Market Overview

NPC International, Inc. Reports Third Quarter 2012 Results

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OVERLAND PARK, Kan.--(BUSINESS WIRE)--

NPC International, Inc. (the “Company”), today reported results for its third fiscal quarter ended September 25, 2012.

THIRD QUARTER HIGHLIGHTS:

  • Comparable store sales increased 1.3% rolling over an increase of 0.4% last year.
  • Adjusted EBITDA (reconciliation attached) of $26.6MM was $5.1MM or 24% greater than last year.
  • Adjusted EBITDA margins expanded 150 basis points over last year.
  • Net income of $2.4MM was $1.1MM below last year.

YEAR-TO-DATE RESULTS:

  • Comparable store sales increased 3.9% rolling over a decrease of (2.5)% last year.
  • Adjusted EBITDA (reconciliation attached) of $99.7MM was $21.1MM or 27% greater than last year.
  • Adjusted EBITDA margins expanded 190 basis points over last year.
  • Cash balances increased $20.4MM from our opening balance sheet, despite investing $19.4MM in the acquisition of 36 units and $4.9MM refinancing our term loan.
  • Net income of $14.4MM was $3.8MM below last year.
  • Our leverage ratio was 3.74X Consolidated EBITDA, net of allowable cash balances of $30.0MM, compared to pro-forma leverage of 4.85X at the closing of the transaction on December 28, 2011.

NPC's President and CEO Jim Schwartz said, “We are pleased to report a 24% increase in our third quarter Adjusted EBITDA on the strength of continued sales growth and continued margin expansion, which was fueled by our margin management initiatives and a softening commodities environment.

The brand continued to promote compelling value this quarter with our $10 Any Pizza promotion while also bringing innovation to the category with the introduction of Garlic Bread Pizza. Our strategy of core value, unique product bundling and product innovation continues to resonate well with the consumer.

Our Delco Lite growth initiative gained significant traction this quarter with the opening of 15 Delco Lites. We have opened 27 Delco Lites this fiscal year-to-date, and 11 since quarter end for a total of 38 opened to date. We expect to comfortably exceed our target of 40 new Delco Lites this year; accordingly, we are turning our attention to next year's growth plan. Importantly, these new locations continue to deliver results that are well in line with our return expectations and, as a result, we are enthusiastically targeting another 40 new units in fiscal 2013.

Our strong fiscal 2012 results and cash flows have allowed us to de-leverage our business by more than one full turn of EBITDA resulting in significant financial flexibility. This increased flexibility affords the opportunity to comfortably pursue our aggressive growth plans.

We look forward to closing this year with solid momentum as we start to look towards fiscal 2013 with a strong focus on excellent operations, organic top line growth, and high return investments.”

The Company is a wholly-owned subsidiary of NPC Restaurant Holdings, LLC ("Parent", formerly NPC Acquisition Holdings, LLC), which has guaranteed the Company's 10.50% Senior Notes due 2020. As a result of its guaranty, Parent is required to file reports with the Securities and Exchange Commission which include consolidated financial statements of Parent and its subsidiaries (including the Company). Parent's only material asset is all of the stock of the Company. The quarterly financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for Parent and the Company on a consolidated basis are set forth in Parent's Form 10-Q for the fiscal quarter ended September 25, 2012 which can be accessed at www.sec.gov.

CONFERENCE CALL INFORMATION:

The Company's third quarter earnings conference call will be held Tuesday, November 6, 2012 at 9:00 am CT (10:00 ET). You can access this call by dialing 866-314-5232. The international number is 617-213-8052. The access code for the call is 75258959.

For those unable to participate live, a replay of the call will be available until November 13, 2012 by dialing 888-286-8010 or by dialing international at 617-801-6888. The access code for the replay is 74077880.

A replay of the call will also be available at the Company's website at www.npcinternational.com.

NPC International, Inc. is the world's largest Pizza Hut franchisee and currently operates 1,222 Pizza Hut restaurants and delivery units in 28 states.

For more complete information regarding the Company's financial position and results of operations, investors are encouraged to review the Parent's quarterly financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated into the Parent's Form 10-Q which can be accessed at www.sec.gov.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

Certain statements contained in this news release that do not relate to historical or current facts constitute forward-looking statements. These include statements regarding our plans and expectations. Forward-looking statements are subject to inherent risks and uncertainties and there can be no assurance that such statements will prove to be correct. Actual results may vary materially from those anticipated in such forward-looking statements as a result of a number of factors, including lower than anticipated consumer discretionary spending; deterioration in general economic conditions; competition in the quick service restaurant market; adverse changes in food, labor and other costs; price inflation or deflation; and other factors. These risks and other risks are described in Parent's and NPC's filings with the Securities and Exchange Commission, including Parent's and NPC's Post Effective Amendment No. 1 to Form S-4 Registration Statement, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Copies of these filings may be obtained by contacting NPC. All forward-looking statements made in this news release are made as of the date hereof. NPC does not intend to update these forward-looking statements and undertakes no duty to any person to provide any such update under any circumstances. Investors are cautioned not to place undue reliance on any forward-looking statements.

           

NPC INTERNATIONAL, INC.

Consolidated Statements of Income

(Dollars in thousands)

(Unaudited)

 
13 Weeks Ended
Sept. 25, 2012 Sept. 27, 2011
   
Net product sales (1) $ 243,533 100.0 % $ 228,021 100.0 %
Fees and other income (2)   12,700   5.2 %   9,830   4.3 %
Total sales   256,233   105.2 %   237,851   104.3 %

Comparable store sales (net product sales only)

1.3 % 0.4 %
 
Cost of sales (3) 70,408 28.9 % 70,695 31.0 %
Direct labor (4) 73,244 30.1 % 66,841 29.3 %
Other restaurant operating expenses (5) 81,099 33.3 % 74,113 32.5 %
General and administrative expenses (6) 14,320 5.9 % 13,102 5.7 %
Corporate depreciation and amortization of intangibles 4,488 1.8 % 3,078 1.3 %
Other   6   0.0 %   902   0.5 %
Total costs and expenses   243,565   100.0 %   228,731   100.3 %
Operating income 12,668 5.2 % 9,120 4.0 %
Interest expense (7)   11,416   4.7 %   6,131   2.7 %
Income before income taxes 1,252 0.5 % 2,989 1.3 %
Income tax benefit   (1,126 ) -0.5 %   (480 ) -0.2 %
 
Net income $ 2,378   1.0 % $ 3,469   1.5 %
 
Percentages are shown as a percent of net product sales.
                         
Capital Expenditures $ 12,464 $ 9,036
Cash Rent Expense     $ 13,001             $ 12,506        
(1)   Net product sales increased 6.8% due to a 1.3% increase in comparable store sales and a 5.3% increase in equivalent units.
(2)

Fees and other income increased 29.2% due to higher delivery charge income from increased delivery transactions, customer delivery charge increases and increased equivalent units.

(3) Cost of sales, as a percentage of net product sales, decreased primarily due to savings from the margin management initiative and lower commodity costs partially offset by product mix changes associated with the $10 Any Pizza promotion.
(4) Direct labor, as a percentage of net product sales, increased largely due to increased delivery transactions, which are more labor intensive, and to a lesser extent lower net selling prices.
(5) Other restaurant operating expenses, as a percentage of net product sales, increased largely due to higher delivery driver reimbursement expense, increased depreciation expense and higher restaurant manager bonus expense partially offset by the sales leveraging effect on fixed and semi-fixed costs, primarily occupancy costs, the benefit of the 2012 development incentives from Pizza Hut, Inc. and lower advertising expenses.
(6) General and administrative expenses increased largely due to higher incentive compensation and salaries expense.
(7) Interest expense increased primarily due to higher average debt levels and interest rates as a result of the acquisition of our Company by Olympus Partners on December 28, 2011.
 

Note: The explanations above are abbreviated disclosures. For complete disclosure see Management's Discussion and Analysis of Financial Condition and Results of Operations in our Parent's Form 10-Q filed with the SEC.

           

NPC INTERNATIONAL, INC.

Consolidated Statements of Income

(Dollars in thousands)

(Unaudited)

 
39 Weeks Ended
Sept. 25, 2012 Sept. 27, 2011
   
Net product sales (1) $ 753,148 100.0 % $ 695,727 100.0 %
Fees and other income (2)   37,060   4.9 %   31,875   4.6 %
Total sales   790,208   104.9 %   727,602   104.6 %
Comparable store sales (net product sales only) 3.9 % -2.5 %
 
Cost of sales (3) 216,660 28.8 % 209,248 30.1 %
Direct labor (4) 220,459 29.3 % 204,298 29.4 %
Other restaurant operating expenses (5) 238,033 31.6 % 222,090 31.9 %
General and administrative expenses (6) 43,158 5.7 % 39,420 5.7 %
Corporate depreciation and amortization of intangibles 13,123 1.7 % 8,978 1.3 %
Other   509   0.1 %   1,530   0.2 %
Total costs and expenses   731,942   97.2 %   685,564   98.6 %
Operating income 58,266 7.7 % 42,038 6.0 %
Other expense:
Interest expense (7) 35,797 4.8 % 19,075 2.7 %
Loss on debt extinguishment (8)   5,144   0.6 %   -   0.0 %
Income before income taxes 17,325 2.3 % 22,963 3.3 %
Income tax expense   2,953   0.4 %   4,838   0.7 %
 
Net income $ 14,372   1.9 % $ 18,125   2.6 %
 
Percentages are shown as a percent of net product sales.
                         
Capital Expenditures $ 28,504 $ 17,763
Cash Rent Expense     $ 38,857             $ 37,854        
(1)   Net product sales increased 8.3% due to a 3.9% increase in comparable store sales and a 4.2% increase in equivalent units.
(2)

Fees and other income increased 16.3% due to higher delivery charge income from increased delivery transactions, increased equivalent units and customer delivery charge increases.

(3)

Cost of sales, as a percentage of net product sales, decreased primarily due to savings from the margin management initiative and lower commodity costs partially offset by product mix changes associated with the $10 Any Pizza promotion and value bundling.

(4)

Direct labor, as a percentage of net product sales, decreased largely due to the benefit of the sales leveraging effect on fixed labor costs partially offset by an increase in delivery transactions, which are more labor intensive.

(5) Other restaurant operating expenses, as a percentage of net product sales, decreased largely due to the sales leveraging effect on fixed and semi-fixed costs, primarily occupancy costs, the benefit of the 2012 development incentives from Pizza Hut, Inc., and lower advertising expenses, partially offset by increased depreciation, higher restaurant manager bonus expense and increased delivery driver reimbursement expense.
(6) General and administrative expenses increased largely due to higher incentive compensation and salaries expense, increased credit card transaction fees and costs associated with our enterprise resource planning system implementation.
(7) Interest expense increased primarily due to higher average debt levels and interest rates as a result of the acquisition of our Company by Olympus Partners on December 28, 2011.
(8) Loss on debt extinguishment related to the refinancing of the Company's term loan.
 

Note: The explanations above are abbreviated disclosures. For complete disclosure see Management's Discussion and Analysis of Financial Condition and Results of Operations in our Parent's Form 10-Q filed with the SEC.

         

NPC INTERNATIONAL, INC.

Condensed Consolidated Balance Sheets

(Dollars in thousands)

(Unaudited)

 
September 25, 2012 December 27, 2011
Assets
Current assets:
Cash and cash equivalents $ 32,358 $ 78,394
Other current assets   26,804   35,105
Total current assets 59,162 113,499
 
Facilities and equipment, net 142,672 131,744
Franchise rights, net 626,371 390,110
Other noncurrent assets   340,269   213,375
Total assets $ 1,168,474 $ 848,728
Liabilities and Stockholders' Equity
Current liabilities:
Other current liabilities $ 96,802 $ 102,852
Current portion of debt   3,750   13,540
Total current liabilities 100,552 116,392
 
Long-term debt, less current portion 560,313 359,160
Other noncurrent liabilities   272,984   171,716
Total liabilities 933,849 647,268
Stockholders' equity   234,625   201,460
Total liabilities and stockholders' equity $ 1,168,474 $ 848,728
 
         

NPC INTERNATIONAL, INC.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 
39 Weeks Ended
Sept. 25, 2012 Sept. 27, 2011
Operating activities
Net income $ 14,372 $ 18,125
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 41,654 33,991
Amortization of debt issuance costs 3,072 1,905
Deferred income taxes 2,545 2,897
Loss on debt extinguishment 5,144 -
Debt extinguishment costs (1,702 ) -
Other 25 828
Changes in assets and liabilities, excluding acquisitions:
Assets 1,482 1,075
Liabilities   (9,758 )   9,608  
Net cash provided by operating activities   56,834     68,429  
Investing activities
Capital expenditures (28,504 ) (17,763 )
Purchase of the stock of the Company (431,540 ) -
Purchase of business assets, net of cash acquired (19,371 ) -
Proceeds from sale or disposition of assets   189     647  
Net cash used in investing activities   (479,226 )   (17,116 )
Financing activities
Payments on term bank facilities (937 ) (29,670 )
Borrowings under revolving credit facility 14,900 -
Payments under revolving credit facility (14,900 ) -
Proceeds from equity contribution, net of costs of $18,735 216,635 -
Retirement of predecessor entity debt (372,700 ) -
Issuance of debt 565,000 -
Debt issuance costs (32,012 ) -
Interest rate derivative (636 ) -
Proceeds from sale-leaseback transactions   1,006     486  
Net cash provided by (used in) financing activities   376,356     (29,184 )
Net change in cash and cash equivalents (46,036 ) 22,129
Beginning cash and cash equivalents   78,394     44,159  
Ending cash and cash equivalents $ 32,358   $ 66,288  
 
               

 

NPC INTERNATIONAL, INC.

Reconciliation of Non-GAAP Financial Measures

(in thousands)

(Unaudited)

 
13 Weeks Ended 39 Weeks Ended
Sept. 25, 2012 Sept. 27, 2011 Sept. 25, 2012   Sept. 27, 2011
Adjusted EBITDA:
Net income $ 2,378 $ 3,469 $ 14,372 $ 18,125
Adjustments:
Interest expense 11,416 6,131 35,797 19,075
Income tax (benefit) expense (1,126 ) (480 ) 2,953 4,838
Depreciation and amortization 14,455 11,124 41,654 33,991
Loss on debt extinguishment - - 5,144 -
Transaction costs 112 791 590 791
Net facility impairment charges 30 - 85 710
Development incentives (1,040 ) - (2,080 ) -
Pre-opening expenses and other   423     499     1,171     1,055  
Adjusted EBITDA (1) $ 26,648   $ 21,534   $ 99,686   $ 78,585  
Adjusted EBITDA Margin(2) 10.9 % 9.4 % 13.2 % 11.3 %
 
Free Cash Flow:
Net cash provided by operating activities $ 3,674 $ 23,701 $ 56,834 $ 68,429
Adjustments:
Predecessor transaction expenses - - 16,019 -
Capital expenditures   (12,464 )   (9,036 )   (28,504 )   (17,763 )
Free Cash Flow (3) $ (8,790 ) $ 14,665   $ 44,349   $ 50,666  
 
         

Unit Count Activity

 
39 Weeks Ended
Sept. 25, 2012 Sept. 27, 2011
 
Beginning of period 1,151 1,136
Acquired 36 -
Developed 27 19
Closed (3) (2)
End of period 1,211 1,153
 
Equivalent units(4) 1,185 1,136

(1) The Company defines Adjusted EBITDA as consolidated net income plus interest, income taxes, depreciation and amortization, facility impairment charges, and pre-opening expenses, further adjusted to exclude unusual litigation expenses (before indemnification offset), the development incentives from Pizza Hut, Inc., the loss on debt extinguishment relating to the refinancing of the Company's indebtedness and expenses related to the acquisition of the Company by an entity controlled by Olympus Growth Fund V, L.P. and certain of its affiliates (“Olympus”). The Company incurred substantial transaction costs in 2011 in connection with the sale of the Company to Olympus on the first day of fiscal 2012 and had substantial interest expense relating to the financing of the acquisition of the Company in 2011 and substantial depreciation and amortization expense relating to the acquisition of the Company in 2011 and to the Company's acquisition of units in recent years. Management believes that the elimination of the above items gives management and investors useful information to compare the performance of our core operations over different periods and to compare our operating performance with the performance of other companies that have different financing and capital structures or tax rates. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation from, or as a substitute for analysis of, the Company's financial information reported under generally accepted accounting principles. Adjusted EBITDA, as defined above, may not be similar to EBITDA measures of other companies.

(2) Calculated as a percentage of net product sales.

(3) The Company defines Adjusted Free Cash Flow as cash flows from operations plus non-recurring predecessor transaction expenses paid from proceeds from the sale of the Company less capital expenditures. Management believes that the free cash flow measure is important to investors to provide a measure of how much cash flow is available, after current changes in working capital and acquisition of property and equipment, to be used for working capital needs or for strategic opportunities, including servicing debt, making acquisitions, and making investments in the business. It should not be inferred that the entire Adjusted Free Cash Flow amount is available for discretionary expenditures.

(4) Equivalent units represent the number of units open at the beginning of a given period, adjusted for units opened, closed, acquired or sold during the period on a weighted average basis.

NPC International, Inc.
Troy D. Cook, 913-327-3109
Executive Vice President-Finance & Chief Financial Officer

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