Papa John‘s International, Inc.
Nov 1, 2011

Papa John's Announces Third Quarter Results

EPS Increased 37.5% over Prior Year Pro Forma Results on Strong Comparable Sales of 5.3% for North America and 4.7% for International

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the third quarter and nine months ended September 25, 2011.

Highlights

"I congratulate our operators throughout the world on achieving one of the best overall quarters in company history," commented Papa John's Founder, Chairman and Chief Executive Officer, John Schnatter. "We've now surpassed 3,000 restaurants in North America and are closing in on 800 international units as we continue to grow the Papa John's brand throughout the world."

Revenues were $305.7 million for third quarter 2011, an 11.9% increase from revenues of $273.1 million for third quarter 2010. Net income was $11.1 million for third quarter 2011, compared to net income of $7.8 million for third quarter 2010 ($8.3 million excluding BIBP, an increase of $2.9 million, or 34.6%). Diluted earnings per share were $0.44 for third quarter 2011, compared to diluted earnings per share of $0.30 for third quarter 2010 ($0.32 per diluted share excluding BIBP, an increase of $0.12 per diluted share, or 37.5%). See "Non-GAAP Measures" for additional information regarding BIBP.

Revenues were $911.7 million for the nine months ended September 25, 2011, an 8.6% increase from revenues of $839.6 million for the same period in 2010. Net income was $39.7 million for the nine months ended September 25, 2011, compared to net income of $37.9 million for the same period in 2010 ($34.4 million excluding BIBP, an increase of $5.3 million, or 15.3%). Diluted earnings per share were $1.55 for the nine months ended September 25, 2011, compared to diluted earnings per share of $1.42 for the same period in 2010 ($1.29 per diluted share excluding BIBP, an increase of $0.26, or 20.2%).

Financial Highlights

Summary Financial Data:

  Three Months Ended   Nine Months Ended
Sept. 25,   Sept. 26, Sept. 25,   Sept. 26,
(In thousands, except per share amounts) 2011 2010 2011 2010
 
Revenues $

305,668

$ 273,126 $ 911,669 $ 839,559
 

Income before income taxes, net of noncontrolling interests

$ 16,029 $ 11,868 $ 59,825 $ 58,460
 
Net income $ 11,123 $ 7,848 $ 39,674 $ 37,915
 
Earnings per share - assuming dilution $ 0.44 $ 0.30 $ 1.55 $ 1.42
 
Diluted weighted average shares outstanding   25,146   26,081   25,528   26,743
 
 

Global Restaurant and Comparable Sales Information:

  Three Months Ended   Nine Months Ended

Sept. 25,

2011

 

Sept. 26,

2010

Sept. 25,

2011

 

Sept. 26,

2010

 
Global restaurant sales growth (a) 8.3 % 2.8 % 8.3 % 2.3 %
 

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

7.6 % 2.8 % 7.7 % 2.1 %
 
Comparable sales growth (decline) (b)
North America company-owned restaurants 6.3 % (1.6 %) 5.0 % (1.5 %)
North America franchised restaurants 4.9 % (0.3 %) 3.6 % 0.3 %
System-wide North America restaurants 5.3 % (0.6 %) 3.9 % (0.2 %)
 
System-wide international restaurants 4.7 % 5.5 % 5.0 % 1.6 %
 

(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 calendar period. 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 conversion.

 

Management believes 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. Franchise restaurant sales are not included in company revenues.

Revenues Highlights

Consolidated revenues increased $32.5 million, or 11.9%, for the third quarter of 2011 and increased $72.1 million, or 8.6%, for the nine months ended September 25, 2011, compared to the same periods in the prior year. The increases in revenues were primarily due to the following:

Operating Highlights

Our income before income taxes, net of noncontrolling interests, for the third quarter of 2011 was $16.0 million, compared to $11.9 million for the corresponding quarter in 2010 ($12.5 million in 2010, excluding the impact of BIBP, an increase of $3.5 million, or 28.0%). For the nine months ended September 25, 2011, pre-tax income, net of noncontrolling interests, was $59.8 million, compared to $58.5 million for the same period in 2010 ($53.0 million in 2010 excluding the impact of BIBP, an increase of $6.9 million, or 13.0%).

Income before income taxes, net of noncontrolling interests, is summarized in the following table on a reporting segment basis:

       
    Three Months Ended   Nine Months Ended
Sept. 25,   Sept. 26, Increase Sept. 25,   Sept. 26, Increase
    2011   2010   (Decrease)   2011   2010   (Decrease)
 
Domestic company-owned restaurants $ 4,273 $ 5,503 $ (1,230 ) $ 22,577 $ 25,604 $ (3,027 )
Domestic commissaries 7,237 5,393 1,844 21,112 20,577 535
North America franchising 15,941 14,663 1,278 50,190 46,713 3,477
International 249 (1,309 ) 1,558 (817 ) (4,162 ) 3,345
All others (66 ) 60 (126 ) (742 ) 1,187 (1,929 )
Unallocated corporate expenses (11,085 ) (11,004 ) (81 ) (29,371 ) (33,963 ) 4,592

Elimination of intersegment losses (profits)

297 (108 ) 405 (256 ) (329 ) 73

Income attributable to noncontrolling interests

    (817 )     (672 )     (145 )     (2,868 )     (2,672 )     (196 )

Total income before income taxes and BIBP, net of noncontrolling interests

16,029 12,526 3,503 59,825 52,955 6,870
BIBP, a variable interest entity     -       (658 )     658       -       5,505       (5,505 )

Total income before income taxes, net of noncontrolling interests

  $ 16,029     $ 11,868     $ 4,161     $ 59,825     $ 58,460     $ 1,365  
 

The increase in income before income taxes, net of noncontrolling interests, of $3.5 million, or 28.0%, for the three months ended September 25, 2011, excluding the impact of BIBP in 2010, was primarily due to the following:

These increases in the quarter were partially offset by the following:

The increase in income before income taxes, net of noncontrolling interests, of $6.9 million, or 13.0%, for the nine months ended September 25, 2011, excluding the impact of BIBP in 2010, was primarily due to the previously stated reasons, in addition to the following items:

Our effective income tax rates, excluding BIBP, were 29.1% and 32.1% for the three and nine months ended September 25, 2011, respectively, representing decreases of 3.2% and 1.2%, from the prior year rates. The lower effective rates were primarily due to the finalization of certain income tax issues which resulted in income tax benefits of $1.0 million and $1.6 million for the three- and nine-month periods, respectively. Our effective income tax rate may fluctuate from quarter to quarter for various reasons, including the settlement or resolution of specific federal and state issues.

See the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for additional information concerning our operating results, including segment and cash flow information, for the three- and nine-month periods ended September 25, 2011.

The company's free cash flow for the first nine months of 2011 and 2010 was as follows (in thousands):

 
Nine Months Ended
Sept. 25,   Sept. 26,
2011 2010
 
Net cash provided by operating activities $ 84,348 $ 62,159
Pre-tax income from BIBP cheese purchasing entity - (5,505 )
Purchase of property and equipment   (20,647 )   (23,608 )
Free cash flow * $ 63,701   $ 33,046  
 

*

The increase in free cash flow is due to higher net income, favorable changes in working capital, primarily due to timing of payments, and lower purchases of property and equipment.

 

Free cash flow is defined as net cash provided by operating activities (from the consolidated statements of cash flows) excluding the impact of BIBP, less the purchase of property and equipment. We view free cash flow as an important measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by accounting principles generally accepted in the United States ("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 performance than the company's GAAP measures.

Our net debt position, defined as total debt less cash and cash equivalents, was $26.3 million at September 25, 2011, compared to $52.8 million at December 26, 2010.

Global Restaurant Unit Data

At September 25, 2011, there were 3,780 Papa John's restaurants operating in all 50 states and in 32 countries, as follows:

         

Company-

owned North

America

 

Franchised

North

America

 

Total North

America

  International   Systemwide

Third Quarter

Beginning - June 26, 2011 595 2,393 2,988 745 3,733
Opened 2 36 38 36 74
Closed -     (16 )   (16 )   (11 )   (27 )
Ending - September 25, 2011 597     2,413     3,010     770     3,780  
 

Year-to-date

Beginning - December 26, 2010 591 2,346 2,937 709 3,646
Opened 6 103 109 87 196
Closed -     (36 )   (36 )   (26 )   (62 )
Ending - September 25, 2011 597     2,413     3,010     770     3,780  
 
Restaurants at September 26, 2010 590     2,321     2,911     672     3,583  
 
Restaurant unit growth 7     92     99     98     197  
 
% increase 1.2 %   4.0 %   3.4 %   14.6 %   5.5 %
 

Our development pipeline as of September 25, 2011 included approximately 1,650 restaurants (410 units in North America and 1,240 units internationally), the majority of which are scheduled to open over the next six years.

Share Repurchase Activity

The company repurchased 798,000 shares of its common stock at an average price of $29.36 per share, or a total of $23.4 million, during the three months ended September 25, 2011 and repurchased 1.6 million shares at an average price of $30.70 per share, or a total of $49.6 million during the nine months ended September 25, 2011. Subsequent to quarter-end through October 26, 2011, the company repurchased 252,000 shares at a total cost of $7.7 million, or $30.74 per share average cost. Approximately $29.5 million remains available under the company's share repurchase program.

There were 25.1 million and 25.5 million diluted weighted average shares outstanding for the three- and nine-month periods, respectively, representing decreases of 3.6% and 4.5%, respectively, over the prior year comparable periods. Diluted earnings per share increased $0.01 and $0.07 for the three- and nine-month periods, respectively, due to the reductions in shares outstanding. Approximately 24.5 million actual shares of the company's common stock were outstanding as of September 25, 2011.

2011 Guidance Update

The following is an update to our 2011 guidance based on our solid year-to-date results:

     
Updated Guidance Previous Guidance
 
Diluted earnings per share $2.08 to $2.15 $2.02 to $2.12
 
North America comparable sales +3% to +4% +2% to +3%
 
International comparable sales +3% to +5% +2% to +4%
 
Worldwide net restaurant openings +210 to +235 +190 to +220
 

Conference Call

A conference call is scheduled for November 2, 2011 at 10:00 a.m. Eastern Daylight Time to review our third quarter 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, through November 7, 2011. The replay can be accessed from the company's web site at www.papajohns.com or by dialing 800-642-1687 (U.S. and Canada) or 706-645-9291 (international). The Conference ID is 70010273.

Non-GAAP Measures

Certain financial measures we present in this press release exclude the impact of the consolidation of BIBP, which is not a measure that is defined in accordance with GAAP. These non-GAAP measures should not be construed as a substitute for or a better indicator of the company's performance than the company's GAAP measures. Management believes presenting the 2010 financial information excluding the impact of BIBP is important for purposes of comparison to current year results. As previously announced, we terminated our cheese purchasing arrangement with BIBP in February 2011 and BIBP operated at breakeven during the first two months of 2011. The presentation of the non-GAAP measures in this press release is made alongside the most directly comparable GAAP measures.

The company has provided the following table to reconcile the pro forma financial results we present in this press release excluding the impact in 2010 of BIBP to our GAAP financial measures for the three- and nine-month periods ended September 25, 2011 and September 26, 2010:

   
Three Months Ended Nine Months Ended
Sept. 25,   Sept. 26, Sept. 25,   Sept. 26,
(In thousands, except per share amounts) 2011 2010 2011 2010
 

Pre-tax income, net of noncontrolling interests, as reported

$ 16,029 $ 11,868 $ 59,825 $ 58,460
Pre-tax loss (income) from BIBP cheese purchasing entity   -   658   -   (5,505 )

Pre-tax income, net of noncontrolling interests, excluding BIBP

$ 16,029 $ 12,526 $ 59,825 $ 52,955  
 
Net income, as reported $ 11,123 $ 7,848 $ 39,674 $ 37,915
Net loss (income) from BIBP cheese purchasing entity   -   417   -   (3,496 )
Net income, excluding BIBP $ 11,123 $ 8,265 $ 39,674 $ 34,419  
 
Earnings per diluted share, as reported $ 0.44 $ 0.30 $ 1.55 $ 1.42
Loss (earnings) from BIBP cheese purchasing entity   -   0.02   -   (0.13 )
Earnings per diluted share, excluding BIBP $ 0.44 $ 0.32 $ 1.55 $ 1.29  
 
Cash flow from operations, as reported $ 84,348 $ 62,159
Cash flow from BIBP cheese purchasing entity   -   (5,505 )
Cash flow from operations, excluding BIBP $ 84,348 $ 56,654  
 

See the free cash flow discussion for more information about our use of free cash flow, which is a non-GAAP measure.

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," "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 statements may relate to projections concerning business performance, revenue, earnings, contingent liabilities, commodity costs, margins, unit growth 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: changes in pricing or other marketing or promotional strategies by competitors which may adversely affect sales, including an increase in or continuation of the current aggressive pricing and promotional environment; new product and concept developments by food industry competitors; the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably; general economic and political conditions and resulting impact on consumer buying habits; changes in consumer preferences; increases in or sustained high costs of food ingredients and other commodities, paper, utilities, fuel, employee compensation and benefits, insurance and similar costs (including the impact of federal health care legislation); the ability of the company to pass along increases in or sustained high costs to franchisees or consumers; the impact of current or future legal claims and current or proposed legislation impacting our business; the impact that product recalls, food quality or safety issues, and general public health concerns could have on our restaurants; currency exchange and interest rates; credit risk associated with parties to leases of restaurants and commissaries, including those Perfect Pizza locations formerly operated by us, for which we remain contractually liable; and increased risks associated with our international operations, including economic and political conditions in our international markets and difficulty in meeting planned sales targets for our international operations. These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" of the Annual Report on Form 10-K for the fiscal year ended December 26, 2010 and "Part II. Item 1A. — Risk Factors" of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 26, 2011. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.

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

 
Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Income
     
 
Three Months Ended Nine Months Ended
September 25, 2011   September 26, 2010 September 25, 2011   September 26, 2010
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
North America:
Domestic Company-owned restaurant sales $ 128,787 $ 120,414 $ 395,099 $ 374,652
Franchise royalties 17,967 16,653 55,801 52,138
Franchise and development fees 155 149 464 460
Domestic commissary sales 130,870 111,884 379,569 338,460
Other sales 12,368 12,138 38,185 39,674
International:
Royalties and franchise and development fees 4,054 3,316 11,865 9,635
Restaurant and commissary sales   11,467       8,572     30,686       24,540  
Total revenues 305,668 273,126 911,669 839,559
 
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales 32,229 27,245 94,491 81,551
Salaries and benefits 35,012 33,320 107,028 102,915
Advertising and related costs 11,790 11,264 36,477 33,817
Occupancy costs 8,496 8,494 24,304 24,264
Other operating expenses   18,858       18,184     57,265       54,218  
Total domestic Company-owned restaurant expenses 106,385 98,507 319,565 296,765
 
Domestic commissary and other expenses:
Cost of sales 110,387 94,422 320,359 284,909
Salaries and benefits 8,840 8,533 26,502 25,833
Other operating expenses   13,381       12,002     40,050       35,543  
Total domestic commissary and other expenses 132,608 114,957 386,911 346,285
 

Loss (income) from the franchise cheese-purchasing program, net of noncontrolling interest

- 409 - (4,573 )
International operating expenses 9,634 7,627 26,118 21,833
General and administrative expenses 27,332 27,133 84,023 83,983
Other general expenses 4,777 2,643 7,017 6,620
Depreciation and amortization   7,974       8,067     24,711       24,122  
Total costs and expenses   288,710       259,343     848,345       775,035  
 
Operating income 16,958 13,783 63,324 64,524
Net interest expense   (112 )     (1,243 )   (631 )     (3,392 )
Income before income taxes 16,846 12,540 62,693 61,132
Income tax expense   4,906       4,020     20,151       20,545  
Net income, including noncontrolling interests 11,940 8,520 42,542 40,587
Less: income attributable to noncontrolling interests   (817 )     (672 )   (2,868 )     (2,672 )
Net income, net of noncontrolling interests $ 11,123     $ 7,848   $ 39,674     $ 37,915  
 
Basic earnings per common share $ 0.45     $ 0.30   $ 1.57     $ 1.43  
Earnings per common share - assuming dilution $ 0.44     $ 0.30   $ 1.55     $ 1.42  
 
Basic weighted average shares outstanding   24,964       25,951     25,302       26,586  
Diluted weighted average shares outstanding   25,146       26,081     25,528       26,743  
 

Note:

Beginning in the first quarter of 2011, we realigned financial reporting for the franchised restaurants operating in Hawaii, Alaska, and Canada from our International business segment to North America Franchising. Certain prior year amounts have been reclassified for consistent presentation with the current year results.

 

   
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 
 
September 25, December 26,
2011 2010
(Unaudited) (Note)
(In thousands)
 
Assets
Current assets:
Cash and cash equivalents $ 23,695 $ 46,225
Accounts receivable, net 27,492 25,357
Inventories 17,201 17,402
Prepaid expenses 6,503 10,009
Other current assets 3,839 3,732
Deferred income taxes   10,343   9,647
Total current assets 89,073 112,372
 
Investments 1,681 1,604
Net property and equipment 183,184 186,594
Notes receivable, net 15,516 17,354
Goodwill 74,871 74,697
Other assets   21,930   23,320
Total assets $ 386,255 $ 415,941
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 35,465 $ 31,569
Income and other taxes payable 9,218 6,140
Accrued expenses   53,864   52,978
Total current liabilities 98,547 90,687
 
Unearned franchise and development fees 6,502 6,596
Long-term debt 50,000 99,017
Other long-term liabilities 11,542 12,100
Deferred income taxes   7,110   341
Total liabilities 173,701 208,741
 
Total stockholders' equity   212,554   207,200
Total liabilities and stockholders' equity $ 386,255 $ 415,941
 
 

Note:

The Condensed Consolidated Balance Sheet at December 26, 2010 has been derived from the audited consolidated financial statements at that date, but does 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
 
 
Nine Months Ended
(In thousands) September 25, 2011   September 26, 2010
(Unaudited) (Unaudited)
 
Operating activities
Net income, net of noncontrolling interests $ 39,674 $ 37,915

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

Provision for uncollectible accounts and notes receivable 882 1,257
Depreciation and amortization 24,711 24,122
Deferred income taxes 5,219 (850 )
Stock-based compensation expense 5,266 4,491
Excess tax benefit related to exercise of non-qualified stock options (576 ) (242 )
Other 1,272 303
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (3,071 ) (4,094 )
Inventories 201 (525 )
Prepaid expenses 3,506 1,309
Other current assets (107 ) 381
Other assets and liabilities 491 (397 )
Accounts payable 3,896 (2,119 )
Income and other taxes 3,078 5,499
Accrued expenses - (5,701 )
Unearned franchise and development fees   (94 )   810  
Net cash provided by operating activities 84,348 62,159
 
Investing activities
Purchase of property and equipment (20,647 ) (23,608 )
Purchase of investments (205 ) (548 )
Proceeds from sale or maturity of investments 128 301
Loans issued (2,598 ) (1,736 )
Loan repayments 4,542 2,444
Proceeds from divestitures of restaurants - 1,423
Other   62     10  
Net cash used in investing activities (18,718 ) (21,714 )
 
Financing activities
Net repayments on line of credit facility (49,000 ) -
Excess tax benefit on equity awards 576 242
Tax payments for restricted stock (1,041 ) -
Proceeds from exercise of stock options 10,981 5,304
Acquisition of Company common stock (49,579 ) (43,215 )
Noncontrolling interests, net of contributions and distributions (261 ) (235 )
Other   97     104  
Net cash used in financing activities (88,227 ) (37,800 )
 
Effect of exchange rate changes on cash and cash equivalents   67     78  
Change in cash and cash equivalents (22,530 ) 2,723
Cash and cash equivalents at beginning of period   46,225     25,457  
 
Cash and cash equivalents at end of period $ 23,695   $ 28,180  

Papa John's International, Inc.
Lance Tucker, 502-261-4218
Chief Financial Officer

Source: Papa John's International, Inc.

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