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Press release from Business Wire

Papa John's Announces Third Quarter 2012 Results

<p class='bwalignc'> <b>EPS Increased 25.0% on Comparable Sales Increases of 2.5% for North America and 6.9% for International</b> </p> <p class='bwalignc'> </p>

Wednesday, October 31, 2012

Papa John's Announces Third Quarter 2012 Results17:07 EDT Wednesday, October 31, 2012 LOUISVILLE, Ky. (Business Wire) -- Papa John's International, Inc. (NASDAQ: PZZA)today announced financial results for the three and nine months ended September 23, 2012. HighlightsThird quarter earnings per diluted share of $0.55 in 2012, an increase of 25.0% over earnings per diluted share of $0.44 in 201156 global net restaurant openings during the quarter2012 earnings guidance raised to a range of $2.53 to $2.63; comparable sales guidance raised for both North America (updated guidance range of +3.0% to +4.0%) and International (updated guidance range of +6.0% to +7.0%) “During the third quarter, we achieved a significant milestone with the opening of our 4,000th restaurant,” said Papa John's founder, chairman, and chief executive officer, John Schnatter. “Consumers and franchisees continue to put a premium on quality and that's where Papa John's wins. This translates into both strong global development and solid comparable sales results.” Third quarter 2012 revenues were $325.5 million, a 6.5% increase from third quarter 2011 revenues of $305.7 million. Third quarter 2012 net income was $13.2 million compared to third quarter 2011 net income of $11.1 million. Third quarter 2012 diluted earnings per share were $0.55, compared to third quarter 2011 diluted earnings per share of $0.44. Revenues were $975.4 million for the nine months ended September 23, 2012, a 7.0% increase from revenues of $911.7 million for the same period in 2011. Net income was $44.7 million for the nine months ended September 23, 2012 ($46.8 million excluding the $2.1 million Incentive Contribution discussed later in this press release), compared to net income of $39.7 million for the same period in 2011. Diluted earnings per share were $1.85 for the nine months ended September 23, 2012 ($1.94 excluding the Incentive Contribution), compared to $1.55 in the prior year. Global Restaurant and Comparable Sales Information     Three Months Ended   Nine Months EndedSept. 23, 2012   Sept. 25, 2011Sept. 23, 2012   Sept. 25, 2011   Global restaurant sales growth (a) 7.1 % 8.3 % 7.6 % 8.3 %   Global restaurant sales growth, excluding the impact of foreign currency (a) 7.4 % 7.6 % 8.0 % 7.7 %   Comparable sales growth (b) Domestic company-owned restaurants 5.0 % 6.3 % 5.1 % 5.0 % North America franchised restaurants 1.7 % 4.9 % 2.4 % 3.6 % System-wide North America restaurants 2.5 % 5.3 % 3.0 % 3.9 %   System-wide international restaurants 6.9 % 4.7 % 7.1 % 5.0 %   (a) Includes both company-owned and franchised restaurant sales.   (b) Represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation.   Management believes global restaurant and comparable sales information, as defined in the table above, is useful in analyzing our results since our franchisees pay royalties that are based on a percentage of franchise sales. Franchise sales generate commissary revenue in the United States and in certain international markets. Global restaurant and comparable sales information is also useful in analyzing industry trends and the strength of our brand. Franchise restaurant sales are not included in company revenues. Revenue and Operating HighlightsRevenues Consolidated revenues increased $19.8 million, or 6.5%, for the third quarter of 2012 and increased $63.7 million, or 7.0%, for the nine months ended September 23, 2012 compared to the same periods in the prior year. The increases in revenues were primarily due to the following: Domestic company-owned restaurant sales increased $14.5 million, or 11.3%, and $35.5 million, or 9.0%, for the three and nine months ended September 23, 2012, respectively, due to increases in comparable sales of 5.0% and 5.1% and the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012. North America franchise royalty revenue increased approximately $800,000, or 4.5%, and $2.6 million, or 4.7%, for the three and nine months ended September 23, 2012, respectively, primarily due to increases in comparable sales of 1.7% and 2.4% and increases in net franchise restaurants over the prior year. Royalty revenue increases were slightly offset by reduced royalties attributable to the company's net acquisition of the 50 restaurants noted above. Domestic commissary sales increased $1.8 million, or 1.4%, and $17.3 million, or 4.6%, for the three and nine months ended September 23, 2012, respectively, primarily due to higher commissary product volumes resulting from increases in the volume of restaurant sales, partially offset by lower revenues due to lower commodity costs. International revenues increased $2.5 million, or 16.2%, and increased $9.7 million, or 22.8%, for the three and nine months ended September 23, 2012, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 6.9% and 7.1%, calculated on a constant dollar basis. Operating Highlights All comparisons below are versus the same period of the prior year unless otherwise noted and exclude the Incentive Contribution. See “Marketing Incentive Contribution” below for further information. Third quarter 2012 income before income taxes was $21.1 million, compared to $16.8 million, or a 25.0% increase. Income before income taxes was $72.4 million for the nine months ended September 23, 2012, compared to $62.7 million, or a 15.5% increase. Income before income taxes is summarized in the following table on a reporting segment basis (in thousands):         Three Months Ended   Nine Months Ended     Sept. 23,   Sept. 25,   Increase   Sept. 23,   Sept. 25,   Increase       2012   2011   (Decrease)   2012   2011   (Decrease)   Domestic company-owned restaurants (a) $ 5,549 $ 4,273 $ 1,276 $ 27,228 $ 22,577 $ 4,651 Domestic commissaries 6,846 7,237 (391 ) 25,990 21,112 4,878 North America franchising 16,070 15,941 129 50,829 50,190 639 International 625 249 376 1,217 (817 ) 2,034 All others 732 (66 ) 798 1,598 (742 ) 2,340 Unallocated corporate expenses (b) (9,007 ) (11,085 ) 2,078 (34,198 ) (29,371 ) (4,827 ) Elimination of intersegment losses (profits)     242       297       (55 )     (229 )     (256 )     27   Income before income taxes 21,057 16,846 4,211 72,435 62,693 9,742 Incentive Contribution (income) expense     (250 )     -       (250 )     3,221       -       3,221   Income before income taxes, excluding Incentive Contribution   $ 20,807     $ 16,846     $ 3,961     $ 75,656     $ 62,693     $ 12,963     (a) The nine months ended September 23, 2012 includes the benefit of a $1.0 million advertising credit from the Papa John's Marketing Fund related to the Incentive Contribution.   (b) Includes the impact of the Incentive Contributionin 2012 ($250,000 increase for the three-month period and a $4.3 million reduction for the nine-month period).   The increase in income before income taxes for the three months ended September 23, 2012, of $4.0 million is primarily due to the following: Domestic company-owned restaurants income improved approximately $1.3 million primarily due to comparable sales increases as well as favorable commodity costs. North America Franchising and International improved due to the previously mentioned increase in net restaurants and strong comparable sales results. All others improved approximately $800,000 primarily due to an improvement in our eCommerce operations due to higher online sales. Unallocated corporate expenses decreased due to the prior year including higher franchise incentives and a charge of approximately $800,000 related to lease obligations associated with our former Perfect Pizza operations in the United Kingdom, partially offset by higher legal and insurance costs. These increases were partially offset by a decrease in Domestic commissaries operating results of approximately $400,000. The decrease was due to lower margins resulting from lower prices charged to restaurants, slightly offset by increased profits from higher restaurant sales. The increase in income before income taxes for the nine months ended September 23, 2012, of $13.0 million is primarily due to the following: Domestic company-owned restaurants operating income improved approximately $4.7 million primarily due to comparable sales increases as well as favorable commodity costs. Domestic commissaries income improved approximately $4.9 million primarily due to the increase in net restaurants and comparable sales. North America Franchising and International improved due to the previously mentioned increase in net restaurants and strong comparable sales results. All others improved approximately $2.3 million primarily due to an improvement in our eCommerce operations due to higher online sales. These increases were slightly offset by higher unallocated corporate expenses primarily due to an increase in short-term management incentives, legal and insurance costs and higher costs related to our operators' conference, partially offset by the prior year including franchise incentives and a charge of approximately $800,000 related to lease obligations associated with our former Perfect Pizza operations in the United Kingdom. The effective tax rates were 33.8% for both the three and nine months ended September 23, 2012, representing increases of 4.7% and 1.7% from the prior year rates. Our effective income tax rate may fluctuate from quarter to quarter for various reasons, including the settlement or resolution of specific federal and state issues. The prior year included significant favorable tax resolution items. The company's free cash flow for the first nine months of 2012 and 2011 was as follows (in thousands):     Sept. 23,   Sept. 25,20122011   Net cash provided by operating activities* $ 94,773 $ 87,216 Purchase of property and equipment   (26,425 )   (20,647 ) Free cash flow $ 68,348   $ 66,569     *The increase in net cash provided by operating activities is primarily due to higher operating income and favorable changes in working capital.   We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the purchase of property and equipment. We view free cash flow as an important measure because it is a factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by accounting principles generally accepted in the United States (“GAAP”) and as a result our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the company's performance than the company's GAAP measures. See the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for additional information concerning our operating results and cash flow for the three- and nine-month periods ended September 23, 2012. Global Restaurant Unit Data   At September 23, 2012, there were 4,029 Papa John's restaurants operating in all 50 states and in 34 countries, as follows:     Domestic Company-owned   Franchised North America   Total North America   International   System-wideThird Quarter         Beginning - June 24, 2012 643 2,475 3,118 855 3,973 Opened 2 45 47 28 75 Closed - (9 ) (9 ) (10 ) (19 ) Acquired 1 3 4 - 4 Divested (3 )   (1 )   (4 )   -     (4 ) Ending - September 23, 2012 643     2,513     3,156     873     4,029     Year-to-date Beginning - December 25, 2011 598 2,463 3,061 822 3,883 Opened 2 127 129 83 212 Closed (3 ) (31 ) (34 ) (32 ) (66 ) Acquired 57 11 68 - 68 Divested (11 )   (57 )   (68 )   -     (68 ) Ending - September 23, 2012 643     2,513     3,156     873     4,029     Restaurants at September 25, 2011 597     2,413     3,010     770     3,780     Year-over-year restaurant unit growth 46     100     146     103     249     % increase 7.7 %   4.1 %   4.9 %   13.4 %   6.6 %   Our development pipeline as of September 23, 2012 included approximately 1,500 restaurants (300 restaurants in North America and 1,200 restaurants internationally), the majority of which are scheduled to open over the next six years. Marketing Incentive Contribution As previously announced, in connection with a new multi-year supplier agreement, the company received a $5.0 million supplier marketing payment in the first quarter of 2012. The company is recognizing the supplier marketing payment evenly as income over the five-year term of the agreement ($250,000 per quarter). The company then contributed the supplier marketing payment to the Papa John's Marketing Fund (“PJMF”), an unconsolidated, non-profit corporation, for the benefit of domestic restaurants. The company's contribution to PJMF was fully expensed in the first quarter of 2012. PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as advertising credits in the first quarter of 2012. Our domestic company-owned restaurants' portion of the adverting credits resulted in an increase in income before income taxes of approximately $1.0 million in the first quarter. The overall impact of the two transactions described above, which are collectively defined as the “Incentive Contribution,” increased income before income taxes $250,000 in the third quarter of 2012 and reduced income before income taxes by approximately $3.2 million for the nine-month period, as outlined in the table below. The impact for full-year 2012 will be a reduction to income before income taxes of approximately $3.0 million (diluted earnings per share reduction of $0.08). The following table reconciles our GAAP financial results to the adjusted financial results, excluding the impact of the Incentive Contribution, for the three and nine months ended September 23, 2012:     Three Months Ended     Nine Months EndedSept. 23,   Sept. 25,Sept. 23,   Sept. 25, (In thousands, except per share amounts) 2012201120122011   Income before income taxes, as reported $ 21,057 $ 16,846 $ 72,435 $ 62,693 Incentive Contribution   (250 )   -   3,221   - Income before income taxes, excluding Incentive Contribution $ 20,807   $ 16,846 $ 75,656 $ 62,693   Net income, as reported $ 13,151 $ 11,123 $ 44,664 $ 39,674 Incentive Contribution   (159 )   -   2,116   - Net income, excluding Incentive Contribution $ 12,992   $ 11,123 $ 46,780 $ 39,674   Earnings per diluted share, as reported $ 0.55 $ 0.44 $ 1.85 $ 1.55 Incentive Contribution   -     -   0.09   - Earnings per diluted share, excluding Incentive Contribution $ 0.55   $ 0.44 $ 1.94 $ 1.55   The non-GAAP measures shown above, which exclude the Incentive Contribution, should not be construed as a substitute for or a better indicator of the company's performance than the company's GAAP measures. Management believes presenting the financial information excluding the impact of the Incentive Contribution is important for purposes of comparison to prior year results. In addition, management uses these non-GAAP measures to allocate resources, and analyze trends and underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for various levels of management, are based on financial measures that exclude the Incentive Contribution. Share Repurchase Activity The company repurchased 515,000 shares of its common stock for $25.4 million during the three months ended September 23, 2012 and repurchased 1.5 million shares for $64.1 million during the nine months ended September 23, 2012. Subsequent to quarter-end through October 24, 2012, the company repurchased 107,000 shares for $5.6 million. Approximately $51.8 million remains available under the company's share repurchase program. There were 23.7 million and 24.1 million diluted weighted average shares outstanding for the three- and nine-month periods, representing decreases of 5.7% and 5.6% over the prior year comparable periods. Diluted earnings per share increased $0.03 and $0.10 for the three- and nine-month periods, respectively, due to the reductions in shares outstanding, primarily resulting from the share repurchase program. Approximately 23.1 million actual shares of the company's common stock were outstanding as of September 23, 2012. 2012 Guidance Update   The company provided the following 2012 guidance updates:     Updated Guidance   Previous Guidance   Diluted earnings per share (a) $2.53 to $2.63 $2.45 to $2.55   North America comparable sales +3.0% to +4.0% +2.0% to +3.0%   International comparable sales +6.0% to +7.0% +4.0% to +5.5%   Capital expenditures $43 to $48 million $47 to $52 million     Worldwide net unit openings 240-280 240-280 North America 125-145 110-130 International 115-135 130-150   (a) The 2012 fiscal year will consist of 53 weeks. The impact of the 53rd week of operations is expected to increase earnings per share by approximately $0.08 to $0.10, substantially offsetting the decrease in 2012 from the Incentive Contribution.   All other guidance remains unchanged. The company will be announcing key operating assumptions and earnings guidance for 2013 in conjunction with its fourth quarter and full year 2012 earnings press release to be issued in late February 2013. Conference Call A conference call is scheduled for November 1, 2012 at 10:00 a.m. Eastern Time to review our third quarter 2012 earnings results. The call can be accessed from the company's web page at www.papajohns.com in a listen-only mode, or dial 877-312-8816 (U.S. and Canada) or 253-237-1189 (international). The conference call will be available for replay, including by downloadable podcast, through November 7, 2012. The replay can be accessed from the company's web site at www.papajohns.com or by dialing 855-859-2056 (U.S. and Canada) or 404-537-3406 (international). The Conference ID is 68145839. Forward-Looking Statements Certain matters discussed in this press release and other company communications constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such statements may relate to projections concerning business performance, revenue, earnings, contingent liabilities, commodity costs, margins, unit growth, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to: aggressive changes in pricing or other marketing or promotional strategies by competitors which may adversely affect sales, including an increase in or continuation of the aggressive pricing and promotional environment; new product and concept developments by food industry competitors; increases in or sustained high costs of food ingredients and other commodities, paper, utilities and fuel, including increases related to drought conditions; the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, which could be impacted by challenges securing financing, finding suitable store locations or securing required domestic or foreign government permits and approvals; our ability to successfully integrate the operations of franchised restaurants we acquire; the credit performance of our franchise loan program; adverse macroeconomic or business conditions; general economic and political conditions, including increasing tax rates, and their resulting impact on consumer buying habits; changes in consumer preferences; increased employee compensation, benefits, insurance and similar costs (including the implementation of federal health care legislation); the ability of the company to pass along increases in or sustained high costs to franchisees or consumers; the impact of current or future legal claims and current or proposed legislation impacting our business; the impact that product recalls, food quality or safety issues, and general public health concerns could have on our restaurants; currency exchange and interest rates; credit risk associated with parties to leases of restaurants and commissaries, including those Perfect Pizza locations formerly operated by us, for which we remain contractually liable; risks associated with security breaches, including theft of company and customer information; and increased risks associated with our international operations, including economic and political conditions in our international markets and difficulty in meeting planned sales targets and new store growth for our international operations. These and other risk factors are discussed in detail in “Part I. Item 1A. - Risk Factors” of the Annual Report on Form 10-K for the fiscal year ended December 25, 2011. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. For more information about the company, please visit www.papajohns.com.     Papa John's International, Inc. and SubsidiariesConsolidated Statements of Income               Three Months EndedNine Months EndedSeptember 23, 2012   September 25, 2011September 23, 2012   September 25, 2011 (In thousands, except per share amounts) (Unaudited)(Unaudited)(Unaudited)(Unaudited)Revenues:North America: Domestic Company-owned restaurant sales $ 143,299 $ 128,787 $ 430,641 $ 395,099 Franchise royalties 18,777 17,967 58,396 55,801 Franchise and development fees 160 155 588 464 Domestic commissary sales 132,666 130,870 396,869 379,569 Other sales 12,581 12,368 36,610 38,185 International: Royalties and franchise and development fees 4,582 4,054 13,769 11,865 Restaurant and commissary sales   13,449       11,467     38,496       30,686   Total revenues 325,514 305,668 975,369 911,669   Costs and expenses: Domestic Company-owned restaurant expenses: Cost of sales 34,054 32,229 99,391 94,491 Salaries and benefits 39,587 35,012 118,239 107,028 Advertising and related costs 13,920 11,790 39,897 36,477 Occupancy costs 9,185 8,496 25,702 24,304 Other operating expenses   21,490       18,858     62,738       57,265   Total domestic Company-owned restaurant expenses 118,236 106,385 345,967 319,565   Domestic commissary and other expenses: Cost of sales 111,114 110,387 328,364 320,359 Salaries and benefits 9,654 8,840 27,875 26,502 Other operating expenses   14,082       13,381     41,886       40,050   Total domestic commissary and other expenses 134,850 132,608 398,125 386,911   International operating expenses 11,394 9,634 32,761 26,118 General and administrative expenses 30,426 27,332 93,485 84,023 Other general expenses 1,211 4,777 8,020 7,017 Depreciation and amortization   8,192       7,974     24,223       24,711   Total costs and expenses   304,309       288,710     902,581       848,345     Operating income 21,205 16,958 72,788 63,324 Net interest expense   (148 )     (112 )   (353 )     (631 ) Income before income taxes 21,057 16,846 72,435 62,693 Income tax expense   7,112       4,906     24,479       20,151   Net income, including noncontrolling interests 13,945 11,940 47,956 42,542 Net income attributable to noncontrolling interests   (794 )     (817 )   (3,292 )     (2,868 ) Net income, net of noncontrolling interests $ 13,151     $ 11,123   $ 44,664     $ 39,674     Basic earnings per common share $ 0.57     $ 0.45   $ 1.89     $ 1.57   Earnings per common share - assuming dilution $ 0.55     $ 0.44   $ 1.85     $ 1.55     Basic weighted average shares outstanding   23,268       24,964     23,685       25,302   Diluted weighted average shares outstanding   23,721       25,146     24,107       25,528       Papa John's International, Inc. and SubsidiariesCondensed Consolidated Balance Sheets       September 23,December 25,20122011 (In thousands) (Unaudited)(Note)   AssetsCurrent assets: Cash and cash equivalents $ 25,353 $ 18,942 Accounts receivable, net 33,072 28,169 Notes receivable, net 4,245 4,221 Inventories 21,419 20,091 Prepaid expenses and other current assets 13,172 15,765 Deferred income taxes   8,409   7,636 Total current assets 105,670 94,824   Property and equipment, net 185,596 181,910 Notes receivable, less current portion, net 12,757 11,502 Goodwill 78,971 75,085 Other assets   29,485   27,061 Total assets $ 412,479 $ 390,382     Liabilities and stockholders' equityCurrent liabilities: Accounts payable $ 34,072 $ 32,966 Income and other taxes payable 10,217 3,969 Accrued expenses and other current liabilities   53,026   44,198 Total current liabilities 97,315 81,133   Deferred revenue 8,019 4,780 Long-term debt 50,000 51,489 Other long-term liabilities 24,611 22,014 Long-term accrued income taxes 4,220 3,597 Deferred income taxes   10,508   9,147 Total liabilities 194,673 172,160   Total stockholders' equity   217,806   218,222 Total liabilities and stockholders' equity $ 412,479 $ 390,382   Note: The balance sheet at December 25, 2011 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements.     Papa John's International, Inc. and SubsidiariesConsolidated Statements of Cash Flows     Nine Months Ended (In thousands) September 23, 2012   September 25, 2011(Unaudited)(Unaudited)   Operating activities Net income, including noncontrolling interests $ 47,956 $ 42,542 Adjustments to reconcile net income to net cash provided by operating activities: Provision for uncollectible accounts and notes receivable 1,250 882 Depreciation and amortization 24,223 24,711 Deferred income taxes 647 5,219 Stock-based compensation expense 4,932 5,266 Excess tax benefit on equity awards (1,717 ) (576 ) Other 3,789 1,272 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (6,018 ) (3,071 ) Inventories (1,188 ) 201 Prepaid expenses and other current assets 3,138 4,102 Other assets and liabilities (1,463 ) 1,000 Accounts payable 1,106 3,896 Income and other taxes payable 6,248 3,023 Accrued expenses and other current liabilities 7,258 (228 ) Long-term accrued income taxes 623 55 Deferred revenue   3,989     (1,078 ) Net cash provided by operating activities 94,773 87,216   Investing activities Purchase of property and equipment (26,425 ) (20,647 ) Loans issued (3,951 ) (2,598 ) Repayments of loans issued 2,620 4,542 Acquisitions, net of cash acquired (6,175 ) - Proceeds from divestitures of restaurants 1,068 - Other   4     62   Net cash used in investing activities (32,859 ) (18,641 )   Financing activities Net repayments on line of credit facility (1,489 ) (49,000 ) Excess tax benefit on equity awards 1,717 576 Tax payments for restricted stock (846 ) (1,041 ) Proceeds from exercise of stock options 11,399 10,981 Acquisition of Company common stock (64,146 ) (49,579 ) Distributions to noncontrolling interests (2,431 ) (3,129 ) Other   174     97   Net cash used in financing activities (55,622 ) (91,095 )   Effect of exchange rate changes on cash and cash equivalents   119     67   Change in cash and cash equivalents 6,411 (22,453 ) Cash and cash equivalents at beginning of period   18,942     47,829     Cash and cash equivalents at end of period $ 25,353   $ 25,376   Papa John?s International, Inc.Lance Tucker, Chief Financial Officer, 502-261-4218