Papa John‘s International, Inc.
Aug 6, 2013

Papa John's Announces Second Quarter 2013 Results

EPS Increased 30.5% on Strong Comparable Sales; Board Approves Quarterly Dividend

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three and six months ended June 30, 2013.

Highlights

"Our commitment to delivering a quality product around the globe continues to pay off, with excellent financial performance, a top ranking by the prestigious American Customer Satisfaction Index for the 12th time in 14 years, and the milestone opening of the 1,000th international Papa John's restaurant," said Papa John's Founder, Chairman and Chief Executive Officer John Schnatter. "I am also pleased to announce a quarterly dividend. The combination of share repurchases and quarterly dividends reflects the strength of our brand and our long term commitment to deliver increasing shareholder value."

Second quarter 2013 revenues were $349.2 million, a 9.6% increase from second quarter 2012 revenues of $318.6 million. Second quarter 2013 net income was $17.2 million, compared to second quarter 2012 net income of $14.3 million ($17.0 million and $14.1 million, for the second quarter of 2013 and 2012, respectively, excluding the impact of the previously disclosed 2012 Incentive Contribution). Second quarter 2013 diluted earnings per share were $0.77 compared to second quarter 2012 diluted earnings per share of $0.59 ($0.76 for the second quarter of 2013 and $0.59 for the second quarter of 2012, excluding the impact of the 2012 Incentive Contribution).

Revenues were $704.8 million for the six months ended June 30, 2013, an 8.5% increase from revenues of $649.9 million for the same period in 2012. Net income was $36.5 million for the six months ended June 30, 2013, compared to $31.3 million for the same period in 2012 ($36.1 million and $33.5 million, for the six-month periods in 2013 and 2012, respectively, excluding the impact of the previously disclosed 2012 Incentive Contribution). Diluted earnings per share were $1.62 for the six months ended June 30, 2013, compared to $1.29 for the same period in 2012 ($1.60 and $1.38, for the six-month periods in 2013 and 2012, respectively, excluding the impact of the 2012 Incentive Contribution).

Global Restaurant and Comparable Sales Information

  Three Months Ended   Six Months Ended
June 30, 2013   June 24, 2012 June 30, 2013   June 24, 2012
 
Global restaurant sales growth (a) 7.2 % 9.8 % 6.6 % 7.9 %
 

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

7.6

%

10.4 %

7.0

%

8.3 %
 
Comparable sales growth (b)
Domestic company-owned restaurants 6.0 % 7.4 % 4.9 % 5.1 %
North America franchised restaurants 2.6 % 5.1 % 1.7 % 2.7 %
System-wide North America restaurants 3.4 % 5.7 % 2.5 % 3.3 %
 
System-wide international restaurants 6.8 % 6.1 % 7.5 % 7.2 %
 

(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 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.

Revenue and Operating Highlights

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

Revenues

Consolidated revenues increased $30.6 million, or 9.6%, for the second quarter of 2013 and increased $54.9 million, or 8.5%, for the six months ended June 30, 2013. The increases in revenues were primarily due to the following:

Operating Highlights

The table below summarizes income before income taxes on a reporting segment basis, excluding the Incentive Contribution:

    Three Months Ended   Six Months Ended
  June 30,   June 24,   Increase   June 30,   June 24,   Increase
(In thousands)   2013   2012   (Decrease)   2013   2012   (Decrease)
 
Domestic company-owned restaurants $ 8,175 $ 9,358 $ (1,183 ) $ 19,131 $ 21,679 $ (2,548 )
Less: Incentive Contribution (a)     -       -       -       -       1,029       (1,029 )

Domestic company-owned restaurants, excluding Incentive Contribution

8,175 9,358 (1,183 ) 19,131 20,650 (1,519 )
 
Domestic commissaries 9,642 7,978 1,664 19,805 19,144 661
North America franchising 17,396 16,619 777 35,618 34,759 859
International 866 320 546 1,207 592 615
All others 1,153 471 682 1,812 866 946
Unallocated corporate expenses (10,413 ) (10,799 ) 386 (19,931 ) (25,583 ) 5,652
Less: Incentive Contribution (a)     250       250       -       500       (4,500 )     5,000  

Unallocated corporate expenses, excluding Incentive Contribution

(10,663 ) (11,049 ) 386 (20,431 ) (21,083 ) 652
 
Elimination of intersegment profits     (211 )     (481 )     270       (737 )     (471 )     (266 )

Total income before income taxes, excluding Incentive Contribution (a)

  $ 26,358     $ 23,216     $ 3,142     $ 56,405     $ 54,457     $ 1,948  
 

(a) Income before income taxes and other financial measures excluding the Incentive Contribution are non-GAAP financial measures. See Marketing Incentive Contribution table below for additional details and a reconciliation to our GAAP financial measures.

 

Second quarter 2013 income before income taxes increased approximately $3.1 million, or 13.5%, excluding the Incentive Contribution, primarily due to the following:

These increases were partially offset by a decrease in income before income taxes at our domestic company-owned restaurants primarily due to higher commodity costs, somewhat offset by incremental profits associated with higher comparable sales of 6.0%.

The increase in income before income taxes for the six months ended June 30, 2013 of $1.9 million, or 3.6%, excluding the Incentive Contribution, was primarily due to the same reasons noted above.

The effective income tax rates were 32.2% and 32.6% for the three and six months ended June 30, 2013, representing decreases of 1.9% and 1.2% from the prior year rates. The lower tax rates were due to the settlement or resolution of specific state issues in 2013. Additionally, the rate for the six months ended June 30, 2013 reflected the reinstatement of certain 2012 tax credits under the American Taxpayer Relief Act of 2012.

The company's free cash flow, a non-GAAP financial measure, for the first six months of 2013 and 2012 was as follows (in thousands):

  Six Months Ended
June 30,   June 24,
2013 2012
 
Net cash provided by operating activities (a) $ 47,232 $ 65,162
Purchase of property and equipment (b)   (25,493 )   (15,046 )
Free cash flow $ 21,739   $ 50,116  
 

(a) The decrease of approximately $17.9 million was primarily due to unfavorable changes in working capital, including the timing of income tax and other payments, partially offset by an increase in net income.

(b) The increased purchases of property and equipment primarily relate to expenditures on equipment for the New Jersey dough production as well as technology investments.

 

We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less 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 performance than the company's GAAP measures.

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 and cash flow for the three- and six-month periods ended June 30, 2013.

Global Restaurant Unit Data

At June 30, 2013, there were 4,252 Papa John's restaurants operating in all 50 states and in 34 countries, as follows:

 

Domestic

Company-

owned

 

Franchised

North

America

 

Total

North

America

  International   System-wide

Second Quarter

       
Beginning - March 31, 2013 649 2,572 3,221 976 4,197
Opened 5 32 37 44 81
Closed -     (16 )   (16 )   (10 )   (26 )
Ending - June 30, 2013 654     2,588     3,242     1,010     4,252  
 

Year-to-date

Beginning - December 30, 2012 648 2,556 3,204 959 4,163
Opened 6 63 69 72 141
Closed -     (31 )   (31 )   (21 )   (52 )
Ending - June 30, 2013 654     2,588     3,242     1,010     4,252  
 
Restaurant unit growth 6     32     38     51     89  
 
% increase 0.9 %   1.3 %   1.2 %   5.3 %   2.1 %

Our development pipeline as of June 30, 2013 included approximately 1,350 restaurants (300 units in North America and 1,050 units internationally), the majority of which are scheduled to open over the next six years.

Marketing Incentive Contribution

The following table reconciles our GAAP financial results to our results excluding the Incentive Contribution for the three and six months ended June 30, 2013 versus the same periods in 2012:

   
Three Months Ended Six Months Ended
June 30,   June 24, June 30,   June 24,
(In thousands, except per share amounts) 2013 2012 2013 2012
 
Income before income taxes, as reported $ 26,608 $ 23,466 $ 56,905 $ 50,986
Incentive Contribution (a) (250 ) (250 ) (500 ) 3,471
Income before income taxes, excluding Incentive Contribution $ 26,358   $ 23,216   $ 56,405   $ 54,457
 
Net income, as reported $ 17,150 $ 14,289 $ 36,456 $ 31,270
Incentive Contribution (a) (164 ) (164 ) (329 ) 2,275
Net income, excluding Incentive Contribution $ 16,986   $ 14,125   $ 36,127   $ 33,545
 
Earnings per diluted share, as reported $ 0.77 $ 0.59 $ 1.62 $ 1.29
Incentive Contribution (a) (0.01 ) -   (0.02 ) 0.09
Earnings per diluted share, excluding Incentive Contribution $ 0.76   $ 0.59   $ 1.60   $ 1.38
 

(a) As previously disclosed, in connection with a 2012 multi-year supplier agreement, the Company received a $5.0 million supplier marketing payment in the first quarter of 2012. The Company is recognizing the supplier marketing payment evenly as income over the five-year term of the agreement ($250,000 per quarter). In 2012, the Company contributed the supplier marketing payment to the Papa John's Marketing Fund ("PJMF"), an unconsolidated, non-profit corporation, for the benefit of domestic restaurants. The Company's contribution to PJMF was fully expensed in the first quarter of 2012. PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as advertising credits in the first quarter of 2012. Our domestic company-owned restaurants' portion resulted in an increase in income before income taxes of approximately $1.0 million in the first quarter of 2012. These transactions together are referred to as the "Incentive Contribution."

 

The results shown in the table above and elsewhere in this press release, which exclude the Incentive Contribution, are not measures defined by accounting principles generally accepted in the United States ("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 results. Management believes presenting the financial information excluding the impact of the Incentive Contribution is important for purposes of comparison to prior year results. In addition, management uses these non-GAAP measures to allocate resources, and analyze trends and underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for various levels of management, were based on financial measures that excluded the Incentive Contribution.

Share Repurchase Activity

The Company's Board of Directors approved a $25 million increase in the amount of common stock that may be purchased under the Company's share repurchase program through March 30, 2014. Approximately $80.1 million remains available under the Company's share repurchase program as of August 2, 2013.

The following table reflects our repurchases for the three and six months ended June 30, 2013 and subsequent repurchases through August 2, 2013 (in thousands):

Period

   

Number

of Shares

   

Cost

       

Three Months Ended June 30, 2013

429

$

26,684

 

Six Months Ended June 30, 2013

978

$

58,806

 

July 1, 2013 through August 2, 2013

23

$

1,503

There were 22.3 million and 22.5 million diluted weighted average shares outstanding for the three and six months ended June 30, 2013, representing decreases of 7.7% and 7.1% over the prior year comparable periods. Diluted earnings per share increased $0.06 and $0.12 for the three and six months ended June 30, 2013 due to the reduction in shares outstanding resulting from the share repurchase program. Approximately 21.6 million actual shares of the company's common stock were outstanding as of June 30, 2013.

Quarterly Regular Dividend Announced

The company announced that its Board of Directors approved the initiation of quarterly cash dividends to its shareholders. A quarterly dividend of $0.25 per common share will be paid on September 20, 2013 to shareholders of record as of the close of business on September 6, 2013. This is the first cash dividend paid to shareholders in the company's history. While future dividends will be subject to Board declaration, the company is initially targeting a dividend payout of $0.25 per quarter.

2013 Guidance Update

The company updated its 2013 guidance as follows:

 
  Updated Guidance   Previous Guidance
 
Diluted earnings per share $2.92 to $3.00 $2.90 to $3.00
 
Capital expenditures $50 to $55 million $55 to $60 million
 

The company reaffirmed all other guidance.

 

Conference Call

A conference call is scheduled for August 7, 2013 at 10:00 a.m. Eastern Time to review our second quarter 2013 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 45274568.

Forward-Looking Statements

Certain matters discussed in this press release 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 forward-looking statements may relate to projections or guidance concerning business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, 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" of the Annual Report on Form 10-K for the fiscal year ended December 30, 2012. 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 Six Months Ended
June 30, 2013   June 24, 2012 June 30, 2013   June 24, 2012
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(In thousands, except per share amounts)
Revenues:
North America:
Domestic Company-owned restaurant sales $ 155,153 $ 143,527 $ 313,051 $ 287,342
Franchise royalties 20,230 19,101 40,963 39,619
Franchise and development fees 219 206 765 428
Domestic commissary sales 140,003 126,593 283,897 264,203
Other sales 12,444 11,771 25,051 24,029
International:
Royalties and franchise and development fees 5,391 4,701 10,458 9,187
Restaurant and commissary sales   15,746       12,680     30,605       25,047  
Total revenues 349,186 318,579 704,790 649,855
 
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales 37,825 32,881 74,898 65,337
Salaries and benefits 42,053 39,839 85,325 78,652
Advertising and related costs 14,677 13,278 29,470 25,977
Occupancy costs 8,939 8,619 17,650 16,517
Other operating expenses   22,431       20,830     45,176       41,248  
Total domestic Company-owned restaurant expenses 125,925 115,447 252,519 227,731
 
Domestic commissary and other expenses:
Cost of sales 114,045 104,412 231,823 217,250
Salaries and benefits 10,264 9,218 20,331 18,221
Other operating expenses   15,768       13,498     31,775       27,804  
Total domestic commissary and other expenses 140,077 127,128 283,929 263,275
 
International operating expenses 12,983 10,975 25,636 21,367
General and administrative expenses 33,126 31,463 66,284 63,059
Other general expenses 1,597 1,135 2,782 6,809
Depreciation and amortization   8,530       8,104     17,067       16,031  
Total costs and expenses   322,238       294,252     648,217       598,272  
 
Operating income 26,948 24,327 56,573 51,583
Net interest (expense) income   (340 )     (861 )   332       (597 )
Income before income taxes 26,608 23,466 56,905 50,986
Income tax expense   8,563       8,005     18,541       17,218  
Net income, including redeemable noncontrolling interests 18,045 15,461 38,364 33,768
Income attributable to redeemable noncontrolling interests   (895 )     (1,172 )   (1,908 )     (2,498 )
Net income, net of redeemable noncontrolling interests $ 17,150     $ 14,289   $ 36,456     $ 31,270  
 
Basic earnings per common share $ 0.79     $ 0.60   $ 1.66     $ 1.31  
Earnings per common share - assuming dilution $ 0.77     $ 0.59   $ 1.62     $ 1.29  
 
Basic weighted average shares outstanding   21,742       23,733     21,998       23,893  
Diluted weighted average shares outstanding   22,250       24,112     22,543       24,270  

 
 
 
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
   
 
June 30, December 30,
2013 2012
(In thousands) (Unaudited) (Note)
 
Assets
Current assets:
Cash and cash equivalents $ 28,236 $ 16,396
Accounts receivable, net 43,235 44,647
Notes receivable 3,440 4,577
Inventories 21,722 22,178
Deferred income taxes 7,715 10,279
Prepaid expenses and other current assets   18,586   20,549
Total current assets 122,934 118,626
 
Property and equipment, net 201,942 196,661
Notes receivable, less current portion, net 13,839 12,536
Goodwill 78,088 78,958
Other assets   32,675   31,627
Total assets $ 449,478 $ 438,408
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 28,728 $ 32,624
Income and other taxes payable 1,407 10,429
Accrued expenses and other current liabilities   51,950   60,528
Total current liabilities 82,085 103,581
 
Deferred revenue 6,736 7,329
Long-term debt 133,241 88,258
Deferred income taxes 11,955 10,672
Other long-term liabilities   40,858   40,674
Total liabilities 274,875 250,514
 
Redeemable noncontrolling interests 6,846 6,380
 
Total stockholders' equity   167,757   181,514
Total liabilities, redeemable noncontrolling interests and stockholders' equity $ 449,478 $ 438,408
 
 
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
   
 
Six Months Ended
(In thousands) June 30, 2013   June 24, 2012
(Unaudited) (Unaudited)
Operating activities
Net income, including redeemable noncontrolling interests $ 38,364 $ 33,768

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

Provision for uncollectible accounts and notes receivable 780 719
Depreciation and amortization 17,067 16,031
Deferred income taxes 8,256 1,797
Stock-based compensation expense 3,784 3,218
Excess tax benefit on equity awards (3,803 ) (1,471 )
Other 694 2,872
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 496 (75 )
Inventories 456 533
Prepaid expenses and other current assets 1,963 417
Other assets and liabilities (1,954 ) 756
Accounts payable (3,896 ) (587 )
Income and other taxes payable (9,022 ) 75
Accrued expenses and other current liabilities (5,870 ) 3,297
Deferred revenue   (83 )   3,812  
Net cash provided by operating activities 47,232 65,162
 
Investing activities
Purchases of property and equipment (25,493 ) (15,046 )
Loans issued (3,103 ) (1,206 )
Repayments of loans issued 2,908 1,730
Acquisitions, net of cash acquired - (5,908 )
Proceeds from divestitures of restaurants - 948
Other   319     (4 )
Net cash used in investing activities (25,369 ) (19,486 )
 
Financing activities
Net proceeds (repayments) on line of credit facility 44,983 (1,489 )
Excess tax benefit on equity awards 3,803 1,471
Tax payments for restricted stock issuances (1,841 ) (822 )
Proceeds from exercise of stock options 3,696 10,400
Acquisition of Company common stock (58,806 ) (38,728 )
Contributions from redeemable noncontrolling interest holders 450 -
Distributions to redeemable noncontrolling interest holders (1,750 ) (1,930 )
Other   (468 )   125  
Net cash used in financing activities (9,933 ) (30,973 )
 
Effect of exchange rate changes on cash and cash equivalents   (90 )   (20 )
Change in cash and cash equivalents 11,840 14,683
Cash and cash equivalents at beginning of period   16,396     18,942  
 
Cash and cash equivalents at end of period $ 28,236   $ 33,625  

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

Source: Papa John's International, Inc.

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