Table of Contents
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 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 October 30, 2020, there were outstanding 32,952,184 shares of the registrant’s common stock, par value $0.01 per share.
INDEX
Page No.
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets — September 27, 2020 and December 29, 2019
3
Condensed Consolidated Statements of Operations — Three and Nine months ended September 27, 2020 and September 29, 2019
4
Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Nine months ended September 27, 2020 and September 29, 2019
5
Condensed Consolidated Statements of Stockholders’ Deficit — Three and Nine months ended September 27, 2020 and September 29, 2019
6
Condensed Consolidated Statements of Cash Flows — Nine months ended September 27, 2020 and September 29, 2019
8
Notes to Condensed Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
40
Item 4.
Controls and Procedures
41
PART II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
42
Item 6.
Exhibits
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 27,
December 29,
(In thousands, except per share amounts)
2020
2019
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$
140,050
27,911
Accounts receivable, net
69,332
70,462
Notes receivable, current portion
10,180
7,790
Income tax receivable
1,903
4,024
Inventories
28,702
27,529
Prepaid expenses and other current assets
29,771
43,830
Total current assets
279,938
181,546
Property and equipment, net
199,291
211,741
Finance lease right-of-use assets, net
9,458
9,383
Operating lease right-of-use assets
139,653
148,229
Notes receivable, less current portion, net
34,319
33,010
Goodwill
80,022
80,340
Deferred income taxes
7,454
1,839
Other assets
66,540
64,633
Total assets
816,675
730,721
Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit
Current liabilities:
Accounts payable
32,288
29,141
Income and other taxes payable
10,034
7,599
Accrued expenses and other current liabilities
153,171
108,517
Current deferred revenue
17,916
17,673
Current finance lease liabilities
2,229
1,789
Current operating lease liabilities
24,853
23,226
Current portion of long-term debt
20,000
Total current liabilities
260,491
207,945
Deferred revenue
13,471
14,722
Long-term finance lease liabilities
7,629
Long-term operating lease liabilities
116,684
125,297
Long-term debt, less current portion, net
328,079
347,290
899
2,649
Other long-term liabilities
103,744
84,927
Total liabilities
830,822
790,459
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
6,834
5,785
Stockholders’ deficit:
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
255,210
219,047
Accumulated other comprehensive loss
(18,510)
(10,185)
Retained earnings
216,911
205,697
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
(288,260)
(332,321)
Noncontrolling interests in subsidiaries
15,415
15,665
Total Stockholders’ deficit
(272,845)
(316,656)
Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit
See accompanying notes.
Condensed Consolidated Statements of Operations
Three Months Ended
Nine Months Ended
September 29,
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:
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
0.99
Basic weighted average common shares outstanding
32,616
31,601
32,347
31,581
Diluted weighted average common shares outstanding
32,971
32,643
Dividends declared per common share
0.225
0.675
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
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:
(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)
Condensed Consolidated Statements of Stockholders’ Deficit
Papa John’s International, Inc.
Common
Accumulated
Stock
Additional
Other
Noncontrolling
Total
Shares
Paid-In
Comprehensive
Retained
Treasury
Interests in
Stockholders’
For the three months ended September 27, 2020
Outstanding
Capital
Loss
Earnings
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)
388
16,096
Other comprehensive income
Cash dividends on common stock
78
(7,414)
(7,336)
Cash dividends on preferred stock
(3,412)
Exercise of stock options
131
1
7,499
7,500
Stock-based compensation expense
4,328
Issuance of restricted stock
(105)
105
Tax effect of restricted stock awards
(86)
Distributions to noncontrolling interests
(697)
(81)
(75)
172
16
Balance at September 27, 2020
32,485
For the nine months ended September 27, 2020
Balance at December 29, 2019
31,894
Cumulative effect of adoption of ASU 2016-13 (1)
(1,066)
Adjusted Balance at December 30, 2019
204,631
(317,722)
1,392
46,157
Other comprehensive loss
210
(22,066)
(21,856)
(10,237)
505
29,199
29,204
13,071
79
(4,573)
4,573
(1,665)
7
(79)
(182)
431
170
At September 27, 2020, the accumulated other comprehensive loss of $18,510 was comprised of net unrealized foreign currency translation loss of $6,705 and net unrealized loss on the interest rate swap agreements of $11,805.
Condensed Consolidated Statements of Stockholders’ Deficit (continued)
For the three months ended September 29, 2019
Balance at June 30, 2019
31,427
443
196,927
(11,196)
228,833
(748,657)
15,584
(318,066)
Net income (1)
241
626
(7,182)
(7,103)
(1,140)
Dividends declared on preferred stock
(2,273)
239
4,764
10
(547)
547
(255)
(462)
(17)
(99)
120
Balance at September 29, 2019
31,448
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
192,984
(3,143)
242,182
(751,704)
15,225
(304,013)
783
7,791
174
(21,545)
(21,371)
(6,608)
12
12,295
54
(3,117)
3,117
(1,150)
(645)
(328)
(240)
597
29
At September 29, 2019, the accumulated other comprehensive loss of $13,896 was comprised of net unrealized foreign currency translation loss of $7,973 and net unrealized loss on the interest rate swap agreements of $5,923.
Condensed Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
(Credit) provision for uncollectible accounts and notes receivable
(334)
1,646
(4,696)
(2,386)
Preferred stock option mark-to-market adjustment
5,914
(1,889)
1,233
3,618
Changes in operating assets and liabilities:
Accounts receivable
(4,378)
(8,682)
3,131
10,241
(1,173)
1,891
14,393
(4,837)
Other assets and liabilities
18,080
(3,245)
3,147
14,921
2,435
1,285
40,112
(19,149)
(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
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
Dividends paid to preferred stockholders
Issuance costs associated with preferred stock
(7,535)
Tax payments for equity award issuances
Proceeds from exercise of stock options
Contributions from noncontrolling interests
840
(1,778)
(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
33,258
Cash and cash equivalents at end of period
28,368
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 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, 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 four joint venture arrangements in which there are noncontrolling interests held by third parties that include 192 restaurants at both September 27, 2020 and September 29, 2019.
Consolidated net income 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 noncontrolling interests.
Net income (loss) attributable to these joint ventures for the three and nine months ended September 27, 2020 and September 29, 2019 was as follows (in thousands):
1,292
213
4,743
1,385
Noncontrolling interests
689
(128)
2,576
327
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
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 amount outstanding under our term debt approximates the carrying value due to the variable market-based interest rate (Level 2).
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:
Our financial assets and liabilities that were measured at fair value on a recurring basis as of September 27, 2020 and December 29, 2019 are as follows (in thousands):
Carrying
Fair Value Measurements
Value
Level 1
Level 2
Level 3
Financial assets:
Cash surrender value of life insurance policies (a)
33,953
Financial liabilities:
Interest rate swaps (b)
15,334
December 29, 2019
33,220
6,168
11
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
7,341
3,572
910
Cumulative effect of adoption of ASU 2016-13
912
463
-
Balance at December 30, 2019
8,253
4,035
Current period (credit) provision for expected credit losses
(234)
(244)
144
Write-offs charged against the allowance
(598)
(10)
Recoveries collected
(100)
Transfers
1,054
(1,054)
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
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 September 27, 2020, we leased and subleased 375 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 $7.6 million and $7.8 million for the nine months ended September 27, 2020 and 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 85 domestic leases. These leases have varying terms, the latest of which expires in 2036. As of 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 $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:
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.
13
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):
18,672
4,569
11,468
11,196
111
103
Prepaid expenses
1,278
1,316
31,529
17,184
Deferred income taxes, net
410
32,076
17,594
Liabilities
764
31,408
14,287
2,855
3,252
Debt
34,263
18,303
1,805
2,094
36,068
20,397
5. Revenue Recognition
Contract Balances
Our contract liabilities primarily relate to franchise fees, unredeemed gift card liabilities, and loyalty program obligations, which we classify as Deferred revenue on the Condensed Consolidated Balance Sheets. During the three and nine months ended September 27, 2020, the Company recognized $8.4 million and $24.7 million in revenue, respectively, related to deferred revenue, compared to $9.0 million and $24.7 million for the three and nine months ended September 29, 2019, respectively.
The contract liability balances are included in the following (in thousands):
Contract Liabilities
Change
Franchise fees and unredeemed gift cards
18,610
20,346
(1,736)
Customer loyalty program
12,777
12,049
728
Total contract liabilities
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 September 27, 2020, and December 29, 2019, the contract assets were approximately $4.8 million and $6.0 million, respectively. For the three and nine months ended September 27, 2020 and September 29, 2019, respectively, revenue
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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
Less than 1 Year
1-2 Years
2-3 Years
3-4 Years
4-5 Years
Thereafter
Franchise fees
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 $4.7 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 32.5 million shares at 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 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 September 27, 2020 and December 29, 2019.
Dividends
The Company recorded dividends of approximately $32.1 million in the nine months ended September 27, 2020 consisting of the following:
On October 30, 2020, our Board of Directors declared a fourth quarter dividend of $0.225 per common share (of which approximately $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 fourth quarter preferred dividend was also declared on October 30, 2020. The common share dividend will be paid on November 20, 2020 to stockholders of record as of the close of business on November 10, 2020. The fourth quarter preferred dividend of $2.3 million will be paid to holders of Series B Preferred Stock on January 4, 2021.
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 shareholders 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 participating securities and undistributed earnings allocated to participating securities, are subtracted from net income attributable to the Company in determining net income (loss) attributable to common 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):
Weighted average common shares outstanding
Dilutive effect of outstanding equity awards (a)
355
296
Diluted weighted average common shares outstanding (b)
8.
Long-term debt, net, consists of the following (in thousands):
Outstanding debt
350,000
370,000
Unamortized debt issuance costs
(1,921)
(2,710)
(20,000)
Total long-term debt, net
The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $5.0 million was outstanding as of September 27, 2020, and a secured term loan facility with an outstanding balance of $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 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 $350.0 million at September 27, 2020 under the PJI Facilities was composed of $345.0 million outstanding under the Term Loan Facility and $5.0 million outstanding under the Revolving Facility. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at September 27, 2020 was approximately $348.8 million.
As of September 27, 2020, the Company had approximately $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.
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As of 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
%
35
2.36
2.34
January 30, 2018 through August 30, 2022
100
1.99
75
50
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
Balance Sheet Location
Other current and long-term liabilities
The effect of derivative instruments on the accompanying condensed consolidated financial statements is as follows (in thousands):
Location of Gain
Amount of Gain
Derivatives -
Amount of Gain or
or (Loss)
Total Net Interest Expense
Cash Flow
(Loss) Recognized
Reclassified from
on Condensed
Hedging
in AOCL
AOCL into
Consolidated Statements
Relationships
on Derivative
Income
of Operations
Interest rate swaps for the three months ended:
1,268
Interest expense
(1,674)
(1,437)
161
Interest rate swaps for the nine months ended:
(7,219)
(3,376)
(9,641)
849
The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 3.8% for the three- and nine-month periods ended September 27, 2020, compared to 3.8% and 4.2% for the three- and nine-month periods ended September 29, 2019, respectively. Interest paid, including payments made or received under the swaps, was $3.9 million and $3.0 million for the three months ended September 27, 2020 and 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 September 27, 2020, the portion of the aggregate $15.3 million interest rate swap liability that would be reclassified into net interest expense during the next twelve months approximates $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, 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 1.9% and 2.7% for the three and nine months ended September 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 December 29, 2019, there was no debt outstanding under the PJMF Revolving Facility. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.
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 not recorded any liability related to this lawsuit as of 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, 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 not recorded any liability related to this lawsuit as of 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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11.
Segment Information
We have four 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 before income taxes and intercompany eliminations. Certain administrative and capital costs are allocated to segments based upon predetermined rates or actual estimated resource usage. We account for intercompany sales and transfers as if the sales or transfers were to third parties and eliminate the activity in consolidation.
Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our consolidated revenues.
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Our segment information is as follows:
Domestic Company-owned restaurants
North America commissaries
North America franchising
International
40,328
29,888
106,846
92,808
All others
47,623
38,056
136,986
114,382
Intersegment revenues:
50,306
47,599
142,169
140,116
824
612
2,291
2,072
191
27,168
19,362
66,509
52,758
Total intersegment revenues
78,298
67,573
210,969
195,137
8,439
9,162
33,852
21,471
8,069
6,790
24,145
22,094
23,353
14,092
62,855
47,693
8,123
4,195
17,211
14,915
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
Property and equipment:
230,669
144,799
16,335
87,355
Unallocated corporate assets
215,144
Accumulated depreciation and amortization
(495,011)
21
Disaggregation of Revenue
In the following tables, revenues are disaggregated by major product/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
Company-owned restaurant sales
Commissary sales
231,644
22,737
254,381
Franchise royalties and fees
26,105
10,703
36,808
6,888
74,791
81,679
Eliminations
(50,306)
(824)
(27,168)
(78,298)
Total segment revenues
International other revenues (1)
(6,888)
Three Months Ended September 29, 2019
202,302
15,195
217,497
16,536
9,484
26,020
5,209
57,418
62,627
(47,599)
(612)
(19,362)
(67,573)
(5,209)
Nine Months Ended September 27, 2020
646,548
59,630
706,178
71,186
27,962
99,148
19,254
203,495
222,749
(142,169)
(2,291)
(66,509)
(210,969)
(19,254)
Nine Months Ended September 29, 2019
590,851
47,009
637,860
55,287
28,834
84,121
17,156
167,140
184,296
(140,116)
(2,072)
(191)
(52,758)
(195,137)
(17,156)
International eliminations (1)
22
23
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 September 27, 2020, there were 5,360 Papa John’s restaurants (597 Company-owned and 4,763 franchised) operating in 48 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, as well as new opportunities for our business. In response to the outbreak, governments and other authorities around the world have imposed measures to attempt to control the spread of COVID-19, including 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. Our delivery and carryout model has positioned us to experience strong demand for our products. Increased demand and customer behavior during the pandemic have 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 have not experienced material 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 has hired thousands of new restaurant team members in 2020 to help serve our customers.
Of the Company’s 2,074 international franchised stores, approximately 90 stores were temporarily closed as of September 27, 2020, principally in Latin America and Europe, in accordance with government policies. In North America, almost all traditional restaurants remain open and fully operational. A number of non-traditional restaurants located in universities
and stadiums are temporarily closed; these non-traditional locations are not significant to our revenues and operating results.
We 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 customers we have experienced due to our menu innovation, customer loyalty programs and our offerings of high-quality pizza and other menu items. Due to the substantial uncertainty related to the effects of the pandemic and its duration, we are unable to predict the specific impact the pandemic and related restrictions will have on our results of operations, liquidity or long-term financial 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 the 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 for the quarterly period ended March 29, 2020.
Restaurant Progression
North America Company-owned:
Beginning of period
598
643
645
Opened
Closed
(1)
(2)
(3)
Sold to franchisees
(21)
(23)
End of period
621
North America franchised:
2,686
2,676
2,690
2,692
38
58
(11)
(37)
(39)
(98)
Acquired from Company
2,689
2,675
International franchised:
2,063
2,026
2,107
1,966
60
83
143
(29)
(116)
(62)
2,074
2,047
Total restaurants – end of period
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.
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, concluded in the third quarter of 2020, as announced in a formal plan in July 2019. The adjusted financial results for the three and nine months ended 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 (collectively defined as “Special items”). We present these non-GAAP measures because we believe the Special items in 2019 impact the comparability of our results of operations.
GAAP income before income taxes
Special charges:
Legal and advisory fees (1)
459
5,922
Mark-to-market adjustment on option valuation (2)
Other costs (3)
2,385
(1,726)
Adjusted income before income taxes
1,796
22,202
GAAP net income (loss) attributable to common shareholders
Tax effect of Non-GAAP items (4)
(237)
(1,434)
Adjusted net income (loss) attributable to common shareholders
(2,207)
8,877
GAAP diluted earnings (loss) per common share
0.01
0.17
0.19
0.08
(0.05)
(0.01)
Adjusted diluted earnings (loss) per common share
(0.07)
0.28
26
The 2019 non-GAAP adjusted results shown above and within this document, which exclude the Special 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 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 and to analyze trends.
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 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 $13.5 million (or approximately $0.31 per diluted share) and $29.3 million (or approximately $0.69 per diluted share) for the three and nine months ended 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):
Sep. 27,
Sep. 29
Royalty relief (a)
3,469
6,353
14,270
13,692
Marketing fund investments (b)
10,000
5,000
15,000
Total Temporary Franchise Support
13,469
11,353
29,270
21,192
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Results of Operations
Discussion of Revenues. Consolidated revenues increased $69.2 million, or 17.1%, and $141.7 million, or 11.8%, for the three and nine months ended September 27, 2020, respectively. Revenues are summarized in the following table (dollars in thousands).
Sep. 29,
Percent
Increase
13,236
8.0
9,357
58.8
26,635
17.2
8,761
35.5
11,246
26.0
Total Revenues
69,235
17.1
35,723
7.3
15,680
29.5
53,644
11.9
11,749
15.5
24,893
19.0
141,689
11.8
Domestic Company-owned restaurant sales increased $13.2 million, or 8.0%, and $35.7 million, or 7.3%, for the three and nine months ended September 27, 2020, respectively, compared to the prior year comparable periods. Excluding the impact of refranchising 46 restaurants in 2019 primarily located in South Florida and Georgia, domestic Company-owned restaurant sales increased $21.9 million, or 14.0%, and $66.2 million, or 14.4% for the three and nine months ended September 27, 2020, respectively. The increases were primarily due to positive comparable sales increases of 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 $9.4 million, or 58.8%, and $15.7 million, or 29.5%, for the three and nine months ended September 27, 2020, respectively, compared to the prior year comparable periods. Excluding the impact of refranchising, North America franchise royalties and fees increased $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 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 26.2% to $642.5 million and 20.3% to $1.86 billion for the three and nine months ended 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 $26.6 million, or 17.2%, and $53.6 million, or 11.9%, for the three and nine months ended September 27, 2020, respectively, primarily due to higher volumes and pricing associated with higher commodities costs, primarily cheese.
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International revenues increased $8.8 million, or 35.5%, for the three months ended September 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 9.4%, partially offset by royalty 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 22.9% to $268.0 million and 12.2% to $735.6 million for the three and nine months ended September 27, 2020, respectively, excluding the impact of foreign currency, primarily due to increases in comparable sales and equivalent units. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.
Other revenues increased $11.2 million, or 26.0%, and $24.9 million, or 19.0%, for the three and nine months ended September 27, 2020, respectively, compared to the prior year comparable periods. The increases were primarily due to higher marketing fund revenues from an increase in franchise sales and an increase in the national marketing fund contribution rate in 2020 and higher online revenues from increased restaurant sales.
Discussion of Operating Results
Income before income taxes is summarized in the following table on a reporting segment basis. Income before income taxes increased approximately $20.2 million and $49.5 million for the three and nine months ended September 27, 2020, respectively, compared to the prior year comparable periods. Alongside the GAAP income before income taxes data, we have included “adjusted” income before income taxes for the three and nine months ended September 29, 2019 to exclude Special items in 2019. We believe this non-GAAP measure is important for purposes of comparing to 2020 results.
Reported
Special
Adjusted
items
in 2019
(Decrease)
7,436
1,003
1,279
9,261
3,928
4,047
2,844
(29,485)
(1,058)
Elimination of intersegment (profits) losses
657
1,118
19,117
19,582
2,051
15,162
2,296
7,486
14,221
(78,464)
(4,560)
418
12,332
37,123
The increases in adjusted income before income taxes of $19.1 million and $37.1 million for the three- and nine-month periods in 2020, respectively, excluding Special items in 2019, were primarily due to the following:
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31
Review of Consolidated Results
Revenues. For the reasons discussed above, consolidated revenues increased $69.2 million, or 17.1%, to $472.9 million, and $141.7 million, or 11.8%, to $1.3 billion for the three and nine months ended September 27, 2020, respectively.
% of Related
($ in thousands)
Revenues
81.1%
81.2%
(0.1%)
92.6%
93.5%
(0.9%)
57.9%
54.9%
3.0%
93.4%
99.3%
(5.9%)
11.1%
13.3%
(2.2%)
2.7%
2.9%
(0.2%)
94.8%
99.2%
(4.4%)
0.0%
0.4%
(0.4%)
5.2%
1.2%
4.0%
(0.8%)
(1.1%)
0.3%
4.4%
0.1%
4.3%
79.6%
81.3%
(1.7%)
92.5%
93.2%
(0.7%)
60.3%
56.1%
4.2%
94.9%
98.2%
(3.3%)
12.8%
2.8%
94.7%
98.1%
(3.4%)
0.2%
5.3%
2.1%
3.2%
(1.2%)
4.5%
0.9%
3.6%
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Costs and expenses. Total costs and expenses were approximately $448.4 million, or 94.8% of total revenues, for the three months ended September 27, 2020 as compared to $400.5 million, or 99.2% of total revenues, for the prior year comparable period. For the nine months ended September 27, 2020, total costs and expenses were approximately $1.27 billion, or 94.7% of total revenues, as compared to $1.18 billion, or 98.1% of total revenues for the prior year comparable period. The decreases in total costs and expenses, as a percentage of revenues, were primarily due to the following:
Domestic Company-owned restaurant expenses were $144.8 million, or 81.1% of related revenues, for the three months ended September 27, 2020, as compared to expenses of $134.0 million, or 81.2% of related 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 0.1% and 1.7% decreases, as a percentage of revenues, for 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. 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 $167.9 million, or 92.6% of related revenues, for the three 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 0.9% and 0.7% decreases in expenses, as a percentage of related revenues, for the three- and nine-month periods, respectively, were primarily due to lower operating costs on higher volumes and lower delivery costs.
International expenses were $19.4 million, or 57.9% of related revenues, for the three months ended September 27, 2020 compared to expenses of $13.6 million, or 54.9% of related revenues, for the prior year comparable period. International expenses were $52.8 million, or 60.3% of 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 3.0% and 4.2% increases in expenses as a percentage of revenues were primarily due to the higher mix of United Kingdom commissary revenues which have a lower overall margin and lower revenues from royalty support provided to certain franchisees.
Other expenses were $50.9 million, or 93.4% of related revenues, for the three months ended September 27, 2020 compared to expenses of $43.0 million, or 99.3% of related revenues for 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 margins from our online and mobile ordering business. The nine- month decrease was partially offset by lower revenues at our printing subsidiary.
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General and administrative expenses (“G&A”) were $52.6 million, and $148.7 million, or 11.1% of revenues, for each of the three and nine months ended September 27, 2020, respectively, compared to $53.5 million, or 13.3%, and $153.4 million, or 12.8%, for the corresponding 2019 periods, respectively. G&A consisted of the following (in thousands):
Other general expenses (a)
8,921
5,430
14,148
9,043
Special charges (b)
14,220
Administrative expenses (c)
43,680
45,229
134,532
130,093
Depreciation and amortization. Depreciation and amortization expense was $12.8 million, or 2.7% of revenues, and $37.4 million, or 2.8% of revenues, for the three and nine months ended September 27, 2020, respectively, compared to $11.8 million, or 2.9%, and $35.1 million, or 2.9% of revenues, for the corresponding periods in 2019, respectively.
Net interest expense. Net interest expense decreased approximately $600,000 and $3.6 million for the three and nine months ended September 27, 2020, respectively, due to a decrease in the average debt balance and lower interest rates. Total debt outstanding was $350.0 million as of September 27, 2020 and there was no outstanding debt balance associated with Papa John’s Marketing Fund, Inc. (“PJMF”).
Income before income taxes. For the reasons discussed above, income before income taxes increased approximately $20.2 million and $49.5 million for the three and nine months ended September 27, 2020, respectively, over the prior year comparable periods.
Income tax expense. The effective income tax rates were 21.6% and 20.2% for the three and nine months ended September 27, 2020, representing decreases of 40.5% and 5.5%, respectively, from the prior year comparable periods. The nine months ended September 29, 2019 included 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, 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 $0.35 for the third quarter of 2020, compared to diluted loss per common share of $0.10 for the third 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.
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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. Despite these recent developments, our liquidity position remains strong. Our cash flow has increased, and we have reduced our borrowings on our secured revolving credit facility. As of September 27, 2020, we had approximately $348.8 million available for borrowing under our secured revolving credit facility, as described below.
The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $5.0 million was outstanding as of September 27, 2020 and a secured term loan facility with an outstanding balance of $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.
55 million
35 million
100 million
75 million
50 million
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% for the three- and nine-month periods ended September 27, 2020, compared to 3.8% and 4.2% for the three- and nine-month periods ending September 29, 2019, respectively.
Our PJI Credit Agreement contains affirmative and negative covenants, including the following financial covenants, as defined by the Amended Credit Agreement:
Actual Ratio as of
Permitted Ratio
Leverage ratio
Not to exceed 5.00 to 1.0
2.5 to 1.0
Interest coverage ratio
Not less than 2.25 to 1.0
3.7 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 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, 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 1.9% and 2.7% for the three and nine months ended September 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 December 29, 2019, there was no debt outstanding under the PJMF Revolving 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 $168.5 million for the nine months ended September 27, 2020, compared to $50.0 million in the corresponding period in 2019. The increase of $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 for the nine-month periods of 2020 and 2019 (in thousands):
Dividends paid to preferred shareholders
Free cash flow (a)
134,041
15,844
Cash flow used in investing activities was $28.6 million for the nine months ended September 27, 2020 compared to $24.1 million for the same period in 2019, or an increase of $4.5 million. The increase in cash flow used in investing activities was primarily due to the inclusion of proceeds received from the divestiture of restaurants in 2019.
Cash flow used in financing activities was $27.4 million for the nine months ended September 27, 2020 compared to $30.7 million for the same period in 2019. 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 $7.2 million of direct costs associated with the issuance. The net proceeds of the Series B Preferred Stock were primarily used for debt repayments of $247.0 million, resulting in 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.
On October 30, 2020, our Board of Directors declared a fourth quarter dividend of $0.225 per common share (of which approximately $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 fourth quarter preferred dividend was also declared
37
on October 30, 2020. The common share dividend will be paid on November 20, 2020 to stockholders of record as of the close of business on November 10, 2020. The fourth quarter preferred dividend of $2.3 million will be paid to holders of Series B Preferred Stock on January 4, 2021.
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 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 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, 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:
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.
39
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 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 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 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 $1.4 million on International revenues for the three and nine months ended September 27, 2020, respectively, and a $1.1 million and $4.1 million unfavorable impact for the three and nine months ended September 29, 2019, respectively. Foreign currency exchange rate fluctuations had an unfavorable impact on income before income taxes of approximately $120,000 and $1.1 million for the three and nine months ended September 27, 2020, and 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 third quarter of 2020 and the projected average block price for cheese by quarter through 2020 (based on the October 30, 2020 Chicago Mercantile Exchange cheese futures market prices):
Projected
Actual
Block Price
Quarter 1
1.857
1.490
Quarter 2
1.679
1.696
Quarter 3
2.262
1.898
Quarter 4
2.408
1.984
Full Year
2.052
*
1.767
*The full year estimate is based on futures prices and does not include the impact of forward pricing agreements we have for a portion of our cheese purchases for our domestic Company-owned restaurants. Additionally, the price charged to restaurants can vary somewhat by quarter from the actual block price based upon our monthly pricing mechanism.
Item 4. Controls and Procedures.
Under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, the chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
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. 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, as supplemented by the risk factors disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2020.
Our 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 anticipated benefits from these measures, or if we incur costs greater than anticipated, our financial condition and operating results may be adversely affected.
In addition, turnover in our corporate office 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the fiscal quarter ended September 27, 2020, the Company acquired 1,020 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
Amendment No. 1 to the March 15, 2019 Endorsement Agreement for personal services of Shaquille O’Neal by and among ABG-Shaq, LLC, Papa John’s Marketing Fund, Inc. and Papa John’s International, Inc., effective July 27, 2020.
31.1
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Financial statements from the quarterly report on Form 10-Q of Papa John’s International, Inc. for the quarter ended September 27, 2020, filed on November 5, 2020, formatted in iXBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Stockholders’ Deficit, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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.
(Registrant)
Date: November 5, 2020
/s/ Ann B. Gugino
Ann B. Gugino
Chief Financial Officer
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