August 2, 2016 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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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

☐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.

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INDEX

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets — June 26, 2016 and December 27, 2015	3

	Condensed Consolidated Statements of Income — Three and Six Months Ended June 26, 2016 and June 28, 2015	4

	Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 26, 2016 and June 28, 2015	5

	Consolidated Statements of Cash Flows — Six Months Ended June 26, 2016 and June 28, 2015	6

	Notes to Condensed Consolidated Financial Statements	7

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

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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.

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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.

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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.

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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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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

Form: 10-Q

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