Papa John’s International, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 27, 2015; 52 weeks. The filing also provides unaudited fourth-quarter data for the 13 weeks ended December 27, 2015.
Business context
Papa John’s operates and franchises pizza delivery and carryout restaurants, with limited dine-in operations internationally. At year-end, the system had 4,893 restaurants in 50 U.S. states and 39 countries and territories: 752 Company-owned and 4,141 franchised. The Company reports domestic Company-owned restaurants, domestic commissaries, North America franchising, international operations, and all other businesses.
During 2015, the Company opened 357 restaurants and closed 127, resulting in net unit growth of 230. International franchised restaurants represented the primary source of expansion.
Financial highlights
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1.637 billion | $1.598 billion | +2.5% |
| Operating income | $136.3 million | $117.6 million | +15.9% |
| Income before taxes | $119.1 million | $114.3 million | +4.3% |
| Net income attributable to Company | $75.7 million | $73.3 million | +3.2% |
| Diluted EPS | $1.89 | $1.75 | +8.0% |
| Net cash from operating activities | $160.3 million | $122.6 million | +30.7% |
| Free cash flow | $121.3 million | $74.0 million | +64.0% |
Excluding the $12.3 million pre-tax Perrin legal settlement, adjusted 2015 income before taxes was $131.4 million, adjusted net income was $83.7 million, and adjusted diluted EPS was $2.09. These are non-GAAP measures.
- Domestic Company-owned restaurant sales rose 7.8% to $756.3 million, driven by 5.9% comparable sales growth and 2.7% equivalent-unit growth.
- North America franchise royalty revenue increased 6.3% to $95.0 million; North America franchised comparable sales increased 3.6%.
- International royalties and franchise and development fees increased 6.1% to $27.3 million; international franchised comparable sales increased 7.3% on a constant-dollar basis.
- Domestic commissary sales declined 2.2% to $615.6 million, primarily because of lower cheese prices; the Company applies a fixed-dollar markup on cheese, limiting the effect on dollar margin.
- Domestic Company-owned restaurant operating margin improved to 20.1% from 18.5%, primarily due to lower commodity costs.
- Consolidated operating margin was approximately 8.3%, compared with 7.4% in 2014. Net income margin was approximately 4.6% in both years.
- Cash and cash equivalents totaled $21.0 million at year-end. Total debt was $256.0 million, consisting entirely of borrowings under an unsecured revolving credit facility.
Material changes versus the prior comparable period
- Revenue growth slowed from 11.1% in 2014 to 2.5% in 2015, partly because 2014 included substantially higher FOCUS equipment sales and higher commodity-driven commissary revenue.
- Profitability benefited from lower cheese costs and stronger domestic Company-owned sales, while general and administrative expense increased to $157.4 million from $140.6 million.
- Interest expense increased to $5.7 million from $4.1 million as average borrowings and the effective interest rate increased.
- Weighted-average diluted shares declined 4.1% to 40.0 million, supported by $119.8 million of share repurchases in 2015.
- Debt increased from $230.5 million to $256.0 million, primarily to fund repurchases and dividends. Remaining credit-facility availability was approximately $120.2 million.
- The Company incurred $7.5 million of pre-tax FOCUS rollout costs in 2015, reducing diluted EPS by approximately $0.13.
- China Company-owned operations, consisting of 45 restaurants and a commissary, were classified as held for sale. The operations generated a $1.2 million pre-tax loss in 2015, compared with a $3.4 million loss in 2014.
Fourth-quarter information
| Metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Total revenue | $416.8 million | $425.5 million |
| Operating income | $40.2 million | $33.4 million |
| Net income attributable to Company | $24.7 million | $21.2 million |
| Diluted EPS | $0.62 | $0.52 |
The filing text does not provide a separate fourth-quarter comparable-sales or cash-flow disclosure.
Liquidity, capital allocation, and commitments
- The revolving credit facility has $400 million of committed capacity, matures October 31, 2019, and permits an additional $100 million increase. Interest is generally LIBOR plus 75 to 175 basis points.
- Actual year-end leverage was 1.6x versus a maximum covenant ratio of 3.0x; interest coverage was 4.8x versus a minimum of 3.5x. The Company was in compliance with all covenants.
- Interest-rate swaps hedge $125 million of borrowings through April 2018, with forward-starting swaps covering $125 million from 2018 through 2023.
- The Company paid $24.8 million of dividends in 2015 and declared $0.175 per share for the first quarter of 2016.
- The share-repurchase authorization totaled $1.525 billion and expires February 28, 2017. Approximately $167.1 million remained available as of February 16, 2016; an additional 860,000 shares were repurchased after year-end for $42.6 million.
- Contractual obligations totaled $510.5 million, including $256.0 million of debt, $46.2 million of estimated interest payments, and $208.3 million of operating leases. Standby letters of credit totaled $23.7 million.
Guidance, outlook, commentary, and risks
- Management expected 2016 net unit growth of approximately 180 to 210 restaurants, with roughly 70% to 80% in international markets.
- The Company planned to construct an additional domestic full-service production and distribution center in the Southeast in 2016.
- Management expected to sell the China Company-owned operations during 2016 and stated that the sale was not expected to have a significant effect on financial results.
- Key risks include intense QSR pizza competition, consumer spending and preference changes, food safety and brand damage, commodity and labor-cost inflation, insurance claims volatility, supply-chain concentration, and dependence on Leprino Foods as the sole domestic cheese supplier.
- International results are exposed to currency, political, economic, regulatory, franchisee, and market-development risks. Currency movements reduced 2015 revenue by $7.5 million and income before taxes by $2.8 million.
- Approximately half of domestic sales originated through digital ordering channels, creating exposure to technology outages, cybersecurity incidents, privacy regulation, and third-party systems failures.
- The Perrin delivery-driver litigation settlement was finally approved in January 2016. The Company recorded a $12.3 million pre-tax expense in 2015 and paid the settlement after year-end while denying wrongdoing.
- Other notable contingencies include $3.7 million of unrecognized tax benefits, insurance reserves of $30.6 million, and redeemable noncontrolling interests of $8.4 million.
Most important facts for investors to verify
- Whether 2016 unit-growth expectations of 180 to 210 restaurants were achieved, particularly the international opening pipeline.
- The timing, proceeds, and operating impact of the planned China refranchising transaction.
- Comparable sales trends and domestic Company-owned restaurant margins after the benefit of low cheese prices.
- Debt levels, share repurchases, dividend commitments, and compliance with revolving-credit covenants.
- Actual commodity, labor, insurance, and foreign-currency impacts versus management’s assumptions.
- Resolution and cash costs of the Perrin settlement and any additional employment, franchise, consumer, or other litigation.
- Execution costs and benefits of the FOCUS point-of-sale rollout and ongoing dependence on digital ordering systems.