Papa John‘s International, Inc.
Nov 3, 2015

Papa John's Announces Third Quarter 2015 Results

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three and nine months ended September 27, 2015.

Highlights

"I'd like to congratulate our operators and team members on another solid quarter of sales, earnings and unit growth," said Papa John's founder, chairman and CEO John Schnatter. "The team delivered solid comp sales in the third quarter, and we again posted exceptional double-digit two year comp sales in both our domestic and international businesses. Our unwavering focus on quality, combined with our strong digital channels, continues to drive the Papa John's brand forward."

Third quarter 2015 revenues were $389.3 million, a 0.3% decrease from third quarter 2014 revenues of $390.4 million. The lower revenues were primarily due to anticipated lower point-of-sale system ("FOCUS") equipment sales as the rollout is now complete as well as lower PJ Food Service ("PJFS") sales from lower commodity costs. Third quarter 2015 net income was $18.0 million, compared to third quarter 2014 net income of $16.1 million. Third quarter 2015 diluted earnings per share were $0.45, or a 15.4% increase, compared to third quarter 2014 diluted earnings per share of $0.39.

Revenues were $1.22 billion for the nine months ended September 27, 2015, a 4.1% increase from revenues of $1.17 billion for the same period in 2014. Net income was $51.0 million for the first nine months of 2015 ($59.0 million, or a 13.1% increase, excluding the after-tax expense of a legal settlement as detailed in the "Item Impacting Comparability" table), compared to $52.1 million for the same period in 2014. Diluted earnings per share were $1.27 for the first nine months of 2015 ($1.47, or a 19.5% increase, excluding the prior quarter legal settlement), compared to $1.23 for the same period in 2014.

 

Global Restaurant and Comparable Sales Information

 
    Three Months Ended     Nine Months Ended

Sept. 27,
2015

   

Sept. 28,
2014

Sept. 27,
2015

   

Sept. 28,
2014

 
Global restaurant sales growth (a) 3.9 % 10.2 % 5.9 % 11.0 %
 

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

7.0 % 10.7 % 8.5 % 11.5 %
 
Comparable sales growth (b)
Domestic company-owned restaurants 4.7 % 8.3 % 6.8 % 9.1 %
North America franchised restaurants 2.4 % 7.1 % 4.4 % 7.2 %
System-wide North America restaurants 3.0 % 7.4 % 5.0 % 7.7 %
 
System-wide international restaurants 8.0 % 5.5 % 7.5 % 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 decreased $1.1 million, or 0.3%, for the third quarter of 2015 and increased $47.9 million, or 4.1%, for the nine months ended September 27, 2015. The decrease for the three-month period was primarily due to the anticipated lower FOCUS equipment sales as the rollout is now complete as well as lower PJFS sales from lower commodity costs. The following summarizes changes in our revenues for the three- and nine-month periods:

Operating Highlights

The tables below summarize income before income taxes on a reporting segment basis and exclude the previously mentioned legal settlement (as detailed in the "Item Impacting Comparability" section) for the three- and nine-month periods of 2015:

                 
            Three Months Ended  
Sept. 27,         Sept. 28, Increase
  (In thousands)         2015         2014         (Decrease)  
 
Domestic company-owned restaurants $ 8,088 $ 8,133 $ (45 )
Domestic commissaries 10,192 8,897 1,295
North America franchising 19,172 19,023 149
International 3,184 1,436 1,748
All others (556 ) (298 ) (258 )
Unallocated corporate expenses (13,482 ) (12,242 ) (1,240 )
  Elimination of intersegment profits           (341 )           (731 )           390    
  Total income before income taxes         $ 26,257           $ 24,218           $ 2,039    
 
         
            Nine Months Ended  
As Reported         Legal         Adjusted                 Adjusted
Sept. 27, Settlement Sept. 27, Sept. 28, Increase
  (In thousands)         2015         expense         2015         2014         (Decrease)  
 
Domestic company-owned restaurants $ 41,185 $ - $ 41,185 $ 32,069 $ 9,116
Domestic commissaries 32,694 - 32,694 26,174 6,520
North America franchising 61,545 - 61,545 56,389 5,156
International 6,807 - 6,807 4,071 2,736
All others (230 ) - (230 ) (150 ) (80 )
Unallocated corporate expenses (60,636 ) 12,278 (48,358 ) (35,405 ) (12,953 )
  Elimination of intersegment profits           (1,141 )           -           (1,141 )           (1,284 )           143    
  Total income before income taxes         $ 80,224           $ 12,278         $ 92,502           $ 81,864           $ 10,638    
 

Third quarter 2015 income before income taxes increased approximately $2.0 million, or 8.4%. This increase was primarily due to the following:

These increases were partially offset by higher unallocated corporate expenses of approximately $1.2 million primarily due to higher health insurance claims costs.

Income before income taxes increased $10.6 million, or 13.0%, for the nine-month period ended September 27, 2015, excluding the $12.3 million legal settlement. This increase was primarily due to the same reasons noted for the quarter, except for the following:

The effective income tax rates were 27.7% and 30.6% for the three and nine months ended September 27, 2015, representing decreases of 2.2% and 1.8% for the three- and nine-month periods, respectively. The rates for 2015 include higher benefits from various tax deductions and credits.

The company's free cash flow, a non-GAAP financial measure, for the first nine months of 2015 and 2014, was as follows (in thousands):

      Nine Months Ended  
  Sept. 27,         Sept. 28,
  2015     2014  
 
Net cash provided by operating activities (a) $ 119,738 $ 84,826
Purchases of property and equipment (b)     (26,508 )       (37,700 )  
Free cash flow   $ 93,230       $ 47,126    
 
(a)   The increase of approximately $34.9 million was primarily due to higher operating income and favorable changes in inventory and other working capital items. The prior year included higher inventory levels of equipment to support the rollout of FOCUS to our domestic franchised restaurants. The Legal Settlement does not currently impact cash provided by operating activities as it has not been paid. Payments will begin in 2016 following court approval.
(b) The decrease of approximately $11.2 million is primarily due to the prior year including FOCUS equipment costs for domestic Company-owned restaurants and higher levels of FOCUS software development costs.
 

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 dividends, share repurchases and 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 (SEC) for additional information concerning our operating results and cash flow for the three and nine months ended September 27, 2015.

Global Restaurant Unit Data

At September 27, 2015, there were 4,786 Papa John's restaurants operating in all 50 states and in 38 international countries and territories, as follows:

                                     
 

Domestic
Company-
owned

       

Franchised
North
America

       

Total North
America

        International         System-wide  

Third Quarter

Beginning - June 28, 2015 693 2,653 3,346 1,388 4,734
Opened 4 31 35 50 85
Closed   -           (20 )         (20 )         (13 )         (33 )
Ending - September 27, 2015   697           2,664           3,361           1,425           4,786    
 

Year-to-date

Beginning - December 28, 2014 686 2,654 3,340 1,323 4,663
Opened 8 68 76 142 218
Closed - (55 ) (55 ) (40 ) (95 )
Acquired (divested)   3           (3 )         -           -           -    
Ending - September 27, 2015   697           2,664           3,361           1,425           4,786    
 
Unit growth   11           10           21           102           123    
 
% increase   1.6 %         0.4 %         0.6 %         7.7 %         2.6 %  
 

Our development pipeline as of September 27, 2015 included approximately 1,220 restaurants (250 units in North America and 970 units internationally), the majority of which are scheduled to open over the next six years.

Item Impacting Comparability

The following table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures, for the three and nine month periods ended September 27, 2015:

             
  Three Months Ended     Nine Months Ended  
Sept. 27,         Sept. 28, Sept. 27,         Sept. 28,
(In thousands, except per share amounts)   2015     2014     2015     2014  
 
Income before income taxes, as reported $ 26,257 $ 24,218 $ 80,224 $ 81,864
Legal Settlement expense     -       -       12,278       -  
Income before income taxes, as adjusted   $ 26,257     $ 24,218     $ 92,502     $ 81,864  
 
Net income, as reported $ 17,971 $ 16,075 $ 50,987 $ 52,134
Legal Settlement expense     -       -       7,986       -  
Net income, as adjusted   $ 17,971     $ 16,075     $ 58,973     $ 52,134  
 
Diluted earnings per share, as reported $ 0.45 $ 0.39 $ 1.27 $ 1.23
Legal Settlement expense     -       -       0.20       -  
Diluted earnings per share, as adjusted   $ 0.45     $ 0.39     $ 1.47     $ 1.23  
 

The Legal Settlement expense represents a pre-tax expense of $12.3 million for a legal settlement preliminarily approved by the court and recorded in the quarter ended June 28, 2015. This collective and class action, Perrin v. Papa John's International, Inc. and Papa John's USA, Inc., which included approximately 19,000 drivers, alleged delivery drivers were not reimbursed in accordance with the Fair Labor Standards Act. The Company continues to deny any liability or wrongdoing in this matter.

The non-GAAP results shown above, which exclude the legal settlement, 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 legal settlement is important for purposes of comparison to prior year results. In addition, management uses this metric to evaluate the company's underlying operating performance and to analyze trends.

Share Repurchase Activity

In October 2015, the company's Board of Directors approved a $125 million increase in the amount of common stock that may be purchased under the company's share repurchase program through December 31, 2016, bringing the total authorized under the program to $1.45 billion since its inception in 1999. Approximately $161.1 million remains available under the company's share repurchase program as of October 27, 2015.

The following table reflects our repurchases for the three and nine months ended September 27, 2015 and subsequent repurchases through October 27, 2015 (in thousands):

                 
  Period        

Number of
Shares

        Cost  
 
Three Months Ended September 27, 2015 390 $ 28,083
 
Nine Months Ended September 27, 2015 1,208 $ 80,166
 
September 28, 2015 through October 27, 2015 192 $ 13,167
 

There were 39.9 million and 40.2 million diluted weighted average shares outstanding for the three and nine months ended September 27, 2015, representing decreases of 3.6% and 4.3%, respectively, over the prior year comparable periods. Diluted earnings per share increased $0.02 and $0.07, respectively, for the three and nine months ended September 27, 2015 due to the reduction in shares outstanding, primarily resulting from the share repurchase program. Approximately 39.2 million actual shares of the company's common stock were outstanding as of September 27, 2015.

China Operations

The company has decided to refranchise the China market and is planning a sale of its existing China operations, consisting of company-owned restaurants and a commissary. The restaurants are located in both Beijing and Tianjin, China. A buyer has not yet been identified. See the "Notes to Condensed Consolidated Financial Statements" in our Quarterly Report on Form 10-Q filed with the SEC on November 3, 2015 for additional information.

2015 Guidance Update

Despite the higher insurance costs, the company is reaffirming its current 2015 diluted earnings per share guidance range of $2.04 to $2.10, excluding the $0.20 impact of the legal settlement, but expects to be near the low end of the range. Additionally, net unit openings are expected to be at the low end of the 2015 guidance range of 220 to 250, with approximately 75% of the net unit growth in International markets.

Conference Call

A conference call is scheduled for November 4, 2015 at 10:00 a.m. Eastern Time to review our third quarter 2015 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 45359098.

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," "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" in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014. 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     Nine Months Ended  
  Sept. 27, 2015     Sept. 28, 2014     Sept. 27, 2015     Sept. 28, 2014  
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
North America:
Domestic company-owned restaurant sales $ 180,059 $ 169,076 $ 563,308 $ 517,269
Franchise royalties 22,079 22,131 70,519 65,728
Franchise and development fees 206 217 666 493
Domestic commissary sales 145,863 149,224 457,203 463,852
Other sales 14,076 23,359 50,110 49,704
International:
Royalties and franchise and development fees 6,755 6,673 19,894 18,769
Restaurant and commissary sales     20,246         19,719         58,859         56,825    
Total revenues 389,284 390,399 1,220,559 1,172,640
 
Costs and expenses:
Domestic company-owned restaurant expenses:
Cost of sales 42,150 42,460 132,943 129,646
Salaries and benefits 50,229 45,835 155,389 139,223
Advertising and related costs 16,293 15,369 49,555 46,979
Occupancy costs and other restaurant operating expenses     39,864         35,687         113,037         104,951    
Total domestic company-owned restaurant expenses 148,536 139,351 450,924 420,799
 
Domestic commissary expenses:
Cost of sales 111,205 116,908 350,108 364,302
Salaries and benefits and other commissary operating expenses     24,029         22,221         72,420         68,162    
Total domestic commissary expenses 135,234 139,129 422,528 432,464
 
Other operating expenses 13,475 22,794 47,726 47,446
International restaurant and commissary expenses 16,481 16,605 48,209 47,366
General and administrative expenses 36,053 33,671 120,029 104,199
Other general expenses 1,607 3,143 4,427 6,640
Depreciation and amortization     10,461         10,520         30,638         29,539    
Total costs and expenses     361,847         365,213         1,124,481         1,088,453    
 
Operating income 27,437 25,186 96,078 84,187
Legal settlement expense - - (12,278 ) -
Net interest expense     (1,180 )       (968 )       (3,576 )       (2,323 )  
Income before income taxes 26,257 24,218 80,224 81,864
Income tax expense     7,281         7,256         24,541         26,522    
Net income before attribution to noncontrolling interests 18,976 16,962 55,683 55,342
Income attributable to noncontrolling interests     (1,005 )       (887 )       (4,696 )       (3,208 )  
Net income attributable to the company   $ 17,971       $ 16,075       $ 50,987       $ 52,134    
 
Calculation of income for earnings per share:
Net income attributable to the company $ 17,971 $ 16,075 $ 50,987 $ 52,134
Decrease (increase) in noncontrolling interest redemption value 49 (42 ) 192 (81 )
Net income attributable to participating securities     (73 )       (77 )       (223 )       (295 )  
Net income attributable to common shareholders   $ 17,947       $ 15,956       $ 50,956       $ 51,758    
 
Basic earnings per common share   $ 0.46       $ 0.39       $ 1.29       $ 1.25    
Diluted earnings per common share   $ 0.45       $ 0.39       $ 1.27       $ 1.23    
 
Basic weighted average common shares outstanding     39,394         40,739         39,640         41,248    
Diluted weighted average common shares outstanding     39,895         41,386         40,210         42,021    
 
Dividends declared per common share $ 0.175 $ 0.14 $ 0.455 $ 0.39
 

 

Papa John's International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets
             
September 27, December 28,
  2015         2014  
(In thousands) (Unaudited) (Note)
 
Assets
Current assets:
Cash and cash equivalents $ 24,441 $ 20,122
Accounts receivable, net 56,445 56,047
Notes receivable, net 7,738 6,106
Income taxes receivable 796 9,527
Inventories 24,335 27,394
Deferred income taxes 9,990 8,248
Prepaid expenses and other current assets 25,376 28,564
Assets held for sale     9,555       -  
Total current assets 158,676 156,008
 
Property and equipment, net 209,137 219,457
Notes receivable, less current portion, net 10,444 12,801
Goodwill 79,913 82,007
Deferred income taxes 3,021 3,914
Other assets     33,426       38,616  
Total assets   $ 494,617     $ 512,803  
 
 

Liabilities and stockholders' equity

Current liabilities:
Accounts payable $ 35,546 $ 38,832
Income and other taxes payable 10,012 9,637
Accrued expenses and other current liabilities     78,562       58,293  
Total current liabilities 124,120 106,762
 
Deferred revenue 3,627 4,257
Long-term debt 239,000 230,451
Deferred income taxes 14,251 22,188
Other long-term liabilities     44,034       41,875  
Total liabilities 425,032 405,533
 
Redeemable noncontrolling interests 8,274 8,555
 

Total stockholders' equity

    61,311       98,715  

Total liabilities, redeemable noncontrolling interests and stockholders' equity

  $ 494,617     $ 512,803  
 

Note: The Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements, 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 27, 2015         September 28, 2014  
(Unaudited) (Unaudited)
Operating activities
Net income before attribution to noncontrolling interests $ 55,683 $ 55,342

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

Provision for uncollectible accounts and notes receivable 813 1,714
Depreciation and amortization 30,638 29,539
Deferred income taxes 2,259 7,687
Stock-based compensation expense 7,124 5,958
Excess tax benefit on equity awards (9,884 ) (8,493 )
Other 3,268 3,916
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (1,994 ) (6,861 )
Income taxes receivable 8,731 -
Inventories 2,178 (9,792 )
Prepaid expenses and other current assets 2,400 2,148
Other assets and liabilities 819 3,887
Accounts payable (3,380 ) (1,380 )
Income taxes and other taxes payable 375 6,434
Accrued expenses and other current liabilities 20,508 (5,163 )
Deferred revenue     200         (110 )  
Net cash provided by operating activities 119,738 84,826
 
Investing activities
Purchases of property and equipment (26,508 ) (37,700 )
Loans issued (2,497 ) (5,221 )
Repayments of loans issued 3,961 3,371
Acquisitions, net of cash acquired (491 ) (4,264 )
Other     406         25    
Net cash used in investing activities (25,129 ) (43,789 )
 
Financing activities
Net proceeds on line of credit facility 8,549 66,784
Cash dividends paid (17,950 ) (16,119 )
Excess tax benefit on equity awards 9,884 8,493
Tax payments for equity award issuances (10,947 ) (7,540 )
Proceeds from exercise of stock options 4,569 4,752
Acquisition of Company common stock (80,166 ) (94,152 )
Contributions from noncontrolling interest holders 683 1,086
Distributions to noncontrolling interest holders (4,950 ) (1,200 )
Other     377         423    
Net cash used in financing activities (89,951 ) (37,473 )
 
Effect of exchange rate changes on cash and cash equivalents     (339 )       (86 )  
Change in cash and cash equivalents 4,319 3,478
Cash and cash equivalents at beginning of period     20,122         13,670    
 
Cash and cash equivalents at end of period   $ 24,441       $ 17,148    
 

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

Source: Papa John's International, Inc.

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