Wendy's Co 10-Q

Item 1. Financial Statements. THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Par Value) October 2, 2022 January 2, 2022 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 731,801 $ 249,438 Restricted cash 34,363 27,535 Accounts and notes receivable, net 142,447 119,540 Inventories 6,578 5,934 Prepaid expenses and other current assets 28,795 30,584 Advertising funds restricted assets 150,662 159,818 Total current assets 1,094,646 592,849 Properties 882,283 906,867 Finance lease assets 237,517 244,279 Operating lease assets 765,688 812,620 Goodwill 772,984 775,278 Other intangible assets 1,252,198 1,280,791 Investments 45,482 49,870 Net investment in sales-type and direct financing leases 310,576 299,707 Other assets 163,615 139,130 Total assets $ 5,524,989 $ 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 17,585 15,513 Current portion of operating lease liabilities 47,481 47,315 Accounts payable 34,667 41,163 Accrued expenses and other current liabilities 130,202 140,783 Advertising funds restricted liabilities 159,231 157,901 Total current liabilities 418,416 426,925 Long-term debt 2,827,493 2,356,416 Long-term finance lease liabilities 567,472 559,587 Long-term operating lease liabilities 804,632 853,328 Deferred income taxes 276,089 267,710 Deferred franchise fees 91,669 88,102 Other liabilities 101,839 112,918 Total liabilities 5,087,610 4,664,986 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 212,945 and 215,849 shares outstanding, respectively 47,042 47,042 Additional paid-in capital 2,930,388 2,898,633 Retained earnings 400,111 344,198 Common stock held in treasury, at cost; 257,479 and 254,575 shares, respectively ( 2,871,442 ) ( 2,805,268 ) Accumulated other comprehensive loss ( 68,720 ) ( 48,200 ) Total stockholders’ equity 437,379 436,405 Total liabilities and stockholders’ equity $ 5,524,989 $ 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 Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (Unaudited) Revenues: Sales $ 228,786 $ 171,078 $ 668,930 $ 553,660 Franchise royalty revenue and fees 141,733 138,755 414,145 398,246 Franchise rental income 58,463 62,446 174,944 182,190 Advertising funds revenue 103,587 97,976 300,976 289,699 532,569 470,255 1,558,995 1,423,795 Costs and expenses: Cost of sales 196,168 146,436 578,506 457,440 Franchise support and other costs 12,728 10,509 34,456 27,080 Franchise rental expense 31,687 34,424 92,699 101,058 Advertising funds expense 108,269 108,529 317,042 310,642 General and administrative 62,523 62,840 186,506 178,576 Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) 34,252 30,940 100,911 93,243 Amortization of cloud computing arrangements 888 — 888 — System optimization gains, net ( 452 ) ( 1,437 ) ( 4,138 ) ( 32,719 ) Reorganization and realignment costs 8 345 628 7,381 Impairment of long-lived assets 206 566 2,682 1,831 Other operating income, net ( 11,843 ) ( 3,092 ) ( 20,482 ) ( 10,800 ) 434,434 390,060 1,289,698 1,133,732 Operating profit 98,135 80,195 269,297 290,063 Interest expense, net ( 31,916 ) ( 26,000 ) ( 90,406 ) ( 82,990 ) Loss on early extinguishment of debt — — — ( 17,917 ) Investment income, net — — 2,107 6 Other income, net 2,910 171 4,355 455 Income before income taxes 69,129 54,366 185,353 189,617 Provision for income taxes ( 18,587 ) ( 13,195 ) ( 49,258 ) ( 41,356 ) Net income $ 50,542 $ 41,171 $ 136,095 $ 148,261 Net income per share: Basic $ .24 $ .19 $ .64 $ .67 Diluted .24 .18 .63 .66 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 (Unaudited) Net income $ 50,542 $ 41,171 $ 136,095 $ 148,261 Other comprehensive (loss) income: Foreign currency translation adjustment ( 14,183 ) ( 4,659 ) ( 20,520 ) 908 Other comprehensive (loss) income ( 14,183 ) ( 4,659 ) ( 20,520 ) 908 Comprehensive income $ 36,359 $ 36,512 $ 115,575 $ 149,169 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 Net income — — 50,542 — — 50,542 Other comprehensive loss — — — — ( 14,183 ) ( 14,183 ) Cash dividends — — ( 26,607 ) — — ( 26,607 ) Share-based compensation — 5,027 — — — 5,027 Common stock issued upon exercises of stock options — 450 — 241 — 691 Common stock issued upon vesting of restricted shares — ( 1,876 ) — 817 — ( 1,059 ) Other — 48 ( 11 ) 68 — 105 Balance at October 2, 2022 $ 47,042 $ 2,930,388 $ 400,111 $ ( 2,871,442 ) $ ( 68,720 ) $ 437,379 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 Net income — — 41,171 — — 41,171 Other comprehensive loss — — — — ( 4,659 ) ( 4,659 ) Cash dividends — — ( 26,684 ) — — ( 26,684 ) Repurchases of common stock — — — ( 43,857 ) — ( 43,857 ) Share-based compensation — 5,702 — — — 5,702 Common stock issued upon exercises of stock options — 351 — 1,465 — 1,816 Common stock issued upon vesting of restricted shares — ( 1,835 ) — 642 — ( 1,193 ) Other — 60 ( 6 ) 48 — 102 Balance at October 3, 2021 $ 47,042 $ 2,911,552 $ 317,956 $ ( 2,685,063 ) $ ( 48,733 ) $ 542,754 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Nine Months Ended October 2, 2022 October 3, 2021 (Unaudited) Cash flows from operating activities: Net income $ 136,095 $ 148,261 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) 100,911 93,243 Amortization of cloud computing arrangements 888 — Share-based compensation 17,497 16,735 Impairment of long-lived assets 2,682 1,831 Deferred income tax 10,214 ( 25 ) Non-cash rental expense, net 26,164 28,421 Change in operating lease liabilities ( 34,241 ) ( 34,220 ) Net receipt of deferred vendor incentives 1,884 1,906 System optimization gains, net ( 4,138 ) ( 32,719 ) Distributions received from joint ventures, net of equity in earnings 3,468 3,561 Long-term debt-related activities, net 5,746 23,043 Cloud computing arrangements expenditures ( 22,685 ) ( 5,619 ) Changes in operating assets and liabilities and other, net ( 61,846 ) 32,255 Net cash provided by operating activities 182,639 276,673 Cash flows from investing activities: Capital expenditures ( 50,036 ) ( 43,401 ) Franchise development fund ( 2,484 ) — Acquisitions — 4,879 Dispositions 3,731 52,657 Notes receivable, net 2,713 907 Net cash (used in) provided by investing activities ( 46,076 ) 15,042 Cash flows from financing activities: Proceeds from long-term debt 500,000 1,100,000 Repayments of long-term debt ( 19,437 ) ( 955,782 ) Repayments of finance lease liabilities ( 13,411 ) ( 9,021 ) Deferred financing costs ( 10,232 ) ( 20,873 ) Repurchases of common stock ( 51,950 ) ( 125,656 ) Dividends ( 80,153 ) ( 68,963 ) Proceeds from stock option exercises 2,668 27,204 Payments related to tax withholding for share-based compensation ( 2,980 ) ( 4,390 ) Net cash provided by (used in) financing activities 324,505 ( 57,481 ) Net cash provided by operations before effect of exchange rate changes on cash 461,068 234,234 Effect of exchange rate changes on cash ( 7,176 ) 177 Net increase in cash, cash equivalents and restricted cash 453,892 234,411 Cash, cash equivalents and restricted cash at beginning of period 366,966 418,241 Cash, cash equivalents and restricted cash at end of period $ 820,858 $ 652,652 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of October 2, 2022, the results of our operations for the three and nine months ended October 2, 2022 and October 3, 2021 and cash flows for the nine months ended October 2, 2022 and October 3, 2021. The results of operations for the nine months ended October 2, 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 nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years, quarters and months relate to fiscal periods rather than calendar periods. Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue. Reclassifications Beginning in 2022, 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 nine months ended October 3, 2021: As Previously Reported Reclassifications As Currently Reported Cloud computing arrangements expenditures $ — $ ( 5,619 ) $ ( 5,619 ) Changes in operating assets and liabilities and other, net 26,636 5,619 32,255 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 October 2, 2022 Sales at Company-operated restaurants $ 225,245 $ 3,541 $ — $ 228,786 Franchise royalty revenue 108,780 15,777 — 124,557 Franchise fees 15,294 1,257 625 17,176 Franchise rental income — — 58,463 58,463 Advertising funds revenue 96,615 6,972 — 103,587 Total revenues $ 445,934 $ 27,547 $ 59,088 $ 532,569 Nine Months Ended October 2, 2022 Sales at Company-operated restaurants $ 659,649 $ 9,281 $ — $ 668,930 Franchise royalty revenue 315,572 45,743 — 361,315 Franchise fees 46,685 3,695 2,450 52,830 Franchise rental income — — 174,944 174,944 Advertising funds revenue 281,779 19,197 — 300,976 Total revenues $ 1,303,685 $ 77,916 $ 177,394 $ 1,558,995 Three Months Ended October 3, 2021 Sales at Company-operated restaurants $ 169,961 $ 1,117 $ — $ 171,078 Franchise royalty revenue 102,603 13,918 — 116,521 Franchise fees 19,759 1,144 1,331 22,234 Franchise rental income — — 62,446 62,446 Advertising funds revenue 91,481 6,495 — 97,976 Total revenues $ 383,804 $ 22,674 $ 63,777 $ 470,255 Nine Months Ended October 3, 2021 Sales at Company-operated restaurants $ 552,297 $ 1,363 $ — $ 553,660 Franchise royalty revenue 305,373 39,048 — 344,421 Franchise fees 46,020 4,041 3,764 53,825 Franchise rental income — — 182,190 182,190 Advertising funds revenue 271,911 17,788 — 289,699 Total revenues $ 1,175,601 $ 62,240 $ 185,954 $ 1,423,795 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: October 2, 2022 (a) January 2, 2022 (a) Receivables, which are included in “Accounts and notes receivable, net” (b) $ 68,936 $ 49,168 Receivables, which are included in “Advertising funds restricted assets” 68,251 65,497 Deferred franchise fees (c) 100,136 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 $ 8,467 and $ 91,669 , respectively, as of October 2, 2022, and $ 9,084 and $ 88,102 , respectively, as of January 2, 2022. Significant changes in deferred franchise fees are as follows: Nine Months Ended October 2, 2022 October 3, 2021 Deferred franchise fees at beginning of period $ 97,186 $ 97,785 Revenue recognized during the period ( 7,193 ) ( 14,001 ) New deferrals due to cash received and other 10,143 15,273 Deferred franchise fees at end of period $ 100,136 $ 99,057 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) $ 5,026 2023 6,518 2024 6,342 2025 6,171 2026 6,065 Thereafter 70,014 $ 100,136 _______________ (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 nine months ended October 2, 2022 and October 3, 2021. During the fourth quarter of 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 nine months ended October 2, 2022 and October 3, 2021, the Company facilitated 54 and 34 Franchise Flips, respectively. Additionally, during the nine months ended October 2, 2022, the Company completed the sale of one Company-operated restaurant to a franchisee and, during the nine months ended October 3, 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees. Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.” The following is a summary of the disposition activity recorded as a result of our system optimization initiative: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 Number of restaurants sold to franchisees 1 — 1 47 Proceeds from sales of restaurants (a) $ 79 $ — $ 79 $ 50,518 Net assets sold (b) ( 141 ) — ( 141 ) ( 16,939 ) Goodwill related to sales of restaurants — — — ( 4,847 ) Net unfavorable leases (c) ( 360 ) — ( 360 ) ( 2,939 ) Gain on sales-type leases — — — 7,156 Other (d) 6 — 6 ( 2,148 ) ( 416 ) — ( 416 ) 30,801 Post-closing adjustments on sales of restaurants (e) — 5 3,522 520 (Loss) gain on sales of restaurants, net ( 416 ) 5 3,106 31,321 Gain on sales of other assets, net (f) 868 1,432 1,032 1,398 System optimization gains, net $ 452 $ 1,437 $ 4,138 $ 32,719 _______________ 13 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (a) In addition to the proceeds noted herein, the Company received cash proceeds of $ 126 and $ 284 during the three and nine months ended October 2, 2022, respectively, and $ 26 during the three and nine months ended October 3, 2021 related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants. (b) Net assets sold consisted primarily of equipment. (c) During the nine months ended October 3, 2021, the Company recorded favorable lease assets of $ 3,799 and unfavorable lease liabilities of $ 6,738 as a result of leasing and/or subleasing land, buildings and/or leasehold improvements to franchisees, in connection with the sale of the New York Company-operated restaurants (including Manhattan). (d) The nine months ended October 3, 2021 include a deferred gain of $ 3,500 as a result of certain contingencies related to the extension of lease terms. (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 nine months ended October 2, 2022, the Company received net cash proceeds of $ 2,510 and $ 3,368 , respectively, primarily from the sale of surplus and other properties. During the three and nine months ended October 3, 2021, the Company received net cash proceeds of $ 2,100 and $ 2,113 , respectively, primarily from the sale of surplus and other properties. Assets Held for Sale As of October 2, 2022 and January 2, 2022, the Company had assets held for sale of $ 2,100 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 Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 System optimization initiative $ 7 $ 295 $ 548 $ 5,870 Other reorganization and realignment plans 1 50 80 1,511 Reorganization and realignment costs $ 8 $ 345 $ 628 $ 7,381 System Optimization Initiative The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During the nine months ended October 2, 2022, the Company recognized costs totaling $ 548 , 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 nine months ended October 3, 2021, the Company recognized costs totaling $ 5,870 , which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the 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 Nine Months Ended Total Incurred Since Inception October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 Severance and related employee costs $ — $ — $ — $ 661 $ 18,898 Professional fees ( 28 ) 277 346 1,016 24,023 Other (a) 18 — 151 1,354 7,769 ( 10 ) 277 497 3,031 50,690 Accelerated depreciation and amortization (b) — — — — 25,398 NPC lease termination costs (c) 17 18 51 2,839 2,907 Share-based compensation (d) — — — — 5,013 Total system optimization initiative $ 7 $ 295 $ 548 $ 5,870 $ 84,008 _______________ (a) The nine months ended October 3, 2021 includes transaction fees of $ 1,350 associated with the NPC bankruptcy sale process. (b) Primarily includes accelerated amortization of previously acquired franchise rights related to the Company-operated restaurants in territories that have been sold to franchisees in connection with our system optimization initiative. (c) The nine months ended October 3, 2021 includes the write-off of lease assets of $ 1,359 and lease termination fees paid of $ 1,480 . (d) Represents incremental share-based compensation resulting from the modification of stock options and performance-based awards in connection with the termination of employees under our system optimization initiative. The 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 October 2, 2022 Professional fees $ — $ 346 $ ( 346 ) $ — Other — 151 ( 151 ) — $ — $ 497 $ ( 497 ) $ — Balance January 3, 2021 Charges Payments Balance October 3, 2021 Severance and related employee costs $ — $ 661 $ ( 661 ) $ — Professional fees 1,230 1,016 ( 2,246 ) — Other — 1,354 ( 1,354 ) — $ 1,230 $ 3,031 $ ( 4,261 ) $ — Other Reorganization and Realignment Plans Costs incurred under the Company’s other reorganization and realignment plans were not material during the nine months ended October 2, 2022 and October 3, 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: October 2, 2022 January 2, 2022 Equity method investments $ 33,375 $ 39,870 Other investments in equity securities 12,107 10,000 $ 45,482 $ 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: Nine Months Ended October 2, 2022 October 3, 2021 Balance at beginning of period $ 39,870 $ 44,574 Equity in earnings for the period 9,091 8,005 Amortization of purchase price adjustments (a) ( 2,163 ) ( 2,392 ) 6,928 5,613 Distributions received ( 10,396 ) ( 9,174 ) Foreign currency translation adjustment included in “Other comprehensive (loss) income” and other ( 3,027 ) 343 Balance at end of period $ 33,375 $ 41,356 _______________ (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 nine months ended October 2, 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: October 2, 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 $ 99,750 $ — 4.535 % Series 2022-1 Class A-2-II Notes, anticipated repayment date 2032 399,000 — Series 2021-1 Class A-2 Notes: 2.370 % Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029 444,375 447,750 2.775 % Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 641,875 646,750 Series 2019-1 Class A-2 Notes: 3.783 % Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 365,000 368,000 4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 410,625 414,000 Series 2018-1 Class A-2 Notes: 3.884 % Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 452,438 456,000 7 % debentures, due in 2025 86,070 85,175 Unamortized debt issuance costs ( 42,390 ) ( 37,009 ) 2,856,743 2,380,666 Less amounts payable within one year ( 29,250 ) ( 24,250 ) Total long-term debt $ 2,827,493 $ 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 Series 2022-1 Class A-2 Notes have scheduled principal payments of $ 2,500 in 2022 (of which $ 1,250 was paid during the three months ended October 2, 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 nine months ended October 2, 2022. During the nine months ended October 2, 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: October 2, 2022 January 2, 2022 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Measurements Financial assets Cash equivalents $ 504,850 $ 504,850 $ — $ — 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) 99,750 90,374 — — Level 2 Series 2022-1 Class A-2-II Notes (b) 399,000 354,152 — — Level 2 Series 2021-1 Class A-2-I Notes (b) 444,375 360,966 447,750 439,283 Level 2 Series 2021-1 Class A-2-II Notes (b) 641,875 501,946 646,750 642,352 Level 2 Series 2019-1 Class A-2-I Notes (b) 365,000 336,348 368,000 381,579 Level 2 Series 2019-1 Class A-2-II Notes (b) 410,625 365,744 414,000 439,792 Level 2 Series 2018-1 Class A-2-II Notes (b) 452,438 408,325 456,000 473,693 Level 2 7 % debentures, due in 2025 (b) 86,070 90,000 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) the deterioration in operating performance of certain Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below represent the remaining carrying value and were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance. Total impairment losses may also include the impact of remeasuring long-lived assets held for sale. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 9 for further information on impairment of our long-lived assets. Fair Value Measurements October 2, 2022 Level 1 Level 2 Level 3 Held and used $ 850 $ — $ — $ 850 Held for sale 1,133 — — 1,133 Total $ 1,983 $ — $ — $ 1,983 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 Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 Company-operated restaurants $ 159 $ 566 $ 2,234 $ 1,500 Restaurants leased or subleased to franchisees — — 194 189 Surplus properties 47 — 254 142 $ 206 $ 566 $ 2,682 $ 1,831 19 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (10) Income Taxes The Company’s effective tax rate for the three months ended October 2, 2022 and October 3, 2021 was 26.9 % and 24.3 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the three months ended October 2, 2022 primarily due to state income taxes, including discrete changes to state deferred income taxes, and tax effects of our foreign operations. The Company’s effective tax rate for the nine months ended October 2, 2022 and October 3, 2021 was 26.6 % and 21.8 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the nine months ended October 2, 2022 primarily due to state income taxes, including discrete changes to state deferred income taxes. Unrecognized tax benefits for the Company decreased $ 1,225 and $ 1,175 during the three and nine months ended October 2, 2022, respectively. The decrease was primarily related to a state tax law change and the lapse of statutes of limitations during the third quarter of 2022. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $ 308 due to lapses of statutes of limitations. The current portion of refundable income taxes was $ 7,136 and $ 11,901 as of October 2, 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 October 2, 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 Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 Net income $ 50,542 $ 41,171 $ 136,095 $ 148,261 Common stock: Weighted average basic shares outstanding 212,805 222,373 214,032 222,527 Dilutive effect of stock options and restricted shares 1,796 2,685 1,971 3,201 Weighted average diluted shares outstanding 214,601 225,058 216,003 225,728 Net income per share: Basic $ .24 $ .19 $ .64 $ .67 Diluted $ .24 $ .18 $ .63 $ .66 Basic net income per share for the three and nine months ended October 2, 2022 and October 3, 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 4,298 and 4,377 for the three and nine months ended October 2, 2022, respectively, and 2,746 and 2,147 for the three and nine months ended October 3, 2021, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. 20 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (12) Stockholders’ Equity Dividends During each of the first, second and third quarters of 2022, the Company paid quarterly dividends per share of $ .125 . During the first, second and third quarters of 2021, the Company paid dividends per share of $ .09 , $ .10 and $ .12 , 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 nine months ended October 2, 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 October 2, 2022, the Company had $ 198,089 of availability remaining under its 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 $ 100,000 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 nine months ended October 3, 2021, the Company repurchased 5,876 shares under the February 2020 Authorization with an aggregate purchase price of $ 127,150 , of which $ 2,299 was accrued at October 3, 2021, and excluding commissions of $ 82 . Accumulated Other Comprehensive Loss The following table provides a rollforward of accumulated other comprehensive loss, which is entirely comprised of foreign currency translation: Nine Months Ended October 2, 2022 October 3, 2021 Balance at beginning of period $ ( 48,200 ) $ ( 49,641 ) Foreign currency translation ( 20,520 ) 908 Balance at end of period $ ( 68,720 ) $ ( 48,733 ) 21 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (13) Leases Nature of Leases The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At October 2, 2022, Wendy’s and its franchisees operated 7,080 Wendy’s restaurants. Of the 412 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 158 restaurants, owned the building and held long-term land leases for 142 restaurants and held leases covering the land and building for 112 restaurants. Wendy’s also owned 489 and leased 1,205 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment. Company as Lessee The components of lease cost are as follows: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 Finance lease cost: Amortization of finance lease assets $ 4,053 $ 3,543 $ 12,223 $ 10,302 Interest on finance lease liabilities 10,717 10,371 32,055 30,931 14,770 13,914 44,278 41,233 Operating lease cost 21,929 22,388 64,914 68,761 Variable lease cost (a) 16,367 16,635 47,626 48,406 Short-term lease cost 1,116 1,125 3,954 3,721 Total operating lease cost (b) 39,412 40,148 116,494 120,888 Total lease cost $ 54,182 $ 54,062 $ 160,772 $ 162,121 _______________ (a) Includes expenses for executory costs of $ 8,943 and $ 10,016 for the three months ended October 2, 2022 and October 3, 2021, respectively, and $ 27,796 and $ 30,166 for the nine months ended October 2, 2022 and October 3, 2021, respectively, for which the Company is reimbursed by sublessees. (b) Includes $ 31,559 and $ 34,396 for the three months ended October 2, 2022 and October 3, 2021, respectively, and $ 92,555 and $ 101,011 for the nine months ended October 2, 2022 and October 3, 2021, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 7,357 and $ 5,213 for the three months ended October 2, 2022 and October 3, 2021, respectively, and $ 22,130 and $ 18,005 for the nine months ended October 2, 2022 and October 3, 2021, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. 22 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Company as Lessor The components of lease income are as follows: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 Sales-type and direct-financing leases: Selling profit $ 711 $ 705 $ 2,868 $ 4,244 Interest income (a) 7,784 7,786 23,277 22,861 Operating lease income 42,351 45,834 127,839 134,312 Variable lease income 16,112 16,612 47,105 47,878 Franchise rental income (b) $ 58,463 $ 62,446 $ 174,944 $ 182,190 _______________ (a) Included in “Interest expense, net.” (b) Includes sublease income of $ 43,540 and $ 46,102 recognized during the three months ended October 2, 2022 and October 3, 2021, respectively, and $ 130,394 and $ 134,597 recognized during the nine months ended October 2, 2022 and October 3, 2021, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 8,947 and $ 10,087 for the three months ended October 2, 2022 and October 3, 2021, respectively, and $ 27,732 and $ 30,156 for the nine months ended October 2, 2022 and October 3, 2021, respectively. (14) Supplemental Cash Flow Information The following table includes supplemental non-cash investing and financing activities: Nine Months Ended October 2, 2022 October 3, 2021 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable $ 7,232 $ 4,363 Finance leases 24,212 43,277 The following table includes a reconciliation of cash, cash equivalents and restricted cash: October 2, 2022 January 2, 2022 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 731,801 $ 249,438 Restricted cash 34,363 27,535 Restricted cash, included in Advertising funds restricted assets 54,694 89,993 Total cash, cash equivalents and restricted cash $ 820,858 $ 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. 23 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (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 nine months ended October 2, 2022 and October 3, 2021, Wendy’s paid TimWen $ 15,148 and $ 13,994 , respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $ 166 and $ 165 during the nine months ended October 2, 2022 and October 3, 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 October 2, 2022 owned and operated 84 Wendy’s restaurants. During the nine months ended October 2, 2022 and October 3, 2021, the Company recognized $ 9,942 and $ 7,016 , respectively, in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of October 2, 2022 and January 2, 2022, $ 987 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.” (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 $ 94,075 as of October 2, 2022. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of October 2, 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 October 2, 2022. Letters of Credit As of October 2, 2022, the Company had outstanding letters of credit with various parties totaling $ 28,619 . 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. 24 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (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. Except as set forth below, there were no material developments in those legal proceedings as of October 2, 2022. Certain of the Company’s present and former directors have been named in two putative stockholder derivative complaints arising out of the cybersecurity incidents that affected certain of our franchisees in 2015 and 2016. The first case, brought by James Graham in the U.S. District Court for the Southern District of Ohio (the “Graham Case”), asserts claims of breach of fiduciary duty, waste of corporate assets, unjust enrichment and gross mismanagement, and additionally names one non-director executive officer of the Company. The second case, brought by Thomas Caracci in the U.S. District Court for the Southern District of Ohio (the “Caracci Case”), asserts claims of breach of fiduciary duty and violations of Section 14(a) and Rule 14a-9 of the Securities Exchange Act of 1934. Collectively, the plaintiffs seek a judgment on behalf of the Company for all damages incurred or that will be incurred as a result of the alleged wrongful acts or omissions, a judgment ordering disgorgement of all profits, benefits, and other compensation obtained by the named individual defendants, a judgment directing the Company to reform its governance and internal procedures, attorneys’ fees and other costs. The Graham Case and the Caracci Case were consolidated and on December 31, 2018, the court issued an order naming Graham and his counsel as lead in the case. On January 31, 2019, Graham filed a consolidated verified stockholder derivative complaint with the court. On January 24, 2020, the court issued an order granting preliminary approval of the settlement, which consists of certain corporate governance undertakings and the payment of plaintiffs’ attorneys’ fees and expenses up to $ 950 (covered by applicable insurance). On September 15, 2021, the court issued an order granting final approval of the settlement, with the final judgment entered on September 24, 2021. On October 20, 2021, Thomas Caracci filed a Notice of Appeal. On August 11, 2022, the U.S. Court of Appeals for the Sixth Circuit issued an opinion affirming the district court’s order. (18) Segment Information Revenues by segment were as follows: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 Wendy’s U.S. $ 445,934 $ 383,804 $ 1,303,685 $ 1,175,601 Wendy’s International 27,547 22,674 77,916 62,240 Global Real Estate & Development 59,088 63,777 177,394 185,954 Total revenues $ 532,569 $ 470,255 $ 1,558,995 $ 1,423,795 25 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table reconciles profit by segment to the Company’s consolidated income before income taxes: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021 Wendy’s U.S. (a) $ 123,696 $ 108,878 $ 355,519 $ 347,615 Wendy’s International (b) 8,560 6,949 23,363 21,161 Global Real Estate & Development 25,905 27,027 80,795 79,849 Total segment profit $ 158,161 $ 142,854 $ 459,677 $ 448,625 Unallocated franchise support and other costs ( 756 ) ( 70 ) ( 750 ) ( 70 ) Advertising funds deficit ( 1,441 ) ( 1,574 ) ( 4,059 ) ( 4,440 ) Unallocated general and administrative (c) ( 31,517 ) ( 30,744 ) ( 93,511 ) ( 84,715 ) Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) ( 34,252 ) ( 30,940 ) ( 100,911 ) ( 93,243 ) Amortization of cloud computing arrangements ( 888 ) — ( 888 ) — System optimization gains, net 452 1,437 4,138 32,719 Reorganization and realignment costs ( 8 ) ( 345 ) ( 628 ) ( 7,381 ) Impairment of long-lived assets ( 206 ) ( 566 ) ( 2,682 ) ( 1,831 ) Unallocated other operating income, net 8,590 143 8,911 399 Interest expense, net ( 31,916 ) ( 26,000 ) ( 90,406 ) ( 82,990 ) Loss on early extinguishment of debt — — — ( 17,917 ) Investment income, net — — 2,107 6 Other income, net 2,910 171 4,355 455 Income before income taxes $ 69,129 $ 54,366 $ 185,353 $ 189,617 _______________ (a) Wendy’s U.S. includes advertising fund expense of $ 2,779 and $ 8,101 for the three and nine months ended October 2, 2022, respectively, and $ 8,979 and $ 16,503 for the three and nine months ended October 3, 2021, respectively, related to the Company’s funding of incremental advertising. (b) Wendy’s International includes advertising fund expense of $ 1,002 and $ 2,924 for the three and nine months ended October 2, 2022, respectively, related to the Company’s funding of incremental advertising. In addition, Wendy’s International includes other international-related advertising surplus (deficit) of $ 538 and $( 984 ) for the three and nine months ended October 2, 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. 26