Papa John’s International, Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 25, 2016, compared with September 27, 2015. Papa John’s operated 4,971 restaurants at quarter-end, including 778 company-owned and 4,193 franchised locations across all 50 states and 44 international countries and territories.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $422.4 million | $389.3 million | $1.274 billion | $1.221 billion |
| Operating income | $33.4 million | $27.4 million | $113.1 million | $96.1 million |
| Income before taxes | $31.6 million | $26.3 million | $108.2 million | $80.2 million |
| Net income attributable to the Company | $21.5 million | $18.0 million | $70.2 million | $51.0 million |
| Diluted EPS | $0.57 | $0.45 | $1.86 | $1.27 |
| Operating cash flow | Not separately provided | Not separately provided | $116.0 million | $119.7 million |
| Free cash flow | Not separately provided | Not separately provided | $77.0 million | $93.2 million |
Q3 revenue increased 8.5% and nine-month revenue increased 4.4%. Approximate consolidated operating margins were 7.9% in Q3 2016 versus 7.0% in Q3 2015, and 8.9% for the first nine months versus 7.9% in the prior-year period. Net income attributable to the Company increased 19.5% in Q3 and 37.7% year to date.
- Domestic company-owned restaurant sales increased 10.5% in Q3 and 8.1% year to date, supported by comparable sales growth of 6.3% and 4.2%, respectively, and equivalent-unit growth of 5.1% and 4.8%.
- Domestic franchise royalties and fees increased 11.2% in Q3 and 7.5% year to date.
- International revenue increased 7.2% in Q3 and 7.7% year to date, although foreign currency reduced international revenue by approximately $3.7 million and $7.7 million, respectively.
- Q3 domestic company-owned restaurant margin improved to 18.7% from 17.5%; the nine-month margin improved modestly to 20.1% from 20.0%.
- International margin declined to 35.8% in Q3 from 39.0%, principally because of United Kingdom lease presentation changes and an approximately $0.8 million nonrecurring straight-line rent charge.
- Cash and cash equivalents were $19.1 million at September 25, 2016, compared with $21.0 million at December 27, 2015.
Liquidity, debt, capital allocation, and material changes
- Outstanding debt was $312.4 million, net debt was $311.6 million, compared with $256.0 million and $255.1 million, respectively, at December 27, 2015.
- The unsecured revolving credit facility was increased from $400 million to $500 million. Remaining availability, including the effect of letters of credit, was approximately $162.4 million.
- The facility matures October 31, 2019, bears interest at LIBOR plus 75 to 175 basis points, and was subject to a 1.71-to-1.0 leverage ratio versus a 3.0-to-1.0 maximum and a 4.68-to-1.0 interest coverage ratio versus a 3.5-to-1.0 minimum. The Company was in compliance with all covenants.
- The Company repurchased $109.4 million of common stock during the first nine months and paid $20.5 million of dividends. It repurchased an additional $4.4 million of stock through October 25, 2016; approximately $95.9 million remained authorized for repurchases.
- Investing cash use increased to $45.7 million from $25.1 million, primarily due to the $11.2 million acquisition of 20 franchised restaurants, new restaurant construction, online and mobile ordering initiatives, and construction of a new Georgia commissary expected to open in 2017.
- Share repurchases, dividends, acquisitions, capital investment, and the 2015 legal settlement were funded through operating cash flow and credit-facility borrowings.
Outlook, commentary, risks, and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management states that interim results are not necessarily indicative of full-year results.
- The 2015 nine-month comparison includes a $12.3 million legal settlement expense related to delivery-driver reimbursement claims. Excluding that item, nine-month 2016 income before taxes increased approximately 17.0%.
- Management reported higher insurance costs from adverse automobile claims experience, which partially offset domestic restaurant performance.
- Projected fourth-quarter 2016 cheese block pricing was $1.610 per pound, versus $1.602 in Q4 2015; the projected 2016 full-year average was $1.545 versus $1.614 in 2015, before the effect of certain forward-pricing agreements.
- Key risks include competition and pricing pressure, consumer demand, food safety, labor and insurance costs, supply-chain disruption, commodity prices, international and currency exposure, litigation, technology and data-security incidents, and dependence on key leadership.
- Brexit may contribute to additional currency volatility and future trade, tariff, or regulatory changes. Six of the Company’s 44 international country operations were in the European Union.
- Interest-rate swaps covered specified debt amounts at fixed rates ranging from 1.36% to 2.36%. A 100-basis-point increase in interest rates on the September 25 debt balance, after swaps, was estimated to increase annual interest expense by approximately $1.9 million.
- The Company expects the fiscal 2017 adoption of ASU 2016-09 on stock compensation could materially affect the financial statements. The effect of the future lease standard had not yet been determined; the Company did not expect the new revenue standard to have a significant impact.
Most important facts to verify
- Whether comparable-sales momentum and unit growth continue after the 6.3% Q3 domestic company-owned comparable-sales increase.
- Debt-funded capital allocation, remaining credit capacity, covenant headroom, and the sustainability of share repurchases and dividends.
- The effect of adverse automobile claims, labor costs, commodity prices, and other operating-cost inflation on restaurant margins.
- The recurring versus nonrecurring nature of the United Kingdom lease charge and the comparability effects of lease-income presentation changes.
- Foreign-exchange exposure, particularly in the United Kingdom and other international markets, and the continuing effects of Brexit.
- The impact of the 2017 stock-compensation accounting adoption and subsequent accounting changes on earnings, cash flow, and equity.