Papa John’s International, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 24, 2017, compared with September 25, 2016. Papa John’s operated 5,101 restaurants at quarter-end, including 742 company-owned and 4,359 franchised restaurants, across all 50 U.S. states and 43 international countries and territories. Revenue is generated primarily from company-owned restaurant sales, franchise royalties and fees, commissary and other sales, and international operations.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $431.7 million | $422.4 million | $1.316 billion | $1.274 billion |
| Operating income | $33.5 million | $33.4 million | $114.4 million | $113.1 million |
| Income before taxes | $30.9 million | $31.6 million | $108.3 million | $108.2 million |
| Net income attributable to the Company | $21.8 million | $21.5 million | $73.8 million | $70.2 million |
| Diluted EPS | $0.60 | $0.57 | $2.02 | $1.86 |
| Operating margin | 7.8% | 7.9% | 8.7% | 8.9% |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $114.9 million | $121.5 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | $71.7 million | $82.5 million |
Cash and cash equivalents were $39.5 million at September 24, 2017, compared with $15.6 million at December 25, 2016. Total debt was $400.0 million, consisting entirely of term-loan borrowings, versus $300.6 million under the prior revolving facility at year-end 2016. Remaining availability under the new facilities, after letters of credit, was approximately $569.2 million. The company was in compliance with its debt covenants, with a 2.0-to-1.0 leverage ratio versus a permitted maximum of 4.5-to-1.0 and interest coverage of 4.8-to-1.0 versus a permitted minimum of 2.75-to-1.0.
Dividends declared were $0.225 per share for the quarter and $0.625 per share for the nine months, compared with $0.200 and $0.550, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- Quarterly revenue increased 2.2%; nine-month revenue increased 3.3%.
- Domestic company-owned restaurant sales declined 1.4% in the quarter and 0.5% for the nine months, primarily because of fewer company-owned equivalent units following the 2016 refranchising of 42 restaurants. Comparable sales increased 1.7% and 2.3%, respectively.
- North America franchise royalties and fees increased 3.2% in the quarter and 4.2% for the nine months. North America franchise restaurant sales increased 3.6% and 3.8%, respectively, although those sales are not included in company revenue.
- North America commissary and other sales increased 4.9% in the quarter and 7.1% for the nine months, driven mainly by volume and, for the nine-month period, commodity price increases.
- International revenue increased 9.9% in the quarter and 6.7% for the nine months. International comparable sales increased 5.3% and 5.0% on a constant-dollar basis.
- Domestic company-owned restaurant margin fell to 17.5% from 18.7% in the quarter and to 19.2% from 20.1% for the nine months, primarily due to higher delivery costs and non-owned automobile insurance costs.
- North America commissary and other margin declined to 5.6% from 7.1% in the quarter and to 6.5% from 7.3% for the nine months, primarily because of start-up and higher operating costs at the new Georgia commissary.
- General and administrative expense declined $3.2 million in the quarter and $6.1 million for the nine months, mainly from lower management incentive costs and restaurant supervisor bonuses.
- Net interest expense increased $0.8 million in the quarter and $1.3 million for the nine months because of higher rates and higher average debt balances.
- Diluted EPS increased 5.3% in the quarter and 8.6% for the nine months, aided by higher net income, share repurchases, and the adoption of new stock-compensation accounting guidance. The nine-month EPS benefit from that accounting adoption was approximately $0.05.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide clear full-year revenue, earnings, or unit-growth guidance.
- Management expected to repurchase the remaining share-repurchase authorization by early to mid-2019 and expected to implement an accelerated share-repurchase program in the fourth quarter of 2017. Approximately $485.9 million remained authorized as of October 24, 2017; an additional $29.7 million of shares was repurchased after quarter-end through that date.
- The company entered a new August 30, 2017 credit agreement providing a $600 million revolving facility and a $400 million term loan facility, maturing August 30, 2022. Quarterly $5 million term-loan amortization begins in the fourth quarter of 2017.
- Interest-rate exposure remains material. The company used swaps to fix rates on portions of its debt; a 100-basis-point increase in rates was estimated to increase annual interest expense by approximately $2.8 million.
- October 2017 subsequent events included $275 million of additional forward-starting interest-rate swaps, effective in 2018, and declaration of a $0.225-per-share fourth-quarter dividend.
- Projected fourth-quarter 2017 cheese block pricing was $1.672 per pound, versus $1.610 in the fourth quarter of 2016. The filing notes continuing exposure to commodity volatility, including cheese, the company’s largest individual food-cost item.
- International operations face foreign-exchange, Brexit, political, economic, tariff, and regulatory risks. Foreign currency reduced nine-month 2017 revenue by approximately $5.9 million.
- Other principal risks include competition, consumer preferences, food safety, labor and insurance costs, supply-chain disruption, information-technology and data-security incidents, litigation, and the ability of franchisees to execute growth plans.
- The company closed its India market during the third quarter; the filing states that the closures had no significant impact on operating results. The company also sold 25 company-owned restaurants to a 70%-owned joint venture on September 25, 2017, immediately after quarter-end.
- The company adopted ASU 2016-09 for stock-based compensation in 2017. It expects to adopt the new revenue-recognition standard in the first quarter of 2018 using the modified retrospective method and was still evaluating effects on loyalty programs, advertising funds, and franchise and development fees.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether company-owned restaurant margins recover after delivery, insurance, and Georgia commissary cost pressures.
- The pace and valuation impact of planned share repurchases, including the proposed accelerated repurchase program.
- Debt-service capacity, covenant headroom, refinancing exposure, and sensitivity to variable interest rates.
- Actual commodity costs, especially cheese, and their effect on restaurant and commissary margins.
- International comparable sales, currency effects, and the operational impact of India closures and Brexit-related uncertainty.
- The final accounting and reported financial effects of the 2018 revenue-recognition adoption.
- Details and potential financial exposure of ordinary-course litigation, employment claims, food-safety matters, and other contingencies, for which the filing text does not provide a clear aggregate value.