UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 27, 2015June 26, 2016
OR
o☐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 x☒ No o☐
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 x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| Accelerated filer |
Non-accelerated filer |
| Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
At October 27, 2015,July 26, 2016, there were outstanding 39,014,06736,984,132 shares of the registrant’s common stock, par value $0.01 per share.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART 1.I. FINANCIAL INFORMATION
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
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|
| June 26, |
| December 27, |
| |||||||||
(In thousands, except per share amounts) |
| September 27, |
| December 28, |
|
| 2016 |
| 2015 |
| ||||
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| (Unaudited) |
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| (Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 24,441 |
| $ | 20,122 |
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| $ | 15,266 |
| $ | 21,006 |
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Accounts receivable, net |
| 56,445 |
| 56,047 |
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|
| 56,357 |
|
| 63,320 |
| ||
Notes receivable, net |
| 7,738 |
| 6,106 |
|
|
| 4,715 |
|
| 7,816 |
| ||
Income taxes receivable |
| 796 |
| 9,527 |
|
|
| 744 |
|
| 272 |
| ||
Inventories |
| 24,335 |
| 27,394 |
|
|
| 22,531 |
|
| 21,564 |
| ||
Deferred income taxes |
| 9,990 |
| 8,248 |
| |||||||||
Prepaid expenses |
| 15,914 |
| 18,736 |
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|
| 17,841 |
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| 20,372 |
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Other current assets |
| 9,462 |
| 9,828 |
|
|
| 8,148 |
|
| 8,941 |
| ||
Assets held for sale |
| 9,555 |
| — |
|
|
| 8,823 |
|
| 9,299 |
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Total current assets |
| 158,676 |
| 156,008 |
|
|
| 134,425 |
|
| 152,590 |
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Property and equipment, net |
| 209,137 |
| 219,457 |
|
|
| 217,528 |
|
| 214,044 |
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Notes receivable, less current portion, net |
| 10,444 |
| 12,801 |
|
|
| 9,906 |
|
| 11,105 |
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Goodwill |
| 79,913 |
| 82,007 |
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|
| 87,266 |
|
| 79,657 |
| ||
Deferred income taxes |
| 3,021 |
| 3,914 |
|
|
| 1,713 |
|
| 2,415 |
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Other assets |
| 33,426 |
| 38,616 |
|
|
| 36,385 |
|
| 34,247 |
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Total assets |
| $ | 494,617 |
| $ | 512,803 |
|
| $ | 487,223 |
| $ | 494,058 |
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Liabilities and stockholders’ equity |
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Liabilities and stockholders’ (deficit) equity |
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Current liabilities: |
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Accounts payable |
| $ | 35,546 |
| $ | 38,832 |
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| $ | 34,928 |
| $ | 43,492 |
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Income and other taxes payable |
| 10,012 |
| 9,637 |
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|
| 12,231 |
|
| 8,527 |
| ||
Accrued expenses and other current liabilities |
| 78,562 |
| 58,293 |
|
|
| 68,887 |
|
| 80,918 |
| ||
Total current liabilities |
| 124,120 |
| 106,762 |
|
|
| 116,046 |
|
| 132,937 |
| ||
Deferred revenue |
| 3,627 |
| 4,257 |
|
|
| 3,965 |
|
| 3,190 |
| ||
Long-term debt |
| 239,000 |
| 230,451 |
| |||||||||
Long-term debt, net |
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| 316,484 |
|
| 255,146 |
| |||||||
Deferred income taxes |
| 14,251 |
| 22,188 |
|
|
| 2,002 |
|
| 4,610 |
| ||
Other long-term liabilities |
| 44,034 |
| 41,875 |
|
|
| 58,019 |
|
| 47,606 |
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Total liabilities |
| 425,032 |
| 405,533 |
|
|
| 496,516 |
|
| 443,489 |
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| |||||||||
Redeemable noncontrolling interests |
| 8,274 |
| 8,555 |
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|
| 7,989 |
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| 8,363 |
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Stockholders’ equity: |
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Stockholders’ (deficit) equity: |
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Preferred stock ($0.01 par value per share; no shares issued) |
| — |
| — |
|
|
| — |
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| — |
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Common stock ($0.01 par value per share; issued 43,708 at September 27, 2015 and 43,331 at December 28, 2014) |
| 437 |
| 433 |
| |||||||||
Common stock ($0.01 par value per share; issued 43,940 at June 26, 2016 and 43,731 at December 27, 2015) |
|
| 440 |
|
| 437 |
| |||||||
Additional paid-in capital |
| 155,170 |
| 147,912 |
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| 161,849 |
|
| 158,348 |
| ||
Accumulated other comprehensive income (loss) |
| (1,305 | ) | 671 |
| |||||||||
Accumulated other comprehensive loss |
|
| (7,850) |
|
| (1,836) |
| |||||||
Retained earnings |
| 126,045 |
| 92,876 |
|
|
| 179,882 |
|
| 143,789 |
| ||
Treasury stock (4,673 shares at September 27, 2015 and 3,549 shares at December 28, 2014, at cost) |
| (232,032 | ) | (155,659 | ) | |||||||||
Total stockholders’ equity, net of noncontrolling interests |
| 48,315 |
| 86,233 |
| |||||||||
Treasury stock (7,054 shares at June 26, 2016 and 5,308 shares at December 27, 2015, at cost) |
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| (364,742) |
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| (271,557) |
| |||||||
Total stockholders’ (deficit) equity, net of noncontrolling interests |
|
| (30,421) |
|
| 29,181 |
| |||||||
Noncontrolling interests in subsidiaries |
| 12,996 |
| 12,482 |
|
|
| 13,139 |
|
| 13,025 |
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Total stockholders’ equity |
| 61,311 |
| 98,715 |
| |||||||||
Total liabilities, redeemable noncontrolling interests and stockholders’ equity |
| $ | 494,617 |
| $ | 512,803 |
| |||||||
Total stockholders’ (deficit) equity |
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| (17,282) |
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| 42,206 |
| |||||||
Total liabilities, redeemable noncontrolling interests and stockholders’ (deficit) equity |
| $ | 487,223 |
| $ | 494,058 |
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See accompanying notes.
3
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| Three months ended |
| Six Months Ended |
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(In thousands, except per share amounts) |
| Sept. 27, 2015 |
| Sept. 28, 2014 |
| Sept. 27, 2015 |
| Sept. 28, 2014 |
|
| June 26, 2016 |
| June 28, 2015 |
| June 26, 2016 |
| June 28, 2015 |
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North America revenues: |
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Revenues: |
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Domestic Company-owned restaurant sales |
| $ | 180,059 |
| $ | 169,076 |
| $ | 563,308 |
| $ | 517,269 |
|
| $ | 204,248 |
| $ | 185,962 |
| $ | 409,927 |
| $ | 383,249 |
|
Franchise royalties |
| 22,079 |
| 22,131 |
| 70,519 |
| 65,728 |
| |||||||||||||||||
Franchise and development fees |
| 206 |
| 217 |
| 666 |
| 493 |
| |||||||||||||||||
Domestic commissary sales |
| 145,863 |
| 149,224 |
| 457,203 |
| 463,852 |
| |||||||||||||||||
Other sales |
| 14,076 |
| 23,359 |
| 50,110 |
| 49,704 |
| |||||||||||||||||
International revenues: |
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Royalties and franchise and development fees |
| 6,755 |
| 6,673 |
| 19,894 |
| 18,769 |
| |||||||||||||||||
Restaurant and commissary sales |
| 20,246 |
| 19,719 |
| 58,859 |
| 56,825 |
| |||||||||||||||||
Domestic franchise royalties and fees |
|
| 25,302 |
|
| 23,276 |
|
| 51,778 |
|
| 48,900 |
| |||||||||||||
Domestic commissary and other sales |
|
| 164,954 |
|
| 163,427 |
|
| 333,939 |
|
| 347,374 |
| |||||||||||||
International |
|
| 28,460 |
|
| 26,326 |
|
| 55,915 |
|
| 51,752 |
| |||||||||||||
Total revenues |
| 389,284 |
| 390,399 |
| 1,220,559 |
| 1,172,640 |
|
|
| 422,964 |
|
| 398,991 |
|
| 851,559 |
|
| 831,275 |
| ||||
Costs and expenses: |
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Domestic Company-owned restaurant expenses: |
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Cost of sales |
| 42,150 |
| 42,460 |
| 132,943 |
| 129,646 |
| |||||||||||||||||
Salaries and benefits |
| 50,229 |
| 45,835 |
| 155,389 |
| 139,223 |
| |||||||||||||||||
Advertising and related costs |
| 16,293 |
| 15,369 |
| 49,555 |
| 46,979 |
| |||||||||||||||||
Occupancy costs and other restaurant operating expenses |
| 39,864 |
| 35,687 |
| 113,037 |
| 104,951 |
| |||||||||||||||||
Total domestic Company-owned restaurant expenses |
| 148,536 |
| 139,351 |
| 450,924 |
| 420,799 |
| |||||||||||||||||
Domestic commissary expenses: |
|
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|
|
|
|
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| |||||||||||||||||
Cost of sales |
| 111,205 |
| 116,908 |
| 350,108 |
| 364,302 |
| |||||||||||||||||
Salaries and benefits and other commissary operating expenses |
| 24,029 |
| 22,221 |
| 72,420 |
| 68,162 |
| |||||||||||||||||
Total domestic commissary expenses |
| 135,234 |
| 139,129 |
| 422,528 |
| 432,464 |
| |||||||||||||||||
Other operating expenses |
| 13,475 |
| 22,794 |
| 47,726 |
| 47,446 |
| |||||||||||||||||
International restaurant and commissary expenses |
| 16,481 |
| 16,605 |
| 48,209 |
| 47,366 |
| |||||||||||||||||
Operating costs (excluding depreciation and amortization shown separately below): |
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Domestic Company-owned restaurant expenses |
|
| 163,469 |
|
| 147,356 |
|
| 324,779 |
|
| 302,388 |
| |||||||||||||
Domestic commissary and other expenses |
|
| 152,258 |
|
| 151,206 |
|
| 309,064 |
|
| 321,545 |
| |||||||||||||
International expenses |
|
| 17,752 |
|
| 16,250 |
|
| 35,342 |
|
| 31,728 |
| |||||||||||||
General and administrative expenses |
| 36,053 |
| 33,671 |
| 120,029 |
| 104,199 |
|
|
| 42,623 |
|
| 43,047 |
|
| 82,870 |
|
| 86,796 |
| ||||
Other general expenses |
| 1,607 |
| 3,143 |
| 4,427 |
| 6,640 |
| |||||||||||||||||
Depreciation and amortization |
| 10,461 |
| 10,520 |
| 30,638 |
| 29,539 |
|
|
| 10,031 |
|
| 10,136 |
|
| 19,775 |
|
| 20,177 |
| ||||
Total costs and expenses |
| 361,847 |
| 365,213 |
| 1,124,481 |
| 1,088,453 |
|
|
| 386,133 |
|
| 367,995 |
|
| 771,830 |
|
| 762,634 |
| ||||
Operating income |
| 27,437 |
| 25,186 |
| 96,078 |
| 84,187 |
|
|
| 36,831 |
|
| 30,996 |
|
| 79,729 |
|
| 68,641 |
| ||||
Legal settlement expense |
| — |
| — |
| (12,278 | ) | — |
|
|
| — |
|
| (12,278) |
|
| — |
|
| (12,278) |
| ||||
Net interest expense |
| (1,180 | ) | (968 | ) | (3,576 | ) | (2,323 | ) |
|
| (1,631) |
|
| (1,187) |
|
| (3,120) |
|
| (2,396) |
| ||||
Income before income taxes |
| 26,257 |
| 24,218 |
| 80,224 |
| 81,864 |
|
|
| 35,200 |
|
| 17,531 |
|
| 76,609 |
|
| 53,967 |
| ||||
Income tax expense |
| 7,281 |
| 7,256 |
| 24,541 |
| 26,522 |
|
|
| 11,088 |
|
| 5,063 |
|
| 24,446 |
|
| 17,260 |
| ||||
Net income before attribution to noncontrolling interests |
| 18,976 |
| 16,962 |
| 55,683 |
| 55,342 |
|
|
| 24,112 |
|
| 12,468 |
|
| 52,163 |
|
| 36,707 |
| ||||
Income attributable to noncontrolling interests |
| (1,005 | ) | (887 | ) | (4,696 | ) | (3,208 | ) |
|
| (1,571) |
|
| (1,688) |
|
| (3,440) |
|
| (3,691) |
| ||||
Net income attributable to the Company |
| $ | 17,971 |
| $ | 16,075 |
| $ | 50,987 |
| $ | 52,134 |
|
| $ | 22,541 |
| $ | 10,780 |
| $ | 48,723 |
| $ | 33,016 |
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Calculation of income for earnings per share: |
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Net income attributable to the Company |
| $ | 17,971 |
| $ | 16,075 |
| $ | 50,987 |
| $ | 52,134 |
|
| $ | 22,541 |
| $ | 10,780 |
| $ | 48,723 |
| $ | 33,016 |
|
Decrease (increase) in noncontrolling interest redemption value |
| 49 |
| (42 | ) | 192 |
| (81 | ) | |||||||||||||||||
Change in noncontrolling interest redemption value |
|
| 279 |
|
| 73 |
|
| 499 |
|
| 143 |
| |||||||||||||
Net income attributable to participating securities |
| (73 | ) | (77 | ) | (223 | ) | (295 | ) |
|
| (91) |
|
| (50) |
|
| (201) |
|
| (150) |
| ||||
Net income attributable to common shareholders |
| $ | 17,947 |
| $ | 15,956 |
| $ | 50,956 |
| $ | 51,758 |
|
| $ | 22,729 |
| $ | 10,803 |
| $ | 49,021 |
| $ | 33,009 |
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Basic earnings per common share |
| $ | 0.46 |
| $ | 0.39 |
| $ | 1.29 |
| $ | 1.25 |
|
| $ | 0.61 |
| $ | 0.27 |
| $ | 1.30 |
| $ | 0.83 |
|
Diluted earnings per common share |
| $ | 0.45 |
| $ | 0.39 |
| $ | 1.27 |
| $ | 1.23 |
|
| $ | 0.61 |
| $ | 0.27 |
| $ | 1.29 |
| $ | 0.82 |
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| ||||
Basic weighted average common shares outstanding |
| 39,394 |
| 40,739 |
| 39,640 |
| 41,248 |
|
|
| 37,203 |
|
| 39,692 |
|
| 37,567 |
|
| 39,764 |
| ||||
Diluted weighted average common shares outstanding |
| 39,895 |
| 41,386 |
| 40,210 |
| 42,021 |
|
|
| 37,507 |
|
| 40,217 |
|
| 37,904 |
|
| 40,368 |
| ||||
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| ||||
Dividends declared per common share |
| $ | 0.175 |
| $ | 0.14 |
| $ | 0.455 |
| $ | 0.39 |
|
| $ | 0.175 |
| $ | 0.140 |
| $ | 0.350 |
| $ | 0.280 |
|
See accompanying notes.
4
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
(In thousands) |
| Sept. 27, 2015 |
| Sept. 28, 2014 |
| Sept. 27, 2015 |
| Sept. 28, 2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income before attribution to noncontrolling interests |
| $ | 18,976 |
| $ | 16,962 |
| $ | 55,683 |
| $ | 55,342 |
|
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustments |
| (1,700 | ) | (1,634 | ) | (1,125 | ) | (708 | ) | ||||
Interest rate swaps (1) |
| (1,386 | ) | 694 |
| (2,011 | ) | 247 |
| ||||
Other comprehensive income (loss), before tax |
| (3,086 | ) | (940 | ) | (3,136 | ) | (461 | ) | ||||
Income tax effect: |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustments |
| 629 |
| 605 |
| 416 |
| 262 |
| ||||
Interest rate swaps (2) |
| 513 |
| (256 | ) | 744 |
| (91 | ) | ||||
Income tax effect |
| 1,142 |
| 349 |
| 1,160 |
| 171 |
| ||||
Other comprehensive income (loss), net of tax |
| (1,944 | ) | (591 | ) | (1,976 | ) | (290 | ) | ||||
Comprehensive income before attribution to noncontrolling interests |
| 17,032 |
| 16,371 |
| 53,707 |
| 55,052 |
| ||||
Comprehensive loss, redeemable noncontrolling interests |
| (587 | ) | (724 | ) | (2,915 | ) | (3,066 | ) | ||||
Comprehensive (loss) income, nonredeemable noncontrolling interests |
| (418 | ) | (163 | ) | (1,781 | ) | (142 | ) | ||||
Comprehensive income attributable to the Company |
| $ | 16,027 |
| $ | 15,484 |
| $ | 49,011 |
| $ | 51,844 |
|
(1) Amounts reclassified out of accumulated other comprehensive income (“AOCI”) into net interest (expense) income included $390 and $1,177 for the three and nine months ended September 27, 2015, respectively, and $250 and $749 for the three and nine months ended September 28, 2014, respectively.
(2) The income tax effects of amounts reclassified out of AOCI into net interest (expense) income were $145 and $436 for the three and nine months ended September 27,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
(In thousands) |
| June 26, 2016 |
| June 28, 2015 |
| June 26, 2016 |
| June 28, 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before attribution to noncontrolling interests |
| $ | 24,112 |
| $ | 12,468 |
| $ | 52,163 |
| $ | 36,707 |
|
Other comprehensive (loss) income, before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| (1,441) |
|
| 2,116 |
|
| (3,513) |
|
| 575 |
|
Interest rate swaps (1) |
|
| (2,760) |
|
| 459 |
|
| (6,049) |
|
| (625) |
|
Other comprehensive (loss) income, before tax |
|
| (4,201) |
|
| 2,575 |
|
| (9,562) |
|
| (50) |
|
Income tax effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 533 |
|
| (783) |
|
| 1,300 |
|
| (213) |
|
Interest rate swaps (2) |
|
| 1,021 |
|
| (170) |
|
| 2,238 |
|
| 231 |
|
Income tax effect |
|
| 1,554 |
|
| (953) |
|
| 3,538 |
|
| 18 |
|
Other comprehensive (loss) income, net of tax |
|
| (2,647) |
|
| 1,622 |
|
| (6,024) |
|
| (32) |
|
Comprehensive income before attribution to noncontrolling interests |
|
| 21,465 |
|
| 14,090 |
|
| 46,139 |
|
| 36,675 |
|
Comprehensive loss, redeemable noncontrolling interests |
|
| (881) |
|
| (1,015) |
|
| (2,125) |
|
| (2,328) |
|
Comprehensive loss, nonredeemable noncontrolling interests |
|
| (690) |
|
| (673) |
|
| (1,315) |
|
| (1,363) |
|
Comprehensive income attributable to the Company |
| $ | 19,894 |
| $ | 12,402 |
| $ | 42,699 |
| $ | 32,984 |
|
(1) | Amounts reclassified out of accumulated other comprehensive loss into net interest expense included $311 and $628 for the three and six months ended June 26, 2016, respectively and $393 and $787 for the three and six months ended June 28, 2015. |
(2) | The income tax effects of amounts reclassified out of accumulated other comprehensive loss into net interest expense were $115 and $232 for the three and six months ended June 26, 2016, respectively and $145 and $291 for the three and six months ended June 28, 2015, |
See accompanying notes.
See accompanying notes.5
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
|
| Nine Months Ended |
| ||||
(In thousands) |
| Sept. 27, 2015 |
| Sept. 28, 2014 |
| ||
|
|
|
|
|
| ||
Operating activities |
|
|
|
|
| ||
Net income before attribution to noncontrolling interests |
| $ | 55,683 |
| $ | 55,342 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Provision for uncollectible accounts and notes receivable |
| 813 |
| 1,714 |
| ||
Depreciation and amortization |
| 30,638 |
| 29,539 |
| ||
Deferred income taxes |
| 2,259 |
| 7,687 |
| ||
Stock-based compensation expense |
| 7,124 |
| 5,958 |
| ||
Excess tax benefit on equity awards |
| (9,884 | ) | (8,493 | ) | ||
Other |
| 3,268 |
| 3,916 |
| ||
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
| ||
Accounts receivable |
| (1,994 | ) | (6,861 | ) | ||
Income taxes receivable |
| 8,731 |
| — |
| ||
Inventories |
| 2,178 |
| (9,792 | ) | ||
Prepaid expenses |
| 2,033 |
| 2,461 |
| ||
Other current assets |
| 367 |
| (313 | ) | ||
Other assets and liabilities |
| 819 |
| 3,887 |
| ||
Accounts payable |
| (3,380 | ) | (1,380 | ) | ||
Income and other taxes payable |
| 375 |
| 6,434 |
| ||
Accrued expenses and other current liabilities |
| 20,508 |
| (5,163 | ) | ||
Deferred revenue |
| 200 |
| (110 | ) | ||
Net cash provided by operating activities |
| 119,738 |
| 84,826 |
| ||
|
|
|
|
|
| ||
Investing activities |
|
|
|
|
| ||
Purchases of property and equipment |
| (26,508 | ) | (37,700 | ) | ||
Loans issued |
| (2,497 | ) | (5,221 | ) | ||
Repayments of loans issued |
| 3,961 |
| 3,371 |
| ||
Acquisitions, net of cash acquired |
| (491 | ) | (4,264 | ) | ||
Other |
| 406 |
| 25 |
| ||
Net cash used in investing activities |
| (25,129 | ) | (43,789 | ) | ||
|
|
|
|
|
| ||
Financing activities |
|
|
|
|
| ||
Net proceeds on line of credit facility |
| 8,549 |
| 66,784 |
| ||
Cash dividends paid |
| (17,950 | ) | (16,119 | ) | ||
Excess tax benefit on equity awards |
| 9,884 |
| 8,493 |
| ||
Tax payments for equity award issuances |
| (10,947 | ) | (7,540 | ) | ||
Proceeds from exercise of stock options |
| 4,569 |
| 4,752 |
| ||
Acquisition of Company common stock |
| (80,166 | ) | (94,152 | ) | ||
Contributions from noncontrolling interest holders |
| 683 |
| 1,086 |
| ||
Distributions to noncontrolling interest holders |
| (4,950 | ) | (1,200 | ) | ||
Other |
| 377 |
| 423 |
| ||
Net cash used in financing activities |
| (89,951 | ) | (37,473 | ) | ||
Effect of exchange rate changes on cash and cash equivalents |
| (339 | ) | (86 | ) | ||
Change in cash and cash equivalents |
| 4,319 |
| 3,478 |
| ||
Cash and cash equivalents at beginning of period |
| 20,122 |
| 13,670 |
| ||
Cash and cash equivalents at end of period |
| $ | 24,441 |
| $ | 17,148 |
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| ||||
(In thousands) |
| June 26, 2016 |
| June 28, 2015 |
| ||
Operating activities |
|
|
|
|
|
|
|
Net income before attribution to noncontrolling interests |
| $ | 52,163 |
| $ | 36,707 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Provision for uncollectible accounts and notes receivable |
|
| 247 |
|
| 631 |
|
Depreciation and amortization |
|
| 19,775 |
|
| 20,177 |
|
Deferred income taxes |
|
| 3,786 |
|
| (3,064) |
|
Stock-based compensation expense |
|
| 4,893 |
|
| 4,985 |
|
Other |
|
| 1,883 |
|
| 2,239 |
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
Accounts receivable |
|
| 6,680 |
|
| 1,682 |
|
Income taxes receivable |
|
| (472) |
|
| (1,281) |
|
Inventories |
|
| (877) |
|
| 3,474 |
|
Prepaid expenses |
|
| 2,548 |
|
| 999 |
|
Other current assets |
|
| 1,269 |
|
| 293 |
|
Other assets and liabilities |
|
| (1,724) |
|
| (773) |
|
Accounts payable |
|
| (8,654) |
|
| (3,877) |
|
Income and other taxes payable |
|
| 3,703 |
|
| 72 |
|
Accrued expenses and other current liabilities |
|
| (11,425) |
|
| 15,495 |
|
Deferred revenue |
|
| 1,328 |
|
| 223 |
|
Net cash provided by operating activities |
|
| 75,123 |
|
| 77,982 |
|
Investing activities |
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (24,001) |
|
| (16,501) |
|
Loans issued |
|
| (1,630) |
|
| (1,571) |
|
Repayments of loans issued |
|
| 5,382 |
|
| 2,787 |
|
Acquisitions, net of cash acquired |
|
| (11,202) |
|
| (491) |
|
Other |
|
| 165 |
|
| 348 |
|
Net cash used in investing activities |
|
| (31,286) |
|
| (15,428) |
|
Financing activities |
|
|
|
|
|
|
|
Net proceeds from issuance of long-term debt |
|
| 61,375 |
|
| 3,549 |
|
Cash dividends paid |
|
| (13,130) |
|
| (11,083) |
|
Excess tax benefit on equity awards |
|
| 4,490 |
|
| 9,488 |
|
Tax payments for equity award issuances |
|
| (5,831) |
|
| (10,654) |
|
Proceeds from exercise of stock options |
|
| 2,812 |
|
| 3,915 |
|
Acquisition of Company common stock |
|
| (96,355) |
|
| (52,083) |
|
Distributions to noncontrolling interest holders |
|
| (3,200) |
|
| (3,667) |
|
Other |
|
| 391 |
|
| 319 |
|
Net cash used in financing activities |
|
| (49,448) |
|
| (60,216) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (129) |
|
| (13) |
|
Change in cash and cash equivalents |
|
| (5,740) |
|
| 2,325 |
|
Cash and cash equivalents at beginning of period |
|
| 21,006 |
|
| 20,122 |
|
Cash and cash equivalents at end of period |
| $ | 15,266 |
| $ | 22,447 |
|
See accompanying notes.
6
Papa John’s International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)(Unaudited)
September 27, 2015June 26, 2016
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 ninethree and six months ended September 27, 2015June 26, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ended December 27, 2015.25, 2016. 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,”“Company”, “Papa John’s” or in the first person notations of “we,”“we”, “us” and “our”) for the year ended December 28, 2014.27, 2015.
2.Significant Accounting Policies
Noncontrolling Interests
Papa John’s has four joint venturesventure arrangements in which there are noncontrolling interests including the following as of September 27, 2015held by third parties. These joint ventures include 215 restaurants at June 26, 2016 and September206 restaurants at June 28, 2014:
|
| Number of |
| Restaurant Locations |
| Papa John’s |
| Noncontrolling |
|
September 27, 2015 |
|
|
|
|
|
|
|
|
|
Star Papa, LP |
| 85 |
| Texas |
| 51 | % | 49 | % |
Colonel’s Limited, LLC |
| 61 |
| Maryland and Virginia |
| 70 | % | 30 | % |
PJ Minnesota, LLC |
| 35 |
| Minnesota |
| 70 | % | 30 | % |
PJ Denver, LLC |
| 27 |
| Colorado |
| 60 | % | 40 | % |
|
|
|
|
|
|
|
|
|
|
September 28, 2014 |
|
|
|
|
|
|
|
|
|
Star Papa, LP |
| 82 |
| Texas |
| 51 | % | 49 | % |
Colonel’s Limited, LLC |
| 56 |
| Maryland and Virginia |
| 70 | % | 30 | % |
PJ Minnesota, LLC |
| 34 |
| Minnesota |
| 70 | % | 30 | % |
PJ Denver, LLC |
| 25 |
| Colorado |
| 60 | % | 40 | % |
2015. 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 and ninesix months ended September 27,June 26, 2016 and June 28, 2015 and September 28, 2014 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
|
| |||||||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||
|
| Sept. 27, |
| Sept. 28, |
| Sept. 27, |
| Sept. 28, |
|
| June 26, |
| June 28, |
| June 26, |
| June 28, |
| ||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Papa John’s International, Inc. |
| $ | 1,570 |
| $ | 1,387 |
| $ | 7,240 |
| $ | 4,979 |
|
| $ | 2,529 |
| $ | 2,660 |
| $ | 5,289 |
| $ | 5,670 |
|
Noncontrolling interests |
| 1,005 |
| 887 |
| 4,696 |
| 3,208 |
|
|
| 1,571 |
|
| 1,688 |
|
| 3,440 |
|
| 3,691 |
| ||||
Total income before income taxes |
| $ | 2,575 |
| $ | 2,274 |
| $ | 11,936 |
| $ | 8,187 |
|
| $ | 4,100 |
| $ | 4,348 |
| $ | 8,729 |
| $ | 9,361 |
|
7
The following summarizes the redemption feature, location and related accounting within the condensed consolidated balance sheets and the value at which the noncontrolling interests are recorded for each joint venture as of September 27, 2015:sheets:
|
|
|
| |||
|
|
|
|
| ||
Type of Joint Venture Arrangement | Location within the Condensed Consolidated Balance Sheets | Recorded Value | ||||
|
| |||||
|
|
|
| |||
|
|
|
| |||
|
|
| Permanent equity |
| Carrying value | |
|
|
|
|
| ||
Option to require the Company to purchase their interest - not currently redeemable | Temporary equity |
| Carrying value | |||
The noncontrolling interest holders of two joint ventures have the option to require the Company to purchase their interests. Since redemption of the noncontrolling interests is outside of the Company’s control, the noncontrolling interests are presented in the caption “Redeemable noncontrolling interests” in the condensed consolidated balance sheets and include the following joint ventures:
· The Star Papa, LP agreement contains a redemption feature that is not currently redeemable, but it is probable to become redeemable in the future. Due to specific valuation provisions contained in the agreement, this noncontrolling interest has been recorded at its carrying value.
· The PJ Denver, LLC agreement contains a redemption feature that is currently redeemable and, therefore, this noncontrolling interest has been recorded at its current redemption value. *The change in redemption value is recorded as an adjustment to “Redeemable noncontrolling interests” and “Retained earnings” in the condensed consolidated balance sheets.
The following summarizes changes in these redeemable noncontrolling interests (in thousands):
Balance at December 28, 2014 |
| $ | 8,555 |
|
Net income |
| 2,915 |
| |
Distributions |
| (3,004 | ) | |
Change in redemption value |
| (192 | ) | |
Balance at September 27, 2015 |
| $ | 8,274 |
|
The noncontrolling interests of our Colonel’s Limited, LLC and PJ Minnesota, LLC joint ventures are recorded at carrying value in “Stockholders’ equity” in the condensed consolidated balance sheets at both September 27, 2015 and December 28, 2014, as the noncontrolling interest holders’ agreements had no redemption features.
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 September 27, 2015,June 26, 2016, we had a net deferred tax liability of approximately $1.2 million.$300,000.
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 faircarrying value of our notes receivable net of allowances also approximates carryingfair 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. |
· |
|
8
Our financial assets and liabilities that were measured at fair value on a recurring basis as of SeptemberJune 26, 2016 and December 27, 2015 and December 28, 2014 are as follows (in thousands):
|
| Carrying |
| Fair Value Measurements |
| ||||||||
|
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
September 27, 2015 |
|
|
|
|
|
|
|
|
| ||||
Financial assets: |
|
|
|
|
|
|
|
|
| ||||
Cash surrender value of life insurance policies (a) |
| $ | 17,412 |
| $ | 17,412 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
| ||||
Financial liabilities: |
|
|
|
|
|
|
|
|
| ||||
Interest rate swaps (b) |
| 2,417 |
| — |
| 2,417 |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
December 28, 2014 |
|
|
|
|
|
|
|
|
| ||||
Financial assets: |
|
|
|
|
|
|
|
|
| ||||
Cash surrender value of life insurance policies (a) |
| $ | 18,238 |
| $ | 18,238 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
| ||||
Financial liabilities: |
|
|
|
|
|
|
|
|
| ||||
Interest rate swaps (b) |
| 376 |
| — |
| 376 |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying |
| Fair Value Measurements |
| ||||||||
|
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies (a) |
| $ | 19,838 |
| $ | 19,838 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (b) |
|
| 8,331 |
|
| — |
|
| 8,331 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies (a) |
| $ | 17,916 |
| $ | 17,916 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (b) |
|
| 2,262 |
|
| — |
|
| 2,262 |
|
| — |
|
(a) Represents life insurance policies held in our non-qualified deferred compensation plan.
(b) The fair values
(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”). |
There were no transfers among levels within the fair value hierarchy during the ninesix months ended September 27, 2015.June 26, 2016.
Variable Interest EntitiesEntity
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.
Revenue from Contracts with CustomersAccounting Standards Adopted
Deferred Debt Issuance Costs
In May 2014,April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03 “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The update requires that deferred debt issuance costs be reported as a reduction to long-term debt (previously reported in other noncurrent assets). We adopted ASU 2015-03 in the first quarter of 2016 and for all retrospective periods, as required. The impact of the adoption was not material to our condensed consolidated financial statements. See Debt Footnote for more details.
Accounting Standards to be Adopted in Future Periods
Employee Share-Based Payments
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax
9
withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for the Company beginning in fiscal 2017, with early application permitted. Based on the significance of our employee stock compensation program, we expect the adoption could have a material impact to our condensed consolidated statements of income.
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 Contract with Customers
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers” (Accounting Standards Update 2014-09)(“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 today’s 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.
We are required to adopt the new requirementsASU 2014-09 in the first quarter of 2018 based on the FASB’s decision to defer the effective date by one year.2018. We are currently evaluating the method of adoption and its impact of the new requirements on our condensed consolidated financial statements. We currently do not believe the impact will be significant.
Reclassifications
Certain prior year captions have been combined in the condensed consolidated statement of income and certain amounts within the consolidated statement of cash flows have been reclassified to conform to the current year presentation.
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, in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing“Distinguishing Liabilities from EquityEquity”, the change in the redemption value for the noncontrolling interest of PJ Denver, LLCone of our joint ventures increases or decreases income attributable to common shareholders.
10
The calculations of basic and diluted earnings per common share are as follows (in thousands, except per-share data):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| Sept. 27, |
| Sept. 28, |
| Sept. 27, |
| Sept. 28, |
| ||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Net income attributable to the Company |
| $ | 17,971 |
| $ | 16,075 |
| $ | 50,987 |
| $ | 52,134 |
|
Decrease (increase) in noncontrolling interest redemption value |
| 49 |
| (42 | ) | 192 |
| (81 | ) | ||||
Net income attributable to participating securities |
| (73 | ) | (77 | ) | (223 | ) | (295 | ) | ||||
Net income attributable to common shareholders |
| $ | 17,947 |
| $ | 15,956 |
| $ | 50,956 |
| $ | 51,758 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding |
| 39,394 |
| 40,739 |
| 39,640 |
| 41,248 |
| ||||
Basic earnings per common share |
| $ | 0.46 |
| $ | 0.39 |
| $ | 1.29 |
| $ | 1.25 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Net income attributable to common shareholders |
| $ | 17,947 |
| $ | 15,956 |
| $ | 50,956 |
| $ | 51,758 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding |
| 39,394 |
| 40,739 |
| 39,640 |
| 41,248 |
| ||||
Dilutive effect of outstanding equity awards (a) |
| 501 |
| 647 |
| 570 |
| 773 |
| ||||
Diluted weighted average common shares outstanding |
| 39,895 |
| 41,386 |
| 40,210 |
| 42,021 |
| ||||
Diluted earnings per common share |
| $ | 0.45 |
| $ | 0.39 |
| $ | 1.27 |
| $ | 1.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 26, |
| June 28, |
| June 26, |
| June 28, |
| ||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company |
| $ | 22,541 |
| $ | 10,780 |
| $ | 48,723 |
| $ | 33,016 |
|
Change in noncontrolling interest redemption value |
|
| 279 |
|
| 73 |
|
| 499 |
|
| 143 |
|
Net income attributable to participating securities |
|
| (91) |
|
| (50) |
|
| (201) |
|
| (150) |
|
Net income attributable to common shareholders |
| $ | 22,729 |
| $ | 10,803 |
| $ | 49,021 |
| $ | 33,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
| 37,203 |
|
| 39,692 |
|
| 37,567 |
|
| 39,764 |
|
Basic earnings per common share |
| $ | 0.61 |
| $ | 0.27 |
| $ | 1.30 |
| $ | 0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
| $ | 22,729 |
| $ | 10,803 |
| $ | 49,021 |
| $ | 33,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
| 37,203 |
|
| 39,692 |
|
| 37,567 |
|
| 39,764 |
|
Dilutive effect of outstanding equity awards (a) |
|
| 304 |
|
| 525 |
|
| 337 |
|
| 604 |
|
Diluted weighted average common shares outstanding |
|
| 37,507 |
|
| 40,217 |
|
| 37,904 |
|
| 40,368 |
|
Diluted earnings per common share |
| $ | 0.61 |
| $ | 0.27 |
| $ | 1.29 |
| $ | 0.82 |
|
(a) Excludes 219689 and 234566 awards for the three and ninesix months ended September 27, 2015June 26, 2016 and 270292 and 208198 awards for the three and ninesix months ended SeptemberJune 28, 2014, because their inclusion2015, as the effect of including such awards would have had an antidilutive effect.been antidilutive.
4.DebtAcquisition 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 purchase price of the 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.
5.Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
| June 26, |
|
| December 27, |
|
|
|
| 2016 |
|
| 2015 |
Outstanding debt |
|
| $ | 317,375 |
| $ | 256,000 |
Debt issuance costs |
|
|
| (891) |
|
| (854) |
Total long-term debt |
|
| $ | 316,484 |
| $ | 255,146 |
11
Our outstanding debt is comprised entirely of borrowings under ouran unsecured revolving line of credit (“Credit Facility”). The outstanding balance was $239.0 million as with an expiration date of September 27, 2015 and $230.5 million as of December 28, 2014. On October 31, 2014,2019. On June 8, 2016, we amendedexercised our Credit Facilityoption to increase the amount available under our Credit Facility to $400$500 million from the previous $300$400 million availability. Including outstanding letters of credit, the remaining availability and to extend the maturity date from April 30, 2018 to October 31, 2019. Additionally, we have the option to increaseunder the Credit Facility an additional $100 million. was approximately $157.7 million as of June 26, 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 remaining availability under the Credit Facility, reduced for outstanding letters of credit, was approximately $138.5 million as of September 27, 2015.
The Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At September 27, 2015,June 26, 2016, we were in compliance with these covenants.
We useattempt 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 againstexposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the effectsfailure of potentialthe counterparty to perform under the terms of the derivative contract.
As of June 26, 2016, we have the following interest rate increases on borrowings under our Credit Facility. During the quarter ended September 27, 2015, we executedswap agreements, including three additional forward starting swaps for $125.0 millionexecuted in 2015 that become effective in 2018 upon expiration of the two existing swaps for $125.0 million. As of September 27, 2015, we have the following interest rate swap agreements:$125 million:
|
|
| |||
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
|
|
|
|
Our swaps are derivative instruments that are designated as cash flow hedges because the swaps provide a hedge against the effects of rising interest rates on borrowings. The newly executed forward starting swaps are also deemed cash flow hedges based upon our intent to replace the existing facility that matures in 2019 with new variable rate debt. As of September 27, 2015, the swaps were highly effective cash flow hedges with no ineffectiveness for the three and nine month periods ended September 27, 2015. The newly executed forward starting swaps are deemed effective given the probability of future forecasted interest payments.
The effective portion of the gain or loss on the swaps is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the swaps affect earnings. Gains or losses on the swaps representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Amounts payable or receivable under the swaps are accounted for as adjustments to interest expense.
|
|
|
|
|
|
|
|
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 forrates on the Credit Facility, including the impact of the previously mentioned swaps,interest rate swap agreements, were 2.0%2.1% and 1.8%2.0% for the three months ended September 27,June 26, 2016 and June 28, 2015, and September 28, 2014, respectively, and 2.0%2.1% and 1.7%2.0% for the ninesix months ended September 27,June 26, 2016 and June 28, 2015, and September 28, 2014, respectively. Interest paid, including payments made or received under the swaps, was $1.3$1.8 million and $1.0$1.3 million for the three months ended September 27,June 26, 2016 and June 28, 2015, and September 28, 2014, respectively, and $3.9$3.4 million and $2.6 million for the ninesix months ended September 27,June 26, 2016 and June 28, 2015, and September 28, 2014, respectively. As of September 27, 2015,June 26, 2016, the portion of the $2.4$8.3 million interest rate swap liability that would be reclassified into earnings during the next twelve months as interest expense approximates $715,000.
5.Litigation
Litigation$1.0 million.
The Company is involved in a number of lawsuits, claims, investigations and proceedings, including the matter identified below, consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with ASC 450, Contingencies, the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s 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.6.Segment Information
Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective and class action filed in August 2009 in the United States District Court, Eastern District of Missouri (“the Court”), alleging that delivery drivers were not properly reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act (“FLSA”). Approximately 3,900 drivers out of a potential class size of 28,800 opted into the action. In late December 2013, the Court granted a motion for class certification in five additional states, which added approximately 15,000 plaintiffs to the case. The trial, originally scheduled for August 2015, was stayed in June 2015, pending U.S. Supreme Court review of another relevant case regarding certification. After the stay
was granted, the parties reached a settlement in principle, which has been preliminarily approved by the Court in September 2015. The Court has scheduled a final approval hearing in January 2016. The Company continues to deny any liability or wrongdoing in this matter. In accordance with this preliminary settlement agreement, the Company recorded a pre-tax expense of $12.3 million in June 2015 under the provisions of ASC 450, Contingencies. There was no impact for the quarter ended September 27, 2015. This amount is separately reported as Legal settlement expense in the condensed consolidated statements of income.
6.Segment Information
We have five reportable segments: domestic Company-owned restaurants, domestic 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, such asincluding breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. The domestic 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. The North America franchising segment consists of our franchise sales and support activities 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
12
printing and promotional items, risk management services, 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.
Our segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||
|
| Sept. 27, 2015 |
| Sept. 28, 2014 |
| Sept. 27, 2015 |
| Sept. 28, 2014 |
|
| June 26, 2016 |
| June 28, 2015 |
| June 26, 2016 |
| June 28, 2015 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenues from external customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Domestic Company-owned restaurants |
| $ | 180,059 |
| $ | 169,076 |
| $ | 563,308 |
| $ | 517,269 |
|
| $ | 204,248 |
| $ | 185,962 |
| $ | 409,927 |
| $ | 383,249 |
|
Domestic commissaries |
| 145,863 |
| 149,224 |
| 457,203 |
| 463,852 |
|
|
| 150,895 |
|
| 149,007 |
|
| 306,849 |
|
| 311,340 |
| ||||
North America franchising |
| 22,285 |
| 22,348 |
| 71,185 |
| 66,221 |
|
|
| 25,302 |
|
| 23,276 |
|
| 51,778 |
|
| 48,900 |
| ||||
International |
| 27,001 |
| 26,392 |
| 78,753 |
| 75,594 |
|
|
| 28,460 |
|
| 26,326 |
|
| 55,915 |
|
| 51,752 |
| ||||
All others |
| 14,076 |
| 23,359 |
| 50,110 |
| 49,704 |
|
|
| 14,059 |
|
| 14,420 |
|
| 27,090 |
|
| 36,034 |
| ||||
Total revenues from external customers |
| $ | 389,284 |
| $ | 390,399 |
| $ | 1,220,559 |
| $ | 1,172,640 |
|
| $ | 422,964 |
| $ | 398,991 |
| $ | 851,559 |
| $ | 831,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Intersegment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Domestic commissaries |
| $ | 53,398 |
| $ | 53,830 |
| $ | 165,744 |
| $ | 160,143 |
|
| $ | 57,722 |
| $ | 54,459 |
| $ | 116,048 |
| $ | 112,346 |
|
North America franchising |
| 643 |
| 574 |
| 1,985 |
| 1,761 |
|
|
| 739 |
|
| 671 |
|
| 1,452 |
|
| 1,342 |
| ||||
International |
| 73 |
| 78 |
| 223 |
| 236 |
|
|
| 67 |
|
| 75 |
|
| 132 |
|
| 150 |
| ||||
All others |
| 3,833 |
| 6,421 |
| 11,459 |
| 18,238 |
|
|
| 4,075 |
|
| 3,694 |
|
| 8,172 |
|
| 7,626 |
| ||||
Total intersegment revenues |
| $ | 57,947 |
| $ | 60,903 |
| $ | 179,411 |
| $ | 180,378 |
|
| $ | 62,603 |
| $ | 58,899 |
| $ | 125,804 |
| $ | 121,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Domestic Company-owned restaurants |
| $ | 8,088 |
| $ | 8,133 |
| $ | 41,185 |
| $ | 32,069 |
|
| $ | 15,325 |
| $ | 14,617 |
| $ | 35,512 |
| $ | 33,097 |
|
Domestic commissaries |
| 10,192 |
| 8,897 |
| 32,694 |
| 26,174 |
|
|
| 11,682 |
|
| 10,702 |
|
| 23,228 |
|
| 22,502 |
| ||||
North America franchising |
| 19,172 |
| 19,023 |
| 61,545 |
| 56,389 |
|
|
| 22,445 |
|
| 20,054 |
|
| 46,025 |
|
| 42,373 |
| ||||
International |
| 3,184 |
| 1,436 |
| 6,807 |
| 4,071 |
|
|
| 2,875 |
|
| 2,279 |
|
| 5,913 |
|
| 3,623 |
| ||||
All others |
| (556 | ) | (298 | ) | (230 | ) | (150 | ) |
|
| 425 |
|
| (117) |
|
| 476 |
|
| 326 |
| ||||
Unallocated corporate expenses (1) |
| (13,482 | ) | (12,242 | ) | (60,636 | ) | (35,405 | ) | |||||||||||||||||
Elimination of intersegment losses (profits) |
| (341 | ) | (731 | ) | (1,141 | ) | (1,284 | ) | |||||||||||||||||
Unallocated corporate expenses |
|
| (17,079) |
|
| (29,949) |
|
| (33,411) |
|
| (47,154) |
| |||||||||||||
Elimination of intersegment profit |
|
| (473) |
|
| (55) |
|
| (1,134) |
|
| (800) |
| |||||||||||||
Total income before income taxes |
| $ | 26,257 |
| $ | 24,218 |
| $ | 80,224 |
| $ | 81,864 |
|
| $ | 35,200 |
| $ | 17,531 |
| $ | 76,609 |
| $ | 53,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Domestic Company-owned restaurants |
| $ | 215,945 |
|
|
|
|
|
|
|
| $ | 227,023 |
|
|
|
|
|
|
|
|
|
| |||
Domestic commissaries |
| 109,532 |
|
|
|
|
|
|
|
|
| 112,666 |
|
|
|
|
|
|
|
|
|
| ||||
International |
| 21,266 |
|
|
|
|
|
|
|
|
| 16,854 |
|
|
|
|
|
|
|
|
|
| ||||
All others |
| 49,541 |
|
|
|
|
|
|
|
|
| 50,949 |
|
|
|
|
|
|
|
|
|
| ||||
Unallocated corporate assets |
| 176,089 |
|
|
|
|
|
|
|
|
| 186,922 |
|
|
|
|
|
|
|
|
|
| ||||
Accumulated depreciation and amortization |
| (363,236 | ) |
|
|
|
|
|
|
|
| (376,886) |
|
|
|
|
|
|
|
|
|
| ||||
Net property and equipment |
| $ | 209,137 |
|
|
|
|
|
|
|
| $ | 217,528 |
|
|
|
|
|
|
|
|
|
|
(1)13 Includes a $12.3 million legal settlement expense in the nine-month period of 2015. See “Note 5” for additional information.
7.Assets Held for Sale
The Company has decided to refranchise the China market and is planning a sale
|
| September 27, 2015 |
| |
Inventories |
| $ | 808 |
|
Prepaid expenses |
| 790 |
| |
Net property and equipment |
| 5,406 |
| |
Goodwill |
| 1,719 |
| |
Other assets |
| 832 |
| |
Total assets held for sale |
| $ | 9,555 |
|
The Company-owned China operations have incurred losses before income taxes of $0.4 million and $1.4 million for the three months ended September 27, 2015 and September 28, 2014, respectively, and losses before income taxes of $0.9 million and $2.3 million for the nine months ended September 27, 2015 and September 28, 2014, respectively. The losses for the three and nine months ended September 28, 2014, include an impairment charge of $0.7 million for eight Company-owned restaurants in China. These results are reported in our International segment.
8.Subsequent Event - Acquisition
In October 2015, the Company signed a letter of intent to purchase 19 domestic franchised Papa John’s restaurants in the Southeast for approximately $11.0 million. The transaction is expected to be completed in the first quarter of 2016.
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 September 27, 2015,June 26, 2016, there were 4,7864,935 Papa John’s restaurants (744(776 Company-owned and 4,0424,159 franchised) operating in all 50 states and in 3843 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, risk management services, 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 theour 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 |
| Nine Months Ended |
| ||||
|
| Sept. 27, 2015 |
| Sept. 28, 2014 |
| Sept. 27, 2015 |
| Sept. 28, 2014 |
|
|
|
|
|
|
|
|
|
|
|
North America Company-owned: |
|
|
|
|
|
|
|
|
|
Beginning of period |
| 693 |
| 672 |
| 686 |
| 665 |
|
Opened |
| 4 |
| 5 |
| 8 |
| 9 |
|
Closed |
| — |
| (1 | ) | — |
| (3 | ) |
Acquired from franchisees |
| — |
| 7 |
| 3 |
| 12 |
|
End of period |
| 697 |
| 683 |
| 697 |
| 683 |
|
International Company-owned: |
|
|
|
|
|
|
|
|
|
Beginning of period |
| 48 |
| 59 |
| 49 |
| 58 |
|
Opened |
| — |
| — |
| — |
| 1 |
|
Closed |
| (1 | ) | (1 | ) | (2 | ) | (1 | ) |
End of period |
| 47 |
| 58 |
| 47 |
| 58 |
|
North America franchised: |
|
|
|
|
|
|
|
|
|
Beginning of period |
| 2,653 |
| 2,614 |
| 2,654 |
| 2,621 |
|
Opened |
| 31 |
| 37 |
| 68 |
| 86 |
|
Closed |
| (20 | ) | (14 | ) | (55 | ) | (65 | ) |
Sold to Company |
| — |
| (7 | ) | (3 | ) | (12 | ) |
End of period |
| 2,664 |
| 2,630 |
| 2,664 |
| 2,630 |
|
International franchised: |
|
|
|
|
|
|
|
|
|
Beginning of period |
| 1,340 |
| 1,142 |
| 1,274 |
| 1,084 |
|
Opened |
| 50 |
| 54 |
| 142 |
| 123 |
|
Closed |
| (12 | ) | (30 | ) | (38 | ) | (41 | ) |
End of period |
| 1,378 |
| 1,166 |
| 1,378 |
| 1,166 |
|
Total restaurants - end of period |
| 4,786 |
| 4,537 |
| 4,786 |
| 4,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 26, 2016 |
| June 28, 2015 |
| June 26, 2016 |
| June 28, 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Papa John’s Restaurant Progression: |
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Company-owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
| 729 |
|
| 691 |
|
| 707 |
|
| 686 |
|
Opened |
|
| 5 |
|
| 1 |
|
| 7 |
|
| 4 |
|
Acquired |
|
| — |
|
| 1 |
|
| 20 |
|
| 3 |
|
End of period |
|
| 734 |
|
| 693 |
|
| 734 |
|
| 693 |
|
International Company-owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
| 44 |
|
| 48 |
|
| 45 |
|
| 49 |
|
Closed |
|
| (2) |
|
| — |
|
| (3) |
|
| (1) |
|
End of period |
|
| 42 |
|
| 48 |
|
| 42 |
|
| 48 |
|
North America franchised: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
| 2,661 |
|
| 2,650 |
|
| 2,681 |
|
| 2,654 |
|
Opened |
|
| 23 |
|
| 19 |
|
| 41 |
|
| 37 |
|
Closed |
|
| (16) |
|
| (15) |
|
| (34) |
|
| (35) |
|
Divested |
|
| — |
|
| (1) |
|
| (20) |
|
| (3) |
|
End of period |
|
| 2,668 |
|
| 2,653 |
|
| 2,668 |
|
| 2,653 |
|
International franchised: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
| 1,469 |
|
| 1,310 |
|
| 1,460 |
|
| 1,274 |
|
Opened |
|
| 46 |
|
| 42 |
|
| 70 |
|
| 92 |
|
Closed |
|
| (24) |
|
| (12) |
|
| (39) |
|
| (26) |
|
End of period |
|
| 1,491 |
|
| 1,340 |
|
| 1,491 |
|
| 1,340 |
|
Total restaurants - end of period |
|
| 4,935 |
|
| 4,734 |
|
| 4,935 |
|
| 4,734 |
|
Item Impacting Comparability; Non-GAAP Measure
The following table reconciles our GAAP financial results to the adjusted (non-GAAP) financial results, excluding the legal settlement expense for Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc., a conditionally certified collective and class action, for the three and nine months ended September 27, 2015. We present these non-GAAP measures because we believe the legal settlement impacts the comparability of our results of operations. For additional information about the legal settlement, see “Note 5” of “Notes to Condensed Consolidated Financial Statements.”14
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| Sept. 27, |
| Sept. 28, |
| Sept. 27, |
| Sept. 28, |
| ||||
(In thousands, except per share amounts) |
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes, as reported |
| $ | 26,257 |
| $ | 24,218 |
| $ | 80,224 |
| $ | 81,864 |
|
Legal settlement expense |
| — |
| — |
| 12,278 |
| — |
| ||||
Income before income taxes, as adjusted |
| $ | 26,257 |
| $ | 24,218 |
| $ | 92,502 |
| $ | 81,864 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income, as reported |
| $ | 17,971 |
| $ | 16,075 |
| $ | 50,987 |
| $ | 52,134 |
|
Legal settlement expense |
| — |
| — |
| 7,986 |
| — |
| ||||
Net income, as adjusted |
| $ | 17,971 |
| $ | 16,075 |
| $ | 58,973 |
| $ | 52,134 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share, as reported |
| $ | 0.45 |
| $ | 0.39 |
| $ | 1.27 |
| $ | 1.23 |
|
Legal settlement expense |
| — |
| — |
| 0.20 |
| — |
| ||||
Diluted earnings per share, as adjusted |
| $ | 0.45 |
| $ | 0.39 |
| $ | 1.47 |
| $ | 1.23 |
|
The non-GAAP results shown above and within this document, which exclude the legal settlement, should not be construed as a substitute for or a better indicatorTable of the Company’s performance than the Company’s GAAP results. Management believes presenting certain financial information without the legal settlement is important for purposesContents
Results of comparison to prior year results. In addition, management uses this metric to evaluate the Company’s underlying operating performance and to analyze trends.Operations
FOCUS SystemIncome Statement Presentation
As of September 27, 2015, weWe have implementedstreamlined our new, proprietary point-of-sale system (“FOCUS”)income statement presentation by combining certain income statement captions in our domestic restaurants. FOCUS had the following impact on our condensed consolidated statements of income for the three and nine months ended September 27, 2015 and September 28, 2014 (in thousands):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| Sept 27, |
| Sept. 28, |
| Sept 27, |
| Sept. 28, |
| ||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Franchise royalties (a) |
| $ | (673 | ) | $ | (63 | ) | $ | (1,980 | ) | $ | (68 | ) |
Other sales (b) |
| 38 |
| 9,708 |
| 9,846 |
| 9,848 |
| ||||
Other operating expenses (c) |
| (56 | ) | (9,773 | ) | (9,959 | ) | (10,424 | ) | ||||
Depreciation and amortization (d) |
| (1,261 | ) | (1,064 | ) | (3,737 | ) | (1,643 | ) | ||||
Net decrease in income before income taxes |
| $ | (1,952 | ) | $ | (1,192 | ) | $ | (5,830 | ) | $ | (2,287 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per common share |
| $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.10 | ) | $ | (0.04 | ) |
(a) Royalty incentive program tiedhave conformed prior year amounts to franchise rollout of FOCUS.
(b) Represents revenues for equipment installed at domestic franchised restaurants.
(c) Includes cost of sales associated with equipment installed at franchised restaurants and other costs to support the rollout of the program.
(d) Includes depreciation expense for both the capitalized software and for equipment installed at Company-owned restaurants, which are being depreciated over five to seven years, respectively.this new presentation.
ResultsReview of Operations
Summary ofConsolidated Operating Results - Segment Review
Discussion of Revenues
Consolidated revenues were $389.3 million for the three months ended September 27, 2015, a decrease of $1.1 million, or 0.3%, over the corresponding 2014 period. The decrease for the three month period was primarily due to lower FOCUS equipment sales and lower PJ Food Service (“PJFS”) sales as a result of lower commodity costs. For the nine months ended September 27, 2015, total revenues were $1.22 billion, an increase of $47.9 million, or 4.1%, over the corresponding 2014 period. The changes in revenues for the three and nine months ended September 27, 2015, compared to the corresponding periods in 2014, were primarily due to the following:
·Revenues. Domestic Company-owned restaurant sales increased $11.0$18.3 million, or 6.5%9.8%, and $46.0$26.7 million, or 8.9%7.0%, for the three and ninesix months ended September 27, 2015,June 26, 2016, respectively, primarily due to increases of 4.7%5.6% and 6.8%3.2% in comparable sales and increases of 2.8%5.1% and 2.9%4.6% in equivalent units during the three and ninesix months ended September 27, 2015, respectively. “Comparable sales” representsJune 26, 2016, including 20 restaurants acquired from franchisees during the change in year-over-year sales for the same base of restaurants for the same fiscal periods.first quarter. “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 royalty revenue decreased approximately $50,000, or 0.2%, “Comparable sales” represents the change in year-over-year sales for the three months ended September 27, 2015 assame base of restaurants for the increase in revenue from a 2.4% increase insame fiscal periods.
Domestic franchise comparable sales was offset by higher royalty incentives. Revenuesroyalties and fees increased $4.8$2.0 million, or 7.3%, for the nine months ended September 27, 2015 primarily due to an increase of 4.4% in franchise comparable sales8.7% and due to lower royalty incentives.
· International royalties and franchise and development fees increased approximately $80,000, or 1.2%, and $1.1$2.9 million, or 6.0%,5.9% for the three and ninesix months ended September 27, 2015, respectively,June 26, 2016, respectively. The increase was primarily due to increases in comparable sales of 4.5% and 2.1% for the numberthree and six months, respectively, as well as reduced levels of franchised restaurantsroyalty incentives in 2016. Domestic franchise restaurant sales increased 4.3% to $545.5 million and increases2.2% to $1.1 billion for the three and six months ended June 26, 2016, respectively. The increase is primarily due to the increase in comparable sales noted above. Franchise restaurant sales are not included in Company revenues; however, our domestic royalty revenue is derived from these sales.
Domestic commissary and other sales increased $1.5 million, or 0.9% and decreased $13.4 million, or 3.9% for the three and six months ended June 26, 2016, respectively. The increase of 8.5%$1.5 million for the second quarter was primarily due to a $1.9 million increase in domestic commissary sales from an increase in volumes, partially offset by lower pricing for certain commodities, including cheese, and 7.8%,an increase in online fee revenue for our online and mobile ordering business. These increases were partially offset by the prior year inclusion of approximately $1.3 million for point-of-sale system (“FOCUS”) equipment sales to franchisees which had no significant impact on 2015 operating results. The decrease for the comparable six month period was due to a $9.8 million decrease in FOCUS equipment sales and a decrease in commissary sales of $4.5 million associated with lower pricing for certain commodities, partially offset by higher domestic commissary sales volumes.
International revenues increased approximately $2.1 million, or 8.1% and $4.2 million, or 8.0% for the three and six months ended June 26, 2016, respectively, primarily due to the following:
· | The three and six month periods of 2016 include sublease rental revenue in the United Kingdom of approximately $1.7 million and $3.3 million, respectively, which was shown net of the rental expenses in the corresponding periods of the prior year. The change had no impact on income before income taxes. |
· | Higher royalties and commissary revenues resulted from an increase in the number of restaurants and an increase in comparable sales of 5.3% and 5.5% for the three and six months ended June 26, 2016, calculated on a constant dollar basis. International franchise restaurant sales increased 7.7% to $161.8 million, and 8.0% to $316.1 million for the three and six month periods. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales. |
· | These increases were somewhat offset by lower China Company-owned restaurant revenues of $1.3 million and $2.6 million for the three and six month periods, respectively, primarily due to negative comparable sales and fewer restaurants. |
The negative impact of foreign currency exchange rates reduced ourwas approximately $2.2 million and $4.0 million on international revenues by approximately $800,000 and $2.1 million for the three- and nine-month periods.
· International restaurant and commissary sales increased approximately $500,000, or 2.7%, and $2.0 million, or 3.6%, for the three and ninesix months ended September 27,June 26, 2016.
15
Costs and expenses. The operating margin for domestic Company-owned restaurants was 20.0% and 20.8% in the three and six months ended June 26, 2016, respectively, compared to 20.8% and 21.1% in the corresponding 2015 periods, and consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Six Months Ended | |||||||||||||||
| June 26, 2016 |
| June 28, 2015 |
| June 26, 2016 |
| June 28, 2015 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant sales | $ | 204,248 |
|
|
| $ | 185,962 |
|
|
| $ | 409,927 |
|
|
| $ | 383,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
| 46,329 |
| 22.7% |
|
| 43,289 |
| 23.3% |
|
| 93,530 |
| 22.8% |
|
| 90,793 |
| 23.7% |
|
Other operating expenses |
| 117,140 |
| 57.4% |
|
| 104,067 |
| 56.0% |
|
| 231,249 |
| 56.4% |
|
| 211,595 |
| 55.2% |
|
Total expenses | $ | 163,469 |
| 80.0% |
| $ | 147,356 |
| 79.2% |
| $ | 324,779 |
| 79.2% |
| $ | 302,388 |
| 78.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin | $ | 40,779 |
| 20.0% |
| $ | 38,606 |
| 20.8% |
| $ | 85,148 |
| 20.8% |
| $ | 80,861 |
| 21.1% |
|
Domestic Company-owned restaurants cost of sales were approximately 0.6% and 0.9% lower as a percentage of sales for the three and six months ended June 26, 2016, respectively, primarily due to an increase in United Kingdom commissary revenues from increases in unitslower commodity costs, including cheese, meats and dough. Domestic restaurants other operating expenses were approximately 1.4% and 1.2% higher comparable sales. This increase was partially offset by loweras a percentage of sales at China Company-owned restaurants due to the disposition of eleven restaurants in 2014 and negative comparable sales. Additionally, sales were negatively impacted $1.3 million and $3.8 million for the three- and nine month periods, respectively, by foreign currency exchange rates.
· Other sales decreased approximately $9.3 million, or 39.7%, and increased $400,000, or 0.8%, for the three and ninesix months ended September 27,June 26, 2016, respectively, primarily due to higher insurance costs.
The domestic commissary and other operating margins were 7.7% and 7.4% for the three and six months ended June 26, 2016, respectively, compared to 7.5% and 7.4% in the corresponding periods of the prior year and consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | |||||||||||||||||
| June 26, 2016 |
| June 28, 2015 | ||||||||||||||||
|
| Revenues |
| Expenses |
|
| Margin $ |
| Margin % |
|
| Revenues |
| Expenses |
|
| Margin $ |
| Margin % |
Domestic commissary | $ | 150,895 | $ | 139,616 |
| $ | 11,279 |
| 7.5% |
| $ | 149,007 | $ | 137,558 |
| $ | 11,449 |
| 7.7% |
All others |
| 14,059 |
| 12,642 |
|
| 1,417 |
| 10.1% |
|
| 14,420 |
| 13,648 |
|
| 772 |
| 5.4% |
Domestic commissary and other | $ | 164,954 | $ | 152,258 |
| $ | 12,696 |
| 7.7% |
| $ | 163,427 | $ | 151,206 |
| $ | 12,221 |
| 7.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended | |||||||||||||||||
|
| June 26, 2016 |
|
| June 28, 2015 | ||||||||||||||
|
| Revenues |
| Expenses |
|
| Margin $ |
| Margin % |
|
| Revenues |
| Expenses |
|
| Margin $ |
| Margin % |
Domestic commissary | $ | 306,849 | $ | 284,189 |
| $ | 22,660 |
| 7.4% |
| $ | 311,340 | $ | 287,294 |
| $ | 24,046 |
| 7.7% |
All others |
| 27,090 |
| 24,875 |
|
| 2,215 |
| 8.2% |
|
| 36,034 |
| 34,251 |
|
| 1,783 |
| 4.9% |
Domestic commissary and other | $ | 333,939 | $ | 309,064 |
| $ | 24,875 |
| 7.4% |
| $ | 347,374 | $ | 321,545 |
| $ | 25,829 |
| 7.4% |
Domestic commissary margins were 0.2% and 0.3% lower for the three and six months ended June 26, 2016, respectively, primarily due to the reclassification of certain expenses from general and administrative to operating expenses beginning in the first quarter of 2016, which had no impact on commissary income before income taxes. The “All others” margins were 4.7% and 3.3% higher for the three and six month periods, respectively, primarily due to the
16
prior year including FOCUS equipment sales to franchisees, which had no significant margin, and improved operating results at Preferred Marketing Solutions.
The international operating margins were 37.6% and 36.8% in the three and six months ended June 26, 2016, respectively, compared to 38.3% and 38.7% versus the corresponding 2015 periods. The lower margins were primarily due to a decrease in restaurant, commissary and other margins of 1.7% and 2.7% for the three and six months ended June 26, 2016 primarily due to the gross presentation of certain sublease rental income and expenses. These amounts were shown net in the prior year; the change in presentation had no impact on income before income taxes. This lower margin was substantially offset by the benefit of higher royalties and fees.
The international operating margins consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | |||||||||||||||||||
|
| June 26, 2016 |
| June 28, 2015 | ||||||||||||||||||
|
| Revenues |
| Expenses |
|
| Margin $ (a) |
| Margin % |
| Revenues |
| Expenses |
|
| Margin $ |
| Margin % | ||||
Royalties and franchise development fees |
| $ | 7,397 |
| $ | - |
| $ | 7,397 |
|
|
| $ | 6,641 |
| $ | - |
| $ | 6,641 |
|
|
Restaurant, commissary and other |
|
| 21,063 |
|
| 17,752 |
|
| 3,311 |
| 15.7% |
|
| 19,685 |
|
| 16,250 |
|
| 3,435 |
| 17.4% |
Total international |
| $ | 28,460 |
| $ | 17,752 |
| $ | 10,708 |
| 37.6% |
| $ | 26,326 |
| $ | 16,250 |
| $ | 10,076 |
| 38.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended | |||||||||||||||||||
|
| June 26, 2016 |
| June 28, 2015 | ||||||||||||||||||
|
| Revenues |
| Expenses |
|
| Margin $ (a) |
| Margin % |
| Revenues |
| Expenses |
|
| Margin $ |
| Margin % | ||||
Royalties and franchise development fees |
| $ | 14,265 |
| $ | - |
| $ | 14,265 |
|
|
| $ | 13,139 |
| $ | - |
| $ | 13,139 |
|
|
Restaurant, commissary and other |
|
| 41,650 |
|
| 35,342 |
|
| 6,308 |
| 15.1% |
|
| 38,613 |
|
| 31,728 |
|
| 6,885 |
| 17.8% |
Total international |
| $ | 55,915 |
| $ | 35,342 |
| $ | 20,573 |
| 36.8% |
| $ | 51,752 |
| $ | 31,728 |
| $ | 20,024 |
| 38.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | The negative impact of foreign currency exchange rates on income before income taxes was approximately $500,000 and $1.2 million for the three and six months ended June 26, 2016, respectively. |
General and administrative (G&A) expenses were $42.6 million, or 10.1% of revenues for the three months ended June 26, 2016, which approximated G&A of $43.0 million, or 10.8%, of revenues for the same period in 2015. G&A expenses were $82.9 million, or 9.7% of revenues for the six months ended June 26, 2016, compared to $86.8 million, or 10.4% of revenues for the same period in 2015. The decrease of $3.9 million for the three-monthsix month period was primarily due to higher FOCUS equipment sales to franchisees in 2014. FOCUS equipment sales had no significant impact on operating income results. See the “FOCUS System” section above for additional information.following:
· | Corporate G&A costs decreased primarily due to lower legal costs. |
· | Domestic Company-owned restaurant supervisor bonuses decreased due to lower comparable sales bonus payouts, primarily in the first quarter of 2016. |
· | International G&A costs decreased primarily due to lower advertising spending; in the prior year, advertising levels were higher with the launch of the United Kingdom Quality Guarantee in 2015. |
·Depreciation and amortization. Domestic commissary sales decreased $3.4Depreciation and amortization was $10.0 million, or 2.3%, and $6.62.4% of revenues for the three months ended June 26, 2016, compared to $10.1 million, or 1.4%2.5% of revenues for the same period in 2015, and $19.8 million, or 2.3% of revenues for the six months ended June 26, 2016, compared to $20.2 million, or 2.4% of revenues for the same period in 2015.
Legal settlement expense. The 2015 legal settlement expense represents a pre-tax expense of $12.3 million for a collective and class action, Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc.,including approximately 19,000 drivers, which alleged delivery drivers were not reimbursed in accordance with the Fair Labor Standards Act.
17
Net interest expense. Net interest expense increased approximately $400,000 and $700,000 for the three and ninesix months ended September 27,June 26, 2016, respectively, primarily due to higher average outstanding debt balances.
Income tax expense. The effective income tax rates were 31.5% and 31.9% for the three and six months ended June 26, 2016, respectively, representing an increase of 2.6% for the three month period and no change from the prior year six month period. The legal settlement reduced our 2015 respectively, as lower revenues associated with lower cheese pricesincome tax rates by approximately 2.5% and 0.5% for the three and six month periods, respectively. Our effective income tax rates may fluctuate from quarter to quarter for various reasons, including the timing of various deductions and credits.
Diluted earnings per share. Diluted earnings per share were somewhat offset$0.61 for the three months ended June 26, 2016, compared to $0.27 in the corresponding prior year period. Diluted earnings per share were $1.29 for the six months ended June 26, 2016, compared to $0.82 in the corresponding prior year period. Diluted earnings per share for the three and six months ended June 28, 2015 were negatively impacted by increases in restaurant sales volumes.$0.20 due to the 2015 legal settlement.
Discussion of Operating Results by Segment
Third quarter 2015 income before income taxes was $26.3 million compared to $24.2 million in the prior year comparable period, or an increaseSee “Review of 8.4%. Income before income taxes was $80.2 millionConsolidated Operating Results” above for the nine months ended September 27, 2015, compared to $81.9 million for the prior year comparable period. Excluding the previously discussed legal settlement, income before income taxes was $92.5 million for the nine months ended September 28, 2015, or an increase of 13.0%. revenue highlights.
Income before income taxes is summarized in the following table on a reporting segment basis. Alongside the GAAP income before income taxes data, we have included “adjusted” income before income taxes for the nine-month period of 2015 to exclude the 2015 legal settlement expense.expense previously discussed. We believe this non-GAAP measure is important for purposes of comparing to prior year results.
|
| Three Months Ended |
| |||||||
|
| Sept. 27, |
| Sept. 28, |
| Increase |
| |||
(In thousands) |
| 2015 |
| 2014 |
| (Decrease) |
| |||
|
|
|
|
|
|
|
| |||
Domestic company-owned restaurants |
| $ | 8,088 |
| $ | 8,133 |
| $ | (45 | ) |
Domestic commissaries |
| 10,192 |
| 8,897 |
| 1,295 |
| |||
North America franchising |
| 19,172 |
| 19,023 |
| 149 |
| |||
International |
| 3,184 |
| 1,436 |
| 1,748 |
| |||
All others |
| (556 | ) | (298 | ) | (258 | ) | |||
Unallocated corporate expenses |
| (13,482 | ) | (12,242 | ) | (1,240 | ) | |||
Elimination of intersegment profits |
| (341 | ) | (731 | ) | 390 |
| |||
Total income before income taxes (a) |
| $ | 26,257 |
| $ | 24,218 |
| $ | 2,039 |
|
|
| Nine Months Ended |
| |||||||||||||
|
| As Reported |
| Legal |
| Adjusted |
|
|
| Adjusted |
| |||||
|
| Sept. 27, |
| Settlement |
| Sept. 27, |
| Sept. 28, |
| Increase |
| |||||
(In thousands) |
| 2015 |
| Expense |
| 2015 |
| 2014 |
| (Decrease) |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Domestic company-owned restaurants |
| $ | 41,185 |
| $ | — |
| $ | 41,185 |
| $ | 32,069 |
| $ | 9,116 |
|
Domestic commissaries |
| 32,694 |
| — |
| 32,694 |
| 26,174 |
| 6,520 |
| |||||
North America franchising |
| 61,545 |
| — |
| 61,545 |
| 56,389 |
| 5,156 |
| |||||
International |
| 6,807 |
| — |
| 6,807 |
| 4,071 |
| 2,736 |
| |||||
All others |
| (230 | ) | — |
| (230 | ) | (150 | ) | (80 | ) | |||||
Unallocated corporate expenses |
| (60,636 | ) | 12,278 |
| (48,358 | ) | (35,405 | ) | (12,953 | ) | |||||
Elimination of intersegment losses |
| (1,141 | ) | — |
| (1,141 | ) | (1,284 | ) | 143 |
| |||||
Total income before income taxes (a) |
| $ | 80,224 |
| $ | 12,278 |
| $ | 92,502 |
| $ | 81,864 |
| $ | 10,638 |
|
(a) Includes FOCUS system costs Management uses this metric to evaluate the underlying operating performance of approximately $2.0 million and $1.2 million for the three months ended September 27, 2015 and September 28, 2014, respectively, and approximately $5.8 million and $2.3 million for the nine months ended September 27, 2015 and September 28, 2014, respectively. See the “Focus System” section above for additional information.
The increases of $2.0 million, or 8.4%, and $10.6 million, or 13.0%, excluding the legal settlement, for the three- and nine-month periods in 2015, respectively, were primarily due to the following:
·Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’business. Adjusted income before income taxes were relatively flatshould not be construed as a substitute for or a better indicator of our performance than the thirdCompany’s GAAP measure.
18
Second quarter of 2015, compared to the same quarter of the prior year, as higher profits from the 4.7% increase in comparable sales and lower commodity costs were offset by incremental insurance expense of approximately $2.9 million primarily from higher non-owned automobile claims costs. Income2016 income before income taxes increased approximately $9.1was $35.2 million for the nine-month period, compared to the corresponding prior year period, as higher profits from the 6.8% increase in comparable sales and lower commodity costs were partially offset by incremental insurance costs of $3.9$17.5 million and higher depreciation expense of $1.1 million associated with FOCUS
equipment. The market price for cheese averaged $1.68 and $1.62 per pound for the three- and nine-month periods in 2015, compared to $2.14 and $2.16 per pound in the prior year comparable periods.
·Domestic Commissary Segment. Domestic commissaries’year. Excluding the 2015 legal settlement, income before income taxes increased approximately $1.318.1%, or $5.4 million, and $6.5as compared to $29.8 million for the three and nine months ended September 27, 2015, respectively, compared to the corresponding prior year periods primarily due to higher margins and incremental profits from higher restaurant volumes. These increases were partially offset by incremental insurance expensesecond quarter of approximately $1.6 million and $2.22015. Income before income taxes was $76.6 million for the three and nine-month periods, respectively, primarily from higher automobile claims costs.
·North America Franchising Segment. North America Franchisingsix months ended June 26, 2016, compared to $54.0 million for the prior comparable period. Excluding the 2015 legal settlement, income before income taxes was $149,000 higher for the third quarter of 2015,increased 15.6%, or $10.4 million, as compared to the same quarter of the prior year, as higher royalties from the 2.4% comparable sales increase were substantially offset by higher royalty incentives. Income before income taxes increased $5.2$66.2 million for the ninesix months ended September 27, 2015, compared to the corresponding prior year period, due to higher royalties from the 4.4% comparable sales increase and lower royalty incentives.June 28, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| |||||||||||||
|
|
|
| As Reported |
| Legal |
| Adjusted |
| Adjusted |
| |||||
|
| June 26, |
| June 28, |
| Settlement |
| June 28, |
| Increase |
| |||||
(In thousands) |
| 2016 |
| 2015 |
| Expense |
| 2015 |
| (Decrease) |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Company-owned restaurants |
| $ | 15,325 |
| $ | 14,617 |
| $ | — |
| $ | 14,617 |
| $ | 708 |
|
Domestic commissaries |
|
| 11,682 |
|
| 10,702 |
|
| — |
|
| 10,702 |
|
| 980 |
|
North America franchising |
|
| 22,445 |
|
| 20,054 |
|
| — |
|
| 20,054 |
|
| 2,391 |
|
International |
|
| 2,875 |
|
| 2,279 |
|
| — |
|
| 2,279 |
|
| 596 |
|
All others |
|
| 425 |
|
| (117) |
|
| — |
|
| (117) |
|
| 542 |
|
Unallocated corporate expenses |
|
| (17,079) |
|
| (29,949) |
|
| 12,278 |
|
| (17,671) |
|
| 592 |
|
Elimination of intersegment profits |
|
| (473) |
|
| (55) |
|
| — |
|
| (55) |
|
| (418) |
|
Total income before income taxes |
| $ | 35,200 |
| $ | 17,531 |
| $ | 12,278 |
| $ | 29,809 |
| $ | 5,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| |||||||||||||
|
|
|
| As Reported |
| Legal |
| Adjusted |
| Adjusted |
| |||||
|
| June 26, |
| June 28, |
| Settlement |
| June 28, |
| Increase |
| |||||
(In thousands) |
| 2016 |
| 2015 |
| Expense |
| 2015 |
| (Decrease) |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Company-owned restaurants |
| $ | 35,512 |
| $ | 33,097 |
| $ | — |
| $ | 33,097 |
| $ | 2,415 |
|
Domestic commissaries |
|
| 23,228 |
|
| 22,502 |
|
| — |
|
| 22,502 |
|
| 726 |
|
North America franchising |
|
| 46,025 |
|
| 42,373 |
|
| — |
|
| 42,373 |
|
| 3,652 |
|
International |
|
| 5,913 |
|
| 3,623 |
|
| — |
|
| 3,623 |
|
| 2,290 |
|
All others |
|
| 476 |
|
| 326 |
|
| — |
|
| 326 |
|
| 150 |
|
Unallocated corporate expenses |
|
| (33,411) |
|
| (47,154) |
|
| 12,278 |
|
| (34,876) |
|
| 1,465 |
|
Elimination of intersegment profits |
|
| (1,134) |
|
| (800) |
|
| — |
|
| (800) |
|
| (334) |
|
Total income before income taxes |
| $ | 76,609 |
| $ | 53,967 |
| $ | 12,278 |
| $ | 66,245 |
| $ | 10,364 |
|
·International Segment. Income before income taxes increased approximately $1.7 million and $2.7 million for the three and nine months ended September 27, 2015, respectively, compared to the corresponding prior year periods. The increases were primarily due to increasesChanges in units and comparable sales increases of 8.0% and 7.5%, which resulted in both higher royalties and increases of approximately $1.4 million and $1.9 million in United Kingdom results for the three- and nine-month periods, respectively. These increases were somewhat offset by the impact of negative foreign currency exchange rates of approximately $900,000 and $2.2 million for the three- and nine-month periods, respectively. Additionally, the 2014 periods include an impairment charge of approximately $700,000 for eight Company-owned restaurants in China.
·All Others Segment. The “All Others” reporting segment income before income taxes which primarily includes our online and mobile ordering business and our wholly-owned print and promotions subsidiary, Preferred Marketing Solutions, decreased approximately $250,000 and $80,000 forare summarized on a segment basis as follows excluding the three and nine months ended September 27, 2015 respectively, compared to the corresponding prior year periods. The decrease of approximately $250,000 for the three-month period was primarily due to higher infrastructure costs to support our online and mobile ordering business, partially offset by higher online volumes. The decrease of approximately $80,000 for the nine-month period was primarily due to reduced operating results at Preferred Marketing Solutions, primarily associated with an increased number of discounted direct mail campaigns, partially offset by improvements in our online and mobile ordering business due to higher online volumes.legal settlement:
· | Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ income before income taxes increased approximately $700,000 and $2.4 million for the three and six months ended June 26, 2016, respectively, compared to the corresponding prior year periods. The increase was primarily due to 5.6% and 3.2% increases in comparable sales for the three and six months ended June 26, 2016 and lower commodity costs. These increases were partially offset by higher non-owned automobile claim costs. |
· | Domestic Commissary Segment. Domestic commissaries’ income before income taxes increased approximately $1.0 million and $700,000 for the three and six months ended June 26, 2016, respectively, primarily due to higher sales volumes. |
· | North America Franchising Segment. North America franchising income before income taxes increased approximately $2.4 million and $3.7 million for the three and six months ended June 26, 2016, respectively. The increases were primarily due to increases of 4.5% and 2.1% in comparable sales for the three and six months ended June 26, 2016, respectively. In addition, sales and development incentives are lower in 2016. |
· | International Segment. International income before income taxes increased approximately $600,000 and $2.3 million for the three and six months ended June 26, 2016, respectively. The increases were primarily due to an increase in the number of restaurants and an increase in comparable sales, which resulted in higher royalties. The United Kingdom profits also increased from lower advertising costs; in the prior year, advertising costs were higher with the launch of the Quality Guarantee in 2015. These increases were somewhat offset by the |
·Unallocated Corporate Expenses. Unallocated corporate expenses increased approximately $1.2 million and $13.0 million for the three and nine months ended September 27, 2015, respectively, compared to the corresponding 2014 periods. The increase of $1.2 million for the third quarter was primarily due to higher health insurance claims costs. The increase of $13.0 million for the nine-month period was primarily due to higher salaries and benefits, including an increase in health insurance claims costs, and increased legal and interest costs. In addition, management incentive compensation costs have increased in 2015 due to higher annual operating results.
Diluted earnings per share were $0.45 for the three months ended September 27, 2015, compared to $0.39 in the corresponding prior year period. Diluted earnings per share were $1.27 ($1.47, excluding the $0.20 legal settlement), for the nine months ended September 27, 2015, compared to $1.23 in the corresponding prior year period. Diluted earnings per share increased $0.02 and $0.07 for the three- and nine-month periods, respectively, due to reductions in shares outstanding (a 3.6% reduction for the three-month period and a 4.3% reduction for the nine-month period). Additionally, FOCUS system costs reduced diluted earnings per share by $0.04 and $0.02 for the three months ended September 27, 2015 and September 28, 2014, respectively, and $0.10 and $0.04 for the nine months ended September 27, 2015 and September 28, 2014, respectively.
Review of Consolidated Operating Results
Revenues. Domestic Company-owned restaurant sales were $180.1 million for the three months ended September 27, 2015, compared to $169.1 million for the same period in 2014, and $563.3 million for the nine months ended September 27, 2015, compared to $517.3 million for the same period in 2014. The increases of $11.0 million and $46.0 million were primarily due to the previously mentioned increases of 4.7% and 6.8% in comparable sales and increases of 2.8% and 2.9% in equivalent units during the three and nine months ended September 27, 2015, respectively.
North America franchise royalties were $22.1 million and $70.5 million for the three and nine months ended September 27, 2015, respectively, representing a decrease of approximately $50,000, or 0.2%, and an increase of $4.8 million, or 7.3%, from the comparable periods in the prior year. The decrease for the three-month period was primarily due to increased levels of royalty incentives which more than offset the higher royalties from an increase in North America franchise sales. The increase for the nine-month period was primarily due to higher royalties from the increase in North America franchise sales and reduced levels of royalty incentives. North America franchise sales increased 3.1% to $499.2 million for the three months ended September 27, 2015, compared to $484.3 million for the same period in 2014, and increased 4.9% to $1.585 billion for the nine months ended September 27, 2015, compared to $1.511 billion for the same period in 2014. The increases were primarily due to the 2.4% and 4.4% increases in comparable sales for the three- and nine-month periods, respectively. Franchise restaurant sales are not included in Company revenues; however, our domestic royalty revenue is derived from these sales.19
Average weekly sales for comparable units include restaurants that were open throughout the periods presented below. The comparable sales base for domestic Company-owned and North America franchised restaurants, respectively, includes restaurants acquired by the Company or divested to franchisees during the previous twelve months. Average weekly sales for non-comparable units include restaurants that were not open throughout the periods presented below and include non-traditional sites. Average weekly sales for non-traditional units not subject to continuous operations are calculated based upon actual days open.
negative impact of foreign currency exchange rates of approximately $500,000 and $1.2 million for the three and six month periods in 2016. |
· | All Others Segment. The “All others” segment, which primarily includes our online and mobile ordering business and our wholly-owned print and promotions subsidiary, Preferred Marketing Solutions, increased approximately $500,000 and $200,000 for the three and six months ended June 26, 2016. The increases were primarily due to improved operating results at Preferred Marketing Solutions. |
· | Unallocated Corporate Segment. Unallocated corporate expenses decreased approximately $600,000 and $1.5 million for the three and six months ended June 26, 2016, respectively. The decreases were primarily due to lower legal costs. |
The comparable sales base and average weekly sales for 2015 and 2014 for domestic Company-owned and North America franchised restaurants consisted of the following:
|
| Three Months Ended |
| ||||||||||
|
| September 27, 2015 |
| September 28, 2014 |
| ||||||||
|
| Company |
| Franchised |
| Company |
| Franchised |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total domestic units (end of period) |
| 697 |
| 2,664 |
| 683 |
| 2,630 |
| ||||
Equivalent units |
| 685 |
| 2,521 |
| 667 |
| 2,496 |
| ||||
Comparable sales base units |
| 668 |
| 2,355 |
| 649 |
| 2,311 |
| ||||
Comparable sales base percentage |
| 97.5 | % | 93.4 | % | 97.3 | % | 92.6 | % | ||||
Average weekly sales - comparable units |
| $ | 20,382 |
| $ | 15,596 |
| $ | 19,628 |
| $ | 15,306 |
|
Average weekly sales - total non-comparable units (a) |
| $ | 13,525 |
| $ | 10,073 |
| $ | 15,081 |
| $ | 10,179 |
|
Average weekly sales - all units |
| $ | 20,208 |
| $ | 15,234 |
| $ | 19,504 |
| $ | 14,926 |
|
(a) Includes 124 traditional and 214 non-traditional units as of September 27, 2015 and 150 traditional and 204 non-traditional units as of September 28, 2014.
|
| Nine Months Ended |
| ||||||||||
|
| September 27, 2015 |
| September 28, 2014 |
| ||||||||
|
| Company |
| Franchised |
| Company |
| Franchised |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total domestic units (end of period) |
| 697 |
| 2,664 |
| 683 |
| 2,630 |
| ||||
Equivalent units |
| 682 |
| 2,536 |
| 662 |
| 2,513 |
| ||||
Comparable sales base units |
| 665 |
| 2,348 |
| 644 |
| 2,302 |
| ||||
Comparable sales base percentage |
| 97.5 | % | 92.6 | % | 97.3 | % | 91.6 | % | ||||
Average weekly sales - comparable units |
| $ | 21,369 |
| $ | 16,482 |
| $ | 20,209 |
| $ | 15,879 |
|
Average weekly sales - total non-comparable units (a) |
| $ | 13,686 |
| $ | 10,324 |
| $ | 13,759 |
| $ | 10,356 |
|
Average weekly sales - all units |
| $ | 21,184 |
| $ | 16,204 |
| $ | 20,026 |
| $ | 15,415 |
|
(a) Includes 124 traditional and 214 non-traditional units as of September 27, 2015 and 150 traditional and 204 non-traditional units as of September 28, 2014.
Domestic commissary sales decreased 2.3% to $145.9 million for the three months ended September 27, 2015, from $149.2 million in the comparable 2014 period and decreased 1.4% to $457.2 million for the nine months ended September 27, 2015, from $463.9 million in the comparable 2014 period. The decreases were primarily due to decreases in cheese prices, which were somewhat offset by increases in sales volumes. PJFS pricing for cheese is based on a fixed dollar markup; when cheese prices decrease, revenues will decrease with no overall impact on the related dollar margin.
Other sales decreased approximately $9.3 million, or 39.7%, and increased approximately $400,000, or 0.8%, for the three and nine months ended September 27, 2015, from the prior comparable periods. The decrease for the three-month period was primarily due to lower FOCUS equipment sales to franchisees. See the “FOCUS System” section above for additional information.
International royalties and franchise and development fees increased approximately $80,000, or 1.2%, for the three months ended September 27, 2015, and increased $1.1 million, or 6.0%, for the nine months ended September 27, 2015, from the prior comparable periods. The increases were due to increases in units and comparable sales of 8.5% and 7.8%, calculated on a constant dollar basis, for the three- and nine-month periods, respectively. The negative impact of foreign currency exchange rates reduced our revenues by approximately $800,000 and $2.1 million for the three- and nine-month periods. International franchise sales were $146.1 million for the three months ended September 27, 2015, compared to $139.4 million for the same period in 2014, representing an increase of 4.8%. International franchise sales for the nine months ended September 27, 2015 increased 7.0% to $438.9 million compared to $410.3 million for the same period in 2014. International franchise sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.
International restaurant and commissary sales increased approximately $500,000, or 2.7%, for the three months ended September 27, 2015, and increased $2.0 million, or 3.6%, for the nine months ended September 27, 2015, from the prior comparable periods. The increases were primarily due to higher commissary revenues from increases in units and comparable sales. The increases were partially offset by lower sales at China Company-owned restaurants due to the disposition of eleven restaurants in 2014 and negative comparable sales. Additionally, sales were negatively impacted $1.3 million and $3.8 million for the three- and nine month periods, respectively, by foreign currency exchange rates.
Costs and expenses. The restaurant operating margin for domestic Company-owned units was 17.5% for the three months ended September 27, 2015, compared to 17.6% for the same period in 2014, and was 20.0% for the nine months ended September 27, 2015, compared to 18.6% for the same period in 2014. The margins were comprised of the following changes for the three and nine months ended September 27, 2015, as compared to the same periods in 2014:
· Cost of sales were 1.7% and 1.5% lower for the three and nine months ended September 27, 2015, as compared to the same periods in 2014, primarily due to lower commodity costs, primarily cheese.
· Salaries and benefits were 0.8% and 0.7% higher for the three and nine months ended September 27, 2015, primarily due to higher bonuses paid to general managers and minimum wage increases.
· Advertising and related costs were 0.3% lower for the nine months ended September 27, 2015 (no change for the third quarter) primarily due to lower discretionary spending and the benefit of higher sales.
· Occupancy costs and other restaurant operating costs were 1.0% higher and 0.2% lower for the three and nine months ended September 27, 2015. The higher operating expenses for the three months ended were due to the previously mentioned increase in non-owned automobile insurance claims costs, partially offset by lower mileage reimbursement due to lower gas prices.
Domestic commissary margin was 7.3% for the three months ended September 27, 2015, compared to 6.8% for the corresponding period in 2014, and 7.6% for the nine months ended September 27, 2015, compared to 6.8% for the corresponding period in 2014 and consisted of the following differences:
· Cost of sales were 2.1% and 2.0% lower for the three and nine months ended September 27, 2015 primarily due to lower cheese costs which have a fixed-dollar markup. As cheese prices are lower, food cost as a percentage of sales is lower.
· Salaries and benefits and other commissary operating expenses were 1.6% and 1.1% higher as a percentage of sales. This is primarily due to the previously discussed incremental automobile insurance claims costs of $1.6 million and $2.2 million for the three- and nine-month periods of 2015, respectively. Additionally, PJFS revenues are lower due to lower cheese prices, which increases overall salaries and benefits and other commissary operating expenses as a percentage of sales.
Other operating expenses as a percentage of other sales were 95.7% for the three months ended September 27, 2015 compared to 97.6% for the corresponding period in 2014 and 95.2% for the nine months ended September 27, 2015 compared to 95.5% in the prior comparable periods. The lower operating expenses for the quarter were primarily due to the decreasing number of franchise FOCUS systems sales, and related operating expenses, as we finished the rollout. Overall, FOCUS systems sales have a low margin. The nine month results reflect the impact of an increased number of direct mail campaigns offered to our domestic restaurants by Preferred Marketing Solutions.
International restaurant and commissary expenses as a percentage of sales were 81.4% for the third quarter of 2015 and 84.2% in the third quarter of 2014. For the nine months ended September 27, 2015, expenses were 81.9% as compared to 83.4% for the corresponding 2014 period. The decreases as a percentage of sales for the three- and nine-month periods were primarily due to the benefit of higher commissary sales volumes and higher commissary margins.
General and administrative (G&A) costs were $36.1 million, or 9.3%, of revenues for the three months ended September 27, 2015, compared to $33.7 million, or 8.6%, of revenues for the same period in 2014. G&A costs were $120.0 million, or 9.8%, of revenues for the nine months ended September 27, 2015, compared to $104.2 million, or 8.9%, of revenues for the same period in 2014. The increase of $2.4 million for the three-month period was primarily due to higher insurance claims costs, primarily health insurance, and international support costs. The increase of $15.8 million for the nine-month period was primarily due to the following:
· Corporate G&A costs increased primarily due to higher salaries and benefits, including an increase in health insurance claims costs, increased legal costs, and higher management incentive compensation due to higher annual operating results.
· Domestic Company-owned restaurant supervisor bonuses increased due to higher sales and higher operating profits.
· International G&A costs increased primarily due to incremental advertising spending and other international support costs.
Other general expenses decreased approximately $1.5 million and $2.2 million for the three and nine months ended September 27, 2015, respectively, primarily due to lower provisions for uncollectible accounts and notes receivable and the $700,000 impairment charge in the prior year for eight Company-owned restaurants in China.
Depreciation and amortization was $10.5 million (2.7% of revenues) for the three months ended September 27, 2015, compared to $10.5 million (2.7% of revenues) for the same 2014 period, and $30.6 million (2.5% of revenues) for the nine months ended September 27, 2015, compared to $29.5 million (2.5% of revenues) for the 2014 period. The nine-month period of 2015 includes higher depreciation from both FOCUS capitalized software costs and Company-owned restaurants equipment costs.
Legal settlement expense. This line item consists of $12.3 million of settlement costs in the nine month period of 2015 for a conditionally certified collective and class action alleging our delivery drivers were not properly reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act (“FLSA”). For additional information, see “Note 5” of “Notes to Condensed Consolidated Financial Statements.”
Net interest expense. Net interest expense increased approximately $200,000 and $1.3 million for the three and nine months ended September 27, 2015, respectively, primarily due to a higher average outstanding debt balance and higher effective interest rates.
Income tax expense. Our effective income tax rates were 27.7% and 30.6% for the three and nine months ended September 27, 2015, respectively, representing decreases from the prior year comparable periods of 2.2% and 1.8% for the three- and nine-month periods, respectively. The rates for 2015 include higher benefits from various tax deductions and credits, including the U.S. federal manufacturing deduction.
Planned Sale of China Company-owned Operations
The Company has decided to refranchise the China market and is planning a sale of its existing China operations, consisting of the Company-owned restaurants and a commissary. We expect to sell the business within the next 12 months; upon completion of the sale, the Company will not have any Company-owned international restaurants.
The Company-owned China operations have incurred losses before income taxes of $0.4 million and $1.4 million for the three months ended September 27, 2015 and September 28, 2014, respectively, and losses before income taxes of $0.9 million and $2.3 million for the nine months ended September 27, 2015 and September 28, 2014, respectively, which are recorded in our International segment. The losses for the three and nine months ended September 28, 2014, include an impairment charge of $0.7 million for eight Company-owned restaurants in China. We do not expect the sale of our China operations to have a significant impact on our financial results.
See “Note 7” of “Notes to Condensed Consolidated Financial Statements” for additional information.
Liquidity and Capital Resources
Debt
Our debt is comprised entirely of borrowings under ouran unsecured revolving line of credit facility (“Credit Facility”) with a maturity dateoutstanding balances of October 31, 2019. Outstanding balances under this $400 million Credit Facility were $239.0$317.4 million as of September 27, 2015June 26, 2016 and $230.5$256.0 million as of December 28, 2014.27, 2015. On June 8, 2016, we exercised our option to increase the amount available under our Credit Facility to $500 million from the previous $400 million availability. The increase in the outstanding debt balance from December 27, 2015 was primarily due to borrowings to fund share repurchases, pay dividends, acquire restaurants and pay the 2015 legal settlement.
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 incrementspread 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 $138.5$157.7 million as of September 27, 2015.June 26, 2016.
We useAs of June 26, 2016, we have the following interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our Credit Facility. During the quarter ended September 27, 2015, we executedswap agreements, including three additional forward starting
swaps for $125.0 millionexecuted in 2015 that become effective in 2018 upon expiration of the two existing swaps for $125.0 million. As of September 27, 2015, we have the following interest rate swap agreements:$125 million:
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Effective Dates | Floating Rate Debt | Fixed Rates | ||||
July 30, 2013 through April 30, 2018 |
| $ | 75 million |
| 1.42 | % |
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December 30, 2014 through April 30, 2018 |
| $ | 50 million |
| 1.36 | % |
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April 30, 2018 through April 30, 2023 |
| $ | 55 million |
| 2.33 | % |
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April 30, 2018 through April 30, 2023 |
| $ | 35 million |
| 2.36 | % |
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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 revolving credit facility:
Actual Ratio for the | |||||
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Leverage Ratio |
| Not to exceed 3.0 to 1.0 |
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Interest Coverage Ratio |
| Not less than 3.5 to 1.0 |
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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 September 27, 2015.June 26, 2016.
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Cash Flows
Cash flow provided by operating activities was $119.7$75.1 million for the ninesix months ended September 27, 2015,June 26, 2016, compared to $84.8$78.0 million for the same period in 2014.2015. The increasedecrease of approximately $34.9$2.9 million was primarily due to higher operating incomethe payment of approximately $12.5 million in the first quarter of 2016 for the previously discussed legal settlement and favorableunfavorable changes in inventory and other working capital items. The prior year includeditems, partially offset by higher inventory levels of equipment to support the rollout of FOCUS to our domestic franchised restaurants. The Perrin legal settlement does not currently impact cash provided by operating activities as it has not yet been paid. Payments will begin in 2016 following court approval.net income.
Our free cash flow, a non-GAAP financial measure, for the nine months ended September 27, 2015 and September 28, 2014 was as follows for the six months ended June 26, 2016 and June 28, 2015 (in thousands):
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| Sept. 28, |
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| 2014 |
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Net cash provided by operating activities |
| $ | 119,738 |
| $ | 84,826 |
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Purchases of property and equipment (a) |
| (26,508 | ) | (37,700 | ) | ||
Free cash flow (b) |
| $ | 93,230 |
| $ | 47,126 |
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Net cash provided by operating activities |
| $ | 75,123 |
| $ | 77,982 |
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Purchases of property and equipment |
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Free cash flow (a) |
| $ | 51,122 |
| $ | 61,481 |
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Cash flow used in investing activities was $31.3 million for the six months ended June 26, 2016, compared to $15.4 million for the same period in 2015, or an increase of $15.9 million. The increase in cash flow used in investing activities was primarily due to the acquisition of 20 restaurants from franchisees for approximately $11.2 million in the first quarter of 2016.
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 revolving credit facility.Credit Facility. We repurchased $80.2$96.4 million and $94.2$52.1 million of common stock for the ninesix months ended September 27,June 26, 2016 and June 28, 2015, and September 28, 2014, respectively. Subsequent to September 27, 2015,June 26, 2016, through October 27, 2015,July 26, 2016, we repurchased an additional $13.2$4.7 million of common stock. As of October 27, 2015, approximately $161.1July 26, 2016, $108.7 million remained available for repurchase under our Board of Directors’ authorization.
We paid cash dividends of $18.0$13.1 million ($0.4550.35 per common share) and $16.1$11.1 million ($0.390.28 per common share) for the ninesix months ended September 27,June 26, 2016 and June 28, 2015, and September 28, 2014, respectively. Subsequent to the thirdsecond quarter on October 30, 2015,July 28, 2016, our Board of Directors declared a fourththird quarter dividend of $0.175$0.20 per common share (approximately $6.9$7.4 million in total based on current outstanding shares)shareholders of record). The dividend will be paid on November 20, 2015August 19, 2016 to shareholders of record as of the close of business on November 10, 2015.August 8, 2016. 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,
21
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. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:
· | 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, 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, and 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 or proposed legislation impacting 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; and |
· | 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. |
For a discussion of these and other risks that may cause actual results to differ from expectations, refer to “Part“Part I. Item 1A. —– Risk Factors” in our Annual Report on Form 10-K for the year ended December 28, 2014,27, 2015, 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our debt is comprised entirely of borrowings under ouran unsecured revolving line of credit facility (“Credit Facility”) with outstanding balances of $239.0$317.4 million as of September 27, 2015June 26, 2016 and $230.5$256.0 million as of December 28, 2014. On27, 2015 and a maturity date of October 31, 2014,2019. On June 8, 2016, we amendedexercised our option under the Credit Facility to increase the amount available to $500 million from $300 million tothe previous $400 million and extend the maturity date from April 30, 2018 to October 31, 2019. The amendment also allows for an additional $100 million in borrowings.availability. 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 and to lowerby fixing our overall long-term borrowing costs for changes in interest ratesrate 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 theour existing debt and we anticipatethe anticipated critical terms match onof 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.
During22
As of June 26, 2016, we have the quarter ended September 27, 2015, we executedfollowing interest rate swap agreements, including three additional forward starting swaps for $125.0 millionexecuted in 2015 that become effective in 2018 upon expiration of the two existing swaps for $125.0 million. As of September 27, 2015, we have the following interest rate swap agreements:$125 million:
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Effective Dates |
| Floating Rate Debt |
| Fixed Rates |
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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 effectiveweighted average interest rate on borrowings under the Credit Facility, including the impact of the interest rate swaps,swap agreements, was 2.0% for the third quarter2.1% as of 2015.June 26, 2016. An increase in the present interest rate of 100 basis points on the Credit Facility balance outstanding balance as of September 27, 2015,June 26, 2016, including the impact of the interest rate swaps, would increase interest expense by $1.1$1.9 million.
Foreign Currency Exchange Rate Risk
We currently do not enter into any financial instrumentsare exposed to manage foreign currency exchange rates. Sales to customers and royaltiesrate fluctuations from our operations outside of the United States, represent approximatelywhich 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 total revenues.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 $2.2 million and $2.0 million for the three months ended June 26, 2016 and June 28, 2015, respectively, and $4.0 million and $3.8 million for the six months ended June 26, 2016 and June 28, 2015, respectively. Foreign currency exchange rate fluctuations had a negative impact on our income before income taxes of $500,000 and $700,000 for the three months ended June 26, 2016 and June 28, 2015, respectively, and $1.2 million and $1.3 million for the six months ended June 26, 2016 and June 28, 2015, respectively. The recent referendum by United Kingdom voters known as Brexit may cause additional volatility in currency exchange rates. The future impact of Brexit on our operations included in the European Union could also include but may not be limited to future trade, tariff, and regulatory changes. As of June 26, 2016, 5 of our 43 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 (historically representing 35% to 40% of our(our largest individual food cost)cost item), are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our 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.
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The following table presents the actual average block price for cheese by quarter through the thirdsecond quarter of 20152016 and the projected average block price for cheese for the fourthby quarter of 2015through 2016 (based on the October 27, 2015July 26, 2016 Chicago Mercantile Exchange cheese futures market prices):
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Quarter 1 |
| $ | 1.538 |
| $ | 2.212 |
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| $ | 1.473 |
| $ | 1.538 |
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Quarter 2 |
| 1.630 |
| 2.131 |
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| 1.405 |
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| 1.630 |
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Quarter 3 |
| 1.684 |
| 2.141 |
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| 1.712 |
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| 1.676 |
| 1.991 |
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| 1.727 |
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| $ | 1.632 | * | $ | 2.119 |
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| $ | 1.579 | * | $ | 1.614 |
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*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.
The Company is involved in a number of lawsuits, claims, investigations and proceedings including the matter identified below, 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“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.
Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective and class action filed in August 2009 in the United States District Court, Eastern District of Missouri (“the Court”), alleging that delivery drivers were not properly reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act (“FLSA”). Approximately 3,900 drivers out of a potential class size of 28,800 opted into the action. In late December 2013, the Court granted a motion for class certification in five additional states, which added approximately 15,000 plaintiffs to the case. The trial, originally scheduled for August 2015, was stayed in June 2015, pending U.S. Supreme Court review of another relevant case regarding certification. After the stay was granted, the parties reached a settlement in principle, which has been preliminarily approved by the Court in September 2015. The Court has scheduled a final approval hearing in January 2016. The Company continues to deny any liability or wrongdoing in this matter. In accordance with this preliminary settlement agreement, the Company recorded a pre-tax expense of $12.3 million in June 2015 under the provisions of ASC 450, Contingencies. There was no impact for the quarter ended September 27, 2015. This amount is separately reported as Legal settlement expense in the condensed consolidated statements of income.
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 28, 2014.27, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Board of Directors has authorized the repurchase of up to $1.45$1.525 billion of common stock under a share repurchase program that began on December 9, 1999 and expires on December 31, 2016.February 28, 2017. Through September 27, 2015,June 26, 2016, a total of 106.8109.2 million shares with an aggregate cost of $1.3$1.4 billion and an average price of $11.94$12.92 per share have been repurchased under this program. Subsequent to September 27, 2015,June 26, 2016, through October 27, 2015,July 26, 2016, we acquired an additional 192,00068,000 shares at an aggregate cost of $13.2$4.7 million. As of October 27, 2015,July 26, 2016, approximately $161.1$108.7 million remained available for repurchase of common stock under this authorization.
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The following table summarizes our repurchases by fiscal period during the three months ended September 27, 2015June 26 2016 (in thousands, except per-share amounts):
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06/29/2015 - 07/26/2015 |
| 99 |
| $ | 76.28 |
| 106,527 |
| $ | 194,808 |
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07/27/2015 - 08/23/2015 |
| 97 |
| $ | 73.87 |
| 106,624 |
| $ | 187,680 |
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08/24/2015 - 09/27/2015 |
| 194 |
| $ | 68.86 |
| 106,818 |
| $ | 174,308 |
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Our share repurchase authorization increased from $1.325 billion to $1.45 billion as of October 30, 2015. For presentation purposes, the maximum dollar value of shares that may be purchased was adjusted retroactively to September 27, 2015.
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03/28/2016 - 04/24/2016 |
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| 254 |
| $ | 55.64 |
| 108,996 |
| $ | 129,517 |
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04/25/2016 - 05/22/2016 |
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| 154 |
| $ | 58.33 |
| 109,150 |
| $ | 120,540 |
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05/23/2016 - 06/26/2016 |
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| 113 |
| $ | 63.59 |
| 109,263 |
| $ | 113,326 |
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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 September 27, 2015,June 26, 2016, the Company acquired approximately 4,1003,000 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.
On October 30, 2015, our Board of Directors, upon recommendation of the Corporate Governance and Nominating Committee, adopted amendments to the Company’s Amended and Restated Bylaws that provide for a forum selection provision identifying Delaware as the exclusive forum for certain disputes.
The Board of Directors believes that this amendment is in the best interests of the Company and its stockholders, and could provide protection for the Company against having to defend potentially concurrent multi-jurisdictional litigation in non-Delaware courts that would subject the Company to, among other things, the risk of conflicting outcomes and the potential of litigating in inconvenient forums. The amendment could therefore help the Company avoid excessive costs and inefficiencies that may occur from certain types of multi-jurisdictional litigation.
In addition, our Board approved certain other non-material changes to our Bylaws that are primarily clerical in nature and designed to update and conform our Bylaws with the current Delaware General Corporation Law, including, among other things, notice and record dates and other procedural requirements for stockholder and director meetings.
The foregoing is a summary of the amendments to the Bylaws and is qualified in its entirety by the Amended and Restated Bylaws, a copy of which is included as Exhibit 3.1 to this Form 10-Q and is incorporated into this Item 5 by reference.
Exhibit | ||
Number | Description | |
|
|
|
|
| Second Amendment to First Amended and Restated |
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 |
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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: | /s/ Lance F. Tucker | |
| Lance F. Tucker | |
| Senior Vice President, | |
| Chief Financial Officer, | |
| Chief Administrative Officer and Treasurer |
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