November 5, 2020 - 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 September 27, 2020

☐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 30, 2020, there were outstanding 32,952,184 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 27, 2020 and December 29, 2019	3

	Condensed Consolidated Statements of Operations — Three and Nine months ended September 27, 2020 and September 29, 2019	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Nine months ended September 27, 2020 and September 29, 2019	5

	Condensed Consolidated Statements of Stockholders’ Deficit — Three and Nine months ended September 27, 2020 and September 29, 2019	6

	Condensed Consolidated Statements of Cash Flows — Nine months ended September 27, 2020 and September 29, 2019	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	41

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 6.	Exhibits	42

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets



	September 27,		December 29,
(In thousands, except per share amounts)	2020		2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	140,050	$	27,911
Accounts receivable, net		69,332		70,462
Notes receivable, current portion		10,180		7,790
Income tax receivable		1,903		4,024
Inventories		28,702		27,529
Prepaid expenses and other current assets		29,771		43,830
Total current assets		279,938		181,546
Property and equipment, net		199,291		211,741
Finance lease right-of-use assets, net		9,458		9,383
Operating lease right-of-use assets		139,653		148,229
Notes receivable, less current portion, net		34,319		33,010
Goodwill		80,022		80,340
Deferred income taxes		7,454		1,839
Other assets		66,540		64,633
Total assets	$	816,675	$	730,721

Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit
Current liabilities:
Accounts payable	$	32,288	$	29,141
Income and other taxes payable		10,034		7,599
Accrued expenses and other current liabilities		153,171		108,517
Current deferred revenue		17,916		17,673
Current finance lease liabilities		2,229		1,789
Current operating lease liabilities		24,853		23,226
Current portion of long-term debt		20,000		20,000
Total current liabilities		260,491		207,945
Deferred revenue		13,471		14,722
Long-term finance lease liabilities		7,454		7,629
Long-term operating lease liabilities		116,684		125,297
Long-term debt, less current portion, net		328,079		347,290
Deferred income taxes		899		2,649
Other long-term liabilities		103,744		84,927
Total liabilities		830,822		790,459

Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at September 27, 2020 and December 29, 2019		251,864		251,133
Redeemable noncontrolling interests		6,834		5,785

Stockholders’ deficit:
Common stock ($0.01 par value per share; issued 45,253 at September 27, 2020 and 44,748 at December 29, 2019)		452		447
Additional paid-in capital		255,210		219,047
Accumulated other comprehensive loss		(18,510)		(10,185)
Retained earnings		216,911		205,697
Treasury stock (12,768 shares at September 27, 2020 and 12,854 shares at December 29, 2019, at cost)		(742,323)		(747,327)
Total stockholders’ deficit		(288,260)		(332,321)
Noncontrolling interests in subsidiaries		15,415		15,665
Total Stockholders’ deficit		(272,845)		(316,656)
Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit	$	816,675	$	730,721

See accompanying notes.

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)



	Three Months Ended				Nine Months Ended
		September 27,	September 29,		September 27,		September 29,
(In thousands, except per share amounts)	2020		2019		2020		2019

Revenues:
Domestic Company-owned restaurant sales	$	178,371	$	165,135	$	526,317	$	490,594
North America franchise royalties and fees		25,281		15,924		68,895		53,215
North America commissary revenues		181,338		154,703		504,379		450,735
International revenues		33,440		24,679		87,592		75,843
Other revenues		54,511		43,265		156,240		131,347
Total revenues		472,941		403,706		1,343,423		1,201,734
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses		144,803		134,037		419,082		399,040
North America commissary expenses		167,937		144,624		466,676		419,925
International expenses		19,370		13,557		52,775		42,514
Other expenses		50,917		42,952		148,219		129,019
General and administrative expenses		52,601		53,503		148,680		153,356
Depreciation and amortization		12,764		11,832		37,436		35,102
Total costs and expenses		448,392		400,505		1,272,868		1,178,956
Refranchising gains		—		1,726		—		1,889
Operating income		24,549		4,927		70,555		24,667
Net interest expense		(3,636)		(4,249)		(11,230)		(14,797)
Income before income taxes		20,913		678		59,325		9,870
Income tax expense		4,516		421		11,984		2,535
Net income before attribution to noncontrolling interests		16,397		257		47,341		7,335
Net (income) loss attributable to noncontrolling interests		(689)		128		(2,576)		(327)
Net income attributable to the Company	$	15,708	$	385	$	44,765	$	7,008

Calculation of net income (loss) for earnings (loss) per share:
Net income attributable to the Company	$	15,708	$	385	$	44,765	$	7,008
Dividends paid to participating securities and accretion		(3,548)		(3,473)		(10,546)		(9,029)
Net income attributable to participating securities		(703)		—		(1,809)		—
Net income (loss) attributable to common shareholders	$	11,457	$	(3,088)	$	32,410	$	(2,021)

Basic earnings (loss) per common share	$	0.35	$	(0.10)	$	1.00	$	(0.06)
Diluted earnings (loss) per common share	$	0.35	$	(0.10)	$	0.99	$	(0.06)

Basic weighted average common shares outstanding		32,616		31,601		32,347		31,581
Diluted weighted average common shares outstanding		32,971		31,601		32,643		31,581

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

See accompanying notes.

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Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)



	Three Months Ended				Nine Months Ended
	September 27,		September 29,		September 27,		September 29,
(In thousands)	2020		2019		2020		2019


Net income before attribution to noncontrolling interests	$	16,397	$	257	$	47,341	$	7,335
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		1,721		(1,642)		(1,438)		(1,446)
Interest rate swaps (1)		1,647		(1,866)		(9,375)		(12,520)
Other comprehensive income (loss), before tax		3,368		(3,508)		(10,813)		(13,966)
Income tax effect:
Foreign currency translation adjustments		(395)		379		332		334
Interest rate swaps (2)		(379)		429		2,156		2,879
Income tax effect		(774)		808		2,488		3,213
Other comprehensive income (loss), net of tax		2,594		(2,700)		(8,325)		(10,753)
Comprehensive income (loss) before attribution to noncontrolling interests		18,991		(2,443)		39,016		(3,418)
Less: comprehensive (income) loss, redeemable noncontrolling interests		(301)		369		(1,184)		456
Less: comprehensive (income), nonredeemable noncontrolling interests		(388)		(241)		(1,392)		(783)
Comprehensive income (loss) attributable to the Company	$	18,302	$	(2,315)	$	36,440	$	(3,745)

(1)Amounts reclassified out of accumulated other comprehensive loss into net interest expense included ($1,674) and ($3,376) for the three and nine months ended September 27, 2020, respectively, and $161 and $849 for the three and nine months ended September 29, 2019, respectively.

(2)The income tax effects of amounts reclassified out of accumulated other comprehensive loss into net interest expense were $378 and $763 for the three and nine months ended September 27, 2020, respectively, and ($37) and ($195) for the three and nine months ended September 29, 2019, respectively.

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 September 27, 2020	Outstanding	Stock		Capital		Loss		Earnings		Stock		Subsidiaries		Deficit
Balance at June 28, 2020	32,349	$	451	$	243,577	$	(21,104)	$	212,104	$	(742,600)	$	15,724	$	(291,848)
Net income (2)	—		—		—		—		15,708		—		388		16,096
Other comprehensive income	—		—		—		2,594		—		—		—		2,594
Cash dividends on common stock	—		—		78		—		(7,414)		—		—		(7,336)
Cash dividends on preferred stock	—		—		—		—		(3,412)		—		—		(3,412)
Exercise of stock options	131		1		7,499		—		—		—		—		7,500
Stock-based compensation expense	—		—		4,328		—		—		—		—		4,328
Issuance of restricted stock	2		—		(105)		—		—		105		—		—
Tax effect of restricted stock awards	—		—		(86)		—		—		—		—		(86)
Distributions to noncontrolling interests	—		—		—		—		—		—		(697)		(697)
Other	3		—		(81)		—		(75)		172		—		16
Balance at September 27, 2020	32,485	$	452	$	255,210	$	(18,510)	$	216,911	$	(742,323)	$	15,415	$	(272,845)

For the nine months ended September 27, 2020
Balance at December 29, 2019	31,894	$	447	$	219,047	$	(10,185)	$	205,697	$	(747,327)	$	15,665	$	(316,656)
Cumulative effect of adoption of ASU 2016-13 (1)	—		—		—		—		(1,066)		—		—		(1,066)
Adjusted Balance at December 30, 2019	31,894		447		219,047		(10,185)		204,631		(747,327)		15,665		(317,722)
Net income (2)	—		—		—		—		44,765		—		1,392		46,157
Other comprehensive loss	—		—		—		(8,325)		—		—		—		(8,325)
Cash dividends on common stock	—		—		210		—		(22,066)		—		—		(21,856)
Cash dividends on preferred stock	—		—		—		—		(10,237)		—		—		(10,237)
Exercise of stock options	505		5		29,199		—		—		—		—		29,204
Stock-based compensation expense	—		—		13,071		—		—		—		—		13,071
Issuance of restricted stock	79		—		(4,573)		—		—		4,573		—		—
Tax effect of restricted stock awards	—		—		(1,665)		—		—		—		—		(1,665)
Distributions to noncontrolling interests	—		—		—		—		—		—		(1,642)		(1,642)
Other	7		—		(79)		—		(182)		431		—		170
Balance at September 27, 2020	32,485	$	452	$	255,210	$	(18,510)	$	216,911	$	(742,323)	$	15,415	$	(272,845)

(1)	As of December 30, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”.

(2)	Net income to the Company for the three and nine months ended September 27, 2020 excludes $301 and $1,184 allocable to the redeemable noncontrolling interests for our joint venture arrangements.

At September 27, 2020, the accumulated other comprehensive loss of $18,510 was comprised of net unrealized foreign currency translation loss of $6,705 and net unrealized loss on the interest rate swap agreements of $11,805.

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.
	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
Stock-based compensation expense	—		—		4,764		—		—		—		—		4,764
Issuance of restricted stock	10		—		(547)		—		—		547		—		—
Tax effect of restricted stock awards	—		—		(255)		—		—		—		—		(255)
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	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	—		—

Form: 10-Q

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