May 7, 2019 - 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 March 31, 2019

☐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 every interactive Data File required to be submitted 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 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 April 30, 2019, there were outstanding 31,778,648 shares of the registrant’s common stock, par value $0.01 per share.

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common stock, $0.01 par value	PZZA	The NASDAQ Stock Market LLC

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INDEX

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets — March 31, 2019 and December 30, 2018	3

	Condensed Consolidated Statements of Operations — Three months ended March 31, 2019 and April 1, 2018	4

	Condensed Consolidated Statements of Comprehensive (Loss) Income — Three months ended March 31, 2019 and April 1, 2018	5

	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) — Three months ended March 31, 2019 and April 1, 2018	6

	Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2019 and April 1, 2018	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	44

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6.	Exhibits	47

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


	March 31,		December 30,
(In thousands, except per share amounts)	2019		2018
			(Note)
Assets
Current assets:
Cash and cash equivalents	$	29,273	$	33,258
Accounts receivable, net		80,748		78,118
Notes receivable, net		5,983		5,498
Income tax receivable		5,431		16,146
Inventories		26,144		27,203
Prepaid expenses		22,488		30,376
Other current assets		18,582		5,678
Assets held for sale		10,765		—
Total current assets		199,414		196,277
Property and equipment, net		217,437		226,894
Right-of-use assets		150,216		—
Notes receivable, less current portion, net		23,607		23,259
Goodwill		83,193		84,516
Deferred income taxes, net		1,244		1,137
Other assets		63,957		63,814
Total assets	$	739,068	$	595,897

Liabilities and stockholders’ (deficit)
Current liabilities:
Accounts payable	$	35,214	$	27,106
Income and other taxes payable		7,336		6,590
Accrued expenses and other current liabilities		120,975		129,167
Deferred revenue current		2,516		2,598
Current lease liabilities		22,546		—
Current portion of long-term debt		29,982		20,009
Total current liabilities		218,569		185,470
Deferred revenue		18,562		20,674
Long-term lease liabilities		130,391		—
Long-term debt, less current portion, net		346,433		601,126
Deferred income taxes, net		5,835		7,852
Other long-term liabilities		75,887		79,324
Total liabilities		795,677		894,446

Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at March 31, 2019; no shares issued at December 30, 2018		251,303		—
Redeemable noncontrolling interests		5,346		5,464

Stockholders’ (deficit):
Common stock ($0.01 par value per share; issued 44,303 at March 31, 2019 and 44,301 at December 30, 2018)		443		443
Additional paid-in capital		193,243		192,984
Accumulated other comprehensive (loss)		(4,846)		(3,143)
Retained earnings		231,439		242,182
Treasury stock (12,883 shares at March 31, 2019 and 12,929 shares at December 30, 2018, at cost)		(748,995)		(751,704)
Total stockholders’ (deficit)		(328,716)		(319,238)
Noncontrolling interests in subsidiaries		15,458		15,225
Total stockholders’ (deficit)		(313,258)		(304,013)
Total liabilities, redeemable noncontrolling interests, Series B preferred stock and stockholders’ (deficit)	$	739,068	$	595,897

Note: The Condensed Consolidated Balance Sheet has been derived from the audited consolidated financial statements, restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See Note 2 of “Notes to Condensed Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



	Three Months Ended
		March 31,	April 1,
(In thousands, except per share amounts)	2019		2018
			(Note)
Revenues:
Domestic Company-owned restaurant sales	$	161,803	$	190,242
North America franchise royalties and fees		17,530		24,806
North America commissary		148,904		161,713
International		25,667		30,114
Other revenues		44,501		43,247
Total revenues		398,405		450,122
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses		133,053		157,574
North America commissary		138,557		151,681
International expenses		14,305		19,030
Other expenses		44,097		42,367
General and administrative expenses		51,135		39,996
Depreciation and amortization		11,749		11,539
Total costs and expenses		392,896		422,187
Refranchising and impairment gains/(losses), net		—		204
Operating income		5,509		28,139
Net interest expense		(6,276)		(5,075)
(Loss) income before income taxes		(767)		23,064
Income tax expense		831		4,978
Net (loss) income before attribution to noncontrolling interests		(1,598)		18,086
Income attributable to noncontrolling interests		(133)		(643)
Net (loss) income attributable to the Company	$	(1,731)	$	17,443

Calculation of income for earnings per share:
Net (loss) income attributable to the Company	$	(1,731)	$	17,443
Preferred stock dividends		(2,070)		—
Net income attributable to participating securities		—		(75)
Net (loss) income attributable to common shareholders	$	(3,801)	$	17,368

Basic (loss) earnings per common share	$	(0.12)	$	0.52
Diluted (loss) earnings per common share	$	(0.12)	$	0.52

Basic weighted average common shares outstanding		31,554		33,279
Diluted weighted average common shares outstanding		31,554		33,552

Dividends declared per common share	$	0.225	$	0.225

Note: The Condensed Consolidated Statement of Operations is unaudited and has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See Note 2 of “Notes to Condensed Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)



	Three Months Ended
	March 31,		April 1,
(In thousands)	2019		2018
			(Note)
Net (loss) income before attribution to noncontrolling interests	$	(1,598)	$	18,086
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments		1,733		1,983
Interest rate swaps (1)		(3,955)		6,718
Other comprehensive (loss) income, before tax		(2,222)		8,701
Income tax effect:
Foreign currency translation adjustments		(399)		(473)
Interest rate swaps (2)		918		(1,545)
Income tax effect (3)		519		(2,018)
Other comprehensive (loss) income, net of tax		(1,703)		6,683
Comprehensive (loss) income before attribution to noncontrolling interests		(3,301)		24,769
Less: comprehensive loss (income), redeemable noncontrolling interests		119		(344)
Less: comprehensive income, nonredeemable noncontrolling interests		(252)		(299)
Comprehensive (loss) income attributable to the Company	$	(3,434)	$	24,126

(1)

Amounts reclassified out of accumulated other comprehensive income (loss) into net interest income included $148 for the three months ended March 31, 2019 and net interest expense of $108 for the three months ended April 1, 2018.

(2)

The income tax effects of amounts reclassified out of accumulated other comprehensive income (loss) into net interest income was $94 for the three months ended March 31, 2019 and net interest expense was $25 for the three months ended April 1, 2018.

(3)

As of January 1, 2018, we adopted ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” and reclassified stranded tax effects of approximately $455 to retained earnings in the first quarter of 2018.

Note: The Condensed Consolidated Statement of Comprehensive (Loss) Income is unaudited and has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See Note 2 of “Notes to Condensed Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)


	Papa John’s International, Inc.
	Common					Accumulated								Total
	Stock			Additional		Other						Noncontrolling		Stockholders’
	Shares	Common		Paid-In		Comprehensive		Retained		Treasury		Interests in		Equity
(In thousands)	Outstanding	Stock		Capital		Loss		Earnings		Stock		Subsidiaries		(Deficit)
Balance at December 30, 2018 (Restated)	31,372	$	443	$	192,984	$	(3,143)	$	242,182	$	(751,704)	$	15,225	$	(304,013)
Net loss (1)	—		—		—		—		(1,731)		—		252		(1,479)
Other comprehensive loss	—		—		—		(1,703)		—		—		—		(1,703)
Cash dividends on common stock	—		—		36		—		(7,161)		—		—		(7,125)
Cash dividends on preferred stock	—		—		—		—		(2,040)		—		—		(2,040)
Exercise of stock options	3		—		51		—		—		—		—		51
Tax effect of equity awards	—		—		(869)		—		—		—		—		(869)
Stock-based compensation expense	—		—		3,731		—		—		—		—		3,731
Issuance of restricted stock	42		—		(2,454)		—		—		2,454		—		—
Distributions to noncontrolling interests	—		—		—		—		—		—		(19)		(19)
Other	3		—		(236)		—		189		255		—		208
Balance at March 31, 2019	31,420	$	443	$	193,243	$	(4,846)	$	231,439	$	(748,995)	$	15,458	$	(313,258)

(1)

Net loss to the Company at March 31, 2019 excludes $133 allocable to the noncontrolling interests for our joint venture arrangements.

At March 31, 2019, the accumulated other comprehensive loss of $4,846 was comprised of net unrealized foreign currency translation loss of $5,525, partially offset by net unrealized gain on the interest rate swap agreements of $679.

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (continued)

(Unaudited)


	Papa John’s International, Inc. (Note)
	Common					Accumulated								Total
	Stock			Additional		Other						Noncontrolling		Stockholders’
	Shares	Common		Paid-In		Comprehensive		Retained		Treasury		Interests in		Equity
(In thousands)	Outstanding	Stock		Capital		Income (Loss)		Earnings		Stock		Subsidiaries		(Deficit)
Balance at December 31, 2017	33,931	$	442	$	184,785	$	(2,117)	$	292,251	$	(597,072)	$	15,757	$	(105,954)
Cumulative effect of adoption of ASU 2014-09 (1)	—		—		—		—		(24,359)		—		—		(24,359)
Adjusted balance at January 1, 2018	33,931		442		184,785		(2,117)		267,892		(597,072)		15,757		(130,313)
Net income (2)	—		—		—		—		17,443		—		344		17,787
Other comprehensive income	—		—		—		6,683		—		—		—		6,683
Adoption of ASU 2018-02 (3)	—		—		—		(455)		455		—		—		—
Cash dividends on common stock	—		—		36		—		(7,569)		—		—		(7,533)
Exercise of stock options	42		1		1,769		—		—		—		—		1,770
Tax effect of equity awards	—		—		(1,342)		—		—		—		—		(1,342)
Acquisition of Company common stock	(2,001)		—		(22,000)		—		—		(119,736)		—		(141,736)
Stock-based compensation expense	—		—		2,475		—		—		—		—		2,475
Issuance of restricted stock	48		—		(2,517)		—		—		2,517		—		—
Distributions to noncontrolling interests	—		—		—		—		—		—		(432)		(432)
Other	3		—		(8)		(1)		507		194		589		1,281
Balance at April 1, 2018	32,023	$	443	$	163,198	$	4,110	$	278,728	$	(714,097)	$	16,258	$	(251,360)

(1)

As of January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers”.

(2)

Net income to the Company at April 1, 2018 excludes $643 allocable to the noncontrolling interests for our joint venture arrangements.

(3)

As of January 1, 2018, the Company adopted ASU 2018-02, “Reclassifications of Certain Tax Effects from Accumulated Other Comprehensive Income,” and reclassified stranded tax effects of approximately $455 to retained earnings in the first quarter of 2018.

At April 1, 2018, the accumulated other comprehensive gain of $4,110 was comprised of net unrealized gain on the interest rate swap agreements of $5,666, partially offset by net unrealized foreign currency translation loss of $1,556.

Note: The Condensed Consolidated Statement of Stockholders’ Equity (Deficit) is unaudited and has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See Note 2 of “Notes to Condensed Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Three Months Ended
	March 31,		April 1,
(In thousands)	2019		2018
				(Note)
Operating activities
Net (loss) income before attribution to noncontrolling interests	$	(1,598)	$	18,086
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for uncollectible accounts and notes receivable		(50)		1,539
Depreciation and amortization		11,749		11,539
Deferred income taxes		(1,309)		(2,004)
Preferred stock option mark-to-market adjustment		5,914		—
Stock-based compensation expense		3,731		2,475
Gain on refranchising		—		(204)
Other		838		1,903
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(3,443)		2,675
Income tax receivable		10,715		3,899
Inventories		810		2,193
Prepaid expenses		7,888		555
Other current assets		(13,855)		(1,264)
Other assets and liabilities		(3,258)		475
Accounts payable		8,108		2,563
Income and other taxes payable		746		(466)
Accrued expenses and other current liabilities		(11,003)		(3,759)
Deferred revenue		(2,170)		(3,474)
Net cash provided by operating activities		13,813		36,731
Investing activities
Purchases of property and equipment		(8,658)		(9,320)
Loans issued		(859)		(563)
Repayments of loans issued		925		1,636
Proceeds from divestitures of restaurants		—		3,690
Other		329		114
Net cash used in investing activities		(8,263)		(4,443)
Financing activities
Proceeds from issuance of preferred stock		252,530		—
Repayments of term loan		(5,000)		(5,000)
Net proceeds (repayments) of revolving credit facilities		(240,026)		140,308
Dividends paid to common stockholders		(7,125)		(7,565)
Dividends paid to preferred stockholders		(2,040)		—
Issuance costs associated with preferred stock		(7,179)		—
Tax payments for equity award issuances		(869)		(1,342)
Proceeds from exercise of stock options		51		1,770
Acquisition of Company common stock		—		(141,736)
Distributions to noncontrolling interest holders		(19)		(432)
Other		50		183
Net cash used in financing activities		(9,627)		(13,814)
Effect of exchange rate changes on cash and cash equivalents		92		119
Change in cash and cash equivalents		(3,985)		18,593
Cash and cash equivalents at beginning of period		33,258		27,891
Cash and cash equivalents at end of period	$	29,273	$	46,484

Note: The Condensed Consolidated Statement of Cash Flows is unaudited and has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See Note 2 of “Notes to Condensed Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2019

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 months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2019. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K/A 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 30, 2018.

2.Update to Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant items that are subject to such estimates and assumptions include allowance for doubtful accounts and notes receivable, intangible assets, contract assets and contract liabilities, including the online customer loyalty program obligation, right-of-use assets and lease liabilities, gift card breakage, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates.

Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction

Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation that is designed to break even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the domestic restaurants, of which approximately 80% are franchised.

During the first quarter of 2019, the Company reassessed the governance structure and operating procedures of PJMF and determined that the Company has the power to control certain significant activities of PJMF, as defined by Accounting Standards Codification 810 (“ASC 810”), Consolidations. Therefore, the Company is the primary beneficiary of the VIE, and per ASC 810, must consolidate the VIE. Prior to 2019, the Company did not consolidate PJMF. The Company has concluded the previous accounting policy to not consolidate PJMF was an immaterial error and has determined that PJMF should be consolidated. The Company has corrected this immaterial error by restating the 2018 condensed consolidated financial statements and related notes included herein to include PJMF. Notes 5, 6, 9, 11, 13 and 14 have been updated to reflect the immaterial restatement.

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The immaterial impacts of this error correction in fiscal year 2018 are as follows:


Condensed Consolidated Balance Sheet (unaudited)
	December 30, 2018
(In thousands)	As Reported		Change		As Restated
Cash and cash equivalents	$	19,468	$	13,790	$	33,258
Accounts receivable, net		67,854		10,264		78,118
Income tax receivable		16,073		73		16,146
Prepaid expenses		29,935		441		30,376
Other current assets		5,677		1		5,678
Total current assets		171,708		24,569		196,277
Deferred income taxes, net		756		381		1,137
Total assets		570,947		24,950		595,897
Accounts payable		29,891		(2,785)		27,106
Accrued expenses and other current liabilities		105,712		23,455		129,167
Deferred revenue current		2,443		155		2,598
Current portion of long-term debt		20,000		9		20,009
Total current liabilities		164,636		20,834		185,470
Deferred revenue		14,679		5,995		20,674
Total liabilities		867,617		26,829		894,446
Retained earnings		244,061		(1,879)		242,182
Total stockholders' equity (deficit)		(302,134)		(1,879)		(304,013)
Total liabilities, redeemable noncontrolling interests, Series B preferred stock and stockholders' equity (deficit)		570,947		24,950		595,897

Form: 10-Q

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