Papa John‘s International, Inc.
PAPA JOHNS INTERNATIONAL INC (Form: 10-Q, Received: 08/02/2016 17:13:31)

Table of Contents

 

 

 

C:/USERS/JENNIFER_MCALLISTER/DESKTOP/PJ_SECONDARY_LOGO_CMYK.JPG

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 26, 2016

 

OR

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number:  0-21660

 

PAPA JOHN’S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

    

61-1203323

(State or other jurisdiction of

 

(I.R.S. Employer Identification

incorporation or organization)

 

number)

 

2002 Papa Johns Boulevard

Louisville, Kentucky 40299-2367

(Address of principal executive offices)

 

(502) 261-7272

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

At July 26, 2016, there were outstanding 36,984,132   shares of the registrant’s common stock, par value $0.01 per share.

 

 

 


 

Table of Contents

INDEX

 

 

 

Page No.

 

 

 

PART I.  

FINANCIAL INFORMATION

 

 

 

 

Item 1.  

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets — June 26, 2016 and December 27, 2015

 

 

 

 

Condensed Consolidated Statements of Income — Three and Six Months Ended June 26, 2016 and June 28, 2015

 

 

 

 

Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 26, 2016 and June 28, 2015

 

 

 

 

Consolidated Statements of Cash Flows — Six Months Ended June 26, 2016 and June 28, 2015

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

22 

 

 

 

Item 4.  

Controls and Procedures

24 

 

 

 

PART II.  

OTHER INFORMATION

 

 

 

 

Item 1.  

Legal Proceedings

24 

 

 

 

Item 1A.  

Risk Factors

24 

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

24 

 

 

 

Item 6.  

Exhibits

25 

 

 

2

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

    

June 26,

    

December 27,

 

(In thousands, except per share amounts)

 

2016

 

2015

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,266

 

$

21,006

 

Accounts receivable, net

 

 

56,357

 

 

63,320

 

Notes receivable, net

 

 

4,715

 

 

7,816

 

Income taxes receivable

 

 

744

 

 

272

 

Inventories

 

 

22,531

 

 

21,564

 

Prepaid expenses

 

 

17,841

 

 

20,372

 

Other current assets

 

 

8,148

 

 

8,941

 

Assets held for sale

 

 

8,823

 

 

9,299

 

Total current assets

 

 

134,425

 

 

152,590

 

Property and equipment, net

 

 

217,528

 

 

214,044

 

Notes receivable, less current portion, net

 

 

9,906

 

 

11,105

 

Goodwill

 

 

87,266

 

 

79,657

 

Deferred income taxes

 

 

1,713

 

 

2,415

 

Other assets

 

 

36,385

 

 

34,247

 

Total assets

 

$

487,223

 

$

494,058

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ (deficit) equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

34,928

 

$

43,492

 

Income and other taxes payable

 

 

12,231

 

 

8,527

 

Accrued expenses and other current liabilities

 

 

68,887

 

 

80,918

 

Total current liabilities

 

 

116,046

 

 

132,937

 

Deferred revenue

 

 

3,965

 

 

3,190

 

Long-term debt, net

 

 

316,484

 

 

255,146

 

Deferred income taxes

 

 

2,002

 

 

4,610

 

Other long-term liabilities

 

 

58,019

 

 

47,606

 

Total liabilities

 

 

496,516

 

 

443,489

 

Redeemable noncontrolling interests

 

 

7,989

 

 

8,363

 

 

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

 

Preferred stock ($0.01 par value per share; no shares issued)

 

 

 —

 

 

 —

 

Common stock ($0.01 par value per share; issued 43,940 at June 26, 2016 and 43,731 at December 27, 2015)

 

 

440

 

 

437

 

Additional paid-in capital

 

 

161,849

 

 

158,348

 

Accumulated other comprehensive loss

 

 

(7,850)

 

 

(1,836)

 

Retained earnings

 

 

179,882

 

 

143,789

 

Treasury stock (7,054 shares at June 26, 2016 and 5,308 shares at December 27, 2015, at cost)

 

 

(364,742)

 

 

(271,557)

 

Total stockholders’ (deficit) equity, net of noncontrolling interests

 

 

(30,421)

 

 

29,181

 

Noncontrolling interests in subsidiaries

 

 

13,139

 

 

13,025

 

Total stockholders’ (deficit) equity

 

 

(17,282)

 

 

42,206

 

Total liabilities, redeemable noncontrolling interests and stockholders’ (deficit) equity

 

$

487,223

 

$

494,058

 

 

 

See accompanying notes.

3

 


 

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended

 

Six Months Ended

 

(In thousands, except per share amounts)

    

June 26, 2016

    

June 28, 2015

    

June 26, 2016

    

June 28, 2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurant sales

 

$

204,248

 

$

185,962

 

$

409,927

 

$

383,249

 

Domestic franchise royalties and fees

 

 

25,302

 

 

23,276

 

 

51,778

 

 

48,900

 

Domestic commissary and other sales

 

 

164,954

 

 

163,427

 

 

333,939

 

 

347,374

 

International

 

 

28,460

 

 

26,326

 

 

55,915

 

 

51,752

 

Total revenues

 

 

422,964

 

 

398,991

 

 

851,559

 

 

831,275

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurant expenses

 

 

163,469

 

 

147,356

 

 

324,779

 

 

302,388

 

Domestic commissary and other expenses

 

 

152,258

 

 

151,206

 

 

309,064

 

 

321,545

 

International expenses

 

 

17,752

 

 

16,250

 

 

35,342

 

 

31,728

 

General and administrative expenses

 

 

42,623

 

 

43,047

 

 

82,870

 

 

86,796

 

Depreciation and amortization

 

 

10,031

 

 

10,136

 

 

19,775

 

 

20,177

 

Total costs and expenses

 

 

386,133

 

 

367,995

 

 

771,830

 

 

762,634

 

Operating income

 

 

36,831

 

 

30,996

 

 

79,729

 

 

68,641

 

Legal settlement expense

 

 

 —

 

 

(12,278)

 

 

 —

 

 

(12,278)

 

Net interest expense

 

 

(1,631)

 

 

(1,187)

 

 

(3,120)

 

 

(2,396)

 

Income before income taxes

 

 

35,200

 

 

17,531

 

 

76,609

 

 

53,967

 

Income tax expense

 

 

11,088

 

 

5,063

 

 

24,446

 

 

17,260

 

Net income before attribution to noncontrolling interests

 

 

24,112

 

 

12,468

 

 

52,163

 

 

36,707

 

Income attributable to noncontrolling interests

 

 

(1,571)

 

 

(1,688)

 

 

(3,440)

 

 

(3,691)

 

Net income attributable to the Company

 

$

22,541

 

$

10,780

 

$

48,723

 

$

33,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Calculation of income for earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

 

$

22,541

 

$

10,780

 

$

48,723

 

$

33,016

 

Change in noncontrolling interest redemption value

 

 

279

 

 

73

 

 

499

 

 

143

 

Net income attributable to participating securities

 

 

(91)

 

 

(50)

 

 

(201)

 

 

(150)

 

Net income attributable to common shareholders

 

$

22,729

 

$

10,803

 

$

49,021

 

$

33,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.61

 

$

0.27

 

$

1.30

 

$

0.83

 

Diluted earnings per common share

 

$

0.61

 

$

0.27

 

$

1.29

 

$

0.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

37,203

 

 

39,692

 

 

37,567

 

 

39,764

 

Diluted weighted average common shares outstanding

 

 

37,507

 

 

40,217

 

 

37,904

 

 

40,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.175

 

$

0.140

 

$

0.350

 

$

0.280

 

 

See accompanying notes.

 

 

4

 


 

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

(In thousands)

    

June 26, 2016

    

June 28, 2015

    

June 26, 2016

    

June 28, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income before attribution to noncontrolling interests

 

$

24,112

 

$

12,468

 

$

52,163

 

$

36,707

 

Other comprehensive (loss) income, before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,441)

 

 

2,116

 

 

(3,513)

 

 

575

 

Interest rate swaps (1)

 

 

(2,760)

 

 

459

 

 

(6,049)

 

 

(625)

 

Other comprehensive (loss) income, before tax

 

 

(4,201)

 

 

2,575

 

 

(9,562)

 

 

(50)

 

Income tax effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

533

 

 

(783)

 

 

1,300

 

 

(213)

 

Interest rate swaps (2)

 

 

1,021

 

 

(170)

 

 

2,238

 

 

231

 

Income tax effect

 

 

1,554

 

 

(953)

 

 

3,538

 

 

18

 

Other comprehensive (loss) income, net of tax

 

 

(2,647)

 

 

1,622

 

 

(6,024)

 

 

(32)

 

Comprehensive income before attribution to noncontrolling interests

 

 

21,465

 

 

14,090

 

 

46,139

 

 

36,675

 

Comprehensive loss, redeemable noncontrolling interests

 

 

(881)

 

 

(1,015)

 

 

(2,125)

 

 

(2,328)

 

Comprehensive loss, nonredeemable noncontrolling interests

 

 

(690)

 

 

(673)

 

 

(1,315)

 

 

(1,363)

 

Comprehensive income attributable to the Company

 

$

19,894

 

$

12,402

 

$

42,699

 

$

32,984

 


(1)

Amounts reclassified out of accumulated other comprehensive loss into net interest expense included $311 and $628 for the three and six months ended June 26, 2016, respectively and $393 and $787 for the three and six months ended June 28, 2015.

 

(2)

The income tax effects of amounts reclassified out of accumulated other comprehensive loss into net interest expense were $115 and $232 for the three and six months ended June 26, 2016, respectively and $145 and $291 for the three and six months ended June 28, 2015, respectively.

 

See accompanying notes.

 

5

 


 

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

(In thousands)

    

June 26, 2016

    

June 28, 2015

 

Operating activities

 

 

 

 

 

 

 

Net income before attribution to noncontrolling interests

 

$

52,163

 

$

36,707

 

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

 

 

 

 

 

 

 

Provision for uncollectible accounts and notes receivable

 

 

247

 

 

631

 

Depreciation and amortization

 

 

19,775

 

 

20,177

 

Deferred income taxes

 

 

3,786

 

 

(3,064)

 

Stock-based compensation expense

 

 

4,893

 

 

4,985

 

Other

 

 

1,883

 

 

2,239

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

6,680

 

 

1,682

 

Income taxes receivable

 

 

(472)

 

 

(1,281)

 

Inventories

 

 

(877)

 

 

3,474

 

Prepaid expenses

 

 

2,548

 

 

999

 

Other current assets

 

 

1,269

 

 

293

 

Other assets and liabilities

 

 

(1,724)

 

 

(773)

 

Accounts payable

 

 

(8,654)

 

 

(3,877)

 

Income and other taxes payable

 

 

3,703

 

 

72

 

Accrued expenses and other current liabilities

 

 

(11,425)

 

 

15,495

 

Deferred revenue

 

 

1,328

 

 

223

 

Net cash provided by operating activities

 

 

75,123

 

 

77,982

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(24,001)

 

 

(16,501)

 

Loans issued

 

 

(1,630)

 

 

(1,571)

 

Repayments of loans issued

 

 

5,382

 

 

2,787

 

Acquisitions, net of cash acquired

 

 

(11,202)

 

 

(491)

 

Other

 

 

165

 

 

348

 

Net cash used in investing activities

 

 

(31,286)

 

 

(15,428)

 

 

Financing activities

 

 

 

 

 

 

 

Net proceeds from issuance of long-term debt

 

 

61,375

 

 

3,549

 

Cash dividends paid

 

 

(13,130)

 

 

(11,083)

 

Excess tax benefit on equity awards

 

 

4,490

 

 

9,488

 

Tax payments for equity award issuances

 

 

(5,831)

 

 

(10,654)

 

Proceeds from exercise of stock options

 

 

2,812

 

 

3,915

 

Acquisition of Company common stock

 

 

(96,355)

 

 

(52,083)

 

Distributions to noncontrolling interest holders

 

 

(3,200)

 

 

(3,667)

 

Other

 

 

391

 

 

319

 

Net cash used in financing activities

 

 

(49,448)

 

 

(60,216)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(129)

 

 

(13)

 

Change in cash and cash equivalents

 

 

(5,740)

 

 

2,325

 

Cash and cash equivalents at beginning of period

 

 

21,006

 

 

20,122

 

Cash and cash equivalents at end of period

 

$

15,266

 

$

22,447

 

 

See accompanying notes.

 

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Table of Contents

Papa John’s International, Inc. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

June 26, 2016

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 26, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ended December 25, 2016. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first person notations of “we”, “us” and “our”) for the year ended December 27, 2015.

 

2. Significant Accounting Policies

 

Noncontrolling Interests

 

Papa John’s has four joint venture arrangements in which there are noncontrolling interests held by third parties. These joint ventures include 215 restaurants at June 26, 2016 and 206 restaurants at June 28, 2015. We are required to report the consolidated net income at amounts attributable to the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the condensed consolidated statements of income attributable to the noncontrolling interest holder.

 

The income before income taxes attributable to these joint ventures for the three and six months ended June 26, 2016 and June 28, 2015 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

    

Three Months Ended

 

Six Months Ended

 

 

 

June 26,

 

June 28,

 

June 26,

 

June 28,

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Papa John’s International, Inc.

 

$

2,529

 

$

2,660

 

$

5,289

 

$

5,670

 

Noncontrolling interests

 

 

1,571

 

 

1,688

 

 

3,440

 

 

3,691

 

Total income before income taxes

 

$

4,100

 

$

4,348

 

$

8,729

 

$

9,361

 

 

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The following summarizes the redemption feature, location and related accounting within the condensed consolidated balance sheets:

 

 

 

 

 

 

 

    

 

    

 

Type of Joint Venture Arrangement

    

Location within the Condensed Consolidated Balance Sheets

    

Recorded Value

 

 

 

 

 

Joint venture with no redemption feature

 

Permanent equity

 

Carrying value

Option to require the Company to purchase their interest - currently redeemable

 

Temporary equity

 

Redemption value*

Option to require the Company to purchase their interest - not currently redeemable

 

Temporary equity

 

Carrying value

 

 

 

 

 


*The change in redemption value is recorded as an adjustment to “Redeemable noncontrolling interests” and “Retained earnings” in the condensed consolidated balance sheets.

 

Deferred Income Tax Accounts and Tax Reserves

 

We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. Discrete items are recorded in the quarter in which they occur.

 

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. As a result, our effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. As of June 26, 2016, we had a net deferred tax liability of approximately $300,000.

 

Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues on a quarterly basis to adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures.

 

Fair Value Measurements and Disclosures

 

The Company is required to determine the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Fair value is a market-based measurement, not an entity specific measurement. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash, accounts receivable and accounts payable. The carrying value of our notes receivable net of allowances also approximates fair value. The fair value of the amount outstanding under our revolving credit facility approximates its carrying value due to its variable market-based interest rate. These assets and liabilities are categorized as Level 1 as defined below.

 

Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following categories:

 

·

Level 1: Quoted market prices in active markets for identical assets or liabilities.

·

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

·

Level 3: Unobservable inputs that are not corroborated by market data.

 

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Our financial assets and liabilities that were measured at fair value on a recurring basis as of June 26, 2016 and December 27, 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Fair Value Measurements

 

 

    

Value

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 26, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash surrender value of life insurance policies (a)

 

$

19,838

 

$

19,838

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (b)

 

 

8,331

 

 

 —

 

 

8,331

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 27, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash surrender value of life insurance policies (a)

 

$

17,916

 

$

17,916

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (b)

 

 

2,262

 

 

 —

 

 

2,262

 

 

 —

 


(a)

Represents life insurance policies held in our non-qualified deferred compensation plan.

(b)

The fair value of our interest rate swaps are based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swaps, as well as considering published discount factors, and projected London Interbank Offered Rates (“LIBOR”).

 

There were no transfers among levels within the fair value hierarchy during the six months ended June 26, 2016.

 

Variable Interest Entity

 

Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants. PJMF is a variable interest entity as it does not have sufficient equity to fund its operations without ongoing financial support and contributions from its members. Based on the ownership and governance structure and operating procedures of PJMF, we have determined that we do not have the power to direct the most significant activities of PJMF and therefore are not the primary beneficiary. Accordingly, consolidation of PJMF is not appropriate.

 

Accounting Standards Adopted

 

Deferred Debt Issuance Costs

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03 “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The update requires that deferred debt issuance costs be reported as a reduction to long-term debt (previously reported in other noncurrent assets). We adopted ASU 2015-03 in the first quarter of 2016 and for all retrospective periods, as required. The impact of the adoption was not material to our condensed consolidated financial statements. See Debt Footnote for more details.

 

Accounting Standards to be Adopted in Future Periods

 

Employee Share-Based Payments

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax

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withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for the Company beginning in fiscal 2017, with early application permitted. Based on the significance of our employee stock compensation program, we expect the adoption could have a material impact to our condensed consolidated statements of income. 

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, “Leases,” (“ASU 2016-02”) which amends leasing guidance by requiring companies to recognize a right-of-use asset and a lease liability for all operating and capital leases (financing) with lease terms greater than twelve months.  The lease liability will be equal to the present value of lease payments. The lease asset will be based on the lease liability, subject to adjustment, such as for initial direct costs.  For income statement purposes, leases will continue to be classified as operating or capital (financing) with lease expense in both cases calculated substantially the same as under the prior leasing guidance. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 (fiscal 2019 for the Company), and early adoption is permitted.  The Company has not yet determined the effect of the adoption on its condensed consolidated financial statements.

 

Revenue from Contract with Customers

 

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. This update requires companies to recognize revenue at amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services at the time of transfer. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. Such estimates may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Companies can either apply a full retrospective adoption or a modified retrospective adoption.

 

We are required to adopt ASU 2014-09 in the first quarter of 2018. We are currently evaluating the method of adoption and impact of the new requirements on our condensed consolidated financial statements. We currently do not believe the impact will be significant.

 

Reclassifications

 

Certain prior year captions have been combined in the condensed consolidated statement of income and certain amounts within the consolidated statement of cash flows have been reclassified to conform to the current year presentation.

 

3. Calculation of Earnings Per Share

 

We compute earnings per share using the two-class method. The two-class method requires an earnings allocation formula that determines earnings per share for common shareholders and participating security holders according to dividends declared and participating rights in undistributed earnings. We consider time-based restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights. Under the two-class method, undistributed earnings allocated to participating securities are subtracted from net income attributable to the Company in determining net income attributable to common shareholders.

 

Additionally, in accordance with Accounting Standards Codification 480, “Distinguishing Liabilities from Equity”, the change in the redemption value for the noncontrolling interest of one of our joint ventures increases or decreases income attributable to common shareholders.

 

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The calculations of basic and diluted earnings per common share are as follows (in thousands, except per-share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 26,

 

June 28,

 

June 26,

 

June 28,

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

 

$

22,541

 

$

10,780

 

$

48,723

 

$

33,016

 

Change in noncontrolling interest redemption value

 

 

279

 

 

73

 

 

499

 

 

143

 

Net income attributable to participating securities

 

 

(91)

 

 

(50)

 

 

(201)

 

 

(150)

 

Net income attributable to common shareholders

 

$

22,729

 

$

10,803

 

$

49,021

 

$

33,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

37,203

 

 

39,692

 

 

37,567

 

 

39,764

 

Basic earnings per common share

 

$

0.61

 

$

0.27

 

$

1.30

 

$

0.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

22,729

 

$

10,803

 

$

49,021

 

$

33,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

37,203

 

 

39,692

 

 

37,567

 

 

39,764

 

Dilutive effect of outstanding equity awards (a)

 

 

304

 

 

525

 

 

337

 

 

604

 

Diluted weighted average common shares outstanding

 

 

37,507

 

 

40,217

 

 

37,904

 

 

40,368

 

Diluted earnings per common share

 

$

0.61

 

$

0.27

 

$

1.29

 

$

0.82

 


(a) Excludes 689 and 566 awards for the three and six months ended June 26, 2016 and 292 and 198 awards for the three and six months ended June 28, 2015, as the effect of including such awards would have been antidilutive.

 

4. Acquisition of Restaurants

 

In the first quarter of 2016, we completed the acquisition of 20 franchised Papa John’s restaurants located in Alabama, Florida and Kentucky in two separate transactions with an aggregate purchase price of $11.2 million. These acquisitions were accounted for by the purchase method of accounting, whereby operating results subsequent to the acquisition date are included in our consolidated financial results.

 

The aggregate purchase price of the acquisitions has been allocated as follows (in thousands):

 

 

 

 

 

 

Property and equipment

 

$

1,028

 

Franchise rights

 

 

1,230

 

Goodwill

 

 

8,837

 

Other

 

 

107

 

Total purchase price

 

$

11,202

 

 

The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill for the domestic Company-owned restaurants segment and is eligible for deduction over 15 years under U.S. tax regulations. 

 

5. Debt

 

Long-term debt consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

June 26,

 

 

December 27,

 

 

 

 

2016

 

 

2015

Outstanding debt

 

 

$

317,375

 

$

256,000

Debt issuance costs

 

 

 

(891)

 

 

(854)

Total long-term debt

 

 

$

316,484

 

$

255,146

 

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Our outstanding debt is comprised entirely of an unsecured revolving line of credit (“Credit Facility”) with an expiration date of October 31, 2019. On June 8, 2016, we exercised our option to increase the amount available under our Credit Facility to $500 million from the previous $400 million availability.  Including outstanding letters of credit, the remaining availability under the Credit Facility was approximately $157.7 million as of June 26, 2016.

 

The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points.

 

The Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At June 26, 2016, we were in compliance with these covenants.

 

We attempt to minimize interest risk exposure by fixing our rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions and have reset dates and critical terms that match those of our existing debt and the anticipated critical terms of future debt. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract.

 

As of June 26, 2016, we have the following interest rate swap agreements, including three forward starting swaps executed in 2015 that become effective in 2018 upon expiration of the two existing swaps for $125 million:

 

 

 

 

 

 

 

 

 

Effective Dates

    

Floating Rate Debt

    

Fixed Rates

 

July 30, 2013 through April 30, 2018

 

$

75

million  

 

1.42

%

December 30, 2014 through April 30, 2018

 

$

50

million  

 

1.36

%

April 30, 2018 through April 30, 2023

 

$

55

million  

 

2.33

%

April 30, 2018 through April 30, 2023

 

$

35

million  

 

2.36

%

April 30, 2018 through April 30, 2023

 

$

35

million  

 

2.34

%

 

The weighted average interest rates on the Credit Facility, including the impact of the interest rate swap agreements, were 2.1% and 2.0% for the three months ended June 26, 2016 and June 28, 2015, respectively, and 2.1% and 2.0% for the six months ended June 26, 2016 and June 28, 2015, respectively. Interest paid, including payments made or received under the swaps, was $1.8 million and $1.3 million for the three months ended June 26, 2016 and June 28, 2015, respectively, and $3.4 million and $2.6 million for the six months ended June 26, 2016 and June 28, 2015, respectively. As of June 26, 2016, the portion of the $8.3 million interest rate swap liability that would be reclassified into earnings during the next twelve months as interest expense approximates $1.0 million.

 

6. Segment Information

 

We have five reportable segments: domestic Company-owned restaurants, domestic commissaries, North America franchising, international operations and “all other” units. The domestic Company-owned restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States) Company-owned restaurants and derives its revenues principally from retail sales of pizza and side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. The domestic commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants. The North America franchising segment consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and collection of royalties from our franchisees located in the United States and Canada. The international operations segment principally consists of Company-owned restaurants in China and distribution sales to franchised Papa John’s restaurants located in the United Kingdom, Mexico and China and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. International franchisees are defined as all franchise operations outside of the United States and Canada. All other business units that do not meet the quantitative thresholds for determining reportable segments, which are not operating segments, we refer to as our “all other” segment, which consists of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of

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printing and promotional items, risk management services, and information systems and related services used in restaurant operations, including our point-of-sale system, online and other technology-based ordering platforms.

 

Generally, we evaluate performance and allocate resources based on profit or loss from operations before income taxes and intercompany eliminations. Certain administrative and capital costs are allocated to segments based upon predetermined rates or actual estimated resource usage. We account for intercompany sales and transfers as if the sales or transfers were to third parties and eliminate the activity in consolidation.

 

Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our consolidated revenues.

 

Our segment information is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

June 26, 2016

    

June 28, 2015

    

June 26, 2016

    

June 28, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

$

204,248

 

$

185,962

 

$

409,927

 

$

383,249

 

Domestic commissaries

 

 

150,895

 

 

149,007

 

 

306,849

 

 

311,340

 

North America franchising

 

 

25,302

 

 

23,276

 

 

51,778

 

 

48,900

 

International

 

 

28,460

 

 

26,326

 

 

55,915

 

 

51,752

 

All others

 

 

14,059

 

 

14,420

 

 

27,090

 

 

36,034

 

Total revenues from external customers

 

$

422,964

 

$

398,991

 

$

851,559

 

$

831,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intersegment revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic commissaries

 

$

57,722

 

$

54,459

 

$

116,048

 

$

112,346

 

North America franchising

 

 

739

 

 

671

 

 

1,452

 

 

1,342

 

International

 

 

67

 

 

75

 

 

132

 

 

150

 

All others

 

 

4,075

 

 

3,694

 

 

8,172

 

 

7,626

 

Total intersegment revenues

 

$

62,603

 

$

58,899

 

$

125,804

 

$

121,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

$

15,325

 

$

14,617

 

$

35,512

 

$

33,097

 

Domestic commissaries

 

 

11,682

 

 

10,702

 

 

23,228

 

 

22,502

 

North America franchising

 

 

22,445

 

 

20,054

 

 

46,025

 

 

42,373

 

International

 

 

2,875

 

 

2,279

 

 

5,913

 

 

3,623

 

All others

 

 

425

 

 

(117)

 

 

476

 

 

326

 

Unallocated corporate expenses

 

 

(17,079)

 

 

(29,949)

 

 

(33,411)

 

 

(47,154)

 

Elimination of intersegment profit

 

 

(473)

 

 

(55)

 

 

(1,134)

 

 

(800)

 

Total income before income taxes

 

$

35,200

 

$

17,531

 

$

76,609

 

$

53,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

$

227,023

 

 

 

 

 

 

 

 

 

 

Domestic commissaries

 

 

112,666

 

 

 

 

 

 

 

 

 

 

International

 

 

16,854

 

 

 

 

 

 

 

 

 

 

All others

 

 

50,949

 

 

 

 

 

 

 

 

 

 

Unallocated corporate assets

 

 

186,922

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation and amortization

 

 

(376,886)

 

 

 

 

 

 

 

 

 

 

Net property and equipment

 

$

217,528

 

 

 

 

 

 

 

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) began operations in 1984. At June 26, 2016, there were 4,935 Papa John’s restaurants (776 Company-owned and 4,159 franchised) operating in all 50 states and 43 international countries and territories. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, printing and promotional items, risk management services, and information systems and related services used in their operations.

 

The results of operations are based on the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of consolidated financial statements requires management to select accounting policies for critical accounting areas and make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact our operating results. See “Notes 1 and 2” of “Notes to Condensed Consolidated Financial Statements” for a discussion of the basis of presentation and the significant accounting policies.

 

Restaurant Progression

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Six Months Ended

 

 

 

June 26, 2016

 

June 28, 2015

 

June 26, 2016

 

June 28, 2015