Papa John‘s International, Inc.
Feb 21, 2017

Papa John's Announces Fourth Quarter 2016 Results

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three months and full year ended December 25, 2016.

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Highlights

"We are pleased to have delivered another excellent year in 2016," said Papa John's founder, chairman and CEO, John Schnatter. "Thanks to the efforts of the entire Papa John's family, we opened our 5,000th global unit and increased our digital mix to over 55% -- all while delivering on our clear label promises and generating strong comp sales and another year of record earnings."

Fourth quarter 2016 revenues were $439.6 million, a 5.5% increase from fourth quarter 2015 revenues of $416.8 million. Full year 2016 revenues were $1.71 billion, a 4.7% increase from full year 2015 revenues of $1.64 billion.

GAAP and adjusted net income and diluted earnings per share ("EPS") excluding Special Items results are summarized below:

      Three Months Ended     Year Ended

Dec. 25,

2016

   

Dec. 27,

2015

   

Increase

%

Dec. 25,

2016

   

Dec. 27,

2015

   

Increase

%

 
GAAP net income $ 32,630 $ 24,695 32.1 % $ 102,820 $ 75,682 35.9 %
Special items   (7,022 )   -     (7,022 )   7,986  
Adjusted net income $ 25,608   $ 24,695 3.7 % $ 95,798   $ 83,668 14.5 %
 
GAAP diluted EPS $ 0.88 $ 0.62 41.9 % $ 2.74 $ 1.89 45.0 %
Special items   (0.19 )   -     (0.19 )   0.20  
Adjusted diluted EPS $ 0.69   $ 0.62 11.3 % $ 2.55   $ 2.09 22.0 %
 

Special Items include a refranchising gain in 2016 from the sale of the 42 restaurant Phoenix company-owned market to a franchisee, an impairment charge in 2016 related to our company-owned stores in China that are currently for sale, and the finalization of a 2015 legal settlement that was paid in 2016. See "Items Impacting Comparability- Non-GAAP Presentation" table on page 8 for more details.

Global Restaurant and Comparable Sales Information

      Three Months Ended     Year Ended

Dec. 25,

2016

   

Dec. 27,

2015

Dec. 25,

2016

   

Dec. 27,

2015

 
Global restaurant sales growth (a) 5.3 %

3.4

% 5.2 % 5.3 %

 

Global restaurant sales growth, excluding the impact of foreign currency (a)

7.0 % 5.7 % 6.8 % 7.8 %
 
Comparable sales growth (b)
Domestic company-owned restaurants 4.8 % 3.4 % 4.4 % 5.9 %
North America franchised restaurants 3.4 % 1.3 % 3.1 % 3.6 %
System-wide North America restaurants 3.8 % 1.9 % 3.5 % 4.2 %
 
System-wide international restaurants 5.6 % 5.3 % 6.0 % 6.9 %
 

(a) Includes both company-owned and franchised restaurant sales.
(b) Represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation.

We believe global restaurant and comparable sales growth information, as defined in the table above, is useful in analyzing our results since our franchisees pay royalties that are based on a percentage of franchise sales. Franchise sales generate commissary revenue in the United States and in certain international markets. Global restaurant and comparable sales growth information is also useful in analyzing industry trends and the strength of our brand. Management believes the presentation of global restaurant sales growth excluding the impact of foreign currency provides investors with useful information regarding underlying sales trends by presenting sales growth excluding the external factor of foreign currency exchange. Franchise restaurant sales are not included in company revenues.

Revenue and Operating Highlights

All revenue and operating highlights below are compared to the same period of the prior year, unless otherwise noted.

Revenue Highlights

Consolidated revenues increased $22.8 million, or 5.5%, for the fourth quarter of 2016 and increased $76.2 million, or 4.7%, for the year ended December 25, 2016. The increases in revenues were primarily due to the following:

Operating Highlights

The tables below summarize income before income taxes on a reporting segment basis for the fourth quarter and full year ended December 25, 2016 and December 27, 2015, and reconcile our GAAP financial results to the adjusted financial results, excluding Special Items. See "Items Impacting Comparability- Non-GAAP Presentation" table for more details.

 
          Three Months Ended
                Adjusted         Adjusted
Dec. 25, Special Dec. 25, Dec. 27, Increase
(In thousands)       2016     Items     2016     2015     (Decrease)
 
Domestic company-owned restaurants $ 28,048 $ (11,572 ) $ 16,476 $ 15,267 $ 1,209
North America commissaries 11,786 - 11,786 12,027 (241 )
North America franchising 23,788 - 23,788 21,770 2,018
International 2,412 1,350 3,762 4,084 (322 )
All others 599 - 599 1,075 (476 )
Unallocated corporate expenses (15,020 ) (898 ) (15,918 ) (15,260 ) (658 )
Elimination of intersegment profits         (1,040 )       -         (1,040 )       (40 )       (1,000 )
Total income before income taxes       $ 50,573       $ (11,120 )     $ 39,453       $ 38,923       $ 530  
 
 
        Year Ended
              Adjusted             Adjusted     Adjusted
Dec. 25, Special Dec. 25, Dec. 27, Special Dec. 27, Increase
(In thousands)     2016     Items     2016     2015     Items     2015     (Decrease)
 
Domestic company-owned restaurants $ 75,136 $ (11,572 ) $ 63,564 $ 56,452 $ - $ 56,452 $ 7,112
North America commissaries 46,325 - 46,325 44,721 - 44,721 1,604
North America franchising 91,669 - 91,669 83,315 - 83,315 8,354
International 11,408 1,350 12,758 10,891 - 10,891 1,867
All others 1,467 - 1,467 845 - 845 622
Unallocated corporate expenses (64,791 ) (898 ) (65,689 ) (75,896 ) 12,278 (63,618 ) (2,071 )
Elimination of intersegment profits       (2,405 )       -         (2,405 )       (1,181 )       -       (1,181 )       (1,224 )
Total income before income taxes     $ 158,809       $ (11,120 )     $ 147,689       $ 119,147       $ 12,278     $ 131,425       $ 16,264  
 

Fourth quarter 2016 income before income taxes increased approximately $11.6 million, or 29.9%. When excluding the impact of the Special Items in the fourth quarter of 2016, adjusted income before income taxes increased approximately $500,000, or 1.4%. This adjusted increase was primarily due to the following:

Full year 2016 income before income taxes increased approximately $39.7 million, or 33.3%. When excluding the impact of Special Items in both years, full year 2016 adjusted income before income taxes increased approximately $16.3 million, or 12.4%. This adjusted increase was primarily due to the following:

The effective income tax rates were 32.2% and 31.3% for the fourth quarter and full year ended December 25, 2016, respectively. These rates approximated the effective rates for the fourth quarter and full year ended December 27, 2015, respectively.

The company's free cash flow, a non-GAAP financial measure, for the full year of 2016 and 2015 was as follows (in thousands):

      Full Year Ended
Dec. 25     Dec. 27
2016 2015
 
Net cash provided by operating activities (a) $ 144,057 $ 160,312
Purchases of property and equipment (b)   (55,554 )   (38,972 )
Free cash flow $ 88,503   $ 121,340  
 

(a) The decrease of approximately $16.3 million was primarily due to the payment of approximately $11.6 million for the previously mentioned legal settlement and other unfavorable changes in working capital items, partially offset by higher net income.
(b) The increase of $16.6 million was primarily due to construction costs for our new domestic commissary in Georgia, which will open in 2017, and initiatives within our online and mobile ordering business.

We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the amounts spent on the purchase of property and equipment. We view free cash flow as an important measure because it is a factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the company's liquidity or performance than the company's GAAP measures.

See the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for additional information concerning our operating results and cash flow for the full year ended December 25, 2016.

Global Restaurant Unit Data

At December 25, 2016, there were 5,097 Papa John's restaurants operating in all 50 states and in 45 international countries and territories, as follows:

     

Domestic

Company-

owned

   

Franchised

North

America

   

Total North

America

   

International

    System-wide

Fourth Quarter

               
Beginning - September 25, 2016 736 2,675 3,411 1,560 4,971
Opened 3 38 41 109 150
Closed - (11 ) (11 ) (13 ) (24 )
Acquired 5 42 47 - 47
Sold (42 )     (5 )     (47 )     -       (47 )
Ending - December 25, 2016 702       2,739       3,441       1,656       5,097  
 

Year-to-date

Beginning - December 27, 2015 707 2,681 3,388 1,505 4,893
Opened 13 104 117 226 343
Closed (1 ) (63 ) (64 ) (75 ) (139 )
Acquired 25 42 67 - 67
Sold (42 )     (25 )     (67 )     -       (67 )
Ending - December 25, 2016 702       2,739       3,441       1,656       5,097  
 
Unit growth (decline) (5 )     58       53       151       204  
 
% increase (decrease) (0.7 %)     2.2 %     1.6 %     10.0 %     4.2 %
 

Our development pipeline as of December 25, 2016 included approximately 1,300 restaurants (220 units in North America and 1,080 units internationally), the majority of which are scheduled to open over the next six years.

Items Impacting Comparability - Non-GAAP Presentation

The following table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures, for the fourth quarter and full year ended December 25, 2016 and December 27, 2015:

      Three Months Ended     Full Year Ended
Dec. 25,     Dec. 27, Dec. 25,     Dec. 27,
(In thousands, except per share amounts) 2016 2015 2016 2015
 
GAAP income before income taxes $ 50,573 $ 38,923 $ 158,809 $ 119,147
Refranchising gain (11,572 ) - (11,572 ) -
Impairment loss on assets held for sale 1,350 - 1,350 -
Legal settlement   (898 )   -   (898 )     12,278
Income before income taxes, as adjusted $ 39,453   $ 38,923 $ 147,689   $ 131,425
 
GAAP net income $ 32,630 $ 24,695 $ 102,820 $ 75,682
Refranchising gain (7,308 ) - (7,308 ) -
Impairment loss on assets held for sale 853 - 853 -
Legal settlement   (567 )   -   (567 )   7,986
Net income, as adjusted $ 25,608   $ 24,695 $ 95,798   $ 83,668
 
GAAP diluted earnings per share $ 0.88 $ 0.62 $ 2.74 $ 1.89
Refranchising gain (0.19 ) - (0.19 ) -
Impairment loss on assets held for sale 0.02 - 0.02 -
Legal settlement   (0.02 )   -   (0.02 )   0.20
Diluted earnings per share, as adjusted $ 0.69   $ 0.62 $ 2.55   $ 2.09
 

Refranchising gain includes a gain in 2016 from the sale of the 42 restaurant Phoenix company-owned market to a franchisee. Impairment loss includes a charge in 2016 related to our company-owned stores in China that are for sale. The legal settlement represents a charge in 2015 for a collective and class action litigation, Perrin v. Papa John's International, Inc. and Papa John's USA, Inc. The settlement amount was finalized and paid in 2016 and the expense was adjusted in 2016 accordingly.

The non-GAAP adjusted results shown above, which exclude Special Items referenced in the preceding paragraph, should not be construed as a substitute for or a better indicator of the company's performance than the company's GAAP results. Management believes presenting the financial information excluding Special Items is important for purposes of comparison to prior year results. In addition, management uses this metric to evaluate the company's underlying operating performance, to analyze trends, and to determine compensation.

Share Repurchase Activity

The following table reflects our repurchases for the fourth quarter and full year 2016 and subsequent repurchases through February 14, 2017 (in thousands):

Period      

Number

of Shares

      Cost
           
Fourth Quarter 2016 158 $ 12,974
 
Full Year 2016 2,145 $ 122,381
 
December 26, 2016 through February 14, 2017 87 $ 7,389
 

There were 37.3 million and 37.6 million diluted weighted average shares outstanding for the fourth quarter and full year ended December 25, 2016, representing decreases of 5.2% and 6.0%, respectively, over the prior year comparable periods. Approximately 37.0 million actual shares of the company's common stock were outstanding as of December 25, 2016.

2017 Key Operating Assumptions and Financial Outlook

In 2017, the Company is targeting the following performance:

Conference Call and Website Information

A conference call is scheduled for February 22, 2017 at 10:00 a.m. Eastern Time to review our fourth quarter and full year 2016 earnings results. The call can be accessed from the company's web page at www.papajohns.com in a listen-only mode, or dial 877-312-8816 (U.S. and Canada) or 253-237-1189 (international). The conference call will be available for replay, including by downloadable podcast, from the company's web site at www.papajohns.com. The Conference ID is 46802412.

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to use our investor relations website as a means of disclosing information about our business, our financial condition and results of operations and other matters and for complying with our disclosure obligations under Regulation FD. The information we post on our investor relations website, including information contained in investor presentations, may be deemed material. Accordingly, investors should monitor our investor relations website, in addition to following our press releases, SEC filings and public conference calls and webcasts. We encourage investors and others to sign up for email alerts at our investor relations page under Shareholder Tools at the bottom right side of the page. These email alerts are intended to help investors and others to monitor our investor relations website by notifying them when new information is posted on the site.

Forward-Looking Statements

Certain matters discussed in this press release and other company communications constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as "expect," "intend," "estimate," "believe," "anticipate," "will," "forecast," "plan," "project," or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, unit level performance, capital expenditures, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:

These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 25, 2016. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.

For more information about the company, please visit www.papajohns.com.

 
 
 
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
                     
Three Months Ended Year Ended
December 25, 2016     December 27, 2015 December 25, 2016     December 27, 2015
(In thousands, except per share amounts) (Unaudited) (Unaudited)
Revenues:
Domestic company-owned restaurant sales $ 206,963 $ 192,999 $ 815,931 $ 756,307
North America franchise royalties and fees 26,426 24,871 102,980 96,056
North America commissary and other sales 177,983 173,008 681,606 680,321
International   28,247         25,938     113,103         104,691  
Total revenues 439,619 416,816 1,713,620 1,637,375
 
Costs and expenses:

Operating costs (excluding depreciation and amortization shown separately below):

Domestic company-owned restaurant expenses 165,007 153,282 651,536 604,206
North America commissary and other expenses 164,859 159,169 631,475 629,423
International expenses 17,573 15,297 71,509 63,506
General and administrative expenses 40,393 39,170 163,812 163,626
Depreciation and amortization   10,598         9,669     40,987         40,307  
Total costs and expenses 398,430 376,587 1,559,319 1,501,068

Refranchising and impairment gains/(losses), net

  10,222         -     10,222         -  
Operating income 51,411 40,229 164,523 136,307
Legal settlement expense 898 - 898 (12,278 )
Net interest expense   (1,736 )       (1,306 )   (6,612 )       (4,882 )
Income before income taxes 50,573 38,923 158,809 119,147
Income tax expense   16,294         12,642     49,717         37,183  
Net income before attribution to noncontrolling interests 34,279 26,281 109,092 81,964
Income attributable to noncontrolling interests   (1,649 )       (1,586 )   (6,272 )       (6,282 )
Net income attributable to the company $ 32,630       $ 24,695   $ 102,820       $ 75,682  
 
Calculation of income for earnings per share:
Net income attributable to the company $ 32,630 $ 24,695 $ 102,820 $ 75,682
Change in noncontrolling interest redemption value 225 (127 ) 567 65
Net income attributable to participating securities   (132 )       (102 )   (420 )       (325 )
Net income attributable to common shareholders $ 32,723       $ 24,466   $ 102,967       $ 75,422  
 
Basic earnings per common share $ 0.89       $ 0.63   $ 2.76       $ 1.91  
Diluted earnings per common share $ 0.88       $ 0.62   $ 2.74       $ 1.89  
 
Basic weighted average common shares outstanding   36,892         38,909     37,253         39,458  
Diluted weighted average common shares outstanding   37,311         39,367     37,608         40,000  
 
Dividends declared per common share $ 0.200 $ 0.175 $ 0.750 $ 0.630

 
 
 
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
       
December 25, December 27,
2016     2015
(In thousands)
 
Assets
Current assets:
Cash and cash equivalents $ 15,563 $ 21,006
Accounts receivable, net 59,691 63,320
Notes receivable, net 3,417 7,816
Income taxes receivable 2,372 272
Inventories 25,132 21,564
Prepaid expenses and other current assets 33,143 29,313
Assets held for sale   6,257   9,299
Total current assets 145,575 152,590
 
Property and equipment, net 230,473 214,044
Notes receivable, less current portion, net 10,141 11,105
Goodwill 85,529 79,657
Deferred income taxes 769 2,415
Other assets   40,078   34,247
Total assets $ 512,565 $ 494,058
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 42,701 $ 43,492
Income and other taxes payable 8,540 8,527
Accrued expenses and other current liabilities   76,789   80,918
Total current liabilities 128,030 132,937
 
Deferred revenue 3,313 3,190
Long-term debt, net 299,820 255,146
Deferred income taxes 10,047 4,610
Other long-term liabilities   53,093   47,606
Total liabilities 494,303 443,489
 
Redeemable noncontrolling interests 8,461 8,363
 
Total stockholders' equity   9,801   42,206
Total liabilities, redeemable noncontrolling interests and stockholders' equity $ 512,565 $ 494,058
 

Note: The Condensed Consolidated Balance Sheets have been derived from the audited consolidated financial statements, but do not include all information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements.

 
 
 
Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
         
Year Ended
(In thousands) December 25, 2016     December 27, 2015
 
Operating activities
Net income before attribution to noncontrolling interests $ 109,092 $ 81,964

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for uncollectible accounts and notes receivable 409 1,232
Depreciation and amortization 40,987 40,307
Deferred income taxes 11,624 (6,246 )
Stock-based compensation expense 10,123 9,423
Refranchising gain (11,572 ) -
Impairment loss 1,350 -
Other 3,337 4,633
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 1,557 (9,179 )
Income taxes receivable (2,100 ) 9,255
Inventories (3,639 ) 4,967
Prepaid expenses and other current assets (3,210 ) (1,596 )
Other assets and liabilities (6,269 ) 620
Accounts payable (916 ) 4,804
Income and other taxes payable 9 (1,113 )
Accrued expenses and other current liabilities (7,960 ) 21,201
Deferred revenue   1,235     40  
Net cash provided by operating activities 144,057 160,312
 
Investing activities
Purchases of property and equipment (55,554 ) (38,972 )
Loans issued (3,210 ) (4,741 )
Repayments of loans issued 8,569 5,183
Acquisitions, net of cash acquired (13,352 ) (922 )
Proceeds from divestiture of restaurants 16,844 -
Other   429     500  
Net cash used in investing activities (46,274 ) (38,952 )
 
Financing activities
Net proceeds on line of credit facility 44,575 25,549
Cash dividends paid (27,896 ) (24,844 )
Excess tax benefit on equity awards 6,200 10,151
Tax payments for equity award issuances (6,024 ) (10,965 )
Proceeds from exercise of stock options 7,060 5,197
Acquisition of Company common stock (122,381 ) (119,793 )
Contributions from noncontrolling interest holders 690 684
Distributions to noncontrolling interest holders (5,610 ) (6,550 )
Other   556     444  
Net cash used in financing activities (102,830 ) (120,127 )
 
Effect of exchange rate changes on cash and cash equivalents   (396 )   (349 )
Change in cash and cash equivalents (5,443 ) 884
Cash and cash equivalents at beginning of period   21,006     20,122  
 
Cash and cash equivalents at end of period $ 15,563   $ 21,006  
 
 

Papa John's International, Inc.
Lance Tucker, 502-261-7272
Chief Financial Officer

Source: Papa John's International, Inc.

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