Wendy's Co 10-Q

Item 1. Financial Statements. THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Par Value) April 2, 2023 January 1, 2023 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 676,469 $ 745,889 Restricted cash 36,348 35,203 Accounts and notes receivable, net 136,343 116,426 Inventories 6,452 7,129 Prepaid expenses and other current assets 29,952 26,963 Advertising funds restricted assets 117,839 126,673 Total current assets 1,003,403 1,058,283 Properties 885,089 895,778 Finance lease assets 229,736 234,570 Operating lease assets 741,258 754,498 Goodwill 773,095 773,088 Other intangible assets 1,239,572 1,248,800 Investments 42,082 46,028 Net investment in sales-type and direct financing leases 314,763 317,337 Other assets 179,030 170,962 Total assets $ 5,408,028 $ 5,499,344 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 29,250 $ 29,250 Current portion of finance lease liabilities 18,744 18,316 Current portion of operating lease liabilities 48,754 48,120 Accounts payable 45,338 43,996 Accrued expenses and other current liabilities 133,848 116,010 Advertising funds restricted liabilities 123,597 132,307 Total current liabilities 399,531 387,999 Long-term debt 2,786,493 2,822,196 Long-term finance lease liabilities 567,849 571,877 Long-term operating lease liabilities 777,395 792,051 Deferred income taxes 272,553 270,421 Deferred franchise fees 88,161 90,231 Other liabilities 96,489 98,849 Total liabilities 4,988,471 5,033,624 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 211,701 and 213,101 shares outstanding, respectively 47,042 47,042 Additional paid-in capital 2,941,138 2,937,885 Retained earnings 401,445 414,749 Common stock held in treasury, at cost; 258,723 and 257,323 shares, respectively ( 2,906,050 ) ( 2,869,780 ) Accumulated other comprehensive loss ( 64,018 ) ( 64,176 ) Total stockholders’ equity 419,557 465,720 Total liabilities and stockholders’ equity $ 5,408,028 $ 5,499,344 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Amounts) Three Months Ended April 2, 2023 April 3, 2022 (Unaudited) Revenues: Sales $ 227,949 $ 209,275 Franchise royalty revenue and fees 141,677 128,976 Franchise rental income 57,807 57,871 Advertising funds revenue 101,374 92,521 528,807 488,643 Costs and expenses: Cost of sales 196,536 185,053 Franchise support and other costs 13,260 11,816 Franchise rental expense 30,629 28,936 Advertising funds expense 101,661 97,800 General and administrative 62,276 62,346 Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) 33,472 33,231 Amortization of cloud computing arrangements 1,582 — System optimization gains, net ( 5 ) ( 3,534 ) Reorganization and realignment costs 6,808 464 Impairment of long-lived assets 376 616 Other operating income, net ( 2,266 ) ( 2,966 ) 444,329 413,762 Operating profit 84,478 74,881 Interest expense, net ( 31,705 ) ( 26,365 ) Loss on early extinguishment of debt ( 1,266 ) — Investment (loss) income, net ( 3,562 ) 2,111 Other income, net 7,336 207 Income before income taxes 55,281 50,834 Provision for income taxes ( 15,460 ) ( 13,432 ) Net income $ 39,821 $ 37,402 Basic and diluted net income per share $ .19 $ .17 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) Three Months Ended April 2, 2023 April 3, 2022 (Unaudited) Net income $ 39,821 $ 37,402 Other comprehensive income: Foreign currency translation adjustment 158 1,118 Other comprehensive income 158 1,118 Comprehensive income $ 39,979 $ 38,520 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 1, 2023 $ 47,042 $ 2,937,885 $ 414,749 $ ( 2,869,780 ) $ ( 64,176 ) $ 465,720 Net income — — 39,821 — — 39,821 Other comprehensive income — — — — 158 158 Cash dividends — — ( 53,103 ) — — ( 53,103 ) Repurchases of common stock — — — ( 38,810 ) — ( 38,810 ) Share-based compensation — 4,609 — — — 4,609 Common stock issued upon exercises of stock options — 808 — 1,808 — 2,616 Common stock issued upon vesting of restricted shares — ( 2,222 ) — 678 — ( 1,544 ) Other — 58 ( 22 ) 54 — 90 Balance at April 2, 2023 $ 47,042 $ 2,941,138 $ 401,445 $ ( 2,906,050 ) $ ( 64,018 ) $ 419,557 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 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Three Months Ended April 2, 2023 April 3, 2022 (Unaudited) Cash flows from operating activities: Net income $ 39,821 $ 37,402 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) 33,472 33,231 Amortization of cloud computing arrangements 1,582 — Share-based compensation 4,609 6,348 Impairment of long-lived assets 376 616 Deferred income tax 2,302 4,527 Non-cash rental expense, net 9,012 6,874 Change in operating lease liabilities ( 11,718 ) ( 11,615 ) Net (recognition) receipt of deferred vendor incentives ( 1,197 ) 7,711 System optimization gains, net ( 5 ) ( 3,534 ) Distributions received from joint ventures, net of equity in earnings 394 898 Long-term debt-related activities, net 3,419 1,717 Cloud computing arrangements expenditures ( 6,643 ) ( 4,656 ) Changes in operating assets and liabilities and other, net ( 22,449 ) ( 58,537 ) Net cash provided by operating activities 52,975 20,982 Cash flows from investing activities: Capital expenditures ( 12,240 ) ( 12,496 ) Franchise development fund ( 218 ) ( 955 ) Dispositions 287 263 Notes receivable, net 110 141 Net cash used in investing activities ( 12,061 ) ( 13,047 ) Cash flows from financing activities: Proceeds from long-term debt — 500,000 Repayments of long-term debt ( 39,122 ) ( 6,063 ) Repayments of finance lease liabilities ( 4,398 ) ( 4,076 ) Deferred financing costs — ( 10,209 ) Repurchases of common stock ( 36,727 ) — Dividends ( 53,103 ) ( 26,911 ) Proceeds from stock option exercises 2,881 1,591 Payments related to tax withholding for share-based compensation ( 1,809 ) ( 1,530 ) Net cash (used in) provided by financing activities ( 132,278 ) 452,802 Net cash (used in) provided by operations before effect of exchange rate changes on cash ( 91,364 ) 460,737 Effect of exchange rate changes on cash 129 305 Net (decrease) increase in cash, cash equivalents and restricted cash ( 91,235 ) 461,042 Cash, cash equivalents and restricted cash at beginning of period 831,801 366,966 Cash, cash equivalents and restricted cash at end of period $ 740,566 $ 828,008 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of April 2, 2023 and the results of our operations and cash flows for the three months ended April 2, 2023 and April 3, 2022. The results of operations for the three months ended April 2, 2023 are not necessarily indicative of the results to be expected for the full 2023 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 1, 2023 (the “Form 10-K”). 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 17 for further information. We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three-month periods presented herein contain 13 weeks. All references to years, quarters and months relate to fiscal periods rather than calendar periods. Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue. (2) Revenue Disaggregation of Revenue The following tables disaggregate revenue by segment and source: Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Three Months Ended April 2, 2023 Sales at Company-operated restaurants $ 222,632 $ 5,317 $ — $ 227,949 Franchise royalty revenue 106,339 15,811 — 122,150 Franchise fees 17,272 1,523 732 19,527 Franchise rental income — — 57,807 57,807 Advertising funds revenue 94,745 6,629 — 101,374 Total revenues $ 440,988 $ 29,280 $ 58,539 $ 528,807 Three Months Ended April 3, 2022 Sales at Company-operated restaurants $ 206,501 $ 2,774 $ — $ 209,275 Franchise royalty revenue 97,920 13,825 — 111,745 Franchise fees 15,405 1,271 555 17,231 Franchise rental income — — 57,871 57,871 Advertising funds revenue 87,485 5,036 — 92,521 Total revenues $ 407,311 $ 22,906 $ 58,426 $ 488,643 9 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Contract Balances The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers: April 2, 2023 (a) January 1, 2023 (a) Receivables, which are included in “Accounts and notes receivable, net” (b) $ 55,588 $ 54,497 Receivables, which are included in “Advertising funds restricted assets” 65,735 70,422 Deferred franchise fees (c) 97,694 99,208 _______________ (a) Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s condensed consolidated statements of operations. (b) Includes receivables related to “Sales” and “Franchise royalty revenue and fees.” (c) Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled $ 9,533 and $ 88,161 , respectively, as of April 2, 2023, and $ 8,977 and $ 90,231 , respectively, as of January 1, 2023. Significant changes in deferred franchise fees are as follows: Three Months Ended April 2, 2023 April 3, 2022 Deferred franchise fees at beginning of period $ 99,208 $ 97,186 Revenue recognized during the period ( 2,814 ) ( 2,283 ) New deferrals due to cash received and other 1,300 3,526 Deferred franchise fees at end of period $ 97,694 $ 98,429 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: 2023 (a) $ 8,037 2024 5,850 2025 5,684 2026 5,577 2027 5,486 Thereafter 67,060 $ 97,694 _______________ (a) Represents franchise fees expected to be recognized for the remainder of 2023, which includes development-related franchise fees expected to be recognized over a duration of one year or less. 10 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (3) System Optimization Gains, Net The Company’s system optimization initiative included 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 achieved 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 and drive new restaurant development. During the three months ended April 3, 2022, the Company facilitated five Franchise Flips. During the three months ended April 2, 2023, the Company facilitated no Franchise Flips. Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs.” 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 April 2, 2023 April 3, 2022 Post-closing adjustments on sales of restaurants (a) $ — $ 3,447 Gain on sales of other assets, net (b) 5 87 System optimization gains, net $ 5 $ 3,534 _______________ (a) Represents the recognition of deferred gains as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. (b) During the three months ended April 2, 2023 and April 3, 2022, the Company received net cash proceeds of $ 287 and $ 168 , respectively, primarily from the sale of surplus and other properties. The Company also received cash proceeds of $ 95 during the three months ended April 3, 2022 related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants. Assets Held for Sale As of April 2, 2023 and January 1, 2023, the Company had assets held for sale of $ 1,379 and $ 1,661 , respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.” (4) Reorganization and Realignment Costs The following is a summary of the initiatives included in “Reorganization and realignment costs:” Three Months Ended April 2, 2023 April 3, 2022 Organizational redesign $ 6,737 $ — Other reorganization and realignment plans 71 464 Reorganization and realignment costs $ 6,808 $ 464 11 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Organizational Redesign In February 2023, the Board of Directors approved a plan to redesign the Company’s organizational structure to better support the execution of the Company’s long-term growth strategy by maximizing organizational efficiency and streamlining decision making (the “Organizational Redesign Plan”). As a result of the Organizational Redesign Plan, the Company expects to hold its general and administrative expense in 2023 and 2024 relatively flat compared with 2022. The Company expects to incur total costs of approximately $ 11,000 to $ 13,000 related to the Organizational Redesign Plan. During the three months ended April 2, 2023, the Company recognized costs totaling $ 6,737 , which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $ 4,000 to $ 6,000 , comprised of (1) severance and related employee costs of approximately $ 2,500 , (2) recruitment and relocation costs of approximately $ 900 , (3) third-party and other costs of approximately $ 700 and (4) share-based compensation of approximately $ 1,200 . The Company expects costs related to the Organizational Redesign Plan to continue into 2026, with approximately three-fourths of the total costs to be recognized during 2023. The following is a summary of the costs recorded as a result of the Organizational Redesign Plan: Three Months Ended April 2, 2023 Severance and related employee costs $ 5,539 Recruitment and relocation costs 78 Third-party and other costs 345 5,962 Share-based compensation (a) 775 Total organizational redesign $ 6,737 _______________ (a) Primarily represents the accelerated recognition of share-based compensation resulting from the termination of employees under the Organizational Redesign Plan. As of April 2, 2023, the accruals for the Organizational Redesign Plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 4,650 and $ 431 , respectively. The table below presents a rollforward of our accruals for the Organizational Redesign Plan. Balance January 1, 2023 Charges Payments Balance April 2, 2023 Severance and related employee costs $ — $ 5,539 $ ( 741 ) $ 4,798 Recruitment and relocation costs — 78 ( 78 ) — Third-party and other costs — 345 ( 62 ) 283 $ — $ 5,962 $ ( 881 ) $ 5,081 Other Reorganization and Realignment Plans Costs incurred under the Company’s other reorganization and realignment plans were not material during the three months ended April 2, 2023 and April 3, 2022. The Company does not expect to incur any material additional costs under these plans. 12 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (5) Investments The following is a summary of the carrying value of our investments: April 2, 2023 January 1, 2023 Equity method investments $ 33,537 $ 33,921 Other investments in equity securities 8,545 12,107 $ 42,082 $ 46,028 Equity Method Investments Wendy’s has a 50 % share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons ® brand (Tim Hortons is a registered trademark of Tim Hortons USA Inc.). In addition, the Company has a 20 % share in a joint venture in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.” Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements: Three Months Ended April 2, 2023 April 3, 2022 Balance at beginning of period $ 33,921 $ 39,870 Equity in earnings for the period 2,783 2,508 Amortization of purchase price adjustments (a) ( 684 ) ( 731 ) 2,099 1,777 Distributions received ( 2,493 ) ( 2,675 ) Foreign currency translation adjustment included in “Other comprehensive income” and other 10 374 Balance at end of period $ 33,537 $ 39,346 _______________ (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 and, during the three months ended April 3, 2022, recognized a gain of $ 2,107 as a result of an observable price change for a similar investment of the same issuer. During the three months ended April 2, 2023, the Company recorded an impairment charge of $ 3,562 for the difference between the estimated fair value and the carrying value of the investment. The Company will continue to monitor its investment in equity securities and it is possible that additional impairment charges will be recorded in future periods if there are further declines in fair value of the investment. 13 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (6) Long-Term Debt Long-term debt consisted of the following: April 2, 2023 January 1, 2023 Series 2022-1 Class A-2 Notes: 4.236 % Series 2022-1 Class A-2-I Notes, anticipated repayment date 2029 $ 99,250 $ 99,500 4.535 % Series 2022-1 Class A-2-II Notes, anticipated repayment date 2032 397,000 398,000 Series 2021-1 Class A-2 Notes: 2.370 % Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029 442,125 443,250 2.775 % Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 638,625 640,250 Series 2019-1 Class A-2 Notes: 3.783 % Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 363,000 364,000 4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 408,375 409,500 Series 2018-1 Class A-2 Notes: 3.884 % Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 450,063 451,250 7 % debentures, due in 2025 (a) 56,264 86,369 Unamortized debt issuance costs ( 38,959 ) ( 40,673 ) 2,815,743 2,851,446 Less amounts payable within one year ( 29,250 ) ( 29,250 ) Total long-term debt $ 2,786,493 $ 2,822,196 _______________ (a) Wendy’s 7 % debentures are unsecured and were reduced to fair value in connection with the Wendy’s Merger. The fair value adjustment is being accreted and the related charge included in “Interest expense, net” until the debentures mature. During the three months ended April 2, 2023, Wendy’s repurchased $ 31,571 in principal of its 7 % debentures at par value. As a result, the Company recognized a loss on early extinguishment of debt of $ 1,266 during the three months ended April 2, 2023. (7) 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. 14 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments: April 2, 2023 January 1, 2023 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Measurements Financial assets Cash equivalents $ 491,577 $ 491,577 $ 560,682 $ 560,682 Level 1 Other investments in equity securities (a) 8,545 8,545 12,107 12,107 Level 2 Financial liabilities (b) Series 2022-1 Class A-2-I Notes 99,250 92,322 99,500 89,401 Level 2 Series 2022-1 Class A-2-II Notes 397,000 362,183 398,000 349,444 Level 2 Series 2021-1 Class A-2-I Notes 442,125 370,987 443,250 357,304 Level 2 Series 2021-1 Class A-2-II Notes 638,625 517,350 640,250 499,011 Level 2 Series 2019-1 Class A-2-I Notes 363,000 341,184 364,000 334,334 Level 2 Series 2019-1 Class A-2-II Notes 408,375 373,908 409,500 361,875 Level 2 Series 2018-1 Class A-2-II Notes 450,063 416,758 451,250 405,809 Level 2 7 % debentures, due in 2025 56,264 58,283 86,369 92,367 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, as of April 2, 2023, was based on a valuation performed by the investment manager and, as of January 1, 2023, was based on an observable price change in an orderly transaction 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. 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. 15 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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 8 for further information on impairment of our long-lived assets. Fair Value Measurements April 2, 2023 Level 1 Level 2 Level 3 Held and used $ 603 $ — $ — $ 603 Held for sale 475 — — 475 Total $ 1,078 $ — $ — $ 1,078 Fair Value Measurements January 1, 2023 Level 1 Level 2 Level 3 Held and used $ 4,590 $ — $ — $ 4,590 Held for sale 1,314 — — 1,314 Total $ 5,904 $ — $ — $ 5,904 (8) Impairment of Long-Lived Assets The Company records impairment charges as a result of (1) the deterioration in operating performance of certain Company-operated restaurants, (2) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications, and (3) closing Company-operated restaurants and classifying such surplus properties as held for sale. The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:” Three Months Ended April 2, 2023 April 3, 2022 Company-operated restaurants $ 350 $ 367 Restaurants leased or subleased to franchisees — 194 Surplus properties 26 55 $ 376 $ 616 (9) Income Taxes The Company’s effective tax rate for the three months ended April 2, 2023 and April 3, 2022 was 28.0 % and 26.4 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the three months ended April 2, 2023 primarily due to a one-time adjustment to our foreign deferred income taxes related to prior periods and state income taxes, including discrete changes to state deferred income taxes. There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three months ended April 2, 2023. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $ 582 due to lapses of statutes of limitations. The current portion of refundable income taxes was $ 4,357 and $ 3,236 as of April 2, 2023 and January 1, 2023, respectively, and is included in “Accounts and notes receivable, net.” There were no long-term refundable income taxes as of April 2, 2023 and January 1, 2023. 16 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (10) Net Income Per Share The calculation of basic and diluted net income per share was as follows: Three Months Ended April 2, 2023 April 3, 2022 Net income $ 39,821 $ 37,402 Common stock: Weighted average basic shares outstanding 212,547 215,619 Dilutive effect of stock options and restricted shares 2,482 2,548 Weighted average diluted shares outstanding 215,029 218,167 Basic and diluted net income per share $ .19 $ .17 Basic net income per share for the three months ended April 2, 2023 and April 3, 2022 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 4,532 and 3,295 for the three months ended April 2, 2023 and April 3, 2022, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. (11) Stockholders’ Equity Dividends During the first quarter of 2023 and 2022, the Company paid dividends per share of $ .25 and $ .125 , respectively. Repurchases of Common Stock In January 2023, our Board of Directors authorized a repurchase program for up to $ 500,000 of our common stock through February 28, 2027, when and if market conditions warrant and to the extent legally permissible (the “January 2023 Authorization”). In connection with the January 2023 Authorization, the remaining portion of the previous February 2022 authorization for $ 250,000 was canceled. During the three months ended April 2, 2023, the Company repurchased 1,794 shares under the January 2023 Authorization with an aggregate purchase price of $ 38,785 , of which $ 2,083 was accrued as of April 2, 2023, and excluding commissions of $ 25 . As of April 2, 2023, the Company had $ 461,215 of availability remaining under the January 2023 Authorization. Subsequent to April 2, 2023 through May 3, 2023, the Company repurchased 1,074 shares under the January 2023 Authorization with an aggregate purchase price of $ 23,597 , excluding commissions of $ 15 . 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, the Board of Directors approved increases totaling $ 200,000 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 17 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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. Accumulated Other Comprehensive Loss The following table provides a rollforward of accumulated other comprehensive loss, which is entirely comprised of foreign currency translation: Three Months Ended April 2, 2023 April 3, 2022 Balance at beginning of period $ ( 64,176 ) $ ( 48,200 ) Foreign currency translation 158 1,118 Balance at end of period $ ( 64,018 ) $ ( 47,082 ) (12) Leases Nature of Leases The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At April 2, 2023, Wendy’s and its franchisees operated 7,095 Wendy’s restaurants. Of the 414 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 145 restaurants and held leases covering the land and building for 111 restaurants. Wendy’s also owned 486 and leased 1,192 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 April 2, 2023 April 3, 2022 Finance lease cost: Amortization of finance lease assets $ 4,063 $ 4,064 Interest on finance lease liabilities 10,750 10,645 14,813 14,709 Operating lease cost 21,449 20,661 Variable lease cost (a) 16,081 14,803 Short-term lease cost 1,506 1,433 Total operating lease cost (b) 39,036 36,897 Total lease cost $ 53,849 $ 51,606 _______________ (a) Includes expenses for executory costs of $ 9,848 and $ 9,608 for the three months ended April 2, 2023 and April 3, 2022, respectively, for which the Company is reimbursed by sublessees. (b) Includes $ 30,598 and $ 28,925 for the three months ended April 2, 2023 and April 3, 2022, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 7,865 and $ 7,294 for the three months ended April 2, 2023 and April 3, 2022, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. 18 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 April 2, 2023 April 3, 2022 Sales-type and direct-financing leases: Selling profit $ 129 $ 480 Interest income (a) 7,862 7,740 Operating lease income 42,156 43,314 Variable lease income 15,651 14,557 Franchise rental income (b) $ 57,807 $ 57,871 _______________ (a) Included in “Interest expense, net.” (b) Includes sublease income of $ 42,951 and $ 43,165 recognized during the three months ended April 2, 2023 and April 3, 2022, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 9,778 and $ 9,535 for the three months ended April 2, 2023 and April 3, 2022, respectively. (13) Supplemental Cash Flow Information The following table includes supplemental non-cash investing and financing activities: Three Months Ended April 2, 2023 April 3, 2022 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable $ 9,119 $ 6,522 Finance leases 333 7,207 The following table includes a reconciliation of cash, cash equivalents and restricted cash: April 2, 2023 January 1, 2023 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 676,469 $ 745,889 Restricted cash 36,348 35,203 Restricted cash, included in Advertising funds restricted assets 27,749 50,709 Total cash, cash equivalents and restricted cash $ 740,566 $ 831,801 19 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (14) 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. Wendy’s paid TimWen $ 4,673 and $ 4,350 under these lease agreements during the three months ended April 2, 2023 and April 3, 2022, respectively, which has been recorded to “Franchise rental expense.” In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $ 60 and $ 54 during the three months ended April 2, 2023 and April 3, 2022, 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 April 2, 2023 owned and operated 83 Wendy’s restaurants. During the three months ended April 2, 2023 and April 3, 2022, the Company recognized $ 3,610 and $ 3,067 , respectively, in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of April 2, 2023 and January 1, 2023, $ 1,271 and $ 1,125 , respectively, was due from Yellow Cab for such income, which is included in “Accounts and notes receivable, net” and “Advertising funds restricted assets.” Transactions with AMC In February 2023, Ms. Kristin Dolan, a director of the Company, was appointed as the Chief Executive Officer of AMC Networks Inc. (“AMC”). During the three months ended April 2, 2023, the Company purchased $ 419 of advertising time from a subsidiary of AMC. As of April 2, 2023, approximately $ 450 was due to AMC for advertising time, which is included in “Advertising funds restricted liabilities.” (15) 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. Franchisee Image Activation Incentive Programs To promote new restaurant development, Wendy’s has provided franchisees with certain incentive programs for qualifying new restaurants. In February 2023, Wendy’s announced a new restaurant development incentive program in the U.S. and Canada that provides for waivers of royalty, national advertising and technical assistance fees for up to the first three years of operation for qualifying new restaurants (referred to as the “Pacesetter” program). Wendy’s previously offered and will continue to offer a restaurant development incentive program that provides for reductions in royalty and national advertising fees for up to the first two years of operation for qualifying new restaurants (referred to as the “Groundbreaker” program). Wendy’s U.S. and Canadian franchisees may elect either the Pacesetter program or the Groundbreaker program when committing to new multi-unit development agreements or adding incremental commitments to existing development agreements. Wendy’s also provides franchisees with the option of an early 20 -year or 25 -year renewal of their franchise agreement upon completion of reimaging utilizing certain approved Image Activation reimage designs. 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 $ 99,392 as of April 2, 2023. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of April 2, 2023. 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 20 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) franchise owner. The liability recorded for our probable exposure associated with these lease guarantees was not material as of April 2, 2023. Letters of Credit As of April 2, 2023, the Company had outstanding letters of credit with various parties totaling $ 28,861 . Substantially all of the outstanding letters of credit include amounts outstanding against the 2021-1 Variable Funding Senior Secured Notes, Class A-1. We do not expect any material loss to result from these letters of credit. (16) 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 we determine it is probable that a liability has been incurred and the loss is reasonably estimable. The Company believes it has 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 due to 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 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. (17) Segment Information Revenues by segment are as follows: Three Months Ended April 2, 2023 April 3, 2022 Wendy’s U.S. $ 440,988 $ 407,311 Wendy’s International 29,280 22,906 Global Real Estate & Development 58,539 58,426 Total revenues $ 528,807 $ 488,643 21 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following table reconciles profit by segment to the Company’s consolidated income before income taxes: Three Months Ended April 2, 2023 April 3, 2022 Wendy’s U.S. (a) $ 125,230 $ 104,824 Wendy’s International (b) 7,446 5,453 Global Real Estate & Development 25,068 27,607 Total segment profit 157,744 137,884 Unallocated franchise support and other costs — 6 Advertising funds surplus (deficit) 1,106 ( 1,243 ) Unallocated general and administrative (c) ( 32,161 ) ( 31,005 ) Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) ( 33,472 ) ( 33,231 ) Amortization of cloud computing arrangements ( 1,582 ) — System optimization gains, net 5 3,534 Reorganization and realignment costs ( 6,808 ) ( 464 ) Impairment of long-lived assets ( 376 ) ( 616 ) Unallocated other operating income, net 22 16 Interest expense, net ( 31,705 ) ( 26,365 ) Loss on early extinguishment of debt ( 1,266 ) — Investment (loss) income, net ( 3,562 ) 2,111 Other income, net 7,336 207 Income before income taxes $ 55,281 $ 50,834 _______________ (a) Wendy’s U.S. includes advertising funds expense of $ 2,556 for the three months ended April 3, 2022 related to the Company’s funding of incremental advertising. (b) Wendy’s International includes advertising funds expense of $ 548 and $ 838 for the three months ended April 2, 2023 and April 3, 2022, respectively, related to the Company’s funding of incremental advertising. In addition, Wendy’s International includes other international-related advertising deficit of $ 845 and $ 642 for the three months ended April 2, 2023 and April 3, 2022, respectively. (c) Includes corporate overhead costs, such as employee compensation and related benefits. (18) New Accounting Standards Business Combinations In October 2021, the Financial Accounting Standards Board (“FASB”) issued an amendment to improve the accounting for revenue contracts with customers acquired in a business combination. The amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with current revenue recognition guidance as if the acquirer had originated the contracts. The Company adopted this amendment during the first quarter of 2023. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. 22 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Common-Control Lease Arrangements In March 2023, the FASB issued an update to amend certain lease accounting guidance that applies to arrangements between related parties under common control. The amendment requires a lessee in a common-control lease arrangement to amortize leasehold improvements that it owns over the useful life of the improvements to the common-control group, regardless of the lease term, if the lessee continues to control the use of the underlying asset through a lease. The standard is effective beginning with our 2024 fiscal year. The Company does not expect the guidance to have a material impact on our condensed consolidated financial statements. 23