Papa John‘s International, Inc.
PAPA JOHNS INTERNATIONAL INC (Form: 10-Q, Received: 11/01/2016 17:09:31)

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 September 25, 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 October 25, 2016, there were outstanding 36,889,475 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 — September 25, 2016 and December 27, 2015

 

 

 

 

Condensed Consolidated Statements of Income — Three and Nine months ended September 25, 2016 and September 27, 2015

 

 

 

 

Consolidated Statements of Comprehensive Income — Three and Nine months ended September 25, 2016 and September 27, 2015

 

 

 

 

Consolidated Statements of Cash Flows — Nine months ended September 25, 2016 and September 27, 2015

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

Item 2.  

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

15 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

24 

 

 

 

Item 4.  

Controls and Procedures

25 

 

 

 

PART II.  

OTHER INFORMATION

 

 

 

 

Item 1.  

Legal Proceedings

25 

 

 

 

Item 1A.  

Risk Factors

25 

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

26 

 

 

 

Item 6.  

Exhibits

26 

 

 

2

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

    

September 25,

    

December 27,

 

(In thousands, except per share amounts)

 

2016

 

2015

 

 

 

(Unaudited)

 

 

 

 

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

 

 

15,633

 

 

20,372

 

Other current assets

 

 

8,584

 

 

8,941

 

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’ (deficit) equity

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common stock ($0.01 par value per share; issued 44,017 at September 25, 2016 and 43,731 at December 27, 2015)

 

 

440

 

 

437

 

Additional paid-in capital

 

 

167,626

 

 

158,348

 

Accumulated other comprehensive loss

 

 

(9,011)

 

 

(1,836)

 

Retained earnings

 

 

193,798

 

 

143,789

 

Treasury stock (7,227 shares at September 25, 2016 and 5,308 shares at December 27, 2015, at cost)

 

 

(377,481)

 

 

(271,557)

 

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

 

 

(24,628)

 

 

29,181

 

Noncontrolling interests in subsidiaries

 

 

13,009

 

 

13,025

 

Total stockholders’ (deficit) equity

 

 

(11,619)

 

 

42,206

 

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

 

$

498,788

 

$

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

 

Nine Months Ended

 

(In thousands, except per share amounts)

    

September 25, 2016

    

September 27, 2015

    

September 25, 2016

    

September 27, 2015

 

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

 

 

See accompanying notes.

 

 

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Table of Contents

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

(In thousands)

    

September 25, 2016

    

September 27, 2015

    

September 25, 2016

    

September 27, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income before attribution to noncontrolling interests

 

$

22,650

 

$

18,976

 

$

74,813

 

$

55,683

 

Other comprehensive (loss) income, before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(2,038)

 

 

(1,700)

 

 

(5,551)

 

 

(1,125)

 

Interest rate swaps (1)

 

 

210

 

 

(1,386)

 

 

(5,839)

 

 

(2,011)

 

Other comprehensive loss, before tax

 

 

(1,828)

 

 

(3,086)

 

 

(11,390)

 

 

(3,136)

 

Income tax effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

754

 

 

629

 

 

2,054

 

 

416

 

Interest rate swaps (2)

 

 

(78)

 

 

513

 

 

2,160

 

 

744

 

Income tax effect

 

 

676

 

 

1,142

 

 

4,214

 

 

1,160

 

Other comprehensive loss, net of tax

 

 

(1,152)

 

 

(1,944)

 

 

(7,176)

 

 

(1,976)

 

Comprehensive income before attribution to noncontrolling interests

 

 

21,498

 

 

17,032

 

 

67,637

 

 

53,707

 

Comprehensive loss, redeemable noncontrolling interests

 

 

(684)

 

 

(587)

 

 

(2,809)

 

 

(2,915)

 

Comprehensive loss, nonredeemable noncontrolling interests

 

 

(499)

 

 

(418)

 

 

(1,814)

 

 

(1,781)

 

Comprehensive income attributable to the Company

 

$

20,315

 

$

16,027

 

$

63,014

 

$

49,011

 


(1)

Amounts reclassified out of accumulated other comprehensive loss into net interest expense included $296 and $924 for the three and nine months ended September 25, 2016, respectively, and $390 and $1,177 for the three and nine months ended September 27, 2015, respectively.

 

(2)

The income tax effects of amounts reclassified out of accumulated other comprehensive loss into net interest expense were $110 and $342 for the three and nine months ended September 25, 2016, respectively, and $145 and $436 for the three and nine months ended September 27, 2015, respectively.

 

See accompanying notes.

 

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Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

(In thousands)

    

September 25, 2016

    

September 27, 2015

 

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

 

 

4,755

 

 

2,033

 

Other current assets

 

 

872

 

 

367

 

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 from issuance of long-term debt

 

 

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)

 

Distributions to noncontrolling interest holders

 

 

(3,830)

 

 

(4,267)

 

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

 

 

See accompanying notes.

 

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Table of Contents

Papa John’s International, Inc. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

September 25, 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 nine months ended September 25, 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 September 25, 2016 and 208 restaurants at September 27, 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 nine months ended September 25, 2016 and September 27, 2015 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 25,

 

September 27,

 

September 25,

 

September 27,

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Papa John’s International, Inc.

 

$

1,879

 

$

1,570

 

$

7,168

 

$

7,240

 

Noncontrolling interests

 

 

1,183

 

 

1,005

 

 

4,623

 

 

4,696

 

Total income before income taxes

 

$

3,062

 

$

2,575

 

$

11,791

 

$

11,936

 

 

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The following summarizes the redemption feature, location and related accounting within the condensed consolidated balance sheets for these joint venture arrangements:

 

 

 

 

 

 

 

    

 

    

 

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 September 25, 2016, we had a net deferred tax liability of approximately $800,000.

 

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 September 25, 2016 and December 27, 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Fair Value Measurements

 

 

    

Value

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 25, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash surrender value of life insurance policies (a)

 

$

21,451

 

$

21,451

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (b)

 

 

8,130

 

 

 —

 

 

8,130

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 nine months ended September 25, 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 Contracts 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 existing 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 (“ASC”) 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

 

Nine Months Ended

 

 

 

September 25,

 

September 27,

 

September 25,

 

September 27,

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

36,989

 

 

39,394

 

 

37,374

 

 

39,640

 

Basic earnings per common share

 

$

0.57

 

$

0.46

 

$

1.88

 

$

1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

21,223

 

$

17,947

 

$

70,244

 

$

50,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

36,989

 

 

39,394

 

 

37,374

 

 

39,640

 

Dilutive effect of outstanding equity awards (a)

 

 

370

 

 

501

 

 

338

 

 

570

 

Diluted weighted average common shares outstanding

 

 

37,359

 

 

39,895

 

 

37,712

 

 

40,210

 

Diluted earnings per common share

 

$

0.57

 

$

0.45

 

$

1.86

 

$

1.27

 


(a) Excludes 22 and 598 awards for the three and nine months ended September 25, 2016, respectively, and 219 and 234 awards for the three and nine months ended September 27, 2015, respectively, 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. 

 

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5. Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

September 25,

 

 

December 27,

 

 

 

 

2016

 

 

2015

Outstanding debt

 

 

$

312,375

 

$

256,000

Debt issuance costs

 

 

 

(805)

 

 

(854)

Total long-term debt, net

 

 

$

311,570

 

$

255,146

 

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 $162.4 million as of September 25, 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 September 25, 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 due to the possible failure of the counterparty to perform under the terms of the derivative contract.

 

As of September 25, 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 September 25, 2016 and September 27, 2015, respectively, and 2.1% and 2.0% for the nine months ended September 25, 2016 and September 27, 2015, respectively. Interest paid, including payments made or received under the swaps, was $1.9 million and $1.3 million for the three months ended September 25, 2016 and September 27, 2015, respectively, and $5.3 million and $3.9 million for the nine months ended September 25, 2016 and September 27, 2015, respectively. As of September 25, 2016, the portion of the aggregate $8.1 million interest rate swap liability that would be reclassified into earnings during the next twelve months as interest expense approximates $800,000.

 

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

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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 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.

 

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Our segment information is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 25, 2016

    

September 27, 2015

    

September 25, 2016

    

September 27, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

$

199,041

 

$

180,059

 

$

608,968

 

$

563,308

 

Domestic commissaries

 

 

155,208

 

 

145,863

 

 

462,057

 

 

457,203

 

North America franchising

 

 

24,776

 

 

22,285

 

 

76,554

 

 

71,185

 

International

 

 

28,941

 

 

27,001

 

 

84,856

 

 

78,753

 

All others

 

 

14,476

 

 

14,076

 

 

41,566

 

 

50,110

 

Total revenues from external customers

 

$

422,442

 

$

389,284

 

$

1,274,001

 

$

1,220,559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intersegment revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic commissaries

 

$

59,811

 

$

53,398

 

$

175,859

 

$

165,744

 

North America franchising

 

 

688

 

 

643

 

 

2,140

 

 

1,985

 

International

 

 

64

 

 

73

 

 

196

 

 

223

 

All others

 

 

4,129

 

 

3,833

 

 

12,301

 

 

11,459

 

Total intersegment revenues

 

$

64,692

 

$

57,947

 

$

190,496

 

$

179,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

$

11,576

 

$

8,088

 

$

47,088

 

$

41,185

 

Domestic commissaries

 

 

11,311

 

 

10,192

 

 

34,539

 

 

32,694

 

North America franchising

 

 

21,856

 

 

19,172

 

 

67,881

 

 

61,545

 

International

 

 

3,083

 

 

3,184