UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 29,September 27, 2020
OR
☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-21660
PAPA JOHN’S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 61-1203323 |
(State or other jurisdiction of | | (I.R.S. Employer Identification |
incorporation or organization) | | number) |
2002 Papa John’s Boulevard
Louisville, Kentucky 40299-2367
(Address of principal executive offices)
(502) 261-7272
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | |
| | | | |
Title of each class: | | Trading Symbol | | Name of each exchange on which registered: |
Common stock, $0.01 par value | | PZZA | | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ |
| Accelerated filer ☐ |
Non-accelerated filer ☐ | | Smaller reporting company ☐ |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At April 28,October 30, 2020, there were outstanding 32,466,24932,952,184 shares of the registrant’s common stock, par value $0.01 per share.
INDEX
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| Condensed Consolidated Balance Sheets — | 3 |
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| 4 | |
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| 5 | |
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| 6 | |
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| 8 | |
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| 9 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| | | | | | | | | | | | |
| | | | | ||||||||
|
| March 29, |
| December 29, |
| September 27, |
| December 29, | ||||
(In thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 | ||||
| | (Unaudited) | | | | (Unaudited) | | | ||||
Assets | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 36,376 | | $ | 27,911 | | $ | 140,050 | | $ | 27,911 |
Accounts receivable, net | | | 77,607 | | | 80,921 | | | 69,332 | | | 70,462 |
Notes receivable, current portion | |
| 9,343 | |
| 7,790 | |
| 10,180 | |
| 7,790 |
Income tax receivable | | | 4,101 | | | 4,024 | | | 1,903 | | | 4,024 |
Inventories | |
| 29,810 | |
| 27,529 | |
| 28,702 | |
| 27,529 |
Prepaid expenses and other current assets | |
| 27,956 | |
| 33,371 | |
| 29,771 | |
| 43,830 |
Total current assets | |
| 185,193 | |
| 181,546 | |
| 279,938 | |
| 181,546 |
Property and equipment, net | |
| 205,035 | |
| 211,741 | |
| 199,291 | |
| 211,741 |
Finance lease right-of-use assets, net | | | 9,365 | | | 9,383 | | | 9,458 | | | 9,383 |
Operating lease right-of-use assets | | | 144,160 | | | 148,229 | | | 139,653 | | | 148,229 |
Notes receivable, less current portion, net | |
| 36,527 | |
| 33,010 | |
| 34,319 | |
| 33,010 |
Goodwill | |
| 79,739 | |
| 80,340 | |
| 80,022 | |
| 80,340 |
Deferred income taxes | | | 1,694 | | | 1,839 | | | 7,454 | | | 1,839 |
Other assets | |
| 56,555 | |
| 64,633 | |
| 66,540 | |
| 64,633 |
Total assets | | $ | 718,268 | | $ | 730,721 | | $ | 816,675 | | $ | 730,721 |
| | | | | | | | | | | | |
Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | |
Accounts payable | | $ | 33,745 | | $ | 29,141 | | $ | 32,288 | | $ | 29,141 |
Income and other taxes payable | |
| 8,167 | |
| 7,599 | |
| 10,034 | |
| 7,599 |
Accrued expenses and other current liabilities | |
| 121,835 | |
| 120,566 | |
| 153,171 | |
| 108,517 |
Current deferred revenue | | | 6,250 | | | 5,624 | | | 17,916 | | | 17,673 |
Current finance lease liabilities | | | 1,913 | | | 1,789 | | | 2,229 | | | 1,789 |
Current operating lease liabilities | | | 23,118 | | | 23,226 | | | 24,853 | | | 23,226 |
Current portion of long-term debt | | | 20,623 | | | 20,000 | | | 20,000 | | | 20,000 |
Total current liabilities | |
| 215,651 | |
| 207,945 | |
| 260,491 | |
| 207,945 |
Deferred revenue | |
| 12,694 | |
| 14,722 | |
| 13,471 | |
| 14,722 |
Long-term finance lease liabilities | | | 7,555 | | | 7,629 | | | 7,454 | | | 7,629 |
Long-term operating lease liabilities | | | 121,368 | | | 125,297 | | | 116,684 | | | 125,297 |
Long-term debt, less current portion, net | |
| 342,611 | |
| 347,290 | |
| 328,079 | |
| 347,290 |
Deferred income taxes | |
| 607 | |
| 2,649 | |
| 899 | |
| 2,649 |
Other long-term liabilities | |
| 86,227 | |
| 84,927 | |
| 103,744 | |
| 84,927 |
Total liabilities | |
| 786,713 | |
| 790,459 | |
| 830,822 | |
| 790,459 |
| | | | | | | | | | | | |
Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at March 29, 2020 and December 29, 2019 | | | 251,893 | | | 251,133 | ||||||
Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at September 27, 2020 and December 29, 2019 | | | 251,864 | | | 251,133 | ||||||
Redeemable noncontrolling interests | |
| 5,962 | |
| 5,785 | |
| 6,834 | |
| 5,785 |
| | | | | | | | | | | | |
Stockholders’ deficit: | | | | | | | | | | | | |
Common stock ($0.01 par value per share; issued 44,775 at March 29, 2020 and 44,748 at December 29, 2019) | | | 448 | | | 447 | ||||||
Common stock ($0.01 par value per share; issued 45,253 at September 27, 2020 and 44,748 at December 29, 2019) | | | 452 | | | 447 | ||||||
Additional paid-in capital | |
| 220,187 | |
| 219,047 | |
| 255,210 | |
| 219,047 |
Accumulated other comprehensive loss | |
| (20,768) | |
| (10,185) | |
| (18,510) | |
| (10,185) |
Retained earnings | |
| 202,287 | |
| 205,697 | |
| 216,911 | |
| 205,697 |
Treasury stock (12,805 shares at March 29, 2020 and 12,854 shares at December 29, 2019, at cost) | |
| (744,463) | |
| (747,327) | ||||||
Treasury stock (12,768 shares at September 27, 2020 and 12,854 shares at December 29, 2019, at cost) | |
| (742,323) | |
| (747,327) | ||||||
Total stockholders’ deficit | |
| (342,309) | |
| (332,321) | |
| (288,260) | |
| (332,321) |
Noncontrolling interests in subsidiaries | |
| 16,009 | |
| 15,665 | |
| 15,415 | |
| 15,665 |
Total Stockholders’ deficit | |
| (326,300) | |
| (316,656) | |
| (272,845) | |
| (316,656) |
Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and | | $ | 718,268 | | $ | 730,721 | | $ | 816,675 | | $ | 730,721 |
See accompanying notes.
3
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | | | |
| | | | | | |
|
| Three Months Ended | ||||
| | | March 29, | | March 31, | |
(In thousands, except per share amounts) |
| 2020 |
| 2019 | ||
| | | | | | |
Revenues: | | | | | | |
Domestic Company-owned restaurant sales | | $ | 161,440 | | $ | 161,803 |
North America franchise royalties and fees | |
| 19,440 | |
| 17,530 |
North America commissary revenues | |
| 155,422 | |
| 148,904 |
International revenues | |
| 26,059 | | | 25,667 |
Other revenues | | | 47,498 | | | 44,501 |
Total revenues | |
| 409,859 | |
| 398,405 |
Costs and expenses: | | | | | | |
Operating costs (excluding depreciation and amortization shown separately below): | | | | | | |
Domestic Company-owned restaurant expenses | | | 129,111 | | | 133,053 |
North America commissary expenses | | | 144,272 | | | 138,557 |
International expenses | | | 15,101 | | | 14,305 |
Other expenses | | | 45,957 | | | 44,097 |
General and administrative expenses | |
| 47,651 | |
| 51,135 |
Depreciation and amortization | |
| 12,295 | |
| 11,749 |
Total costs and expenses | |
| 394,387 | |
| 392,896 |
Operating income | |
| 15,472 | |
| 5,509 |
Net interest expense | |
| (3,967) | | | (6,276) |
Income (loss) before income taxes | |
| 11,505 | |
| (767) |
Income tax expense | |
| 2,512 | |
| 831 |
Net income (loss) before attribution to noncontrolling interests | |
| 8,993 | |
| (1,598) |
Net income attributable to noncontrolling interests | |
| (550) | |
| (133) |
Net income (loss) attributable to the Company | | $ | 8,443 | | $ | (1,731) |
| | | | | | |
Calculation of net income (loss) for earnings per share: | | | | | | |
Net income (loss) attributable to the Company | | $ | 8,443 | | $ | (1,731) |
Preferred stock dividends and accretion | |
| (3,471) | |
| (2,070) |
Net income (loss) attributable to common shareholders | | $ | 4,972 | | $ | (3,801) |
| | | | | | |
Basic earnings (loss) per common share | | $ | 0.15 | | $ | (0.12) |
Diluted earnings (loss) per common share | | $ | 0.15 | | $ | (0.12) |
| | | | | | |
Basic weighted average common shares outstanding | |
| 32,093 | |
| 31,554 |
Diluted weighted average common shares outstanding | |
| 32,320 | |
| 31,554 |
| | | | | | |
Dividends declared per common share | | $ | 0.225 | | $ | 0.225 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
| Three Months Ended | | Nine Months Ended | ||||||||
| | | September 27, | | September 29, | | September 27, | | September 29, | |||
(In thousands, except per share amounts) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | |
Domestic Company-owned restaurant sales | | $ | 178,371 | | $ | 165,135 | | $ | 526,317 | | $ | 490,594 |
North America franchise royalties and fees | |
| 25,281 | |
| 15,924 | |
| 68,895 | |
| 53,215 |
North America commissary revenues | |
| 181,338 | |
| 154,703 | |
| 504,379 | |
| 450,735 |
International revenues | |
| 33,440 | | | 24,679 | |
| 87,592 | |
| 75,843 |
Other revenues | | | 54,511 | | | 43,265 | | | 156,240 | | | 131,347 |
Total revenues | |
| 472,941 | |
| 403,706 | |
| 1,343,423 | |
| 1,201,734 |
Costs and expenses: | | | | | | | | | | | | |
Operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | | | | | |
Domestic Company-owned restaurant expenses | | | 144,803 | | | 134,037 | | | 419,082 | | | 399,040 |
North America commissary expenses | | | 167,937 | | | 144,624 | | | 466,676 | | | 419,925 |
International expenses | | | 19,370 | | | 13,557 | | | 52,775 | | | 42,514 |
Other expenses | | | 50,917 | | | 42,952 | | | 148,219 | | | 129,019 |
General and administrative expenses | |
| 52,601 | |
| 53,503 | |
| 148,680 | |
| 153,356 |
Depreciation and amortization | |
| 12,764 | |
| 11,832 | |
| 37,436 | |
| 35,102 |
Total costs and expenses | |
| 448,392 | |
| 400,505 | |
| 1,272,868 | |
| 1,178,956 |
Refranchising gains | | | — | | | 1,726 | | | — | | | 1,889 |
Operating income | |
| 24,549 | |
| 4,927 | |
| 70,555 | |
| 24,667 |
Net interest expense | |
| (3,636) | | | (4,249) | |
| (11,230) | |
| (14,797) |
Income before income taxes | |
| 20,913 | |
| 678 | |
| 59,325 | |
| 9,870 |
Income tax expense | |
| 4,516 | |
| 421 | |
| 11,984 | |
| 2,535 |
Net income before attribution to noncontrolling interests | |
| 16,397 | |
| 257 | |
| 47,341 | |
| 7,335 |
Net (income) loss attributable to noncontrolling interests | |
| (689) | |
| 128 | |
| (2,576) | |
| (327) |
Net income attributable to the Company | | $ | 15,708 | | $ | 385 | | $ | 44,765 | | $ | 7,008 |
| | | | | | | | | | | | |
Calculation of net income (loss) for earnings (loss) per share: | | | | | | | | | | | | |
Net income attributable to the Company | | $ | 15,708 | | $ | 385 | | $ | 44,765 | | $ | 7,008 |
Dividends paid to participating securities and accretion | |
| (3,548) | |
| (3,473) | |
| (10,546) | |
| (9,029) |
Net income attributable to participating securities | |
| (703) | |
| — | |
| (1,809) | |
| — |
Net income (loss) attributable to common shareholders | | $ | 11,457 | | $ | (3,088) | | $ | 32,410 | | $ | (2,021) |
| | | | | | | | | | | | |
Basic earnings (loss) per common share | | $ | 0.35 | | $ | (0.10) | | $ | 1.00 | | $ | (0.06) |
Diluted earnings (loss) per common share | | $ | 0.35 | | $ | (0.10) | | $ | 0.99 | | $ | (0.06) |
| | | | | | | | | | | | |
Basic weighted average common shares outstanding | |
| 32,616 | |
| 31,601 | |
| 32,347 | |
| 31,581 |
Diluted weighted average common shares outstanding | |
| 32,971 | |
| 31,601 | |
| 32,643 | |
| 31,581 |
| | | | | | | | | | | | |
Dividends declared per common share | | $ | 0.225 | | $ | 0.225 | | $ | 0.675 | | $ | 0.675 |
See accompanying notes.
4
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive LossIncome (Loss)
(Unaudited)
| | | | | | |
| | Three Months Ended | ||||
| | March 29, |
| March 31, | ||
(In thousands) |
| 2020 | | 2019 | ||
| | | | | | |
Net income (loss) before attribution to noncontrolling interests | | $ | 8,993 | | $ | (1,598) |
Other comprehensive loss, before tax: | | | | | | |
Foreign currency translation adjustments | | | (2,825) | | | 1,733 |
Interest rate swaps (1) | |
| (10,919) | |
| (3,955) |
Other comprehensive loss, before tax | |
| (13,744) | |
| (2,222) |
Income tax effect: | | | | | | |
Foreign currency translation adjustments | |
| 650 | |
| (399) |
Interest rate swaps (2) | |
| 2,511 | |
| 918 |
Income tax effect | |
| 3,161 | |
| 519 |
Other comprehensive loss, net of tax | |
| (10,583) | |
| (1,703) |
Comprehensive loss before attribution to noncontrolling interests | |
| (1,590) | |
| (3,301) |
Less: comprehensive (income) loss, redeemable noncontrolling interests | |
| (176) | |
| 119 |
Less: comprehensive (income), nonredeemable noncontrolling interests | |
| (374) | |
| (252) |
Comprehensive loss attributable to the Company | | $ | (2,140) | | $ | (3,434) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 27, | | September 29, | | September 27, | | September 29, | ||||
(In thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | | | | | | | | | | ||
Net income before attribution to noncontrolling interests | | $ | 16,397 | | $ | 257 | | $ | 47,341 | | $ | 7,335 |
Other comprehensive income (loss), before tax: | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 1,721 | | | (1,642) | | | (1,438) | | | (1,446) |
Interest rate swaps (1) | |
| 1,647 | |
| (1,866) | |
| (9,375) | |
| (12,520) |
Other comprehensive income (loss), before tax | |
| 3,368 | |
| (3,508) | |
| (10,813) | |
| (13,966) |
Income tax effect: | | | | | | | | | | | | |
Foreign currency translation adjustments | |
| (395) | |
| 379 | |
| 332 | |
| 334 |
Interest rate swaps (2) | |
| (379) | |
| 429 | |
| 2,156 | |
| 2,879 |
Income tax effect | |
| (774) | |
| 808 | |
| 2,488 | |
| 3,213 |
Other comprehensive income (loss), net of tax | |
| 2,594 | |
| (2,700) | |
| (8,325) | |
| (10,753) |
Comprehensive income (loss) before attribution to noncontrolling interests | |
| 18,991 | |
| (2,443) | |
| 39,016 | |
| (3,418) |
Less: comprehensive (income) loss, redeemable noncontrolling interests | |
| (301) | |
| 369 | |
| (1,184) | |
| 456 |
Less: comprehensive (income), nonredeemable noncontrolling interests | |
| (388) | |
| (241) | |
| (1,392) | |
| (783) |
Comprehensive income (loss) attributable to the Company | | $ | 18,302 | | $ | (2,315) | | $ | 36,440 | | $ | (3,745) |
See accompanying notes.
5
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Papa John’s International, Inc. | | | | | | | | |||||||||||||||
|
| Common |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| |
| | | ||
| | Stock | | | | | Additional | | Other | | | | | | | | Noncontrolling | | Total | | ||||
(In thousands) | | Shares | | Common | | Paid-In | | Comprehensive | | Retained | | Treasury | | Interests in | | Stockholders’ | | |||||||
For the three months ended March 29, 2020 | | Outstanding | | Stock | | Capital | | Loss | | Earnings | | Stock | | Subsidiaries | | Deficit | | |||||||
Balance at December 29, 2019 |
| 31,894 | | $ | 447 | | $ | 219,047 | | $ | (10,185) | | $ | 205,697 | | $ | (747,327) | | $ | 15,665 | | $ | (316,656) | |
Cumulative effect of adoption of ASU 2016-13 (1) | | — | | | — | | | — | | | — | | | (1,066) | | | — | | | — | | | (1,066) | |
Adjusted balance at December 30, 2019 | | 31,894 | | | 447 | | | 219,047 | | | (10,185) | | | 204,631 | | | (747,327) | | | 15,665 | | | (317,722) | |
Net income (2) | | — | | | — | | | — | | | — | | | 8,443 | | | — | | | 374 | | | 8,817 | |
Other comprehensive loss | | — | | | — | | | — | | | (10,583) | | | — | | | — | | | — | | | (10,583) | |
Cash dividends on common stock | | — | | | — | | | 55 | | | — | | | (7,292) | | | — | | | — | | | (7,237) | |
Cash dividends on preferred stock | | — | | | — | | | — | | | — | | | (3,412) | | | — | | | — | | | (3,412) | |
Exercise of stock options | | 27 | | | 1 | | | 1,240 | | | — | | | — | | | — | | | — | | | 1,241 | |
Stock-based compensation expense | | — | | | — | | | 3,950 | | | — | | | — | | | — | | | — | | | 3,950 | |
Issuance of restricted stock | | 47 | | | — | | | (2,707) | | | — | | | — | | | 2,707 | | | — | | | — | |
Tax effect of restricted stock awards | | — | | | — | | | (1,383) | | | — | | | — | | | — | | | — | | | (1,383) | |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (30) | | | (30) | |
Other | | 3 | | | — | | | (15) | | | — | | | (83) | | | 157 | | | — | | | 59 | |
Balance at March 29, 2020 |
| 31,971 | | $ | 448 | | $ | 220,187 | | $ | (20,768) | | $ | 202,287 | | $ | (744,463) | | $ | 16,009 | | $ | (326,300) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Papa John’s International, Inc. | | | | | | | |||||||||||||||
|
| Common |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| |
| | ||
| | Stock | | | | | Additional | | Other | | | | | | | | Noncontrolling | | Total | ||||
(In thousands) | | Shares | | Common | | Paid-In | | Comprehensive | | Retained | | Treasury | | Interests in | | Stockholders’ | |||||||
For the three months ended September 27, 2020 | | Outstanding | | Stock | | Capital | | Loss | | Earnings | | Stock | | Subsidiaries | | Deficit | |||||||
Balance at June 28, 2020 | | 32,349 | | $ | 451 | | $ | 243,577 | | $ | (21,104) | | $ | 212,104 | | $ | (742,600) | | $ | 15,724 | | $ | (291,848) |
Net income (2) | | — | | | — | | | — | | | — | | | 15,708 | | | — | | | 388 | | | 16,096 |
Other comprehensive income | | — | | | — | | | — | | | 2,594 | | | — | | | — | | | — | | | 2,594 |
Cash dividends on common stock | | — | | | — | | | 78 | | | — | | | (7,414) | | | — | | | — | | | (7,336) |
Cash dividends on preferred stock | | — | | | — | | | — | | | — | | | (3,412) | | | — | | | — | | | (3,412) |
Exercise of stock options | | 131 | | | 1 | | | 7,499 | | | — | | | — | | | — | | | — | | | 7,500 |
Stock-based compensation expense | | — | | | — | | | 4,328 | | | — | | | — | | | — | | | — | | | 4,328 |
Issuance of restricted stock | | 2 | | | — | | | (105) | | | — | | | — | | | 105 | | | — | | | — |
Tax effect of restricted stock awards | | — | | | — | | | (86) | | | — | | | — | | | — | | | — | | | (86) |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (697) | | | (697) |
Other | | 3 | | | — | | | (81) | | | — | | | (75) | | | 172 | | | — | | | 16 |
Balance at September 27, 2020 |
| 32,485 | | $ | 452 | | $ | 255,210 | | $ | (18,510) | | $ | 216,911 | | $ | (742,323) | | $ | 15,415 | | $ | (272,845) |
| | | | | | | | | | | | | | | | | | | | | | | |
For the nine months ended September 27, 2020 | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 29, 2019 |
| 31,894 | | $ | 447 | | $ | 219,047 | | $ | (10,185) | | $ | 205,697 | | $ | (747,327) | | $ | 15,665 | | $ | (316,656) |
Cumulative effect of adoption of ASU 2016-13 (1) | | — | | | — | | | — | | | — | | | (1,066) | | | — | | | — | | | (1,066) |
Adjusted Balance at December 30, 2019 | | 31,894 | | | 447 | | | 219,047 | | | (10,185) | | | 204,631 | | | (747,327) | | | 15,665 | | | (317,722) |
Net income (2) |
| — | |
| — | |
| — | |
| — | |
| 44,765 | |
| — | |
| 1,392 | |
| 46,157 |
Other comprehensive loss |
| — | |
| — | |
| — | |
| (8,325) | |
| — | |
| — | |
| — | |
| (8,325) |
Cash dividends on common stock | | — | | | — | | | 210 | | | — | | | (22,066) | | | — | | | — | | | (21,856) |
Cash dividends on preferred stock |
| — | |
| — | |
| — | |
| — | |
| (10,237) | |
| — | |
| — | |
| (10,237) |
Exercise of stock options |
| 505 | |
| 5 | |
| 29,199 | |
| — | |
| — | |
| — | |
| — | |
| 29,204 |
Stock-based compensation expense |
| — | |
| — | |
| 13,071 | |
| — | |
| — | |
| — | |
| — | |
| 13,071 |
Issuance of restricted stock |
| 79 | |
| — | |
| (4,573) | |
| — | |
| — | |
| 4,573 | |
| — | |
| — |
Tax effect of restricted stock awards | | — | | | — | | | (1,665) | | | — | | | — | | | — | | | — | | | (1,665) |
Distributions to noncontrolling interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (1,642) | |
| (1,642) |
Other |
| 7 | |
| — | |
| (79) | |
| — | |
| (182) | |
| 431 | |
| — | |
| 170 |
Balance at September 27, 2020 | | 32,485 | | $ | 452 | | $ | 255,210 | | $ | (18,510) | | $ | 216,911 | | $ | (742,323) | | $ | 15,415 | | $ | (272,845) |
(1) | As of December 30, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. |
(2) | Net income to the Company |
At March 29,September 27, 2020, the accumulated other comprehensive loss of $20,768$18,510 was comprised of net unrealized foreign currency translation loss of $7,774$6,705 and net unrealized loss on the interest rate swap agreements of $12,994.$11,805.
See accompanying notes.
6
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Papa John’s International, Inc. | | | | | | |
| |||||||||||||||
|
| Common |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| |
| |
| ||
| | Stock | | | | | Additional | | Other | | | | | | | | Noncontrolling | | Total |
| ||||
(In thousands) | | Shares | | Common | | Paid-In | | Comprehensive | | Retained | | Treasury | | Interests in | | Stockholders’ |
| |||||||
For the three months ended March 31, 2019 | | Outstanding | | Stock | | Capital | | Loss | | Earnings | | Stock | | Subsidiaries | | Deficit |
| |||||||
Balance at December 30, 2018 |
| 31,372 | | $ | 443 | | $ | 192,984 | | $ | (3,143) | | $ | 242,182 | | $ | (751,704) | | $ | 15,225 | | $ | (304,013) | |
Net loss (1) |
| — | |
| — | |
| — | |
| — | |
| (1,731) | |
| — | |
| 252 | |
| (1,479) | |
Other comprehensive loss |
| — | |
| — | |
| — | |
| (1,703) | |
| — | |
| — | |
| — | |
| (1,703) | |
Cash dividends on common stock |
| — | |
| — | |
| 36 | |
| — | |
| (7,161) | |
| — | |
| — | |
| (7,125) | |
Cash dividends on preferred stock | | — | | | — | | | — | | | — | | | (2,040) | | | — | | | — | | | (2,040) | |
Exercise of stock options |
| 3 | |
| — | |
| 51 | |
| — | |
| — | |
| — | |
| — | |
| 51 | |
Stock-based compensation expense |
| — | |
| — | |
| 3,731 | |
| — | |
| — | |
| — | |
| — | |
| 3,731 | |
Issuance of restricted stock |
| 42 | |
| — | |
| (2,454) | |
| — | |
| — | |
| 2,454 | |
| — | |
| — | |
Tax effect of restricted stock awards |
| — | |
| — | |
| (869) | |
| — | |
| — | |
| — | |
| — | | | (869) | |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (19) | | | (19) | |
Other |
| 3 | |
| — | |
| (236) | |
| — | |
| 189 | |
| 255 | |
| — | |
| 208 | |
Balance at March 31, 2019 |
| 31,420 | | $ | 443 | | $ | 193,243 | | $ | (4,846) | | $ | 231,439 | | $ | (748,995) | | $ | 15,458 | | $ | (313,258) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Papa John’s International, Inc. | | | | | | | |||||||||||||||
|
| Common |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| |
| | ||
| | Stock | | | | | Additional | | Other | | | | | | | | Noncontrolling | | Total | ||||
(In thousands) | | Shares | | Common | | Paid-In | | Comprehensive | | Retained | | Treasury | | Interests in | | Stockholders’ | |||||||
For the three months ended September 29, 2019 | | Outstanding | | Stock | | Capital | | Loss | | Earnings | | Stock | | Subsidiaries | | Deficit | |||||||
Balance at June 30, 2019 |
| 31,427 | | $ | 443 | | $ | 196,927 | | $ | (11,196) | | $ | 228,833 | | $ | (748,657) | | $ | 15,584 | | $ | (318,066) |
Net income (1) |
| — | |
| — | |
| — | |
| — | |
| 385 | |
| — | |
| 241 | |
| 626 |
Other comprehensive loss |
| — | |
| — | |
| — | |
| (2,700) | |
| — | |
| — | |
| — | |
| (2,700) |
Cash dividends on common stock |
| — | |
| — | |
| 79 | |
| — | |
| (7,182) | |
| — | |
| — | |
| (7,103) |
Cash dividends on preferred stock | | — | | | — | | | — | | | — | | | (1,140) | | | — | | | — | | | (1,140) |
Dividends declared on preferred stock | | — | | | — | | | — | | | — | | | (2,273) | | | — | | | — | | | (2,273) |
Exercise of stock options |
| 9 | |
| — | |
| 239 | |
| — | |
| — | |
| — | |
| — | |
| 239 |
Stock-based compensation expense |
| — | |
| — | |
| 4,764 | |
| — | |
| — | |
| — | |
| — | |
| 4,764 |
Issuance of restricted stock |
| 10 | |
| — | |
| (547) | |
| — | |
| — | |
| 547 | |
| — | |
| — |
Tax effect of restricted stock awards |
| — | |
| — | |
| (255) | |
| — | |
| — | |
| — | |
| — | | | (255) |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (462) | | | (462) |
Other |
| 2 | |
| — | |
| (17) | |
| — | |
| (99) | |
| 120 | |
| — | |
| 4 |
Balance at September 29, 2019 |
| 31,448 | | $ | 443 | | $ | 201,190 | | $ | (13,896) | | $ | 218,524 | | $ | (747,990) | | $ | 15,363 | | $ | (326,366) |
For the nine months ended September 29, 2019 | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 30, 2018 |
| 31,372 | | $ | 443 | | $ | 192,984 | | $ | (3,143) | | $ | 242,182 | | $ | (751,704) | | $ | 15,225 | | $ | (304,013) |
Net income (1) |
| — | |
| — | |
| — | |
| — | |
| 7,008 | |
| — | |
| 783 | |
| 7,791 |
Other comprehensive loss |
| — | |
| — | |
| — | |
| (10,753) | |
| — | |
| — | |
| — | |
| (10,753) |
Cash dividends on common stock |
| — | |
| — | |
| 174 | |
| — | |
| (21,545) | |
| — | |
| — | |
| (21,371) |
Cash dividends on preferred stock | | — | |
| — | |
| — | |
| — | |
| (6,608) | |
| — | |
| — | |
| (6,608) |
Dividends declared on preferred stock | | — | | | — | | | — | | | — | | | (2,273) | | | — | | | — | | | (2,273) |
Exercise of stock options |
| 12 | |
| — | |
| 332 | |
| — | |
| — | |
| — | |
| — | |
| 332 |
Stock-based compensation expense |
| — | |
| — | |
| 12,295 | |
| — | |
| — | |
| — | |
| — | |
| 12,295 |
Issuance of restricted stock |
| 54 | |
| — | |
| (3,117) | |
| — | |
| — | |
| 3,117 | |
| — | |
| — |
Tax effect of restricted stock awards |
| — | |
| — | |
| (1,150) | |
| — | |
| — | |
| — | |
| — | | | (1,150) |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (645) | | | (645) |
Other |
| 10 | |
| — | |
| (328) | |
| — | |
| (240) | |
| 597 | |
| — | |
| 29 |
Balance at September 29, 2019 |
| 31,448 | | $ | 443 | | $ | 201,190 | | $ | (13,896) | | $ | 218,524 | | $ | (747,990) | | $ | 15,363 | | $ | (326,366) |
(1) | Net |
At March 31,September 29, 2019, the accumulated other comprehensive loss of $4,846$13,896 was comprised of net unrealized foreign currency translation loss of $5,525, partially offset by$7,973 and net unrealized gainloss on the interest rate swap agreements of $679.$5,923.
See accompanying notes.
7
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | |
| | Three months ended | ||||
| | March 29, |
| March 31, | ||
(In thousands) |
| 2020 | | 2019 | ||
| | | | | | |
Operating activities | | | | | | |
Net income (loss) before attribution to noncontrolling interests | | $ | 8,993 | | $ | (1,598) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Provision (credit) for uncollectible accounts and notes receivable | |
| 768 | |
| (50) |
Depreciation and amortization | |
| 12,295 | |
| 11,749 |
Deferred income taxes | |
| 1,185 | |
| (1,309) |
Preferred stock option mark-to-market adjustment | | | — | | | 5,914 |
Stock-based compensation expense | |
| 3,950 | |
| 3,731 |
Other | |
| 234 | |
| 838 |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | |
| (1,839) | |
| (3,443) |
Income tax receivable | | | 932 | | | 10,715 |
Inventories | |
| (2,281) | |
| 810 |
Prepaid expenses | |
| 6,118 | |
| 7,888 |
Other current assets | |
| (532) | |
| (13,855) |
Other assets and liabilities | |
| 2,670 | |
| (3,258) |
Accounts payable | |
| 4,604 | |
| 8,108 |
Income and other taxes payable | |
| 568 | |
| 746 |
Accrued expenses and other current liabilities | |
| (1,903) | |
| (11,003) |
Deferred revenue | |
| (2,028) | |
| (2,170) |
Net cash provided by operating activities | |
| 33,734 | |
| 13,813 |
Investing activities | | | | | | |
Purchases of property and equipment | |
| (5,933) | |
| (8,658) |
Loans issued | |
| (7,413) | |
| (859) |
Repayments of loans issued | |
| 3,790 | |
| 925 |
Other | |
| 1 | |
| 329 |
Net cash used in investing activities | |
| (9,555) | |
| (8,263) |
Financing activities | | | | | | |
Proceeds from issuance of preferred stock | | | — | | | 252,530 |
Repayments of term loan | | | (5,000) | | | (5,000) |
Net proceeds (repayments) of revolving credit facilities | |
| 640 | |
| (240,026) |
Dividends paid to common stockholders | | | (7,237) | | | (7,125) |
Dividends paid to preferred stockholders | |
| (3,412) | |
| (2,040) |
Issuance costs associated with preferred stock | | | — | | | (7,179) |
Tax payments for equity award issuances | |
| (1,383) | |
| (869) |
Proceeds from exercise of stock options | |
| 1,241 | |
| 51 |
Distributions to noncontrolling interest holders | |
| (30) | |
| (19) |
Other | |
| (350) | |
| 50 |
Net cash used in financing activities | |
| (15,531) | |
| (9,627) |
Effect of exchange rate changes on cash and cash equivalents | |
| (183) | |
| 92 |
Change in cash and cash equivalents | |
| 8,465 | |
| (3,985) |
Cash and cash equivalents at beginning of period | |
| 27,911 | |
| 33,258 |
Cash and cash equivalents at end of period | | $ | 36,376 | | $ | 29,273 |
| | | | | | |
| | | ||||
| | Nine Months Ended | ||||
| | September 27, | | September 29, | ||
(In thousands) |
| 2020 |
| 2019 | ||
| | | | | | |
Operating activities | | | | | | |
Net income before attribution to noncontrolling interests | | $ | 47,341 | | $ | 7,335 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
(Credit) provision for uncollectible accounts and notes receivable | |
| (334) | |
| 1,646 |
Depreciation and amortization | |
| 37,436 | |
| 35,102 |
Deferred income taxes | |
| (4,696) | |
| (2,386) |
Preferred stock option mark-to-market adjustment | | | — | | | 5,914 |
Stock-based compensation expense | |
| 13,071 | |
| 12,295 |
Refranchising gains | | | — | | | (1,889) |
Other | |
| 1,233 | |
| 3,618 |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | |
| (4,378) | |
| (8,682) |
Income tax receivable | | | 3,131 | | | 10,241 |
Inventories | |
| (1,173) | |
| 1,891 |
Prepaid expenses and other current assets | |
| 14,393 | |
| (4,837) |
Other assets and liabilities | |
| 18,080 | |
| (3,245) |
Accounts payable | |
| 3,147 | |
| 14,921 |
Income and other taxes payable | |
| 2,435 | |
| 1,285 |
Accrued expenses and other current liabilities | |
| 40,112 | |
| (19,149) |
Deferred revenue | |
| (1,251) | |
| (4,061) |
Net cash provided by operating activities | |
| 168,547 | |
| 49,999 |
Investing activities | | | | | | |
Purchases of property and equipment | |
| (24,269) | |
| (27,547) |
Notes issued | |
| (13,240) | |
| (7,073) |
Repayments of notes issued | |
| 8,906 | |
| 3,415 |
Proceeds from divestitures of restaurants | |
| — | |
| 5,995 |
Other | |
| 15 | |
| 1,068 |
Net cash used in investing activities | |
| (28,588) | |
| (24,142) |
Financing activities | | | | | | |
Proceeds from issuance of preferred stock | | | — | | | 252,530 |
Repayments of term loan | | | (15,000) | | | (10,000) |
Net repayments of revolving credit facilities | |
| (5,000) | |
| (236,966) |
Dividends paid to common stockholders | | | (21,856) | | | (21,371) |
Dividends paid to preferred stockholders | |
| (10,237) | |
| (6,608) |
Issuance costs associated with preferred stock | | | — | | | (7,535) |
Tax payments for equity award issuances | |
| (1,665) | |
| (1,150) |
Proceeds from exercise of stock options | |
| 29,204 | |
| 332 |
Contributions from noncontrolling interests | |
| — | |
| 840 |
Distributions to noncontrolling interests | |
| (1,778) | |
| (645) |
Other | |
| (1,105) | |
| (101) |
Net cash used in financing activities | |
| (27,437) | |
| (30,674) |
Effect of exchange rate changes on cash and cash equivalents | |
| (383) | |
| (73) |
Change in cash and cash equivalents | |
| 112,139 | |
| (4,890) |
Cash and cash equivalents at beginning of period | |
| 27,911 | |
| 33,258 |
Cash and cash equivalents at end of period | | $ | 140,050 | | $ | 28,368 |
See accompanying notes.
8
Papa John’s International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 29,September 27, 2020
1. | Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 29,September 27, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 27, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first-person notations of “we”, “us” and “our”) for the year ended December 29, 2019.
2. | Update to Significant Accounting Policies |
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant items that are subject to such estimates and assumptions include allowance for doubtful accounts and notes receivable, intangible assets, contract assets and contract liabilities, including the online customer loyalty program obligation and gift card breakage, right-of-use assets and lease liabilities, gift card breakage, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates.
Variable Interest Entity
Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the domestic restaurants, of which approximately 80% are franchised, and does not have sufficient equity to fund its operations without these ongoing financial contributions. Based on an assessment of the governance structure and operating procedures of PJMF, the Company determined it has the power to control certain significant activities of PJMF, and therefore, is the primary beneficiary. The Company has consolidated PJMF in its financial results in accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations.”
Noncontrolling Interests
Papa John’s has 4 joint venture arrangements in which there are noncontrolling interests held by third parties that include 192 restaurants at Marchboth September 27, 2020 and September 29, 2020. At March 31, 2019, there were 183 restaurants held in 3 joint ventures.2019.
Consolidated net income (loss) is required to be reported separately at amounts attributable to both 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 Operations of net income (loss) attributable to the noncontrolling interest holders.interests.
9
TheNet income before income taxes(loss) attributable to these joint ventures for the three and nine months ended March 29,September 27, 2020 and March 31,September 29, 2019 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
|
| | | | | |
| | | | | ||||||||
|
| Three Months Ended |
| Three Months Ended | | Nine Months Ended | | ||||||||||||
| | March 29, | | March 31, | | September 27, | | September 29, | | September 27, | | September 29, | | ||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||
| | | | | | | | | | | | | | | | | | | |
Papa John’s International, Inc. | | $ | 1,131 | | $ | 464 | | $ | 1,292 | | $ | 213 | | $ | 4,743 | | $ | 1,385 | |
Noncontrolling interests | |
| 550 | |
| 133 | |
| 689 | |
| (128) | |
| 2,576 | |
| 327 | |
Total income before income taxes | | $ | 1,681 | | $ | 597 | |||||||||||||
Total net income | | $ | 1,981 | | $ | 85 | | $ | 7,319 | | $ | 1,712 | |
The following summarizes the redemption feature, location and related accounting within the Condensed Consolidated Balance Sheets for these joint venture arrangements:
| | | | |
|
| |
| |
Type of Joint Venture Arrangement |
| Location within the Balance Sheets |
| Recorded Value |
| | | | |
Joint ventures with no redemption feature |
| Permanent equity |
| Carrying value |
Joint ventures with option to require the Company to purchase the noncontrolling interest - not currently redeemable or redemption not probable |
| Temporary equity |
| Carrying value |
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 Papa John’s 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. The effective income tax rate includes the estimated domestic state effective income tax rate and applicable foreign income tax rates. The effective income tax rate is also impacted by various permanent items and credits, net of any related valuation allowances, and can vary based on changes in estimated annual income. 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 attribute carryforwards (e.g., net operating losses, capital losses, and foreign tax credits). The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.
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 or state 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 and cash equivalents, accounts receivable, net of allowances, and accounts payable. The carrying value of notes receivable, net of allowances, also approximates fair value. The fair value of the amountsamount outstanding under our term debt and revolving credit facility approximate theirapproximates the carrying valuesvalue due to the variable market-based interest rate (Level 2).
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Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following categories:
● | Level 1: Quoted market prices in active markets for identical assets or liabilities. |
● | Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. |
● | Level 3: Unobservable inputs that are not corroborated by market data. |
Our financial assets and liabilities that were measured at fair value on a recurring basis as of March 29,September 27, 2020 and December 29, 2019 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying | | Fair Value Measurements |
| | Carrying | | Fair Value Measurements |
| ||||||||||||||||
|
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
|
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||||
March 29, 2020 | | | | | | | | | | | | | | |||||||||||||
September 27, 2020 | | | | | | | | | | | | | | |||||||||||||
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash surrender value of life insurance policies (a) | | $ | 27,787 | | $ | 27,787 | | $ | — | | $ | — | | | $ | 33,953 | | $ | 33,953 | | $ | — | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps (b) | |
| 17,020 | |
| — | |
| 17,020 | |
| — | | |
| 15,334 | |
| — | |
| 15,334 | |
| — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 29, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash surrender value of life insurance policies (a) | | $ | 33,220 | | $ | 33,220 | | $ | — | | $ | — | | | $ | 33,220 | | $ | 33,220 | | $ | — | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps (b) | |
| 6,168 | |
| — | |
| 6,168 | |
| — | | |
| 6,168 | |
| — | |
| 6,168 | |
| — | |
(a) | Represents life insurance policies held in our non-qualified deferred compensation plan. |
(b) | The fair value of our interest rate swaps is 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”). |
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Accounting Standards Adopted
Financial Instruments – Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected versus incurred losses for financial assets held. The Company adopted ASU 2016-13 as of December 30, 2019 (the first day of fiscal 2020) under the modified retrospective transition method. Financial instruments subject to ASU 2016-13 include trade accounts receivable, notes receivable and interest receivable (classified as Other assets in the Condensed Consolidated Balance Sheet) from franchisees. The impact of the adoption was not material to our condensed consolidated financial statements. Upon adoption, the Company recorded a cumulative effect adjustment to retained earnings of $1.1 million, net of $0.3 million of income taxes, on the opening Condensed Consolidated Balance Sheet as of December 30, 2019.
Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors. Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer. Account and note balances are charged off against the allowance after recovery efforts have ceased.
The following table summarizes changes in our allowances for credit losses for accounts receivable, notes receivable and interest receivable:
| | | | | | | | | | | | | | |||
| | | | | ||||||||||||
(in thousands) | Accounts Receivable | | Notes Receivable | | Interest Receivable | Accounts Receivable | | Notes Receivable | | Interest Receivable | ||||||
Balance at December 29, 2019 | $ | 7,341 | | $ | 3,572 | | $ | 910 | $ | 7,341 | | $ | 3,572 | | $ | 910 |
Cumulative effect of adoption of ASU 2016-13 | | 911 | | | 463 | | | - | | 912 | | | 463 | | | - |
Balance at December 30, 2019 | | 8,253 | | 4,035 | | 910 | | 8,253 | | | 4,035 | | 910 | |||
| | | | | | | | | | | | | | |||
Current period provision for expected credit losses | | 625 | | - | | 144 | ||||||||||
Current period (credit) provision for expected credit losses | | (234) | | | (244) | | 144 | |||||||||
Write-offs charged against the allowance | | (380) | | - | | - | | (598) | | | (10) | | - | |||
Recoveries collected | | - | | | (22) | | | - | | - | | | (100) | | - | |
Balance at March 29, 2020 | $ | 8,498 | | $ | 4,013 | | $ | 1,054 | ||||||||
Transfers | | - | | | 1,054 | | | (1,054) | ||||||||
Balance at September 27, 2020 | $ | 7,421 | | $ | 4,735 | | $ | - | ||||||||
| | | | | | | | | | | | | |
Accounting Standards to be Adopted in Future Periods
Reference Rate Reform – Hedging
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. This guidance was effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements and related disclosures.
Convertible Instruments
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends FASB’s guidance on convertible instruments and the
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derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share (“EPS”) guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2021 and interim periods therein, with early adoption permitted. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements and related disclosures.
Reclassification
Certain prior year amounts in the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flows have been reclassified to conform to the current year presentation.
3. Leases
Lessor Operating Leases
We sublease certain retail space to our franchisees in the United Kingdom which are primarily operating leases. At March 29,September 27, 2020, we leased and subleased approximately 370375 Papa John’s restaurants to franchisees in the United Kingdom. The initial lease terms on the franchised sites in the United Kingdom are generally 15 years. The Company has the option to negotiate an extension toward the end of the lease term at the landlord’s discretion. Rental income, primarily derived from properties leased and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms. We recognized total sublease income of $2.5$7.6 million and $2.3$7.8 million as of March 29,for the nine months ended September 27, 2020 and March 31,September 29, 2019, respectively.
Lease Guarantees
As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of approximately 11385 domestic leases. These leases have varying terms, the latest of which expires in 2036. As of March 29,September 27, 2020, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $17.9$15.1 million. This contingent liability is not included in the Condensed Consolidated Balance Sheet as it is not probable to occur. The fair value of the guarantee is not material.
Supplemental Cash Flow & Other Information
Supplemental cash flow information related to leases for the periods reported is as follows:
| | | | | |
| Three Months Ended | ||||
(in thousands) | | March 29, 2020 | | | March 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from finance leases | $ | 151 | | $ | — |
Financing cash flows from finance leases | | 466 | | | — |
Operating cash flows from operating leases (a) | | 9,480 | | | 10,116 |
Right-of-use assets obtained in exchange for new finance lease liabilities | | 19 | | | — |
Right-of-use assets obtained in exchange for new operating lease liabilities | | 7,451 | | | 1,040 |
Cash received from sublease income | | 2,494 | | | 2,061 |
| | | | | |
(a) Included within the change in Other assets and liabilities within the Condensed Consolidated Statements of Cash Flows offset by non-cash operating lease asset amortization and liability accretion. |
| | | | | |
| Nine Months Ended | ||||
(in thousands) | | September 27, 2020 | | | September 29, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from finance leases | $ | 435 | | $ | 108 |
Financing cash flows from finance leases | | 1,438 | | | 371 |
Operating cash flows from operating leases (a) | | 27,965 | | | 30,342 |
Right-of-use assets obtained in exchange for new finance lease liabilities | | 1,056 | | | 10,203 |
Right-of-use assets obtained in exchange for new operating lease liabilities | | 18,421 | | | 13,335 |
Cash received from sublease income | | 7,641 | | | 7,196 |
| | | | | |
(a) Included within the change in Other assets and liabilities within the Condensed Consolidated Statements of Cash Flows offset by non-cash operating lease asset amortization and liability accretion. |
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4. Papa John’s Marketing Fund, Inc.
PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States, for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants. Contributions and expenditures are reported on a gross basis in the Condensed Consolidated Statements of Operations within Other revenues and Other expenses.
Assets and liabilities of PJMF, which are restricted in their use, included in the Condensed Consolidated Balance Sheets were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | March 29, | | December 29, | | | | September 27, | | December 29, | | | ||||
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | ||||
| | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 3,677 | | $ | 4,569 | | | | $ | 18,672 | | $ | 4,569 | | |
Accounts receivable, net | | | 10,408 | | | 11,196 | | | | | 11,468 | | | 11,196 | | |
Income tax receivable | | | 103 | | | 103 | | | | | 111 | | | 103 | | |
Prepaid expenses | | | 649 | | | 1,316 | | | | | 1,278 | | | 1,316 | | |
Total current assets | | | 14,837 | | | 17,184 | | | | | 31,529 | | | 17,184 | | |
Deferred income taxes, net | | | 419 | | | 410 | | | | | 547 | | | 410 | | |
Total assets | | $ | 15,256 | | $ | 17,594 | | | | $ | 32,076 | | $ | 17,594 | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 755 | | $ | 764 | | | | $ | - | | $ | 764 | | |
Accrued expenses and other current liabilities | | | 12,478 | | | 14,287 | | | | | 31,408 | | | 14,287 | | |
Current deferred revenue | | | 3,914 | | | 3,252 | | | | | 2,855 | | | 3,252 | | |
Debt | | | 623 | | | - | | | | | - | | | - | | |
Total current liabilities | | | 17,770 | | | 18,303 | | | | | 34,263 | | | 18,303 | | |
Deferred revenue | | | 513 | | | 2,094 | | | | | 1,805 | | | 2,094 | | |
Total liabilities | | $ | 18,283 | | $ | 20,397 | | | | $ | 36,068 | | $ | 20,397 | | |
5. Revenue Recognition
Contract Balances
Our contract liabilities primarily relate to franchise fees, and unredeemed gift card liabilities, and loyalty program obligations, which we classify as Deferred revenue and customer loyalty program obligations which are classified as Accrued expenses and other current liabilities.on the Condensed Consolidated Balance Sheets. During the three and nine months ended March 29,September 27, 2020, and March 31, 2019, the Company recognized $8.0$8.4 million and $7.4$24.7 million in revenue, respectively, related to deferred revenue, compared to $9.0 million and $24.7 million for the customer loyalty program.three and nine months ended September 29, 2019, respectively.
The contract liability balances are included in the following (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Contract Liabilities | | Contract Liabilities | ||||||||||||||
| | | March 29, 2020 | | | December 29, 2019 | | | Change | | | September 27, 2020 | | | December 29, 2019 | | | Change |
Deferred revenue | | $ | 18,944 | | $ | 20,346 | | $ | (1,402) | |||||||||
Franchise fees and unredeemed gift cards | | $ | 18,610 | | $ | 20,346 | | $ | (1,736) | |||||||||
Customer loyalty program | | | 11,868 | | | 12,049 | | | (181) | | | 12,777 | | | 12,049 | | | 728 |
Total contract liabilities | | $ | 30,812 | | $ | 32,395 | | $ | (1,583) | | $ | 31,387 | | $ | 32,395 | | $ | (1,008) |
Our contract assets consist primarily of equipment incentives provided to franchisees. Equipment incentives are related to the future value of commissary revenue the Company will receive over the term of the incentive agreement. As of March 29,September 27, 2020, and December 29, 2019, the contract assets were approximately $5.4$4.8 million and $6.0 million, respectively. For the three and nine months ended March 29,September 27, 2020 and March 31,September 29, 2019, respectively, revenue was reduced approximately $0.9 million and $0.8 million,
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respectively,was reduced approximately $0.9 million and $2.5 million for the amortization of contract assets over the applicable contract terms. Contract assets are included in Prepaid expenses and other current assets and Other assets on the Condensed Consolidated Balance Sheets.
Transaction Price Allocated to the Remaining Performance Obligations
The following table (in thousands) includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied at the end of the reporting period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Performance Obligations by Period | | | Performance Obligations by Period | ||||||||||||||||||||||||||||||||||||
| | Less than 1 Year | | 1-2 Years | | 2-3 Years | | 3-4 Years | | 4-5 Years | | Thereafter | | Total | | Less than 1 Year | | 1-2 Years | | 2-3 Years | | 3-4 Years | | 4-5 Years | | Thereafter | | Total | ||||||||||||||
Franchise fees | | $ | 2,335 | | $ | 2,138 | | $ | 1,922 | | $ | 1,636 | | $ | 1,404 | | $ | 3,264 | | $ | 12,699 | | $ | 2,285 | | $ | 2,088 | | $ | 1,840 | | $ | 1,586 | | $ | 1,357 | | $ | 3,006 | | $ | 12,162 |
Approximately $1.8 million of area development fees related to unopened stores and international unearned royalties are included in Deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings and franchisees’ revenues. Gift card liabilities of approximately $4.4$4.7 million, included in Deferred revenue, will be recognized in Company-owned restaurant revenues when gift cards are redeemed. The Company will recognize redemption fee revenue in Other revenues when cards are redeemed at franchised restaurant locations.
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
6. Common Stock and Series B Convertible Preferred Stock
Shares Authorized and Outstanding
The Company has authorized 5.0 million shares of preferred stock, 100.0 million shares of common stock, and 260,000 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”). The Company’s outstanding shares of common stock were 32.032.5 million shares at March 29,September 27, 2020 and 31.9 million shares at December 29, 2019.
There were 252,530 shares of Series B Preferred Stock outstanding at both March 29,September 27, 2020 and December 29, 2019. The Series B Preferred Stock is classified as temporary equity on the Condensed Consolidated Balance Sheets as of March 29,September 27, 2020 and December 29, 2019.
Dividends
The Company recorded dividends of approximately $10.7$32.1 million in the first quarter ofnine months ended September 27, 2020 consisting of the following:
● | $ |
● | $ |
● | $ |
On AprilOctober 30, 2020, our Board of Directors declared a secondfourth quarter dividend of $0.225 per common share (of which approximately $7.3$7.4 million will be paid to common stockholders and $1.1 million will be paid as “pass through” dividends to holders of Series B Preferred Stock on an “as converted basis”). The secondfourth quarter preferred dividend was also declared on AprilOctober 30, 2020. The common share dividend will be paid on May 22,November 20, 2020 to stockholders of record as of the close of business on May 11, 2020. November 10, 2020. The secondfourth quarter preferred dividend of $2.3 million will be paid to holders of Series B Preferred Stock on July 1, 2020.January 4, 2021.
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Share Repurchases
Subsequent to the third quarter on November 4, 2020, our Board of Directors approved a new share repurchase program for up to $75 million of the Company’s common stock, effective through December 31, 2021. This represents approximately 3.0% of the Company’s currently outstanding common stock based on the closing price of the stock as of November 4, 2020. The timing and volume of share repurchases may be executed at the discretion of management on an opportunistic basis, subject to market and business conditions, regulatory requirements and other factors, or pursuant to trading plans or other arrangements. Repurchases under the new program may be made through open market, block, and privately negotiated transactions, including Rule 10b5-1 plans, at times and in such amounts as management deems appropriate. Repurchases under the Company’s share repurchase program may be commenced or suspended from time to time at the Company’s discretion without prior notice.
7. Earnings (Loss) Per Share
We compute earnings (loss) per share using the two-class method. The two-class method requires an earnings allocation formula that determines earnings (loss) per share for common stockholdersshareholders and participating security holders according to dividends declared and participating rights in undistributed earnings. The Series B Preferred Stock and time-based restricted stock awards are participating securities because holders of such shares have non-forfeitable dividend rights and participate in undistributed earnings with common stock. Under the two-class method, total dividends provided to the holders of Series B Preferred Stock, including common dividendsparticipating securities and undistributed earnings allocated to participating securities, are subtracted from net income (loss) attributable to the Company in determining net income (loss) attributable to common stockholders.shareholders. Additionally, any accretion to the redemption value for the Series B Preferred Stock is treated as a deemed dividend in the two-class EPS calculation.
The calculations of basic and diluted earnings (loss) per common share are as follows (in thousands, except per-share data):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||
| | March 29, | | March 31, | | September 27, | | September 29, | | September 27, | | September 29, | ||||||
| | 2020 |
| 2019 | | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||
| | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per common share: | | | | | | | ||||||||||||
Net income (loss) attributable to the Company | | $ | 8,443 | | $ | (1,731) | ||||||||||||
Preferred stock dividends and accretion | | | (3,471) | | | (2,070) | ||||||||||||
Basic earnings (loss) per common share | | | | | | | | | | | | | ||||||
Net income attributable to the Company | | $ | 15,708 | | $ | 385 | | $ | 44,765 | | $ | 7,008 | ||||||
Dividends paid to participating securities and accretion | | | (3,548) | | | (3,473) | | | (10,546) | | | (9,029) | ||||||
Net income attributable to participating securities | |
| (703) | |
| — | |
| (1,809) | |
| — | ||||||
Net income (loss) attributable to common shareholders | | $ | 4,972 | | $ | (3,801) | | $ | 11,457 | | $ | (3,088) | | $ | 32,410 | | $ | (2,021) |
| | | | | | | | | | | | | | | | | | |
Basic weighted average common shares outstanding | |
| 32,093 | |
| 31,554 | |
| 32,616 | |
| 31,601 | |
| 32,347 | |
| 31,581 |
Basic earnings (loss) per common share | | $ | 0.15 | | $ | (0.12) | | $ | 0.35 | | $ | (0.10) | | $ | 1.00 | | $ | (0.06) |
| | | | | | | | | | | | | | | | | | |
Diluted earnings (loss) per common share: | | | | | | | ||||||||||||
Diluted earnings (loss) per common share | | | | | | | | | | | | | ||||||
Net income (loss) attributable to common shareholders | | $ | 4,972 | | $ | (3,801) | | $ | 11,457 | | $ | (3,088) | | $ | 32,410 | | $ | (2,021) |
| | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | |
| 32,093 | |
| 31,554 | |
| 32,616 | |
| 31,601 | |
| 32,347 | |
| 31,581 |
Dilutive effect of outstanding equity awards (a) | |
| 227 | |
| — | |
| 355 | |
| — | |
| 296 | |
| — |
Diluted weighted average common shares outstanding (b) | |
| 32,320 | |
| 31,554 | |
| 32,971 | |
| 31,601 | |
| 32,643 | |
| 31,581 |
Diluted earnings (loss) per common share | | $ | 0.15 | | $ | (0.12) | | $ | 0.35 | | $ | (0.10) | | $ | 0.99 | | $ | (0.06) |
(a) | Excludes |
(b) | The Company had |
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8. | Debt |
Long-term debt, net, consists of the following (in thousands):
| | | | | | | | | | | | | ||
| | | March 29, | | | December 29, | | | September 27, | | | December 29, | ||
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | ||
Outstanding debt | | $ | 365,623 | | $ | 370,000 | | $ | 350,000 | | $ | 370,000 | ||
Unamortized debt issuance costs | | | (2,389) | | | (2,710) | | | (1,921) | | | (2,710) | ||
Current portion of long-term debt | | | (20,623) | | | (20,000) | | | (20,000) | | | (20,000) | ||
Total long-term debt, net | | $ | 342,611 | | $ | 347,290 | | $ | 328,079 | | $ | 347,290 |
The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $10.0$5.0 million was outstanding as of March 29,September 27, 2020, and a secured term loan facility with an outstanding balance of $355.0$345.0 million (the “Term Loan Facility”) and together with the Revolving Facility, the “PJI Facilities”. The PJI Facilities mature on August 30, 2022. The loans under the PJI Facilities accrue interest at a per annum rate equal to, at the Company’s election, either LIBOR plus a margin ranging from 125 to 250 basis points or a base rate (generally determined by a prime rate, federal funds rate or LIBOR plus 1.00%) plus a margin ranging from 25 to 150 basis points. In each case, the actual margin is determined according to a ratio of the Company’s total indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the then most recently ended 4-quarter period (the “Leverage Ratio”). The Credit Agreement governing the PJI Facilities (the “PJI Credit Agreement”) places certain customary restrictions upon the Company based on its financial covenants. These include limiting the repurchase of common stock and not increasing the cash dividend above the lesser of $0.225 per share per quarter or $35 million per fiscal year if the Company’s leverage ratio is above 3.75 to 1.0. Quarterly amortization payments are required to be made on the Term Loan Facility in the amount of $5.0 million. Loans outstanding under the PJI Facilities may be prepaid at any time without premium or penalty, subject to customary breakage costs in the case of borrowings for which a LIBOR rate election is in effect. Up to $35.0 million of the Revolving Facility may be advanced in certain agreed foreign currencies, including Euros, Pounds Sterling, Canadian Dollars, Japanese Yen, and Mexican Pesos.
The PJI Credit Agreement contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of the Leverage Ratio and a specified fixed charge coverage ratio. The PJI Credit Agreement allows for a permitted Leverage Ratio of 5.00 to 1.0, decreasing over time to 4.00 to 1.0 by 2022; and a fixed charge coverage ratio of 2.25 to 1.0, which increases over time to 2.50 to 1.0 in 2021 and thereafter. We were in compliance with these financial covenants at March 29,September 27, 2020.
Under the PJI Credit Agreement, we have the option to increase the Revolving Facility or the Term Loan Facility in an aggregate amount of up to $300.0 million, subject to the Leverage Ratio of the Company not exceeding 4.00 to 1.00. The Company and certain direct and indirect domestic subsidiaries are required to grant a security interest in substantially all of the capital stock and equity interests of their respective domestic and first tier material foreign subsidiaries to secure the obligations owed under the PJI Facilities.
Our outstanding debt of $365.0$350.0 million at March 29,September 27, 2020 under the PJI Facilities was composed of $355.0$345.0 million outstanding under the Term Loan Facility and $10.0$5.0 million outstanding under the Revolving Facility. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at March 29,September 27, 2020 was approximately $343.8$348.8 million.
As of March 29,September 27, 2020, the Company had approximately $2.4$1.9 million in unamortized debt issuance costs, which are being amortized into interest expense over the term of the PJI Facilities.
We attempt to minimize interest rate 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 that participate in the PJI Credit Agreement. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract. We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities.
17
As of March 29,September 27, 2020, we have the following interest rate swap agreements with a total notional value of $350 million:
| | | | | | | |
Effective Dates |
| Floating Rate Debt |
| Fixed Rates |
| ||
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 | % |
January 30, 2018 through August 30, 2022 | | $ | 100 | million | | 1.99 | % |
January 30, 2018 through August 30, 2022 | | $ | 75 | million | | 1.99 | % |
January 30, 2018 through August 30, 2022 | | $ | 50 | million | | 2.00 | % |
The gain or loss on the swaps is recognized in Accumulated other comprehensive loss (“AOCL”) and reclassified into earnings as adjustments to interest expense in the same period or periods during which the swaps affect earnings. Gains or losses on the swaps representing hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The following table provides information on the location and amounts of our swaps in the accompanying condensed consolidated financial statements (in thousands):
| | | | | | |
| | Interest Rate Swap Derivatives | ||||
| | Fair Value | | Fair Value | ||
| | March 29, | | December 29, | ||
Balance Sheet Location | | 2020 | | 2019 | ||
| | | | | | |
Other current and long-term liabilities | | $ | 17,020 | | $ | 6,168 |
| | | | | | |
| | Interest Rate Swap Derivatives | ||||
| | Fair Value | | Fair Value | ||
| | September 27, | | December 29, | ||
Balance Sheet Location | | 2020 | | 2019 | ||
Other current and long-term liabilities | | $ | 15,334 | | $ | 6,168 |
The effect of derivative instruments on the accompanying condensed consolidated financial statements is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | ||||
| | | | Location of Gain | | Amount of Gain | | | | | | Location of Gain | | Amount of Gain | | | ||||||||
Derivatives - | | Amount of Gain or | | or (Loss) | | or (Loss) | | Total Net Interest Expense | | Amount of Gain or | | or (Loss) | | or (Loss) | | Total Net Interest Expense | ||||||||
Cash Flow | | (Loss) Recognized | | Reclassified from | | Reclassified from | | on Condensed | | (Loss) Recognized | | Reclassified from | | Reclassified from | | on Condensed | ||||||||
Hedging | | in AOCL | | AOCL into | | AOCL into | | Consolidated Statements | | in AOCL | | AOCL into | | AOCL into | | Consolidated Statements | ||||||||
Relationships | | on Derivative | | Income | | Income | | of Operations | | on Derivative | | Income | | Income | | of Operations | ||||||||
Interest rate swaps for the three months ended: | Interest rate swaps for the three months ended: | |||||||||||||||||||||||
September 27, 2020 | | $ | 1,268 | |
| Interest expense | | $ | (1,674) | | $ | (3,636) | ||||||||||||
September 29, 2019 | | $ | (1,437) | |
| Interest expense | | $ | 161 | | $ | (4,249) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps for the three months ended: | ||||||||||||||||||||||||
March 29, 2020 | | $ | (8,408) | |
| Interest expense | | $ | (330) | | $ | (3,967) | ||||||||||||
March 31, 2019 | | $ | (3,037) | |
| Interest expense | | $ | 148 | | $ | (6,276) | ||||||||||||
Interest rate swaps for the nine months ended: | Interest rate swaps for the nine months ended: | |||||||||||||||||||||||
September 27, 2020 | | $ | (7,219) | | | Interest expense | | $ | (3,376) | | $ | (11,230) | ||||||||||||
September 29, 2019 | | $ | (9,641) | |
| Interest expense | | $ | 849 | | $ | (14,797) |
The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 3.8% and 4.5% for the three monthsthree- and nine-month periods ended MarchSeptember 27, 2020, compared to 3.8% and 4.2% for the three- and nine-month periods ended September 29, 2020 and March 31, 2019, respectively. Interest paid, including payments made or received under the swaps, was $4.1$3.9 million and $6.7$3.0 million for the three months ended March 29,September 27, 2020 and March 31,September 29, 2019, respectively, and $12.0 million and $14.1 million for the nine months ended September 27, 2020 and September 29, 2019, respectively. As of March 29,September 27, 2020, the portion of the aggregate $17.0$15.3 million interest rate swap liability that would be reclassified into net interest expense during the next twelve months approximates $6.6$7.2 million.
PJMF has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 (as amended, the “PJMF Loan Agreement”) with U.S. Bank National Association, as lender (“U.S. Bank”). The PJMF Revolving Facility is secured by substantially all assets of PJMF. The PJMF Revolving Facility matures on September 30, 2020.2021. The borrowings under the PJMF Revolving Facility accrue interest at a variable rate of the one-month LIBOR plus 1.75%. The applicable interest rates on the PJMF Revolving Facility were 3.4%1.9% and 4.5%2.7% for the three and nine months ended MarchSeptember 27, 2020, respectively, compared to 4.0% and 4.2% for the three and
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nine months ended September 29, 2019. As of September 27, 2020 and March 31,December 29, 2019, respectively. As of March 29, 2020, the principal amount ofthere was 0 debt outstanding under the PJMF Revolving Facility was approximately $0.6 million and is classified as current debt (NaN at December 29, 2019).Facility. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.
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9. | Commitments and Contingencies |
Litigation
The Company is involved in a number of lawsuits, claims, investigations and proceedings, including those specifically 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 condensed consolidated financial statements. We review these provisions at least quarterly and adjust them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.
Durling et al v. Papa John’s International, Inc., is a conditionally certified collective action filed in May 2016 in the United States District Court for the Southern District of New York, alleging that corporate restaurant delivery drivers were not properly reimbursed for vehicle mileage and expenses in accordance with the Fair Labor Standards Act. In July 2018, the District Court granted a motion to certify a conditional corporate collective class and the opt-in notice process has been completed. As of the close of the opt-in period on October 29, 2018, 9,571 drivers opted into the collective class. The Company continues to deny any liability or wrongdoing in this matter and intends to vigorously defend this action. The Company has 0t recorded any liability related to this lawsuit as of March 29,September 27, 2020 as it does not believe a loss is probable or reasonably estimable.
Danker v. Papa John’s International, Inc. et al. On August 30, 2018, a class action lawsuit was filed in the United States District Court, Southern District of New York on behalf of a class of investors who purchased or acquired stock in Papa John's through a period up to and including July 19, 2018. The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The District Court appointed the Oklahoma Law Enforcement Retirement System to lead the case. An amended complaint was filed on February 13, 2019, which the Company moved to dismiss. On March 16, 2020, the Court granted the Company’s motion to dismiss, on the ground that the complaint failed to state any viable cause of action. The Plaintiffs subsequently filed a second amended complaint on April 30, 2020.2020, which the Company moved to dismiss. The Company believes that it has valid and meritorious defenses to the second amended complaint and intends to vigorously defend against the case. The Company has 0t recorded any liability related to this lawsuit as of March 29,September 27, 2020 as it does not believe a loss is probable or reasonably estimable.
10. Strategic Corporate Reorganization for Long-term Growth
On September 17, 2020, we announced plans to open a new headquarters in Atlanta, Georgia. Certain corporate functions, including menu innovation, marketing, digital customer experience, human resources, diversity, equity and inclusion, communications, operations and development, will be relocated to the new Atlanta headquarters. Our information technology, finance, supply chain, and legal teams will continue to operate in our Louisville, Kentucky headquarters, which remains critical to our success. We also maintain a headquarters office outside of London, UK, where our international operations are managed.
The new Atlanta headquarters is part of a broader strategic reorganization of corporate functions reflecting the Company’s ongoing transformation into a brand and culture that can effectively and efficiently deliver on the Company’s purpose, values and strategic business priorities
. The opening of the new Atlanta location and related organizational changes are expected to be completed by the summer of 2021. Affected employees who do not relocate to Atlanta have been offered a separation package. As a result, we expect to incur certain one-time corporate reorganization costs of approximately $15 to $20 million related to employee severance and transition, recruitment and relocation and other third-party costs through 2021.
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10. Other General Expenses (Income)
Other general expenses (income) are included within General and administrative expenses and primarily consist of the following (in thousands):
| | | | | |
| Three Months Ended | ||||
| | March 29, | | | March 31, |
| | 2020 | | | 2019 |
Other general expenses (income) (a) | $ | 4,674 | | $ | (100) |
Special charges (b) | | - | | | 10,619 |
Administrative expenses (c) | | 42,977 | | | 40,616 |
General and administrative expenses | $ | 47,651 | | $ | 51,135 |
| | | | | |
11. | Segment Information |
We have 4 reportable segments: domestic Company-owned restaurants, North America commissaries, North America franchising and international operations. The domestic Company-owned restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States) Company-owned restaurants and derives its revenues principally from retail sales of pizza and side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. The North America commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants in the United States and Canada. The North America franchising segment consists of our franchise sales and support activities 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 segment principally consists of distribution sales to franchised Papa John’s restaurants located in the United Kingdom 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 “all other,” which consists of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of printing and promotional items, franchise contributions to marketing funds 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 income (loss) 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. NaN single external customer accounted for 10% or more of our consolidated revenues.
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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. NaN single external customer accounted for 10% or more of our consolidated revenues.
Our segment information is as follows:
| | | | | | | |
| | | Three Months Ended | ||||
| | | March 29, | | March 31, | ||
(In thousands) | |
| 2020 |
| 2019 | ||
Revenues: | | | | | | | |
Domestic Company-owned restaurants | | | $ | 161,440 | | $ | 161,803 |
North America commissaries | | |
| 155,422 | |
| 148,904 |
North America franchising | | |
| 19,440 | |
| 17,530 |
International | | |
| 32,152 | |
| 31,500 |
All others | | |
| 41,405 | |
| 38,668 |
Total revenues | | | $ | 409,859 | | $ | 398,405 |
| | | | | | | |
Intersegment revenues: | | | | | | | |
North America commissaries | | | $ | 44,506 | | $ | 45,555 |
North America franchising | | |
| 674 | |
| 673 |
International | | |
| — | |
| 97 |
All others | | |
| 20,955 | |
| 15,411 |
Total intersegment revenues | | | $ | 66,135 | | $ | 61,736 |
| | | | | | | |
Income (loss) before income taxes: | | | | | | | |
Domestic Company-owned restaurants | | | $ | 8,667 | | $ | 4,597 |
North America commissaries | | |
| 7,509 | |
| 7,512 |
North America franchising | | |
| 17,326 | |
| 15,691 |
International | | |
| 4,499 | |
| 5,317 |
All others | | |
| (259) | |
| (506) |
Unallocated corporate expenses | | |
| (26,051) | |
| (32,465) |
Elimination of intersegment (profits) | | |
| (186) | |
| (913) |
Total income (loss) before income taxes | | | $ | 11,505 | | $ | (767) |
| | | | | | | |
Property and equipment: | | | | | | | |
Domestic Company-owned restaurants | | | $ | 223,539 | | | |
North America commissaries | | | | 143,279 | | | |
International | | | | 15,468 | | | |
All others | | | | 85,775 | | | |
Unallocated corporate assets | | | | 212,537 | | | |
Accumulated depreciation and amortization | | | | (475,563) | | | |
Property and equipment, net | | | $ | 205,035 | | | |
| | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended | ||||||||
| | | September 27, | | September 29, | | September 27, | | September 29, | ||||
(In thousands) | |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Revenues: | | | | | | | | | | | | | |
Domestic Company-owned restaurants | | | $ | 178,371 | | $ | 165,135 | | $ | 526,317 | | $ | 490,594 |
North America commissaries | | |
| 181,338 | |
| 154,703 | |
| 504,379 | |
| 450,735 |
North America franchising | | |
| 25,281 | |
| 15,924 | |
| 68,895 | |
| 53,215 |
International | | |
| 40,328 | |
| 29,888 | |
| 106,846 | |
| 92,808 |
All others | | |
| 47,623 | |
| 38,056 | |
| 136,986 | |
| 114,382 |
Total revenues | | | $ | 472,941 | | $ | 403,706 | | $ | 1,343,423 | | $ | 1,201,734 |
| | | | | | | | | | | | | |
Intersegment revenues: | | | | | | | | | | | | | |
North America commissaries | | | $ | 50,306 | | $ | 47,599 | | $ | 142,169 | | $ | 140,116 |
North America franchising | | |
| 824 | |
| 612 | |
| 2,291 | |
| 2,072 |
International | | |
| — | |
| — | |
| — | |
| 191 |
All others | | |
| 27,168 | |
| 19,362 | |
| 66,509 | |
| 52,758 |
Total intersegment revenues | | | $ | 78,298 | | $ | 67,573 | | $ | 210,969 | | $ | 195,137 |
| | | | | | | | | | | | | |
Income before income taxes | | | | | | | | | | | | | |
Domestic Company-owned restaurants | | | $ | 8,439 | | $ | 9,162 | | $ | 33,852 | | $ | 21,471 |
North America commissaries | | |
| 8,069 | |
| 6,790 | |
| 24,145 | |
| 22,094 |
North America franchising | | |
| 23,353 | |
| 14,092 | |
| 62,855 | |
| 47,693 |
International | | |
| 8,123 | |
| 4,195 | |
| 17,211 | |
| 14,915 |
All others | | |
| 3,181 | |
| (866) | |
| 4,905 | |
| (2,581) |
Unallocated corporate expenses | | |
| (30,543) | |
| (32,329) | |
| (83,024) | |
| (92,685) |
Elimination of intersegment losses (profits) | | |
| 291 | |
| (366) | |
| (619) | |
| (1,037) |
Total income before income taxes | | | $ | 20,913 | | $ | 678 | | $ | 59,325 | | $ | 9,870 |
| | | | | | | | | | | | | |
Property and equipment: | | | | | | | | | | | | | |
Domestic Company-owned restaurants | | | $ | 230,669 | | | | | | | | | |
North America commissaries | | | | 144,799 | | | | | | | | | |
International | | | | 16,335 | | | | | | | | | |
All others | | | | 87,355 | | | | | | | | | |
Unallocated corporate assets | | | | 215,144 | | | | | | | | | |
Accumulated depreciation and amortization | | | | (495,011) | | | | | | | | | |
Property and equipment, net | | | $ | 199,291 | | | | | | | | | |
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Disaggregation of Revenue
In the following tables, revenues are disaggregated by major productproduct/service line. The tables also include a reconciliation of the disaggregated revenues by the reportable segment (in thousands):
| | | | | | | | | | | | | | ||||||||||||
| | | Reportable Segments | ||||||||||||||||||||||
| | | Three Months Ended September 27, 2020 | ||||||||||||||||||||||
Major Products/Services Lines | | | Domestic Company-owned restaurants | | North America commissaries | | North America franchising | | International | | All others | | Total | ||||||||||||
Company-owned restaurant sales | | $ | 178,371 | $ | - | $ | - | $ | - | $ | - | $ | 178,371 | ||||||||||||
Commissary sales | | | - | | 231,644 | | - | | 22,737 | | - | | 254,381 | ||||||||||||
Franchise royalties and fees | | | - | | - | | 26,105 | | 10,703 | | - | | 36,808 | ||||||||||||
Other revenues | | | - | | - | | - | | 6,888 | | 74,791 | | 81,679 | ||||||||||||
Eliminations | | | - | | (50,306) | | (824) | | - | | (27,168) | | (78,298) | ||||||||||||
Total segment revenues | | $ | 178,371 | $ | 181,338 | $ | 25,281 | $ | 40,328 | $ | 47,623 | $ | 472,941 | ||||||||||||
International other revenues (1) | | | - | | - | | - | | (6,888) | | 6,888 | | - | ||||||||||||
Total revenues | | $ | 178,371 | $ | 181,338 | $ | 25,281 | $ | 33,440 | $ | 54,511 | $ | 472,941 | ||||||||||||
| | | | | | | | | | | | | | ||||||||||||
| | | Reportable Segments | ||||||||||||||||||||||
| | | Three Months Ended September 29, 2019 | ||||||||||||||||||||||
Major Products/Services Lines | | | Domestic Company-owned restaurants | | North America commissaries | | North America franchising | | International | | All others | | Total | ||||||||||||
Company-owned restaurant sales | | $ | 165,135 | $ | - | $ | - | $ | - | $ | - | $ | 165,135 | ||||||||||||
Commissary sales | | | - | | 202,302 | | - | | 15,195 | | - | | 217,497 | ||||||||||||
Franchise royalties and fees | | | - | | - | | 16,536 | | 9,484 | | - | | 26,020 | ||||||||||||
Other revenues | | | - | | - | | - | | 5,209 | | 57,418 | | 62,627 | ||||||||||||
Eliminations | | | - | | (47,599) | | (612) | | - | | (19,362) | | (67,573) | ||||||||||||
Total segment revenues | | $ | 165,135 | $ | 154,703 | $ | 15,924 | $ | 29,888 | $ | 38,056 | $ | 403,706 | ||||||||||||
International other revenues (1) | | | - | | - | | - | | (5,209) | | 5,209 | | - | ||||||||||||
Total revenues | | $ | 165,135 | $ | 154,703 | $ | 15,924 | $ | 24,679 | $ | 43,265 | $ | 403,706 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Reportable Segments | | | Reportable Segments | ||||||||||||||||||||
| | Three Months Ended March 29, 2020 | | | Nine Months Ended September 27, 2020 | ||||||||||||||||||||
Major Products/Services Lines | | Domestic Company-owned restaurants | | North America commissaries | | North America franchising | | International | | All others | | Total | | | Domestic Company-owned restaurants | | North America commissaries | | North America franchising | | International | | All others | | Total |
Company-owned restaurant sales | $ | 161,440 | $ | - | $ | - | $ | - | $ | - | $ | 161,440 | | $ | 526,317 | $ | - | $ | - | $ | - | $ | - | $ | 526,317 |
Commissary sales | | - | | 199,928 | | - | | 16,543 | | - | | 216,471 | | | - | | 646,548 | | - | | 59,630 | | - | | 706,178 |
Franchise royalties and fees | | - | | - | | 20,114 | | 9,516 | | - | | 29,630 | | | - | | - | | 71,186 | | 27,962 | | - | | 99,148 |
Other revenues | | - | | - | | - | | 6,093 | | 62,360 | | 68,453 | | | - | | - | | - | | 19,254 | | 203,495 | | 222,749 |
Eliminations | | - | | (44,506) | | (674) | | - | | (20,955) | | (66,135) | | | - | | (142,169) | | (2,291) | | - | | (66,509) | | (210,969) |
Total segment revenues | $ | 161,440 | $ | 155,422 | $ | 19,440 | $ | 32,152 | $ | 41,405 | $ | 409,859 | | $ | 526,317 | $ | 504,379 | $ | 68,895 | $ | 106,846 | $ | 136,986 | $ | 1,343,423 |
International other revenues (1) | | - | | - | | - | | (6,093) | | 6,093 | | - | | | - | | - | | - | | (19,254) | | 19,254 | | - |
Total revenues | $ | 161,440 | $ | 155,422 | $ | 19,440 | $ | 26,059 | $ | 47,498 | $ | 409,859 | | $ | 526,317 | $ | 504,379 | $ | 68,895 | $ | 87,592 | $ | 156,240 | $ | 1,343,423 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Reportable Segments | | | Reportable Segments | ||||||||||||||||||||
| | Three Months Ended March 31, 2019 | | | Nine Months Ended September 29, 2019 | ||||||||||||||||||||
Major Products/Services Lines | | Domestic Company-owned restaurants | | North America commissaries | | North America franchising | | International | | All others | | Total | | | Domestic Company-owned restaurants | | North America commissaries | | North America franchising | | International | | All others | | Total |
Company-owned restaurant sales | $ | 161,803 | $ | - | $ | - | $ | - | $ | - | $ | 161,803 | | $ | 490,594 | $ | - | $ | - | $ | - | $ | - | $ | 490,594 |
Commissary sales | | - | | 194,459 | | - | | 15,866 | | - | | 210,325 | | | - | | 590,851 | | - | | 47,009 | | - | | 637,860 |
Franchise royalties and fees | | - | | - | | 18,203 | | 9,801 | | - | | 28,004 | | | - | | - | | 55,287 | | 28,834 | | - | | 84,121 |
Other revenues | | - | | - | | - | | 5,930 | | 54,079 | | 60,009 | | | - | | - | | - | | 17,156 | | 167,140 | | 184,296 |
Eliminations | | - | | (45,555) | | (673) | | (97) | | (15,411) | | (61,736) | | | - | | (140,116) | | (2,072) | | (191) | | (52,758) | | (195,137) |
Total segment revenues | $ | 161,803 | $ | 148,904 | $ | 17,530 | $ | 31,500 | $ | 38,668 | $ | 398,405 | | $ | 490,594 | $ | 450,735 | $ | 53,215 | $ | 92,808 | $ | 114,382 | $ | 1,201,734 |
International other revenues (1) | | - | | - | | - | | (5,930) | | 5,930 | | - | | | - | | - | | - | | (17,156) | | 17,156 | | - |
International eliminations (1) | | - | | - | | - | | 97 | | (97) | | - | | | - | | - | | - | | 191 | | (191) | | - |
Total revenues | $ | 161,803 | $ | 148,904 | $ | 17,530 | $ | 25,667 | $ | 44,501 | $ | 398,405 | | $ | 490,594 | $ | 450,735 | $ | 53,215 | $ | 75,843 | $ | 131,347 | $ | 1,201,734 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
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(1) | Other revenues as reported in the Condensed Consolidated Statements of Operations include |
2223
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. As of March 29,September 27, 2020, there were 5,3785,360 Papa John’s restaurants (599(597 Company-owned and 4,7794,763 franchised) operating in 4948 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, contributions received from franchisees for domestic and international marketing funds we control, revenues for printing and promotional items, and information systems and related services used in their operations.
Recent Developments and Trends
Strategic Corporate Reorganization for Long-term Growth. On September 17, 2020, we announced plans to open a new headquarters in Atlanta, Georgia. Certain corporate functions, including menu innovation, marketing, digital customer experience, human resources, diversity, equity and inclusion, communications, operations and development, will be relocated to the new Atlanta headquarters. Our information technology, finance, supply chain, and legal teams will continue to operate in our Louisville, Kentucky headquarters, which remains critical to our success. We also maintain a headquarters office outside of London, UK, where our international operations are managed.
The new Atlanta headquarters is part of a broader strategic reorganization of corporate functions reflecting the Company’s ongoing transformation into a brand and culture that can effectively and efficiently deliver on the Company’s purpose, values and strategic business priorities. The opening of the new Atlanta location and related organizational changes are expected to be completed by the summer of 2021. Affected employees who do not relocate to Atlanta have been offered a separation package. As a result, we expect to incur certain one-time corporate reorganization costs of approximately $15 to $20 million related to employee severance and transition, recruitment and relocation and other third-party costs through 2021. Of that amount, we expect to incur costs of approximately $4 to $5 million in the fourth quarter of 2020. There were no significant corporate reorganization costs incurred in the third quarter of 2020.
Coronavirus (“COVID-19”). The COVID-19 outbreak has presented evolving risks and developments domestically and internationally. The outbreak beganinternationally, as well as new opportunities for our business. In response to result in disruption in certain of our international markets beginning in January 2020, which negatively impacted our operations in affected locations, including causing temporary closures of franchise locations in China and South Korea. Subsequently, the outbreak, was characterized as a pandemic by the World Health Organization on March 11, 2020 and declared a national emergency in the United States during the same timeframe. In response, governments and other authorities around the world have imposed measures to attempt to control the spread of COVID-19, includingrestrictions on freedom of movement and business operations such as travel bans, social distancing requirements, including limitations on gatherings, shelter-in-place orders and quarantines, and mandated business closures, which have resulted in significant changes in commercial activity and consumer behavior. In addition,Our delivery and carryout model has positioned us to experience strong demand for our products. Increased demand and customer behavior during the pandemic has resulted in an overall contraction in global economic activityhave contributed to significant sales increases over comparable 2019 periods. To ensure we can continue to meet the demand of our customers, we continue to monitor our supply chain and rising unemployment. We have been in discussions with our major suppliers and currently have not experienced material disruptions in our supply chain.disruptions.
Our primary focus continues to be the safety of our team members, franchisees, and customers. The Company has taken steps to mitigate the impact of the COVID-19 pandemic by implementing extra health and safety measures across our business, including No Contact Delivery and enhanced cleaning and sanitization measures, for the protection of both our customers and team members. We have expanded our employee benefits to include free virtual doctor visits. This is in addition to existing employee benefits of no-cost mental health support, affordable health plan options and access to the Papa John’s Team Member Emergency Relief Fund, if and when needed. In addition, the Company is in the process of hiringhas hired thousands of new restaurant team members in 2020 to help serve our customers.
Of the Company’s approximately 2,1002,074 international franchised stores, approximately 375 are90 stores were temporarily closed as of September 27, 2020, principally in Europe (140 stores), Latin America (130 stores), and the Middle East (95 stores)Europe, in accordance with government policies. In China and South Korea, our markets which were impacted the earliest by the COVID-19 outbreak, a limited number of restaurants remain closed. Some international markets are open predominantly for delivery only, such as in the United Kingdom. In North America, substantiallyalmost all our traditional restaurants remain open and fully operational. A number of non-traditional restaurants located in universities
24
and stadiums are temporarily closed; these non-traditional locations are not significant to our revenues and operating results.
23
Although March salesWe believe the pandemic has accelerated our previously announced efforts to innovate and bring new and former customers to the Papa John’s system. We believe that even after the pandemic-related restrictions are lifted we will benefit from the increase in North America were negatively impacted by the cancellation of large gatherings, including major sporting events,customers we have experienced due to our domestic businesses have performed well, as customers and communities rely on us and others in the food delivery industry. The demand for carry-out and delivery across our markets has increased over the past several weeks. Our sales results by month for the first quarter,menu innovation, customer loyalty programs and our preliminary, estimated comparable sales information for the first monthofferings of the second quarter of 2020 (Period 4) are as follows:
| | | | | | | | | | | |
| | | | | | | | | First | | |
| | | Period 1 | | Period 2 | | Period 3 | | Quarter | | Period 4 |
| | | Dec. 30, | | Jan. 27, | | Feb. 24, | | Three | | Mar. 30, |
| | | 2019, to | | 2020, to | | 2020, to | | months | | 2020, to |
| | | Jan. 26, | | Feb. 23, | | Mar. 29, | | ended | | Apr. 26, |
| | | 2020 | | 2020 | | 2020 | | Mar. 29, 2020 | | 2020 |
Comparable sales growth/(decline)(a): | | | | | | | | | | | |
Domestic Company-owned restaurants | | | 9.4% | | 7.6% | | 2.5% | | 6.1% | | 22.0% |
North America franchised restaurants | | | 7.1% | | 4.8% | | 3.9% | | 5.1% | | 28.4% |
Systemwide North America restaurants | | | 7.6% | | 5.4% | | 3.6% | | 5.3% | | 26.9% |
| | | | | | | | | | | |
System-wide international restaurants | | | 4.9% | | 2.9% | | (0.6%) | | 2.3% | | 1.4% |
| | | | | | | | | | | |
|
|
We have sufficient cash on hand to support our current operationshigh-quality pizza and we have access to approximately $350 million from our secured revolving credit facility, should we need it.
other menu items. Due to the substantial uncertainty related to and the rapidly changing natureeffects of the pandemic and its duration, we are unable to predict the specific impacts ofimpact the outbreakpandemic and related restrictions will have on our results of operations, liquidity or long-term financial condition.condition, including whether and the extent to which the increased demand for our products will continue. For a discussion of the risks to our business presented by the COVID-19 pandemic, please see Part II, Item 1A, “Risk Factors” of thisthe risk factors disclosed in the Company’s Annual Report on Form-10-K for the fiscal year ended December 29, 2019 and Quarterly Report on Form 10-Q.10-Q for the quarterly period ended March 29, 2020.
24
Restaurant Progression
| | | | | | |
| | Three Months Ended | ||||
|
| March 29, 2020 |
| March 31, 2019 | ||
| | | | | | |
North America Company-owned: | | | | | | |
Beginning of period | |
| 598 | |
| 645 |
Opened | |
| 1 | |
| 1 |
Closed | |
| — | |
| — |
Sold to franchisees | | | — | | | (1) |
End of period | |
| 599 | |
| 645 |
North America franchised: | | | | | | |
Beginning of period | |
| 2,690 | |
| 2,692 |
Opened | |
| 15 | |
| 26 |
Closed | |
| (19) | |
| (28) |
Acquired from Company | | | — | | | 1 |
End of period | |
| 2,686 | |
| 2,691 |
International franchised: | | | | | | |
Beginning of period | |
| 2,107 | |
| 1,966 |
Opened | |
| 18 | |
| 49 |
Closed | |
| (32) | |
| (15) |
End of period | |
| 2,093 | |
| 2,000 |
Total restaurants – end of period | |
| 5,378 | |
| 5,336 |
| | | | | | | | | | | | |
|
| Three Months Ended | | Nine Months Ended | ||||||||
|
| September 27, 2020 |
| September 29, 2019 |
| September 27, 2020 |
| September 29, 2019 | ||||
| | | | | | | | | | | | |
North America Company-owned: | | | | | | | | | | | | |
Beginning of period | |
| 598 | |
| 643 | |
| 598 | |
| 645 |
Opened | |
| — | |
| — | |
| 1 | |
| 2 |
Closed | |
| (1) | |
| (1) | |
| (2) | |
| (3) |
Sold to franchisees | | | — | | | (21) | | | — | | | (23) |
End of period | |
| 597 | |
| 621 | |
| 597 | |
| 621 |
North America franchised: | | | | | | | | | | | | |
Beginning of period | |
| 2,686 | |
| 2,676 | |
| 2,690 | |
| 2,692 |
Opened | |
| 14 | |
| 15 | |
| 38 | |
| 58 |
Closed | |
| (11) | |
| (37) | |
| (39) | |
| (98) |
Acquired from Company | | | — | | | 21 | | | — | | | 23 |
End of period | |
| 2,689 | |
| 2,675 | |
| 2,689 | |
| 2,675 |
International franchised: | | | | | | | | | | | | |
Beginning of period | |
| 2,063 | |
| 2,026 | |
| 2,107 | |
| 1,966 |
Opened | |
| 40 | |
| 60 | |
| 83 | |
| 143 |
Closed | |
| (29) | |
| (39) | |
| (116) | |
| (62) |
End of period | |
| 2,074 | |
| 2,047 | |
| 2,074 | |
| 2,047 |
Total restaurants – end of period | |
| 5,360 | |
| 5,343 | |
| 5,360 | |
| 5,343 |
Note: Temporary closures as a result of the COVID-19 outbreak are not reflected as “closed” in the restaurant progression above. See “Recent Development and Trends” section above.
25
Items Impacting Comparability; Non-GAAP Measures
Effective as of the first quarter of 2020, the Company modified its presentation of adjusted (non-GAAP) financial results to no longer present certain financial assistance provided to the North America system in the form of royalty relief and discretionary marketing fund investments as Special charges. This financial assistance, which began in the third quarter of 2018 in response to declining sales in North America, will continue throughconcluded in the third quarter of 2020, as announced in a formal plan in July 2019. The adjusted financial results for the quarterthree and nine months ended March 31,September 29, 2019 have been revised to remove these items. See “Temporary Franchise Support” below for additional information regarding this change in presentation.
The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures.measures (collectively defined as “Special items”). We present these non-GAAP measures because we believe the Special chargesitems in the first quarter of 2019 impact the comparability toof our first quarter 2020 results.results of operations.
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | ||||
| | Three Months Ended | | Three Months Ended | | | Nine Months Ended | ||||||||||||
| | March 29, | | March 31, | | September 27, | | September 29, | | | September 27, | | September 29, | ||||||
(In thousands, except per share amounts) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | | | 2020 |
| 2019 | ||||||
| | | | | | | | | | | | | | | | | | | |
GAAP income (loss) before income taxes | | $ | 11,505 | | $ | (767) | |||||||||||||
GAAP income before income taxes | | $ | 20,913 | | $ | 678 | | | $ | 59,325 | | $ | 9,870 | ||||||
Special charges: | |
| | |
| | |
| | |
| | | |
| | |
| |
Legal and advisory fees (1) | | | — | | | 5,067 | | | — | | | 459 | | | | — | | | 5,922 |
Mark-to-market adjustment on option valuation (2) | | | — | | | 5,914 | | | — | | | — | | | | — | | | 5,914 |
Other costs (3) | | | — | | | 2,385 | | | | — | | | 2,385 | ||||||
Refranchising gains | | | — | | | (1,726) | | | | — | | | (1,889) | ||||||
Adjusted income before income taxes | | $ | 11,505 | | $ | 10,214 | | $ | 20,913 | | $ | 1,796 | | | $ | 59,325 | | $ | 22,202 |
| | | | | | | | | | | | | | | | | | | |
GAAP net income (loss) attributable to common shareholders | | $ | 4,972 | | $ | (3,801) | | $ | 11,457 | | $ | (3,088) | | | $ | 32,410 | | $ | (2,021) |
Special charges: | | | | | | | | | | | | | | | | | | | |
Legal and advisory fees (1) | | | — | | | 5,067 | | | — | | | 459 | | | | — | | | 5,922 |
Mark-to-market adjustment on option valuation (2) | | | — | | | 5,914 | | | — | | | — | | | | — | | | 5,914 |
Tax effect of Legal and advisory fees (3) | | | — | | | (1,176) | |||||||||||||
Adjusted net income attributable to common shareholders | | $ | 4,972 | | $ | 6,004 | |||||||||||||
Other costs (3) | | | | | | 2,385 | | | | | | | 2,385 | ||||||
Refranchising gains | | | — | | | (1,726) | | | | — | | | (1,889) | ||||||
Tax effect of Non-GAAP items (4) | | | — | | | (237) | | | | — | | | (1,434) | ||||||
Adjusted net income (loss) attributable to common shareholders | | $ | 11,457 | | $ | (2,207) | | | $ | 32,410 | | $ | 8,877 | ||||||
| | | | | | | | | | | | | | | | | | | |
GAAP diluted earnings (loss) per share | | $ | 0.15 | | $ | (0.12) | |||||||||||||
GAAP diluted earnings (loss) per common share | | $ | 0.35 | | $ | (0.10) | | | $ | 0.99 | | $ | (0.06) | ||||||
Special charges: | | | | | | | | | | | | | | | | | | | |
Legal and advisory fees (1) | | | — | | | 0.16 | | | — | | | 0.01 | | | | — | | | 0.17 |
Mark-to-market adjustment on option valuation (2) | | | — | | | 0.19 | | | — | | | — | | | | — | | | 0.19 |
Tax effect of Legal and advisory fees (3) | | | — | | | (0.04) | |||||||||||||
Adjusted diluted earnings per share | | $ | 0.15 | | $ | 0.19 | |||||||||||||
Other costs (3) | | | — | | | 0.08 | | | | — | | | 0.08 | ||||||
Refranchising gains | | | — | | | (0.05) | | | | — | | | (0.05) | ||||||
Tax effect of Non-GAAP items (4) | | | — | | | (0.01) | | | | — | | | (0.05) | ||||||
Adjusted diluted earnings (loss) per common share | | $ | 0.35 | | $ | (0.07) | | | $ | 0.99 | | $ | 0.28 | ||||||
| | | | | | | | | | | | | | | | | | | |
(1) | Represents advisory and legal costs incurred in 2019 primarily associated with the review of a wide range of strategic opportunities that culminated in the strategic investment in the Company by affiliates of Starboard Value LP (“Starboard”) as well as certain litigation costs associated with legal proceedings initiated by our founder. |
(2) | Represents a one-time mark-to-market adjustment of $5.9 million primarily related to the increase in the fair value of the Starboard option to purchase the Company’s Series B Convertible Preferred Stock (“Series B Preferred |
(3) | Includes severance costs for our former CEO and costs related to the termination of a license agreement for intellectual property no longer being utilized. |
26
(4) | The tax effect for Legal and advisory fees, Other costs, and Refranchising gains was calculated by applying the 2019 full year marginal rate of |
The 2019 non-GAAP adjusted results shown above and within this document, which exclude the Special charges,items, should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP results. Management believes presenting certain financial information excluding the Special chargesitems is important for purposes of comparison to prior year results. In addition, management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends.
26
Temporary Franchise Support. As previously mentioned, effective as of the first quarter of 2020, the Company no longer presents certain royalty relief and discretionary marketing fund investments, included herein as “Temporary Franchise Support,” as Special charges within its adjusted financial results. The prior period adjusted financial measures presented above in “Items“Items Impacting Comparability; Non-GAAP Measures” have also been revised to remove the impact of these items. The Temporary Franchise Support concluded in the third quarter of 2020.
Temporary Franchise Support investments were $10.7$13.5 million (or approximately $0.26$0.31 per diluted share) in the first quarter ended March 29, 2020, compared to $4.9and $29.3 million (or approximately $0.12$0.69 per diluted share) infor the first quarterthree and nine months ended March 31,September 27, 2020, respectively, compared to $11.4 million (or approximately $0.28 per diluted share) and $21.2 million (or approximately $0.52 per diluted share) for the three and nine months ended September 29, 2019, as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | | | Nine Months Ended | ||||||||||||
| | March 29, | | March 31, | | Sep. 27, | | Sep. 29 | | | | Sep. 27, | | Sep. 29 | ||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | | | 2020 | | 2019 | ||||||
Royalty relief (a) | | $ | 5,656 | | $ | 4,873 | | $ | 3,469 | | $ | 6,353 | | | $ | 14,270 | | $ | 13,692 | |
Marketing fund investments (b) | | | 5,000 | | | - | | | 10,000 | | | 5,000 | | | | 15,000 | | | 7,500 | |
Total Temporary Franchise Support | | $ | 10,656 | | $ | 4,873 | | $ | 13,469 | | $ | 11,353 | | | $ | 29,270 | | $ | 21,192 |
(a) | Represents financial assistance provided to the North America system in the form of temporary royalty reductions that are above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business. Beginning in the third quarter of 2018, the Company began providing various forms of support and financial assistance to the North America franchise system in response to declining North America sales. In July 2019, the Company announced a formal relief program to provide our North America franchisees with certainty regarding the availability and schedule of the temporary relief |
(b) | Represents incremental discretionary marketing fund investments in excess of contractual Company-owned restaurant-level contributions, which were made as part of our previously announced temporary financial support package to our franchisees. The marketing fund investments are included in Unallocated corporate expenses. |
27
Results of Operations
Discussion of Revenues. Consolidated revenues increased $11.5$69.2 million, or 2.9%17.1%, to $409.9and $141.7 million, or 11.8%, for the first quarter ofthree and nine months ended September 27, 2020, compared to $398.4 million for the first quarter of 2019.respectively. Revenues are summarized in the following table (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| ||||||||
| | Three Months Ended | | | | | | Three Months Ended | | | | | ||||||||||||
|
| Mar. 29, | | Mar. 31, |
| Increase |
| Percent |
| Sep. 27, | | Sep. 29, |
| |
| Percent | ||||||||
| | 2020 | | 2019 | | (Decrease) | | Change | | 2020 | | 2019 | | Increase | | Change | ||||||||
Domestic Company-owned restaurant sales | | $ | 161,440 | | $ | 161,803 | | $ | (363) | | (0.2) | % | | $ | 178,371 | | $ | 165,135 | | $ | 13,236 | | 8.0 | % |
North America franchise royalties and fees | |
| 19,440 | |
| 17,530 | |
| 1,910 | | 10.9 | % | |
| 25,281 | 1 |
| 15,924 | |
| 9,357 | | 58.8 | % |
North America commissary | |
| 155,422 | |
| 148,904 | |
| 6,518 | | 4.4 | % | ||||||||||||
International | |
| 26,059 | |
| 25,667 | |
| 392 | | 1.5 | % | ||||||||||||
North America commissary revenues | |
| 181,338 | |
| 154,703 | |
| 26,635 | | 17.2 | % | ||||||||||||
International revenues | |
| 33,440 | |
| 24,679 | |
| 8,761 | | 35.5 | % | ||||||||||||
Other revenues | |
| 47,498 | |
| 44,501 | |
| 2,997 | | 6.7 | % | |
| 54,511 | |
| 43,265 | |
| 11,246 | | 26.0 | % |
Total Revenues | | $ | 409,859 | | $ | 398,405 | | $ | 11,454 | | 2.9 | % | | $ | 472,941 | | $ | 403,706 | | $ | 69,235 | | 17.1 | % |
| | | | | | | | | | | | | ||||||||||||
| | Nine Months Ended | | | | | ||||||||||||||||||
|
| Sep. 27, | | Sep. 29, |
| |
| Percent | ||||||||||||||||
| | 2020 | | 2019 | | Increase | | Change | ||||||||||||||||
Domestic Company-owned restaurant sales | | $ | 526,317 | | $ | 490,594 | | $ | 35,723 | | 7.3 | % | ||||||||||||
North America franchise royalties and fees | |
| 68,895 | |
| 53,215 | |
| 15,680 | | 29.5 | % | ||||||||||||
North America commissary revenues | |
| 504,379 | |
| 450,735 | |
| 53,644 | | 11.9 | % | ||||||||||||
International revenues | |
| 87,592 | |
| 75,843 | |
| 11,749 | | 15.5 | % | ||||||||||||
Other revenues | |
| 156,240 | |
| 131,347 | |
| 24,893 | | 19.0 | % | ||||||||||||
Total Revenues | | $ | 1,343,423 | | $ | 1,201,734 | | $ | 141,689 | | 11.8 | % |
Domestic Company-owned restaurant sales decreased $0.4increased $13.2 million, or 0.2%8.0%, and $35.7 million, or 7.3%, for the three and nine months ended March 29,September 27, 2020, primarily duerespectively, compared to the prior year comparable periods. Excluding the impact of refranchising of 46 restaurants in 2019 primarily located in South Florida and Georgia. Excluding the impact of refranchising, DomesticGeorgia, domestic Company-owned restaurant sales increased $10.8$21.9 million, or 7.2%.14.0%, and $66.2 million, or 14.4% for the three and nine months ended September 27, 2020, respectively. The increase wasincreases were primarily due to positive comparable sales increases of 6.1%18.2% and 15.6% for the three and nine months ended September 27, 2020, respectively, partially offset by the 2019 favorable impact from the expiration of customer rewards associated with our Papa Rewards loyalty program ($5.1 million and $4.1 million unfavorable for the three and nine months ended September 27, 2020, respectively). “Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods.
North America franchise royalties and fees increased $1.9$9.4 million, or 10.9%58.8%, and $15.7 million, or 29.5%, for the three and nine months ended March 29,September 27, 2020, respectively, compared to the three months ended March 31, 2019.prior year comparable periods. Excluding the impact of refranchising, North America franchise royalties and fees increased $1.3$8.7 million, or 54.6%, and $13.7 million, or 25.8%, for the three and nine months ended September 27, 2020, respectively. The increases were primarily due to positive comparable sales increases of 5.1%25.6% and 20.0% for the three and nine months ended September 27, 2020, respectively. The three-month period reflects a higher effective royalty rate due to lower temporary royalty relief of $2.9 million which was part of our franchise assistance program (see “Temporary Franchise Support”).
North America franchise restaurant sales increased 5.9%26.2% to $559.2$642.5 million and 20.3% to $1.86 billion for the three and nine months ended March 29, 2020.September 27, 2020, respectively, compared to the prior year comparable periods. North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales.
North America commissary sales increased $6.5$26.6 million, or 4.4%17.2%, and $53.6 million, or 11.9%, for the three and nine months ended March 29,September 27, 2020, respectively, primarily due to higher volumes and pricing associated with higher commodities costs, primarily cheese.
28
International revenues increased $0.4$8.8 million, or 1.5%35.5%, for the three months ended March 29, 2020. Excluding the impact of refranchising our Quality Control Center in Mexico in 2019, International revenues increased $1.4 million or 5.6%, for the three months ended March 29, 2020. The increase of $1.4 million wasSeptember 27, 2020 primarily due to higher Papa John’s United Kingdom (“PJUK”) commissary revenues, higher royalties from increased equivalent units and higher comparable sales of 20.7% and favorable foreign exchange rates. These increases were partially offset by royalty support provided to certain franchisees. For the nine months ended September 27, 2020, International revenues increased $11.7 million, or 15.5%, primarily due to higher PJUK commissary revenues and higher royalties from increased equivalent units and higher comparable sales of 2.3%. The higher sales were9.4%, partially offset by lower development feesroyalty support provided to certain franchisees and unfavorable foreign exchange rates. “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.
International franchise restaurant sales increased 8.1%22.9% to $235.5$268.0 million and 12.2% to $735.6 million for the three and nine months ended March 29,September 27, 2020, respectively, excluding the impact of foreign currency, primarily due to increases in comparable sales and equivalent units and positive comparable sales.units. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.
Other revenues increased $3.0$11.2 million, or 6.7%26.0%, and $24.9 million, or 19.0%, for the three and nine months ended March 29, 2020.September 27, 2020, respectively, compared to the prior year comparable periods. The increase wasincreases were primarily due to higher marketing fund revenue primarily due torevenues from an increase in franchise sales and an increase in the national marketing fund contribution rate in 2020 and higher online revenues. revenues from increased restaurant sales.
2829
Discussion of Operating Results
Income (loss) before income taxes is summarized in the following table on a reporting segment basis. Income (loss) before income taxes increased approximately $12.3$20.2 million and $49.5 million for the first quarter ofthree and nine months ended September 27, 2020, overrespectively, compared to the first quarter of 2019.prior year comparable periods. Alongside the GAAP income (loss) before income taxes data, we have included “adjusted” income (loss) before income taxes for the first quarter ofthree and nine months ended September 29, 2019 to exclude Special charges.items in 2019. We believe this non-GAAP measure is important for purposes of comparing to 2020 results.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Three Months Ended | ||||||||||||||||||||||||||
| | Reported | | Reported | | Special | | Adjusted | | Adjusted | | | Reported | | Reported | | Special | | Adjusted | | Adjusted | ||||||||||
|
| Mar. 29, | | Mar. 31, | | charges | | Mar. 31, |
| Increase |
|
| Sep. 27, | | Sep. 29, | | items | | Sep. 29, |
| Increase | ||||||||||
(In thousands) | | 2020 | | 2019 | | in 2019 | | 2019 | | (Decrease) |
| | 2020 | | 2019 | | in 2019 | | 2019 | | (Decrease) | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 8,667 | | $ | 4,597 | | $ | — | | $ | 4,597 | | $ | 4,070 | | | $ | 8,439 | | $ | 9,162 | | $ | (1,726) | | $ | 7,436 | | $ | 1,003 |
North America commissaries | |
| 7,509 | |
| 7,512 | |
| — | |
| 7,512 | |
| (3) | | |
| 8,069 | |
| 6,790 | |
| — | |
| 6,790 | |
| 1,279 |
North America franchising | |
| 17,326 | |
| 15,691 | |
| — | |
| 15,691 | |
| 1,635 | | |
| 23,353 | |
| 14,092 | |
| — | |
| 14,092 | |
| 9,261 |
International | |
| 4,499 | |
| 5,317 | |
| — | |
| 5,317 | |
| (818) | | |
| 8,123 | |
| 4,195 | |
| — | |
| 4,195 | |
| 3,928 |
All others | |
| (259) | |
| (506) | |
| — | |
| (506) | |
| 247 | | |
| 3,181 | |
| (866) | |
| — | |
| (866) | |
| 4,047 |
Unallocated corporate expenses | |
| (26,051) | |
| (32,465) | |
| 10,981 | |
| (21,484) | |
| (4,567) | | |
| (30,543) | |
| (32,329) | |
| 2,844 | |
| (29,485) | |
| (1,058) |
Elimination of intersegment profits | |
| (186) | |
| (913) | |
| — | |
| (913) | |
| 727 | | |||||||||||||||
Adjusted income (loss) before income taxes | | $ | 11,505 | | $ | (767) | | $ | 10,981 | | $ | 10,214 | | $ | 1,291 | | |||||||||||||||
Elimination of intersegment (profits) losses | |
| 291 | |
| (366) | |
| — | |
| (366) | |
| 657 | ||||||||||||||||
Adjusted income before income taxes | | $ | 20,913 | | $ | 678 | | $ | 1,118 | | $ | 1,796 | | $ | 19,117 | ||||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||||
| | Nine Months Ended | |||||||||||||||||||||||||||||
|
| Reported |
| Reported |
| Special |
| Adjusted |
| Adjusted | |||||||||||||||||||||
| | Sep. 27, |
| Sep. 29, | | items | | Sep. 29, | | Increase | |||||||||||||||||||||
(In thousands) |
| 2020 |
| 2019 |
| in 2019 |
| 2019 |
| (Decrease) | |||||||||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||||
Domestic Company-owned restaurants | | $ | 33,852 | | $ | 21,471 | | $ | (1,889) | | $ | 19,582 | | $ | 14,270 | ||||||||||||||||
North America commissaries | | | 24,145 | |
| 22,094 | |
| — | |
| 22,094 | |
| 2,051 | ||||||||||||||||
North America franchising | | | 62,855 | | | 47,693 | | | — | | | 47,693 | | | 15,162 | ||||||||||||||||
International | | | 17,211 | | | 14,915 | | | — | | | 14,915 | | | 2,296 | ||||||||||||||||
All others | | | 4,905 | | | (2,581) | | | — | | | (2,581) | | | 7,486 | ||||||||||||||||
Unallocated corporate expenses | | | (83,024) | | | (92,685) | | | 14,221 | | | (78,464) | | | (4,560) | ||||||||||||||||
Elimination of intersegment (profits) losses | | | (619) | | | (1,037) | | | — | | | (1,037) | | | 418 | ||||||||||||||||
Adjusted income before income taxes | | $ | 59,325 | | $ | 9,870 | | $ | 12,332 | | $ | 22,202 | | $ | 37,123 |
The increaseincreases in adjusted income before income taxes of $1.3$19.1 million or 12.6%and $37.1 million for the first quarter ofthree- and nine-month periods in 2020, respectively, excluding Special chargesitems in 2019, waswere primarily due to the following:
● | Domestic Company-owned |
● | North America Commissaries Segment. North America Commissaries increased $1.3 million and $2.1 million for the three and nine months ended September 27, 2020, respectively, primarily due to higher profits from higher volumes, partially offset by higher bonuses. |
30
● | North America Franchising Segment. North America franchising |
● | International Segment. International |
● | All Others. All Others, |
● | Unallocated Corporate Expenses. Unallocated corporate expenses increased approximately $1.1 million and $4.6 million for the |
2931
Review of Consolidated Results
Revenues. For the reasons discussed above, consolidated revenues increased $11.5$69.2 million, or 2.9%17.1%, to $409.9$472.9 million, and $141.7 million, or 11.8%, to $1.3 billion for the first quarter ofthree and nine months ended September 27, 2020, compared to $398.4 million for the first quarter of 2019.respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | ||
| | Three Months Ended | | | | Three Months Ended | | | ||||||||||||||||||
| | March 29, 2020 | | March 31, 2019 | | | | | September 27, 2020 | | September 29, 2019 | | | |||||||||||||
| | | | % of Related | | | | % of Related | | Increase | | | | % of Related | | | | % of Related | | Increase | ||||||
($ in thousands) | | | | Revenues | | | | Revenues | | (Decrease) | | | | Revenues | | | | Revenues | | (Decrease) | ||||||
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | ||
Domestic Company-owned restaurant sales | | $ | 161,440 | | | | $ | 161,803 | | | | | | $ | 178,371 | | | | $ | 165,135 | | | | | ||
North America franchise royalties and fees | | | 19,440 | | | | | 17,530 | | | | | | | 25,281 | | | | | 15,924 | | | | | ||
North America commissary revenues | | | 155,422 | | | | | 148,904 | | | | | | | 181,338 | | | | | 154,703 | | | | | ||
International revenues | | | 26,059 | | | | | 25,667 | | | | | | | 33,440 | | | | | 24,679 | | | | | ||
Other revenues | | | 47,498 | | | | | 44,501 | | | | | | | 54,511 | | | | | 43,265 | | | | | ||
Total revenues | | | 409,859 | | | | | 398,405 | | | | | | | 472,941 | | | | | 403,706 | | | | | ||
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | ||
Operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | | | | | | | | | | | | | | | | | | ||
Domestic Company-owned restaurant expenses | | | 129,111 | | 80.0% | | | 133,053 | | 82.2% | | (2.2%) | | | 144,803 | | 81.1% | | | 134,037 | | 81.2% | | (0.1%) | ||
North America commissary expenses | | | 144,272 | | 92.8% | | | 138,557 | | 93.1% | | (0.3%) | | | 167,937 | | 92.6% | | | 144,624 | | 93.5% | | (0.9%) | ||
International expenses | | | 15,101 | | 57.9% | | | 14,305 | | 55.7% | | 2.2% | | | 19,370 | | 57.9% | | | 13,557 | | 54.9% | | 3.0% | ||
Other expenses | | | 45,957 | | 96.8% | | | 44,097 | | 99.1% | | (2.3%) | | | 50,917 | | 93.4% | | | 42,952 | | 99.3% | | (5.9%) | ||
General and administrative expenses | | | 47,651 | | 11.6% | | | 51,135 | | 12.8% | | (1.2%) | | | 52,601 | | 11.1% | | | 53,503 | | 13.3% | | (2.2%) | ||
Depreciation and amortization | | | 12,295 | | 3.0% | | | 11,749 | | 2.9% | | 0.1% | | | 12,764 | | 2.7% | | | 11,832 | | 2.9% | | (0.2%) | ||
Total costs and expenses | | | 394,387 | | 96.2% | | | 392,896 | | 98.6% | | (2.4%) | | | 448,392 | | 94.8% | | | 400,505 | | 99.2% | | (4.4%) | ||
Refranchising gains | | | - | | 0.0% | | | 1,726 | | 0.4% | | (0.4%) | ||||||||||||||
Operating income | | | 15,472 | | 3.8% | | | 5,509 | | 1.4% | | (2.4%) | | | 24,549 | | 5.2% | | | 4,927 | | 1.2% | | 4.0% | ||
Net interest expense | | | (3,967) | | (1.0%) | | | (6,276) | | (1.6%) | | 0.6% | | | (3,636) | | (0.8%) | | | (4,249) | | (1.1%) | | 0.3% | ||
Income (loss) before income taxes | | $ | 11,505 | | 2.8% | | $ | (767) | | (0.2%) | | 3.0% | ||||||||||||||
Income before income taxes | | $ | 20,913 | | 4.4% | | $ | 678 | | 0.1% | | 4.3% | ||||||||||||||
| | | | | | | | | | | | | ||||||||||||||
| | Nine Months Ended | | | ||||||||||||||||||||||
| | September 27, 2020 | | September 29, 2019 | | | ||||||||||||||||||||
| | | | % of Related | | | | % of Related | | Increase | ||||||||||||||||
($ in thousands) | | | | Revenues | | | | Revenues | | | (Decrease) | |||||||||||||||
Revenues: | | | | | | | | | | | | | ||||||||||||||
Domestic Company-owned restaurant sales | | $ | 526,317 | | | | $ | 490,594 | | | | | ||||||||||||||
North America franchise royalties and fees | | | 68,895 | | | | | 53,215 | | | | | ||||||||||||||
North America commissary revenues | | | 504,379 | | | | | 450,735 | | | | | ||||||||||||||
International revenues | | | 87,592 | | | | | 75,843 | | | | | ||||||||||||||
Other revenues | | | 156,240 | | | | | 131,347 | | | | | ||||||||||||||
Total revenues | | | 1,343,423 | | | | | 1,201,734 | | | | | ||||||||||||||
Costs and expenses: | | | | | | | | | | | | | ||||||||||||||
Operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | | | | | | ||||||||||||||
Domestic Company-owned restaurant expenses | | | 419,082 | | 79.6% | | | 399,040 | | 81.3% | | (1.7%) | ||||||||||||||
North America commissary expenses | | | 466,676 | | 92.5% | | | 419,925 | | 93.2% | | (0.7%) | ||||||||||||||
International expenses | | | 52,775 | | 60.3% | | | 42,514 | | 56.1% | | 4.2% | ||||||||||||||
Other expenses | | | 148,219 | | 94.9% | | | 129,019 | | 98.2% | | (3.3%) | ||||||||||||||
General and administrative expenses | | | 148,680 | | 11.1% | | | 153,356 | | 12.8% | | (1.7%) | ||||||||||||||
Depreciation and amortization | | | 37,436 | | 2.8% | | | 35,102 | | 2.9% | | (0.1%) | ||||||||||||||
Total costs and expenses | | | 1,272,868 | | 94.7% | | | 1,178,956 | | 98.1% | | (3.4%) | ||||||||||||||
Refranchising gains | | | - | | 0.0% | | | 1,889 | | 0.2% | | (0.2%) | ||||||||||||||
Operating income | | | 70,555 | | 5.3% | | | 24,667 | | 2.1% | | 3.2% | ||||||||||||||
Net interest expense | | | (11,230) | | (0.8%) | | | (14,797) | | (1.2%) | | 0.4% | ||||||||||||||
Income before income taxes | | $ | 59,325 | | 4.5% | | $ | 9,870 | | 0.9% | | 3.6% |
32
| | | | | | | | | | | | | |
Costs and expenses. Total costs and expenses were approximately $394.4$448.4 million, or 96.2%94.8% of total revenues, for the first quarter ofthree months ended September 27, 2020 as compared to $392.9$400.5 million, or 98.6%,99.2% of total revenues, for the first quarterprior year comparable period. For the nine months ended September 27, 2020, total costs and expenses were approximately $1.27 billion, or 94.7% of 2019.total revenues, as compared to $1.18 billion, or 98.1% of total revenues for the prior year comparable period. The decreasedecreases in total costs and expenses, as a percentage of revenues, waswere primarily due to the following:
Domestic Company-owned restaurant expenses were $129.1$144.8 million, or 81.1% of related revenues, for the first quarter ofthree months ended September 27, 2020, or 80.0% of related revenues, as compared to expenses of $133.1$134.0 million, or 82.2%81.2% of related revenues.revenues, for the prior year comparable period. For the nine months ended September 27, 2020, Domestic Company-owned restaurant expenses were $419.1 million, or 79.6% of related revenues, compared to expenses of $399.0 million, or 81.3% of related revenues, for the prior year comparable period. The 2.2% decrease in expenses,0.1% and 1.7% decreases, as a percentage of related revenues, wasfor the three and nine months ended September 27, 2020 were primarily due to lower operating expenses on higher sales and lower food costs including the favorable impact of current year promotions, which more than offset higher commodities costs, primarily cheese.costs. These decreases were partially offset by higher bonus expense and the 2019 favorable impact of the expiration of customer rewards with our Papa Rewards loyalty program.
North America commissary expenses were $144.3 million for the first quarter of 2020, or 92.8% of related revenues compared to $138.6$167.9 million, or 93.1%92.6% of related revenues, for the first quarterthree months ended September 27, 2020, compared to $144.6 million, or 93.5% of related revenues for the comparable period in 2019. North America commissary expenses were $466.7 million, or 92.5% of related revenues, for the nine months ended September 27, 2020, compared to $419.9 million, or 93.2% of related revenues, for the prior year comparable period. The 0.3% decrease0.9% and 0.7% decreases in expenses, as a percentage of related revenues, wasfor the three- and nine-month periods, respectively, were primarily due to lower operating costs primarilyon higher volumes and lower delivery costs, partially offset by lower profits from cheese which has a fixed dollar markup.costs.
International expenses were $15.1$19.4 million, for the first quarter of 2020, or 57.9% of related revenues, for the three months ended September 27, 2020 compared to expenses of $14.3$13.6 million, or 55.7%54.9% of related revenues, for the first quarterprior year comparable period. International expenses were $52.8 million, or 60.3% of 2019.related revenues, for the nine months ended September 27, 2020, compared to $42.5 million, or 56.1% of related revenues for the prior year comparable period. The increase of 2.2%3.0% and 4.2% increases in expenses as a percentage of related revenues waswere primarily due to lower development feethe higher mix of United Kingdom commissary revenues the unfavorable impact of currency conversion on revenues andwhich have a lower overall margin at our United Kingdom commissary.and lower revenues from royalty support provided to certain franchisees.
Other expenses were $46.0 million for the first quarter of 2020, or 96.8% of related revenues, compared to expenses of $44.1$50.9 million, or 99.1%93.4% of related revenues, for the first quarterthree months ended September 27, 2020 compared to expenses of 2019. The 2.3% decrease in expenses, as a percentage$43.0 million, or 99.3% of related revenues wasfor the prior year comparable period. For the nine months ended September 27, 2020, Other expenses were $148.2 million, or 94.9% of related revenues, as compared to $129.0 million, or 98.2% of related revenues, for the prior year comparable period. The 5.9% and 3.3% decreases for the three- and nine- month periods, respectively, were primarily due to higher revenuesmargins from our online and mobile ordering business. The nine- month decrease was partially offset by lower revenues at our printing subsidiary.
3033
General and administrative expenses (“G&A”) were $47.7$52.6 million, and $148.7 million, or 11.6%11.1% of revenues, infor each of the first quarter ofthree and nine months ended September 27, 2020, respectively, compared to $51.1$53.5 million, or 13.3%, and $153.4 million, or 12.8%, for the first quarter of 2019.corresponding 2019 periods, respectively. G&A consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Three Months Ended | Three Months Ended | | Nine Months Ended | ||||||||||||||
| | March 29, | | | March 31, | | September 27, | | | | September 29, | | | September 27, | | | | September 29, |
| | 2020 | | | 2019 | | 2020 | | | | 2019 | | | 2020 | | | | 2019 |
Other general expenses (income) (a) | $ | 4,674 | | $ | (100) | |||||||||||||
Other general expenses (a) | $ | 8,921 | | | $ | 5,430 | | $ | 14,148 | | | $ | 9,043 | |||||
Special charges (b) | | - | | | 10,619 | | — | | | | 2,844 | | | — | | | | 14,220 |
Administrative expenses (c) | | 42,977 | | | 40,616 | | 43,680 | | | | 45,229 | | | 134,532 | | | | 130,093 |
General and administrative expenses | $ | 47,651 | | $ | 51,135 | $ | 52,601 | | | $ | 53,503 | | $ | 148,680 | | | $ | 153,356 |
| | | | | | | | | | | | | |
(a) | The |
(b) | See “Items Impacting Comparability; Non-GAAP Measures” for additional detail. |
(c) |
Depreciation and amortization.Depreciation and amortization expense was $12.3$12.8 million, or 3.0%2.7% of revenues, inand $37.4 million, or 2.8% of revenues, for the first quarter ofthree and nine months ended September 27, 2020, respectively, compared to $11.7$11.8 million, or 2.9%, and $35.1 million, or 2.9% of revenues, for the corresponding periods in the first quarter of 2019.2019, respectively.
Net interest expense. Net interest expense decreased approximately $2.3$600,000 and $3.6 million for the first quarter ofthree and nine months ended September 27, 2020, primarilyrespectively, due to a decrease in the average debt balance and lower interest rates. Total debt outstanding was $365.6$350.0 million as of March 29,September 27, 2020 including approximately $0.6 millionand there was no outstanding debt balance associated with Papa John’s Marketing Fund, Inc. (“PJMF”).
Income (loss) before income taxes. For the reasons discussed above, income (loss) before income taxes increased approximately $12.3$20.2 million and $49.5 million for the first quarter ofthree and nine months ended September 27, 2020, respectively, over the first quarter of 2019.prior year comparable periods.
Income tax expense. IncomeThe effective income tax expense was $2.5 millionrates were 21.6% and 20.2% for the first quarterthree and nine months ended September 27, 2020, representing decreases of 2020, for an effective tax rate of 21.8%40.5% and 5.5%, compared to $0.8 million forrespectively, from the first quarter ofprior year comparable periods. The nine months ended September 29, 2019 for an effective tax rate of 108.3%. The change in the effective rate was due to higher income before income taxes in the first quarter of 2020 and theincluded a non-deductible $5.9 million expense associated with the one-time mark-to-market increase in the fair value of the Starboard Value LP (“Starboard”) option to purchase Series B Preferred Stock in the first quarter of 2019.2019, as previously mentioned. Excluding the $5.9 million expense for the nine months ended September 29, 2019, the effective rates were higher for the three and nine months ended September 27, 2020 due to the impact of similar tax credits on higher income before income taxes in the current periods.
Diluted earnings (loss) per common share. Diluted earnings per common share was $0.15$0.35 for the firstthird quarter of 2020, compared to diluted loss per common share of $0.12 in$0.10 for the firstthird quarter of 2019, an increase of 450%. For the nine months ended September 27, 2020, diluted earnings per common share was $0.99, compared to diluted loss per common share of $0.06 for the prior year period ($0.28 excluding Special items mentioned above), an increase of 254% excluding Special items in 2019.
Diluted earnings per common share was reduced by approximately $0.02 and $0.06 per share for the three and nine months ended September 27, 2020, respectively, due to income attributable to participating securities, including Series B Preferred Stockholders, based on undistributed earnings for the periods.
3134
Liquidity and Capital Resources
As previously mentioned, the coronavirus (COVID-19) outbreak has presented evolving developments domestically and internationally, including an anticipated overall contraction in global economic activity and volatility in the financial markets. The outbreak was characterized as a pandemic by the World Health Organization on March 11, 2020 and declared a national emergency in the United States during the same timeframe. Despite these recent developments, we have not experienced any notable reduction in our liquidity position remains strong. Our cash flows,flow has increased, and we have not materially increasedreduced our borrowings on our secured revolving credit facility. As of March 29,September 27, 2020, we had approximately $343.8$348.8 million available for borrowing under our secured revolving credit facility, as described below. We plan to closely monitor our liquidity needs in response to the evolving situation.
Debt
The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $10.0$5.0 million was outstanding as of March 29,September 27, 2020 and a secured term loan facility with an outstanding balance of $355.0$345.0 million (the “Term Loan Facility”) and together with the Revolving Facility, the “PJI Facilities”. The PJI Facilities mature on August 30, 2022. The loans under the PJI Facilities accrue interest at a per annum rate equal to, at the Company’s election, either LIBOR plus a margin ranging from 125 to 250 basis points or a base rate (generally determined by a prime rate, federal funds rate or LIBOR plus 1.00%) plus a margin ranging from 25 to 150 basis points. In each case, the actual margin is determined according to a ratio of the Company’s total indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the then most recently ended four-quarter period (the “Leverage Ratio”). The Credit Agreement governing the PJI Facilities (the “PJI Credit Agreement”) places certain customary restrictions upon the Company based on its financial covenants. These include limiting the repurchase of common stock and not increasing the cash dividend above the lesser of $0.225 per share per quarter or $35 million per fiscal year if the Company’s leverage ratio is above 3.75 to 1.0. Quarterly amortization payments are required to be made on the Term Loan Facility in the amount of $5.0 million. Loans outstanding under the PJI Facilities may be prepaid at any time without premium or penalty, subject to customary breakage costs in the case of borrowings for which a LIBOR rate election is in effect. Up to $35.0 million of the Revolving Facility may be advanced in certain agreed foreign currencies, including Euros, Pounds Sterling, Canadian Dollars, Japanese Yen, and Mexican Pesos.
The PJI Credit Agreement contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of the Leverage Ratio and a specified fixed charge coverage ratio. The PJI Credit Agreement allows for a permitted Leverage Ratio of 5.00 to 1.0, decreasing over time to 4.00 to 1.0 by 2022; and a fixed charge coverage ratio of 2.25 to 1.0, which increases over time to 2.50 to 1.0 in 2021 and thereafter. We were in compliance with these financial covenants at March 29,September 27, 2020.
Under the PJI Credit Agreement, we have the option to increase the Revolving Facility or the Term Loan Facility in an aggregate amount of up to $300.0 million, subject to the Leverage Ratio of the Company not exceeding 4.00 to 1.00. The Company and certain direct and indirect domestic subsidiaries are required to grant a security interest in substantially all of the capital stock and equity interests of their respective domestic and first tier material foreign subsidiaries to secure the obligations owed under the PJI Facilities.
Our outstanding debt of $365.0$350.0 million at March 29,September 27, 2020 under the PJI Facilities was composed of $355.0$345.0 million outstanding under the Term Loan Facility and $10.0$5.0 million outstanding under the Revolving Facility. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at March 29,September 27, 2020 was approximately $343.8$348.8 million.
As of March 29,September 27, 2020, the Company had approximately $2.4$1.9 million in unamortized debt issuance costs, which are being amortized into interest expense over the term of the PJI Facilities.
We attempt to minimize interest rate 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 that participate in the PJI Credit Agreement. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract.
32
We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities.
35
As of March 29,September 27, 2020, we have the following interest rate swap agreements with a total notional value of $350 million:
| | | | | | |
Effective Dates |
| Floating Rate Debt |
| Fixed Rates |
| |
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 | % |
January 30, 2018 through August 30, 2022 | | $ | 100 million | | 1.99 | % |
January 30, 2018 through August 30, 2022 | | $ | 75 million | | 1.99 | % |
January 30, 2018 through August 30, 2022 | | $ | 50 million | | 2.00 | % |
The gain or loss on the swaps is recognized in Accumulated other comprehensive loss and reclassified into earnings as adjustments to interest expense in the same period or periods during which the swaps affect earnings. Gains or losses on the swaps representing hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 3.8% and 4.5% for the three monthsthree- and nine-month periods ended MarchSeptember 27, 2020, compared to 3.8% and 4.2% for the three- and nine-month periods ending September 29, 2020 and March 31, 2019, respectively.
Our PJI Credit Agreement contains affirmative and negative covenants, including the following financial covenants, as defined by the Amended Credit Agreement:
| | | | |
| | | |
|
| | | |
|
|
| Permitted Ratio |
|
|
Leverage ratio |
| Not to exceed 5.00 to 1.0 |
|
|
| | | | |
Interest coverage ratio |
| Not less than 2.25 to 1.0 |
|
|
As stated above, our leverage ratio is defined as outstanding debt divided by consolidated EBITDA, as defined, 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 financial covenants as of March 29,September 27, 2020.
PJMF has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 (as amended, the “PJMF Loan Agreement”) with U.S. Bank National Association, as lender (“U.S. Bank”). The PJMF Revolving Facility is secured by substantially all assets of PJMF. The PJMF Revolving Facility matures on September 30, 2020.2021. The borrowings under the PJMF Revolving Facility accrue interest at a variable rate of the one-month LIBOR plus 1.75%. The applicable interest rates on the PJMF Revolving Facility were 3.4%1.9% and 4.5%2.7% for the three and nine months ended MarchSeptember 27, 2020, respectively, compared to 4.0% and 4.2% for the three and nine months ended September 29, 2019. As of September 27, 2020 and March 31,December 29, 2019, respectively. As of March 29, 2020, the principal amount ofthere was no debt outstanding under the PJMF Revolving Facility was $0.6 million and is classified as current debt (none at December 29, 2019).Facility. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.
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Cash Flows
Cash flow provided by operating activities was $33.7$168.5 million for the nine months ended September 27, 2020, compared to $50.0 million in the first quarter of 2020 compared to $13.8 millioncorresponding period in the first quarter of 2019. The increase of $19.9$118.5 million was primarily due to higher net income and favorable working capital changes including timing of payments.
The Company’s free cash flow, a non-GAAP financial measure, was as follows infor the first quarternine-month periods of 2020 and 2019 (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
|
| March 29, |
| March 31, |
| September 27, |
| September 29, | ||||
| | 2020 | | 2019 | | 2020 | | 2019 | ||||
| | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 33,734 | | $ | 13,813 | | $ | 168,547 | | $ | 49,999 |
Purchases of property and equipment | | | (5,933) | | | (8,658) | | | (24,269) | | | (27,547) |
Dividends paid to preferred shareholders | |
| (3,412) | |
| (2,040) | |
| (10,237) | |
| (6,608) |
Free cash flow (a) | | $ | 24,389 | | $ | 3,115 | | $ | 134,041 | | $ | 15,844 |
(a) | Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the Condensed Consolidated Statements of Cash Flows) less the purchases of property and equipment and less the payment of dividends to preferred stockholders. We view free cash flow as an important liquidity measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. However, it does not represent residual cash flows available for discretionary expenditures. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of our liquidity or performance than the Company’s GAAP measures. |
Cash flow used in investing activities was $9.6$28.6 million for the first quarter ofnine months ended September 27, 2020 compared to $8.3$24.1 million infor the first quarter ofsame period in 2019, or an increase of $1.3$4.5 million. The increase in cash flow used in investing activities was primarily due to higher net franchise loans issued, partially offset by lower purchasesthe inclusion of property and equipment.proceeds received from the divestiture of restaurants in 2019.
Cash flow used in financing activities was $15.5$27.4 million for the first quarter ofnine months ended September 27, 2020 compared to $9.6$30.7 million for the same period in the first quarter of 2019. The increase in cash flow used in financing activities was primarily due to proceeds from the issuance of Series B Preferred Stock in 2019, offset by higher preferred dividend payments in 2020. We require capital for the payment of cash dividends, which are funded by cash flow from operations, borrowings from our Credit Agreement and, in 2019, proceeds from the issuance of preferred stock. In the first quarter of 2019, we received gross proceeds of $252.5 million from the issuance of Series B Preferred Stock and incurred $7.5$7.2 million of direct costs associated with the issuance. The net proceeds of the Series B Preferred Stock were primarily used to pay down our Revolving Facilityfor debt repayments of $247.0 million, resulting in 2019. a net cash outflow of $1.7 million. In the first nine months ended September 27, 2020, net debt repayments were $20.0 million. Additionally, we received $29.2 million of proceeds from the exercise of stock options in the first nine months of 2020.
The additional borrowing availability under the Revolving Facility as a result of the debt repayment provides financial flexibility that enables the Company to make investments in the business and to use for general corporate purposes.
The Company recorded dividends of approximately $10.7$32.1 million in the first quarter ofnine months ended September 27, 2020 consisting of the following:
● | $ |
● | $ |
● | $ |
On AprilOctober 30, 2020, our Board of Directors declared a secondfourth quarter dividend of $0.225 per common share (of which approximately $7.3$7.4 million will be paid to common stockholders and $1.1 million will be paid as “pass through” dividends to holders of Series B Preferred Stock on an “as converted basis”). The secondfourth quarter preferred dividend of $2.3 million was also declared
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on AprilOctober 30, 2020. The common share dividend will be paid on May 22,November 20, 2020 to stockholders of record
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as of the close of business on May 11,November 10, 2020. The secondfourth quarter preferred dividend of $2.3 million will be paid to holders of Series B Preferred Stock on July 1,January 4, 2021.
Subsequent to the third quarter on November 4, 2020, our Board of Directors approved a new share repurchase program for up to $75 million of the Company’s common stock, effective through December 31, 2021. This represents approximately 3.0% of the Company’s currently outstanding common stock based on the closing price of the stock as of November 4, 2020. The timing and volume of share repurchases may be executed at the discretion of management on an opportunistic basis, subject to market and business conditions, regulatory requirements and other factors, or pursuant to trading plans or other arrangements. Repurchases under the new program may be made through open market, block, and privately negotiated transactions, including Rule 10b5-1 plans, at times and in such amounts as management deems appropriate. Repurchases under the Company’s share repurchase program may be commenced or suspended from time to time at the Company’s discretion without prior notice.
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 include or may relate to the preliminary estimated same store sales growth and related trends, projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the financial impact of the temporary business opportunities, disruptions and temporary changes in demand we are experiencing related to the current outbreak of the novel coronavirus disease (COVID-19), including the projections for sales trends and comparable sales, temporary restaurant closures, our cash on hand and access to our credit facilities, commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, the duration of changes in consumer behavior caused by the pandemic, the duration and number of temporary store closures,our plans to open our new headquarters in Atlanta, the associated reorganization costs and the related organizational, employment and real estate changes that are expected,royalty relief, the effectiveness of our strategic turnaround efforts and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, stockholder and other stakeholder engagement, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:
● | our ability to successfully implement or fully realize the anticipated benefits of our new headquarters in Atlanta, Georgia and corporate reorganization in the timeframes we desire or within the expected range of expenses, or at all. In addition, turnover in our support teams due to our relocation to Georgia could distract our employees, decrease employee morale, harm our reputation, and negatively impact the overall performance of our corporate support teams. As a result of these or other similar risks, our business, results of operations and financial condition may be adversely affected; |
● | the ability of the Company to manage difficulties and opportunities associated with or related to the COVID-19 pandemic, including risks related to: the impact of governmental restrictions on freedom of movement and business operations including quarantines, social distancing requirements and mandatory business closures; the virus’s impact on the availability of our workforce; the potential disruption of our supply chain; changes in consumer demand or behavior; the overall contraction in global economic activity, including |
● | the assumption that the store closures in international markets and non-traditional restaurants in North America are not expected to be permanent; the assumption that our delivery restaurants will continue to stay open and be deemed essential businesses by national, state and local authorities in most of the jurisdictions in which we operate; |
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● | the uncertainty of whether and to what extent the increase in demand for our products that we are currently experiencing during the COVID-19 pandemic will continue following a cessation of the effects of the virus in the future; |
● | increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to improve consumer sentiment and sales trends, and the risk that such initiatives will not be effective; |
● | the ability of the Company to ensure the long-term success of the brand through significant investments committed to our U.S. franchise system, including marketing fund investments and royalty relief; |
● | risks related to social media, including publicity adversely and rapidly impacting our brand and reputation; |
● | aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors; |
● | changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending, including higher unemployment; |
● | the adverse impact on the Company or our results caused by global health concerns, 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; |
● | the effectiveness of our technology investments and changes in unit-level operations; |
● | 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; |
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● | 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 vehicles, workers’ compensation, general liability and property; |
● | disruption of our supply chain or commissary operations which could be caused by our sole source of supply of cheese or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our |
● | increased risks associated with our international operations, including economic and political conditions and risks associated with the withdrawal of the United Kingdom from the European Union, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth; |
● | the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the European Union General Data Protection Regulation; |
● | the Company's ability to continue to pay dividends to shareholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline; |
● | failure to effectively manage recent transitions within our executive leadership team or to otherwise successfully execute succession planning; |
● | disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential Company, employee and customer information, including payment cards; and |
● | changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles. |
For a discussion of these and other risks that may cause actual results to differ from expectations, refer to “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, as updated by “Part II. Item 1A – Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 29, 2020 and this Quarterly Report on Form 10-Q, as well as subsequent filings. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to the impact of interest rate changes on our secured revolving credit facility and our secured term loan facility, which comprise the PJI Credit Facilities. We attempt to minimize interest rate 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 that participate in the PJI Facilities. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract. We do not enter into contracts for trading purposes and do not use leveraged instruments. The market risks associated with our debt obligations as of March 29,September 27, 2020 have not changed from those reported in “Part II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019. See Note 8 of “Notes to Condensed Consolidated Financial Statements” for additional information on our debt obligations and derivative instruments.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate fluctuations from our operations outside of the United States, which can adversely impact our revenues, net income (loss) and cash flows. Our international operations principally consist of distribution sales to franchised Papa John’s restaurants located in the United Kingdom 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, approximately 6%7% of our revenues were derived from these operations.
We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had a favorable impact of approximately $850,000 and an unfavorable impact of approximately $0.6 million and $1.7$1.4 million on International revenues for the three and nine months ended MarchSeptember 27, 2020, respectively, and a $1.1 million and $4.1 million unfavorable impact for the three and nine months ended September 29, 2020 and March 31, 2019, respectively. Foreign currency exchange rate fluctuations had no significantan unfavorable impact on income (loss) before income taxes of approximately $120,000 and $1.1 million for the three and nine months ended March 29,September 27, 2020, and March 31,an unfavorable impact on income before income taxes of approximately $250,000 and $1.2 million for the three and nine months ended September 29, 2019.
Commodity Price Risk
In the ordinary course of business, the food and paper products we purchase, including cheese (our largest individual food cost item), are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our 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 remain exposed to on-going commodity volatility.
The following table presents the actual average block price for cheese by quarter through the firstthird quarter of 2020 and the projected average block price for cheese by quarter through 2020 (based on the April 28,October 30, 2020 Chicago Mercantile Exchange cheese futures market prices):
| | | | | | | | | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | ||||
| | Projected | | Actual | | Projected | | Actual | ||||
|
| Block Price |
| Block Price |
| Block Price |
| Block Price | ||||
| | | | | | | | | | | | |
Quarter 1 |
| $ | 1.857 |
| $ | 1.490 |
| $ | 1.857 |
| $ | 1.490 |
Quarter 2 | |
| 1.375 | |
| 1.696 | |
| 1.679 | |
| 1.696 |
Quarter 3 | |
| 1.544 | |
| 1.898 | |
| 2.262 | |
| 1.898 |
Quarter 4 | |
| 1.652 | |
| 1.984 | |
| 2.408 | |
| 1.984 |
Full Year |
| $ | 1.607 | * | $ | 1.767 |
| $ | 2.052 | * | $ | 1.767 |
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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.
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Item 4. Controls and Procedures.
Under the supervision and with the participation of the Company’s management, including its chief executive officer and interim principalchief financial and accounting 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 interim principalchief financial and accounting officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
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(e) and 15d-15(e) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in a number of lawsuits, claims, investigations and proceedings consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with Financial Accounting Standards Board Accounting Standards Codification 450, “Contingencies”, the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s Condensed Consolidated Financial Statements.condensed 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. The legal proceedings described in Note 9 of “Notes to the Condensed Consolidated Financial Statements” are incorporated herein by reference.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019:
We are subject to2019, as supplemented by the risks related to pandemic outbreaks, including COVID-19, which may have a material adverse effectrisk factors disclosed in the Company’s Quarterly Report on our business, financial condition or results of operations.Form 10-Q for the quarter ended March 29, 2020.
WeOur reorganization activities will increase our expenses, may not be successful, and may adversely impact employee hiring and retention.
On September 17, 2020, we announced plans to open a new headquarters in Atlanta, Georgia as part of a broader strategic reorganization with certain corporate functions being relocated to the new Atlanta headquarters. As a result, we expect to incur certain one-time corporate reorganization costs and these expenses will adversely impact our results of operations during the relevant periods and will reduce our cash position. Additionally, the amount of these estimated expenses, as well as our ability to achieve the anticipated benefits of our corporate reorganization, are subject to assumptions and uncertainties. If we do not realize the risks related to the outbreak of the coronavirus (COVID-19), which was recognized by the World Health Organization on March 11, 2020 as a global pandemic. In response, governmentsanticipated benefits from these measures, or if we incur costs greater than anticipated, our financial condition and other authorities around the world have imposed measures to attempt to control the spread of COVID-19, includingoperating results may be adversely affected.
restrictions on freedom of movement and business operations such as travel bans, social distancing requirements, including limitations on gatherings, shelter-in-place orders and quarantines, and mandated business closures, which have resulted in significant changes in commercial activity and consumer behavior.
In addition, the pandemic has had, and is expected to continue to have, significant adverse impacts on economic and market conditions and has resultedturnover in global economic contraction and rising unemployment. As millions of cases have been confirmed, including in China, Europe, and the U.S., we expect COVID-19 to interfere with general commercial activity relatedour corporate office support teams due to our customer base, whichrelocation to Georgia could havedistract our employees, decrease employee morale, harm our reputation, and negatively impact the overall performance of our corporate support teams. As a material adverse effect onresult of these or other similar risks, our business, financial condition, or results of operations in future periods. To the extent that COVID-19 continues or worsens, restrictions imposed by governments may not be lifted, or additional restrictionsand financial condition may be imposed. As a result, businesses such as our restaurants or Quality Control Centers may be required to shut down, our employees may be prohibited from working, and our supply chains may be interrupted. It may be challenging to obtain and process ingredients and raw materials to support our business needs, and individuals could become ill, quarantined or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations or taxes which could adversely impact our business, financial condition or results of operations. Further, if our customers’ economic conditions are similarly affected, they might delay or reduce purchases from us, which could adversely affect our business, financial condition or results of operations. If a significant number of our restaurants are required to close,affected.
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or if our sales decline precipitously as a result of the outbreak, then we may be required to incur additional debt or take other actions to finance our operations on terms that may not be favorable to us if available at all.
The potential effects of COVID-19 also could include heightening many of the risks discussed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 29, 2019, including, but not limited to our profitability; ability to meet consumer demand through the continued availably of our workforce; laws and regulations affecting our business; increased cyber risks and reliance on technology infrastructure to support our business and operations, including through remote-work protocols due to COVID-19; fluctuations in foreign currency markets; the availability of future borrowings; the costs of current and future borrowings; credit risks of our customers and counterparties; our business transformation initiative; and impairment of long-lived assets, the carrying value of goodwill or other indefinite-lived intangible assets. However, given the evolving health, economic, social, and governmental environments, the specific impact that COVID-19 could have on these risks remains uncertain.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the fiscal quarter ended March 29,September 27, 2020, the Company acquired approximately 23,5421,020 shares of its common stock from employees to satisfy minimum tax withholding obligations that arose upon (i) vesting of restricted stock granted pursuant to approved plans and (ii) distribution of shares of common stock issued pursuant to deferred compensation obligations.
Item 6. Exhibits
Exhibit | | |
Number |
| Description |
| | |
10.1 | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
101 | | Financial statements from the quarterly report on Form 10-Q of Papa John’s International, Inc. for the quarter ended |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| PAPA JOHN’S INTERNATIONAL, INC. |
| | (Registrant) |
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Date: | | /s/ |
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