Wendy's Co 10-Q

Item 1. Financial Statements. THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Par Value) July 3, 2022 January 2, 2022 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 700,813 $ 249,438 Restricted cash 33,997 27,535 Accounts and notes receivable, net 115,367 119,540 Inventories 6,456 5,934 Prepaid expenses and other current assets 35,548 30,584 Advertising funds restricted assets 151,741 159,818 Total current assets 1,043,922 592,849 Properties 890,423 906,867 Finance lease assets 238,878 244,279 Operating lease assets 783,645 812,620 Goodwill 774,703 775,278 Other intangible assets 1,262,762 1,280,791 Investments 50,195 49,870 Net investment in sales-type and direct financing leases 312,376 299,707 Other assets 158,677 139,130 Total assets $ 5,515,581 $ 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 17,034 15,513 Current portion of operating lease liabilities 47,482 47,315 Accounts payable 36,156 41,163 Accrued expenses and other current liabilities 112,144 140,783 Advertising funds restricted liabilities 156,757 157,901 Total current liabilities 398,823 426,925 Long-term debt 2,832,790 2,356,416 Long-term finance lease liabilities 567,082 559,587 Long-term operating lease liabilities 823,991 853,328 Deferred income taxes 274,511 267,710 Deferred franchise fees 89,246 88,102 Other liabilities 106,275 112,918 Total liabilities 5,092,718 4,664,986 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 212,781 and 215,849 shares outstanding, respectively 47,042 47,042 Additional paid-in capital 2,926,739 2,898,633 Retained earnings 376,187 344,198 Common stock held in treasury, at cost; 257,643 and 254,575 shares, respectively ( 2,872,568 ) ( 2,805,268 ) Accumulated other comprehensive loss ( 54,537 ) ( 48,200 ) Total stockholders’ equity 422,863 436,405 Total liabilities and stockholders’ equity $ 5,515,581 $ 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 Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 (Unaudited) Revenues: Sales $ 230,869 $ 193,525 $ 440,144 $ 382,582 Franchise royalty revenue and fees 143,436 136,661 272,412 259,491 Franchise rental income 58,610 60,868 116,481 119,744 Advertising funds revenue 104,868 102,283 197,389 191,723 537,783 493,337 1,026,426 953,540 Costs and expenses: Cost of sales 197,285 154,154 382,338 311,004 Franchise support and other costs 9,912 8,885 21,728 16,571 Franchise rental expense 32,076 34,068 61,012 66,634 Advertising funds expense 110,973 107,875 208,773 202,113 General and administrative 61,637 63,114 123,983 115,736 Depreciation and amortization 33,428 30,761 66,659 62,303 System optimization gains, net ( 152 ) ( 30,766 ) ( 3,686 ) ( 31,282 ) Reorganization and realignment costs 156 2,102 620 7,036 Impairment of long-lived assets 1,860 630 2,476 1,265 Other operating income, net ( 5,673 ) ( 4,232 ) ( 8,639 ) ( 7,708 ) 441,502 366,591 855,264 743,672 Operating profit 96,281 126,746 171,162 209,868 Interest expense, net ( 32,125 ) ( 28,204 ) ( 58,490 ) ( 56,990 ) Loss on early extinguishment of debt — ( 17,917 ) — ( 17,917 ) Investment (loss) income, net ( 4 ) 3 2,107 6 Other income, net 1,238 158 1,445 284 Income before income taxes 65,390 80,786 116,224 135,251 Provision for income taxes ( 17,239 ) ( 15,062 ) ( 30,671 ) ( 28,161 ) Net income $ 48,151 $ 65,724 $ 85,553 $ 107,090 Net income per share: Basic $ .23 $ .30 $ .40 $ .48 Diluted .22 .29 .39 .47 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) Three Months Ended Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 (Unaudited) Net income $ 48,151 $ 65,724 $ 85,553 $ 107,090 Other comprehensive (loss) income: Foreign currency translation adjustment ( 7,455 ) 3,347 ( 6,337 ) 5,567 Other comprehensive (loss) income ( 7,455 ) 3,347 ( 6,337 ) 5,567 Comprehensive income $ 40,696 $ 69,071 $ 79,216 $ 112,657 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 Net income — — 48,151 — — 48,151 Other comprehensive loss — — — — ( 7,455 ) ( 7,455 ) Cash dividends — — ( 26,635 ) — — ( 26,635 ) Repurchases of common stock — — — ( 51,950 ) — ( 51,950 ) Share-based compensation — 6,122 — — — 6,122 Common stock issued upon exercises of stock options — ( 300 ) — 399 — 99 Common stock issued upon vesting of restricted shares — ( 1,178 ) — 1,073 — ( 105 ) Other — 53 ( 10 ) 58 — 101 Balance at July 3, 2022 $ 47,042 $ 2,926,739 $ 376,187 $ ( 2,872,568 ) $ ( 54,537 ) $ 422,863 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 January 3, 2021 $ 47,042 $ 2,899,276 $ 238,674 $ ( 2,585,755 ) $ ( 49,641 ) $ 549,596 Net income — — 41,366 — — 41,366 Other comprehensive income — — — — 2,220 2,220 Cash dividends — — ( 20,156 ) — — ( 20,156 ) Repurchases of common stock — — — ( 56,084 ) — ( 56,084 ) Share-based compensation — 5,151 — — — 5,151 Common stock issued upon exercises of stock options — ( 20 ) — 683 — 663 Common stock issued upon vesting of restricted shares — ( 2,996 ) — 817 — ( 2,179 ) Other — 49 ( 5 ) 44 — 88 Balance at April 4, 2021 $ 47,042 $ 2,901,460 $ 259,879 $ ( 2,640,295 ) $ ( 47,421 ) $ 520,665 Net income — — 65,724 — — 65,724 Other comprehensive income — — — — 3,347 3,347 Cash dividends — — ( 22,123 ) — — ( 22,123 ) Repurchases of common stock — — — ( 27,291 ) — ( 27,291 ) Share-based compensation — 5,882 — — — 5,882 Common stock issued upon exercises of stock options — 850 — 23,466 — 24,316 Common stock issued upon vesting of restricted shares — ( 959 ) — 714 — ( 245 ) Other — 41 ( 5 ) 45 — 81 Balance at July 4, 2021 $ 47,042 $ 2,907,274 $ 303,475 $ ( 2,643,361 ) $ ( 44,074 ) $ 570,356 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Six Months Ended July 3, 2022 July 4, 2021 (Unaudited) Cash flows from operating activities: Net income $ 85,553 $ 107,090 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 66,659 62,303 Share-based compensation 12,470 11,033 Impairment of long-lived assets 2,476 1,265 Deferred income tax 7,306 ( 2,137 ) Non-cash rental expense, net 16,684 20,075 Change in operating lease liabilities ( 22,913 ) ( 23,074 ) Net receipt of deferred vendor incentives 5,039 3,332 System optimization gains, net ( 3,686 ) ( 31,282 ) Distributions received from joint ventures, net of equity in earnings 1,108 2,354 Long-term debt-related activities, net 3,731 21,328 Cloud computing arrangements expenditures ( 13,213 ) ( 2,412 ) Changes in operating assets and liabilities and other, net ( 63,019 ) ( 11,124 ) Net cash provided by operating activities 98,195 158,751 Cash flows from investing activities: Capital expenditures ( 30,941 ) ( 24,069 ) Franchise development fund ( 1,312 ) — Acquisitions — 4,879 Dispositions 1,016 50,531 Notes receivable, net 2,445 611 Net cash (used in) provided by investing activities ( 28,792 ) 31,952 Cash flows from financing activities: Proceeds from long-term debt 500,000 1,100,000 Repayments of long-term debt ( 12,125 ) ( 941,220 ) Repayments of finance lease liabilities ( 9,495 ) ( 5,777 ) Deferred financing costs ( 10,232 ) ( 20,873 ) Repurchases of common stock ( 51,950 ) ( 83,658 ) Dividends ( 53,546 ) ( 42,279 ) Proceeds from stock option exercises 1,959 25,933 Payments related to tax withholding for share-based compensation ( 1,904 ) ( 3,197 ) Net cash provided by financing activities 362,707 28,929 Net cash provided by operations before effect of exchange rate changes on cash 432,110 219,632 Effect of exchange rate changes on cash ( 2,428 ) 2,283 Net increase in cash, cash equivalents and restricted cash 429,682 221,915 Cash, cash equivalents and restricted cash at beginning of period 366,966 418,241 Cash, cash equivalents and restricted cash at end of period $ 796,648 $ 640,156 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of July 3, 2022, the results of our operations for the three and six months ended July 3, 2022 and July 4, 2021 and cash flows for the six months ended July 3, 2022 and July 4, 2021. The results of operations for the six months ended July 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- and six-month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years, quarters and months relate to fiscal periods rather than calendar periods. Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue. Reclassifications The Company has reclassified payments for cloud computing arrangements to “Cloud computing arrangements expenditures,” which were previously recorded to “Changes in operating assets and liabilities and other, net.” The prior period amounts in the condensed consolidated statement of cash flows reflect the reclassification of these cash flows to conform to the current year presentation. There was no impact to “Net cash provided by operating activities.” The following table illustrates the reclassifications made to the condensed consolidated statement of cash flows for the six months ended July 4, 2021: As Previously Reported Reclassifications As Currently Reported Cloud computing arrangements expenditures $ — $ ( 2,412 ) $ ( 2,412 ) Changes in operating assets and liabilities and other, net ( 13,536 ) 2,412 ( 11,124 ) 10 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (2) Revenue Disaggregation of Revenue The following tables disaggregate revenue by segment and source: Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Three Months Ended July 3, 2022 Sales at Company-operated restaurants $ 227,903 $ 2,966 $ — $ 230,869 Franchise royalty revenue 108,872 16,141 — 125,013 Franchise fees 15,986 1,167 1,270 18,423 Franchise rental income — — 58,610 58,610 Advertising funds revenue 97,679 7,189 — 104,868 Total revenues $ 450,440 $ 27,463 $ 59,880 $ 537,783 Six Months Ended July 3, 2022 Sales at Company-operated restaurants $ 434,404 $ 5,740 $ — $ 440,144 Franchise royalty revenue 206,792 29,966 — 236,758 Franchise fees 31,391 2,438 1,825 35,654 Franchise rental income — — 116,481 116,481 Advertising funds revenue 185,164 12,225 — 197,389 Total revenues $ 857,751 $ 50,369 $ 118,306 $ 1,026,426 Three Months Ended July 4, 2021 Sales at Company-operated restaurants $ 193,279 $ 246 $ — $ 193,525 Franchise royalty revenue 106,006 13,560 — 119,566 Franchise fees 14,331 1,454 1,310 17,095 Franchise rental income — — 60,868 60,868 Advertising funds revenue 96,227 6,056 — 102,283 Total revenues $ 409,843 $ 21,316 $ 62,178 $ 493,337 Six Months Ended July 4, 2021 Sales at Company-operated restaurants $ 382,336 $ 246 $ — $ 382,582 Franchise royalty revenue 202,770 25,130 — 227,900 Franchise fees 26,261 2,897 2,433 31,591 Franchise rental income — — 119,744 119,744 Advertising funds revenue 180,430 11,293 — 191,723 Total revenues $ 791,797 $ 39,566 $ 122,177 $ 953,540 11 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Contract Balances The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers: July 3, 2022 (a) January 2, 2022 (a) Receivables, which are included in “Accounts and notes receivable, net” (b) $ 57,838 $ 49,168 Receivables, which are included in “Advertising funds restricted assets” 66,918 65,497 Deferred franchise fees (c) 99,108 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 $ 9,862 and $ 89,246 , respectively, as of July 3, 2022, and $ 9,084 and $ 88,102 , respectively, as of January 2, 2022. Significant changes in deferred franchise fees are as follows: Six Months Ended July 3, 2022 July 4, 2021 Deferred franchise fees at beginning of period $ 97,186 $ 97,785 Revenue recognized during the period ( 5,037 ) ( 6,845 ) New deferrals due to cash received and other 6,959 7,469 Deferred franchise fees at end of period $ 99,108 $ 98,409 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) $ 6,831 2023 6,440 2024 6,260 2025 6,084 2026 5,975 Thereafter 67,518 $ 99,108 _______________ (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. 12 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (3) Acquisitions The Company completed no significant acquisitions of restaurants from franchisees during the six months ended July 3, 2022 and July 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 six months ended July 3, 2022 and July 4, 2021, the Company facilitated 46 and 19 Franchise Flips, respectively. In addition, during the three months ended July 4, 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees. No Company-operated restaurants were sold to franchisees during the six months ended July 3, 2022. Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.” The following is a summary of the disposition activity recorded as a result of our system optimization initiative: Three Months Ended Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Number of restaurants sold to franchisees — 47 — 47 Proceeds from sales of restaurants (a) $ — $ 50,518 $ — $ 50,518 Net assets sold (b) — ( 16,939 ) — ( 16,939 ) Goodwill related to sales of restaurants — ( 4,847 ) — ( 4,847 ) Net unfavorable leases (c) — ( 2,939 ) — ( 2,939 ) Gain on sales-type leases — 7,156 — 7,156 Other (d) — ( 2,148 ) — ( 2,148 ) — 30,801 — 30,801 Post-closing adjustments on sales of restaurants (e) 75 — 3,522 515 Gain on sales of restaurants, net 75 30,801 3,522 31,316 Gain (loss) on sales of other assets, net (f) 77 ( 35 ) 164 ( 34 ) System optimization gains, net $ 152 $ 30,766 $ 3,686 $ 31,282 _______________ (a) In addition to the proceeds noted herein, the Company received cash proceeds of $ 63 and $ 158 during the three and six months ended July 3, 2022, respectively, related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants. 13 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (b) Net assets sold consisted primarily of equipment. (c) During the three and six months ended July 4, 2021, the Company recorded favorable lease assets of $ 3,799 and unfavorable lease liabilities of $ 6,738 as a result of leasing and/or subleasing land, buildings and/or leasehold improvements to franchisees, in connection with the sale of the New York Company-operated restaurants (including Manhattan). (d) The three and six months ended July 4, 2021 include a deferred gain of $ 3,500 as a result of certain contingencies related to the extension of lease terms. (e) 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. (f) During the three and six months ended July 3, 2022, the Company received net cash proceeds of $ 690 and $ 858 , respectively, primarily from the sale of surplus and other properties. During the three and six months ended July 4, 2021, the Company received net cash proceeds of $ 10 and $ 13 , respectively, primarily from the sale of surplus and other properties. Assets Held for Sale As of July 3, 2022 and January 2, 2022, the Company had assets held for sale of $ 3,754 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 Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 System optimization initiative $ 134 $ 897 $ 541 $ 5,575 Other reorganization and realignment plans 22 1,205 79 1,461 Reorganization and realignment costs $ 156 $ 2,102 $ 620 $ 7,036 System Optimization Initiative The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During the six months ended July 3, 2022, the Company recognized costs totaling $ 541 , 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 six months ended July 4, 2021, the Company recognized costs totaling $ 5,575 , which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the 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 $ 700 , primarily related to the write-off of certain NPC-related lease liabilities, upon final termination of the leases. 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 costs recorded as a result of our system optimization initiative: Three Months Ended Six Months Ended Total Incurred Since Inception July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Severance and related employee costs $ — $ 661 $ — $ 661 $ 18,898 Professional fees 80 504 374 739 24,051 Other (a) 37 — 133 1,354 7,751 117 1,165 507 2,754 50,700 Accelerated depreciation and amortization (b) — — — — 25,398 NPC lease termination costs (c) 17 ( 268 ) 34 2,821 2,890 Share-based compensation (d) — — — — 5,013 Total system optimization initiative $ 134 $ 897 $ 541 $ 5,575 $ 84,001 _______________ (a) The six months ended July 4, 2021 includes transaction fees of $ 1,350 associated with the NPC bankruptcy sale process. (b) Primarily includes accelerated amortization of previously acquired franchise rights related to the Company-operated restaurants in territories that have been sold to franchisees in connection with our system optimization initiative. (c) The six months ended July 4, 2021 includes the write-off of lease assets of $ 1,341 and lease termination fees paid of $ 1,480 . (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 tables below present 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 2, 2022 Charges Payments Balance July 3, 2022 Professional fees $ — $ 374 $ ( 374 ) $ — Other — 133 ( 133 ) — $ — $ 507 $ ( 507 ) $ — Balance January 3, 2021 Charges Payments Balance July 4, 2021 Severance and related employee costs $ — $ 661 $ ( 661 ) $ — Professional fees 1,230 739 ( 1,969 ) — Other — 1,354 ( 1,354 ) — $ 1,230 $ 2,754 $ ( 3,984 ) $ — Other Reorganization and Realignment Plans Costs incurred under the Company’s other reorganization and realignment plans were not material during the six months ended July 3, 2022 and July 4, 2021. The Company does not expect to incur any material additional costs under these plans. 15 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: July 3, 2022 January 2, 2022 Equity method investments $ 38,088 $ 39,870 Other investments in equity securities 12,107 10,000 $ 50,195 $ 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: Six Months Ended July 3, 2022 July 4, 2021 Balance at beginning of period $ 39,870 $ 44,574 Equity in earnings for the period 5,736 4,921 Amortization of purchase price adjustments (a) ( 1,455 ) ( 1,658 ) 4,281 3,263 Distributions received ( 5,389 ) ( 5,617 ) Foreign currency translation adjustment included in “Other comprehensive (loss) income” and other ( 674 ) 1,456 Balance at end of period $ 38,088 $ 43,676 _______________ (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 six months ended July 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. 16 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (7) Long-Term Debt Long-term debt consisted of the following: July 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 445,500 447,750 2.775 % Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 643,500 646,750 Series 2019-1 Class A-2 Notes: 3.783 % Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 366,000 368,000 4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 411,750 414,000 Series 2018-1 Class A-2 Notes: 3.884 % Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 453,625 456,000 7 % debentures, due in 2025 85,770 85,175 Unamortized debt issuance costs ( 44,105 ) ( 37,009 ) 2,862,040 2,380,666 Less amounts payable within one year ( 29,250 ) ( 24,250 ) Total long-term debt $ 2,832,790 $ 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 six months ended July 3, 2022. During the six months ended July 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. 17 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: July 3, 2022 January 2, 2022 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Measurements Financial assets Cash equivalents $ 415,679 $ 415,679 $ — $ — 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 94,800 — — Level 2 Series 2022-1 Class A-2-II Notes (b) 400,000 376,000 — — Level 2 Series 2021-1 Class A-2-I Notes (b) 445,500 379,254 447,750 439,283 Level 2 Series 2021-1 Class A-2-II Notes (b) 643,500 533,912 646,750 642,352 Level 2 Series 2019-1 Class A-2-I Notes (b) 366,000 348,322 368,000 381,579 Level 2 Series 2019-1 Class A-2-II Notes (b) 411,750 384,122 414,000 439,792 Level 2 Series 2018-1 Class A-2-II Notes (b) 453,625 426,816 456,000 473,693 Level 2 7 % debentures, due in 2025 (b) 85,770 91,467 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. 18 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 July 3, 2022 Level 1 Level 2 Level 3 Held and used $ 952 $ — $ — $ 952 Held for sale 2,275 — — 2,275 Total $ 3,227 $ — $ — $ 3,227 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 Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Company-operated restaurants $ 1,708 $ 488 $ 2,075 $ 934 Restaurants leased or subleased to franchisees — — 194 189 Surplus properties 152 142 207 142 $ 1,860 $ 630 $ 2,476 $ 1,265 (10) Income Taxes The Company’s effective tax rate for the three months ended July 3, 2022 and July 4, 2021 was 26.4 % and 18.6 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the three months ended July 3, 2022 primarily due to state income taxes. 19 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The Company’s effective tax rate for the six months ended July 3, 2022 and July 4, 2021 was 26.4 % and 20.8 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the six months ended July 3, 2022 primarily due to state income taxes. There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three and six months ended July 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 $ 8,266 and $ 11,901 as of July 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 July 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 Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Net income $ 48,151 $ 65,724 $ 85,553 $ 107,090 Common stock: Weighted average basic shares outstanding 213,673 221,874 214,646 222,604 Dilutive effect of stock options and restricted shares 1,569 3,526 2,058 3,459 Weighted average diluted shares outstanding 215,242 225,400 216,704 226,063 Net income per share: Basic $ .23 $ .30 $ .40 $ .48 Diluted $ .22 $ .29 $ .39 $ .47 Basic net income per share for the three and six months ended July 3, 2022 and July 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 5,538 and 4,417 for the three and six months ended July 3, 2022, respectively, and 1,825 and 1,847 for the three and six months ended July 4, 2021, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. (12) Stockholders’ Equity Dividends During each of the first and second quarters of 2022, the Company paid quarterly dividends per share of $ .125 . During the first and second quarters of 2021, the Company paid dividends per share of $ .09 and $ .10 , respectively. Repurchases of Common Stock In February 2022, our Board of Directors authorized a repurchase program for 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 six months ended July 3, 2022, the Company repurchased 2,759 shares under the February 2022 Authorization with an aggregate purchase price of $ 51,911 , excluding commissions of $ 39 . As of July 3, 2022, the Company had $ 198,089 of 20 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) availability remaining under its February 2022 authorization. Subsequent to July 3, 2022 through August 9, 2022, no shares were repurchased under the February 2022 Authorization. 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 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 six months ended July 4, 2021, the Company repurchased 3,956 shares under the February 2020 Authorization with an aggregate purchase price of $ 83,320 , of which $ 440 was accrued at July 4, 2021, and excluding commissions of $ 55 . Accumulated Other Comprehensive Loss The following table provides a rollforward of accumulated other comprehensive loss, which is entirely comprised of foreign currency translation: Six Months Ended July 3, 2022 July 4, 2021 Balance at beginning of period $ ( 48,200 ) $ ( 49,641 ) Foreign currency translation ( 6,337 ) 5,567 Balance at end of period $ ( 54,537 ) $ ( 44,074 ) (13) Leases Nature of Leases The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At July 3, 2022, Wendy’s and its franchisees operated 7,040 Wendy’s restaurants. Of the 411 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 157 restaurants, owned the building and held long-term land leases for 143 restaurants and held leases covering the land and building for 111 restaurants. Wendy’s also owned 489 and leased 1,211 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment. 21 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Company as Lessee The components of lease cost are as follows: Three Months Ended Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Finance lease cost: Amortization of finance lease assets $ 4,106 $ 3,251 $ 8,170 $ 6,759 Interest on finance lease liabilities 10,693 10,267 21,338 20,560 14,799 13,518 29,508 27,319 Operating lease cost 22,324 23,012 42,985 46,373 Variable lease cost (a) 16,456 16,583 31,259 31,771 Short-term lease cost 1,405 1,270 2,838 2,596 Total operating lease cost (b) 40,185 40,865 77,082 80,740 Total lease cost $ 54,984 $ 54,383 $ 106,590 $ 108,059 _______________ (a) Includes expenses for executory costs of $ 9,245 and $ 10,087 for the three months ended July 3, 2022 and July 4, 2021, respectively, and $ 18,853 and $ 20,150 for the six months ended July 3, 2022 and July 4, 2021, respectively, for which the Company is reimbursed by sublessees. (b) Includes $ 32,071 and $ 34,063 for the three months ended July 3, 2022 and July 4, 2021, respectively, and $ 60,996 and $ 66,615 for the six months ended July 3, 2022 and July 4, 2021, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 7,479 and $ 6,111 for the three months ended July 3, 2022 and July 4, 2021, respectively, and $ 14,773 and $ 12,792 for the six months ended July 3, 2022 and July 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 Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Sales-type and direct-financing leases: Selling profit $ 1,677 $ 1,627 $ 2,157 $ 3,539 Interest income (a) 7,753 7,586 15,493 15,075 Operating lease income 42,174 44,356 85,488 88,478 Variable lease income 16,436 16,512 30,993 31,266 Franchise rental income (b) $ 58,610 $ 60,868 $ 116,481 $ 119,744 _______________ (a) Included in “Interest expense, net.” (b) Includes sublease income of $ 43,689 and $ 45,245 recognized during the three months ended July 3, 2022 and July 4, 2021, respectively, and $ 86,854 and $ 88,495 recognized during the six months ended July 3, 2022 and July 4, 2021, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 9,250 and $ 10,195 for the three months ended July 3, 2022 and July 4, 2021, respectively, and $ 18,785 and $ 20,069 for the six months ended July 3, 2022 and July 4, 2021, respectively. 22 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: Six Months Ended July 3, 2022 July 4, 2021 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable $ 5,955 $ 7,242 Finance leases 18,984 30,863 The following table includes a reconciliation of cash, cash equivalents and restricted cash: July 3, 2022 January 2, 2022 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 700,813 $ 249,438 Restricted cash 33,997 27,535 Restricted cash, included in Advertising funds restricted assets 61,838 89,993 Total cash, cash equivalents and restricted cash $ 796,648 $ 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 six months ended July 3, 2022 and July 4, 2021, Wendy’s paid TimWen $ 9,601 and $ 8,817 , respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $ 111 and $ 110 during the six months ended July 3, 2022 and July 4, 2021, respectively, which has been included as a reduction to “General and administrative.” Transactions with Yellow Cab Certain family members and affiliates of Mr. Nelson Peltz, our Chairman, and Mr. Peter May, our Senior Vice Chairman, as well as Mr. Matthew Peltz, our Vice Chairman, hold indirect, minority ownership interests in Yellow Cab Holdings, LLC (“Yellow Cab”) and operating companies managed by Yellow Cab, a Wendy’s franchisee, that as of July 3, 2022 owned and operated 82 Wendy’s restaurants. During the six months ended July 3, 2022 and July 4, 2021, the Company recognized $ 6,476 and $ 4,353 , respectively, in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of July 3, 2022 and January 2, 2022, $ 1,046 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.” 23 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 $ 88,778 as of July 3, 2022. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of July 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 July 3, 2022. Letters of Credit As of July 3, 2022, the Company had outstanding letters of credit with various parties totaling $ 28,633 . 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 July 3, 2022, there were no material developments in those legal proceedings. (18) Segment Information Revenues by segment were as follows: Three Months Ended Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Wendy’s U.S. $ 450,440 $ 409,843 $ 857,751 $ 791,797 Wendy’s International 27,463 21,316 50,369 39,566 Global Real Estate & Development 59,880 62,178 118,306 122,177 Total revenues $ 537,783 $ 493,337 $ 1,026,426 $ 953,540 24 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table reconciles profit by segment to the Company’s consolidated income before income taxes: Three Months Ended Six Months Ended July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021 Wendy’s U.S. (a) $ 126,999 $ 126,650 $ 231,823 $ 238,737 Wendy’s International (b) 9,350 6,528 14,803 14,212 Global Real Estate & Development 27,283 26,569 54,890 52,822 Total segment profit $ 163,632 $ 159,747 $ 301,516 $ 305,771 Unallocated franchise support and other costs — — 6 — Advertising funds deficit ( 1,375 ) ( 1,602 ) ( 2,618 ) ( 2,866 ) Unallocated general and administrative (c) ( 30,989 ) ( 28,864 ) ( 61,994 ) ( 53,971 ) Depreciation and amortization ( 33,428 ) ( 30,761 ) ( 66,659 ) ( 62,303 ) System optimization gains, net 152 30,766 3,686 31,282 Reorganization and realignment costs ( 156 ) ( 2,102 ) ( 620 ) ( 7,036 ) Impairment of long-lived assets ( 1,860 ) ( 630 ) ( 2,476 ) ( 1,265 ) Unallocated other operating income, net 305 192 321 256 Interest expense, net ( 32,125 ) ( 28,204 ) ( 58,490 ) ( 56,990 ) Loss on early extinguishment of debt — ( 17,917 ) — ( 17,917 ) Investment (loss) income, net ( 4 ) 3 2,107 6 Other income, net 1,238 158 1,445 284 Income before income taxes $ 65,390 $ 80,786 $ 116,224 $ 135,251 _______________ (a) Wendy’s U.S. includes advertising fund expense of $ 2,766 and $ 5,322 for the three and six months ended July 3, 2022, respectively, and $ 3,990 and $ 7,524 for the three and six months ended July 4, 2021, respectively, related to the Company’s funding of incremental advertising. (b) Wendy’s International includes advertising fund expense of $ 1,084 and $ 1,922 for the three and six months ended July 3, 2022, respectively, related to the Company’s funding of incremental advertising. In addition, Wendy’s International includes other international-related advertising expense of $ 880 and $ 1,522 for the three and six months ended July 3, 2022, respectively. (c) 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. 25