Papa John’s International, Inc. — 2013 Q2 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2013, compared with June 24, 2012. Papa John’s operated 4,252 restaurants at quarter-end: 705 company-owned and 3,547 franchised, across all 50 states and 34 countries. Revenue is generated from company-owned restaurants, franchise royalties and fees, commissary sales, international operations, and technology and other services.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Revenue | $349.2 million | $318.6 million | $704.8 million | $649.9 million |
| Operating income | $26.9 million | $24.3 million | $56.6 million | $51.6 million |
| Income before taxes | $26.6 million | $23.5 million | $56.9 million | $51.0 million |
| Net income attributable to Papa John’s | $17.2 million | $14.3 million | $36.5 million | $31.3 million |
| Diluted EPS | $0.77 | $0.59 | $1.62 | $1.29 |
| Operating margin | Approximately 7.7% | Approximately 7.6% | Approximately 8.0% | Approximately 7.9% |
| Net margin | Approximately 4.9% | Approximately 4.5% | Approximately 5.2% | Approximately 4.8% |
Q2 revenue increased 9.6%; six-month revenue increased 8.5%. Q2 income before taxes increased 13.4%, while six-month income before taxes increased 11.6%. Excluding the non-GAAP Incentive Contribution, income before taxes increased 13.5% in Q2 and 3.6% for the six months.
- Domestic company-owned comparable sales increased 6.0% in Q2 and 4.9% year to date.
- North America franchised comparable sales increased 2.6% in Q2 and 1.7% year to date.
- International comparable sales increased 6.8% in Q2 and 7.5% year to date on a constant-dollar basis.
- Domestic company-owned restaurant operating margin declined to 18.8% in Q2 from 19.6%, and to 19.3% year to date from 20.7%, primarily because of higher commodity costs and favorable supplier incentives in the prior-year period.
- Cash and cash equivalents were $28.2 million at June 30, 2013, compared with $16.4 million at December 30, 2012.
- Operating cash flow was $47.2 million, versus $65.2 million in the prior-year six-month period. Capital expenditures were $25.5 million, resulting in reported free cash flow of $21.7 million versus $50.1 million.
- Debt consisted of $133.2 million outstanding under a $300 million unsecured revolving credit facility; approximately $147.2 million remained available after letters of credit.
- Leverage was 1.1-to-1.0 against a maximum permitted 3.0-to-1.0, and interest coverage was 5.3-to-1.0 against a minimum required 3.5-to-1.0. The company was in compliance with all covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher comparable sales, net restaurant unit growth, the 2012 acquisition of 50 Denver and Minneapolis restaurants, higher commissary volumes and commodity pricing, and international expansion.
- Domestic company-owned restaurant profitability weakened because of higher food costs, while commissary, franchising, international, and online operations contributed higher earnings.
- General and administrative expense declined as a percentage of revenue to 9.5% in Q2 from 9.9%, and to 9.4% for the six months from 9.7%.
- Share repurchases reduced diluted weighted-average shares by 7.7% in Q2 and 7.1% year to date, contributing approximately $0.06 and $0.12, respectively, to EPS growth.
- The company repurchased 978,000 shares for $58.8 million during the six months, funded with operating cash flow and revolver borrowings.
- The revolving facility was amended in April 2013, increasing capacity from $175 million to $300 million and extending maturity to April 30, 2018.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide clear formal full-year revenue or EPS guidance. Management stated that 2013 full-year commissary margin was expected to approximate 2012.
- The Incentive Contribution, related to a supplier marketing payment and advertising credits, increased pre-tax income by $250,000 in Q2 2013 and $500,000 year to date. Management presents adjusted results excluding this item for comparability.
- On August 2, 2013, the Board approved the company’s first quarterly cash dividend of $0.25 per share, payable September 20, 2013. Future dividends remain subject to Board approval.
- On July 30, 2013, the company replaced its $50 million, 0.56% interest-rate swap with a $75 million swap at 1.42%, maturing April 30, 2018. Management expected no material effect on third-quarter or full-year results.
- Key risks include commodity cost volatility, supply-chain disruption, food safety and product recalls, competition and consumer demand, international operations, labor and regulatory costs, interest and currency rates, technology and cybersecurity risks, franchisee performance, and litigation.
- In the Agne telephone-consumer-protection class action, a settlement was preliminarily approved; final approval was expected later in 2013. Management did not expect costs to differ materially from its recorded estimate.
- The Perrin delivery-driver wage and mileage case remained unresolved. Approximately 3,900 drivers had opted in from a potential class of 28,800, and additional state classes could add approximately 14,000 plaintiffs. A potential loss could not be reasonably estimated and could materially affect the company.
- Disclosure controls and procedures were concluded to be effective, with no material change in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether comparable-sales momentum and unit growth continue without further erosion in company-owned restaurant margins.
- The effect of commodity prices, particularly cheese, on restaurant and commissary profitability.
- Cash generation after elevated capital expenditures, share repurchases, and the newly initiated dividend.
- Debt utilization, revolver availability, interest-rate exposure, and compliance with leverage and coverage covenants.
- Final resolution and ultimate cost of the Agne settlement and the potential exposure from the Perrin litigation.
- Whether international growth and online sales continue to offset higher costs and operational risks.