Papa John’s International, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended December 27, 2020, with quarterly data for the fourth quarter included. Papa John’s operates and franchises pizza delivery and carryout restaurants in 48 countries and territories. The system had 5,400 restaurants at year-end: 588 company-owned and 4,812 franchised. Approximately 2,111 restaurants were international and all were franchised.
The business consists of domestic company-owned restaurants, North America commissaries, North America franchising, international operations, and other technology, marketing, printing and promotional activities. COVID-19 materially influenced demand, operating procedures and development activity during the year.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $1.813 billion | $1.619 billion | 12.0% increase |
| Operating income | $90.3 million | $24.5 million | $65.7 million increase |
| Operating margin | 5.0% | 1.5% | 3.5 percentage-point increase |
| Income before taxes | $75.4 million | $5.0 million | $70.4 million increase |
| Net income attributable to the Company | $57.9 million | $4.9 million | Significant increase |
| Net income attributable to common shareholders | $41.7 million | $(7.6) million | Returned to profitability |
| Diluted EPS | $1.28 | $(0.24) | $1.52 increase |
| Cash flow from operations | $186.4 million | $61.7 million | $124.7 million increase |
| Free cash flow | $137.1 million | $14.0 million | $123.1 million increase |
Adjusted operating income, excluding special items, was $96.2 million versus $34.0 million in 2019. Adjusted diluted EPS was $1.40 versus $0.03. These are non-GAAP measures and should be considered alongside GAAP results.
- Domestic company-owned restaurant sales were $700.8 million, up 7.5%; comparable sales increased 14.2% excluding the effect of 2019 refranchising.
- North America franchise royalties and fees were $96.7 million, up 34.7%, supported by 18.6% comparable franchise sales growth and reduced temporary royalty relief.
- North America commissary revenue was $680.8 million, up 11.1%, primarily from higher volumes and pricing associated with commodity costs.
- International revenue was $124.0 million, up 20.4%; international comparable sales increased 12.6%, excluding foreign-currency effects.
- System-wide net unit growth was five restaurants: 220 openings and 215 closures. Development agreements covered approximately 210 additional North America restaurants and 1,250 additional international restaurants.
Cash and cash equivalents were $130.2 million at year-end, compared with $27.9 million in 2019. Total debt was $350.0 million, consisting of $340.0 million under the term loan and $10.0 million under the revolving facility. Remaining availability under the credit facilities was approximately $344.2 million, including the effect of outstanding letters of credit. The facilities mature on August 30, 2022. The Company was in compliance with its debt covenants; the leverage ratio was 2.4x versus a permitted maximum of 4.75x, and the interest coverage ratio was 3.8x versus a required minimum of 2.25x.
Total stockholders’ deficit was $266.9 million at year-end, and Series B Convertible Preferred Stock was recorded as temporary equity of $251.9 million. The Company paid $29.4 million in common dividends, $4.6 million in pass-through dividends to preferred holders, and $9.1 million in preferred dividends during 2020.
Material changes versus the prior comparable period
- Revenue growth accelerated across all major segments, reflecting strong delivery and carryout demand, menu innovation, digital ordering and increased franchisee sales.
- Operating margin expanded substantially as revenue growth, lower corporate expenses and reduced franchise support more than offset higher labor, bonus and commodity costs.
- Temporary North America franchise support declined to $29.3 million from $46.6 million in 2019 and concluded in the third quarter of 2020.
- 2019 included $14.2 million of special charges and $4.7 million of refranchising gains; 2020 included $6.0 million of strategic corporate reorganization costs.
- Operating cash flow increased sharply because of higher earnings and favorable working-capital changes. Capital expenditures were $35.7 million, compared with $37.7 million in 2019.
- The Company repurchased 32,000 shares for $2.7 million in 2020 under a $75.0 million authorization. An additional 15,000 shares were repurchased after year-end.
- Restaurants increased from 5,395 to 5,400 despite COVID-19-related development delays and approximately 65 temporarily closed international locations at year-end.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a specific quantitative revenue, earnings or unit-growth forecast. Management expects pandemic-related demand benefits to moderate or decline as restrictions are lifted and vaccines become widely available, and states that the duration of elevated demand cannot be predicted.
- The Company planned to open a 60,000-square-foot Atlanta office in summer 2021. Total reorganization costs were estimated at $15.0 million to $20.0 million through 2021; approximately $6.0 million was recorded in 2020 and an additional $9.0 million to $14.0 million was expected in 2021.
- Management continued to emphasize menu innovation, digital ordering, loyalty programs, delivery aggregators, higher-quality ingredients and international franchised growth.
- Key COVID-19 risks include renewed restrictions, workforce availability, supply-chain interruptions, temporary restaurant closures, changes in consumer behavior, cyber risk and potential normalization of comparable sales.
- Other material risks include intense competition, labor and commodity inflation, reliance on Leprino as the domestic sole supplier of mozzarella cheese, franchisee financial health, foreign-currency volatility, food safety, data privacy, technology outages, litigation and regulatory changes.
- Series B Preferred Stock carries a 3.6% annual dividend, can increase to 5.6% after the third anniversary and 7.6% after the fifth anniversary, and has redemption or repurchase rights after November 2026 or upon certain change-of-control events.
- The Company had $82.0 million of insurance reserves, $47.9 million of net franchisee loans outstanding, approximately $190.8 million of operating lease payments, and $14.3 million of contingent lease guarantees at year-end.
- Goodwill impairment testing resulted in no impairment indicators. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether elevated COVID-era comparable sales and margins persist as consumer behavior normalizes.
- The sustainability of franchisee sales growth, royalty rates and the completed phase-out of temporary franchise support.
- Debt maturity and refinancing risk when the credit facilities mature in August 2022, including LIBOR transition effects.
- The cash cost and operational effectiveness of the Atlanta reorganization and office relocation.
- Exposure to cheese, labor, delivery, insurance and other operating-cost inflation.
- The financial condition of franchisees, recoverability of $47.9 million of franchisee loans and the adequacy of related credit-loss reserves.
- Potential dilution, dividend increases and future repurchase obligations associated with the Series B Preferred Stock.
- Developments in disclosed litigation, cybersecurity, privacy, food safety and supply-chain matters.