Papa John’s International, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly filing for the period ended June 28, 2009, covering the three and six months ended June 28, 2009, compared with June 29, 2008. Papa John’s operated 3,418 restaurants at quarter-end: 612 company-owned and 2,806 franchised, across all 50 states and 29 countries. The company generated revenue from company-owned restaurants, franchise royalties and fees, food and paper distribution, international operations, and related services.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $276.6 million | $283.4 million | $561.6 million | $572.4 million |
| Operating income | $24.6 million | $14.5 million | $55.0 million | $30.2 million |
| Net income attributable to Papa John’s | $14.2 million | $7.6 million | $32.0 million | $16.3 million |
| Diluted EPS | $0.51 | $0.27 | $1.15 | $0.57 |
| Operating margin | 8.9% | 5.1% | 9.8% | 5.3% |
| Net margin | 5.1% | 2.7% | 5.7% | 2.8% |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $54.6 million | $29.3 million |
At June 28, 2009, cash and cash equivalents were $24.3 million, compared with $11.0 million at December 28, 2008. Total debt was $107.5 million, including $103.0 million outstanding under a $175.0 million revolving credit facility; remaining availability, net of certain letters of credit, was approximately $54.0 million. The company was in compliance with its debt covenants.
Six-month investing cash outflows were $24.3 million, including $15.2 million of capital expenditures and $9.7 million of loans issued. Financing cash outflows were $18.0 million, principally reflecting $20.5 million of credit-facility repayments and $5.0 million of share repurchases, partially offset by $8.1 million from stock-option exercises.
Material changes versus the prior comparable period
- Revenue declined 2.4% in the quarter and 1.9% year to date, primarily because 62 company-owned restaurants were sold to franchisees in late 2008, commodity-driven commissary sales declined, and other sales weakened.
- Comparable company-owned sales decreased 0.4% in Q2 and were flat for the first six months; comparable domestic franchise sales increased 0.2% in both periods.
- Company-owned restaurant operating income increased $3.0 million in Q2 and $5.6 million year to date, supported by pricing and product mix, lower commodity costs, improved labor economics, and the sale of higher-cost restaurants. Excluding BIBP, restaurant operating margin increased to 21.6% from 19.3% in Q2 and to 21.7% from 19.8% year to date.
- The BIBP cheese-purchasing variable interest entity generated a $6.9 million pretax benefit in Q2 and a $15.9 million benefit year to date, versus pretax losses of $6.3 million and $14.3 million in the comparable 2008 periods. Management stated that BIBP materially affects reported results and is volatile.
- Excluding BIBP, pretax income net of noncontrolling interests decreased approximately $3.1 million in Q2 and $5.6 million year to date. Higher corporate expenses included litigation settlement costs, management transition and recruiting costs, increased employee benefits, franchise-support contributions, and higher receivable provisions.
- Domestic franchising income declined because of fewer unit openings, lower opening fees under incentive programs, and the absence of certain 2008 franchise renewal fees. International losses improved to $0.8 million in Q2 and $1.6 million year to date.
- The company acquired 11 Florida restaurants for $2.8 million and sold 10 New Mexico company-owned restaurants for $1.1 million, recording an approximately $350,000 pretax gain.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected to fund planned capital expenditures and potential share repurchases through operating cash flow, available cash, and remaining credit-facility capacity. No formal revenue or EPS guidance was provided.
- Based on July 29, 2009 cheese futures prices, management projected BIBP to increase 2009 pretax income by approximately $24.3 million, including projected benefits for Q3 and Q4. The filing cautions that actual BIBP results have historically differed materially from futures-based projections.
- BIBP had a $17.3 million stockholders’ deficit, $4.5 million of third-party borrowings, a $3.0 million letter of credit, and $28.2 million of borrowings from Papa John’s. Papa John’s guaranteed BIBP’s third-party debt and agreed to provide additional funding.
- Notes receivable were $13.5 million net of allowances, with reserves of $7.2 million for potential uncollectibility. The company remained contingently liable for approximately $6.2 million of undiscounted lease payments related to former Perfect Pizza operations, although no liability was recorded.
- Key risks include commodity-price volatility, economic weakness and consumer spending, franchisee financial health, competition, labor and operating costs, insurance claims, international operations, legal claims, impairment of goodwill or restaurant assets, and the ability to execute restaurant growth plans.
- Interest-rate exposure was partly hedged through swaps. The filing estimated that a 100-basis-point rate increase would increase annual interest expense by approximately $30,000 on the revolving debt, plus approximately $44,750 on BIBP debt.
- The company adopted SFAS Nos. 160 and 161 in 2009. SFAS No. 167, affecting variable interest entity accounting, was scheduled for adoption in the first quarter of 2010; the company had not assessed its impact.
- Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate the recurring operating performance from the significant and potentially volatile BIBP accounting benefit.
- Reconcile reported earnings and cash flow with the impact of consolidating BIBP and other variable interest entities.
- Assess the sustainability of improved restaurant margins after commodity prices, pricing actions, labor costs, and restaurant divestitures normalize.
- Review franchisee credit exposure, the $7.2 million notes-receivable reserve, and BIBP funding and guarantee obligations.
- Monitor liquidity, the January 2011 credit-facility expiration, covenant compliance, and the company’s intended share-repurchase activity.
- Evaluate the approximately $6.2 million contingent Perfect Pizza lease exposure and potential litigation, insurance, tax, and impairment charges.