Portillo's Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 Annual Report on Form 10-K for the fiscal year ended December 26, 2021 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 December 26, 2021 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 our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the 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 consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. We have prepared the unaudited 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 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,” we 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, 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 June 26, 2022, we owned and operated 71 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. Portillo's Inc. Form 10-Q | 22 Financial Highlights for the Quarter Ended June 26, 2022 vs. Quarter Ended June 27, 2021: • Total revenue increased 7.0% or $9.9 million to $150.6 million; • Same restaurant sales increased 1.9% ; • Operating income decreased $7.0 million to $17.4 million; • Net income decreased $3.0 million to $10.8 million; • Restaurant-Level Adjusted EBITDA* decreased $4.7 million to $38.4 million; and • Adjusted EBITDA* decreased $4.9 million to $27.6 million. Financial Highlights for the Two Quarters Ended June 26, 2022 vs. Two Quarters Ended June 27, 2021: • Total revenue increased 10.5% or $27.1 million to $285.1 million; • Same restaurant sales increased 4.8% ; • Operating income decreased $11.1 million to $24.3 million; • Net income decreased $2.6 million to $11.3 million; • Restaurant-Level Adjusted EBITDA* decreased $6.5 million to $66.4 million; and • Adjusted EBITDA* decreased $5.8 million to $45.2 million. * Adjusted EBITDA and Restaurant-Level Adjusted EBITDA are non-GAAP measures. Definitions and reconciliations of Adjusted EBITDA to net income and Restaurant-Level Adjusted EBITDA to operating income the most directly comparable financial measures presented in accordance with GAAP, are set forth under 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 7.0% during the quarter ended June 26, 2022 and 10.5% for the two quarters ended June 26, 2022. Same-restaurant sales grew 1.9% during the quarter ended June 26, 2022, compared to 25.0% same-restaurant sales growth during the same quarter in 2021. Same-restaurant sales grew 4.8% and 12.7% for the two quarters ended June 26, 2022 and June 27, 2021, respectively. During the quarter and two quarters ended June 26, 2022, we experienced unprecedented commodity inflation, with the largest increases in pork, chicken and beef prices. While we expect these commodity pressures to continue for the remainder of fiscal 2022 in the range of 13% to 15%, we do not believe they will have a material impact to our long-term growth and profitability. Additionally, we experienced higher labor expenses during the second quarter and two quarters ended June 26, 2022 compared to the same periods last year primarily due to additional wage investments made in June 2021. We also made additional wage investments at the beginning of the third quarter of 2022, which combined with the expected commodity inflation, will continue to have an impact to Restaurant-Level Adjusted EBITDA Margin for the remainder of 2022. We are partially offsetting these expense increases through menu price increases and operational efficiencies. During the first and second quarters of 2022, we increased menu prices on certain items by approximately 1.5% and 3.5%, respectively. As a result of these menu price increases and operational efficiencies, Restaurant-Level Adjusted EBITDA Margin sequentially increased from the first quarter of 2022 to 25.5% in the second quarter of 2022. Absent significant and prolonged COVID-19 relapses or global economic disruptions and through our continued efforts to elevate guest experiences and implement operational efficiencies, we believe the strength of our brand will deliver consistent, long-term growth. Development Highlights Two new restaurants were opened during the two quarters ending June 26, 2022. The opening of these restaurants brings the total restaurant count to 71 as of June 26, 2022, including a restaurant owned by C&O of which Portillo’s owns 50% of the equity. Location Opening Date Joliet, Illinois February 2022 St. Petersburg, Florida April 2022 Portillo's Inc. Form 10-Q | 23 Table of Contents Consolidated Results of Operations The following table summarizes our results of operations for the quarter and two quarters ended June 26, 2022 and June 27, 2021 (in thousands): Quarter Ended Two Quarters Ended June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 REVENUES, NET $ 150,623 100.0 % $ 140,734 100.0 % $ 285,105 100.0 % $ 258,041 100.0 % COST AND EXPENSES: Restaurant operating expenses: Cost of goods sold, excluding depreciation and amortization 51,774 34.4 % 42,156 30.0 % 98,040 34.4 % 77,180 29.9 % Labor 37,906 25.2 % 34,482 24.5 % 75,219 26.4 % 65,512 25.4 % Occupancy 7,379 4.9 % 7,106 5.0 % 15,134 5.3 % 13,890 5.4 % Other operating expenses 15,178 10.1 % 13,925 9.9 % 30,343 10.6 % 28,633 11.1 % Total restaurant operating expenses 112,237 74.5 % 97,669 69.4 % 218,736 76.7 % 185,215 71.8 % General and administrative expenses 15,439 10.3 % 12,170 8.6 % 31,126 10.9 % 24,005 9.3 % Pre-opening expenses 423 0.3 % 671 0.5 % 979 0.3 % 1,960 0.8 % Depreciation and amortization 5,309 3.5 % 6,420 4.6 % 10,514 3.7 % 12,709 4.9 % Net income attributable to equity method investment (275) (0.2) % (295) (0.2) % (398) (0.1) % (359) (0.1) % Other (loss) income, net 51 — % (362) (0.3) % (105) — % (803) (0.3) % OPERATING INCOME 17,439 11.6 % 24,461 17.4 % 24,253 8.5 % 35,314 13.7 % Interest expense 6,097 4.0 % 10,712 7.6 % 12,196 4.3 % 21,441 8.3 % Tax Receivable Agreement liability adjustment (1,754) (1.2) % — — % (1,754) (0.6) % — — % INCOME BEFORE INCOME TAXES 13,096 8.7 % 13,749 9.8 % 13,811 4.8 % 13,873 5.4 % Income tax expense 2,340 1.6 % — — % 2,505 0.9 % — — % NET INCOME 10,756 7.1 % 13,749 9.8 % 11,306 4.0 % 13,873 5.4 % Less: Redeemable preferred units accretion — — % (5,577) (4.0) % — — % (11,092) (4.3) % NET INCOME ATTRIBUTABLE TO COMMON HOLDERS 10,756 7.1 % 8,172 5.8 % 11,306 4.0 % 2,781 1.1 % Net income attributable to non-controlling interests 5,645 3.7 % — — % 6,001 2.1 % — — % NET INCOME ATTRIBUTABLE TO PORTILLO'S INC. $ 5,111 3.4 % $ 8,172 5.8 % $ 5,305 1.9 % $ 2,781 1.1 % Portillo's Inc. Form 10-Q | 24 Table of Contents 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. At the end of 2021, the Company began to record the difference in higher third-party delivery menu prices, versus regular menu prices, in revenues. This markup was previously recorded in Cost of goods sold, excluding depreciation and amortization. As a result, we anticipate this change to positively impact our same-restaurant sales growth by 2%-3% in each quarter in 2022 and for the full fiscal year 2022, with a corresponding increase to Cost of goods sold, excluding depreciation and amortization. Operating income has not been, and is not anticipated in the future to be, impacted by such change. See Note 2. Summary Of Significant Accounting Policies-Revenue Recognition, for more information. Revenues for the quarter ended June 26, 2022 were $150.6 million compared to $140.7 million for the quarter ended June 27, 2021, an increase of $9.9 million or 7.0%. The increase in revenues was primarily attributed to the opening of four new restaurants in the second through fourth quarters of 2021 and two new restaurants during the two quarters ended June 26, 2022 combined with an increase in our same-restaurant sales. The new restaurants positively impacted revenues by approximately $7.4 million in the quarter ended June 26, 2022. Same-restaurant sales increased 1.9% during the second quarter ended June 26, 2022, which was attributable to an increase in average check of 4.8% and a 2.7% impact from the change in recording third-party delivery pricing, offset by a decline in transactions of 5.6% . The higher average check was driven by an approximate 6.8% increase in certain menu prices partially offset by lower items sold per transaction. During the second quarter of 2022, we increased menu prices on certain items resulting in an approximate 3.5% effective overall increase to continue to combat inflationary cost pressures. For the purpose of calculating same-restaurant sales for June 26, 2022, sales for 61 restaurants were included in the Comparable Restaurant Base (as defined in "Selected Operating Data" below) versus 59 as of the quarter ended June 27, 2021. Revenues for the two quarters ended June 26, 2022 were $285.1 million compared to $258.0 million for the two quarters ended June 27, 2021, an increase of $27.1 million or 10.5%. The increase in revenues was primarily attributed to the opening of five new restaurants in 2021 and two new restaurants during the two quarters ended June 26, 2022 combined with an increase in our same-restaurant sales. The new restaurants positively impacted revenues by approximately $15.2 million in the two quarters ended June 26, 2022. Same-restaurant sales increased 4.8% during the two quarters ended June 26, 2022, which was attributable to an increase in average check of 6.0% and a 2.8% i mpact from the change in recording third-party delivery pricing, offset by a decline in transactions of 4.0% . The higher average check was primarily driven by an approximate 7.0% increase in menu prices partially offset by lower items sold per transaction. We increased menu prices approximately 1.5% in the first quarter of 2022 and approximately 3.5% during the second quarter of 2022 to continue to combat inflationary cost pressures. For the purpose of calculating same-restaurant sales for June 26, 2022, sales for 61 restaurants were included in the Comparable Restaurant Base (as defined in "Selected Operating Data" below) versus 59 as of the quarter ended June 27, 2021. 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 and third-party delivery commissions. 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 . We anticipate the comparability of cost of goods sold, excluding depreciation and amortization, to be impacted in 2022 versus 2021 due to the aforementioned change in how the Company records third-party delivery menu prices. Operating income has not been, and is not anticipated in the future to be, impacted by such change. Cost of goods sold, excluding depreciation and amortization for the quarter ended June 26, 2022 was $51.8 million compared to $42.2 million for the quarter ended June 27, 2021, an increase of $9.6 million or 22.8%. This increase was primarily driven by a 15.2% increase in all commodity prices, with the largest increases in pork, chicken, and beef prices; the impact of how the Company records third-party delivery menu prices; and the opening of four new restaurants in the second through fourth quarters of 2021 and two new restaurants during the two quarters ended June 26, 2022. As a percentage of revenues net, cost of goods sold, excluding depreciation and amortization increased 4.4% during the quarter ended June 26, 2022. The increase was primarily due to an increase in all commodity prices and the impact of how the Company records third-party delivery menu prices, partially offset by an increase in our average check. Portillo's Inc. Form 10-Q | 25 Table of Contents Cost of goods sold, excluding depreciation and amortization for the two quarters ended June 26, 2022 was $98.0 million compared to $77.2 million for the two quarters ended June 27, 2021, an increase of $20.9 million or 27.0%. This increase was primarily driven by a 15.5% increase in all commodity prices, with the largest increases in pork, chicken, and beef prices; the impact of how the Company records third-party delivery menu prices; and the opening of five new restaurants in 2021 and two new restaurants during the two quarters ended June 26, 2022. As a percentage of revenues, net, cost of goods sold, excluding depreciation and amortization increased 4.5% during the two quarters ended June 26, 2022. The increase was primarily due to an increase in all commodity prices and the impact of how the Company records third-party delivery menu prices, partially offset by an increase in our average check. Labor Expenses Labor expenses include hourly and management wages, bonuses and stock compensation, payroll taxes, workers’ compensation expense, and team member benefits. Factors that influence labor costs include wage inflation and payroll tax legislation, health care costs and the staffing needs of our restaurants . Labor expenses for the quarter ended June 26, 2022 were $37.9 million compared to $34.5 million for the quarter ended June 27, 2021, an increase of $3.4 million or 9.9%. This increase was primarily driven by incremental investments to support our team members, including rate increases primarily made in June 2021 and equity-based compensation, and the opening of four new restaurants in the second through fourth quarters of 2021 and two new restaurants during the two quarters ended June 26, 2022. These increases were partially offset by operational efficiencies and lower variable-based compensation. As a percentage of revenues, net, labor increased 0.7% due primarily to the aforementioned incremental rate increases to support our team members, partially offset by an increase in our average check, operational efficiencies and lower variable-based compensation. Labor expenses for the two quarters ended June 26, 2022 were $75.2 million compared to $65.5 million for the two quarters ended June 27, 2021, an increase of $9.7 million or 14.8%. This increase was primarily driven by incremental investments to support our team members, including rate increases primarily made in the June 2021 and equity-based compensation, and the opening of five new restaurants in 2021 and two new restaurants during the two quarters ended June 26, 2022. These increases were partially offset by operational efficiencies and lower variable-based compensation. As a percentage of revenues, net, labor increased 1.0% due primarily to the aforementioned incremental hourly rate increases to support our team members, partially offset by an increase in our average check, lower variable-based compensation, and operational efficiencies. Occupancy Expenses Occupancy expenses primarily consist of rent, property insurance, common area expenses and property taxes. Occupancy expenses for the quarter ended June 26, 2022 were $7.4 million compared to $7.1 million for the quarter ended June 27, 2021, an increase of $0.3 million or 3.8%, primarily driven by the opening of four new restaurants in the second through fourth quarters of 2021 and two new restaurants during the two quarters ended June 26, 2022. Occupancy expenses for the two quarters ended June 26, 2022 were $15.1 million compared to $13.9 million for the two quarters ended June 27, 2021, an increase of $1.2 million or 9.0%, primarily driven by the opening of five new restaurants in 2021 and two new restaurants during the two quarters ended June 26, 2022. 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 June 26, 2022 were $15.2 million compared to $13.9 million for the quarter ended June 27, 2021, an increase of $1.3 million or 9.0%, primarily driven by the opening of four new restaurants in the second through fourth quarters of 2021 and two new restaurants during the two quarters ended June 26, 2022 as well as an increase in repair and maintenance and insurance expenses, offset by a decrease in travel expense. Portillo's Inc. Form 10-Q | 26 Table of Contents Other operating expenses for the two quarters ended June 26, 2022 were $30.3 million compared to $28.6 million for the two quarters ended June 27, 2021, an increase of $1.7 million or 6.0%, primarily driven by the opening of five new restaurants in 2021 and two new restaurants during the two quarters ended June 26, 2022 as well as an increase in repair and maintenance and insurance expenses, offset by a reduction in utility and uniform costs. 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 equity-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 June 26, 2022 were $15.4 million compared to $12.2 million for the quarter ended June 27, 2021, an increase of $3.3 million or 26.9%. This increase was primarily driven by increases in equity-based compensation of $3.4 million, insurance and software licensing fees, partially offset by a decrease in variable-based compensation expense. General and administrative expenses for the two quarters ended June 26, 2022 were $31.1 million compared to $24.0 million for the two quarters ended June 27, 2021, an increase of $7.1 million or 29.7%. This increase was primarily driven by an increase in equity-based compensation of $6.7 million. The remainder of the increase is related to a $0.7 million increase in transaction-related fees and expenses, consisting primarily of certain professional fees and an increase in software licensing fees, partially offset by a decrease in variable-based compensation expense. 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 June 26, 2022 were $0.4 million compared to $0.7 million for the quarter ended June 27, 2021, a decrease of $0.2 million or 37.0%. This decrease was due to the timing and geographic location of restaurant openings in the second quarter of 2022 versus 2021. Pre-opening expenses for the two quarters ended June 26, 2022 were $1.0 million compared to $2.0 million for the two quarters ended June 27, 2021, a decrease of $1.0 million or 50.1%. This decrease was due to the timing and geographic location of restaurant openings in the first two quarters of 2022 versus 2021. 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. Depreciation and amortization expense for the quarter ended June 26, 2022 was $5.3 million compared to $6.4 million for the quarter ended June 27, 2021, a decrease of $1.1 million or 17.3%. This decrease was primarily attributable to an expired non-compete intangible asset, partially offset by incremental depreciation of capital expenditures related to the opening of four new restaurants in quarters two through four of 2021 and two new restaurants during the quarter ended June 26, 2022. Depreciation and amortization expense for the two quarters ended June 26, 2022 was $10.5 million compared to $12.7 million for the two quarters ended June 27, 2021, a decrease of $2.2 million or 17.3%. This decrease was primarily attributable to an expired non-compete intangible asset, partially offset by incremental depreciation of capital expenditures related to the opening of five new restaurants in 2021 and two new restaurants during the two quarters ended June 26, 2022. Portillo's Inc. Form 10-Q | 27 Table of Contents 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 was $0.3 million for each of the quarters ended June 26, 2022 and June 27, 2021. Net income attributable to equity method investment was $0.4 million for each of the two quarters ended June 26, 2022 and June 27, 2021. Other Loss (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 loss, net for the quarter ended June 26, 2022 was $0.1 million compared to other income, net of $0.4 million for the quarter ended June 27, 2021 a decrease of $0.4 million or 114.1%. This decrease was primarily due to an increase in trading losses in the rabbi trust used to fund our deferred compensation plan. Other income, net for the two quarters ended June 26, 2022 was $0.1 million compared to $0.8 million for the two quarters ended June 27, 2021 a decrease of $0.7 million or 86.9%. This decrease was primarily due to a increase in trading losses in the rabbi trust used to fund our deferred compensation plan. 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 the quarter ended June 26, 2022 was $6.1 million compared to $10.7 million for the quarter ended June 27, 2021, a decrease of $4.6 million or 43.1%. This decrease was primarily driven by the payoff of the Second Term B-3 Loans with the use of IPO proceeds during the year ended December 26, 2021 and decreased borrowings on the First Lien Term B-3 Loans during the quarter ended June 26, 2022. There were no outstanding borrowings under the Revolving Facility during the quarter ended June 26, 2022 or June 27, 2021. Interest expense for the two quarters ended June 26, 2022 was $12.2 million compared to $21.4 million for the two quarters ended June 27, 2021, a decrease of $9.2 million or 43.1%. This decrease was primarily driven by the payoff of the Second Term B-3 Loans with the use of IPO proceeds during the year ended December 26, 2021 and decreased borrowings on the First Lien Term B-3 Loans during the quarter ended June 26, 2022. There were no outstanding borrowings under the Revolving Facility during the two quarters ended June 26, 2022 or June 27, 2021. Tax Receivable Agreement Liability Adjustment In connection with the IPO, we entered into 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 in some cases is deemed to realize as a result of certain transactions. Portillo's Inc. Form 10-Q | 28 Table of Contents The tax receivable agreement liability adjustment was $1.8 million for the quarter and two quarters ended June 26, 2022 related to a remeasurement due to option exercises. There was no tax receivable agreement adjustment for the quarter and two quarters ended June 27, 2021. 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 passed through to and included in the taxable income or loss of its members on a pro rata basis. As of the IPO, 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 26, 2022 was $2.3 million. Our effective income tax rate for the quarter ended June 26, 2022 was 17.9% . There was no income tax expense for the quarter ended June 27, 2021. Income tax expense for the two quarters ended June 26, 2022 was $2.5 million. Our effective income tax rate for the two quarters ended June 26, 2022 was 18.1%. There was no income tax expense for the two quarters ended June 27, 2021. Net Income Attributable to Non-controlling Interests In connection with the IPO, we became the sole managing member of Portillo's OpCo. W e 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 26, 2022 was $5.6 million. There was no such income for the quarter ended June 27, 2021. Net income attributable to non-controlling interests for the two quarters ended June 26, 2022 was $6.0 million. There was no such income for the two quarters ended June 27, 2021. Portillo's Inc. Form 10-Q | 29 Table of Contents Key Performance Indicators and Non-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 new restaurant openings, average unit volume ("AUV"), same-restaurant sales, Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin. The Company includes these 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. Quarter Ended Two Quarters Ended June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 Total Restaurants (a) 71 67 71 67 AUV (in millions) (a) N/A N/A $ 8.3 $ 7.9 Change in same-restaurant sales (b) 1.9 % 25.0 % 4.8 % 12.7 % Adjusted EBITDA (in thousands) $ 27,613 $ 32,539 $ 45,244 $ 51,073 Adjusted EBITDA Margin 18.3 % 23.1 % 15.9 % 19.8 % Restaurant-Level Adjusted EBITDA (in thousands) $ 38,386 $ 43,065 $ 66,369 $ 72,826 Restaurant-Level Adjusted EBITDA Margin 25.5 % 30.6 % 23.3 % 28.2 % (a) Includes a restaurant that is owned by C&O, of which Portillo’s owns 50% of the equity, as described in Note 2. Summary Of Significant Accounting Policies in the notes to the unaudited condensed consolidated financial statements. AUVs for the quarters ended June 26, 2022 and June 27, 2021 represent AUVs for the twelve months ended June 26, 2022 and June 27, 2021, 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 two quarters ended June 26, 2022 and June 27, 2021, there were 61 and 59 restaurants i n 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 2. Summary Of Significant Accounting Policies 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, including a restaurant that is owned by C&O, 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, 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. Portillo's Inc. Form 10-Q | 30 Table of Contents Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA represents net income 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, the most directly comparable GAAP measure to Adjusted 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. The following table reconciles net income to Adjusted EBITDA and Adjusted EBITDA margin (in thousands): Quarter Ended Two Quarters Ended June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 Net income $ 10,756 $ 13,749 $ 11,306 $ 13,873 Depreciation and amortization 5,309 6,420 10,514 12,709 Interest expense 6,097 10,712 12,196 21,441 Income tax expense 2,340 — 2,505 — EBITDA 24,502 30,881 36,521 48,023 Deferred rent (1) 865 798 1,946 1,594 Equity-based compensation 3,864 168 7,649 273 Consulting fees (2) — 500 — 1,000 Other loss (income) (3) 93 141 125 132 Transaction-related fees & expenses (4) 43 51 757 51 Tax Receivable Agreement liability adjustment (5) (1,754) — (1,754) — Adjusted EBITDA $ 27,613 $ 32,539 $ 45,244 $ 51,073 Adjusted EBITDA Margin 18.3 % 23.1 % 15.9 % 19.8 % (1) Represents the difference between cash rent payments and the recognition of straight-line rent expense recognized over the lease term. (2) Represents consulting fees related to our former owner. (3) Represents loss on disposal of property and equipment. (4) Represents the exclusion of certain expenses that management believes are not indicative of ongoing operations, consisting primarily of certain professional fees. (5) Represents remeasurement of the Tax Receivable Agreement. 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. 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. Portillo's Inc. Form 10-Q | 31 Table of Contents 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 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 Operating income $ 17,439 $ 24,461 $ 24,253 $ 35,314 Plus: General and administrative expenses 15,439 12,170 31,126 24,005 Pre-opening expenses 423 671 979 1,960 Depreciation and amortization 5,309 6,420 10,514 12,709 Net income attributable to equity method investment (275) (295) (398) (359) Other loss (income), net 51 (362) (105) (803) Restaurant-Level Adjusted EBITDA $ 38,386 $ 43,065 $ 66,369 $ 72,826 Restaurant-Level Adjusted EBITDA Margin 25.5 % 30.6 % 23.3 % 28.2 % 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 June 26, 2022, we maintained a cash and cash equivalents and restricted cash balance of $49.7 million and had $45.0 million of availability under our Revolver, after giving effect to $5.0 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. Based 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. 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 $430.0 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 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, we entered into a Tax Receivable Agreement ("TRA") with certain of our pre-IPO LLC Members, pursuant to which we will generally be required to pay 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that we actually realize or be deemed to realize, as a result of (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 in 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 (iv) certain other tax benefits related to entering into the TRA, including payments made under the TRA. Portillo's Inc. Form 10-Q | 32 Table of Contents Based on several assumptions, it was estimated that, as of June 26, 2022, our obligation for future payments under the TRA totaled $154.9 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 $182.2 million as of June 26, 2022 . Under this scenario, we would be required to pay the TRA Parties approximately 85% of such amount, or $154.9 million , primarily over the next 15 years, substantially declining in year 16 through year 47. Summary of Cash Flows The following table presents a summary of our cash flows from operating, investing and financing activities: (in thousands) Two Quarters Ended June 26, 2022 June 27, 2021 Net cash provided by operating activities $ 25,359 $ 32,817 Net cash used in investing activities (13,910) (18,545) Net cash used in financing activities (982) (1,312) Net increase in cash and cash equivalents and restricted cash 10,467 12,960 Cash and cash equivalents and restricted cash at beginning of period 39,263 41,432 Cash and cash equivalents and restricted cash at end of period $ 49,730 $ 54,392 Operating Activities Net cash provided by operating activities for the two quarters ended June 26, 2022 was $25.4 million compared to net cash provided by operating activities of $32.8 million for the two quarters ended June 27, 2021, a decrease of $7.5 million or 22.7%. This decrease was primarily driven by a decrease in the change in operating assets and liabilities of $10.1 million and lower net income of $2.6 million, partially offset by the change in non-cash items of $5.2 million. The $10.1 million change in our operating asset and liability balances was primarily driven by operating assets and liabilities being a use of net cash of $7.7 million in the two quarters ended June 26, 2022, compared to a source of net cash of $2.5 million in two quarters ended June 27, 2021 driven by the change in accounts payable and accrued expenses and other liabilities in the two quarters ended June 26, 2022. The $5.2 million change from the two quarters ended June 26, 2022 in non-cash charges is primarily attributable to equity-based compensation, offset by a decrease in depreciation and amortization. Investing Activities Net cash used in investing activities was $13.9 million for the two quarters ended June 26, 2022 compared to $18.5 million for the two quarters ended June 27, 2021, a decrease of $4.6 million or 25.0%. This decrease was primarily due to the timing of restaurant openings in 2022 compared to the timing of restaurant openings in 2021. Financing Activities Net cash used in financing activities was $1.0 million for the quarter ending June 26, 2022 compared to net cash used in financing activities of $1.3 million for the quarter ending June 27, 2021, a decrease of $0.3 million or 25.2%. This decrease is primarily due to proceeds from stock option exercises of $1.5 million offset by $0.8 million payment of IPO issuance costs in the two quarters ended June 26, 2022, which were accrued for as of December 26, 2021. 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. Portillo's Inc. Form 10-Q | 33 Table of Contents As of June 26, 2022, there were no borrowings outstanding under the Revolving Facility. We had $45.0 million of availability, as of June 26, 2022, after giving effect to $5.0 million in outstanding letters of credit. In connection with the IPO, the Company received aggregate net proceeds of approximately $430.0 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. Borrowings under the First 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. These covenants are customary for these types of debt agreements. As of June 26, 2022, the Company was in compliance with all covenants. Material Cash Requirements There have been no material changes to the material cash requirements as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021 , other than those payments made in the ordinary course of business. Critical Accounting Estimates This discussion and analysis of financial condition and results of operations is based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of condensed consolidated financial statements. There have been no significant changes to our critical accounting estimates or significant accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021. See Note 2. Summary of Significant Accounting Policies under Part I, Item 1 of this Form 10-Q for an analysis of recently issued accounting pronouncements. JOBS Act We qualify as an emerging growth company ("EGC") pursuant to the provisions of the Jumpstart our Business Startups (“JOBS”) Act. For as long as we are an EGC, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not 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 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 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. 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 | 34 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 26, 2021.