November 6, 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 September 29, 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 October 31, 2019, there were outstanding 31,946,162 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 — September 29, 2019 and December 30, 2018	3

	Condensed Consolidated Statements of Operations — Three and Nine months ended September 29, 2019 and September 30, 2018	4

	Condensed Consolidated Statements of Comprehensive (Loss) Income — Three and Nine months ended September 29, 2019 and September 30, 2018	5

	Condensed Consolidated Statements of Stockholders’ Deficit — Three and Nine months ended September 29, 2019 and September 30, 2018	6

	Condensed Consolidated Statements of Cash Flows — Nine months ended September 29, 2019 and September 30, 2018	9

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	54

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 6.	Exhibits	56

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)



	September 29,		December 30,
(In thousands)	2019		2018
			(Note)
Assets
Current assets:
Cash and cash equivalents	$	28,368	$	33,258
Accounts receivable, net		82,401		78,118
Notes receivable		5,806		5,498
Income tax receivable		5,905		16,146
Inventories		25,190		27,203
Prepaid expenses		18,450		30,376
Other current assets		21,125		5,678
Assets held for sale		7,139		—
Total current assets		194,384		196,277
Property and equipment, net		212,313		226,894
Finance lease right-of-use assets, net		9,870		—
Operating lease right-of-use assets		144,881		—
Notes receivable, less current portion, net		27,841		23,259
Goodwill		79,457		84,516
Deferred income taxes, net		1,197		1,137
Other assets		60,622		63,814
Total assets	$	730,565	$	595,897

Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit
Current liabilities:
Accounts payable	$	42,027	$	27,106
Income and other taxes payable		7,875		6,590
Accrued expenses and other current liabilities		115,026		129,167
Current deferred revenue		2,461		2,598
Current finance lease liabilities		1,748		—
Current operating lease liabilities		23,701		—
Current portion of long-term debt		29,051		20,009
Total current liabilities		221,889		185,470
Deferred revenue		16,671		20,674
Long-term finance lease liabilities		8,083		—
Long-term operating lease liabilities		121,320		—
Long-term debt, less current portion, net		346,064		601,126
Deferred income taxes, net		2,318		7,852
Other long-term liabilities		83,664		79,324
Total liabilities		800,009		894,446

Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at September 29, 2019; no shares issued at December 30, 2018		251,074		—
Redeemable noncontrolling interests		5,848		5,464

Stockholders’ deficit:
Common stock ($0.01 par value per share; issued 44,313 at September 29, 2019 and 44,301 at December 30, 2018)		443		443
Additional paid-in capital		201,190		192,984
Accumulated other comprehensive loss		(13,896)		(3,143)
Retained earnings		218,524		242,182
Treasury stock (12,865 shares at September 29, 2019 and 12,929 shares at December 30, 2018, at cost)		(747,990)		(751,704)
Total stockholders’ deficit		(341,729)		(319,238)
Noncontrolling interests in subsidiaries		15,363		15,225
Total Stockholders’ deficit		(326,366)		(304,013)
Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit	$	730,565	$	595,897

Note: The Condensed Consolidated Balance Sheets have 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				Nine Months Ended
		September 29,	September 30,		September 29,		September 30,
(In thousands, except per share amounts)	2019		2018		2019		2018
			(Note)					(Note)
Revenues:
Domestic Company-owned restaurant sales	$	165,135	$	158,285	$	490,594	$	529,906
North America franchise royalties and fees		15,924		12,806		53,215		61,524
North America commissary revenues		154,703		146,240		450,735		461,408
International revenues		24,679		25,653		75,843		84,836
Other revenues		43,265		42,247		131,347		127,631
Total revenues		403,706		385,231		1,201,734		1,265,305
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses		134,037		136,257		399,040		441,699
North America commissary expenses		144,624		137,928		419,925		432,909
International expenses		13,557		15,184		42,514		52,462
Other expenses		42,952		42,736		129,019		127,904
General and administrative expenses		53,503		55,711		153,356		134,679
Depreciation and amortization		11,832		11,585		35,102		34,855
Total costs and expenses		400,505		399,401		1,178,956		1,224,508
Refranchising gains (losses), net		1,726		—		1,889		(1,918)
Operating income (loss)		4,927		(14,170)		24,667		38,879
Net interest expense		(4,249)		(6,058)		(14,797)		(16,930)
Income (loss) before income taxes		678		(20,228)		9,870		21,949
Income tax expense (benefit)		421		(7,367)		2,535		4,651
Net income (loss) before attribution to noncontrolling interests		257		(12,861)		7,335		17,298
Net loss (income) attributable to noncontrolling interests		128		(439)		(327)		(1,956)
Net income (loss) attributable to the Company	$	385	$	(13,300)	$	7,008	$	15,342

Calculation of (loss) income for earnings per share:
Net income (loss) attributable to the Company	$	385	$	(13,300)	$	7,008	$	15,342
Preferred stock dividends and accretion		(3,473)		—		(9,029)		—
Net income attributable to participating securities		—		—		—		(147)
Net (loss) income attributable to common shareholders	$	(3,088)	$	(13,300)	$	(2,021)	$	15,195

Basic (loss) earnings per common share	$	(0.10)	$	(0.42)	$	(0.06)	$	0.47
Diluted (loss) earnings per common share	$	(0.10)	$	(0.42)	$	(0.06)	$	0.47

Basic weighted average common shares outstanding		31,601		31,573		31,581		32,265
Diluted weighted average common shares outstanding		31,601		31,573		31,581		32,489

Dividends declared per common share	$	0.225	$	0.225	$	0.675	$	0.675

Note: The Condensed Consolidated Statements of Operations are unaudited and have 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				Nine Months Ended
	September 29,		September 30,		September 29,		September 30,
(In thousands)	2019		2018		2019		2018
				(Note)			(Note)
Net income (loss) before attribution to noncontrolling interests	$	257	$	(12,861)	$	7,335	$	17,298
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments (1)		(1,642)		(154)		(1,446)		(3,466)
Interest rate swaps (2)		(1,866)		1,960		(12,520)		11,512
Other comprehensive (loss) income, before tax		(3,508)		1,806		(13,966)		8,046
Income tax effect:
Foreign currency translation adjustments (1)		379		35		334		780
Interest rate swaps (3)		429		(477)		2,879		(2,649)
Income tax effect (4)		808		(442)		3,213		(1,869)
Other comprehensive (loss) income, net of tax		(2,700)		1,364		(10,753)		6,177
Comprehensive (loss) income before attribution to noncontrolling interests		(2,443)		(11,497)		(3,418)		23,475
Less: comprehensive loss (income), redeemable noncontrolling interests		369		378		456		(26)
Less: comprehensive (income), nonredeemable noncontrolling interests		(241)		(817)		(783)		(1,930)
Comprehensive (loss) income attributable to the Company	$	(2,315)	$	(11,936)	$	(3,745)	$	21,519

(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 loss into net interest expense included $161 and $849 for the three and nine months ended September 29, 2019, respectively, and ($19) and ($216) for the three and nine months ended September 30, 2018, respectively.

(3)The income tax effects of amounts reclassified out of accumulated other comprehensive loss were ($37) and ($195) for the three and nine months ended September 29, 2019, respectively, and $4 and $50 for the three and nine months ended September 30, 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 Statements of Comprehensive (Loss) Income are unaudited and have 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’ 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 September 29, 2019	Outstanding	Stock		Capital		Loss		Earnings		Stock		Subsidiaries		Deficit
Balance at June 30, 2019	31,427	$	443	$	196,927	$	(11,196)	$	228,833	$	(748,657)	$	15,584	$	(318,066)
Net income (1)	—		—		—		—		385		—		241		626
Other comprehensive loss	—		—		—		(2,700)		—		—		—		(2,700)
Cash dividends on common stock	—		—		79		—		(7,182)		—		—		(7,103)
Cash dividends on preferred stock	—		—		—		—		(1,140)		—		—		(1,140)
Dividends declared on preferred stock	—		—		—		—		(2,273)		—		—		(2,273)
Exercise of stock options	9		—		239		—		—		—		—		239
Tax effect of equity awards	—		—		(255)		—		—		—		—		(255)
Stock-based compensation expense	—		—		4,764		—		—		—		—		4,764
Issuance of restricted stock	10		—		(547)		—		—		547		—		—
Distributions to noncontrolling interests	—		—		—		—		—		—		(462)		(462)
Other	2		—		(17)		—		(99)		120		—		4
Balance at September 29, 2019	31,448	$	443	$	201,190	$	(13,896)	$	218,524	$	(747,990)	$	15,363	$	(326,366)

For the nine months ended September 29, 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)	—		—		—		—		7,008		—		783		7,791
Other comprehensive loss	—		—		—		(10,753)		—		—		—		(10,753)
Cash dividends on common stock	—		—		174		—		(21,545)		—		—		(21,371)
Cash dividends on preferred stock	—		—		—		—		(6,608)		—		—		(6,608)
Dividends declared on preferred stock	—		—		—		—		(2,273)		—		—		(2,273)
Exercise of stock options	12		—		332		—		—		—		—		332
Tax effect of equity awards	—		—		(1,150)		—		—		—		—		(1,150)
Stock-based compensation expense	—		—		12,295		—		—		—		—		12,295
Issuance of restricted stock	54		—		(3,117)		—		—		3,117		—		—
Distributions to noncontrolling interests	—		—		—		—		—		—		(645)		(645)
Other	10		—		(328)		—		(240)		597		—		29
Balance at September 29, 2019	31,448	$	443	$	201,190	$	(13,896)	$	218,524	$	(747,990)	$	15,363	$	(326,366)

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(1)	Net income to the Company for the three and nine months ended September 29, 2019 excludes ($128) and $327, respectively, allocable to the noncontrolling interests for our joint venture arrangements, respectively.

At September 29, 2019, the accumulated other comprehensive loss of $13,896 was comprised of net unrealized foreign currency translation loss of $7,973 and net unrealized loss on the interest rate swap agreements of $5,923.

See accompanying notes.

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 September 30, 2018	Outstanding	Stock		Capital		Income (Loss)		Earnings		Stock		Subsidiaries		Deficit
Balance at July 1, 2018	31,548	$	443	$	188,026	$	2,240	$	282,739	$	(742,694)	$	16,135	$	(253,111)
Net loss (1)	—		—		—		—		(13,300)		—		818		(12,482)
Other comprehensive income	—		—		—		1,364		—		—		—		1,364
Cash dividends on common stock	—		—		36		—		(7,093)		—		—		(7,057)
Exercise of stock options	18		—		413		—		—		—		—		413
Tax effect of equity awards	—		—		(121)		—		—		—		—		(121)
Acquisition of Company common stock	(207)		—		—		—		—		(9,609)		—		(9,609)
Stock-based compensation expense	—		—		2,144		—		—		—		—		2,144
Issuance of restricted stock	6		—		(347)		—		—		347		—		—
Distributions to noncontrolling interests	—		—		—		—		—		—		(1,576)		(1,576)
Other	1		—		(16)		1		2,251		61		32		2,329
Balance at September 30, 2018	31,366	$	443	$	190,135	$	3,605

Form: 10-Q

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