What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-02 compared with 2022-03-10 · 236 added, 192 removed, 254 unchanged (63% of the section changed)

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If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.

For a comparison of results of operations and financial condition for fiscal years 2020 and 2019, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus filed with the SEC on October 22, 2021.

We use a 52- or 53-week fiscal year ending on the Sunday prior to December 31.

For a comparison of results of operations and financial condition for fiscal years 2021 and 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the fiscal year ended December 26, 2021, filed March 10, 2022.

We use a 52- or 53-week fiscal year ending on the Sunday on or prior to December 31.

In a 52-week fiscal year, each quarterly period is comprised of 13 weeks.

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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 December 26, 2021, we owned and operated 69 Portillo’s restaurants across nine states, including a restaurant owned by C&O Chicago, L.L.C.

As of December 25, 2022, we owned and operated 72 Portillo’s restaurants across 9 states, including a restaurant owned by C&O Chicago, L.L.C.

("C&O") of which Portillo’s owns 50% of the equity.

Initial Public Offering

In October 2021, we completed an initial public offering ("IPO") of 23,310,810 shares of the Company's Class A common stock ( including 3,040,540 shares sold to the underwriters pursuant to their overallotment option) at an offering price of $20.00 per share.

The Company received aggregate net proceeds of approximately $430.0 million (after deducting underwriting discounts and commissions and other 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;

• to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC members of $57.0 million.

Portillo's Inc.

Form 10-K | 32

Secondary Offerings

In the third quarter and fourth quarter of 2022, the Company completed two secondary offerings of 8,066,458 shares (including 66,458 shares sold to the underwriters pursuant to their overallotment option) and 8,000,000 shares, respectively, of the Company's Class A common stock at an offering price of $23.75 and $22.69, respectively, per share.

We used all of the net proceeds from the secondary offerings to purchase LLC Units and corresponding shares of Class B common stock from certain pre-IPO LLC Members and to repurchase shares of Class A common stock from the shareholders of the Blocker Companies at a price per LLC Unit or share of Class A common stock, as applicable, equal to the public offering price per share of Class A common stock, less the underwriting discounts and commissions.

As a result, Portillo’s did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change;

however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock.

New Credit Agreement

On February 2, 2023, PHD Intermediate LLC, a Delaware limited liability company (“Holdings”), Portillo’s Holdings, LLC, a Delaware limited liability company (the “Borrower”), the other Guarantors party thereto from time to time, each lender party thereto from time to time and Fifth Third Bank, National Association, as Administrative Agent, L/C Issuer and Swing Line Lender entered into a Credit Agreement (“New Credit Agreement”) which provides for a Term A Loan ("Term Loan") in an initial aggregate principal amount of $300.0 million and initial Revolving Credit Commitments in an initial aggregate principal amount of $100.0 million (the “New Revolver Facility”).

The proceeds under the Term Loan and New Revolver Facility, along with cash on hand, were used to repay outstanding indebtedness under the First Lien Credit Agreement and to pay related transaction expenses.

The Term Loan and New Revolver Facility are scheduled to mature on February 2, 2028.

The Company anticipates using the remainder of the loan proceeds for general corporate purposes and working capital needs.

Subsequent Events for a description of the New Credit Agreement and the repayment of borrowings under the First Lien Credit Agreement.

Recent Developments and Trends

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• Same-restaurant sales increased 5.4%;

• Operating income decreased $27.3 million to $30.0 million;

• Net income decreased $25.7 million to a net loss of $13.4 million;

• Restaurant-Level Adjusted EBITDA* increased $20.1 million to $142.1 million;

• Adjusted EBITDA* increased $10.7 million to $98.5 million.

• Operating income increased $11.3 million to $41.3 million;

• Net income increased $30.6 million to $17.2 million;

• Restaurant-Level Adjusted EBITDA* decreased $9.6 million to $132.5 million;

• Adjusted EBITDA* decreased $13.5 million to $85.0 million.

* Adjusted EBITDA and Restaurant-Level Adjusted EBITDA are non-GAAP measures.

Definitions and reconciliations of Adjusted EBITDA to net (loss) income and Restaurant-Level Adju sted 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".

In addition, we completed an initial public offering ("IPO") of 23,310,810 shares of the Company's Class A common stock ( including 3,040,540 shares sold to the underwriters pursuant to their overallotment option) at an offering price of $20.00 per share.

The Company received aggregate net proceeds of approximately $430.0 million (after deducting underwriting discounts and commissions and other 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;

• to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC members of $57.0 million.

COVID-19 Developments

As the COVID-19 pandemic continues and new variants emerge, such as Omicron in late 2021, our priority has been ensuring the health and safety of our team members and guests, and compliance with the applicable safety regulations.

We first began to experience impacts from the COVID-19 pandemic during the second half of March 2020, as federal, state and local governments began to react to the public health crisis by encouraging or requiring social distancing, instituting stay-at-home orders, and requiring, in varying degrees, restaurant dine-in limitations, capacity limitations or other restrictions that largely limited restaurants to take-out, drive-thru and delivery sales.

We experienced a steady recovery during the year ended December 26, 2021, all while continuing to support our team members, guests and the communities in which we operate during the pandemic.

Same-restaurant sales increased 0.8% in the first quarter ended March 28, 2021, increased 25.0% in the second quarter ended June 27, 2021, increased 6.8% in the third quarter ended September 26, 2021 and increased 10.3% in the fourth quarter ended December 26, 2021 versus the comparable periods in 2020.

The Omicron variant began quickly spreading during the end of the fourth quarter 2021 and our sales, particularly our seasonal catering sales, were negatively impacted during the last few weeks of the fourth quarter.

Impacts also included staffing shortages that carried into the first several weeks of fiscal 2022.

However, the Company did see improvements in sales trends and staffing levels beginning in mid-January 2022.

During fiscal 2021, we also experienced certain supply shortages and transportation delays largely attributable to impacts of the COVID-19 pandemic as well as changes in customer demand and behaviors.

While we expect these shortages and delays may continue into fiscal 2022, we view them to be temporary and do not believe they will have a material impact to our long-term growth and profitability.

Absent significant and prolonged COVID-19 relapses or global economic disruptions, and based on the current trend of our business operations and our focused efforts to elevate customer experiences and enhance digital capabilities, we are confident in the strength of our brand to deliver consistent growth.

We anticipate additional wage investments, along with increased supply chain and commodity costs, will have an impact to Restaurant-Level Adjusted EBITDA Margin in fiscal 2022.

We plan to partially offset these expense increases through menu price increases and operational efficiencies.

During the fourth quarter of 2021, we increased certain menu prices by approximately 3.0%, and during the first quarter of 2022, we increased certain prices to reflect an approximate 1.5% increase to menu prices, both actions to counter increases in labor and commodity expenses.

Definitions and reconciliations of Adjusted EBITDA to net income (loss) and Restaurant-Level Adju sted 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".

We continue to see revenue growth due to our new restaurant openings, as well as same-restaurant sales growth.

Total revenue grew 9.7% during the year ended December 25, 2022.

Same-restaurant sales grew 5.4% during the year ended December 25, 2022.

During the fourth quarter of 2022, total revenue grew 8.6% and same-restaurant sales increased 6.0%.

We experienced positive trends during most of the quarter, but did experience significant sales declines the last week of our fiscal quarter due to Winter Storm Elliott.

We estimate that Winter Storm Elliott had a negative impact of at least 0.7% on our same-restaurant sales growth in the fourth quarter of 2022.

Subsequent to the fourth quarter of 2022, we have seen improvements in our sales trends as same-restaurant sales grew 12.3% in our first fiscal period of 2023 and we estimate same-restaurant sales to grow 7.9% in our second fiscal period of 2023.

We currently anticipate our same-restaurant sales growth to be in the range of 8% to 10% and total revenue growth to be in the range of 16% to 18% for the first quarter of 2023.

Portillo's Inc.

Form 10-K | 33

During the year ended December 25, 2022, we experienced approximately 15.2% commodity inflation versus the year ended December 26, 2021, with the most impactful increases in beef and chicken prices.

Additionally, we experienced higher labor expenses during the year ended December 25, 2022, compared to the year ended December 26, 2021 primarily due to additional wage investments, specifically investments to support our hourly team members.

These investments in labor, combined with the commodity inflation, had a negative impact to Restaurant-Level Adjusted EBITDA Margin.

We partially offset these expense increases through menu price increases and operational efficiencies.

For the year ended December 25, 2022, we increased certain menu prices by 7.5%.

As a result of the aforementioned expenses and menu price increases, Restaurant-Level Adjusted EBITDA Margin was 22.6% in the year ended December 25, 2022 versus 26.6% in the year ended December 26, 2021.

In fiscal 2023, we expect our overall commodity inflation to ease and are currently estimating commodity inflation in the mid single digits.

Additionally, we do anticipate additional wage investments.

We will continue to strategically offset these expense increases through menu price increases and operational efficiencies.

During mid-January of 2023, we increased certain menu prices by approximately 2.0%.

Absent global economic disruptions, and based on the current trend of our business operations and our continued focus on strategic initiatives that will grow our restaurant count, improve the operating model, enhance the menu, and improve our career pathing and compensation models, we believe in the strength of our brand and that our focus on our strategic priorities will deliver consistent growth.

Development Highlights

In fiscal 2021 , we opened five new restaurants, successfully executing on our targeted growth plan for the year.

We entered new markets this year in Detroit, Michigan and Orlando, Florida.

We also opened additional restaurants in our current markets, opening restaurants in Arizona, Indiana and Wisconsin.

Below are the restaurants opened during fiscal 2021:

In 2022, we targeted opening seven new restaurants ("Class of 2022").

During the year ended December 25, 2022, we opened three new restaurants in our existing markets of Illinois, Florida, and Indiana.

Permitting and occupancy delays caused our Class of 2022 opening timeline to lengthen into 2023, resulting in four restaurants opening subsequent to our 2022 fiscal year end.

These restaurants included three in our existing markets of Florida and Arizona and our first restaurant in the state of Texas.

Below are the seven restaurants included in the Class of 2022 along with their opening dates.

Location Opening Date

Sterling Heights, Michigan March 2021

Orlando, Florida April 2021

Glendale, Arizona May 2021

Westfield, Indiana November 2021

Madison, Wisconsin November 2021

Going forward, we plan to increase our number of restaurants by approximately 10% annually.

Our near-term restaurant growth strategy is focused on leveraging our proven unit economic model primarily in adjacent and national markets outside Chicagoland with favorable macro-economic tailwinds where we already have a presence and brand awareness.

Joliet, Illinois January 2022

Petersburg, Florida March 2022

Schererville, Indiana November 2022

Kissimmee, Florida December 2022

The Colony, Texas January 2023

Tucson, Arizona February 2023

Gilbert, Arizona March 2023 (Expected)

Long term, we aim to increase our number of restaurants by approximately 10% annually.

Our near-term restaurant growth strategy is focused on leveraging our proven unit economic model primarily in markets outside Chicagoland with favorable macro-economic tailwinds where we already have a presence and brand awareness.

We will also add select new restaurants in the Chicagoland market.

For fiscal 2022, we are targeting opening seven new restaurants.

Our development strategy for 2022 will focus on adding at least one restaurant in the Chicagoland market, as well as the expected opening of our first restaurant in Texas, and the remaining restaurants in adjacent and national markets outside Chicagoland.

In February 2022, we opened our first off-premise only restaurant, located in Joliet, Illinois featuring three drive-thru lanes and a pick-up area at the restaurant.

For fiscal 2023, we are targeting opening nine new restaurants ("Class of 2023").

Our development pipeline for the Class of 2023 will focus on growing across the sunbelt (Arizona, Texas, and Florida) and building scale in existing Midwest markets.

Menu Innovation

Our primary strategy for menu innovation is to drive traffic through truly craveable foods that can be made with a Portillo's spin.

New menu items are introduced when we believe they will offer superior guest satisfaction and typically coincide with the removal of an existing menu item to ensure a manageable menu size, so that our team members can maintain the operational efficiency that enables our high volumes and consistently high quality offerings.

Fiscal 2021 marked a year of great achievements in menu innovation for us.

We began offering a Spicy Chicken sandwich which features a spicy giardiniera sauce, a new signature sauce that can be used across multiple offerings.

We are constantly studying ways to further enhance our existing offerings while thoughtfully adding new high-quality items.

We are also disciplined in maintaining the number of options on our menu, while ensuring consistency in execution, and maintaining the breadth that helps drive our industry-leading volumes.

When a new item earns its way onto our menu, we often replace an existing item to maintain our operational efficiency .

In the year ended December 25, 2022, we introduced the Plant-based Garden Dog.

The Plant-based Garden Dog is made with 100% plant-based protein, grilled and dragged through the same garden of Chicago-style ingredients as our classic Chicago-style hot dog.

We also offer seasonal shakes and specialty cakes to compliment our existing menu.

Heart of Portillo's Foundation

We care deeply about our people and believe that by taking care of our team members, they will in turn take care of our guests.

In June 2020 in response to the difficulties faced as a result of the COVID-19 pandemic, we started the “Heart of Portillo’s Fund,” a 501(c)(3) charitable fund within the Portillo’s organization that raised over $250,000 from members of the Portillo’s family to provide emergency assistance to other team members in need in 2021 .

In 2021, t he fund awarded over 40 grants and has provided support for expenses following illness or injury, the unexpected death of a family member and other financial hardships.

Portillo's Inc.

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Interest expense 27,644 4.7 % 39,694 7.4 %

Tax Receivable Agreement liability adjustment (5,345) (0.9) % — — %

Loss on debt extinguishment — — % 7,265 1.4 %

(LOSS) INCOME BEFORE INCOME TAXES (16,947) (3.2) % 12,263 2.7 %

Income tax benefit (3,531) (0.7) % — — %

NET (LOSS) INCOME (13,416) (2.5) % 12,263 2.7 %

INCOME (LOSS) BEFORE INCOME TAXES 18,980 3.2 % (16,947) (3.2) %

Income tax expense (benefit) 1,823 0.3 % (3,531) (0.7) %

NET INCOME (LOSS) 17,157 2.9 % (13,416) (2.5) %

Redeemable preferred units accretion — — % (21,176) (4.0) %

NET LOSS ATTRIBUTABLE TO COMMON HOLDERS (34,592) (6.5) % (8,261) (1.8) %

Net loss attributable to non-controlling interests (19,408) (3.6) % — — %

NET LOSS ATTRIBUTABLE TO PORTILLO'S INC.

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON HOLDERS 17,157 2.9 % (34,592) (6.5) %

Net income (loss) attributable to non-controlling interests 6,306 1.1 % (19,408) (3.6) %

NET INCOME (LOSS) ATTRIBUTABLE TO PORTILLO'S INC.

$ 10,851 1.8 % $ (15,184) (2.8) %

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Revenues in any period are directly influenced by the number of operating weeks in the period, the number of open restaurants, restaurant traffic, our menu prices, third-party delivery platform prices and product mix.

Revenues for the year ended December 26, 2021 were $535.0 million compared to $455.5 million for the year ended December 27, 2020, an increase of $79.5 million or 17.5%.

The increase in revenues was primarily attributed to an increase in our average check, increase in transactions and the opening of new restaurants.

Two restaurants opened in the fourth quarter of 2020 and five new restaurants opened in the year ended December 26, 2021 positively impacted revenues in the year ended December 26, 2021 by approximately $33.0 million .

Same-restaurant sales increased 10.5% during the year ended December 26, 2021, which was attributabl e to a 7.8% i ncrease in average check and 2.7% increase in transactions.

The higher average check was driven by an increase in menu prices and mix of items sold.

For the purpose of calculating same-restaurant sales for December 26, 2021, sales for 61 restaurants were included in the Comparable Restaurant Base (as defined in "Key Performance Indicators and Non-GAAP Financial Measures" below) as of the end of fiscal 2021.

At the end of 2021, the Company began to record in revenues the difference in higher third-party delivery menu prices, versus regular menu prices.

This markup was previously recorded in Cost of goods sold, excluding depreciation and amortization.

As a result, this change positively impacted our same-restaurant sales growth by 2.0% to 3.0% 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.

Summary Of Significant Accounting Policies-Revenue Recognition, for more information.

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Form 10-K | 35

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 costs of goods sold, excluding depreciation and amortization.

There is no anticipated or actual impact on operating income for any period.

Revenues for the year ended December 25, 2022 were $587.1 million compared to $535.0 million for the year ended December 26, 2021, an increase of $52.2 million or 9.7%.

The increase in revenues was primarily attributed to the opening of new restaurants, combined with an increase in our same-restaurant sales.

Three new restaurants opened in the year ended December 25, 2022 and five restaurants opened in 2021 positively impacted revenues in the year ended December 25, 2022 by approximately $25.3 million.

Same-restaurant sales increased 5.4% during the year ended December 25, 2022, which was attributabl e to an i ncrease in average check of 6.1% and a 2.7% impact from the change in recording third-party delivery pricing, offset by a 3.4% decline in transactions.

The higher average check was driven by an approximate 7.5% 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, approximately 3.5% during the second quarter of 2022, and approximately 3.4% during the fourth quarter of 2022 to combat inflationary cost pressures.

For the purpose of calculating same-restaurant sales as of December 25, 2022, sales for 62 restaurants were included in the Comparable Restaurant Base (as defined in "Key Performance Indicators and Non-GAAP Financial Measures" below) as of the end of fiscal 2022.

Cost of Goods Sold, Excluding Depreciation and Amortization

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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.

There is no anticipated or actual impact on operating income for any period.

The comparability of cost of goods sold, excluding depreciation and amortization, was 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 impacted by such change.

Cost of goods sold, excluding depreciation and amortization for the year ended December 25, 2022 was $204.2 million compared to $166.8 million for the year ended December 26, 2021, an increase of $37.5 million or 22.5%.

This increase was primarily driven by the opening of two new restaurants in the fourth quarter of 2020, five new restaurants in 2021, an increase in commodity prices, primarily beef, chicken and pork.

As a percentage of revenues, cost of goods sold, excluding depreciation and amortization, decreased 0.1% during the year ended December 26, 2021.

This decrease was primarily due to an increase in our average check, partially offset by higher commodity prices.

This increase was primarily driven by a 15.2% increase in commodity prices, with the largest impacts in beef and chicken prices;

the impact of how the Company records third-party delivery menu prices;

the opening of three restaurants in the year ended December 25, 2022 and the opening of five restaurants in 2021.

These increases were partially offset by a decline in transactions.

As a percentage of revenues, net, cost of goods sold, excluding depreciation and amortization, increased 3.6% during the year ended December 25, 2022.

This increase was primarily due to an increase in 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, payroll taxes, workers’ compensation expense, equity-based 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 include hourly and management wages, bonuses and equity-based compensation, payroll taxes, workers’ compensation expense, and team member benefits.

Factors that influence labor costs include wage inflation and payroll tax legislation, health care costs and the staffing needs of our restaurants.

Labor expenses for the year ended December 25, 2022 were $154.4 million compared to $138.8 million for the year ended December 26, 2021, an increase of $15.6 million or 11.2%.

This increase was primarily driven by 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 five new restaurants in 2021, partially offset by lower staffing levels and increased productivity in our restaurants.

As a percentage of revenues, labor expenses increased 0.5% during the year ended December 26, 2021 primarily due 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.

This increase was primarily driven by incremental investments to support our team members, including hourly rate increases primarily made in July 2022 and June 2021 and higher equity-based compensation, and the opening of three new restaurants during the year ended December 25, 2022 and the opening of five restaurants in 2021.

These increases were partially offset by a decline in transactions and operational efficiencies.

As a percentage of revenues, net, labor increased 0.4% during the year ended December 25, 2022 primarily due to the aforementioned incremental hourly rate increases to support our team members, partially offset by an increase in our average check.

Occupancy Expenses

Occupancy expenses primarily consist of rent, property insurance, common area expenses and property taxes.

Occupancy expenses for the year ended December 26, 2021 were $28.1 million compared to $24.9 million for the year ended December 27, 2020, an increase of $3.1 million or 12.6%, primarily driven by the opening of two new restaurants in the fourth quarter of 2020 and five new restaurants opened during in 2021.

As a percentage of revenues, occupancy expenses decreased 0.2% during the year ended December 26, 2021 due primarily to the leveraging of higher same-restaurant sales.

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 year ended December 26, 2021 were $59.3 million compared to $50.2 million for the year ended December 27, 2020, an increase of $9.1 million or 18.1%, primarily driven by the opening of two new restaurants in the fourth quarter of 2020, five new restaurants opened in 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.

Occupancy expenses primarily consist of rent, property insurance and property taxes.

Occupancy expenses for the year ended December 25, 2022 were $30.7 million compared to $28.1 million for the year ended December 26, 2021, an increase of $2.6 million or 9.3%, primarily driven by the opening of three new restaurants in the year ended December 25, 2022 and the opening of five restaurants in 2021.

As a percentage of revenues, occupancy expenses were flat during the year ended December 25, 2022 compared to the year ended December 26, 2021.

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Other Operating Expenses

Other operating expenses consist of direct marketing expenses, utilities and other expenses incidental to operating our restaurants, such as credit card fees and repairs and maintenance.

Other operating expenses for the year ended December 25, 2022 were $65.3 million compared to $59.3 million for the year ended December 26, 2021, an increase of $6.1 million or 10.2%, primarily driven by the opening of three new restaurants in the year ended December 25, 2022 and the opening of five restaurants in 2021 as well as an increase in building and equipment repairs and maintenance, insurance and credit card fees.

General and Administrative Expenses

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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 year ended December 26, 2021 were $87.1 million compared to $39.9 million for the year ended December 27, 2020, an increase of $47.2 million or 118.5%.

This increase was primarily driven by an increase in equity-based stock compensation of $29.2 million.

In connection with the IPO, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards, we recognized cash stock-compensation expense of approximately $1.3 million and non-cash stock-compensation expense of approximately $27.3 million for the quarter.

The remainder of equity-based compensation expense is related to awards under the 2014 Equity Incentive Plan and 2021 Equity Incentive Plan as described in Note 15.

"Equity-Based Compensation" to our consolidated financial statements.

The remainder of the increase in general and administrative expenses was driven by an option holder payment in connection with the IPO of $6.6 million, an increase in costs associated with being a public company of $3.2 million, including costs related to the preparation for Sarbanes-Oxley compliance and other transaction-related fees and expenses, and an increase in salaries and wages attributable to annual rate increases, filling open positions, and training program costs for future restaurant managers.

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 year ended December 25, 2022 were $66.9 million compared to $87.1 million for the year ended December 26, 2021, a decrease of $20.2 million or 23.2%.

This decrease was primarily driven by a decrease in equity-based stock compensation of $15.5 million, option holder payments of $6.6 million made in 2021 in connection with the IPO, a decrease in variable-based compensation of $3.8 million and a decrease in transaction-related fees and expenses of $1.0 million.

In 2021, we recognized additional equity-based stock compensation in connection with the IPO, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards.

These decreases were offset by increases in salaries and wages attributable to annual rate increases, filling open positions, training program costs for future restaurant managers, insurance and software licensing fees.

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, food, beverage, and the initial stocking of operating supplies.

Pre-opening expenses consist primarily of wages, occupancy expenses, which represent rent expense recognized during the period between the date of possession of the restaurant facility and the restaurant opening date, travel for the opening team, 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.

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Pre-opening expenses for the year ended December 25, 2022 were $4.7 million compared to $3.6 million for the year ended December 26, 2021, an increase of $1.2 million or 32.3%.

This increase was due to five new restaurants opened in 2021 compared to two new restaurants opened in 2020.

This increase was due to the timing and geographic location of activities related to our planned restaurant openings at the end of fiscal 2022 and early fiscal 2023.

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 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, and in prior years, non-compete agreements and favorable leasehold positions.

Depreciation and amortization expense for the year ended December 25, 2022 was $20.9 million compared to $23.3 million for the year ended December 26, 2021, a decrease of $2.4 million or 10.3%.

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 2020 and five new restaurants in 2021.

This decrease was primarily attributable to an expired non-compete intangible asset, partially offset by incremental depreciation of capital expenditures related to the three new restaurants opened in 2022 and five restaurants opened in 2021.

Net Income Attributable to Equity Method Investment

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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 year ended December 26, 2021 was $0.8 million compared to $0.5 million for the year ended December 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.

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Net income attributable to equity method investment for the year ended December 25, 2022 was $1.1 million compared to $0.8 million for the year ended December 26, 2021.

This increase was primarily driven by increased revenue, which is attributable to an increase in average check.

Other Income, Net

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Other income, net for the year ended December 25, 2022 was $0.2 million compared to $1.1 million for the year ended December 26, 2021, a decrease of $0.9 million or 81.4%.

Other income, net decreased primarily due to a decrease in trading gains in our deferred compensation plan and an increase in losses on asset disposals.

Other income, net decreased primarily due to an increase in trading losses in the rabbi trust used to fund our deferred compensation plan.

Interest Expense

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Interest expense for year ended December 25, 2022 was $27.6 million compared to $39.7 million for year ended December 26, 2021, a decrease of $12.1 million or 30.4%.

This decrease was primarily driven by decreased borrowings on the First Lien Term B-3 Loans and the payoff of the Second Term B-3 Loans with the use of IPO proceeds during the year ended December 26, 2021.

There were no outstanding borrowings or repayments under the Revolving Facility during the year ended December 26, 2021.

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 year ended December 25, 2022.

This decrease was partially offset by $2.9 million of additional interest expense on the First Lien Term B-3 Loans due to rising interest rates affecting the floating portion of our First Lien Term B-3 Loans.

There were no outstanding borrowings under the Revolving Facility during the year ended December 25, 2022 or year ended December 26, 2021.

Tax Receivable Agreement Liability Adjustment

In connection with the IPO, we entered into a Tax Receivable Agreement with certain members of Portillo's OpCo that provides for the payment by us of 85% of the amount of tax benefits, if any, that Portillo's Inc.

actually realizes or in some cases is deemed to realize as a result of certain transactions.

The Tax Receivable Agreement liability adjustment was $5.3 million for the year ended December 25, 2022 related to a remeasurement primarily due to stock activity.

There was no Tax Receivable Agreement liability adjustment for the year ended December 26, 2021.

Loss on Debt Extinguishment

Loss on debt extinguishment for year ended December 26, 2021 was $7.3 million due to prepayment penalties of $3.1 million and the write-off of debt discount and deferred issuance costs of $4.2 million associated with the payoff of the Second Term B-3 Loans.

Loss on debt extinguishment for the year ended December 26, 2021 was $7.3 million due to prepayment penalties of $3.1 million and the write-off of debt discount and deferred issuance costs of $4.2 million associated with the payoff of the Second Term B-3 Loans.

There was no such loss for year ended December 25, 2022.

Income Tax Expense

Income Tax Expense (Benefit)

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.

Rather, any taxable income or loss generated by Portillo's OpCo is allocated to its members in relation to their respective ownership percentage of Portillo's OpCo.

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 benefit for year ended December 26, 2021 was $3.5 million.

Our effective income tax rate for year ended December 26, 2021 was 20.9% .

There was no income tax expense for year ended December 27, 2020.

Net Loss Attributable to Non-controlling Interests

Income tax expense for the year ended December 25, 2022 was $1.8 million compared to an income tax benefit of $3.5 million for the year ended December 26, 2021, an increase of $5.4 million.

Our effective income tax rate for year ended December 25, 2022 was 9.6%, compared to 20.9% for year ended December 26, 2021.

The decrease in our effective income tax rate for the year ended December 25, 2022 compared to the year ended December 26, 2021 was primarily driven by the change in the valuation allowance and the tax benefit from the exercise and vesting of equity-based awards.

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Net Income (Loss) Attributable to Non-controlling Interests

In connection with the IPO, we became the sole managing member of Portillo's OpCo.

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and the non-controlling interest holders.

Net loss attributable to non-controlling interests for year ended December 26, 2021 was $19.4 million.

There was no such loss for year ended December 27, 2020.

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Net income attributable to non-controlling interests for the year ended December 25, 2022 was $6.3 million, compared to a loss of $19.4 million for the year ended December 26, 2021.

The increase in net income attributable to non-controlling interests for the year ended December 25, 2022 was primarily due to an improvement in net income primarily due to the factors driving the aforementioned expenses, compared to the year ended December 26, 2021 and a decrease in the non-controlling interest holders' weighted average ownership, from 49.9% for the year ended December 26, 2021 to 45.8% for the year ended December 25, 2022.

Key Performance Indicators and Non-GAAP Financial Measures

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Change in same-restaurant sales (b) 5.4 % 10.5 %

Adjusted EBITDA (in thousands) $ 98,497 $ 87,804

Adjusted EBITDA Margin 18.4 % 19.3 %

Restaurant-Level Adjusted EBITDA (in thousands) $ 142,082 $ 121,945

Restaurant-Level Adjusted EBITDA Margin 26.6 % 26.8 %

Adjusted EBITDA (in thousands) (b) $ 84,955 $ 98,497

Adjusted EBITDA Margin (b) 14.5 % 18.4 %

Restaurant-Level Adjusted EBITDA (in thousands) (b) $ 132,506 $ 142,082

Restaurant-Level Adjusted EBITDA Margin (b) 22.6 % 26.6 %

(a) Includes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity, as described in Note 2.

"Equity Method Investment" in our consolidated financial statements.

Summary Of Significant Accounting Policies in our consolidated financial statements.

Total restaurants indicated are as of a point in time.

(b) Excludes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity.

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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 years ended December 26, 2021 and December 27, 2020, there were 61 and 56 restaurants in our Comparable Restaurant Base, respectively.

As of December 25, 2022 and December 26, 2021, there were 62 and 61 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 2.

"Equity Method Investment" in our consolidated financial statements.

Summary Of Significant Accounting Policies in our consolidated financial statements.

A change in same-restaurant sales growth is the result of a change in restaurant transactions, average guest check, or a combination of the two.

We gather daily sales data and regularly analyze the guest transaction counts and the mix of menu items sold to strategically evaluate menu pricing and demand.

Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base.

We believe this measure provides a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of restaurant openings and enables investors to better understand and evaluate the Company’s historical and prospective operating performance.

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Average Unit Volume

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.

AUV is the total revenue (excluding gift card breakage) recognized in the Comparable Restaurant Base, including C&O, divided by the number of restaurants in the Comparable Restaurant Base, including C&O, by period.

This key performance indicator allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.

Non-GAAP Financial Measures

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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.

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 shareholders 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.

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Adjusted EBITDA and Adjusted EBITDA Margin

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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 (loss) income to Adjusted EBITDA and Adjusted EBITDA margin (in thousands):

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The following table reconciles net income (loss) to Adjusted EBITDA and Adjusted EBITDA margin (in thousands):

Fiscal Years Ended

December 25, 2022 December 26, 2021

Net (loss) income $ (13,416) $ 12,263

Net income (loss) $ 17,157 $ (13,416)

Depreciation and amortization 20,907 23,312

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Loss on debt extinguishment — 7,265

Income tax benefit (3,531) —

Income tax expense (benefit) 1,823 (3,531)

EBITDA 67,531 53,324

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Transaction-related fees & expenses (4) 2,237 3,268

Tax Receivable Agreement liability adjustment (5) (5,345) —

Adjusted EBITDA $ 84,955 $ 98,497

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(3) Represents loss on disposal of property and equipment.

(4) Represents fees and expenses associated with public company readiness.

(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 liability.

Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin

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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.

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The following table reconciles operating income to Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin (in thousands):

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Restaurant-Level Adjusted EBITDA Margin 22.6 % 26.6 %

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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 December 26, 2021, we maintained cash and cash equivalents and restricted cash balance of $39.3 million and had $45.0 million of availability under our Revolver.

As of December 25, 2022, we maintained cash and cash equivalents and restricted cash balance of $44.4 million and had $45.8 million of availability under our Revolving Facility.

Our primary requirements for liquidity are to fund our working capital needs, operating lease obligations, capital expenditures, and general restaurant support center needs.

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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.

Subsequent Events for a discussion of the New Revolver Facility, which replaced the Revolving Facility, effective February 2, 2023.

Liquidity Upon IPO

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• to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC Members of $57.0 million.

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In connection with the IPO, we entered into a Tax Receivable Agreement ("TRA") with certain of our pre-IPO LLC Members, in which we will generally be required to pay 85% of the amount of cash savings, if any, in U.S.

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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 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.

As of December 26, 2021, such TRA obligations totaled $156.6 million.

Secondary Offerings

As a result, Portillo’s did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change;

however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock.

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Tax Receivable Agreement

As of December 25, 2022, we estimate that our obligation for future payments under the TRA totaled $252.8 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.

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Under this scenario, we would be required to pay the TRA Parties approximately 85% of such amount, or $252.8 million , primarily over the next 15 years, substantially declining in year 16 through year 47.

We expect a payment of $0.8 million to be paid within the next 12 months.

Summary of Cash Flows

The following table presents a summary of our cash flows from operating, investing and financing activities:

(in thousands) Fiscal Years Ended

The following table presents a summary of our cash flows from operating, investing and financing activities (in thousands):

Fiscal Years Ended

December 25, 2022 December 26, 2021

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Net cash used in financing activities (4,708) (8,783)

Net (decrease) increase in cash and cash equivalents and restricted cash (2,169) 18,803

Net increase (decrease) in cash and cash equivalents and restricted cash 5,164 (2,169)

Cash and cash equivalents and restricted cash at beginning of period 39,263 41,432

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Operating Activities

Net cash provided by operating activities for the year ended December 26, 2021 was $42.9 million compared to net cash provided by operating activities of $58.3 million for the year ended December 27, 2020, a decrease of $15.4 million or 26.4%.

This decrease was driven by an decrease in net income of $25.7 million, a change in operating assets and liabilities of $20.7 million, partially offset by an increase in non-cash charges of $31.0 million.

The $20.7 million change in our operating asset and liability balances was primarily driven by operating assets and liabilities being a use of net cash of $7.0 million in year ended December 26, 2021, compared to a source of net cash of $13.6 million in year ended December 27, 2020 driven by increased payments for insurance, interest and employer social security taxes pursuant to the Coronavirus Aid, Relief, and Economic Security ("CARES") Act for the year ended December 26, 2021 offset by an increase in the receipt of deferred lease incentives and the deferral of employer social security taxes pursuant to the CARES Act in the year ended December 27, 2020.

The CARES Act allowed eligible employers to defer the remittance of certain employer social security 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.

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Net cash provided by operating activities for the year ended December 25, 2022 was $56.9 million compared to net cash provided by operating activities of $42.9 million for the year ended December 26, 2021, an increase of $14.0 million or 32.7%.

This increase was driven by higher net income of $30.6 million and the change in operating assets and liabilities of $10.9 million, partially offset by the change in non-cash items of $27.4 million.

The $10.9 million change in our operating asset and liability balances was primarily driven by operating assets and liabilities being a source of net cash of $3.9 million in year ended December 25, 2022, compared to a use of net cash of $7.0 million in year ended December 26, 2021 driven by the change in accounts payable and accrued expenses and other liabilities due to increased payments in the prior year for insurance and interest.

The $27.4 million change from the year ended December 26, 2021 in non-cash charges is primarily attributable to equity-based compensation and loss on debt extinguishment in the prior year, offset by a decrease in depreciation and amortization.

Investing Activities

Net cash used in investing activities was $47.0 million for the year ended December 25, 2022 compared to net cash used in investing activities of $36.3 million for the year ended December 26, 2021, an increase of $10.8 million or 29.7%.

This increase was primarily due to the opening of five new restaurants in 2021 compared to two new restaurants in 2020.

This increase was primarily due to the number of restaurant openings and builds in process during 2022.

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Financing Activities

Net cash used in financing activities was $8.8 million for the year ended December 26, 2021 compared to net cash used in financing activities of $18.0 million for the year ended December 27, 2020, a decrease of $9.3 million.

For the year ended December 26, 2021, we received proceeds from our IPO of $437.1 million, net of underwriting discounts and commissions.

Net cash used in financing activities was $4.7 million for the year ended December 25, 2022 compared to net cash used in financing activities of $8.8 million for the year ended December 26, 2021, a decrease of $4.1 million or 46.4%.

During the year ended December 25, 2022, we received proceeds of $365.0 million, net of underwriting discounts and commissions, which were used to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC Members of $365.0 million.

In addition, payments of IPO offering costs were $0.8 million, payments on long term-debt were $3.3 million and payments related to stock activity were $0.6 million.

During the year ended December 26, 2021, we received proceeds from our IPO of $437.1 million, net of underwriting discounts and commissions.

As discussed in Liquidity and Capital Resources, the proceeds were used 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.

and to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC Members and shareholders of the Blocker Companies of $57.0 million.

In addition, payments of IPO offering costs were $6.3 million and payments on long term-debt were $3.3 million.

During the year ended December 27, 2020, we made repayments on borrowings of $18.3 million.

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.

As of December 26, 2021, there were no borrowings outstanding under the Revolver.

During the year ended December 25, 2022, we maintained a Revolving Facility that provided for a revolving total commitment amount of $50.0 million, which, as of February 2, 2023, was replaced by the New Revolver Facility, as further described in this section below and in Note 18.

Subsequent Events.

As of December 25, 2022, there were no borrowings outstanding under the Revolving Facility.

We had $45.8 million of availability, as of December 25, 2022, after giving effect to $4.2 million in outstanding letters of credit.

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.

On April 30, 2020, the Company was granted a loan in the aggregate amount of $10.0 million, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020.

On May 5, 2020, the Company repaid the $10.0 million proceeds from the loan.

In connection with the IPO, the Company received aggregate net proceeds of approximately $430.0 million after deducting underwriting discounts and commissions and other 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 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.

Borrowings under the First Lien Credit Agreement are guaranteed by Holdings, the Borrower and certain of the Borrower’s subsidiaries, and Holdings, the Borrower and certain of the Borrower’s subsidiaries have pledged substantially all tangible and intangible assets as collateral, 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 December 25, 2022, the Company was in compliance with all covenants.

On February 2, 2023, Holdings, the Borrower, the other Guarantors party thereto from time to time, each lender party thereto from time to time and Fifth Third Bank, National Association, as Administrative Agent, L/C Issuer and Swing Line Lender entered into a New Credit Agreement which provides for a Term Loan in an initial aggregate principal amount of $300.0 million and a New Revolver Facility in an initial aggregate principal amount of $100.0 million.

The Company anticipates using the remainder of the loan proceeds for general corporate purposes and working capital needs.

Subsequent Events for refinancing of borrowings under the First Lien Credit Agreement.

Material Cash Requirements

Our material cash requirements greater than twelve months include:

Long-term debt.

Refer to Note 9.

Debt" to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Operating leases obligations .

Debt and Note 18.

Subsequent Events, under the header New Credit Agreement, to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Lease obligations .

Refer to Note 10.

Operating Leases" to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Leases to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Portillo's Inc.

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Income Taxes to the consolidated financial statements for further information of our obligations.

We also enter into short-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating us to purchase specified quantities and/or products at fixed prices.

These commitments are cancellable and there are no material financial penalties associated with these agreements in the event of early termination.

Additionally, we enter into purchase commitments related to construction, marketing and other service-related arrangements that occur in the normal course of business.

We may enter into purchase commitments relating to supply chain, construction, marketing and other service-related arrangements that occur in the normal course of business.

Such commitments are typically short-term in nature and are not material as of December 25, 2022.

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Critical accounting estimates are defined as those reflective of significant judgments, estimates and uncertainties, which may result in materially different results under different assumptions and conditions.

As conditions resulting from the COVID-19 pandemic continue to evolve, the Company expects these judgments and estimates may be subject to change, which could materially impact future periods.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived intangible assets are assessed for impairment annually or more frequently if events and circumstances indicate that it is more likely than not that the fair value of a reporting unit or an intangible asset is less than its carrying value.

We have one reporting unit which is evaluated for goodwill impairment annually.

Fair value of the reporting unit is estimated using the income approach and the market approach.

Under the income approach, fair value is based on the present value of estimated future cash flows.

The market approach is based upon both the price-earnings multiples of comparable public companies, as well as transactional data from similar companies that were recently sold.

Further given the timing of the Transactions, an IPO approach was also applied, which is a form of the market approach using the transactional method.

If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded for the difference between the fair value of the reporting unit and the carrying value of the reporting unit.

As of December 26, 2021, the fair value of the reporting unit substantially exceeded its carrying value.

No impairment charge was recorded for any period presented.

Our indefinite-lived intangible assets consist of trade names and trade marks (collectively “trade names”).

We estimate the fair value of our trade names using a relief-from-royalty income approach.

If the fair value of the trade name is less than its carrying value, an impairment loss is recorded for the difference between the estimated fair value and carrying value of the intangible assets.

As of December 26, 2021, the fair value of our trade names exceeded its carrying value by greater than 20%.

No impairment charge was recorded for any period presented.

Equity-based Compensation

We have granted equity-based awards consisting of non-qualified stock options, restricted stock units, and performance based stock options to team members, officers and directors.

Equity-based compensation expense is measured based on the grant-date fair value of those awards and is recognized on a straight-line basis over the vesting period.

The grant-date fair value of the stock options is determined using the Black-Scholes option pricing model.

The grant-date fair value of the performance based stock options is determined using a Monte Carlo simulation model.

Both of these models require the input of highly subjective assumptions, including the fair value of the underlying common stock, the risk-free interest rate, the expected equity volatility, and the expected term of the option.

Due to their inherent uncertainty, these judgments and estimates may be subject to change, which could materially impact future periods.

We lease land for our retail restaurants and commissaries, and office space under various long-term operating lease agreements that expire or become subject to renewal clauses at various dates through 2068.

We also lease equipment, which primarily consists of restaurant equipment and copiers.

We have immaterial short-term operating leases, such as those for seasonal rentals and training spaces.

We evaluate the contracts to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified.

We evaluate whether we control the use of the asset, which is determined by assessing whether we obtain substantially all economic benefits from the use of the asset, and whether we have the right to direct the use of the asset.

If these criteria are met and we have identified a lease, we account for the contract under the requirements of ASC 842.

Upon the possession of a leased asset, we determine its classification as an operating or financing lease.

As of December 25, 2022, all of our leases are classified as operating leases.

We make judgments regarding the probable term for each lease, which can impact the classification and accounting for a lease as operating or financing, as well as the amount of straight-lined rent expense in a particular period.

Generally, t he leases for the restaurant locations have an initial term of 10 years to 20 years and typically provide for renewal options in five-year increments, as well as rent escalations.

Renewal options are generally recognized as part of the right-of-use assets and lease liabilities as it is reasonably certain at commencement date that we would exercise the options to extend the lease.

Some of our real estate leases provide for base rent, plus if applicable additional rent based on gross sales, as defined in each lease agreement, which is considered to be variable rent.

When the achievement of such sales thresholds are deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period.

For operating leases that include rent holidays and rent escalation clauses, we recognize lease expense on a straight-line basis over the lease term from the date we take possession of the leased property.

Lease expense incurred before a restaurant opens is recorded in pre-opening expenses in the consolidated statements of operations.

Once a restaurant opens, we record the straight-line lease expense and any contingent rent, if applicable, in occupancy and related expenses on the consolidated statements of operations.

Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancy and other operating expenses on the consolidated statements of operations and is generally considered to be variable rent.

For leases with a lease term of 12 months or less ("short-term lease"), any fixed lease payments are recognized on a straight-line basis over such term, and are not recognized on the consolidated balance sheets.

Per the ASC 842 requirements, a lessee is required to use the rate implicit in the lease when readily determinable;

alternatively, it would use the incremental borrowing rate in determining the present value of future lease payments.

We estimate our incremental borrowing rates corresponding to the maturities of our leases.

We estimate this rate based on prevailing financial market conditions, indications for the Company's credit rating, and other benchmarks related to our outstanding secured borrowings.

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Equity-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures.

Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment to equity-based compensation expense will be recognized at that time.

In connection with the IPO, each option under the 2014 Equity Incentive Plan that was outstanding, whether vested or unvested, was substituted for an option to purchase a number of shares of Class A common stock under the 2021 Equity Incentive Plan, and the option holders received a cash payment in respect of their options (whether vested or unvested) in an aggregate amount of approximately $6.6 million, which was recorded in the fourth quarter of 2021.

In addition, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards we recorded compensation expense based on the fair value of the modified awards.

Assuming all of the options vest and an offering price of $20.00 per share of Class A common stock, we recognized a cash compensation expense of approximately $1.3 million and a non-cash compensation expense of approximately $26.2 million, each at the modification date in the fourth quarter of fiscal 2021.

We expend cash for leasehold improvements to build out our leased premises.

Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon terms in our lease agreements.

If obtained, landlord incentives usually take the form of up-front cash, full or partial credits against our future minimum or contingent rents otherwise payable by us, or a combination thereof.

In most cases, landlord incentives are received after we take possession of the property, as we meet required milestones during the construction of the property.

We include these amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset.

Liabilities Under Tax Receivable Agreement

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As of December 25, 2022, we recognized $252.8 million of liabilities relating to our obligations under the TRA, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits.

If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would de-recognize the portion of the liability related the benefits not expected to be utilized.

If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would de-recognize the portion of the liability related to the benefits not expected to be utilized.

Additionally, we estimate the amount of TRA payments expected to be paid within the next 12 months and classify this amount as current on our consolidated balance sheet.

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To the extent our estimate differs from actual results, we may be required to reclassify portions of our liabilities under the TRA between current and non-current.

We expect a payment of $0.8 million to be paid within the next 12 months.

We are subject to U.S.

federal, state and local income taxes with respect to our allocable share of any taxable income of Portillo’s OpCo and will be taxed at the prevailing corporate tax rates.

In addition to tax expenses, we also will incur expenses related to our operations, plus payments under the TRA, which will be significant.

We intend to cause Portillo’s OpCo to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the TRA.

In addition to tax expenses, we also will incur expenses related to our operations, plus payments under the TRA, which are expected to be significant.

We intend to cause Portillo’s OpCo to make cash distributions to us in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the TRA.

We anticipate that we will account for the income tax effects and corresponding TRA’s effects resulting from future taxable exchanges or redemptions of LLC Units of pre-IPO LLC Members by us or Portillo’s OpCo by recognizing an increase in our deferred tax assets, based on enacted tax rates at the date of the purchase or redemption.

The amounts recorded for both the deferred tax assets and the liability for our obligations under the TRA were estimated at the time of the IPO as a reduction to shareholders’ equity, and the effects of changes in any of our estimates after this date will be included in net income (loss).

The amounts recorded for both the deferred tax assets and the liability for our obligations under the TRA were estimated at the time of the IPO and secondary offerings as a reduction to shareholders’ equity, and the effects of changes in any of our estimates after this date will be included in net income (loss).

Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income (loss).

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The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.

As of December 26, 2021, we had $74.5 million of deferred tax assets, net of valuation allowances.

As of December 25, 2022, we had $150.5 million of deferred tax assets, net of the recorded valuation allowance.

Under the provisions of ASC 740— Income Taxes , as it relates to accounting for uncertainties in tax positions, we recognize the tax benefit of tax positions to the extent that the benefit will more likely than not be realized.

The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.

For the tax year ended December 26, 2021, we did not have any uncertain tax positions.

For the tax year ended December 25, 2022, we did not record any unrecognized tax benefits.

Portillo's Inc.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis