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 26, 2022 December 25, 2021 (Unaudited) Assets Current assets Cash and cash equivalents $ 287,013 $ 48,583 Restricted cash 10,257 3,448 Accounts receivable, net 6,385 6,993 Prepaid expenses and other current assets 3,652 4,928 Advertising fund assets, restricted 16,926 6,197 Total current assets 324,233 70,149 Property and equipment, net 57,314 54,503 Goodwill 56,877 56,877 Trademarks 32,700 32,700 Customer relationships, net 9,981 10,302 Other non-current assets 26,191 24,672 Total assets $ 507,296 $ 249,203 Liabilities and stockholders' deficit Current liabilities Accounts payable $ 4,931 $ 5,414 Dividends payable 120,149 300 Other current liabilities 24,512 27,770 Current portion of debt 4,850 — Advertising fund liabilities 16,926 6,197 Total current liabilities 171,368 39,681 Long-term debt, net 710,918 469,394 Deferred revenues, net of current 26,893 28,024 Deferred income tax liabilities, net 6,942 7,432 Other non-current liabilities 15,402 14,197 Total liabilities 931,523 558,728 Commitments and contingencies (see Note 7) Stockholders' deficit Common stock, $ 0.01 par value; 100,000,000 shares authorized; 29,876,820 and 29,837,454 shares issued and outstanding as of March 26, 2022 and December 25, 2021, respectively 299 299 Additional paid-in-capital 409 463 Retained deficit ( 424,613 ) ( 310,031 ) Accumulated other comprehensive loss ( 322 ) ( 256 ) Total stockholders' deficit ( 424,227 ) ( 309,525 ) Total liabilities and stockholders' deficit $ 507,296 $ 249,203 See accompanying notes to consolidated financial statements. 4 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (amounts in thousands, except per share data) (Unaudited) Thirteen Weeks Ended March 26, 2022 March 27, 2021 Revenue: Royalty revenue, franchise fees and other $ 35,070 $ 31,606 Advertising fees 22,539 21,520 Company-owned restaurant sales 18,596 17,564 Total revenue 76,205 70,690 Costs and expenses: Cost of sales (1) 15,674 13,279 Advertising expenses 23,167 22,027 Selling, general and administrative 18,086 13,786 Depreciation and amortization 2,227 1,795 Loss on disposal of assets 444 — Total costs and expenses 59,598 50,887 Operating income 16,607 19,803 Interest expense, net 4,192 3,782 Loss on debt extinguishment 814 — Other expense 65 — Income before income tax expense 11,536 16,021 Income tax expense 2,860 2,861 Net income $ 8,676 $ 13,160 Earnings per share Basic $ 0.29 $ 0.44 Diluted $ 0.29 $ 0.44 Weighted average shares outstanding Basic 29,851 29,706 Diluted 29,974 29,844 Dividends per share $ 4.17 $ 0.14 Other comprehensive income (loss) Currency translation adjustment $ ( 66 ) $ — Other comprehensive income (loss) ( 66 ) — Comprehensive income $ 8,610 $ 13,160 (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 27, 2021 and March 26, 2022 (amounts in thousands, except share data) (Unaudited) Common Stock Shares Amount Additional Paid-In Capital Retained Deficit Accumulated Other Comprehensive Loss 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 ) Common Stock Shares Amount Additional Paid-In Capital Retained Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Deficit Balance at December 25, 2021 29,837,454 $ 299 $ 463 $ ( 310,031 ) $ ( 256 ) $ ( 309,525 ) Net income — — — 8,676 — 8,676 Shares issued under stock plans 41,289 — 125 — — 125 Tax payments for restricted stock upon vesting ( 1,923 ) — — ( 298 ) — ( 298 ) Stock-based compensation expense — — 2,191 — — 2,191 Dividends declared on common stock and equivalents — — ( 2,370 ) ( 122,960 ) — ( 125,330 ) Currency translation adjustment — — — — ( 66 ) ( 66 ) Balance at March 26, 2022 29,876,820 299 409 ( 424,613 ) ( 322 ) ( 424,227 ) 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 26, 2022 March 27, 2021 Operating activities Net income $ 8,676 $ 13,160 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 2,227 1,795 Deferred income taxes ( 490 ) 897 Stock-based compensation expense 2,191 2,316 Loss on disposal of assets 444 — Amortization of debt issuance costs 373 358 Loss on debt extinguishment 814 — Changes in operating assets and liabilities: Accounts receivable 608 ( 1,021 ) Prepaid expenses and other assets 263 ( 904 ) Advertising fund assets and liabilities, net 9,403 5,592 Accounts payable and other current liabilities ( 2,931 ) ( 8,433 ) Deferred revenue ( 1,125 ) 358 Other non-current liabilities ( 87 ) ( 330 ) Cash provided by operating activities 20,366 13,788 Investing activities Purchases of property and equipment ( 6,293 ) ( 2,841 ) Proceeds from sales of assets 1,479 — Cash used in investing activities ( 4,814 ) ( 2,841 ) Financing activities Proceeds from exercise of stock options 125 156 Borrowings of long-term debt 250,000 — Payment of deferred financing costs and other debt-related costs ( 5,442 ) — Tax payments for restricted stock upon vesting ( 298 ) ( 1,862 ) Dividends paid ( 5,294 ) ( 4,662 ) Cash provided by (used in) financing activities 239,091 ( 6,368 ) Net increase in cash, cash equivalents, and restricted cash 254,643 4,579 Cash, cash equivalents, and restricted cash at beginning of period 54,906 59,270 Cash, cash equivalents, and restricted cash at end of period $ 309,549 $ 63,849 Supplemental information: Accrued capital expenditures $ 5,189 $ — 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 26, 2022, the Company had a total of 1,791 restaurants in its system. The Company's restaurant base is approximately 98 % franchised, with 1,754 franchised locations (including 203 international locations) and 37 company-owned restaurants as of March 26, 2022. 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 (“GAAP”) have been condensed or omitted. Balance sheet amounts are as of March 26, 2022 and December 25, 2021, and operating results are for the thirteen weeks ended March 26, 2022 and March 27, 2021. 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 25, 2021. Fiscal year. The Company uses a 52- or 53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2022 and 2021 have 53- and 52-weeks, respectively . 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 26, 2022 and December 25, 2021 were as follows (in thousands): March 26, 2022 December 25, 2021 Cash and cash equivalents $ 287,013 $ 48,583 Restricted cash 10,257 3,448 Restricted cash, included in Advertising fund assets, restricted 12,279 2,875 Total cash, cash equivalents, and restricted cash $ 309,549 $ 54,906 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. (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 26, 2022 March 27, 2021 Basic weighted average shares outstanding 29,851 29,706 Dilutive shares 123 139 Diluted weighted average shares outstanding 29,974 29,844 For the thirteen weeks ended March 26, 2022 and March 27, 2021, equity awards representing approximately 8,000 and 5,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. (3) Dividends In connection with the Company's regular dividend program, on February 15, 2022, our Board of Directors declared a quarterly dividend of $ 0.17 per share of common stock, resulting in a total dividend of approximately $ 5.1 million. This dividend was paid on March 25, 2022 to stockholders of record as of March 11, 2022. Subsequent to the first quarter, on May 3, 2022, the Company’s Board of Directors declared a quarterly dividend of $ 0.17 per share of common stock for stockholders of record as of May 20, 2022. The regular quarterly dividend is to be paid on June 10, 2022, totaling approximately $ 5.1 million. Separate from the Company’s regular dividend program, on March 9, 2022, the Company’s Board of Directors declared a special dividend of $ 4.00 per share of common stock, resulting in a total dividend of approximately $ 119.5 million. This dividend was paid on April 7, 2022 to stockholders of record as of March 24, 2022. (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. 9 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 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 and the investment in bonds held by the Company’s United Kingdom master franchisee, Lemon Pepper Holdings Ltd., (“LPH”) are determined on a non-recurring basis, which results are summarized as follows (in thousands): Fair Value Hierarchy March 26, 2022 December 25, 2021 Carrying Value Fair Value Carrying Value Fair Value Securitized Financing Facility: 2020-1 Class A-2 Senior Secured Notes (1) Level 2 $ 477,600 $ 455,167 $ 477,600 $ 480,676 2022-1 Class A-2 Senior Secured Notes (1) Level 2 $ 250,000 $ 250,000 $ — $ — Investment in bonds of LPH (2) Level 2 $ 4,020 $ 4,020 $ 4,151 $ 4,151 (1) The fair value of the 2020-1 and 2022-1 Class A-2 Senior Secured Notes was estimated using available market information. (2) The fair value is based on a discounted cash flow analysis using current market rates for debt investments with similar maturities and credit risk. 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 24.8 %, respectively, for the thirteen weeks ended March 26, 2022, and $ 2.9 million and 17.9 %, respectively, for the thirteen weeks ended March 27, 2021. Income tax expense for the thirteen weeks ended March 26, 2022 included $ 0.2 million in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, as compared to $ 1.3 million in tax benefits for the thirteen weeks ended March 27, 2021, respectively. (6) Debt Obligations Long-term debt consisted of the following components (in thousands): March 26, 2022 December 25, 2021 2020-1 Class A-2 Senior Secured Notes $ 477,600 $ 477,600 2022-1 Class A-2 Senior Secured Notes 250,000 — Debt issuance costs, net of amortization ( 11,832 ) ( 8,206 ) Total debt 715,768 469,394 Less: current portion of debt ( 4,850 ) — Long-term debt, net $ 710,918 $ 469,394 On March 9, 2022, the Company completed a securitized financing transaction, in which Wingstop Funding LLC, a limited purpose, bankruptcy-remote, indirect wholly owned subsidiary of the Company (the “Issuer”), issued $ 250 million of its Series 2022-1 3.734 % Fixed Rate Senior Secured Notes, Class A-2 (the "2022 Class A-2 Notes"). The Issuer also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Notes, Class A-1 (the “2022 Variable Funding Notes,” and together with the 2022 Class A-2 Notes, the “2022 Notes”), which permits borrowings of up to a maximum principal amount of $ 200 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit. The proceeds from the securitized financing transaction were used to pay related transaction fees and expenses, strengthen the Company's liquidity position and for general corporate purposes, which included a return of capital to the Company’s stockholders. In addition to the 2022 Notes, the Company’s outstanding debt consists of its existing Series 2020-1 2.84 % Fixed Rate Senior Secured Notes, Class A-2 (the “2020 Notes”). The Company’s existing revolving financing facility of Series 2020-1 Class A-1 Notes (“the 2020 Variable Funding Notes”) was terminated in connection with the transaction. As of December 25, 2021, $ 3.5 million of letters of credit were outstanding against the 2020 Variable Funding Notes, which related primarily to required 10 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) interest reserves, and there were no amounts drawn down on the letters of credit as of December 25, 2021. No borrowings were outstanding under the 2022 Variable Funding Notes as of March 26, 2022. The 2022 Notes were issued in a securitization transaction, which is guaranteed by certain limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company and secured by a security interest in substantially all of their assets, including certain domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements, intellectual property, and vendor rebate contracts. The 2022 Notes were issued pursuant to a base indenture and related supplemental indentures (collectively, the “Indenture”). Interest and principal payments on the 2022 Class A-2 Notes are payable on a quarterly basis. The requirement to make such quarterly principal payments on the 2022 Class A-2 Notes is subject to certain financial conditions set forth in the Indenture. The legal final maturity date of the 2022 Notes is in March of 2052, but, unless earlier prepaid to the extent permitted under the Indenture, the anticipated repayment date of the 2022 Class A-2 Notes is March 2029. If the Issuer has not repaid or refinanced the 2022 Class A-2 Notes prior to the anticipated repayment date, additional interest will accrue on the Notes. The 2022 Variable Funding Notes accrue interest at a variable rate based on (i) the prime rate, (ii) the overnight federal funds rates, (iii) the secured overnight financing rate, or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin, as more fully set forth in the 2022 Variable Funding Note Purchase Agreement, dated March 9, 2022, and the indenture supplement. Commitment fees and other usage fees apply to the 2022 Variable Funding Notes facility depending on the type of borrowing requested. There is a 60 -basis points draw fee on borrowings requested pursuant to the terms of the 2022 Variable Fund Notes. Additionally, during a commitment availability period, there is a 30 -basis point commitment fee on the committed portion of the 2022 Variable Funding Notes. There were no amounts drawn down on the letters of credit as of March 26, 2022. The 2022 Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Issuer maintains specified reserve accounts to be used to make required payments in respect of the 2022 Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the 2022 Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, that the assets pledged as collateral for the 2022 Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information, and similar matters. The 2022 Class A-2 Notes are also subject to customary rapid amortization events provided for in the indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain levels on certain measurement dates, certain change of control and manager termination events, an event of default, and the failure to repay or refinance the 2022 Class A-2 Notes on the applicable scheduled maturity date. The 2022 Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal or other amounts due on or with respect to the 2022 Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. As of March 26, 2022, the Company was in compliance with all financial covenants. During the first quarter of 2022, as a result of the termination of the 2020 Variable Funding Notes, the Company recorded a loss on debt extinguishment of $ 0.8 million related to the write-off of previously capitalized financing costs. Total debt issuance costs incurred and capitalized in connection with the issuance of the 2022 Notes were $ 5.5 million. As of December 25, 2021, the Company’s leverage ratio was less than 5.0 x, and accordingly, per the terms of the applicable debt agreements, the Company elected to suspend principal payments and classified the balance of the 2020 Notes as long-term debt. Subsequent to the closing of the 2022 Notes, the Company had a leverage ratio of greater than 5.0 x and, accordingly, the Company will resume making scheduled amortization payments on the notes in the third quarter of 2022. The 2020 Class A-2 Notes and the 2022 Class A-2 Notes are generally subject to 1 % annual amortization. (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. 11 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (8) Stock-Based Compensation During the thirteen weeks ended March 26, 2022, the Company granted stock options to purchase 37,787 shares of common stock and 26,431 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 $ 144.94 per share and had a weighted-average grant-date fair value of $ 49.10 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 $ 144.27 per unit. In addition, the Company granted 30,209 performance stock units (“PSUs”) to certain employees during the thirteen weeks ended March 26, 2022. The PSUs cliff-vest at the end of a three year service period or vest in equal annual amounts over a three year period. Vested amounts may range from 0 % to a maximum of 250 % of targeted amounts depending on the achievement of performance measures at the end of each vesting period. Such performance measures are based on the Company meeting certain return on incremental investment targets or unit development targets for the vesting period. The PSUs had a weighted-average grant-date fair value of $ 144.35 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. Total compensation expense related to all share-based awards was $ 2.2 million and $ 2.3 million for the thirteen weeks ended March 26, 2022 and March 27, 2021, respectively, and was included in Selling, general and administrative (“SG&A”) expense in the Consolidated Statements of Comprehensive Income. (9) Revenue from Contracts with Customers The following table represents a disaggregation of revenue from contracts with customers for the thirteen weeks ended March 26, 2022 and March 27, 2021 (in thousands): Thirteen Weeks Ended March 26, 2022 March 27, 2021 Royalty revenue $ 32,204 $ 28,809 Advertising fees 22,539 21,520 Franchise fees 960 1,195 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 26, 2022 was included in the deferred revenue balance as of December 25, 2021. Approximately $ 9.4 million and $ 10.4 million of deferred revenue as of March 26, 2022 and December 25, 2021, 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 7.5 years. The Company did not have any material contract assets as of March 26, 2022. 12