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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

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 October 31, 2019, there were outstanding 31,946,162 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 — 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

2

Table of Contents

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.

3

Table of Contents

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.

4

Table of Contents

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.

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 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)

6

Table of Contents

(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