Market Overview

Papa John's Announces Second Quarter 2018 Results and Updates 2018 Outlook

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Papa John's International, Inc. (NASDAQ:PZZA) today announced
financial results for the three and six months ended July 1, 2018.

Highlights

  • Earnings per diluted share of $0.36 and adjusted earnings per
    diluted share of $0.49 in the second quarter of 2018, excluding the
    impact of China refranchising; adjusted earnings per diluted share
    down 24.6% from the second quarter 2017 of $0.65
  • System-wide North America comparable sales decrease of 6.1%
  • International comparable sales decrease of 0.8%; total
    international sales increase of 12.2%, driven by unit growth
  • 35 net unit openings in second quarter of 2018 driven by
    international operations
  • Company completed the refranchising of 34 company-owned restaurants
    in China during Q2
  • Cash flow from operations of $74.2 million; free cash flow of $52.6
    million for the first six months of 2018
  • 2018 outlook revised downward including lowered adjusted EPS range
    of $1.30 to $1.80 as a result of negative sales trends

"Earlier this year, we began implementing key changes in how we operate
and market our products to refocus on quality and better connect with
customers," said Steve Ritchie, President and CEO of Papa John's. "While
results have been challenged by recent events, we are committed to these
strategic priorities and continue to believe that they will lead to
enhanced performance. We have also begun an external audit of Papa
John's culture and will address any improvements that are recommended at
its conclusion. Our entire leadership team understands the importance of
getting our culture and business improvements right. We have important
work ahead of us, and I feel certain that with the collective efforts of
our 120,000 corporate and franchise team members that the best days for
Papa John's are ahead."

Operating Highlights

   

(In thousands, except per share amounts)

 
Three Months Ended Six Months Ended

July 1,

2018

 

June 25,

2017

 

Increase /

(Decrease)

%

 

July 1,

2018

 

June 25,

2017

 

Increase /

(Decrease)

%

 
Total revenue $ 407,959 $ 434,778 (6.2 %) $ 835,328 $ 884,044 (5.5 %)
Income before income taxes 19,705 35,458 (44.4 %) 42,067 77,329 (45.6 %)
Net income 11,791 23,538 (49.9 %) 28,528 51,966 (45.1 %)
Diluted EPS $ 0.36 $ 0.65 (44.6 %) $ 0.86 $ 1.42 (39.4 %)
Diluted EPS, adjusted $ 0.49 $ 0.65 (24.6 %) $ 0.98 $ 1.42 (31.0 %)
 

All operating highlights are compared to the same period of the prior
year, unless otherwise noted.

Adjusted financial results excluding Special items, which impact
comparability, are summarized in the following reconciliation. The table
reconciles our GAAP financial results to our adjusted financial results,
which are non-GAAP measures. All highlights are compared to the same
period of the prior year, unless otherwise noted.

  Three Months Ended     Six Months Ended
Jul. 1,   Jun. 25, Jul. 1,   Jun. 25,
(In thousands, except per share amounts) 2018 2017 2018 2017
 
GAAP Income before income taxes $ 19,705

 

$ 35,458 $ 42,067 $ 77,329
Special items:
Refranchising losses, net   2,122

 

  -   1,918   -
Adjusted income before income taxes $ 21,827

 

$ 35,458 $ 43,985 $ 77,329
 
GAAP Net income $ 11,791 $ 23,538 $ 28,528 $ 51,966
Special items:
Refranchising losses, net (1) 1,647 - 1,488 -
Tax impact of China refranchising   2,435   -   2,435   -
Adjusted net income $ 15,873 $ 23,538 $ 32,451 $ 51,966
 
GAAP Diluted earnings per share $ 0.36 $ 0.65 $ 0.86 $ 1.42
Special items:
Refranchising losses, net 0.05 - 0.05 -
Tax impact of China refranchising   0.08   -   0.07   -
Adjusted diluted earnings per share $ 0.49 $ 0.65 $ 0.98 $ 1.42
 
(1) Tax effect was calculated using the company's marginal rate of
22.4%.
 

On June 15, 2018, we refranchised our China operations including our 34
company-owned restaurants and the quality control center. The
refranchising losses, net of tax, of $1.6 million for the second quarter
of 2018 and $1.5 million for the six months ended July 1, 2018 are
primarily driven by this China refranchise. We also had $2.4 million of
additional tax expense associated with the China refranchise. This
additional tax expense is primarily attributable to the required
recapture of operating losses previously taken by Papa John's
International.

The non-GAAP adjusted results shown above 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 the financial
information excluding these Special items is important for purposes of
comparison to prior year results. In addition, management uses these
metrics to evaluate the company's underlying operating performance, to
analyze trends, and to determine compensation.

Consolidated revenues decreased $26.8 million, or 6.2%, for the second
quarter of 2018 and decreased $48.7 million, or 5.5%, for the six months
ended July 1, 2018. These decreases were primarily due to lower
comparable sales for North America restaurants that resulted in lower
company-owned restaurant revenues, lower royalties and decreased North
America commissary sales. These decreases were somewhat offset by higher
International revenues due to an increase in equivalent units and the
favorable impact of foreign exchange rates and the impact of higher
commodity prices on North America commissary revenues. Additionally,
2018 included an increase in revenues of approximately $1.8 million and
$4.3 million for the quarter and six months ended July 1, 2018,
respectively, primarily due to the required reporting of franchise
marketing fund contributions as revenues (previously netted with
expenses) under the newly adopted revenue recognition standard, Revenue
from Contracts with Customers
("Topic 606"); see the "Revenue
Recognition and Income Statement Presentation" section below for more
details.

Consolidated income before income taxes of $19.7 million for the second
quarter of 2018 decreased $15.8 million, or 44.4%, compared to the
second quarter of 2017. Income before income taxes, as a percentage of
consolidated revenues, was 4.8% for the second quarter of 2018, as
compared to 8.2% for the second quarter of 2017. The $15.8 million
decrease was primarily driven by lower North America revenues as
explained above, higher restaurant operating costs, higher interest
expense and a loss on the sale of our China operations. Significant
changes in the components of income before income taxes are as follows:

  • Domestic Company-owned restaurants operating margin decreased $6.7
    million, or 1.4% as a percentage of related revenues, primarily due to
    lower comparable sales of 7.2% and increased operating costs including
    higher commodities and minimum wages as well as increased non-owned
    automobile costs. Additionally, the adoption of Topic 606 reduced the
    restaurant operating margin due to the revised method of accounting
    for the customer loyalty program.
  • North America franchise royalties and fees decreased $2.7 million, or
    10.1% as compared to the second quarter of 2017, primarily due to
    lower comparable sales of 5.7% and an increase in franchise royalty
    waivers.
  • North America commissary operating margin decreased $400,000, and
    remained flat as a percentage of related revenues, primarily due to
    lower sales volumes.
  • International operating margin increased $800,000, or 0.6% as a
    percentage of related revenues, primarily due to higher royalties from
    increased equivalent units and higher income from the United Kingdom
    Quality Control Center.
  • Other operating margin decreased $1.2 million, or 6.3%, primarily due
    to higher costs related to various technology initiatives and
    increased advertising spend in the United Kingdom. The "Revenue
    Recognition and Income Statement Presentation" section below provides
    more information on our "Other revenues" and "Other expenses" income
    statement line items.
  • General and administrative ("G&A") costs decreased $1.5 million, or
    3.8%, primarily due to lower management incentive and benefit costs as
    well as a shift in the timing of the annual operators' conference to
    the third quarter of 2018. These cost decreases were partially offset
    by an increase in various technology initiative costs and higher bad
    debt expenses.
  • Refranchising losses of $2.1 million were incurred in the second
    quarter of 2018 primarily related to the refranchising of China, as
    previously discussed.
  • Net interest expense increased $3.9 million for the second quarter due
    to an increase in average outstanding debt, which is primarily due to
    share repurchases, as well as higher interest rates.

For the six months ended July 1, 2018 consolidated income before income
taxes was $42.1 million, a decrease of $35.3 million, or 45.6%, compared
to the six months ended June 25, 2017. Income before income taxes, as a
percentage of consolidated revenues, was 5.0% for the six months ended
July 1, 2018 compared to 8.7% for the six months ended June 25, 2017.
These decreases were primarily due to the same reasons noted above for
the three-month period. In addition, for the six months ended July 1,
2018, G&A expenses increased $1.8 million, or 2.3%, primarily due to an
increase in various technology initiative costs and higher bad debt
expenses and legal fees.

Operating margin is not a measurement defined by GAAP and should not be
considered in isolation, or as an alternative to evaluation of the
company's financial performance. In addition to an evaluation of GAAP
consolidated income before income taxes, we believe the presentation of
operating margin is beneficial as it represents an additional measure
used by the company to further evaluate operating efficiency and
performance of the various business units. Additionally, operating
margin discussion may be helpful for comparison within the industry. The
operating margin results detailed herein can be calculated by business
unit based on the specific revenue and operating expense line items on
the face of the Condensed Consolidated Income Statement. Consolidated
income before income taxes reported includes G&A expenses, depreciation
and amortization, refranchising losses and net interest expense that
have been excluded from this operating margin calculation.

The effective income tax rates were 35.7% and 28.6% for the three and
six months ended July 1, 2018, respectively, representing an increase of
6.2% and a decrease of 0.5%, respectively, from the prior year
comparable periods. The increase for the three months ended July 1, 2018
was due the impact of the China refranchising, as previously discussed.
Excluding the China refranchising impact of 12.4% and 5.8%, the
effective income tax rates were 23.4% and 22.8% for the three and six
months ended July 1, 2018, respectively.

Diluted earnings per share decreased 44.6% to $0.36 for the second
quarter of 2018 and decreased 39.4% to $0.86 for the six months ended
July 1, 2018. Adjusted diluted earnings per share decreased 24.6% to
$0.49 for the second quarter of 2018 and 31.0% to $0.98 for the six
months ended.

Global Restaurant and Comparable Sales
Information

  Three Months Ended   Six Months Ended

July 1,

2018

 

June 25,

2017

July 1,

2018

 

June 25,

2017

 
Global restaurant sales (decline) / growth (a) (2.3%) 4.1% (1.8%) 4.5%
 

Global restaurant sales growth, excluding the impact of foreign
currency (a)

2.3% 5.1% 0.6% 5.3%
 
Comparable sales (decline) / growth (b)
Domestic company-owned restaurants (7.2%) 2.3% (6.7%) 2.7%
North America franchised restaurants (5.7%) 1.1% (5.3%) 1.4%
System-wide North America restaurants (6.1%) 1.4% (5.7%) 1.7%
 
System-wide international restaurants (0.8%) 3.9% (0.3%) 4.9%
 
(a) Includes both company-owned and franchised restaurant sales.
 
(b) Represents the change in year-over-year sales for the same base of
restaurants for the same fiscal periods. Comparable sales results
for restaurants operating outside of the United States are reported
on a constant dollar basis, which excludes the impact of foreign
currency translation.
 

We believe North America, international and global restaurant and
comparable sales growth information, as defined in the table above, is
useful in analyzing our results since our franchisees pay royalties that
are based on a percentage of franchise sales. Franchise sales also
generate commissary revenue in the United States and in certain
international markets. Franchise restaurant and comparable sales growth
information is also useful for comparison to industry trends and
evaluating the strength of our brand. Management believes the
presentation of franchise restaurant sales growth, excluding the impact
of foreign currency, provides investors with useful information
regarding underlying sales trends and the impact of new unit growth
without being impacted by swings in the external factor of foreign
currency. Franchise restaurant sales are not included in company
revenues.

Free Cash Flow

The company's free cash flow, a non-GAAP financial measure, was as
follows for the first six months of 2018 and 2017 (in thousands):

  Six Months Ended
July 1,   June 25,
2018 2017
 
Net cash provided by operating activities (a) $ 74,201 $ 77,863
Purchases of property and equipment (b)   (21,562 )   (30,457 )
Free cash flow $ 52,639   $ 47,406  
 
(a) The decrease of $3.7 million was primarily due to lower net income
somewhat offset by favorable changes in working capital items.
(b) The decrease of $8.9 million was primarily due to higher capital
expenditures in 2017 related to the construction of the company's
new domestic commissary in Georgia, which opened in the third
quarter of 2017.
 

We define free cash flow as net cash provided by operating activities
(from the Consolidated Statements of Cash Flows) less the amounts spent
on the purchase of property and equipment. 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 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 the company's liquidity than the company's GAAP measures.

See the Management's Discussion and Analysis of Financial Condition and
Results of Operations section of our Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission (SEC) for additional
information concerning our operating results for the three and six
months ended July 1, 2018 and cash flow for the six months ended July 1,
2018.

Global Restaurant Unit Data

At July 1, 2018, there were 5,247 Papa John's restaurants operating in
all 50 states and in 46 international countries and territories, as
follows:

 

Domestic

Company-

owned

 

Franchised

North

America

 

Total North

America

  International   System-wide

Second Quarter

       
Beginning - April 1, 2018 679 2,745 3,424 1,788 5,212
Opened 1 26 27 61 88
Closed (2 ) (42 ) (44 ) (9 ) (53 )
Acquired - - - 34 34
Sold -     -     -     (34 )   (34 )
Ending - July 1, 2018 678     2,729     3,407     1,840     5,247  
 

Year-to-date

Beginning - December 31, 2017 708 2,733 3,441 1,758 5,199
Opened 5 44 49 114 163
Closed (4 ) (79 ) (83 ) (32 ) (115 )
Acquired - 31 31 34 65
Sold (31 )   -     (31 )   (34 )   (65 )
Ending - July 1, 2018 678     2,729     3,407     1,840     5,247  
 
Unit growth (decline) (30 )   (4 )   (34 )   82     48  
 
% increase (decrease) (4.2 %)   (0.1 %)   (1.0 %)   4.7 %   0.9 %
 

The company has added 159 net worldwide units over the trailing four
quarters ended July 1, 2018. Our development pipeline as of July 1, 2018
included approximately 1,210 restaurants (140 units in North America and
1,070 units internationally), the majority of which are scheduled to
open over the next six years.

Share Repurchase Activity

The following table reflects our share repurchases for the three and six
months ended July 1, 2018 and subsequent repurchases through July 31,
2018 (in thousands):

Period      

Number

of Shares

      Cost
           
Three months ended July 1, 2018 490 $ 28,440
Six months ended July 1, 2018 2,491 148,390
July 2, 2018 through July 31, 2018 134 6,518
 

There were 32.2 million and 32.9 million diluted weighted average shares
outstanding for the three and six months ended July 1, 2018,
respectively, representing decreases of 13.6% and 11.9% over the prior
year comparable periods. Approximately 31.5 million actual shares of the
company's common stock were outstanding as of July 1, 2018.

As previously disclosed, on March 1, 2018 we announced a $100 million
accelerated share repurchase agreement ("ASR Agreement") with Bank of
America, N.A. ("BofAML"). Pursuant to the terms of the ASR Agreement, we
paid BofAML $100 million in cash. On March 6, 2018, we received an
initial delivery of approximately 1.3 million shares of common stock for
$78.0 million or 78% of the total ASR Agreement. The remaining $22.0
million of the ASR Agreement was completed May 14, 2018, delivering
approximately 400,000 additional shares. Under the completed ASR
Agreement, approximately 1.7 million shares were repurchased for $100.0
million.

The company does not expect to repurchase any more shares in 2018 after
the current trading plan expires in early August.

Cash Dividend

We paid a cash dividend of approximately $7.2 million ($0.225 per common
share) during the second quarter of 2018. Subsequent to the second
quarter, on August 1, 2018, our Board of Directors declared a third
quarter dividend of $0.225 per common share (approximately $7.2 million
based on current shareholders of record). The dividend will be paid on
August 24, 2018 to shareholders of record as of the close of business on
August 13, 2018. The declaration and payment of any future dividends
will be at the discretion of our Board of Directors, subject to the
company's financial results, cash requirements, and other factors deemed
relevant by our Board of Directors.

Revenue Recognition and Income Statement
Presentation

On January 1, 2018, we adopted the new revenue recognition standard
using the modified retrospective method. Under the modified
retrospective method, prior period results were not restated to reflect
the impact of Topic 606, resulting in reduced comparability between 2018
and 2017 operating results. The impact of adoption includes the
following:

 
(in thousands, except for per share amounts)
 
  Three Months Ended   Six Months Ended
July 1, 2018   July 1, 2018
 
Total revenue impact (a) $ 1,814 $ 4,250
Pre-tax income impact (b) (1,375 ) (1,860 )
Diluted EPS (0.03 ) (0.04 )
(a) The increase in total revenues of $1.8 million and $4.3 million for
the three and six months ended July 1, 2018, respectively, is
primarily due to the requirement to present revenues and expenses
related to marketing funds we control on a "gross" basis. This
increase was partially offset by lower company-owned restaurant
revenues attributable to the revised method of accounting for the
loyalty program. The marketing fund gross up is reported in the new
financial statement line items, Other revenues and Other expenses,
as discussed further below.
(b) The $1.4 million and $1.9 million decreases in pre-tax income for
the three and six months ended July 1, 2018 are primarily due to the
revised method of accounting for the loyalty program, marketing fund
co-ops we control and franchise fees.
 

Additional detail on the adoption and 2018 impact of the new revenue
recognition standard can be found in our Form 10-Q for the quarterly
period ended July 1, 2018 filed with the SEC.

While not required as part of the adoption of Topic 606, our income
statement includes newly created Other revenues and Other expenses line
items. Other revenues and Other expenses include the Topic 606 "gross
up" of revenues and expenses derived from certain domestic and
international marketing fund co-ops we control, as previously discussed.
Additionally, Other revenues and Other expenses include various
reclassifications from North America commissary and other, International
expenses and G&A expenses to better reflect and aggregate various
domestic and international services provided by the company for the
benefit of franchisees. Related 2017 amounts have also been reclassified
to conform to the new 2018 presentation, as detailed in the "Summary of
Income Statement Presentation Reclassifications" included with this
press release. These reclassifications had no impact on reported total
revenues or total costs and expenses. Refer to the ‘Investor Relations'
section on our company website for details of income statement
presentation reclassifications for each quarter of 2017.

Update of Previously Issued Financial Guidance

The recent negative publicity surrounding the company's brand negatively
impacted July sales in North America. Our North America comparable sales
for the July period decreased approximately 10.5%. At this time, the
company cannot predict how long and the extent to which the negative
customer sentiment will continue to impact future sales. In addition,
the company expects to incur significant costs as a result of the recent
negative publicity including, but not limited to, the following:

  • re-imaging costs at nearly all domestic and international restaurants,
  • costs to accelerate our replacement of certain branded assets and
    related marketing efforts,
  • financial assistance to domestic franchisees, such as short-term
    royalty reductions, in an effort to mitigate closings,
  • additional costs for branding initiatives, including but not limited
    to, launching a new advertising and marketing campaign and promotional
    activities to mitigate negative consumer sentiment and negative sales
    trends,
  • costs associated with a third-party audit of the culture at Papa
    John's commissioned by the Special Committee as well as costs
    associated with implementing new policies and procedures to address
    any findings as a result of the audit, and
  • additional legal and advisory costs, including costs associated with
    the activities of the Special Committee.

Based on the negative consumer sentiment and the expected impact on
future sales, the company is lowering its financial and associated
outlook items. The below outlook incorporates a range of the potential
negative sales impact from these recent events but excludes the related
costs the company will incur, as detailed above. The company is still
gathering information regarding these costs but has developed a
preliminary range of $30 million to $50 million for the remainder of
2018. The below outlook also excludes the $0.13 impact of the China
refranchising.

  Updated Outlook   Previous Outlook
 
North America Comparable Sales (7.0%) to (10.0%) (3%) to flat
International Comparable Sales (2%) to 1% 3.0% - 5.0%
Adjusted Diluted EPS (1) $1.30 - $1.80 $2.40 - $2.60
Net global unit growth 0.0% - 3.0% 3.0% - 5.0%
Debt / Adjusted EBITDA ratio (2) Above 4.0x 3.0x - 3.5x
Income tax rate (3) 20% - 24% 20% - 24%
Capital Expenditures $45 - $50 million $45 - $55 million
Block Cheese Prices per lb. Low $1.60s Low $1.60s
 
(1) This adjusted diluted EPS guidance excludes the impact of the
China refranchising and the estimated future costs of the above
noted items related to the recent negative publicity. We believe
excluding these items from adjusted EPS is meaningful to our
financial statement users as it presents our core results excluding
unusual, non-recurring items.
 
(2) We were in compliance with all financial covenants as of July
1, 2018. Based on this revised lower outlook, we plan to work with
the banks within our credit facility to evaluate options with the
covenants to mitigate the possibility of violating a financial
covenant in the future.
 
(3) The tax rate excludes any tax impact from the divestiture of
our China company-owned operations.
 

Conference Call and Website Information

A conference call is scheduled for August 7, 2018 at 5:00 p.m. Eastern
Time to review the company's second quarter 2018 earnings results. The
call can be accessed from the company's web page at www.papajohns.com
in a listen-only mode, or dial 877-312-8816 (U.S. and Canada) or
253-237-1189 (international). The conference call will be available for
replay, including by downloadable podcast, from the company's web site
at www.papajohns.com.
The Conference ID is 5177337.

Investors and others should note that we announce material financial
information to our investors using our investor relations website, press
releases, SEC filings and public conference calls and webcasts. We
intend to use our investor relations website as a means of disclosing
information about our business, our financial condition and results of
operations and other matters and for complying with our disclosure
obligations under Regulation FD. The information we post on our investor
relations website, including information contained in investor
presentations, may be deemed material. Accordingly, investors should
monitor our investor relations website, in addition to following our
press releases, SEC filings and public conference calls and webcasts. We
encourage investors and others to sign up for email alerts at our
investor relations page under Shareholder Tools at the bottom right side
of the page. These email alerts are intended to help investors and
others to monitor our investor relations website by notifying them when
new information is posted on the site.

Forward-Looking Statements

Certain matters discussed in this press release and other company
communications constitute forward-looking statements within the meaning
of the federal securities laws. Generally, the use of words such as
"expect," "intend," "estimate," "believe," "anticipate," "will,"
"forecast," "plan," "project," or similar words identify forward-looking
statements that we intend to be included within the safe harbor
protections provided by the federal securities laws. Such
forward-looking statements may relate to projections or guidance
concerning business performance, revenue, earnings, cash flow,
contingent liabilities, resolution of litigation, commodity costs,
profit margins, unit growth, unit level performance, capital
expenditures, ability of the company to mitigate negative consumer
sentiment through advertising, marketing and promotional activity,
corporate governance, shareholder and other stakeholder engagement,
strategic decisions and actions, the ongoing cultural audit and
investigation, share repurchases, dividends, effective tax rates, the
impact of the Tax Cuts and Job Act and the 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:

  • negative publicity and consumer sentiment as a result of statements
    and actions by the company's founder and former spokesperson, which
    may continue to cause sales to decline and/or change consumers'
    acceptance of and enthusiasm for our brand;
  • the results of the previously announced external audit and
    investigation the Special Committee is overseeing regarding the
    company's existing processes, policies and systems related to
    diversity and inclusion, supplier and vendor engagement and the
    company's culture;
  • costs the company expects to incur as a result of the recent negative
    publicity and negative consumer sentiment, including costs related to
    the audit and investigation, costs associated with the operations of
    the Special Committee, any costs associated with related litigation,
    legal fees, and increased costs for branding initiatives and launching
    a new advertising and marketing campaign and promotions to mitigate
    negative consumer sentiment and negative sales trends;
  • costs the company expects to incur relating to franchisee financial
    assistance to mitigate store closings;
  • the ability of the company to mitigate the negative consumer sentiment
    through advertising, marketing and promotional activities;
  • the company's ability to regain lost customers;
  • 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;
  • the adverse impact on the company or our results caused by product
    recalls, food quality or safety issues, incidences of foodborne
    illness, food contamination and other general public health concerns
    about our company-owned or franchised restaurants or others in the
    restaurant industry;
  • the effectiveness of our initiatives to improve our brand proposition
    and operating results, including marketing, advertising and public
    relations initiatives, technology investments and changes in
    unit-level operations;
  • the risk that any new advertising or marketing campaign may not be
    effective in increasing sales;
  • the ability of the company and its franchisees to meet planned growth
    targets and operate new and existing restaurants profitably, including
    difficulties finding qualified franchisees, store level employees or
    suitable sites;
  • increases in food costs or sustained higher other operating costs.
    This could include increased employee compensation, benefits,
    insurance, tax rates, new regulatory requirements or increasing
    compliance costs;
  • increases in insurance claims and related costs for programs funded by
    the company up to certain retention limits, including medical, owned
    and non-owned 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 control;
  • increased risks associated with our international operations,
    including economic and political conditions, instability or
    uncertainty in our international markets, especially emerging markets,
    fluctuations in currency exchange rates, difficulty in meeting planned
    sales targets and new store growth;
  • the impact of current or future claims and litigation 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;
  • maintaining compliance with debt covenants under our credit agreement
    if restaurant sales and operating results continue to decline, and our
    ability to obtain a waiver or modification to the credit agreement
    from our lenders if we are unable to maintain compliance;
  • failure to effectively 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;
  • changes in Federal or state income, general and other tax laws, rules
    and regulations, including changes from the Tax Cuts and Jobs Act and
    any related Treasury regulations, rules or interpretations if and when
    issued; and
  • changes in generally accepted accounting principles including new
    standards for revenue recognition and leasing.

These and other risk factors are discussed in detail in "Part I. Item
1A. – Risk Factors" in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2017, as updated by "Part II. Item 1A. – Risk
Factors" in our Quarterly Report on Form 10-Q for the quarterly period
ended July 1, 2018. 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.

For more information about the company, please visit www.papajohns.com.

       
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
   
 
Three Months Ended Six Months Ended
July 1, 2018 June 25, 2017 July 1, 2018   June 25, 2017
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Domestic Company-owned restaurant sales $ 181,379 $ 202,756 $ 371,621 $ 409,652
North America franchise royalties and fees 23,912 26,588 48,718 54,195
North America commissary 153,455 160,059 315,168 331,399
International 29,069 27,245 59,183 52,867
Other revenues   20,144     18,130     40,638     35,931  
Total revenues 407,959 434,778 835,328 884,044
 
Costs and expenses:

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

Domestic company-owned restaurant expenses 147,781 162,433 305,100 327,852
North America commissary 143,300 149,472 294,981 309,429
International expenses 18,248 17,272 37,278 33,063
Other expenses 20,698 17,482 41,656 35,029
General and administrative expenses 38,712 40,248 78,441 76,662
Depreciation and amortization   11,731     10,654     23,270     21,111  
Total costs and expenses 380,470 397,561 780,726 803,146
Refranchising loss, net   (2,122 )   -     (1,918 )   -  
Operating income 25,367 37,217 52,684 80,898
Net interest expense   (5,662 )   (1,759 )   (10,617 )   (3,569 )
Income before income taxes 19,705 35,458 42,067 77,329
Income tax expense   7,040     10,476     12,022     22,448  
Net income before attribution to noncontrolling interests 12,665 24,982 30,045 54,881
Income attributable to noncontrolling interests   (874 )   (1,444 )   (1,517 )   (2,915 )
Net income attributable to the company $ 11,791   $ 23,538   $ 28,528   $ 51,966  
 
Calculation of income for earnings per share:
Net income attributable to the Company $ 11,791 $ 23,538 $ 28,528 $ 51,966
Change in noncontrolling interest redemption value - 662 - 1,182
Net income attributable to participating securities   (72 )   (99 )   (147 )   (216 )
Net income attributable to common shareholders $ 11,719   $ 24,101   $ 28,381   $ 52,932  
 
Basic earnings per common share $ 0.37   $ 0.66   $ 0.87   $ 1.44  
Diluted earnings per common share $ 0.36   $ 0.65   $ 0.86   $ 1.42  
 
Basic weighted average common shares outstanding   31,941     36,732     32,610     36,771  
Diluted weighted average common shares outstanding   32,175     37,217     32,860     37,283  
 
Dividends declared per common share $ 0.225 $ 0.20 $ 0.450 $ 0.40
 

   

Papa John's International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets
 
 
July 1, December 31,
2018   2017
(In thousands) (Unaudited) (Note)
 
Assets
Current assets:
Cash and cash equivalents $ 25,719 $ 22,345
Accounts receivable, net 62,973 64,644
Notes receivable, net 5,180 4,333
Income tax receivable - 3,903
Inventories 27,109 30,620
Prepaid expenses and other current assets 33,952 38,016
Assets held for sale   2,786     6,133  
Total current assets 157,719 169,994
 
Property and equipment, net 227,722 234,331
Notes receivable, less current portion, net 15,648 15,568
Goodwill 85,064 86,892
Deferred income taxes, net 709 585
Other assets   71,309     48,183  
Total assets $ 558,171   $ 555,553  
 
 
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 33,307 $ 32,006
Income and other taxes payable 8,904 10,561
Accrued expenses and other current liabilities 81,197 70,293
Deferred revenue current 2,426 -
Current portion of long-term debt   20,000     20,000  
Total current liabilities 145,834 132,860
 
Deferred revenue 15,329 2,652
Long-term debt, less current portion, net 556,387 446,565
Deferred income taxes, net 5,140 12,546
Other long-term liabilities   78,515     60,146  
Total liabilities 801,205 654,769
 
Redeemable noncontrolling interests 7,356 6,738
 
Total stockholders' (deficit)   (250,390 )   (105,954 )
Total liabilities, redeemable noncontrolling interests and
stockholders' (deficit)
$ 558,171   $ 555,553  
 
 

Note: The Condensed Consolidated Balance Sheets have been derived
from the audited consolidated financial statements, but do not
include all information and footnotes required by accounting
principles generally accepted in the United States for a complete
set of financial statements.

 

   
Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended
(In thousands) July 1, 2018   June 25, 2017
(Unaudited) (Unaudited)
Operating activities
Net income before attribution to noncontrolling interests $ 30,045 $ 54,881

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

Provision for uncollectible accounts and notes receivable 3,591 (1,091 )
Depreciation and amortization 23,270 21,111
Deferred income taxes (2,511 ) 158
Stock-based compensation expense 4,929 5,571
Loss on refranchising 1,918 -
Other 3,032 1,978
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (148 ) (355 )
Income tax receivable 3,678 (45 )
Inventories 3,188 550
Prepaid expenses and other current assets 6,683 2,594
Other assets and liabilities (2,202 ) (1,559 )
Accounts payable 2,511 (3,950 )
Income and other taxes payable (1,656 ) 1,275
Accrued expenses and other current liabilities (2,506 ) (3,002 )
Deferred revenue   379     (253 )
Net cash provided by operating activities 74,201 77,863
 
Investing activities
Purchases of property and equipment (21,562 ) (30,457 )
Loans issued (1,904 ) (1,476 )
Repayments of loans issued 2,720 2,125
Acquisitions, net of cash acquired - (21 )
Proceeds from divestitures of restaurants 3,690 -
Other   146     25  
Net cash used in investing activities (16,910 ) (29,804 )
 
Financing activities
Repayments of term loan (10,000 ) -
Net proceeds of revolving credit facility 119,400 5,156
Cash dividends paid (14,762 ) (14,703 )
Tax payments for equity award issuances (1,353 ) (2,282 )
Proceeds from exercise of stock options 2,179 5,218
Acquisition of Company common stock (148,440 ) (33,968 )
Distributions to noncontrolling interest holders (1,110 ) (1,389 )
Other   231     494  
Net cash used in financing activities (53,855 ) (41,474 )
 
Effect of exchange rate changes on cash and cash equivalents   (62 )   99  
Change in cash and cash equivalents 3,374 6,684
Cash and cash equivalents at beginning of period   22,345     15,563  
 
Cash and cash equivalents at end of period $ 25,719   $ 22,247  
 

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