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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 30, 2019

OR

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

2

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.

3

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.

4

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.

5

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.

6

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)