Wendy's Co 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Introduction This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 (the “Form 10-K”). There have been no material changes as of April 3, 2022 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II. Other Information” of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”). The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC (formerly known as Wendy’s International, Inc). Wendy’s International, LLC is the indirect parent company of (1) Quality Is Our Recipe, LLC (“Quality”), which is the owner and franchisor of the Wendy’s restaurant system in the United States (the “U.S.”) and all international jurisdictions except for Canada, and (2) Wendy’s Restaurants of Canada Inc., which is the owner and franchisor of the Wendy’s restaurant system in Canada. As used herein, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to the ownership or franchising of the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand. Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the U.S. based on traffic share, and the third largest globally with 7,016 restaurants in the U.S. and 31 foreign countries and U.S. territories as of April 3, 2022. Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of toppings and condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty ® desserts and kids’ meals. In addition, Wendy’s restaurants sell a variety of promotional products on a limited time basis. Wendy’s also offers breakfast across the U.S. system and in Canada. Wendy’s breakfast menu features a variety of breakfast sandwiches such as the Breakfast Baconator ® , sides such as seasoned potatoes, and a beverage platform that includes our vanilla and chocolate Frosty-ccino TM iced coffee. The Company is comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the operation and franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company reports on the segment profit for each of the three segments described above. The Company measures segment profit using segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. See “Results of Operations” below and Note 18 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information. 24 The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three-month periods presented herein contain 13 weeks. All references to years, quarters and months relate to fiscal periods rather than calendar periods. Executive Overview Our Business As of April 3, 2022, the Wendy’s restaurant system was comprised of 7,016 restaurants, with 5,969 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 402 were operated by the Company and 5,567 were operated by a total of 226 franchisees. In addition, at April 3, 2022, there were 1,047 Wendy’s restaurants in operation in 31 foreign countries and U.S. territories. Of the international restaurants, 1,041 were operated by franchisees and six were operated by the Company in the United Kingdom (the “U.K.”). The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of April 3, 2022. Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather. The COVID-19 pandemic has had and may continue to have the effect of heightening the impact of many of these factors. Wendy’s long-term growth opportunities include investing in accelerated global growth through (1) building our breakfast daypart, (2) accelerating our implementation of consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint through global restaurant expansion. Key Business Measures We track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure: • Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one week are excluded from same-restaurant sales. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes. • Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs. • Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company’s royalty and advertising funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and profitability. The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability. Same-restaurant sales and systemwide sales exclude sales from Argentina and Venezuela due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary. 25 The Company believes its presentation of same-restaurant sales, restaurant margin and systemwide sales provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales and systemwide sales, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand. The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure. First Quarter Financial Highlights • Revenue increased 6.2% to $488.6 million in the first quarter of 2022 compared to $460.2 million in the first quarter of 2021; • Global same-restaurant sales increased 2.4%, U.S. same-restaurant sales increased 1.1% and international same-restaurant sales increased 14.1% compared to the first quarter of 2021; • Company-operated restaurant margin was 11.6% in the first quarter of 2022, a decrease of 540 basis points compared to the first quarter of 2021; and • Net income decreased 9.6% to $37.4 million in the first quarter of 2022 compared to $41.4 million in the first quarter of 2021. Breakfast Wendy’s long-term growth opportunities include investing in accelerated global growth, which includes building upon our breakfast daypart. Since the launch of breakfast across the U.S. system in March 2020, systemwide sales have benefited from this new daypart, with average weekly U.S. breakfast sales representing approximately $2,500 per restaurant during the three months ended April 3, 2022. The Company launched breakfast in Canada on May 2, 2022, which has increased the percentage of global systemwide restaurants serving breakfast to approximately 95%. The Company expects to fund a total of $16.0 million of incremental advertising during 2022 to support the breakfast daypart, which the Company expects will continue to drive trial and acceleration of the Company’s breakfast offering in the U.S. and Canada. Digital Wendy’s long-term growth opportunities include accelerated implementation of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program and establishing delivery agreements with third-party vendors. The Company’s digital business continues to grow and represented approximately 10.6% of global systemwide sales during the three months ended April 3, 2022. The Company is also partnering with key technology providers to help execute our digital, restaurant technology and enterprise technology initiatives and support our technology innovation and growth. New Restaurant Development Wendy’s long-term growth opportunities include expanding the Company’s footprint through global restaurant expansion. To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants, including technical assistance fee waivers and reductions in royalty and national advertising payments. In addition, the Company has development agreements in place with a number of franchisees that contractually obligate such franchisees to open additional Wendy’s restaurants over a specified timeframe. During the three months ended April 3, 2022, 26 the Company and its franchisees added 67 net new restaurants across the Wendy’s system. The Company expects net new restaurant growth of 5% to 6% in 2022 and expects to reach 8,500 to 9,000 systemwide restaurants by the end of 2025. Debt Financing On April 1, 2022, the Company completed a debt financing transaction under which the Company issued fixed rate senior secured notes in the following 2022-1 series: Class A-2-I with an interest rate of 4.236% and initial principal amount of $100.0 million (the “Class A-2-I Notes”) and Class A-2-II with an interest rate of 4.535% and initial principal amount of $400.0 million (the “Class A-2-II Notes” and, collectively, the “Series 2022-1 Class A-2 Notes”). The anticipated repayment dates of the Class A-2-I Notes and the Class A-2-II Notes will be March 2029 and March 2032, respectively. See “Liquidity and Capital Resources” below and Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information on the Company’s debt financing transaction. Results of Operations The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the first quarter of 2022 and 2021. First Quarter 2022 2021 Change Revenues: Sales $ 209.3 $ 189.1 $ 20.2 Franchise royalty revenue and fees 128.9 122.8 6.1 Franchise rental income 57.9 58.9 (1.0) Advertising funds revenue 92.5 89.4 3.1 488.6 460.2 28.4 Costs and expenses: Cost of sales 185.1 156.9 28.2 Franchise support and other costs 11.8 7.7 4.1 Franchise rental expense 28.9 32.6 (3.7) Advertising funds expense 97.8 94.2 3.6 General and administrative 62.3 52.6 9.7 Depreciation and amortization 33.2 31.5 1.7 System optimization gains, net (3.5) (0.5) (3.0) Reorganization and realignment costs 0.5 4.9 (4.4) Impairment of long-lived assets 0.6 0.6 — Other operating income, net (3.0) (3.4) 0.4 413.7 377.1 36.6 Operating profit 74.9 83.1 (8.2) Interest expense, net (26.4) (28.8) 2.4 Investment income, net 2.1 — 2.1 Other income, net 0.2 0.2 — Income before income taxes 50.8 54.5 (3.7) Provision for income taxes (13.4) (13.1) (0.3) Net income $ 37.4 $ 41.4 $ (4.0) 27 First Quarter 2022 % of Total Revenues 2021 % of Total Revenues Revenues: Sales $ 209.3 42.8 % $ 189.1 41.1 % Franchise royalty revenue and fees: Franchise royalty revenue 111.7 22.9 % 108.3 23.5 % Franchise fees 17.2 3.5 % 14.5 3.2 % Total franchise royalty revenue and fees 128.9 26.4 % 122.8 26.7 % Franchise rental income 57.9 11.9 % 58.9 12.8 % Advertising funds revenue 92.5 18.9 % 89.4 19.4 % Total revenues $ 488.6 100.0 % $ 460.2 100.0 % First Quarter 2022 % of Sales 2021 % of Sales Cost of sales: Food and paper $ 68.3 32.6 % $ 54.8 29.0 % Restaurant labor 70.5 33.7 % 60.1 31.8 % Occupancy, advertising and other operating costs 46.3 22.1 % 42.0 22.2 % Total cost of sales $ 185.1 88.4 % $ 156.9 83.0 % First Quarter 2022 % of Sales 2021 % of Sales Restaurant margin $ 24.2 11.6 % $ 32.2 17.0 % 28 The table below presents certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein. First Quarter 2022 2021 Key business measures: U.S. same-restaurant sales: Company-operated 2.9 % 13.0 % Franchised 1.0 % 13.6 % Systemwide 1.1 % 13.5 % International same-restaurant sales (a) 14.1 % 7.9 % Global same-restaurant sales: Company-operated 2.9 % 13.0 % Franchised (a) 2.4 % 13.0 % Systemwide (a) 2.4 % 13.0 % Systemwide sales (b): U.S. Company-operated $ 206.5 $ 189.1 U.S. franchised 2,505.8 2,458.3 U.S. systemwide 2,712.3 2,647.4 International Company-operated 2.8 — International franchised (a) 356.7 303.6 International systemwide (a) 359.5 303.6 Global systemwide (a) $ 3,071.8 $ 2,951.0 _______________ (a) Excludes Argentina and Venezuela due to the impact of the highly inflationary economies of those countries. (b) During the first quarter of 2022 and 2021, global systemwide sales increased 4.2% and 12.5%, respectively, U.S. systemwide sales increased 2.4% and 13.1%, respectively, and international systemwide sales increased 19.2% and 7.3%, respectively, on a constant currency basis. First Quarter U.S. Company-operated U.S. Franchised International Company-operated International Franchised Systemwide Restaurant count: Restaurant count at January 2, 2022 403 5,535 5 1,006 6,949 Opened — 45 1 47 93 Closed (a) (2) (12) — (12) (26) Net purchased from (sold by) franchisees 1 (1) — — — Restaurant count at April 3, 2022 402 5,567 6 1,041 7,016 _______________ (a) Excludes restaurants temporarily closed. 29 Sales First Quarter 2022 2021 Change Sales $ 209.3 $ 189.1 $ 20.2 The increase in sales for the first quarter of 2022 was primarily due to (1) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021, (2) a 2.9% increase in Company-operated same-restaurant sales and (3) net new restaurant development. These increases were partially offset by the sale of 47 Company-operated restaurants in New York during the second quarter of 2021. Company-operated same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count. Company-operated same-restaurant sales benefited from government stimulus payments to consumers during the first quarter of 2021, which did not recur in the first quarter of 2022. Franchise Royalty Revenue and Fees First Quarter 2022 2021 Change Franchise royalty revenue $ 111.7 $ 108.3 $ 3.4 Franchise fees 17.2 14.5 2.7 $ 128.9 $ 122.8 $ 6.1 The increase in franchise royalty revenue during the first quarter of 2022 was primarily due to (1) a 2.4% increase in global franchise same-restaurant sales and (2) a net increase in the number of franchise restaurants in operation during the first quarter of 2022 compared to the first quarter of 2021. Franchise same-restaurant sales increased during the first quarter of 2022 due to higher average check, partially offset by a decrease in customer count. Franchise same-restaurant sales benefited from government stimulus payments to consumers during the first quarter of 2021, which did not recur in the first quarter of 2022. The increase in franchise fees during the first quarter of 2022 was primarily due to higher fees for providing information technology services to franchisees, reflecting the one-month waiver of technology fees during the first quarter of 2021, partially offset by the accelerated recognition of franchise fees associated with canceled development agreements during the first quarter of 2021. Franchise Rental Income First Quarter 2022 2021 Change Franchise rental income $ 57.9 $ 58.9 $ (1.0) The decrease in franchise rental income during the first quarter of 2022 was primarily due to the impact of terminating existing leases where the Company was lessor in connection with the Company’s acquisition of franchise-operated restaurants in Florida during the fourth quarter of 2021. This decrease was partially offset by the impact of the sale of Company-operated restaurants in New York during the second quarter of 2021. Advertising Funds Revenue First Quarter 2022 2021 Change Advertising funds revenue $ 92.5 $ 89.4 $ 3.1 The increase in advertising funds revenue during the first quarter of 2022 was primarily due to an increase in franchise same-restaurant sales in the U.S. and Canada. 30 Cost of Sales, as a Percent of Sales First Quarter 2022 2021 Change Food and paper 32.6 % 29.0 % 3.6 % Restaurant labor 33.7 % 31.8 % 1.9 % Occupancy, advertising and other operating costs 22.1 % 22.2 % (0.1) % 88.4 % 83.0 % 5.4 % The increase in cost of sales, as a percent of sales, during the first quarter of 2022 was primarily due to (1) higher commodity costs, (2) an increase in restaurant labor rates, (3) a decrease in customer count and (4) the impact of the Company’s investments to support the entry into the U.K. market. These impacts were partially offset by (1) higher average check and (2) the net favorable impact of the Company’s acquisition and disposition of restaurants during 2021. Franchise Support and Other Costs First Quarter 2022 2021 Change Franchise support and other costs $ 11.8 $ 7.7 $ 4.1 The increase in franchise support and other costs during the first quarter of 2022 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees. Franchise Rental Expense First Quarter 2022 2021 Change Franchise rental expense $ 28.9 $ 32.6 $ (3.7) The decrease in franchise rental expense during the first quarter of 2022 was primarily due to the impact of assigning certain leases to franchisees. Advertising Funds Expense First Quarter 2022 2021 Change Advertising funds expense $ 97.8 $ 94.2 $ 3.6 On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to exceed advertising funds revenue by approximately $21.0 million for 2022, which includes (1) the Company’s previously announced decision to fund up to $16.0 million of incremental advertising and (2) the amount by which advertising funds revenue exceeded advertising funds expense in prior years (excluding the Company’s funding of incremental advertising) of approximately $5.0 million. During the first quarter of 2022, advertising funds expense increased due to an increase in franchise same-restaurant sales in the U.S. and Canada. General and Administrative First Quarter 2022 2021 Change Employee compensation and related benefits $ 33.0 $ 28.6 $ 4.4 Travel-related expenses 2.2 0.5 1.7 Share-based compensation 6.3 5.1 1.2 Professional fees 9.6 8.7 0.9 Other, net 11.2 9.7 1.5 $ 62.3 $ 52.6 $ 9.7 The increase in general and administrative expenses during the first quarter of 2022 was primarily due to (1) an increase in employee compensation and related benefits, reflecting investments in resources to support the Company’s development and digital organizations, (2) an increase in travel-related expenses, (3) higher share-based compensation and (4) higher professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning (“ERP”) implementation. 31 Depreciation and Amortization First Quarter 2022 2021 Change Restaurants $ 21.8 $ 19.4 $ 2.4 Technology support, corporate and other 11.4 12.1 (0.7) $ 33.2 $ 31.5 $ 1.7 The increase in depreciation and amortization during the first quarter of 2022 was primarily due to depreciation and amortization on assets acquired from a franchisee in Florida during the fourth quarter of 2021. System Optimization Gains, Net First Quarter 2022 2021 Change System optimization gains, net $ (3.5) $ (0.5) $ (3.0) System optimization gains, net for the first quarter of 2022 and 2021 were primarily comprised of post-closing adjustments on previous sales of restaurants. See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information. Reorganization and Realignment Costs First Quarter 2022 2021 Change System optimization initiative $ 0.4 $ 4.7 $ (4.3) Other reorganization and realignment plans 0.1 0.2 (0.1) $ 0.5 $ 4.9 $ (4.4) As part of the Company’s system optimization initiative, the Company expects to continue to optimize the Wendy’s system through strategic restaurant acquisitions and dispositions, as well as by facilitating Franchise Flips. During the three months ended April 3, 2022, the Company recognized costs associated with its system optimization initiative totaling $0.4 million, 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 $4.7 million, 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”). The Company expects to recognize a gain of approximately $0.9 million, primarily related to the write-off of certain NPC-related lease liabilities upon final termination of the leases. See Note 5 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the NPC bankruptcy sale process. 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. Impairment of Long-Lived Assets First Quarter 2022 2021 Change Impairment of long-lived assets $ 0.6 $ 0.6 $ — Impairment charges for the first quarter of 2022 and 2021 primarily reflected the deterioration in operating performance of certain Company-operated restaurants. 32 Other Operating Income, Net First Quarter 2022 2021 Change Gains on sales-type leases $ (0.5) $ (1.9) $ 1.4 Lease buyout (0.8) — (0.8) Other, net (1.7) (1.5) (0.2) $ (3.0) $ (3.4) $ 0.4 The decrease in other operating income, net during the first quarter of 2022 was primarily due to lower gains on new and modified sales-type leases, partially offset by lease buyout activity. Interest Expense, Net First Quarter 2022 2021 Change Interest expense, net $ 26.4 $ 28.8 $ (2.4) Interest expense, net decreased during the first quarter of 2022 primarily due to the impact of completing the refinancing of a portion of the Company’s securitized financing facility in the second quarter of 2021. Investment Income, Net First Quarter 2022 2021 Change Investment income, net $ 2.1 $ — $ 2.1 During the first quarter of 2022, the Company recognized a gain of $2.1 million on an investment in equity securities as a result of an observable price change. Provision for Income Taxes First Quarter 2022 2021 Change Income before income taxes $ 50.8 $ 54.5 $ (3.7) Provision for income taxes (13.4) (13.1) (0.3) Effective tax rate on income 26.4 % 24.1 % 2.3 % Our effective tax rates for the first quarter of 2022 and 2021 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The increase in the effective tax rate for the first quarter of 2022 compared with the first quarter of 2021 was primarily due to an increase in state income taxes, including discrete changes to state deferred taxes. Segment Information See Note 18 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments. Wendy’s U.S. First Quarter 2022 2021 Change Sales $ 206.5 $ 189.1 $ 17.4 Franchise royalty revenue 97.9 96.8 1.1 Franchise fees 15.4 11.9 3.5 Advertising fund revenue 87.5 84.2 3.3 Total revenues $ 407.3 $ 382.0 $ 25.3 Segment profit $ 104.8 $ 112.1 $ (7.3) 33 The increase in Wendy’s U.S. revenues during the first quarter of 2022 was primarily due to (1) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021, (2) an increase in same-restaurant sales and (3) higher fees for providing information technology services to franchisees, reflecting the one-month waiver of technology fees during the first quarter of 2021. Same-restaurant sales increased during the first quarter of 2022 primarily due to higher average check, partially offset by a decrease in customer count. These increases were partially offset by the sale of 47 Company-operated restaurants in New York during the second quarter of 2021. The decrease in Wendy’s U.S. segment profit during the first quarter of 2022 was primarily due to higher cost of sales, as a percent of sales for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales” (excluding the impact of the U.K. market). These impacts were partially offset by higher revenues. Wendy’s International First Quarter 2022 2021 Change Sales $ 2.8 $ — $ 2.8 Franchise royalty revenue 13.8 11.6 2.2 Franchise fees 1.3 1.4 (0.1) Advertising fund revenue 5.0 5.2 (0.2) Total revenues $ 22.9 $ 18.2 $ 4.7 Segment profit $ 5.5 $ 7.7 $ (2.2) The increase in Wendy’s International revenues during the first quarter of 2022 was primarily due to (1) the opening of Company-operated restaurants in the U.K. beginning in the second quarter of 2021 and (2) an increase in same-restaurant sales. Same-restaurant sales increased during the first quarter of 2022 due to (1) an increase in customer count and (2) higher average check. The decrease in Wendy’s International segment profit during the first quarter of 2022 was primarily due to (1) higher general and administrative expenses and (2) higher advertising fund expense, reflecting the Company’s funding of incremental advertising to support the launch of breakfast in Canada on May 2, 2022. These changes were partially offset by higher revenues. Global Real Estate & Development First Quarter 2022 2021 Change Franchise fees $ 0.5 $ 1.1 $ (0.6) Franchise rental income 57.9 58.9 (1.0) Total revenues $ 58.4 $ 60.0 $ (1.6) Segment profit $ 27.6 $ 26.3 $ 1.3 The decrease in Global Real Estate & Development revenues during the first quarter of 2022 was primarily due to lower franchise rental income. See “Franchise Rental Income” above for further information. The increase in Global Real Estate & Development segment profit during the first quarter of 2022 was primarily due to a decrease in franchise rental expense, reflecting the impact of assigning certain leases to franchisees. This change was partially offset by lower revenues. 34 Liquidity and Capital Resources Cash Flows Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized financing facility. Our principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to stockholders. Our anticipated cash requirements for the remainder of 2022, exclusive of operating cash flow requirements, consist principally of: • capital expenditures of approximately $77.5 million to $87.5 million, resulting in total anticipated cash capital expenditures for the year of approximately $90.0 million to $100.0 million; • cash dividends aggregating approximately $80.3 million as discussed below in “Dividends;” and • potential stock repurchases of up to $250.0 million, of which $23.5 million was repurchased subsequent to April 3, 2022 through May 4, 2022, as discussed below in “Stock Repurchases.” Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months. We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us. The table below summarizes our cash flows from operating, investing and financing activities for the first three months of 2022 and 2021: First Quarter 2022 2021 Change Net cash provided by (used in): Operating activities $ 21.0 $ 85.8 $ (64.8) Investing activities (13.0) (5.1) (7.9) Financing activities 452.8 (91.7) 544.5 Effect of exchange rate changes on cash 0.2 0.9 (0.7) Net increase (decrease) in cash, cash equivalents and restricted cash $ 461.0 $ (10.1) $ 471.1 Operating Activities Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities. Cash provided by operating activities was $21.0 million and $85.8 million in the first quarter of 2022 and 2021, respectively. The change was primarily due to (1) an increase in payments for incentive compensation for the 2021 fiscal year paid in 2022, (2) the timing of payments for marketing expenses of the national advertising funds, (3) lower net income, adjusted for non-cash expenses and (4) cash paid for cloud computing arrangements, primarily related to the Company’s ERP implementation. Investing Activities Cash used in investing activities was $13.0 million and $5.1 million in the first quarter of 2022 and 2021, respectively. The change was primarily due to (1) the net settlement of deposits associated with the Company’s consortium bid to acquire NPC’s Wendy’s restaurants of $4.9 million in the first quarter of 2021 and (2) an increase in capital expenditures of $2.1 million. 35 Financing Activities Cash provided by (used in) financing activities was $452.8 million and $(91.7) million in the first quarter of 2022 and 2021, respectively. The change was primarily due to (1) a net increase in cash provided by long-term debt activities of $495.6 million, reflecting the impact of the completion of the Company’s debt financing transaction during the first quarter of 2022 and (2) a decrease in the repurchases of common stock of $55.6 million. These changes were partially offset by an increase in dividends of $6.8 million. Long-Term Debt, Including Current Portion 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 the Series 2022-1 Class A-2 Notes with initial principal amounts totaling $500.0 million. 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. 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 $300.0 million 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. Except as described above, there were no material changes to the terms of any debt obligations since January 2, 2022. The Company was in compliance with its debt covenants as of April 3, 2022. See Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations. Dividends On March 15, 2022, the Company paid quarterly cash dividends per share of $.125, aggregating $26.9 million. On May 11, 2022, the Company announced a dividend of $.125 per share to be paid on June 15, 2022 to stockholders of record as of June 1, 2022. If the Company pays regular quarterly cash dividends for the remainder of 2022 at the same rate as declared in the second quarter of 2022, the Company’s total cash requirement for dividends for the remainder of 2022 will be approximately $80.3 million based on the number of shares of its common stock outstanding at May 4, 2022. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any. Stock Repurchases In February 2022, our Board of Directors authorized a repurchase program of up to $100.0 million 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 $150.0 million to the February 2022 Authorization, resulting in an aggregate authorization of $250.0 million 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 1.2 million shares under the February 2022 Authorization with an aggregate purchase price of $23.5 million, excluding commissions. In February 2020, our Board of Directors authorized a repurchase program for up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible (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 approved increases of $50.0 million, $70.0 million and $80.0 million, respectively, to the February 2020 Authorization, resulting in an aggregate authorization of $300.0 million 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 $125.0 million in cash and received an initial delivery of 4.9 million 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 0.7 million shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2021 36 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, 5.6 million 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. Cloud Computing Arrangements In addition to the anticipated cash requirements for capital expenditures noted above, the Company expects to spend approximately $30.0 million during 2022 on cloud computing arrangements (“CCA”), primarily related to the Company’s ERP implementation. The Company’s cash expenditures related to CCA amounted to $4.7 million during the three months ended April 3, 2022. General Inflation, Commodities and Changing Prices Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the three months ended April 3, 2022, and we expect this to continue throughout the remainder of 2022. We attempt to manage any inflationary costs and commodity price increases through selective menu price increases and changes in product mix. Delays in implementing such menu price increases, competitive pressures, consumer spending levels and other factors may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases. Seasonality Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.