Papa John‘s International, Inc.
Feb 23, 2016

Papa John's Announces Fourth Quarter and Full Year 2015 Results

2016 Operating Assumptions and Earnings Guidance Announced

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the fourth quarter and fiscal year ended December 27, 2015.

Highlights

"I'd like to congratulate our entire team for making 2015 another great year for the Papa John's brand," said Papa John's founder, chairman and CEO John Schnatter. "From continued improvements to our product, to digital innovations, to growing our international footprint - all while again growing EPS nearly 20% and running strong positive comp sales - this year has left us tremendously well-positioned entering 2016."

Fourth quarter 2015 revenues were $416.8 million, a 2.0% decrease from fourth quarter 2014 revenues of $425.5 million. Fourth quarter 2015 net income increased 16.6% to $24.7 million, compared to fourth quarter 2014 net income of $21.2 million. Fourth quarter 2015 diluted earnings per share were $0.62, or a 19.2% increase, compared to fourth quarter 2014 diluted earnings per share of $0.52.

Full year 2015 revenues were $1.64 billion, a 2.5% increase from 2014 revenues of $1.60 billion. Full year 2015 net income was $75.7 million ($83.7 million, or a 14.1% increase, excluding the after-tax expense of a legal settlement as detailed in the "Item Impacting Comparability" table), compared to 2014 net income of $73.3 million. Full year 2015 diluted earnings per share were $1.89 ($2.09, or a 19.4% increase, excluding the legal settlement), compared to 2014 diluted earnings per share of $1.75.

Global Restaurant and Comparable Sales Information

       
Three Months Ended Year Ended

Dec. 27,

2015

   

Dec. 28,

2014

Dec. 27,

2015

   

Dec. 28,

2014

 
Global restaurant sales growth (a) 3.4% 6.6% 5.3% 9.8%
 

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

5.7% 8.2% 7.8% 10.6%
 
Comparable sales growth (b)
Domestic company-owned restaurants 3.4% 5.9% 5.9% 8.2%
North America franchised restaurants 1.3% 3.4% 3.6% 6.2%
System-wide North America restaurants 1.9% 4.1% 4.2% 6.7%
 
System-wide international restaurants 5.3% 8.9% 6.9% 7.4%
 

(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 $8.7 million, or 2.0%, for the fourth quarter of 2015 and increased $39.2 million, or 2.5%, for the full year. The decrease for the three-month period was primarily due to lower FOCUS equipment sales, as anticipated, since the rollout is now complete and lower domestic commissary sales from lower commodity costs. The following summarizes changes in our revenues for the fourth quarter and full year:

Operating Highlights

The tables below summarize income before income taxes on a reporting segment basis for the fourth quarter and full year 2015. Full year 2015 adjusted income before income taxes excludes the previously mentioned legal settlement (as detailed in the "Item Impacting Comparability" section).

       
      Three Months Ended
Dec. 27,   Dec. 28, Increase
(In thousands)   2015   2014     (Decrease)
 
Domestic company-owned restaurants 15,267 $ 8,900 $ 6,367
Domestic commissaries 12,027 13,143 (1,116 )
North America franchising 21,770 20,620 1,150
International 4,084 3,179 905
All others 1,075 141 934
Unallocated corporate expenses (15,260 ) (14,035 ) (1,225 )
Elimination of intersegment profits     (40 )     443         (483 )
Total income before income taxes   $ 38,923     $ 32,391       $ 6,532  
 
             
      Year Ended
As Reported Legal Adjusted Adjusted
Dec. 27, Settlement Dec. 27, Dec. 28, Increase
(In thousands)   2015   expense   2015   2014     (Decrease)
 
Domestic company-owned restaurants $ 56,452 $ - $ 56,452 $ 40,969 $ 15,483
Domestic commissaries 44,721 - 44,721 39,317 5,404
North America franchising 83,315 - 83,315 77,009 6,306
International 10,891 - 10,891 7,250 3,641
All others 845 - 845 (9 ) 854
Unallocated corporate expenses (75,896 ) 12,278 (63,618 ) (49,440 ) (14,178 )
Elimination of intersegment profits     (1,181 )     -     (1,181 )     (841 )       (340 )
Total income before income taxes   $ 119,147     $ 12,278   $ 131,425     $ 114,255       $ 17,170  
 

Fourth quarter 2015 income before income taxes increased approximately $6.5 million, or 20.2%. This increase was primarily due to the following:

These increases were partially offset by the following decreases:

Income before income taxes increased $17.2 million, or 15.0%, for the full year 2015, excluding the $12.3 million legal settlement. This increase was primarily due to the following:

These increases were partially offset by higher unallocated corporate expenses of approximately $14.2 million primarily due to higher salaries and benefits, including an increase in health insurance claims costs, as well as increased interest costs associated with higher levels of debt and a higher effective interest rate. In addition, management incentive compensation costs increased in 2015 due to higher annual operating results.

The effective income tax rates were 32.5% and 31.2% for the fourth quarter and full year 2015, respectively, representing an increase of 1.5% for the fourth quarter and a decrease of 0.8% for the full year period. Our effective income tax rate may fluctuate from quarter to quarter for various reasons. The 2015 full year rate includes higher benefits from various tax deductions and credits.

The company's free cash flow, a non-GAAP financial measure, was as follows (in thousands):

 
Year Ended
Dec. 27,   Dec. 28,
2015 2014
 
Net cash provided by operating activities (a) $ 160,312 $ 122,632
Purchases of property and equipment (b)   (38,972 )   (48,655 )
Free cash flow $ 121,340   $ 73,977  
 

(a)

The increase of approximately $37.7 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 impact cash provided by operating activities as it was paid in January 2016.

 

(b)

The decrease of approximately $9.7 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 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 27, 2015.

Global Restaurant Unit Data

At December 27, 2015, there were 4,893 Papa John's restaurants operating in all 50 states and in 39 international countries and territories, as follows:

         

Domestic

Company

-owned

 

Franchised

North

America

 

Total North

America

  International   System-wide

Fourth Quarter

Beginning - September 27, 2015 697 2,664 3,361 1,425 4,786
Opened 8 38 46 93 139
Closed (2 ) (17 ) (19 ) (13 ) (32 )
Acquired (divested) 4     (4 )   -     -     -  
Ending - December 27, 2015 707     2,681     3,388     1,505     4,893  
 

Year-to-date

Beginning - December 28, 2014 686 2,654 3,340 1,323 4,663
Opened 16 106 122 235 357
Closed (2 ) (72 ) (74 ) (53 ) (127 )
Acquired (divested) 7     (7 )   -     -     -  
Ending - December 27, 2015 707     2,681     3,388     1,505     4,893  
 
Unit growth 21     27     48     182     230  
 
% increase 3.1 %   1.0 %   1.4 %   13.8 %   4.9 %
 

Our development pipeline as of December 27, 2015 included approximately 1,140 restaurants (200 units in North America and 940 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 fourth quarter and year ended December 27, 2015:

         
Three Months Ended Year Ended
Dec. 27,   Dec. 28, Dec. 27, Dec. 28,
(In thousands, except per share amounts) 2015 2014 2015 2014
 
Income before income taxes, as reported $ 38,923 $ 32,391 $ 119,147 $ 114,255
Legal Settlement expense   -   -   12,278     -
Income before income taxes, as adjusted $ 38,923 $ 32,391 $ 131,425 $ 114,255
 
Net income, as reported $ 24,695 $ 21,181 $ 75,682 $ 73,315
Legal Settlement expense   -   -   7,986   -
Net income, as adjusted $ 24,695 $ 21,181 $ 83,668 $ 73,315
 
Diluted earnings per share, as reported $ 0.62 $ 0.52 $ 1.89 $ 1.75
Legal Settlement expense   -   -   0.20   -
Diluted earnings per share, as adjusted $ 0.62 $ 0.52 $ 2.09 $ 1.75
 

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. The court issued the final approval on January 12, 2016 and the funds were then remitted to the administrator for payment to the class and the plaintiffs' attorneys. 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 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 February 2016, the company's Board of Directors approved a $75 million increase in the amount of common stock that may be purchased under the company's share repurchase program through February 2017, bringing the total authorized under the program to $1.525 billion since its inception in 1999. Approximately $167.1 million remains available under the company's share repurchase program as of February 16, 2016.

The following table reflects our repurchases for the fourth quarter and full year 2015 and subsequent repurchases through February 16, 2016 (in thousands):

           
Period      

Number

of Shares

      Cost
 
Fourth Quarter 2015 637 $ 39,627
 
Full Year 2015 1,845 $ 119,793
 
December 28, 2015 through February 16, 2016 860 $ 42,589
 

There were 39.4 million and 40.0 million diluted weighted average shares outstanding for the fourth quarter and full year 2015, respectively, representing decreases of 3.5% and 4.1%, respectively, over the prior year comparable periods. Diluted earnings per share increased $0.02 and $0.08, respectively, for the fourth quarter and full year 2015 due to the reduction in shares outstanding, primarily resulting from the share repurchase program. Approximately 38.6 million actual shares of the company's common stock were outstanding as of December 27, 2015.

2016 Key Operating Assumptions and Earnings Guidance

Earnings per Share (EPS) - The company projects 2016 EPS to increase to a range of $2.30 to $2.40, or increase 10% to 15% over 2015 EPS of $2.09, excluding the legal settlement.

Comparable Restaurant Sales - North America system-wide comparable sales are expected to increase 2% to 4% in 2016. International comparable sales are expected to increase 5% to 7%, on a constant dollar basis, in 2016.

Worldwide Net Unit Growth - Worldwide net unit growth in 2016 is expected to range between 180 and 210 units, with approximately 75% of the net unit growth in International markets.

Revenues - Total consolidated revenues are expected to increase 4% to 6% in 2016.

Income Before Income Taxes Margin - Consolidated income before income taxes margin in 2016 is expected to increase up to 25 basis points over 2015 levels. We are assuming full-year block cheese prices in the low $1.60's per pound.

Income Tax Rate - The income tax rate in 2016 is expected to range from 31.0% to 32.5%.

Share Repurchases and Debt - The company expects to repurchase shares of its outstanding stock in a range of $100 to $150 million. Debt is expected to range between 1.5x and 2.0x 2016 earnings before interest, taxes, depreciation and amortization ("EBITDA").

Capital Expenditures - Capital expenditures for 2016 are expected to approximate $55 to $60 million. This includes a new domestic commissary in the Southeast Region to be completed in 2017, company-owned unit development in the U.S., investments in technology and routine capital replacement.

Conference Call

A conference call is scheduled for February 24, 2016 at 10:00 a.m. Eastern Time to review our fourth quarter and full year 2015 earnings results and 2016 guidance. 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 45364479.

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.

Annual Meeting Date Scheduled

The 2016 Annual Meeting of Stockholders will be held on Thursday, April 28, 2016, at 11:00 am local time at the company's corporate offices located at 2002 Papa John's Boulevard, Louisville, Kentucky.

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 27, 2015. 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
Dec. 27, 2015   Dec. 28, 2014 Dec. 27, 2015   Dec. 28, 2014
(In thousands, except per share amounts) (Unaudited) (Unaudited)
Revenues:
North America:
Domestic company-owned restaurant sales $ 192,999 $ 184,585 $ 756,307 $ 701,854
Franchise royalties 24,527 23,715 95,046 89,443
Franchise and development fees 344 233 1,010 726
Domestic commissary sales 158,407 165,640 615,610 629,492
Other sales 14,601 24,475 64,711 74,179
International:
Royalties and franchise and development fees 7,395 6,961 27,289 25,730
Restaurant and commissary sales   18,543       19,900     77,402       76,725  
Total revenues 416,816 425,509 1,637,375 1,598,149
 
Costs and expenses:
Domestic company-owned restaurant expenses:
Cost of sales 46,009 46,087 178,952 175,733
Salaries and benefits 52,609 49,011 207,998 188,234
Advertising and related costs 17,609 16,484 67,164 63,463
Occupancy costs and other restaurant operating expenses   37,055       39,677     150,092       144,628  
Total domestic company-owned restaurant expenses 153,282 151,259 604,206 572,058
 
Domestic commissary expenses:
Cost of sales 121,704 128,638 471,812 492,940
Salaries and benefits and other commissary operating expenses   24,295       23,819     96,715       91,981  
Total domestic commissary expenses 145,999 152,457 568,527 584,921
 
Other operating expenses 13,170 23,622 60,896 71,068
International restaurant and commissary expenses 15,297 16,352 63,506 63,718
General and administrative expenses 37,392 36,367 157,421 140,566
Other general expenses 1,778 1,583 6,205 8,223
Depreciation and amortization   9,669       10,426     40,307       39,965  
Total costs and expenses   376,587       392,066     1,501,068       1,480,519  
 
Operating income 40,229 33,443 136,307 117,630
Legal settlement expense - - (12,278 ) -
Net interest expense   (1,306 )     (1,052 )   (4,882 )     (3,375 )
Income before income taxes 38,923 32,391 119,147 114,255
Income tax expense   12,642       10,036     37,183       36,558  
Net income before attribution to noncontrolling interests 26,281 22,355 81,964 77,697
Income attributable to noncontrolling interests   (1,586 )     (1,174 )   (6,282 )     (4,382 )
Net income attributable to the company $ 24,695     $ 21,181   $ 75,682     $ 73,315  
 
Calculation of income for earnings per share:
Net income attributable to the company $ 24,695 $ 21,181 $ 75,682 $ 73,315
Decrease (increase) in noncontrolling interest redemption value (127 ) 37 65 (44 )
Net income attributable to participating securities   (102 )     (107 )   (325 )     (402 )
Net income attributable to common shareholders $ 24,466     $ 21,111   $ 75,422     $ 72,869  
 
Basic earnings per common share $ 0.63     $ 0.53   $ 1.91     $ 1.78  
Diluted earnings per common share $ 0.62     $ 0.52   $ 1.89     $ 1.75  
 
Basic weighted average common shares outstanding   38,909       40,097     39,458       40,960  
Diluted weighted average common shares outstanding   39,367       40,789     40,000       41,718  
 
Dividends declared per common share $ 0.175 $ 0.14 $ 0.63 $ 0.53
 

   
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 
Year Ended
Dec. 27, 2015   Dec. 28, 2014
(In thousands)
 
Assets
Current assets:
Cash and cash equivalents $ 21,006 $ 20,122
Accounts receivable, net 63,320 56,047
Notes receivable, net 7,816 6,106
Income tax receivable 272 9,527
Inventories 21,564 27,394
Prepaid expenses and other current assets 29,313 28,564
Assets held for sale   9,299   -
Total current assets 152,590 147,760
 
Property and equipment, net 214,044 219,457
Notes receivable, less current portion, net 11,105 12,801
Goodwill 79,657 82,007
Deferred income taxes 2,415 3,914
Other assets   35,101   38,616
Total assets $ 494,912 $ 504,555
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 43,492 $ 38,832
Income and other taxes payable 8,527 9,637
Accrued expenses and other current liabilities   80,918   58,293
Total current liabilities 132,937 106,762
 
Deferred revenue 3,190 4,257
Long-term debt 256,000 230,451
Deferred income taxes 4,610 13,940
Other long-term liabilities   47,606   41,875
Total liabilities 444,343 397,285
 
Redeemable noncontrolling interests 8,363 8,555
 
Total stockholders' equity   42,206   98,715
Total liabilities, redeemable noncontrolling interests and stockholders' equity $ 494,912 $ 504,555
 
 

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) Dec. 27, 2015   Dec. 28, 2014
 
Operating activities
Net income before attribution to noncontrolling interests $ 81,964 $ 77,697

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

Provision for uncollectible accounts and notes receivable 1,232 1,795
Depreciation and amortization 40,307 39,965
Deferred income taxes (6,246 ) 4,422
Stock-based compensation expense 9,423 8,712
Other 4,633 4,738
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (9,179 ) (5,741 )
Income taxes receivable 9,255 (9,527 )
Inventories 4,967 (2,838 )
Prepaid expenses and other current assets (1,596 ) (4,781 )
Other assets and liabilities 620 915
Accounts payable 4,804 3,171
Income taxes and other taxes payable (1,113 ) 5,233
Accrued expenses and other current liabilities 21,201 (665 )
Deferred revenue   40     (464 )
Net cash provided by operating activities 160,312 122,632
 
Investing activities
Purchases of property and equipment (38,972 ) (48,655 )
Loans issued (4,741 ) (6,816 )
Repayments of loans issued 5,183 4,254
Acquisitions, net of cash acquired (922 ) (4,773 )
Proceeds from divestitures of restaurants - 400
Other   500     556  
Net cash used in investing activities (38,952 ) (55,034 )
 
Financing activities
Net proceeds on line of credit facility 25,549 72,551
Cash dividends paid (24,844 ) (21,735 )
Excess tax benefit on equity awards 10,151 10,282
Tax payments for equity award issuances (10,965 ) (9,235 )
Proceeds from exercise of stock options 5,197 5,837
Acquisition of Company common stock (119,793 ) (117,400 )
Contributions from noncontrolling interest holders 684 1,086
Distributions to noncontrolling interest holders (6,550 ) (2,800 )
Other   444     491  
Net cash used in financing activities (120,127 ) (60,923 )
 
Effect of exchange rate changes on cash and cash equivalents   (349 )   (223 )
Change in cash and cash equivalents 884 6,452
Cash and cash equivalents at beginning of period   20,122     13,670  
 
Cash and cash equivalents at end of period $ 21,006   $ 20,122  

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

Source: Papa John's International, Inc.

News Provided by Acquire Media