Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 28, 2008
OR
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-21660
PAPA JOHN’S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
61-1203323
(State or other jurisdiction of
(I.R.S. Employer Identification
incorporation or organization)
number)
2002 Papa Johns Boulevard
Louisville, Kentucky 40299-2367
(Address of principal executive offices)
(502) 261-7272
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
At October 29, 2008, there were outstanding 27,927,398 shares of the registrant’s common stock, par value $0.01 per share.
Page No.
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets – September 28, 2008 and December 30, 2007
2
Consolidated Statements of Income – Three and Nine Months Ended September 28, 2008 and September 30, 2007
3
Consolidated Statements of Stockholders’ Equity – Nine Months Ended September 28, 2008 and September 30, 2007
4
Consolidated Statements of Cash Flows – Nine Months Ended September 28, 2008 and September 30, 2007
5
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
Item 4.
Controls and Procedures
31
PART II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
32
Item 6.
Exhibits
33
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
September 28, 2008
December 30, 2007
(Unaudited)
(Note)
Assets
Current assets:
Cash and cash equivalents
$
12,678
8,877
Accounts receivable
22,808
22,539
Inventories
16,910
18,806
Prepaid expenses
7,261
10,711
Other current assets
5,721
5,581
Assets held for sale
12,041
—
Deferred income taxes
8,581
7,147
Total current assets
86,000
73,661
Investments
614
825
Net property and equipment
190,666
198,957
Notes receivable
10,902
11,804
16,394
12,384
Goodwill
76,730
86,505
Other assets
16,459
17,681
Total assets
397,765
401,817
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
29,414
31,157
Income and other taxes
7,509
10,866
Accrued expenses
52,905
56,466
Current portion of debt
9,000
8,700
Total current liabilities
98,828
107,189
Unearned franchise and development fees
6,190
6,284
Long-term debt, net of current portion
145,085
134,006
Other long-term liabilities
26,410
27,435
Stockholders’ equity:
Preferred stock
Common stock
352
349
Additional paid-in capital
216,979
208,598
Accumulated other comprehensive income (loss)
(240
)
156
Retained earnings
120,983
96,963
Treasury stock
(216,822
(179,163
Total stockholders’ equity
121,252
126,903
Total liabilities and stockholders’ equity
Note: The balance sheet at December 30, 2007 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.
See accompanying notes.
Three Months Ended
Nine Months Ended
(In thousands, except per share amounts)
Sept. 28, 2008
Sept. 30, 2007
Domestic revenues:
Company-owned restaurant sales
130,662
126,610
403,332
368,287
Variable interest entities restaurant sales
2,014
1,862
6,293
5,151
Franchise royalties
14,378
13,158
44,582
41,356
Franchise and development fees
194
602
1,361
1,905
Commissary sales
108,804
97,753
321,172
294,176
Other sales
13,643
14,995
46,922
46,841
International revenues:
Royalties and franchise and development fees
3,326
2,514
9,454
7,185
Restaurant and commissary sales
7,007
5,281
19,325
14,754
Total revenues
280,028
262,775
852,441
779,655
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales
29,750
28,950
92,125
79,867
Salaries and benefits
39,069
38,369
120,679
111,241
Advertising and related costs
12,123
12,998
36,733
35,060
Occupancy costs
9,516
8,652
26,527
23,461
Other operating expenses
18,203
17,330
54,582
50,134
Total domestic Company-owned restaurant expenses
108,661
106,299
330,646
299,763
Variable interest entities restaurant expenses
1,765
1,566
5,545
4,297
Domestic commissary and other expenses:
91,891
81,006
271,873
243,725
8,728
8,692
26,820
26,496
12,428
10,915
36,072
33,060
Total domestic commissary and other expenses
113,047
100,613
334,765
303,281
(Income) loss from the franchise cheese-purchasing program, net of minority interest
(2,587
7,854
7,335
14,032
International operating expenses
6,200
4,557
17,358
13,021
General and administrative expenses
26,170
27,282
80,621
77,903
Minority interests and other general expenses
4,891
1,186
8,846
4,122
Depreciation and amortization
8,590
7,911
25,000
23,395
Total costs and expenses
266,737
257,268
810,116
739,814
Operating income
13,291
5,507
42,325
39,841
Investment income
193
314
640
1,035
Interest expense
(1,930
(1,982
(5,624
(5,214
Income before income taxes
11,554
3,839
37,341
35,662
Income tax expense
3,807
(988
13,321
10,671
Net income
7,747
4,827
24,020
24,991
Basic earnings per common share
0.28
0.16
0.85
0.83
Earnings per common share - assuming dilution
0.84
0.82
Basic weighted average shares outstanding
27,787
29,708
28,286
29,942
Diluted weighted average shares outstanding
27,984
30,027
28,478
30,435
Accumulated
Common
Additional
Other
Total
Stock Shares
Paid-In
Comprehensive
Retained
Treasury
Stockholders’
Outstanding
Stock
Capital
Income (Loss)
Earnings
Equity
Balance at December 31, 2006
30,696
341
187,990
515
63,614
(106,292
146,168
Cumulative effect of adoption of FIN 48
Adjusted balance at January 1, 2007
64,228
146,782
Comprehensive income:
Change in valuation of interest rate swap agreements, net of tax of $305
(532
Other, net
375
Comprehensive income
24,834
Exercise of stock options
674
7
10,783
10,790
Tax benefit related to exercise of non-qualified stock options
3,047
Acquisition of treasury stock
(2,213
(61,943
3,928
Balance at September 30, 2007
29,157
348
205,748
358
89,219
(168,235
127,438
Balance at December 30, 2007
28,777
Change in valuation of interest rate swap agreements, net of tax of $64
(142
(254
23,624
259
4,614
4,617
770
(1,397
(37,659
2,997
Balance at September 28, 2008
27,639
At September 30, 2007, the accumulated other comprehensive gain of $358 was comprised of unrealized foreign currency translation gains of $1,471, a net unrealized gain on investments of $10, offset by a net unrealized loss on the interest rate swap agreements of $539 and a $584 pension liability for PJUK.
At September 28, 2008, the accumulated other comprehensive loss of $240 was comprised of a net unrealized loss on the interest rate swap agreements of $1,442, offset by unrealized foreign currency translation gains of $1,202.
Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Restaurant closure, impairment and disposition losses
5,071
500
Provision for uncollectible accounts and notes receivable
1,896
1,204
(5,373
(10,315
Stock-based compensation expense
Excess tax benefit related to exercise of non-qualified stock options
(770
(3,047
1,094
3,618
Changes in operating assets and liabilities, net of acquisitions:
(2,036
1,633
4,099
3,450
1,529
109
2,329
Other assets and liabilities
(1,359
(2,514
(1,744
295
(3,357
(3,404
(3,227
(511
(94
(432
Net cash provided by operating activities
47,573
47,177
Investing activities
Purchase of property and equipment
(24,021
(23,091
Purchase of investments
(632
Proceeds from sale or maturity of investments
843
732
Loans issued
(925
(5,966
Loan repayments
1,469
5,839
Acquisitions
(100
(24,983
Proceeds from divestitures of restaurants
632
206
30
Net cash used in investing activities
(23,160
(46,807
Financing activities
Net proceeds from line of credit facility
11,000
28,000
Net proceeds from short-term debt - variable interest entities
300
13,875
Proceeds from exercise of stock options
Acquisition of Company common stock
402
862
Net cash used in financing activities
(20,570
(5,369
Effect of exchange rate changes on cash and cash equivalents
(42
98
Change in cash and cash equivalents
3,801
(4,901
Cash and cash equivalents at beginning of period
12,979
Cash and cash equivalents at end of period
8,078
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine months ended September 28, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ended December 28, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first person notations of “we”, “us” and “our”) for the year ended December 30, 2007.
2. Recent Accounting Pronouncements
SFAS No. 157, Fair Value Measurements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. SFAS No. 157 requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. We will adopt the provisions of SFAS No. 157 in two phases: (1) phase one was effective for financial assets and liabilities in our first quarter of 2008 and (2) phase two is effective for non-financial assets and liabilities for fiscal years beginning after November 15, 2008 or our first quarter of fiscal 2009. The adoption of phase one during the first quarter of 2008 did not have a significant impact on our financial statements.
SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
· Level 1: Quoted market prices in active markets for identical assets or liabilities.
· Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
· Level 3: Unobservable inputs that are not corroborated by market data.
Our financial assets and liabilities that are measured at fair value on a recurring basis as of September 28, 2008 are as follows:
Carrying
Fair Value Measurements
Value
Level 1
Level 2
Level 3
Financial assets:
Non-qualified deferred compensation plan
10,226
Financial liabilities:
Interest rate swaps
2,254
The adoption for non-financial assets and liabilities in fiscal 2009 could impact our future estimates of value related to long-lived and intangible assets such as our annual fair value evaluation of our United Kingdom subsidiary, Papa John’s UK (“PJUK”) and domestic Company-owned restaurants.
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133. SFAS No. 161 enhances the required disclosures regarding derivatives and hedging activities, including disclosures regarding how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008 or our first quarter of fiscal 2009. We are currently evaluating the requirements of SFAS No. 161 and have not yet determined the impact, if any, on disclosures included in our consolidated financial statements.
3. Accounting for Variable Interest Entities
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51(FIN 46), provides a framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited-liability company, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a “variable interest holder”) is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities and non-controlling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest.
We have a purchasing arrangement with BIBP Commodities, Inc. (“BIBP”), a special-purpose entity formed at the direction of our Franchise Advisory Council for the sole purpose of reducing cheese price volatility to domestic system-wide restaurants. BIBP is an independent, franchisee-owned corporation. BIBP purchases cheese at the market price and sells it to our distribution subsidiary, PJ Food Service, Inc. (“PJFS”), at a fixed quarterly price based in part upon historical average market prices. PJFS in turn sells cheese to Papa John’s restaurants (both Company-owned and franchised) at a set quarterly price. PJFS purchased $45.1 million and $125.3 million of cheese from BIBP for the three and nine months ended September 28, 2008, respectively, and $38.2 million and $99.2 million of cheese for the comparable periods in 2007, respectively.
As defined by FIN 46, we are the primary beneficiary of BIBP, a VIE. We recognize the operating losses generated by BIBP if BIBP’s shareholders’ equity is in a net deficit position. Further, we will recognize the subsequent operating income generated by BIBP up to the amount of any losses previously recognized.
We recognized pre-tax income of $2.8 million ($1.8 million net of tax, or $0.07 per share) for the three months ended September 28, 2008 and a pre-tax loss of $11.4 million ($7.4 million net of tax, or $0.27 per share) for the nine months ended September 28, 2008, and pre-tax losses of $10.7 million ($7.0 million net of tax, or $0.23 per share) and $19.4 million ($12.5 million net of tax, or $0.41 per share) for the three and nine months ended September 30, 2007, respectively, from the consolidation of BIBP. The impact on future operating income from the consolidation of BIBP is expected to be significant for any given reporting period due to the volatility of the cheese market.
BIBP has a $15.0 million line of credit with a commercial bank. Recently, Papa John’s agreed to guarantee the outstanding balance associated with the line of credit. As of September 28, 2008, BIBP had outstanding borrowings of $9.0 million and a letter of credit of $3.0 million outstanding under the commercial line of credit facility. In addition, Papa John’s has agreed to provide additional funding in the form of a loan to BIBP. As of September 28, 2008, BIBP had outstanding borrowings of $35.4 million with Papa John’s (the $35.4 million outstanding balance under the Papa John’s line of credit is eliminated upon consolidation of the financial results of BIBP with Papa John’s).
In addition, Papa John’s has extended loans to certain franchisees. Under FIN 46, Papa John’s was deemed the primary beneficiary of three franchise entities as of September 28, 2008 and September 30, 2007, even though we had no ownership in them. The three franchise entities at September 28, 2008 operated a total of twelve restaurants with annual revenues approximating $8.3 million. Our net loan balance receivable from these entities was $566,000 at September 28, 2008, with no further funding commitments. The consolidation of these franchise entities has had no significant impact on Papa John’s operating results and is not expected to have a significant impact in future periods.
The following table summarizes the balance sheets for our consolidated VIEs as of September 28, 2008 and December 30, 2007:
BIBP
Franchisees
Assets:
153
43
196
1,789
235
2,024
Accounts receivable - Papa John’s
5,349
4,424
1,725
40
968
46
1,014
1,015
756
455
15,366
11,324
22,593
1,553
24,146
18,505
1,492
19,997
Liabilities and stockholders’ equity (deficit):
Accounts payable and accrued expenses
6,113
362
6,475
9,785
319
10,104
Short-term debt - third party
Short-term debt - Papa John’s
35,432
566
35,998
20,538
560
21,098
Total liabilities
50,545
928
51,473
39,023
879
39,902
Stockholders’ equity (deficit)
(27,952
625
(27,327
(20,518
613
(19,905
Total liabilities and stockholders’ equity (deficit)
8
4. Restaurant Closure, Impairment and Dispositions
During the third quarter, we entered into four agreements to sell a total of 26 Company-owned restaurants. These transactions were completed early in the fourth quarter. Total consideration for the sale of the restaurants was $2.5 million, consisting of cash proceeds of $1.1 million and notes financed by Papa John’s for $1.4 million. In addition, we entered into a preliminary agreement to sell 37 Company-owned restaurants, which is expected to be finalized during the fourth quarter. The sale of the 37 restaurants is subject to the completion of due diligence and finalization of commercial terms. Given the uncertainty for available financing in the current credit environment, we will provide 100% of the financing for the transaction, with the expectation that the buyer, an existing Papa John’s franchisee, will obtain third-party financing at a future date when the credit markets have stabilized. For the transactions for which we provide significant financing, we will include the operating results of those franchise entities in the Papa John’s financial statements as defined under FIN 46, even though we have no ownership interest in the franchise entities.
The annual revenues for the above-mentioned 63 restaurants approximate $38 million. In connection with the divestiture, or anticipated divestiture, of those 63 restaurants, including the closure of three restaurants in one market, we recorded pre-tax losses of $3.9 million and $5.1 million in the three and nine months ended September 28, 2008, respectively. Upon completion of the divestiture of the 63 restaurants, we will record a $3.1 million intangible asset, representing the value of the investment in the continuing franchise agreement with the purchasers/franchisees. The $3.1 million intangible asset will be amortized over the ten-year franchise agreements as a reduction in royalty revenue of approximately $310,000 annually.
5. Debt
Our debt is comprised of the following (in thousands):
September 28,
December 30,
2008
2007
Revolving line of credit
145,000
134,000
Debt associated with VIEs *
85
Total debt
154,085
142,706
Less: current portion of debt
(9,000
(8,700
Long-term debt
*Papa John’s has guaranteed BIBP’s outstanding debt.
9
6. Calculation of Earnings Per Share
The calculations of basic earnings per common share and earnings per common share – assuming dilution are as follows (in thousands, except per share data):
Sept. 28,
Sept. 30,
Basic earnings per common share:
Weighted average shares outstanding
Earnings per common share - assuming dilution:
Dilutive effect of outstanding stock compensation awards
197
192
493
7. Comprehensive Income
Comprehensive income is comprised of the following:
Change in valuation of interest rate swap agreements, net of tax
87
(895
(387
55
7,447
3,987
10
8. Segment Information
We have defined five reportable segments: domestic restaurants, domestic commissaries, domestic franchising, international operations and variable interest entities (“VIEs”).
The domestic restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States) Company-owned restaurants and derives its revenues principally from retail sales of pizza and side items, such as breadsticks, cheesesticks, chicken strips, chicken wings, dessert items and soft drinks to the general public. The domestic commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants. The domestic franchising segment consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and collection of royalties from our domestic franchisees. The international operations segment principally consists of our Company-owned restaurants and distribution sales to franchised Papa John’s restaurants located in the United Kingdom, China and Mexico and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. VIEs consist of entities in which we are deemed the primary beneficiary, as defined in Note 3, and include BIBP and certain franchisees to which we have extended loans. All other business units that do not meet the quantitative thresholds for determining reportable segments consist of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of printing and promotional items, risk management services, and information systems and related services used in restaurant operations and certain partnership development activities.
Generally, we evaluate performance and allocate resources based on profit or loss from operations before income taxes and eliminations. Certain administrative and capital costs are allocated to segments based upon predetermined rates or actual estimated resource usage. We account for intercompany sales and transfers as if the sales or transfers were to third parties and eliminate the related profit in consolidation.
Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our consolidated revenues in the periods covered by this report.
11
Our segment information is as follows:
Revenues from external customers:
Domestic Company-owned restaurants
Domestic commissaries
Domestic franchising
14,572
13,760
45,943
43,261
International
10,333
7,795
28,779
21,939
Variable interest entities (1)
All others
Total revenues from external customers
Intersegment revenues:
36,443
33,155
108,519
93,684
463
390
1,407
1,067
324
227
932
533
45,057
38,186
125,290
99,203
3,906
4,526
12,042
11,941
Total intersegment revenues
86,193
76,484
248,190
206,428
Income (loss) before income taxes:
Domestic Company-owned restaurants (2)
(1,067
3,493
13,888
19,243
6,142
9,661
22,199
27,592
12,599
11,629
40,166
36,737
(1,193
(2,022
(4,452
(6,374
Variable interest entities (3)
2,826
(10,707
(11,427
(19,370
1,039
1,321
5,557
4,045
Unallocated corporate expenses
(8,523
(9,369
(26,886
(25,150
Elimination of intersegment profits
(269
(167
(1,704
(1,061
Total income before income taxes
Property and equipment:
161,627
78,532
10,842
Variable interest entities
1,994
24,493
Unallocated corporate assets
137,912
Accumulated depreciation and amortization
(224,734
(1)
The revenues from external customers for variable interest entities are attributable to the franchise entities to which we have extended loans that qualify as consolidated VIEs. The intersegment revenues for variable interest entities are attributable to BIBP.
(2)
Includes losses of $3.9 million and $5.1 million for the three and nine months ended September 28, 2008 associated with restaurant closure, impairment and disposition losses.
(3)
Represents BIBP’s operating income (loss), net of minority interest income for each year.
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) began operations in 1985. At September 28, 2008, there were 3,317 Papa John’s restaurants (670 Company-owned and 2,647 franchised) operating in all 50 states and 29 countries. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, printing and promotional items, risk management services, and information systems and related services used in their operations.
Critical Accounting Policies and Estimates
The results of operations are based on the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires management to select accounting policies for critical accounting areas and make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results. We have identified the following accounting policies and related judgments as critical to understanding the results of our operations.
Allowance for Doubtful Accounts and Notes Receivable
We establish reserves for uncollectible accounts and notes receivable based on overall receivable aging levels and a specific evaluation of accounts and notes for franchisees with known financial difficulties. These reserves and corresponding write-offs could significantly increase if the identified franchisees continue to experience deteriorating financial results.
Long-Lived and Intangible Assets
The recoverability of long-lived assets is evaluated annually or more frequently if impairment indicators exist. Indicators of impairment include historical financial performance, operating trends and our future operating plans. If impairment indicators exist, we evaluate the recoverability of long-lived assets on an operating unit basis (e.g., an individual restaurant) based on undiscounted expected future cash flows before interest for the expected remaining useful life of the operating unit. Recorded values for long-lived assets that are not expected to be recovered through undiscounted future cash flows are written down to current fair value. The recoverability of indefinite-lived intangible assets (i.e., goodwill) is evaluated annually, or more frequently if impairment indicators exist, on a reporting unit basis (e.g., a regional business unit) by comparing the fair value of the reporting unit to its carrying value. Our estimated fair value for Company-owned restaurants is comprised of two components. The first component is the cash sales price that would be received at the time of the sale and the second component is an investment in the continuing franchise agreement, representing the discounted value of future royalties less any incremental direct operating costs, that would be collected under the ten-year franchise agreement. We purchased 118 domestic restaurants during 2007 and 2006 in several markets, which resulted in recording $41.7 million of goodwill. If our plans for increased sales, unit growth and profitability of these restaurants are not met, future impairment charges could occur. At September 28, 2008, our United Kingdom subsidiary, Papa John’s UK (“PJUK”), had goodwill of approximately $17.2 million. In addition to the sale of the Perfect Pizza operations, which occurred in 2006, we have restructured management and developed plans for PJUK to improve its future operating results. The plans include efforts to increase Papa John’s brand awareness in the United Kingdom and increase net PJUK franchise unit openings over the next several years. We will continue to periodically evaluate our progress in achieving these plans. If our initiatives are not successful, impairment charges could occur.
Subsequent to the third quarter, we sold to franchisees 26 Company-owned restaurants located in three markets. Total consideration for the sale of the restaurants was $2.5 million (including cash proceeds of $1.1 million and notes issued by the purchasers of $1.4 million). As a part of the sales of the restaurants, we recorded a $1.5 million intangible asset for the investment in the continuing franchise agreement, representing the discounted value of the royalties we will receive over the next ten years from the purchaser/franchisee. The $1.5 million intangible asset will be amortized over the ten-year franchise agreement as a reduction in royalty income of $150,000 annually.
In addition, we entered into a preliminary agreement to sell 37 Company-owned restaurants to a franchisee, which is expected to be finalized during the fourth quarter. The divestiture of the 37 restaurants is subject to the completion of due diligence and finalization of commercial terms. Given the uncertainty for available financing in the current credit environment, we will provide 100% of the financing for the transaction, with the expectation that the buyer, an existing Papa John’s franchisee, will obtain third party financing at a future date when the credit markets have stabilized. Upon completion of the sale of the 37 restaurants, we will record a $1.6 million intangible asset for the investment in the continuing franchise agreement. The $1.6 million intangible asset will be amortized over the ten-year franchise agreement as a reduction in royalty revenue of approximately $160,000 annually.
Insurance Reserves
Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles and health insurance coverage provided to our employees are self-insured up to certain individual and aggregate reinsurance levels. Losses are accrued based upon estimates of the aggregate retained liability for claims incurred using certain third-party actuarial projections and our claims loss experience. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims significantly differ from historical trends used to estimate the insurance reserves recorded by the Company.
From October 2000 through September 2004, our captive insurance company, which provided insurance to our franchisees, was self-insured. In October 2004, a third-party commercial insurance company began providing fully-insured coverage to franchisees participating in the franchise insurance program. This arrangement eliminates our risk of loss for franchise insurance coverage written after September 2004, but our operating income will still be subject to potential adjustments for changes in estimated insurance reserves for policies written from the inception of the captive insurance company in October 2000 through September 2004. Such adjustments, if any, will be determined in part based upon periodic actuarial valuations.
Deferred Income Tax Assets and Tax Reserves
We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and the related assets and liabilities. Income taxes are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 109,Accounting for Income Taxes. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the enactment date changes. As a result, our effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.
As of September 28, 2008, we had a net deferred income tax asset balance of $25.0 million, of which approximately $15.4 million relates to the net operating loss carryforward of BIBP Commodities, Inc. (“BIBP”). We have not provided a valuation allowance for the deferred income tax assets associated with our domestic operations, including BIBP, since we believe it is more likely than not future earnings will be sufficient to ensure the realization of the net deferred income tax assets for federal and state purposes.
14
Certain tax authorities periodically audit the Company. We provide reserves for potential exposures based on Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) requirements. We evaluate these issues on a quarterly basis to adjust for events, such as court rulings or audit settlements, which may impact our ultimate payment for such exposures. We recognized reductions in income tax expense of $500,000 for the three- and nine-month periods in 2008 and $2.4 million for the comparable 2007 periods in our customary income tax expense due to the finalization of certain income tax issues.
Consolidation of BIBP Commodities, Inc. as a Variable Interest Entity
BIBP is a franchisee-owned corporation that conducts a cheese-purchasing program on behalf of domestic Company-owned and franchised restaurants. As required by FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (FIN 46), we consolidate the financial results of BIBP since we qualify as the primary beneficiary, as defined by FIN 46, of BIBP. We recognized a pre-tax gain of $2.8 million for the three months ended September 28, 2008 and a pre-tax loss of $11.4 million for the nine months ended September 28, 2008, compared to pre-tax losses of $10.7 million and $19.4 million for the three and nine months ended September 30, 2007, respectively, from the consolidation of BIBP. We expect the consolidation of BIBP to continue to have a significant impact on Papa John’s operating income in future periods due to the volatility of cheese prices. Papa John’s will recognize the operating losses generated by BIBP if the shareholders’ equity of BIBP is in a net deficit position. Further, Papa John’s will recognize subsequent operating income generated by BIBP up to the amount of BIBP losses previously recognized by Papa John’s.
Many domestic franchisees are facing financial challenges due to a recent decline in sales and continued operating margin pressures from higher commodity costs (primarily cheese and wheat) as well as increased utility costs. In addition, due to the recent events impacting credit availability, many franchisees are having difficulty obtaining credit from third-party lending institutions for working capital and development purposes. In an effort to assist franchisees through this difficult period, the BIBP formula was modified effective for the last two months of 2008. The modified formula will result in domestic restaurants paying the expected futures spot market price for cheese plus an interest carry cost, which is approximately $0.28 per pound less than the pre-established fourth quarter price paid by domestic restaurants during October 2008. The modified price will reduce the food cost and increase operating margin for the average restaurant approximately 1.4% for the last two months of 2008. Any decision to continue this formula modification into 2009 will be made as part of a comprehensive assessment of potential franchise support initiatives due to ongoing economic challenges.
Recent Accounting Pronouncements
15
16
Restaurant Progression
Papa John’s Restaurant Progression:
U.S. Company-owned:
Beginning of period
652
606
648
577
Opened
Closed
(3
(1
(9
Acquired from franchisees
42
61
Sold to franchisees
End of period
649
International Company-owned:
18
(2
21
U.S. franchised:
2,117
2,096
2,112
2,080
25
36
71
96
(14
(12
(54
(38
Acquired from Company
Sold to Company
(61
2,128
2,078
International franchised:
483
380
434
347
38
28
93
64
(5
(8
(11
519
401
Total restaurants - end of period
3,317
3,139
Results of Operations
Variable Interest Entities
As required by FIN 46, our operating results include BIBP’s operating results. The consolidation of BIBP had a significant impact on our operating results for the first nine months of 2008 and the first nine months and full year of 2007, and is expected to have a significant impact on our future operating results, including the full year of 2008, and income statement presentation as described below.
Consolidation accounting requires the net impact from the consolidation of BIBP to be reflected primarily in three separate components of our statement of income. The first component is the portion of BIBP operating income or loss attributable to the amount of cheese purchased by Company-owned restaurants during the period. This portion of BIBP operating income (loss) is reflected as a reduction (increase) in the “Domestic Company-owned restaurant expenses - cost of sales” line item. This approach effectively reports cost of sales for Company-owned restaurants as if the purchasing arrangement with BIBP did not exist and such restaurants were purchasing cheese at the spot market prices (i.e., the impact of BIBP is eliminated in consolidation).
The second component of the net impact from the consolidation of BIBP is reflected in the caption “(Income) loss from the franchise cheese-purchasing program, net of minority interest.” This line item represents BIBP’s income or loss from purchasing cheese at the spot market price and selling to franchised restaurants at a fixed
17
quarterly price, net of any income or loss attributable to the minority interest BIBP shareholders. The amount of income or loss attributable to the BIBP shareholders depends on its cumulative shareholders’ equity balance and the change in such balance during the reporting period. The third component is reflected as investment income or interest expense, depending upon whether BIBP is in a net investment or net borrowing position during the reporting period.
In addition, we have extended loans to certain franchisees. Under the FIN 46 rules, we are deemed to be the primary beneficiary of certain franchisees even though we have no ownership interest in them. We consolidated the financial results of three franchise entities operating a total of twelve restaurants with annual sales approximating $8.3 million and $8.4 million for 2008 and 2007, respectively.
The following table summarizes the impact of VIEs, prior to the required consolidating eliminations, on our consolidated statements of income for the three and nine months ended September 28, 2008 and September 30, 2007 (in thousands):
September 30, 2007
BIBP sales
47,071
40,048
Operating expenses
41,623
1,903
43,526
48,650
1,699
50,349
99
127
226
80
108
Other general expense (income)
(35
69
19
41,722
43,736
48,678
50,540
Operating income (loss)
3,335
(10,492
(509
(215
Income (loss) before income taxes
131,583
104,354
135,068
5,997
141,065
118,203
4,664
122,867
145
291
436
75
189
264
(44
260
49
135,213
141,506
118,278
123,429
Operating loss
(9,923
(19,075
(1,504
(295
Loss before income taxes
Non-GAAP Measures
The financial information we present in this report excluding the impact of the consolidation of BIBP, the finalization of certain income tax issues and the loss recorded on the divestiture of Company-owned restaurants, are not measures that are defined in accordance with accounting principles generally accepted in the United States (“GAAP”). These non-GAAP measures should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. We believe the financial information excluding the impact of the above-mentioned items is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. We analyze our business performance and trends excluding the impact of these items because they are not indicative of the principal operating activities of the Company. In addition, annual cash bonuses, and certain long-term incentive programs for various levels of management, are based on financial measures that exclude BIBP and income tax issues. We believe these non-GAAP measures provide management and investors with a more consistent view of performance than the closest GAAP equivalent. We compensate for this by using these measures in combination with the GAAP measures. The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.
Summary of Operating Results
Total revenues were $280.0 million for the third quarter of 2008, representing an increase of $17.3 million, or 6.6%, from revenues of $262.8 million for the same period in 2007. For the nine-month period ending September 28, 2008, total revenues were $852.4 million, representing an increase of $72.8 million, or 9.3%, from revenues of $779.7 million for the same period in 2007. The increases of $17.3 million and $72.8 million in revenues for the three and nine months ended September 28, 2008, respectively, were primarily due to the following:
·
Domestic Company-owned restaurant revenues increased $4.1 million, or 3.2%, for the three-month period ending September 28, 2008, reflecting an increase in comparable sales results of 1.9% and an increase of 1.0% in equivalent units due to the acquisition of domestic restaurants during the third quarter of 2007. Domestic Company-owned restaurant revenues increased $35.0 million, or 9.5%, for the nine-month period ending September 28, 2008, reflecting an increase in comparable sales results of 2.7% and an increase of 6.6% in equivalent units from the comparable period in 2007 due primarily to the acquisition of 42 domestic restaurants during the third quarter of 2007. “Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis.
Franchise royalties increased $1.2 million and $3.2 million for the three and nine months ended September 28, 2008, respectively, primarily due to the increase in royalty rate from 4.0% to 4.25% for the majority of domestic franchise restaurants effective at the beginning of 2008 and a 1.6% increase in comparable sales in both the three- and nine-month periods.
Domestic commissaries revenues increased $11.1 million and $27.0 million for the three and nine months ended September 28, 2008, respectively, due to increases in the prices of certain commodities, primarily cheese and wheat. The commissary charges a fixed dollar mark-up on its cost of cheese, and cheese cost is based upon the 40 lb. cheddar block price, which increased from $1.50 per pound in the third quarter of 2007 to $2.04 per pound in the third quarter of 2008, or a 36.0% increase, and increased from $1.41 per pound for the first nine months of 2007 to $1.80 per pound for the first nine months of 2008, or a 27.7% increase.
International revenues increased $2.5 million and $6.8 million for the three and nine months ended September 28, 2008, respectively, reflecting the increase in both the number and average unit volumes of our Company-owned and franchised restaurants over the past year.
Other sales decreased $1.4 million for the three months ended September 28, 2008 or 9.0%, primarily due to reduced volumes at our print and promotions operations. For the nine months ended September 28, 2008, other sales were consistent with the prior comparable period.
Our income before income taxes totaled $11.6 million and $37.3 million for the three and nine months ended September 28, 2008, respectively, compared to $3.8 million and $35.7 million for the same periods in 2007, respectively, as summarized in the following table on an operating segment basis (in thousands):
Increase
(Decrease)
(4,560
(5,355
(3,519
(5,393
970
3,429
829
1,922
(282
1,512
846
(1,736
(102
(643
Income before income taxes, excluding variable interest entities
14,546
(5,818
48,768
55,032
(6,264
13,533
7,943
7,715
1,679
Excluding the impact of the consolidation of BIBP, third quarter 2008 income before taxes was $8.7 million, or a decrease of approximately $5.8 million from 2007 comparable results, and income before income taxes for the nine months ended September 28, 2008 was $48.8 million, or a decrease of approximately $6.3 million from 2007 comparable results. The decreases of $5.8 million and $6.3 million, respectively, for the three and nine months ended September 28, 2008, excluding the consolidation of BIBP, were principally due to the following:
· Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ operating income decreased approximately $4.6 million and $5.4 million for the three- and nine-month periods ended September 28, 2008, respectively, as compared to the corresponding periods in 2007, comprised of the following:
Recurring operations
2,861
3,993
(1,132
18,959
19,149
(190
Loss on disposition of restaurants
(3,928
(500
(3,428
(5,071
(4,571
Gain on lease termination
594
(594
Total segment operating income (loss)
Domestic Company-owned restaurants’ income from recurring operations decreased approximately $1.1 million and $200,000 for the three- and nine-month periods ended September 28, 2008, respectively, as compared to the same periods in 2007. The decreases were primarily the result of the significant rise in commodity costs during the three- and nine-month periods ended September 28, 2008, partially offset by the fixed cost leverage associated with increases of 1.9% and 2.7% in comparable sales for the three- and nine-month periods ended September 28, 2008, respectively. Restaurant operating margin on an external basis, excluding the impact of the consolidation of BIBP, decreased as a percentage of sales 1.9% and 1.4% for the three- and nine-month periods ended September 28, 2008, respectively.
During the third quarter, we entered into four agreements to sell a total of 26 Company-owned restaurants. These transactions were completed early in the fourth quarter. Total consideration for the sale of the restaurants was $2.5 million, consisting of cash proceeds of $1.1 million and notes financed
20
by Papa John’s for $1.4 million. In addition, we entered into a preliminary agreement to sell 37 Company-owned restaurants, which is expected to be finalized during the fourth quarter. The sale of the 37 restaurants is subject to the completion of due diligence and finalization of commercial terms. Given the uncertainty for available financing in the current credit environment, we will provide 100% of the financing for the transaction, with the expectation that the buyer, an existing Papa John’s franchisee, will obtain third-party financing at a future date when the credit markets have stabilized. For the transactions for which we provide significant financing, we will include the operating results of those franchise entities in the Papa John’s financial statements as defined under FIN 46, even though we have no ownership interest in the franchise entities.
The annual revenues for the above-mentioned 63 restaurants approximate $38 million. In connection with the divestiture, or anticipated divestiture, of those 63 restaurants, including the closure of three restaurants in one market, we recorded pre-tax losses of $3.9 million and $5.1 million in the three and nine months ended September 28, 2008, respectively. Upon completion of the divestiture of the 63 restaurants, we will record a $3.1 million intangible asset, representing the value of the investment in the continuing franchise agreement with the purchasers/franchisees. The intangible asset will be amortized over the ten-year franchise agreements as a reduction in royalty revenue of approximately $310,000 annually.
· Domestic Commissary Segment. Domestic commissaries’ operating income decreased approximately $3.5 million and $5.4 million for the three and nine months ended September 28, 2008, respectively, over the comparable periods in 2007, reflecting a decline in sales volumes, increases in distribution costs due to higher fuel prices and a reduction in gross margin resulting from increases in the cost of certain commodities that were not passed along via price increases to domestic restaurants.
· Domestic Franchising Segment. Domestic franchising operating income increased approximately $1.0 million to $12.6 million for the three months ended September 28, 2008, from $11.6 million in the prior comparable period and increased $3.4 million to $40.2 million for the nine-month period ended September 28, 2008, from $36.7 million in the prior comparable period. The increases for both the three- and nine-month periods were primarily the result of the 0.25% increase in our royalty rate implemented at the beginning of 2008 (the royalty rate for the majority of domestic franchisees is 4.25% in 2008 as compared to 4.0% in 2007). Our equivalent franchise units increased 2.0% and 1.1% for the three- and nine-month periods, respectively, as compared to the same periods of the prior year.
· International Segment. The international segment reported operating losses of $1.2 million and $4.5 million for the three and nine months ended September 28, 2008, respectively, compared to losses of $2.0 million and $6.4 million, respectively, in the same periods of the prior year. The improvements of $800,000 and $1.9 million in operating results in the three- and nine-month periods, respectively, reflect leverage on the international organizational structure from increased revenues due to growth in the number of units and unit volumes.
· All Others Segment. The operating income for the “All others” reporting segment decreased approximately $300,000 for the three months ended September 28, 2008 and increased $1.5 million for the nine months ended September 28, 2008, as compared to the corresponding 2007 periods. The decline in operating results for the three months ended September 28, 2008 was due to lower sales from our print and promotions subsidiary, Preferred Marketing Solutions, Inc. (Preferred Marketing). The increase for the nine-month period ended September 28, 2008 was primarily due to an increase in sales for Preferred Marketing during the first six months of the year and an increase in sales from our online operations on a year-to-date basis.
· Unallocated Corporate Segment. Unallocated corporate expenses decreased approximately $800,000 for the three months ended September 28, 2008 and increased $1.7 million for the nine months ended September 28, 2008, as compared to the corresponding periods of the prior year. The components of the unallocated corporate expenses were as follows (in thousands):
(decrease)
General and administrative
5,150
6,297
(1,147
17,346
15,586
1,760
Net interest
1,286
1,583
(297
3,644
4,281
(637
Depreciation
2,016
1,677
339
5,753
4,990
763
Contributions to the Marketing Fund
225
400
(175
Other expense (income)
(4
(188
184
(82
(107
Total unallocated corporate expenses
8,523
9,369
(846
26,886
25,150
1,736
The decrease of $1.1 million in general and administrative expenses for the three months ended September 28, 2008 was primarily due to a reduction in the expected payments under certain cash and equity-based compensation programs. The increase in general and administrative expenses for the nine months ended September 28, 2008, as compared to the corresponding 2007 period, is due to the 2007 results including an adjustment of approximately $1.2 million for awards forfeited by our Founder Chairman due to a change in status from an employee director of the Company to a non-employee director. Additionally, an increase in certain employee benefit costs during 2008, including health insurance, and severance-related costs impacted the year-over-year comparison.
The effective income tax rate was 35.7% for the nine months ended September 28, 2008, compared to 29.9% in the corresponding 2007 period. During the third quarters of 2008 and 2007, the Company recorded reductions of $500,000 and $2.4 million, respectively, in its customary income tax expense due to the finalization of certain income tax issues.
Diluted earnings per share were $0.28 in the third quarter of 2008, compared to $0.16 in the third quarter of 2007. For the nine months ended September 28, 2008, diluted earnings per share were $0.84, compared to $0.82 per share for the comparable period in 2007. Share repurchase activity had no impact on earnings per diluted share for the three months ended September 28, 2008 and a $0.01 impact for the nine months ended September 28, 2008.
Diluted earnings per share for the three- and nine-month periods ending September 28, 2008 and September 30, 2007 were impacted by the following items:
Earnings per diluted share, as reported
(Gain) loss from BIBP cheese purchasing entity
(0.07
0.23
0.27
0.41
0.09
0.01
0.11
Gain from finalization of certain income tax issues
(0.02
(0.08
Earnings per diluted share, excluding noted items
0.32
1.20
1.16
22
Review of Operating Results
Revenues. Domestic Company-owned restaurant sales were $130.7 million for the three months ended September 28, 2008, compared to $126.6 million for the same period in 2007, and were $403.3 million for the nine months ended September 28, 2008, compared to $368.3 million for the same period in 2007. The increases for the three- and nine-month periods were due to increases in comparable sales of 1.9% and 2.7%, respectively, and increases of 1.0% and 6.6%, respectively, in equivalent units due to the acquisition of 42 domestic restaurants during the last three months of 2007.
Variable interest entities restaurant sales include restaurant sales for certain franchise entities to which we have extended loans. Revenues from these restaurants totaled $2.0 million and $6.3 million for the three and nine months ended September 28, 2008, as compared to $1.9 million and $5.2 million for the corresponding periods in 2007. We have no further lending commitments to these franchisees.
Domestic franchise sales for the three and nine months ended September 28, 2008 increased 4.3% to $367.6 million and increased 2.7% to $1.122 billion, from $352.6 million and $1.093 billion for the same periods in 2007, respectively, primarily resulting from increases of 1.6% in comparable sales for both the three and nine months ended September 28, 2008, respectively, and increases in equivalent units of 2.0% and 1.1% for the three- and nine-month periods, respectively. Domestic franchise royalties were $14.4 million and $44.6 million for the three and nine months ended September 28, 2008, respectively, representing increases of 9.3% and 7.8%, respectively, over the prior comparable periods. The increases were primarily due to an increase in the royalty rate from 4.0% to 4.25% for the majority of domestic franchise restaurants effective at the beginning of 2008.
Average weekly sales for comparable units include restaurants that were open throughout the periods presented below. The comparable sales base for Company-owned and franchised restaurants, respectively, includes restaurants acquired by the Company or divested to franchisees, as the case may be, during the previous twelve months. Average weekly sales for other units include restaurants that were not open throughout the periods presented below and include non-traditional sites such as Six Flags theme parks and Live Nation concert amphitheaters.
23
The comparable sales base and average weekly sales for 2008 and 2007 for domestic Company-owned and domestic franchised restaurants consisted of the following:
Company
Franchise
Total domestic units (end of period)
Equivalent units
647
2,068
641
2,028
Comparable sales base units
626
1,921
609
1,898
Comparable sales base percentage
96.8
%
92.9
95.0
93.6
Average weekly sales - comparable units
15,680
13,536
15,432
13,261
Average weekly sales - traditional non-comparable units
11,169
10,437
10,840
10,766
Average weekly sales - non-traditional non-comparable units
10,064
34,213
9,649
29,505
Average weekly sales - total non-comparable units
10,963
15,511
10,673
15,065
Average weekly sales - all units
15,524
13,676
15,191
13,376
646
2,061
2,039
620
1,917
578
1,923
96.0
93.0
95.4
94.3
16,203
13,993
15,847
13,730
12,087
10,767
10,402
11,155
7,975
28,816
8,374
27,015
11,461
13,557
10,100
14,038
16,008
13,963
15,577
13,748
Domestic franchise and development fees were approximately $200,000 for the three months ended September 28, 2008, including approximately $100,000 recognized upon development cancellation, extension and transfer fees, compared to approximately $600,000, including approximately $200,000 recognized upon development cancellation, extension and transfer fees, for the same period in 2007. Domestic franchise and development fees decreased to $1.4 million for the nine months ended September 28, 2008, including approximately $500,000 associated with the completion of the franchise renewal program and $300,000 in development cancellation, extension and transfer fees, compared to $1.9 million for the same period in 2007, including $500,000 upon development cancellation, extension and transfer fees. There were 25 and 71 domestic franchise restaurant openings during the three and nine months ended September 28, 2008, respectively, including four units at Live Nation concert amphitheaters, compared to 36 and 96 openings, respectively, during the same periods in 2007, including the opening of ten and 23 units at Live Nation concert amphitheaters for the three- and nine-month periods in 2007. The decrease in fees, exclusive of cancellation, renewal, extension and transfer fees, was primarily the result of fee reductions granted to certain franchisees that opened restaurants in underpenetrated markets.
Domestic commissary sales increased 11.3% to $108.8 million for the three months ended September 28, 2008 from $97.8 million in the comparable 2007 period and increased 9.2% to $321.2 million for the nine months ended September 28, 2008, from $294.2 million for the comparable 2007 period, reflecting an increase in the price of certain commodities, primarily cheese and wheat. Our commissaries charge a fixed dollar mark-up on the cost of cheese, and cheese cost is based upon the 40 lb. cheddar block price, which increased from $1.50 per pound in the third quarter of 2007 to $2.04 per pound in the third quarter of 2008, or a 36.0% increase, and increased from $1.41 per pound for the first nine months of 2007 to $1.80 per pound for the first nine months
24
of 2008, or a 27.7% increase. Other sales decreased to $13.6 million for the three months ended September 28, 2008, from $15.0 million in the prior comparable period and increased to $46.9 million for the nine months ended September 28, 2008, from $46.8 million in the prior comparable period. The changes in other sales were primarily due to changes in volumes at our print and promotions subsidiary, Preferred Marketing.
Our PJUK operations, denominated in British Pounds Sterling and converted to U.S. dollars, represent approximately 57% of international revenues during the nine-month period in 2008, compared to 64% during the nine-month period in 2007. International revenues were $10.3 million and $28.8 million for the three and nine months ended September 28, 2008, respectively, compared to $7.8 million and $21.9 million for the comparable periods in 2007, reflecting the increase in both the number and average unit volumes of our Company-owned and franchised restaurants over the past year.
Costs and Expenses. The restaurant operating margin for domestic Company-owned units was 16.8% and 18.0% for the three and nine months ended September 28, 2008, respectively, compared to 16.0% and 18.6% for the same periods in 2007. Excluding the impact of consolidating BIBP, the restaurant operating margin decreased 1.9% to 16.2% in the third quarter of 2008 from 18.1% in the same quarter of the prior year, and decreased 1.4% to 18.6% for the nine months ended September 28, 2008 from 20.0% in the corresponding period of 2007, consisting of the following differences:
· Cost of sales increased 2.6% and 1.9% for the three and nine months ended September 28, 2008 primarily due to an increase in commodities (principally cheese and wheat).
· Salaries and benefits were 0.4% and 0.3% lower as a percentage of sales for the three and nine months ended September 28, 2008, respectively, compared to the 2007 corresponding periods, as increased sales offset labor increases resulting from federal and state minimum wage increases in the latter half of 2007 and 2008.
· Advertising and related costs as a percentage of sales were 1.0% and 0.4% lower for the three and nine months ended September 28, 2008 as compared to the corresponding periods in 2007 reflecting fewer discretionary advertising dollars spent during 2008.
· Occupancy costs and other operating costs, on a combined basis, as a percentage of sales, were 0.7% and 0.2% higher for both the three- and nine-month periods, respectively, as compared to the corresponding periods in 2007. The increase of 0.7% for the three months ended September 28, 2008, as compared to the prior comparable period was due to increases in utilities and mileage reimbursement to our delivery drivers.
Domestic commissary and other margin was 7.7% and 9.1% for the three and nine months ended September 28, 2008, respectively, compared to 10.8% and 11.1% for the same periods in 2007. Cost of sales was 75.0% and 73.9% of revenues for the three and nine months ended September 28, 2008, respectively, compared to 71.8% and 71.5% for both the three- and nine-month periods in 2007, respectively. Cost of sales, as a percentage of revenues, increased due to increases in the cost of certain commodities that were not passed along via price increases to domestic restaurants and due to the previously mentioned fixed dollar markup on the cost of cheese. Given the current commodity cost environment, we chose to mitigate commodity cost increases at domestic restaurants by supporting the entire domestic system via reduced commissary margins. Salaries and benefits were $8.7 million and $26.8 million for the three and nine months ended September 28, 2008, which were relatively consistent with the prior comparable periods. Other operating expenses increased approximately $1.5 million and $3.0 million for the three and nine months ended September 28, 2008, as compared to the prior comparable periods, reflecting increases in distribution costs due to higher fuel prices.
The (income) loss from the franchise cheese-purchasing program, net of minority interest, was income of $2.6 million for the three months ended September 28, 2008 compared to a loss of $7.9 million for the comparable period in 2007. For the nine months ended September 28, 2008, the Company recorded a loss of $7.3 million compared to a loss of $14.0 million for the same period in 2007. These results only represent the portion of BIBP’s operating income related to the proportion of BIBP cheese sales to franchisees. The total impact of the consolidation of BIBP on Papa John’s pre-tax income was income of $2.8 million and a loss of $11.4 million for
the three- and nine-month periods ended September 28, 2008, compared to losses of $10.7 million and $19.4 million for the same periods in 2007.
General and administrative expenses were $26.2 million or 9.3% of revenues for the three months ended September 28, 2008, compared to $27.3 million or 10.4% of revenues in the same period of 2007, and $80.6 million, or 9.5% of revenues, for the nine months ended September 28, 2008, compared to $77.9 million, or 10.0% of revenues, for the same period in 2007. The decrease of $1.1 million for the three months ended September 28, 2008 was primarily due to a reduction in the expected payments under certain cash and equity-based compensation programs. The increase of $2.7 million for the nine-month period ended September 28, 2008 was primarily due to the fact that the 2007 results included an adjustment of approximately $1.2 million for awards forfeited by our Founder Chairman due to a change in status from an employee director of the Company to a non-employee director. Additionally, an increase in certain employee benefit costs during 2008, including health insurance and severance-related costs recorded in the first quarter of 2008, impacted the year-over-year comparison.
Minority interests and other general expenses reflected net expense of $4.9 million and $8.8 million for the three and nine months ended September 28, 2008, respectively, compared to approximately $1.2 million and $4.1 million, respectively, for the comparable periods in 2007 as detailed below (in thousands):
Minority interests
182
167
1,376
1,203
173
Restaurant closure, impairment and disposition losses (a)
3,428
4,571
Disposition and valuation-related costs of other assets
367
368
1,010
1,705
(695
Provision for uncollectible accounts and notes receivable (b)
269
236
758
590
168
Pre-opening costs (income)
58
(85
143
318
(191
Contribution to Marketing Fund
104
592
Gain associated with a terminated lease agreement
(17
(88
Total minority interests and other general expenses
3,705
4,724
(a) The charges for the three- and nine-month periods of 2008 and 2007 relate to the anticipated sale of 63 restaurants and the closure of three restaurants in one market.
(b) The nine-month period of 2007 includes the collection of $650,000 which had previously been reserved, from Papa Card, Inc., a non-stock, nonprofit corporation, which administers the Papa John’s gift card program.
Depreciation and amortization was $8.6 million (3.1% of revenues) for the three months ended September 28, 2008 compared to $7.9 million (3.0% of revenues) for the comparable period in 2007 and $25.0 million (2.9% of revenues) for the nine months ended September 28, 2008 compared to $23.4 million (3.0% of revenues) for the comparable period in 2007. The increase in depreciation expense was principally due to the acquisition of 42 restaurants during the third quarter of 2008, capital additions we have made within our restaurant operations, and the addition of certain information technology assets.
Net interest. Net interest expense was $1.7 million for the three months ended September 28, 2008 as compared to $1.7 million in 2007 and $5.0 million for the nine months ended September 28, 2008, compared to $4.2 million for the comparable period in 2007. The increase in net interest expense for the nine months ended
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September 28, 2008 reflects the increase in our average outstanding debt balance resulting from our share repurchase program and restaurant acquisitions during 2007 and lower investment income than in the 2007 period.
Income Tax Expense. We recognized reductions of $500,000 and $2.4 million in our customary income tax expense associated with the finalization of certain income tax issues in 2008 and 2007, respectively. Our effective income tax rate was 35.7% for the nine months ended September 28, 2008, compared to 29.9% for the comparable 2007 period.
Liquidity and Capital Resources
Our revolving line of credit allows us to borrow up to $175.0 million until its expiration date in January 2011. Outstanding balances accrue interest at 50.0 to 100.0 basis points over the London Interbank Offered Rate (LIBOR) or other bank developed rates at our option. The commitment fee on the unused balance ranges from 12.5 to 20.0 basis points. The increment over LIBOR and the commitment fee are determined quarterly based upon the ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the line of credit.
Cash flow from operating activities was $47.6 million in the first nine months of 2008 compared to $47.2 million for the same period in 2007. The consolidation of BIBP decreased cash flow from operations by approximately $11.4 million and $19.4 million in 2008 and 2007, respectively (as reflected in the income from operations and deferred income taxes captions in the accompanying Consolidated Statements of Cash Flows). Excluding the impact of the consolidation of BIBP, cash flow from operating activities was $59.0 million in the first nine months of 2008 and $66.5 million in the first nine months of 2007. The $7.5 million decrease, excluding the consolidation of BIBP, was primarily due to a decrease in net income and a decline in working capital, including accounts receivable, accrued expenses and accounts payable.
We require capital primarily for the development, acquisition, renovation and maintenance of restaurants, the development, renovation and maintenance of commissary and print and promotions facilities and equipment and the enhancement of corporate systems and facilities. In addition, we have a common stock repurchase program. During the nine months ended September 28, 2008, common stock repurchases of $37.7 million and capital expenditures of $24.0 million were funded primarily by cash flow from operations, proceeds from our line of credit facility and from available cash and cash equivalents.
The Company’s board of directors authorized the repurchase of $100.0 million of common stock during 2008 of which $50.0 million is authorized through the end of 2009. The Company repurchased approximately 1.4 million shares of our common stock at an average price of $26.95 per share, or a total of $37.7 million, during the first nine months of 2008. In September, the Company terminated its previously announced trading plan under Rule 10b5-1 in response to market conditions. The Company retains the ability to repurchase shares on a
27
discretionary basis through the end of 2009 pursuant to the current remaining authorization of $62.3 million at October 29, 2008.
We expect to fund planned capital expenditures and any additional share repurchases of our common stock for the remainder of 2008 from operating cash flows and the $9.6 million remaining availability under our line of credit, reduced for certain outstanding letters of credit.
Forward-Looking Statements
Certain information contained in this quarterly report, particularly information regarding future financial performance and plans and objectives of management, is forward-looking. Certain factors could cause actual results to differ materially from those expressed in forward-looking statements. These factors include, but are not limited to: changes in pricing or other marketing or promotional strategies by competitors which may adversely affect sales; new product and concept developments by food industry competitors; the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably; general economic conditions and its impact on consumer buying habits; increases in or sustained high costs of food ingredients and other commodities, paper, utilities, fuel, employee compensation and benefits, insurance and similar costs; the ability of the Company to pass along such increases in or sustained high costs to franchisees; the ability to obtain ingredients from alternative suppliers, if needed; health- or disease-related disruptions or consumer concerns about commodities supplies; the selection and availability of suitable restaurant locations; negotiation of suitable lease or financing terms; constraints on permitting and construction of restaurants; local governmental agencies’ restrictions on the sale of certain food products; higher-than-anticipated construction costs; the hiring, training and retention of management and other personnel; changes in consumer taste, demographic trends, traffic patterns and the type, number and location of competing restaurants; franchisee relations; the uncertainties associated with litigation; the possibility of impairment charges if Papa John’s UK (“PJUK”) or recently acquired restaurants perform below our expectations; our PJUK operations remain contingently liable for payment under certain lease arrangements with a total value of approximately $10.0 million associated with the sold Perfect Pizza operations; federal and state laws governing such matters as wages, benefits, working conditions, citizenship requirements and overtime, including legislation to further increase the federal and state minimum wage; and labor shortages in various markets resulting in higher required wage rates. In recent months, the credit markets have experienced instability. Certain franchisees, or prospective franchisees, may experience difficulty in obtaining adequate financing and thus our growth strategy and franchise revenues may be adversely affected. The above factors might be especially harmful to the financial viability of franchisees or Company-owned operations in under-penetrated or emerging markets, leading to greater unit closings than anticipated. Increases in projected claims losses for the Company’s self-insured coverage or within the captive franchise insurance program could have a significant impact on our operating results. Additionally, domestic franchisees are only required to purchase seasoned sauce and dough from our quality control centers (“QC Centers”) and changes in purchasing practices by domestic franchisees could adversely affect the financial results of our QC Centers, including the recoverability of the BIBP cheese purchasing entity deficit. Our international operations are subject to additional factors, including political and health conditions in the countries in which the Company or its franchisees operate; currency regulations and fluctuations; differing business and social cultures and consumer preferences; diverse government regulations and structures; ability to source high-quality ingredients and other commodities in a cost-effective manner; and differing interpretation of the obligations established in franchise agreements with international franchisees. See “Part II. Item 1A. – Risk Factors” of this Form 10-Q and “Part I. Item 1A. – Risk Factors” of the Annual Report on Form 10-K for the fiscal year ended December 30, 2007 for additional factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our debt at September 28, 2008 was principally comprised of a $145.0 million outstanding principal balance on the $175.0 million unsecured revolving line of credit. The interest rate on the revolving line of credit is variable and is based on LIBOR plus a 50.0 to 100.0 basis point spread, tiered based upon debt and cash flow levels.
We have three interest rate swap agreements that provide for fixed rates of 4.98%, 5.18% and 3.74%, as compared to LIBOR, on the following amount of floating rate debt:
FloatingRate Debt
FixedRates
The first interest rate swap agreement:
March 15, 2006 to January 16, 2007
50 million
4.98
January 16, 2007 to January 15, 2009
60 million
January 15, 2009 to January 15, 2011
The second interest rate swap agreement:
March 1, 2007 to January 31, 2009
30 million
5.18
The third interest rate swap agreement:
January 31, 2009 to January 31, 2011
3.74
The effective interest rate on the line of credit, including the impact of the interest rate swap agreements, was 5.16% as of September 28, 2008. An increase in the present interest rate of 100 basis points on the line of credit balance outstanding as of September 28, 2008, as mitigated by the interest rate swap agreements based on present interest rates, would increase interest expense approximately $550,000. The annual impact of a 100 basis point increase in interest rates on the debt associated with BIBP would be $90,000.
Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations do not have a significant impact on our operating results.
Cheese costs, historically representing 35% to 40% of our total food cost, are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our control. As previously discussed in Results of Operations and Critical Accounting Policies and Estimates, we have a purchasing arrangement with a third-party entity, BIBP, formed at the direction of our Franchise Advisory Council for the sole purpose of reducing cheese price volatility to domestic system-wide restaurants. Under this arrangement, domestic Company-owned and franchised restaurants are able to purchase cheese at a fixed price per pound throughout a given quarter, based in part on historical average cheese prices. Gains and losses incurred by BIBP are used as a factor in determining adjustments to the selling price to restaurants over time. Accordingly, for any given quarter, the price paid by the domestic Company-owned and franchised restaurants may be less than or greater than the prevailing average market price.
As a result of the adoption of FIN 46, Papa John’s began consolidating the operating results of BIBP in 2004. Consolidation accounting requires the portion of BIBP operating income (loss) related to domestic Company-owned restaurants to be reflected as a reduction (increase) in the “Domestic Company-owned restaurant expenses – cost of sales” line item, thus reflecting the actual market price of cheese had the purchasing arrangement not existed. The consolidation of BIBP had a significant impact on our operating results for the first nine months of 2008 as well as the first nine months of 2007 and is expected to have a significant impact on future operating results depending on the prevailing spot block market price of cheese as compared to the price charged to domestic restaurants.
Many domestic franchisees are facing financial challenges due to recent declining sales trends and continued operating margin pressures from higher commodity costs (primarily cheese and wheat) as well as increased
labor and energy costs. In addition, due to the recent events impacting credit availability, some franchisees are having difficulty obtaining credit from third-party lending institutions for working capital and development purposes. In an effort to assist franchisees through this difficult period, the BIBP formula was modified effective for the last two months of 2008. The modified formula will result in domestic restaurants paying the expected futures spot market price for cheese plus an interest carry cost, which is approximately $0.28 per pound less than the pre-established fourth quarter price paid by domestic restaurants during October 2008. The modified price will reduce the food cost and increase operating margin for the average restaurant approximately 1.4% for the last two months of 2008. Any decision to continue this formula modification into 2009 will be made as part of a comprehensive assessment of potential franchise support initiatives due to ongoing economic challenges.
The following table presents the actual average block price for cheese and the BIBP block price by quarter as projected through the third quarter of 2009 (based on the October 29, 2008 Chicago Mercantile Exchange (CME) milk futures market prices) and the actual prices in 2008 and 2007 to date:
2009
Actual
Block Price (b)
Block Price
Quarter 1
1.887
(a)
1.615
1.608
1.904
1.344
1.341
Quarter 2
1.940
1.652
1.754
1.996
1.379
1.684
Quarter 3
1.899
1.679
2.042
1.859
1.497
1.969
Quarter 4
N/A
1.831
1.743
1.564
1.982
Full Year
1.809
1.876
1.446
1.744
The following table presents the 2007 impact by quarter on our pre-tax income due to consolidating BIBP (in thousands):
(406
(8,257
(12,339
(31,709
Additionally, based on the CME milk futures market prices as of October 29, 2008, and the actual fourth quarter and projected first, second and third quarters of 2009 cheese costs to restaurants as determined by the BIBP pricing formula (including the modified price for the last two months of the quarter as noted above, and assuming no modification to the formula price in 2009) the consolidation of BIBP is projected to increase (decrease) our pre-tax income as follows (in thousands):
Quarter 1 - 2008
(7,951
Quarter 2 - 2008
(6,302
Quarter 3 - 2008
Quarter 4 - 2008
2,212
(c)
Full Year - 2008
(9,215
)(c)
Quarter 1 - 2009
6,760
(b), (c)
Quarter 2 - 2009
6,888
Quarter 3 - 2009
5,333
N/A – not available
The amounts are estimates based on futures prices.
(b)
The projected BIBP price for 2009 assumes we do not modify (i.e., reduce) the formula as we did for the last two months of 2008. If we modify the BIBP formula for 2009, the projected BIBP block price would approximate the expected futures spot market price plus an interest carry cost and BIBP would have approximately break-even results.
The projections are based upon current futures market prices. Historically, actual results have been subject to large fluctuations and have often differed significantly from previous projections using the futures market prices.
Over the long term, we expect to purchase cheese at a price approximating the actual average market price and therefore we do not generally make use of financial instruments to hedge commodity prices.
Item 4. Controls and Procedures
Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“1934 Act”)), as of the end of the period covered by this report. Based upon their evaluation, the CEO and CFO concluded that the disclosure controls and procedures are effective in providing reasonable assurance that all required information relating to the Company is included in this quarterly report.
We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the 1934 Act) designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that occurred that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to claims and legal actions in the ordinary course of our business. We believe that all such claims and actions currently pending against us are either adequately covered by insurance or would not have a material adverse effect on us if decided in a manner unfavorable to us.
Item 1A. Risk Factors
In addition to the other information set forth in this report, the factors discussed in “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for our 2007 fiscal year could materially affect the Company’s business, financial condition or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may adversely affect our business, financial condition or operating results.
The following updates to our risk factors should be read in conjunction with the risk factors included in our Annual Report on Form 10-K for the year ended December 30, 2007:
· The current credit markets have experienced extreme deterioration and are highly unpredictable. Further deterioration of the credit markets may impact the ability of our franchisees and prospective franchisees to obtain financing to acquire, expand or operate franchises. This may require the Company to provide financing to certain franchisees and prospective franchisees in order to mitigate store closings, allow new units to open and continue to execute our refranchising strategy, due to the unavailability of credit. If we are unable or unwilling to provide such financing, our results of operations may be adversely impacted.
· Any increase in or continued high cost of food ingredients and other commodities could adversely impact our operating results and the operating results of our franchisees. Higher commodity costs (primarily cheese and wheat) have resulted in operating margin pressure on our franchisees. Given the current commodity cost environment, we chose to mitigate commodity cost increases at domestic restaurants by supporting the entire domestic system via reduced commissary margins. For example, we did not pass through higher fuel charges incurred during 2008 by our quality control centers (“QC Centers”) to our domestic restaurants. Additionally, for the last two months of 2008, in an effort to assist franchisees through this difficult period, we have decided not to pass along the higher price of cheese
that would have been required under the pricing formula for cheese sales from BIBP, the franchisee-owned cheese purchasing entity, to franchisees. Instead, we are allowing domestic restaurants to pay the expected futures spot market price for cheese plus an interest carry cost, which is approximately $0.28 per pound less than the pre-established fourth quarter price paid by domestic restaurants during October 2008. Our decision during the fourth quarter to reduce the BIBP formula price will result in a delay in the recovery of the BIBP cheese purchasing entity deficit. Additionally, further delays in the recovery of the BIBP deficit will occur if we decide to continue to assist the domestic franchise system in 2009 or beyond by maintaining a lower BIBP price than would otherwise be called for by the pricing formula. Domestic franchisees are only required to purchase seasoned sauce and dough from our QC Centers and changes in purchasing practices by domestic franchisees could adversely affect the financial results of our QC Centers, including the recovery of the BIBP cheese purchasing entity deficit.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Papa John’s Board of Directors has authorized the repurchase of up to $775.0 million of common stock under a share repurchase program that began December 9, 1999, and runs through December 31, 2009. Through September 28, 2008, a total of 42.2 million shares with an aggregate cost of $712.7 million and an average price of $16.89 per share have been repurchased under this program. As of September 28, 2008, approximately $62.3 million remains available for repurchase of common stock under this authorization. The following table summarizes our repurchases by fiscal period during the first nine months of 2008 (in thousands, except per-share amounts):
Total Number
Maximum Dollar
Average
of Shares Purchased
Value of Shares
Number
Price
as Part of
that May Yet Be
of Shares
Paid per
Publicly Announced
Purchased Under the
Fiscal Period
Purchased
Share
Plans or Programs
12/31/2007 - 01/27/2008
21.74
40,893
97,700
01/28/2008 - 02/24/2008
*
02/25/2008 - 03/30/2008
03/31/2008 - 04/27/2008
203
25.51
41,096
92,523
04/28/2008 - 05/25/2008
214
27.29
41,310
86,690
05/26/2008 - 06/29/2008
247
28.32
41,557
79,685
06/30/2008 - 07/27/2008
223
26.72
41,780
73,735
07/28/2008 - 08/24/2008
213
28.38
41,993
67,698
08/25/2008 - 09/28/2008
27.84
42,186
62,313
*There were no share repurchases during this period.
Our share repurchase authorization increased from $725.0 million to $775.0 million in August 2008. For presentation purposes, the maximum dollar value of shares that may be purchased was adjusted retroactively to December 31, 2007.
In September, the Company terminated its previously announced written trading plan under Rule 10b5-1 in response to market conditions. The Company retains the ability to repurchase shares on a discretionary basis through the end of 2009 pursuant to the current remaining authorization of $62.3 million at October 29, 2008.
Item 6. Exhibits
Exhibit
Description
10.1
First and Second Amendments to $175,000,000 Revolving Line of Credit Facility, dated May 11, 2007 and September 30, 2008, respectively.
10.2
Fifth Amendment Agreement, As of July 31, 2008, of the Secured Loan Agreement, by and between BIBP Commodities, Inc. and Capital Delivery, Ltd. and of the Promissory Note by BIBP Commodities, Inc.
31.1
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 4, 2008
/s/ J. David Flanery
J. David Flanery
Senior Vice President and
Chief Financial Officer
34