What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 176 added, 144 removed, 282 unchanged (53% of the section changed)

2 unchanged sentences

Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023 (the “Form 10-K”).

There have been no material changes as of April 2, 2023 to the application of our critical accounting policies as described in Item 7 of the Form 10-K.

There have been no material changes as of July 2, 2023 to the application of our critical accounting policies as described in Item 7 of the Form 10-K.

Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995.

13 unchanged sentences

and 32 foreign countries and U.S.

territories as of April 2, 2023.

territories as of July 2, 2023.

Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of toppings and condiments.

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

All three-month periods presented herein contain 13 weeks.

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

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

Executive Overview

As of April 2, 2023, the Wendy’s restaurant system was comprised of 7,095 restaurants, with 5,989 Wendy’s restaurants in operation in the U.S.

As of July 2, 2023, the Wendy’s restaurant system was comprised of 7,115 restaurants, with 5,993 Wendy’s restaurants in operation in the U.S.

restaurants, 403 were operated by the Company and 5,590 were operated by a total of 216 franchisees.

In addition, at April 2, 2023, there were 1,106 Wendy’s restaurants in operation in 31 foreign countries and U.S.

In addition, at July 2, 2023, there were 1,122 Wendy’s restaurants in operation in 32 foreign countries and U.S.

Of the international restaurants, 1,111 were operated by a total of 105 franchisees and 11 were operated by the Company in the United Kingdom (the “U.K.”).

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

Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of April 2, 2023.

Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of July 2, 2023.

Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather.

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

First Quarter Financial Highlights

• Revenue increased 8.2% to $528.8 million in the first quarter of 2023 compared with $488.6 million in the first quarter of 2022;

Second Quarter Financial Highlights

• Revenue increased 4.4% to $561.6 million in the second quarter of 2023 compared with $537.8 million in the second quarter of 2022;

• Global same-restaurant sales increased 5.1%, U.S.

same-restaurant sales increased 7.2% and international same-restaurant sales increased 13.9% compared with the first quarter of 2022.

same-restaurant sales increased 4.9% and international same-restaurant sales increased 7.2% compared with the second quarter of 2022.

On a two-year basis, global same-restaurant sales increased 8.8%;

• Global Company-operated restaurant margin was 13.8% in the first quarter of 2023, an increase of 220 basis points compared with the first quarter of 2022;

• Net income increased 6.4% to $39.8 million in the first quarter of 2023 compared with $37.4 million in the first quarter of 2022.

• Global Company-operated restaurant margin was 16.5% in the second quarter of 2023, an increase of 200 basis points compared with the second quarter of 2022;

• Net income increased 23.7% to $59.6 million in the second quarter of 2023 compared with $48.2 million in the second quarter of 2022.

Year-to-Date Financial Highlights

• Revenue increased 6.2% to $1.1 billion in the first six months of 2023 compared with $1.0 billion in the first six months of 2022;

• Global same-restaurant sales increased 6.5%, U.S.

same-restaurant sales increased 6.0% and international same-restaurant sales increased 10.3% compared with the first six months of 2022.

On a two-year basis, global same-restaurant sales increased 9.6%;

• Global Company-operated restaurant margin was 15.2% in the first six months of 2023, an increase of 210 basis points compared with the first six months of 2022;

• Net income increased 16.2% to $99.5 million in the first six months of 2023 compared with $85.6 million in the first six months of 2022.

Global Same-Restaurant Sales

Wendy’s long-term growth opportunities include driving strong same-restaurant sales momentum across all dayparts through our ownable core products, exciting menu innovation, compelling value offerings and improvements in speed and consistency in our restaurants.

Global same-restaurant sales increased 8.0% in the first quarter of 2023 and increased 10.4% on a two-year basis.

Global same-restaurant sales increased 5.1% in the second quarter of 2023 and increased 8.8% on a two-year basis.

Global same-restaurant sales increased 6.5% in the first six months of 2023 and increased 9.6% on a two-year basis.

Wendy’s long-term growth opportunities include accelerated implementation of consumer-facing digital platforms and technologies.

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The Company is also partnering with key technology providers to help execute our digital, restaurant technology and enterprise technology initiatives and support our technology innovation and growth.

The Company’s digital business represented approximately 12.4% and 10.6% of global systemwide sales during the three months ended April 2, 2023 and April 3, 2022, respectively.

During the second quarter of 2023, the Company revised its definition of digital sales to reflect our full digital portfolio by including in-restaurant mobile scans, in addition to our previously included delivery, mobile order and kiosk digital channels.

Under the revised definition, the Company’s digital business represented approximately 12.7% and 10.9% of global systemwide sales during the six months ended July 2, 2023 and July 3, 2022, respectively.

New Restaurant Development

Wendy’s long-term growth opportunities include expanding the Company’s footprint through global restaurant expansion.

To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants.

To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants, in addition to our $100.0 million build to suit development fund.

In February 2023, the Company 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.

In addition, the Company has development agreements in place with a number of

franchisees that contractually obligate such franchisees to open additional Wendy’s restaurants over a specified timeframe.

Global restaurant counts as of April 2, 2023 were flat compared with January 1, 2023.

In addition, the Company has development agreements in place with a number of franchisees that contractually obligate such franchisees to open additional Wendy’s restaurants over a specified timeframe.

During the six months ended July 2, 2023, the Company and its franchisees added 20 net new restaurants across the Wendy’s system.

Organizational Redesign

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The cash expenditures are expected to continue into 2025, with approximately two-thirds of the total cash expenditures occurring in 2023.

Costs related to the Organizational Redesign Plan are recorded to “Reorganization and realignment costs.” During the three months ended April 2, 2023, the Company recognized costs totaling $6.7 million, which primarily included severance and related employee costs and share-based compensation.

Costs related to the Organizational Redesign Plan are recorded to “Reorganization and realignment costs.” During the six months ended July 2, 2023, the Company recognized costs totaling $7.4 million, which primarily included severance and related employee costs and share-based compensation.

The Company expects to incur additional costs aggregating approximately $3.5 million to $5.5 million, comprised of (1) severance and related employee costs of approximately $2.5 million, (2) recruitment and relocation costs of approximately $0.8 million, (3) third-party and other costs of approximately $0.3 million and (4) share-based compensation of approximately $1.0 million.

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Results of Operations

The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the first quarter of 2023 and 2022.

First Quarter

2023 2022 Change

The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the second quarter and the first six months of 2023 and 2022.

Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Sales $ 240.7 $ 230.9 $ 9.8 $ 468.6 $ 440.1 $ 28.5

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General and administrative 62.7 61.6 1.1 125.0 124.0 1.0

Depreciation and amortization (exclusive of amortization of

cloud computing arrangements shown separately below)

33.5 33.2 0.3

Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) 33.5 33.4 0.1 67.0 66.7 0.3

Amortization of cloud computing arrangements 2.3 — 2.3 3.8 — 3.8

System optimization gains, net — (3.5) 3.5

System optimization losses (gains), net — (0.2) 0.2 — (3.7) 3.7

Reorganization and realignment costs 0.7 0.2 0.5 7.5 0.6 6.9

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Net income $ 59.6 $ 48.2 $ 11.4 $ 99.5 $ 85.6 $ 13.9

First Quarter

Second Quarter Six Months

Total Revenues 2022 % of

Total Revenues 2023 % of

Total Revenues 2022 % of

Total Revenues

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$ 561.6 100.0 % $ 537.8 100.0 % $ 1,090.4 100.0 % $ 1,026.4 100.0 %

First Quarter

Second Quarter Six Months

Sales 2022 % of

Sales 2023 % of

Sales 2022 % of

Cost of sales:

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Total cost of sales $ 201.0 83.5 % $ 197.3 85.5 % $ 397.5 84.8 % $ 382.3 86.9 %

First Quarter

Second Quarter Six Months

Sales 2022 % of

Sales 2023 % of

Sales 2022 % of

Company-operated restaurant margin:

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

First Quarter

Second Quarter Six Months

2023 2022 2023 2022

Key business measures:

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Franchised 5.0 % 2.2 % 6.1 % 1.6 %

4.9 % 2.3 % 6.0 % 1.7 %

International same-restaurant sales (a) 7.2 % 15.2 % 10.3 % 14.7 %

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(a) Excludes Argentina due to the impact of that country’s highly inflationary economy.

(b) During the first quarter of 2023 and 2022, global systemwide sales increased 10.0% and 4.2%, respectively, U.S.

(b) During the second quarter of 2023 and 2022, global systemwide sales increased 6.9% and 5.6%, respectively, U.S.

systemwide sales increased 6.1% and 3.5%, respectively, and international systemwide sales increased 12.7% and 22.7%, respectively, on a constant currency basis.

First Quarter

During the first six months of 2023 and 2022, global systemwide sales increased 8.4% and 4.9%, respectively, U.S.

systemwide sales increased 7.3% and 3.0%, respectively, and international systemwide sales increased 16.6% and 21.1%, respectively, on a constant currency basis.

Second Quarter

Company-operated U.S.

1 unchanged sentence

Restaurant count:

Restaurant count at April 2, 2023

403 5,586 11 1,095 7,095

Opened 1 18 — 22 41

Closed (1) (14) — (6) (21)

Restaurant count at July 2, 2023

403 5,590 11 1,111 7,115

Company-operated U.S.

Franchised International Company-operated International Franchised Systemwide

Restaurant count at January 1, 2023

2 unchanged sentences

Closed (2) (38) (1) (19) (60)

Restaurant count at April 2, 2023

Restaurant count at July 2, 2023

403 5,590 11 1,111 7,115

Sales First Quarter

2023 2022 Change

Sales Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Sales $ 240.7 $ 230.9 $ 9.8 $ 468.6 $ 440.1 $ 28.5

The increase in sales during the first quarter of 2023 was primarily due to (1) a 7.4% increase in Company-operated same-restaurant sales of $14.9 million and (2) net new restaurant development compared with the first quarter of 2022 of $4.2 million.

The increase in sales during the second quarter and the first six months of 2023 was primarily due to (1) a 3.3% and 5.3% increase in global Company-operated same-restaurant sales of $6.5 million and $21.4 million, respectively, and (2) net new restaurant development of $4.1 million and $8.2 million, respectively.

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

Franchise Royalty Revenue and Fees First Quarter

2023 2022 Change

Franchise Royalty Revenue and Fees Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Franchise royalty revenue $ 132.1 $ 125.0 $ 7.1 $ 254.3 $ 236.8 $ 17.5

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$ 153.1 $ 143.4 $ 9.7 $ 294.8 $ 272.4 $ 22.4

Franchise royalty revenue during the first quarter of 2023 increased $10.5 million, of which (1) $8.8 million was due to an 8.0% increase in global franchise same-restaurant sales and (2) $2.0 million was due to net new restaurant development compared with the first quarter of 2022.

Franchise same-restaurant sales during the first quarter of 2023 increased due to (1) higher average check and (2) an increase in customer count.

The increase in franchise fees during the first quarter of 2023 was primarily due to (1) higher fees for providing information technology services to franchisees of $0.9 million and (2) higher other miscellaneous franchise fees of $0.9 million.

Franchise Rental Income First Quarter

2023 2022 Change

Franchise royalty revenue during the second quarter of 2023 increased $7.1 million, of which (1) $6.4 million was due to a 5.3% increase in global franchise same-restaurant sales and (2) $2.5 million was due to net new restaurant development.

Franchise royalty revenue during the first six months of 2023 increased $17.5 million, of which (1) $15.3 million was due to a 6.6% increase in global franchise same-restaurant sales and (2) $5.1 million was due to net new restaurant development.

Franchise same-restaurant sales during the second quarter and the first six months of 2023 increased due to higher average check, partially offset by a decrease in customer count.

The increase in franchise fees during the second quarter and the first six months of 2023 was primarily due to (1) an increase in fees as a result of Franchise Flips and other development-related fees of $1.5 million and $1.9 million, respectively, and (2) higher fees for providing information technology services to franchisees of $1.0 million and $1.9 million, respectively.

Franchise Rental Income Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Franchise rental income $ 58.0 $ 58.6 $ (0.6) $ 115.8 $ 116.5 $ (0.7)

The decrease in franchise rental income during the first quarter of 2023 was primarily due to the impact of assigning fewer leases to franchisees during 2023 compared with 2022.

Advertising Funds Revenue First Quarter

2023 2022 Change

The decrease in franchise rental income during the second quarter and the first six months of 2023 was primarily due to the impact of assigning certain leases to franchisees.

Advertising Funds Revenue Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Advertising funds revenue $ 109.8 $ 104.9 $ 4.9 $ 211.2 $ 197.4 $ 13.8

The increase in advertising funds revenue during the first quarter of 2023 was primarily due to an increase in franchise same-restaurant sales in the U.S.

Cost of Sales, as a Percent of Sales First Quarter

2023 2022 Change

The increase in advertising funds revenue during the second quarter and the first six months of 2023 was primarily due to an increase in franchise same-restaurant sales in the U.S.

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

2023 2022 Change 2023 2022 Change

Food and paper 31.5 % 33.0 % (1.5) % 31.9 % 32.9 % (1.0) %

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83.5 % 85.5 % (2.0) % 84.8 % 86.9 % (2.1) %

The decrease in cost of sales, as a percent of sales, during the first quarter of 2023 was primarily due to higher average check.

The decrease in cost of sales, as a percent of sales, during the second quarter and the first six months of 2023 was primarily due to higher average check.

This impact was partially offset by (1) higher commodity costs, (2) an increase in restaurant labor rates, (3) a decrease in customer count and (4) the impact of the Company’s investments to support the entry into the U.K.

market and additional inflationary pressures in the U.K.

Franchise Support and Other Costs First Quarter

2023 2022 Change

Franchise Support and Other Costs Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Franchise support and other costs $ 13.8 $ 9.9 $ 3.9 $ 27.0 $ 21.7 $ 5.3

The increase in franchise support and other costs during the first quarter of 2023 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees.

Franchise Rental Expense First Quarter

2023 2022 Change

The increase in franchise support and other costs during the second quarter and the first six months of 2023 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees.

Franchise Rental Expense Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Franchise rental expense $ 32.4 $ 32.1 $ 0.3 $ 63.0 $ 61.0 $ 2.0

The increase in franchise rental expense during the first quarter of 2023 was primarily due to the impact of assigning fewer leases to franchisees during 2023 compared with 2022.

Advertising Funds Expense First Quarter

2023 2022 Change

The increase in franchise rental expense during the second quarter and the first six months of 2023 was primarily due to the impact of assigning fewer leases to franchisees during 2023 compared with 2022.

Advertising Funds Expense Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Advertising funds expense $ 109.6 $ 111.0 $ (1.4) $ 211.3 $ 208.8 $ 2.5

On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue.

The Company expects advertising funds expense to be lower than advertising funds revenue by approximately $3.0 million for 2023, which includes the amount by which advertising funds expense exceeded advertising funds revenue in prior years (excluding the Company’s funding of incremental advertising) of approximately $5.0 million, partially offset by the Company’s planned incremental funding of advertising in Canada of approximately $2.0 million.

During the first quarter of 2023, advertising funds expense increased due to an increase in franchise same-restaurant sales in the U.S.

The Company expects advertising funds expense to be lower than advertising funds revenue by approximately $3.0 million for 2023, which includes the amount by which advertising funds expense exceeded advertising funds revenue in prior years (excluding the Company’s funding of incremental advertising) of approximately $5.0 million, partially offset by the Company’s incremental funding of advertising in Canada of approximately $2.0 million.

The decrease in advertising funds expense during the second quarter was due to a decrease in the Company’s funding of incremental advertising, partially offset by an increase in franchise same-restaurant sales in the U.S.

The increase in advertising funds expense during the first six months of 2023 was due to an increase in franchise same-restaurant sales in the U.S.

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

General and Administrative First Quarter

2023 2022 (a) Change

Share-based compensation $ 3.8 $ 6.3 $ (2.5)

Professional fees 15.0 13.5 1.5

General and Administrative Second Quarter Six Months

2023 2022 (a) Change 2023 2022 (a) Change

Incentive compensation $ 7.6 $ 6.7 $ 0.9 $ 15.1 $ 12.9 $ 2.2

Professional fees 14.7 $ 15.0 (0.3) 29.6 28.5 1.1

Employee compensation and benefits 31.2 30.8 0.4 65.0 64.0 1.0

Share-based compensation 5.4 6.1 (0.7) 9.3 12.5 (3.2)

Other, net 3.8 3.0 0.8 6.0 6.1 (0.1)

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

General and administrative expenses during the first quarter of 2023 were flat compared with the first quarter of 2022, primarily due to a decrease in share-based compensation, offset by (1) higher professional fees, reflecting higher information technology-related costs, and (2) an increase in incentive compensation accruals.

Depreciation and Amortization (exclusive of amortization of cloud computing arrangements shown separately below) First Quarter

2023 2022 Change

The increase in general and administrative expenses during the second quarter of 2023 was primarily due to an increase in incentive compensation accruals, reflecting higher operating performance as compared to plan in 2023 versus 2022.

The increase in general and administrative expenses during the first six months of 2023 was primarily due to (1) an increase in incentive compensation accruals, reflecting higher operating performance as compared to plan in 2023 versus 2022, (2) higher professional fees, reflecting higher information technology-related costs and (3) higher employee compensation and benefits.

These increases were partially offset by lower share-based compensation.

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

2023 2022 Change 2023 2022 Change

Restaurants $ 21.1 $ 21.3 $ (0.2) $ 42.0 $ 43.1 $ (1.1)

1 unchanged sentence

$ 33.5 $ 33.4 $ 0.1 $ 67.0 $ 66.7 $ 0.3

The increase in depreciation and amortization during the first quarter of 2023 was primarily due to depreciation and amortization for technology investments and new restaurant assets, partially offset by assets becoming fully depreciated.

Amortization of Cloud Computing Arrangements First Quarter

2023 2022 Change

The increase in depreciation and amortization during the second quarter and the first six months of 2023 was primarily due to depreciation and amortization for technology investments and new restaurant assets, partially offset by assets becoming fully depreciated.

Amortization of Cloud Computing Arrangements Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Amortization of cloud computing arrangements $ 2.3 $ — $ 2.3 $ 3.8 $ — $ 3.8

Amortization of cloud computing arrangements primarily represents amortization of assets associated with the Company’s enterprise resource planning (“ERP”) system implementation completed in the third quarter of 2022.

System Optimization Gains, Net First Quarter

2023 2022 Change

System optimization gains, net $ — $ (3.5) $ 3.5

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

System Optimization Losses (Gains), Net Second Quarter Six Months

2023 2022 Change 2023 2022 Change

System optimization losses (gains), net $ — $ (0.2) $ 0.2 $ — $ (3.7) $ 3.7

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

See Note 3 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.

Reorganization and Realignment Costs First Quarter

2023 2022 Change

Reorganization and Realignment Costs Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Organizational redesign $ 0.7 $ — $ 0.7 $ 7.4 $ — $ 7.4

1 unchanged sentence

$ 0.7 $ 0.2 $ 0.5 $ 7.5 $ 0.6 $ 6.9

During the three months ended April 2, 2023, the Company recognized costs totaling $6.7 million under the Organizational Redesign Plan, which primarily included severance and related employee costs of $5.5 million and share-based compensation of $0.8 million.

During the first six months ended July 2, 2023, the Company recognized costs totaling $7.4 million under the Organizational Redesign Plan, which primarily included severance and related employee costs of $5.6 million and share-based compensation of $1.0 million.

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

Costs incurred under the Company’s other reorganization and realignment plans were not material during the first quarter of 2023 and 2022.

Costs incurred under the Company’s other reorganization and realignment plans were not material during the three and six months ended July 2, 2023 and July 3, 2022.

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

Impairment of Long-Lived Assets First Quarter

2023 2022 Change

Impairment of Long-Lived Assets Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Impairment of long-lived assets $ 0.1 $ 1.9 $ (1.8) $ 0.5 $ 2.5 $ (2.0)

The decrease in impairment charges during the first quarter of 2023 was primarily driven by lease modifications associated with restaurants leased or subleased to franchisees in the prior year.

Other Operating Income, Net First Quarter

2023 2022 Change

The decrease in impairment of long-lived assets during the second quarter and the first six months of 2023 was primarily due to higher impairment charges in the prior year as a result of the deterioration in operating performance of certain Company-operated restaurants.

Other Operating Income, Net Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Lease buyout $ 0.1 $ (1.3) $ 1.4 (0.1) (2.1) $ 2.0

Gains on sales-type leases (1.1) (1.7) 0.6 (1.2) (2.2) 1.0

Equity in earnings in joint ventures, net (2.1) (1.7) (0.4)

Other, net (2.8) (2.7) (0.1) (4.7) (4.4) (0.3)

$ (3.8) $ (5.7) $ 1.9 $ (6.0) $ (8.7) $ 2.7

The decrease in other operating income, net during the first quarter of 2023 was primarily due to (1) lower lease buyout activity and (2) lower gains on sales-type leases.

These decreases were partially offset by an increase in the equity in earnings from our TimWen joint venture.

Interest Expense, Net First Quarter

2023 2022 Change

The decrease in other operating income, net during the second quarter and the first six months of 2023 was primarily due to (1) lower lease buyout activity and (2) lower gains on sales-type leases.

Interest Expense, Net Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Interest expense, net $ 31.1 $ 32.1 $ (1.0) $ 62.8 $ 58.5 $ 4.3

The increase in interest expense, net during the first quarter of 2023 was primarily due to the impact of completing a debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.

Loss on Early Extinguishment of Debt First Quarter

2023 2022 Change

The decrease in interest expense, net during the second quarter of 2023 was primarily due to the impact of repurchasing $31.6 million in principal of the Company’s 7% debentures during the first quarter of 2023.

The increase in interest expense, net during the first six months of 2023 was primarily due to the impact of completing a debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022, partially offset by the impact of repurchasing $31.6 million in principal of the Company’s 7% debentures during the first quarter of 2023.

Loss on Early Extinguishment of Debt Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Loss on early extinguishment of debt $ — $ — $ — $ 1.3 $ — $ 1.3

During the first quarter of 2023, the Company incurred a loss on early extinguishment of debt of $1.3 million due to the repurchase of $31.6 million in principal of the Company’s 7% debentures.

Investment (Loss) Income, Net First Quarter

2023 2022 Change

Investment (Loss) Income, Net Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Investment (loss) income, net $ (6.8) $ — $ (6.8) $ (10.4) $ 2.1 $ (12.5)

During the first quarter of 2023, the Company recorded a loss of $3.6 million due to an impairment charge for the difference between the estimated fair value and the carrying value of an investment in equity securities.

During the first quarter of 2022, the Company recognized a gain of $2.1 million on an investment in equity securities as a result of an observable price change.

Other Income, Net First Quarter

2023 2022 Change

During the second quarter and the first six months of 2023, the Company recorded a loss of $6.8 million and $10.4 million, respectively, due to impairment charges for the difference between the estimated fair value and the carrying value of an investment in equity securities.

During the first six months of 2022, the Company recognized a gain of $2.1 million on an investment in equity securities as a result of an observable price change.

Other Income, Net Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Other income, net $ 7.5 $ 1.2 $ 6.3 $ 14.9 $ 1.4 $ 13.5

The increase in other income, net during the first quarter of 2023 was primarily due to interest income earned on our cash equivalents, which increased as a result of cash received from our debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.

Provision for Income Taxes First Quarter

2023 2022 Change

The increase in other income, net during the second quarter and the first six months of 2023 was primarily due to interest income earned on our cash equivalents, which increased as a result of cash received from our debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022.

Provision for Income Taxes Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Income before income taxes $ 78.9 $ 65.4 $ 13.5 $ 134.2 $ 116.2 $ 18.0

3 unchanged sentences

24.4 % 26.4 % (2.0) % 25.9 % 26.4 % (0.5) %

Our effective tax rates for the first quarter of 2023 and 2022 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items.

The increase in the effective tax rate for the first quarter of 2023 compared with the first quarter of 2022 was primarily due to a one-time adjustment to our foreign deferred income taxes related to prior periods.

This unfavorable adjustment was partially offset by state income taxes, including discrete changes to state deferred income taxes.

Our effective tax rates for the second quarter and the first six months of 2023 and 2022 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items.

The decrease in the effective tax rate for the second quarter of 2023 compared with the second quarter of 2022 was primarily due to a decrease in the tax effects of our foreign operations and additional net income from our national advertising funds which are not subject to tax.

The decrease in the effective tax rate for the first six months of 2023 compared with the first six months of 2022 was primarily due to (1) net income from our national advertising funds not subject to tax, (2) a decrease in the tax effects of our foreign operations and (3) an increase in the benefit from share-based compensation.

These benefits were partially offset by a one-time adjustment to our foreign deferred income taxes related to prior periods.

Segment Information

See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments.

First Quarter

2023 2022 Change

Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Sales $ 234.9 $ 227.9 $ 7.0 $ 457.5 $ 434.4 $ 23.1

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The increase in Wendy’s U.S.

revenues during the first quarter of 2023 was primarily due to an increase in same-restaurant sales.

Same-restaurant sales increased during the first quarter of 2023 primarily due to (1) higher average check and (2) an increase in customer count.

revenues during the second quarter and the first six months of 2023 was primarily due to an increase in same-restaurant sales.

Same-restaurant sales increased during the second quarter and the first six months of 2023 primarily due to higher average check, partially offset by a decrease in customer count.

The increase in Wendy’s U.S.

segment profit during the first quarter of 2023 was primarily due to (1) higher revenues, (2) lower cost of sales, as a percent of sales for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales” (excluding the impact of the U.K.

segment profit during the second quarter and the first six months of 2023 was primarily due to (1) higher revenues, (2) lower cost of sales, as a percent of sales for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales” (excluding the impact of the U.K.

market) and (3) a decrease in the recognition of the Company’s funding of incremental advertising.

Wendy’s International

First Quarter

2023 2022 Change

Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Sales $ 5.8 $ 3.0 $ 2.8 $ 11.1 $ 5.7 $ 5.4

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Segment profit $ 8.5 $ 9.4 $ (0.9) $ 16.0 $ 14.8 $ 1.2

The increase in Wendy’s International revenues during the first quarter of 2023 was primarily due to (1) net new restaurant development in the U.K.

The increase in Wendy’s International revenues during the second quarter and the first six months of 2023 was primarily due to (1) net new restaurant development in the U.K.

and (2) an increase in same-restaurant sales.

Same-restaurant sales increased during the first quarter of 2023 due to (1) an increase in customer count and (2) higher average check.

The increase in Wendy’s International segment profit during the first quarter of 2023 was primarily due to higher revenues, partially offset by the Company’s investments to support the entry into the U.K.

Same-restaurant sales increased during the second quarter and the first six months of 2023 due to (1) higher average check and (2) an increase in customer count.

The decrease in Wendy’s International segment profit during the second quarter of 2023 was primarily due to (1) an increase in franchise support and other costs and (2) the Company’s investments to support the entry into the U.K.

market and additional inflationary pressures in the U.K.

These changes were partially offset by higher revenues.

The increase in Wendy’s International segment profit during the first six months of 2023 was primarily due to higher revenues.

This increase was partially offset by (1) higher franchise support and other costs and (2) the Company’s investments to support the entry into the U.K.

market and inflationary pressures in the U.K.

Global Real Estate & Development

First Quarter

2023 2022 Change

Second Quarter Six Months

2023 2022 Change 2023 2022 Change

Franchise fees $ 2.1 $ 1.3 $ 0.8 $ 2.8 $ 1.8 $ 1.0

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Segment profit $ 26.5 $ 27.3 $ (0.8) $ 51.6 $ 54.9 $ (3.3)

The increase in Global Real Estate & Development revenues during the first quarter of 2023 was primarily due to higher franchise development-related fees.

The decrease in Global Real Estate & Development segment profit during the first quarter of 2023 was primarily due to an increase in franchise rental expense.

See “Franchise Rental Expense” above for further information.

The increase in Global Real Estate & Development revenues during the second quarter and the first six months of 2023 was primarily due to higher fees as a result of Franchise Flips and other development-related fees.

The decrease in Global Real Estate & Development segment profit during the second quarter and the first six months of 2023 was primarily due to (1) lower gains on sales-type leases and (2) an increase in franchise rental expense.

These changes were partially offset by higher revenues.

Liquidity and Capital Resources

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

The table below summarizes our cash flows from operating, investing and financing activities for the first three months of 2023 and 2022:

First Quarter

The table below summarizes our cash flows from operating, investing and financing activities for the first six months of 2023 and 2022:

2023 2022 Change

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

Cash provided by operating activities was $53.0 million and $21.0 million in the first quarter of 2023 and 2022, respectively.

The change was primarily due to (1) a decrease in payments for incentive compensation, (2) higher net income, adjusted for non-cash expenses, and (3) the timing of payments for marketing expenses of the national advertising funds.

These changes were partially offset by the timing of receipt of franchisee rental payments in the first quarter of 2022.

Cash provided by operating activities was $141.5 million and $98.2 million in the first six months of 2023 and 2022, respectively.

The change was primarily due to (1) higher net income, adjusted for non-cash expenses, and (2) a decrease in payments for incentive compensation.

These changes were partially offset by an increase in cash paid for income taxes.

Investing Activities

Cash used in investing activities was $12.1 million and $13.0 million in the first quarter of 2023 and 2022, respectively.

The change was primarily due to a decrease in expenditures associated with the Company’s franchise development fund of $0.7 million.

Cash used in investing activities was $28.9 million and $28.8 million in the first six months of 2023 and 2022, respectively.

The change was primarily due to lower proceeds from notes receivable of $1.1 million, partially offset by a decrease in expenditures associated with the Company’s franchise development fund of $0.9 million.

Financing Activities

Cash (used in) provided by financing activities was $(132.3) million and $452.8 million in the first quarter of 2023 and 2022, respectively.

The change was primarily due to (1) a net increase in cash used in long-term debt activities of $522.9 million, reflecting the respective impacts of the completion of the Company’s debt financing transaction during the first quarter of 2022 and repurchases of the Company’s 7% debentures during the first quarter of 2023, (2) an increase in the repurchases of common stock of $36.7 million and (3) an increase in dividends of $26.2 million.

Cash (used in) provided by financing activities was $(246.3) million and $362.7 million in the first six months of 2023 and 2022, respectively.

The first six months of 2023 was primarily comprised of (1) dividends of $105.7 million, (2) repurchases of common stock of $86.9 million and (3) long-term debt activities of $46.4 million, reflecting the impact of repurchases of the Company’s 7% debentures during the first quarter of 2023.

The first six months of 2022 was primarily comprised of long-term debt activities of $477.6 million, reflecting the impact of the completion of the Company’s debt financing transaction during the first quarter of 2022, partially offset by (1) dividends of $53.5 million and (2) repurchases of common stock of $52.0 million.

Long-Term Debt, Including Current Portion

During the three months ended April 2, 2023, Wendy’s repurchased $31.6 million in principal of its 7% debentures at par value.

During the six months ended July 2, 2023, Wendy’s repurchased $31.6 million in principal of its 7% debentures at par value.

We may from time to time seek to repurchase additional portions of our outstanding long-term debt, including our 7% debentures and/or our senior secured notes, through open market purchases, privately negotiated transactions or otherwise.

In February 2023, our Board of Directors authorized additional debt repurchases through February 2024, resulting in total debt repurchases of up to $75.0 million in 2023.

As of April 2, 2023, the Company had $43.4 million of additional debt repurchases remaining under the authorization.

In December 2022, our Board of Directors authorized debt repurchases of up to $25.0 million and, in February 2023, our Board of Directors authorized additional debt repurchases of up to $50.0 million through February 2024, resulting in total debt repurchase authorizations of up to $75.0 million.

As of July 2, 2023, the Company had completed the December 2022 debt repurchase authorization and had $43.4 million remaining under the February 2023 authorization.

Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Whether or not to repurchase any debt and the size and timing of any such repurchases will be determined at our discretion.

Whether or not to repurchase any additional debt and the size and timing of any such repurchases will be determined at our discretion.

Except as described above, there were no material changes to the Company’s debt obligations since January 1, 2023.

The Company was in compliance with its debt covenants as of April 2, 2023.

The Company was in compliance with its debt covenants as of July 2, 2023.

See Note 6 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.

On March 15, 2023, the Company paid quarterly cash dividends per share of $.25, aggregating $53.1 million.

On May 10, 2023, the Company announced a dividend of $.25 per share to be paid on June 15, 2023 to stockholders of record as of June 1, 2023.

If the Company pays regular quarterly cash dividends for the remainder of 2023 at the same rate as declared in the second quarter of 2023, the Company’s total cash requirement for dividends for the remainder of 2023 will be approximately $158.1 million based on the number of shares of its common stock outstanding at May 3, 2023.

On March 15, 2023 and June 15, 2023, the Company paid quarterly cash dividends per share of $.25, aggregating $105.7 million.

On August 9, 2023, the Company announced a dividend of $.25 per share to be paid on September 15, 2023 to stockholders of record as of September 1, 2023.

If the Company pays regular quarterly cash dividends for the remainder of 2023 at the same rate as declared in the third quarter of 2023, the Company’s total cash requirement for dividends for the remainder of 2023 will be approximately $104.6 million based on the number of shares of its common stock outstanding at August 2, 2023.

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

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In connection with the January 2023 Authorization, the remaining portion of the previous February 2022 authorization for $250.0 million was canceled.

During the three months ended April 2, 2023, the Company repurchased 1.8 million shares under the January 2023 Authorization with an aggregate purchase price of $38.8 million, of which $2.1 million was accrued as of April 2, 2023, and excluding commissions.

As of April 2, 2023, the Company had $461.2 million of availability remaining under the January 2023 Authorization.

Subsequent to April 2, 2023 through May 3, 2023, the Company repurchased 1.1 million shares under the January 2023 Authorization with an aggregate purchase price of $23.6 million, excluding commissions.

During the six months ended July 2, 2023, the Company repurchased

4.0 million shares under the January 2023 Authorization with an aggregate purchase price of $88.3 million, of which $1.4 million was accrued as of July 2, 2023, and excluding excise tax of $0.7 million and commissions of $0.1 million.

As of July 2, 2023, the Company had $411.7 million of availability remaining under the January 2023 Authorization.

Subsequent to July 2, 2023 through August 2, 2023, the Company repurchased 0.7 million shares under the January 2023 Authorization with an aggregate purchase price of $15.2 million, excluding applicable excise tax and commissions.

Cloud Computing Arrangements

In addition to the anticipated cash requirements for capital expenditures noted above in “Cash Flows,” the Company expects to spend approximately $30.0 million during 2023 on cloud computing arrangements (“CCA”), primarily related to the Company’s human capital management system implementation.

The Company’s cash expenditures related to CCA amounted to $6.6 million during the three months ended April 2, 2023.

The Company’s cash expenditures related to CCA amounted to $16.8 million during the six months ended July 2, 2023.

General Inflation, Commodities and Changing Prices

Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the three months ended April 2, 2023, and we expect this to continue throughout the remainder of 2023.

We attempt to

manage any inflationary costs and commodity price increases through selective menu price increases and product mix.

Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the six months ended July 2, 2023, and we expect this to continue throughout the remainder of 2023.

We attempt to manage any inflationary costs and commodity price increases through selective menu price increases and product mix.

Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future.

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Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

Quantitative and Qualitative Disclosures about Market Risk.

As of April 2, 2023, there were no material changes from the information contained in the Company’s Form 10-K for the fiscal year ended January 1, 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis