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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-36556

EL POLLO LOCO HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

20-3563182

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

3535 Harbor Blvd., Suite 100, Costa Mesa, California

92626

(Address of principal executive offices)

(Zip Code)

(714) 599-5000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

LOCO

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No

As of October 28, 2022, there were 37,049,182 shares of the issuer’s common stock outstanding.

Table of Contents

    

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2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands, except share data)

    

September 28,

    

December 29,

    

2022

    

2021

Assets

  

Current assets:

  

  

Cash and cash equivalents

$

19,275

$

30,046

Accounts and other receivables, net

 

14,946

 

13,407

Inventories

 

2,209

 

2,318

Prepaid expenses and other current assets

 

2,977

 

3,732

Income tax receivable

 

570

 

Total current assets

 

39,977

 

49,503

Property and equipment, net

 

78,107

 

75,668

Property and equipment held under finance lease, net

 

1,565

 

1,635

Property and equipment held under operating leases, net ("ROU asset")

 

167,985

 

171,981

Goodwill

 

248,674

 

248,674

Trademarks

 

61,888

 

61,888

Deferred tax assets

 

1,253

 

2,245

Other assets

 

2,920

 

2,192

Total assets

$

602,369

$

613,786

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Current portion of obligations under finance leases

$

109

$

143

Current portion of obligations under operating leases

 

20,063

 

19,959

Accounts payable

 

12,486

 

10,626

Accrued salaries and vacation

 

6,975

 

11,539

Accrued insurance

 

11,286

 

11,193

Accrued income taxes payable

 

 

889

Current portion of income tax receivable agreement payable

 

417

 

437

Other accrued expenses and current liabilities

 

18,930

 

19,796

Total current liabilities

 

70,266

 

74,582

Revolver loan

 

20,000

 

40,000

Obligations under finance leases, net of current portion

 

1,653

 

1,712

Obligations under operating leases, net of current portion

 

167,562

 

171,651

Deferred taxes

 

6,739

 

5,464

Income tax receivable agreement payable, net of current portion

 

776

 

1,101

Other noncurrent liabilities

 

5,862

 

8,653

Total liabilities

 

272,858

 

303,163

Commitments and contingencies (Note 7)

 

  

 

  

Stockholders’ equity

 

  

 

  

Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized; 37,053,405 and 36,601,648 shares issued and outstanding as September 28, 2022 and December 29, 2021, respectively

 

370

 

365

Additional paid-in-capital

 

347,079

 

342,941

Accumulated deficit

 

(18,128)

 

(32,393)

Accumulated other comprehensive income (loss)

 

190

 

(290)

Total stockholders’ equity

 

329,511

 

310,623

Total liabilities and stockholders’ equity

$

602,369

$

613,786

See notes to condensed consolidated financial statements (unaudited).

3

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Amounts in thousands, except share data)

    

Thirteen Weeks Ended

    

Thirty-Nine Weeks Ended

    

September 28, 2022

September 29, 2021

September 28, 2022

September 29, 2021

Revenue

 

  

 

  

 

  

 

  

 

Company-operated restaurant revenue

$

103,174

$

99,986

$

303,585

$

301,117

Franchise revenue

 

9,543

 

8,918

 

28,862

 

24,919

Franchise advertising fee revenue

 

7,161

 

6,796

 

21,590

 

19,370

Total revenue

 

119,878

 

115,700

 

354,037

 

345,406

Cost of operations

 

  

 

  

 

  

 

  

Food and paper cost

 

30,163

 

26,698

 

89,586

 

78,971

Labor and related expenses

 

33,279

 

27,802

 

98,966

 

90,060

Occupancy and other operating expenses

 

26,920

 

25,108

 

76,597

 

74,288

Company restaurant expenses

 

90,362

 

79,608

 

265,149

 

243,319

General and administrative expenses

 

9,855

 

9,357

 

29,488

 

30,354

Franchise expenses

 

9,027

 

8,545

 

27,315

 

24,457

Depreciation and amortization

 

3,530

 

3,685

 

10,745

 

11,540

Loss on disposal of assets

 

21

 

83

 

129

 

194

Loss on disposition of restaurants

10

1,534

Impairment and closed-store reserves

 

219

 

167

 

598

 

1,091

Total expenses

 

113,014

 

101,455

 

333,424

 

312,489

Income from operations

 

6,864

 

14,245

 

20,613

 

32,917

Interest expense, net

 

108

 

449

 

957

 

1,399

Income tax receivable agreement income

 

(29)

 

(19)

 

(345)

 

(69)

Income before provision for income taxes

 

6,785

 

13,815

 

20,001

 

31,587

Provision for income taxes

 

1,776

 

3,654

 

5,736

 

8,644

Net income

$

5,009

$

10,161

$

14,265

$

22,943

Net income per share

 

  

 

  

 

Basic

$

0.14

$

0.28

$

0.39

$

0.64

Diluted

$

0.14

$

0.28

$

0.39

$

0.63

Weighted-average shares used in computing net income per share

 

  

 

  

 

  

 

  

Basic

 

36,402,899

 

36,067,754

 

36,329,938

 

35,930,246

Diluted

 

36,507,050

 

36,525,424

 

36,491,624

 

36,457,110

See notes to condensed consolidated financial statements (unaudited).

4

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Amounts in thousands)

    

Thirteen Weeks Ended

    

Thirty-Nine Weeks Ended

    

September 28, 2022

September 29, 2021

September 28, 2022

    

September 29, 2021

Net income

$

5,009

$

10,161

$

14,265

$

22,943

Other comprehensive income (loss)

 

  

 

  

 

 

Changes in derivative instruments

 

  

 

  

 

 

Unrealized net gains (losses) arising during the period from interest rate swap

 

43

 

(32)

 

974

 

44

Reclassifications of (gains) losses into net income

 

(369)

 

133

 

(197)

 

367

Income tax expense

 

 

(27)

 

(297)

 

(111)

Other comprehensive (loss) income, net of taxes

 

(326)

 

74

480

 

300

Comprehensive income

$

4,683

$

10,235

$

14,745

$

23,243

See notes to condensed consolidated financial statements (unaudited).

5

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Amounts in thousands, except share data)

Thirteen Weeks Ended September 28, 2022

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income

    

Equity

Balance, June 29, 2022

37,002,513

$

369

$

346,095

$

(23,137)

$

516

$

323,843

Stock-based compensation

 

 

1,009

 

 

 

1,009

Issuance of common stock related to restricted shares

53,476

1

(1)

Shares repurchased for employee tax withholdings

(2,584)

(24)

(24)

Other comprehensive income, net of tax

 

 

 

 

(326)

 

(326)

Net income

 

 

 

5,009

 

 

5,009

Balance, September 28, 2022

37,053,405

$

370

$

347,079

$

(18,128)

$

190

$

329,511

Thirteen Weeks Ended September 29, 2021

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Loss

    

Equity

Balance, June 30, 2021

36,637,761

$

367

$

341,358

$

(48,732)

$

(607)

292,386

Stock-based compensation

 

 

1,042

 

 

 

1,042

Issuance of common stock upon exercise of stock options, net

41,216

 

 

300

 

 

 

300

Shares repurchased for employee tax withholdings

(2,446)

 

 

(45)

 

 

 

(45)

Forfeiture of common stock related to restricted shares

(5,084)

(1)

1

Other comprehensive income, net of tax

74

74

Net income

 

 

 

10,161

 

 

10,161

Balance, September 29, 2021

36,671,447

$

366

$

342,656

$

(38,571)

$

(533)

$

303,918

6

Thirty-Nine Weeks Ended September 28, 2022

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Equity

Balance, December 29, 2021

36,601,648

$

365

$

342,941

$

(32,393)

$

(290)

$

310,623

Stock-based compensation

 

 

2,806

 

 

 

2,806

Issuance of common stock related to restricted shares

352,114

4

(4)

Issuance of common stock upon exercise of stock options, net

150,475

1

1,579

1,580

Shares repurchased for employee tax withholdings

(22,901)

(243)

(243)

Forfeiture of common stock related to restricted shares

(27,931)

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

480

 

480

Net income

 

 

 

14,265

 

 

14,265

Balance, September 28, 2022

37,053,405

$

370

$

347,079

$

(18,128)

$

190

$

329,511

Thirty-Nine Weeks Ended September 29, 2021

    

    

    

    

    

Accumulated

    

  

    

    

    

Additional

    

    

Other

    

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Equity

Balance, December 30, 2020

36,423,505

$

364

$

339,561

$

(61,514)

$

(833)

$

277,578

Stock-based compensation

 

 

2,936

 

 

 

2,936

Issuance of common stock related to restricted shares

206,098

 

2

 

(2)

 

 

 

Issuance of common stock upon exercise of stock options, net

132,760

 

1

 

865

 

 

 

866

Shares repurchased for employee tax withholdings

(40,384)

 

 

(705)

 

 

 

(705)

Forfeiture of common stock related to restricted shares

(50,532)

(1)

1

Other comprehensive income, net of tax

300

300

Net income

 

 

 

22,943

 

 

22,943

Balance, September 29, 2021

36,671,447

$

366

$

342,656

$

(38,571)

$

(533)

$

303,918

See notes to condensed consolidated financial statements (unaudited).

7

EL POLLO LOCO HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands)

    

Thirty-Nine Weeks Ended

    

    

September 28, 2022

September 29, 2021

    

Cash flows from operating activities:

  

  

Net income

$

14,265

$

22,943

Adjustments to reconcile net income to net cash flows provided by provided by operating activities:

 

 

Depreciation and amortization

 

10,745

 

11,540

Stock-based compensation expense

 

2,806

 

2,936

Income tax receivable agreement income

 

(345)

 

(69)

Loss on disposition of restaurants

 

 

1,534

Loss on disposal of assets

 

129

 

194

Impairment of property and equipment

 

392

 

701

Amortization of deferred financing costs

 

292

 

188

Deferred income taxes, net

 

2,351

 

2,026

Changes in operating assets and liabilities:

 

 

Accounts and other receivables

 

(1,539)

 

(1,547)

Inventories

 

108

 

(27)

Prepaid expenses and other current assets

 

755

 

825

Income taxes receivable

 

(1,459)

 

3,616

Other assets

 

(150)

 

289

Accounts payable

 

1,285

 

(507)

Accrued salaries and vacation

 

(4,564)

 

(2,116)

Accrued insurance

 

93

 

615

Other accrued expenses and liabilities

 

(3,257)

 

(809)

Net cash flows provided by operating activities

 

21,907

 

42,332

Cash flows from investing activities:

 

Proceeds from disposition of restaurants

 

 

4,556

Purchase of property and equipment

 

(13,022)

 

(12,699)

Net cash flows used in investing activities

 

(13,022)

 

(8,143)

Cash flows from financing activities:

 

  

 

  

Payments on revolver and swingline loan

 

(20,000)

 

(22,800)

Minimum tax withholdings related to net share settlements

 

(243)

 

(705)

Proceeds from issuance of common stock upon exercise of stock options, net of expenses

1,580

866

Payment of obligations under finance leases

 

(124)

 

(100)

Deferred financing costs for revolver loan

 

(869)

 

Net cash flows used in financing activities

 

(19,656)

 

(22,739)

Increase (decrease) in cash and cash equivalents

 

(10,771)

 

11,450

Cash and cash equivalents, beginning of period

 

30,046

 

13,219

Cash and cash equivalents, end of period

$

19,275

$

24,669

    

Thirty-Nine Weeks Ended

    

September 28, 2022

September 29, 2021

Supplemental cash flow information

 

  

 

  

 

Cash paid during the period for interest

$

819

$

828

Cash paid during the period for income taxes

$

5,100

$

4,088

Unpaid purchases of property and equipment

$

3,030

$

2,259

See notes to condensed consolidated financial statements (unaudited).

8

EL POLLO LOCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively referred to herein as the “Company.” The Company’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses, and operates quick-service restaurants under the name El Pollo Loco® and operates under one operating segment. At September 28, 2022, the Company operated 190 and franchised 297 El Pollo Loco restaurants.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position and results of operations and cash flows for the periods presented. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The condensed consolidated financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 29, 2021.

The Company uses a 52- or 53-week fiscal year ending on the last Wednesday of the calendar year. In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations, and the fourth quarter includes 14 weeks of operations. Every six or seven years, a 53-week fiscal year occurs. Fiscal 2022 and 2021 are both 52-week years, ending on December 28, 2022 and December 29, 2021, respectively. Revenues, expenses, and other financial and operational figures may be elevated in a 53-week year.

Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 2022 Revolver (as defined below) on a full and unconditional basis (see Note 4, “Long-Term Debt”), and Intermediate has no subsidiaries other than EPL. EPL is a separate and distinct legal entity and has no obligation to make funds available to Intermediate. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively, subject to the terms of the 2022 Revolver.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and revenue and expenses during the periods reported. Actual results could materially differ from those estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, insurance reserves, lease accounting matters, stock-based compensation, income tax receivable agreement liability, contingent liabilities and income tax valuation allowances.

9

COVID-19

The Company may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. During both thirteen weeks ended September 28, 2022 and September 29, 2021, respectively, the Company incurred $0.5 million in COVID-19 related expenses, primarily due to leaves of absence. During the thirty-nine weeks ended September 28, 2022 and September 29, 2021, respectively, the Company incurred $3.1 million and $3.5 million, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. While all of the Company’s restaurants had dining rooms open as of September 28, 2022, the Company continues to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs. Further, the Company continues to experience inflationary pressures, which resulted in increased commodity prices and impacted the Company’s business and results of operations during the thirteen and thirty-nine weeks ended September 28, 2022. The Company expects these pressures to continue during the remainder of fiscal 2022.

Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate direct and indirect impact that the COVID-19 pandemic and related economic effects will have on the Company’s condensed consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on the Company’s condensed consolidated financial condition, liquidity, and future results of operations is uncertain.

Cash and Cash Equivalents

The Company considers all liquid instruments with an original maturity of three months or less at the date of purchase to be cash equivalents.

Liquidity

The Company’s principal liquidity and capital requirements are new restaurants, existing restaurant capital investments (remodels and maintenance), interest payments on its debt, lease obligations and working capital and general corporate needs. At September 28, 2022, the Company’s total debt was $20.0 million. The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures depends on available cash and its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond the Company’s control. Based on current operations, the Company believes that its cash flow from operations and available cash of $19.3 million at September 28, 2022 will be adequate to meet the Company’s liquidity needs for the next twelve months from the date of filing of these condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

None.

Subsequent Events

On October 11, 2022, the Company announced that its Board of Directors declared a special dividend of $1.50 per share on the common stock, par value $0.01 per share, of the Company (the “Common Stock”). The special dividend is payable on November 9, 2022, to stockholders of record, including holders of restricted stock and restricted stock units, at the close of business on October 24, 2022.

In addition, on October 11, 2022, the Company announced that its Board of Directors approved a share repurchase program under which the Company is authorized to repurchase up to $20.0 million of shares of the Company’s Common Stock. The repurchase program will terminate on March 28, 2024, may be modified, suspended or discontinued at any time, and does not obligate the Company to acquire any particular number of shares.

Lastly, on November 3, 2022, the Company borrowed $46.0 million on its 2022 Revolver and outstanding borrowings as of November 3, 2022 were $66.0 million. After payment of the special dividend, the Company is expected to have approximately $10.0 million in cash on hand.

10

Concentration of Risk

Cash and cash equivalents are maintained at financial institutions and, at times, these balances may exceed federally-insured limits. The Company has never experienced any losses related to these balances.

The Company had one supplier to whom amounts due totaled 25.2% and 26.1% of the Company’s accounts payable at September 28, 2022 and December 29, 2021, respectively. Purchases from the Company’s largest supplier totaled 28.4% and 28.5% of total expenses for the thirteen and thirty-nine weeks ended September 28, 2022 and 27.0% and 28.1% of total expenses for the thirteen and thirty-nine weeks ended September 29, 2021.

Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 71.9% and 71.2% of total revenue for the thirteen and thirty-nine weeks ended September 28, 2022 and 71.6% and 70.8% for the thirteen and thirty-nine weeks ended September 29, 2021, respectively.

Goodwill and Indefinite Lived Intangible Assets

The Company’s indefinite-lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquired in business combinations accounted for under the purchase method. The Company does not amortize its goodwill and indefinite-lived intangible assets. Goodwill resulted from the acquisition of certain franchise locations.

Upon the sale or closure of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained.

The Company performs an annual impairment test for goodwill during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise.

The Company reviews goodwill for impairment utilizing either a qualitative assessment or a fair value test by comparing the fair value of a reporting unit with its carrying amount. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs the fair value test, the Company will compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.

The Company performs an annual impairment test for indefinite-lived intangible assets during the fourth fiscal quarter of each year, or more frequently if impairment indicators arise. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with its carrying amount. The excess of the carrying amount of an intangible asset over its fair value is recognized as an impairment loss.

The assumptions used in the estimate of fair value are generally consistent with the past performance of the Company’s reporting segment and are also consistent with the projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and competitive conditions.

The Company determined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen and thirty-nine weeks ended September 28, 2022. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen and thirty-nine weeks ended September 28, 2022.

11

Fair Value Measurements

Fair value is 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. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1: Quoted prices for identical instruments in active markets.
Level 2: Observable prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
Level 3: Unobservable inputs used when little or no market data is available.

During fiscal 2019, the Company entered into an interest rate swap, which is required to be measured at fair value on a recurring basis. The fair value was determined based on Level 2 inputs, which include valuation models, as reported by the Company’s counterparty. These valuation models use a discounted cash flow analysis on the cash flows of the derivative based on the terms of the contract and the forward yield curves adjusted for the Company’s credit risk. The key inputs for the valuation models are observable market prices, discount rates, and forward yield curves. In connection with the Company’s entry into the 2022 Credit Agreement (as defined below), it terminated the interest rate swap in July 2022 previously used to hedge interest rate risk. In settlement of this swap, the Company received approximately $0.6 million. See Note 4, “Long-Term Debt” for further discussion regarding the Company’s interest rate swap and its termination.

The following table presents fair value for the interest rate swap at December 29, 2021 (in thousands):

Fair Value Measurements Using

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

    

Other non-current liabilities - Interest rate swap

$

396

$

$

396

$

Certain assets and liabilities are measured at fair value on a nonrecurring basis. In other words, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances (e.g., when there is evidence of impairment).

The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen and thirty-nine weeks ended September 28, 2022, reflecting certain property and equipment assets and right-of-use (“ROU”) assets for which an impairment loss was recognized during the corresponding periods, as discussed under Note 2, “Property and Equipment” and immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):

Thirteen Weeks

Thirty-Nine Weeks

Fair Value Measurements at September 28, 2022 Using

Ended September 28, 2022

Ended September 28, 2022

    

Total

    

Level 1

    

Level 2

    

Level 3

Impairment Losses

Impairment Losses

Certain property and equipment, net

$

$

$

$

 

$

100

$

353

Certain ROU assets, net

$

332

$

$

$

332

$

39

$

39

12

The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen and thirty-nine weeks ended September 29, 2021, reflecting certain property and equipment assets and ROU assets for which an impairment loss was recognized during the corresponding periods, as discussed immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):