Wendy's Co 10-Q

Item 1. Financial Statements. THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Par Value) April 3, 2022 January 2, 2022 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 741,216 $ 249,438 Restricted cash 32,627 27,535 Accounts and notes receivable, net 118,151 119,540 Inventories 5,945 5,934 Prepaid expenses and other current assets 32,101 30,584 Advertising funds restricted assets 149,787 159,818 Total current assets 1,079,827 592,849 Properties 895,684 906,867 Finance lease assets 242,917 244,279 Operating lease assets 793,727 812,620 Goodwill 775,534 775,278 Other intangible assets 1,273,006 1,280,791 Investments 51,453 49,870 Net investment in sales-type and direct financing leases 302,783 299,707 Other assets 148,168 139,130 Total assets $ 5,563,099 $ 5,101,391 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 29,250 $ 24,250 Current portion of finance lease liabilities 17,211 15,513 Current portion of operating lease liabilities 47,178 47,315 Accounts payable 33,152 41,163 Accrued expenses and other current liabilities 129,168 140,783 Advertising funds restricted liabilities 151,690 157,901 Total current liabilities 407,649 426,925 Long-term debt 2,836,838 2,356,416 Long-term finance lease liabilities 561,238 559,587 Long-term operating lease liabilities 833,466 853,328 Deferred income taxes 271,627 267,710 Deferred franchise fees 88,476 88,102 Other liabilities 109,270 112,918 Total liabilities 5,108,564 4,664,986 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 215,375 and 215,849 shares outstanding, respectively 47,042 47,042 Additional paid-in capital 2,922,042 2,898,633 Retained earnings 354,681 344,198 Common stock held in treasury, at cost; 255,049 and 254,575 shares, respectively ( 2,822,148 ) ( 2,805,268 ) Accumulated other comprehensive loss ( 47,082 ) ( 48,200 ) Total stockholders’ equity 454,535 436,405 Total liabilities and stockholders’ equity $ 5,563,099 $ 5,101,391 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 April 3, 2022 April 4, 2021 (Unaudited) Revenues: Sales $ 209,275 $ 189,057 Franchise royalty revenue and fees 128,976 122,830 Franchise rental income 57,871 58,876 Advertising funds revenue 92,521 89,440 488,643 460,203 Costs and expenses: Cost of sales 185,053 156,850 Franchise support and other costs 11,816 7,686 Franchise rental expense 28,936 32,566 Advertising funds expense 97,800 94,238 General and administrative 62,346 52,622 Depreciation and amortization 33,231 31,542 System optimization gains, net ( 3,534 ) ( 516 ) Reorganization and realignment costs 464 4,934 Impairment of long-lived assets 616 635 Other operating income, net ( 2,966 ) ( 3,476 ) 413,762 377,081 Operating profit 74,881 83,122 Interest expense, net ( 26,365 ) ( 28,786 ) Investment income, net 2,111 3 Other income, net 207 126 Income before income taxes 50,834 54,465 Provision for income taxes ( 13,432 ) ( 13,099 ) Net income $ 37,402 $ 41,366 Net income per share: Basic $ .17 $ .19 Diluted .17 .18 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 April 3, 2022 April 4, 2021 (Unaudited) Net income $ 37,402 $ 41,366 Other comprehensive income: Foreign currency translation adjustment 1,118 2,220 Other comprehensive income 1,118 2,220 Comprehensive income $ 38,520 $ 43,586 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 2, 2022 $ 47,042 $ 2,898,633 $ 344,198 $ ( 2,805,268 ) $ ( 48,200 ) $ 436,405 Net income — — 37,402 — — 37,402 Other comprehensive income — — — — 1,118 1,118 Cash dividends — — ( 26,911 ) — — ( 26,911 ) Repurchases of common stock, including accelerated share repurchase — 18,750 — ( 18,750 ) — — Share-based compensation — 6,348 — — — 6,348 Common stock issued upon exercises of stock options — 237 — 1,354 — 1,591 Common stock issued upon vesting of restricted shares — ( 1,989 ) — 459 — ( 1,530 ) Other — 63 ( 8 ) 57 — 112 Balance at April 3, 2022 $ 47,042 $ 2,922,042 $ 354,681 $ ( 2,822,148 ) $ ( 47,082 ) $ 454,535 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 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Three Months Ended April 3, 2022 April 4, 2021 (Unaudited) Cash flows from operating activities: Net income $ 37,402 $ 41,366 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 33,231 31,542 Share-based compensation 6,348 5,151 Impairment of long-lived assets 616 635 Deferred income tax 4,527 ( 1,116 ) Non-cash rental expense, net 6,874 10,152 Change in operating lease liabilities ( 11,615 ) ( 11,607 ) Net receipt of deferred vendor incentives 7,711 6,522 System optimization gains, net ( 3,534 ) ( 516 ) Distributions received from joint ventures, net of equity in earnings 898 1,409 Long-term debt-related activities, net 1,717 1,677 Cloud computing arrangements expenditures ( 4,656 ) — Changes in operating assets and liabilities and other, net ( 58,537 ) 615 Net cash provided by operating activities 20,982 85,830 Cash flows from investing activities: Capital expenditures ( 12,496 ) ( 10,364 ) Franchise development fund ( 955 ) — Acquisitions — 4,879 Dispositions 263 3 Notes receivable, net 141 397 Net cash used in investing activities ( 13,047 ) ( 5,085 ) Cash flows from financing activities: Proceeds from long-term debt 500,000 — Repayments of long-term debt ( 6,063 ) ( 11,900 ) Repayments of finance lease liabilities ( 4,076 ) ( 2,659 ) Deferred financing costs ( 10,209 ) — Repurchases of common stock — ( 55,611 ) Dividends ( 26,911 ) ( 20,156 ) Proceeds from stock option exercises 1,591 972 Payments related to tax withholding for share-based compensation ( 1,530 ) ( 2,308 ) Net cash provided by (used in) financing activities 452,802 ( 91,662 ) Net cash provided by (used in) operations before effect of exchange rate changes on cash 460,737 ( 10,917 ) Effect of exchange rate changes on cash 305 823 Net increase (decrease) in cash, cash equivalents and restricted cash 461,042 ( 10,094 ) Cash, cash equivalents and restricted cash at beginning of period 366,966 418,241 Cash, cash equivalents and restricted cash at end of period $ 828,008 $ 408,147 See accompanying notes to condensed consolidated financial statements. 8 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 April 3, 2022 and the results of our operations and cash flows for the three months ended April 3, 2022 and April 4, 2021. The results of operations for the three months ended April 3, 2022 are not necessarily indicative of the results to be expected for the full 2022 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 2, 2022 (the “Form 10-K”). In March 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 18 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-month periods presented herein contain 13 weeks. 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 April 3, 2022 Sales at Company-operated restaurants $ 206,501 $ 2,774 $ — $ 209,275 Franchise royalty revenue 97,920 13,825 — 111,745 Franchise fees 15,405 1,271 555 17,231 Franchise rental income — — 57,871 57,871 Advertising funds revenue 87,485 5,036 — 92,521 Total revenues $ 407,311 $ 22,906 $ 58,426 $ 488,643 9 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 Three Months Ended April 4, 2021 Sales at Company-operated restaurants $ 189,057 $ — $ — $ 189,057 Franchise royalty revenue 96,764 11,570 — 108,334 Franchise fees 11,930 1,443 1,123 14,496 Franchise rental income — — 58,876 58,876 Advertising funds revenue 84,203 5,237 — 89,440 Total revenues $ 381,954 $ 18,250 $ 59,999 $ 460,203 Contract Balances The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers: April 3, 2022 (a) January 2, 2022 (a) Receivables, which are included in “Accounts and notes receivable, net” (b) $ 52,032 $ 49,168 Receivables, which are included in “Advertising funds restricted assets” 59,596 65,497 Deferred franchise fees (c) 98,429 97,186 _______________ (a) Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s condensed consolidated statements of operations. (b) Includes receivables related to “Sales” and “Franchise royalty revenue and fees.” (c) Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled $ 9,953 and $ 88,476 , respectively, as of April 3, 2022, and $ 9,084 and $ 88,102 , respectively, as of January 2, 2022. Significant changes in deferred franchise fees are as follows: Three Months Ended April 3, 2022 April 4, 2021 Deferred franchise fees at beginning of period $ 97,186 $ 97,785 Revenue recognized during the period ( 2,283 ) ( 4,337 ) New deferrals due to cash received and other 3,526 1,799 Deferred franchise fees at end of period $ 98,429 $ 95,247 10 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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: 2022 (a) $ 8,550 2023 6,367 2024 6,184 2025 5,999 2026 5,886 Thereafter 65,443 $ 98,429 _______________ (a) Represents franchise fees expected to be recognized for the remainder of 2022, which includes development-related franchise fees expected to be recognized over a duration of one year or less. (3) Acquisitions The Company completed no significant acquisitions of restaurants from franchisees during the three months ended April 3, 2022 and April 4, 2021. During 2021, the Company acquired 93 restaurants from a franchisee for total net cash consideration of $ 127,948 . The fair values of the identifiable net assets related to the acquisition were provisional amounts as of January 2, 2022, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended April 3, 2022, which resulted in no adjustments to the fair values of the identifiable net assets related to the acquisition. (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 move its ownership away from approximately 5 % of the total system, 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 April 3, 2022, the Company facilitated five Franchise Flips. During the three months ended April 4, 2021, the Company facilitated no Franchise Flips. 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.” 11 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 disposition activity recorded as a result of our system optimization initiative: Three Months Ended April 3, 2022 April 4, 2021 Post-closing adjustments on sales of restaurants (a) $ 3,447 $ 515 Gain on sales of other assets, net (b) 87 1 System optimization gains, net $ 3,534 $ 516 _______________ (a) Represents the recognition of deferred gains as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. (b) During the three months ended April 3, 2022 and April 4, 2021, the Company received net cash proceeds of $ 168 and $ 3 , respectively, primarily from the sale of surplus and other properties. The Company also received cash proceeds of $ 95 during the three months ended April 3, 2022 related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants during 2021. Assets Held for Sale As of April 3, 2022 and January 2, 2022, the Company had assets held for sale of $ 3,485 and $ 3,541 , respectively, primarily consisting 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 April 3, 2022 April 4, 2021 System optimization initiative $ 407 $ 4,678 Other reorganization and realignment plans 57 256 Reorganization and realignment costs $ 464 $ 4,934 System Optimization Initiative The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During the three months ended April 3, 2022, the Company recognized costs totaling $ 407 , which were primarily comprised of professional fees and other costs associated with the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021. During the three months ended April 4, 2021, the Company recognized costs totaling $ 4,678 , which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the bankruptcy sale process of NPC Quality Burgers, Inc. (“NPC”). As previously announced, NPC, formerly the Company’s largest franchisee, filed for chapter 11 bankruptcy in July 2020 and completed a process during the three months ended April 4, 2021 under which all of NPC’s Wendy’s restaurants were sold to Wendy’s approved franchisees. The Company expects to recognize a gain of approximately $ 900 , primarily related to the write-off of certain NPC-related lease liabilities, upon final termination of the leases. 12 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 Total Incurred Since Inception April 3, 2022 April 4, 2021 Severance and related employee costs $ — $ — $ 18,898 Professional fees 294 235 23,971 Other (a) 96 1,354 7,714 390 1,589 50,583 Accelerated depreciation and amortization (b) — — 25,398 NPC lease termination costs (c) 17 3,089 2,873 Share-based compensation (d) — — 5,013 Total system optimization initiative $ 407 $ 4,678 $ 83,867 _______________ (a) The three months ended April 4, 2021 includes transaction fees of $ 1,350 associated with the NPC bankruptcy sale process. (b) Primarily includes accelerated amortization of previously acquired franchise rights related to the Company-operated restaurants in territories that have been sold to franchisees in connection with our system optimization initiative. (c) The three months ended April 4, 2021 includes the write-off of lease assets of $ 1,609 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 April 4, 2021. Balance January 2, 2022 Charges Payments Balance April 3, 2022 Professional fees — 294 ( 294 ) — Other — 96 ( 96 ) — $ — $ 390 $ ( 390 ) $ — Balance January 3, 2021 Charges Payments Balance April 4, 2021 Professional fees $ 1,230 235 ( 1,461 ) $ 4 Other — 1,354 ( 1,354 ) — $ 1,230 $ 1,589 $ ( 2,815 ) $ 4 Other Reorganization and Realignment Plans Costs incurred under the Company’s other reorganization and realignment plans were not material during the three months ended April 3, 2022 and April 4, 2021. The Company does not expect to incur any material additional costs under these plans. 13 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (6) Investments The following is a summary of the carrying value of our investments: April 3, 2022 January 2, 2022 Equity method investments $ 39,346 $ 39,870 Other investments in equity securities 12,107 10,000 $ 51,453 $ 49,870 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, the Company has a 20 % share in a joint venture in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.” Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements: Three Months Ended April 3, 2022 April 4, 2021 Balance at beginning of period $ 39,870 $ 44,574 Equity in earnings for the period 2,508 2,167 Amortization of purchase price adjustments (a) ( 731 ) ( 595 ) 1,777 1,572 Distributions received ( 2,675 ) ( 2,981 ) Foreign currency translation adjustment included in “Other comprehensive income” and other 374 578 Balance at end of period $ 39,346 $ 43,743 _______________ (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. Other Investments in Equity Securities During 2021, the Company made an investment in equity securities of $ 10,000 . During the three months ended April 3, 2022, the Company recognized a gain of $ 2,107 as a result of an observable price change for a similar investment of the same issuer. 14 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (7) Long-Term Debt Long-term debt consisted of the following: April 3, 2022 January 2, 2022 Series 2022-1 Class A-2 Notes: 4.236 % Series 2022-1 Class A-2-I Notes, anticipated repayment date 2029 $ 100,000 $ — 4.535 % Series 2022-1 Class A-2-II Notes, anticipated repayment date 2032 400,000 — Series 2021-1 Class A-2 Notes: 2.370 % Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029 446,625 447,750 2.775 % Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 645,125 646,750 Series 2019-1 Class A-2 Notes: 3.783 % Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 367,000 368,000 4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 412,875 414,000 Series 2018-1 Class A-2 Notes: 3.884 % Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 454,813 456,000 7 % debentures, due in 2025 85,472 85,175 Unamortized debt issuance costs ( 45,822 ) ( 37,009 ) 2,866,088 2,380,666 Less amounts payable within one year ( 29,250 ) ( 24,250 ) Total long-term debt $ 2,836,838 $ 2,356,416 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. On April 1, 2022, the Master Issuer completed a financing transaction with respect to this facility under which the Master Issuer issued fixed rate senior secured notes in the following 2022-1 series: Class A-2-I with an initial principal amount of $ 100,000 and Class A-2-II with an initial principal amount of $ 400,000 (collectively, the “Series 2022-1 Class A-2 Notes”). Interest and principal payments on the Series 2022-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series 2022-1 Class A-2 Notes is March 2052. If the Master Issuer has not repaid or refinanced the Series 2022-1 Class A-2 Notes prior to their respective anticipated repayment dates, additional interest will accrue pursuant to the indenture governing the Series 2022-1 Class A-2 Notes. The net proceeds from the sale of the Series 2022-1 Class A-2 Notes will be used for general corporate purposes, which may include funding for growth initiatives, return of capital to shareholders and debt retirement. The Series 2022-1 Class A-2 Notes have scheduled principal payments of $ 2,500 in 2022, $ 5,000 annually from 2023 through 2028, $ 97,500 in 2029, $ 4,000 annually from 2030 through 2031 and $ 362,000 in 2032. The Series 2022-1 Class A-2 Notes are secured by a security interest in substantially all of the assets of the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors, except for certain real estate assets and subject to certain limitations. The Series 2022-1 Class A-2 Notes are subject to substantially the same series of covenants and restrictions as the Company’s outstanding Series 2021-1 Class A-2 Notes, Series 2019-1 Class A-2 Notes and Series 2018-1 Class A-2 Notes. Under the securitized financing facility, the Master Issuer has issued outstanding Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Class A-1 Notes”), which allow 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 Class A-1 Notes during the three months ended April 3, 2022. During the three months ended April 3, 2022, the Company incurred debt issuance costs of $ 10,232 in connection with the issuance of the Series 2022-1 Class A-2 Notes. The debt issuance costs will be amortized to “Interest expense, net” through the anticipated repayment dates of the Series 2022-1 Class A-2 Notes utilizing the effective interest rate method. 15 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: April 3, 2022 January 2, 2022 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Measurements Financial assets Cash equivalents $ 415,000 $ 415,000 $ — $ — Level 1 Other investments in equity securities (a) 12,107 12,107 10,000 10,000 Level 2 Financial liabilities Series 2022-1 Class A-2-I Notes (b) 100,000 99,320 — — Level 2 Series 2022-1 Class A-2-II Notes (b) 400,000 398,680 — — Level 2 Series 2021-1 Class A-2-I Notes (b) 446,625 395,442 447,750 439,283 Level 2 Series 2021-1 Class A-2-II Notes (b) 645,125 565,517 646,750 642,352 Level 2 Series 2019-1 Class A-2-I Notes (b) 367,000 358,853 368,000 381,579 Level 2 Series 2019-1 Class A-2-II Notes (b) 412,875 405,113 414,000 439,792 Level 2 Series 2018-1 Class A-2-II Notes (b) 454,813 445,307 456,000 473,693 Level 2 7 % debentures, due in 2025 (b) 85,472 97,425 85,175 101,142 Level 2 _______________ (a) The fair value of our other investments in equity securities is based on our review of information provided by the investment manager, which is based on observable price changes in orderly transactions for a similar investment of the same issuer. (b) The fair values were based on quoted market prices in markets that are not considered active markets. The carrying amounts of cash, accounts payable and accrued expenses approximate fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximate fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents are the only financial assets measured and recorded at fair value on a recurring basis. 16 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 April 3, 2022 Level 1 Level 2 Level 3 Held and used $ 325 $ — $ — $ 325 Held for sale 1,467 — — 1,467 Total $ 1,792 $ — $ — $ 1,792 Fair Value Measurements January 2, 2022 Level 1 Level 2 Level 3 Held and used $ 1,618 $ — $ — $ 1,618 Held for sale 371 — — 371 Total $ 1,989 $ — $ — $ 1,989 (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. 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 April 3, 2022 April 4, 2021 Company-operated restaurants $ 367 $ 446 Restaurants leased or subleased to franchisees 194 189 Surplus properties 55 — $ 616 $ 635 (10) Income Taxes The Company’s effective tax rate for the three months ended April 3, 2022 and April 4, 2021 was 26.4 % and 24.1 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the three months ended April 3, 2022 primarily due to state income taxes. 17 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three months ended April 3, 2022. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $ 936 due to lapses of statutes of limitations. The current portion of refundable income taxes was $ 7,206 and $ 11,901 as of April 3, 2022 and January 2, 2022, respectively, and is included in “Accounts and notes receivable, net.” There were no long-term refundable income taxes as of April 3, 2022 and January 2, 2022. (11) Net Income Per Share The calculation of basic and diluted net income per share was as follows: Three Months Ended April 3, 2022 April 4, 2021 Net income $ 37,402 $ 41,366 Common stock: Weighted average basic shares outstanding 215,619 223,334 Dilutive effect of stock options and restricted shares 2,548 3,393 Weighted average diluted shares outstanding 218,167 226,727 Net income per share: Basic $ .17 $ .19 Diluted $ .17 $ .18 Basic net income per share for the three months ended April 3, 2022 and April 4, 2021 was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding. Diluted net income per share was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of 3,295 and 1,870 for the three months ended April 3, 2022 and April 4, 2021, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. (12) Stockholders’ Equity Dividends During the first quarter of 2022 and 2021, the Company paid dividends per share of $ .125 and $ .09 , respectively. Repurchases of Common Stock In February 2022, our Board of Directors authorized a repurchase program of up to $ 100,000 of our common stock through February 28, 2023, when and if market conditions warrant and to the extent legally permissible (the “February 2022 Authorization”). On April 1, 2022, the Company’s Board of Directors approved an increase of $ 150,000 to the February 2022 Authorization, resulting in an aggregate authorization of $ 250,000 that continues to expire on February 28, 2023. During the three months ended April 3, 2022, no shares were repurchased under the February 2022 Authorization. Subsequent to April 3, 2022 through May 4, 2022, the Company repurchased 1,156 shares under the February 2022 Authorization with an aggregate purchase price of $ 23,521 , excluding commissions of $ 16 . 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”). In July 2020, the Company’s Board of Directors approved an extension of the February 2020 Authorization by one year, through February 28, 2022. In addition, in May 2021, August 2021 and November 2021, the Board of Directors 18 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) approved increases of $ 50,000 , $ 70,000 and $ 80,000 , respectively, to the February 2020 Authorization, resulting in an aggregate authorization of $ 300,000 that continued to expire on February 28, 2022. In November 2021, the Company entered into an accelerated share repurchase agreement (the “2021 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the February 2020 Authorization. Under the 2021 ASR Agreement, the Company paid the financial institution an initial purchase price of $ 125,000 in cash and received an initial delivery of 4,910 shares of common stock, representing an estimated 85 % of the total shares expected to be delivered under the 2021 ASR Agreement. In February 2022, the Company completed the 2021 ASR Agreement and received an additional 715 shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2021 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2021 ASR Agreement, less an agreed upon discount. In total, 5,625 shares were delivered under the 2021 ASR Agreement at an average purchase price of $ 22.22 per share. With the completion of the 2021 ASR Agreement in February 2022 as described above, the Company completed the February 2020 Authorization. During the three months ended April 4, 2021, the Company repurchased 2,763 shares under the February 2020 Authorization with an aggregate purchase price of $ 56,046 , of which $ 1,196 was accrued at April 4, 2021, and excluding commissions of $ 38 . Accumulated Other Comprehensive Loss The following table provides a rollforward of accumulated other comprehensive loss, which is entirely comprised of foreign currency translation: Three Months Ended April 3, 2022 April 4, 2021 Balance at beginning of period $ ( 48,200 ) $ ( 49,641 ) Foreign currency translation 1,118 2,220 Balance at end of period $ ( 47,082 ) $ ( 47,421 ) (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 April 3, 2022, Wendy’s and its franchisees operated 7,016 Wendy’s restaurants. Of the 408 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 158 restaurants, owned the building and held long-term land leases for 140 restaurants and held leases covering the land and building for 110 restaurants. Wendy’s also owned 486 and leased 1,221 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment. 19 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Company as Lessee The components of lease cost are as follows: Three Months Ended April 3, 2022 April 4, 2021 Finance lease cost: Amortization of finance lease assets $ 4,064 $ 3,508 Interest on finance lease liabilities 10,645 10,293 14,709 13,801 Operating lease cost 20,661 23,361 Variable lease cost (a) 14,803 15,188 Short-term lease cost 1,433 1,326 Total operating lease cost (b) 36,897 39,875 Total lease cost $ 51,606 $ 53,676 _______________ (a) Includes expenses for executory costs of $ 9,608 and $ 10,063 for the three months ended April 3, 2022 and April 4, 2021, respectively, for which the Company is reimbursed by sublessees. (b) Includes $ 28,925 and $ 32,552 for the three months ended April 3, 2022 and April 4, 2021, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 7,294 and $ 6,681 for the three months ended April 3, 2022 and April 4, 2021, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. Company as Lessor The components of lease income are as follows: Three Months Ended April 3, 2022 April 4, 2021 Sales-type and direct-financing leases: Selling profit $ 480 $ 1,912 Interest income (a) 7,740 7,489 Operating lease income 43,314 44,122 Variable lease income 14,557 14,754 Franchise rental income (b) $ 57,871 $ 58,876 _______________ (a) Included in “Interest expense, net.” (b) Includes sublease income of $ 43,165 and $ 43,250 recognized during the three months ended April 3, 2022 and April 4, 2021, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 9,535 and $ 9,874 for the three months ended April 3, 2022 and April 4, 2021, respectively. 20 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (14) Supplemental Cash Flow Information The following table includes supplemental non-cash investing and financing activities: Three Months Ended April 3, 2022 April 4, 2021 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable $ 6,522 $ 5,461 Finance leases 7,207 5,539 The following table includes a reconciliation of cash, cash equivalents and restricted cash: April 3, 2022 January 2, 2022 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 741,216 $ 249,438 Restricted cash 32,627 27,535 Restricted cash, included in Advertising funds restricted assets 54,165 89,993 Total cash, cash equivalents and restricted cash $ 828,008 $ 366,966 Franchise Development Fund In August 2021, the Company announced the creation of a $ 100,000 strategic build to suit development fund to drive additional new restaurant growth. The Company expects the development fund to drive approximately 80 to 90 new franchise restaurants from 2022 to 2025. Capital expenditures related to the fund are included in “Franchise development fund” in the condensed consolidated statements of cash flows. (15) 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 three months ended April 3, 2022 and April 4, 2021, Wendy’s paid TimWen $ 4,350 and $ 4,026 , respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $ 54 during each of the three months ended April 3, 2022 and April 4, 2021, which has been included as a reduction to “General and administrative.” Transactions with Yellow Cab Certain family members and affiliates of Mr. Nelson Peltz, our Chairman, and Mr. Peter May, our Senior Vice Chairman, as well as Mr. Matthew Peltz, our Vice Chairman, hold indirect, minority ownership interests in operating companies managed by Yellow Cab Holdings, LLC (“Yellow Cab”), a Wendy’s franchisee, that as of April 3, 2022 owned and operated 82 Wendy’s restaurants. During the three months ended April 3, 2022 and April 4, 2021, the Company recognized $ 3,067 and $ 1,659 , respectively, in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of April 3, 2022 and January 2, 2022, $ 984 and $ 974 , respectively, was due from Yellow Cab for such income, which is included in “Accounts and notes receivable, net” and “Advertising funds restricted assets.” 21 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (16) 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 $ 89,294 as of April 3, 2022. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of April 3, 2022. In the event of default by a franchise owner where Wendy’s is called upon to perform under its guarantee, Wendy’s has the ability to pursue repayment from the franchise owner. The liability recorded for our probable exposure associated with these lease guarantees was not material as of April 3, 2022. Letters of Credit As of April 3, 2022, the Company had outstanding letters of credit with various parties totaling $ 22,121 . Substantially all of the outstanding letters of credit include amounts outstanding against the 2021-1 Class A-1 Notes. See Note 7 for further information. We do not expect any material loss to result from these letters of credit. (17) 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. As of April 3, 2022, there were no material developments in those legal proceedings. (18) Segment Information Revenues by segment were as follows: Three Months Ended April 3, 2022 April 4, 2021 Wendy’s U.S. $ 407,311 $ 381,954 Wendy’s International 22,906 18,250 Global Real Estate & Development 58,426 59,999 Total revenues $ 488,643 $ 460,203 22 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table reconciles profit by segment to the Company’s consolidated income before income taxes: Three Months Ended April 3, 2022 April 4, 2021 Wendy’s U.S. (a) $ 104,824 $ 112,087 Wendy’s International (a) 5,453 7,684 Global Real Estate & Development 27,607 26,253 Total segment profit $ 137,884 $ 146,024 Unallocated franchise support and other costs 6 — Advertising funds deficit ( 1,243 ) ( 1,264 ) Unallocated general and administrative (b) ( 31,005 ) ( 25,107 ) Depreciation and amortization ( 33,231 ) ( 31,542 ) System optimization gains, net 3,534 516 Reorganization and realignment costs ( 464 ) ( 4,934 ) Impairment of long-lived assets ( 616 ) ( 635 ) Unallocated other operating income, net 16 64 Interest expense, net ( 26,365 ) ( 28,786 ) Investment income, net 2,111 3 Other income, net 207 126 Income before income taxes $ 50,834 $ 54,465 _______________ (a) Wendy’s U.S. includes advertising fund expense of $ 2,556 and $ 3,534 for the three months ended April 3, 2022 and April 4, 2021, respectively, and Wendy’s International includes advertising fund expense of $ 838 for the three months ended April 3, 2022, all of which related to the Company’s funding of incremental advertising. In addition, Wendy’s International includes other international-related advertising expense of $ 642 for the three months ended April 3, 2022. (b) Includes corporate overhead costs, such as employee compensation and related benefits. (19) New Accounting Standards Financial Instruments In August 2020, the Financial Accounting Standards Board (“FASB”) issued an amendment that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendment simplifies accounting for convertible instruments by removing major separation models required under current accounting guidance. In addition, the amendment removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception, and also simplifies the diluted earnings per share calculation in certain areas. The Company adopted this amendment during the first quarter of 2022. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. 23