UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 26, 2021June 25, 2023
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: 001-40951
PORTILLO'S INC.
(Exact name of registrant as specified in its charter) | | | | | | | | |
| Delaware | | 87-1104304 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| 2001 Spring Road, Suite 400, Oak Brook, Illinois 60523 |
| (Address of principal executive offices) |
(630)-954-3773 954-3773
(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 | Name of each exchange on which registered |
| Class A common stock, $0.01 par value per share | PTLO | Nasdaq Global Select Market |
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, or 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). (Check one)
| | | | | | | | | | | | | | |
| 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 November 11, 2021,July 27, 2023, there were 35,807,17155,101,465 shares of the registrant's Class A common stock, par value $0.01 per share, issued and outstanding.
TABLE OF CONTENTS
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| Financial Information | |
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| | PHD Group Holdings LLC | |
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Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast,","future, "future," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements, so you should not unduly rely on these statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:
•risks related to or arising from our organizational structure;
•risks of food-borne illness and food safety and other health concerns about our food;
•the impact of unionization activities of our restaurant workers on our operations and profitability;
•the impact of recent bank failures on the marketplace, including the ability to access credit;
•risks associated with our reliance on certain information technology systems and potential failures or interruptions;
•privacy and cyber security risks related to our digital ordering and payment platforms for our delivery business;
•the impact of competition, including from our competitors in the restaurant industry or our own restaurants;
•the increasingly competitive labor market and our ability to attract and retain the best talent and qualified employees;
•the impact of federal, state or local government regulations relating to privacy, data protection, advertising and consumer protection, building and zoning requirements, costs or ability to open new restaurants, or sale of food and alcoholic beverage control regulations;
•inability to achieve our growth strategy, such as the availability of suitable new restaurant sites in existing and new markets and opening of new restaurants at the anticipated rate and on the anticipated timeline;
•increases in food and other operating costs, tariffs and import taxes, and supply shortages;
•the potential future impact of COVID-19 (including any variant) on our results of operations, supply chain or liquidity; and
•other risks identified in our filings with the Securities and Exchange Commission (the “SEC”).
All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed under the heading "Risk Factors" included in our prospectus, dated October 20, 2021,Annual Report on Form 10-K for the fiscal year ended December 25, 2022 filed pursuant to Rule 424(b)(4) with the Securities and Exchange Commission (the "SEC")SEC on October 22, 2021, relating to our initial public offering ("IPO"),March 2, 2023, which is available on the SEC's website at www.sec.gov.
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. The Company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Portillo’s Inc. was formed as a Delaware corporation on June 8, 2021 and has not, to date, conducted any activities other than those incidental to its formation and those in preparation for the IPO. Separate statements of operations, changes in stockholder's equity, and cash flows have not been presented because Portillo's Inc. is a newly incorporated entity and has had no business transactions or activities to date other than the issuance of shares of Class A common stock in the IPO.
Portillo's Inc. 
Form 10-Q | 1
PART I – FINANCIAL INFORMATION
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| Item 1. Financial Statements (Unaudited) | |
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Portillo's Inc. Form 10-Q | 2
PORTILLO'S INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
(In thousands, except common stock and per common share data)
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| September 26, 2021 | | |
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Cash and cash equivalents | $ | 1 | | | |
ASSETS | $ | 1 | | | |
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COMMITMENTS AND CONTINGENCIES | | | |
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STOCKHOLDERS' EQUITY | | | |
Class A common stock, par value 0.01 per share, 100 shares authorized, 100 issued and outstanding | — | | | |
Additional paid-in-capital | 1 | | | |
TOTAL STOCKHOLDERS' EQUITY | $ | 1 | | | |
Portillo's Inc. 
Form 10-Q | 3
PORTILLO'S INC.
NOTES TO THE CONDENSED BALANCE SHEET
NOTE 1. DESCRIPTION OF BUSINESS
Portillo’s Inc. (the “Company’) was formed and incorporated as a Delaware corporation on June 8, 2021. The Company was formed for the purpose of completing a public offering and related reorganization transactions (collectively, the "Transactions”) in order to carry on the business of PHD Group Holdings LLC and its subsidiaries (“Portillo’s OpCo”). Following the consummation of the Transactions on October 20, 2021, the Company became the sole managing member of Portillo’s OpCo and has the sole voting interest in, and controls the management of, Portillo’s OpCo. See Note 4 for more information. As of September 26, 2021, the Company had not yet commenced operations. All activities for the period from June 8, 2021 through September 26, 2021 relates to the Company's formation and the preparation for the initial public offering ("IPO"), which is described below.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed balance sheet is presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the financial statement 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 financial statement. Separate statements of operations, changes in stockholders' equity, and cash flows have not been presented because the Company has not engaged in any business or other activities other than the initial issuance of Class A common stock, par value $0.01 per share ("Class A common stock").
Fiscal Year
The Company uses a 52- or 53-week fiscal year ending on the Sunday prior to December 31. In a 52-week fiscal year, each quarterly period is comprised of 13 weeks. The additional week in a 53-week fiscal year is added to the fourth quarter.
Offering Costs
In connection with the IPO, Portillo's OpCo incurred certain legal, accounting, and other IPO-related costs, which were reimbursed by the Company upon the consummation of the IPO. Such costs are deferred and recorded in stockholders’ equity as reduction from the proceeds of the offer. As of September 26, 2021, $4.6 million of deferred offering costs had been recorded.
NOTE 3. STOCKHOLDERS' EQUITY
On August 11, 2021, the Company issued 100 shares of common stock to Portillo’s OpCo for $1,000. The excess paid over par value of $0.01 per share was recorded to additional paid-in capital.
NOTE 4. SUBSEQUENT EVENTS
The Company's registration statement on Form S-1, as amended (Registration No. 333-259810) (the "Registration Statement"), related to its IPO was declared effective October 20, 2021, and the Company's Class A common stock began trading on the Nasdaq Global Select Market on October 21, 2021. On October 25, 2021, the Company completed its IPO of 23,310,810 shares of the Company's Class A common stock (including 3,040,540 shares sold to the underwriters pursuant to their overallotment option), $0.01 par value per share, at an offering price of $20.00 per share. The Company received aggregate net proceeds of approximately $429.9 million after deducting underwriting discounts and commissions of $29.1 million and other offering expenses of approximately $7.2 million.
In connection with the IPO, we completed the following:
•We amended and restated the limited liability company agreement of Portillo’s OpCo to, among other things, convert all outstanding equity interests (except for those redeemable preferred units which were redeemed in connection with this offering) into LLC Units.
Portillo's Inc. Form 10-Q | 4
PORTILLO'S INC.
NOTES TO THE CONDENSED BALANCE SHEET
•We became the sole managing member of Portillo's OpCo. Because we manage and operate the business and control the strategic decisions and day-to-day operations of Portillo’s OpCo and because we also have a substantial financial interest in Portillo’s OpCo, we will consolidate the financial results of Portillo’s OpCo, and a portion of our net income will be allocated to non-controlling interests to reflect the entitlement of the pre-IPO LLC members who retained their equity ownership in Portillo's OpCo. In addition, because Portillo’s OpCo will be under the common control of the pre-IPO LLC members before and after the reorganization, we will initially measure the assets and liabilities of Portillo’s OpCo at their carrying amounts as of the date of the completion of the reorganization.
•We amended and restated our certificate of incorporation to authorize the issuance of two classes of common stock: Class A common stock and Class B common stock. Each share of Class A common stock and Class B common stock will entitle its holder to one vote per share on all matters submitted to a vote of our stockholders. The Class B common stock is not entitled to economic interests in Portillo’s Inc.
The Company received net proceeds from the offering of approximately $429.9 million (after deducting underwriting fees and commissions and offering expenses). The net proceeds and cash on hand were used as follows:
•to repay the redeemable preferred units in full (including the redemption premium) of $221.7 million;
•to repay all of the borrowings outstanding under the Second Lien Credit Agreement (including any prepayment penalties) of $158.1 million; and
•to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC members of $57.0 million.
In connection with the IPO, the Company entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with certain pre-IPO LLC Members, pursuant to which Portillo's Inc. is obligated to pay 85% of the amount of applicable cash tax savings, if any, in U.S. federal, state, and local income tax or franchise tax that Portillo's Inc. actually realizes as a result of (a) the increases in tax basis attributable to exchanges of LLC Units by pre-IPO LLC Members and (b) tax benefits related to imputed interest deemed to be paid by Portillo's Inc. as a result of the Tax Receivable Agreement. We will retain the benefit of the remaining 15% of these tax savings.
In connection with the IPO, each option under the 2014 Equity Incentive Plan (the "2014 Plan") that was outstanding, whether vested or unvested, was substituted for an option to purchase a number of shares of Class A common stock under the Company's 2021 Equity Incentive Plan (the "2021 Plan") adopted in connection with the IPO, and the option holders received a cash payment in respect of their options (whether vested or unvested) in an aggregate amount of approximately $6.3 million, which we expect to make in the fourth quarter of fiscal 2021.
In addition, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards, we will record compensation expense based on the fair value of the modified awards in the fourth quarter of fiscal 2021. We would expect to recognize a cash compensation expense of approximately $1.3 million and a non-cash compensation expense of approximately $23.3 million, each in the fourth quarter of fiscal 2021, as well as, an additional non-cash compensation expense of approximately $12.7 million ratably over the next 4.5 years.
In connection with the IPO, the Company granted options to purchase shares of Class A common stock under the 2021 Plan. The 2021 Plan permits the granting of awards to any employee, officer, non-employee director, consultant or other personal service provider of the Company in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock-based awards. All awards granted to participants under the 2021 Plan generally will be represented by an award agreement. 7,148,049 shares of Class A common stock are available for awards under the 2021 Plan (excluding options previously awarded under the 2014 Plan that were assumed by the 2021 Plan). The 2021 Plan gives broad powers to the Company’s Board of Directors (the "Board") to administer and interpret the 2021 Plan, including the authority to select the individuals to be granted awards and rights to prescribe the particular form and conditions of each award to be granted.
The Company is a holding company and its sole material asset is an ownership interest in Portillo’s OpCo.
Portillo's Inc. Form 10-Q | 5
PHD GROUP HOLDINGS LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except common unitshare and per common unitshare data)
| | | September 26, 2021 | | December 27, 2020 | | June 25, 2023 | | December 25, 2022 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| CURRENT ASSETS: | CURRENT ASSETS: | | CURRENT ASSETS: | |
| Cash and cash equivalents | $ | 49,367 | | | $ | 41,211 | | |
| Restricted cash | 190 | | | 221 | | |
| Cash and cash equivalents and restricted cash | | Cash and cash equivalents and restricted cash | $ | 22,457 | | | $ | 44,427 | |
| Accounts receivable | Accounts receivable | 5,727 | | | 5,204 | | Accounts receivable | 11,496 | | | 8,590 | |
| Inventory | Inventory | 4,399 | | | 5,075 | | Inventory | 6,493 | | | 7,387 | |
| Other current assets | 7,445 | | | 2,915 | | |
| Prepaid expenses | | Prepaid expenses | 5,139 | | | 4,922 | |
| Total current assets | Total current assets | 67,128 | | | 54,626 | | Total current assets | 45,585 | | | 65,326 | |
| Property and equipment, net | Property and equipment, net | 186,621 | | | 174,769 | | Property and equipment, net | 250,443 | | | 227,036 | |
| OTHER ASSETS: | | | | |
| Operating lease assets | | Operating lease assets | 179,449 | | | 166,808 | |
| | Goodwill | Goodwill | 394,298 | | | 394,298 | | Goodwill | 394,298 | | | 394,298 | |
| Intangible assets-net of accumulated amortization | 260,541 | | | 266,180 | | |
| Trade names | | Trade names | 223,925 | | | 223,925 | |
| Other intangible assets, net | | Other intangible assets, net | 30,356 | | | 31,800 | |
| Equity method investment | Equity method investment | 16,278 | | | 16,015 | | Equity method investment | 16,373 | | | 16,274 | |
| Deferred tax assets | | Deferred tax assets | 186,997 | | | 150,497 | |
| Other assets | Other assets | 4,596 | | | 4,334 | | Other assets | 4,061 | | | 4,119 | |
| Total other assets | Total other assets | 675,713 | | | 680,827 | | Total other assets | 856,010 | | | 820,913 | |
| TOTAL ASSETS | TOTAL ASSETS | $ | 929,462 | | | $ | 910,222 | | TOTAL ASSETS | $ | 1,331,487 | | | $ | 1,280,083 | |
| | LIABILITIES, REDEEMABLE PREFERRED UNITS AND COMMON EQUITY | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | LIABILITIES AND STOCKHOLDERS' EQUITY | |
| CURRENT LIABILITIES: | CURRENT LIABILITIES: | | CURRENT LIABILITIES: | |
| Accounts payable | Accounts payable | $ | 21,531 | | | $ | 21,427 | | Accounts payable | $ | 24,147 | | | $ | 30,273 | |
| Current portion of long-term debt | Current portion of long-term debt | 3,324 | | | 3,324 | | Current portion of long-term debt | 7,500 | | | 4,155 | |
| | Current portion of Tax Receivable Agreement liability | | Current portion of Tax Receivable Agreement liability | 6,309 | | | 813 | |
| Short-term debt | | Short-term debt | 10,000 | | | — | |
| | Current deferred revenue | Current deferred revenue | 3,929 | | | 6,774 | | Current deferred revenue | 4,696 | | | 7,292 | |
| Short-term operating lease liability | | Short-term operating lease liability | 5,053 | | | 4,849 | |
| Accrued expenses | Accrued expenses | 33,482 | | | 34,827 | | Accrued expenses | 31,322 | | | 29,915 | |
| Total current liabilities | Total current liabilities | 62,266 | | | 66,352 | | Total current liabilities | 89,027 | | | 77,297 | |
| LONG-TERM LIABILITIES: | LONG-TERM LIABILITIES: | | LONG-TERM LIABILITIES: | |
| Long-term debt, net of current portion | Long-term debt, net of current portion | 466,764 | | | 466,380 | | Long-term debt, net of current portion | 289,168 | | | 314,425 | |
| Deferred rent | 30,844 | | | 26,694 | | |
| | Tax Receivable Agreement liability | | Tax Receivable Agreement liability | 295,696 | | | 252,003 | |
| Long-term operating lease liability | | Long-term operating lease liability | 217,989 | | | 200,166 | |
| Other long-term liabilities | Other long-term liabilities | 6,862 | | | 9,516 | | Other long-term liabilities | 3,151 | | | 3,291 | |
| Total long-term liabilities | Total long-term liabilities | 504,470 | | | 502,590 | | Total long-term liabilities | 806,004 | | | 769,885 | |
| Total liabilities | Total liabilities | 566,736 | | | 568,942 | | Total liabilities | 895,031 | | | 847,182 | |
| | COMMITMENTS AND CONTINGENCIES (NOTE 12) | 0 | | 0 | |
| REDEEMABLE PREFERRED UNITS | 217,549 | | | 200,571 | | |
| COMMITMENTS AND CONTINGENCIES (NOTE 14) | | COMMITMENTS AND CONTINGENCIES (NOTE 14) | |
| STOCKHOLDERS' EQUITY: | | STOCKHOLDERS' EQUITY: | |
| | COMMON EQUITY: | | |
| Common units—51,210,222 and 51,192,434 units authorized, 51,210,222 and 51,192,434 units issued and outstanding as of September 26, 2021 and December 27, 2020 | — | | | — | | |
| Stock subscription receivable | — | | | (499) | | |
| Preferred stock, $0.01 par value per share, 10,000,000 shares authorized, none issued or outstanding | | Preferred stock, $0.01 par value per share, 10,000,000 shares authorized, none issued or outstanding | — | | | — | |
| Class A common stock, $0.01 par value per share, 380,000,000 shares authorized, and 55,073,993 and 48,420,723 shares issued and outstanding at June 25, 2023 and December 25, 2022, respectively. | | Class A common stock, $0.01 par value per share, 380,000,000 shares authorized, and 55,073,993 and 48,420,723 shares issued and outstanding at June 25, 2023 and December 25, 2022, respectively. | 551 | | | 484 | |
| Class B common stock, $0.00001 par value per share, 50,000,000 shares authorized, and 17,472,926 and 23,837,162 shares issued and outstanding at June 25, 2023 and December 25, 2022, respectively. | | Class B common stock, $0.00001 par value per share, 50,000,000 shares authorized, and 17,472,926 and 23,837,162 shares issued and outstanding at June 25, 2023 and December 25, 2022, respectively. | — | | | — | |
| Additional paid-in-capital | Additional paid-in-capital | 141,751 | | | 141,208 | | Additional paid-in-capital | 301,622 | | | 260,664 | |
| Retained earnings | 3,426 | | | — | | |
| Total common equity | 145,177 | | | 140,709 | | |
| TOTAL LIABILITIES, REDEEMABLE PREFERRED UNITS AND COMMON EQUITY | $ | 929,462 | | | $ | 910,222 | | |
| Retained earnings (accumulated deficit) | | Retained earnings (accumulated deficit) | 1,462 | | | (4,812) | |
| Total stockholders' equity attributable to Portillo's Inc. | | Total stockholders' equity attributable to Portillo's Inc. | 303,635 | | | 256,336 | |
| Non-controlling interest | | Non-controlling interest | 132,821 | | | 176,565 | |
| Total stockholders' equity | | Total stockholders' equity | 436,456 | | | 432,901 | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,331,487 | | | $ | 1,280,083 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 63
PHD GROUP HOLDINGS LLCPORTILLO'S INC
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands)thousands, except share and per share data)
| | | Quarter Ended | | Three Quarters Ended | | Quarter Ended | | Two Quarters Ended |
| | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 | | June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| | REVENUES | $ | 138,003 | | | $ | 119,700 | | | $ | 396,044 | | | $ | 336,960 | | |
| REVENUES, NET | | REVENUES, NET | $ | 169,182 | | | $ | 150,623 | | | $ | 325,242 | | | $ | 285,105 | |
| | COST AND EXPENSES: | COST AND EXPENSES: | | COST AND EXPENSES: | |
| Restaurant operating expenses: | Restaurant operating expenses: | | Restaurant operating expenses: | |
| Cost of goods sold, excluding depreciation and amortization | 44,285 | | | 36,572 | | | 121,465 | | | 106,095 | | |
| Food, beverage and packaging costs | | Food, beverage and packaging costs | 56,229 | | | 51,774 | | | 109,856 | | | 98,040 | |
| Labor | Labor | 36,921 | | | 29,125 | | | 102,433 | | | 87,205 | | Labor | 43,153 | | | 37,906 | | | 83,612 | | | 75,219 | |
| Occupancy | Occupancy | 7,000 | | | 6,368 | | | 20,890 | | | 18,717 | | Occupancy | 8,237 | | | 7,379 | | | 16,688 | | | 15,134 | |
| Other operating expenses | Other operating expenses | 15,554 | | | 13,012 | | | 44,187 | | | 37,559 | | Other operating expenses | 18,832 | | | 15,178 | | | 37,536 | | | 30,343 | |
| Total restaurant operating expenses | Total restaurant operating expenses | 103,760 | | | 85,077 | | | 288,975 | | | 249,576 | | Total restaurant operating expenses | 126,451 | | | 112,237 | | | 247,692 | | | 218,736 | |
| | General and administrative expenses | General and administrative expenses | 11,750 | | | 9,706 | | | 35,755 | | | 27,918 | | General and administrative expenses | 19,609 | | | 15,439 | | | 38,387 | | | 31,126 | |
| Pre-opening expenses | Pre-opening expenses | 347 | | | 544 | | | 2,307 | | | 838 | | Pre-opening expenses | 275 | | | 423 | | | 2,619 | | | 979 | |
| Depreciation and amortization | Depreciation and amortization | 5,516 | | | 6,138 | | | 18,225 | | | 18,404 | | Depreciation and amortization | 5,941 | | | 5,309 | | | 11,610 | | | 10,514 | |
| Net income attributable to equity method investment | Net income attributable to equity method investment | (292) | | | (121) | | | (651) | | | (353) | | Net income attributable to equity method investment | (381) | | | (275) | | | (588) | | | (398) | |
| Other income, net | (292) | | | (514) | | | (1,095) | | | (1,092) | | |
| Other (income) loss, net | | Other (income) loss, net | (97) | | | 51 | | | (354) | | | (105) | |
| OPERATING INCOME | OPERATING INCOME | 17,214 | | | 18,870 | | | 52,528 | | | 41,669 | | OPERATING INCOME | 17,384 | | | 17,439 | | | 25,876 | | | 24,253 | |
| Interest expense | Interest expense | 10,683 | | | 10,766 | | | 32,124 | | | 34,298 | | Interest expense | 6,523 | | | 6,097 | | | 13,966 | | | 12,196 | |
| Tax Receivable Agreement liability adjustment | | Tax Receivable Agreement liability adjustment | (579) | | | (1,754) | | | (1,163) | | | (1,754) | |
| Loss on debt extinguishment | | Loss on debt extinguishment | — | | | — | | | 3,465 | | | — | |
| INCOME BEFORE INCOME TAXES | | INCOME BEFORE INCOME TAXES | 11,440 | | | 13,096 | | | 9,608 | | | 13,811 | |
| Income tax expense | | Income tax expense | 1,542 | | | 2,340 | | | 983 | | | 2,505 | |
| NET INCOME | NET INCOME | 6,531 | | | 8,104 | | | 20,404 | | | 7,371 | | NET INCOME | 9,898 | | | 10,756 | | | 8,625 | | | 11,306 | |
| Less: Redeemable preferred units accretion | (5,886) | | | (5,282) | | | (16,978) | | | (15,240) | | |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON UNIT HOLDERS | $ | 645 | | | $ | 2,822 | | | $ | 3,426 | | | $ | (7,869) | | |
| | Earnings/(loss) per common unit: | | |
| | Net income attributable to non-controlling interests | | Net income attributable to non-controlling interests | 3,110 | | | 5,645 | | | 2,351 | | | 6,001 | |
| NET INCOME ATTRIBUTABLE TO PORTILLO'S INC. | | NET INCOME ATTRIBUTABLE TO PORTILLO'S INC. | $ | 6,788 | | | $ | 5,111 | | | $ | 6,274 | | | $ | 5,305 | |
| | Net income per common share attributable to Portillo's Inc.: | | Net income per common share attributable to Portillo's Inc.: | |
| Basic | Basic | $ | 0.01 | | | $ | 0.06 | | | $ | 0.07 | | | $ | (0.15) | | Basic | $ | 0.12 | | | $ | 0.14 | | | $ | 0.12 | | | $ | 0.15 | |
| Diluted | Diluted | $ | 0.01 | | | $ | 0.05 | | | $ | 0.07 | | | $ | (0.15) | | Diluted | $ | 0.12 | | | $ | 0.13 | | | $ | 0.11 | | | $ | 0.13 | |
| | Weighted-average common units outstanding: | | |
| Weighted-average common shares outstanding: | | Weighted-average common shares outstanding: | |
| Basic | Basic | 51,210,222 | | | 51,192,285 | | | 51,201,100 | | | 51,187,878 | | Basic | 54,964,649 | | | 35,991,079 | | | 52,252,053 | | | 35,899,125 | |
| Diluted | Diluted | 51,581,685 | | | 51,410,002 | | | 51,569,034 | | | 51,187,878 | | Diluted | 58,550,057 | | | 39,687,090 | | | 55,806,455 | | | 39,839,292 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 74
PHD GROUP HOLDINGS LLCPORTILLO'S INC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED UNITS ANDSTOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except unitshare data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 26, 2021 and September 27, 2020 |
| | | | | | | | | | | | | | | | |
| | Preferred Units | | Common Units |
| | Units | | Amounts | | Units | | Amounts | | Stock Subscription Receivable | | Additional Paid-In Capital | | Retained Earnings | | Total Common Equity |
| Balance, as of June 28, 2020 | | 100,000 | | | $ | 190,005 | | | 51,185,674 | | | $ | — | | | $ | (499) | | | $ | 138,902 | | | $ | (733) | | | $ | 137,670 | |
| Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 8,104 | | | 8,104 | |
| Unit-based compensation | | — | | | — | | | — | | | — | | | — | | | 187 | | | — | | | 187 | |
| Repayment of subscription receivable | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common units | | — | | | — | | | 6,760 | | | — | | | — | | | 25 | | | — | | | 25 | |
| Redeemable preferred units accretion | | — | | | 5,282 | | | — | | | — | | | — | | | — | | | (5,282) | | | (5,282) | |
| Balance, as of September 27, 2020 | | 100,000 | | | 195,287 | | | 51,192,434 | | | — | | | (499) | | | 139,114 | | | 2,089 | | | 140,704 | |
| | | | | | | | | | | | | | | | |
| Balance, as of June 27, 2021 | | 100,000 | | | 211,663 | | | 51,210,223 | | | — | | | (249) | | | 141,581 | | | 2,781 | | | 144,113 | |
| Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 6,531 | | | 6,531 | |
| Unit-based compensation | | — | | | — | | | — | | | — | | | — | | | 170 | | | — | | | 170 | |
| Repayment of subscription receivable | | — | | | — | | | — | | | — | | | 249 | | | — | | | — | | | 249 | |
| Issuance of common units | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Redeemable preferred units accretion | | — | | | 5,886 | | | — | | | — | | | — | | | — | | | (5,886) | | | (5,886) | |
| Balance, as of September 26, 2021 | | 100,000 | | | $ | 217,549 | | | 51,210,223 | | | — | | | — | | | $ | 141,751 | | | $ | 3,426 | | | $ | 145,177 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended June 25, 2023 and June 26, 2022 |
| | | | | | Class A Common Stock | | Class B Common Stock | | | | | | | | |
| | | | | | | | Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Non-Controlling Interest | | Total Stockholders' Equity |
| Balance at March 27, 2022 | | | | | | | | 35,807,171 | | | $ | 358 | | | 35,673,321 | | | $ | — | | | $ | 188,752 | | | $ | (15,756) | | | $ | 254,387 | | | $ | 427,741 | |
| Net income | | | | | | | | — | | | — | | | — | | | — | | | — | | | 5,111 | | | 5,645 | | | 10,756 | |
| Equity-based compensation | | | | | | | | — | | | — | | | — | | | — | | | 1,941 | | | — | | | 1,923 | | | 3,864 | |
| Activity under equity-based compensation plans | | | | | | | | 411,184 | | | 4 | | | — | | | — | | | 1,447 | | | — | | | — | | | 1,451 | |
| Non-controlling interest adjustment | | | | | | | | — | | | — | | | — | | | — | | | 722 | | | — | | | (722) | | | — | |
| Balance at June 26, 2022 | | | | | | | | 36,218,355 | | | 362 | | | 35,673,321 | | | — | | | 192,862 | | | (10,645) | | | 261,233 | | | 443,812 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance at March 26, 2023 | | | | | | | | 54,467,951 | | | 545 | | | 17,943,562 | | | — | | | 294,984 | | | (5,326) | | | 132,783 | | | 422,986 | |
| Net income | | | | | | | | — | | | — | | | — | | | — | | | — | | | 6,788 | | | 3,110 | | | 9,898 | |
| Equity-based compensation | | | | | | | | — | | | — | | | — | | | — | | | 3,146 | | | — | | | 1,037 | | | 4,183 | |
| Activity under equity-based compensation plans | | | | | | | | 135,406 | | | 1 | | | — | | | — | | | 577 | | | — | | | — | | | 578 | |
| Redemption of LLC Interests | | | | | | | | 470,636 | | | 5 | | | (470,636) | | | — | | | (5) | | | — | | | — | | | — | |
| Non-controlling interest adjustment | | | | | | | | — | | | — | | | — | | | — | | | 4,109 | | | — | | | (4,109) | | | — | |
| Establishment of liabilities under Tax Receivable Agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | — | | | — | | | — | | | — | | | (1,189) | | | — | | | — | | | (1,189) | |
| Balance at June 25, 2023 | | | | | | | | 55,073,993 | | | $ | 551 | | | 17,472,926 | | | $ | — | | | $ | 301,622 | | | $ | 1,462 | | | $ | 132,821 | | | $ | 436,456 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 5
PORTILLO'S INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Two Quarters Ended June 25, 2023 and June 26, 2022 |
| | | | | | Class A Common Stock | | Class B Common Stock | | | | | | | | |
| | | | | | | | Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Non-Controlling Interest | | Total Stockholders' Equity |
| Balance at December 26, 2021 | | | | | | | | 35,807,171 | | | $ | 358 | | | 35,673,321 | | | $ | — | | | $ | 186,856 | | | $ | (15,950) | | | $ | 252,142 | | | $ | 423,406 | |
| Net income | | | | | | | | — | | | — | | | — | | | — | | | — | | | 5,305 | | | 6,001 | | | 11,306 | |
| Equity-based compensation | | | | | | | | — | | | — | | | — | | | — | | | 3,837 | | | — | | | 3,812 | | | 7,649 | |
| Activity under equity-based compensation plans | | | | | | | | 411,184 | | | 4 | | | — | | | — | | | 1,447 | | | — | | | — | | | 1,451 | |
| Non-controlling interest adjustment | | | | | | | | — | | | — | | | — | | | — | | | 722 | | | — | | | (722) | | | — | |
| Balance at June 26, 2022 | | | | | | | | 36,218,355 | | | 362 | | | 35,673,321 | | | — | | | 192,862 | | | (10,645) | | | 261,233 | | | 443,812 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 25, 2022 | | | | | | | | 48,420,723 | | | 484 | | | 23,837,162 | | | — | | | 260,664 | | | (4,812) | | | 176,565 | | | 432,901 | |
| Net income | | | | | | | | — | | | — | | | — | | | — | | | — | | | 6,274 | | | 2,351 | | | 8,625 | |
| Equity-based compensation | | | | | | | | — | | | — | | | — | | | — | | | 5,571 | | | — | | | 2,149 | | | 7,720 | |
| Activity under equity-based compensation plans | | | | | | | | 289,034 | | | 3 | | | — | | | — | | | 1,288 | | | — | | | — | | | 1,291 | |
| Redemption of LLC Interests | | | | | | | | 6,364,236 | | | 64 | | | (6,364,236) | | | — | | | (64) | | | — | | | — | | | — | |
| Non-controlling interest adjustment | | | | | | | | — | | | — | | | — | | | — | | | 47,845 | | | — | | | (47,845) | | | — | |
| Distributions paid to non-controlling interest holders | | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (399) | | | (399) | |
| Establishment of liabilities under Tax Receivable Agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | — | | | — | | | — | | | — | | | (13,682) | | | — | | | — | | | (13,682) | |
| Balance at June 25, 2023 | | | | | | | | 55,073,993 | | | $ | 551 | | | 17,472,926 | | | $ | — | | | $ | 301,622 | | | $ | 1,462 | | | $ | 132,821 | | | $ | 436,456 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 6
PORTILLO'S INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
| | | | | | | | | | | |
| Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income | $ | 8,625 | | | $ | 11,306 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 11,610 | | | 10,514 | |
| Amortization of debt issuance costs and discount | 620 | | | 1,243 | |
| Loss on sales of assets | 496 | | | 107 | |
| Equity-based compensation | 7,720 | | | 7,649 | |
| Deferred rent and tenant allowance | — | | | 2,112 | |
| Deferred income tax expense | 983 | | | 2,505 | |
| Tax Receivable Agreement liability adjustment | (1,163) | | | (1,754) | |
| Amortization of deferred lease incentives | — | | | (166) | |
| Gift card breakage | (528) | | | (474) | |
| Loss on debt extinguishment | 3,465 | | | — | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (906) | | | (1,089) | |
| Receivables from related parties | (141) | | | (66) | |
| Inventory | 894 | | | 439 | |
| Other current assets | (218) | | | 754 | |
| Operating lease assets | 3,880 | | | — | |
| Accounts payable | (2,779) | | | (2,908) | |
| Accrued expenses and other liabilities | (559) | | | (6,140) | |
| Operating lease liabilities | (1,359) | | | — | |
| Deferred lease incentives | 850 | | | 1,251 | |
| Other assets and liabilities | (181) | | | 76 | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 31,309 | | | 25,359 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Purchase of property and equipment | (37,359) | | | (13,940) | |
| | | |
| Proceeds from the sale of property and equipment | 33 | | | 30 | |
| NET CASH USED IN INVESTING ACTIVITIES | (37,326) | | | (13,910) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Proceeds from short-term debt, net | 10,000 | | | — | |
| Proceeds from long-term debt | 300,000 | | | — | |
| Payments of long-term debt | (322,428) | | | (1,662) | |
| | | |
| | | |
| Proceeds from equity offering, net of underwriting discounts | 179,306 | | | — | |
| Repurchase of outstanding equity / Portillo's OpCo units | (179,306) | | | — | |
| | | |
| Distributions paid to non-controlling interest holders | (399) | | | — | |
| Proceeds from stock option exercises | 1,015 | | | 1,451 | |
| Employee withholding taxes related to net settled equity awards | (56) | | | — | |
| Proceeds from Employee Stock Purchase Plan purchases | 297 | | | — | |
| Payments of Tax Receivable Agreement liability | (813) | | | — | |
| Payment of deferred financing costs | (3,569) | | | — | |
| Payment of initial public offering issuance costs | — | | | (771) | |
| NET CASH USED IN FINANCING ACTIVITIES | (15,953) | | | (982) | |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (21,970) | | | 10,467 | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE PERIOD | 44,427 | | | 39,263 | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE PERIOD | $ | 22,457 | | | $ | 49,730 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 7
PORTILLO'S INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
| | | | | | | | | | | |
| Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 |
| SUPPLEMENTAL CASH FLOW INFORMATION | | | |
| Interest paid | $ | 13,447 | | | $ | 10,815 | |
| Income tax paid | — | | | — | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Accrued capital expenditures | $ | 6,537 | | | $ | 333 | |
| | | |
| Establishment of liabilities under Tax Receivable Agreement | 51,165 | | | — | |
| | | |
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 8
PHD GROUP HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED UNITS AND EQUITY
(UNAUDITED)
(In thousands, except unit data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Quarters Ended September 26, 2021 and September 27, 2020 |
| | | | | | | | | | | | | | | | |
| | Preferred Units | | Common Units |
| | Units | | Amounts | | Units | | Amounts | | Stock Subscription Receivable | | Additional Paid-In Capital | | Retained Earnings | | Total Common Equity |
| Balance, as of December 29, 2019 | | 100,000 | | | $ | 180,047 | | | 51,185,674 | | | $ | — | | | $ | (749) | | | $ | 148,483 | | | $ | — | | | $ | 147,734 | |
| Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 7,371 | | | 7,371 | |
| Unit-based compensation | | — | | | — | | | — | | | — | | | — | | | 564 | | | — | | | 564 | |
| Repayment of subscription receivable | | — | | | — | | | — | | | — | | | 250 | | | — | | | — | | | 250 | |
| Issuance of common units | | — | | | — | | | 6,760 | | | — | | | — | | | 25 | | | — | | | 25 | |
| Redeemable preferred units accretion | | — | | | 15,240 | | | — | | | — | | | — | | | (9,958) | | | (5,282) | | | (15,240) | |
| Balance, as of September 27, 2020 | | 100,000 | | | $ | 195,287 | | | 51,192,434 | | | — | | | (499) | | | 139,114 | | | 2,089 | | | 140,704 | |
| | | | | | | | | | | | | | | | |
| Balance, as of December 27, 2020 | | 100,000 | | | $ | 200,571 | | | 51,192,434 | | | — | | | (499) | | | 141,208 | | | — | | | 140,709 | |
| Net income | | — | | | — | | | — | | | — | | | — | | | — | | | 20,404 | | | 20,404 | |
| Unit-based compensation | | — | | | — | | | — | | | — | | | — | | | 443 | | | — | | | 443 | |
| Repayment of subscription receivable | | — | | | — | | | — | | | — | | | 499 | | | — | | | — | | | 499 | |
| Issuance of common units | | — | | | — | | | 17,789 | | | — | | | — | | | 100 | | | — | | | 100 | |
| Redeemable preferred units accretion | | — | | | 16,978 | | | — | | | — | | | — | | | — | | | (16,978) | | | (16,978) | |
| Balance, as of September 26, 2021 | | 100,000 | | | $ | 217,549 | | | 51,210,223 | | | $ | — | | | $ | — | | | $ | 141,751 | | | $ | 3,426 | | | $ | 145,177 | |
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 9
PHD GROUP HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
| | | | | | | | | | | |
| Three Quarters Ended |
| September 26, 2021 | | September 27, 2020 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income | $ | 20,404 | | | $ | 7,371 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 18,225 | | | 18,404 | |
| Amortization of debt issuance costs and discount | 2,877 | | | 2,901 | |
| Loss on sales of assets | 130 | | | 19 | |
| Unit-based compensation | 443 | | | 564 | |
| Deferred rent and tenant allowance | 3,099 | | | 2,726 | |
| Amortization of deferred lease incentives | (289) | | | (241) | |
| Gift card breakage | (554) | | | (556) | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivables | (89) | | | 804 | |
| Receivables from related parties | (144) | | | 204 | |
| Inventory | 676 | | | 83 | |
| Other current assets | 807 | | | 572 | |
| Accounts payable | (2,511) | | | (881) | |
| Accrued expenses and other liabilities | (3,634) | | | 583 | |
| Deferred lease incentives | 690 | | | 1,976 | |
| Other assets and liabilities | (239) | | | 3,576 | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 39,891 | | | 38,105 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Purchase of property and equipment | (27,687) | | | (10,138) | |
| Purchase of investment securities | (200) | | | — | |
| Proceeds from the sale of property and equipment | 123 | | | 30 | |
| NET CASH USED IN INVESTING ACTIVITIES | (27,764) | | | (10,108) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Repayments of short-term debt | — | | | (15,000) | |
| Payments of long-term debt | (2,493) | | | (12,493) | |
| Proceeds from Paycheck Protection Program loan | — | | | 10,000 | |
| Proceeds from issuance of common units | 100 | | | 25 | |
| Repayment of stock subscription receivable | 499 | | | 250 | |
| Payments for in-process equity financings (offering costs) | (2,108) | | | — | |
| NET CASH USED IN FINANCING ACTIVITIES | (4,002) | | | (17,218) | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | 8,125 | | | 10,779 | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE PERIOD | 41,432 | | | 22,629 | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE PERIOD | $ | 49,557 | | | $ | 33,408 | |
| | | |
| SUPPLEMENTAL CASH FLOW INFORMATION | | | |
| Interest paid | 29,043 | | | 24,468 | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Accrued capital expenditures | 2,041 | | | 3,411 | |
| Proceeds from the sale of property and equipment | 41 | | | 61 | |
| | | |
| Redeemable preferred units accretion | (16,978) | | | (15,240) | |
| Deferred offering costs in accounts payable | 2,446 | | | — | |
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 10
PHD GROUP HOLDINGS LLCPORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
Portillo’s Inc. (the "Company") was formed and incorporated as a Delaware corporation on June 8, 2021. The Company was formed for the purpose of completing aan initial public offering ("IPO") and related reorganization transactions(collectively, the "Transactions”) in order to carry on the business of PHD Group Holdings LLC and its subsidiaries.subsidiaries ("Portillo's OpCo"). Following the consummation of the Transactions on October 20, 2021, the Company became the sole managing member of Portillo’s OpCo, and as sole managing member, the Company operates and controls all of the business and affairs of Portillo's OpCo. As a result, the Company consolidates the financial results of Portillo's OpCo and reports a non-controlling interest representing the economic interest in Portillo's OpCo held by the other members of Portillo's OpCo (the "pre-IPO LLC Members"). Unless the context otherwise requires, references to "we," "us," "our," "Portillo's," and the "Company" refer to Portillo's Inc. and its subsidiaries, including PHD Group Holdings LLC, which we refer to as "Portillo's OpCo".Portillo's OpCo.
We operateThe Company operates fast-casual restaurants in Illinois, Indiana, California, Arizona, Florida, Wisconsin, Minnesota, Iowa and Michigan,10 states, along with 2two food production commissaries in Illinois. As of September 26, 2021June 25, 2023 and December 27, 2020,25, 2022, the Company had 6675 and 6371 restaurants in operation, respectively. The Company also had 3 and 4two non-traditional locations in operation as of September 26, 2021June 25, 2023 and September 27, 2020, respectively.December 25, 2022. These non-traditional locations include a food truck and a ghost kitchen (small kitchen with no store-front presence, used to fill online orders), and concessions.. Portillo's Hot Dogs, LLC additionally has a 50% interest in a single restaurant in Chicago, IL, thatowned by C&O, which is referred to in Note 8. There were noexcluded from the Company's restaurant closings during any period presented in the financial statements.count. The Company’s principal corporate offices are located in Oak Brook, IL.Illinois.
Secondary Offerings
In the first quarter of 2023, the Company completed a secondary offering of 8,000,000 shares of the Company's Class A common stock at an offering price of $21.05 per share. On April 5, 2023, the Underwriter exercised its overallotment option in part, to purchase an additional 620,493 shares of the Company's Class A common stock at an offering price of $21.05 per share (collectively the "Q1 Secondary Offering and Overallotment Option"). We used all of the net proceeds from the Q1 Secondary Offering and Overallotment Option to purchase LLC Units and corresponding shares of Class B common stock from certain pre-IPO LLC Members and to repurchase shares of Class A common stock from the shareholders of the entities treated as corporations for U.S. tax purposes that held LLC Units prior to the Transactions ("Blocker Companies") at a price per LLC Unit or share of Class A common stock, as applicable, equal to the public offering price per share of Class A common stock, less the underwriting discounts and commissions. The proceeds from the Q1 Secondary Offering and Overallotment Option were used to (i) purchase 2,269,776 existing shares of Class A common stock from the shareholders of the Blocker Companies and (ii) redeem 6,350,717 LLC Units held by the pre-IPO LLC Members. In connection with the redemption, 6,350,717 shares of Class B common stock were surrendered by the pre-IPO LLC Members and canceled and the Company received 6,350,717 newly-issued LLC Units, increasing the Company's total ownership interest in Portillo's OpCo. As a result, Portillo’s did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change; however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock.
In the third and fourth quarters of 2022, the Company completed two secondary offerings of 8,066,458 shares (including 66,458 shares sold to the underwriters pursuant to their overallotment option) and 8,000,000 shares, respectively, of the Company's Class A common stock at an offering price of $23.75 and $22.69, respectively, per share.
As of June 25, 2023, the Company owns 75.9% of Portillo's OpCo and the pre-IPO LLC Members own the remaining 24.1% of Portillo's OpCo.
Portillo's Inc. Form 10-Q | 9
PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information.
The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with GAAPaccounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the "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 presentation of our financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes theretoincluded in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020 included in our Registration Statement, which was declared effective on October 20, 2021.25, 2022.
All intercompany balances and transactions have been eliminated in consolidation.
The Company does not have any components of other comprehensive income (loss) recorded within its condensed consolidated financial statements, and therefore, does not separately present a statement of comprehensive income (loss).
Segment Reporting
The Company owns and operates fast-casual restaurants in the United States, along with two food production commissaries in Illinois. The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer.Officer ("CEO"). The CODM reviews financial performance and allocates resources at a consolidated level on a recurring basis. The Company has aggregated its operations into 1one operating segment and 1one reportable segment.
Fiscal Year
We useThe Company uses a 52- or 53-week fiscal year ending on the Sunday prior to or on December 31, effective beginning with the first quarter of 2019.31. In a 52-week fiscal year, each quarterly period is comprised of 13 weeks. The additional week in a 53-week fiscal year is added to the fourth quarter. Fiscal 20212023 and 2020 each2022 consist of 53 and 52 weeks.weeks, respectively. The fiscal periods presented in this report are the quarterquarters and threetwo quarters ended SeptemberJune 25, 2023 and June 26, 2021 and September 27, 2020,2022, respectively.
Portillo's Inc. Form 10-Q | 11
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of these 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 disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the period. Actual results could differ from those estimates.
Reverse Common Unit Split
On October 20, 2021, the members of Portillo's OpCo executed the Second AInc. mended and Restated Limited Liability Company Agreement for Portillo's OpCo, effecting a 7.4-for-1 reverse common unit split. All applicable unit data, per unit amounts and related information in the condensed consolidated financial statements and notes thereto have been adjusted retroactively to give effect to the 7.4-for-1 reverse common unit split.Form 10-Q | 10
PORTILLO'S INC.
LeasesNOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Standards
In AprilMarch 2020, the Financial Accounting Standards Board ("FASB") issued guidance related to rent concessions resulting from the COVID-19 pandemic. This guidance allows entities an election to account for eligible concessions, regardless of their form, either by (1) applying the modification framework for these concessions in accordance with FASB Accounting Standards Codification ("ASC") Topic 840, Leases or (2) accounting for the concessions as if they were made under the enforceable rights included in the original agreement. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During the three quarters ended September 27, 2020, the Company received non-substantial concessions from certain landlords in the form of rent deferrals and abatements. The Company has elected to account for these rent concessions as if they were made under the enforceable rights included in the original agreements. The recognition of rent concessions resulting from the COVID-19 pandemic did not have a material impact on the Company's condensed consolidated financial statements as of September 26, 2021 or September 27, 2020.
Deferred Offering Costs
Deferred offering costs consist of costs incurred in connection with the sale of the Company’s Class A common stock in an IPO including certain legal, accounting, and other IPO related costs. At the completion of the IPO, deferred offering costs were recorded in stockholders’ equity as reduction from the proceeds of the offering. No deferred offering costs were recorded as of December 27, 2020. As of September 26, 2021, $4.6 million of deferred offering costs had been recorded in other current assets on the Company’s condensed consolidated balance sheets.
Recently Issued Accounting Standards
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"). The pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. The update is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is in the process of implementing ASC 842 and expects this guidance to materially impact the Company's consolidated financial statements by significantly increasing assets and liabilities on the consolidated balance sheet in order to record the right-of-use assets and related lease liabilities. However, the Company does not expect this guidance to have a significant impact on its consolidated statements of operations or consolidated statements of cash flows.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. FASB has extended the sunset date to December 31, 2024. The Company is currently evaluatingdoes not believe the impact of the transition from LIBOR to alternative reference rates but do not expect a significant impact on its consolidated financial statements.
Portillo's Inc. Form 10-Q | 12
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for years beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2018-13 did not result in a material change to its consolidated financial statements.
In August 2018,February 2016, the FASB issued ASU No. 2018-15, Intangibles-Goodwill2016-02, Leases (Topic 842) ("ASC 842"), along with related clarifications and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred inimprovements. The pronouncement requires lessees to recognize a Cloud Computing Arrangement That Isliability, which represents the discounted obligation to make future minimum lease payments, and a Service Contract, which clarifiescorresponding right-of-use asset on the accounting for implementation costs in cloud computingbalance sheet. The guidance requires disclosure of key information about leasing arrangements that is a service contract.intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. The update is effective for fiscal years beginning after December 15, 2020,2021, with early adoption permitted. The Company adopted this standard effective December 28, 2020. Subsequent27, 2021, electing the modified retrospective approach to apply the standard as of the transition date. We have elected the transition package of three practical expedients permitted under the new standard, which eliminates the requirement to reassess the conclusions about historical lease identifications, lease classifications, and initial direct costs. We did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease terms and impairments of right-of-use assets. We elected to apply the practical expedient of combining lease and non-lease components. Additionally, we elected to utilize the short-term lease exception policy, which allows us to not apply the recognition requirements of this standard to leases with a term of 12 months or less. The adoption of ASU 2018-15,this standard had a significant impact on the Company will capitalize such costs within other current assets or other assets on itsCompany’s condensed consolidated balance sheets.sheet as we recognized the right-of-use asset and lease liabilities for our operating leases. The Company will amortize the implementation costs once the system is ready for its intended use, on a straight-line basis, over the term of the related service agreements, including all reasonably certain renewals. The amortization expense related to cloud computing arrangements that are service contracts will be recorded within general and administrative expenses or other operating expensesadoption had an immaterial impact on the Company's condensed consolidated statementsstatement of operations. The adoption of ASU 2018-15 did not result in a material change to its consolidated financial statements.operations, cash flows and overall liquidity. See Note 9. Leases for additional information.
The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to its condensed consolidated financial statements.
NOTE 3. REVENUE RECOGNITION
Revenues from retail restaurants are presented net of discounts and recognized when food and beverage products are sold to the end customer. Sales taxes collected from customers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities.
The Company offers delivery services to its customers. Delivery servicessales are generally fulfilled by the Company and third-party service providers. In some cases, the Company makes delivery salespartners whether ordered through Portillos.com or the Portillo's Appapp and website ("Dispatch Sales") or through third-party delivery partners ("Marketplace Sales"). In other cases,Dispatch Sales include delivery and service fees as the Company makes delivery sales through a non-Company owned channel, such ascontrols the delivery partner’s website or app (“Marketplace Sales”).
With respect todelivery. Revenue from Dispatch Sales delivery may be performed by the Company or through a third-party service provider. The Company generally recognizes revenue, including delivery fees,is recognized when the performance obligation is complete and the food is transferreddelivered to the customer. For these sales, the Company receives payment directly from the customer at the time of sale.
With respect to Revenue for Marketplace Sales is recognized in the Company generally recognizes revenue, excluding delivery fees collected byamount paid to the delivery partner whenby the performance obligationcustomer for food and excludes delivery and service fees charged by the third-party delivery partner as the Company does not control the delivery. Revenue from Marketplace Sales is complete, and control of therecognized when food is transferreddelivered to the delivery partner. Thecustomer. For these sales, the Company receives payment from the delivery partner subsequent to the transfer of food. The payment terms with respect to Marketplace Sales are short-term in nature and areorder, which is generally paid one week in arrears. For all delivery sales of food, the Company is considered the principal and recognizes revenue on a gross basis.
The Company sells gift cards which do not have expiration dates. The Company records the sale of the gift card as a contract liability and recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) in the event a gift card is not expected to be redeemed, in proportion to the pattern of rights exercised by the customer (gift card breakage). The Company has determined that 11% of gift card sales will not be redeemed and will be retained by us based on a portfolio assessment of historical data on gift card redemption patterns. Gift card breakage is recorded within revenues, net in the condensed consolidated statements of operations. The Company recognized gift card breakage of $0.1$0.2 million and $0.6$0.5 million for the quarter and two quarters ended June 25, 2023, respectively, and $0.2 million and $0.5 million for the quarter and threetwo quarters endedSeptemberJune 26, 2021, respectively, and $0.1 million and $0.6 million for the quarter and three quarters ended September 27, 20202022, respectively.
Portillo's Inc. Form 10-Q | 11
PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s only revenue related to performance obligations not yet satisfied is revenue from gift cards sold but not yet redeemed. The gift card liability included in current deferred revenue on the condensed consolidated balance sheets is as follows (in thousands):
| | | | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 | | |
| Gift card liability | $ | 3,852 | | | $ | 6,216 | | | |
Portillo's Inc. Form 10-Q | 13
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | |
| June 25, 2023 | | December 25, 2022 | | |
| Gift card liability | $ | 4,624 | | | $ | 6,988 | | | |
Revenue recognized in the condensed consolidated statement of operations for the redemption of gift cards that were included in their respective liability balances at the beginning of the year is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| Revenue recognized from gift card liability balance at the beginning of the year | $ | 446 | | | $ | 443 | | | $ | 2,923 | | | $ | 2,890 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| Revenue recognized from gift card liability balance at the beginning of the year | $ | 900 | | | $ | 830 | | | $ | 2,837 | | | $ | 2,681 | |
NOTE 4. FAIR VALUE OFINVENTORIES
Inventories consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | June 25, 2023 | | December 25, 2022 |
| Raw materials | | $ | 4,711 | | | $ | 5,722 | |
| Work in progress | | 123 | | | 104 | |
| Finished goods | | 846 | | | 876 | |
| Consigned inventory | | 813 | | | 685 | |
| | $ | 6,493 | | | $ | 7,387 | |
NOTE 5. PROPERTY & EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
| | | | | | | | | | | |
| June 25, 2023 | | December 25, 2022 |
| Land improvements | $ | 16,525 | | | $ | 16,369 | |
| Furniture, fixtures, and equipment | 139,943 | | | 126,130 | |
| Leasehold improvements | 180,639 | | | 153,341 | |
| Transportation equipment | 2,672 | | | 2,281 | |
| Construction-in-progress | 26,081 | | | 35,386 | |
| 365,860 | | | 333,507 | |
| Less accumulated depreciation | (115,417) | | | (106,471) | |
| $ | 250,443 | | | $ | 227,036 | |
Depreciation expense was $5.2 million and $10.2 million for the quarter and two quarters ended June 25, 2023, respectively, and $4.5 million and $8.9 million for the quarter and two quarters ended June 26, 2022, respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.
Portillo's Inc. Form 10-Q | 12
PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INSTRUMENTSSTATEMENTS
NOTE 6. GOODWILL & INTANGIBLE ASSETS
The Company discloses and recognizeshas one reporting unit for goodwill which is evaluated for impairment annually in the fair valuefourth quarter of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows:each fiscal year.
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities atIntangibles, net consisted of the measurement date;following (in thousands):
| | | | | | | | | | | | | | | | | |
| June 25, 2023 |
| | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | |
| Indefinite-lived intangible assets: | | | | | |
| Trade names | $ | 223,925 | | | $ | — | | | $ | 223,925 | |
| Intangibles subject to amortization: | | | | | |
| Recipes | 56,117 | | | (25,761) | | | 30,356 | |
| | | | | |
| $ | 280,042 | | | $ | (25,761) | | | $ | 254,281 | |
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and | | | | | | | | | | | | | | | | | | | | | | | |
| December 25, 2022 |
| | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | ASC 842 Adjustment | | Net Carrying Amount |
| | | | | | | |
| Indefinite-lived intangible assets: | | | | | | | |
| Trade names | $ | 223,925 | | | $ | — | | | $ | — | | | $ | 223,925 | |
| Intangibles subject to amortization: | | | | | | | |
| Recipes | 56,117 | | | (24,317) | | | — | | | 31,800 | |
| Covenants not-to-compete | 40,799 | | | (40,799) | | | — | | | — | |
| Favorable rental contracts | 2,991 | | | (1,849) | | | (1,142) | | | — | |
| $ | 323,832 | | | $ | (66,965) | | | $ | (1,142) | | | $ | 255,725 | |
Level 3—Unobservable inputs that are significant
Amortization expense was $0.7 million and $1.4 million for the quarter and two quarters ended June 25, 2023, respectively, and $0.8 million and $1.6 million for the quarter and two quarters ended June 26, 2022, respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.
The estimated aggregate amortization expense related to intangible assets held at June 25, 2023 for the measurementremainder of this year and the fair value of the assets or liabilities that are supported by little or no market datasucceeding five years and thereafter is as follows (in thousands):
| | | | | |
| Estimated Amortization |
| 2023 (excluding the two quarters ended June 25, 2023) | $ | 1,445 | |
| 2024 | 2,813 | |
| 2025 | 2,707 | |
| 2026 | 2,707 | |
| 2027 | 2,707 | |
| 2028 | 2,707 | |
| 2029 and thereafter | 15,270 | |
| $ | 30,356 | |
Portillo's Inc. Form 10-Q | 13
PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying value of the Company's cash and cash equivalents, restricted cash, accounts receivable, accounts payable and all other current assets and liabilities approximate fair values due to the short-term nature of these financial instruments.
Other assets consist of a deferred compensation plan with related assets held in a rabbi trust.
Deferred Compensation Plan - The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities carried at fair value. The fair value measurement of these trading securities is considered Level 1 of the fair value hierarchy as they are measured using quoted market prices.
As of September 26, 2021June 25, 2023 and December 27, 2020,25, 2022, the fair value of the mutual fund investments and deferred compensation obligations were as follows:follows (in thousands):
| | | September 26, 2021 | | December 27, 2020 | | June 25, 2023 | | December 25, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | | Level 1 | |
Assets - Investments designated for deferred compensation plan | Assets - Investments designated for deferred compensation plan | | | | | | | | | | | | Assets - Investments designated for deferred compensation plan | | | | | |
| Cash/money accounts | Cash/money accounts | $ | 1,447 | | | $ | — | | | $ | — | | | $ | 481 | | | $ | — | | | $ | — | | Cash/money accounts | $ | 995 | | | | $ | 1,470 | | |
| Mutual Funds | 2,776 | | | — | | | — | | | 3,643 | | | — | | | — | | |
| Mutual funds | | Mutual funds | 2,625 | | | | 2,241 | | |
| Total assets | Total assets | $ | 4,223 | | | $ | — | | | $ | — | | | $ | 4,124 | | | $ | — | | | $ | — | | Total assets | $ | 3,620 | | | | $ | 3,711 | | |
As of June 25, 2023 and December 25, 2022, we had no Level 2 or Level 3 assets.
The mutual funddeferred compensation investments and deferred compensation obligations are included in other assets, accrued expenses and other long-term liabilities in the condensed consolidated balance sheets. Changes in the fair value of securities held in the rabbi trust are recognized as trading gains and losses and included in other income in the condensed consolidated statements of operations and offsetting increases or decreases in the deferred compensation obligation are recorded in other long-term liabilities in the condensed consolidated balance sheets.
Refer to "Note 9 – Debt"Note 8. Debt for additional information relating to the fair value of the Company's outstanding debt instruments.
Portillo's Inc. Form 10-Q | 14
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities that are measured at fair value on a non-recurring basis include property and equipment, net, operating lease assets, equity-method investment, goodwill and indefinite-lived intangible assets. These assets are measured at fair value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges recognized during the quarter and threetwo quarters ended SeptemberJune 25, 2023 and June 26, 2021 and September 27, 2020.
NOTE 5. INVENTORIES
Inventories consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | September 26, 2021 | | December 27, 2020 |
| Raw materials | | $ | 2,705 | | | $ | 3,999 | |
| Work in progress | | 99 | | | 112 | |
| Finished goods | | 1,168 | | | 715 | |
| Consigned inventory | | 427 | | | 249 | |
| | $ | 4,399 | | | $ | 5,075 | |
NOTE 6. PROPERTY & EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
| | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| Land improvements | $ | 15,347 | | | $ | 15,039 | |
| Furniture, fixtures, and equipment | 112,930 | | | 105,059 | |
| Leasehold improvements | 130,093 | | | 115,695 | |
| Transportation equipment | 2,203 | | | 2,285 | |
| Construction-in-progress | 12,206 | | | 10,711 | |
| 272,779 | | | 248,789 | |
| Less accumulated depreciation | (86,158) | | | (74,020) | |
| $ | 186,621 | | | $ | 174,769 | |
Depreciation expense was $4.3 million and $12.6 million for the quarter and three quarters ended September 26, 2021, respectively, and $3.9 million and $11.8 million for the quarter and three quarters ended September 27, 2020, respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.
NOTE 7. GOODWILL & INTANGIBLE ASSETS
The Company has 1 reporting unit for goodwill which is evaluated for impairment annually in the fourth quarter of each fiscal year. The Company used the income approach and market approach to test goodwill. Under the income approach, fair value is based on the present value of estimated future cash flows. The market approach utilized both the price-earnings multiples of comparable public companies, as well as transactional data from similar companies that were recently sold. Adjustments are then made for any dissimilarities, to appropriately compare and correlate the market transactions used in this method. In estimating the fair value of the Company under the market approach, the most significant assumptions include the selection of the guideline public companies used in the analysis and the selection of EBITDA multiples. The most significant assumptions utilized in the fair value estimate of the income approach include projected annual revenue, earnings before interest, taxes, depreciation and amortization ("EBITDA"), capital expenditures and the discount rate. Growth assumptions were primarily based on a combination of historical performance, expected comparable store sales growth, the number of new restaurant additions, and performance of new restaurants.2022.
Portillo's Inc. Form 10-Q | 15
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For indefinite-lived intangibles, the relief-from-royalty method estimates the fair value of an intangible asset based on what a third party would pay for the right to use that asset. The most significant assumptions utilized in the relief-from-royalty method are projected revenues and the royalty rate.
No impairment charges were recognized for goodwill or indefinite-lived intangible assets for the quarter and three quarters ended September 26, 2021 and September 27, 2020.
Intangibles, net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| As of September 26, 2021 |
| | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | |
| Indefinite-lived intangible assets: | | | | | |
| Trade names | $ | 223,925 | | | $ | — | | | $ | 223,925 | |
| Intangibles subject to amortization: | | | | | |
| Recipes | 56,117 | | | (20,705) | | | 35,412 | |
| Covenants not-to-compete | 40,799 | | | (40,799) | | | — | |
| Favorable rental contracts | 2,991 | | | (1,787) | | | 1,204 | |
| $ | 323,832 | | | $ | (63,291) | | | $ | 260,541 | |
| | | | | |
| As of December 27, 2020 |
| | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | |
| Indefinite-lived intangible assets: | | | | | |
| Trade names | $ | 223,925 | | | $ | — | | | $ | 223,925 | |
| Intangibles subject to amortization: | | | | | |
| Recipes | 56,117 | | | (18,538) | | | 37,579 | |
| Covenants not-to-compete | 40,799 | | | (37,515) | | | 3,284 | |
| Favorable rental contracts | 2,991 | | | (1,599) | | | 1,392 | |
| $ | 323,832 | | | $ | (57,652) | | | $ | 266,180 | |
Amortization expense was $1.2 million and $5.6 million for the quarter and three quarters ended September 26, 2021, respectively, and $2.2 million and $6.6 million for the quarter and three quarters ended September 27, 2020, respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.
The estimated aggregate amortization expense for the intangibles for the remainder of this year and the succeeding five years and thereafter are $0.8 million, $3.1 million, $3.1 million, $3.0 million, $3.0 million, $2.9 million and $20.7 million, respectively.
Portillo's Inc. Form 10-Q | 1614
PHD GROUP HOLDINGS LLCPORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EQUITY METHOD INVESTMENT
The Company has a 50% interest in C&O Chicago, LLC ("C&O"). The Company accounts for the investment and financial results in the condensed consolidated financial statements under the equity method of accounting as the Company has significant influence but does not have control. The investment is adjusted to reflect the Company’s share of C&O’s earnings and losses to date and any distributions received.
A summary of financial information for C&O is as follows (in thousands): | | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| Assets: | | | |
| Current assets | $ | 2,058 | | | $ | 1,349 | |
| Property, plant, and equipment, net of accumulated depreciation $5,921 and $5,838 in 2021 and 2020, respectively | 821 | | | 837 | |
| Total assets | 2,879 | | | 2,186 | |
| | | |
| Liabilities: | | | |
| Current liabilities | 709 | | | 681 | |
| Non-current liabilities | | | |
| Deferred rent | 1,206 | | | 1,193 | |
| Total liabilities | 1,915 | | | 1,874 | |
| | | |
| Members’ equity | 964 | | | 312 | |
| Total liabilities and members' equity | $ | 2,879 | | | $ | 2,186 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| Results from operations: | | | | | | | |
| Sales | $ | 3,608 | | | $ | 2,815 | | | $ | 9,205 | | | $ | 8,480 | |
| Net income | 585 | | | 242 | | | 1,303 | | | 707 | |
Portillo's Inc. Form 10-Q | 17
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. DEBT
Debt consisted of the following (in thousands): | | | | | | | | | | | |
| September 26, 2021 | | December 27, 2020 |
| First Lien Term B-3 Loans | $ | 326,583 | | | $ | 329,076 | |
| Revolving Loans | — | | | — | |
| Second Lien Term B-3 Loans | 155,000 | | | 155,000 | |
| Unamortized discount and debt issuance costs | (11,495) | | | (14,372) | |
| Total debt, net | 470,088 | | | 469,704 | |
| Less: current portion | (3,324) | | | (3,324) | |
| Long-term debt, net | $ | 466,764 | | | $ | 466,380 | |
| | | | | | | | | | | |
| June 25, 2023 | | December 25, 2022 |
| 2023 Term Loan | $ | 300,000 | | | $ | — | |
| 2014 Term B-3 Loans | — | | | 322,428 | |
| 2023 Revolver Facility | 10,000 | | | — | |
| Unamortized discount and debt issuance costs | (3,332) | | | (3,848) | |
| Total debt, net | 306,668 | | | 318,580 | |
| Less: Short-term debt | (10,000) | | | — | |
| Less: Current portion of long-term debt | (7,500) | | | (4,155) | |
| Long-term debt, net | $ | 289,168 | | | $ | 314,425 | |
First Lien2023 Credit Agreement
On February 2, 2023 (the "Closing Date"), PHD Intermediate LLC (“Holdings”), Portillo’s Holdings LLC (the “Borrower”), the other Guarantors party thereto from time to time, each lender party thereto from time to time and Fifth Third Bank, National Association, as Administrative Agent, L/C Issuer and Swing Line Lender entered into a credit agreement (“2023 Credit Agreement”) which provides for a term A loan (the "2023 Term Loan") in an initial aggregate principal amount of $300.0 million and revolving credit commitments in an initial aggregate principal amount of $100.0 million (the “2023 Revolver Facility”). The 2023 Term Loan and 2023 Revolver Facility are scheduled to mature on February 2, 2028.
The 2023 Term Loan and the 2023 Revolver Facility will accrue interest at the forward-looking secured overnight financing rate (“SOFR”) plus an applicable rate determined upon the consolidated total net rent adjusted leverage ratio, subject to a floor of 0.00% (plus a credit spread adjustment of 0.10% per annum for 1-month interest periods and 0.15% for 3-month interest periods).
As of June 25, 2023, the interest rate on both the 2023 Term Loan and 2023 Revolver Facility was 8.00%. Pursuant to the 2023 Credit Agreement, as of June 25, 2023, the commitment fees to maintain the 2023 Revolver Facility were 0.250%, letter of credit fees were 2.75%, and letter of credit fronting fees were 0.125%. Commitment fees, letter of credit fees, and letter of credit fronting fees are recorded as interest expense in the condensed consolidated statements of operations. As of June 25, 2023, the effective interest rate was 8.16%.
The 2023 Term Loan will amortize in equal quarterly installments in aggregate annual amounts equal to $7.5 million for the first two (2) years following the Closing Date, (b) $15.0 million for the third (3rd) and fourth (4th) years following the Closing Date, and (c) $30.0 million for the fifth (5th) year following the Closing Date, commencing on the last day of the first full fiscal quarter ended after the Closing Date, with the balance payable on the final maturity date.
As of June 25, 2023, outstanding borrowings under the 2023 Credit Agreement totaled $310.0 million, comprising $300.0 million under the 2023 Term Loan and $10.0 million under the 2023 Revolver Facility. Letters of credit issued under the 2023 Revolver Facility totaled $4.3 million. As a result, as of June 25, 2023, the Company had $85.7 million available under the 2023 Revolver Facility. On July 31, 2023, the Company made a $5.0 million payment on the 2023 Revolver Facility (see Note 16. Subsequent Events for additional details).
2014 Credit Agreement
Holdings, the Borrower and certain of its subsidiaries entered into the First Lien Credit Agreementa credit agreement ("First Lien2014 Credit Agreement"), dated as of August 1, 2014 and as amended October 25, 2016, May 18, 2018 and December 6, 2019, with UBS AG, Stamford Branch, as the administrative agent and collateral agent, and other lenders from time to time party thereto (the “First Lien“2014 Lenders”). The First Lien2014 Lenders extended credit in the form of (i) first lien initial term loans in an initial aggregate principal amount of $335.0 million and (ii) a revolving credit facility in an original principal amount equal to $30.0 million, including a letter of credit sub-facility with a $7.5 million sublimit (the “Revolving“2014 Revolving Facility” and the loans thereunder, the “Revolving“2014 Revolving Loans”).
Portillo's Inc. Form 10-Q | 15
PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On December 6, 2019, the Borrower entered a third amendment to the First Lien2014 Credit Agreement (the “Third Amendment to First Lien2014 Credit Agreement”) whereby the aggregate principal amount of the term loans as of the effective date of the Third Amendment to First Lien2014 Credit Agreement was $332.4 million (the “First Lien“2014 Term B-3 Loans”), and the 2014 Revolving Facility was increased by $50to $50.0 million. The maturity date with respect to the First Lien2014 Term B-3 Loans was extended to September 6, 2024, and the maturity date with respect to the 2014 Revolving Loans date was extended to June 6, 2024.
In connection with the Third Amendment to First Lien2014 Credit Agreement, the interest rates spread for the First Lien2014 Term B-3 Loans increased by 100 basis points to 5.50% for the adjusted London interbank offered rate ("Eurocurrency Rate") loans. As of SeptemberJune 26, 2021,2022, the interest rate on the 2014 Term B-3 Loans was 6.50%6.56%. As of September 26, 2021 and September 27, 2020, the effective interest rate on the Term Loans was 7.80% and 7.52%, respectively. Beginning with December 31, 2019, the Company is required to pay on the last business day of each calendar quarter, March 31, June 30, September 30, and December 31, an aggregate principal amount of $0.8 million.
As of September 26, 2021 and December 27, 2020,25, 2022, the Company had $0.0 million inno borrowings under the Revolver outstanding, respectively.2014 Revolving Facility. As of SeptemberJune 26, 2021 and September 27, 2020,2022, the interest rate on the Revolver2014 Revolving Facility was 3.25% and 3.50%, respectively, subject to change based on a consolidated first lien net leverage ratio as defined in the First Lien2014 Credit Agreement. As of SeptemberJune 26, 2021 and September 27, 2020,2022, the commitment fees, pursuant to the First Lien,2014 Credit Agreement, to maintain the Revolver2014 Revolving Facility were 0.250% and 0.375%, respectively.. Also pursuant to the First Lien2014 Credit Agreement, as of SeptemberJune 26, 2021 and September 27, 2020,2022, letter of credit fronting fees were 0.125%. Commitment fees and letter of credit fronting fees are recorded as interest expense in the condensed consolidated statements of operations. As of June 26, 2022, the effective interest rate was 7.38%.
The Company had $5.3 million and $5.8$4.2 million of letters of credit issued against the 2014 Revolving Facility as of September 26, 2021 and December 27, 2020, respectively. As of September 26, 2021, the Company had $44.7 million of availability under the Revolving Facility.25, 2022.
Second LienOn February 2, 2023, the Company used proceeds from the 2023 Term Loan and 2023 Revolver Facility, along with cash on hand, to pay off the 2014 Credit Agreement in full in the amount of $321.8 million. The 2023 Revolver Facility under the 2023 Credit Agreement replaces the $50.0 million 2014 Revolving Facility under the 2014 Credit Agreement.
Holdings, the Borrower and certain of its subsidiaries entered into the Second Lien Credit Agreement (the “Second Lien Credit Agreement”) dated as of August 1, 2014 and as amended on October 25, 2016 and December 6, 2019 with UBS AG, Stamford Branch, as administrative agent and collateral agent, and other lenders from time to time party thereto (the “Second Lien Lenders”). The Second Lien Lenders extended
credit in the form of initial second lien term loans in an initial aggregate principal amount of $80.0 million.
Portillo's Inc. Form 10-Q | 18
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On December 6, 2019, the Borrower entered into second amendment to the Second Lien Credit Agreement (the “Second Amendment to Second Lien Credit Agreement”) whereby the aggregate principal amount of the term loans as of the effective date of the Second Amendment to the Second Lien Credit Agreement was $155.0 million (the “Second Lien Term B-3 Loans”). The maturity date of the Second Lien Term B-3 Loans was extended to December 6, 2024 (the “Second Lien Maturity Date”). In addition to the increased principal amount, the interest rates spread for the Second Lien Term B-3 Loans increased by 150 basis points to 9.50% for Eurocurrency Rate loans. The Borrower determined interest on the Second Lien at the Eurocurrency Rate, plus 9.50%. As of September 26, 2021, the interest rate on the Term Loans was 10.75%. As of September 26, 2021 and September 27, 2020, the effective interest rate on the Second Lien was 12.22% and 11.90%, respectively. No principal payments are required. The aggregate principal is due on the Second Lien Maturity Date.
In connection with the IPO, the Company received aggregate net proceeds of approximately $429.9 million after deducting underwriting discounts and commissions and offering expenses. Net proceeds of $158.1 million were used to repay the Second Lien Term B-3 Loans (including prepayment penalties) in full.
Discount and Debt Issuance Costs
In connection with entering intoPursuant to the Third Amendment to First Lien2023 Credit Agreement, the Company capitalized deferred financing costs and the Second Amendment to Second Lien Credit Agreement, in each case, dated asissuance discount of December 6, 2019, the Borrower paid debt issuance costs of $14.5$3.6 million of which $13.3 million were capitalized and are beingwill be amortized over the term of the related debt agreements,2023 Credit Agreement.
In connection with the repayment of the 2014 Credit Agreement as described above, deferred financing costs and $1.2original issuance discount of $3.5 million were expensedrecorded as incurred.a loss on debt extinguishment during the two quarters ended June 25, 2023 in the condensed consolidated statement of operations.
The Company amortized $0.6an immaterial amount and $0.3 million of deferred financing costs respectively, during each of the quarter and two quarters ended September 26, 2021June 25, 2023, respectively, and September 27, 2020,$0.5 million and $1.7$0.9 million of deferred financing costs, respectively, during each of the threequarter and two quarters ended SeptemberJune 26, 2021 and September 27, 2020,2022, respectively, which is included in interest expense in the condensed consolidated statements of operations. In addition, the Company also amortized $0.4$0.2 million and $0.3 million in original issue discount related to the long-term debt which is included in interest expenseduring the quarter and two quarters ended June 25, 2023, respectively, and $0.1 million and $0.3 million, respectively, in the condensed consolidated statements of operations in each of thequarter and two quarters ended SeptemberJune 26, 2021 and September 27, 2020, respectively, and $1.2 million in original issue discount related to long-term debt in each of the three quarters ended September 26, 2021 and September 27, 2020,2022 which is included in interest expense in the condensed consolidated statements of operations.
Total interest costs incurred were $10.7$6.5 million and $10.8$14.0 million for the quarter and two quarters ended September 26, 2021 and September 27, 2020,June 25, 2023, respectively, and $32.1$6.1 million and $34.3$12.2 million for the threequarter and two quarters ended SeptemberJune 26, 2021 and September 27, 2020.2022, respectively.
As of September 26, 2021June 25, 2023 and December 27, 2020,25, 2022, the fair value of long-term debt approximates the carrying value as it is variable rate debt. The fair value measurement of this debt is considered Level 2 of the fair value hierarchy as inputs to interest are observable, unadjusted quoted prices in active markets for similar assets or liabilities.
Borrowings under the First LienThe 2023 Credit Agreement and Second Lien Credit Agreement areis guaranteed by all domestic subsidiaries of the Borrower (subject to customary exceptions) and secured by liens on substantially all of the assets of Holdings, the Borrower and certain of the Borrower’s subsidiaries, and Holdings, the Borrower and certain of the Borrower’s subsidiaries have pledged substantially all tangible and intangible assets as collateral, subjectsubsidiary guarantors (subject to certain exclusions and exceptions.customary exceptions).
The Borrower is subject to2023 Credit Agreement also includes certain financial covenants with respect to cash interest coverage and reporting covenants pursuant to the terms of the First Lien Credit Agreement and Second Lien Credit Agreement. These covenants are customary for these types of debt agreements.total net rent adjusted leverage. As of September 26, 2021,June 25, 2023, the Company was in compliance with all covenants.
NOTE 10. REDEEMABLE PREFERRED UNITS
Pursuant to a unit purchase agreement, dated August 1, 2014, between the Company and Broad Street Principal Investments (the “Preferred Investor”), Portillo's OpCo issued 100,000 preferred units in exchange for a capital contribution of $97.7 million, net of discounts and fees as agreed between the parties. The Preferred Units have all the rights, privileges, and obligations as provided forcovenants in the Amended and Restated Limited Liability Company Agreement of the Company (the “LLC Agreement”), which include redemption rights and the amounts payable upon liquidation, but exclude dividend and conversion rights.2023 Credit Agreement.
Portillo's Inc. Form 10-Q | 1916
PHD GROUP HOLDINGS LLCPORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Preferred YieldNOTE 9. LEASES
PursuantWe qualify as an emerging growth company pursuant to the LLC Agreement, each Preferred Unit accrues on a daily basis the following applicable preferred rate, subject to certain triggering events as defined in the LLC Agreement that would result in an additional 2% to the prevailing rate below:
•11% per year until the eighth anniversaryprovisions of the closing dateJumpstart our Business Startups ("JOBS") Act. As such, we adopted ASU 2016-02, Leases (Topic 842), along with related clarifications and improvements, using a modified retrospective approach, with first presentation of the application of ASC 842 in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022. Quarterly interim financial statements for 2023 are presented under ASC 842. Quarterly interim financial statements were not required in 2022 under prior lease accounting guidance, therefore comparative amounts are not presented for those periods.
•
12% per year from the eighth to the tenth anniversary
A summary of the closing dateoperating lease right-of-use assets and liabilities is as follows (in thousands):
•13% per year thereafter | | | | | | | | | | | | | | |
| Operating leases | Classification | June 25, 2023 | | December 25, 2022 |
| Right-of-use assets | Operating lease assets | $ | 179,449 | | | $ | 166,808 | |
| | 179,449 | | | 166,808 | |
| | | | |
| Current lease liabilities | Short-term operating lease liability | 5,053 | | | 4,849 | |
| Non-current lease liabilities | Long-term operating lease liability | 217,989 | | | 200,166 | |
| | $ | 223,042 | | | $ | 205,015 | |
The rate accrues daily and compounds semiannually on June 30 and December 31components of each year on the sum of the preferred unreturned capital contributions and the unpaid Preferred Yield outstanding that has compounded for all prior periods.lease expense were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Quarter Ended | | Two Quarters Ended |
| Operating leases | Classification | June 25, 2023 | | June 25, 2023 |
| Operating lease cost | Occupancy
Other operating expenses
General and administrative expenses
Pre-opening expenses | $ | 7,007 | | | $ | 13,835 | |
| Short-term operating lease cost | Occupancy
Other operating expenses | 180 | | | 332 | |
| Variable lease cost | Occupancy
Other operating expenses
General and administrative expenses | 1,028 | | | 2,022 | |
| | $ | 8,215 | | | $ | 16,189 | |
Call RightsA summary of lease terms and discount rates for operating leases is as follows:
| | | | | | | | | | | |
| Operating leases | June 25, 2023 | | December 25, 2022 |
| Weighted-average remaining lease term (years): | 25.4 | | 25.0 |
| Weighted-average discount rate: | 9.8 | % | | 9.8 | % |
The Company can, on or after the first anniversary of the closing date, chooseSupplemental cash flow information related to redeem the Preferred Units in whole or in part, by giving proper written noticeleases is as required in the LLC Agreement. The redemption price is a premium percentage, as noted below, applied to the sum of the unreturned capital contributions for the Preferred Units and the unpaid Preferred Yield (together, the “Preferred Liquidation Amount”). As of September 26, 2021, the percentage of Preferred Liquidation Amount is 101%.follows (in thousands):
| | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 25, 2023 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows for operating leases | $ | 5,808 | | | $ | 11,581 | |
| Operating lease assets obtained in exchange for lease liabilities: | | | |
| Operating leases | 7,834 | | | 15,097 | |
Put Rights
Portillo's Inc. Form 10-Q | 17
PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of June 25, 2023, the maturity analysis of the lease liabilities consisted of the following (in thousands):
The Preferred Units holder can also require the Company to redeem the Preferred Units, in whole or in part, by delivering proper written notice (i) immediately prior to or simultaneously with a sale of the Company or (ii) at any time from and after the twelfth anniversary of the closing date. The redemption price is specified in the LLC Agreement. | | | | | |
| Year Ending | Operating Leases |
| 2023 (excluding the two quarters ended June 25, 2023) | $ | 11,987 | |
| 2024 | 24,548 | |
| 2025 | 24,558 | |
| 2026 | 24,638 | |
| 2027 | 23,933 | |
| Thereafter | 583,994 | |
| Total lease payments | 693,658 | |
| Less: imputed interest | (470,616) | |
| Total operating lease liabilities | $ | 223,042 | |
As of September 26, 2021 and December 27, 2020, the Company had recordedJune 25, 2023, operating lease payments include $217.5398.7 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $200.653.1 million respectively, as Redeemable Preferred Units. These transactions were recorded in accordance with FASB ASC 480 Distinguishing Between Liabilities and Equity. As a result of the probability of the redemption by holder feature, the Preferred Units are classified outside of permanent equity within the condensed consolidated balance sheets.
In connection with the IPO, the Company received aggregate net proceeds of approximately $429.9 million after deducting underwriting discounts and commissions and offering expenses. Net proceeds of $221.7 million were used to repay the redeemable preferred units in full including the Preferred Liquidation Amount.minimum payments for leases signed but not yet commenced.
NOTE 11. COMMON UNITS AND UNIT-BASED COMPENSATION
Common Units10. NON-CONTROLLING INTERESTS
We are the sole managing member of Portillo's OpCo, and as a result, consolidate the financial results of Portillo's OpCo. We report a non-controlling interest representing the LLC Units in Portillo's OpCo held by pre-IPO LLC Members. Changes in our ownership interest in Portillo's OpCo while we retain our controlling interest in Portillo's OpCo will be accounted for as equity transactions. As such, future redemptions or direct exchanges of September 26, 2021LLC Units in Portillo's OpCo by the pre-IPO LLC members will result in a change in ownership and December 27, 2020,reduce the Company had 51,210,222amount recorded as non-controlling interest and 51,192,434increase additional paid-in capital.
In the first and second quarters of 2023, in connection with the Q1 Secondary Offering and Overallotment Option described in Note 1. Description Of Business, 6,350,717 of LLC Units and corresponding shares of Class B common stock were redeemed, respectively, by the pre-IPO LLC Members for newly-issued shares of Class A Commoncommon stock. We received a total of 6,350,717 newly-issued LLC Units, outstanding, respectively. The increase of 131,578 Class A Common Units was primarily attributable to the issuance of common units to a member of the Company’s Board during the three quarters ended September 26, 2021.The Company has 7,477,256 options authorized to purchase Class A Common Units as designated by the Company’s 2014 Equity Incentive Plan, as amended (the "2014 Plan").
2014 Equity Incentive Planincreasing our total ownership interest in Portillo's OpCo.
The Company has granted options to acquire units under its 2014 Plan. The 2014 Plan permitsfollowing table summarizes the granting of awards to employees, officers, directorsLLC interest ownership by Portillo's Inc. and consultants of the Company and affiliates in the form of options, unit appreciation rights, Restricted Class A Units, Unrestricted Class A Units, Performance Awards and awards convertible into or otherwise based on Class A Units. The 2014 Plan gives broad powers to the Company’s Board to administer and interpret the 2014 Plan, including the authority to select the individuals to be granted awards and rights to prescribe the particular form and conditions of each award to be granted.pre-IPO LLC members:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 25, 2023 | | December 25, 2022 |
| LLC Units | | Ownership % | | LLC Units | | Ownership % |
| Portillo's Inc. | 55,073,993 | | | 75.9 | % | | 48,420,723 | | | 67.0 | % |
| pre-IPO LLC Members | 17,472,926 | | | 24.1 | % | | 23,837,162 | | | 33.0 | % |
| Total | 72,546,919 | | | 100.0 | % | | 72,257,885 | | | 100.0 | % |
As of SeptemberThe weighted average ownership percentages for the applicable reporting periods are used to attribute net income to Portillo's Inc. and the pre-IPO LLC Members. The pre-IPO LLC Members' weighted average ownership percentage for the quarter and two quarters ended June 25, 2023 was 24.2% and 27.8%, respectively. The pre-IPO LLC Members' weighted average ownership percentage for both the quarter and two quarters ended June 26, 2021, the Co2022mpany had 40,558 options available to be issued under the 2014 Plan. was 49.8%.
Portillo's Inc. Form 10-Q | 2018
PHD GROUP HOLDINGS LLCPORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UnderThe following table summarizes the 2014 Plan, the numbereffects of common units and exercise price of each option were determined prior to the IPO by the board of managers (the “Board of Managers”), or a committee designated by the Board of Managers. The awards granted are generally exercisable within a 10-year period from the date of grant. As of September 26, 2021, the Company has issued options with time vesting, and other options with time and performance vesting. The Company’s performance condition restricts certain option holders’ ability to exercise vested options until a liquidity event and payback criteria to the Buyer are both met. Because these events, conditions or criteria were not considered probable as of September 26, 2021, no compensation expense related to these options to acquire units was recognized. For options to acquire units granted without performance conditions, the Company records compensation expense over the vesting period basedchanges in ownership in Portillo's OpCo on the grant-date fair value of the option, determined using the Black-Scholes option pricing valuation model. Options issued and outstanding expire on various dates through the year 2031. The exercise price on all options outstanding as of September 26, 2021, range from $3.25 to $5.77, and the options vest over a range of immediately to five-year periods.Company’s equity (in thousands):
No additional options will be issued under the 2014 Plan. See "Note 15 – Subsequent Events" for a description of the treatment of the options to acquire units in connection with the IPO. | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| Net income attributable to Portillo's Inc. | $ | 6,788 | | | $ | 5,111 | | | $ | 6,274 | | | $ | 5,305 | |
| | | | | | | |
| Activity under equity-based compensation plans | 577 | | | 1,447 | | | 1,288 | | | 1,447 | |
| Non-controlling interest adjustment | 4,109 | | | 722 | | | 47,845 | | | 722 | |
| Redemption of LLC Units | (5) | | | — | | | (64) | | | — | |
| Establishment of liabilities under Tax Receivable Agreement and related changes to deferred tax assets associated with increases in tax basis | (1,189) | | | — | | | (13,682) | | | — | |
| Total effect of changes in ownership interest on equity attributable to Portillo's Inc. | $ | 10,280 | | | $ | 7,280 | | | $ | 41,661 | | | $ | 7,474 | |
Unit-Based Compensation Expense
In accordance with FASB ASC Topic 718, Compensation-Stock Compensation, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the grant). The Company recognized $0.2 million and $0.4 million of stock-based compensation expense for the quarter and three quarters ended September 26, 2021 and $0.2 million and $0.6 million for the quarter and three quarters ended September 27, 2020, respectively, with a corresponding increase to additional paid-in-capital. Unit-basedEquity-based compensation expense is calculated based on equity awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment to unit-basedequity-based compensation expense will be recognized at that time. Unit-based
Equity-based compensation expense included in the Company’s consolidated statements of operations is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| Labor | $ | 440 | | | $ | 340 | | | $ | 785 | | | $ | 689 | |
| General and administrative expenses | 3,744 | | | 3,525 | | | 6,935 | | | 6,960 | |
| Total equity-based compensation expense | $ | 4,184 | | | $ | 3,865 | | | $ | 7,720 | | | $ | 7,649 | |
During the quarter ended June 25, 2023, we granted 236,096 and 56,488 restricted stock units (“RSUs”) under the Portillo's Inc. 2021 Equity Incentive Plan (the "2021 Plan") to certain employees and directors, respectively. During the two quarters ended June 25, 2023, we granted 236,812 and 56,488 RSUs under the 2021 Plan to certain employees and directors, respectively. The weighted average fair value of these awards was determined using the Company's closing stock price on the applicable grant dates, which was $20.51. The RSUs granted to employees will vest one-third on each of the first three anniversaries of the date of grant subject to continued service on such date. The RSUs granted to non-employee directors will vest at the end of this fiscal year.
Employee Stock Purchase Plan
During the quarter and two quarters ended June 25, 2023, the Company issued 9,051 and 15,014 shares, respectively, under the Employee Stock Purchase Plan ("ESPP"). At June 25, 2023, 227,248 shares remained available for issuance under the ESPP. The expense incurred under the ESPP was immaterial for the quarter and two quarters ended June 25, 2023 and is included inwithin general and administrative expenses onand labor in the condensed consolidated statements of operations.
NOTE 12. INCOME TAXES
We are the sole managing member of Portillo's OpCo, and as a result, consolidate the financial results of Portillo's OpCo. Portillo's OpCo is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Portillo's OpCo is not subject to U.S. federal and state and local income taxes in the majority of states in which it operates. Any taxable income or loss generated by Portillo's OpCo is passed through to and included in the taxable income or loss of its members, including us, based upon the respective member's ownership percentage in Portillo's OpCo. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of Portillo's OpCo, as well as any stand-alone income or loss generated by Portillo's Inc.
Portillo's Inc. Form 10-Q | 19
PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Income Tax Expense
The effective income tax rate for the quarter and two quarters ended June 25, 2023 was 13.5% and 10.2%, and 17.9% and 18.1% for the quarter and two quarters ended June 26, 2022, respectively. The decrease in our effective income tax rate for the quarter and two quarters ended June 25, 2023 compared to the quarter and two quarters ended June 26, 2022 was primarily driven by the recording of net operating loss carryforwards, partially offset by an increase in the Company's ownership interest in Portillo's OpCo, which increases its share of taxable income (loss) of Portillo's OpCo. The Company’s annual effective tax rate differs from the statutory rate of 21% primarily because the Company is not liable for federal or state income taxes on the portion of OpCo’s earnings that are attributable to non-controlling interests, deferred tax adjustments and impacts from equity-based award activity.
We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of June 25, 2023, the Company concluded, based on the weight of all available positive and negative evidence, that all of its deferred tax assets (except for those deferred tax assets relating to the basis difference in its investment in Portillo's OpCo that will never be realizable or only reverse upon the eventual sale of its interest in Portillo's OpCo, which we expect would result in a capital loss which we do not expect to be able to utilize) are more likely than not to be realized.
Secondary Offerings
In the first quarter of 2023, in connection with the Q1 Secondary Offering and Overallotment Option previously discussed in Note 1. Description Of Business, 6,350,717 LLC Units were redeemed by the pre-IPO LLC Members for newly-issued shares of Class A common stock and on April 5, 2023, the Underwriter exercised its overallotment option in part, causing an additional 457,117 LLC Units to be redeemed. As a result, an increase in the tax basis of net assets of Portillo's OpCo subject to the provisions of the Tax Receivable Agreement (the "Tax Receivable Agreement" or "TRA") was recorded. The Company recorded a deferred tax asset of $37.5 million and an additional TRA liability of $51.2 million. As of June 25, 2023, we estimated that our obligation for future payments under the TRA liability totaled $302.0 million. The Company made payments of $0.8 million under the TRA during the two quarters ended June 25, 2023 relating to tax year 2021. There were no amounts paid under the TRA during the quarter ended June 25, 2023 and the quarter and two quarters ended June 26, 2022. We expect a payment of $6.3 million relating to tax year 2022 to be paid within the next 12 months.
NOTE 12.13. EARNINGS PER SHARE
Basic net earnings per share of Class A common stock is computed by dividing net income attributable to Portillo's Inc. by the weighted-average number of Class A common stock outstanding.
Diluted net earnings per share is computed by dividing net income attributable to Portillo's Inc. by the weighted-average number of dilutive securities, using the treasury stock method.
Portillo's Inc. Form 10-Q | 20
PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The computations of basic and diluted earnings per share for the quarters and two quarters ended June 25, 2023 and June 26, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| Net income | $ | 9,898 | | | $ | 10,756 | | | $ | 8,625 | | | $ | 11,306 | |
| Net income attributable to non-controlling interests | 3,110 | | | 5,645 | | | 2,351 | | | 6,001 | |
| Net income attributable to Portillo's Inc. | $ | 6,788 | | | $ | 5,111 | | | $ | 6,274 | | | $ | 5,305 | |
| | | | | | | |
| Shares: | | | | | | | |
| Weighted-average number of common shares outstanding-basic | 54,965 | | | 35,991 | | | 52,252 | | | 35,899 | |
| Dilutive share awards | 3,585 | | | 3,696 | | | 3,554 | | | 3,940 | |
| Weighted-average number of common shares outstanding-diluted | 58,550 | | | 39,687 | | | 55,806 | | | 39,839 | |
| | | | | | | |
| Basic net income per share | $ | 0.12 | | | $ | 0.14 | | | $ | 0.12 | | | $ | 0.15 | |
| Diluted net income per share | $ | 0.12 | | | $ | 0.13 | | | $ | 0.11 | | | $ | 0.13 | |
The following shares were excluded from the calculation of diluted earnings per share because they would be antidilutive (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| Shares subject to performance conditions | 1,807 | | | 1,794 | | | 1,807 | | | 1,794 | |
| Shares that were antidilutive | 22 | | | 28 | | | 14 | | | 18 | |
| Total shares excluded from diluted net income per share | 1,829 | | | 1,822 | | | 1,821 | | | 1,812 | |
NOTE 14. CONTINGENCIES
The Company is party to legal proceedings and potential claims arising in the normal conduct of business, including claims related to employment matters, contractual disputes, customer injuries, and property damage. Although the ultimate outcome of these claims and lawsuits cannot be predicted with certainty, management believes that the resulting liability, if any, will not have a material effect on the Company’s condensed consolidated financial statements.
The Company is subject to unclaimed property laws by states in the ordinary course of business. These laws generally require entities to report and remit abandoned and unclaimed property to the state which includes unclaimed wages, gift card funds, vendor payments, and customer refunds. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability. The Company routinely remits payments to states in compliance with applicable unclaimed property laws. As of September 26, 2021 and December 27, 2020, the Company recorded a $0.0 million and $0.9 million loss contingency related to the probable loss that may arise from an obligation to report and deliver unclaimed gift card funds. This loss contingency was resolved during the quarter ended September 26, 2021 for $0.8 million.
NOTE 13.15. RELATED PARTY TRANSACTIONS
As of September 26, 2021both June 25, 2023 and December 27, 2020,25, 2022, the related parties’ receivables balance consisted of a receivable balance$0.4 million due from C&O, of $0.3 million and $0.2 million, respectively, which is included in accounts receivable in the condensed consolidated balance sheets.
The Company previously issued 195,933 common units to the CEO and President for a unit subscription receivable of $1.0 million. As of September 26, 2021 and December 27, 2020, the Company had $0.0 million and $0.5 million recorded as subscription receivable, respectively. On August 13, 2021, the remaining stock subscription receivable of $0.2 million was fully repaid.Olo, Inc.
Also, Noah Glass, a member of the Company's Board, is the founder and CEO of Mobo Systems,Olo, Inc. (also known as "Olo"("Olo"), a platform the Company uses in connection with our mobile ordering application and delivery. The Company incurred $0.3 million and $0.7 million in net Olo-related costs for the quarter and three quarters ended September 26, 2021. Of these expenses, $0.2 million and $0.4 million, respectively, were included in cost of goods sold and $0.1 million and $0.3 million, respectively, were included in other operating expenses in the condensed
Portillo's Inc. Form 10-Q | 21
PHD GROUP HOLDINGS LLCPORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
consolidated statements of operations. The Company incurred $0.3 million and $0.9 million in netthe following Olo-related costs for thethe quarter and threetwo quarters ended September 27, 2020. Of these expenses, $0.2 millionJune 25, 2023 and $0.6 million, respectively, were included in cost of goods sold and $0.1 million and $0.3 million, respectively, were included in other operating expenses in the condensed consolidated statements of operations. June 26, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| Food, beverage and packaging costs | $ | 478 | | | $ | 558 | | | $ | 1,063 | | | $ | 883 | |
| Other operating expenses | 112 | | | 101 | | | 226 | | | 215 | |
| Net Olo-related costs | $ | 590 | | | $ | 659 | | | $ | 1,289 | | | $ | 1,098 | |
As of September 26, 2021June 25, 2023 and December 27, 2020, $0.025, 2022, $0.1 million and $0.2 million, wasrespectively, were payable to Olo and was included in accounts payable in the condensed consolidated balance sheets.
Additionally,Tax Receivable Agreement
We are party to a TRA with certain members of Portillo's OpCo that provides for the payment by us of 85% of the amount of tax benefits, if any, that Portillo's Inc. actually realizes or in some cases is deemed to realize as a result of certain transactions. The Company leases 23 real propertiesmade payments of $0.8 million under the TRA relating to tax year 2021 during the two quarters ended June 25, 2023. There were no amounts paid under the TRA during the quarter ended June 25, 2023 and quarter and two quarters ended June 26, 2022.
| | | | | | | | | | | | |
| (in thousands) | | June 25, 2023 | | December 25, 2022 |
| Current portion of Tax Receivable Agreement liability | | $ | 6,309 | | | $ | 813 | |
| Tax receivable agreement liability | | 295,696 | | | 252,003 | |
Secondary Offerings
In connection with the secondary offerings previously discussed in Note 1. Description Of Business, we purchased LLC Units and corresponding shares of Class B common stock and shares of Class A common stock using the proceeds of the secondary offerings at a price equal to the public offering price less the underwriting discounts and commissions from entities ownedcertain pre-IPO LLC Members and controlled by Richard Portillo. Mr. Portillo wasshareholders of the former President, CEO, and OwnerBlocker Companies, including from funds affiliated with Berkshire Partners LLC, which is our largest shareholder that beneficially owns approximately 30.8% of the Company as comprised at the date of the merger transaction in August 2014 through which the Company was acquired by funds affiliated or managed by Berkshire Partners LLC. The Company made $2.0 million and $1.9 million in rental payments related to the aforementioned 23 locations, during each of the quarters ended September 26, 2021 and September 27, 2020, respectively, and $5.9 million and $5.6 million in rental payments, during each of the three quarters ended September 26, 2021 and September 27, 2020. Beginning in 2014 through July 31, 2021, Mr. Portillo served as a consultant, under an Agreement with Portillo's Holdings, LLC (the "Consulting Agreement")June 25, 2023. Under the terms of the Consulting Agreement, $2.0 million was paid annually for various consulting services, which was included in general and administrative expenses in the condensed statements of operations. The Consulting Agreement terminated on July 31, 2021 and has not been renewed.
NOTE 14. EARNINGS (LOSS) PER UNIT16. SUBSEQUENT EVENTS
Basic earnings (loss) per unit is computed by dividing net income (loss) available to common unitholders byOn July 31, 2023, the weighted-average number of common unitsCompany made a $5.0 million payment on the 2023 Revolver Facility. The outstanding during the year.
Net income (loss) applicable to common unitholders is calculated after deducting any redeemable preferred unit accretion.
Diluted earnings (loss) per unit is computed by dividing net income available to common unit holders by the weighted-average number of common units outstanding inclusivebalance of the incentive common units, using2023 Revolver Facility upon payment is $5.0 million. As a result, as of July 31, 2023, the treasury stock method, if dilutive.
ForCompany had $90.7 million available under the quarter and three quarters ended September 26, 2021 and September 27, 2020, the potential dilutive units related to the incentive common units were not included in the computation of diluted net loss per unit as the effect of including these units in the calculation would have been anti-dilutive.
The computations of basic and diluted earnings (loss) per unit for the quarter and three quarters ended September 26, 2021 and September 27, 2020 are as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| Net income | $ | 6,531 | | | $ | 8,104 | | | $ | 20,404 | | | $ | 7,371 | |
| Less: Redeemable Preferred Units Accretion | (5,886) | | | (5,282) | | | (16,978) | | | (15,240) | |
| Net income (loss) attributable to common unit holders | $ | 645 | | | $ | 2,822 | | | $ | 3,426 | | | $ | (7,869) | |
| | | | | | | |
| Units: | | | | | | | |
| Weighted-average number of common units outstanding-basic | 51,210,222 | | | 51,192,285 | | | 51,201,100 | | | 51,187,878 | |
| Dilutive unit awards | 371,463 | | | 217,717 | | | 367,934 | | | — | |
| Weighted-average number of common units outstanding-diluted | 51,581,685 | | | 51,410,002 | | | 51,569,034 | | | 51,187,878 | |
| | | | | | | |
| Basic net income (loss) per unit | $ | 0.01 | | | $ | 0.06 | | | $ | 0.07 | | | $ | (0.15) | |
| Diluted net income (loss) per unit | $ | 0.01 | | | $ | 0.05 | | | $ | 0.07 | | | $ | (0.15) | |
Portillo's Inc. Form 10-Q | 22
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following units were excluded from the calculation of diluted earnings per share because they would be anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| Units subject to performance conditions | 318,514 | | | 57,729 | | | 318,704 | | | 57,729 | |
| Units that were antidilutive | — | | | — | | | — | | | 216,926 | |
| Total units excluded from diluted income (loss) per unit | 318,514 | | | 57,729 | | | 318,704 | | | 274,655 | |
NOTE 15. SUBSEQUENT EVENTS
The Company opened 1 new restaurant subsequent to September 26, 2021 for a total of 67 restaurants, excluding a restaurant owned by C&O, of which Portillo's owns 50% of the equity.
On October 25, 2021, Portillo's Inc. completed the IPO of its Class A common stock. Portillo's Inc. issued 23,310,810 shares, including 3,040,540 shares sold to the underwriters pursuant to their overallotment option. Portillo's Inc. received net proceeds from the offering of approximately $429.9 million (after deducting $29.1 million of underwriting fees and commissions and approximately $7.2 million of offering expenses). The net proceeds and cash on hand were used to as follows:
•to repay the redeemable preferred units in full (including the redemption premium) of $221.7 million;
•to repay all of the borrowings outstanding under the Second Lien Credit Agreement (including prepayment penalties) of $158.1 million; and
•to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC members of $57.0 million.
On October 20, 2021, the members of Portillo's OpCo executed the Second Amended and Restated Limited Liability Company Agreement for Portillo's OpCo, effecting a 7.4-for-1 reverse common unit split.
In connection with the IPO, Portillo's Inc. entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with certain pre-IPO LLC Members, pursuant to which Portillo's Inc. is obligated to pay 85% of the amount of applicable cash tax savings, if any, in U.S. federal, state, and local income tax or franchise tax that Portillo's Inc. actually realizes as a result of (a) the increases in tax basis attributable to exchanges of LLC Units by pre-IPO LLC Members and (b) tax benefits related to imputed interest deemed to be paid by Portillo's Inc. as a result of the Tax Receivable Agreement. We will retain the benefit of the remaining 15% of these tax savings.
In connection with the IPO, each option under the 2014 Plan that was outstanding, whether vested or unvested, was substituted for an option to purchase a number of shares of Class A common stock under the 2021 Plan, and the option holders received a cash payment in respect of their options (whether vested or unvested) in an aggregate amount of approximately $6.3 million, which Portillo's Inc. expects to make in the fourth quarter of fiscal 2021. In addition, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards, Portillo's Inc. will record compensation expense based on the fair value of the modified awards in the fourth quarter of fiscal 2021. We would expect to recognize a cash compensation expense of approximately $1.3 million and a non-cash compensation expense of approximately $23.3 million, each in the fourth quarter of fiscal 2021, as well as an additional non-cash compensation expense of approximately $12.7 million ratably over the next 4.5 years.
In connection with the IPO, Portillo's Inc. granted options to purchase shares of Class A common stock under its 2021 Plan. The 2021 Plan permits the granting of awards to any employee, officer, non-employee director, consultant or other personal service provider of the Company in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock-based awards. All awards granted to participants under the 2021 Plan generally will be represented by an award agreement. 7,148,049 shares of Class A common stock are available for awards under the 2021 Plan (excluding options previously awarded under the 2014 Plan that were assumed by the 2021 Plan). The 2021 Plan gives broad powers to the Board to administer and interpret the 2021 Plan, including the authority to select the individuals to be granted awards and rights to prescribe the particular form and conditions of each award to be granted.
As of October 25, 2021, following the issuance of the stock sold in the IPO, Portillo's Inc. had a total of 35,807,171 shares of Class A common stock issued and outstanding, 35,673,321 shares of Class B common stock issued and outstanding and no preferred shares issued and outstanding.
Portillo's Inc. Form 10-Q | 23
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying condensed notes. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Cautionary Statements Concerning Forward-Looking Statements” in this report and under the heading “Risk Factors” in Part I, Item IA of our prospectus, dated October 20, 2021, filed pursuant to Rule 424(b)(4)Annual Report on Form 10-K for the fiscal year ended December 25, 2022 and Part II, Item 1A of this Form 10-Q. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended Securities and Exchange Commission (the "SEC")December 25, 2022 and the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on October 22, 2021, relatingour fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our IPO, which is available onfiscal years and the SEC's website at www.sec.gov.associated quarters, months and periods of those fiscal years.
Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to provide revisions to any forward-looking statements should circumstances change.
The following discussion summarizes the significant factors affecting the condensed consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Registration Statement and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein.
Unless the context otherwise requires, references to "we," "us," "our," "Portillo's," and the "Company" refer to PHD Group Holdings LLC and its subsidiaries, which we refer to as "Portillo's OpCo.
We have prepared the unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and pursuant to the rules and regulations of the SEC.Securities and Exchange Commission (the "SEC").
Overview
Portillo’s serves iconic Chicago street food through high-energy, multichannel restaurants designed to ignite the senses and create a memorable dining experience. Since our founding in 1963 in a small trailer which Dick Portillo called “The Dog House,” Portillo’s haswe have grown to become a treasured brand with a passionate (some might say obsessed) nationwide following. We create a consumer experience like no other by combining the best attributes of fast casual and quick service concepts with an exciting energy-filled atmosphere and restaurant model capable of generating tremendous volumes. Nearly all of our restaurants were built with double lane drive-thrus and have been thoughtfully designed with a layout that accommodates a variety of access modes including dine-in, carryout, / curbside, delivery, and catering in order to quickly and efficiently serve our guests. No matter how our guests order from us, our highly productive kitchens and team members consistently serve high quality food and deliver a memorable guest experience. We believe the combination of our craveable food, multichannel sales model, dedication to operational excellence, and a distinctive culture driven by our team members gives us a competitive advantage.
As of September 26, 2021,June 25, 2023, we owned and operated 6776 Portillo’s restaurants across nineten states, including a restaurant owned by C&O Chicago, L.L.C. ("C&O") of which Portillo’s owns 50% of the equity.
Portillo's Inc. Form 10-Q | 2423
Financial Highlights for the Quarter Ended SeptemberJune 25, 2023 vs. Quarter Ended June 26, 2021:2022:
•Total revenue increased 15.3%12.3% or $18.6 million to $138.0$169.2 million;
•Same restaurant sales increased 6.8%5.9%;
•Operating income decreased 8.8%$0.1 million to $17.2$17.4 million;
•Net income decreased 19.4%$0.9 million to $6.5$9.9 million;
•Restaurant-Level Adjusted EBITDA*, a non-GAAP measure, decreased 1.1% increased $4.3 million to $34.2$42.7 million; and
•Adjusted EBITDA*, a non-GAAP measure, decreased 8.4% increased $1.6 million to $24.2$29.2 million.
Financial Highlights for the ThreeTwo Quarters Ended SeptemberJune 25, 2023 vs. Two Quarters Ended June 26, 2021:2022:
•Total revenue increased 17.5%14.1% or $59.1$40.1 million to $325.2 million;
•Same restaurant sales increased 10.6%7.4%;
•Operating income increased 26.1%$1.6 million to $52.5$25.9 million;
•Net income increased 176.8%decreased $2.7 million to $20.4$8.6 million;
•Restaurant-Level Adjusted EBITDA*, a non-GAAP measure, increased 22.5%$11.2 million to $107.1$77.6 million; and
•Adjusted EBITDA*, a non-GAAP measure increased 17.1%$3.6 million to $75.3$48.9 million.
* Adjusted EBITDA and Restaurant-Level Adjusted EBITDA are non-GAAP measures. Definitions and reconciliations of Adjusted EBITDA to net (loss) income (loss) and Restaurant-Level Adjusted EBITDA to operating income (loss) the most directly comparable financial measures presented in accordance with GAAP, are set forth on pageunder the section "Key Performance Indicators and Non-GAAP Financial Measures".
Recent Developments and Trends
We continue to see revenue growth due to our new restaurant openings, as well as same-restaurant sales growth. Total revenue grew 12.3% during the quarter ended June 25, 2023 and 14.1% for the two quarters ended June 25, 2023. Same-restaurant sales grew 305.9% .during the quarter ended June 25, 2023, compared to 1.9% same-restaurant sales growth during the same quarter in 2022. Same-restaurant sales grew 7.4% during the two quarters ended June 25, 2023, compared to 4.8% same-restaurant sales growth during the two quarters ended June 26, 2022.
During the quarter ended June 25, 2023, we opened one new restaurant in Gilbert, Arizona for a total of 76 restaurants, including a restaurant owned by C&O, of which Portillo's owns 50% of the equity. Two restaurants opened in the second through fourth quarters of 2022 and four restaurants opened during the two quarters ended June 25, 2023, positively impacted revenues by approximately $10.4 million and $20.9 million in the quarter and two quarters ended June 25, 2023, respectively. We plan to open eight new restaurants in the third and fourth quarters of 2023.
In the quarter and two quarters ended June 25, 2023, we continued to experience commodity inflation, but to a lesser extent than we saw in 2022. Commodity inflation was 5.5% and 7.1% for the quarter and two quarters ended June 25, 2023, respectively, compared to 15.2% and 15.5% for the quarter and two quarters ended June 26, 2022. We expect our overall commodity inflation to ease over the course of the year and are currently estimating commodity inflation in the mid-single digits for the full fiscal year. Labor expenses, as a percentage of revenue, slightly increased during the second quarter of 2023 compared to the same quarter in 2022. For the two quarters ended June 25, 2023, we experienced a decline in labor expenses, as a percentage of revenue, compared to the two quarters ended June 26, 2022 primarily due to increases in our average check, partially offset by additional wage investments. Subsequent to the quarter, we made additional wage investments in our team members. We currently estimate mid-single digit labor inflation for the full fiscal year. During mid-January 2023 and at the beginning of May 2023, we increased certain menu prices to reflect a net approximate 2.0% and 3.0% price increase, respectively, to continue to combat inflationary cost pressures and progress towards our goal to improve Restaurant-Level Adjusted EBITDA margins for fiscal 2023. We will continue to monitor the environment and make additional pricing decisions if necessary.
In the quarter ended June 25, 2023, operating income margin and Restaurant-Level Adjusted EBITDA Margin continued to improve since the fourth quarter of 2022. We believe this improvement was the result of our ongoing efforts to deploy strategic pricing actions, elevate guest experiences, and implement operational efficiencies.
Portillo's Inc. Form 10-Q | 24
Development Highlights
During the two quarters ended June 25, 2023, we opened the remaining four restaurants that were planned for 2022. The opening of these restaurants brings the total restaurant count to 76, including a restaurant owned by C&O of which Portillo’s owns 50% of the equity.
| | | | | |
| Location | Opening Date |
| Kissimmee, Florida | December 2022 |
| The Colony, Texas | January 2023 |
| Tucson, Arizona | February 2023 |
| Gilbert, Arizona | March 2023 |
Portillo's Inc. Form 10-Q | 25
Consolidated Results of Operations
The following table summarizes our results of operations for the quarter and threetwo quarters ended SeptemberJune 25, 2023 and June 26, 2021 and September 27, 20202022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| REVENUE | $ | 138,003 | | | 100.0 | % | | $ | 119,700 | | | 100.0 | % | | $ | 396,044 | | | 100.0 | % | | $ | 336,960 | | | 100.0 | % |
| Restaurant operating expenses: | | | | | | | | | | | | | | | |
| Cost of goods sold, excluding depreciation and amortization | 44,285 | | | 32.1 | % | | 36,572 | | | 30.6 | % | | 121,465 | | | 30.7 | % | | 106,095 | | | 31.5 | % |
| Labor | 36,921 | | | 26.8 | % | | 29,125 | | | 24.3 | % | | 102,433 | | | 25.9 | % | | 87,205 | | | 25.9 | % |
| Occupancy | 7,000 | | | 5.1 | % | | 6,368 | | | 5.3 | % | | 20,890 | | | 5.3 | % | | 18,717 | | | 5.6 | % |
| Other operating expenses | 15,554 | | | 11.3 | % | | 13,012 | | | 10.9 | % | | 44,187 | | | 11.2 | % | | 37,559 | | | 11.1 | % |
| Total operating expenses | 103,760 | | | 75.2 | % | | 85,077 | | | 71.1 | % | | 288,975 | | | 73.0 | % | | 249,576 | | | 74.1 | % |
| General and administrative expenses | 11,750 | | | 8.5 | % | | 9,706 | | | 8.1 | % | | 35,755 | | | 9.0 | % | | 27,918 | | | 8.3 | % |
| Pre-opening expenses | 347 | | | 0.3 | % | | 544 | | | 0.5 | % | | 2,307 | | | 0.6 | % | | 838 | | | 0.2 | % |
| Depreciation and amortization | 5,516 | | | 4.0 | % | | 6,138 | | | 5.1 | % | | 18,225 | | | 4.6 | % | | 18,404 | | | 5.5 | % |
| Net income attributable to equity method investment | (292) | | | (0.2) | % | | (121) | | | (0.1) | % | | (651) | | | (0.2) | % | | (353) | | | (0.1) | % |
| Other income, net | (292) | | | (0.2) | % | | (514) | | | (0.4) | % | | (1,095) | | | (0.3) | % | | (1,092) | | | (0.3) | % |
| OPERATING INCOME | 17,214 | | | 12.5 | % | | 18,870 | | | 15.8 | % | | 52,528 | | | 13.3 | % | | 41,669 | | | 12.4 | % |
| Interest expense | 10,683 | | | 7.7 | % | | 10,766 | | | 9.0 | % | | 32,124 | | | 8.1 | % | | 34,298 | | | 10.2 | % |
| NET INCOME | $ | 6,531 | | | 4.7 | % | | $ | 8,104 | | | 6.8 | % | | $ | 20,404 | | | 5.2 | % | | $ | 7,371 | | | 2.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| REVENUES, NET | $ | 169,182 | | | 100.0 | % | | $ | 150,623 | | | 100.0 | % | | $ | 325,242 | | | 100.0 | % | | $ | 285,105 | | | 100.0 | % |
| | | | | | | | | | | | | | | |
| COST AND EXPENSES: | | | | | | | | | | | | | | | |
| Restaurant operating expenses: | | | | | | | | | | | | | | | |
| Food, beverage and packaging costs | 56,229 | | | 33.2 | % | | 51,774 | | | 34.4 | % | | 109,856 | | | 33.8 | % | | 98,040 | | | 34.4 | % |
| Labor | 43,153 | | | 25.5 | % | | 37,906 | | | 25.2 | % | | 83,612 | | | 25.7 | % | | 75,219 | | | 26.4 | % |
| Occupancy | 8,237 | | | 4.9 | % | | 7,379 | | | 4.9 | % | | 16,688 | | | 5.1 | % | | 15,134 | | | 5.3 | % |
| Other operating expenses | 18,832 | | | 11.1 | % | | 15,178 | | | 10.1 | % | | 37,536 | | | 11.5 | % | | 30,343 | | | 10.6 | % |
| Total restaurant operating expenses | 126,451 | | | 74.7 | % | | 112,237 | | | 74.5 | % | | 247,692 | | | 76.2 | % | | 218,736 | | | 76.7 | % |
| General and administrative expenses | 19,609 | | | 11.6 | % | | 15,439 | | | 10.3 | % | | 38,387 | | | 11.8 | % | | 31,126 | | | 10.9 | % |
| Pre-opening expenses | 275 | | | 0.2 | % | | 423 | | | 0.3 | % | | 2,619 | | | 0.8 | % | | 979 | | | 0.3 | % |
| Depreciation and amortization | 5,941 | | | 3.5 | % | | 5,309 | | | 3.5 | % | | 11,610 | | | 3.6 | % | | 10,514 | | | 3.7 | % |
| Net income attributable to equity method investment | (381) | | | (0.2) | % | | (275) | | | (0.2) | % | | (588) | | | (0.2) | % | | (398) | | | (0.1) | % |
| Other (income) loss, net | (97) | | | (0.1) | % | | 51 | | | — | % | | (354) | | | (0.1) | % | | (105) | | | — | % |
| OPERATING INCOME | 17,384 | | | 10.3 | % | | 17,439 | | | 11.6 | % | | 25,876 | | | 8.0 | % | | 24,253 | | | 8.5 | % |
| Interest expense | 6,523 | | | 3.9 | % | | 6,097 | | | 4.0 | % | | 13,966 | | | 4.3 | % | | 12,196 | | | 4.3 | % |
| Tax Receivable Agreement liability adjustment | (579) | | | (0.3) | % | | (1,754) | | | (1.2) | % | | (1,163) | | | (0.4) | % | | (1,754) | | | (0.6) | % |
| Loss on debt extinguishment | — | | | — | % | | — | | | — | % | | 3,465 | | | 1.1 | % | | — | | | — | % |
| INCOME BEFORE INCOME TAXES | 11,440 | | | 6.8 | % | | 13,096 | | | 8.7 | % | | 9,608 | | | 3.0 | % | | 13,811 | | | 4.8 | % |
| Income tax expense | 1,542 | | | 0.9 | % | | 2,340 | | | 1.6 | % | | 983 | | | 0.3 | % | | 2,505 | | | 0.9 | % |
| NET INCOME | 9,898 | | | 5.9 | % | | 10,756 | | | 7.1 | % | | 8,625 | | | 2.7 | % | | 11,306 | | | 4.0 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Net income attributable to non-controlling interests | 3,110 | | | 1.8 | % | | 5,645 | | | 3.7 | % | | 2,351 | | | 0.7 | % | | 6,001 | | | 2.1 | % |
| NET INCOME ATTRIBUTABLE TO PORTILLO'S INC. | $ | 6,788 | | | 4.0 | % | | $ | 5,111 | | | 3.4 | % | | $ | 6,274 | | | 1.9 | % | | $ | 5,305 | | | 1.9 | % |
Portillo's Inc. Form 10-Q | 25
Revenues, Net
Revenues primarily represent the aggregate sales of food and beverages, net of discounts. Sales taxes collected from customers are excluded from revenues. Revenues in any period are directly influenced by the number of operating weeks in the period, the number of open restaurants, restaurant traffic, our menu prices, third-party delivery platform prices and product mix.
Revenues for the quarter ended September 26, 2021June 25, 2023 were $138.0$169.2 million compared to $119.7$150.6 million for the quarter ended September 27, 2020,June 26, 2022, an increase of $18.3$18.6 million or 15.3%12.3%. The increase in revenues was primarily attributed to the opening of two restaurants in the second through fourth quarters of 2022 and four restaurants during the two quarters ended June 25, 2023 and an increase in our average check and the opening of two newsame-restaurant sales. New restaurants positively impacted revenues by approximately $10.4 million in the fourth quarter of 2020 and three new restaurants during the three quarters ended September 26, 2021.June 25, 2023. Same-restaurant sales increased 6.8%5.9% during the thirdsecond quarter ended September 26, 2021,June 25, 2023, which was attributable to an increase in average check of 7.9%,7.1% and partially offset by a decline1.2% decrease in traffic.transactions. The higher average check was driven by an approximate 9.9% increase in certain menu prices mix of items sold, and more items per order. Although we did not increase prices in the quarter ended September 27, 2021, we benefited from price increases earlier in the year and expect to increase prices in the fourth quarter.partially offset by product mix. For the purpose of calculating same-restaurant sales for September 26, 2021,June 25, 2023, sales for 60the 66 restaurants that were open for at least 24 full fiscal periods were included in the Comparable Restaurant Base (as defined in "Selected Operating Data" below) versus 55 as of the end of the third quarter of 2020..
Portillo's Inc. Form 10-Q | 26
Revenues for the threetwo quarters ended September 26, 2021June 25, 2023 were $396.0$325.2 million compared to $337.0$285.1 million for the threetwo quarters ended September 27, 2020,June 26, 2022, an increase of $59.1$40.1 million or 17.5%14.1%. The increase in revenues was primarily attributed to an increasethe opening of three restaurants in guest traffic as a result of2022 and four restaurants during the recovery from the COVID-19 pandemic,two quarters ended June 25, 2023 and an increase in our same-restaurant sales. The new restaurants positively impacted revenues by approximately $20.9 million in the two quarters ended June 25, 2023. Same-restaurant sales increased 7.4% during the two quarters ended June 25, 2023, which was attributable to an increase in average check of 7.9%7.1% and the opening of two new restaurants in the fourth quarter of 2020 and three new restaurants during the quarter ended September 26, 2021. The five new restaurants opened in the fourth quarter of 2020 and the three quarters ended September 26, 2021 positively impacted revenues in the three quarters ended September 26, 2021 by approximately $24.3 million. We operated on an off-premise and drive-thru only operating model beginning in the second half of March 2020. Since May 2020, we reopened and operated in-restaurant dining in varying degrees of capacity. Same-restaurant sales increased 10.6% during the three quarters ended September 26, 2021, which was attributable to a 3.3%0.3% increase in guest traffic and a 7.3% increase in average check.transactions. The higher average check was primarily driven by an approximate 9.6% increase in menu prices mixpartially offset by product mix. During mid-January 2023 and at the beginning of items sold,May 2023, we increased certain menu prices to reflect an approximate 2.0% and more items per order.3.0% price increase, respectively, to continue to combat inflationary cost pressures and progress towards our goal to improve Restaurant-Level Adjusted EBITDA margins for fiscal 2023. For the purpose of calculating same-restaurant sales for September 26, 2021,June 25, 2023, sales for 60the 66 restaurants that were open for at least 24 full fiscal periods were included in the Comparable Restaurant Base versus 55 as of the end of the third quarter of 2020.Base.
Cost of Goods Sold, Excluding DepreciationFood, Beverage and AmortizationPackaging Costs
Cost of goods sold, excluding depreciationFood, beverage and amortization includespackaging costs include the direct costs associated with food and beverages, including paper products.products and third-party delivery commissions. The components of cost of goods sold, excluding depreciationfood, beverage and amortizationpackaging costs are variable by nature, change with sales volume, are impacted by product mix and are subject to increases or decreases in commodity costs.
Cost of goods sold, excluding depreciationFood, beverage and amortizationpackaging costs for the quarter ended September 26, 2021June 25, 2023 was $44.3$56.2 million compared to $36.6$51.8 million for the quarter ended September 27, 2020,June 26, 2022, an increase of $7.7$4.5 million or 21.1%8.6%. This increase was primarily driven by a 5.5% increase in commodity prices and the opening of two new restaurants in the second through fourth quarterquarters of 20202022 and three newfour restaurants opened during the threetwo quarters ended September 26, 2021, an increase in commodity prices, primarily ground beef and beef flats used in our Italian beef sandwiches, and an increase in items per order.June 25, 2023, partially offset by lower third-party delivery commissions. As a percentage of revenues cost of goods sold, excluding depreciationnet, food, beverage and amortization increased 1.5%packaging costs decreased 1.2% during the quarter ended September 26, 2021.June 25, 2023. The increase was primarily due to an increase in commodity prices, primarily ground beef and beef flats used to make our Italian beef sandwiches, partially offset by an increase in our average check.
Cost of goods sold, excluding depreciation and amortization for the three quarters ended September 26, 2021 was $121.5 million compared to $106.1 million for the three quarters ended September 27, 2020, an increase of $15.4 million or 14.5%. This increase was primarily driven by the opening of two new restaurants in the fourth quarter of 2020 and three new restaurants opened during the three quarters ended September 26, 2021 and an increase in items per order, partially offset by lower commodity prices earlier in the year, primarily for ground beef and beef flats used in our Italian beef sandwiches. As a percentage of revenues, cost of goods sold, excluding depreciation and amortization, decreased 0.8% during the three quarters ended September 26, 2021. This decrease was primarily due to an increase in our average check.check and lower third-party delivery commissions, partially offset by an increase in certain commodity prices.
Portillo's Inc. Form 10-Q |Food, beverage and packaging costs for the two quarters ended June 25, 2023 was $109.9 million compared to $98.0 million for the two quarters ended June 26,
$11.8 million or 12.1%. This increase was primarily driven by a 7.1% increase in commodity prices and the opening of three restaurants in 2022 and four restaurants during the two quarters ended June 25, 2023, partially offset by lower third-party delivery commissions. As a percentage of revenues, net, food, beverage and packaging costs decreased 0.6% during the two quarters ended June 25, 2023. The decrease was primarily due to an increase in average check and lower third-party delivery commissions, partially offset by an increase in certain commodity prices.
Labor Expenses
Labor expenses include hourly and management wages, bonuses and equity-based compensation, payroll taxes, workers’ compensation expense, and team member benefits. Factors that influence labor costs include minimum wage inflation and payroll tax legislation, health care costs and the performancestaffing needs of our restaurants.
Labor expenses for the quarter ended September 26, 2021June 25, 2023 were $36.9$43.2 million compared to $29.1$37.9 million for the quarter ended September 27, 2020,June 26, 2022, an increase of $7.8$5.2 million or 26.8%. This increase was primarily driven by several incremental investments to support our team members, including hourly rate increases, training costs and discretionary bonuses, and the opening of two new restaurants in the fourth quarter of 2020 and three new restaurants opened during the three quarters ended September 26, 2021, partially offset by lower staffing levels and increased productivity in our restaurants. As a percentage of revenues, labor increased 2.5% due primarily to the aforementioned incremental investments to support our team members, including hourly rate increases, training costs and discretionary bonuses, partially offset by an increase in our average check and lower staffing levels and increased productivity in our restaurants.
Labor expenses for the three quarters ended September 26, 2021 were $102.4 million compared to $87.2 million for the three quarters ended September 27, 2020, an increase of $15.2 million or 17.5%13.8%. This increase was primarily driven by the opening of two new restaurants in the second through the fourth quarter of 20202022 and three newfour restaurants opened during the threetwo quarters ended September 26, 2021June 25, 2023, and several incremental investments to support our team members, including hourlyannual rate increases training costsprimarily made in July 2022, and discretionary bonuses, partially offset by lower staffing levels and increased productivity in our restaurants.higher variable-based compensation. As a percentage of revenues, net, labor was flatincreased 0.3% primarily due to the deploymentaforementioned incremental wage rate increases to support our team members and higher labor utilization, partially offset by the increase in our average check.
Labor expenses for the two quarters ended June 25, 2023 were $83.6 million compared to $75.2 million for the two quarters ended June 26, 2022, an increase of $8.4 million or 11.2%. This increase was primarily driven by the opening of three restaurants in 2022 and four restaurants during the two quarters ended June 25, 2023, incremental investments to support our team members, including annual rate increases primarily made in July 2022 and higher variable-based compensation. As a leanerpercentage of revenues, net, labor modeldecreased 0.7% primarily due to COVID-19 related dining room capacity limitations and the reduction of restaurant hours combined with an increase in our average check, partially offset by the aforementioned incremental hourly rate increases and discretionary bonuses.to support our team members.
Portillo's Inc. Form 10-Q | 27
Occupancy Expenses
Occupancy expenses primarily consist of rent, property insurance common area expenses and property taxes.
Occupancy expenses for the quarter ended September 26, 2021June 25, 2023 were $7.0$8.2 million compared to $6.4$7.4 million for the quarter ended September 27, 2020,June 26, 2022, an increase of $0.6 million or 9.9%, primarily driven by the opening of two new restaurants in the fourth quarter of 2020 and three new restaurants opened during the three quarters ended September 26, 2021.
Occupancy expenses for the three quarters ended September 26, 2021 were $20.9 million compared to $18.7 million for the three quarters ended September 27, 2020, an increase of $2.2$0.9 million or 11.6%, primarily driven by the opening of two new restaurants in the second through fourth quarterquarters of 20202022 and three newfour restaurants opened during the threetwo quarters ended SeptemberJune 25, 2023. As a percentage of revenues, net, occupancy expenses were flat compared to the quarter ended June 26, 2021.2022.
Occupancy expenses for the two quarters ended June 25, 2023 were $16.7 million compared to $15.1 million for the two quarters ended June 26, 2022, an increase of $1.6 million or 10.3%, primarily driven by the opening of three restaurants in 2022 and four restaurants during the two quarters ended June 25, 2023. As a percentage of revenues, net, occupancy expenses slightly decreased 0.2% primarily due to an increase in our average check.
Other Operating Expenses
Other operating expenses consist of direct marketing expenses, utilities and other operating expenses incidental to operating our restaurants, such as credit card fees and repairs and maintenance.
Other operating expenses for the quarter ended September 26, 2021June 25, 2023 were $15.6$18.8 million compared to $13.0$15.2 million for the quarter ended September 27, 2020,June 26, 2022, an increase of $2.5$3.7 million or 19.5%24.1%, primarily driven bydue to an increase in credit card fees, repair and maintenance expenses, insurance, and utilities, and the opening of two new restaurants in the second through fourth quarterquarters of 20202022 and three newfour restaurants opened during the threetwo quarters ended September 26, 2021 and incremental costs associated with cleaning and utilities asJune 25, 2023. As a resultpercentage of continued expansion of our dine in capacityrevenues, net, operating expenses increased 1.0% due primarily to the recovery from the COVID-19 pandemic, as well as an increaseaforementioned increases in direct marketing expenses, and repair and maintenance.partially offset by increases in our average check.
Other operating expenses for the threetwo quarters ended September 26, 2021June 25, 2023 were $44.2$37.5 million compared to $37.6$30.3 million for the threetwo quarters ended September 27, 2020,June 26, 2022, an increase of $6.6$7.2 million or 17.6%23.7%, primarily driven by the opening of two new restaurants in the fourth quarter of 2020 and three new restaurants opened during the three quarters ended September 26, 2021 and incremental costs associated with cleaning and utilities as a result of continued expansion of our dine in capacity due to the recovery from the COVID-19 pandemic, as well as an increase in repair and maintenance variableexpenses, credit card fees, operating supplies, insurance, advertising and utilities, and the opening of three restaurants in 2022 and four restaurants during the two quarters ended June 25, 2023. As a percentage of revenues, net, operating supplies.expenses increased 0.9% due primarily to the aforementioned increases in expenses, partially offset by increases in our average check and transactions.
Portillo's Inc. Form 10-Q | 27
General and Administrative Expenses
General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations, including marketing and advertising costs incurred as well as legal and professional fees. General and administrative expenses also include unit-basedequity-based compensation expense. General and administrative expenses are impacted by changes in our team member count and costs related to strategic and growth initiatives.
General and administrative expenses for the quarter ended September 26, 2021June 25, 2023 were $11.8$19.6 million compared to $9.7$15.4 million for the quarter ended September 27, 2020,June 26, 2022, an increase of $2.0$4.2 million or 21.1%27.0%. This increase was primarily driven by an increaseincreases in variable-based compensation, salaries and wages attributable to annual rate increases, the filling of open positions, professional and training program costs for future restaurant managers as well as an increase in costs associated with being a public company, including costs related to preparation for compliance with Sarbanes-Oxley and other transaction-related fees and expenses. In 2020, the lower costs were driven by a disciplined cost reduction strategy across the majority of discretionary spend categories including travel and advertising.licensing fees.
General and administrative expenses for the threetwo quarters ended September 26, 2021June 25, 2023 were $35.8$38.4 million compared to $27.9$31.1 million for the threetwo quarters ended September 27, 2020,June 26, 2022, an increase of $7.8$7.3 million or 28.1%23.3%. This increase was primarily driven by an increaseincreases in variable-based compensation, salaries and wages attributable to annual rate increases, the filling of open positions, professional and training program costs for future restaurant managers, as well as an increase in costs associated with being a public company, including costs related preparation for compliance with Sarbanes-Oxley and other transaction-relatedlicensing fees, and advertising expenses. In 2020, the lower costs were driven by a disciplined cost reduction strategy across the majority of discretionary spend categories including travel and advertising.
Portillo's Inc. Form 10-Q | 28
Pre-Opening Expenses
Pre-opening expenses consist primarily of wages, occupancy expenses, which represent rent expense recognized during the period between the date of possession of the restaurant facility and the restaurant opening date, wages, travel for the opening team and other supporting team members, food, beverage, and the initial stocking of operating supplies. All such costs incurred prior to the opening are expensed in the period in which the expense was incurred. Pre-opening expenses can fluctuate significantly from period to period, based on the number and timing of openings and the specific pre-opening expenses incurred for each restaurant. Additionally, restaurant openings in new geographic market areas will initially experience higher pre-opening expenses than our established geographic market areas, such as the Chicagoland area, where we have greater economies of scale and incur lower travel and lodging costs for our training team.
Pre-opening expenses for the quarter ended September 26, 2021June 25, 2023 were $0.3 million compared to $0.5$0.4 million for the quarter ended September 27, 2020,June 26, 2022, a decrease of $0.2$0.1 million or 36.2%35.0%. ThisThe decrease was due to the timing and geographic location of expectedactivities related to our planned restaurant openings infor the fourth quarter of 2021 versus 2020.ended June 25, 2023 as compared to the quarter ended June 26, 2022.
Pre-opening expenses for the threetwo quarters ended September 26, 2021June 25, 2023 were $2.3$2.6 million compared to $0.8$1.0 million for the threetwo quarters ended September 27, 2020. TheJune 26, 2022, an increase of $1.5$1.6 million or 175.3%167.5%. This increase was due to three new restaurants openedthe timing and geographic location of restaurant openings in the threefirst two quarters ended September 26, 2021 compared to no new restaurants opened in the three quarters ended September 27, 2020.of 2023 versus 2022.
Depreciation and Amortization
Depreciation and amortization expenses consist of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of recipes, non-compete agreements and favorable leasehold positions.recipes.
Depreciation and amortization expense for the quarter ended September 26, 2021June 25, 2023 was $5.5$5.9 million compared to $6.1$5.3 million for the quarter ended September 27, 2020, a decreaseJune 26, 2022, an increase of $0.6 million or 10.1%11.9%. This decreaseincrease was primarily attributable to an expiring non-compete intangible asset, partially offset by incremental depreciation of capital expenditures related to the opening of two new restaurants in the second through fourth quarterquarters of 20202022 and three newfour restaurants opened induring the threetwo quarters ended September 26, 2021.June 25, 2023.
Depreciation and amortization expense for the threetwo quarters ended September 26, 2021June 25, 2023 was $18.2$11.6 million compared to $18.4$10.5 million for the threetwo quarters ended September 27, 2020, a decreaseJune 26, 2022, an increase of $1.3$1.1 million or 1.0%10.4%. This decreaseincrease was as primarily attributable to an expiring non-compete intangible asset, partially offset by incremental depreciation of capital expenditures related to the opening of five newthree restaurants in the fourth quarter of 20202022 and four restaurants during the threetwo quarters ended September 26, 2021.June 25, 2023.
Portillo's Inc. Form 10-Q | 28
Net Income Attributable to Equity Method Investment
Net income attributable to equity method investment consists of a 50% interest in C&O, which runs a single restaurant located within the Chicagoland market. We account for the investment and financial results in the condensed consolidated financial statements under the equity method of accounting as we have significant influence but do not have control.
Net income attributable to equity method investment for the quarter ended September 26, 2021June 25, 2023 was $0.3$0.4 million compared to $0.1$0.3 million for the quarter September 27, 2020.ended June 26, 2022, an increase of $0.1 million or 38.5%. This increase was primarily driven by increased revenues duerevenue, which is attributable to an increaseincreases in guest traffic asaverage check, partially offset by a result of the recovery from the COVID-19 pandemic.decrease in transactions.
Net income attributable to equity method investment for the threetwo quarters ended September 26, 2021June 25, 2023 was $0.7$0.6 million compared to $0.4 million for the threetwo quarters ended September 27, 2020.June 26, 2022. This increase was primarily driven by increased revenues duerevenue, which is attributable to an increase in guest traffic asaverage check, partially offset by a result of the recovery from the COVID-19 pandemic.decrease in transactions.
Other Income,(Income) Loss, Net
Other income,(income) loss, net includes, among other items, income resulting from discounts received for timely filing of sales tax returns, management fee income associated with our investment in C&O, trading gains or losses on our deferred compensation plan and gains or losses on asset disposals.
Other income, net for the quarter ended September 26, 2021June 25, 2023 was $0.3$0.1 million compared to $0.5other loss, net of $0.1 million for the quarter ended September 27, 2020June 26, 2022, an increase of $0.2$0.1 million or 43.2%290.2%. This decreaseincrease was primarily due to a decrease in trading gains in our deferred compensation plan.
Other income, net for three quarters ended September 26, 2021 was $1.1 million compared to $1.1 million for the three quarters ended September 27, 2020, a decrease of $0.0 million or 0.3%. Other income, net was flat primarily due to an increase in trading gains in the rabbi trust used to fund our deferred compensation plan, partially offset by an increase in lossesloss on asset disposals.sale of assets.
Portillo's Inc. Form 10-Q | 29
Other income, net for the two quarters ended June 25, 2023 was $0.4 million compared to $0.1 million for the two quarters ended June 26, 2022, an increase of $0.2 million or 237.1%. This increase was primarily due to an increase in trading gains in the rabbi trust used to fund our deferred compensation plan, partially offset by an increase in loss on sale of assets.
Interest Expense
Interest expense primarily consists of interest and fees on our Credit Facilitiescredit facilities and the amortization expense for debt discount and deferred issuance costs.
Interest expense for the quarter ended September 26, 2021June 25, 2023 was $10.7$6.5 million compared to $10.8$6.1 million for the quarter ended September 27, 2020, a decreaseJune 26, 2022, an increase of $0.1$0.4 million or 0.8%7.0%. This decreaseincrease was primarily driven by decreased borrowings ona higher effective interest rate attributable to the First Lienyear over year rising interest rate environment, partially offset by the improved lending terms associated with our 2023 Term B-3 Loans during the quarter ended September 26, 2021. There were no outstanding borrowings or repayments under the Revolving Facility during the quarter ended September 26, 2021 or the quarter ended September 27, 2020.Loan and 2023 Revolver Facility.
Interest expense for threethe two quarters ended September 26, 2021June 25, 2023 was $32.1$14.0 million compared to $34.3$12.2 million for threethe two quarters ended September 27, 2020, a decreaseJune 26, 2022, an increase of $2.2$1.8 million or 6.3%14.5%. This decreaseincrease was primarily driven by decreased borrowings undera higher effective interest rate attributable to the Revolving Facility duringyear over year rising interest rate environment, partially offset by the three quarters ended Septemberimproved lending terms associated with our 2023 Term Loan and 2023 Revolver Facility.
Our effective interest rate was 8.16% and 7.38% as of June 25, 2023 and June 26, 2021. There were no outstanding borrowings2022, respectively.
Tax Receivable Agreement Liability Adjustment
We are party to a Tax Receivable Agreement liability with certain members of Portillo's OpCo that provides for the payment by us of 85% of the amount of tax benefits, if any, that Portillo's Inc. actually realizes or repayments under the Revolving Facility duringin some cases is deemed to realize as a result of certain transactions.
The tax receivable agreement liability adjustment was $0.6 million for the quarter ended SeptemberJune 25, 2023 and $1.2 million for the two quarters ended June 25, 2023 related to a remeasurement primarily due to option exercises. The tax receivable agreement liability adjustment was $1.8 million for the quarter and two quarters ended June 26, 2021.2022.
Loss on Debt Extinguishment
Loss on debt extinguishment for the two quarters ended June 25, 2023 was $3.5 million due to the write-off of debt discount and deferred issuance costs of associated with the payoff of the 2014 Credit Agreement as described in Note 8. Debt. There was no loss on debt extinguishment for the quarter ended June 25, 2023 and the quarter and two quarters ended June 26, 2022.
Income Tax Expense
Portillo's OpCo is treated as a partnership for U.S. federal, as well as state and local income tax purposes and is not subject to taxes. Rather, any taxable income or loss generated by Portillo's OpCo is allocated to its members in relation to their respective ownership percentage of Portillo's OpCo. We are subject to U.S. federal, as well as state and local income taxes with respect to our allocable share of any taxable income or loss of Portillo's OpCo, as well as any stand-alone income or loss generated by Portillo's Inc.
Income tax expense for the quarter ended June 25, 2023 was $1.5 million compared to income tax expense of $2.3 million for the quarter ended June 26, 2022, a decrease of $0.8 million or 34.1%. Our effective income tax rate for the quarter ended June 25, 2023 was 13.5%, compared to 17.9% for the quarter ended June 26, 2022. The decrease in our effective income tax rate for the quarter ended June 25, 2023 compared to the quarter ended June 26, 2022 was primarily driven by the recording of net operating loss carryforwards, partially offset by an increase in the Company's ownership interest in Portillo's OpCo, which increases its share of taxable income (loss) of Portillo's OpCo.
Income tax expense for the two quarters ended June 25, 2023 was $1.0 million compared to income tax expense of $2.5 million for the two quarters ended June 26, 2022, a decrease of $1.5 million or 60.8%. Our effective income tax rate for the two quarters ended June 25, 2023 was 10.2%, compared to 18.1% for the two quarters ended June 26, 2022. The decrease in our effective income tax rate for the two quarters ended June 25, 2023 compared to the two quarters ended June 26, 2022 was primarily driven by the recording of net operating loss carryforwards, partially offset by an increase in the Company's ownership interest in Portillo's OpCo, which increases its share of taxable income (loss) of Portillo's OpCo.
Portillo's Inc. Form 10-Q | 30
Net Income Attributable to Non-controlling Interests
We are the sole managing member of Portillo's OpCo. We manage and operate the business and control the strategic decisions and day-to-day operations of Portillo’s OpCo and we also have a substantial financial interest in Portillo’s OpCo. Accordingly, we consolidate the financial results of Portillo’s OpCo, and a portion of our net income is allocated to non-controlling interests to reflect the entitlement of the pre-IPO LLC Members who retained their equity ownership in Portillo's OpCo (the "pre-IPO LLC Members"). The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) to Portillo's Inc. and the non-controlling interest holders.
Net income attributable to non-controlling interests for the quarter ended June 25, 2023 was $3.1 million, compared to net income attributable to non-controlling interests of $5.6 million for the quarter ended June 26, 2022, a decrease of $2.5 million or 44.9%. The decrease in net income attributable to non-controlling interests for the quarter ended June 25, 2023 was primarily due to a decrease in the non-controlling interest holders' weighted average ownership, from 49.8% for the quarter ended June 26, 2022 to 24.2% for the quarter ended June 25, 2023 and by a decrease in net income compared to the quarter ended June 26, 2022.
Net income attributable to non-controlling interests for the two quarters ended June 25, 2023 was $2.4 million, compared to net income attributable to non-controlling interest of $6.0 million for the two quarters ended June 26, 2022, a decrease of $3.7 million or 60.8%. The decrease in net income attributable to non-controlling interests for the two quarters ended June 25, 2023 was primarily due to a decrease in the non-controlling interest holders' weighted average ownership, from 49.8% for the two quarters ended June 26, 2022 to 27.8% for the two quarters ended June 25, 2023 and by a decrease in net income compared to the two quarters ended June 26, 2022.
Key Performance Indicators and Selected Operating DataNon-GAAP Financial Measures
In addition to the GAAP measures presented in our financial statements, we use the following key performance indicators and non-GAAP financial measures to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. These key measures include same-restaurant sales, new restaurant openings, average unit volume (AUV)("AUV"), same-restaurant sales, Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin. The Company includes these measures, including certain non-GAAP measures because management believes that they are important to day-to-day operations and overall strategy and are useful to investors in that they provide for greater transparency with respect to supplemental information used by management in its financial and operational decision-making.
Portillo's Inc. Form 10-Q | 29
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| Total Restaurants(a) | 67 | | 62 | | 67 | | 62 |
| AUV (in millions) (a) | N/A | | N/A | | $ | 8.0 | | | $ | 8.0 | |
| Change in same-restaurant sales (b) | 6.8 | % | | (2.1) | % | | 10.6 | % | | (7.2) | % |
| Adjusted EBITDA (in thousands) | $ | 24,202 | | | $ | 26,434 | | | $ | 75,276 | | | $ | 64,297 | |
| Adjusted EBITDA Margin | 17.5 | % | | 22.1 | % | | 19.0 | % | | 19.1 | % |
| Restaurant-Level Adjusted EBITDA (in thousands) | $ | 34,243 | | | $ | 34,623 | | | $ | 107,069 | | | $ | 87,384 | |
| Restaurant-Level Adjusted EBITDA Margin | 24.8 | % | | 28.9 | % | | 27.0 | % | | 25.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| Total Restaurants (a) | 76 | | 71 | | 76 | | 71 |
| AUV (in millions) (a) | N/A | | N/A | | $ | 8.8 | | | $ | 8.3 | |
| Change in same-restaurant sales (b) | 5.9 | % | | 1.9 | % | | 7.4 | % | | 4.8 | % |
| Adjusted EBITDA (in thousands) (b) | $ | 29,223 | | | $ | 27,613 | | | $ | 48,856 | | | $ | 45,244 | |
| Adjusted EBITDA Margin (b) | 17.3 | % | | 18.3 | % | | 15.0 | % | | 15.9 | % |
| Restaurant-Level Adjusted EBITDA (in thousands) (b) | $ | 42,731 | | | $ | 38,386 | | | $ | 77,550 | | | $ | 66,369 | |
| Restaurant-Level Adjusted EBITDA Margin (b) | 25.3 | % | | 25.5 | % | | 23.8 | % | | 23.3 | % |
(a) Includes a restaurant that is owned by C&O, Chicago, L.L.C. ("C&O") of which Portillo’s owns 50% of the equity, as described in "Note 8 – Equity Method Investment" in the notes to the audited consolidated financial statements. In the table above,equity. AUVs for the three quarters ended SeptemberJune 25, 2023 and June 26, 2021 and September 27, 20202022 represent AUVs for the Twelve Months Ended Septembertwelve months ended June 25, 2023 and June 26, 2021 and September 27, 2020,2022, respectively. Total restaurants indicated are as of a point in time.
(b) Excludes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity.
Change in Same-Restaurant Sales
The change in same-restaurant sales is the percentage change in year-over-year revenue (excluding gift card breakage) for the comparable restaurant base, which is defined as the number of restaurants open for at least 24 full fiscal periods (the “Comparable Restaurant Base”). For the threetwo quarters ended SeptemberJune 25, 2023 and June 26, 20212022, there were 66 and September 27, 2020, there were61 re 60 and 55 staurants irestaurants inn our Comparable Restaurant Base, respectively. The Comparable Restaurant Base excludes a restaurant that is owned by C&O, of which Portillo’s owns 50% of the equity, as describedequity.
Portillo's Inc. Form 10-Q | 31
A change in "Note 8 – Equity Method Investment"same-restaurant sales growth is the result of a change in restaurant transactions, average guest check, or a combination of the notestwo. We gather daily sales data and regularly analyze the guest transaction counts and the mix of menu items sold to strategically evaluate menu pricing and demand. Measuring our same-restaurant sales growth allows management to evaluate the unaudited condensed consolidated financial statements.performance of our existing restaurant base. We believe this measure provides a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of restaurant openings and enables investors to better understand and evaluate the Company’s historical and prospective operating performance.
Average Unit Volume ("AUV")
AUV is the total revenue (excluding gift card breakage) recognized in the Comparable Restaurant Base, including C&O, divided by the number of restaurants in the Comparable Restaurant Base, including C&O, by period.
This key performance indicator allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.
NON-GAAP FINANCIAL MEASURES
Non-GAAP Financial Measures
To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: Adjusted EBITDA and Adjusted EBITDA Margin, and Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin. Accordingly, these measures are not required by, nor presented in accordance with GAAP, but rather are supplemental measures of operating performance of our restaurants. You should be aware that these measures are not indicative of overall results for the Company and that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. These measures are supplemental measures of operating performance and our calculations thereof may not be comparable to similar measures reported by other companies. These measures are important measures to evaluate the performance and profitability of our restaurants, individually and in the aggregate, but also have important limitations as analytical tools and should not be considered in isolation as substitutes for analysis of our results as reported under GAAP.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA represents net income (loss) before depreciation and amortization, interest expense and income taxes, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of net income, (loss), the most directly comparable GAAP measure to Adjusted EBITDA, included in “Non-GAAP Measures”EBITDA. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues.
We use Adjusted EBITDA and Adjusted EBITDA Margin (i) to evaluate our operating results and the effectiveness of our business strategies, (ii) internally as benchmarks to compare our performance to that of our competitors and (iii) as factors in evaluating management’s performance when determining incentive compensation.
We believe that Adjusted EBITDA and Adjusted EBITDA Margin are important measures of operating performance because they eliminate the impact of expenses that do not relate to our core operating performance. Adjusted EBITDA and Adjusted EBITDA Margin are supplemental measures of operating performance and our calculations thereof may not be comparable to similar measures reported by other companies. Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as analytical tools and should not be considered in isolation as substitutes for analysis of our results as reported under GAAP.
Portillo's Inc. Form 10-Q | 3032
The following table reconciles net income to Adjusted EBITDA and Adjusted EBITDA margin (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| Net income | $ | 6,531 | | | $ | 8,104 | | | $ | 20,404 | | | $ | 7,371 | |
| Depreciation and amortization | 5,516 | | | 6,138 | | | 18,225 | | | 18,404 | |
| Interest expense | 10,683 | | | 10,766 | | | 32,124 | | | 34,298 | |
| EBITDA | 22,730 | | | 25,008 | | | 70,753 | | | 60,073 | |
| Deferred rent(1) | 781 | | | 738 | | | 2,375 | | | 2,050 | |
| Unit-based compensation and consulting fees(2) | 337 | | | 687 | | | 1,611 | | | 2,064 | |
| Other income(3) | 25 | | | (7) | | | 157 | | | 45 | |
| Transaction-related fees & expenses(4) | 329 | | | 8 | | | 380 | | | 65 | |
| Adjusted EBITDA | $ | 24,202 | | | $ | 26,434 | | | $ | 75,276 | | | $ | 64,297 | |
| Adjusted EBITDA Margin | 17.5 | % | | 22.1 | % | | 19.0 | % | | 19.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| Net income | $ | 9,898 | | | $ | 10,756 | | | $ | 8,625 | | | $ | 11,306 | |
| Depreciation and amortization | 5,941 | | | 5,309 | | | 11,610 | | | 10,514 | |
| Interest expense | 6,523 | | | 6,097 | | | 13,966 | | | 12,196 | |
| Loss on debt extinguishment | — | | | — | | | 3,465 | | | — | |
| Income tax expense | 1,542 | | | 2,340 | | | 983 | | | 2,505 | |
| EBITDA | 23,904 | | | 24,502 | | | 38,649 | | | 36,521 | |
| Deferred rent (1) | 1,169 | | | 865 | | | 2,393 | | | 1,946 | |
| Equity-based compensation | 4,184 | | | 3,864 | | | 7,720 | | | 7,649 | |
| | | | | | | |
| Other loss (2) | 377 | | | 93 | | | 496 | | | 125 | |
| Transaction-related fees & expenses (3) | 168 | | | 43 | | | 761 | | | 757 | |
| Tax Receivable Agreement liability adjustment (4) | (579) | | | (1,754) | | | (1,163) | | | (1754) | |
| Adjusted EBITDA | $ | 29,223 | | | $ | 27,613 | | | $ | 48,856 | | | $ | 45,244 | |
| Adjusted EBITDA Margin (5) | 17.3 | % | | 18.3 | % | | 15.0 | % | | 15.9 | % |
(1) Represents the difference between cash rent payments and the recognition of straight-line rent expense recognized over the lease term. (2) Represents unit-based compensation and consulting fees related to our former owner.
(3)(2) Represents loss on disposal of property and equipment.
(3) Represents the exclusion of certain expenses that management believes are not indicative of ongoing operations, consisting primarily of certain professional fees.
(4) Represents fees and expenses associated with public company readiness.remeasurement of the Tax Receivable Agreement liability.
(5) Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by Revenues, net.
Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin
Restaurant-Level Adjusted EBITDA is defined as revenue, less restaurant operating expenses, which include cost of goods sold, excluding depreciationfood, beverage and amortization,packaging costs, labor expenses, occupancy expenses and other operating expenses. Restaurant-Level Adjusted EBITDA excludes corporate level expenses and depreciation and amortization on restaurant property and equipment. Restaurant-Level Adjusted EBITDA Margin represents Restaurant-Level Adjusted EBITDA as a percentage of revenue. Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are not required by, nor presented in accordance with GAAP. Rather, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are supplemental measures of operating performance of our restaurants. You should be aware that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are not indicative of overall results for the Company, and Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. In addition, our calculations thereof may not be comparable to similar measures reported by other companies.
We believe that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are important measures to evaluate the performance and profitability of our restaurants, individually and in the aggregate. Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin have limitations as analytical tools and should not be considered as a substitute for analysis of our results as reported under GAAP.
Portillo's Inc. Form 10-Q | 31
The following table reconciles operating income to Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Two Quarters Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| Operating income | $ | 17,384 | | | $ | 17,439 | | | $ | 25,876 | | | $ | 24,253 | |
| Plus: | | | | | | | |
| General and administrative expenses | 19,609 | | | 15,439 | | | 38,387 | | | 31,126 | |
| Pre-opening expenses | 275 | | | 423 | | | 2,619 | | | 979 | |
| Depreciation and amortization | 5,941 | | | 5,309 | | | 11,610 | | | 10,514 | |
| Net income attributable to equity method investment | (381) | | | (275) | | | (588) | | | (398) | |
| Other (income) loss, net | (97) | | | 51 | | | (354) | | | (105) | |
| Restaurant-Level Adjusted EBITDA | $ | 42,731 | | | $ | 38,386 | | | $ | 77,550 | | | $ | 66,369 | |
| Restaurant-Level Adjusted EBITDA Margin (1) | 25.3 | % | | 25.5 | % | | 23.8 | % | | 23.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Three Quarters Ended |
| September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
| Operating income | $ | 17,214 | | | $ | 18,870 | | | $ | 52,528 | | | $ | 41,669 | |
| Plus: | | | | | | | |
| General and administrative expenses | 11,750 | | | 9,706 | | | 35,755 | | | 27,918 | |
| Pre-Opening expenses | 347 | | | 544 | | | 2,307 | | | 838 | |
| Depreciation and amortization | 5,516 | | | 6,138 | | | 18,225 | | | 18,404 | |
| Net income attributable to equity method investment | (292) | | | (121) | | | (651) | | | (353) | |
| Other income, net | (292) | | | (514) | | | (1,095) | | | (1,092) | |
| Restaurant-Level Adjusted EBITDA | $ | 34,243 | | | $ | 34,623 | | | $ | 107,069 | | | $ | 87,384 | |
| Restaurant-Level Adjusted EBITDA Margin | 24.8 | % | | 28.9 | % | | 27.0 | % | | 25.9 | % |
Portillo's Inc. Form 10-Q | 33
Liquidity and Capital Resources
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, and availability under our Revolving2023 Revolver Facility. As of September 26, 2021,June 25, 2023, we maintained a cash and cash equivalents and restricted cash balance of $49.6$22.5 million and had $44.7$85.7 million of availability under our Revolver.2023 Revolver Facility, after giving effect to $10.0 million in borrowings and $4.3 million in outstanding letters of credit.
Our primary requirements for liquidity are to fund our working capital needs, operating lease obligations, capital expenditures, and general restaurant support center needs. Our requirements for working capital are not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening of new restaurants, existing capital investments (both for remodels and maintenance), as well as investments in our restaurant support center infrastructure.
Liquidity Upon IPOBased upon current levels of operations and anticipated growth, we expect that cash flows from operations will be sufficient to meet our needs for at least the next twelve months, and the foreseeable future.
See Note 8. Debt for a discussion of the 2023 Credit Agreement, effective February 2, 2023.
On October 25, 2021, Portillo's Inc.
Secondary Offering
In the first quarter of 2023, the Company completed the IPOa secondary offering of 23,310,8108,000,000 shares of the Company's Class A common stock (including 3,040,540at an offering price of $21.05 per share. On April 5, 2023, the Underwriter exercised its overallotment option in part, to purchase an additional 620,493 shares sold toof the underwriters pursuant to their overallotment option)Company's Class A common stock at an offering price of $21.05 per share (collectively the “Q1 Secondary Offering and Overallotment Option”). Portillo's Inc. receivedWe used all of the net proceeds from the offering of approximately $429.9 million (after deducting underwriting feesQ1 Secondary Offering and commissions and offering expenses). The net proceeds and cash on hand were used as follows:
•to repay the redeemable preferred units in full (including the redemption premium) of $221.7 million;
•to repay all of the borrowings outstanding under the Second Lien Credit Agreement (including any prepayment penalties) of $158.1 million; and
•Overallotment Option to purchase LLC Units orand corresponding shares of Class B common stock from certain pre-IPO LLC Members and to repurchase shares of Class A common stock from certainthe shareholders of the Blocker Companies at a price per LLC Unit or share of Class A common stock, as applicable, equal to the public offering price per share of Class A common stock, less the underwriting discounts and commissions. The proceeds from the Q1 Secondary Offering and Overallotment Option were used to (i) purchase 2,269,776 existing shares of Class A common stock from the shareholders of the Blocker Companies and (ii) redeem 6,350,717 LLC Units held by the pre-IPO LLC membersMembers. In connection with the redemption, 6,350,717 shares of $57.0 million.Class B common stock were surrendered by the pre-IPO LLC Members and canceled and the Company received 6,350,717 newly-issued LLC Units, increasing the Company's total ownership interest in Portillo's OpCo. As a result, Portillo’s did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change; however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock.
Tax Receivable Agreement
In connection with the IPO, Portillo's Inc.we entered into thea Tax Receivable Agreement ("TRA") with thecertain of our pre-IPO LLC Members, pursuant to which Portillo's Inc. is obligatedwe will generally be required to pay 85% of the amount of applicable cash tax savings, if any, in U.S. federal, state, and local income tax that we actually realize or franchise tax that Portillo's Inc. actually realizesare deemed to realize, as a result of (a)(i) our allocable share of existing tax basis in depreciable or amortizable assets relating to LLC Units acquired in the IPO, (ii) certain favorable tax attributes acquired by the Company from entities treated as corporations for U.S. tax purposes that held LLC Units prior to the Transactions ("Blocker Companies") (including net operating losses and the Blocker Companies' allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis attributablein depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with the IPO and (y) future redemptions or exchanges of LLC Units by pre-IPO LLC Members for Class A common stock and (b)(iv) certain other tax benefits related to imputed interest deemed to be paid by Portillo's Inc. as a result ofentering into the Tax Receivable Agreement. We will retainTRA, including payments made under the benefit of the remaining 15% of these tax savings.TRA.
Portillo's Inc. Form 10-Q | 3234
As of June 25, 2023, we estimate that our obligation for future payments under the TRA totaled $302.0 million. Amounts payable under the TRA are contingent upon, among other things, (i) generation of future taxable income over the term of the TRA and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we would not be required to make the related TRA payments. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us, but we expect the cash tax savings we will realize to fund the required payments. Assuming no material changes in relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we estimate that the tax savings associated with all tax attributes described above would aggregate to approximately $355.3 million as of June 25, 2023. Under this scenario, we would be required to pay the TRA Parties approximately 85% of such amount, or $302.0 million, primarily over the next 15 years, substantially declining in year 16 through year 47. In the two quarters ended June 25, 2023, we made a TRA payment of $0.8 million relating to tax year 2021. We made no TRA payments in the quarter ended June 25, 2023. We expect a payment of $6.3 million relating to tax year 2022 to be paid within the next 12 months.
Summary of Cash Flows
The following table presents a summary of our cash flows from operating, investing and financing activities:activities (in thousands): | | (in thousands) | Three Quarters Ended | |
| | | Two Quarters Ended |
| | September 26, 2021 | | September 27, 2020 | | June 25, 2023 | | June 26, 2022 |
| Net cash provided by operating activities | Net cash provided by operating activities | $ | 39,891 | | | $ | 38,105 | | Net cash provided by operating activities | $ | 31,309 | | | $ | 25,359 | |
| Net cash used in investing activities | Net cash used in investing activities | (27,764) | | | (10,108) | | Net cash used in investing activities | (37,326) | | | (13,910) | |
| Net cash used in financing activities | Net cash used in financing activities | (4,002) | | | (17,218) | | Net cash used in financing activities | (15,953) | | | (982) | |
| Net increase in cash and cash equivalents and restricted cash | 8,125 | | | 10,779 | | |
| Net (decrease) increase in cash and cash equivalents and restricted cash | | Net (decrease) increase in cash and cash equivalents and restricted cash | (21,970) | | | 10,467 | |
| Cash and cash equivalents and restricted cash at beginning of period | Cash and cash equivalents and restricted cash at beginning of period | 41,432 | | | 22,629 | | Cash and cash equivalents and restricted cash at beginning of period | 44,427 | | | 39,263 | |
| Cash and cash equivalents and restricted cash at end of period | Cash and cash equivalents and restricted cash at end of period | $ | 49,557 | | | $ | 33,408 | | Cash and cash equivalents and restricted cash at end of period | $ | 22,457 | | | $ | 49,730 | |
Operating Activities
Net cash provided by operating activities for the threetwo quarters ended September 26, 2021June 25, 2023 was $39.9$31.3 million compared to net cash provided by operating activities of $38.1$25.4 million for the threetwo quarters ended September 27, 2020,June 26, 2022, an increase of $1.8$6.0 million or 4.7%23.5%. This increase was primarily driven by an increase in net income of $13.0 million, and athe change in operating assets and liabilities of $11.4$7.2 million and the change in non-cash items of $1.5 million, partially offset by the impactlower net income of non-cash charges of $0.1$2.7 million.
The $11.4$7.2 million change in our operating assetassets and liabilityliabilities balances was primarily driven by operating assets and liabilities being a use of net cash of $4.4$0.5 million in threethe two quarters ended September 27, 2020,June 25, 2023, compared to a sourceuse of net cash of $6.9$7.7 million in threetwo quarters ended September 27, 2020June 26, 2022 driven by the change in accrued expenses and other liabilities in the two quarters ended June 25, 2023. The $1.5 million change from the two quarters ended June 25, 2023 in non-cash charges is attributable to loss on debt extinguishment, an increase in depreciation and amortization and a decrease in the receipt of deferred lease incentives andTax Receivable Agreement liability adjustment. The decrease in net income for the deferral of employer social security taxes of $3.4 million pursuanttwo quarters ended June 25, 2023 was primarily due to the CARES Actfactors driving the aforementioned expenses as described in condensed consolidated results of operations, partially offset by higher revenue in the threetwo quarters ended September 27, 2020. The CARES Act also allowed eligible employersJune 25, 2023 compared to defer the remittance of certain FICA taxes otherwise payable during calendar year 2020 and remit half of such deferred amounts on or before December 31, 2021 and half on or before December 31,two quarters ended June 26, 2022.
Investing Activities
Net cash used in investing activities was $27.8$37.3 million for the threetwo quarters ended September 26, 2021June 25, 2023 compared to net cash used in investing activities of $10.1$13.9 million for the threetwo quarters ended September 27, 2020,June 26, 2022, an increase of $17.7$23.4 million or 174.7%168.3%. This increase was primarily due to the opening of three new restaurants in 2021 and the deferralnumber of restaurant openings and buildings in 2020process during the first two quarters of 2023 compared to the fourth quarter.first two quarters of 2022.
Portillo's Inc. Form 10-Q | 35
Financing Activities
Net cash used in financing activities was $4.0$16.0 million for the threetwo quarters ended September 26, 2021June 25, 2023 compared to net cash used in financing activities of $17.2$1.0 million for the threetwo quarters ended September 27, 2020, a decreaseJune 26, 2022, an increase of $13.2 million.$15.0 million or 1524.5%. This decreaseincrease is primarily due to no repayments onthe refinancing of our Revolving Facility duringlong-term debt as described in Note 8. Debt and the three quarters ended September 26, 2021 compared to repayments on borrowingspayment of $17.5 million during the three quarters ended September 27, 2020.deferred financing costs of $3.6 million.
Revolving2023 Revolver Facility and Liens
We maintain a Revolving Facility thatOn February 2, 2023, Holdings, the Borrower, the other Guarantors party thereto from time to time, each lender party thereto from time to time and Fifth Third Bank, National Association, as Administrative Agent, L/C Issuer and Swing Line Lender entered into the 2023 Credit Agreement which provides for a revolving total commitmentthe 2023 Term Loan in an initial aggregate principal amount of $50.0$300.0 million and the 2023 Revolver Facility in an initial aggregate principal amount of $100.0 million. The Revolving Facility will mature and all amounts outstanding will be due and payable in June 2024. The Revolving Facility permits the issuance of letters of credit upon our request.
In March 2020, we borrowed $40.0 millionproceeds under the Revolving2023 Term Loan and 2023 Revolver Facility, along with cash on hand, were used to enhance liquidityrepay outstanding indebtedness under the 2014 Credit Agreement and provide financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020.to pay related transaction expenses. The 2023 Term Loan and 2023 Revolver Facility are scheduled to mature on February 2, 2028.
As of September 26, 2021, there were noJune 25, 2023, we had $10.0 million of borrowings outstanding under the Revolver. We had $44.7 million2023 Revolver Facility, and letters of availability,credit issued under the 2023 Revolver Facility totaled $4.3 million. As a result, as of September 26, 2021, after giving effect to $5.3 million in outstanding letters of credit.
In connection with the IPO,June 25, 2023, the Company received aggregate net proceeds of approximately $429.9had $85.7 million after deducting underwriting discounts and commissions and offering expenses. Net proceeds of $158.1 million were used to repay the Second Lien Term B-3 Loans (including prepayment penalties) in full.
Portillo's Inc. Form 10-Q | 33
Borrowingsavailable under the First Lien Credit Agreement and Second Lien Credit Agreement are guaranteed by PHD Intermediate LLC ("Holdings"), Portillo’s Holdings LLC (the "Borrower") and certain of2023 Revolver Facility. On July 31, 2023, the Borrower’s subsidiaries, and Holdings,Company made a $5.0 million payment on the Borrower and certain of the Borrower’s subsidiaries have pledged substantially all tangible and intangible assets as collateral, subject to certain exclusions and exceptions.2023 Revolver Facility (see Note 16. Subsequent Events for additional details).
The Borrower is subject to2023 Credit Agreement also includes certain financial covenants with respect to cash interest coverage and reporting covenants pursuant to the terms of the First Lien Credit Agreement and Second Lien Credit Agreement. These covenants are customary for these types of debt agreements.total net rent adjusted leverage. As of September 26, 2021,June 25, 2023, the Company was in compliance with all covenants.covenants in the 2023 Credit Agreement.
Contractual ObligationsMaterial Cash Requirements
There have been no material changes to the contractual obligationsmaterial cash requirements as disclosed in our Registration StatementAnnual Report on Form 10-K for the fiscal year ended December 25, 2022, other than those payments made in the ordinary course of business.
Off-Balance Sheet Arrangements
There have been no other material changesRefer to our off-balance sheet arrangements as disclosed in our Registration Statement.Note 8. Debt for a description of a Credit Agreement and the repayment of borrowings.
Critical Accounting Policies and Estimates
OurThis discussion and analysis of our condensed consolidated financial condition and results of operations is based upon the accompanyingCompany's condensed consolidated financial statements, and notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidatedthese financial statements requires usthe Company to make estimates, judgments, and assumptions which we believe to be reasonable, basedthat can have a meaningful effect on the information available. These estimates and assumptions affect the reported amountsreporting of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.condensed consolidated financial statements. There have been no significant changes to our critical accounting estimates or significant accounting policies as disclosed in our Registration Statement.Annual Report on Form 10-K for the fiscal year ended December 25, 2022.
See "Note 2 – Summary of Significant Accounting Policies-Recently Issued Accounting Standards” under Part I, Item 1 of this Form 10-Q.The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to its condensed consolidated financial statements.
JOBS Act
We qualify as an “emergingemerging growth company”company ("EGC") pursuant to the provisions of the Jumpstart our Business Startups (“JOBS”) Act. For as long as we are an “emerging growth company,”EGC, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,”EGCs, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company”EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company”EGC can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the extended transition period.
Portillo's Inc. Form 10-Q | 3436
We will remain an EGC until the last day of the fiscal year following the fifth anniversary of the date of the first sale of our Class A common stock pursuant to an effective registration statement, which was October 21, 2021, unless, prior to that time, we have more than $1.07 billion in annual gross revenue, have a market value for our Class A common stock held by non-affiliates of more than $700 million as of the last day of our second fiscal quarter of the fiscal year and a determination is made that we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or issue more than $1.0 billion of non-convertible debt over a three-year period, whether or not issued in a registered offering. We have availed ourselves of the reduced reporting obligations with respect to executive compensation disclosure and expect to continue to avail ourselves of the reduced reporting obligations available to EGCs in future filings.
Portillo's Inc. Form 10-Q | 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to our exposure to market risks as previously discloseddescribed in Part II, Item 7A of our Registration Statement.Annual Report on Form 10-K for the fiscal year ended December 25, 2022.
Item 4. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to our internal control over financial reporting that occurred during the quarter ended September 26, 2021June 25, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Portillo's Inc. Form 10-Q | 3538
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Information regarding certain legal proceedings to which the Company is a party are discussed in "Note 12 – Contingencies”Note 14. Contingencies in the notes to the unaudited condensed consolidated financial statements and is incorporated herein by reference.
Item 1A. Risk FactorsFactors.
There have been no material changes fromto the risk factors previously disclosed in the prospectus, dated October 20, 2021, filed pursuantCompany's Annual Report on Form 10-K for the year ended December 25, 2022, except as updated in the Company's last Quarterly Report on Form 10-Q for the quarter ended March 26, 2023, and as set forth below.
Matters relating to Rule 424(b)(4)employment and labor law could have a material adverse effect, result in litigation or additional union activities, add significant costs and divert management attention.
Various federal and state labor laws govern our relationships with our team members and affect our operating costs. Our operations are subject to the U.S. Occupational Safety and Health Act, which governs worker health and safety, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages and overtime, and a variety of similar federal, state and local laws that govern these and other employment law matters. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, overtime, family leave, working conditions, safety standards, immigration status, state and local payroll taxes, federal and state laws which prohibit discrimination, citizenship requirements and other wage and benefit requirements for team members classified as non-exempt. In addition, with the SECpassage in 2010 of the U.S. Patient Protection and Affordable Care Act (the “ACA”), we are required to provide affordable coverage, as defined in the ACA, to eligible team members, or otherwise be subject to a payment per team member based on October 22, 2021, relatingthe affordability criteria in the ACA. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Significant additional government regulations and new laws, including mandated increases in minimum wages, changes in exempt and non-exempt status, or increased mandated benefits such as health care and insurance costs could have a material adverse effect on our business, financial condition and results of operations. In addition, changes in federal or state workplace regulations could adversely affect our ability to meet our IPO,financial targets.
Federal law requires that we verify that our workers have the proper documentation and authorization to work in the U.S. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our team members may, without our knowledge, be unauthorized workers. We currently participate in the “E-Verify” program, an Internet-based, free program run by the U.S. government to verify employment eligibility, in Arizona, which is the only state in which we operate where participation is required. However, use of the “E-Verify” program does not guarantee that we will properly identify all applicants who are ineligible for employment, and we are not utilizing “E-Verify” in any other states where we operate. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized, we could experience adverse publicity that may negatively impact our brand and may make it more difficult to hire and keep qualified team members. Termination of a significant number of team members who are unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new team members and result in adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. These factors could materially adversely affect our business, financial condition and results of operations.
Portillo's Inc. Form 10-Q | 39
Our business is subject to the risk of litigation by team members, consumers, suppliers, shareholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies, including us, have been subject to lawsuits alleging violations of federal and state laws regarding workplace and employment conditions, discrimination and similar matters, and some restaurants have been subject to class action lawsuits in respect of such matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers and failure to pay for all hours worked. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations and result in increases in our insurance premiums. In addition, they may generate negative publicity, which could reduce guest traffic and sales. Although we maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could have a material adverse effect on our business, financial condition and results of operations.
On April 13, 2023, certain of our team members at one of our commissaries elected to be represented by a union. We filed objections to the SEC's websiteelection with the National Labor Relations Board on April 19th, asserting that the union and its agent's promises prevented a free and fair election. We have appealed to the NLRB Regional Director to set aside the election. Although we have not received other petitions to unionize, it is possible that additional team members may elect to be represented by labor unions in the future. If a significant number of our team members were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements, it could have a material adverse effect on our business, financial condition and results of operations. In addition, a labor dispute involving some or all our team members may harm our reputation, disrupt our operations and reduce our revenues, and resolution of disputes could increase our costs. Further, if we enter into a new market with unionized construction companies, or the construction companies in our current markets become unionized, construction and build-out costs for new restaurants in such markets could materially increase.
Changes in market and general economic conditions have in the past adversely affected, and may in the future adversely affect, our business and profitability and cause volatility in our results of operations.
Recently, concerns have arisen with respect to the financial condition of a number of banking organizations in the United States, in particular those with exposure to certain types of depositors and large portfolios of investment securities. In early March, the FDIC was appointed the receiver for both Silicon Valley Bank and Signature Bank in early March 2023 and First Republic Bank in early May 2023 after the banks were closed by regulators. While we do not have any exposure to these banks, we do hold the cash and cash equivalents used to meet our working capital and operating expense needs, primarily at www.sec.gov.one financial institution, often in balances that exceed the current FDIC insurance limits. If other banks and financial institutions enter receivership or become insolvent in the future, our ability to access our cash and cash equivalents to satisfy our operations may be threatened and could have a material adverse effect on our business and financial condition. We may also lose amounts in excess of the FDIC insurance limits and there can be no guarantee that the government would intervene. Our ability to borrow under our existing credit facilities, as well as our ability to secure additional sources of financing, may be impacted in significant ways. We may also be adversely impacted by increased costs of capital resulting from additional regulatory changes and requirements. Our vendors and service providers may also suffer disruptions that in turn adversely impact our operations and business.
Economic and market conditions have had, and will continue to have, a direct and material impact on our results of operations and financial condition because our performance is heavily influenced by the overall strength of general economic conditions. Concerns about or future adverse developments in the global and domestic financial markets also impact confidence in economic conditions, specifically consumer confidence. In a time of uncertainty or a downturn, consumers may be willing to spend less with our business. There may be additional risks that we have not yet identified. We continue to monitor the potential impact on our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Secondary Offering
O
n October 20, 2021, our Registration Statement was declared effective by
In the SEC for our IPOfirst quarter of our Class A common stock. We registered2023, the Company completed a secondary offering and sale of 23,310,8108,000,000 shares of the Company's Class A common stock (including 3,040,540at an offering price of $21.05 per share. On April 5, 2023, the Underwriter exercised its overallotment option in part, to purchase an additional 620,493 shares sold toof the underwriters pursuant to their overallotment option). On October 25, 2021, the Company completed its IPO of 23,310,810 shares ofCompany's Class A common Stock, forstock at an aggregate offering price of $466.2 million. The underwriters were Jefferies LLC, Morgan Stanley & Co. LLC, BofA Securities, Inc., Piper Sandler & Co., Robert W. Baird & Co. Incorporated, UBS Securities LLC, William Blair & Company, L.L.C, Guggenheim Securities, LLC, Stifel, Nicolaus & Company, Incorporated, Loop Capital Markets LLC$21.05 per share (collectively the "Q1 Secondary Offering and Samuel A. Ramirez & Company Inc..
At the closing, we received net proceeds of approximately $429.9 million, after deducting the underwriting discount of approximately $29.1 million and related fees and expense of approximately $7.2 millionOverallotment Option"). The net proceeds and cash on hand wereWe used as follows:
•to repay the redeemable preferred units in full (including the redemption premium) of $221.7 million;
•to repay all of the borrowings outstanding undernet proceeds from the Second Lien Credit Agreement (including any prepayment penalties) of $158.1 million;Q1 Secondary Offering and
• Overallotment Option to purchase LLC Units orand corresponding shares of Class B common stock from certain pre-IPO LLC Members and to repurchase shares of Class A common stock from certainthe shareholders of the entities treated as corporations for U.S. tax purposes that held LLC Units prior to the Transactions ("Blocker Companies") at a price per LLC Unit or share of Class A common stock, as applicable, equal to the public offering price per share of Class A common stock, less the underwriting discounts and commissions. The proceeds from the Q1 Secondary Offering and Overallotment Option
Portillo's Inc. Form 10-Q | 40
were used to (i) purchase 2,269,776 existing shares of Class A common stock from the shareholders of the Blocker Companies and (ii) redeem 6,350,717 LLC Units held by the pre-IPO LLC membersMembers. In connection with the redemption, 6,350,717 shares of $57.0 million.Class B common stock were surrendered by the pre-IPO LLC Members and canceled and the Company received 6,350,717 newly-issued LLC Units, increasing the Company's total ownership interest in Portillo's OpCo. As a result, Portillo’s did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change; however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.During the quarter ended June 25, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Portillo's Inc. Form 10-Q | 3641
Item 6. Exhibits.
| | | | | | | | | | | |
| Exhibit Number | | Description | Filed Herewith |
| | | * |
| | | * |
| | First Lien CreditForm of Stock and Unit Purchase Agreement dated as of August 1, 2014,by and among Portillo's Holdings, LLC, as Borrower, PHD Intermediate LLC, UBS AG, Stamford Branch, as administrative agentPortillo’s Inc. and collateral agent and ledgers from time to time party theretothe parties named therein (incorporated by reference to the Company's Registration Statement on Form S-1 filed on September 27, 2021).August 8, 2022) | |
| | First Amendment to First Lien Credit Agreement, dated as of October 25, 2016, among Portillo’s Holdings, LLC, as Borrower, PHD Intermediate LLC, UBS AG, Stamford Branch, as administrative agent and collateral agent, and the lenders from time to time party thereto (incorporated by reference to the Company’s Registration Statement on Form S-1 filed on September 27, 2021). | |
| | Second Amendment to First Lien Credit Agreement, dated as of May 18, 2018, among Portillo's Holdings, LLC, as Borrower, PHD Intermediate LLC, UBS AG, Stamford Branch, as administrative agent and collateral agent, and the lenders from time to time party thereto (incorporated by reference to the Company's Registration Statement on Form S-1 filed on September 27, 2021). | |
| | Third Amendment to First Lien Credit Agreement, dated as of December 6, 2019, among Portillo’s Holdings, LLC, as Borrower, PHD Intermediate LLC, UBS AG, Stamford Branch, as administrative agent and collateral agent, and the lenders from time to time party thereto (incorporated by reference to the Company's Registration Statement on Form S-1 filed on September 27, 2021). | |
| | Second Lien Credit Agreement, dated as of August 1, 2014, among Portillo's Holdings, LLC, as Borrower, PHD Intermediate LLC, UBS AG, Stamford Branch, as administrative agent and collateral agent and the lenders from time to time party thereto (incorporated by reference to the Company's Registration Statement on Form S-1 filed on September 27, 2021). | |
| | First Amendment to Second Lien Credit Agreement, dated as of October 25, 2014, among Portillo's Holdings, LLC, as Borrower, PHD Intermediate LLC, UBS AG, Stamford Branch, as administrative agent and collateral agent and the lenders from time to time party thereto (incorporated by reference to the Company's Registration Statement on Form S-1 filed on September 27, 2021). | |
| | Second Amendment to Second Lien Credit Agreement, dated as of December 6, 2019, among Portillo’s Holdings, LLC, as Borrower, PHD Intermediate LLC, UBS AG, Stamford Branch, as administrative agent and collateral agent, and the lenders from time to time party thereto (incorporated by reference to the Company’s Registration Statement on Form S-1 filed on September 27, 2021). | |
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Portillo's Inc. Form 10-Q | 37
| | | | | | | | | | | |
| | | * |
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| | | * |
| | | * |
| | | # |
| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | * |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | * |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | * |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | * |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | * |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | * |
| 104 | | Cover page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | * |
* Filed Herewith
# Furnished Herewith
† Indicates a management contract or compensatory plan or agreement
Portillo's Inc. Form 10-Q | 3842
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | | Portillo's Inc. |
| | | (Registrant) |
| | | | |
Date: November 18, 2021August 3, 2023 | | By: | /s/ Michael Osanloo |
| | | | Michael Osanloo |
| | | | President, Chief Executive Officer and Director
(Principal Executive Officer) |
| | | | |
Date: November 18, 2021August 3, 2023 | | By: | /s/ Michelle Hook |
| | | | Michelle Hook |
| | | | Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer) |
Portillo's Inc. Form 10-Q | 3943 