Papa John‘s International, Inc.
PAPA JOHNS INTERNATIONAL INC (Form: 10-Q, Received: 10/31/2017 17:08:26)

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 24, 2017

 

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 John’s 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒

    

Accelerated filer ☐

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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 24, 2017, there were outstanding 35,042,057 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 24, 2017 and December 25, 2016

3

 

 

 

 

Condensed Consolidated Statements of Income — Three and Nine months ended September 24, 2017 and September 25, 2016

4

 

 

 

 

Consolidated Statements of Comprehensive Income — Three and Nine months ended September 24, 2017 and September 25, 2016

5

 

 

 

 

Consolidated Statements of Cash Flows — Nine months ended September 24, 2017 and September 25, 2016

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.  

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

15

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4.  

Controls and Procedures

23

 

 

 

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

 

 

 

 

 

 

 

 

 

    

September 24,

    

December 25,

(In thousands, except per share amounts)

 

2017

 

2016

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,543

 

$

15,563

Accounts receivable, net

 

 

63,266

 

 

59,691

Notes receivable, net

 

 

3,829

 

 

3,417

Income taxes receivable

 

 

577

 

 

2,372

Inventories

 

 

28,369

 

 

25,132

Prepaid expenses

 

 

14,846

 

 

24,105

Other current assets

 

 

8,885

 

 

9,038

Assets held for sale

 

 

8,274

 

 

6,257

Total current assets

 

 

167,589

 

 

145,575

Property and equipment, net

 

 

236,812

 

 

230,473

Notes receivable, less current portion, net

 

 

10,921

 

 

10,141

Goodwill

 

 

86,825

 

 

85,529

Deferred income taxes

 

 

289

 

 

769

Other assets

 

 

48,492

 

 

40,078

Total assets

 

$

550,928

 

$

512,565

 

 

 

 

 

 

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

38,235

 

$

42,701

Income and other taxes payable

 

 

10,443

 

 

8,540

Accrued expenses and other current liabilities

 

 

69,376

 

 

76,789

     Current portion of long-term debt

 

 

20,000

 

 

 —

Total current liabilities

 

 

138,054

 

 

128,030

Deferred revenue

 

 

2,987

 

 

3,313

Long-term debt, less current portion, net

 

 

378,548

 

 

299,820

Deferred income taxes

 

 

11,823

 

 

10,047

Other long-term liabilities

 

 

58,898

 

 

53,093

Total liabilities

 

 

590,310

 

 

494,303

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

6,434

 

 

8,461

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

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

 

 

 —

 

 

 —

Common stock ($0.01 par value per share; issued 44,214 at September 24, 2017 and 44,066 at December 25, 2016)

 

 

442

 

 

441

Additional paid-in capital

 

 

182,212

 

 

172,573

Accumulated other comprehensive loss

 

 

(4,230)

 

 

(5,887)

Retained earnings

 

 

271,601

 

 

219,278

Treasury stock (8,905 shares at September 24, 2017 and 7,383 shares at December 25, 2016, at cost)

 

 

(509,323)

 

 

(390,316)

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

 

 

(59,298)

 

 

(3,911)

Noncontrolling interests in subsidiaries

 

 

13,482

 

 

13,712

Total stockholders’ equity (deficit) 

 

 

(45,816)

 

 

9,801

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

 

$

550,928

 

$

512,565

 

 

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

 

September 24,

 

September 25,

 

September 24,

 

September 25,

(In thousands, except per share amounts)

2017

    

2016

    

2017

    

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurant sales

$

196,267

 

$

199,041

 

$

605,919

 

$

608,968

North America franchise royalties and fees

 

25,567

 

 

24,776

 

 

79,762

 

 

76,554

North America commissary and other sales

 

178,083

 

 

169,684

 

 

539,532

 

 

503,623

International

 

31,792

 

 

28,941

 

 

90,540

 

 

84,856

Total revenues

 

431,709

 

 

422,442

 

 

1,315,753

 

 

1,274,001

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurant expenses

 

161,867

 

 

161,750

 

 

489,719

 

 

486,529

North America commissary and other expenses

 

168,031

 

 

157,552

 

 

504,732

 

 

466,616

International expenses

 

19,785

 

 

18,594

 

 

57,257

 

 

53,936

General and administrative expenses

 

37,330

 

 

40,549

 

 

117,340

 

 

123,419

Depreciation and amortization

 

11,181

 

 

10,614

 

 

32,292

 

 

30,389

Total costs and expenses

 

398,194

 

 

389,059

 

 

1,201,340

 

 

1,160,889

Operating income

 

33,515

 

 

33,383

 

 

114,413

 

 

113,112

Net interest expense

 

(2,566)

 

 

(1,756)

 

 

(6,135)

 

 

(4,876)

Income before income taxes

 

30,949

 

 

31,627

 

 

108,278

 

 

108,236

Income tax expense

 

8,280

 

 

8,977

 

 

30,728

 

 

33,423

Net income before attribution to noncontrolling interests

 

22,669

 

 

22,650

 

 

77,550

 

 

74,813

Income attributable to noncontrolling interests

 

(852)

 

 

(1,183)

 

 

(3,767)

 

 

(4,623)

Net income attributable to the Company

$

21,817

 

$

21,467

 

$

73,783

 

$

70,190

 

 

 

 

 

 

 

 

 

 

 

 

Calculation of income for earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

$

21,817

 

$

21,467

 

$

73,783

 

$

70,190

Change in noncontrolling interest redemption value

 

237

 

 

(157)

 

 

1,419

 

 

342

Net income attributable to participating securities

 

(89)

 

 

(87)

 

 

(305)

 

 

(288)

Net income attributable to common shareholders

$

21,965

 

$

21,223

 

$

74,897

 

$

70,244

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.61

 

$

0.57

 

$

2.05

 

$

1.88

Diluted earnings per common share

$

0.60

 

$

0.57

 

$

2.02

 

$

1.86

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

36,146

 

 

36,989

 

 

36,563

 

 

37,374

Diluted weighted average common shares outstanding

 

36,581

 

 

37,359

 

 

37,047

 

 

37,712

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

$

0.225

 

$

0.200

 

$

0.625

 

$

0.550

 

See accompanying notes.

 

 

4

 


 

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 24,

 

September 25,

 

September 24,

 

September 25,

(In thousands)

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income before attribution to noncontrolling interests

 

$

22,669

 

$

22,650

 

$

77,550

 

$

74,813

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

2,894

 

 

(2,038)

 

 

4,315

 

 

(5,551)

Interest rate swaps (1)

 

 

641

 

 

210

 

 

(1,684)

 

 

(5,839)

Other comprehensive income (loss), before tax

 

 

3,535

 

 

(1,828)

 

 

2,631

 

 

(11,390)

Income tax effect:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,071)

 

 

754

 

 

(1,597)

 

 

2,054

Interest rate swaps (2)

 

 

(237)

 

 

(78)

 

 

623

 

 

2,160

Income tax effect

 

 

(1,308)

 

 

676

 

 

(974)

 

 

4,214

Other comprehensive income (loss), net of tax

 

 

2,227

 

 

(1,152)

 

 

1,657

 

 

(7,176)

Comprehensive income before attribution to noncontrolling interests

 

 

24,896

 

 

21,498

 

 

79,207

 

 

67,637

Less: comprehensive income, redeemable noncontrolling interests

 

 

(352)

 

 

(684)

 

 

(1,891)

 

 

(2,809)

Less: comprehensive income, nonredeemable noncontrolling interests

 

 

(500)

 

 

(499)

 

 

(1,876)

 

 

(1,814)

Comprehensive income attributable to the Company

 

$

24,044

 

$

20,315

 

$

75,440

 

$

63,014

 


(1)

Amounts reclassified out of accumulated other comprehensive income (loss) into net interest expense included $54 and $378 for the three and nine months ended September 24, 2017, respectively, and $296 and $924 for the three and nine months ended September 25, 2016, respectively.

 

(2)

The income tax effects of amounts reclassified out of accumulated other comprehensive income (loss) into net interest expense were $20 and $140 for the three and nine months ended September 24, 2017, respectively, and $110 and $342 for the three and nine months ended September 25, 2016, respectively.

 

See accompanying notes.

 

5

 


 

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 24,

 

September 25,

(In thousands)

    

2017

    

2016

Operating activities

 

 

 

 

 

 

Net income before attribution to noncontrolling interests

 

$

77,550

 

$

74,813

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

 

 

 

 

 

 

Provision (credit) for uncollectible accounts and notes receivable

 

 

(353)

 

 

153

Depreciation and amortization

 

 

32,292

 

 

30,389

Deferred income taxes

 

 

1,283

 

 

4,966

Stock-based compensation expense

 

 

8,094

 

 

7,525

Other

 

 

3,004

 

 

2,811

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

(5,131)

 

 

3,867

Income taxes receivable

 

 

1,795

 

 

5,045

Inventories

 

 

(3,234)

 

 

(2,673)

Prepaid expenses

 

 

9,262

 

 

4,755

Other current assets

 

 

(1,297)

 

 

872

Other assets and liabilities

 

 

(4,092)

 

 

(3,085)

Accounts payable

 

 

(2,480)

 

 

(6,290)

Income and other taxes payable

 

 

1,779

 

 

3,381

Accrued expenses and other current liabilities

 

 

(3,229)

 

 

(6,484)

Deferred revenue

 

 

(326)

 

 

1,411

Net cash provided by operating activities

 

 

114,917

 

 

121,456

Investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(43,195)

 

 

(38,954)

Loans issued

 

 

(2,376)

 

 

(2,216)

Repayments of loans issued

 

 

3,151

 

 

6,449

Acquisitions, net of cash acquired

 

 

(21)

 

 

(11,202)

Other

 

 

25

 

 

193

Net cash used in investing activities

 

 

(42,416)

 

 

(45,730)

Financing activities

 

 

 

 

 

 

Proceeds from issuance of term loan

 

 

400,000

 

 

 —

Net (repayments) proceeds of revolving credit facility

 

 

(300,575)

 

 

56,375

Debt issuance costs

 

 

(3,181)

 

 

 —

Cash dividends paid

 

 

(22,886)

 

 

(20,523)

Tax payments for equity award issuances

 

 

(2,411)

 

 

(5,999)

Proceeds from exercise of stock options

 

 

5,974

 

 

5,377

Acquisition of Company common stock

 

 

(121,705)

 

 

(109,407)

Distributions to noncontrolling interest holders

 

 

(4,606)

 

 

(3,830)

Other

 

 

580

 

 

481

Net cash used in financing activities

 

 

(48,810)

 

 

(77,526)

Effect of exchange rate changes on cash and cash equivalents

 

 

289

 

 

(99)

Change in cash and cash equivalents

 

 

23,980

 

 

(1,899)

Cash and cash equivalents at beginning of period

 

 

15,563

 

 

21,006

Cash and cash equivalents at end of period

 

$

39,543

 

$

19,107

 

See accompanying notes.

 

6

 


 

Table of Contents

Papa John’s International, Inc. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

September 24, 2017

 

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 24, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2017. 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 25, 2016.

 

2. Significant Accounting Policies

 

Noncontrolling Interests

 

Papa John’s has five joint venture arrangements in which there are noncontrolling interests held by third parties. These joint ventures include 222 restaurants at September 24, 2017 and 215 restaurants at September 25, 2016. Subsequent to the end of the third quarter, on September 25, 2017, the Company sold 25 Company-owned restaurants to a current 70% owned joint venture.

 

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 24, 2017 and September 25, 2016 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

September 24,

 

September 25,

 

September 24,

 

September 25,

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Papa John’s International, Inc.

 

$

1,469

 

$

1,879

 

$

6,172

 

$

7,168

Noncontrolling interests

 

 

852

 

 

1,183

 

 

3,767

 

 

4,623

Total income before income taxes

 

$

2,321

 

$

3,062

 

$

9,939

 

$

11,791

 

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Table of Contents

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  Balance Sheets

    

Recorded Value

 

 

 

 

 

Joint venture with no redemption feature

 

Permanent equity

 

Carrying value

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

 

Temporary equity

 

Redemption value*

Option to require the Company to purchase the noncontrolling 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.

 

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 or state 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 Credit Agreement and previous 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 24, 2017 and December 25, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Fair Value Measurements

 

 

    

Value

    

Level 1

    

Level 2

    

Level 3

 

September 24, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash surrender value of life insurance policies (a)

 

$

27,254

 

$

27,254

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (b)

 

 

2,454

 

 

 —

 

 

2,454

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 25, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash surrender value of life insurance policies (a)

 

$

21,690

 

$

21,690

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (b)

 

 

770

 

 

 —

 

 

770

 

 

 —

 


(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”).

 

Our assets and liabilities that were measured at fair value on a non-recurring basis as of September 24, 2017 and December 25, 2016 include assets and liabilities held for sale.  The fair value was determined using a discounted cash flow model with unobservable inputs (Level 3) less any estimated selling costs.

 

There were no transfers among levels within the fair value hierarchy during the nine months ended September 24, 2017.

 

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

 

Employee Share-Based Payments

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The guidance simplified the accounting and financial reporting of the income tax impact of stock-based compensation arrangements.  This guidance requires excess tax benefits to be recorded as a discrete item within income tax expense rather than additional paid-in capital.  In addition, excess tax benefits are required to be classified as cash from operating activities rather than cash from financing activities. 

 

The Company adopted this guidance as of the beginning of fiscal 2017.  The Company elected to apply the cash flow guidance of ASU 2016-09 retrospectively to all prior periods.  The impact of retrospectively applying this guidance to the consolidated statement of cash flows for the nine months ended September 25, 2016 was a $5.5 million increase in net cash provided by operating activities and a corresponding increase in net cash used in financing activities.  The

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Company elected to continue to estimate forfeitures, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.   

 

Accounting Standards to be Adopted in Future Periods

 

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 areas 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. In March and April 2016, the FASB issued the following amendments to clarify the implementation guidance: ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”.  

 

We are required to adopt ASU 2014-09 in the first quarter of 2018.   We do not expect the adoption will significantly impact our recognition of revenue from Company-owned restaurants, commissary sales or our continuing royalties or other fees from franchisees that are based on a percentage of the franchise sales.  We are continuing to evaluate the impact on other transactions including our loyalty program (including a change to a deferred revenue approach from the incremental cost accrual model), the impact on local cooperative advertising funds (including a change to gross revenue and expense presentation from net presentation), and the timing of recognizing franchise and development fees. We expect to use the modified retrospective method of adoption. 

 

Hedging

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”)   which intends to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendment attempts to simplify the application of hedge accounting guidance. T he pronouncement is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We plan to early adopt this guidance in the fourth quarter of 2017; we do not anticipate the impact will be material to our consolidated financial statements.

 

 

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

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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, the change in the redemption value for the noncontrolling interest of one of our joint ventures increases or decreases income attributable to common shareholders.

 

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 24,

 

September 25,

 

September 24,

 

September 25,

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

 

$

21,817

 

$

21,467

 

$

73,783

 

$

70,190

Change in noncontrolling interest redemption value

 

 

237

 

 

(157)

 

 

1,419

 

 

342

Net income attributable to participating securities

 

 

(89)

 

 

(87)

 

 

(305)

 

 

(288)

Net income attributable to common shareholders

 

$

21,965

 

$

21,223

 

$

74,897

 

$

70,244

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

36,146

 

 

36,989

 

 

36,563

 

 

37,374

Basic earnings per common share

 

$

0.61

 

$

0.57

 

$

2.05

 

$

1.88

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

21,965

 

$

21,223

 

$

74,897

 

$

70,244

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

36,146

 

 

36,989

 

 

36,563

 

 

37,374

Dilutive effect of outstanding equity awards (a)

 

 

435

 

 

370

 

 

484

 

 

338

Diluted weighted average common shares outstanding

 

 

36,581

 

 

37,359

 

 

37,047

 

 

37,712

Diluted earnings per common share

 

$

0.60

 

$

0.57

 

$

2.02

 

$

1.86


(a) Excludes 328 and 261 awards for the three and nine months ended September 24, 2017, respectively, and 22 and 598 awards for the three and nine months ended September 25, 2016, 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 final purchase price of the 2016 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 24,

 

 

December 25,

 

 

 

 

2017

 

 

2016

Outstanding debt

 

 

$

400,000

 

$

300,575

Unamortized debt issuance costs

 

 

 

(1,452)

 

 

(755)

Current portion of long-term debt

 

 

 

(20,000)

 

 

 -

Total long term debt, less current portion, net

 

 

$

378,548

 

$

299,820

 

Our outstanding debt of $300.6 million at December 25, 2016 represented amounts outstanding under a $500 million unsecured revolving line of credit (“previous Credit Facility”) with an expiration date of October 31, 2019.  The interest rate charged on outstanding balances was LIBOR plus 75 to 175 basis points.  The commitment fee on the unused balance ranged from 15 to 25 basis points. 

 

On August 30, 2017, we entered into a new Credit Agreement (the “Credit Agreement”) replacing the previous Credit Facility.  This Credit Agreement provides for an unsecured revolving credit facility in an aggregate principal amount of $600.0 million (the “Revolving Facility”) and an unsecured term loan facility in an aggregate principal amount of $400.0 million (the “Term Loan Facility” and together with the Revolving Facility, the “Facilities”).  Additionally, we have the option to increase the Revolving Facility or the Term Loan Facility in an aggregate amount of up to $300.0 million, subject to certain conditions.  Our outstanding debt as of September 24, 2017 under the Facilities was $400.0 million, which was comprised entirely of principal amounts due under the Term Loan Facility.  Including outstanding letters of credit, the remaining availability under the Facilities was approximately $569.2 million as of September 24, 2017.  In connection with the Credit Agreement, the Company capitalized $3.2 million of debt issuance costs, which are being amortized into interest expense, over the term of the Facilities.  Debt issuance costs attributable to the Term Loan of approximately $1.5 million were netted against debt and the remaining amounts attributable to the Revolving Facility were reported in other long term assets.

 

Loans under the Facilities accrue interest at a per annum rate equal to, at the Company’s election, either a LIBOR rate plus a margin ranging from 75 to 200 basis points or a base rate (generally determined by a prime rate, federal funds rate or a LIBOR rate plus 1.00%) plus a margin ranging from 0 to 100 basis points.  In each case, the actual margin is determined according to a ratio of the Company’s total indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA“) for the then most recently ended four quarter period (the “ Leverage Ratio ”).  An unused commitment fee at a rate ranging from 15 to 30 basis points per annum, determined according to the Leverage Ratio, applies to the unutilized commitments under the Revolving Facility.  Loans outstanding under the Credit Agreement may be prepaid at any time without premium or penalty, subject to customary breakage costs in the case of borrowings for which a LIBOR rate election is in effect.  Up to $35.0 million of the Revolving Facility may be advanced in certain agreed foreign currencies, including Euros, Pounds Sterling, Canadian Dollars, Japanese Yen, and Mexican Pesos.  

   

The Facilities mature on August 30, 2022.  Quarterly amortization payments are required to be made on the Term Loan Facility in the amount of $5.0 million beginning in the fourth quarter of 2017.  The obligations under the Credit Agreement are guaranteed by certain direct and indirect material subsidiaries of the Company. 

 

The Credit Agreement contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At September 24, 2017, 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 that participate in our Credit Agreement. 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.

 

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As of September 24, 2017, 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

%

 

 

 

 

 

 

 

 

Subsequent to the end of the third quarter, in October 2017, we executed the following additional interest rate swaps for $275 million, which are forward starting swaps that become effective in 2018.

 

 

 

 

 

 

 

 

Effective Dates

    

Floating Rate Debt

    

Fixed Rates

 

January 30, 2018 through August 30, 2022

 

$

100

million  

 

1.99

%

January 30, 2018 through August 30, 2022

 

$

75

million  

 

1.99

%

January 30, 2018 through August 30, 2022

 

$

75

million  

 

2.00

%

January 30, 2018 through August 30, 2022

 

$

25

million  

 

1.99

%

 

The weighted average interest rates on our debt, including the impact of the interest rate swap agreements, were 2.7% and 2.4% for the three and nine months ended September 24, 2017, respectively, and 2.1% for both the three and nine months ended September 25, 2016. Interest paid, including payments made or received under the swaps, was $2.0 million and $1.9 million for the three months ended September 24, 2017 and September 25, 2016, respectively, and $5.9 million and $5.3 million for the nine months ended September 24, 2017 and September 25, 2016, respectively. As of September 24, 2017, the portion of the aggregate $2.5 million interest rate swap liability that would be reclassified into earnings during the next twelve months as interest expense approximates $210,000.

 

6. Segment Information

 

We have five reportable segments: domestic Company-owned restaurants, North America 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 North America 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 in the United States and Canada. 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, 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.

 

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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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 24,

 

September 25,

 

September 24,

 

September 25,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

 

$

196,267

 

$

199,041

 

$

605,919

 

$

608,968

North America commissaries

 

 

 

164,028

 

 

155,208

 

 

495,427

 

 

462,057

North America franchising

 

 

 

25,567

 

 

24,776

 

 

79,762

 

 

76,554

International

 

 

 

31,792

 

 

28,941

 

 

90,540

 

 

84,856

All others

 

 

 

14,055

 

 

14,476

 

 

44,105

 

 

41,566

Total revenues from external customers

 

 

$

431,709

 

$

422,442

 

$

1,315,753

 

$

1,274,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intersegment revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

North America commissaries

 

 

$

60,364

 

$

59,811

 

$

181,302

 

$

175,859

North America franchising

 

 

 

709

 

 

688

 

 

2,224

 

 

2,140

International

 

 

 

71

 

 

64

 

 

202

 

 

196

All others

 

 

 

3,716

 

 

4,129

 

 

12,826

 

 

12,301

Total intersegment revenues

 

 

$

64,860

 

$

64,692

 

$

196,554

 

$

190,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes: