Wendy's Co 10-Q

Item 1. Financial Statements. THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Par Value) October 1, 2023 January 1, 2023 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 598,025 $ 745,889 Restricted cash 36,727 35,203 Accounts and notes receivable, net 138,064 116,426 Inventories 6,813 7,129 Prepaid expenses and other current assets 33,311 26,963 Advertising funds restricted assets 113,112 126,673 Total current assets 926,052 1,058,283 Properties 886,792 895,778 Finance lease assets 227,289 234,570 Operating lease assets 718,387 754,498 Goodwill 773,187 773,088 Other intangible assets 1,225,290 1,248,800 Investments 34,441 46,028 Net investment in sales-type and direct financing leases 313,969 317,337 Other assets 185,041 170,962 Total assets $ 5,290,448 $ 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 19,734 18,316 Current portion of operating lease liabilities 49,155 48,120 Accounts payable 41,693 43,996 Accrued expenses and other current liabilities 148,936 116,010 Advertising funds restricted liabilities 116,432 132,307 Total current liabilities 405,200 387,999 Long-term debt 2,768,226 2,822,196 Long-term finance lease liabilities 566,739 571,877 Long-term operating lease liabilities 753,301 792,051 Deferred income taxes 270,614 270,421 Deferred franchise fees 89,363 90,231 Other liabilities 94,441 98,849 Total liabilities 4,947,884 5,033,624 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 207,468 and 213,101 shares outstanding, respectively 47,042 47,042 Additional paid-in capital 2,950,916 2,937,885 Retained earnings 414,324 414,749 Common stock held in treasury, at cost; 262,956 and 257,323 shares, respectively ( 3,006,116 ) ( 2,869,780 ) Accumulated other comprehensive loss ( 63,602 ) ( 64,176 ) Total stockholders’ equity 342,564 465,720 Total liabilities and stockholders’ equity $ 5,290,448 $ 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 Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (Unaudited) Revenues: Sales $ 234,721 $ 228,786 $ 703,358 $ 668,930 Franchise royalty revenue and fees 149,345 141,733 444,070 414,145 Franchise rental income 57,567 58,463 173,407 174,944 Advertising funds revenue 108,922 103,587 320,092 300,976 550,555 532,569 1,640,927 1,558,995 Costs and expenses: Cost of sales 199,522 196,168 597,068 578,506 Franchise support and other costs 14,806 12,728 41,853 34,456 Franchise rental expense 31,876 31,687 94,901 92,699 Advertising funds expense 107,895 108,269 319,174 317,042 General and administrative 59,288 62,523 184,306 186,506 Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) 34,288 34,252 101,258 100,911 Amortization of cloud computing arrangements 3,844 888 7,692 888 System optimization gains, net ( 120 ) ( 452 ) ( 119 ) ( 4,138 ) Reorganization and realignment costs 611 8 8,100 628 Impairment of long-lived assets 59 206 513 2,682 Other operating income, net ( 3,117 ) ( 11,843 ) ( 9,174 ) ( 20,482 ) 448,952 434,434 1,345,572 1,289,698 Operating profit 101,603 98,135 295,355 269,297 Interest expense, net ( 30,957 ) ( 31,916 ) ( 93,798 ) ( 90,406 ) Loss on early extinguishment of debt ( 319 ) — ( 1,585 ) — Investment (loss) income, net — — ( 10,389 ) 2,107 Other income, net 7,637 2,910 22,546 4,355 Income before income taxes 77,964 69,129 212,129 185,353 Provision for income taxes ( 19,915 ) ( 18,587 ) ( 54,627 ) ( 49,258 ) Net income $ 58,049 $ 50,542 $ 157,502 $ 136,095 Net income per share: Basic $ .28 $ .24 $ .75 $ .64 Diluted .28 .24 .74 .63 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (Unaudited) Net income $ 58,049 $ 50,542 $ 157,502 $ 136,095 Other comprehensive (loss) income: Foreign currency translation adjustment ( 4,533 ) ( 14,183 ) 574 ( 20,520 ) Other comprehensive (loss) income ( 4,533 ) ( 14,183 ) 574 ( 20,520 ) Comprehensive income $ 53,516 $ 36,359 $ 158,076 $ 115,575 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 Net income — — 59,632 — — 59,632 Other comprehensive income — — — — 4,949 4,949 Cash dividends — — ( 52,612 ) — — ( 52,612 ) Repurchases of common stock — — — ( 50,183 ) — ( 50,183 ) Share-based compensation — 5,609 — — — 5,609 Common stock issued upon exercises of stock options — 1,136 — 3,829 — 4,965 Common stock issued upon vesting of restricted shares — ( 2,182 ) — 1,283 — ( 899 ) Other — 53 ( 16 ) 60 — 97 Balance at July 2, 2023 $ 47,042 $ 2,945,754 $ 408,449 $ ( 2,951,061 ) $ ( 59,069 ) $ 391,115 Net income — — 58,049 — — 58,049 Other comprehensive loss — — — — ( 4,533 ) ( 4,533 ) Cash dividends — — ( 52,156 ) — — ( 52,156 ) Repurchases of common stock — — — ( 56,714 ) — ( 56,714 ) Share-based compensation — 6,551 — — — 6,551 Common stock issued upon exercises of stock options — 210 — 894 — 1,104 Common stock issued upon vesting of restricted shares — ( 1,658 ) — 702 — ( 956 ) Other — 59 ( 18 ) 63 — 104 Balance at October 1, 2023 $ 47,042 $ 2,950,916 $ 414,324 $ ( 3,006,116 ) $ ( 63,602 ) $ 342,564 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED (In Thousands) Common Stock Additional Paid-In Capital Retained Earnings Common Stock Held in Treasury Accumulated Other Comprehensive Loss Total (Unaudited) Balance at January 2, 2022 $ 47,042 $ 2,898,633 $ 344,198 $ ( 2,805,268 ) $ ( 48,200 ) $ 436,405 Net income — — 37,402 — — 37,402 Other comprehensive income — — — — 1,118 1,118 Cash dividends — — ( 26,911 ) — — ( 26,911 ) Repurchases of common stock, including accelerated share repurchase — 18,750 — ( 18,750 ) — — Share-based compensation — 6,348 — — — 6,348 Common stock issued upon exercises of stock options — 237 — 1,354 — 1,591 Common stock issued upon vesting of restricted shares — ( 1,989 ) — 459 — ( 1,530 ) Other — 63 ( 8 ) 57 — 112 Balance at April 3, 2022 $ 47,042 $ 2,922,042 $ 354,681 $ ( 2,822,148 ) $ ( 47,082 ) $ 454,535 Net income — — 48,151 — — 48,151 Other comprehensive loss — — — — ( 7,455 ) ( 7,455 ) Cash dividends — — ( 26,635 ) — — ( 26,635 ) Repurchases of common stock — — — ( 51,950 ) — ( 51,950 ) Share-based compensation — 6,122 — — — 6,122 Common stock issued upon exercises of stock options — ( 300 ) — 399 — 99 Common stock issued upon vesting of restricted shares — ( 1,178 ) — 1,073 — ( 105 ) Other — 53 ( 10 ) 58 — 101 Balance at July 3, 2022 $ 47,042 $ 2,926,739 $ 376,187 $ ( 2,872,568 ) $ ( 54,537 ) $ 422,863 Net income — — 50,542 — — 50,542 Other comprehensive loss — — — — ( 14,183 ) ( 14,183 ) Cash dividends — — ( 26,607 ) — — ( 26,607 ) Share-based compensation — 5,027 — — — 5,027 Common stock issued upon exercises of stock options — 450 — 241 — 691 Common stock issued upon vesting of restricted shares — ( 1,876 ) — 817 — ( 1,059 ) Other — 48 ( 11 ) 68 — 105 Balance at October 2, 2022 $ 47,042 $ 2,930,388 $ 400,111 $ ( 2,871,442 ) $ ( 68,720 ) $ 437,379 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Nine Months Ended October 1, 2023 October 2, 2022 (Unaudited) Cash flows from operating activities: Net income $ 157,502 $ 136,095 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) 101,258 100,911 Amortization of cloud computing arrangements 7,692 888 Share-based compensation 16,769 17,497 Impairment of long-lived assets 513 2,682 Deferred income tax ( 502 ) 10,214 Non-cash rental expense, net 30,724 26,164 Change in operating lease liabilities ( 35,319 ) ( 34,241 ) Net receipt of deferred vendor incentives 4,007 1,884 System optimization gains, net ( 119 ) ( 4,138 ) Distributions received from joint ventures, net of equity in earnings 1,349 3,468 Long-term debt-related activities, net 7,310 5,746 Cloud computing arrangements expenditures ( 25,154 ) ( 22,685 ) Changes in operating assets and liabilities and other, net 3,495 ( 61,846 ) Net cash provided by operating activities 269,525 182,639 Cash flows from investing activities: Capital expenditures ( 55,689 ) ( 50,036 ) Franchise development fund ( 1,947 ) ( 2,484 ) Dispositions 280 3,731 Notes receivable, net 1,825 2,713 Net cash used in investing activities ( 55,531 ) ( 46,076 ) Cash flows from financing activities: Proceeds from long-term debt — 500,000 Repayments of long-term debt ( 61,280 ) ( 19,437 ) Repayments of finance lease liabilities ( 16,947 ) ( 13,411 ) Deferred financing costs — ( 10,232 ) Repurchases of common stock ( 142,413 ) ( 51,950 ) Dividends ( 157,871 ) ( 80,153 ) Proceeds from stock option exercises 9,113 2,668 Payments related to tax withholding for share-based compensation ( 3,827 ) ( 2,980 ) Net cash (used in) provided by financing activities ( 373,225 ) 324,505 Net cash (used in) provided by operations before effect of exchange rate changes on cash ( 159,231 ) 461,068 Effect of exchange rate changes on cash 307 ( 7,176 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 158,924 ) 453,892 Cash, cash equivalents and restricted cash at beginning of period 831,801 366,966 Cash, cash equivalents and restricted cash at end of period $ 672,877 $ 820,858 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of October 1, 2023, the results of our operations for the three and nine months ended October 1, 2023 and October 2, 2022 and cash flows for the nine months ended October 1, 2023 and October 2, 2022. The results of operations for the nine months ended October 1, 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- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years, quarters and months relate to fiscal periods rather than calendar periods. Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue. (2) Revenue Disaggregation of Revenue The following tables disaggregate revenue by segment and source: Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Three Months Ended October 1, 2023 Sales at Company-operated restaurants $ 227,674 $ 7,047 $ — $ 234,721 Franchise royalty revenue 112,698 17,390 — 130,088 Franchise fees 17,079 1,597 581 19,257 Franchise rental income — — 57,567 57,567 Advertising funds revenue 99,789 9,133 — 108,922 Total revenues $ 457,240 $ 35,167 $ 58,148 $ 550,555 Three Months Ended October 2, 2022 Sales at Company-operated restaurants $ 225,245 $ 3,541 $ — $ 228,786 Franchise royalty revenue 108,780 15,777 — 124,557 Franchise fees 15,294 1,257 625 17,176 Franchise rental income — — 58,463 58,463 Advertising funds revenue 96,615 6,972 — 103,587 Total revenues $ 445,934 $ 27,547 $ 59,088 $ 532,569 10 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Nine Months Ended October 1, 2023 Sales at Company-operated restaurants $ 685,168 $ 18,190 $ — $ 703,358 Franchise royalty revenue 333,958 50,408 — 384,366 Franchise fees 51,812 4,515 3,377 59,704 Franchise rental income — — 173,407 173,407 Advertising funds revenue 296,043 24,049 — 320,092 Total revenues $ 1,366,981 $ 97,162 $ 176,784 $ 1,640,927 Nine Months Ended October 2, 2022 Sales at Company-operated restaurants $ 659,649 $ 9,281 $ — $ 668,930 Franchise royalty revenue 315,572 45,743 — 361,315 Franchise fees 46,685 3,695 2,450 52,830 Franchise rental income — — 174,944 174,944 Advertising funds revenue 281,779 19,197 — 300,976 Total revenues $ 1,303,685 $ 77,916 $ 177,394 $ 1,558,995 Contract Balances The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers: October 1, 2023 (a) January 1, 2023 (a) Receivables, which are included in “Accounts and notes receivable, net” (b) $ 54,931 $ 54,497 Receivables, which are included in “Advertising funds restricted assets” 66,676 70,422 Deferred franchise fees (c) 99,889 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) The current portion of deferred franchise fees is included in “Accrued expenses and other current liabilities” and the long-term portion of deferred franchise fees is included in “Deferred franchise fees” and totaled $ 10,526 and $ 89,363 , respectively, as of October 1, 2023, and $ 8,977 and $ 90,231 , respectively, as of January 1, 2023. Significant changes in deferred franchise fees are as follows: Nine Months Ended October 1, 2023 October 2, 2022 Deferred franchise fees at beginning of period $ 99,208 $ 97,186 Revenue recognized during the period ( 9,016 ) ( 7,193 ) New deferrals due to cash received and other 9,697 10,143 Deferred franchise fees at end of period $ 99,889 $ 100,136 11 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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) $ 6,332 2024 6,090 2025 5,908 2026 5,797 2027 5,689 Thereafter 70,073 $ 99,889 _______________ (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. (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 nine months ended October 1, 2023 and October 2, 2022, the Company facilitated 88 and 54 Franchise Flips, respectively. Additionally, during the nine months ended October 2, 2022, the Company completed the sale of 1 Company-operated restaurant to a franchisee. No Company-operated restaurants were sold to franchisees during the nine months ended October 1, 2023. 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.” 12 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following is a summary of the disposition activity recorded as a result of our system optimization initiative: Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Number of restaurants sold to franchisees — 1 — 1 Proceeds from sales of restaurants (a) $ — $ 79 $ — $ 79 Net assets sold (b) — ( 141 ) — ( 141 ) Net unfavorable leases — ( 360 ) — ( 360 ) Other — 6 — 6 — ( 416 ) — ( 416 ) Post-closing adjustments on sales of restaurants (c) 537 — 537 3,522 Gain (loss) on sales of restaurants, net 537 ( 416 ) 537 3,106 (Loss) gain on sales of other assets, net (d) ( 417 ) 868 ( 418 ) 1,032 System optimization gains, net $ 120 $ 452 $ 119 $ 4,138 _______________ (a) In addition to the proceeds noted herein, the Company received cash proceeds of $ 126 and $ 284 during the three and nine months ended October 2, 2022, respectively, related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants. (b) Net assets sold consisted primarily of equipment. (c) 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. (d) During the nine months ended October 1, 2023, the Company received net cash proceeds of $ 280 primarily from the sale of surplus and other properties. During the three and nine months ended October 2, 2022, the Company received net cash proceeds of $ 2,510 and $ 3,368 , respectively, primarily from the sale of surplus and other properties. Assets Held for Sale As of October 1, 2023 and January 1, 2023, the Company had assets held for sale of $ 1,320 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 Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Organizational redesign $ 579 $ — $ 7,986 $ — Other reorganization and realignment plans 32 8 114 628 Reorganization and realignment costs $ 611 $ 8 $ 8,100 $ 628 13 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 nine months ended October 1, 2023, the Company recognized costs totaling $ 7,986 , which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $ 3,000 to $ 5,000 , comprised of (1) severance and related employee costs of approximately $ 1,500 , (2) recruitment and relocation costs of approximately $ 500 , (3) third-party and other costs of approximately $ 500 and (4) share-based compensation of approximately $ 1,500 . 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 Nine Months Ended October 1, 2023 October 1, 2023 Severance and related employee costs $ 114 $ 5,674 Recruitment and relocation costs 140 304 Third-party and other costs 173 904 427 6,882 Share-based compensation (a) 152 1,104 Total organizational redesign $ 579 $ 7,986 _______________ (a) Primarily represents the accelerated recognition of share-based compensation resulting from the termination of employees under the Organizational Redesign Plan. As of October 1, 2023, the accruals for the Organizational Redesign Plan are included in “Accrued expenses and other current liabilities”. The table below presents a rollforward of our accruals for the Organizational Redesign Plan. Balance January 1, 2023 Charges Payments Balance October 1, 2023 Severance and related employee costs $ — $ 5,674 $ ( 3,524 ) $ 2,150 Recruitment and relocation costs — 304 ( 304 ) — Third-party and other costs — 904 ( 904 ) — $ — $ 6,882 $ ( 4,732 ) $ 2,150 Other Reorganization and Realignment Plans Costs incurred under the Company’s other reorganization and realignment plans were not material during the nine months ended October 1, 2023 and October 2, 2022. The Company does not expect to incur any material additional costs under these plans. 14 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: October 1, 2023 January 1, 2023 Equity method investments $ 32,723 $ 33,921 Other investments in equity securities 1,718 12,107 $ 34,441 $ 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.). The Company has significant influence over this investee. Such investment is accounted for using the equity method, under which our results of operations include our share of the income of the investee in “Other operating income, net.” Presented below is activity related to our investment in TimWen included in our condensed consolidated financial statements: Nine Months Ended October 1, 2023 October 2, 2022 Balance at beginning of period $ 33,921 $ 39,870 Equity in earnings for the period 10,012 9,091 Amortization of purchase price adjustments (a) ( 2,051 ) ( 2,163 ) 7,961 6,928 Distributions received ( 9,310 ) ( 10,396 ) Foreign currency translation adjustment included in “Other comprehensive (loss) income” and other 151 ( 3,027 ) Balance at end of period $ 32,723 $ 33,375 _______________ (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 nine months ended October 2, 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 nine months ended October 1, 2023, the Company recorded impairment charges of $ 10,389 for the difference between the estimated fair value and the carrying value of the investment. 15 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: October 1, 2023 January 1, 2023 Class A-2 Notes (a): 4.236 % Series 2022-1 Class A-2-I Notes, anticipated repayment date 2029 $ 98,750 $ 99,500 4.535 % Series 2022-1 Class A-2-II Notes, anticipated repayment date 2032 395,000 398,000 2.370 % Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029 439,875 443,250 2.775 % Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 635,375 640,250 3.783 % Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 361,000 364,000 4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 406,125 409,500 3.884 % Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 447,688 451,250 7 % debentures, due in 2025 (b) 49,190 86,369 Unamortized debt issuance costs ( 35,527 ) ( 40,673 ) 2,797,476 2,851,446 Less amounts payable within one year ( 29,250 ) ( 29,250 ) Total long-term debt $ 2,768,226 $ 2,822,196 _______________ (a) Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased $ 29,171 in principal of its Class A-2 senior secured notes for $ 24,935 . (b) Wendy’s 7 % debentures are unsecured and were reduced to fair value in connection with the 2008 merger of Triarc Companies, Inc. and Wendy’s International, Inc. (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 nine months ended October 1, 2023, Wendy’s repurchased $ 39,266 in principal of its 7 % debentures for $ 39,343 . As a result, the Company recognized a loss on early extinguishment of debt of $ 1,585 during the nine months ended October 1, 2023. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased $ 1,164 in principal of its 7 % debentures for $ 1,174 . (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. 16 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: October 1, 2023 January 1, 2023 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Measurements Financial assets Cash equivalents $ 419,744 $ 419,744 $ 560,682 $ 560,682 Level 1 Other investments in equity securities (a) 1,718 1,718 12,107 12,107 Level 2 Financial liabilities (b) Series 2022-1 Class A-2-I Notes 98,750 89,191 99,500 89,401 Level 2 Series 2022-1 Class A-2-II Notes 395,000 345,744 398,000 349,444 Level 2 Series 2021-1 Class A-2-I Notes 439,875 360,785 443,250 357,304 Level 2 Series 2021-1 Class A-2-II Notes 635,375 497,753 640,250 499,011 Level 2 Series 2019-1 Class A-2-I Notes 361,000 334,683 364,000 334,334 Level 2 Series 2019-1 Class A-2-II Notes 406,125 360,111 409,500 361,875 Level 2 Series 2018-1 Class A-2-II Notes 447,688 404,217 451,250 405,809 Level 2 7 % debentures, due in 2025 49,190 51,115 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 was based on observable price changes. (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. 17 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 October 1, 2023 Level 1 Level 2 Level 3 Held and used $ 593 $ — $ — $ 593 Held for sale 1,044 — — 1,044 Total $ 1,637 $ — $ — $ 1,637 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 Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Company-operated restaurants $ — $ 159 $ 428 $ 2,234 Restaurants leased or subleased to franchisees — — — 194 Surplus properties 59 47 85 254 $ 59 $ 206 $ 513 $ 2,682 (9) Income Taxes The Company’s effective tax rate for the three months ended October 1, 2023 and October 2, 2022 was 25.5 % and 26.9 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the three months ended October 1, 2023 primarily due to state income taxes, including discrete changes to state deferred income taxes. The Company’s effective tax rate for the nine months ended October 1, 2023 and October 2, 2022 was 25.8 % and 26.6 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % for the nine months ended October 1, 2023 primarily due to state income taxes, including discrete changes to state deferred income taxes, and a one-time adjustment to our foreign deferred income taxes related to prior periods. There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three and nine months ended October 1, 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 $ 8,062 and $ 3,236 as of October 1, 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 October 1, 2023 and January 1, 2023. 18 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 Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Net income $ 58,049 $ 50,542 $ 157,502 $ 136,095 Common stock: Weighted average basic shares outstanding 208,834 212,805 210,668 214,032 Dilutive effect of stock options and restricted shares 1,768 1,796 2,185 1,971 Weighted average diluted shares outstanding 210,602 214,601 212,853 216,003 Net income per share: Basic $ .28 $ .24 $ .75 $ .64 Diluted $ .28 $ .24 $ .74 $ .63 Basic net income per share for the three and nine months ended October 1, 2023 and October 2, 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 5,204 and 4,719 for the three and nine months ended October 1, 2023, respectively, and 4,298 and 4,377 for the three and nine months ended October 2, 2022, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. (11) Stockholders’ Equity Dividends During each of the first, second and third quarters of 2023, the Company paid dividends per share of $ .25 . During each of the first, second and third quarters of 2022, the Company paid dividends per share of $ .125 . 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”). During the nine months ended October 1, 2023, the Company repurchased 6,730 shares under the January 2023 Authorization with an aggregate purchase price of $ 144,320 , of which $ 2,001 was accrued as of October 1, 2023, and excluding excise tax of $ 1,293 and commissions of $ 94 . As of October 1, 2023, the Company had $ 355,680 of availability remaining under the January 2023 Authorization. Subsequent to October 1, 2023 through October 26, 2023, the Company repurchased 1,232 shares under the January 2023 Authorization with an aggregate purchase price of $ 23,596 , excluding applicable excise tax and commissions. In February 2022, our Board of Directors authorized a repurchase program for up to $ 100,000 of our common stock through February 28, 2023, when and if market conditions warranted and to the extent legally permissible (the “February 2022 Authorization”). In April 2022, the Company’s Board of Directors approved an increase of $ 150,000 to the February 2022 Authorization, resulting in an aggregate authorization of $ 250,000 that was set to expire on February 28, 2023. During the nine months ended October 2, 2022, the Company repurchased 2,759 shares under the February 2022 Authorization with an aggregate purchase price of $ 51,911 , excluding commissions of $ 39 . In connection with the January 2023 Authorization, the remaining portion of the February 2022 Authorization was canceled. 19 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) 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 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: Nine Months Ended October 1, 2023 October 2, 2022 Balance at beginning of period $ ( 64,176 ) $ ( 48,200 ) Foreign currency translation 574 ( 20,520 ) Balance at end of period $ ( 63,602 ) $ ( 68,720 ) (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 October 1, 2023, Wendy’s and its franchisees operated 7,166 Wendy’s restaurants. Of the 415 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 159 restaurants, owned the building and held long-term land leases for 144 restaurants and held leases covering the land and building for 112 restaurants. Wendy’s also owned 488 and leased 1,186 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment. 20 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Company as Lessee The components of lease cost are as follows: Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Finance lease cost: Amortization of finance lease assets $ 4,111 $ 4,053 $ 12,232 $ 12,223 Interest on finance lease liabilities 10,664 10,717 32,157 32,055 14,775 14,770 44,389 44,278 Operating lease cost 21,577 21,929 64,455 64,914 Variable lease cost (a) 16,889 16,367 50,489 47,626 Short-term lease cost 1,466 1,116 4,433 3,954 Total operating lease cost (b) 39,932 39,412 119,377 116,494 Total lease cost $ 54,707 $ 54,182 $ 163,766 $ 160,772 _______________ (a) Includes expenses for executory costs of $ 9,777 and $ 8,943 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $ 29,797 and $ 27,796 for the nine months ended October 1, 2023 and October 2, 2022, respectively, for which the Company is reimbursed by sublessees. (b) Includes $ 31,824 and $ 31,559 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $ 94,751 and $ 92,555 for the nine months ended October 1, 2023 and October 2, 2022, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 7,570 and $ 7,357 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $ 22,981 and $ 22,130 for the nine months ended October 1, 2023 and October 2, 2022, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. Company as Lessor The components of lease income are as follows: Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Sales-type and direct-financing leases: Selling profit $ 354 $ 711 $ 1,555 $ 2,868 Interest income (a) 7,853 7,784 23,583 23,277 Operating lease income 40,567 42,351 123,352 127,839 Variable lease income 17,000 16,112 50,055 47,105 Franchise rental income (b) $ 57,567 $ 58,463 $ 173,407 $ 174,944 _______________ (a) Included in “Interest expense, net.” (b) Includes sublease income of $ 42,545 and $ 43,540 recognized during the three months ended October 1, 2023 and October 2, 2022, respectively, and $ 128,457 and $ 130,394 recognized during the nine months ended October 1, 2023 and October 2, 2022, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 9,811 and $ 8,947 for the three months ended October 1, 2023 and October 2, 2022, respectively, and $ 29,704 and $ 27,732 for the nine months ended October 1, 2023 and October 2, 2022, respectively. 21 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (13) Supplemental Cash Flow Information The following table includes supplemental non-cash investing and financing activities: Nine Months Ended October 1, 2023 October 2, 2022 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable $ 10,856 $ 7,232 Finance leases 13,436 24,212 The following table includes a reconciliation of cash, cash equivalents and restricted cash: October 1, 2023 January 1, 2023 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 598,025 $ 745,889 Restricted cash 36,727 35,203 Restricted cash, included in Advertising funds restricted assets 38,125 50,709 Total cash, cash equivalents and restricted cash $ 672,877 $ 831,801 (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 $ 15,713 and $ 15,148 under these lease agreements during the nine months ended October 1, 2023 and October 2, 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 $ 181 and $ 166 during the nine months ended October 1, 2023 and October 2, 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 October 1, 2023 owned and operated 83 Wendy’s restaurants. During the nine months ended October 1, 2023 and October 2, 2022, the Company recognized $ 11,143 and $ 9,942 , respectively, in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of October 1, 2023 and January 1, 2023, $ 1,116 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 nine months ended October 1, 2023, the Company purchased approximately $ 1,800 of advertising time from a subsidiary of AMC. As of October 1, 2023, approximately $ 16 was due to AMC for advertising time, which is included in “Advertising funds restricted liabilities.” 22 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (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 $ 92,673 as of October 1, 2023. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of October 1, 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 franchise owner. The liability recorded for our probable exposure associated with these lease guarantees was not material as of October 1, 2023. Letters of Credit As of October 1, 2023, the Company had outstanding letters of credit with various parties totaling $ 28,843 . 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. 23 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (17) Segment Information Revenues by segment are as follows: Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Wendy’s U.S. $ 457,240 $ 445,934 $ 1,366,981 $ 1,303,685 Wendy’s International 35,167 27,547 97,162 77,916 Global Real Estate & Development 58,148 59,088 176,784 177,394 Total revenues $ 550,555 $ 532,569 $ 1,640,927 $ 1,558,995 The following table reconciles profit by segment to the Company’s consolidated income before income taxes: Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Wendy’s U.S. (a) $ 134,887 $ 123,696 $ 403,064 $ 355,519 Wendy’s International (b) 10,831 8,560 26,808 23,363 Global Real Estate & Development 24,418 25,905 76,020 80,795 Total segment profit 170,136 158,161 $ 505,892 $ 459,677 Unallocated franchise support and other costs ( 29 ) ( 756 ) ( 6 ) ( 750 ) Advertising funds surplus (deficit) 1,088 ( 1,441 ) 3,509 ( 4,059 ) Unallocated general and administrative (c) ( 30,962 ) ( 31,517 ) ( 96,776 ) ( 93,511 ) Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) ( 34,288 ) ( 34,252 ) ( 101,258 ) ( 100,911 ) Amortization of cloud computing arrangements ( 3,844 ) ( 888 ) ( 7,692 ) ( 888 ) System optimization gains, net 120 452 119 4,138 Reorganization and realignment costs ( 611 ) ( 8 ) ( 8,100 ) ( 628 ) Impairment of long-lived assets ( 59 ) ( 206 ) ( 513 ) ( 2,682 ) Unallocated other operating income, net 52 8,590 180 8,911 Interest expense, net ( 30,957 ) ( 31,916 ) ( 93,798 ) ( 90,406 ) Loss on early extinguishment of debt ( 319 ) — ( 1,585 ) — Investment (loss) income, net — — ( 10,389 ) 2,107 Other income, net 7,637 2,910 22,546 4,355 Income before income taxes $ 77,964 $ 69,129 $ 212,129 $ 185,353 _______________ (a) Wendy’s U.S. includes advertising funds expense of $ 2,779 and $ 8,101 for the three and nine months ended October 2, 2022, respectively, related to the Company’s funding of incremental advertising. (b) Wendy’s International includes advertising funds expense of $ 596 and $ 1,802 for the three and nine months ended October 1, 2023, respectively, and $ 1,002 and $ 2,924 for the three and nine months ended October 2, 2022, respectively, related to the Company’s funding of incremental advertising in Canada. In addition, Wendy’s International includes other international-related advertising surplus (deficit) of $ 535 and $( 789 ) for the three and nine months ended October 1, 2023, respectively, and $ 538 and $( 984 ) for the three and nine months ended October 2, 2022, respectively. (c) Includes corporate overhead costs, such as employee compensation and related benefits. 24 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (18) New Accounting Standards New Accounting Standards Common-Control Lease Arrangements In March 2023, the Financial Accounting Standards Board (“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. New Accounting Standards Adopted Reference Rate Reform In March 2020, the FASB issued guidance to provide temporary optional expedients and exceptions to current reference rate reform guidance to ease the financial reporting burdens related to the market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. During the nine months ended October 1, 2023, certain of the Company’s subsidiaries executed amendments to the 2021-1 Variable Funding Senior Secured Notes, Class A-1 and the U.S. advertising fund revolving line of credit to transition from LIBOR to the Secured Overnight Financing Rate (“SOFR”), plus any applicable margin. In connection with these contract amendments, the Company adopted the reference rate reform guidance during the second quarter of 2023. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. Business Combinations In October 2021, the 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. 25