Wendy's Co (WEN) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere within this report. Certain statements we make under this Item 7 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part I” preceding “Item 1 - Business.” You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in Item 1A above, as well as our consolidated financial statements, related notes and other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission (the “SEC”).

The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC (formerly known as Wendy’s International, Inc). Wendy’s International, LLC is the indirect parent company of (1) Quality Is Our Recipe, LLC (“Quality”), which is the owner and franchisor of the Wendy’s restaurant system in the United States (the “U.S.”) and all international jurisdictions except for Canada, and (2) Wendy’s Restaurants of Canada Inc., which is the owner and franchisor of the Wendy’s restaurant system in Canada. As used herein, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to the ownership or franchising of the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand.

Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the U.S. based on traffic share, and the third largest globally with 6,949 restaurants in the U.S. and 31 foreign countries and U.S. territories as of January 2, 2022.

The Company is comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the operation and franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company reports on the segment profit for each of the three segments described above. The Company measures segment profit using segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the

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Company’s core operating performance. See “Results of Operations” below and Note 26 of the Financial Statements and Supplementary Data contained in Item 8 herein for segment financial information.

The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31 and are referred to herein as (1) “the year ended January 2, 2022” or “2021,” which consisted of 52 weeks, (2) “the year ended January 3, 2021” or “2020,” which consisted of 53 weeks, and (3) “the year ended December 29, 2019” or “2019,” which consisted of 52 weeks. All references to years, quarters and months relate to fiscal periods rather than calendar periods.

Executive Overview

Our Business

As of January 2, 2022, the Wendy’s restaurant system was comprised of 6,949 restaurants, with 5,938 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 403 were operated by the Company and 5,535 were operated by a total of 228 franchisees. In addition, at January 2, 2022, there were 1,011 Wendy’s restaurants in operation in 31 foreign countries and U.S. territories. Of the international restaurants, 1,006 were operated by franchisees and five were operated by the Company in the United Kingdom (the “U.K.”).

The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of January 2, 2022.

Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather. The COVID-19 pandemic has had and may continue to have the effect of heightening the impact of many of these factors. See “COVID-19 Update” below and “Special Note Regarding Forward-Looking Statements and Projections” in “Part I” preceding “Item 1 - Business” for additional information.

Wendy’s long-term growth opportunities include investing in accelerated global growth through (1) building our breakfast daypart, (2) accelerating our implementation of consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint through targeted U.S. restaurant expansion and accelerated international restaurant expansion.

Key Business Measures

We track our results of operations and manage our business using the following key business measures, which include non-GAAP financial measures:

•Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one week are excluded from same-restaurant sales. For 2020, same-restaurant sales excluded the impact of a 53rd operating week. For 2020, same-restaurant sales compared the 52 weeks from December 30, 2019 through December 27, 2020 to the 52 weeks from December 31, 2018 through December 29, 2019. For 2021, same-restaurant sales compared the 52 weeks from January 4, 2021 through January 2, 2022 to the 52 weeks from January 6, 2020 through January 3, 2021. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes.

•Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.

•Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company’s royalty and advertising

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funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and profitability.

•Average Unit Volumes - We calculate Company-operated restaurant average unit volumes by summing the average weekly sales of all Company-operated restaurants which reported sales during the week. Average unit volumes exclude the impact of the 53rd week of 2020. For 2020, average unit volumes are calculated using the 52 weeks from December 30, 2019 through December 27, 2020.

Franchised restaurant average unit volumes is a non-GAAP financial measure, which includes sales by franchised restaurants, which are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. We calculate franchised restaurant average unit volumes by summing the average weekly sales of all franchised restaurants which reported sales during the week.

The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.

Same-restaurant sales and systemwide sales exclude sales from Argentina and Venezuela due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.

The Company believes its presentation of same-restaurant sales, restaurant margin, systemwide sales and average unit volumes, including franchised restaurant average unit volumes, provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales, systemwide sales and franchised restaurant average unit volumes, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand.

The non-GAAP financial measures discussed above do not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, these measures as used by other companies may not be consistent with the way the Company calculates such measures.

2021 Financial Highlights

•Revenue increased 9.4% to $1.9 billion in 2021 compared to $1.7 billion in 2020;

•Global same-restaurant sales increased 10.0%, U.S. same-restaurant sales increased 9.2% and international same-restaurant sales increased 17.6% compared to 2020;

•Company-operated restaurant margin was 16.7% in 2021, an increase of 180 basis points compared to 2020; and

•Net income increased 70.1% to $200.4 million in 2021 compared to $117.8 million in 2020.

COVID-19 Update

In March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on our results of operations, financial condition and prospects.

In response to the pandemic, in March 2020, Wendy’s updated its brand standard to include the closure of all dining rooms except where there were specific needs, or a drive-thru or pick-up window option was not available, subject to applicable

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federal, state and local requirements. Substantially all Wendy’s restaurants continued to offer drive-thru and delivery service to our customers. During the second quarter of 2020, the Company began to implement its restaurant and dining room reopening process through a phased approach in accordance with federal, state and local requirements, with customer and team member safety as its top priority. Dining rooms have been re-opening at each restaurant owner’s discretion, subject to applicable regulatory restrictions. During 2021, restaurant operations have been impacted by increased pressure on labor availability brought about by both the COVID-19 pandemic and other macroeconomic factors; however, as of January 2, 2022, substantially all restaurants were open across the Wendy’s system, and the majority of restaurants had dining rooms open. Global systemwide same-restaurant sales during 2021 increased 10.0%, in part due to a significant increase in customer count compared with the adversely impacted fiscal months of March through June 2020.

Breakfast

Wendy’s long-term growth opportunities include investing in accelerated global growth, which includes building upon our breakfast daypart. Since the launch of breakfast across the U.S. system in March 2020, systemwide sales have benefited from this new daypart, with breakfast representing approximately 7.3% of U.S. systemwide sales during 2021 and 7.8% during the fourth quarter of 2021. The Company funded $25.0 million of incremental advertising to support the breakfast daypart during 2021, which continued to drive trial and acceleration of the Company’s breakfast offering. The Company recently announced plans to launch breakfast in Canada in the second quarter of 2022, which will increase the percentage of global systemwide restaurants serving breakfast to approximately 95%.

Digital

Wendy’s long-term growth opportunities include accelerated implementation of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program and establishing delivery agreements with third-party vendors. The Company’s digital business continues to grow and represented approximately 8.5% of global systemwide sales during 2021, with the fourth quarter of 2021 reaching approximately 9.5%. 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.

New Restaurant Development

Wendy’s long-term growth opportunities include expanding the Company’s footprint through targeted U.S. restaurant expansion and accelerated international restaurant expansion. To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants, including technical assistance fee waivers and reductions in royalty and national advertising payments. During 2021, the Company and its franchisees added 121 net new restaurants across the Wendy’s system. The Company expects to reach 8,500 to 9,000 systemwide restaurants by the end of 2025.

REEF Kitchens Development Commitment

On August 11, 2021, the Company announced a development commitment by REEF Kitchens (“REEF”) to open and operate 700 delivery kitchens over a five-year period across the U.S., Canada and the U.K.

Strategic Build to Suit Development Fund

On August 11, 2021, the Company announced the creation of a $100.0 million strategic build to suit development fund to drive additional new restaurant growth that is being funded by the additional cash that was obtained as part of the Company’s debt refinancing transaction completed in June 2021. The Company expects the development fund to drive approximately 80 to 90 new franchise restaurants from 2022 to 2025.

System Optimization Initiative

The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating 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

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acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages.

During 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees, resulting in net gains totaling $30.8 million. Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our consolidated statements of operations. See Note 4 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information on the dispositions.

In addition, during 2021, the Company completed a transaction to acquire 93 franchise-operated restaurants in Florida for $127.9 million. See Note 3 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information on the acquisition.

Debt Refinancing

In June 2021, the Company completed a refinancing transaction under which the Company issued fixed rate senior secured notes in the following 2021-1 series: Class A-2-I with an interest rate of 2.370% and initial principal amount of $450.0 million and Class A-2-II with an interest rate of 2.775% and initial principal amount of $650.0 million (collectively, the “Series 2021-1 Class A-2 Notes”). A portion of the net proceeds from the sale of the Series 2021-1 Class A-2 Notes were used to repay in full the Company’s outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes, including the payment of prepayment and transaction costs. The Company also entered into a revolving financing facility of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2021-1 Class A-1 Notes”), which allows for the drawing of up to $300.0 million on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2021-1 Class A-1 Notes during 2021. The Series 2021-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2019-1 Class A-1 Notes and $100.0 million Series 2020-1 Class A-1 Notes, which were cancelled on the closing date. As a result of the refinancing transaction, the Company incurred a loss on the early extinguishment of debt of $17.9 million, which was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs of $8.3 million. See Note 12 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information on the Company’s debt refinancing transaction.

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This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. For discussion related to 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K, please refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K, filed with the United States Securities and Exchange Commission on March 3, 2021.

Results of Operations

The tables included throughout this Results of Operations section set forth in millions (except as otherwise indicated) the Company’s consolidated results of operations for the years ended January 2, 2022, January 3, 2021 and December 29, 2019. Except as noted below, the Company’s consolidated results of operations described below includes the benefit of the 53rd week in 2020.

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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.

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(a)Excludes the impact of the 53rd week in 2020.

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

(c)During 2021 and 2020, global systemwide sales increased 9.8% and 3.7%, respectively, U.S. systemwide sales increased 8.6% and 4.8%, respectively, and international systemwide sales increased 20.7% and decreased 5.5%, respectively, on a constant currency basis. 2020 systemwide sales growth percentages included a positive impact of approximately 2% for the 53rd week in 2020.

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The table below presents details regarding the change in restaurant counts of the Wendy’s system from 2019 to 2021.

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(a)Excludes restaurants temporarily closed due to the impact of the COVID-19 pandemic.

The increase in sales during 2021 was primarily due to (1) an 11.9% increase in Company-operated same-restaurant sales, (2) net new restaurant development and (3) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021. These increases were partially offset by (1) the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021 and (2) Company-operated sales during the 53rd week of 2020 of approximately $13.7 million. Company-operated same-restaurant sales increased due to (1) higher average check and (2) an increase in customer count, reflecting the positive impact from the breakfast daypart and the prior year impact of the COVID-19 pandemic. Company-operated same-restaurant sales during 2021 benefited from government stimulus payments to consumers during the first quarter of 2021.

The increase in franchise royalty revenue during 2021 was primarily due to (1) a 9.9% increase in global franchise same-restaurant sales and (2) a net increase in the number of franchise restaurants in operation during 2021 compared to 2020. These increases were partially offset by royalties earned during the 53rd week of 2020 of approximately $7.8 million. Franchise same-restaurant sales increased due to (1) higher average check and (2) an increase in customer count, reflecting the positive impact from the breakfast daypart and the prior year impact of the COVID-19 pandemic. Franchise same-restaurant sales during 2021 benefited from government stimulus payments to consumers during the first quarter of 2021.

The increase in franchise fees during 2021 was primarily due to (1) an increase in fees for providing information technology services to franchisees and (2) the accelerated recognition of franchise agreement revenue as a result of franchisee-to-franchisee restaurant transfers.

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The increase in franchise rental income during 2021 was primarily due to (1) an increase in percent rent, reflecting higher systemwide sales compared with 2020, and (2) the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021. These increases were partially offset by the impact of terminating existing leases where the Company was lessor in connection with the Company’s acquisition of franchise-operated restaurants in Florida during the fourth quarter of 2021.

The Company maintains two national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales of the franchised restaurants. The increase in advertising funds revenue during 2021 was primarily due to (1) an increase in franchise same-restaurant sales in the U.S. and Canada and (2) the prior year abatement of national advertising fund contributions on breakfast sales. These increases were partially offset by revenues earned during the 53rd week of 2020 of approximately $6.4 million.

The decrease in cost of sales, as a percent of sales, during 2021 was primarily due to (1) higher average check, (2) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (3) incremental recognition pay during April and May of 2020. These impacts were partially offset by (1) an increase in restaurant labor rates and (2) higher commodity costs.

The increase in franchise support and other costs during 2021 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees, partially offset by investments made in 2020 to support U.S. franchisees in preparation of the national launch of breakfast in March 2020.

The increase in franchise rental expense during 2021 was primarily due to (1) an increase in percent rent, reflecting higher systemwide sales compared with 2020 and (2) the impact of the sale of 47 Company-operated restaurants in New York to franchisees during the second quarter of 2021.

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The increase in advertising funds expense during 2021 was primarily due to the same factors as described above for “Advertising Funds Revenue.” Advertising funds expense also increased during 2021 due to the Company’s funding of $25.0 million of incremental advertising to support the breakfast daypart, compared with the Company’s funding of $14.6 million in 2020.

The increase in general and administrative expenses during 2021 was primarily due to (1) an increase in incentive compensation accruals and higher share-based compensation, reflecting higher operating performance as compared to plan in 2021, and (2) higher professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning (“ERP”) implementation.

The decrease in depreciation and amortization during 2021 was primarily due to (1) assets becoming fully depreciated and (2) the impact of a prior year change in useful lives for certain asset categories. These decreases were partially offset by an increase in depreciation and amortization for technology investments.

System optimization gains, net during 2021 were primarily comprised of a gain on the sale of 47 Company-operated restaurants in New York. See Note 4 of the Financial Statements and Supplementary Data contained in Item 8 herein for further discussion. System optimization gains, net during 2020 were primarily comprised of gains on the sale of surplus and other properties.

In September 2020, the Company initiated a plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment

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Plan realigned the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. The Operations and Field Realignment Plan also included contract terminations, including the closure of certain field offices. During 2021, the Company recognized costs associated with the Operations and Field Realignment Plan totaling $1.7 million, which primarily included third-party and other costs. During 2020, the Company recognized costs associated with the Operations and Field Realignment Plan totaling $3.8 million, which included severance and related employee costs of $3.1 million and share-based compensation of $0.6 million. The Company does not expect to incur any material additional costs under the Operations and Field Realignment Plan.

In December 2019, the Company’s Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth (the “IT Realignment Plan”). Additionally, in June 2020, the Company made changes to its leadership structure that included the elimination of the Chief Digital Experience Officer position and the creation of a Chief Information Officer position. During 2020, the Company recognized costs associated with the IT Realignment Plan totaling $7.3 million, which included third-party and other costs of $5.2 million, recruitment and relocation costs of $1.3 million and severance and related employee costs of $0.8 million. The Company does not expect to incur any material additional costs under the IT Realignment Plan.

In May 2017, the Company initiated a plan to reduce its general and administrative expenses (the “G&A Realignment Plan”). Additionally, in May 2019, the Company announced changes to its management and operating structure. G&A realignment costs for 2020 were primarily comprised of share-based compensation. The Company does not expect to incur any material additional costs under the G&A Realignment Plan.

As part of the Company’s system optimization initiative, the Company expects to continue to optimize the Wendy’s system through strategic restaurant acquisitions and dispositions, as well as by facilitating Franchise Flips. During 2021, the Company recognized costs associated with its system optimization initiative totaling $6.9 million, which were primarily comprised of the write-off of certain lease assets, lease termination fees and transaction fees associated with the NPC bankruptcy sale process, as well as professional fees and transaction fees associated with the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021. During 2020, the Company recognized costs associated with its system optimization initiative totaling $4.3 million, which primarily included professional fees related to the NPC bankruptcy sale process. The Company expects to recognize a gain of approximately $0.8 million, primarily related to the write-off of certain NPC-related lease liabilities upon final termination of the leases. See Note 3 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information regarding the NPC bankruptcy sale process.

The change in impairment charges during 2021 was primarily driven by the deterioration in operating performance of certain Company-operated restaurants in 2020 as a result of the COVID-19 pandemic.

The increase in other operating income, net during 2021 was primarily due to (1) an increase in the equity in earnings from our TimWen joint venture, which included a gain on the sale of a parcel of land during 2021, and (2) gains on new and modified sales-type leases.

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Interest expense, net decreased during 2021 primarily due to (1) the impact of completing the refinancing of a portion of the Company’s securitized financing facility in the second quarter of 2021 and (2) the impact of the 53rd week in 2020 of approximately $1.9 million.

During the second quarter of 2021, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of repaying the outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes with the proceeds from the issuance of its Series 2021-1 Class A-2 Notes. The loss on the early extinguishment of debt of $17.9 million was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs of $8.3 million.

Other income, net decreased during 2021 primarily due to fluctuations in interest income earned on our cash equivalents.

The increase in the provision for income taxes during 2021 was primarily due to higher income before income taxes in 2021, partially offset by (1) the tax benefit for changes in state deferred income taxes and (2) an increase in the tax benefit from share-based compensation. The 2021 tax benefit for changes in state deferred income taxes was primarily due to a 2021 change in tax law, which resulted in a one-time release of a previously recorded valuation allowance against our deferred tax assets. The decrease in the effective tax rate in 2021 was primarily due to the tax benefit for changes in state deferred income taxes described above and a decrease in the tax effect of our foreign operations.

Segment Information

See Note 26 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information regarding the Company’s segments.

Wendy’s U.S.

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The increase in Wendy’s U.S. revenues during 2021 was primarily due to (1) an increase in systemwide same-restaurant sales, (2) higher franchise fees, reflecting an increase in fees for providing information technology services to franchisees, (3) net new restaurant development and (4) the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021. Same-restaurant sales increased during 2021 primarily due to (1) higher average check and (2) an increase in customer count, reflecting the positive impact from the breakfast daypart and the prior year impact of the COVID-19 pandemic. These increases were partially offset by (1) the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021 and (2) sales and royalty revenue during the 53rd week of 2020 of approximately $13.7 million and $7.0 million, respectively.

The increase in Wendy’s U.S. segment profit during 2021 was primarily due to (1) higher revenues and (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.” These changes were partially offset by (1) higher franchise support and other costs, (2) higher advertising fund expense, reflecting the Company’s funding of $25.0 million of incremental advertising to support the breakfast daypart, and (3) higher general and administrative expenses.

Wendy’s International

The increase in Wendy’s International revenues during 2021 was primarily due to (1) an increase in same-restaurant sales, (2) the opening of Company-operated restaurants in the U.K and (3) higher franchise fees, reflecting an increase in fees for providing information technology services to franchisees. Same-restaurant sales increased during 2021 due to (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (2) higher average check.

The increase in Wendy’s International segment profit during 2021 was primarily due to higher revenues, partially offset by (1) higher general and administrative expenses and (2) higher franchise support and other costs.

Global Real Estate & Development

The increase in Global Real Estate & Development revenues during 2021 was primarily due to (1) higher franchise rental income (see “Franchise Rental Income” above for further information) and (2) the accelerated recognition of franchise agreement revenue as a result of franchisee-to-franchisee restaurant transfers.

The increase in Global Real Estate & Development segment profit during 2021 was primarily due to (1) an increase in the equity in earnings from the TimWen joint venture and (2) gains on new and modified sales-type leases. These increases were partially offset by a decrease in net rental income, reflecting the impact of terminating existing leases where the Company was lessor in connection with the Company’s acquisition of franchise-operated restaurants in Florida during the fourth quarter of 2021.

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Consolidated Outlook for 2022

Sales

We expect sales at our Company-operated restaurants to be favorably impacted primarily by (1) a net increase in the number of Company-operated restaurants, including the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021 and the Company’s continued expansion in the U.K., (2) continued growth of our breakfast daypart, (3) our “Fast Food Done Right” strategy, which includes continuing core menu improvements, product innovation and strategic price increases on our menu items to partially offset commodity and labor inflation pressures, and (4) continued growth of our digital business. We expect these favorable impacts to be partially offset by lapping the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.

Franchise Royalty Revenue and Fees

We expect sales at franchised restaurants to generally benefit from many of the factors described above under “Sales.” In addition, we expect franchise royalty revenue and fees to be favorably impacted by (1) a net increase in the number of franchise restaurants in operation due to net new restaurant development, (2) the sale of 47 Company-operated restaurants in New York during the second quarter of 2021 and (3) the Company’s recently announced plans to launch breakfast in Canada in the second quarter of 2022. We expect these favorable impacts to be partially offset by the Company’s acquisition of 93 franchise-owned restaurants in Florida during the fourth quarter of 2021.

Cost of Sales

We expect cost of sales, as a percent of sales to be negatively impacted by (1) higher restaurant labor rates and (2) an increase in commodity costs. We expect cost of sales, as a percent of sales to be favorably impacted by many of the same factors described above under “Sales,” and to also benefit from productivity initiatives.

Advertising Funds Revenue and Expense

We expect advertising funds expense to exceed advertising funds revenue due to the Company’s plans to fund $16.0 million of incremental advertising in 2022 to continue to drive growth in our breakfast daypart.

General and Administrative

We expect general and administrative expenses to be higher primarily due to increases in (1) IT-related costs, primarily related to our ERP implementation, (2) IT and development headcount investments and (3) travel-related expenses. We expect these increases to be partially offset by lower incentive compensation.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized financing facility. Our principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to stockholders.

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Cash Flows from Operating, Investing and Financing Activities

The table below summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years:

Operating Activities

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 $345.8 million and $284.4 million in 2021 and 2020, respectively. The increase was primarily due to (1) higher net income, adjusted for non-cash expenses, (2) a cash payment of $24.7 million related to the settlement of the financial institutions class action in January 2020, (3) the timing of the collection of royalty receivables and (4) a decrease in payments for incentive compensation for the 2020 fiscal year paid in 2021. These increases were partially offset by (1) the timing of payments for marketing expenses of the national advertising funds, (2) an increase in cash paid for income taxes and (3) cash paid for cloud computing arrangements, primarily related to the Company’s ERP implementation.

Investing Activities

Cash used in investing activities was $154.7 million and $68.3 million in 2021 and 2020, respectively. The change was primarily due to (1) an increase in payments for acquisitions of $118.2 million compared to the prior year, reflecting the impact of the Company’s acquisition of 93 franchise-operated restaurants in Florida during the fourth quarter of 2021, (2) a payment for an investment in equity securities of $10.0 million during 2021 and (3) an increase in capital expenditures of $9.0 million. These changes were partially offset by an increase in proceeds from dispositions of $49.0 million, reflecting the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.

Financing Activities

Cash used in financing activities was $242.7 million and $157.9 million in 2021 and 2020, respectively. The change was primarily due to (1) an increase in repurchases of common stock of $206.4 million and (2) an increase in dividends of $30.0 million. These changes were partially offset by (1) a net increase in cash provided by long-term debt activities of $149.1 million, reflecting the impact of the completion of the Company’s debt refinancing transaction during the second quarter of 2021, and (2) an increase in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $7.7 million.

Material Cash Requirements

Our anticipated cash requirements for 2022, exclusive of operating cash flow requirements, consist principally of:

•capital expenditures of approximately $90.0 million to $100.0 million as discussed below in “Capital Expenditures;”

•quarterly cash dividends aggregating approximately $107.6 million as discussed below in “Dividends;” and

•stock repurchases of up to $100.0 million under our February 2022 authorization as discussed below in “Stock Repurchases.”

Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.

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We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us. As previously announced, the Company is evaluating, subject to market and other conditions, a potential debt raise transaction within its securitized debt facility during 2022. If the Company proceeds with the transaction and the transaction is completed, the Company expects to use the net proceeds from the transaction in accordance with its capital allocation policy, including investments to support the growth of the Wendy’s brand or the return of capital to stockholders through dividends and share repurchases.

Capital Expenditures

In 2021, cash capital expenditures amounted to $78.0 million. In 2022, we expect that cash capital expenditures will amount to approximately $90.0 million to $100.0 million, principally relating to (1) the opening of new Company-operated restaurants and the reimaging of existing Company-operated restaurants, (2) technology investments, including consumer-facing digital technology, (3) restaurant equipment investments, (4) maintenance capital expenditures for Company-operated restaurants and (5) various other capital projects.

In addition to the capital expenditures noted above, the Company expects to spend approximately $30.0 million in 2022 on cloud computing arrangements (“CCA”), primarily related to the Company’s ERP implementation. See Note 1 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information related to our accounting policy for CCA.

Dividends

On March 15, 2021, June 15, 2021, September 15, 2021 and December 15, 2021, the Company paid quarterly cash dividends per share of $.09, $.10, $.12 and $.12, respectively, aggregating $94.8 million. On February 23, 2022, the Company announced a dividend of $0.125 per share to be paid on March 15, 2022 to stockholders of record as of March 7, 2022. If the Company pays regular quarterly cash dividends for the remainder of 2022 at the same rate as declared in the first quarter of 2022, the Company’s total cash requirement for dividends for all of 2022 would be approximately $107.6 million based on the number of shares of its common stock outstanding at February 22, 2022. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any.

Stock Repurchases

In February 2020, our Board of Directors authorized a repurchase program for up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022. The Company resumed share repurchases in August 2020. In addition, in May 2021, August 2021 and November 2021 the Board of Directors approved increases of $50.0 million, $70.0 million and $80.0 million, respectively, to the February 2020 authorization, resulting in an aggregate authorization of $300.0 million 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 Company’s existing share repurchase program. Under the 2021 ASR Agreement, the Company paid the financial institution an initial purchase price of $125.0 million in cash and received an initial delivery of 4.9 million shares of common stock, representing an estimated 85% of the total shares expected to be delivered under the 2021 ASR Agreement. In February 2022, the Company completed the 2021 ASR Agreement and received an additional 0.7 million shares of common stock. 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, 5.6 million shares were delivered under the 2021 ASR Agreement at an average purchase price of $22.22 per share.

In addition to the shares repurchased in connection with the 2021 ASR Agreement, during 2021, the Company repurchased 6.6 million shares with an aggregate purchase price of $142.7 million, excluding commissions of $0.1 million, under the February 2020 repurchase authorization. After taking into consideration these repurchases, with the completion of the 2021 ASR Agreement in February 2022 described above, the Company completed the February 2020 authorization.

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In February 2022, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock through February 28, 2023, when and if market conditions warrant and to the extent legally permissible.

Long-Term Debt, Including Current Portion

As of January 2, 2022, the Company’s long-term debt obligations totaled $2,380.7 million, including $24.3 million payable within 12 months. In addition, the Company is party to a revolving financing facility of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Class A-1 Notes”), which allows for the drawing of up to $300.0 million on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Class A-1 Notes during 2021. See Note 12 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information related to our long-term debt obligations and the timing of expected payments.

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. The Company also leases restaurant, office and transportation equipment. As of January 2, 2022, the Company’s future minimum rental payments for non-cancelable leases were $2,280.6 million, including $148.3 million payable within 12 months. See Note 20 of the Financial Statements and Supplementary Data contained in Item 8 herein for further information related to our finance and operating lease obligations and the timing of expected payments.

Purchase Obligations

The Company’s purchase obligations include payment obligations to a third-party global IT consultant, purchase requirements under a beverage agreement and other obligations related primarily to marketing and information technology. As of January 2, 2022, the Company’s purchase obligations were $210.1 million, including $68.0 million payable within 12 months.

Guarantees and Other Contingencies

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(a)Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees. These leases extend through 2045.

(b)The Company has outstanding letters of credit with various parties. The Company does not expect any material loss to result from these letters of credit because we do not believe performance will be required.

General Inflation, Commodities and Changing Prices

Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during 2021, and we expect this to continue into 2022. 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. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases.

Seasonality

Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. 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.

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Off-Balance Sheet Arrangements

Other than the obligations for guarantees described above in “Guarantees and Other Contingencies,” we do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our financial condition or results of operations.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in applying our critical accounting policies that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Our estimates and assumptions affect, among other things, impairment of goodwill and indefinite-lived intangible assets, impairment of long-lived assets, realizability of deferred tax assets and federal and state income tax uncertainties. We evaluate those estimates and assumptions on an ongoing basis based on historical experience and on various other factors which we believe are reasonable under the circumstances.

We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements:

•Impairment of goodwill and indefinite-lived intangible assets:

Our goodwill totaled $775.3 million as of January 2, 2022, of which $620.9 million, $31.9 million and $122.5 million was allocated to our U.S. Company-operated and franchise restaurants reporting unit, Canada franchise restaurants reporting unit and global real estate and development operations reporting unit, respectively.

We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Our annual impairment test of goodwill may be completed through a qualitative assessment to determine if the fair value of the reporting unit is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment for any reporting units, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test. Under the quantitative test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The fair value of the reporting unit is determined by management and is based on the results of (1) estimates we made regarding the present value of the anticipated cash flows associated with each reporting unit (the “income approach”) and/or (2) the indicated value of the reporting units based on a comparison and correlation of the Company and other similar companies (the “market approach”).

The income approach, which considers factors unique to each of our reporting units and related long range plans that may not be comparable to other companies and that are not yet publicly available, is dependent on several critical management assumptions. These assumptions include estimates of future sales growth, operating profit, income tax rates, terminal value growth rates, capital expenditures and the weighted average cost of capital (discount rate). Anticipated cash flows used under the income approach are developed every fourth quarter in conjunction with our annual budgeting process and also incorporate amounts and timing of future cash flows based on our long range plan.

The discount rates used in the income approach are an estimate of the rate of return that a market participant would expect of each reporting unit. To select an appropriate rate for discounting the future earnings stream, a review is made of short-term interest rate yields of long-term corporate and government bonds, as well as the typical capital structure of companies in the industry. The discount rates used for each reporting unit may vary depending on the risk inherent in the cash flow projections, as well as the risk level that would be perceived by a market participant. A terminal value is included at the end of the projection period used in our discounted cash flow analysis to reflect the remaining value that each reporting unit is expected to generate. The terminal value represents the present value in the last year of the projection period of all subsequent cash flows into perpetuity. The terminal value growth rate is a key assumption used in determining the terminal value as it represents the annual growth of all subsequent cash flows into perpetuity.

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Under the market approach, we apply the guideline company method in estimating fair value. The guideline company method makes use of market price data of corporations whose stock is actively traded in a public market. The corporations we select as guideline companies are engaged in a similar line of business or are subject to similar financial and business risks, including the opportunity for growth. The guideline company method of the market approach provides an indication of value by relating the equity or invested capital (debt plus equity) of guideline companies to various measures of their earnings and cash flow, then applying such multiples to the business being valued. The result of applying the guideline company approach is adjusted based on the incremental value associated with a controlling interest in the business. This “control premium” represents the amount a new controlling stockholder would pay for the benefits resulting from synergies and other potential benefits derived from controlling the enterprise.

For the annual goodwill impairment test in the fourth quarter of 2021, we elected to perform a qualitative assessment for the U.S. Company-operated and franchise restaurants and the Canada franchise restaurants, and we performed a quantitative goodwill impairment test for the global real estate and development operations. The qualitative assessment indicated the fair value of our U.S. Company-operated and franchise restaurants and our Canada franchise restaurants reporting units was more likely than not greater than the carrying amount. Our quantitative goodwill impairment test for our global real estate and development operations indicated that there had been no impairment and the fair value of this reporting unit of $1,586.0 million was approximately 33% in excess of its carrying value.

Our indefinite-lived intangible assets represent trademarks and totaled $903.0 million as of January 2, 2022. We test indefinite-lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired. Our annual impairment test may be completed through a qualitative assessment to determine if the fair value of the indefinite-lived intangible assets is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, we test for impairment using a quantitative process. Our quantitative process includes comparing the carrying value to the fair value of our indefinite-lived intangible assets, with any excess recognized as an impairment loss. Our critical estimates in the determination of the fair value of our indefinite-lived intangible assets include the anticipated future revenues of Company-operated and franchised restaurants and the resulting cash flows.

For the annual impairment test of our indefinite-lived intangible assets in the fourth quarter of 2021, we elected to perform a qualitative assessment. The qualitative assessment indicated the fair value of our indefinite-lived intangible assets was more likely than not greater than the carrying amount.

The estimated fair values of our goodwill reporting units and indefinite-lived intangible assets are subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we use, we may be required to recognize impairment charges in future years.

•Impairment of long-lived assets:

As of January 2, 2022, the total net carrying value of our long-lived tangible and definite-lived intangible assets was $2,341.6 million. Our long-lived assets include (1) properties and related definite-lived intangible assets (e.g., favorable leases) that are leased and/or subleased to franchisees, (2) Company-operated restaurant assets and related definite-lived intangible assets, which include reacquired rights under franchise agreements, and (3) finance and operating lease assets.

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess the recoverability of our long-lived assets by comparing the carrying amount of the asset group to future undiscounted net cash flows expected to be generated through leases and/or subleases or by our individual Company-operated restaurants. If the carrying amount of the long-lived asset group is not recoverable on an undiscounted cash flow basis, then impairment is recognized to the extent that the carrying amount exceeds its fair value and is included in “Impairment of long-lived assets.” Our critical estimates in this review process include the anticipated future cash flows from leases and/or subleases or individual Company-operated restaurants, which is used in assessing the recoverability of the respective long-lived assets. Our impairment losses principally reflect impairment charges resulting from the deterioration in operating performance of certain Company-operated restaurants.

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Our fair value estimates are subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we used, we may be required to recognize additional impairment charges in future years.

•Our ability to realize deferred tax assets:

We account for income taxes under the asset and liability method. A deferred tax asset or liability is recognized whenever there are (1) future tax effects from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and (2) operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled.

Deferred tax assets are recognized to the extent the Company believes these assets will more likely than not be realized. In evaluating the realizability of deferred tax assets, the Company considers all available positive and negative evidence, including the interaction and the timing of future reversals of existing temporary differences, recent operating results, tax-planning strategies and projected future taxable income. In projecting future taxable income, we begin with historical results from continuing operations and incorporate assumptions including future operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment and are consistent with the plans and estimates we are using to manage our underlying business. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income.

When considered necessary, a valuation allowance is recorded to reduce the carrying amount of the deferred tax assets to their anticipated realizable value. Our evaluation of the realizability of our deferred tax assets is subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions, the competitive environment and the effect of future tax legislation. Should future taxable income vary from projected taxable income, we may be required to adjust our valuation allowance in future years.

Net operating loss and credit carryforwards are subject to various limitations and carryforward periods. As of January 2, 2022, we have foreign tax credits of $19.5 million and state tax credits of $0.6 million, both of which will begin to expire in 2022. In addition, as of January 2, 2022, we have deferred tax assets for foreign net operating loss carryforwards of $1.4 million, as well as state and local net operating loss carryforwards of $39.1 million that will begin to expire in 2022. We believe it is more likely than not that the benefit from certain net operating loss carryforwards and tax credits will not be realized. In recognition of this risk, we have provided a valuation allowance of $38.3 million.

•Income tax uncertainties:

We measure income tax uncertainties in accordance with a two-step process of evaluating a tax position. We first determine if it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is then measured, for purposes of financial statement recognition, as the largest amount that has a greater than 50% likelihood of being realized upon effective settlement. We have unrecognized tax benefits of $18.8 million, which if resolved favorably would reduce our tax expense by $14.9 million as of January 2, 2022.

We accrue interest related to uncertain tax positions in “Interest expense, net.” As of January 2, 2022, we had $1.0 million accrued for interest.

The Company participates in the Internal Revenue Service (the “IRS”) Compliance Assurance Process (“CAP”). As part of CAP, tax years are examined on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. As such, our U.S. federal income tax returns for fiscal years 2009 through 2019 have been settled. The statute of limitations for the Company’s state tax returns vary, but generally the Company’s state income tax returns from its 2018 fiscal year forward remain subject to examination. We believe that adequate provisions have been made for any liabilities, including interest and penalties that may result from the completion of these examinations.

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New Accounting Standards

See Note 1 of the Financial Statements and Supplementary Data contained in Item 8 herein for a summary of new or amended accounting standards applicable to us.