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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-10 · 149 added, 133 removed, 328 unchanged (46% of the section changed)

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Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 (the “Form 10-K”).

There have been no material changes as of July 3, 2022 to the application of our critical accounting policies as described in Item 7 of the Form 10-K.

There have been no material changes as of October 2, 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.

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and 31 foreign countries and U.S.

territories as of July 3, 2022.

territories as of October 2, 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.

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

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

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

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

Executive Overview

As of July 3, 2022, the Wendy’s restaurant system was comprised of 7,040 restaurants, with 5,983 Wendy’s restaurants in operation in the U.S.

As of October 2, 2022, the Wendy’s restaurant system was comprised of 7,080 restaurants, with 5,997 Wendy’s restaurants in operation in the U.S.

restaurants, 403 were operated by the Company and 5,594 were operated by a total of 218 franchisees.

In addition, at July 3, 2022, there were 1,057 Wendy’s restaurants in operation in 31 foreign countries and U.S.

Of the international restaurants, 1,049 were operated by franchisees and eight were operated by the Company in the United Kingdom (the “U.K.”).

In addition, at October 2, 2022, there were 1,083 Wendy’s restaurants in operation in 31 foreign countries and U.S.

Of the international restaurants, 1,074 were operated by franchisees and nine were operated by the Company in the United Kingdom (the “U.K.”).

The revenues from our restaurant business are derived from two principal sources:

(1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants.

Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of July 3, 2022.

Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of October 2, 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.

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Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs.

Cost of sales excludes certain costs that support restaurant operations that are not allocated to individual restaurants, which are included in “General and administrative.” Cost of sales also excludes depreciation and amortization expense and impairment of long-lived assets.

Therefore, as restaurant margin as presented excludes certain costs as described above, its usefulness may be limited and may not be comparable to other similarly titled measures of other companies in our industry.

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.

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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.

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.

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Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.

Second Quarter Financial Highlights

• Revenue increased 9.0% to $537.8 million in the second quarter of 2022 compared to $493.3 million in the second quarter of 2021;

Third Quarter Financial Highlights

• Revenue increased 13.3% to $532.6 million in the third quarter of 2022 compared to $470.3 million in the third quarter of 2021;

• Global same-restaurant sales increased 6.9%, U.S.

same-restaurant sales increased 2.3% and international same-restaurant sales increased 15.2% compared to the second quarter of 2021;

• Company-operated restaurant margin was 14.5% in the second quarter of 2022, a decrease of 580 basis points compared to the second quarter of 2021;

• Net income decreased 26.7% to $48.2 million in the second quarter of 2022 compared to $65.7 million in the second quarter of 2021.

same-restaurant sales increased 6.4% and international same-restaurant sales increased 10.8% compared to the third quarter of 2021;

• Company-operated restaurant margin was 14.3% in the third quarter of 2022, a decrease of 10 basis points compared to the third quarter of 2021;

• Net income increased 22.8% to $50.5 million in the third quarter of 2022 compared to $41.2 million in the third quarter of 2021.

Year-to-Date Financial Highlights

• Revenue increased 7.6% to $1.0 billion in the first six months of 2022 compared to $953.5 million in the first six months of 2021;

• Revenue increased 9.5% to $1.6 billion in the first nine months of 2022 compared to $1.4 billion in the first nine months of 2021;

• Global same-restaurant sales increased 4.4%, U.S.

same-restaurant sales increased 1.7% and international same-restaurant sales increased 14.7% compared to the first six months of 2021;

• Company-operated restaurant margin was 13.1% in the first six months of 2022, a decrease of 560 basis points from the first six months of 2021;

• Net income decreased 20.1% to $85.6 million in the first six months of 2022 compared to $107.1 million in the first six months of 2021.

same-restaurant sales increased 3.3% and international same-restaurant sales increased 13.3% compared to the first nine months of 2021;

• Company-operated restaurant margin was 13.5% in the first nine months of 2022, a decrease of 390 basis points from the first nine months of 2021;

• Net income decreased 8.2% to $136.1 million in the first nine months of 2022 compared to $148.3 million in the first nine months of 2021.

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

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system in March 2020, systemwide sales have benefited from this new daypart, with average weekly U.S.

breakfast sales representing approximately $2,600 per restaurant during the six months ended July 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%.

breakfast sales representing approximately $2,600 per restaurant during the nine months ended October 2, 2022.

The Company launched breakfast in Canada in May 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.

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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 represented approximately 10.2% of global systemwide sales during the six months ended July 3, 2022.

The Company’s digital business represented approximately 10.1% of global systemwide sales during the nine months ended October 2, 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.

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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 six months ended July 3, 2022, the Company and its franchisees added 91 net new restaurants across the Wendy’s system.

During the second quarter of 2022, the Company reevaluated the development commitment by REEF Kitchens (“REEF”) and now anticipates that REEF will open 100 to 150 delivery kitchens by the end of 2025, primarily in Canada and the U.K.

During the nine months ended October 2, 2022, the Company and its franchisees added 131 net new restaurants across the Wendy’s system.

During the first nine months of 2022, the Company reevaluated its development plans resulting in a reduction in its expected net new restaurant growth, primarily related to non-traditional restaurants.

As a result, the Company now expects net new restaurant growth of 2.0% to 2.5% in 2022 and expects to reach 8,000 to 8,500 systemwide restaurants by the end of 2025.

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Results of Operations

The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the second quarter and the first six months of 2022 and 2021.

Second Quarter Six Months

The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the third quarter and the first nine months of 2022 and 2021.

Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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General and administrative 62.5 62.8 (0.3) 186.5 178.6 7.9

Depreciation and amortization 33.4 30.8 2.6 66.7 62.3 4.4

Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) 34.3 30.9 3.4 100.9 93.2 7.7

Amortization of cloud computing arrangements 0.9 — 0.9 0.9 — 0.9

System optimization gains, net (0.5) (1.4) 0.9 (4.1) (32.7) 28.6

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Net income $ 50.5 $ 41.2 $ 9.3 $ 136.1 $ 148.3 $ (12.2)

Second Quarter Six Months

Third Quarter Nine Months

Total Revenues 2021 % of

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$ 532.6 100.0 % $ 470.3 100.0 % $ 1,559.0 100.0 % $ 1,423.8 100.0 %

Second Quarter Six Months

Third Quarter Nine Months

Sales 2021 % of

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Total cost of sales $ 196.2 85.7 % $ 146.4 85.6 % $ 578.5 86.5 % $ 457.4 82.6 %

Second Quarter Six Months

Third Quarter Nine Months

Sales 2021 % of

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

Second Quarter Six Months

Third Quarter Nine Months

2022 2021 2022 2021

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

(b) During the second quarter of 2022 and 2021, global systemwide sales increased 5.6% and 22.9%, respectively, U.S.

(b) During the third quarter of 2022 and 2021, global systemwide sales increased 8.9% and 5.3%, respectively, U.S.

systemwide sales increased 7.7% and 3.7%, respectively, and international systemwide sales increased 18.3% and 20.2%, respectively, on a constant currency basis.

During the first six months of 2022 and 2021, global systemwide sales increased 4.9% and 17.7%, respectively, U.S.

During the first nine months of 2022 and 2021, global systemwide sales increased 6.3% and 13.2%, respectively, U.S.

systemwide sales increased 4.6% and 12.1%, respectively, and international systemwide sales increased 20.1% and 23.6%, respectively, on a constant currency basis.

Second Quarter

Third Quarter

Company-operated U.S.

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Restaurant count:

Restaurant count at April 3, 2022

Restaurant count at July 3, 2022

403 5,580 8 1,049 7,040

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Closed (a) (1) (12) — (5) (18)

Restaurant count at July 3, 2022

Net purchased from (sold by) franchisees (1) 1 — — —

Restaurant count at October 2, 2022

403 5,594 9 1,074 7,080

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Net purchased from (sold by) franchisees — — — — —

Restaurant count at July 3, 2022

Restaurant count at October 2, 2022

403 5,594 9 1,074 7,080

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(a) Excludes restaurants temporarily closed.

Sales Second Quarter Six Months

Sales Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Sales $ 228.8 $ 171.1 $ 57.7 $ 668.9 $ 553.7 $ 115.2

The increase in sales for the second quarter and the first six months 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.

The increase in sales for the third quarter and the first nine months of 2022 was primarily due to (1) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021 of $43.0 million and $128.2 million, respectively, (2) a 6.8% and 4.2% increase in Company-operated same-restaurant sales of $11.2 million and $22.6 million, respectively, and (3) net new restaurant development of $2.9 million and $4.8 million, respectively.

The increase in sales during the first nine months of 2022 was partially offset by the sale of 47 Company-operated restaurants in New York during the second quarter of 2021 of $42.9 million.

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

Company-operated same-restaurant sales during the first six months of 2021 benefited from government stimulus payments to consumers during the first quarter of 2021, which did not recur in the first six months of 2022.

Franchise Royalty Revenue and Fees Second Quarter Six Months

Company-operated same-restaurant sales during the first nine months of 2021 benefited from government stimulus payments to consumers during the first quarter of 2021, which did not recur in the first nine months of 2022.

Franchise Royalty Revenue and Fees Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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$ 141.7 $ 138.8 $ 2.9 $ 414.2 $ 398.2 $ 16.0

The increase in franchise royalty revenue during the second quarter and the first six months of 2022 was primarily due to (1) a 3.7% and 3.1% increase in global franchise same-restaurant sales, respectively, and (2) a net increase in the number of franchise restaurants in operation during 2022 compared to 2021.

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

Franchise same-restaurant sales during the first six months of 2021 benefited from government stimulus payments to consumers during the first quarter of 2021, which did not recur in the first six months of 2022.

The increase in franchise fees during the second quarter and the first six months of 2022 was primarily due to higher fees for providing information technology services to franchisees.

The increase in franchise fees during the first six months of 2022 reflects 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 six months of 2021.

Franchise Rental Income Second Quarter Six Months

Franchise royalty revenue during the third quarter of 2022 increased $7.9 million, of which (1) $7.7 million was due to a 6.9% increase in global franchise same-restaurant sales and (2) $0.4 million was due to a net increase in the number of franchise restaurants in operation during 2022 compared to 2021.

Franchise royalty revenue during the first nine months of 2022 increased $17.0 million, of which (1) $14.6 million was due to a 4.4% increase in global franchise same-restaurant sales and (2) $2.8 million was due to a net increase in the number of franchise restaurants in operation during 2022 compared to 2021.

Franchise same-restaurant sales during the third quarter and the first nine months of 2022 increased due to higher average check, partially offset by a decrease in customer count.

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

benefited from government stimulus payments to consumers during the first quarter of 2021, which did not recur in the first nine months of 2022.

The decrease in franchise fees during the third quarter and the first nine months of 2022 was primarily due to the accelerated recognition of franchise agreement revenue in the prior year as a result of franchisee-to-franchisee restaurant transfers of $4.8 million.

During the first nine months of 2022, franchise fees also decreased due to the accelerated recognition of franchise fees of $1.7 million associated with canceled development agreements during the first nine months of 2021, partially offset by higher fees for providing information technology services to franchisees of $5.5 million.

This increase in fees for providing information technology services during the first nine months of 2022 reflects the one-month waiver of technology fees during the first quarter of 2021.

Franchise Rental Income Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Franchise rental income $ 58.5 $ 62.4 $ (3.9) $ 174.9 $ 182.2 $ (7.3)

The decrease in franchise rental income during the second quarter and the first six months 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 Second Quarter Six Months

The decrease in franchise rental income during the third quarter and the first nine months of 2022 was primarily due to the impact of terminating existing leases where the Company was lessor of $3.2 million and $8.0 million, respectively, primarily in connection with the Company’s acquisition of franchise-operated restaurants in Florida during the fourth quarter of 2021.

The decrease in franchise rental income for the first nine months of 2022 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 Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Advertising funds revenue $ 103.6 $ 98.0 $ 5.6 $ 301.0 $ 289.7 $ 11.3

The increase in advertising funds revenue during the second quarter and the first six months of 2022 was primarily due to an increase in franchise same-restaurant sales in the U.S.

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

The increase in advertising funds revenue during the third quarter and the first nine months of 2022 was primarily due to an increase in franchise same-restaurant sales in the U.S.

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

2022 2021 Change 2022 2021 Change

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85.7 % 85.6 % 0.1 % 86.5 % 82.6 % 3.9 %

The increase in cost of sales, as a percent of sales, during the second quarter and the first six months 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.

The increase in cost of sales, as a percent of sales, during the third quarter and the first nine months 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.

These impacts were partially offset by higher average check.

Franchise Support and Other Costs Second Quarter Six Months

Franchise Support and Other Costs Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Franchise support and other costs $ 12.7 $ 10.5 $ 2.2 $ 34.5 $ 27.1 $ 7.4

The increase in franchise support and other costs during the second quarter and the first six months of 2022 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees.

Franchise Rental Expense Second Quarter Six Months

The increase in franchise support and other costs during the third quarter and the first nine months of 2022 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees.

Franchise Rental Expense Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Franchise rental expense $ 31.7 $ 34.4 $ (2.7) $ 92.7 $ 101.1 $ (8.4)

The decrease in franchise rental expense during the second quarter and the first six months of 2022 was primarily due to (1) the impact of assigning certain leases to franchisees and (2) the impact of the Company’s acquisition of franchise-operated restaurants in Florida during the fourth quarter of 2021.

Advertising Funds Expense Second Quarter Six Months

The decrease in franchise rental expense during the third quarter and the first nine months of 2022 was primarily due to (1) the impact of assigning certain leases to franchisees and (2) the impact of the Company’s acquisition of franchise-operated restaurants in Florida during the fourth quarter of 2021.

Advertising Funds Expense Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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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 second quarter and the first six months of 2022, advertising funds expense increased due to an increase in franchise same-restaurant sales in the U.S.

General and Administrative Second Quarter Six Months

2022 2021 Change 2022 2021 Change

During the third quarter of 2022, advertising funds expense decreased due to a decrease in the recognition of the Company’s funding of incremental advertising, partially offset by an increase in franchise same-restaurant sales in the U.S.

During the first nine months of 2022, advertising funds expense increased due to an increase in franchise same-restaurant sales in the U.S.

and Canada, partially offset by a decrease in the recognition of the Company’s funding of incremental advertising.

General and Administrative Third Quarter Nine Months

2022 2021 (a) Change 2022 2021 (a) Change

Incentive compensation $ 6.4 $ 11.0 $ (4.6) $ 19.2 $ 33.5 $ (14.3)

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$ 62.5 $ 62.8 $ (0.3) $ 186.5 $ 178.6 $ 7.9

The decrease in general and administrative expenses during the second quarter of 2022 was primarily due to a decrease in incentive compensation accruals, reflecting higher operating performance as compared to plan in the first six months of 2021 compared to the first six months of 2022.

This decrease was partially offset by (1) an increase in employee compensation and related benefits, reflecting investments in resources to support the Company’s development and digital organizations, (2) higher professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning (“ERP”) implementation and (3) an increase in travel-related expenses.

The increase in general and administrative expenses during the first six months 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) higher professional fees, primarily as a result of costs associated with the Company’s ERP implementation and (3) an increase in travel-related expenses.

These increases were partially offset by a decrease in incentive compensation accruals, reflecting higher operating performance as compared to plan in the first six months of 2021 compared to the first six months of 2022.

Depreciation and Amortization Second Quarter Six Months

_______________

(a) Certain reclassifications have been made to the prior year presentation to conform to the current year presentation.

The decrease in general and administrative expenses during the third quarter of 2022 was primarily due to a decrease in incentive compensation accruals, reflecting higher operating performance as compared to plan in the first nine months of 2021 compared to the first nine months of 2022.

This decrease was partially offset by (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 and (3) higher professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning (“ERP”) implementation.

The increase in general and administrative expenses during the first nine months 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) higher professional fees, primarily as a result of costs associated with the Company’s ERP implementation and (3) an increase in travel-related expenses.

These increases were partially offset by a decrease in incentive compensation accruals, reflecting higher operating performance as compared to plan in the first nine months of 2021 compared to the first nine months of 2022.

Depreciation and Amortization (exclusive of amortization of cloud computing arrangements shown separately below) Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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$ 34.3 $ 30.9 $ 3.4 $ 100.9 $ 93.2 $ 7.7

The increase in depreciation and amortization during the second quarter and the first six months 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 Second Quarter Six Months

The increase in depreciation and amortization during the third quarter and the first nine months of 2022 was primarily due to depreciation and amortization on assets acquired from a franchisee in Florida during the fourth quarter of 2021.

Amortization of Cloud Computing Arrangements Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Amortization of cloud computing arrangements $ 0.9 $ — $ 0.9 $ 0.9 $ — $ 0.9

Amortization of cloud computing arrangements primarily represents amortization of assets associated with the Company's ERP implementation.

System Optimization Gains, Net Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

System optimization gains, net $ (0.5) $ (1.4) $ 0.9 $ (4.1) $ (32.7) $ 28.6

System optimization gains, net for the first six months of 2022 were primarily comprised of post-closing adjustments on previous sales of restaurants.

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

System optimization gains, net for the first nine months of 2022 were primarily comprised of post-closing adjustments on previous sales of restaurants.

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

See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.

Reorganization and Realignment Costs Second Quarter Six Months

Reorganization and Realignment Costs Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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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 six months ended July 3, 2022, the Company recognized costs associated with its system optimization initiative totaling $0.5 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 six months ended July 4, 2021, the Company recognized costs totaling $5.5 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.

During the first nine months of 2022, the Company recognized costs associated with its system optimization initiative totaling $0.5 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 first nine months of 2021, the Company recognized costs totaling $5.8 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.

The Company expects to recognize a gain of approximately $0.7 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 and six months ended months ended July 3, 2022 and July 4, 2021.

Costs incurred under the Company’s other reorganization and realignment plans were not material during the third quarter and first nine months of 2022 and 2021.

The Company does not expect to incur any material additional costs under these plans.

Impairment of Long-Lived Assets Second Quarter Six Months

Impairment of Long-Lived Assets Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Impairment of long-lived assets $ 0.2 $ 0.6 $ (0.4) $ 2.7 $ 1.8 $ 0.9

The change in impairment charges during the second quarter and the first six months of 2022 was primarily driven by higher impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants.

Other Operating Income, Net Second Quarter Six Months

The change in impairment charges during the first nine months of 2022 was primarily driven by impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants.

Other Operating Income, Net Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Gains on sales-type leases $ (1.7) $ (1.6) $ (0.1) $ (2.2) $ (3.5) $ 1.3

Lease buyout (1.3) (0.8) (0.5) (2.1) (0.9) (1.2)

Gain from insurance recoveries $ (8.6) $ — $ (8.6) $ (8.6) $ — $ (8.6)

Equity in earnings in joint ventures, net (2.6) (2.3) (0.3) (6.9) (5.6) (1.3)

Lease buyout — — — (2.1) (0.9) (1.2)

Gains on sales-type leases (0.7) (0.7) — (2.9) (4.2) 1.3

Other, net 0.1 — 0.1 — (0.1) 0.1

$ (11.8) $ (3.0) $ (8.8) $ (20.5) $ (10.8) $ (9.7)

The increase in other operating income, net during the second quarter and the first six months of 2022 was primarily due to (1) lease buyout activity and (2) an increase in the equity in earnings from our TimWen joint venture.

During the first six months of 2022, these increases were partially offset by lower gains on new and modified sales-type leases.

Interest Expense, Net Second Quarter Six Months

The increase in other operating income, net during the third quarter of 2022 was primarily due to a gain from insurance recoveries.

The increase in other operating income, net during the first nine months of 2022 was primarily due to (1) a gain from insurance recoveries, (2) an increase in the equity in earnings from our TimWen joint venture and (3) lease buyout activity.

During the first nine months of 2022, these increases were partially offset by lower gains on new and modified sales-type leases.

Interest Expense, Net Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Interest expense, net $ 31.9 $ 26.0 $ 5.9 $ 90.4 $ 83.0 $ 7.4

The increase in interest expense, net during the second quarter and the first six months of 2022 was primarily due to the impact of completing a debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.

This increase was partially offset by the impact of completing the refinancing of a portion of the Company’s securitized financing facility in the second quarter of 2021.

Loss on Early Extinguishment of Debt Second Quarter Six Months

The increase in interest expense, net during the third quarter and the first nine months of 2022 was primarily due to the impact of completing a debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.

During the first nine months of 2022, this increase was partially offset by the impact of completing the refinancing of a portion of the Company’s securitized financing facility in the second quarter of 2021.

Loss on Early Extinguishment of Debt Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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

Investment Income, Net Second Quarter Six Months

Investment Income, Net Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Investment income, net $ — $ — $ — $ 2.1 $ — $ 2.1

During the first six months 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.

Other Income, Net Second Quarter Six Months

During the first nine months 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.

Other Income, Net Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

Other income, net $ 2.9 $ 0.2 $ 2.7 $ 4.4 $ 0.4 $ 4.0

The change in other income, net during the second quarter and the first six months of 2022 was primarily due to interest income earned on our cash equivalents, which increased as a result of cash received from our debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.

Provision for Income Taxes Second Quarter Six Months

The increase in other income, net during the third quarter and the first nine months of 2022 was primarily due to interest income earned on our cash equivalents, which increased as a result of cash received from our debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.

Provision for Income Taxes Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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26.9 % 24.3 % 2.6 % 26.6 % 21.8 % 4.8 %

Our effective tax rates for the second quarter and the first six months 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 second quarter and the first six months of 2022 was primarily due to a decrease in the benefit from share-based compensation.

Our effective tax rates for the third quarter and the first nine months 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 third quarter of 2022 compared with the third quarter of 2021 was primarily due to an increase in the tax effects of our foreign operations.

The increase in the effective tax rate for the first nine months of 2022 compared with the first nine months of 2021 was primarily due to a decrease in the benefit from share-based compensation and an increase in the tax effects of our foreign operations.

Segment Information

See Note 18 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments.

Second Quarter Six Months

Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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The increase in Wendy’s U.S.

revenues during the second quarter and the first six months of 2022 was primarily due to (1) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021 and (2) an increase in same-restaurant sales.

revenues during the third quarter and the first nine months of 2022 was primarily due to (1) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021 and (2) an increase in same-restaurant sales.

The increase in Wendy’s U.S.

revenues during the first six months of 2022 was also driven by 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 second quarter and the first six months 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 six months 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.

These impacts were partially offset by higher revenues.

revenues during the first nine months of 2022 was also driven by 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 sale of 47 Company-operated restaurants in New York during the second quarter of 2021.

Same-restaurant sales increased during the third quarter and the first nine months of 2022 primarily due to higher average check, partially offset by a decrease in customer count.

The increase in Wendy’s U.S.

segment profit during the third quarter and the first nine months of 2022 was primarily due to (1) higher revenues and (2) a decrease in the recognition of the Company’s funding of incremental advertising.

During the first nine months of 2022, these increases were partially offset by 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.

Wendy’s International

Second Quarter Six Months

Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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Segment profit $ 8.6 $ 6.9 $ 1.7 $ 23.4 $ 21.2 $ 2.2

The increase in Wendy’s International revenues during the second quarter and the first six months of 2022 was primarily due to (1) the opening of Company-operated restaurants in the U.K.

The increase in Wendy’s International revenues during the third quarter and the first nine months 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 second quarter and first six months of 2022 due to (1) an increase in customer count and (2) higher average check.

The increase in Wendy’s International segment profit during the second quarter and the first six months of 2022 was primarily due to higher revenues.

This increase was partially offset by (1) the Company’s investments to support the entry into the U.K.

market 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.

Same-restaurant sales increased during the third quarter and first nine months of 2022 due to (1) an increase in customer count and (2) higher average check.

The increase in Wendy’s International segment profit during the third quarter and the first nine months of 2022 was primarily due to higher revenues.

This increase was partially offset by (1) higher advertising fund expense, reflecting the Company’s funding of incremental advertising to support the launch of breakfast in Canada in May 2022, and (2) the Company’s investments to support the entry into the U.K.

Global Real Estate & Development

Second Quarter Six Months

Third Quarter Nine Months

2022 2021 Change 2022 2021 Change

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Segment profit $ 25.9 $ 27.0 $ (1.1) $ 80.8 $ 79.8 $ 1.0

The decrease in Global Real Estate & Development revenues during the second quarter and the first six months of 2022 was primarily due to lower franchise rental income.

The decrease in Global Real Estate & Development revenues during the third quarter and the first nine months 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 second quarter and the first six months of 2022 was primarily due to a decrease in franchise rental expense.

The decrease in Global Real Estate & Development segment profit during the third quarter of 2022 was primarily due to lower revenues, partially offset by a decrease in franchise rental expense.

The increase in Global Real Estate & Development segment profit during the first nine months of 2022 was primarily due to a decrease in franchise rental expense, partially offset by lower revenues.

See “Franchise Rental Expense” above for further information.

This change was partially offset by lower revenues.

Liquidity and Capital Resources

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

The table below summarizes our cash flows from operating, investing and financing activities for the first six months of 2022 and 2021:

The table below summarizes our cash flows from operating, investing and financing activities for the first nine months of 2022 and 2021:

2022 2021 Change

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Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities.

Cash provided by operating activities was $98.2 million and $158.8 million in the first six months 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 receipt of franchisee rental payments and (3) cash paid for cloud computing arrangements, primarily related to the Company’s ERP implementation.

These changes were partially offset by the timing of payments for marketing expenses of the national advertising funds.

Cash provided by operating activities was $182.6 million and $276.7 million in the first nine months 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 receipt of franchisee rental payments, (3) cash paid for cloud computing arrangements, primarily related to the Company’s ERP implementation, and (4) the timing of payments for marketing expenses of the national advertising funds.

Investing Activities

Cash (used in) provided by investing activities was $(28.8) million and $32.0 million in the first six months of 2022 and 2021, respectively.

Cash (used in) provided by investing activities was $(46.1) million and $15.0 million in the first nine months of 2022 and 2021, respectively.

The change was primarily due to (1) a decrease in proceeds from dispositions of $48.9 million, reflecting the sale of 47 Company-operated restaurants in New York during the second quarter of 2021, (2) an increase in capital expenditures of $6.6 million and (3) the net settlement of deposits associated with the Company’s consortium bid to acquire NPC’s Wendy’s restaurants of $4.9 million in the first quarter of 2021.

Financing Activities

Cash provided by financing activities was $362.7 million and $28.9 million in the first six months of 2022 and 2021, respectively.

The change was primarily due to (1) a net increase in cash provided by long-term debt activities of $339.7 million, reflecting the respective impacts of the completion of the Company’s debt financing transaction during the first quarter of 2022 and the debt refinancing transaction during the second quarter of 2021, and (2) a decrease in the repurchases of common stock of $31.7 million.

These changes were partially offset by an (1) a decrease in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $22.7 million and (2) an increase in dividends of $11.3 million.

Cash provided by (used in) financing activities was $324.5 million and $(57.5) million in the first nine months of 2022 and 2021, respectively.

The change was primarily due to (1) a net increase in cash provided by long-term debt activities of $347.0 million, reflecting the respective impacts of the completion of the Company’s debt financing transaction during the first quarter of 2022 and the Company’s debt refinancing transaction during the second quarter of 2021, and (2) a decrease in the repurchases of common stock of $73.7 million.

These changes were partially offset by (1) a decrease in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $23.1 million and (2) an increase in dividends of $11.2 million.

Long-Term Debt, Including Current Portion

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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 six months ended July 3, 2022.

using various credit instruments, including a letter of credit facility.

No amounts were borrowed under the Class A-1 Notes during the nine months ended October 2, 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 July 3, 2022.

The Company was in compliance with its debt covenants as of October 2, 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.

On March 15, 2022 and June 15, 2022, the Company paid quarterly cash dividends per share of $.125, aggregating $53.5 million.

On August 10, 2022, the Company announced a dividend of $.125 per share to be paid on September 15, 2022 to stockholders of record as of September 1, 2022.

If the Company pays regular quarterly cash dividends for the remainder of 2022 at the same rate as declared in the third quarter of 2022, the Company’s total cash requirement for dividends for the remainder of 2022 will be approximately $53.2 million based on the number of shares of its common stock outstanding at August 3, 2022.

On March 15, 2022, June 15, 2022 and September 15, 2022, the Company paid quarterly cash dividends per share of $.125, aggregating $80.2 million.

On November 9, 2022, the Company announced a dividend of $.125 per share to be paid on December 15, 2022 to stockholders of record as of December 1, 2022.

As a result, the Company expects that its total cash requirement for the fourth quarter of 2022 will be approximately $26.6 million based on the number of shares of its common stock outstanding at November 2, 2022.

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

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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 six months ended July 3, 2022, the Company repurchased 2.8 million shares under the February 2022 Authorization with an aggregate purchase price of $51.9 million, excluding commissions.

As of July 3, 2022, the Company had $198.1 million of availability remaining under the February 2022 authorization.

Subsequent to July 3, 2022 through August 9, 2022, no shares were repurchased under the February 2022 Authorization.

During the nine months ended October 2, 2022, the Company repurchased 2.8 million shares under the February 2022 Authorization with an aggregate purchase price of $51.9 million, excluding commissions.

As of October 2, 2022, the Company had $198.1 million of availability remaining under the February 2022 authorization.

Subsequent to October 2, 2022 through November 2, 2022, no shares were repurchased under the February 2022 Authorization.

In February 2020, our Board of Directors authorized a repurchase program for up to $100.0 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”).

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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.

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.

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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 $13.2 million during the six months ended July 3, 2022.

In addition to the anticipated cash requirements for capital expenditures noted above in “Cash Flows,” 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 $22.7 million during the nine months ended October 2, 2022.

General Inflation, Commodities and Changing Prices

Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the six months ended July 3, 2022, and we expect this to continue throughout the remainder of 2022.

Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the nine months ended October 2, 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.

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis