Papa John’s(PZZA) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company's financial statements show significant revenue and operating income growth, with balance sheet changes driven by new debt issuance and the elimination of preferred stock Condensed Consolidated Balance Sheets | Balance Sheet Items (In thousands) | Sep 26, 2021 | Dec 27, 2020 | | :--- | :--- | :--- | | Total current assets | $271,760 | $306,407 | | Total assets | $889,954 | $872,770 | | Total current liabilities | $318,119 | $288,869 | | Long-term debt, less current portion, net | $414,915 | $328,292 | | Total liabilities | $1,019,469 | $881,334 | | Series B Convertible Preferred Stock | $0 | $251,901 | | Total stockholders' deficit | ($137,046) | ($266,939) | - The company's balance sheet shows the complete elimination of the Series B Convertible Preferred Stock, which was valued at $251.9 million at the end of 2020, accompanied by an increase in long-term debt[10] Condensed Consolidated Statements of Operations | Metric (In thousands, except EPS) | Q3 2021 | Q3 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Total revenues | $512,782 | $472,941 | +8.4% | | Operating income | $38,577 | $24,549 | +57.1% | | Net income attributable to Company | $29,256 | $15,708 | +86.2% | | Diluted earnings per common share | $0.79 | $0.35 | +125.7% | | Metric (In thousands, except EPS) | 9 Months 2021 | 9 Months 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Total revenues | $1,539,536 | $1,343,423 | +14.6% | | Operating income | $130,076 | $70,555 | +84.4% | | Net income attributable to Company | $95,393 | $44,765 | +113.1% | | Diluted earnings (loss) per common share | ($0.59) | $0.99 | N/A | - For the nine months ended September 26, 2021, the company reported a net loss attributable to common shareholders of $20.4 million, resulting in a diluted loss per share of ($0.59), primarily due to a $109.9 million deemed dividend on the redemption of Series B Convertible Preferred Stock[12][58] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (In thousands) | 9 Months Ended Sep 26, 2021 | 9 Months Ended Sep 27, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $193,624 | $168,547 | | Net cash used in investing activities | ($41,191) | ($28,588) | | Net cash used in financing activities | ($177,058) | ($27,437) | | Change in cash and cash equivalents | ($24,391) | $112,139 | - Financing activities for the nine months ended September 26, 2021, were primarily driven by the issuance of $400.0 million in senior notes and the repayment of a $340.0 million term loan, alongside a significant $188.6 million cash outflow for the repurchase of Series B Convertible Preferred Stock[26] Notes to Condensed Consolidated Financial Statements - In Q2 2021, the company repurchased all outstanding Series B Preferred Stock for $188.6 million, resulting in a $109.9 million deemed dividend that reduced net income attributable to common shareholders[58] - In September 2021, the company issued $400.0 million of 3.875% senior notes due 2029 and entered into a new $600.0 million revolving credit facility to repay previous borrowings[70][76][84] - The company expects to incur total one-time corporate reorganization costs of $17.0 to $20.0 million through 2021 related to its new Atlanta office, with $15.3 million incurred to date[91] Management's Discussion and Analysis of Financial Condition and Results of Operations System-wide sales growth continued for the ninth consecutive quarter, driven by strong comparable sales, though management notes staffing challenges amid strong demand Overview and Recent Developments - The company achieved its ninth consecutive quarter of system-wide sales growth, with two-year comparable sales of +30.7% in North America and +29.0% internationally for Q3[104] - Key capital allocation initiatives in 2021 include issuing $400.0 million in senior notes, refinancing the credit facility, and announcing a new $425.0 million share repurchase program[105] - The company's delivery and carryout model has led to strong demand, but it faces challenges in attracting and retaining hourly employees in a competitive job market[106] Global Restaurant Sales Information | Comparable Sales Growth | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | North America restaurants | 6.9% | 23.8% | | International restaurants | 8.3% | 20.7% | | Total | 7.3% | 23.0% | - The company saw net unit growth of 46 restaurants in Q3 2021 and 169 restaurants for the nine months ended September 26, 2021, reaching a total of 5,569 restaurants worldwide[104][113] Results of Operations - Consolidated revenues increased 8.4% to $512.8 million in Q3 2021, driven by positive comparable sales and higher North America franchise royalties[117][119] - Operating income as a percentage of revenue improved from 5.2% in Q3 2020 to 7.5% in Q3 2021, primarily due to sales leverage and improved margins[115] - Adjusted diluted EPS for Q3 2021 was $0.83, compared to $0.35 in the prior year, while nine-month GAAP results were heavily impacted by the Series B Preferred Stock repurchase[140][145] Liquidity and Capital Resources - As of September 26, 2021, the company had $425.0 million in outstanding debt and approximately $572.3 million available for borrowing under its revolving facility[147] | Free Cash Flow (Non-GAAP, In thousands) | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $193,624 | $168,547 | | Purchases of property and equipment | ($41,328) | ($24,269) | | Dividends paid to preferred stockholders | ($6,394) | ($10,237) | | Free cash flow | $145,902 | $134,041 | - The Board of Directors declared a fourth-quarter dividend of $0.35 per common share, payable in November 2021[156] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from interest rates, foreign currency, and commodities, with specific exposures in its variable-rate debt and international revenues - The company is exposed to interest rate changes on its PJI Revolving Facility, which it attempts to minimize using interest rate swaps that were recently de-designated as hedges[167] - Operations outside the U.S., accounting for approximately 7% of revenues, expose the company to foreign currency fluctuations, which had a favorable impact of $7.9 million on revenues for the nine-month period[168][169] - The company faces commodity price risk for food and paper products, with cheese being the largest single food cost, and is subject to market volatility despite some forward pricing agreements[170] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective, with no material changes to internal controls during the third quarter of 2021 - The CEO and CFO concluded that as of September 26, 2021, the company's disclosure controls and procedures were effective[172] - No changes were made to the company's internal control over financial reporting during the most recent fiscal quarter that have materially affected or are likely to materially affect such controls[173] PART II. OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, including a collective action lawsuit concerning delivery driver expense reimbursement, for which no loss has been recorded - The company is defending a conditionally certified collective action lawsuit (Durling et al v. Papa John's International, Inc) and has not recorded any liability as it does not believe a loss is probable or reasonably estimable[89][174] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 2020[175] Unregistered Sales of Equity Securities and Use of Proceeds The company continued its share repurchase program in Q3 and subsequently received board approval for a new, larger $425.0 million repurchase authorization - Under its $75.0 million share repurchase program, the company repurchased 103,000 shares in Q3 2021, with approximately $31.9 million remaining available under this authorization as of October 29, 2021[176][177] - On October 28, 2021, the Board of Directors approved a new share repurchase program authorizing the company to buy back up to $425.0 million of its common stock[178] Exhibits This section lists exhibits filed with the Form 10-Q, including agreements for new senior notes and credit facilities, along with required officer certifications - Key exhibits filed with this report include the Indenture for the 3.875% Senior Notes due 2029 and the Amended and Restated Credit Agreement dated September 14, 2021[180]