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:
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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Securities registered pursuant to Section 12(b) of the Act:
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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). ☒
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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 July 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)
| June 29, |
| 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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Income tax receivable |
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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 |
| Twenty-Six Weeks Ended |
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June 29, 2022 | June 30, 2021 | June 29, 2022 | June 30, 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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Loss on assets held for sale | — | | — | | |||||||||
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 expense (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 |
| Twenty-Six Weeks Ended |
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June 29, 2022 | June 30, 2021 | June 29, 2022 |
| June 30, 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 June 29, 2022 | |||||||||||||||||
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Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Income |
| Equity | ||||||
Balance, March 30, 2022 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Stock-based compensation | — |
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Issuance of common stock related to restricted shares | | | ( | — | — | — | |||||||||||
Issuance of common stock upon exercise of stock options | | — | | — | — | | |||||||||||
Shares repurchased for employee tax withholdings | ( | — | ( | — | — | ( | |||||||||||
Forfeiture of common stock related to restricted shares | ( |
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Other comprehensive income, net of tax | — |
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Net income | — |
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Balance, June 29, 2022 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Thirteen Weeks Ended June 30, 2021 | |||||||||||||||||
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Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||
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| Amount |
| Capital |
| Deficit |
| Loss |
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Balance, March 31, 2021 | | $ | | $ | | $ | ( | $ | ( | | |||||||
Stock-based compensation | — |
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Issuance of common stock related to restricted shares | |
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Issuance of common stock upon exercise of stock options | |
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Shares repurchased for employee tax withholdings | ( |
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Forfeiture of common stock related to restricted shares | ( | — | — | — | — | — | |||||||||||
Other comprehensive income, net of tax | — | — | — | — | | | |||||||||||
Net income | — |
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Balance, June 30, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | |
6
Twenty-Six Weeks Ended June 29, 2022 | |||||||||||||||||
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Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||
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| Deficit |
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Balance, December 29, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation | — |
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Issuance of common stock related to restricted shares | | | ( | — | — | — | |||||||||||
Issuance of common stock upon exercise of stock options | | | | — | — | | |||||||||||
Shares repurchased for employee tax withholdings | ( | — | ( | — | — | ( | |||||||||||
Forfeiture of common stock related to restricted shares | ( |
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Other comprehensive income, net of tax | — |
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Net income | — |
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Balance, June 29, 2022 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Twenty-Six Weeks Ended June 30, 2021 | |||||||||||||||||
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Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||
| Shares |
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| Deficit |
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Balance, December 30, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation | — |
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Issuance of common stock related to restricted shares | |
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Issuance of common stock upon exercise of stock options | |
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Shares repurchased for employee tax withholdings | ( |
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Repurchase of common stock | — |
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Forfeiture of common stock related to restricted shares | ( | — | — | — | — | — | |||||||||||
Other comprehensive (loss) income, net of tax | — | — | — | — | | | |||||||||||
Net income | — |
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Balance, June 30, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | |
See notes to condensed consolidated financial statements (unaudited).
7
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
| Twenty-Six Weeks Ended |
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| June 29, 2022 | June 30, 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 provided by 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 assets held for sale |
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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 receivable |
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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 provided by operating activities |
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Cash flows from investing activities: |
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Proceeds from disposition of restaurants |
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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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Minimum tax withholdings related to net share settlements |
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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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Increase (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 | $ | | $ | |
| Twenty-Six Weeks Ended |
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June 29, 2022 | June 30, 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).
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
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 June 29, 2022, the Company continues to experience staffing challenges, which resulted in reduced operating hours and service channels at some of the Company restaurants, as well as higher wage inflation, overtime costs and other labor related costs. Further, the Company experienced inflationary pressures and supply chain disruptions that resulted in increased commodity prices and impacted the Company’s business and results of operations during the thirteen and twenty-six weeks ended June 29, 2022. The Company expects these pressures to continue during the rest of fiscal 2022. During the thirteen and twenty-six weeks ended June 29, 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 June 29, 2022, the Company’s total debt was $
Recently Adopted Accounting Pronouncements
None.
Subsequent Events
2022 Credit Agreement
On July 27, 2022, the Company refinanced the 2018 Revolver, pursuant to a credit agreement (the “2022 Credit Agreement”) among EPL, as borrower, the Company and Intermediate, as guarantors, 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 $
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Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either the secured overnight financing rate (“SOFR”) 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 2022 Credit Agreement includes negative covenants and financial covenants, including, among others, the following (all subject to certain exceptions): a maximum lease-adjusted consolidated leverage ratio covenant, a minimum consolidated fixed charge coverage ratio, and limitations on (among others) indebtedness, liens, investments, asset sales, mergers, consolidations, liquidations, dispositions, restricted payments, negative pledges, transactions with affiliates, sale-leaseback transactions and prepayments of certain debt. The 2022 Credit Agreement also includes certain affirmative covenants and events of default.
In connection with the Company’s entry into the 2022 Credit Agreement, it terminated the interest rate swap previously used to hedge interest rate risk. In settlement of this swap, the Company received approximately $
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
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
11
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 twenty-six weeks ended June 29, 2022. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen and twenty-six weeks ended June 29, 2022.
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. 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 June 29, 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 and twenty-six weeks ended June 29, 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,
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