Wingstop Inc. 10-Q

Item 1. Financial Statements WINGSTOP INC. AND SUBSIDIARIES Consolidated Balance Sheets (amounts in thousands, except share and par value amounts) June 27, 2020 December 28, 2019 (Unaudited) Assets Current assets Cash and cash equivalents $ 45,766 $ 12,849 Restricted cash 4,132 4,790 Accounts receivable, net 5,580 5,175 Prepaid expenses and other current assets 4,118 2,449 Advertising fund assets, restricted 7,860 4,927 Total current assets 67,456 30,190 Property and equipment, net 27,220 27,842 Goodwill 50,160 50,188 Trademarks 32,700 32,700 Customer relationships, net 12,255 12,910 Other non-current assets 11,323 12,283 Total assets $ 201,114 $ 166,113 Liabilities and stockholders' deficit Current liabilities Accounts payable $ 2,890 $ 3,348 Other current liabilities 20,829 21,454 Current portion of debt 16,000 3,200 Advertising fund liabilities 7,860 4,927 Total current liabilities 47,579 32,929 Long-term debt, net 310,846 307,669 Deferred revenues, net of current 22,280 22,343 Deferred income tax liabilities, net 6,043 4,485 Other non-current liabilities 7,038 8,115 Total liabilities 393,786 375,541 Commitments and contingencies (see Note 7) Stockholders' deficit Common stock, $ 0.01 par value; 100,000,000 shares authorized; 29,596,347 and 29,457,228 shares issued and outstanding as of June 27, 2020 and December 28, 2019, respectively 296 295 Additional paid-in-capital 43 552 Accumulated deficit ( 193,011 ) ( 210,275 ) Total stockholders' deficit ( 192,672 ) ( 209,428 ) Total liabilities and stockholders' deficit $ 201,114 $ 166,113 See accompanying notes to consolidated financial statements. 4 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Operations (amounts in thousands, except per share data) (Unaudited) Thirteen Weeks Ended Twenty-Six Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Revenue: Royalty revenue, franchise fees and other $ 27,858 $ 21,187 $ 52,057 $ 42,515 Advertising fees and related income 19,923 13,487 35,937 26,697 Company-owned restaurant sales 18,324 13,888 33,547 27,403 Total revenue 66,105 48,562 121,541 96,615 Costs and expenses: Cost of sales (1) 13,387 10,573 24,563 20,303 Advertising expenses 18,589 12,973 33,513 25,707 Selling, general and administrative 13,194 13,394 27,504 25,936 Depreciation and amortization 1,398 1,335 2,953 2,611 Total costs and expenses 46,568 38,275 88,533 74,557 Operating income 19,537 10,287 33,008 22,058 Interest expense, net 4,214 4,299 8,359 8,709 Income before income tax expense 15,323 5,988 24,649 13,349 Income tax expense 3,784 1,070 5,014 1,825 Net income $ 11,539 $ 4,918 $ 19,635 $ 11,524 Earnings per share Basic $ 0.39 $ 0.17 $ 0.66 $ 0.39 Diluted $ 0.39 $ 0.17 $ 0.66 $ 0.39 Weighted average shares outstanding Basic 29,588 29,418 29,538 29,377 Diluted 29,793 29,667 29,751 29,650 Dividends per share $ 0.11 $ 0.09 $ 0.22 $ 0.18 (1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately. See accompanying notes to consolidated financial statements. 5 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficit For the Twenty-Six Weeks Ended June 29, 2019 and June 27, 2020 (amounts in thousands, except share data) (Unaudited) Common Stock Shares Amount Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Deficit Balance at December 29, 2018 29,296,939 $ 293 $ 1,036 $ ( 226,159 ) $ ( 224,830 ) Adjustment for ASC 842 adoption — — — 154 154 Net income — — — 6,606 6,606 Shares issued under stock plans 114,936 1 157 — 158 Tax payments for restricted stock upon vesting ( 12,469 ) — — ( 833 ) ( 833 ) Stock-based compensation expense — — 838 — 838 Dividends paid — — ( 1,825 ) ( 746 ) ( 2,571 ) Balance at March 30, 2019 29,399,406 294 206 ( 220,978 ) ( 220,478 ) Net income — — — 4,918 4,918 Shares issued under stock plans 45,778 1 147 — 148 Tax payments for restricted stock upon vesting ( 2,456 ) — — ( 226 ) ( 226 ) Stock-based compensation expense — — 1,928 — 1,928 Dividends paid — — ( 1,389 ) ( 1,269 ) ( 2,658 ) Balance at June 29, 2019 29,442,728 $ 295 $ 892 $ ( 217,555 ) $ ( 216,368 ) Common Stock Shares Amount Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Deficit Balance at December 28, 2019 29,457,228 $ 295 $ 552 $ ( 210,275 ) $ ( 209,428 ) Net income — — — 8,096 8,096 Shares issued under stock plans 128,585 1 504 — 505 Tax payments for restricted stock upon vesting ( 2,419 ) — — ( 229 ) ( 229 ) Stock-based compensation expense — — 1,331 — 1,331 Dividends paid — — ( 2,168 ) ( 1,055 ) ( 3,223 ) Balance at March 28, 2020 29,583,394 296 219 ( 203,463 ) ( 202,948 ) Net income — — — 11,539 11,539 Shares issued under stock plans 13,057 — 57 — 57 Tax payments for restricted stock upon vesting ( 104 ) — — ( 12 ) ( 12 ) Stock-based compensation expense — — 1,969 — 1,969 Dividends paid — — ( 2,202 ) ( 1,075 ) ( 3,277 ) Balance at June 27, 2020 29,596,347 $ 296 $ 43 $ ( 193,011 ) $ ( 192,672 ) See accompanying notes to consolidated financial statements. 6 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (amounts in thousands) (Unaudited) Twenty-Six Weeks Ended June 27, 2020 June 29, 2019 Operating activities Net income $ 19,635 $ 11,524 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 2,953 2,611 Deferred income taxes 1,720 ( 687 ) Stock-based compensation expense 3,300 2,766 Gain on disposal of assets ( 2,016 ) — Amortization of debt issuance costs 815 775 Changes in operating assets and liabilities: Accounts receivable ( 405 ) 123 Prepaid expenses and other assets ( 652 ) ( 678 ) Advertising fund assets and liabilities, net 2,004 ( 2,664 ) Accounts payable and other current liabilities ( 675 ) ( 3,503 ) Deferred revenue 10 ( 258 ) Other non-current liabilities ( 1,077 ) 482 Cash provided by operating activities 25,612 10,491 Investing activities Purchases of property and equipment ( 2,670 ) ( 1,442 ) Proceeds from sales of assets 2,300 — Cash used in investing activities ( 370 ) ( 1,442 ) Financing activities Proceeds from exercise of stock options 562 306 Borrowings of long-term debt 16,000 — Repayments of long-term debt ( 800 ) ( 800 ) Tax payments for restricted stock upon vesting ( 241 ) ( 1,059 ) Dividends paid ( 6,500 ) ( 5,229 ) Cash provided by (used in) financing activities 9,021 ( 6,782 ) Net increase in cash, cash equivalents, and restricted cash 34,263 2,267 Cash, cash equivalents, and restricted cash at beginning of period 21,175 20,940 Cash, cash equivalents, and restricted cash at end of period $ 55,438 $ 23,207 See accompanying notes to consolidated financial statements. 7 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (1) Basis of Presentation and Update to Significant Accounting Policies Basis of Presentation Wingstop Inc., together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”), is in the business of franchising and operating Wingstop restaurants. As of June 27, 2020, the Company had 1,244 domestic franchised restaurants, and 162 international franchised restaurants. As of June 27, 2020, the Company owned and operated 30 restaurants. The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Balance sheet amounts are as of June 27, 2020 and December 28, 2019, and operating results are for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019. In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019. The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2020 and 2019 each have 52 weeks . Cash, Cash Equivalents, and Restricted Cash Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows as of June 27, 2020 and December 28, 2019 were as follows (in thousands): June 27, 2020 December 28, 2019 Cash and cash equivalents $ 45,766 $ 12,849 Restricted cash 4,132 4,790 Restricted cash, included in Advertising fund assets, restricted 5,540 3,536 Total cash, cash equivalents, and restricted cash $ 55,438 $ 21,175 Segment Reporting Historically, the Company had two reporting segments: franchise operations and company restaurant operations. In accordance with Accounting Standards Codification 280 “Segment Reporting”, the Company uses the management approach for determining its reportable segments. The management approach is based upon the way management reviews performance and allocates resources. Due to changes in how the Company’s chief operating decision maker assesses the Company’s performance and allocates resources, the Company reevaluated its operating segments and has determined it has one operating segment and one reporting segment. Recently Issued Accounting Pronouncements In December 2019, the Financial Accounting Standards Board issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. 8 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (2) Earnings per Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities convertible into, or other contracts to issue, common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of the exercise and vesting of stock options and restricted stock units, respectively, as determined using the treasury stock method. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands): Thirteen Weeks Ended Twenty-Six Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Basic weighted average shares outstanding 29,588 29,418 29,538 29,377 Dilutive shares 205 249 213 273 Diluted weighted average shares outstanding 29,793 29,667 29,751 29,650 For the thirteen weeks ended June 27, 2020 and June 29, 2019, equity awards representing approximately 1,000 and 6,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. For the twenty-six weeks ended June 27, 2020 and June 29, 2019, equity awards representing approximately 1,000 and 18,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. (3) Dividends In each of the first two quarters of 2020, the Company’s Board of Directors declared a quarterly dividend of $ 0.11 per share of common stock, which, in the aggregate, totaled $ 6.5 million, or $ 0.22 per share of common stock, and which was paid during the twenty-six weeks ended June 27, 2020. Subsequent to the second quarter, on July 28, 2020, the Company’s Board of Directors declared a quarterly dividend of $ 0.14 per share of common stock for stockholders of record as of August 28, 2020, to be paid on September 11, 2020, totaling approximately $ 4.1 million. (4) Fair Value Measurements Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows: Level 1 — Unadjusted quoted prices for identical instruments traded in active markets. Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data. Level 3 — Unobservable inputs reflecting management’s estimates and assumptions. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. Fair value of debt is determined on a non-recurring basis, which results are summarized as follows (in thousands): Fair Value Hierarchy June 27, 2020 December 28, 2019 Carrying Value Fair Value Carrying Value Fair Value Securitized Financing Facility: 2018-1 Class A-2 Senior Secured Notes (1) Level 2 $ 316,800 $ 314,395 $ 317,600 $ 331,247 2018-1 Class A-1 Variable Funding Senior Notes (2) Level 2 $ 16,000 $ 16,000 $ — $ — (1) The fair value of the 2018-1 Class A-2 Senior Secured Notes was estimated using available market information. 9 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (2) The fair value of the 2018-1 Class A-1 Variable Funding Senior Notes was estimated based on the borrowing rates currently available for variable rate loans obtained from third-party lending institutions and approximated the book value of such 2018-1 Class A-1 Variable Funding Senior Notes. The Company also measures certain non-financial assets (primarily long-lived assets, intangible assets, and goodwill) at fair value on a non-recurring basis in connection with its periodic evaluations of such assets for potential impairment. (5) Income Taxes Income tax expense and the effective tax rate were $ 3.8 million and 24.7 %, respectively, for the thirteen weeks ended June 27, 2020, and $ 1.1 million and 17.9 %, respectively, for the thirteen weeks ended June 29, 2019. Income tax expense and the effective tax rate were $ 5.0 million and 20.3 %, respectively, for the twenty-six weeks ended June 27, 2020, and $ 1.8 million and 13.7 %, respectively, for the twenty-six weeks ended June 29, 2019. Income tax expense for the thirteen and twenty-six weeks ended June 27, 2020 included $ 0.2 million and $ 1.5 million, respectively, in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, as compared to $ 0.6 million and $ 1.8 million in tax benefits for the thirteen and twenty-six weeks ended June 29, 2019, respectively. (6) Debt Obligations Long-term debt consists of the following components (in thousands): June 27, 2020 December 28, 2019 2018-1 Class A-2 Senior Secured Notes $ 316,800 $ 317,600 2018-1 Class A-1 Variable Funding Senior Notes 16,000 — Debt issuance costs, net of amortization ( 5,954 ) ( 6,731 ) Total debt 326,846 310,869 Less: current portion of debt ( 16,000 ) ( 3,200 ) Long-term debt, net $ 310,846 $ 307,669 The Company's outstanding debt consists of (i) Series 2018-1 4.97 % Fixed Rate Senior Secured Notes, Class A-2 (the “Class A-2 Notes”) issued by Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary of Wingstop Inc. and (ii) Series 2018-1 Variable Funding Senior Notes, Class A-1, which permit borrowings of up to a maximum principal amount of $ 20 million, which may be used to borrow amounts on a revolving basis and to issue letters of credit (the “Variable Funding Notes,” and together with the Class A-2 Notes, the “Notes”). As of June 27, 2020, we had $ 316.8 million of Class A-2 Notes outstanding and $ 16.0 million of Variable Funding Notes outstanding. The Variable Funding Notes were issued in the first quarter of 2020 as a precautionary measure to improve the Company's cash position. The Variable Funding Notes had a weighted average interest rate of 2.72 % during the twenty-six weeks ended June 27, 2020 and are classified as current debt. There were no borrowings outstanding under the Variable Funding Notes as of December 28, 2019. Further, as of June 27, 2020 and December 28, 2019, $ 4.0 million of letters of credit were outstanding against the Variable Funding Notes, which relate primarily to interest reserves required under the base indenture and related supplemental indenture. There were no amounts drawn down on the letters of credit as of June 27, 2020 or December 28, 2019. During the first fiscal quarter of 2020, the Company had a leverage ratio under the Class A-2 Notes of less than 5.0 x. Per the terms of the Company’s debt agreements, principal payments on the Class A-2 Notes are not due until the repayment date as long as the Company maintains a leverage ratio of less than 5.0x. As such, the Company ceased making principal payments beginning in the second quarter of 2020. Accordingly, the entire outstanding balance of the Class A-2 Notes has been classified as long-term debt. The Class A-2 Notes and the Variable Funding Notes were each issued in a securitization transaction pursuant to which certain of the Company’s domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements and intellectual property, were contributed or otherwise transferred to the Issuer and certain other limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company that act as guarantors of the Notes and that have pledged substantially all of their assets. 10 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (7) Commitments and Contingencies The Company is subject to legal proceedings, claims, and liabilities, such as employment-related claims and premises-liability cases, which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of ultimate liability with respect to such actions is not likely to have a material adverse impact on the Company’s financial position, results of operations, or cash flows. (8) Stock-Based Compensation Stock-based compensation is measured at the date of grant, based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period (generally the vesting period of the award). The Company recognized $ 3.3 million in stock-based compensation expense for the twenty-six weeks ended June 27, 2020, with a corresponding increase to additional paid-in-capital. Stock-based compensation expense is included in selling, general and administrative expense in the Consolidated Statements of Operations. Stock Options The following table summarizes stock option activity (in thousands, except term and per share data): Stock Options Weighted Average Exercise Price Per Share Aggregate Intrinsic Value Weighted Average Remaining Term Outstanding - December 28, 2019 134 $ 5.72 $ 10,801 3.8 Options granted 67 84.41 Options exercised ( 46 ) 12.12 Outstanding - June 27, 2020 155 $ 38.02 $ 15,086 5.6 The total grant-date fair value of stock options vested during the twenty-six weeks ended June 27, 2020 was $ 0.2 million. The total intrinsic value of stock options exercised during the twenty-six weeks ended June 27, 2020 was $ 2.8 million. As of June 27, 2020, total unrecognized compensation expense related to unvested stock options was $ 1.4 million, which is expected to be recognized over a weighted-average period of 2.7 years. During the twenty-six weeks ended June 27, 2020, there was a modification to certain awards resulting in additional compensation expense of $ 0.4 million. Restricted Stock Units and Performance Stock Units The following table summarizes activity related to restricted stock units (“RSUs”) and performance stock units (“PSUs”) (in thousands, except per share data): Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Performance Stock Units Weighted Average Grant Date Fair Value Outstanding - December 28, 2019 82 $ 52.73 169 $ 55.92 Units granted 24 87.72 43 84.37 Units vested ( 38 ) 44.57 ( 52 ) 41.54 Units canceled ( 11 ) 63.89 ( 8 ) 66.04 Outstanding - June 27, 2020 57 $ 70.82 152 $ 68.49 The fair value of the Company’s RSUs and PSUs is based on the closing market price of the stock on the date of grant. The RSUs granted during the twenty-six weeks ended June 27, 2020 vest over a three-year service period. As of June 27, 2020, total unrecognized compensation expense related to unvested RSUs was $ 3.4 million, which is expected to be recognized over a weighted-average period of 1.9 years. The Company granted 40,529 PSUs during the twenty-six weeks ended June 27, 2020 that are based on a service condition and a performance vesting condition based on the achievement of certain adjusted EBITDA targets over a performance period of three years . The maximum vesting percentage that could be realized for each of the PSUs is 250 % based on the level of performance achieved for the respective awards, as well as a market vesting condition linked to the level of total stockholder return received by the Company’s stockholders during the performance period measured against the companies in the S&P 600 Restaurant Index (“TSR PSUs”). The TSR PSUs were valued based on a Monte Carlo simulation model to reflect the impact of the total stockholder return market condition, resulting in a grant-date fair value range of $ 0.00 to $ 157.96 per unit based on the 11 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) outcome of the performance condition. The probability of satisfying a market condition is considered in the estimation of the grant-date fair value for TSR PSUs and the compensation cost is not reversed if the market condition is not achieved, provided the requisite service has been provided. The compensation expense related to the PSUs is recognized over the vesting period when the achievement of the performance conditions becomes probable. The total compensation cost for the PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest. As of June 27, 2020, total unrecognized compensation expense related to unvested PSUs was $ 5.8 million. (9) Company-owned Restaurant Transactions During the Company’s fiscal quarter ended June 27, 2020, the Company sold two company-owned restaurants in the Houston market to an existing franchisee for proceeds of $ 2.3 million. In connection with the sale of the restaurants, the Company recorded a $ 2.0 million pre-tax gain on the sale of the related assets and liabilities, which was net of a $ 28,000 reduction in goodwill. The net gain on these restaurants was recorded in Selling, general and administrative expense on our Consolidated Statements of Operations. Subsequent to the end of the Company’s fiscal quarter ended June 27, 2020, the Company completed the sale of five company-owned restaurants in the Kansas City market to an existing franchisee for proceeds of $ 2.5 million. The total assets associated with these restaurants held for sale totaled $ 1.9 million and were included in Prepaid expenses and other current assets on the Consolidated Balance Sheet as of June 27, 2020. (10) Revenue from Contracts with Customers The following table represents a disaggregation of revenue from contracts with customers for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019 (in thousands): Thirteen Weeks Ended Twenty-Six Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Royalty revenue $ 25,447 $ 18,437 $ 46,755 $ 36,344 Advertising fees and related income 19,923 13,487 35,937 26,697 Franchise fees 881 939 1,763 2,521 Franchise fee, development fee, and international territory fee payments received by the Company are recorded as deferred revenue on the Consolidated Balance Sheets, which represents a contract liability. Deferred revenue is reduced as fees are recognized in revenue over the term of the franchise license for the respective restaurant. As the term of the franchise license is typically ten years, substantially all of the franchise fee revenue recognized in the thirteen and twenty-six weeks ended June 27, 2020 was included in the deferred revenue balance as of December 28, 2019. Approximately $ 8.3 million and $ 8.3 million of deferred revenue as of June 27, 2020 and December 28, 2019, respectively, relates to restaurants that have not yet opened, so the fees are not yet being amortized. The weighted average remaining amortization period for deferred franchise and renewal fees related to open restaurants is 7.2 years. The Company does not have any material contract assets as of June 27, 2020. 12