August 6, 2019 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

Table of Contents

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 30, 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)

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

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 July 31, 2019, there were outstanding 31,786,388 shares of the registrant’s common stock, par value $0.01 per share.

Table of Contents

INDEX

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

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

	Condensed Consolidated Statements of Operations — Three and Six months ended June 30, 2019 and July 1, 2018	4

	Condensed Consolidated Statements of Comprehensive (Loss) Income — Three and Six months ended June 30, 2019 and July 1, 2018	5

	Condensed Consolidated Statements of Stockholders’ Deficit — Three and Six months ended June 30, 2019 and July 1, 2018	6

	Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2019 and July 1, 2018	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	51

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6.	Exhibits	53

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



	June 30,		December 30,
(In thousands)	2019		2018
			(Note)
Assets
Current assets:
Cash and cash equivalents	$	30,656	$	33,258
Accounts receivable, net		77,019		78,118
Notes receivable		5,182		5,498
Income tax receivable		4,447		16,146
Inventories		26,615		27,203
Prepaid expenses		21,477		30,376
Other current assets		17,484		5,678
Assets held for sale		11,005		—
Total current assets		193,885		196,277
Property and equipment, net		212,257		226,894
Right-of-use assets		148,868		—
Notes receivable, less current portion, net		27,336		23,259
Goodwill		82,763		84,516
Deferred income taxes, net		1,051		1,137
Other assets		60,404		63,814
Total assets	$	726,564	$	595,897

Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit
Current liabilities:
Accounts payable	$	32,516	$	27,106
Income and other taxes payable		7,155		6,590
Accrued expenses and other current liabilities		113,812		129,167
Current deferred revenue		2,493		2,598
Current lease liabilities		24,103		—
Current portion of long-term debt		31,241		20,009
Total current liabilities		211,320		185,470
Deferred revenue		17,564		20,674
Long-term lease liabilities		124,458		—
Long-term debt, less current portion, net		349,749		601,126
Deferred income taxes, net		2,227		7,852
Other long-term liabilities		81,805		79,324
Total liabilities		787,123		894,446

Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at June 30, 2019; no shares issued at December 30, 2018		251,290		—
Redeemable noncontrolling interests		6,217		5,464

Stockholders’ deficit:
Common stock ($0.01 par value per share; issued 44,304 at June 30, 2019 and 44,301 at December 30, 2018)		443		443
Additional paid-in capital		196,927		192,984
Accumulated other comprehensive loss		(11,196)		(3,143)
Retained earnings		228,833		242,182
Treasury stock (12,877 shares at June 30, 2019 and 12,929 shares at December 30, 2018, at cost)		(748,657)		(751,704)
Total stockholders’ deficit		(333,650)		(319,238)
Noncontrolling interests in subsidiaries		15,584		15,225
Total Stockholders’ deficit		(318,066)		(304,013)
Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit	$	726,564	$	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.

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended				Six Months Ended
		June 30,	July 1,		June 30,		July 1,
(In thousands, except per share amounts)	2019		2018		2019		2018
			(Note)					(Note)
Revenues:
Domestic Company-owned restaurant sales	$	163,656	$	181,379	$	325,459	$	371,621
North America franchise royalties and fees		19,761		23,912		37,291		48,718
North America commissary revenues		147,128		153,455		296,032		315,168
International revenues		25,497		29,069		51,164		59,183
Other revenues		43,581		42,137		88,082		85,384
Total revenues		399,623		429,952		798,028		880,074
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses		131,950		147,868		265,003		305,442
North America commissary expenses		136,744		143,300		275,301		294,981
International expenses		14,652		18,248		28,957		37,278
Other expenses		41,970		42,801		86,067		85,168
General and administrative expenses		48,718		38,972		99,853		78,968
Depreciation and amortization		11,521		11,731		23,270		23,270
Total costs and expenses		385,555		402,920		778,451		825,107
Refranchising gains (losses), net		163		(2,122)		163		(1,918)
Operating income		14,231		24,910		19,740		53,049
Net interest expense		(4,272)		(5,797)		(10,548)		(10,872)
Income before income taxes		9,959		19,113		9,192		42,177
Income tax expense		1,283		7,040		2,114		12,018
Net income before attribution to noncontrolling interests		8,676		12,073		7,078		30,159
Net income attributable to noncontrolling interests		(322)		(874)		(455)		(1,517)
Net income attributable to the Company	$	8,354	$	11,199	$	6,623	$	28,642

Calculation of income for earnings per share:
Net income attributable to the Company	$	8,354	$	11,199	$	6,623	$	28,642
Preferred stock dividends and accretion		(3,486)		—		(5,556)		—
Net income attributable to participating securities		—		(72)		—		(147)
Net income attributable to common shareholders	$	4,868	$	11,127	$	1,067	$	28,495

Basic earnings per common share	$	0.15	$	0.35	$	0.03	$	0.87
Diluted earnings per common share	$	0.15	$	0.35	$	0.03	$	0.87

Basic weighted average common shares outstanding		31,587		31,941		31,570		32,610
Diluted weighted average common shares outstanding		31,773		32,175		31,746		32,860

Dividends declared per common share	$	0.225	$	0.225	$	0.450	$	0.450

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.

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)



	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
(In thousands)	2019		2018		2019		2018
				(Note)			(Note)
Net income before attribution to noncontrolling interests	$	8,676	$	12,073	$	7,078	$	30,159
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments (1)		(1,537)		(5,295)		196		(3,312)
Interest rate swaps (2)		(6,699)		2,834		(10,654)		9,552
Other comprehensive (loss) income, before tax		(8,236)		(2,461)		(10,458)		6,240
Income tax effect:
Foreign currency translation adjustments (1)		354		1,218		(45)		745
Interest rate swaps (3)		1,532		(627)		2,450		(2,172)
Income tax effect (4)		1,886		591		2,405		(1,427)
Other comprehensive (loss) income, net of tax		(6,350)		(1,870)		(8,053)		4,813
Comprehensive income (loss) before attribution to noncontrolling interests		2,326		10,203		(975)		34,972
Less: comprehensive (income) loss, redeemable noncontrolling interests		(32)		(319)		87		(618)
Less: comprehensive income, nonredeemable noncontrolling interests		(290)		(555)		(542)		(899)
Comprehensive income (loss) attributable to the Company	$	2,004	$	9,329	$	(1,430)	$	33,455

(1)On June 15, 2018, the Company refranchised 34 Company-owned restaurants and a quality control center located in China. In connection with the transaction, approximately $1,300 of accumulated other comprehensive income and $300 associated deferred tax related to foreign currency translation were reversed.

(2)Amounts reclassified out of accumulated other comprehensive income (loss) into net interest expense included $231 and $688 for the three and six months ended June 30, 2019, respectively, and $89 and $197 for the three and six months ended July 1, 2018, respectively.

(3)The income tax effects of amounts reclassified out of accumulated other comprehensive loss into net interest expense included $53 and $158 for the three and six months ended June 30, 2019, respectively, and $20 and $45 for the three and six months ended July 1, 2018, respectively.

(4)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 associated with the Tax Cuts and Jobs Act 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.

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(Unaudited)


	Papa John’s International, Inc.
	Common					Accumulated
	Stock			Additional		Other						Noncontrolling		Total
(In thousands)	Shares	Common		Paid-In		Comprehensive		Retained		Treasury		Interests in		Stockholders’
For the three months ended June 30, 2019	Outstanding	Stock		Capital		Loss		Earnings		Stock		Subsidiaries		Deficit
Balance at March 31, 2019	31,420	$	443	$	193,243	$	(4,846)	$	231,439	$	(748,995)	$	15,458	$	(313,258)
Net income (1)	—		—		—		—		8,354		—		290		8,644
Other comprehensive loss	—		—		—		(6,350)		—		—		—		(6,350)
Cash dividends on common stock	—		—		59		—		(7,203)		—		—		(7,144)
Cash dividends on preferred stock	—		—		—		—		(3,428)		—		—		(3,428)
Exercise of stock options	1		—		42		—		—		—		—		42
Tax effect of equity awards	—		—		(26)		—		—		—		—		(26)
Stock-based compensation expense	—		—		3,800		—		—		—		—		3,800
Issuance of restricted stock	2		—		(116)		—		—		116		—		—
Distributions to noncontrolling interests	—		—		—		—		—		—		(164)		(164)
Other	4		—		(75)		—		(329)		222		—		(182)
Balance at June 30, 2019	31,427	$	443	$	196,927	$	(11,196)	$	228,833	$	(748,657)	$	15,584	$	(318,066)

For the six months ended June 30, 2019
Balance at December 30, 2018 (Restated)	31,372	$	443	$	192,984	$	(3,143)	$	242,182	$	(751,704)	$	15,225	$	(304,013)
Net income (1)	—		—		—		—		6,623		—		542		7,165
Other comprehensive loss	—		—		—		(8,053)		—		—		—		(8,053)
Cash dividends on common stock	—		—		95		—		(14,364)		—		—		(14,269)
Cash dividends on preferred stock	—		—		—		—		(5,470)		—		—		(5,470)
Exercise of stock options	4		—		93		—		—		—		—		93
Tax effect of equity awards	—		—		(895)		—		—		—		—		(895)
Stock-based compensation expense	—		—		7,531		—		—		—		—		7,531
Issuance of restricted stock	44		—		(2,570)		—		—		2,570		—		—
Distributions to noncontrolling interests	—		—		—		—		—		—		(183)		(183)
Other	7		—		(311)		—		(138)		477		—		28
Balance at June 30, 2019	31,427	$	443	$	196,927	$	(11,196)	$	228,833	$	(748,657)	$	15,584	$	(318,066)

(1)	Net income to the Company for the three and six months ended June 30, 2019 excludes $322 and $455, respectively, allocable to the noncontrolling interests for our joint venture arrangements, respectively.

At June 30, 2019, the accumulated other comprehensive loss of $11,196 was comprised of net unrealized foreign currency translation loss of $6,709 and net unrealized loss on the interest rate swap agreements of $4,487.

See accompanying notes.

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit (continued)

(Unaudited)


	Papa John’s International, Inc. (Note)
	Common					Accumulated
	Stock			Additional		Other						Noncontrolling		Total
(In thousands)	Shares	Common		Paid-In		Comprehensive		Retained		Treasury		Interests in		Stockholders’
For the three months ended July 1, 2018	Outstanding	Stock		Capital		Income (Loss)		Earnings		Stock		Subsidiaries		Deficit
Balance at April 1, 2018	32,023	$	443	$	163,198	$	4,110	$	278,728	$	(714,097)	$	16,258	$	(251,360)
Net income (1)	—		—		—		—		11,199		—		555		11,754
Other comprehensive loss	—		—		—		(1,870)		—		—		—		(1,870)
Cash dividends on common stock	—		—		36		—		(7,188)		—		—		(7,152)
Exercise of stock options	13		—		409		—		—		—		—		409
Tax effect of equity awards	—		—		(11)		—		—		—		—		(11)
Acquisition of Company common stock	(490)		—		22,000		—		—		(28,704)		—		(6,704)
Stock-based compensation expense	—		—		2,454		—		—		—		—		2,454
Issuance of restricted stock	1		—		(30)		—		—		30		—		—
Distributions to noncontrolling interests	—		—		—		—		—		—		(678)		(678)
Other	1		—		(30)		—		—		77		—		47
Balance at July 1, 2018	31,548	$	443	$	188,026	$	2,240	$	282,739	$

Form: 10-Q

Documents