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PAPA JOHNS INTERNATIONAL INC - Quarter Report: 2017 March (Form 10-Q)

Table of Contents

 

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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 March 26, 2017

 

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 Johns Boulevard

Louisville, Kentucky 40299-2367

(Address of principal executive offices)

 

(502) 261-7272

(Registrant’s telephone number, including area code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 April 25, 2017, there were outstanding 36,766,262 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 — March 26, 2017 and December 25, 2016

3

 

 

 

 

Condensed Consolidated Statements of Income — Three months ended March 26, 2017 and March 27, 2016

4

 

 

 

 

Consolidated Statements of Comprehensive Income — Three months ended March 26, 2017 and March 27, 2016

5

 

 

 

 

Consolidated Statements of Cash Flows — Three months ended March 26, 2017 and March 27, 2016

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

21

 

 

 

Item 4. 

Controls and Procedures

22

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

22

 

 

 

Item 1A. 

Risk Factors

22

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

Item 6. 

Exhibits

23

 

 

2

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

    

March 26,

    

December 25,

 

(In thousands, except per share amounts)

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,715

 

$

15,563

 

Accounts receivable, net

 

 

60,586

 

 

59,691

 

Notes receivable, net

 

 

3,626

 

 

3,417

 

Income taxes receivable

 

 

 —

 

 

2,372

 

Inventories

 

 

22,711

 

 

25,132

 

Prepaid expenses

 

 

20,534

 

 

24,105

 

Other current assets

 

 

9,365

 

 

9,038

 

Assets held for sale

 

 

6,031

 

 

6,257

 

Total current assets

 

 

145,568

 

 

145,575

 

Property and equipment, net

 

 

230,765

 

 

230,473

 

Notes receivable, less current portion net

 

 

10,443

 

 

10,141

 

Goodwill

 

 

85,787

 

 

85,529

 

Deferred income taxes

 

 

212

 

 

769

 

Other assets

 

 

43,674

 

 

40,078

 

Total assets

 

$

516,449

 

$

512,565

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

37,362

 

$

42,701

 

Income and other taxes payable

 

 

16,357

 

 

8,540

 

Accrued expenses and other current liabilities

 

 

66,705

 

 

76,789

 

Total current liabilities

 

 

120,424

 

 

128,030

 

Deferred revenue

 

 

3,157

 

 

3,313

 

Long-term debt, net

 

 

294,332

 

 

299,820

 

Deferred income taxes

 

 

10,559

 

 

10,047

 

Other long-term liabilities

 

 

56,704

 

 

53,093

 

Total liabilities

 

 

485,176

 

 

494,303

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

8,735

 

 

8,461

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock ($0.01 par value per share; no shares issued)

 

 

 —

 

 

 —

 

Common stock ($0.01 par value per share; issued 44,151 at March 26, 2017 and 44,066 at December 25, 2016)

 

 

441

 

 

441

 

Additional paid-in capital

 

 

174,364

 

 

172,573

 

Accumulated other comprehensive loss

 

 

(5,796)

 

 

(5,887)

 

Retained earnings

 

 

240,870

 

 

219,278

 

Treasury stock (7,497 shares at March 26, 2017 and 7,383 shares at December 25, 2016, at cost)

 

 

(401,029)

 

 

(390,316)

 

Total stockholders’ equity (deficit), net of noncontrolling interests

 

 

8,850

 

 

(3,911)

 

Noncontrolling interests in subsidiaries

 

 

13,688

 

 

13,712

 

Total stockholders’ equity

 

 

22,538

 

 

9,801

 

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

 

$

516,449

 

$

512,565

 

 

 

See accompanying notes.

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Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

Three months ended

(In thousands, except per share amounts)

March 26, 2017

    

March 27, 2016

Revenues:

 

 

 

 

 

Domestic Company-owned restaurant sales

$

206,896

 

$

205,679

North America franchise royalties and fees

 

27,607

 

 

26,476

North America commissary and other sales

 

186,245

 

 

168,985

International

 

28,518

 

 

27,455

Total revenues

 

449,266

 

 

428,595

Costs and expenses:

 

 

 

 

 

Operating costs (excluding depreciation and amortization shown separately below):

 

 

 

 

 

Domestic Company-owned restaurant expenses

 

165,419

 

 

161,310

North America commissary and other expenses

 

173,712

 

 

156,806

International expenses

 

17,990

 

 

17,590

General and administrative expenses

 

38,007

 

 

40,247

Depreciation and amortization

 

10,457

 

 

9,744

Total costs and expenses

 

405,585

 

 

385,697

Operating income

 

43,681

 

 

42,898

Net interest expense

 

(1,810)

 

 

(1,489)

Income before income taxes

 

41,871

 

 

41,409

Income tax expense

 

11,972

 

 

13,358

Net income before attribution to noncontrolling interests

 

29,899

 

 

28,051

Income attributable to noncontrolling interests

 

(1,471)

 

 

(1,869)

Net income attributable to the Company

$

28,428

 

$

26,182

 

 

 

 

 

 

Calculation of income for earnings per share:

 

 

 

 

 

Net income attributable to the Company

$

28,428

 

$

26,182

Change in noncontrolling interest redemption value

 

520

 

 

220

Net income attributable to participating securities

 

(117)

 

 

(110)

Net income attributable to common shareholders

$

28,831

 

$

26,292

 

 

 

 

 

 

Basic earnings per common share

$

0.78

 

$

0.69

Diluted earnings per common share

$

0.77

 

$

0.69

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

36,810

 

 

37,931

Diluted weighted average common shares outstanding

 

37,350

 

 

38,297

 

 

 

 

 

 

Dividends declared per common share

$

0.20

 

$

0.175

 

See accompanying notes.

 

 

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Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

(In thousands)

    

March 26, 2017

    

March 27, 2016

 

 

 

 

 

 

 

Net income before attribution to noncontrolling interests

 

$

29,899

 

$

28,051

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

Foreign currency income (loss) adjustments

 

 

613

 

 

(2,071)

Interest rate swaps (1)

 

 

(468)

 

 

(3,289)

Other comprehensive income (loss), before tax

 

 

145

 

 

(5,360)

Income tax effect:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(227)

 

 

766

Interest rate swaps (2)

 

 

173

 

 

1,217

Income tax effect

 

 

(54)

 

 

1,983

Other comprehensive income (loss), net of tax

 

 

91

 

 

(3,377)

Comprehensive income before attribution to noncontrolling interests

 

 

29,990

 

 

24,674

Comprehensive loss, redeemable noncontrolling interests

 

 

(794)

 

 

(1,244)

Comprehensive loss, nonredeemable noncontrolling interests

 

 

(677)

 

 

(625)

Comprehensive income attributable to the Company

 

$

28,519

 

$

22,805


(1)

Amounts reclassified out of accumulated other comprehensive income (loss) into net interest expense included $198 for the three months ended March 26, 2017 and $317 for the three months ended March 27, 2016.

 

(2)

The income tax effects of amounts reclassified out of accumulated other comprehensive income (loss) into net interest expense were $73 for the three months ended March 26, 2017 and $117 for the three months ended March 27, 2016.

 

See accompanying notes.

 

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Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

(In thousands)

    

March 26, 2017

    

March 27, 2016

 

Operating activities

 

 

 

 

 

 

 

Net income before attribution to noncontrolling interests

 

$

29,899

 

$

28,051

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for uncollectible accounts and notes receivable

 

 

(417)

 

 

216

 

Depreciation and amortization

 

 

10,457

 

 

9,744

 

Deferred income taxes

 

 

1,015

 

 

7,141

 

Stock-based compensation expense

 

 

2,736

 

 

2,172

 

Other

 

 

769

 

 

1,101

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,048)

 

 

6,457

 

Income taxes receivable

 

 

2,372

 

 

4,107

 

Inventories

 

 

2,425

 

 

(612)

 

Prepaid expenses

 

 

3,574

 

 

1,938

 

Other current assets

 

 

(134)

 

 

(314)

 

Other assets and liabilities

 

 

(1,577)

 

 

(614)

 

Accounts payable

 

 

(5,239)

 

 

(10,007)

 

Income and other taxes payable

 

 

7,817

 

 

277

 

Accrued expenses and other current liabilities

 

 

(5,164)

 

 

(16,738)

 

Deferred revenue

 

 

(156)

 

 

934

 

Net cash provided by operating activities

 

 

47,329

 

 

33,853

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(15,064)

 

 

(10,249)

 

Loans issued

 

 

(715)

 

 

(917)

 

Repayments of loans issued

 

 

863

 

 

1,275

 

Acquisitions, net of cash acquired

 

 

(21)

 

 

(11,202)

 

Other

 

 

 7

 

 

159

 

Net cash used in investing activities

 

 

(14,930)

 

 

(20,934)

 

Financing activities

 

 

 

 

 

 

 

Net (repayments) proceeds from issuance of long-term debt

 

 

(5,575)

 

 

61,500

 

Cash dividends paid

 

 

(7,354)

 

 

(6,628)

 

Tax payments for equity award issuances

 

 

(2,259)

 

 

(5,670)

 

Proceeds from exercise of stock options

 

 

3,248

 

 

922

 

Acquisition of Company common stock

 

 

(13,075)

 

 

(66,033)

 

Distributions to noncontrolling interest holders

 

 

(702)

 

 

(980)

 

Other

 

 

396

 

 

294

 

Net cash used in financing activities

 

 

(25,321)

 

 

(16,595)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

74

 

 

(58)

 

Change in cash and cash equivalents

 

 

7,152

 

 

(3,734)

 

Cash and cash equivalents at beginning of period

 

 

15,563

 

 

21,006

 

Cash and cash equivalents at end of period

 

$

22,715

 

$

17,272

 

 

See accompanying notes.

 

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Table of Contents

Papa John’s International, Inc. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

March 26, 2017

 

1.Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three months ended March 26, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first person notations of “we”, “us” and “our”) for the year ended December 25, 2016.

 

2.Significant Accounting Policies

 

Noncontrolling Interests

 

Papa John’s has five joint venture arrangements in which there are noncontrolling interests held by third parties. These joint ventures include 223 restaurants at March 26, 2017 and 213 restaurants at March 27, 2016. We are required to report the consolidated net income at amounts attributable to the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the condensed consolidated statements of income attributable to the noncontrolling interest holder.

 

The income before income taxes attributable to these joint ventures for the three months ended March 26, 2017 and March 27, 2016 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

March 26,

 

March 27,

 

    

2017

    

2016

 

 

 

 

 

 

 

Papa John’s International, Inc.

 

$

2,362

 

$

2,760

Noncontrolling interests

 

 

1,471

 

 

1,869

Total income before income taxes

 

$

3,833

 

$

4,629

 

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The following summarizes the redemption feature, location and related accounting within the condensed consolidated balance sheets for these joint venture arrangements:

 

 

 

 

 

 

 

    

 

    

 

Type of Joint Venture Arrangement

    

Location within the  Balance Sheets

    

Recorded Value

 

 

 

 

 

Joint venture with no redemption feature

 

Permanent equity

 

Carrying value

Option to require the Company to purchase the noncontrolling interest - currently redeemable

 

Temporary equity

 

Redemption value*

Option to require the Company to purchase the noncontrolling interest - not currently redeemable

 

Temporary equity

 

Carrying value

 

 

 

 

 


*The change in redemption value is recorded as an adjustment to “Redeemable noncontrolling interests” and “Retained earnings” in the condensed consolidated balance sheets.

 

Deferred Income Tax Accounts and Tax Reserves

 

We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. Discrete items are recorded in the quarter in which they occur.

 

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. As a result, our effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. As of March 26, 2017, we had a net deferred tax liability of approximately $10.3 million.

 

Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues on a quarterly basis to adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures.

 

Fair Value Measurements and Disclosures

 

The Company is required to determine the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Fair value is a market-based measurement, not an entity specific measurement. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash, accounts receivable and accounts payable. The carrying value of our notes receivable net of allowances also approximates fair value. The fair value of the amount outstanding under our revolving credit facility approximates its carrying value due to its variable market-based interest rate. These assets and liabilities are categorized as Level 1 as defined below.

 

Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following categories:

 

·

Level 1: Quoted market prices in active markets for identical assets or liabilities.

·

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

·

Level 3: Unobservable inputs that are not corroborated by market data.

 

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Our financial assets and liabilities that were measured at fair value on a recurring basis as of March 26, 2017 and December 25, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Fair Value Measurements

 

 

    

Value

    

Level 1

    

Level 2

    

Level 3

 

March 26, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash surrender value of life insurance policies (a)

 

$

24,238

 

$

24,238

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (b)

 

 

1,238

 

 

 —

 

 

1,238

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 25, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash surrender value of life insurance policies (a)

 

$

21,690

 

$

21,690

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (b)

 

 

770

 

 

 —

 

 

770

 

 

 —

 


(a)

Represents life insurance policies held in our non-qualified deferred compensation plan.

(b)

The fair value of our interest rate swaps are based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swaps, as well as considering published discount factors, and projected London Interbank Offered Rates (“LIBOR”).

 

Our assets and liabilities that were measured at fair value on a non-recurring basis as of March 26, 2017 and December 25, 2016 include assets held for sale.  The fair value was determined using a discounted cash flow model with unobservable inputs (Level 3) less estimated selling costs.  No impairment loss was recorded for these assets held for sale for the three months ended March 26, 2017.

 

There were no transfers among levels within the fair value hierarchy during the three months ended March 26, 2017.

 

Variable Interest Entity

 

Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants. PJMF is a variable interest entity as it does not have sufficient equity to fund its operations without ongoing financial support and contributions from its members. Based on the ownership and governance structure and operating procedures of PJMF, we have determined that we do not have the power to direct the most significant activities of PJMF and therefore are not the primary beneficiary. Accordingly, consolidation of PJMF is not appropriate.

 

Accounting Standards Adopted

 

Employee Share-Based Payments

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The guidance simplified the accounting and financial reporting of the income tax impact of stock-based compensation arrangements.  This guidance requires excess tax benefits to be recorded as a discrete item within income tax expense rather than additional paid-in capital.  In addition, excess tax benefits are required to be classified as cash from operating activities rather than cash from financing activities. 

 

The Company adopted this guidance as of the beginning of fiscal 2017.  The Company elected to apply the cash flow guidance of ASU 2016-09 retrospectively to all prior periods.  The impact of retrospectively applying this guidance to the consolidated statement of cash flows for the three months ended March 27, 2016 was a $3.9 million increase in net

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cash provided by operating activities and a corresponding increase in net cash used in financing activities.  The Company elected to continue to estimate forfeitures, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.   

 

Accounting Standards to be Adopted in Future Periods

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, “Leases,” (“ASU 2016-02”) which amends leasing guidance by requiring companies to recognize a right-of-use asset and a lease liability for all operating and capital leases (financing) with lease terms greater than twelve months.  The lease liability will be equal to the present value of lease payments. The lease asset will be based on the lease liability, subject to adjustment, such as for initial direct costs.  For income statement purposes, leases will continue to be classified as operating or capital (financing) with lease expense in both cases calculated substantially the same as under the prior leasing guidance. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 (fiscal 2019 for the Company), and early adoption is permitted.  The Company has not yet determined the effect of the adoption on its condensed consolidated financial statements.

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. This update requires companies to recognize revenue at amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services at the time of transfer. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. Such estimates may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Companies can either apply a full retrospective adoption or a modified retrospective adoption. In March and April 2016, the FASB issued the following amendments to clarify the implementation guidance: ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. 

 

We are required to adopt ASU 2014-09 in the first quarter of 2018.   We do not expect the adoption will significantly impact our recognition of revenue from Company-owned restaurants, commissary sales or our continuing royalties or other fees from franchisees that are based on a percentage of the franchise sales.  We are continuing to evaluate the impact on other less significant transactions including our loyalty program and the timing of recognizing franchise and development fees. We are also currently evaluating the method of adoption and the impact adoption will have on our related financial statement disclosures.

 

3.Calculation of Earnings Per Share

 

We compute earnings per share using the two-class method. The two-class method requires an earnings allocation formula that determines earnings per share for common shareholders and participating security holders according to dividends declared and participating rights in undistributed earnings. We consider time-based restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights. Under the two-class method, undistributed earnings allocated to participating securities are subtracted from net income attributable to the Company in determining net income attributable to common shareholders.

 

Additionally,  the change in the redemption value for the noncontrolling interest of one of our joint ventures increases or decreases income attributable to common shareholders.

 

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The calculations of basic and diluted earnings per common share are as follows (in thousands, except per-share data):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 26,

 

March 27,

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

Net income attributable to the Company

 

$

28,428

 

$

26,182

 

Change in noncontrolling interest redemption value

 

 

520

 

 

220

 

Net income attributable to participating securities

 

 

(117)

 

 

(110)

 

Net income attributable to common shareholders

 

$

28,831

 

$

26,292

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

36,810

 

 

37,931

 

Basic earnings per common share

 

$

0.78

 

$

0.69

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

28,831

 

$

26,292

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

36,810

 

 

37,931

 

Dilutive effect of outstanding equity awards (a)

 

 

540

 

 

366

 

Diluted weighted average common shares outstanding

 

 

37,350

 

 

38,297

 

Diluted earnings per common share

 

$

0.77

 

$

0.69

 


(a) Excludes 117 and 476 awards for the three months ended March 26, 2017 and March 27, 2016, respectively, as the effect of including such awards would have been antidilutive.

 

4.Acquisition of Restaurants

 

In the first quarter of 2016, we completed the acquisition of 20 franchised Papa John’s restaurants located in Alabama, Florida and Kentucky in two separate transactions with an aggregate purchase price of $11.2 million. These acquisitions were accounted for by the purchase method of accounting, whereby operating results subsequent to the acquisition date are included in our consolidated financial results.

 

The aggregate final purchase price of the 2016 acquisitions has been allocated as follows (in thousands):

 

 

 

 

 

 

Property and equipment

 

$

1,028

 

Franchise rights

 

 

1,230

 

Goodwill

 

 

8,837

 

Other

 

 

107

 

Total purchase price

 

$

11,202

 

 

The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill for the domestic Company-owned restaurants segment and is eligible for deduction over 15 years under U.S. tax regulations. 

 

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5.Debt

 

Long-term debt, net consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

March 26,

 

 

December 25,

 

 

 

 

2017

 

 

2016

Outstanding debt

 

 

$

295,000

 

$

300,575

Debt issuance costs

 

 

 

(668)

 

 

(755)

Total long-term debt, net

 

 

$

294,332

 

$

299,820

 

 

 

 

 

 

 

 

 

Our outstanding debt is comprised entirely of a $500 million unsecured revolving line of credit (“Credit Facility”) with an expiration date of October 31, 2019. Including outstanding letters of credit, the remaining availability under the Credit Facility was approximately $176.6 million as of March 26, 2017.

 

The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points.

 

The Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At March 26, 2017, we were in compliance with these covenants.

 

We attempt to minimize interest risk exposure by fixing our rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions and have reset dates and critical terms that match those of our existing debt and the anticipated critical terms of future debt. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is due to the possible failure of the counterparty to perform under the terms of the derivative contract.

 

As of March 26, 2017, we have the following interest rate swap agreements, including three forward starting swaps executed in 2015 that become effective in 2018 upon expiration of the two existing swaps for $125 million:

 

 

 

 

 

 

 

 

 

Effective Dates

    

Floating Rate Debt

    

Fixed Rates

 

July 30, 2013 through April 30, 2018

 

$

75

million  

 

1.42

%

December 30, 2014 through April 30, 2018

 

$

50

million  

 

1.36

%

April 30, 2018 through April 30, 2023

 

$

55

million  

 

2.33

%

April 30, 2018 through April 30, 2023

 

$

35

million  

 

2.36

%

April 30, 2018 through April 30, 2023

 

$

35

million  

 

2.34

%

 

The weighted average interest rates on the Credit Facility, including the impact of the interest rate swap agreements, were 2.2% and 2.1% for the three months ended March 26, 2017 and March 27, 2016, respectively. Interest paid, including payments made or received under the swaps, was $1.9 million and $1.6 million for the three months ended March 26, 2017 and March 27, 2016, respectively. As of March 26, 2017, the portion of the aggregate $1.2 million interest rate swap liability that would be reclassified into earnings during the next twelve months as interest expense approximates $200,000.

 

6.Segment Information

 

We have five reportable segments: domestic Company-owned restaurants, North America commissaries, North America franchising, international operations and “all other” units. The domestic Company-owned restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States) Company-owned restaurants and derives its revenues principally from retail sales of pizza and side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. The North America commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants in the United States and Canada. The North America franchising segment consists of our franchise sales and support activities

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and derives its revenues from sales of franchise and development rights and collection of royalties from our franchisees located in the United States and Canada. The international operations segment principally consists of Company-owned restaurants in China and distribution sales to franchised Papa John’s restaurants located in the United Kingdom, Mexico and China and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. International franchisees are defined as all franchise operations outside of the United States and Canada. All other business units that do not meet the quantitative thresholds for determining reportable segments, which are not operating segments, we refer to as our “all other” segment, which consists of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of printing and promotional items, and information systems and related services used in restaurant operations, including our point-of-sale system, online and other technology-based ordering platforms.

 

Generally, we evaluate performance and allocate resources based on profit or loss from operations before income taxes and intercompany eliminations. Certain administrative and capital costs are allocated to segments based upon predetermined rates or actual estimated resource usage. We account for intercompany sales and transfers as if the sales or transfers were to third parties and eliminate the activity in consolidation.

 

Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our consolidated revenues.

 

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Our segment information is as follows (in thousands):

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

March 26, 2017

 

March 27, 2016

 

 

 

 

 

 

 

 

Revenues from external customers:

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

 

$

206,896

 

$

205,679

North America commissaries

 

 

 

171,340

 

 

155,954

North America franchising

 

 

 

27,607

 

 

26,476

International

 

 

 

28,518

 

 

27,455

All others

 

 

 

14,905

 

 

13,031

Total revenues from external customers

 

 

$

449,266

 

$

428,595

 

 

 

 

 

 

 

 

Intersegment revenues:

 

 

 

 

 

 

 

North America commissaries

 

 

$

61,736

 

$

58,326

North America franchising

 

 

 

764

 

 

713

International

 

 

 

63

 

 

65

All others

 

 

 

5,026

 

 

4,097

Total intersegment revenues

 

 

$

67,589

 

$

63,201

 

 

 

 

 

 

 

 

Income (loss) before income taxes:

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

 

$

15,487

 

$

20,187

North America commissaries

 

 

 

12,244

 

 

11,546

North America franchising

 

 

 

24,875

 

 

23,580

International

 

 

 

4,344

 

 

3,038

All others

 

 

 

(166)

 

 

51

Unallocated corporate expenses

 

 

 

(15,755)

 

 

(16,332)

Elimination of intersegment profit and losses

 

 

 

842

 

 

(661)

Total income before income taxes

 

 

$

41,871

 

$

41,409

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

Domestic Company-owned restaurants

 

 

$

226,420

 

 

 

North America commissaries

 

 

 

130,475

 

 

 

International

 

 

 

16,426

 

 

 

All others

 

 

 

57,163

 

 

 

Unallocated corporate assets

 

 

 

195,321

 

 

 

Accumulated depreciation and amortization

 

 

 

(395,040)

 

 

 

Net property and equipment

 

 

$

230,765

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Overview

 

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) began operations in 1984. At March 26, 2017, there were 5,082 Papa John’s restaurants (746 Company-owned and 4,336 franchised) operating in all 50 states and 45 international countries and territories. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, printing and promotional items, and information systems and related services used in their operations.

 

The results of operations are based on the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of consolidated financial statements requires management to select accounting policies for critical accounting areas and make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact our operating results. See “Notes 1 and 2” of “Notes to Condensed Consolidated Financial Statements” for a discussion of the basis of presentation and the significant accounting policies.

 

Restaurant Progression

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

March 26, 2017

    

March 27, 2016

 

 

 

 

 

 

 

North America Company-owned:

 

 

 

 

 

 

Beginning of period

 

 

702

 

 

707

Opened

 

 

 2

 

 

 2

Acquired

 

 

 1

 

 

20

End of period

 

 

705

 

 

729

International Company-owned:

 

 

 

 

 

 

Beginning of period

 

 

42

 

 

45

Closed

 

 

(1)

 

 

(1)

End of period

 

 

41

 

 

44

North America franchised:

 

 

 

 

 

 

Beginning of period

 

 

2,739

 

 

2,681

Opened

 

 

15

 

 

18

Closed

 

 

(30)

 

 

(18)

Divested

 

 

(1)

 

 

(20)

End of period

 

 

2,723

 

 

2,661

International franchised:

 

 

 

 

 

 

Beginning of period

 

 

1,614

 

 

1,460

Opened

 

 

38

 

 

24

Closed

 

 

(39)

 

 

(15)

End of period

 

 

1,613

 

 

1,469

Total restaurants - end of period

 

 

5,082

 

 

4,903

 

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Results of Operations

 

Review of Consolidated Operating Results

 

Revenues. Domestic Company-owned restaurant sales were $206.9 million in the first quarter of 2017, an increase of $1.2 million, or 0.6%, compared to the first quarter of 2016, primarily due to a 3.0% increase in comparable sales.  This was somewhat offset by a 2.4% decrease in equivalent units due to the refranchising of 42 restaurants in the fourth quarter of 2016. “Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. “Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis. 

 

North America franchise royalties and fees were $27.6 million in the first quarter of 2017, an increase of $1.1 million, or 4.3%, compared to the first quarter of 2016. The increase was primarily due to a 1.7% increase in comparable sales and a 2.6% increase in equivalent units. North America franchise restaurant sales increased 4.1% to $587.4 million for the first quarter of 2017. The increase is primarily due to the increase in comparable sales and equivalent units noted above.  Franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales.

 

North America commissary and other sales were $186.2 million in the first quarter of 2017, an increase of $17.3 million, or 10.2%, compared to the first quarter of 2016. The increase was primarily due to higher commissary sales from an increase in volumes and the impact of higher commodities, primarily cheese. 

 

International revenues were $28.5 million in the first quarter of 2017, an increase of $1.1 million, or 3.9%, compared to the first quarter of 2016.  This increase was net of the negative impact of foreign currency exchange rates of approximately $3.1 million.  The increase was primarily due to an increase in the number of restaurants and a 6.0% increase in comparable sales, calculated on a constant dollar basis.  This increase was partially offset by lower China Company-owned restaurant revenues primarily due to negative comparable sales and fewer restaurants.   International franchise restaurant sales increased 14.0% to $175.9 million in the first quarter of 2017. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.

 

Costs and expenses.  The operating margin for domestic Company-owned restaurants was 20.0% in the first quarter of 2017 compared to 21.6% in the first quarter of 2016, and consisted of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 26, 2017

 

March 27, 2016

 

 

 

 

 

 

 

 

 

 

Restaurant sales

$

206,896

 

 

 

$

205,679

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

46,912

 

22.7%

 

 

47,201

 

22.9%

Other operating expenses

 

118,507

 

57.3%

 

 

114,109

 

55.5%

Total expenses

$

165,419

 

80.0%

 

$

161,310

 

78.4%

 

 

 

 

 

 

 

 

 

 

Margin

$

41,477

 

20.0%

 

$

44,369

 

21.6%

 

Domestic Company-owned restaurants cost of sales approximated the prior year comparable period. Domestic restaurants other operating expenses were approximately 1.8% higher as a percentage of sales primarily due to increased labor costs including higher minimum wages, higher non-owned automobile claims costs, and increased mileage reimbursement costs from higher fuel prices.  

 

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North America commissary and other margin was 6.7% in the first quarter of 2017 compared to 7.2% in the first quarter of 2016 and consisted of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 26, 2017

 

March 27, 2016

 

 

Revenues

 

 

Expenses

 

 

Margin $

 

Margin %

 

 

Revenues

 

 

Expenses

 

 

Margin $

 

Margin %

North America commissary

$

171,340

 

$

159,957

 

$

11,383

 

6.6%

 

$

155,954

 

$

144,573

 

$

11,381

 

7.3%

All others

 

14,905

 

 

13,755

 

 

1,150

 

7.7%

 

 

13,031

 

 

12,233

 

 

798

 

6.1%

North America commissary and other

$

186,245

 

$

173,712

 

$

12,533

 

6.7%

 

$

168,985

 

$

156,806

 

$

12,179

 

7.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America commissary margin was 0.7% lower primarily due to higher delivery costs including higher driver labor and higher fuel costs.  The “All others” margin was 1.6% higher in the first quarter of 2017 primarily due to improved operating results for our online and mobile ordering business.

 

The international operating margin was 36.9% in the first quarter of 2017 compared to 35.9% in the first quarter of 2016 and consisted of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 26, 2017

 

 

March 27, 2016

 

 

Revenues

 

 

Expenses

 

 

Margin $

 

Margin %

 

 

Revenues

 

 

Expenses

 

 

Margin $

 

Margin %

Franchise royalties and fees

$

7,936

 

$

 -

 

$

7,936

 

 

 

$

6,868

 

$

 -

 

$

6,868

 

 

Restaurant, commissary and other

 

20,582

 

 

17,990

 

 

2,592

 

12.6%

 

 

20,587

 

 

17,590

 

 

2,997

 

14.6%

Total international

$

28,518

 

$

17,990

 

$

10,528

 

36.9%

 

$

27,455

 

$

17,590

 

$

9,865

 

35.9%

 

 

The higher margin was primarily due to an increase in franchise royalties and fees due to an increase in the number of restaurants and comparable sales of 6.0%.  This increase was partially offset by a lower commissary margin in 2017 which was planned.

 

General and administrative (“G&A”) expenses were $38.0 million, or 8.5% of revenues in the first quarter of 2017, compared to $40.2 million, or 9.4% of revenues in the first quarter of 2016. The decrease of $2.2 million was primarily due to the following:

 

·

Corporate G&A costs decreased primarily due to a decrease in bad debt expense.

·

Domestic Company-owned restaurant supervisor bonuses decreased due to lower operating results.

·

North America franchise incentive costs were lower.

·

International G&A costs decreased primarily due to the timing of advertising spend.

 

Depreciation and amortization. Depreciation and amortization was $10.5 million, or 2.3% of revenues in the first quarter of 2017, compared to $9.7 million, or 2.3% of revenues in the first quarter of 2016.

 

Net interest expense. Net interest expense increased approximately $300,000 in the first quarter of 2017 compared to the first quarter of 2016 primarily due to a higher average outstanding debt balance and higher interest rate.

 

Total income before income taxes. Total income before income taxes increased approximately $500,000, or 1.1%, in the first quarter of 2017 as compared to the first quarter of 2016. The increase is attributable primarily to the factors affecting our revenues and costs and expenses described above.

 

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Income tax expense.  The effective income tax rate was 28.6% in the first quarter of 2017 compared to 32.3% in the first quarter of 2016.  This decrease was primarily due to the adoption of new accounting guidance for share-based compensation in the first quarter of 2017.  This guidance requires excess tax benefits recognized on stock based awards to be recorded as a reduction of income tax expense rather than equity.  The impact of this adoption decreased our effective tax rate by 3.2%.

 

Diluted earnings per share. Diluted earnings per share was $0.77 in the first quarter of 2017 compared to $0.69 in the first quarter of 2016, an increase of $0.08, or 11.6%  primarily due to an increase in net income and a decrease in shares outstanding.  Diluted earnings per share was favorably impacted by approximately $0.03 due to the adoption of the new guidance for accounting for share-based compensation.  Excluding the impact of this adoption, diluted earnings per share would have increased 7.2% compared to first quarter 2016.

 

Liquidity and Capital Resources

 

Debt

 

Our debt is comprised entirely of a $500 million unsecured revolving line of credit (“Credit Facility”) with outstanding balances of $295.0 million as of March 26, 2017 and $300.6 million as of December 25, 2016.

 

The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points. The spread over LIBOR and the commitment fee are determined quarterly based upon the ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined by the Credit Facility. The remaining availability under the Credit Facility, reduced for outstanding letters of credit, was approximately $176.6 million as of March 26, 2017.

 

As of March 26, 2017, we have the following interest rate swap agreements, including three forward starting swaps executed in 2015 that become effective in 2018 upon expiration of the two existing swaps for $125 million:

 

 

 

 

 

 

 

 

Effective Dates

    

Floating Rate Debt 

    

Fixed Rates

 

July 30, 2013 through April 30, 2018

 

$

75 million

 

1.42

%

December 30, 2014 through April 30, 2018

 

$

50 million

 

1.36

%

April 30, 2018 through April 30, 2023

 

$

55 million

 

2.33

%

April 30, 2018 through April 30, 2023

 

$

35 million

 

2.36

%

April 30, 2018 through April 30, 2023

 

$

35 million

 

2.34

%

 

 

Our Credit Facility contains affirmative and negative covenants, including the following financial covenants, as defined by the Credit Facility:

 

 

 

 

 

 

 

 

 

Actual Ratio for the

 

 

 

 

Quarter Ended

 

    

Permitted Ratio

    

March 26, 2017

Leverage Ratio

 

Not to exceed 3.0 to 1.0

 

1.5 to 1.0

 

 

 

 

 

Interest Coverage Ratio

 

Not less than 3.5 to 1.0

 

4.8 to 1.0

 

Our leverage ratio is defined as outstanding debt divided by consolidated EBITDA for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all covenants as of March 26, 2017.

 

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Cash Flows

 

Cash flow provided by operating activities was $47.3 million for the three months ended March 26, 2017, compared to $33.9 million for the same period in 2016. The increase of approximately $13.5 million was primarily due to the payment of approximately $12.5 million in the first quarter of 2016 for a legal settlement and higher net income.

 

Our free cash flow, a non-GAAP financial measure, was as follows for the three months ended March 26, 2017 and March 27, 2016 (in thousands): 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 26,

    

March 27,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

47,329

 

$

33,853

 

Purchases of property and equipment

 

 

(15,064)

 

 

(10,249)

 

Free cash flow (a)

 

$

32,265

 

$

23,604

 


(a)

Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the consolidated statements of cash flows) less the purchases of property and equipment. We view free cash flow as an important measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP and as a result our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of our performance than the Company’s GAAP measures.

 

Cash flow used in investing activities was $14.9 million for the three months ended March 26, 2017, compared to $20.9 million for the same period in 2016, or a decrease of $6.0 million. The decrease in cash flow used in investing activities was primarily due to the acquisition of 20 restaurants from franchisees in the first quarter of 2016 offset by construction costs for our new domestic commissary in Georgia, which will open in mid-2017.

 

We also require capital for share repurchases and the payment of cash dividends, which are funded by cash flow from operations and borrowings on our Credit Facility. We repurchased $13.1 million and $66.0 million of common stock for the three months ended March 26, 2017 and March 27, 2016, respectively. Subsequent to March 26, 2017, through April 25, 2017, we repurchased an additional $3.9 million of common stock. As of April 25, 2017, $120.3 million remained available for repurchase under our Board of Directors’ authorization.

 

We paid cash dividends of $7.4 million ($0.20 per common share) and $6.6 million ($0.175 per common share) for the three months ended March 26, 2017 and March 27, 2016, respectively. Subsequent to the first quarter on April 27, 2017, our Board of Directors declared a second quarter dividend of $0.20 per common share (approximately $7.4 million based on current shareholders of record). The dividend will be paid on May 19, 2017 to shareholders of record as of the close of business on May 8, 2017. The declaration and payment of any future dividends will be at the discretion of our Board of Directors, subject to the Company’s financial results, cash requirements, and other factors deemed relevant by our Board of Directors.

 

Forward-Looking Statements

 

Certain matters discussed in this report, including information within Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “intend”, “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements may relate to projections or guidance concerning business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, unit level performance, capital expenditures, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements.

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The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:

 

·

aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors;

·

changes in consumer preferences or consumer buying habits, including changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending; 

·

the adverse impact on the company or our results caused by product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our company-owned or franchised restaurants or others in the restaurant industry;

·

failure to maintain our brand strength, quality reputation and consumer enthusiasm for  our better ingredients marketing and advertising strategy;

·

the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites;

·

increases in food costs or sustained higher other operating costs. This could include increased employee compensation, benefits, insurance, tax rates, new regulatory requirements or increasing compliance costs;

·

increases in insurance claims and related costs for programs funded by the company up to certain retention limits, including medical, owned and non-owned automobiles, workers’ compensation, general liability and property;

·

disruption of our supply chain or commissary operations which could be caused by our sole source of supply of cheese or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control;

·

increased risks associated with our international operations, including economic and political conditions, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth;

·

the impact of current or future claims and litigation, including labor and employment-related claims;

·

current, proposed or future legislation that could impact our business;

·

failure to effectively execute succession planning, and our reliance on the multiple roles of our founder, chairman and chief executive officer, who also serves as our brand spokesperson;

·

disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential company, employee and customer information, including payment cards; and

·

changes in GAAP, including new standards for accounting for share-based compensation that may result in changes to our net income. Based on recent share prices, the impact of the 2017 adoption of this guidance would be favorable throughout 2017.

For a discussion of these and other risks that may cause actual results to differ from expectations, refer to “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the year ended December 25, 2016, as well as subsequent filings. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.

 

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk

 

Our debt is comprised entirely of a $500 million Credit Facility with outstanding balances of $295.0 million as of March 26, 2017 and $300.6 million as of December 25, 2016, and a maturity date of October 31, 2019.  The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points.

 

We attempt to minimize interest risk exposure by fixing our rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions and have reset dates and critical terms that match those of our existing debt and the anticipated critical terms of future debt. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract.

 

As of March 26, 2017, we have the following interest rate swap agreements, including three forward starting swaps executed in 2015 that become effective in 2018 upon expiration of the two existing swaps for $125 million:

 

 

 

 

 

 

 

 

Effective Dates

    

Floating Rate Debt 

    

Fixed Rates

 

July 30, 2013 through April 30, 2018

 

$

75 million

 

1.42

%

December 30, 2014 through April 30, 2018

 

$

50 million

 

1.36

%

April 30, 2018 through April 30, 2023

 

$

55 million

 

2.33

%

April 30, 2018 through April 30, 2023

 

$

35 million

 

2.36

%

April 30, 2018 through April 30, 2023

 

$

35 million

 

2.34

%

 

The weighted average interest rate on the Credit Facility, including the impact of the interest rate swap agreements, was 2.2% as of March 26, 2017. An increase in the present interest rate of 100 basis points on the Credit Facility balance outstanding as of March 26, 2017, including the impact of the interest rate swaps, would increase interest expense by $1.7 million.

 

Foreign Currency Exchange Rate Risk

 

We are exposed to foreign currency exchange rate fluctuations from our operations outside of the United States, which can adversely impact our revenues, net income and cash flows. Our international operations principally consist of Company-owned restaurants in China and distribution sales to franchised Papa John’s restaurants located in the United Kingdom, Mexico and China and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. For each of the periods presented, between 6% and 7% of our revenues were derived from these operations.

 

We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had a negative impact on our revenues of approximately $3.1 million and $1.9 million for the three months ended March 26, 2017 and March 27, 2016, respectively.  Foreign currency exchange rate fluctuations had no significant impact on income before income taxes for the three months ended March 26, 2017 and a negative impact on our income before income taxes of $700,000 for the three months ended March 27, 2016. 

 

The recent referendum in the United Kingdom, the outcome of which was a vote to leave the European Union known as Brexit, has resulted in exchange rate fluctuations.  The future impact of Brexit on our franchise operations included in the European Union could also include but may not be limited to additional currency volatility and future trade, tariff, and regulatory changes.  As of March 26, 2017, six of our 45 international country operations are included in the European Union.

 

Commodity Price Risk

 

In the ordinary course of business, the food and paper products we purchase, including cheese (our largest individual food cost item), are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our

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control. We have pricing agreements with some of our vendors, including forward pricing agreements for a portion of our cheese purchases for our domestic Company-owned restaurants, which are accounted for as normal purchases; however, we still remain exposed to on-going commodity volatility.

 

The following table presents the actual average block price for cheese by quarter through the first quarter of 2017 and the projected average block price for cheese by quarter through 2017 (based on the April 25, 2017 Chicago Mercantile Exchange cheese futures market prices):

 

 

 

 

 

 

 

 

 

2017

 

2016

 

 

Projected

 

Actual

 

    

Block Price

    

Block Price

 

 

 

 

 

 

 

Quarter 1

 

$

1.613

 

$

1.473

Quarter 2

 

 

1.523

 

 

1.405

Quarter 3

 

 

1.684

 

 

1.691

Quarter 4

 

 

1.711

 

 

1.718

Full Year

 

$

1.633

*  

$

1.572

 

*The full year estimate is based on futures prices and does not include the impact of forward pricing agreements we have for a portion of our cheese purchases for our domestic Company-owned restaurants.  Additionally, the price charged to restaurants can vary somewhat by quarter from the actual block price based upon our monthly pricing mechanism.

 

Item 4.Controls and Procedures

 

Under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, the chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

 

During the most recently completed fiscal quarter, there was no change made in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company is involved in a number of lawsuits, claims, investigations and proceedings consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with Accounting Standards Codification 450, “Contingencies”, the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

 

Item 1A. Risk Factors

 

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2016.

 

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

 

Our Board of Directors has authorized the repurchase of up to $1.575 billion of common stock under a share repurchase program that began on December 9, 1999 and expires on February 28, 2018. Through March 26, 2017, a total of 109.7 million shares with an aggregate cost of $1.5 billion and an average price of $13.22 per share have been repurchased under this program. Subsequent to March 26, 2017, through April 25, 2017, we acquired an additional 49,000 shares at

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an aggregate cost of $3.9 million. As of April 25, 2017, approximately $120.3 million remained available for repurchase of common stock under this authorization.

 

The following table summarizes our repurchases by fiscal period during the three months ended March 26, 2017 (in thousands, except per-share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number

    

Maximum Dollar

 

 

 

 

Total

 

Average

 

of Shares Purchased

 

Value of Shares

 

 

 

 

Number

 

Price

 

as Part of Publicly

 

that May Yet Be

 

 

 

 

of Shares

 

Paid per

 

Announced Plans

 

Purchased Under the

 

Fiscal Period

 

    

Purchased

    

Share

    

or Programs

    

Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/26/2016 - 1/22/2017

 

 

44

 

$

86.46

 

109,645

 

$

133,463

 

1/23/2017 - 2/19/2017

 

 

50

 

$

83.94

 

109,695

 

$

129,307

 

2/20/2017 - 3/26/2017

 

 

65

 

$

78.45

 

109,760

 

$

124,225

 

 

The Company utilizes a written trading plan under Rule 10b5-1 under the Exchange Act from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program. There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise.

 

During the fiscal quarter ended March 26, 2017, the Company acquired approximately 23,000 shares of its common stock from employees to satisfy minimum tax withholding obligations that arose upon (i) vesting of restricted stock granted pursuant to approved plans and (ii) distribution of shares of common stock issued pursuant to deferred compensation obligations.

 

 

Item 6.  Exhibits

 

Exhibit

 

 

Number

    

Description

 

 

 

 

31.1

 

 

Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

101

 

Financial statements from the quarterly report on Form 10-Q of Papa John’s International, Inc. for the quarter ended March 26, 2017, filed on May 2, 2017, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.

 

 

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

    

PAPA JOHN’S INTERNATIONAL, INC.

 

 

(Registrant)

 

 

 

 

 

 

Date: May 2, 2017

 

/s/ Lance F. Tucker

 

 

Lance F. Tucker

 

 

Senior Vice President,

 

 

Chief Financial Officer,

 

 

Chief Administrative Officer and Treasurer

 

 

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