Item 2. Management’s Discussion and Analysis
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 our prospectus, dated October 20, 2021, filed pursuant to Rule 424(b)(4) with the Securities and Exchange Commission (the "SEC") on October 22, 2021, relating to our IPO, which is available on the SEC's website at www.sec.gov.
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 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.
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 has 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. As of September 26, 2021, we owned and operated 67 Portillo’s restaurants across nine states, including a restaurant owned by C&O Chicago, L.L.C. ("C&O") of which Portillo’s owns 50% of the equity.
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Financial Highlights for the Quarter Ended September 26, 2021:
• Total revenue increased 15.3% to $138.0 million;
• Same restaurant sales increased 6.8%;
• Operating income decreased 8.8% to $17.2 million;
• Net income decreased 19.4% to $6.5 million;
• Restaurant-Level Adjusted EBITDA*, a non-GAAP measure, decreased 1.1% to $34.2 million; and
• Adjusted EBITDA*, a non-GAAP measure, decreased 8.4% to $24.2 million.
Financial Highlights for the Three Quarters Ended September 26, 2021:
• Total revenue increased 17.5% or $59.1 million;
• Same restaurant sales increased 10.6%;
• Operating income increased 26.1% to $52.5 million;
• Net income increased 176.8% to $20.4 million;
• Restaurant-Level Adjusted EBITDA*, a non-GAAP measure, increased 22.5% to $107.1 million; and
• Adjusted EBITDA*, a non-GAAP measure increased 17.1% to $75.3 million.
* Adjusted EBITDA and Restaurant-Level Adjusted EBITDA are non-GAAP measures. Definitions and reconciliations of Adjusted EBITDA to net 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 page 30 .
Consolidated Results of Operations
The following table summarizes our results of operations for the quarter and three quarters ended September 26, 2021 and September 27, 2020 (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 %
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Revenues
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 and product mix.
Revenues for the quarter ended September 26, 2021 were $138.0 million compared to $119.7 million for the quarter ended September 27, 2020, an increase of $18.3 million or 15.3%. The increase in revenues was primarily attributed to an increase in our average check and the opening of two new restaurants in the fourth quarter of 2020 and three new restaurants during the three quarters ended September 26, 2021. Same-restaurant sales increased 6.8% during the third quarter ended September 26, 2021, which was attributable to an increase in average check of 7.9%, partially offset by a decline in traffic. The higher average check was driven by an increase in 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. For the purpose of calculating same-restaurant sales for September 26, 2021, sales for 60 restaurants 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.
Revenues for the three quarters ended September 26, 2021 were $396.0 million compared to $337.0 million for the three quarters ended September 27, 2020, an increase of $59.1 million or 17.5%. The increase in revenues was primarily attributed to an increase in guest traffic as a result of the recovery from the COVID-19 pandemic, an increase in our average check of 7.9% 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 attributabl e to a 3.3% increase in guest traffic and a 7.3% i ncrease in average check. The higher average check was driven by an increase in menu prices, mix of items sold, and more items per order. For the purpose of calculating same-restaurant sales for September 26, 2021, sales for 60 restaurants were included in the Comparable Restaurant Base versus 55 as of the end of the third quarter of 2020.
Cost of Goods Sold, Excluding Depreciation and Amortization
Cost of goods sold, excluding depreciation and amortization includes the direct costs associated with food and beverages, including paper products. The components of cost of goods sold, excluding depreciation and amortization 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 depreciation and amortization for the quarter ended September 26, 2021 was $44.3 million compared to $36.6 million for the quarter ended September 27, 2020, an increase of $7.7 million or 21.1%. 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, an increase in commodity prices, primarily ground beef and beef flats used in our Italian beef sandwiches, and an increase in items per order. As a percentage of revenues, cost of goods sold, excluding depreciation and amortization increased 1.5% during the quarter ended September 26, 2021. 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.
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Labor Expenses
Labor expenses include hourly and management wages, bonuses, payroll taxes, workers’ compensation expense and team member benefits. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs and the performance of our restaurants .
Labor expenses for the quarter ended September 26, 2021 were $36.9 million compared to $29.1 million for the quarter ended September 27, 2020, an increase of $7.8 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%. 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 several incremental investments to support our team members, including hourly rate increases, training costs and discretionary bonuses, partially offset by lower staffing levels and increased productivity in our restaurants. As a percentage of revenues, labor was flat primarily due to the deployment of a leaner labor model due to COVID-19 related dining room capacity limitations and the reduction of restaurant hours combined with an increase in our average check, offset by hourly rate increases and discretionary bonuses.
Occupancy Expenses
Occupancy expenses primarily consist of rent, property insurance, common area expenses and property taxes.
Occupancy expenses for the quarter ended September 26, 2021 were $7.0 million compared to $6.4 million for the quarter ended September 27, 2020, 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 million or 11.6%, 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.
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, 2021 were $15.6 million compared to $13.0 million for the quarter ended September 27, 2020, an increase of $2.5 million or 19.5%, 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 direct marketing expenses and repair and maintenance.
Other operating expenses for the three quarters ended September 26, 2021 were $44.2 million compared to $37.6 million for the three quarters ended September 27, 2020, an increase of $6.6 million or 17.6%, 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, variable credit card fees and operating supplies.
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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-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, 2021 were $11.8 million compared to $9.7 million for the quarter ended September 27, 2020, an increase of $2.0 million or 21.1%. This increase was primarily driven by an increase in salaries and wages attributable to annual rate increases, filling open positions, 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.
General and administrative expenses for the three quarters ended September 26, 2021 were $35.8 million compared to $27.9 million for the three quarters ended September 27, 2020, an increase of $7.8 million or 28.1%. This increase was primarily driven by an increase in salaries and wages attributable to annual rate increases, filling open positions, 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-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.
Pre-Opening Expenses
Pre-opening expenses consist primarily of 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, 2021 were $0.3 million compared to $0.5 million for the quarter ended September 27, 2020, a decrease of $0.2 million or 36.2%. This decrease was due to the timing and geographic location of expected restaurant openings in the fourth quarter of 2021 versus 2020.
Pre-opening expenses for the three quarters ended September 26, 2021 were $2.3 million compared to $0.8 million for the three quarters ended September 27, 2020. The increase of $1.5 million or 175.3%. This increase was due to three new restaurants opened in the three quarters ended September 26, 2021 compared to no new restaurants opened in the three quarters ended September 27, 2020.
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.
Depreciation and amortization expense for the quarter ended September 26, 2021 was $5.5 million compared to $6.1 million for the quarter ended September 27, 2020, a decrease of $0.6 million or 10.1%. This decrease 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 fourth quarter of 2020 and three new restaurants opened in the three quarters ended September 26, 2021.
Depreciation and amortization expense for the three quarters ended September 26, 2021 was $18.2 million compared to $18.4 million for the three quarters ended September 27, 2020, a decrease of $1.3 million or 1.0%. This decrease 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 new restaurants in the fourth quarter of 2020 and during the three quarters ended September 26, 2021.
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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 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, 2021 was $0.3 million compared to $0.1 million for the quarter September 27, 2020. This increase was primarily driven by increased revenues due to an increase in guest traffic as a result of the recovery from the COVID-19 pandemic.
Net income attributable to equity method investment for the three quarters ended September 26, 2021 was $0.7 million compared to $0.4 million for the three quarters ended September 27, 2020. This increase was primarily driven by increased revenues due to an increase in guest traffic as a result of the recovery from the COVID-19 pandemic.
Other Income, Net
Other income, 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, 2021 was $0.3 million compared to $0.5 million for the quarter ended September 27, 2020 an increase of $0.2 million or 43.2%. This decrease 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 our deferred compensation plan, offset by an increase in losses on asset disposals.
Interest Expense
Interest expense primarily consists of interest and fees on our Credit Facilities and the amortization expense for debt discount and deferred issuance costs.
Interest expense for quarter ended September 26, 2021 was $10.7 million compared to $10.8 million for quarter ended September 27, 2020, a decrease of $0.1 million or 0.8%. This decrease was primarily driven by decreased borrowings on the First Lien 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.
Interest expense for three quarters ended September 26, 2021 was $32.1 million compared to $34.3 million for three quarters ended September 27, 2020, a decrease of $2.2 million or 6.3%. This decrease was primarily driven by decreased borrowings under the Revolving Facility during the three quarters ended September 26, 2021. There were no outstanding borrowings or repayments under the Revolving Facility during the quarter ended September 26, 2021.
Key Performance Indicators and Selected Operating Data
In addition to the GAAP measures presented in our financial statements, we use the following key performance indicators 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), 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.
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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 %
(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, AUVs for the three quarters ended September 26, 2021 and September 27, 2020 represent AUVs for the Twelve Months Ended September 26, 2021 and September 27, 2020, respectively.
(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 three quarters ended September 26, 2021 and September 27, 2020, there were 60 and 55 restaurants in 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 described in "Note 8 – Equity Method Investment" in the notes to the unaudited condensed consolidated financial statements.
Average Unit Volume ("AUV")
AUV is the total revenue (excluding gift card breakage) recognized in the Comparable Restaurant Base, divided by the number of restaurants in the Comparable Restaurant Base by period.
NON-GAAP FINANCIAL MEASURES
To supplement the 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, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin.
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” 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.
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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 %
(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) Represents loss on disposal of property and equipment.
(4) Represents fees and expenses associated with public company readiness.
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 depreciation and amortization, 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.
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The following table reconciles operating income to Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin (in thousands):
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 %
Liquidity and Capital Resources
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, and availability under our Revolving Facility. As of September 26, 2021, we maintained a cash and cash equivalents balance of $49.6 million and had $44.7 million of availability under our Revolver.
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 IPO
On October 25, 2021, Portillo's Inc. completed the IPO of 23,310,810 shares of the Class A common stock (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 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, Portillo's Inc. entered into the Tax Receivable Agreement with the 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.
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Summary of Cash Flows
The following table presents a summary of our cash flows from operating, investing and financing activities:
(in thousands) Three Quarters Ended
September 26, 2021 September 27, 2020
Net cash provided by operating activities $ 39,891 $ 38,105
Net cash used in investing activities (27,764) (10,108)
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 period 41,432 22,629
Cash and cash equivalents and restricted cash at end of period $ 49,557 $ 33,408
Operating Activities
Net cash provided by operating activities for the three quarters ended September 26, 2021 was $39.9 million compared to net cash provided by operating activities of $38.1 million for the three quarters ended September 27, 2020, an increase of $1.8 million or 4.7%. This increase was primarily driven by an increase in net income of $13.0 million, and a change in operating assets and liabilities of $11.4 million, partially offset by the impact of non-cash charges of $0.1 million.
The $11.4 million change in our operating asset and liability balances was primarily driven by operating assets and liabilities being a use of net cash of $4.4 million in three quarters ended September 27, 2020, compared to a source of net cash of $6.9 million in three quarters ended September 27, 2020 driven by an increase in the receipt of deferred lease incentives and the deferral of employer social security taxes of $3.4 million pursuant to the CARES Act in the three quarters ended September 27, 2020. The CARES Act also allowed eligible employers 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, 2022.
Investing Activities
Net cash used in investing activities was $27.8 million for the three quarters ended September 26, 2021 compared to net cash used in investing activities of $10.1 million for the three quarters ended September 27, 2020, an increase of $17.7 million or 174.7%. This increase was primarily due to the opening of three new restaurants in 2021 and the deferral of restaurant openings in 2020 to the fourth quarter.
Financing Activities
Net cash used in financing activities was $4.0 million for the three quarters ended September 26, 2021 compared to net cash used in financing activities of $17.2 million for the three quarters ended September 27, 2020, a decrease of $13.2 million. This decrease is primarily due to no repayments on our Revolving Facility during the three quarters ended September 26, 2021 compared to repayments on borrowings of $17.5 million during the three quarters ended September 27, 2020.
Revolving Facility and Liens
We maintain a Revolving Facility that provides for a revolving total commitment amount of $50.0 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 million under the Revolving Facility to enhance liquidity 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.
As of September 26, 2021, there were no borrowings outstanding under the Revolver. We had $44.7 million of availability, as of September 26, 2021, after giving effect to $5.3 million in outstanding letters of credit.
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.
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Borrowings 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 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, subject to certain exclusions and exceptions.
The Borrower is subject to certain financial 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. As of September 26, 2021, the Company was in compliance with all covenants.
Contractual Obligations
There have been no material changes to the contractual obligations as disclosed in our Registration Statement , other than those made in the ordinary course of business.
Off-Balance Sheet Arrangements
There have been no other material changes to our off-balance sheet arrangements as disclosed in our Registration Statement.
Critical Accounting Policies and Estimates
Our discussion and analysis of our condensed consolidated financial condition and results of operations is based upon the accompanying condensed consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts 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. There have been no significant changes to our critical accounting policies as disclosed in our Registration Statement.
See "Note 2 – Summary of Significant Accounting Policies-Recently Issued Accounting Standards” under Part I, Item 1 of this Form 10-Q.
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart our Business Startups (“JOBS”) Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” 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” 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” 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to our exposure to market risks as previously disclosed in our Registration Statement.