Papa John’s International, Inc. — 2015 Q2 Form 10-Q Summary
Business context and reporting period
Quarterly report for the quarter ended June 28, 2015, including results for the three and six months ended June 28, 2015 compared with the corresponding periods ended June 29, 2014. Papa John’s operated 4,734 restaurants at quarter-end: 741 company-owned and 3,993 franchised, located in the United States and 38 international countries and territories.
Financial performance and key metrics
| Metric | Three months 2015 | Three months 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $399.0 million | $380.9 million | $831.3 million | $782.2 million |
| Operating income | $31.0 million | $27.0 million | $68.6 million | $59.0 million |
| Income before taxes | $17.5 million | $26.2 million | $54.0 million | $57.6 million |
| Net income attributable to the Company | $10.8 million | $16.7 million | $33.0 million | $36.1 million |
| Diluted EPS | $0.27 | $0.40 | $0.82 | $0.85 |
| Net cash from operating activities | Not separately provided | Not separately provided | $78.0 million | $54.6 million |
| Free cash flow | Not separately provided | Not separately provided | $61.5 million | $28.3 million |
- Revenue increased 4.8% in the quarter and 6.3% year to date. Domestic company-owned comparable sales increased 7.4% and 7.7%, respectively; North America franchise comparable sales increased 4.8% and 5.4%.
- Reported operating margin was approximately 7.8% for the quarter and 8.3% year to date, compared with approximately 7.1% and 7.5% in the prior-year periods.
- Reported net margin declined to approximately 2.7% for the quarter and 4.0% year to date, primarily because of a $12.3 million pre-tax legal settlement accrual.
- Excluding the legal settlement, adjusted income before taxes increased 13.6% for the quarter and 14.9% year to date. Adjusted diluted EPS was $0.47 for the quarter and $1.02 year to date, compared with $0.40 and $0.85, respectively, in the prior-year periods.
- Domestic company-owned restaurant margin improved to 20.8% for the quarter and 21.1% year to date, versus 18.9% and 19.2%. Domestic commissary margin improved to 7.7% in both 2015 periods, versus 6.0% and 6.8%.
- Cash and cash equivalents were $22.4 million at June 28, 2015, compared with $20.1 million at December 28, 2014.
- Debt consisted entirely of an unsecured revolving credit facility. Borrowings were $234.0 million, with approximately $147.2 million of remaining availability after letters of credit. The facility matures October 31, 2019, and the company was in compliance with its covenants.
- The company repurchased $52.1 million of common stock and paid $11.1 million in dividends during the first six months. The quarterly dividend was $0.14 per share.
Material changes versus the prior comparable period
- Revenue growth was led by higher company-owned restaurant sales, franchise royalties, international activity and FOCUS equipment sales. Domestic commissary revenue declined 1.0% because of lower cheese prices, although volumes increased.
- Lower cheese costs supported company-owned restaurant and commissary margins. The average cheese price was $1.63 per pound in the second quarter versus $2.13 in the prior-year quarter.
- General and administrative expense increased $8.5 million in the quarter and $13.4 million year to date, driven by higher incentive compensation, salaries and benefits, legal costs, international advertising and timing of the annual operators’ conference.
- The FOCUS point-of-sale system had been implemented in domestic restaurants. FOCUS reduced pre-tax income by approximately $2.1 million in the quarter and $3.9 million year to date, including rollout costs, equipment-related expenses and depreciation.
- Operating cash flow increased $23.4 million year to date, while capital expenditures declined $9.7 million. Share repurchases were lower than in the prior-year period, but remained significant.
- The restaurant base increased from 4,487 at June 29, 2014 to 4,734 at June 28, 2015, primarily through international franchised unit growth.
Outlook, risks, contingencies and unusual items
- The filing does not provide a clear formal earnings or revenue guidance figure. Management discusses expected performance, unit growth, commodity costs, margins and capital expenditures as forward-looking matters but cautions that actual results may differ.
- Management projected 2015 average cheese block prices of approximately $1.644 per pound, based on futures prices and excluding the effect of certain forward-pricing agreements. Commodity costs remain a material risk.
- The company recorded a $12.3 million pre-tax expense for a preliminary settlement in the Perrin delivery-driver mileage and expense reimbursement litigation. The settlement remained subject to court approval, and the company continued to deny liability. Management expected most settlement payments within the following 12 months.
- The company faces risks from competition, consumer preferences, food safety, labor and healthcare costs, supply-chain concentration, international operations and foreign currency fluctuations, interest rates, franchisee credit performance, litigation, technology disruption and data security.
- A 100-basis-point increase in interest rates on the June 28, 2015 debt balance, after considering interest-rate swaps, would increase annual interest expense by approximately $1.1 million.
- On July 30, 2015, after quarter-end, the board approved a 25% increase in the annual dividend rate from $0.56 to $0.70 per share and declared a $0.175 third-quarter dividend.
- Management stated that disclosure controls and procedures were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Obtain court approval and final payment terms for the Perrin litigation settlement, including the timing and cash impact of payments.
- Reconcile reported results with adjusted results that exclude the legal settlement and separately assess the recurring impact of FOCUS rollout costs.
- Monitor debt utilization, covenant headroom, interest-rate exposure and the maturity of the company’s interest-rate swaps in 2018.
- Evaluate whether favorable cheese prices persist and how commodity, labor, delivery and healthcare costs affect restaurant margins.
- Assess the sustainability of share repurchases and the increased dividend relative to cash flow, debt levels and settlement obligations.
- Track international unit growth, foreign exchange effects and performance in emerging markets, particularly China.