UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(
(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 |
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. ☒
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). ☒
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 | ☐ | ☒ | |
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).
As of April 29, 2022, there were
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
| March 30, |
| December 29, | |||
| 2022 |
| 2021 | |||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts and other receivables, net |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Property and equipment held under finance lease, net |
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Property and equipment held under operating leases, net ("ROU asset") |
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Goodwill |
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Trademarks |
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Deferred tax assets |
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Other assets |
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Total assets | $ | | $ | | ||
Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Current portion of obligations under finance leases | $ | | $ | | ||
Current portion of obligations under operating leases |
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Accounts payable |
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Accrued salaries and vacation |
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Accrued insurance |
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Accrued income taxes payable |
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Current portion of income tax receivable agreement payable |
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Other accrued expenses and current liabilities |
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Total current liabilities |
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Revolver loan |
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Obligations under finance leases, net of current portion |
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Obligations under operating leases, net of current portion |
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Deferred taxes |
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Income tax receivable agreement payable, net of current portion |
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Other noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies (Note 7) |
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Stockholders’ equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in-capital |
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Accumulated deficit |
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Accumulated other comprehensive income (loss) |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
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 |
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March 30, 2022 | March 31, 2021 | ||||||
Revenue |
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Company-operated restaurant revenue | $ | | $ | | |||
Franchise revenue |
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Franchise advertising fee revenue |
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Total revenue |
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Cost of operations |
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Food and paper cost |
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Labor and related expenses |
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Occupancy and other operating expenses |
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Company restaurant expenses |
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General and administrative expenses |
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Franchise expenses |
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Depreciation and amortization |
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Loss on disposal of assets |
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Impairment and closed-store reserves |
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Total expenses |
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Income from operations |
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Interest expense, net |
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Income tax receivable agreement income |
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Income before provision for income taxes |
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Provision for income taxes |
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Net income | $ | | $ | | |||
Net income per share |
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Basic | $ | | $ | | |||
Diluted | $ | | $ | | |||
Weighted-average shares used in computing net income per share |
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Basic |
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Diluted |
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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 |
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March 30, 2022 |
| March 31, 2021 | ||||
Net income | $ | | $ | | ||
Other comprehensive income (loss) |
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Changes in derivative instruments |
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Unrealized net gains arising during the period from interest rate swap |
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Reclassifications of losses into net income |
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Income tax expense |
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Other comprehensive income, net of taxes | |
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Comprehensive income | $ | | $ | | ||
See notes to condensed consolidated financial statements (unaudited).
5
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Thirteen Weeks Ended March 30, 2022 | |||||||||||||||||
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Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| (Loss) Income |
| Equity | ||||||
Balance, December 29, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation | — |
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Issuance of common stock upon exercise of stock options | | | | — | — | | |||||||||||
Other comprehensive income, net of tax | — |
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Net income | — |
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Balance, March 30, 2022 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Thirteen Weeks Ended March 31, 2021 | |||||||||||||||||
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Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||
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| Amount |
| Capital |
| Deficit |
| Income (Loss) |
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Balance, December 30, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation | — |
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Issuance of common stock upon exercise of stock options | |
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Forfeiture of common stock related to restricted shares | ( | — | — | — | — | — | |||||||||||
Other comprehensive loss, net of tax | — | — | — | — | | | |||||||||||
Net income | — |
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Balance, March 31, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
See notes to condensed consolidated financial statements (unaudited).
6
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
| Thirteen Weeks Ended |
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| March 30, 2022 | March 31, 2021 |
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Cash flows from operating activities: |
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Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash flows (used in) provided by operating activities: |
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Depreciation and amortization |
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Stock-based compensation expense |
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Income tax receivable agreement income |
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Loss on disposal of assets |
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Impairment of property and equipment |
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Amortization of deferred financing costs |
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Deferred income taxes, net |
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Changes in operating assets and liabilities: |
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Accounts and other receivables |
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Inventories |
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Prepaid expenses and other current assets |
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Income taxes payable |
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Other assets |
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Accounts payable |
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Accrued salaries and vacation |
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Accrued insurance |
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Other accrued expenses and liabilities |
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Net cash flows (used in) provided by operating activities |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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Net cash flows used in investing activities |
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Cash flows from financing activities: |
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Payments on revolver and swingline loan |
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Proceeds from issuance of common stock upon exercise of stock options, net of expenses | | | |||||
Payment of obligations under finance leases |
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Net cash flows provided by (used in) financing activities |
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Decrease in cash and cash equivalents |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | $ | | $ | | |||
| Thirteen Weeks Ended |
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March 30, 2022 | March 31, 2021 | ||||||
Supplemental cash flow information |
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Cash paid during the period for interest | $ | | $ | | |||
Cash paid during the period for income taxes | $ | | $ | — | |||
Unpaid purchases of property and equipment | $ | | $ | | |||
See notes to condensed consolidated financial statements (unaudited).
7
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
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 2018 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 2018 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.
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COVID-19
While all of the Company’s restaurants had dining rooms open as of March 30, 2022, the Company continues to experience staffing challenges, which resulted in reduced operating hours and service channels at some of the Company restaurants and resulted in higher wage inflation, overtime costs and other labor related costs. Further, the Company experienced inflationary pressures due to supply chain disruptions that resulted in increased commodity prices and impacted the Company’s business and results of operations during the thirteen weeks ended March 30, 2022. The Company expects these pressures to continue during the rest of fiscal 2022. During the thirteen weeks ended March 30, 2022, the Company incurred $
Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic 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 March 30, 2022, the Company’s total debt was $
Recently Adopted Accounting Pronouncements
None.
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
Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately
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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 weeks ended March 30, 2022. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 30, 2022. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.
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
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key inputs for the valuation models are observable market prices, discount rates, and forward yield curves. See Note 4, “Long-Term Debt” for further discussion regarding the Company’s interest rate swap.
The following table presents fair value for the interest rate swap at March 30, 2022 (in thousands):
Fair Value Measurements Using | |||||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 |
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Other assets - Interest rate swap | $ | | $ | | $ | | $ | | |||||
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 |
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Other non-current liabilities - Interest rate swap | $ | | $ | — | $ | | $ | — | |||||
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 weeks ended March 30, 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):
| Total |
| Level 1 |
| Level 2 |
| Level 3 | Impairment Losses | |||||||
Certain property and equipment, net | $ | | $ | | $ | | $ | |
| $ | | ||||
The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen weeks ended March 31, 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):
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Impairment Losses | ||||||
Certain property and equipment, net | $ | | $ | | $ | | $ | |
| $ | | ||||
Certain ROU assets, net | $ | | $ | | $ | | $ | | $ | | |||||
Impairment of Long-Lived Assets and ROU Assets
The Company reviews its long-lived and ROU assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable. The Company considers a triggering event related to long-lived assets or ROU assets in a net asset position to have occurred related to a specific restaurant if the restaurant’s average unit volume for the last twelve months is less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. Additionally, the Company considers a triggering event related to ROU assets to have occurred related to a specific lease if the location has been subleased and future estimated sublease income is less than lease payments under the head lease. If the Company concludes that the carrying value of certain long-lived and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment loss is recorded to reduce the long-lived or ROU assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in the Company’s impairment review analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods, and such charges could be material. The Company determined that triggering events occurred for certain restaurants during the thirteen weeks ended March 30, 2022 that required an impairment review of certain of the Company’s long-lived and ROU assets. Based on the results of the analysis, the Company recorded non-cash impairment charges of $
11
The Company recorded a non-cash impairment charge of $
Closed-Store Reserves
When a restaurant is closed, the Company will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and common area maintenance (“CAM”) payments relating to closed restaurants are included within closed-store expense. During the thirteen weeks ended March 30, 2022, the Company recognized less than $
Derivative Financial Instruments
The Company uses an interest rate swap, a derivative instrument, to hedge interest rate risk and not for trading purposes. The derivative contract is entered into with a financial institution.
The Company records the derivative instrument on its condensed consolidated balance sheets at fair value. The derivative instrument qualifies as a hedging instrument in a qualifying cash flow hedge relationship, and the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive (loss) income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For any derivative instruments not designated as hedging instruments, the gain or loss will be recognized in earnings immediately. If a derivative previously designated as a hedge is terminated, or no longer meets the qualifications for hedge accounting, any balances in AOCI will be reclassified to earnings immediately.
As a result of the use of an interest rate swap, the Company is exposed to risk that the counterparty will fail to meet its contractual obligations. To mitigate the counterparty credit risk, the Company will only enter into contracts with major financial institutions, based upon their credit ratings and other factors, and will continue to assess the creditworthiness of the counterparty. As of March 30, 2022, the counterparty to the Company’s interest rate swap has performed in accordance with its contractual obligation.
Income Taxes
The provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If, after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by charging to tax expense a reserve for the portion of deferred tax assets which are not expected to be realized.
The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits
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involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect the Company’s condensed consolidated financial position, results of operations, and cash flows.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company had
On July 30, 2014, the Company entered into the income tax receivable agreement (the “TRA”), which calls for the Company to pay to its pre-initial public offering (“IPO”) stockholders
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law as a stimulus package, and contained several tax provisions, including a correction of a previous drafting error related to quality improvement property and immediate refundability of all remaining alternative minimum tax credits. The new provisions did not have a material impact on the Company’s condensed consolidated financial statements.
The CARES Act also provides for the deferral of employer Social Security taxes that are otherwise owed for wage payment and the creation of refundable employee retention credits. The total amount deferred as of December 30, 2020 was $
2. PROPERTY AND EQUIPMENT
The costs and related accumulated depreciation and amortization of major classes of property and equipment are as follows (in thousands):
| March 30, 2022 |
| December 29, 2021 | |||
Land | $ | | $ | | ||
Buildings and improvements |
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Other property and equipment |
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Construction in progress |
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Less: accumulated depreciation and amortization |
| ( |
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$ | | $ | | |||
Depreciation expense was $
Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $
During the thirteen weeks ended March 31, 2021, the Company recorded non-cash impairment charges of $
13
3. STOCK-BASED COMPENSATION
At March 30, 2022, options to purchase
Weighted-Average |
| Aggregate | |||||||||
|
| Weighted-Average |
| Contractual Life |
| Intrinsic Value | |||||
Shares | Exercise Price |
| Life (Years) |
| (in thousands) | ||||||
Outstanding - December 29, 2021 |
| | $ | | |||||||
Exercised |
| ( | $ | | |||||||
Outstanding - March 30, 2022 |
| | $ | | $ | | |||||
Vested and expected to vest at March 30, 2022 |
| | $ | | $ | | |||||
Exercisable at March 30, 2022 |
| | $ | | $ | | |||||
At March 30, 2022, the Company had total unrecognized compensation expense of $
A summary of restricted share activity as of March 30, 2022 and changes during the thirteen weeks ended March 30, 2022 is as follows:
|
| Weighted-Average | |||
Shares | Fair Value | ||||
Unvested shares at December 29, 2021 |
| | $ | | |
Unvested shares at March 30, 2022 |
| | $ | | |
At March 30, 2022, the Company had unrecognized compensation expense of $
Total stock-based compensation expense was
4. LONG-TERM DEBT
The Company, as a guarantor, is a party to a credit agreement (the “2018 Credit Agreement”) among EPL, as borrower, Intermediate, as a guarantor, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $
Under the 2018 Revolver, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $
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to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed
Borrowings under the 2018 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus
The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with the financial covenants as of March 30, 2022.
At March 30, 2022, $
Maturities
Interest Rate Swap
During the year ended December 25, 2019, the Company entered into a variable-to-fixed interest rate swap agreement with a notional amount of $
The changes in the fair value of the interest rate swap are not included in earnings, but are included in other comprehensive (loss) income (“OCI”). These changes in fair value are subsequently reclassified into net earnings as a component of interest expense as the hedged interest payments are made on the variable rate borrowings.
For the thirteen weeks ended March 30, 2022, the swap was a highly effective cash flow hedge.
As of March 30, 2022, the estimated net gain included in AOCI related to the Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is $
The following table shows the financial statement line item and amount of the Company’s cash flow hedge accounting on the condensed consolidated balance sheets (in thousands):
March 30, 2022 | December 29, 2021 | |||||||||||
| Notional |
| Fair value |
| Notional |
| Fair value | |||||
Other assets - Interest rate swap | $ | | $ | | — | — | ||||||
Other liabilities - Interest rate swap | $ | — | $ | — | $ | | $ | | ||||
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The following table summarizes the effect of the Company’s cash flow hedge accounting on the condensed consolidated statements of income (in thousands):
| March 30, 2022 |
| March 31, 2021 | ||||
Interest expense on hedged portion of debt | $ | | $ | | |||
Interest expense on interest rate swap |
| |
| | |||
Interest expense on debt and derivatives, net | $ | | $ | | |||
The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the thirteen weeks ended March 30, 2022 and March 31, 2021 (in thousands):
Gain (Loss) Reclassified from | |||||||||||||
Net Gain (Loss) Recognized in OCI | AOCI into Interest expense | ||||||||||||
| March 30, 2022 | March 31, 2021 | March 30, 2022 | March 31, 2021 |
| ||||||||
Interest rate swap | $ | | $ | | $ | | $ | | |||||
See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” for information about the fair value of the Company’s derivative asset.
5. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES
Other accrued expenses and current liabilities consist of the following (in thousands):
| March 30, 2022 |
| December 29, 2021 | |||
Accrued sales and property taxes | $ | | $ | | ||
Gift card liability |
| |
| | ||
Loyalty rewards program liability | | | ||||
Accrued advertising | | | ||||
Accrued legal settlements and professional fees |
| |
| | ||
Deferred franchise and development fees |
| |
| | ||
Other |
| |
| | ||
Total other accrued expenses and current liabilities | $ | | $ | | ||
6. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
| March 30, 2022 |
| December 29, 2021 | |||
Deferred franchise and development fees | $ | | $ | | ||
Derivative liability | — | | ||||
Employer social security tax deferral | — | | ||||
Other |
| |
| | ||
Total other noncurrent liabilities | $ | | $ | | ||
7. COMMITMENTS AND CONTINGENCIES
Legal Matters
On or about February 24, 2014, a former employee filed a class action in the Superior Court of the State of California, County of Orange, under the caption Elliott Olvera, et al v. El Pollo Loco, Inc., et al (Case No. 30-2014-00707367-CU-OE-CXC) on behalf of all putative class members (all hourly employees from 2010 to the present) alleging certain violations of California labor laws, including failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements. The parties reached a settlement in principle on January 24, 2019 of all claims brought on behalf of the 32,000+ putative class members in Olvera, as well as all claims for failure to pay overtime compensation, failure to provide meal periods and rest breaks, and failure to provide itemized wage statements brought in the class actions captioned Martha Perez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case
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No. BC624001), Maria Vega, et al. v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC649719), and Gonzalez v. El Pollo Loco, Inc. (Los Angeles Superior Court Case No. BC712867). The settlement reached in principle in the Olvera, Perez, Vega, and Gonzalez actions resolves all potential claims from April 12, 2010 through April 1, 2019 that El Pollo Loco restaurant employees may have against El Pollo Loco for failure to pay for all compensation owed, failure to pay overtime compensation, failure to provide meal periods and rest breaks and failure to provide itemized wage statements, among other wage and hour related claims. A $16.3 million accrual of an expected settlement amount related to this matter was recorded as of December 26, 2018, and the court formally approved the settlement on January 31, 2020. The settlement payment was made on February 28, 2020. Purported class actions alleging wage and hour violations are commonly filed against California employers. The Company fully expects to have to defend against similar lawsuits in the future.
On or about November 5, 2015, a purported Holdings shareholder filed a derivative complaint on behalf of Holdings in the Court of Chancery of the State of Delaware against certain Holdings officers, directors and Trimaran Pollo Partners, L.L.C., under the caption Armen Galustyan v. Sather, et al. (Case No. 11676-VCL). The derivative complaint alleges that these defendants breached their fiduciary duties to Holdings and were unjustly enriched when they sold shares of Holdings at artificially inflated prices due to alleged misrepresentations and omissions regarding EPL’s comparable store sales in the second quarter of 2015. The Holdings shareholder’s requested remedies include an award of compensatory damages to Holdings, as well as a court order to improve corporate governance by putting forward for stockholder vote certain resolutions for amendments to Holdings’ Bylaws or Certificate of Incorporation. The Holdings shareholder voluntarily dismissed the action on October 7, 2020. A second purported Holdings shareholder filed a derivative complaint on or about September 23, 2016, under the caption Diep v. Sather, CA 12760-VCL in the Delaware Court of Chancery. The Diep action is also purportedly brought on behalf of Holdings, names the same defendants and asserts substantially the same claims on substantially the same alleged facts as does Galustyan. Defendants moved to stay or dismiss the Diep action.
On March 17, 2017, the Delaware court granted in part, and denied in part, the motion to stay the Diep action. The court denied defendants’ motion to dismiss the complaint for failure to state a claim. On January 17, 2018, the court entered an order granting the parties’ stipulation staying all proceedings in the Diep action for five months or until the completion of an investigation of the allegations in the action by a special litigation committee of the Holdings board of directors (the “SLC”). On September 25, 2020, after concluding its investigation, the SLC filed a motion to dismiss the Diep action and filed its investigative report under seal as an exhibit to the motion to dismiss.
On May 21, 2021, while the SLC’s motion to dismiss the Diep action was pending, the Company filed a notice of proposed partial settlement of the Diep action with respect to defendants Kay Bogeajis, Laurance Roberts, Stephen J. Sather, Edward J. Valle, Douglas K. Ammerman, and Samuel N. Borgese (collectively, the “Settling Defendants”). Defendant Trimaran Pollo Partners, LLC (“Trimaran”) was not a party to the settlement. The court approved the settlement of $
On July 30, 2021, the court granted the SLC’s motion to dismiss with respect to the claims asserted against remaining defendant Trimaran. On October 4, 2021, Plaintiffs filed a notice of appeal of the court’s granting of the motion to dismiss against defendant Trimaran. Plaintiff filed its opening brief on December 6, 2021. SLC filed its answering brief on December 20, 2021 and the public version of the brief was filed on January 7, 2022. Plaintiffs filed the reply brief on January 4, 2022. The hearing on the appeal took place on March 30, 2022, and the parties are awaiting a ruling.
The Company is also involved in various other claims such as wage and hour and other legal actions that arise in the ordinary course of business. The outcomes of these actions are not predictable but the Company does not believe that the ultimate resolution of these other actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources. A significant increase in the number of claims, or an increase in amounts owing under successful claims, could materially and adversely affect its business, condensed consolidated financial condition, results of operations, and cash flows.
17
Purchasing Commitments
The Company has long-term beverage supply agreements with certain major beverage vendors. Pursuant to the terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based upon the dollar volume of purchases for system-wide restaurants which will vary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup. These contracts have terms extending through the end of 2024.
At March 30, 2022, the Company’s total estimated commitment to purchase chicken was $
Contingent Lease Obligations
As a result of assigning the Company’s interest in obligations under real estate leases in connection with the sale of company-operated restaurants to some of the Company’s franchisees, the Company is contingently liable on
Employment Agreements
As of March 30, 2022, the Company had employment agreements with
Indemnification Agreements
The Company has entered into indemnification agreements with each of its current directors and officers. These agreements require the Company to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to the Company and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also intends to enter into indemnification agreements with future directors and officers.
8. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is calculated using the weighted-average number of shares of common stock outstanding during the thirteen weeks ended March 30, 2022 and March 31, 2021. Diluted EPS is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.
Below are basic and diluted EPS data for the periods indicated (in thousands except for share and per share data):
Thirteen Weeks Ended | |||||||
March 30, 2022 |
| March 31, 2021 |
| ||||
Numerator: |
|
|
|
| |||
Net income | $ | | $ | | |||
Denominator: |
|
|
|
| |||
Weighted-average shares outstanding—basic |
| |
| | |||
Weighted-average shares outstanding—diluted |
| |
| | |||
Net income per share—basic | $ | | $ | | |||
Net income per share—diluted | $ | | $ | | |||
Anti-dilutive securities not considered in diluted EPS calculation |
| |
| — | |||
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Below is a reconciliation of basic and diluted share counts:
| Thirteen Weeks Ended |
| |||
March 30, 2022 | March 31, 2021 | ||||
Weighted-average shares outstanding—basic |
| |
| |
|
Dilutive effect of stock options and restricted shares |
| |
| |
|
Weighted-average shares outstanding—diluted |
| |
| |
|
9. RELATED PARTY TRANSACTIONS
Trimaran Pollo Partners, L.L.C. (“LLC”) owns approximately
10. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
Nature of products and services
The Company has
Company-operated restaurant revenue
Revenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment is tendered at the time of sale. The Company presents sales, net of sales-related taxes and promotional allowances.
The Company offers a loyalty rewards program, which awards a customer points for dollars spent. Customers earn points for each dollar spent and
The Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. Furthermore, due to these escheatment rights, the Company does not recognize breakage related to the sale of gift cards due to the immateriality of the amount remaining after escheatment.
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The Company recognizes income from gift cards when redeemed by the customer. Unredeemed gift card balances are deferred and recorded as other accrued expenses on the accompanying condensed consolidated balance sheets.
Franchise and franchise advertising revenue
Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees, IT support services, and rental income for subleases to franchisees. Franchise advertising revenue consists of advertising contributions received from franchisees. These revenue streams are made up of the following performance obligations:
| ● | Franchise license - inclusive of advertising services, development agreements, training, access to plans and help desk services. |
| ● | Discounted renewal option. |
| ● | Hardware services. |
The Company satisfies the performance obligation related to the franchise license over the term of the franchise agreement, which is typically
The sales-based royalty fee and sales-based advertising fee are considered variable consideration and will continue to be recognized as revenue as such sales are earned by the franchisees. Both sales-based fees qualify under the royalty constraint exception, and do not require an estimate of future transaction price. Additionally, the Company is utilizing the practical expedient available under ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”) regarding disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for sales-based royalties.
In certain franchise agreements, the Company offers a discounted renewal to incentivize future renewals after the end of the initial franchise term. As this is considered a separate performance obligation, the Company allocates a portion of the initial franchise fee to this discounted renewal, on a pro-rata basis, assuming a
The Company purchases hardware, such as scanners, printers, cash registers and tablets, from third party vendors, which it then sells to franchisees. As the Company is considered the principal in this relationship, payment for the hardware is considered revenue, and is received upon transfer of the goods from the Company to the franchisee. As of March 30, 2022, there were
Disaggregated revenue
The following table presents the Company’s revenues disaggregated by revenue source and market (in thousands):
| March 30, |
| March 31, | ||||
| 2022 | 2021 | |||||
Core Market(1): |
|
|
| ||||
Company-operated restaurant revenue | $ | | $ | | |||
Franchise revenue |
| |
| | |||
Franchise advertising fee revenue |
| |
| | |||
Total core market | $ | | $ | | |||
Non-Core Market(2): |
|
|
|
| |||
Company-operated restaurant revenue | $ | | $ | | |||
Franchise revenue |
| |
| | |||
Franchise advertising fee revenue |
| |
| | |||
Total non-core market | $ | | $ | | |||
Total revenue | $ | | $ | |
20
| (1) | Core Market includes markets with existing company-operated restaurants at the time of the Company’s IPO on July 28, 2014. |
| (2) | Non-Core Market includes markets entered into by the Company subsequent to the IPO date. |
The following table presents the Company’s revenues disaggregated by geographic market:
March 30, 2022 |
| March 31, 2021 |
| ||
Greater Los Angeles area market | | % |