Papa John‘s International, Inc.
Nov 1, 2016

Papa John's Announces Third Quarter 2016 Results

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

Highlights

"We are pleased that our strong performance continued in the 3rd quarter, with excellent comp sales, earnings and unit growth," said Papa John's founder, chairman and CEO John Schnatter. "With continued enhancements to our digital platforms, expansion of our international footprint, and the introduction of our new pan pizza, 2016 is shaping up to be another outstanding year for Papa John's."

Third quarter 2016 revenues were $422.4 million, an 8.5% increase from third quarter 2015 revenues of $389.3 million. Third quarter 2016 net income was $21.5 million, a 19.5% increase from third quarter 2015 net income of $18.0 million. Third quarter 2016 diluted earnings per share were $0.57, a 26.7% increase compared to third quarter 2015 diluted earnings per share of $0.45.

Revenues were $1.27 billion for the nine months ended September 25, 2016, a 4.4% increase from revenues of $1.22 billion for the same period in 2015. Net income was $70.2 million for the first nine months of 2016, compared to $51.0 million for the same period in 2015. Net income for the first nine months of 2016 increased 19.0%, compared to 2015 adjusted net income of $59.0 million, which excludes the prior year legal settlement ("adjusted"), as detailed in the "Item Impacting Comparability Non-GAAP Presentation" table. Diluted earnings per share were $1.86 for the first nine months of 2016, compared to $1.27 for the same period in 2015 (adjusted diluted earnings per share of $1.47 in the same period of 2015, or a 26.5% increase).

Global Restaurant and Comparable Sales Information

       
Three Months Ended Nine Months Ended

Sept. 25,
2016

   

Sept. 27,
2015

Sept. 25,
2016

   

Sept. 27,
2015

 
Global restaurant sales growth (a) 7.6% 3.9% 5.2% 5.9%
 

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

8.9% 7.0% 6.8% 8.5%
 
Comparable sales growth (b)
Domestic company-owned restaurants 6.3% 4.7% 4.2% 6.8%
North America franchised restaurants 5.1% 2.4% 3.0% 4.4%
System-wide North America restaurants 5.5% 3.0% 3.4% 5.0%
 
System-wide international restaurants 7.6% 8.0% 6.2% 7.5%
 
(a) Includes both company-owned and franchised restaurant sales.
 
(b) Represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation.
 

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

Revenue and Operating Highlights

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

Revenue Highlights

Consolidated revenues increased $33.2 million, or 8.5%, for the third quarter of 2016 and increased $53.4 million, or 4.4%, for the nine months ended September 25, 2016. The increases in revenues were primarily due to the following:

Foreign currency exchange rates reduced International revenues by approximately $3.7 million and $7.7 million for the three- and nine-months periods, respectively.

Operating Highlights

The tables below summarize income before income taxes on a reporting segment basis for the three and nine months ended September 25, 2016 and September 27, 2015, and reconcile our GAAP financial results to the adjusted (non-GAAP measure as detailed in the "Item Impacting Comparability Non-GAAP Presentation" table) financial results, excluding the legal settlement in 2015, for the nine months ended September 27, 2015:

       
      Three Months Ended
Sept. 25     Sept. 27 Increase
(In thousands)     2016     2015     (Decrease)
 
Domestic company-owned restaurants $ 11,576 $ 8,088 $ 3,488
Domestic commissaries 11,311 10,192 1,119
North America franchising 21,856 19,172 2,684
International 3,083 3,184 (101 )
All others 392 (556 ) 948
Unallocated corporate expenses (16,360 ) (13,482 ) (2,878 )
Elimination of intersegment profits       (231 )       (341 )       110  
Total income before income taxes     $ 31,627       $ 26,257       $ 5,370  
 
               
      Nine Months Ended
    As Reported Legal Adjusted Adjusted
Sept. 25, Sept. 27, Settlement Sept. 27, Increase
(In thousands)     2016     2015     expense     2015     (Decrease)
 
Domestic company-owned restaurants $ 47,088 $ 41,185 $ - $ 41,185 $ 5,903
Domestic commissaries 34,539 32,694 - 32,694 1,845
North America franchising 67,881 61,545 - 61,545 6,336
International 8,996 6,807 - 6,807 2,189
All others 868 (230 ) - (230 ) 1,098
Unallocated corporate expenses (49,771 ) (60,636 ) 12,278 (48,358 ) (1,413 )
Elimination of intersegment profits       (1,365 )       (1,141 )       -       (1,141 )       (224 )
Total income before income taxes     $ 108,236       $ 80,224       $ 12,278     $ 92,502       $ 15,734  
 

Third quarter 2016 income before income taxes increased approximately $5.4 million, or 20.5%, compared to the prior year period. The increase of $5.4 million was primarily due to the following:

Income before income taxes increased $28.0 million for the nine month period ended September 25, 2016, compared to the prior year period and increased $15.7 million, or 17.0%, compared to the adjusted 2015 income before income taxes. The increase of $15.7 million was primarily due to the same reasons noted for the three-month period, except as follows:

The effective income tax rates were 28.4% and 30.9% for the three and nine months ended September 25, 2016, representing increases of 0.7% and 0.3% for the three- and nine-month periods, respectively. Our effective income tax rates may fluctuate from quarter to quarter for various reasons, including the timing of various deductions and credits.

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

   
Nine Months Ended
Sept. 25     Sept. 27
2016 2015
 
Net cash provided by operating activities (a) $ 115,982 $ 119,738
Purchases of property and equipment (b)   (38,954 )   (26,508 )
Free cash flow $ 77,028   $ 93,230  
 
(a) The decrease of approximately $3.8 million was primarily due to the payment of approximately $12.5 million in the first quarter of 2016 for the previously mentioned legal settlement and other unfavorable changes in working capital items, partially offset by higher net income.
 
(b) The increase of $12.4 million was primarily due to new restaurant builds, initiatives in our online and mobile ordering business, and construction costs for our new domestic commissary in Georgia, which is expected to open in 2017.
 

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

See the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 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 25, 2016.

Global Restaurant Unit Data

At September 25, 2016, there were 4,971 Papa John's restaurants operating in all 50 states and in 44 international countries and territories, as follows:

                   

Domestic
Company-
owned

   

Franchised
North
America

   

Total North
America

    International     System-wide

Third Quarter

Beginning - June 26, 2016 734 2,668 3,402 1,533 4,935
Opened 3 25 28 47 75
Closed (1 )     (18 )     (19 )     (20 )     (39 )
Ending - September 25, 2016 736       2,675       3,411       1,560       4,971  
 

Year-to-date

Beginning - December 27, 2015 707 2,681 3,388 1,505 4,893
Opened 10 66 76 117 193
Closed (1 ) (52 ) (53 ) (62 ) (115 )
Acquired (divested) 20       (20 )     -       -       -  
Ending - September 25, 2016 736       2,675       3,411       1,560       4,971  
 
Unit growth (decline) 29       (6 )     23       55       78  
 
% increase (decrease) 4.1 %     (0.2 %)     0.7 %     3.7 %     1.6 %
 

Our development pipeline as of September 25, 2016 included approximately 1,400 restaurants (220 units in North America and 1,180 units internationally), the majority of which are scheduled to open over the next six years.

Item Impacting Comparability - Non-GAAP Presentation

The following table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures, for the nine months ended September 25, 2016 and September 27, 2015:

   
Nine Months Ended
Sept. 25,     Sept. 27,
(In thousands, except per share amounts) 2016 2015
 
Income before income taxes, as reported $ 108,236 $ 80,224
Legal settlement expense   -   12,278
Income before income taxes, as adjusted $ 108,236 $ 92,502
 
Net income, as reported $ 70,190 $ 50,987
Legal settlement expense   -   7,986
Net income, as adjusted $ 70,190 $ 58,973
 
Diluted earnings per share, as reported $ 1.86 $ 1.27
Legal settlement expense   -   0.20
Diluted earnings per share, as adjusted $ 1.86 $ 1.47
 

The 2015 legal settlement expense represents a pre-tax expense of $12.3 million for a collective and class action litigation, Perrin v. Papa John's International, Inc. and Papa John's USA, Inc.

The non-GAAP adjusted results shown above, which exclude the 2015 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

The following table reflects our repurchases for the three and nine months ended September 25, 2016 and subsequent repurchases through October 25, 2016 (in thousands):

       
Period    

Number
of Shares

    Cost
 
Three Months Ended September 25, 2016 180 $ 13,052
 
Nine Months Ended September 25, 2016 1,987 $ 109,407
 
September 26, 2016 through October 25, 2016

56

$

4,377

 

There were 37.4 million and 37.7 million diluted weighted average shares outstanding for the three and nine months ended September 25, 2016, representing decreases of 6.4% and 6.2%, respectively, over the prior year comparable periods. Approximately 36.9 million actual shares of the company's common stock were outstanding as of September 25, 2016.

2016 Guidance

The company provided the following 2016 guidance updates and reaffirmed all other guidance:

       
Updated Guidance Previous Guidance
 
Diluted earnings per share* $2.46 to $2.52 $2.35 to $2.45
 

*The earnings guidance presented excludes any potential impact of a refranchising in 2016 of our Company-owned China market, for which we have previously disclosed our plans to sell, and any related non-operating items.

Conference Call and Website Information

A conference call is scheduled for November 2, 2016 at 10:00 a.m. Eastern Time to review our third quarter 2016 earnings results. The call can be accessed from the company's web page at www.papajohns.com in a listen-only mode, or dial 877-312-8816 (U.S. and Canada) or 253-237-1189 (international). The conference call will be available for replay, including by downloadable podcast, from the company's web site at www.papajohns.com. The Conference ID is 46765499.

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

Forward-Looking Statements

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

These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 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 Nine Months Ended
September 25, 2016     September 27, 2015 September 25, 2016     September 27, 2015
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Domestic company-owned restaurant sales $ 199,041 $ 180,059 $ 608,968 $ 563,308
Domestic franchise royalties and fees 24,776 22,285 76,554 71,185
Domestic commissary and other sales 169,684 159,939 503,623 507,313
International   28,941         27,001     84,856         78,753  
Total revenues 422,442 389,284 1,274,001 1,220,559
 
Costs and expenses:

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

Domestic company-owned restaurant expenses 161,750 148,536 486,529 450,924
Domestic commissary and other expenses 157,552 148,709 466,616 470,254
International expenses 18,594 16,481 53,936 48,209
General and administrative expenses 40,549 37,660 123,419 124,456
Depreciation and amortization   10,614         10,461     30,389         30,638  
Total costs and expenses   389,059         361,847     1,160,889         1,124,481  
 
Operating income 33,383 27,437 113,112 96,078
Legal settlement expense - - - (12,278 )
Net interest expense   (1,756 )       (1,180 )   (4,876 )       (3,576 )
Income before income taxes 31,627 26,257 108,236 80,224
Income tax expense   8,977         7,281     33,423         24,541  
Net income before attribution to noncontrolling interests 22,650 18,976 74,813 55,683
Income attributable to noncontrolling interests   (1,183 )       (1,005 )   (4,623 )       (4,696 )
Net income attributable to the company $ 21,467       $ 17,971   $ 70,190       $ 50,987  
 
Calculation of income for earnings per share:
Net income attributable to the company $ 21,467 $ 17,971 $ 70,190 $ 50,987
Change in noncontrolling interest redemption value (157 ) 49 342 192
Net income attributable to participating securities   (87 )       (73 )   (288 )       (223 )
Net income attributable to common shareholders $ 21,223       $ 17,947   $ 70,244       $ 50,956  
 
Basic earnings per common share $ 0.57       $ 0.46   $ 1.88       $ 1.29  
Diluted earnings per common share $ 0.57       $ 0.45   $ 1.86       $ 1.27  
 
Basic weighted average common shares outstanding   36,989         39,394     37,374         39,640  
Diluted weighted average common shares outstanding   37,359         39,895     37,712         40,210  
 
Dividends declared per common share $ 0.200 $ 0.175 $ 0.550 $ 0.455
 

 
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
       
 
September 25, December 27,
2016 2015
(In thousands) (Unaudited) (Note)
 
Assets
Current assets:
Cash and cash equivalents $ 19,107 $ 21,006
Accounts receivable, net 59,046 63,320
Notes receivable, net 4,269 7,816
Income taxes receivable 701 272
Inventories 24,328 21,564
Prepaid expenses and other current assets 24,217 29,313
Assets held for sale   8,784     9,299
Total current assets 140,452 152,590
 
Property and equipment, net 221,809 214,044
Notes receivable, less current portion, net 9,747 11,105
Goodwill 86,570 79,657
Deferred income taxes 1,428 2,415
Other assets   38,782     34,247
Total assets $ 498,788   $ 494,058
 
 
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 37,302 $ 43,492
Income and other taxes payable 11,909 8,527
Accrued expenses and other current liabilities   73,648     80,918
Total current liabilities 122,859 132,937
 
Deferred revenue 3,772 3,190
Long-term debt, net 311,570 255,146
Deferred income taxes 2,215 4,610
Other long-term liabilities   61,161     47,606
Total liabilities 501,577 443,489
 
Redeemable noncontrolling interests 8,830 8,363
 
Total stockholders' equity (deficit)   (11,619 )   42,206
Total liabilities, redeemable noncontrolling interests and stockholders' equity (deficit) $ 498,788   $ 494,058
 
 

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 25, 2016 September 27, 2015
(Unaudited) (Unaudited)
Operating activities
Net income before attribution to noncontrolling interests $ 74,813 $ 55,683

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

Provision for uncollectible accounts and notes receivable 153 813
Depreciation and amortization 30,389 30,638
Deferred income taxes 4,966 (7,625 )
Stock-based compensation expense 7,525 7,124
Other 2,811 3,268
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 3,867 (1,994 )
Income taxes receivable (429 ) 8,731
Inventories (2,673 ) 2,178
Prepaid expenses and other current assets 5,627 2,400
Other assets and liabilities (3,085 ) 819
Accounts payable (6,290 ) (3,380 )
Income and other taxes payable 3,381 375
Accrued expenses and other current liabilities (6,484 ) 20,508
Deferred revenue   1,411     200  
Net cash provided by operating activities 115,982 119,738
 
Investing activities
Purchases of property and equipment (38,954 ) (26,508 )
Loans issued (2,216 ) (2,497 )
Repayments of loans issued 6,449 3,961
Acquisitions, net of cash acquired (11,202 ) (491 )
Other   193     406  
Net cash used in investing activities (45,730 ) (25,129 )
 
Financing activities
Net proceeds on line of credit facility 56,375 8,549
Cash dividends paid (20,523 ) (17,950 )
Excess tax benefit on equity awards 5,474 9,884
Tax payments for equity award issuances (5,999 ) (10,947 )
Proceeds from exercise of stock options 5,377 4,569
Acquisition of Company common stock (109,407 ) (80,166 )
Contributions from noncontrolling interest holders 120 683
Distributions to noncontrolling interest holders (3,950 ) (4,950 )
Other   481     377  
Net cash used in financing activities (72,052 ) (89,951 )
 
Effect of exchange rate changes on cash and cash equivalents   (99 )   (339 )
Change in cash and cash equivalents (1,899 ) 4,319
Cash and cash equivalents at beginning of period   21,006     20,122  
 
Cash and cash equivalents at end of period $ 19,107   $ 24,441  

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

Source: Papa John's International, Inc.

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