and $ 178 , respectively. The tables below present a rollforward of our accruals for the IT Realignment Plan. Balance January 3, 2021 Charges Payments Balance October 3, 2021 Severance and related employee costs $ 1,508 $ ( 151 ) $ ( 1,115 ) $ 242 Recruitment and relocation costs — 133 ( 133 ) — Third-party and other costs — 7 ( 7 ) — $ 1,508 $ ( 11 ) $ ( 1,255 ) $ 242 Balance December 29, 2019 Charges Payments Balance September 27, 2020 Severance and related employee costs $ 7,548 $ 1,009 $ ( 5,640 ) $ 2,917 Recruitment and relocation costs — 659 ( 659 ) — Third-party and other costs 1,076 5,141 ( 6,217 ) — $ 8,624 $ 6,809 $ ( 12,516 ) $ 2,917 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 nine months ended September 27, 2020, the Company recognized costs totaling $ 282 , which primarily included share-based compensation. The Company does not expect to incur any material additional costs under the 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) The following is a summary of the activity recorded as a result of the G&A Realignment Plan: Three Months Ended Nine Months Ended Total Incurred Since Inception October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Severance and related employee costs (a) $ ( 8 ) $ ( 116 ) $ ( 61 ) $ 30 $ 24,205 Recruitment and relocation costs 1 27 1 42 2,877 Third-party and other costs — 9 — 10 2,223 ( 7 ) ( 80 ) ( 60 ) 82 29,305 Share-based compensation (b) — 31 19 200 8,130 Termination of defined benefit plans — — — — 1,335 Total G&A realignment $ ( 7 ) $ ( 49 ) $ ( 41 ) $ 282 $ 38,770 _______________ (a) The three and nine months ended October 3, 2021 and September 27, 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. As of October 3, 2021, the accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities.” As of September 27, 2020, the accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled and $ 1,705 and $ 18 , respectively. The tables below present a rollforward of our accruals for the G&A Realignment Plan. Balance January 3, 2021 Charges Payments Balance October 3, 2021 Severance and related employee costs $ 932 $ ( 61 ) $ ( 828 ) $ 43 Recruitment and relocation costs — 1 ( 1 ) — Third-party and other costs — — — — $ 932 $ ( 60 ) $ ( 829 ) $ 43 Balance December 29, 2019 Charges Payments Balance September 27, 2020 Severance and related employee costs $ 5,276 $ 30 $ ( 3,627 ) $ 1,679 Recruitment and relocation costs 83 42 ( 81 ) 44 Third-party and other costs — 10 ( 10 ) — $ 5,359 $ 82 $ ( 3,718 ) $ 1,723 System Optimization Initiative The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During the nine months ended October 3, 2021, the Company recognized costs totaling $ 5,870 , 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. 17 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 costs recorded as a result of our system optimization initiative: Three Months Ended Nine Months Ended Total Incurred Since Inception October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Severance and related employee costs $ — $ — $ 661 $ — $ 18,898 Professional fees 277 — 1,016 80 23,123 Other (a) — — 1,354 4 7,207 277 — 3,031 84 49,228 Accelerated depreciation and amortization (b) — — — — 25,398 NPC lease termination costs (c) 18 — 2,839 — 2,839 Share-based compensation (d) — — — — 5,013 Total system optimization initiative $ 295 $ — $ 5,870 $ 84 $ 82,478 _______________ (a) The nine months ended October 3, 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 nine months ended October 3, 2021 includes the write-off of lease assets of $ 1,359 and lease termination fees paid of $ 1,480 . (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 October 3, 2021 Severance and related employee costs $ — $ 661 $ ( 661 ) $ — Professional fees 1,230 1,016 ( 2,246 ) — Other — 1,354 ( 1,354 ) — $ 1,230 $ 3,031 $ ( 4,261 ) $ — (6) Investments Equity Method 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.” 18 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements: Nine Months Ended October 3, 2021 September 27, 2020 Balance at beginning of period $ 44,574 $ 45,310 Equity in earnings for the period 8,005 6,113 Amortization of purchase price adjustments (a) ( 2,392 ) ( 1,671 ) 5,613 4,442 Distributions received ( 9,174 ) ( 5,629 ) Foreign currency translation adjustment included in “Other comprehensive (loss) income” and other 343 ( 701 ) Balance at end of period $ 41,356 $ 43,422 _______________ (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. (7) Long-Term Debt Long-term debt consisted of the following: October 3, 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 $ 448,875 $ — 2.775 % Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 648,375 — Series 2019-1 Class A-2 Notes: 3.783 % Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 373,000 386,000 4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 419,625 434,250 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 457,188 460,750 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 84,880 83,998 Unamortized debt issuance costs ( 38,430 ) ( 30,085 ) 2,393,513 2,247,125 Less amounts payable within one year ( 32,750 ) ( 28,962 ) Total long-term debt $ 2,360,763 $ 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 19 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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 nine months ended October 3, 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 (of which $ 2,750 was paid during the three months ended October 3, 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 nine months ended October 3, 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. 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 nine months ended October 3, 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 October 3, 2021, the Company had no outstanding borrowings under the Canadian revolving credit facility. 20 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (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. Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments: October 3, 2021 January 3, 2021 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Measurements Financial assets Cash equivalents $ 125,042 $ 125,042 $ 75,067 $ 75,067 Level 1 Financial liabilities Series 2021-1 Class A-2-I Notes (a) 448,875 454,441 — — Level 2 Series 2021-1 Class A-2-II Notes (a) 648,375 663,806 — — Level 2 Series 2019-1 Class A-2-I Notes (a) 373,000 395,641 386,000 409,778 Level 2 Series 2019-1 Class A-2-II Notes (a) 419,625 454,874 434,250 469,555 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) 457,188 486,037 460,750 491,021 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) 84,880 100,800 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. 21 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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. 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 October 3, 2021 Level 1 Level 2 Level 3 Held and used $ 1,256 $ — $ — $ 1,256 Held for sale 340 — — 340 Total $ 1,596 $ — $ — $ 1,596 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 nine months ended September 27, 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 Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Company-operated restaurants $ 566 $ — $ 1,500 $ 4,395 Restaurants leased or subleased to franchisees — — 189 — Surplus properties — 23 142 332 $ 566 $ 23 $ 1,831 $ 4,727 22 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (10) Income Taxes The Company’s effective tax rate for the three months ended October 3, 2021 and September 27, 2020 was 24.3 % and 24.2 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the three months ended October 3, 2021 primarily due to state income taxes, partially offset by a benefit related to the filing of our 2020 federal income tax return. The Company’s effective tax rate for the nine months ended October 3, 2021 and September 27, 2020 was 21.8 % and 24.8 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the nine months ended October 3, 2021 primarily due to state income taxes, including discrete changes to state deferred taxes, partially offset by the tax benefit from share-based compensation. Unrecognized tax benefits for the Company decreased $ 1,874 and $ 2,019 during the three and nine months ended October 3, 2021, respectively. The decrease was primarily related to settlements with various taxing jurisdictions. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $ 66 due primarily to the lapse of statutes of limitations and expected settlements. The current portion of refundable income taxes was $ 1,813 and $ 5,399 as of October 3, 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 October 3, 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 Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Net income $ 41,171 $ 39,753 $ 148,261 $ 79,098 Common stock: Weighted average basic shares outstanding 222,373 223,907 222,527 223,521 Dilutive effect of stock options and restricted shares 2,685 4,410 3,201 4,312 Weighted average diluted shares outstanding 225,058 228,317 225,728 227,833 Net income per share: Basic $ .19 $ .18 $ .67 $ .35 Diluted $ .18 $ .17 $ .66 $ .35 Basic net income per share for the three and nine months ended October 3, 2021 and September 27, 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 nine months ended October 3, 2021 and September 27, 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 2,746 and 2,147 for the three and nine months ended October 3, 2021, respectively, and 1,049 and 2,117 for the three and nine months ended September 27, 2020, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. 23 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (12) Stockholders’ Equity Dividends During the first, second and third quarter of 2021, the Company paid dividends per share of $ .09 , $ .10 and $ .12 , respectively. During the first, second and third quarter of 2020, the Company paid dividends per share of $ .12 , $ .05 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 (the “February 2020 authorization”). 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 and August 2021, the Board of Directors approved increases of $ 50,000 and $ 70,000 , respectively, to the February 2020 authorization, resulting in an aggregate authorization of $ 220,000 that continues to expire on February 28, 2022. During the nine months ended October 3, 2021, the Company repurchased 5,876 shares under the February 2020 authorization with an aggregate purchase price of $ 127,150 , of which $ 2,299 was accrued at October 3, 2021, and excluding commissions of $ 82 . As of October 3, 2021, the Company had $ 60,566 of availability remaining under the February 2020 authorization. Subsequent to October 3, 2021 through November 3, 2021, the Company repurchased 697 shares under the February 2020 authorization with an aggregate purchase price of $ 15,494 , excluding commissions of $ 10 . In addition, in November 2021, the Board of Directors approved an increase of $ 80,000 to the February 2020 authorization, resulting in an aggregate authorization of $ 300,000 that continues to expire on February 28, 2022. The Company also announced in November 2021 its intention to launch a $ 125,000 accelerated share repurchase transaction during the fourth quarter of 2021 as part of the February 2020 authorization. The Company has availability of $ 125,072 remaining under the February 2020 authorization as of November 10, 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 (the February 2019 authorization”). 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 February 2019 authorization. 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 nine months ended September 27, 2020, the Company repurchased 2,172 shares with an aggregate purchase price of $ 45,014 , excluding commissions of $ 30 , 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 the February 2019 authorization. 24 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Accumulated Other Comprehensive Loss The following table provides a rollforward of accumulated other comprehensive loss: Nine Months Ended October 3, 2021 September 27, 2020 Balance at beginning of period $ ( 49,641 ) $ ( 53,828 ) Foreign currency translation 908 ( 5,138 ) Balance at end of period $ ( 48,733 ) $ ( 58,966 ) (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 October 3, 2021, Wendy’s and its franchisees operated 6,891 Wendy’s restaurants. Of the 313 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 136 restaurants, owned the building and held long-term land leases for 117 restaurants and held leases covering the land and building for 60 restaurants. Wendy’s also owned 510 and leased 1,275 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment. Company as Lessee The components of lease cost are as follows: Three Months Ended Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Finance lease cost: Amortization of finance lease assets $ 3,543 $ 3,471 $ 10,302 $ 9,995 Interest on finance lease liabilities 10,371 10,244 30,931 30,462 13,914 13,715 41,233 40,457 Operating lease cost 22,388 23,170 68,761 68,304 Variable lease cost (a) 16,635 15,548 48,406 43,766 Short-term lease cost 1,125 1,006 3,721 3,327 Total operating lease cost (b) 40,148 39,724 120,888 115,397 Total lease cost $ 54,062 $ 53,439 $ 162,121 $ 155,854 _______________ (a) Includes expenses for executory costs of $ 10,016 and $ 9,326 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $ 30,166 and $ 28,526 for the nine months ended October 3, 2021 and September 27, 2020, respectively, for which the Company is reimbursed by sublessees. (b) Includes $ 34,396 and $ 32,421 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $ 101,011 and $ 92,975 for the nine months ended October 3, 2021 and September 27, 2020, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 5,213 and $ 6,651 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $ 18,005 and $ 20,315 for the nine months ended October 3, 2021 and September 27, 2020, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. 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 cash flow and non-cash information related to leases: Nine Months Ended October 3, 2021 September 27, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 31,608 $ 28,689 Operating cash flows from operating leases 69,476 62,026 Financing cash flows from finance leases 9,021 5,850 Right-of-use assets obtained in exchange for lease obligations: Finance lease liabilities 43,277 24,617 Operating lease liabilities 11,404 12,149 The following table includes supplemental information related to leases: October 3, 2021 January 3, 2021 Weighted-average remaining lease term (years): Finance leases 15.8 16.2 Operating leases 14.2 14.6 Weighted average discount rate: Finance leases 9.19 % 9.54 % Operating leases 5.01 % 5.06 % Supplemental balance sheet information: Finance lease assets, gross $ 271,075 $ 261,308 Accumulated amortization ( 60,415 ) ( 55,155 ) Finance lease assets 210,660 206,153 Operating lease assets 783,986 821,480 The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of October 3, 2021: Finance Leases Operating Leases Fiscal Year Company-Operated Franchise and Other Company-Operated Franchise and Other 2021 (a) (b) $ 1,398 $ 13,934 $ 3,504 $ 18,313 2022 3,699 51,912 14,412 73,572 2023 3,644 53,569 14,726 73,226 2024 3,712 54,001 14,738 73,145 2025 3,787 54,496 14,633 72,829 Thereafter 46,140 682,798 141,258 732,276 Total minimum payments $ 62,380 $ 910,710 $ 203,271 $ 1,043,361 Less interest ( 22,694 ) ( 405,706 ) ( 58,455 ) ( 312,148 ) Present value of minimum lease payments (c) (d) $ 39,686 $ 505,004 $ 144,816 $ 731,213 _______________ 26 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (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 $ 1,038 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 $ 15,915 and $ 528,775 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 $ 45,541 and $ 830,488 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively. Company as Lessor The components of lease income are as follows: Three Months Ended Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Sales-type and direct-financing leases: Selling profit $ 705 $ 182 $ 4,244 $ 1,379 Interest income (a) 7,786 7,296 22,861 21,804 Operating lease income 45,834 43,510 134,312 130,514 Variable lease income 16,612 15,211 47,878 42,920 Franchise rental income (b) $ 62,446 $ 58,721 $ 182,190 $ 173,434 _______________ (a) Included in “Interest expense, net.” (b) Includes sublease income of $ 46,102 and $ 43,122 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $ 134,597 and $ 126,653 for the nine months ended October 3, 2021 and September 27, 2020, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 10,087 and $ 9,379 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $ 30,156 and $ 28,538 for the nine months ended October 3, 2021 and September 27, 2020, respectively. 27 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of October 3, 2021: Sales-Type and Direct Financing Leases Operating Leases Fiscal Year Subleases Owned Properties Subleases Owned Properties 2021 (a) (b) $ 8,409 $ 1,407 $ 28,841 $ 13,942 2022 34,188 2,610 116,068 56,305 2023 35,247 2,656 116,795 56,614 2024 37,248 2,667 116,962 57,720 2025 36,149 2,784 116,443 58,323 Thereafter 479,695 32,057 1,172,444 748,781 Total future minimum receipts 630,936 44,181 $ 1,667,553 $ 991,685 Unearned interest income ( 341,031 ) ( 21,892 ) Net investment in sales-type and direct financing leases (c) $ 289,905 $ 22,289 _______________ (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 $ 273 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 sales-type and direct financing rental receipts of $ 6,952 and $ 305,242 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. The present value of minimum sales-type and direct financing rental receipts includes a net investment in unguaranteed residual assets of $ 535 . Properties owned by the Company and leased to franchisees and other third parties under operating leases include: October 3, 2021 January 3, 2021 Land $ 280,767 $ 279,956 Buildings and improvements 307,593 309,605 Restaurant equipment 1,701 1,701 590,061 591,262 Accumulated depreciation and amortization ( 179,439 ) ( 170,722 ) $ 410,622 $ 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 nine months ended October 3, 2021 and September 27, 2020, Wendy’s paid TimWen $ 13,994 and $ 11,970 , respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $ 165 and $ 152 during the nine months ended October 3, 2021 and September 27, 2020, respectively, which has been included as a reduction to “General and administrative.” 28 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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 October 3, 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 nine months ended October 3, 2021, the Company recognized $ 7,016 in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of October 3, 2021, $ 866 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 $ 89,574 as of October 3, 2021. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of October 3, 2021. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations. The liability recorded for our probable exposure associated with these lease guarantees was not material as of October 3, 2021. Letters of Credit As of October 3, 2021, the Company had outstanding letters of credit with various parties totaling $ 23,569 . 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 October 3, 2021. 29 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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 (covered by applicable insurance). On September 15, 2021, the Court issued an order granting final approval of the Settlement, with the final judgment entered on September 24, 2021. On October 20, 2021, Thomas Caracci, one of the plaintiffs in the matter, filed a Notice of Appeal. (17) Segment Information Revenues by segment were as follows: Three Months Ended Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Wendy’s U.S. $ 383,804 $ 374,895 $ 1,175,601 $ 1,037,194 Wendy’s International 22,674 17,264 62,240 46,739 Global Real Estate & Development 63,777 60,083 185,954 175,575 Total revenues $ 470,255 $ 452,242 $ 1,423,795 $ 1,259,508 The following table reconciles profit by segment to the Company’s consolidated income before income taxes: Three Months Ended Nine Months Ended October 3, 2021 September 27, 2020 October 3, 2021 September 27, 2020 Wendy’s U.S. (a) $ 108,878 $ 108,297 $ 347,615 $ 283,261 Wendy’s International 6,949 6,567 21,161 15,256 Global Real Estate & Development 27,027 25,340 79,849 75,541 Total segment profit $ 142,854 $ 140,204 $ 448,625 $ 374,058 Unallocated franchise support and other costs ( 70 ) — ( 70 ) — Advertising funds deficit ( 1,574 ) ( 1,140 ) ( 4,440 ) ( 3,547 ) Unallocated general and administrative (b) ( 30,744 ) ( 21,424 ) ( 84,715 ) ( 68,594 ) Depreciation and amortization ( 30,940 ) ( 32,966 ) ( 93,243 ) ( 98,726 ) System optimization gains, net 1,437 23 32,719 2,333 Reorganization and realignment costs ( 345 ) ( 3,375 ) ( 7,381 ) ( 10,196 ) Impairment of long-lived assets ( 566 ) ( 23 ) ( 1,831 ) ( 4,727 ) Unallocated other operating income, net 143 49 399 140 Interest expense, net ( 26,000 ) ( 29,086 ) ( 82,990 ) ( 86,696 ) Loss on early extinguishment of debt — — ( 17,917 ) — Other income, net 171 181 461 1,113 Income before income taxes $ 54,366 $ 52,443 $ 189,617 $ 105,158 _______________ 30 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (a) Includes advertising funds expense of $ 8,979 and $ 16,503 for the three and nine months ended October 3, 2021, respectively, and $ 6,153 and $ 8,338 for the three and nine months ended September 27, 2020, respectively, 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 Company early adopted this amendment during the three months ended October 3, 2021 by applying the guidance prospectively to leases that commence or are modified on or after the date of adoption. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. 31