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Actionable news in LOCO: EL POLLO LOCO HOLDINGS Inc,

EL POLLO LOCO HOLDINGS, INC.

Table of ContentsPage
PART I—FINANCIAL INFORMATION4
Item 1. Financial Statements.4
Condensed Consolidated Balance Sheets (Unaudited)4
Condensed Consolidated Statements of Operations (Unaudited)5
Condensed Consolidated Statements of Cash Flows (Unaudited)6
Notes to Condensed Consolidated Financial Statements (Unaudited)8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.35
Item 4. Controls and Procedures.35
PART II—OTHER INFORMATION37
Item 1. Legal Proceedings.37
Item 1A. Risk Factors.38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.42
Item 3. Defaults Upon Senior Securities.42
Item 4. Mine Safety Disclosures.42
Item 5. Other Information.42
Item 6. Exhibits.43
Signatures44
September 27, 2017December 28, 2016
Assets

Current assets:

Cash and cash equivalents$7,062
$2,168
Restricted cash
125
Accounts and other receivables, net7,994
6,919
Inventories2,233
2,112
Prepaid expenses and other current assets3,016
3,104
Total current assets20,305
14,428
Property and equipment owned, net114,903
118,470
Property held under capital leases, net46
64
Goodwill248,674
248,674
Trademarks61,888
61,888
Other intangible assets, net403
484
Deferred tax assets6,317
25,905
Other assets1,136
1,392
Total assets$453,672
$471,305
Liabilities and Stockholders' Equity

Current liabilities:

Current portion of obligations under capital leases$129
$144
Accounts payable10,358
11,637
Accrued salaries and vacation9,315
5,754
Accrued insurance5,548
5,444
Accrued income taxes payable3
120
Accrued interest151
198
Other accrued expenses and current liabilities32,732
22,021
Total current liabilities58,236
45,318
Revolver loan85,000
104,000
Obligations under capital leases, net of current portion219
317
Deferred taxes3,966
18,488
Other intangible liabilities, net843
1,012
Other noncurrent liabilities30,739
36,988
Total liabilities179,003
206,123
Commitments and contingencies

Stockholders' Equity

Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding



Common stock, $0.01 par value—200,000,000 shares authorized; 38,652,918 and 38,473,772 shares issued and outstanding387
385
Additional paid-in-capital372,671
371,843
Accumulated deficit(98,389)(107,046)
Total stockholders' equity274,669
265,182
Total liabilities and stockholder’s equity$453,672
$471,305
Thirteen Weeks EndedThirty-Nine Weeks Ended
September 27, 2017September 28, 2016September 27, 2017September 28, 2016
Revenue
Company-operated restaurant revenue$94,982
$89,738
$287,316
$268,984
Franchise revenue6,173
6,078
19,183
18,660
Total revenue101,155
95,816
306,499
287,644
Cost of operations



Food and paper cost27,851
26,960
84,069
80,760
Labor and related expenses27,514
24,455
80,939
73,323
Occupancy and other operating expenses22,242
20,071
64,358
58,401
Gain on recovery of insurance proceeds, lost profit
(502)
(502)
Company restaurant expenses77,607
70,984
229,366
211,982
General and administrative expenses8,285
8,252
27,594
25,776
Franchise expenses709
797
2,532
2,960
Depreciation and amortization4,697
4,074
13,646
11,796
Loss on disposal of assets65
58
724
524
Expenses related to fire loss


48
Loss (gain) on recovery of insurance proceeds, property, equipment and expenses
148

(741)
Recovery of securities lawsuits related legal expenses(634)
(1,145)
Asset impairment and closed-store reserves16,038
2,490
17,293
2,624
Total expenses106,767
86,803
290,010
254,969
(Loss) gain on disposition of restaurants
(5)
28
(Loss) income from operations(5,612)9,008
16,489
32,703
Interest expense, net of interest income of $6 and $7 for the quarters ended September 27, 2017 and September 28, 2016, respectively and $17 and $22 for year-to-date ended September 27, 2017 and September 28, 2016, respectively. 903
785
2,471
2,441
Income tax receivable agreement (income) expense(19)182
107
411
(Loss) income before (benefit) provision for income taxes(6,496)8,041
13,911
29,851
(Benefit) provision for income taxes(2,457)2,830
5,254
11,930
Net (loss) income$(4,039)$5,211
$8,657
$17,921
Net (loss) income per share



Basic$(0.11)$0.14
$0.23
$0.47
Diluted$(0.11)$0.13
$0.22
$0.46
Weighted-average shares used in computing net (loss) income per share



Basic38,462,100
38,415,189
38,449,453
38,331,400
Diluted38,462,100
39,083,577
39,101,214
39,020,127
Thirty-Nine Weeks Ended
September 27, 2017September 28, 2016
Cash flows from operating activities:

Net income$8,657
$17,921
Adjustments to reconcile net income to net cash flows provided by operating activities:

Depreciation and amortization13,646
11,796
Stock-based compensation expense738
244
Fire insurance proceeds for expenses paid and lost profit
257
Income tax receivable agreement expense107
411
Gain on disposition of restaurants
(28)
Loss on disposal of assets724
524
Gain on recovery of insurance proceeds, property, equipment and expenses
(741)
Gain on recovery of insurance proceeds, lost profits
(502)
Impairment of property and equipment15,480
2,508
Closed-store reserve1,813
116
Amortization of deferred financing costs228
229
Amortization of favorable and unfavorable leases, net(88)(51)
Excess income tax benefit related to share-based compensation plans
(169)
Deferred income taxes, net5,066
11,624
Changes in operating assets and liabilities:

Accounts and other receivables, net(1,075)(2,066)
Inventories(121)57
Prepaid expenses and other current assets88
(770)
Income taxes (receivable) payable(117)134
Other assets28
94
Accounts payable747
(6,269)
Accrued salaries and vacation3,561
2,538
Accrued insurance104
140
Other accrued expenses and liabilities2,499
1,673
Restricted cash125

Net cash flows provided by operating activities52,210
39,670
Cash flows from investing activities:

Proceeds from sale of restaurant
1,465
Fire insurance proceeds for property and equipment
743
Purchase of property and equipment(28,295)(26,465)
Net cash flows used in investing activities(28,295)(24,257)
Cash flows from financing activities:

Payments on revolver loan(19,000)(16,000)
Proceeds from issuance of common stock upon exercise of stock options, net of expenses93
978
Payment of obligations under capital leases(114)(132)
Excess income tax benefit related to share-based compensation plans
169
Net cash flows used in financing activities(19,021)(14,985)
Increase in cash and cash equivalents4,894
428
Cash and cash equivalents, beginning of period2,168
6,101
Cash and cash equivalents, end of period$7,062
$6,529
Thirty-Nine Weeks Ended
Supplemental cash flow informationSeptember 27, 2017September 28, 2016
Cash paid during the period for interest$2,475
$2,355
Cash paid during the period for income taxes$320
$173
Unpaid purchases of property and equipment$3,131
$4,599
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
Fair Value Measurements at September 27, 2017 UsingImpairment Loss
TotalLevel 1Level 2Level 3Thirteen Weeks Ended September 27, 2017Thirty-Nine Weeks Ended September 27, 2017
Property and equipment owned, net$280
$
$
$280
$15,035
15,480
Fair Value Measurements at September 28, 2016 UsingImpairment Loss
TotalLevel 1Level 2Level 3Thirteen Weeks Ended September 28, 2016Thirty-Nine Weeks Ended September 28, 2016
Property and equipment owned, net$
$
$
$
$2,508
2,508
September 27, 2017December 28, 2016
Land$12,323
$12,323
Buildings and improvements132,297
125,159
Other property and equipment68,157
65,831
Construction in progress8,470
11,539
221,247
214,852
Less: accumulated depreciation and amortization(106,344)(96,382)
$114,903
$118,470
September 27, 2017December 28, 2016
Accrued sales and property taxes$5,255
$4,223
Income tax receivable agreement payable20,506
12,349
Gift card liability1,786
1,870
Other5,185
3,579
Total other accrued expenses and current liabilities$32,732
$22,021
September 27, 2017December 28, 2016
Deferred rent$8,835
$8,328
Income tax receivable agreement payable18,256
26,306
Other3,648
2,354
Total other noncurrent liabilities$30,739
$36,988
Thirteen Weeks EndedThirty-Nine Weeks Ended
September 27, 2017September 28, 2016September 27, 2017September 28, 2016
Numerator:



Net (loss) income$(4,039)$5,211
$8,657
$17,921
Denominator:



Weighted-average shares outstanding—basic38,462,100
38,415,189
38,449,453
38,331,400
Weighted-average shares outstanding—diluted38,462,100
(a)39,083,577
39,101,214
39,020,127
Net (loss) income per share—basic$(0.11)$0.14
$0.23
$0.47
Net (loss) income per share—diluted$(0.11)$0.13
$0.22
$0.46
Anti-dilutive securities not considered in diluted EPS calculation2,490,029
451,325
749,421
451,325
Thirteen Weeks EndedThirty-Nine Weeks Ended
September 27, 2017September 28, 2016September 27, 2017September 28, 2016
Weighted-average shares outstanding— basic38,462,100
38,415,189
38,449,453
38,331,400
Dilutive effect of stock options and restricted shares
(a)668,388
651,761
688,727
Weighted-average shares outstanding— diluted38,462,100
39,083,577
39,101,214
39,020,127
Thirty-Nine Weeks EndedFiscal Year Ended
September 27, 2017201620152014
Company-operated restaurant activity:



Beginning of period201
186
172
168
Openings12
18
14
11
Restaurant sale to franchisee
(1)
(6)
Closures(5)(2)
(1)
Restaurants at end of period208
201
186
172
Franchised restaurant activity:



Beginning of period259
247
243
233
Openings6
13
5
5
Restaurant sale to franchisee
1

6
Closures
(2)(1)(1)
Restaurants at end of period265
259
247
243
System-wide restaurant activity:



Beginning of period460
433
415
401
Openings18
31
19
16
Closures(5)(4)(1)(2)
Restaurants at end of period473
460
433
415
Thirteen Weeks EndedThirty-Nine Weeks Ended
(Dollar amounts in thousands)September 27, 2017September 28, 2016September 27, 2017September 28, 2016
Company-operated restaurant revenue$94,982
$89,738
$287,316
$268,984
Company restaurant expenses77,607
70,984
229,366
211,982
Restaurant contribution$17,375
$18,754
$57,950
$57,002
Restaurant contribution margin (%)18.3%20.9%20.2%21.2%
Thirteen Weeks EndedThirty-Nine Weeks Ended
(Amounts in thousands)September 27, 2017September 28, 2016September 27, 2017September 28, 2016
Net (loss) income$(4,039)$5,211
$8,657
$17,921
Non-GAAP adjustments:



(Benefit) provision for income taxes(2,457)2,830
5,254
11,930
Interest expense, net of interest income903
785
2,471
2,441
Depreciation and amortization4,697
4,074
13,646
11,796
EBITDA$(896)$12,900
$30,028
$44,088
Stock-based compensation expense(a)324
105
738
244
Loss on disposal of assets(b)(c)65
58
724
524
Expenses related to fire loss(c)


48
Loss (gain) on recovery of insurance proceeds, property, equipment and expenses(c)
148

(741)
Recovery of securities lawsuits related legal expense(d)(634)
(1,145)
Asset impairment and closed-store reserves(e)16,038
2,490
17,293
2,624
Loss (gain) on disposition of restaurants(f)
5

(28)
Income tax receivable agreement (income) expense(g)(19)182
107
411
Securities lawsuits related legal expense(h)933
519
2,341
2,327
Pre-opening costs(i)429
918
1,526
1,775
Executive transition costs(j)

271

Adjusted EBITDA$16,240
$17,325
$51,883
$51,272
(c)In November 2015, one of our restaurants incurred damage resulting from a fire. During the thirty-nine weeks ended September 28, 2016, we incurred costs directly related to the fire of less than $0.1 million, disposed of an additional $0.1 million in assets, and recognized gains of $0.7 million, related to the reimbursement of property and equipment and $0.5 million, related to the reimbursement of lost profits. The reimbursement of lost profits is included in the accompanying consolidated financial statements of operations, for the thirteen and thirty-nine weeks ended September 28, 2016, as a reduction of company restaurant expenses. We received from the insurance company cash of $1.0 million during the thirty-nine weeks ended September 28, 2016, and $0.4 million on October 5, 2016, net of the insurance deductible. The $0.4 million is included in accounts and other receivables in the condensed consolidated balance sheet as of September 28, 2016. The restaurant was reopened for business on March 14, 2016.
(d)During the thirteen and thirty-nine weeks ended September 27, 2017, we received insurance proceeds of $0.6 million and $1.1 million, respectively, related to the reimbursement of certain legal expenses paid in prior years for the defense of securities lawsuits. See the Notes to the Condensed Consolidated Financial Statements, Note 7, Commitments and Contingencies, Legal Matters.
(e)Includes costs related to impairment of long-lived assets and closing restaurants. During the thirteen and thirty-nine weeks ended September 27, 2017, we determined that the carrying value of the assets of 10 and 11 restaurants, respectively, in Texas and California may not be recoverable. As a result, we recorded a $15.0 million and $15.5 million expense, respectively, related to the impairment of the assets of the restaurants. During the thirteen and thirty-nine weeks ended September 27, 2017 we closed three restaurants in Texas, one of which was fully impaired during the fourth quarter of 2016. During the thirty-nine weeks ended September 27, 2017, we closed an additional two restaurants, one in Arizona and one in Texas, which were fully impaired in the third quarter of 2016. These closures resulted in closed-store reserve expenses of $1.0 million and $1.8 million for the thirteen and thirty-nine weeks ended September 27, 2017, respectively. During the thirteen and thirty-nine weeks ended September 28, 2016, we determined the carrying value of two restaurants in Arizona and Texas may not be recoverable. As a result we recognized an expense of $2.5 million, primarily related to the impairment of the assets of the two restaurants. We continue to monitor the recoverability of the carrying value of the assets of several other restaurants.
(f)On June 16, 2016, we completed an agreement to sell one company-operated restaurant in Tucson, Arizona to a franchisee, resulting in cash proceeds of $1.5 million and a net gain of less than $0.1 million, which is recorded as a gain on disposition of restaurants in the accompanying consolidated statement of operations. This restaurant is now included in our franchised restaurant totals.
(g)On July 30, 2014, we entered into the TRA. This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods. For the thirteen and thirty-nine weeks ended September 27, 2017 and September 28, 2016, income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.
(i)Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs. These are generally incurred over the three to five months prior to opening. Pre-opening costs also include occupancy costs incurred between the date of possession and the opening date for a restaurant.
Thirteen Weeks Ended
September 27, 2017September 28, 2016Increase /(Decrease)
Statements of Operations Data($ ,000)(%)($ ,000)(%)($ ,000)(%)
Company-operated restaurant revenue$94,982
93.9
$89,738
93.7
$5,244
5.8
Franchise revenue6,173
6.1
6,078
6.3
95
1.6
Total revenue101,155
100
95,816
100
5,339
5.6
Cost of operations





Food and paper costs(1)27,851
29.3
26,960
30.0
891
3.3
Labor and related expenses(1)27,514
29.0
24,455
27.3
3,059
12.5
Occupancy and other operating expenses(1)22,242
23.4
20,071
22.4
2,171
10.8
Gain on recovery of insurance proceeds, lost profit(1)

(502)(0.6)502
(100.0)
Company restaurant expenses(1)77,607
81.7
70,984
79.1
6,623
9.3
General and administrative expenses8,285
8.2
8,252
8.6
33
0.4
Franchise expenses709
0.7
797
0.8
(88)(11.0)
Depreciation and amortization4,697
4.6
4,074
4.3
623
15.3
Loss on disposal of assets65
0.1
58
0.1
7
12.1
Loss on recovery of insurance proceeds, property, equipment and expenses

148
0.2
(148)(100.0)
Recovery of securities lawsuits related legal expenses(634)(0.6)

(634)N/A
Asset impairment and closed-store reserves16,038
15.9
2,490
2.6
13,548
544.1
Total expenses106,767
105.5
86,803
90.6
19,964
23.0
(Loss) gain on disposition of restaurants

(5)0.0
5
(100.0)
(Loss) income from operations(5,612)(5.5)9,008
9.4
(14,620)(162.3)
Interest expense, net of interest income903
0.9
785
0.8
118
15.0
Income tax receivable agreement (income) expense (19)0.0
182
0.2
(201)(110.4)
(Loss) income before (benefit) provision for income taxes(6,496)(6.4)8,041
8.4
(14,537)(180.8)
(Benefit) provision for income taxes(2,457)(2.4)2,830
3.0
(5,287)(186.8)
Net (loss) income$(4,039)(4.0)$5,211
5.4
$(9,250)(177.5)


Thirty-Nine Weeks Ended
September 27, 2017September 28, 2016Increase /(Decrease)
Statement of Operations Data($ ,000)(%)($ ,000)(%)($ ,000)(%)
Company-operated restaurant revenue$287,316
93.7
$268,984
93.5
$18,332
6.8
Franchise revenue19,183
6.3
18,660
6.5
523
2.8
Total revenue306,499
100.0
287,644
100.0
18,855
6.6
Cost of operations





Food and paper costs(1)84,069
29.3
80,760
30.0
3,309
4.1
Labor and related expenses(1)80,939
28.2
73,323
27.3
7,616
10.4
Occupancy and other operating expenses(1)64,358
22.4
58,401
21.7
5,957
10.2
Gain on recovery of insurance proceeds, lost profit(1)

(502)(0.2)502
(100)
Company restaurant expenses(1)229,366
79.8
211,982
78.8
17,384
8.2
General and administrative expenses27,594
9.0
25,776
9.0
1,818
7.1
Franchise expenses2,532
0.8
2,960
1.0
(428)(14.5)
Depreciation and amortization13,646
4.5
11,796
4.1
1,850
15.7
Loss on disposal of assets724
0.2
524
0.2
200
38.2
Expenses related to fire loss

48
0.0
(48)(100.0)
Gain on recovery of insurance proceeds, property, equipment and expenses

(741)(0.3)741
(100.0)
Recovery of securities lawsuits related legal expenses(1,145)(0.4)

(1,145)N/A
Asset impairment and closed-store reserves17,293
5.6
2,624
0.9
14,669
559.0
Total expenses290,010
94.6
254,969
88.6
35,041
13.7
Gain on disposition of restaurants

28
0.0
(28)(100.0)
Income from operations16,489
5.4
32,703
11.4
(16,214)(49.6)
Interest expense, net of interest income2,471
0.8
2,441
0.8
30
1.2
Income tax receivable agreement expense 107
0.0
411
0.1
(304)(74.0)
Income before provision for income taxes13,911
4.5
29,851
10.4
(15,940)(53.4)
Provision for income taxes5,254
1.7
11,930
4.1
(6,676)(56.0)
Net income$8,657
2.8
$17,921
6.2
$(9,264)(51.7)
Thirty-Nine Weeks Ended
(Amounts in thousands)September 27, 2017September 28, 2016
Net cash provided (used) by

Operating activities$52,210
$39,670
Investing activities(28,295)(24,257)
Financing activities(19,021)(14,985)
Net increase in cash$4,894
$428
1.Certain accounting staff shared accounting system password information and access with an external consultant, who was not engaged through standard Company channels and subject to standard terms and conditions of engagement, who conducted standard accounting functions and had system administrator access.
2.Certain accounting staff, on several occasions, used passwords from other Company employees to enter data for approval on those employees’ behalf and then approved the resulting transactions in the accounting system, thereby circumventing controls over segregation of duties.
1.Increased awareness among accounting and information system employees of our existing password, data security and access, and accounting entry policies.
2.Designed and implemented controls over system access and password assignments so that users cannot circumvent these controls.
3.Changed our vendor approval and payment procedures so that accounting staff in relevant positions cannot engage or pay vendors without additional review and adherence to standard Company policies and provisions for engagement.
obtain or have available the financing required to acquire and operate a restaurant, including construction and opening costs;
hire, train, and retain the skilled management and other employees necessary to meet staffing needs;
obtain, in a timely manner and for an acceptable cost, required licenses, permits, and regulatory approvals;
respond effectively to any changes in local, state, and federal law and regulations that adversely affect our and our franchisees’ costs or abilities to open new restaurants; and
NumberDescription
31.1Certification of Principal Executive Officer under section 302 of the Sarbanes–Oxley Act of 2002
31.2Certification of Principal Financial Officer under section 302 of the Sarbanes–Oxley Act of 2002
32.1*Certification of Chief Executive Officer and Chief Financial Officer under 18 U.S.C. section 1350, adopted by section 906 of the Sarbanes–Oxley Act of 2002
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
*Pursuant to Item 601(b)(32)(ii) of Regulation S-K (17 C.F.R. § 229.601(b)(32)(ii)), this certification is deemed furnished, not filed, for purposes of section 18 of the Exchange Act, nor is it otherwise subject to liability under that section. It will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except if the registrant specifically incorporates it by reference.

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