Wingstop Inc. 10-Q

Item 1. Financial Statements WINGSTOP INC. AND SUBSIDIARIES Consolidated Balance Sheets (amounts in thousands, except share and par value amounts) March 27, 2021 December 26, 2020 (Unaudited) Assets Current assets Cash and cash equivalents $ 39,993 $ 40,858 Restricted cash 4,666 4,815 Accounts receivable, net 5,950 4,929 Prepaid expenses and other current assets 8,220 5,532 Advertising fund assets, restricted 22,315 16,486 Total current assets 81,144 72,620 Property and equipment, net 30,473 27,948 Goodwill 53,690 53,690 Trademarks 32,700 32,700 Customer relationships, net 11,276 11,600 Other non-current assets 8,488 13,007 Total assets $ 217,771 $ 211,565 Liabilities and stockholders' deficit Current liabilities Accounts payable $ 3,666 $ 3,658 Other current liabilities 17,397 26,729 Current portion of debt 4,800 3,600 Advertising fund liabilities 22,315 16,486 Total current liabilities 48,178 50,473 Long-term debt, net 466,056 466,933 Deferred revenues, net of current 25,266 24,962 Deferred income tax liabilities, net 5,377 4,480 Other non-current liabilities 4,622 6,027 Total liabilities 549,499 552,875 Commitments and contingencies (see Note 7) Stockholders' deficit Common stock, $ 0.01 par value; 100,000,000 shares authorized; 29,736,838 and 29,687,123 shares issued and outstanding as of March 27, 2021 and December 26, 2020, respectively 298 297 Additional paid-in-capital 26 421 Accumulated deficit ( 332,052 ) ( 342,028 ) Total stockholders' deficit ( 331,728 ) ( 341,310 ) Total liabilities and stockholders' deficit $ 217,771 $ 211,565 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 March 27, 2021 March 28, 2020 Revenue: Royalty revenue, franchise fees and other $ 31,606 $ 24,199 Advertising fees 21,520 16,014 Company-owned restaurant sales 17,564 15,223 Total revenue 70,690 55,436 Costs and expenses: Cost of sales (1) 13,279 11,176 Advertising expenses 22,027 16,995 Selling, general and administrative 13,786 12,239 Depreciation and amortization 1,795 1,555 Total costs and expenses 50,887 41,965 Operating income 19,803 13,471 Interest expense, net 3,782 4,145 Income before income tax expense 16,021 9,326 Income tax expense 2,861 1,230 Net income $ 13,160 $ 8,096 Earnings per share Basic $ 0.44 $ 0.27 Diluted $ 0.44 $ 0.27 Weighted average shares outstanding Basic 29,706 29,487 Diluted 29,844 29,742 Dividends per share $ 0.14 $ 0.11 (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 Thirteen Weeks Ended March 28, 2020 and March 27, 2021 (amounts in thousands, except share data) (Unaudited) 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 ) Adjustment for ASC 842 adoption — — — — — 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 declared on common stock and equivalents — — ( 2,168 ) ( 1,055 ) ( 3,223 ) Balance at March 28, 2020 29,583,394 296 219 ( 203,463 ) ( 202,948 ) Common Stock Shares Amount Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Deficit Balance at December 26, 2020 29,687,123 $ 297 $ 421 $ ( 342,028 ) $ ( 341,310 ) Net income — — — 13,160 13,160 Shares issued under stock plans 60,958 1 155 — 156 Tax payments for restricted stock upon vesting ( 11,243 ) — — ( 1,862 ) ( 1,862 ) Stock-based compensation expense — — 2,316 — 2,316 Dividends declared on common stock and equivalents — — ( 2,866 ) ( 1,322 ) ( 4,188 ) Balance at March 27, 2021 29,736,838 298 26 ( 332,052 ) ( 331,728 ) See accompanying notes to consolidated financial statements. 6 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (amounts in thousands) (Unaudited) Thirteen Weeks Ended March 27, 2021 March 28, 2020 Operating activities Net income $ 13,160 $ 8,096 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,795 1,555 Deferred income taxes 897 1,503 Stock-based compensation expense 2,316 1,331 Amortization of debt issuance costs 358 411 Changes in operating assets and liabilities: Accounts receivable ( 1,021 ) 35 Prepaid expenses and other assets ( 904 ) 902 Advertising fund assets and liabilities, net 5,592 5,708 Accounts payable and other current liabilities ( 8,433 ) ( 6,370 ) Deferred revenue 358 ( 189 ) Other non-current liabilities ( 330 ) ( 511 ) Cash provided by operating activities 13,788 12,471 Investing activities Purchases of property and equipment ( 2,841 ) ( 1,579 ) Cash used in investing activities ( 2,841 ) ( 1,579 ) Financing activities Proceeds from exercise of stock options 156 505 Borrowings of long-term debt — 16,000 Repayments of long-term debt — ( 800 ) Tax payments for restricted stock upon vesting ( 1,862 ) ( 229 ) Dividends paid ( 4,662 ) ( 3,223 ) Cash provided by (used in) financing activities ( 6,368 ) 12,253 Net increase in cash, cash equivalents, and restricted cash 4,579 23,145 Cash, cash equivalents, and restricted cash at beginning of period 59,270 21,175 Cash, cash equivalents, and restricted cash at end of period $ 63,849 $ 44,320 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 Nature of operations. Wingstop Inc., together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”), is in the business of franchising and operating Wingstop restaurants. As of March 27, 2021, the Company had 1,371 domestic franchised restaurants and 175 international franchised restaurants. As of March 27, 2021, the Company owned and operated 33 restaurants. Basis of presentation. 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 March 27, 2021 and December 26, 2020, and operating results are for the thirteen weeks ended March 27, 2021 and March 28, 2020. 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 26, 2020. Fiscal year. The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2021 and 2020 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 March 27, 2021 and December 26, 2020 were as follows (in thousands): March 27, 2021 December 26, 2020 Cash and cash equivalents $ 39,993 $ 40,858 Restricted cash 4,666 4,815 Restricted cash, included in Advertising fund assets, restricted 19,190 13,597 Total cash, cash equivalents, and restricted cash $ 63,849 $ 59,270 Recently issued accounting pronouncements. We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements. Change in presentation. Beginning in the first quarter of 2021, headcount related expenses that support our national advertising fund are presented within “Advertising expenses” on the Consolidated Statements of Operations. Prior to the first quarter of 2021, these expenses were presented within “Selling, general and administrative expenses.” Prior period amounts have been reclassified to conform to the current presentation. This reclassification had no impact on operating income, balance sheets or statements of cash flows. Headcount related expenses associated with the national advertising fund totaled $ 2.1 million for each of the thirteen weeks ended March 27, 2021 and March 28, 2020. (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. 8 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands): Thirteen Weeks Ended March 27, 2021 March 28, 2020 Basic weighted average shares outstanding 29,706 29,487 Dilutive shares 139 255 Diluted weighted average shares outstanding 29,844 29,742 For the thirteen weeks ended March 27, 2021 and March 28, 2020, equity awards representing approximately 5,000 and 4,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. (3) Dividends On February 16, 2021, the Company’s Board of Directors declared a quarterly dividend of $ 0.14 per share of common stock for stockholders of record as of March 5, 2021, which was paid on March 26, 2021, totaling $ 4.2 million. Subsequent to the first quarter, on April 27, 2021, the Company’s Board of Directors declared a quarterly dividend of $ 0.14 per share of common stock for stockholders of record as of May 14, 2021. The regular quarterly dividend is to be paid on June 4, 2021, totaling approximately $ 4.2 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 March 27, 2021 December 26, 2020 Carrying Value Fair Value Carrying Value Fair Value Securitized Financing Facility: 2020-1 Class A-2 Senior Secured Notes (1) Level 2 $ 480,000 $ 487,742 $ 480,000 $ 483,365 (1) The fair value of the 2020-1 Class A-2 Senior Secured Notes was estimated using available market information. 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 $ 2.9 million and 17.9 %, respectively, for the thirteen weeks ended March 27, 2021, and $ 1.2 million and 13.2 %, respectively, for the thirteen weeks ended March 28, 2020. The increase in the effective tax rate is primarily due to $ 1.2 million in tax benefits resulting from the recognition of excess tax benefits associated with stock options exercised during the thirteen weeks ended March 28, 2020. 9 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (6) Debt Obligations Long-term debt consisted of the following components (in thousands): March 27, 2021 December 26, 2020 2020-1 Class A-2 Senior Secured Notes $ 480,000 $ 480,000 Debt issuance costs, net of amortization ( 9,144 ) ( 9,467 ) Total debt 470,856 470,533 Less: current portion of debt ( 4,800 ) ( 3,600 ) Long-term debt, net $ 466,056 $ 466,933 The Company’s outstanding debt consists of (i) Series 2020-1 2.84 % Fixed Rate Senior Secured Notes, Class A-2 (the “2020 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 2020-1 Variable Funding Senior Notes, Class A-1 (the “2020 Variable Funding Notes” and together with the Class A-2 Notes, the “2020 Notes”), which permit borrowings of up to a maximum principal amount of $ 50 million which may be used to borrow amounts on a revolving basis and to issue letters of credit. As of March 27, 2021 and December 26, 2020, the Company had $ 480.0 million of 2020 Class A-2 Notes outstanding. There were no borrowings outstanding under the 2020 Variable Funding Notes as of March 27, 2021 and December 26, 2020. Further, as of March 27, 2021 and December 26, 2020, $ 3.5 million and $ 4.9 million, respectively, of letters of credit were outstanding against the 2020 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 March 27, 2021 or December 26, 2020. The 2020 Notes were 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. (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 During the thirteen weeks ended March 27, 2021, the Company granted stock options to purchase 42,703 shares of common stock and 18,540 restricted stock units (“RSUs”) to certain employees. The stock options vest in equal annual amounts over a three year period subsequent to the grant date, and have a maximum contractual term of ten years . The stock options were granted with a weighted-average exercise price of $ 129.11 per share and had a weighted-average grant-date fair value of $ 42.51 per share. The RSUs granted to certain employees generally vest in equal annual amounts over a three-year period, subsequent to the grant date and had a weighted-average grant-date fair value of $ 129.11 per unit. In addition, the Company granted 30,137 performance stock units (“PSUs”) to certain employees during the thirteen weeks ended March 27, 2021. Of the total PSUs granted, 25,623 PSUs are subject to a service condition and a performance vesting condition based on return on incremental invested capital (“ROI PSUs”). The ROI PSUs are generally eligible to cliff-vest approximately three years from the grant date, and the maximum vesting percentage that could be realized for each of the ROI PSUs is 250 % based on the level of performance achieved for the awards. The remaining 4,514 PSUs granted are subject to a service condition and a performance vesting condition based on the number of net new restaurants opened over the performance period (“NNR PSUs”). The NNR PSUs vest in equal annual amounts over a three-year period, and the maximum vesting percentage that could be realized for each of the NNR PSUs is 100 % based on the level of performance achieved for the awards. The PSUs had a weighted-average grant-date fair value of $ 129.11 per unit. 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 based on the outcome. 10 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) Total compensation expense related to all share-based awards was $ 2.3 million and $ 1.3 million for the thirteen weeks ended March 27, 2021 and March 28, 2020, respectively, and was included in Selling, general and administrative expense in the Consolidated Statements of Operations. (9) Revenue from Contracts with Customers The following table represents a disaggregation of revenue from contracts with customers for the thirteen weeks ended March 27, 2021 and March 28, 2020 (in thousands): Thirteen Weeks Ended March 27, 2021 March 28, 2020 Royalty revenue $ 28,809 $ 21,307 Advertising fees and related income 21,520 16,014 Franchise fees 1,195 883 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 weeks ended March 27, 2021 was included in the deferred revenue balance as of December 26, 2020. Approximately $ 9.7 million and $ 9.8 million of deferred revenue as of March 27, 2021 and December 26, 2020, 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 did not have any material contract assets as of March 27, 2021. (10) Refranchising of Company-owned Restaurants During the first fiscal quarter 2021, the Company entered into an arrangement to re-franchise six company-owned restaurants in the Colorado market for a total purchase price of approximately $ 6.7 million. This transaction is subject to customary closing conditions, and the Company expects the transaction to close in the third fiscal quarter 2021. The assets associated with these restaurants held for sale totaled $ 4.3 million and were included in Prepaid expenses and other current assets on the Consolidated Balance Sheet as of March 27, 2021. 11