Papa John’s 37
International Markets
Executive Leadership Team
ANNUAL
REPORT
2013
D
D
E
E
NG R
R ING R
E
T
T
E
B
I E NTS.BE
I E NTS. BE
T
T
T
T
E
E
R
P
I
Z
Z
A
.
John H. Schnatter
Founder, Chairman and
Chief Executive Officer
Steve M. Ritchie
SVP, Global Operations and Global OST
Timothy C. O’Hern
SVP, Chief Development Officer
Sean A. Muldoon
SVP, R&D, QA and Supply Chain
Caroline Miller Oyler
SVP, Legal Affairs
Robert C. Kraut
SVP, Chief Marketing Officer
Anthony N. Thompson
President and Chief Operating Officer
Lance F. Tucker
SVP, Chief Financial Officer,
Chief Administrative Officer,
and Treasurer
Cynthia McClellan
SVP, Information Systems
and Project Management Office
R. Shane Hutchins
SVP, PJ Food Service, Inc.
Robert Smith
VP, Global Human Resources
Cayman Islands
Dominican Republic
United Kingdom
Ireland
Puerto Rico
Cyprus
Russia
Turkey
Jordan
Lebanon
Azerbaijan
South Korea
China
Canada
Mexico
Trinidad
Venezuela
Egypt
Saudi Arabia
Guam
Philippines
Malaysia
El Salvador
Guatemala
Nicaragua
Costa Rica
Chile
Panama
Colombia
Ecuador
Peru
Note: 2013 Markets entered – Guatemala
India
Kuwait
Bahrain
Qatar
Oman
United Arab Emirates
R ING R
E
T
T
E
D
E
I E NTS. BE
T
T
E
R
P
I
Z
Z
A
B
Note: International Locations as of December 30, 2012
.
2012 Markets entered – Azerbaijan, Guam, Lebanon
Papa John’s 37
International Markets
Executive Leadership Team
Cayman Islands
Dominican Republic
United Kingdom
Ireland
Puerto Rico
Cyprus
Russia
Turkey
Jordan
Lebanon
Azerbaijan
South Korea
China
Canada
Mexico
Trinidad
Venezuela
Egypt
Saudi Arabia
Guam
Philippines
Malaysia
El Salvador
Guatemala
Nicaragua
Costa Rica
Chile
Panama
Colombia
Ecuador
Peru
Note: 2013 Markets entered – Guatemala
India
Kuwait
Bahrain
Qatar
Oman
United Arab Emirates
R ING R
E
T
T
E
D
E
I E NTS. BE
T
T
E
R
P
I
Z
Z
A
B
Note: International Locations as of December 30, 2012
.
2012 Markets entered – Azerbaijan, Guam, Lebanon
ANNUAL
REPORT
2013
R ING R
E
T
T
E
B
D
E
I E NTS. BE
T
T
E
R
P
I
Z
Z
A
.
John H. Schnatter
Founder, Chairman and
Chief Executive Officer
Steve M. Ritchie
SVP, Global Operations and Global OST
Timothy C. O’Hern
SVP, Chief Development Officer
Sean A. Muldoon
SVP, R&D, QA and Supply Chain
Caroline Miller Oyler
SVP, Legal Affairs
Robert C. Kraut
SVP, Chief Marketing Officer
Anthony N. Thompson
President and Chief Operating Officer
Lance F. Tucker
SVP, Chief Financial Officer,
Chief Administrative Officer,
and Treasurer
Cynthia McClellan
SVP, Information Systems
and Project Management Office
R. Shane Hutchins
SVP, PJ Food Service, Inc.
Robert Smith
VP, Global Human Resources
TO OUR SHAREHOLDERS,
FRANCHISEES, SUPPLY
PARTNERS AND
TEAM MEMBERS:
As Papa John’s celebrates its Thirtieth Anniversary, I’m
proud to say we have never lost sight of our founding
principle – the unrelenting focus on superior-quality
products to drive a loyal customer base. In a very real way,
we’ve always kept our “eye on the pie” for the past thirty
years. At the end of the day, nothing sells like the truth;
and, our customers take notice of our better ingredients,
better pizza promise because they do taste the difference
between mediocrity and superiority. To that end, I am both
proud and pleased to report the results for 2013, another
outstanding year for Papa John’s.
History of Digital
Leadership
2014
INDUSTRY
FIRST
1st
MOBILE-
OPTIMIZED
EGIFT CARD
ORDERING
50%+
1997
FIRST ONLINE
ORDER
(PILOT IN NORTH
CAROLINA)
Papa John’s achieved a 20.2% increase in EPS and an increase
of $700 million in market capitalization in 2013. Over the past five
years, EPS has grown an average of 20% per year and the market
capitalization has gone from $500 million to more than $2 billion.
We have also reinvested approximately $50 million per year for the
last several years back into property, plant and equipment to first
and foremost protect and enhance the “Quality Moat” around the
brand castle, further enhance productivity and innovations, and
last but not least, drive future international success. With 28%
combined ownership of the company’s stock, our Board and senior
management team are highly vested in the continued long-term
success of Papa John’s.
$1.70
$1.50
$1.30
$1.10
$0.90
$0.70
$0.50
Earnings Per Share
$1.55
$1.29
$1.08
$0.92
$0.69
2009
2010
2011
2012
2013
PJI Market
Capitalization
1,908,930
1,221,700
905,040
704,660
629,080
Under the outstanding leadership of Papa John’s President and
COO Tony Thompson, the company’s 2013 accomplishments are
unparalleled – the result of exceptional execution of our strategy
across all aspects of our growing business
Quality and Service Leadership: There’s no better place
to start than our system wide quality and service performance,
driven by the exceptional execution of our world class operations
team led by Steve Ritchie, Papa John’s Senior Vice President, Global
Operations. We spend a great deal of time and money each year
to ensure our restaurants are making and delivering the industry’s
highest quality pizzas with world class customer service. We did not
disappoint in 2013. Our quality and service scores were higher than
any year in our history, which led to Papa John’s earning the highest
rating in the prestigious American Customer Satisfaction Index for
the 12th time in the last 14 years. Superior quality products and a
focus on customer service were the primary drivers behind our 4%
comparable North American sales increase in 2013, driving the
fifth straight year of pretax income growth in Papa John’s North
American Franchise segment.
Digital Leadership: In 2013, Papa John’s became the
first national pizza company to near 50% of domestic system
sales through digital channels, building on its unmatched history
of technology “firsts.” Papa John’s was the first national pizza
company to offer systemwide online ordering (2001); the first
to offer systemwide text ordering (2007); and the first and only
pizza company to offer a digital rewards program, Papa Rewards
(2010). Our dedication to innovation through technology has been
and remains a commitment of Papa John’s leadership.
Online Sales Mix
Domestic Restaurants
46%
40%
33%
28%
25%
$5 BILLION
IN U.S. DIGITAL SALES
OVER 45% OF U.S.
TOTAL SALES FROM
DIGITAL SALES
KINDLE FIRE
ORDERING app*
ANDROID
ORDERING app*
2013
INDUSTRY
FIRST
1st
2012
2011
$
$2 BILLION
IN U.S. DIGITAL SALES*
DIGITAL LOYALTY
REWARDS PROGRAM
iOS ORDERING app
2010
INDUSTRY
FIRST
1st
NATIONWIDE
ONLINE ORDERING
2001
INDUSTRY
FIRST
1st
LOCAL SPECIAL
ONLINE OFFERS*
NATIONWIDE 24/7
“PLAN AHEAD”
ONLINE ORDERING* 24/7
2006
INDUSTRY
FIRST
1st
NATIONWIDE
MOBILE TEXT
ORDERING*
2007
INDUSTRY
FIRST
1st
$
$1 BILLION
IN U.S. DIGITAL SALES
NATIONWIDE MOBILE
WEB ORDERING
INDUSTRY
FIRST
1st
2008
*ALL U.S. DELIVERY RESTAURANTS. Kindle Fire and the Amazon “a” logo are registered
trademarks of Amazon Technologies, Inc. Android is a registered trademark of Google, Inc.
The Apple logo is a registered trademark of Apple, Inc.
Leadership in Giving Back: Having been blessed
in so many ways, we feel it is important to give back to the
communities that we serve. The Salvation Army is our national
charitable partner, and in 2013 we joined with them to support
the victims and aid workers recovering from several disasters
including the devastating tornados that hit Oklahoma City.
Papa John’s work with the Salvation Army along with our local
charitable efforts, and the numerous relief efforts, fundraisers,
and humanitarian projects our franchisees participated in, totaled
hundreds-of-thousands-of-dollars in monetary and product
donations last year. We also positively impacted the lives of our
friends and neighbors in communities throughout the country and
world. Our system is grateful for and humbled by our success,
and we will continue to support and positively impact the people
in these communities that support us so strongly.
International Growth: In 2013, Papa John’s continued to
build international momentum with a 7.5% international comparable
sales increase and 183 net unit openings around the world. We
passed the one-thousandth international restaurant milestone in
the third quarter, and finished the year with 1,142 restaurants open
outside of North America. Strong sales momentum and market
penetration continues in the UK, Russia, Latin America, China and
the Middle East.
1,100
1,000
900
800
700
600
500
400
300
1,200 Ending Store Count
International
1142
959
822
709
635
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
Note: The results for 2009 and 2010 are presented on a non-GAAP basis for comparability purposes. See the Investor Relations section of our website which contains the GAAP to non-GAAP reconciliations.
Directors
John H. Schnatter
Founder, Chairman and CEO
Corporate
Information
Corporate Headquarters
2002 Papa John’s Boulevard
Louisville, Kentucky 40299
502-261-7272
Mark S. Shapiro (1)(3*)
Annual Meeting
Executive Producer, Dick Clark Productions
The annual meeting of stockholders will be held
Tuesday, April 29, 2014, 11:00 A.M. (E.D.T) at:
Stock Listing
Papa John’s stock is listed on The NASDAQ Global
Select Market under the ticker symbol PZZA
Papa John’s International, Inc.
2002 Papa John’s Boulevard
Louisville, Kentucky 40299
Independent Public Accountants
Ernst & Young LLP
Transfer Agent
Computershare Shareholder Services
211 Quality Circle, Suite 210
College Station, TX 77845
www.computershare.com/investor
800-622-6757 (US, Canada, Puerto Rico)
781-575-4735 (non-US)
SVP, Chief Financial Officer, Chief Administrative
Investor Relations
Lance F. Tucker
Officer, and Treasurer
502-261-4218
Corporate Communications – Media
Relations
Robert C. Kraut
SVP, Chief Marketing Officer
502-261-4318
Forward-Looking Statements
This report includes non-historical or “forward
looking” statements concerning future events or
conditions. Important risk factors, which could
cause actual results to differ materially from these
statements, are set forth in Item 1A. Risk Factors in
the accompanying Form 10-K.
For More Information
To learn more about Papa John’s, or to order
online, visit our website at www.papajohns.com
W. Kent Taylor (2)
Founder, Chairman and CEO of Texas Roadhouse, Inc.
Christopher L. Coleman (1)(3)
Managing Director, Rothschild – London
Olivia F. Kirtley (1*)(2)
Business Consultant
Philip Guarascio (3)
Chairman and CEO of PG Ventures LLC,
a marketing consulting firm
Norborne P. Cole, Jr. (2*)(4)
Business Consultant
NUMBERS INDICATE BOARD COMMITTEES:
( 1 ) Audit Committee
( 2 ) Compensation Committee
( 4 ) Lead Independent Director
*Committee Chair
( 3 ) Corporate Governance and Nominating Committee
TO OUR SHAREHOLDERS,
FRANCHISEES, SUPPLY
PARTNERS AND
TEAM MEMBERS:
As Papa John’s celebrates its Thirtieth Anniversary, I’m
proud to say we have never lost sight of our founding
principle – the unrelenting focus on superior-quality
products to drive a loyal customer base. In a very real way,
we’ve always kept our “eye on the pie” for the past thirty
years. At the end of the day, nothing sells like the truth;
and, our customers take notice of our better ingredients,
better pizza promise because they do taste the difference
between mediocrity and superiority. To that end, I am both
proud and pleased to report the results for 2013, another
outstanding year for Papa John’s.
Papa John’s achieved a 20.2% increase in EPS and an increase
Under the outstanding leadership of Papa John’s President and
of $700 million in market capitalization in 2013. Over the past five
COO Tony Thompson, the company’s 2013 accomplishments are
years, EPS has grown an average of 20% per year and the market
unparalleled – the result of exceptional execution of our strategy
capitalization has gone from $500 million to more than $2 billion.
across all aspects of our growing business
We have also reinvested approximately $50 million per year for the
last several years back into property, plant and equipment to first
and foremost protect and enhance the “Quality Moat” around the
brand castle, further enhance productivity and innovations, and
last but not least, drive future international success. With 28%
combined ownership of the company’s stock, our Board and senior
management team are highly vested in the continued long-term
success of Papa John’s.
$1.70
$1.50
$1.30
$1.10
$0.90
$0.70
$0.50
Earnings Per Share
$1.55
$1.29
$1.08
$0.92
$0.69
2009
2010
2011
2012
2013
PJI Market
Capitalization
1,908,930
1,221,700
905,040
704,660
629,080
Quality and Service Leadership: There’s no better place
to start than our system wide quality and service performance,
driven by the exceptional execution of our world class operations
team led by Steve Ritchie, Papa John’s Senior Vice President, Global
Operations. We spend a great deal of time and money each year
to ensure our restaurants are making and delivering the industry’s
highest quality pizzas with world class customer service. We did not
disappoint in 2013. Our quality and service scores were higher than
any year in our history, which led to Papa John’s earning the highest
rating in the prestigious American Customer Satisfaction Index for
the 12th time in the last 14 years. Superior quality products and a
focus on customer service were the primary drivers behind our 4%
comparable North American sales increase in 2013, driving the
fifth straight year of pretax income growth in Papa John’s North
American Franchise segment.
Digital Leadership: In 2013, Papa John’s became the
first national pizza company to near 50% of domestic system
sales through digital channels, building on its unmatched history
of technology “firsts.” Papa John’s was the first national pizza
company to offer systemwide online ordering (2001); the first
to offer systemwide text ordering (2007); and the first and only
pizza company to offer a digital rewards program, Papa Rewards
(2010). Our dedication to innovation through technology has been
and remains a commitment of Papa John’s leadership.
Online Sales Mix
Domestic Restaurants
46%
40%
33%
28%
25%
History of Digital
Leadership
2014
INDUSTRY
FIRST
1st
MOBILE-
OPTIMIZED
EGIFT CARD
ORDERING
50%+
1997
FIRST ONLINE
ORDER
(PILOT IN NORTH
CAROLINA)
$5 BILLION
IN U.S. DIGITAL SALES
OVER 45% OF U.S.
TOTAL SALES FROM
DIGITAL SALES
KINDLE FIRE
ORDERING app*
ANDROID
ORDERING app*
2013
INDUSTRY
FIRST
1st
2012
2011
$
$2 BILLION
IN U.S. DIGITAL SALES*
DIGITAL LOYALTY
REWARDS PROGRAM
iOS ORDERING app
2010
INDUSTRY
FIRST
1st
NATIONWIDE
ONLINE ORDERING
2001
INDUSTRY
FIRST
1st
LOCAL SPECIAL
ONLINE OFFERS*
NATIONWIDE 24/7
“PLAN AHEAD”
ONLINE ORDERING* 24/7
2006
INDUSTRY
FIRST
1st
NATIONWIDE
MOBILE TEXT
ORDERING*
$
$1 BILLION
IN U.S. DIGITAL SALES
NATIONWIDE MOBILE
WEB ORDERING
2007
INDUSTRY
FIRST
1st
INDUSTRY
FIRST
1st
2008
*ALL U.S. DELIVERY RESTAURANTS. Kindle Fire and the Amazon “a” logo are registered
trademarks of Amazon Technologies, Inc. Android is a registered trademark of Google, Inc.
The Apple logo is a registered trademark of Apple, Inc.
Leadership in Giving Back: Having been blessed
in so many ways, we feel it is important to give back to the
communities that we serve. The Salvation Army is our national
charitable partner, and in 2013 we joined with them to support
the victims and aid workers recovering from several disasters
including the devastating tornados that hit Oklahoma City.
Papa John’s work with the Salvation Army along with our local
charitable efforts, and the numerous relief efforts, fundraisers,
and humanitarian projects our franchisees participated in, totaled
hundreds-of-thousands-of-dollars in monetary and product
donations last year. We also positively impacted the lives of our
friends and neighbors in communities throughout the country and
world. Our system is grateful for and humbled by our success,
and we will continue to support and positively impact the people
in these communities that support us so strongly.
International Growth: In 2013, Papa John’s continued to
build international momentum with a 7.5% international comparable
sales increase and 183 net unit openings around the world. We
passed the one-thousandth international restaurant milestone in
the third quarter, and finished the year with 1,142 restaurants open
outside of North America. Strong sales momentum and market
penetration continues in the UK, Russia, Latin America, China and
the Middle East.
1,200 Ending Store Count
International
1,100
1142
959
822
709
635
1,000
900
800
700
600
500
400
300
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
Note: The results for 2009 and 2010 are presented on a non-GAAP basis for comparability purposes. See the Investor Relations section of our website which contains the GAAP to non-GAAP reconciliations.
Directors
John H. Schnatter
Founder, Chairman and CEO
Corporate
Information
Corporate Headquarters
2002 Papa John’s Boulevard
Louisville, Kentucky 40299
502-261-7272
Mark S. Shapiro (1)(3*)
Annual Meeting
Executive Producer, Dick Clark Productions
The annual meeting of stockholders will be held
Tuesday, April 29, 2014, 11:00 A.M. (E.D.T) at:
Stock Listing
Papa John’s stock is listed on The NASDAQ Global
Select Market under the ticker symbol PZZA
Papa John’s International, Inc.
2002 Papa John’s Boulevard
Louisville, Kentucky 40299
Independent Public Accountants
Ernst & Young LLP
Transfer Agent
Computershare Shareholder Services
211 Quality Circle, Suite 210
College Station, TX 77845
www.computershare.com/investor
800-622-6757 (US, Canada, Puerto Rico)
781-575-4735 (non-US)
SVP, Chief Financial Officer, Chief Administrative
Investor Relations
Lance F. Tucker
Officer, and Treasurer
502-261-4218
Corporate Communications – Media
Relations
Robert C. Kraut
SVP, Chief Marketing Officer
502-261-4318
Forward-Looking Statements
This report includes non-historical or “forward
looking” statements concerning future events or
conditions. Important risk factors, which could
cause actual results to differ materially from these
statements, are set forth in Item 1A. Risk Factors in
the accompanying Form 10-K.
For More Information
To learn more about Papa John’s, or to order
online, visit our website at www.papajohns.com
W. Kent Taylor (2)
Founder, Chairman and CEO of Texas Roadhouse, Inc.
Christopher L. Coleman (1)(3)
Managing Director, Rothschild – London
Olivia F. Kirtley (1*)(2)
Business Consultant
Philip Guarascio (3)
Chairman and CEO of PG Ventures LLC,
a marketing consulting firm
Norborne P. Cole, Jr. (2*)(4)
Business Consultant
NUMBERS INDICATE BOARD COMMITTEES:
( 1 ) Audit Committee
( 2 ) Compensation Committee
( 4 ) Lead Independent Director
*Committee Chair
( 3 ) Corporate Governance and Nominating Committee
Corporate store sales in China were below expectations, though
2013 strategic infrastructure investments in technology and
marketing should result in significantly improved performance
moving forward. Overall, new leadership in our operations and
development, with consistent and disciplined execution, has
positioned us for accelerated international growth and advanced
levels of performance in 2014 and beyond.
NFL Leadership: In 2013, Papa John’s was noted as
the most recognized sponsor of the National Football League,
surpassing significant brands that have long been associated
with the famous NFL moniker. As Papa John’s continued strategic
activation around its NFL partnership as its Official Pizza, we
continued to reap the rewards of this highly recognized affiliation.
The Papa John’s/NFL partnership cultivated the sponsorship of
nearly twenty individual NFL teams in 2013, and its continued
relationship with and endorsement of Peyton Manning, the most
recognized face of the NFL. With an overwhelming 62% of fans
affiliating Manning as the face of the National Football League,
this important Papa John’s relationship continued to be an
impactful strategy for the company.
Sponsors that do the best job
activating around the NFL:
41%
36%
20%
23%
50%
40%
30%
20%
10%
5%
0%
Visa
Verizon
Anheuser-
Busch
Papa John’s
Source: Street & Smith’s Sports Business Journal, Nov. 25, 2013 issue
Strong Business Model: Papa John’s success in 2013
continued to be supported by our winning and straightforward
business model – investing in opportunities that pose minimal risk
and present great potential for reward. When I look at investing,
I prefer opportunities that have a relatively low down side with
minimal risk and the potential of very high upside. At Papa John’s,
our steady and consistent profits provide a high level of stability,
while the opportunities we have to grow our international business
and domestic comparable sales provide the potential for very
positive upside.
While there were a multitude of positives last year at Papa John’s,
there were several challenges as well. I’d like to further explain those
challenges and summarize our ongoing efforts in dealing with them:
Our first challenge continues to be the difficult market price
inflation for several key ingredients. Input costs continue to rise,
significantly increasing the cost of our product. With that said,
I am convinced that Papa John’s is in the best position in our
industry to navigate high cost levels. Our Quality position,
leadership in execution, proven business model, and solid
financial footing should enable us to navigate rising costs this
year and forward.
“In a very real way
we’ve always kept
our ‘eye on the pie’...”
Our second challenge was the performance of our corporate
markets in China as noted above. While we saw sales increases
in Beijing and Tianjin, our average unit volumes need to improve.
Tony, Steve and I are optimistic that the infrastructure and
technology investments we made during 2013 will continue to
move this important market forward in 2014.
In closing, I give all the credit for our 2013 success and the
success we’ve enjoyed over the past five years to our all-star
operations and leadership team. Although we take our
responsibilities as a publicly held company very seriously, we
treat our people and product more like a family business. We are
able to increase shareholder value because our franchisees and
operators have an “ownership” mindset that is not “quarter to
quarter” but truly long term. Just as important are the members of
our outstanding corporate staff, who do a fantastic job dealing with
the many obstacles and increasing government regulations that
adversely affect all businesses. I am so proud of what the people
at headquarters do day in and day out to support our field
operational team.
We have had tremendous success over the past thirty years by
keeping our “eye on the pie” and executing a very straightforward
strategy, consisting of an unrelenting focus on quality and an
unwavering commitment to earning our customers’ loyalty. We will
continue to follow this winning strategy, and I’m confident that our
history of success by operating in this manner will continue for
years to come.
John H. Schnatter
Founder, Chairman and Chief
Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December
December 29, 2013
[ ] Transition report pursuant to Section
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________________ to _______________________
For the transition period from _____________________ to _______________________
For the transition period from _____________________ to _______________________
or
Commission File Number: 0-21660
Commission File Number: 0
PAPA JOHN’S INTERNATIONAL, INC.
PAPA JOHN’S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
Delaware
(State or other jurisdiction of
(State or other jurisdiction of
incorporation or organization)
incorporation or organization)
61-1203323
(I.R.S. Employer
Identification No.)
2002 Papa Johns Boulevard
2002 Papa
Louisville, Kentucky
Louisville, Kentucky
(Address of principal executive offices)
(Address of principal executive offices)
40299-2367
(Zip Code)
(502) 261-7272
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section
(Title of Each Class)
.01 par value
Common Stock, $0.01 par value
(Name of each exchange on which registered)
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
Securities registered pursuant to Section
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
known seasoned issuer, as defined in Rule 405 of the
Indicate by check mark if the registrant is a well
Securities Act.
Yes [X] No [ ]
Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or S
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or S
the Act.
Yes [ ] No [X]
Yes [ ] No [X]
egistrant (1) has filed all reports required to be filed by Section 13 or
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
Indicate by check mark whether the
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
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.
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of
this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
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]
Non-accelerated filer [ ]
Accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by
reference to the closing sale price on The NASDAQ Stock Market as of the last business day of the Registrant’s
most recently completed second fiscal quarter, June 30, 2013, was $1,042,454,017.
As of February 18, 2014, there were 41,888,411 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III of this annual report are incorporated by reference to the Registrant’s Proxy Statement for
the Annual Meeting of Stockholders to be held April 29, 2014.
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
Item 6.
Item 7.
and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Page
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10
16
16
18
19
22
24
25
49
51
84
84
86
86
86
87
87
87
PART IV
Item 15.
Exhibits, Financial Statement Schedules
88
PART I
Item 1. Business
General
Papa John’s International, Inc., a Delaware corporation (referred to as the “Company”, “Papa John’s” or
in the first person notations of “we”, “us” and “our”) operates and franchises pizza delivery and carryout
restaurants and, in certain international markets, dine-in and delivery restaurants under the trademark
“Papa John’s”. Papa John’s began operations in 1984. At December 29, 2013, there were 4,428 Papa
John’s restaurants in operation, consisting of 723 Company-owned and 3,705 franchised restaurants
operating domestically in all 50 states and in 34 countries. Our Company-owned restaurants include 191
restaurants operated under four joint venture arrangements and 58 units in Beijing and North China.
Papa John’s has defined five reportable segments: domestic Company-owned restaurants, domestic
commissaries (Quality Control Centers), North America franchising, international operations, and “all
other” business units. North America is defined as the United States and Canada. Domestic is defined as
the contiguous United States. International franchisees are defined as all franchise operations outside of
the United States and Canada. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Note 20” of “Notes to Consolidated Financial Statements” for financial
information about our segments.
All of our periodic and current reports filed with the Securities and Exchange Commission (the “SEC”)
pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the
“Exchange Act”), are available, free of charge, through our website located at www.papajohns.com,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and any amendments to those reports. Those documents are available through our website as soon as
reasonably practicable after we electronically file them with the SEC. We also make available free of
charge on our website our Corporate Governance Guidelines, Board Committee Charters, and our Code of
Ethics, which applies to Papa John's directors, officers and employees. Printed copies of such documents
are also available free of charge upon written request to Investor Relations, Papa John’s International,
Inc., P.O. Box 99900, Louisville, KY 40269-0900. You may read and copy any materials filed with the
SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. This
information is also available at www.sec.gov. The references to these website addresses do not constitute
incorporation by reference of the information contained on the websites, which should not be considered
part of this document.
Strategy
Our goal is to build the strongest brand loyalty in the pizza industry. The key elements of our strategy
include:
High Quality Menu Offerings. Domestic Papa John’s restaurants offer a menu of high-quality pizza along
with side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned
or bottled beverages. Papa John’s traditional crust pizza is prepared using fresh dough (never frozen).
Papa John’s pizzas are made from a proprietary blend of wheat flour, cheese made from 100% real
mozzarella, fresh-packed pizza sauce made from vine-ripened tomatoes (not from concentrate) and a
proprietary mix of savory spices, and a choice of high-quality meat (100% beef and pork with no fillers)
and vegetable toppings. Domestically, all ingredients and toppings can be purchased from our Quality
Control Center (“QC Center”) system, which delivers to individual restaurants twice weekly. To ensure
consistent food quality, each domestic franchisee is required to purchase dough and tomato sauce from
1
our QC Centers and to purchase all other supplies from our QC Centers or other approved suppliers.
Internationally, the menu may be more diverse than in our domestic operations to meet local tastes and
customs. QC Centers outside the U.S. may be operated by franchisees pursuant to license agreements or
by other third parties. International QC Centers are required to meet food safety and quality standards and
to be in compliance with all applicable laws. We provide significant assistance to licensed international
QC Centers in sourcing approved quality suppliers.
In addition to our fresh dough traditional crust pizza, we offer a thin crust pizza, which is a par-baked
product produced by a third-party vendor. Our traditional crust pizza offers a container of our special
garlic sauce and a pepperoncini pepper. Each thin crust pizza is served with a packet of special seasonings
and a pepperoncini pepper.
We continue to test new product offerings both domestically and internationally. The new products can
become a part of the permanent menu if they meet certain established guidelines.
Efficient Operating System. We believe our operating and distribution systems, restaurant layout and
designated delivery areas result in lower restaurant operating costs and improved food quality, and
promote superior customer service. Our QC Center system takes advantage of volume purchasing of food
and supplies, and provides consistency and efficiencies of scale in fresh dough production. This
eliminates the need for each restaurant to order food from multiple vendors and commit substantial labor
and other resources to dough preparation.
Commitment to Team Member Training and Development. We are committed to the development and
motivation of our team members through training programs, incentive and recognition programs and
opportunities for advancement. Team member training programs are conducted for corporate restaurant
team members, and offered to our franchisees electronically and at training locations across the United
States and internationally. We offer performance-based financial incentives to corporate and restaurant
team members at various levels.
Marketing. Our domestic marketing strategy consists of both national and local components. Our national
strategy includes national advertising via television, print, direct mail, digital, mobile marketing and
social media channels. Our online and digital marketing activities have increased significantly over the
past several years in response to increasing consumer use of online and mobile web technology. Local
advertising programs include television, radio, and print materials.
In international markets, we target customers who live or work within a small radius of a Papa John’s
restaurant. Our international markets use a combination of advertising strategies, including television,
radio, digital, and print depending on the size of the local market.
Strong Franchise System. We are committed to developing and maintaining a strong franchise system by
attracting experienced operators, supporting them to expand and grow their business and monitoring their
compliance with our high standards. We seek to attract franchisees with experience in restaurant or retail
operations and with the financial resources and management capability to open single or multiple
locations. We devote significant resources to provide Papa John’s franchisees with assistance in restaurant
operations, management training, team member training, marketing, site selection and restaurant design.
Unit Sales and Investment Costs
We are committed to maintaining strong unit economics. In 2013, the 633 domestic Company-owned
restaurants included in the full year’s comparable restaurant base generated average unit sales of
$988,000. North America franchise sales per unit on average are lower than Company-owned restaurants
as a higher percentage of our Company-owned restaurants are located in more heavily penetrated markets.
2
The average cash investment for the 13 domestic traditional Company-owned restaurants opened during
the 2013 fiscal year, exclusive of land, was approximately $280,000 per unit, excluding tenant allowances
that we received. With few exceptions, domestic restaurants do not offer a dine-in area, which reduces our
restaurant capital investment. We also opened 11 Company-owned restaurants in China, with an average
investment cost of approximately $225,000.
We define a “traditional” domestic Papa John’s restaurant as a delivery and carryout unit that services a
defined trade area. We consider the location of a traditional restaurant to be important and therefore
devote significant resources to the investigation and evaluation of potential sites. The site selection
process includes a review of trade area demographics, target population density and competitive factors.
A member of our development team inspects each potential domestic Company-owned restaurant location
and substantially all franchised restaurant locations before a site is approved. Our restaurants are typically
located in strip shopping centers or freestanding buildings that provide visibility, curb appeal and
accessibility. Our restaurant design can be configured to fit a wide variety of building shapes and sizes,
which increases the number of suitable locations for our restaurants. A typical domestic inline or end cap
Papa John’s restaurant averages 1,100 to 1,500 square feet with visible exterior signage.
“Non-traditional” Papa John’s restaurants generally do not provide delivery service but rather provide
walk-up or carry-out service to a captive customer group within a designated facility, such as a food court
at an airport, university or military base or an event-driven service at facilities such as sports stadiums or
entertainment venues. Non-traditional units are designed to fit the unique requirements of the venue.
Most of our international Papa John’s restaurants are slightly smaller and average between 900 and 1,400
square feet; however, in order to meet certain local customer preferences, some international restaurants
have been opened in larger spaces to accommodate both dine-in and restaurant-based delivery service,
typically with 35 to 100 seats.
Development
A total of 386 Papa John’s restaurants were opened during 2013, consisting of 30 Company-owned (19 in
North America and 11 in Beijing and North China) and 356 franchised restaurants (152 in North America
and 204 international), while 121 Papa John’s restaurants closed during 2013, consisting of three
Company-owned (two in North America and one in Beijing) and 118 franchised restaurants (87 in North
America and 31 international).
During 2014, we expect net unit growth of approximately 220 to 250 units, approximately 70% of which
will open in international markets. International franchised unit expansion includes an emphasis on
markets in the Americas, the United Kingdom, the Middle East and Asia.
Although most of our domestic Company-owned markets are well-penetrated, our Company-owned
growth strategy is to continue to open domestic restaurants in existing markets as appropriate, thereby
increasing consumer awareness and enabling us to take advantage of operational and marketing
efficiencies. Our experience in developing markets indicates that market penetration through the opening
of multiple restaurants in a particular market results in increased average restaurant sales in that market
over time. We have co-developed domestic markets with some franchisees or divided markets among
franchisees, and will continue to utilize market co-development in the future, where appropriate.
3
Of the total 3,286 North American restaurants open as of December 29, 2013, 665 or 20% were
Company-owned (including 191 units owned in joint venture arrangements with franchisees in which the
Company has a majority ownership position). The Company expects the percentage of domestic
Company-owned units to decline over the next several years because future net openings will be more
heavily weighted toward franchise units. From time to time, the Company evaluates the purchase or sale
of significant markets, which could change the percentage of Company-owned units. Each is evaluated on
its individual merits.
Of the 1,142 international restaurants open as of December 29, 2013, 58 or 5% were Company-owned
(located in Beijing and North China). We plan to continue to grow our international units during the next
several years, substantially all of which will be franchised.
QC Center System and Supply Chain Management
Our domestic QC Centers, comprised of ten full-service regional production and distribution centers,
supply pizza dough, food products, paper products, smallwares and cleaning supplies twice weekly to
each restaurant throughout the contiguous United States. This system enables us to monitor and control
product quality and consistency, while lowering food and other costs. We evaluate the QC Center system
capacity in relation to planned restaurant growth, and facilities are developed or upgraded as operational
or economic conditions warrant.
We own full-service international QC Centers in the United Kingdom, Mexico City, Mexico and Beijing,
China. Other international full-service QC Centers are licensed to franchisees or non-franchisee third
parties and are generally located in the markets where our franchisees have restaurants.
We set quality standards for all products used in our restaurants and designate approved outside suppliers
of food and paper products that meet our quality standards. In order to ensure product quality and
consistency, all Papa John’s restaurants are required to purchase tomato sauce and dough from QC
Centers. Franchisees may purchase other goods directly from our QC Centers or other approved suppliers.
National purchasing agreements with most of our suppliers generally result in volume discounts to us,
allowing us to sell products to our restaurants at prices we believe are below those generally available in
the marketplace. Within our domestic QC Center system, products are distributed to restaurants by
refrigerated trucks leased and operated by us or transported by a dedicated logistics company.
Marketing Programs
Our local restaurant-level marketing programs target consumers within the delivery area of each
restaurant through the use of local television, radio, print materials, targeted direct mail, store-to-door
flyers, digital display advertising, email marketing, text messages and local social media. Local marketing
efforts also include a variety of community-oriented activities within schools, sports venues and other
organizations supported with some of the same advertising vehicles mentioned above.
Domestic Company-owned and franchised Papa John’s restaurants within a defined market are required
to join an area advertising cooperative (“Co-op”). Each member restaurant contributes a percentage of
sales to the Co-op for market-wide programs, such as television, radio, digital and print advertising, and
sports sponsorships. The rate of contribution and uses of the monies collected are determined by a
majority vote of the Co-op’s members. The contribution rate for Co-ops may generally not be below 2.0%
of sales without approval from Papa John’s.
The restaurant-level and Co-op marketing efforts are supported by media, print, digital and electronic
advertising materials that are produced by Papa John’s Marketing Fund, Inc. (“PJMF”). PJMF is an
unconsolidated nonstock corporation designed to operate at break-even for the purpose of designing and
4
administering advertising and promotional programs for all participating domestic restaurants. PJMF
produces and buys air time for Papa John’s national television commercials, buys digital media such as
banner advertising, paid search-engine advertising, mobile marketing, social media advertising and
marketing, and SMS text and email, in addition to other brand-building activities, such as consumer
research and public relations activities. Domestic Company-owned and franchised Papa John’s restaurants
are required to contribute a certain minimum percentage of sales to PJMF. The contribution rate to PJMF
can be increased above the required minimum contribution rate if approved by the governing board of
PJMF up to 3% of sales, and beyond those levels if approved by a supermajority of domestic restaurants.
The contribution rate has been 4.0% since 2011.
We provide both Company-owned and franchised restaurants with pre-approved marketing materials and
catalogs for the purchase of uniforms and promotional items. We also provide direct marketing services to
Company-owned and franchised restaurants using customer information gathered by our proprietary
point-of-sale technology (see “Company Operations – Domestic Point-of-Sale Technology”). In addition,
we provide database tools, templates and training for operators to facilitate local email marketing and text
messaging through our approved tools.
Our proprietary digital ordering platform allows customers to order online. Our eCommerce platforms
include “plan ahead ordering,” Spanish-language ordering capability, and enhanced mobile web ordering
for our customers, including Papa John's iPhone® and Android® applications. We also have a Papa
Rewards® program, which is an eCommerce customer loyalty program designed to increase loyalty and
frequency of consumer use of our eCommerce ordering platform. We receive a percentage-based fee from
U.S. franchisees for online sales, in addition to royalties, to defray development and operating costs
associated with our eCommerce ordering platform.
Our domestic restaurants offer customers the opportunity to purchase a reloadable gift card marketed as
the “Papa Card.” The Papa Card is sold as either a plastic gift card purchased in our restaurants, or an
online digital card purchased at our web site. We sell Papa Cards to consumers through third-party
retailers and bulk orders of cards to business entities and organizations. We continue to explore other
Papa Card distribution opportunities. The Papa Card may be redeemed for delivery, carryout, and
eCommerce orders and is accepted at all Papa John’s traditional domestic restaurants.
In international markets, we target customers who live or work within a small radius of a Papa John’s
restaurant. Certain markets can effectively use television and radio as part of their marketing strategies.
The majority of the marketing efforts include using print materials such as flyers, newspaper inserts, in-
store marketing materials, and to a growing extent, digital marketing such as display, search engine
marketing, social media, mobile marketing, email, and SMS text. Local marketing efforts, such as
sponsoring or participating in community events, sporting events and school programs, are also used to
build customer awareness.
Company Operations
Domestic Restaurant Personnel. A typical Papa John’s Company-owned domestic restaurant employs a
restaurant manager and approximately 20 to 25 hourly team members, many of whom work part-time.
The manager is responsible for the day-to-day operation of the restaurant and maintaining Company-
established operating standards. We seek to hire experienced restaurant managers and staff and provide
comprehensive training programs in areas such as operations and managerial skills. We also employ
directors of operations who are responsible for overseeing an average of seven Company-owned
restaurants. Additional levels of operations senior management and corporate staff also support the field
teams in many areas, including, but not limited to, quality assurance, food safety, training, marketing and
technology. We seek to motivate and retain personnel by providing opportunities for advancement and
performance-based financial incentives.
5
Training and Education. The Global Operations Support and Training (“GOST”) department is
responsible for creating tools and materials for the training and development of both corporate and
franchise team members. We believe training is very important to delivering consistent operational
execution. Operations personnel complete our management training program and ongoing development
programs, including multi-unit training, in which instruction is given on all aspects of our systems and
operations.
Domestic Point-of-Sale Technology. Our proprietary PROFIT SystemTM, point-of-sale technology
(“POS”), is in place in all North America traditional Papa John’s restaurants. We believe this technology
facilitates fast and accurate order-taking and pricing, reduces paperwork and allows the restaurant
manager to better monitor and control food and labor costs, including food inventory management and
order placement from the domestic QC Centers. We believe the PROFIT System also enhances
restaurant-level marketing capabilities. Polling capabilities allow us to obtain restaurant operating
information, providing us with timely access to sales and customer information. The PROFIT System is
also closely integrated with our digital ordering solutions in all domestic traditional Papa John’s
restaurants, enabling Papa John’s to offer nationwide digital ordering to our customers. We plan to roll
out our next generation POS system, which we refer to as FOCUS, to substantially all of our domestic
restaurants beginning in 2014. We expect FOCUS will add efficiencies to our operations. The cost of the
system will vary depending on the current equipment, including hardware and wiring, located at each
restaurant. Our franchisees will have the option of obtaining financing for the new system from a
designated lender.
Domestic Hours of Operation. Our domestic restaurants are open seven days a week, typically from
11:00 a.m. to 12:30 a.m. Monday through Thursday, 11:00 a.m. to 1:30 a.m. on Friday and Saturday and
12:00 noon to 11:30 p.m. on Sunday. Carryout hours are generally more limited for late night, for security
purposes.
Franchise Program
General. We continue to attract franchisees with significant restaurant and retail experience. We consider
our franchisees to be a vital part of our system’s continued growth and believe our relationship with our
franchisees is good. As of December 29, 2013, there were 3,705 franchised Papa John’s restaurants
operating in all 50 states and 34 countries. During 2013, 356 (152 North America and 204 international)
franchised Papa John’s restaurants were opened. As of December 29, 2013, we have development
agreements with our franchisees for approximately 200 additional North America restaurants, the
majority of which are committed to open over the next two to three years, and agreements for
approximately 1,000 additional international franchised restaurants, the majority of which are scheduled
to open over the next six years. There can be no assurance that all of these restaurants will be opened or
that the development schedule set forth in the development agreements will be achieved.
Approval. Franchisees are approved on the basis of the applicant’s business background, restaurant
operating experience and financial resources. We seek franchisees to enter into development agreements
for single or multiple restaurants. We require each franchisee to complete our training program or to hire
a full-time operator who completes the training and has either an equity interest or the right to acquire an
equity interest in the franchise operation. Outside the United States, we will allow an approved operator
bonus plan to substitute for the equity interest.
North America Development and Franchise Agreements. We enter into development agreements with our
franchisees in North America for the opening of a specified number of restaurants within a defined period
of time and specified geographic area. Substantially all existing franchise agreements have an initial 10-
year term with a 10-year renewal option. We have the right to terminate a franchise agreement for a
6
variety of reasons, including a franchisee’s failure to make payments when due or failure to adhere to our
policies and standards. Many state franchise laws limit the ability of a franchisor to terminate or refuse to
renew a franchise.
We provide assistance to Papa John’s franchisees in selecting sites, developing restaurants and evaluating
the physical specifications for typical restaurants. We provide layout and design services and
recommendations for subcontractors, signage installers and telephone systems to Papa John’s franchisees.
Our franchisees can purchase complete new store equipment packages through an approved third-party
supplier. In addition, we sell replacement smallwares and related items to our franchisees. Each
franchisee is responsible for selecting the location for its restaurants but must obtain our approval of
restaurant design and location based on accessibility and visibility of the site and targeted demographic
factors, including population density, income, age and traffic.
Under our standard domestic development agreement, the franchisee is required to pay, at the time of
signing the agreement, a non-refundable fee of $25,000 for the first restaurant and $5,000 for any
additional restaurants. The non-refundable fee is credited against the standard $25,000 franchise fee
payable to us upon signing the franchise agreement for a specific location. Generally, a franchise
agreement is executed when a franchisee secures a location. Our current standard development agreement
requires the franchisee to pay a royalty fee of 5% of sales and the majority of our existing franchised
restaurants also have a 5% royalty rate in effect.
Domestic Franchise Development Incentives. Over the past few years, we have offered various
development incentive programs for domestic franchisees to increase unit openings. Such incentives
included the following for 2013 traditional openings: (1) no franchise fee if the unit opens on time in
accordance with the agreed upon development schedule, $5,000 if the unit opens late (standard fee is
$25,000); (2) the waiver of some or all of the 5% royalty fee for a period of time; (3) a credit for a portion
of the purchase of certain equipment; and (4) a credit to be applied toward a future food purchase, under
certain circumstances. We believe the development incentive programs have accelerated unit openings
and expect they will continue to do so in 2014.
Marketing Fund Incentives. In 2013, domestic franchisees could earn up to a 45 basis point royalty rebate
(against our standard 5.0% royalty rate) by meeting certain sales growth targets.
Domestic Franchise Support Initiatives. From time to time, we offer additional discretionary support
initiatives to our domestic franchisees, including:
• Food cost relief by lowering the commissary margin on certain commodities sold by PJ Food
Service, Inc. (“PJFS”) to the franchise system and by providing incentive rebate opportunities;
• Targeted royalty relief and local marketing support to assist certain identified franchisees or
markets;
• Restaurant opening incentives; and
• Reduced cost direct mail campaigns from Preferred Marketing Solutions (“Preferred,” our
wholly-owned print and promotions subsidiary).
In 2014, we plan to continue domestic franchise support initiatives. We believe the support programs
have mitigated potential unit closures and strengthened our brand.
International Development and Franchise Agreements. We opened our first franchised restaurant outside
the United States in 1998. We define “international” as all markets outside the United States and Canada.
In international markets, we have either a development agreement or a master franchise agreement with a
franchisee for the opening of a specified number of restaurants within a defined period of time and
specified geographic area. Under a master franchise agreement, the franchisee has the right to
7
subfranchise a portion of the development to one or more subfranchisees approved by us. Under our
current standard international development agreement, the franchisee is required to pay total fees of
$25,000 per restaurant: $5,000 at the time of signing the agreement and $20,000 when the restaurant
opens or on the agreed-upon development date, whichever comes first. Under our current standard master
franchise agreement, the master franchisee is required to pay total fees of $25,000 per restaurant owned
and operated by the master franchisee, under the same terms as the standard development agreement, and
$15,000 for each subfranchised restaurant – $5,000 at the time of signing the agreement and $10,000
when the restaurant opens or on the agreed-upon development date, whichever comes first.
Our current standard international master franchise and development agreements provide for payment to
us of a royalty fee of 5% of sales. For international markets with subfranchise agreements, the effective
subfranchise royalty received by the Company is generally 3%. The remaining terms applicable to the
operation of individual restaurants are substantially equivalent to the terms of our domestic franchise
agreement. From time to time, development agreements will be negotiated at other-than-standard terms
for fees and royalties. We also offer various development incentives to help drive net unit growth.
Non-traditional Restaurant Development. We had approximately 250 non-traditional restaurants at
December 29, 2013. These agreements generally cover venues or areas not originally targeted for
traditional unit development and have terms differing from the standard agreements.
Franchisee Loans. Selected franchisees have borrowed funds from us, principally for the purchase of
restaurants from us or other franchisees or for construction and development of new restaurants. Loans
made to franchisees typically bear interest at fixed or floating rates and in most cases are secured by the
fixtures, equipment and signage of the restaurant and/or are guaranteed by the franchise owners. At
December 29, 2013, net loans outstanding totaled $16.8 million. See “Note 11” of “Notes to Consolidated
Financial Statements” for additional information.
Domestic Franchise Insurance Program. Our franchisees may elect to purchase various insurance
policies, such as health insurance, non-owned automobile and workers’ compensation, through our
wholly-owned insurance agency, Risk Services Corp. (“Risk Services”). Various third-party commercial
insurance companies provide fully-insured coverage for these lines of business to franchisees
participating in the franchise insurance program offered by Risk Services.
Domestic Franchise Training and Support. Our domestic field support structure consists of franchise
business directors, each of whom is responsible for serving an average of 130 franchised units. Our
franchise business directors maintain open communication with the franchise community, relaying
operating and marketing information and new initiatives between franchisees and us. Franchise business
directors report to division vice presidents, who report to the Senior Vice President, Global Operations &
Global Operations Support and Training.
Every franchisee is required to have a principal operator approved by us who satisfactorily completes our
required training program. Principal operators for traditional restaurants are required to devote their full
business time and efforts to the operation of the franchisee’s traditional restaurants. Each franchised
restaurant manager is also required to complete our Company-certified management training program.
Ongoing supervision of training is monitored by the GOST team. Multi-unit franchisees are encouraged
to appoint training store general managers or hire a full-time training coordinator certified to deliver
Company-approved training programs.
International Franchise Operations Support. We employ or contract with international business directors
who are responsible for supporting one or more franchisees. The international business directors report to
regional vice presidents. Additional levels of senior management and corporate staff also support the
8
international field teams in many areas, including but not limited to food safety, quality assurance,
training, marketing and technology.
Franchise Operations. All franchisees are required to operate their Papa John’s restaurants in compliance
with our policies, standards and specifications, including matters such as menu items, ingredients, and
restaurant design. Franchisees generally have full discretion to determine the prices to be charged to
customers, but we have the authority to set maximum price points for nationally advertised promotions.
Franchise Advisory Council. We have a Franchise Advisory Council (“FAC”) that consists of Company
and franchisee representatives of domestic restaurants. We also have a franchise advisory council in the
United Kingdom (“UK FAC”). The FAC and UK FAC and subcommittees hold regular meetings to
discuss new product and marketing ideas, operations, growth and other business issues. Certain domestic
franchisees have also formed a separate franchise association for the purpose of communicating and
addressing issues, needs and opportunities among its members.
We currently communicate with, and receive input from, our franchisees in several forms, including
through the FAC, UK FAC, annual operations conferences, system communications, national conference
calls, various regional meetings conducted with franchisees throughout the year and ongoing
communications from franchise business directors and international business directors in the field.
Monthly webcasts are also conducted by the Company to discuss current operational, marketing or other
issues affecting the franchisees’ business. We are committed to communicating with our franchisees and
receiving input from them.
Industry and Competition
The United States Quick Service Restaurant pizza industry (“QSR Pizza”) is mature and highly
competitive with respect to price, service, location, food quality and variety. There are well-established
competitors with substantially greater financial and other resources than Papa John’s. The category is
largely fragmented and competitors include international, national and regional chains, as well as a large
number of local independent pizza operators. Some of our competitors have been in existence for
substantially longer periods than Papa John’s and can have higher levels of restaurant penetration and
stronger, more developed brand awareness in markets where we compete. According to industry sources,
domestic QSR Pizza category sales, which includes dine-in, carry-out and delivery, totaled approximately
$32.5 billion in 2013, or a decrease of 0.2% from the prior year.
With respect to the sale of franchises, we compete with many franchisors of restaurants and other
business concepts. In general, there is also active competition for management personnel and attractive
commercial real estate sites suitable for our restaurants.
Government Regulation
We, along with our franchisees, are subject to various federal, state and local laws affecting the operation
of our respective businesses. Each Papa John’s restaurant is subject to licensing and regulation by a
number of governmental authorities, which include zoning, health, safety, sanitation, building and fire
agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining, or the
failure to obtain, required licenses or approvals could delay or prevent the opening of a new restaurant in
a particular area. Our QC Centers are licensed and subject to regulation by state and local health and fire
codes, and the operation of our trucks is subject to Department of Transportation regulations. We are also
subject to federal and state environmental regulations. In addition, our domestic system-wide restaurant
operations are subject to various federal and state laws governing such matters as minimum wage
requirements, benefits, working conditions, citizenship requirements, and overtime.
9
We are subject to Federal Trade Commission (“FTC”) regulation and various state laws regulating the
offer and sale of franchises. The laws of several states also regulate substantive aspects of the franchisor-
franchisee relationship. The FTC requires us to furnish to prospective franchisees a franchise disclosure
document containing prescribed information. State laws that regulate the franchisor-franchisee
relationship presently exist in a significant number of states and bills have been introduced in Congress
from time to time that would provide for federal regulation of the U.S. franchisor-franchisee relationship
in certain respects if such bills were enacted. The state laws often limit, among other things, the duration
and scope of non-competition provisions and the ability of a franchisor to terminate or refuse to renew a
franchise. Some foreign countries also have disclosure requirements and other laws regulating franchising
and the franchisor-franchisee relationship. Further, national, state and local government regulations or
initiatives, including health care legislation, “living wage,” menu labeling, or other current or proposed
regulations and increases in minimum wage rates affect Papa John’s as well as others within the
restaurant industry. As we expand internationally, we are subject to applicable laws in each jurisdiction
where franchised units are established.
Trademarks, Copyrights and Domain Names
Our rights in our principal trademarks and service marks are a significant part of our business. We own
the federal registration of the trademark “Papa John’s.” We have also registered “Pizza Papa John’s and
design” (our logo), “Better Ingredients. Better Pizza.”, “Pizza Papa John’s Better Ingredients. Better
Pizza. and design” and “Papa Rewards” as trademarks and service marks. We also own federal
registrations for several ancillary marks, principally advertising slogans. We have also applied to register
our primary trademark, “Pizza Papa John’s and design,” in more than 100 foreign countries and the
European Community. We are aware of the use by other persons in certain geographical areas of names
and marks that are the same as or similar to our marks. It is our policy to pursue registration of our marks
whenever possible and to vigorously oppose any infringement of our marks.
We hold copyrights in certain packaging, training and promotional materials used in our business. In
addition, we have registered and maintain Internet domain names, including “Papajohns.com.”
Employees
As of December 29, 2013, we employed approximately 20,700 persons, of whom approximately 18,000
were restaurant team members, approximately 900 were restaurant management personnel, approximately
700 were corporate personnel and approximately 1,100 were QC Center and Preferred personnel. Most
restaurant team members work part-time and are paid on an hourly basis. None of our team members is
covered by a collective bargaining agreement. We consider our team member relations to be good.
Item 1A. Risk Factors
We are subject to various risks that could have a negative effect on our business, financial condition and
results of operations. These risks could cause actual operating results to differ from those expressed in
certain “forward looking statements” contained in this Form 10-K as well as in other Company
communications. Although we believe our expectations are based on reasonable assumptions, actual
results may differ materially from those in the forward-looking statements as a result of various factors:
We face competition from other food industry competitors, and our results of operations can be
negatively impacted by the actions of one or more of our competitors.
The QSR Pizza category and the restaurant industry in general are intensely competitive, and there are
many well-established competitors with substantially greater financial and other resources than the Papa
John’s system. Some of these competitors have been in existence for a substantially longer period than
10
Papa John’s and may be better established in the markets where restaurants operated by us or our
franchisees are, or may be, located. Demographic trends, traffic patterns, the type, number and location of
competing restaurants, and changes in pricing or other marketing initiatives or promotional strategies,
including new product and concept developments, by one or more of our major competitors can have a
rapid and adverse impact on our sales and earnings and our system-wide restaurant operations. Such an
adverse impact could also be caused or exacerbated if our marketing incentives or new product offerings
are not effective in driving sales or if we have insufficient funds to support effective advertising programs
for our system.
Changes in consumer preferences or discretionary consumer spending could adversely impact our
results.
Changes in consumer preferences and trends (for example, changes in dietary preferences that could
cause consumers to avoid pizza in favor of foods that are perceived as healthier, lower-calorie or
otherwise based on their nutritional content) could adversely affect our restaurant business. Also, our
success depends to a significant extent on numerous factors affecting consumer confidence and
discretionary consumer income, including higher tax rates domestically or in international markets, and
adverse economic conditions such as continued high levels of unemployment, high fuel and energy costs
and reduced access to credit. Such factors could cause consumers to spend less on food or shift to lower-
priced products. Further adverse changes in these factors could reduce sales or inhibit our ability to
increase pricing, either of which could materially adversely affect our results of operations.
Food safety and quality concerns may negatively impact our business and profitability.
Incidents or reports of food- or water-borne illness or other food safety issues, food contamination or
tampering, employee hygiene and cleanliness failures or improper employee conduct at our restaurants
could lead to product liability or other claims. Such incidents or reports could negatively affect our brand
and reputation and a decrease in customer traffic resulting from these reports could negatively impact our
revenues and profits. Similar incidents or reports occurring at quick service restaurants unrelated to us
could likewise create negative publicity, which could negatively impact consumer behavior towards us.
In addition, we rely on our domestic and international suppliers, as do our franchisees, to provide quality
ingredients and to comply with applicable laws and industry standards. A failure of one of our domestic
or international suppliers to meet our quality standards, or meet domestic or international food industry
standards, could result in a disruption in our supply chain and negatively impact our brand and our
business and profitability.
Our success depends on the differentiation of our brand and maintaining the value and quality reputation
of our brand, and any damage to consumers’ perception of our brand may negatively impact our business
and profitability.
Our results depend upon our ability to differentiate our brand and our reputation for quality. Our brand
has been highly rated in U.S. surveys and we strive to build the value of our brand as we develop
international markets. The value of our brand and demand for our products could be damaged by
incidents that harm consumer perceptions of the Company and our brand, such as product recalls, food
safety issues, privacy breaches, and related negative publicity. Social media can be used to promote
adverse consumer perceptions with significantly greater speed and scope than traditional media outlets.
As a result, the value of our brand and the demand for our products could be damaged and have an
adverse effect on our financial results.
11
We may not be able to execute our strategy or achieve our planned growth targets, which could
negatively impact our business and our financial results.
Our growth strategy depends on the Company’s and our franchisees’ ability to open new restaurants and
to operate them on a profitable basis. We may fail to attract new qualified franchisees or existing
franchisees may close underperforming locations. Planned growth targets and the ability to operate new
and existing restaurants profitably are affected by economic, regulatory and competitive conditions and
consumer buying habits. Increased commodity or operating costs, including, but not limited to, employee
compensation and benefits or insurance costs, could slow the rate of new store openings or increase the
number of store closings. Our business is susceptible to adverse changes in local, national and global
economic conditions, which could make it difficult for us to meet our growth targets. Additionally, we or
our franchisees may face challenges securing financing, finding suitable store locations at acceptable
terms or securing required domestic or foreign government permits and approvals.
Our franchisees remain dependent on the availability of financing to remodel or renovate existing
locations or construct and open new restaurants. The reduced availability of credit has required, and may
continue to require, the Company to provide financing to certain franchisees and prospective franchisees
in order to mitigate store closings or allow new units to open. If we are unable or unwilling to provide
such financing, we may experience slower than expected new restaurant openings and our results of
operations may be adversely impacted. To the extent we provide financing to franchisees in domestic and
international markets, our results could be negatively impacted by the credit performance of our
franchisee loans, particularly if our franchisees encounter worsening economic or political conditions in
their markets.
If we do not meet our growth targets or the expectations of the market for net restaurant openings, our
stock price could decline.
Our results of operations and the operating results of our franchisees may be adversely impacted by
increases in the cost of food ingredients and other commodities.
We are exposed to ongoing commodity volatility, and an increase in the cost, or sustained high levels of
the cost, of cheese or other commodities could adversely affect the profitability of our system-wide
restaurant operations, particularly if we are unable to increase the selling price of our products to offset
costs. Cheese, historically representing 35% to 40% of our food cost, and other commodities can be
subject to significant cost fluctuations due to weather, availability, global demand and other factors that
are beyond our control. Additionally, increases in fuel, utility, and insurance costs could adversely affect
the profitability of our restaurant and QC Center businesses. Most of the factors affecting costs are
beyond our control, and we may not be able to pass along these costs to our customers or franchisees Our
domestic franchisees buy substantially all of their food products from our QC Center business.
Our dependence on a sole supplier or a limited number of suppliers for some ingredients could result in
disruptions to our business.
Domestic restaurants purchase substantially all food and related products from our QC Centers.
Domestically, we are dependent on sole suppliers for our cheese and flour products, and internationally
we are dependent on a sole supplier for substantially all our cheese. Alternative sources may not be
available on a timely basis to supply these key ingredients or be available on terms as favorable to us as
under our current arrangements. Our corporate and franchised restaurants could also be harmed by a
prolonged disruption in the supply of products from or to our QC Centers due to weather, crop disease,
interruption of service by carriers and other events beyond our control. Insolvency of key suppliers could
also cause similar business interruptions and negatively impact our business.
12
Changes in purchasing practices by our domestic franchisees could harm our commissary business.
Although our domestic franchisees currently purchase substantially all food products from our QC
Centers, they are only required to purchase tomato sauce, dough and other items we may designate as
proprietary or integral to our system from our QC Centers. Any changes in purchasing practices by
domestic franchisees, such as seeking alternative approved suppliers of ingredients or other food
products, could adversely affect the financial results of our QC Centers and the Company.
Our international operations are subject to increased risks and other factors that may make it more
difficult to achieve or maintain profitability or meet planned growth rates.
Our international operations could be negatively impacted by changes in international economic, political
and health conditions in the countries in which the Company or our franchisees operate. In addition, there
are risks associated with differing business and social cultures and consumer preferences, diverse and
sometimes uncertain or unstable government regulations and structures, limited availability and high cost
of suitable restaurant locations, and difficulties in sourcing and importing high-quality ingredients and
other commodities in a cost-effective manner. In addition, our international operations are subject to
additional factors, including compliance with anti-corruption and other foreign laws, and various currency
regulations and fluctuations. Accordingly, there can be no assurance that our international operations will
maintain profitability or meet planned growth rates.
We are subject to numerous laws and regulations governing our workforce and our operations. Changes
in these laws, including health care legislation and minimum wage increases or additional laws could
increase costs for our system-wide operations.
Domestic system-wide restaurant operations are subject to federal and state laws governing such matters
as wages, benefits, working conditions, citizenship requirements and overtime. A significant number of
hourly personnel are paid at rates closely related to the federal and state minimum wage requirements.
Accordingly, further increases in the federal minimum wage or the enactment of additional state or local
minimum wage increases above federal wage rates would increase labor costs for our domestic system-
wide operations. Additionally, current conditions may make it easier for workers to form unions,
potentially resulting in higher costs. Local government agencies have also implemented ordinances that
restrict the sale of certain food or drink products. Compliance with additional government mandates,
including menu labeling requirements, could increase costs and be harmful to system-wide restaurant
sales.
The Affordable Care Act, enacted in 2010, requires employers such as us to provide health insurance for
all qualifying employees or pay penalties for not providing coverage. We are evaluating the impact the
law will have on our domestic operations, and although we cannot predict with certainty the financial
impact of the legislation, we, like other industry competitors, expect that the requirement that we provide
more extensive health benefits to employees than we currently provide, and/or fund a larger portion than
previously funded, could negatively impact our results of operations once the legislation is fully
implemented.
We operate in an increasingly complex regulatory environment, and the cost of regulatory compliance is
increasing. Failure to comply with applicable U.S. and international labor, health care, food, anti-bribery
and corruption, consumer and other laws, may result in civil and criminal liability, damages, fines and
penalties. This could harm our reputation, limit our ability to grow and adversely affect our financial
performance.
13
Our expansion into emerging or under-penetrated domestic and international markets may present
increased risks.
Any or all of the risks listed above could be even more harmful to the financial viability of our
franchisees or could significantly impact the operating results of the Company in markets where we have
a Company-owned presence, such as China. A decline in or failure to improve financial performance
could lead to reduced new restaurant openings or unit closings at greater than anticipated levels and
therefore adversely impact our ability to achieve our targets for growth and results of operations as well
as have a negative impact on market share.
Our business and brand may be harmed should the services of our Founder, John Schnatter, as Chief
Executive Officer, Chairman or brand spokesman terminate for any reason. Failure to effectively execute
succession planning could harm our Company and brand.
John H. Schnatter, our Founder, Chairman and Chief Executive Officer, does not serve under an
employment agreement and we do not maintain key man life insurance on Mr. Schnatter. We also depend
on the continued availability of Mr. Schnatter’s image and his services as spokesman in our advertising
and promotion materials. While we have entered into a license agreement with Mr. Schnatter related to
the use of certain intellectual property related to his name, likeness and image, our business and brand
may be harmed if Mr. Schnatter’s services were not available to the Company for any reason or the
reputation of Mr. Schnatter were negatively impacted. In addition, failure to effectively execute
succession planning could harm our Company and brand.
We may be required to resort to litigation to protect our intellectual property rights, which could
negatively affect our results of operations.
We depend on our Papa John’s brand name and rely on a combination of trademarks, copyrights, service
marks and similar intellectual property rights to protect and promote our brand. We believe the success of
our business depends on our continued ability to use our existing trademarks and service marks to
increase brand awareness and further develop our brand, both domestically and abroad. We may not be
able to adequately protect our intellectual property rights and we may be required to resort to litigation to
enforce such rights. Litigation could result in high costs and diversion of resources, which could
negatively affect our results of operations, regardless of the outcome.
Disruptions of our critical business or information technology systems could harm our ability to conduct
normal business.
We rely heavily on information systems, including digital ordering solutions, through which over 45% of
our domestic sales originate. We also rely heavily on point-of-sale processing in our restaurants for data
collection and payment systems for the collection of cash, credit and debit card transactions, and other
processes and procedures. Our ability to efficiently and effectively manage our business depends on the
reliability and capacity of these technology systems. In addition, we anticipate that consumers will
continue to have more options to place orders digitally, both domestically and internationally. Our failure
to adequately invest in new technology, particularly our digital ordering capabilities, could cause us to
lose our competitive advantage and have an adverse effect on our results.
Our systems could be damaged or interrupted by power loss through various technological failures or acts
of God. In particular, we may experience occasional interruptions of our digital ordering solutions, which
make online ordering unavailable or slow to respond, negatively impacting sales and the experience of
our customers. If our digital ordering solutions do not perform with adequate speed, our customers may
be less inclined to return to our digital ordering solutions, as frequently or at all. If our systems do not
14
operate properly, we may need to upgrade or replace these systems, which could require material capital
investment from us and our franchisees. Part of our technology infrastructure is specifically designed for
us and our operational systems, which could cause unexpected costs, delays or inefficiencies when
infrastructure upgrades are needed. If we experience prolonged and widespread technological difficulties
with the planned rollout of our upgraded POS system, “FOCUS,” our domestic corporate and franchise
operations could be disrupted, adversely impacting sales. Significant portions of our technology
infrastructure are provided by third parties, and the performance of these systems is largely beyond our
control. Failure of our third party systems, and backup systems, to adequately perform, particularly as our
online sales grow, could harm our business and the satisfaction of our customers. In addition, we may not
have or be able to obtain adequate protection or insurance to mitigate the risks of these events or
compensate for losses related to these events, which could damage our business and reputation and be
expensive and difficult to remedy or repair.
We may incur significant costs resulting from a security breach, including a breach of confidential
customer information from our digital ordering business.
We are subject to a number of privacy and data protection laws and regulations. Our business requires the
collection and retention of large volumes of internal and customer data, including credit card data and
other personally identifiable information of our employees and customers housed in the various
information systems we use. The integrity and protection of that customer, employee and Company data
is critical to us. Although we take significant steps to prevent security breaches such as theft of customer
and Company information, failure to prevent fraud or security breaches could harm our business and
revenues due to the reputational damage to our brand. Such a breach could also result in litigation,
penalties, and other significant costs to us and have a material adverse effect on our financial results.
We have been and will continue to be subject to various types of litigation, including collective and class
action litigation, which could subject us to significant damages or other remedies.
We and our restaurant industry competitors are subject to the risk of litigation from various parties,
including vendors, customers, franchisees and employees. We are involved in a number of lawsuits,
claims, investigations, and proceedings consisting of intellectual property, employment, consumer,
commercial and other matters arising in the ordinary course of business. We are currently a defendant in a
case containing collective and class action allegations. Plaintiffs in these types of lawsuits often seek
recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such
lawsuits may not be accurately estimated. We evaluate all of the claims and proceedings involving us to
assess the expected outcome and where possible we estimate the amount of potential losses to us. In many
cases, particularly collective and class action cases, we may not be able to estimate the amount of
potential losses and/or our estimates may prove to be insufficient. These assessments are made by
management based on the information available at the time made and require the use of a significant
amount of judgment, and actual outcomes or losses may materially differ. Regardless of whether any
claims against us are valid, or whether we are ultimately held liable, such litigation may be expensive to
defend and may divert resources away from our operations and negatively impact earnings. Further, we
may not be able to obtain adequate insurance to protect us from these types of litigation matters or
extraordinary business losses.
We may be subject to impairment charges.
Impairment charges are possible if our subsidiaries located in the United Kingdom (“PJUK”) and China
or previously acquired domestic restaurants perform below our expectations. This could result in a
decrease in our reported asset value and reduction in our net income.
15
Our results of operations could be materially impacted as a result of the credit risk of operators of leases
for which we remain contingently liable.
We remain contingently liable for certain restaurant and commissary leases previously operated by us and
subsequently sold or refranchised. We enter into these arrangements as part of the process of disposing of
or refranchising our stores in the ordinary course of business. While the new operators are the primary
obligors under such assigned leases, we could be liable in the event that one or more new operators are
unwilling or unable to make any required lease payments. Continuing weakness in the economy and
difficulty in credit markets could make it difficult for these operators to meet their contractual
commitments. If these operators default on the leases and we are unable to sublease the properties for
which we remain contingently liable, it could have a material impact on our results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 29, 2013, there were 4,428 Papa John’s restaurants system-wide. The following tables
provide the locations of our restaurants. We define “North America” as the United States and Canada and
“domestic” as the contiguous United States.
North America Restaurants:
Alabama…………………………………………………………
Alaska...........................................................................................
Arizona ………………………………………………………….
Arkansas………………………………………………………...
California………………………………………………………..
Colorado………………………………………………………...
Connecticut……………………………………………………...
Delaware………………………………………………………...
District of Columbia…………………………………………….
Florida…………………………………………………………...
Georgia ………………………………………………………….
Hawaii...........................................................................................
Idaho…………………………………………………………….
Illinois...........................................................................................
Indiana..........................................................................................
Iowa..............................................................................................
Kansas...........................................................................................
Kentucky………………………………………………………...
Louisiana………………………………………………………..
Maine……………………………………………………………
Maryland………………………………………………………...
Massachusetts…………………………………………………...
Michigan………………………………………………………...
Minnesota.....................................................................................
Mississippi....................................................................................
Missouri........................................................................................
Montana........................................................................................
Nebraska.......................................................................................
Company
-
-
39
-
-
25
-
-
-
47
89
-
-
6
41
-
13
43
-
-
60
-
-
33
-
41
-
-
Franchised
79
6
36
24
210
24
16
15
11
227
62
14
11
116
84
25
21
70
61
7
40
19
45
17
32
32
10
17
Total
79
6
75
24
210
49
16
15
11
274
151
14
11
122
125
25
34
113
61
7
100
19
45
50
32
73
10
17
16
North America Restaurants (continued):
Company
-
Nevada…………………………………………………………..
-
New Hampshire…………………………………………………
-
New Jersey………………………………………………………
-
New Mexico…………………………………………………….
-
New York……………………………………………………….
85
North Carolina…………………………………………………..
-
North Dakota……………………………………………………
-
Ohio……………………………………………………………..
Oklahoma………………………………………………………..
-
Oregon………………………………………………………….. -
-
Pennsylvania…………………………………………………….
-
Rhode Island…………………………………………………….
6
South Carolina…………………………………………………..
-
South Dakota……………………………………………………
30
Tennessee………………………………………………………..
81
Texas…………………………………………………………….
-
Utah……………………………………………………………..
-
Vermont…………………………………………………………
26
Virginia………………………………………………………….
-
Washington………………………………………………….......
-
West Virginia……………………………………………………
-
Wisconsin……………………………………………………….
Wyoming………………………………………………………..
-
665
Total U.S. Papa John’s Restaurants………………………….
Canada…………………………………………………………..
-
665
Total North America Papa John’s Restaurants………………
Franchised
23
2
79
16
124
81
5
157
30
14
97
5
58
12
79
173
32
1
112
54
22
27
8
2,542
79
2,621
International Restaurants:
Azerbaijan……………………………………………………….
Bahrain………………………………………………………….
Cayman Islands…………………………………………............
Chile.............................................................................................
China............................................................................................
Colombia......................................................................................
Costa Rica.....................................................................................
Cyprus..........................................................................................
Dominican Republic.....................................................................
Ecuador.........................................................................................
Egypt............................................................................................
El Salvador...................................................................................
Guam............................................................................................
Guatemala.....................................................................................
India..............................................................................................
Ireland...........................................................................................
Jordan...........................................................................................
Kuwait..........................................................................................
Lebanon........................................................................................
Malaysia.......................................................................................
-
-
-
-
58
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2
19
2
23
144
20
18
8
11
14
21
14
2
2
20
53
7
28
3
25
17
Total
23
2
79
16
124
166
5
157
30
14
97
5
64
12
109
254
32
1
138
54
22
27
8
3,207
79
3,286
2
19
2
23
202
20
18
8
11
14
21
14
2
2
20
53
7
28
3
25
International Restaurants (continued):
Mexico..........................................................................................
Nicaragua......................................................................................
Oman............................................................................................
Panama.........................................................................................
Peru...............................................................................................
Philippines....................................................................................
Puerto Rico...................................................................................
Qatar.............................................................................................
Russia...........................................................................................
Saudi Arabia.................................................................................
South Korea.................................................................................
Trinidad........................................................................................
Turkey..........................................................................................
United Arab Emirates...................................................................
United Kingdom...........................................................................
Venezuela.....................................................................................
Total International Papa John’s Restaurants...........................
Company
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
58
Franchised
67
2
7
6
25
15
16
14
65
14
81
6
16
33
246
35
1,084
Total
67
2
7
6
25
15
16
14
65
14
81
6
16
33
246
35
1,142
Note: Company-owned Papa John’s restaurants
include restaurants owned by majority-owned
subsidiaries. There were 191 such restaurants at December 29, 2013 (25 in Colorado, 26 in Maryland, 33
in Minnesota, 81 in Texas, and 26 in Virginia).
Most Papa John’s Company-owned restaurants are located in leased space. The initial term of most
domestic restaurant leases is generally five years with most leases providing for one or more options to
renew for at least one additional term. Generally, the leases are triple net leases, which require us to pay
all or a portion of the cost of insurance, taxes and utilities. Additionally, we lease our Company-owned
restaurant sites in Beijing and North China. At December 29, 2013, we leased and subleased to
franchisees in the United Kingdom 168 of the 246 franchised Papa John’s restaurant sites. The initial
lease terms on the franchised sites are generally 10 to 15 years. The initial lease terms of the franchisee
subleases are generally five to ten years. In connection with the 2006 sale of our former Perfect Pizza
operations in the United Kingdom, we remain contingently liable for payment under approximately 30
lease arrangements, primarily associated with Perfect Pizza restaurant sites.
Seven of our ten domestic QC Centers are located in leased space, including the following locations:
Raleigh, NC; Denver, CO; Phoenix, AZ; Des Moines, IA; Portland, OR; Pittsburgh, PA; and Cranbury,
NJ. Our remaining three locations are in buildings we own, located in: Orlando, FL; Dallas, TX; and
Louisville, KY. Additionally, our corporate headquarters and our printing operations are located in
Louisville, KY in buildings owned by us. Internationally, we own a full-service QC Center in the United
Kingdom and lease office space near London. We also lease our QC Centers and office space in Beijing,
China and Mexico City, Mexico.
Item 3. Legal Proceedings
The Company is involved in a number of lawsuits, claims, investigations and proceedings, including
those specifically identified below, consisting of intellectual property, employment, consumer,
commercial and other matters arising in the ordinary course of business. In accordance with Accounting
Standards Codification (“ASC”) 450, “Contingencies,” the Company has made accruals with respect to
these matters, where appropriate, which are reflected in the Company’s financial statements. We review
these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations,
18
settlements, rulings, advice of legal counsel and other information and events pertaining to a particular
case.
Agne v. Papa John’s International, Inc. et al. is a class action filed on May 28, 2010 in the United States
District Court for the Western District of Washington seeking damages for violations of the Telephone
Consumer Protection Act and Washington State telemarketing laws alleging, among other things that
several Papa John’s franchisees retained a vendor to send unsolicited commercial text message offers
primarily in Washington and Oregon. The court granted plaintiff’s motion for class certification in
November 2012; we filed a petition for permission to appeal the court’s ruling on class certification to the
United States Court of Appeals for the Ninth Circuit.
In February 2013, the parties tentatively agreed to the financial terms of a settlement of the litigation. The
court preliminarily approved the terms in June 2013 and granted final approval of the settlement and fee
award in October 2013, following the close of the claims period. The actual settlement cost was $2.9
million, and all settlement and fee payments were made in 2013.
Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective
action filed in August 2009 in the United States District Court, Eastern District of Missouri, alleging that
delivery drivers were not reimbursed for mileage and expenses in accordance with the Fair Labor
Standards Act. Approximately 3,900 drivers out of a potential class size of 28,800 have opted into the
action. Additionally, in late December 2013, the District Court granted a motion for class certification in
five additional states, which could add an additional 5,000 to 10,000 plaintiffs to the case.
We intend to vigorously defend against all claims in this lawsuit. However, given the inherent
uncertainties of litigation, the outcome of this case cannot be predicted and the amount of any potential
loss cannot be reasonably estimated. A negative outcome in this case could have a material adverse effect
on the Company.
Item 4. Mine Safety Disclosures
None.
19
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the current executive officers of Papa John’s:
Name
John H. Schnatter
Age (a)
52
Founder, Chairman and Chief Executive
Officer
Position
First Elected
Executive Officer
Anthony N. Thompson
47
President and Chief Operating Officer
Robert C. Kraut
Timothy C. O’Hern
Steve M. Ritchie
Lance F. Tucker
54
50
39
44
Senior Vice President and Chief
Marketing Officer
Senior Vice President and Chief
Development Officer
Senior Vice President, Global
Operations & Global Operations Support
and Training
Senior Vice President, Chief Financial
Officer, Chief Administrative Officer,
and Treasurer
(a) Ages are as of January 1, 2014.
1985
2009
2013
2005
2012
2011
John H. Schnatter created the Papa John’s concept and started operations in 1984. He currently serves as
Founder, Chairman and Chief Executive Officer. He previously served as Interim Chief Executive Officer
from December 2008 to April 2009, Executive Chairman of the Company from 2005 until May 2007, as
Chairman of the Board and Chief Executive Officer from 1990 until 2005, and as President from 1985 to
1990 and from 2001 until 2005.
Anthony N. Thompson was appointed President in August 2013 and Chief Operating Officer in July
2012, after previously serving as Executive Vice President, Global Operations since July 2011. Mr.
Thompson has served as President, PJ Food Service since May 2010. Mr. Thompson joined Papa John's
in 2006 and has held the positions of Executive Vice President, North American Operations from
December 2010 to July 2011, Senior Vice President, PJ Food Service from 2009 to May 2010 and Vice
President, QCC Operations from 2006 to 2009. Prior to joining Papa John's, Mr. Thompson worked for
the Scotts Company for six years as Plant Manager, Director of Marysville Operations and Director of
Lawn and Controls Operations. Before joining the Scotts Company, Mr. Thompson spent four years with
Conagra Grocery Products Company and seven years in various roles with Gulf Coast Coca Cola.
Robert C. Kraut was appointed Senior Vice President and Chief Marketing Officer in October 2013. From
2010 until June 2013, Mr. Kraut served as Senior Vice President of Brand Marketing and Advertising at
Arby’s Restaurant Group. From 2006 until 2009, Mr. Kraut served as Vice President of Marketing
Communications for Pizza Hut, Inc. Before joining Pizza Hut, Mr. Kraut held various marketing and
advertising positions at General Motors.
Timothy C. O'Hern was appointed Senior Vice President and Chief Development Officer in July 2012. He
previously served as Senior Vice President, Development since June 2009, a position he previously held
20
from 2005 until 2007. From 2002 until 2005 and from 2007 until 2009, he managed the operations of a
Papa John's franchisee in which he has an ownership interest. Prior to his departure from Papa John's in
2002, Mr. O'Hern held various positions, including Vice President of Global Development from February
2001 to 2002, Vice President of U.S. Development from March 1997 to February 2001, Director of
Franchise Development from December 1996 to March 1997 and Construction Manager from November
1995 to December 1996. He has been a franchisee since 1993.
Steve M. Ritchie was appointed Senior Vice President, Global Operations & Global Operations Support
and Training in May 2013. Mr. Ritchie is responsible for all aspects of restaurant operations, support and
training for both Company-owned and franchised restaurants throughout the world. Mr. Ritchie has
served in various capacities of increasing responsibility since joining Papa John’s in 1996, including
Senior Vice President, North and Latin American Operations & Global OST from July 2012 to May
2013, Senior Vice President, North American Operations & Global OST from August 2011 until July
2012, Senior Vice President, Operations and Global OST from December 2010 until August 2011 and
Vice President, Operations & Global OST from July 2010 until December 2010. Since 2006, he also has
served as a franchise owner and operator of multiple units in the Company’s Midwest Division.
Lance F. Tucker was appointed Chief Administrative Officer in July 2012 and Chief Financial Officer
and Treasurer in February 2011. Mr. Tucker previously held the positions of Chief of Staff and Senior
Vice President, Strategic Planning from June 2010 to February 2011, after serving as Chief of Staff and
Vice President, Strategic Planning since June 2009. Mr. Tucker was previously employed by the
Company from 1994 to 1999 working in its finance department. From 2003 to 2009, Mr. Tucker served
as Chief Financial Officer of Evergreen Real Estate, a company owned by John Schnatter. Mr. Tucker is a
licensed Certified Public Accountant.
There are no family relationships among our executive officers and other key personnel.
21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our common stock trades on The NASDAQ Global Select Market tier of The NASDAQ Stock Market
under the symbol PZZA. As of February 18, 2014, there were 805 record holders of common stock.
However, there are significantly more beneficial owners of our common stock than there are record
holders. The following table sets forth, for the quarters indicated, the high and low sales prices of our
common stock, as reported by The NASDAQ Stock Market, and dividends declared per common share.
All sales prices have been adjusted to reflect a two-for-one split of the Company’s outstanding shares of
stock. The stock split was effected in the form of a stock dividend and entitled each shareholder of record
at the close of business on December 12, 2013 to receive one additional share for every outstanding share
of stock held on the record date. The stock dividend of approximately 21.0 million shares of stock was
distributed on December 27, 2013.
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$
31.16
33.61
36.20
46.12
$
Low
24.94
29.50
32.78
33.88
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$
20.41
25.23
28.21
27.34
$
Low
18.13
18.28
22.60
23.21
Dividends
Declared
per Share
-
$
-
0.125
0.125
Dividends
Declared
per Share
$
-
-
-
-
Our Board of Directors declared a quarterly dividend of $0.125 per share on January 30, 2014 that was
payable on February 21, 2014 to shareholders of record at the close of business on February 10, 2014.
We anticipate continuing the payment of quarterly cash dividends. The actual amount of such dividends is
subject to declaration by our Board of Directors and will depend upon future earnings, results of
operations, capital requirements, our financial condition and other relevant factors. There can be no
assurance that the Company will continue to pay quarterly cash dividends.
Our Board of Directors has authorized the repurchase of up to $1.2 billion of common stock under a share
repurchase program that began December 9, 1999, and expires December 31, 2014. Through December
29, 2013, a total of 103.0 million shares with an aggregate cost of $1.1 billion and an average price of
$10.46 per share have been repurchased under this program. Subsequent to year-end, we acquired an
additional 236,000 shares at an aggregate cost of $11.0 million. Approximately $110.9 million remained
available under the Company’s share repurchase program as of February 18, 2014.
22
The following table summarizes our repurchase activity by fiscal period during the fourth quarter ended
December 29, 2013, as adjusted for the two-for-one stock split, (in thousands, except per share amounts):
Total
Number
of Shares
Purchased
Average
Price
Paid per
Share
Total Number
of Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under the
Plans or Programs
Fiscal Period
09/30/2013 - 10/27/2013
10/28/2013 - 11/24/2013
11/25/2013 - 12/29/2013
146
1,034
101
$35.33
$38.59
$43.47
101,913
102,947
103,048
$166,143
$126,246
$121,875
The Company retired all common stock shares held in treasury as of October 29, 2013 in connection with
the stock split.
The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of
1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this
share repurchase program. There can be no assurance that we will repurchase shares of our common stock
either through a Rule 10b5-1 trading plan or otherwise.
Stock Performance Graph
The following performance graph compares the cumulative shareholder return of the Company's common
stock for the five-year period between December 28, 2008 and December 29, 2013 to (i) the NASDAQ
Stock Market (U.S.) Index and (ii) a group of the Company's peers consisting of U.S. companies listed on
NASDAQ with standard industry classification (SIC) codes 5800-5899 (eating and drinking places).
Management believes the companies included in this peer group appropriately reflect the scope of the
Company’s operations and match the competitive market in which the Company operates. The graph
assumes the value of the investments in the Company's common stock and in each index was $100 on
December 28, 2008, and that all dividends were reinvested.
Papa John's International, Inc.
Papa John's International, Inc.
Papa John's International, Inc.
NASDAQ Stock Market (U.S. Companies)
NASDAQ Stock Market (U.S. Companies)
NASDAQ Stock Market (U.S. Companies)
NASDAQ Stocks (SIC 5800-5899 U.S. Companies) Eating and Drinking
NASDAQ Stocks (SIC 5800-5899 U.S. Companies) Eating and Drinking
NASDAQ Stocks (SIC 5800-5899 U.S. Companies) Eating and Drinking
Dec. 30, 2012
Dec. 30, 2012
300.23
Dec. 30, 2012
300.23
300.23
202.46
202.46
202.46
368.52
368.52
368.52
Dec. 29, 2013
Dec. 29, 2013
Dec. 29, 2013
514.23
514.23
514.23
286.22
286.22
286.22
565.22
565.22
565.22
Item 6. Selected Financial Data
The selected financial data presented for each of the fiscal years in the five-year period ended December
29, 2013, were derived from our audited consolidated financial statements. The selected financial data
below should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the “Consolidated Financial Statements” and Notes thereto
included in Item 7 and Item 8, respectively, of this Form 10-K.
(In thousands, except per share data)
Year Ended (1)
Income Statement Data
North America revenues:
Domestic Company-owned restaurant sales
Franchise royalties (2)
Franchise and development fees
Domestic commissary sales
Other sales
International revenues:
Royalties and franchise and development fees (3)
Restaurant and commissary sales (4)
Total revenues
Operating income (5)
Investment income
Interest expense
Income before income taxes
Income tax expense
Net income before attribution to noncontrolling interests
Income attributable to noncontrolling interests (6)
Net income attributable to the Company
Dec. 29,
2013
Dec. 30,
2012
Dec. 25,
2011
Dec. 26,
2010
Dec. 27,
2009
52 weeks
53 weeks
52 weeks
52 weeks
52 weeks
$
635,317
81,692
1,181
578,870
53,322
21,979
66,661
1,439,022
106,503
589
(983)
106,109
33,130
72,979
(3,442)
69,537
$
$
592,203
79,567
806
545,924
51,223
$
525,841
73,694
722
508,155
50,912
$
503,272
69,631
610
454,506
51,951
$
503,818
62,083
912
417,689
54,045
19,881
53,049
1,342,653
99,807
750
(2,162)
98,395
32,393
66,002
(4,342)
61,660
$
16,327
42,231
1,217,882
87,017
755
(2,981)
84,791
26,324
58,467
(3,732)
54,735
$
13,265
33,162
1,126,397
86,744
875
(4,309)
83,310
27,247
56,063
(3,485)
52,578
$
11,780
28,223
1,078,550
95,218
629
(11,660)
84,187
26,702
57,485
(3,756)
53,729
$
Net income attributable to common shareholders
$
68,497
$
61,660
$
54,735
$
52,578
$
53,729
Basic earnings per common share (7)
$
1.58
$
1.31
$
1.09
$
1.00
$
0.97
Earnings per common share - assuming dilution (7)
$
1.55
$
1.29
$
1.08
$
0.99
$
0.96
Basic weighted average common shares outstanding (7)
Diluted weighted average common shares outstanding (7)
43,387
44,243
46,916
47,810
50,086
50,620
52,656
52,936
55,476
55,818
Dividends declared per common share
$
0.25
$
-
$
-
$
-
$
-
Balance Sheet Data
Total assets
Total debt
Mandatorily redeemable noncontrolling interests (8)
Redeemable noncontrolling interests
Redeemable noncontrolling interests, including
Total stockholders’ equity
$
464,291
157,900
10,786
7,024
138,184
$
438,408
88,258
11,837
6,380
181,514
$
390,382
51,489
11,065
3,965
205,647
$
417,492
99,017
9,972
3,512
195,608
$
396,009
99,050
10,960
3,215
173,145
(1) We operate on a 52-53 week fiscal year ending on the last Sunday of December of each year. The
2012 fiscal year consisted of 53 weeks and all other years above consisted of 52 weeks. The
additional week resulted in additional revenues of approximately $21.5 million and additional
income before income taxes of approximately $4.1 million, or $0.05 per diluted share for 2012.
(2) North America franchise royalties were derived from franchised restaurant sales of $1.91 billion in
2013, $1.85 billion in 2012 ($1.82 billion on a 52 week basis), $1.71 billion in 2011, $1.62 billion in
2010, and $1.58 billion in 2009.
(3) International royalties were derived from franchised restaurant sales of $460.0 million in 2013,
$388.4 million in 2012 ($379.4 million on a 52 week basis), $320.0 million in 2011, $258.8 million
in 2010, and $222.2 million in 2009.
(4) Restaurant sales for international Company-owned restaurants were $22.7 million in 2013, $16.2
million in 2012, $12.4 million in 2011, $11.0 million in 2010, and $10.3 million in 2009.
24
(5) The operating results include the consolidation of BIBP Commodities, Inc. (“BIBP”), which
increased operating income approximately $21.4 million in 2010 (including a reduction in BIBP’s
cost of sales of $14.2 million associated with PJFS’s agreement to pay BIBP for past cheese
purchases an amount equal to its accumulated deficit). BIBP increased operating income by $23.3
million in 2009 (break-even results in 2011 prior to dissolution).
(6) Represents the noncontrolling interests’ allocation of income for our joint venture arrangements.
(7) Adjusted to reflect a two-for-one stock split effected in the form of a stock dividend to stockholders
of record on December 12, 2013.
(8) Mandatorily redeemable noncontrolling interest is included in other long-term liabilities in the
consolidated balance sheets.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
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 1984. At December 29, 2013, there were 4,428
Papa John’s restaurants in operation, consisting of 723 Company-owned and 3,705 franchised restaurants.
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.
New unit openings in 2013 were 386 as compared to 368 in 2012 and 321 in 2011 and unit closings in
2013 were 121 as compared to 88 in 2012 and 84 in 2011. We expect net unit growth of approximately
220 to 250 units during 2014. Our expansion strategy is to cluster restaurants in targeted markets, thereby
increasing consumer awareness and enabling us to take advantage of operational, distribution and
advertising efficiencies.
We continue to generate strong sales in our domestic Company-owned restaurants even in a very
competitive environment. Average annual Company-owned sales for our most recent comparable
restaurant base were $988,000 for 2013 (52-week year), compared to $953,000 for 2012 (53-week year)
and $897,000 for 2011 (52-week year). Average sales volumes in new markets are generally lower than in
those markets in which we have established a significant market position. The comparable sales for
domestic Company-owned restaurants increased 6.6% in 2013, 5.6% in 2012, and 4.1% in 2011.
We continue to be pleased with the ongoing growth in both our domestic and international franchise
restaurant sales. The comparable sales for North America franchised units increased 3.1% in 2013, 2.9%
in 2012 and 3.1% in 2011. The comparable sales for International franchised units increased 7.5% in
2013, 7.1% in 2012 and 5.1% in 2011. “Comparable sales” represents sales generated by restaurants open
for the entire twelve-month period reported.
We strive to obtain high-quality restaurant sites with good access and visibility, and to enhance the
appearance and quality of our restaurants. We believe these factors improve our image and brand
awareness. The average cash investment for the 13 domestic traditional Company-owned restaurants
opened during 2013 was approximately $280,000, compared to the $260,000 investment for the eight
units opened in 2012, exclusive of land and any tenant improvement allowances we received. We also
opened 11 Company-owned restaurants in China, with an average investment cost of approximately
$225,000 which compares to $240,000 for the 20 restaurants opened in 2012, on a constant dollar basis.
25
Approximately 43% to 47% of our domestic revenues for the last three years were derived from sales to
franchisees of various items including food and paper products, printing and promotional items, risk
management services and information systems equipment and software and related services. We believe
that in addition to supporting both Company and franchised profitability and growth, these activities
contribute to product quality and consistency throughout the Papa John’s system.
Critical Accounting Policies and Estimates
The results of operations are based on our consolidated financial statements, which were prepared in
conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation
of consolidated financial statements requires management to select accounting policies for critical
accounting areas as well as estimates and assumptions that affect the amounts reported in the consolidated
financial statements. The Company’s significant accounting policies are more fully described in “Note 2”
of “Notes to 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 and other customers with known
financial difficulties. Balances are charged off against the allowance after recovery efforts have ceased.
Noncontrolling Interests
The Company had the following four joint ventures in which there are noncontrolling interests as of
December 29, 2013:
Joint Venture
Redemption Feature
Location within the
Consolidated Balance Sheet
Recorded value
Colonel’s Limited, LLC Mandatorily redeemable Other long-term liabilities
Star Papa, LP
PJ Denver, LLC
PJ Minnesota, LLC
Redeemable
Redeemable
No redemption feature
Temporary equity
Temporary equity
Permanent equity
Redemption value
Carrying value
Redemption value
Carrying value
Consolidated net income is required to be reported separately at amounts attributable to both to the parent
and the noncontrolling interest. Disclosures are required to clearly identify and distinguish between the
interests of the parent company and the interests of the noncontrolling owners, including a disclosure on
the face of the consolidated statements of income attributable to the noncontrolling interest holder.
See “Note 6” of “Notes to Consolidated Financial Statements” for additional information.
Stock Based Compensation
Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures and is
recognized over the vesting period (generally in equal installments over three years). Restricted stock is
valued based on the market price of the Company’s shares on the date of grant. Stock options are valued
using a Black-Scholes option pricing model.
26
Our specific assumptions for estimating the fair value of options include the following:
Assumptions (weighted average):
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
2013
2012
2011
1.1%
0.1%
37.5%
6.0
1.1%
0.0%
37.8%
6.0
1.5%
0.0%
41.2%
3.7
The risk-free interest rate for the periods within the contractual life of an option is based on the U.S.
Treasury yield curve in effect at the time of grant. The expected dividend yield was estimated as the
annual dividend divided by the market price of the Company’s shares on the date of grant. Expected
volatility was estimated by using the Company’s historical share price volatility for a period similar to the
expected life of the option. See “Note 18” of “Notes to Consolidated Financial Statements” for additional
information.
Intangible Assets – Goodwill
We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or
circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying
amount. Such tests are completed separately with respect to the goodwill of each of our reporting units.
We may perform a qualitative assessment or move directly to the quantitative assessment for any
reporting unit in any period if we believe that it is more efficient or if impairment indicators exist.
We applied the qualitative assessment for our domestic Company-owned restaurants and China reporting
unit, which is included in our international reporting segment. As a result of our qualitative analysis, we
determined that it was more-likely-than-not that the fair value of our domestic Company-owned
restaurants and China reporting unit were greater than their carrying amounts. With respect to the
reporting unit for our subsidiary located in the United Kingdom (“PJUK”), which represents $15.7
million of goodwill as of December 29, 2013, we bypassed the qualitative assessment and performed the
two-step quantitative goodwill impairment test, which indicated the fair value significantly exceeded the
carrying amount. The fair value was calculated using an income approach that projected net cash flow,
with various growth assumptions, over a 10-year discrete period and a terminal value, which were
discounted using appropriate rates. The selected discount rate considers the risk and nature of our PJUK
reporting unit’s cash flow and the rates of return market participants would require to invest their capital
in the PJUK reporting unit. See “Note 8” of “Notes to Consolidated Financial Statements” for additional
information.
Subsequent to completing our annual qualitative and quantitative goodwill impairment tests, no
indications of impairment were identified.
Insurance Reserves
Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles,
property, and health insurance coverage provided to our employees are funded by the Company up to
certain retention levels. Losses are accrued based upon undiscounted 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 differ significantly from historical trends used to estimate the insurance reserves recorded
by the Company. See “Note 12” of “Notes to Consolidated Financial Statements” for additional
information.
27
Deferred Income Tax Accounts and Tax Reserves
Papa John’s is subject to income taxes in the United States and several foreign jurisdictions. Significant
judgment is required in determining Papa John’s provision for income taxes and the related assets and
liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and
those deferred.
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 new tax rate is enacted. Valuation allowances are established when necessary on a
jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. As of December 29,
2013, we had a net deferred income tax liability of approximately $6.7 million.
Tax authorities periodically audit the Company. We record reserves and related interest and penalties for
identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute
of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for
such exposures. We recognized a decrease of $909,000 and $711,000 in income tax expense associated
with the finalization of certain income tax issues in 2013 and 2011, respectively. In 2012, we recognized
additional income tax expense of approximately $305,000. See “Note 15” of “Notes to Consolidated
Financial Statements” for additional information.
Fiscal Year
The Company follows a fiscal year ending on the last Sunday of December, generally consisting of 52
weeks made up of four 13-week quarters. The 13-week quarters consist of two four-week periods
followed by one five-week period. Our 2013 and 2011 fiscal years consisted of 52 weeks while our 2012
fiscal year consisted of 53 weeks, including a six-week period in the fourth quarter. The additional week
in 2012 resulted in additional revenues of approximately $21.5 million and additional income before
income taxes of $4.1 million, or $0.05 per diluted common share.
Two-for-One Stock Split
The Company completed a two-for-one stock split of the Company’s outstanding shares of stock in
December 2013 effected in the form of a stock dividend. Shareholders of record on December 12, 2013
received one additional share for each outstanding share of stock held on the record date. The stock
dividend was distributed effective December 27, 2013. All share and per-share amounts have been
adjusted to reflect the stock split.
28
Items Impacting Comparability; Non-GAAP Measures
The following table reconciles our financial results as reported under GAAP to certain non-GAAP
measures. We present these non-GAAP measures to adjust for certain items which we believe impact the
comparability of our results of operations.
(In thousands, except per share amounts)
Total revenues, as reported
53rd week of operations (a)
Total revenues, as adjusted
Income before income taxes, as reported
53rd week of operations (a)
Incentive Contribution (b)
Income before income taxes, as adjusted
Net income, as reported
53rd week of operations (a)
Incentive Contribution (b)
Net income, as adjusted
Earnings per diluted common share, as reported
53rd week of operations (a)
Incentive Contribution (b)
Earnings per diluted common share, as adjusted
Dec. 29,
2013
$
1,439,022
-
$
1,439,022
Year Ended
Dec. 30,
2012
$
$
1,342,653
(21,500)
1,321,153
Dec. 25,
2011
$
1,217,882
-
$
1,217,882
$
$
$
106,109
-
(1,000)
105,109
69,537
-
(660)
68,877
1.55
-
(0.02)
1.53
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
98,395
(4,145)
2,971
97,221
61,660
(2,634)
1,955
60,981
1.29
(0.05)
0.04
1.28
84,791
-
-
84,791
54,735
-
-
54,735
1.08
-
-
1.08
(a) The Company follows a fiscal year ending on the last Sunday of December, generally consisting of 52
weeks made up of four 13-week quarters. In 2012, the Company’s fiscal year consisted of 53 weeks,
with the additional week added to the fourth quarter (14 weeks) results. The 2012 impact of the 53rd
week on income before income taxes was an increase of $4.1 million, or $0.05 earnings per diluted
common share.
(b) In connection with a new multi-year supplier agreement, the Company received a $5.0 million
supplier marketing payment in 2012. The Company is recognizing the supplier marketing payment
evenly as income over the five-year term of the agreement ($1.0 million per year). In 2012, the
Company contributed the supplier marketing payment to the Papa John’s Marketing Fund (“PJMF”),
an unconsolidated nonstock corporation designed to operate at break even for the purpose of
designing and administering advertising and promotional programs for all participating domestic
restaurants. The Company’s contribution to PJMF was fully expensed in 2012.
PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as
advertising credits in 2012. Our domestic Company-owned restaurants’ portion of the advertising
credits resulted in an increase in income before income taxes of approximately $1.0 million in 2012.
The overall impact of these transactions described above, which are collectively defined as the
“Incentive Contribution,” was an increase in income before income taxes of approximately $1.0
29
million in 2013 (or an increase in diluted earnings per common share of approximately $0.02) and a
reduction in income before income taxes of approximately $3.0 million in 2012 (or a reduction to
diluted earnings per share of approximately $0.04)
The non-GAAP results shown above, which exclude the items impacting comparability, should not be
construed as a substitute for or a better indicator of the Company’s performance than the Company’s
GAAP results. Management believes presenting the financial information without these items is important
for purposes of comparison to prior year results and analyzing each segment’s operating results. In
addition, management uses these non-GAAP measures to allocate resources, and analyze trends and
underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for
various levels of management, are based on financial measures that exclude the Incentive Contribution.
See “Results of Operations” for further analysis regarding the impact of these items.
In addition, we present free cash flow in this report, which is a non-GAAP measure. We define free cash
flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the
purchases of property and equipment. We view free cash flow as an important measure because it is one
factor that management uses in determining the amount of cash available for discretionary investment.
Free cash flow is not a term defined by GAAP and as a result our measure of free cash flow might not be
comparable to similarly titled measures used by other companies. Free cash flow should not be construed
as a substitute for or a better indicator of our performance than the Company’s GAAP measures. See
“Liquidity and Capital Resources” for a reconciliation of free cash flow to the most directly comparable
GAAP measure.
The presentation of the non-GAAP measures in this report is made alongside the most directly
comparable GAAP measures.
30
Percentage Relationships and Restaurant Data and Unit Progression
The following tables set forth the percentage relationship to total revenues, unless otherwise indicated, of
certain income statement data, and certain restaurant data for the years indicated:
Income Statement Data:
North America revenues:
Domestic Company-owned restaurant sales
Franchise royalties
Franchise and development fees
Domestic commissary sales
Other sales
International revenues:
Royalties and franchise and development fees
Restaurant and commissary sales
Total revenues
Costs and expenses:
Domestic Company-owned restaurant cost of sales (2)
Domestic Company-owned restaurant operating expenses (2)
Domestic commissary cost of sales (3)
Domestic commissary operating expenses (3)
Other operating expenses (4)
International restaurant and commissary expenses (5)
General and administrative expenses
Other general expenses
Depreciation and amortization
Total costs and expenses
Operating income
Net interest expense
Income before income taxes
Income tax expense
Net income before attribution to noncontrolling interests
Income attributable to noncontrolling interests
Net income attributable to the Company
Dec. 29,
2013
Year Ended (1)
Dec. 30,
2012
Dec. 25,
2011
52 weeks
53 weeks
52 weeks
44.2%
5.7
0.1
40.2
3.7
1.5
4.6
100.0
24.6
56.9
77.5
14.8
90.0
84.9
9.3
0.5
2.4
92.6
7.4
(0.1)
7.3
2.3
5.0
(0.2)
4.8%
44.1%
5.9
0.1
40.7
3.8
1.5
3.9
100.0
23.2
57.1
78.1
14.2
88.7
84.6
9.8
0.6
2.4
92.6
7.4
(0.1)
7.3
2.4
4.9
(0.3)
4.6%
43.2%
6.1
0.1
41.7
4.2
1.3
3.4
100.0
24.1
56.9
78.2
14.1
91.0
84.5
9.2
0.8
2.7
92.9
7.1
(0.1)
7.0
2.2
4.8
(0.3)
4.5%
31
Year Ended (1)
Dec. 29, Dec. 30, Dec. 25,
2012
2013
2011
Restaurant Data:
Percentage increase in comparable domestic
Company-owned restaurant sales (6)
Number of Company-owned restaurants included in the
most recent full year's comparable restaurant base
Average sales for Company-owned restaurants included
52 weeks 53 weeks 52 weeks
6.6%
5.6%
4.1%
633
615
581
in the most recent comparable restaurant base
$988,000 $953,000 $897,000
Papa John's Restaurant Progression:
North America Company-owned:
Beginning of period
Opened
Closed
Acquired from franchisees
Sold to franchisees
End of period
International Company-owned:
Beginning of period
Opened
Closed
End of period
North America franchised:
Beginning of period
Opened
Closed
Acquired from Company
Sold to Company
End of period
International franchised:
Beginning of period
Opened
Closed
End of period
Total Papa John's restaurants - end of period
648
19
(2)
-
-
665
48
11
(1)
58
2,556
152
(87)
-
-
2,621
911
204
(31)
1,084
4,428
598
8
(3)
57
(12)
648
30
20
(2)
48
2,463
182
(44)
12
(57)
2,556
792
158
(39)
911
4,163
591
8
(1)
-
-
598
21
9
-
30
2,346
166
(49)
-
-
2,463
688
138
(34)
792
3,883
(1) We operate on a 52-53 week fiscal year ending on the last Sunday of December of each year. The
2013 and 2011 fiscal years consisted of 52 weeks and the 2012 fiscal year consisted of 53 weeks.
The additional week in 2012 resulted in additional revenues of approximately $21.5 million and
additional income before income taxes of approximately $4.1 million, or $0.05 per diluted common
share.
(2) As a percentage of domestic Company-owned restaurant sales.
(3) As a percentage of domestic commissary sales.
(4) As a percentage of other sales.
(5) As a percentage of international restaurant and commissary sales.
(6)
Includes only Company-owned restaurants open throughout the periods being compared.
32
Results of Operations
2013 Compared to 2012
Discussion of Revenues. Consolidated revenues increased $96.4 million, or 7.2%, to $1.44 billion in
2013, compared to $1.34 billion in 2012. Revenues are summarized in the following table on a reporting
segment basis. Alongside the GAAP financial statement data, we have included certain additional “non-
GAAP” measures that the Company believes are important for purposes of comparing to prior year results
and analyzing each segment’s revenue trends. Excluding the impact of the 53rd week of operations in
2012, which approximated $21.5 million, revenues increased 8.9%.
(In thousands)
North America Revenues:
Domestic company-owned restaurant sales
Franchise royalties
Franchise and development fees
Domestic commissary sales
Other sales
International Revenues:
Royalties and franchise and development fees
Restaurant and commissary sales
Total Revenues
Year Ended
Dec. 29,
2013
52 weeks
Dec. 30,
2012
53 weeks
Increase
53rd
Week
Adjusted
Increase-
$ (*)
Adjusted
Increase-
% (*)
$
635,317
81,692
1,181
578,870
53,322
$
592,203
79,567
806
545,924
51,223
$
43,114
2,125
375
32,946
2,099
$
10,600
1,400
-
8,500
200
$
53,714
3,525
375
41,446
2,299
21,979
66,661
1,439,022
$
19,881
53,049
1,342,653
$
2,098
13,612
96,369
$
150
650
21,500
$
2,248
14,262
117,869
$
9.2%
4.5%
46.5%
7.7%
4.5%
11.4%
27.2%
8.9%
The increase in revenues in 2013 compared to 2012 was primarily due to the following:
• Domestic Company-owned restaurant sales increased $43.1 million, or 7.3%. Excluding the
$10.6 million impact of the 53rd week in 2012, sales increased $53.7 million, or 9.2%, primarily
due to an increase in comparable sales of 6.6% and the net acquisition of 50 restaurants in the
Denver and Minneapolis markets from a franchisee in the second quarter of 2012.
• North America franchise royalty revenues increased $2.1 million, or 2.7%. Excluding the $1.4
million impact of the 53rd week in 2012, revenues increased approximately $3.5 million, or 4.5%,
due to an increase in comparable sales of 3.1% and an increase in net franchise units over the
prior year. This increase was slightly offset by reduced royalties attributable to the Company’s
net acquisition of the 50 restaurants noted above.
•
• Domestic commissary sales increased $32.9 million, or 6.0%. Excluding the $8.5 million impact
of the 53rd week in 2012, sales increased $41.4 million, or 7.7%, primarily due to higher
commissary product volumes, primarily resulting from increases in the volume of restaurant
sales, higher overall margins and increases in the prices of underlying commodities.
International royalties and franchise and development fees increased $2.1 million or 10.6%.
Excluding the $150,000 impact of the 53rd week in 2012, royalties and fees increased $2.2
million, or 11.4%. This was primarily due to an increase in units and comparable sales of 7.5%.
International restaurant and commissary sales increased $13.6 million, or 25.7%. Excluding the
$650,000 impact of the 53rd week in 2012, sales increased $14.3 million, or 27.2%. The increase
was primarily due to an increase in China Company-owned restaurant sales due to an increase in
units. In addition, we are no longer consolidating China one month in arrears, which puts China
on the same reporting cycle as our Domestic operations. The inclusion of the additional month of
operations in fiscal 2013 resulted in $2.1 million of incremental revenues and an incremental loss
before income taxes of $215,000, which is not material to our consolidated financial statements.
•
33
United Kingdom commissary revenues also increased due to both an increase in units and higher
comparable sales.
Discussion of Operating Results
Our income before income taxes totaled $106.1 million in 2013, as compared to $98.4 million in 2012, an
increase of approximately $7.7 million. Income before income taxes is summarized in the following table
on a reporting segment basis. Alongside the GAAP financial statement data, we have included certain
additional “non-GAAP’ measures that the Company believes are important for purposes of comparing to
prior year results and analyzing each segment’s operating results.
(In thousands)
Domestic company-owned restaurants
Domestic commissaries
North America franchising
International
All others
Unallocated corporate expenses
Elimination of intersegment profits
Total income before income taxes
Year Ended
Dec. 29,
2013
52 weeks
Dec. 30,
2012
53 weeks
Increase/
(Decrease) Week (a)
53rd
Incentive
Contribution
(b)
Adjusted
Increase/
(Decrease) (c)
$
$
$
$
$
34,590
37,804
70,201
2,803
3,490
(41,025)
(1,754)
106,109
38,114
34,317
69,332
3,063
2,889
(48,958)
(362)
98,395
(3,524)
3,487
869
(260)
601
7,933
(1,392)
7,714
1,609
1,200
1,414
414
215
(707)
-
4,145
$
1,029
-
-
-
(5,000)
-
(3,971)
$
$
$
$
$
$
(886)
4,687
2,283
154
816
2,226
(1,392)
7,888
(a) The 53rd week of operations increased income before income taxes by approximately $4.1 million
in 2012. The “Adjusted Increase/(Decrease)” column eliminates the impact of the 53rd week so
that the 52 weeks of 2013 can be compared to an equivalent 52 weeks in 2012.
(b) Includes the $5.0 million of expense related to the 2012 Incentive Contribution to PJMF and the
related benefit of a $1.0 million advertising credit from PJMF that was received by the Domestic
Company-owned restaurants. The annual amortization of the $5.0 million ($1.0 million per year)
is the same in both years presented. The “Adjusted Increase/(Decrease)” column eliminates the
impact of the Incentive Contribution for comparability.
(c) See “Items Impacting Comparability; Non-GAAP Measures” previously discussed for further
information. The impact of the 53rd week in 2012 substantially offset the impact of the Incentive
Contribution.
Changes in income before income taxes for 2013 in comparison to 2012 are summarized on a segment
basis as follows:
• Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’
income before income taxes decreased $3.5 million. Excluding the 2012 impact of the 53rd week
and the Incentive Contribution of approximately $2.6 million, income decreased $900,000 due to
higher commodity costs of approximately $5.8 million, largely offset by incremental profits
associated with higher comparable sales of 6.6%. Additionally, 2012 benefited from various
supplier incentives of approximately $1.0 million.
• Domestic Commissary Segment. Domestic commissaries’ income before income taxes
increased $3.5 million. Excluding the impact of the 53rd week in 2012 of approximately $1.2
million, income increased $4.7 million. The increase was primarily due to higher commissary
product volumes, resulting from increased restaurant sales volumes from the previously noted
increase in net units and comparable sales, and higher margins. The incremental profits from
higher sales were somewhat offset by higher costs of approximately $1.4 million related to
34
bringing distribution in house at certain of our commissaries from a third party provider. In
addition, we had one-time dough production start up costs at our New Jersey commissary of
approximately $700,000 in 2013.
•
• North America Franchising Segment. North America franchising income before income taxes
increased approximately $900,000 in 2013. Excluding the impact of the 53rd week in 2012 of
approximately $1.4 million, income increased approximately $2.3 million due to the previously
mentioned royalty revenue increase, partially offset by both an increase in incentives and a
reduction in royalties attributable to the Company’s net acquisition of the 50 Denver and
Minneapolis restaurants.
International Segment. The international segment reported income before income taxes of
approximately $2.8 million in 2013 compared to $3.1 million in 2012, a decrease of
approximately $300,000. Excluding the 2012 impact of the 53rd week of approximately $400,000,
income increased approximately $150,000. This increase was primarily due to the increase in
units and comparable sales of 7.5%, which provided higher royalties. Additionally, United
Kingdom results improved by approximately $1.0 million due to increased units and higher
comparable sales. These increases were substantially offset by higher operating losses in our
Company-owned China market of approximately $2.1 million, including $215,000 of incremental
losses associated with the additional month of operations in the fourth quarter of 2013, as
previously discussed. The losses in the China market include a reduction in operating results at
our Company-owned restaurants, primarily associated with new stores, as well as write off costs
associated with closing one location and the disposition of certain other assets. Additionally, 2013
reflects higher infrastructure and support costs to expand in this underpenetrated market. Based
on prior experience in underpenetrated markets, some operating losses can occur as the business
is being established.
• All Others Segment. The “All others” segment income increased approximately $600,000.
Excluding the impact of the 53rd week in 2012 of approximately $200,000, income increased
approximately $800,000. The increase was primarily due to an improvement in our online and
mobile ordering (“eCommerce”) business due to higher online volumes. This increase was
somewhat offset by reduced operating results at our wholly-owned print and promotions
subsidiary, Preferred Marketing Solutions (“Preferred”), due to reduced cost direct mail
campaigns offered to our domestic franchised restaurants.
• Unallocated Corporate Segment. Unallocated corporate expenses decreased $7.9 million.
Excluding the impact of the 53rd week and the Incentive Contribution in 2012 of $5.7 million,
expenses decreased $2.2 million. The components of unallocated corporate expenses excluding
the 53rd week and the Incentive Contribution were as follows (in thousands):
Year Ended
December 29,
2013
Year Ended
December 30,
2012
Increase
(Decrease)
General and administrative (a)
Net interest expense (b)
Depreciation expense
Perfect Pizza lease obligation (c)
Other (income) (d)
Total unallocated corporate expenses
$
$
$
34,819
482
6,845
305
(426)
42,025
36,911
1,476
7,193
(135)
(1,194)
44,251
(2,092)
(994)
(348)
440
768
(2,226)
$
$
$
(a) The decrease in unallocated general and administrative costs was primarily due to 2012
including higher legal and professional fees of approximately $3.2 million, primarily
associated with the Agne litigation reserves (see “Note 17” of “Notes to Consolidated
Financial Statements” for additional information). In addition, management incentives, net of
salary increases, were lower in 2013 by approximately $1.5 million. This was offset by
35
various other general and administrative cost increases including higher travel, operator’s
conference and information technology costs.
(b) The decrease in net interest was primarily due to a decrease in the change in redemption
value of a mandatorily redeemable noncontrolling interest in a joint venture, partially offset
by higher interest costs on our line of credit due to both a higher average debt balance and a
higher effective interest rate.
(c) The Perfect Pizza lease obligation relates to rents, taxes and insurance associated with the
former Perfect Pizza operations in the United Kingdom. See “Note 17” of “Notes to
Consolidated Financial Statements” for additional information.
(d) Other income was lower primarily due to higher expenses associated with our online
customer loyalty program.
Diluted earnings per common share were $1.55 in 2013, compared to $1.29 in 2012, an increase of $0.26,
or 20.2%. As previously discussed, the 2012 benefit of the 53rd week of operations was substantially
offset by the impact of the Incentive Contribution. Diluted earnings per common share increased $0.12
due to the 7.5% reduction in weighted average shares outstanding.
Review of Consolidated Operating Results
Revenues. Domestic Company-owned restaurant sales were $635.3 million for 2013 compared to $592.2
million for 2012. As previously noted, the 7.2% increase was primarily due to a 6.6% increase in
comparable sales and the net acquisition of 50 restaurants in Denver and Minneapolis from a franchisee in
the second quarter of 2012. Excluding the impact of the 53rd week in 2012 of $10.6 million, revenues
increased 9.2%.
North America franchise sales increased 3.0% to $1.91 billion, from $1.85 billion in 2012, as domestic
franchise comparable sales increased 3.1% and equivalent units increased 3.2%, somewhat offset by the
impact of the 53rd week in 2012. “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. North America franchise sales are not included in our consolidated statements
of income; however, our North America franchise royalty revenue is derived from these sales. North
America franchise royalties were $81.7 million, representing an increase of 2.7% from the comparable
period. As previously noted, this increase is due to the franchise comparable sales increase and an
increase in units. Excluding the impact of the 53rd week in 2012 of $1.4 million, royalties increased 4.5%.
Average weekly sales for comparable units include restaurants that were open throughout the periods
presented below. The comparable sales base for domestic Company-owned and North America franchised
restaurants, respectively, includes restaurants acquired by the Company or divested to franchisees during
the previous twelve months. Average weekly sales for non-comparable units include restaurants that were
not open throughout the periods presented below and include non-traditional sites. Average weekly sales
for non-traditional units not subject to continuous operation are calculated based upon actual days open.
36
The comparable sales base and average weekly sales for 2013 and 2012 for domestic Company-owned
and North America franchised restaurants consisted of the following:
Total domestic units (end of period)
Equivalent units
Comparable sales base units
Comparable sales base percentage
Average weekly sales - comparable units
Average weekly sales - total non-comparable units*
Average weekly sales - all units
Year Ended
December 29, 2013
Domestic
Company-
owned
North
America
Franchised
Year Ended
December 30, 2012
North
America
Franchised
Domestic
Company-
owned
665
649
633
97.5%
18,995
12,167
18,832
$
$
$
2,621
2,492
2,263
90.8%
15,171
10,092
14,704
$
$
$
648
624
615
98.6%
17,987
12,604
17,908
$
$
$
2,556
2,415
2,190
90.7%
14,870
10,389
14,453
$
$
$
*Includes 185 traditional units in 2013 and 215 in 2012 and 184 non-traditional units in 2013 and 158 in 2012.
North America franchise and development fees were approximately $1.2 million in 2013, or an increase
of approximately $375,000 from 2012.
Domestic commissary sales increased 6.0% to $578.9 million in 2013, from $545.9 million in the prior
year. Excluding the impact of the 53rd week in 2012, the increase was 7.7%. As previously discussed, the
increase was primarily due to an increase in sales volumes, higher overall margins and increases in the
prices of commodities. Our commissaries charge a fixed dollar mark-up on the cost of cheese. Cheese
prices are based upon the block price, which increased to an average price of $1.76 per pound in 2013
from $1.69 per pound in 2012.
Other sales increased $2.1 million to $53.3 million in 2013. Excluding the impact of the 53rd week in
2012, the increase was $2.3 million, or 4.5%. The increase primarily resulted from an increase in online
fees due to higher online volumes.
International franchise restaurant sales were $460.0 million in 2013, compared to $388.4 million in 2012.
International franchise restaurant sales are not included in our consolidated statements of income;
however, our international royalty revenue is derived from these sales. Total international revenues in our
consolidated financial statements were $88.6 million for 2013 compared to $72.9 million in 2012, an
increase of $15.7 million. This increase was primarily attributable to an increase in China Company-
owned restaurant sales due to an increase in restaurants and an additional month of reported results, as
previously discussed. Additionally, royalties and commissary sales increased due to an increase in
franchised units and the 7.5% increase in comparable sales, calculated on a constant dollar basis. Our
PJUK operations represented 48% of international revenues in 2013 and 51% in 2012 and our China
Company-owned operations represented approximately 28% of international revenues in 2013 and 22%
in 2012.
37
Costs and Expenses. The restaurant operating margin at domestic Company-owned units was 18.5% in
2013 compared to 19.7% in 2012 (19.5% excluding the $1.0 million advertising credit from PJMF). The
decrease of 1.2% consisted of the following differences:
• Cost of sales was 1.4% higher as a percentage of sales in 2013 due to both higher commodity
costs of approximately $5.8 million, including cheese, dough and meats, as well as lower national
promotion pricing. 2012 also included various supplier incentives, as previously noted.
• Salaries and benefits were 0.3% lower as a percentage of sales in 2013, primarily due to the
benefit of higher sales volumes.
• Advertising and related costs as a percentage of sales were relatively flat year-over-year; 2012
included a $1.0 million advertising credit received from PJMF.
• Occupancy costs and other operating costs, on a combined basis as a percentage of sales, were
relatively consistent (20.3% in 2013 and 20.4% in 2012).
Domestic commissary operating margin was 7.7% in both 2013 and 2012, with the following differences
by income statement line:
• Cost of sales was 0.6% lower as a percentage of revenues in 2013 primarily due to pricing
changes.
• Salaries and benefits as a percentage of revenues were relatively consistent (4.3% in 2013 and
4.1% in 2012).
• Other operating expenses were 0.4% higher as a percentage of revenues. This was primarily
attributable to higher distribution and other operating costs related to bringing distribution in
house for certain of our commissaries from a third party provider and the start up dough
production costs at our New Jersey commissary, as previously discussed.
Other operating expenses as a percentage of other sales were 90.0% in 2013, compared to 88.7% in 2012.
The higher operating expenses were primarily due to the impact of the reduced cost direct mail campaigns
offered to our domestic franchised restaurants by Preferred.
International restaurant and commissary expenses were 84.9% in 2013 compared to 84.6% in 2012, as a
percentage of total restaurant and commissary sales. The increase of 0.3% is primarily attributable to the
higher operating expenses associated with our China Company-owned restaurant operations. As
previously noted, our China Company-owned restaurant operations represented approximately 28% of
international revenues in 2013 and 22% in 2012, an increase of 6%, and our PJUK operations represented
48% of international revenues in 2013, a decrease of 3%.
General and administrative expenses were $134.2 million, or 9.3% of revenues for 2013, as compared to
$131.6 million, or 9.8% of revenues for 2012. The decrease as a percentage of sales was primarily the
result of leverage from higher sales. Additionally, 2012 included approximately $3.3 million related to the
previously discussed Agne text messaging class action, which increased the 2012 general and
administrative expenses percentage by approximately 0.2%.
38
Other general expenses reflected net expense of $6.7 million in 2013, as compared to $8.3 million in 2012
as detailed below (in thousands):
2013
2012
Increase
(Decrease)
Supplier marketing payment (a)
Franchise and development incentives and initiatives (b)
Disposition and impairment losses (c)
Pre-opening restaurant costs
Perfect Pizza lease obligation (d)
Other expense (e)
Total other general expenses
$
$
$
(1,000)
4,645
804
458
305
1,461
6,673
4,000
3,194
362
321
(135)
571
8,313
(5,000)
1,451
442
137
440
890
(1,640)
$
$
$
(a) See “Items Impacting Comparability; Non-GAAP Measures” above for further information about the
Incentive Contribution.
(b) Includes incentives provided to domestic franchisees for opening restaurants.
(c) Disposition and impairment losses include costs associated with the disposition of certain systems
and other equipment, which were higher in 2013.
(d) The Perfect Pizza lease obligation relates to rents, taxes and insurance associated with the former
Perfect Pizza operations in the United Kingdom.
(e) The increase is primarily due to higher expenses associated with our online customer loyalty
program.
Depreciation and amortization was $35.1 million, or 2.4% of revenues for 2013, as compared to $32.8
million, or 2.4% of revenues, for 2012. The increase of $2.3 million is primarily due to higher
deprecation for our domestic commissaries, primarily attributable to incremental depreciation related to
the New Jersey dough production capital expenditures, and higher international depreciation costs
primarily associated with the additional number of China Company-owned restaurants.
Net interest. Net interest expense consisted of the following (in thousands):
Interest expense - line of credit (a)
Investment income
Change in redemption value of mandatorily redeemable
noncontrolling interest in a joint venture (b)
Net interest (expense) income
Dec. 29,
2013
Year Ended
Dec. 30,
2012
(Increase)
Decrease
$
(2,131)
589
$
(1,114)
750
$
(1,017)
(161)
1,148
(394)
$
(1,048)
(1,412)
$
2,196
1,018
$
(a) The increase in interest expense was due to a higher average outstanding debt balance and a higher
effective interest rate.
(b) See “Notes 2 and 6” of “Notes to Consolidated Financial Statements” for additional information.
Income Tax Expense. Our effective income tax rate was 31.2% in 2013 compared to 32.9% in 2012. The
lower tax rate in 2013 includes both higher levels of tax credits, including Work Opportunity Tax Credit
and state and federal research and experimentation credits, as well as favorable nonrecurring settlements
of specific state tax issues. We recognized a decrease of $909,000 in our 2013 income tax expense
associated with the finalization of certain income tax issues while we recognized additional income tax
39
expense in 2012 of approximately $305,000. See “Note 15” of “Notes to Consolidated Financial
Statements” for additional information.
2012 Compared to 2011
Discussion of Revenues
Consolidated revenues increased $124.8 million, or 10.2%, to $1.34 billion in 2012, compared to $1.22
billion in 2011. The 53rd week of operations in 2012 approximated $21.5 million, or 1.8%. The increase in
revenues was primarily due to the following:
• Domestic Company-owned restaurant sales increased $66.4 million, or 12.6%, in 2012, primarily
due to an increase in comparable sales of 5.6%, the net acquisition of 50 restaurants in the Denver
and Minneapolis markets from a franchisee in the second quarter of 2012, and $10.6 million, or
2.0%, benefit from the 53rd week of operations.
• North America franchise royalty revenues increased approximately $5.9 million, or 8.0%, in
2012, due to an increase in comparable sales of 2.9%, an increase in net franchise units over the
prior year, and a $1.4 million, or 1.8%, benefit from the 53rd week of operations. These increases
were slightly offset by reduced royalties attributable to the Company’s net acquisition of the 50
restaurants noted above.
• Domestic commissary sales increased $37.8 million, or 7.4%, in 2012, primarily due to higher
commissary product volumes primarily resulting from increases in the volume of restaurant sales.
The benefit from the 53rd week of operations was approximately $8.5 million, or an increase of
1.7%.
International revenues increased $14.4 million, or 24.5%, in 2012, primarily due to an increase in
the number of restaurants and an increase in comparable sales of 7.1%, calculated on a constant
dollar basis, which excludes the impact of foreign currency translation. The benefit from the 53rd
week of operations was approximately $800,000, or 1.4%.
•
Discussion of Operating Results
Our income before income taxes totaled $98.4 million in 2012, as compared to $84.8 million in 2011, an
increase of approximately $13.6 million. Income before income taxes is summarized in the following
table on a reporting segment basis (in thousands):
(a)
2012
53 weeks
(a)
2011
52 weeks
Increase
(Decrease)
$
$
$
38,114
34,317
69,332
3,063
2,889
(48,958)
(362)
98,395
28,980
30,532
66,222
(165)
(441)
(39,727)
(610)
84,791
9,134
3,785
3,110
3,228
3,330
(9,231)
248
13,604
$
$
$
Domestic Company-owned restaurants (b)
Domestic commissaries
North America franchising
International
All others
Unallocated corporate expenses (c)
Elimination of intersegment profits
Income before income taxes
40
(a) The 53rd week of operations increased income before income taxes by approximately $4.1 million
in 2012 as follows:
Increase
(Decrease)
Domestic company-owned restaurants
Domestic commissaries
North America franchising
International
All others
Unallocated corporate expenses
Income before income taxes
$
$
1,609
1,200
1,414
414
215
(707)
4,145
(b) Includes the benefit of a $1.0 million advertising credit from PJMF related to the Incentive
Contribution in 2012. See “Items Impacting Comparability; Non-GAAP Measures” above for
further information about the Incentive Contribution.
(c) Includes the impact of the Incentive Contribution in 2012 ($4.0 million increase in expense).
Changes in income before income taxes for 2012 are summarized on a segment basis as follows:
• Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’
income before income taxes increased $9.1 million from the prior comparable period, including
approximately $1.6 million related to the 53rd week of operations. The remaining increase was
due to the previously noted comparable sales increase, favorable commodity costs, and various
supplier incentives.
• Domestic Commissary Segment. Domestic commissaries’ income before income taxes
increased $3.8 million in 2012 as compared to the comparable 2011 period. Approximately $1.2
million of the increase was due to the impact of the 53rd week of operations. The remaining
increase was primarily due to higher commissary product volumes resulting from increased sales
volumes from the previously noted increase in net units and comparable sales.
• North America Franchising Segment. North America franchising income before income taxes
increased approximately $3.1 million in 2012, including approximately $1.4 million related to the
53rd week of operations in 2012. The remaining increase was due to the previously mentioned
royalty revenue increase, partially offset by both an increase in development incentive costs and a
reduction in royalties attributable to the Company’s net acquisition of the 50 Denver and
Minneapolis restaurants.
International Segment. The international segment reported income before income taxes of
approximately $3.1 million in 2012 compared to a loss of approximately $165,000 in 2011. The
improvement in operating results of $3.2 million was primarily due to increased royalties due to
growth in the number of units and a comparable sales increase of 7.1%, and improved operating
results in our United Kingdom commissary. The 53rd week of operations increased operating
results by approximately $400,000 in 2012.
•
• All Others Segment. The “All others” segment reported operating income of approximately $2.9
million in 2012, representing an increase of approximately $3.3 million, as compared to the
corresponding 2011 period. The increase was primarily due to an improvement in our online and
mobile ordering (“eCommerce”) business. This improvement was somewhat offset by reduced
operating results at our wholly-owned print and promotions subsidiary, Preferred Marketing
Solutions (“Preferred”).
41
• Unallocated Corporate Segment. Unallocated corporate expenses increased $9.2 million in
2012, as compared to the prior year, including approximately $700,000 related to the 53rd week of
operations. The components of unallocated corporate expenses were as follows (in thousands):
Year Ended
December 30,
2012
Year Ended
December 25,
2011
Increase
(Decrease)
General and administrative (a)
Supplier marketing payment (b)
Net interest expense
Depreciation expense
Franchise incentives and initiatives (c)
Perfect Pizza lease obligation (d)
Other (income) expense (e)
Total unallocated corporate expenses
$
$
$
37,618
4,000
1,476
7,193
-
(135)
(1,194)
48,958
24,807
-
2,300
8,021
3,234
832
533
39,727
12,811
4,000
(824)
(828)
(3,234)
(967)
(1,727)
9,231
$
$
$
(a) The increase in unallocated general and administrative costs was primarily due to increases in
legal costs, including estimated costs associated with the tentative settlement of the Agne
litigation (see “Note 17” of “Notes to Consolidated Financial Statements” for additional
information), short-term management incentives, insurance costs, and higher costs related to
our operators’ conference.
(b) See “Items Impacting Comparability; Non-GAAP Measures” above for further information
about the Incentive Contribution.
(c) In 2011, we offered certain incentives to domestic franchisees for meeting certain sales
targets, including driving comparable sales, transactions and online sales. Other incentives
offered are included in the North America Franchising segment.
(d) The Perfect Pizza lease obligation relates to rents, taxes and insurance associated with the
former Perfect Pizza operations in the United Kingdom. See the notes to the consolidated
financial statements for additional information.
(e) Other (income) expense improved primarily due to the prior year including both higher costs
related to our online customer loyalty program and disposition and valuation costs associated
with certain systems and other equipment.
Diluted earnings per share were $1.29 in 2012, compared to $1.08 in 2011, an increase of $0.21, or
19.4%. The 2012 diluted earnings per share include the benefit of the 53rd week of operations ($0.05 per
diluted share increase), which was substantially offset by the decrease of $0.04 per diluted share
attributable to the Incentive Contribution. Diluted earnings per share increased $0.07 due to the reduction
in weighted average shares outstanding (5.7% reduction).
Review of Consolidated Operating Results
Revenues. Domestic Company-owned restaurant sales were $592.2 million for 2012 compared to $525.8
million for 2011. The 12.6% increase was primarily due to a 5.6% increase in comparable sales and the
net acquisition of 50 restaurants in Denver and Minneapolis from a franchisee in the second quarter of
2012, and $10.6 million, or 2.0%, benefit from the 53rd week of operations.
North America franchise restaurant sales increased 7.9% to $1.85 billion, from $1.71 billion in 2011, as
domestic franchise comparable sales increased 2.9% and equivalent units increased 3.6%. North America
franchise restaurant sales are not included in our consolidated statements of income; however, our North
America franchise royalty revenue is derived from these sales. North America franchise royalties were
$79.6 million, representing an increase of 8.0% from the comparable period, including a $1.4 million, or
42
1.8% increase from the 53rd week of operations in 2012. The remaining increase in royalties was
primarily due to the previously noted increase in franchise sales.
The comparable sales base and average weekly sales for 2012 and 2011 for domestic Company-owned
and North America franchised restaurants consisted of the following:
Total domestic units (end of period)
Equivalent units
Comparable sales base units
Comparable sales base percentage
Average weekly sales - comparable units
Average weekly sales - total non-comparable units*
Average weekly sales - all units
Year Ended
December 30, 2012
Domestic
Company-
owned
North
America
Franchised
Year Ended
December 25, 2011
North
America
Franchised
Domestic
Company-
owned
648
624
615
98.6%
17,987
12,604
17,908
$
$
$
2,556
2,415
2,190
90.7%
14,870
10,389
14,453
$
$
$
598
589
581
98.6%
17,248
11,218
17,164
$
$
$
2,463
2,332
2,135
91.6%
14,459
10,708
14,142
$
$
$
*Includes 215 traditional units in 2012 and 183 in 2011 and 158 non-traditional units in 2012 and 134 in 2011.
North America franchise and development fees were approximately $800,000 in 2012, or an increase of
approximately $100,000 from 2011.
Domestic commissary sales increased 7.4% to $545.9 million in 2012, from $508.2 million in the prior
comparable period. The increase was primarily due to higher commissary product volumes resulting from
increases in the volume of restaurant sales. Our commissaries charge a fixed dollar mark-up on the cost of
cheese. Cheese prices are based upon the block price, which decreased to an average price of $1.69 per
pound in 2012 from the $1.80 per pound in 2011.
Other sales increased $300,000 to $51.2 million in 2012. The increase primarily resulted from an increase
in online sales, partially offset by a decline in sales at Preferred.
International franchise restaurant sales were $388.4 million in 2012, compared to $320.0 million in 2011.
International franchise restaurant sales are not included in our consolidated statements of income;
however, our international royalty revenue is derived from these sales. Total international revenues were
$72.9 million for 2012 compared to $58.6 million in 2011, reflecting an increase in the number of
Company-owned and franchised restaurants in addition to the 7.1% increase in comparable sales,
calculated on a constant dollar basis. Our PJUK operations represented 51% of international revenues in
both 2012 and 2011.
Costs and Expenses. The restaurant operating margin at domestic Company-owned units was 19.7% in
2012 (19.5% excluding the $1.0 million advertising credit from PJMF) compared to 19.0% in 2011. The
increase of 0.7% consisted of the following differences:
• Cost of sales was 0.9% lower as a percentage of sales in 2012 due to lower commodity costs,
primarily cheese; 2012 also included various supplier incentives.
• Salaries and benefits were 0.5% higher as a percentage of sales in 2012, primarily due to higher
bonuses paid to general managers.
• Advertising and related costs as a percentage of sales were relatively flat year-over-year and
included a $1.0 million advertising credit received from PJMF. The higher costs, excluding the
43
advertising credit, were due to increased local advertising, including additional costs for newly
acquired markets.
• Occupancy costs and other operating costs, on a combined basis, as a percentage of sales, were
0.2% lower in 2012 reflecting the benefit of increased sales.
Domestic commissary operating margin was 7.7% in both 2012 and 2011, with the following differences
by line item:
• Cost of sales was 0.1% lower as a percentage of revenues in 2012, as compared to 2011 due to
lower commodity costs, primarily cheese, which has a fixed-dollar markup.
• Salaries and benefits as a percentage of revenues were flat year-over-year.
• Other operating expenses were 0.1% higher as a percentage of revenues in 2012, as compared to
2011.
Other operating expenses as a percentage of other sales were 88.7% in 2012, compared to 91.0% in 2011.
The lower operating expenses were primarily due to an improvement in online results, due to both higher
online fees and higher online sales volumes.
International operating expenses were relatively consistent at 84.6% of international restaurant and
commissary sales in 2012 as compared to 84.5% in 2011. The most significant change versus the prior
year was an increase in operating expenses primarily associated with the new Company-owned
restaurants in China (approximate 2.0% increase). This increase was substantially offset by lower
operating expenses in the United Kingdom (approximate 1.5% decrease) as a result of improved operating
results primarily attributable to higher sales.
General and administrative expenses were $131.6 million, or 9.8% of revenues for 2012, as compared to
$111.6 million, or 9.2% of revenues for 2011. The increase in general and administrative expenses of
$20.0 million is primarily due to increases in legal costs of approximately $4.3 million, including
estimated costs of $3.3 million associated with the tentative settlement of the Agne litigation, higher
short-term management
insurance costs of
approximately $3.0 million, and higher costs related to our operators’ conference of $1.2 million. In
addition, the 53rd week of operations in 2012 increased general and administrative expenses by
approximately $700,000.
incentives of approximately $7.5 million, higher
Other general expenses reflected net expense of $8.3 million in 2012, as compared to $9.8 million in 2011
as detailed below (in thousands):
2012
2011
Increase
(Decrease)
Supplier marketing payment (a)
Franchise and development incentives and initiatives (b)
Provision for uncollectible accounts and notes receivable
Disposition and impairment losses (c)
Pre-opening restaurant costs
Perfect Pizza lease obligation (d)
Other (income) expense (e)
Total other general expenses
$
$
4,000
3,194
826
362
321
(135)
(255)
8,313
$
-
4,921
379
1,745
273
832
1,617
9,767
$
4,000
(1,727)
447
(1,383)
48
(967)
(1,872)
(1,454)
$
$
(a) See “Items Impacting Comparability; Non-GAAP Measures” above for further information about the
Incentive Contribution.
44
(b) Includes incentives provided to domestic franchisees for opening restaurants. The 2011 amount
includes approximately $3.2 million in incentives offered to domestic franchisees for meeting certain
sales targets, including driving comparable sales, transactions and online sales, which were not
offered in 2012.
(c) Disposition and impairment losses include costs associated with the disposition of certain systems
and other equipment, which were higher in 2011.
(d) The Perfect Pizza lease obligation relates to rents, taxes and insurance associated with the former
Perfect Pizza operations in the United Kingdom.
(e) The decrease is primarily a result of 2011 including higher costs related to our online customer
loyalty program.
Depreciation and amortization was $32.8 million, or 2.4% of revenues for 2012, as compared to $32.7
million, or 2.7% of revenues, for 2011.
Net interest. Net interest expense was approximately $1.4 million in 2012, compared to $2.2 million in
2011. The decrease in net interest costs reflects a lower effective interest rate and a reduction in interest
expense associated with a change in redemption value of noncontrolling interest in a joint venture whose
noncontrolling interest is deemed mandatorily redeemable. See “Notes 2 and 6” of “Notes to
Consolidated Financial Statements” for additional information.
Income Tax Expense. Our effective income tax rate was 32.9% in 2012 compared to 31.0% in 2011. Our
effective income tax rate may fluctuate for various reasons, including the settlement or resolution of
specific federal and state issues. We recognized additional income tax expense in 2012 of approximately
$305,000, associated with the reserving of certain income tax issues while we recognized a decrease of
$711,000 in our 2011 income tax expense. See “Note 15” of “Notes to Consolidated Financial
Statements” for additional information.
Liquidity and Capital Resources
Our debt is comprised entirely of a revolving credit facility. The outstanding balance under this facility
was $157.9 million as of December 29, 2013, $88.3 million as of December 30, 2012, and $51.5 million
as of December 25, 2011. The increase in 2013 was primarily due to increased share repurchases.
In September 2010, we entered into a five-year, $175 million unsecured revolving credit facility, which
was amended in November 2011 to extend the maturity date to November 30, 2016. On April 30, 2013,
we amended and restated our revolving credit facility to increase the amount available for borrowing
thereunder to $300 million and extend the maturity date to April 30, 2018. The interest rate charged on
outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance
ranges from 15 to 25 basis points. The remaining availability under the revolving credit facility, reduced
for outstanding letters of credit, was approximately $121.4 million as of December 29, 2013.
In August 2011, we entered into an interest rate swap agreement that resulted in a fixed rate of 0.53%,
instead of the variable rate of LIBOR, with a notional amount of $50.0 million and a maturity date of
August 2013. On December 31, 2012, we amended our interest rate swap agreement to extend the
maturity date to December 30, 2015. The amendment resulted in a change to the fixed rate (to 0.56%
from 0.53%) but did not impact the notional amount of the interest rate swap agreement. On July 30,
2013, we terminated the $50 million swap and entered into a new $75 million swap. The new swap has an
interest rate of 1.42% and a maturity date of April 30, 2018, which coincides with the maturity date of our
revolving credit facility. The termination of the previous swap did not have a material impact on our 2013
results. See “Note 9” of “Notes to Consolidated Financial Statements” for additional information.
45
Our credit facility contains affirmative and negative covenants, including the following financial
covenants, as defined by the credit facility:
Permitted Ratio
Actual Ratio for the
Year Ended
December 29, 2013
Leverage Ratio
Not to exceed 3.0 to 1.0
Interest Coverage Ratio
Not less than 3.5 to 1.0
1.2 to 1.0
4.9 to 1.0
Our leverage ratio is defined as outstanding debt divided by consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”) for the most recent four fiscal quarters. Our interest coverage
ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent
four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense
for the most recent four fiscal quarters. We were in compliance with all covenants as of December 29,
2013.
Cash flow provided by operating activities was $101.4 million for 2013 as compared to $104.4 million in
2012. The reduction in 2013, as compared to 2012, is primarily due to working capital needs offset
somewhat by higher net income. Cash flow provided by operating activities increased to $104.4 million in
2012 from $101.0 million in 2011, primarily due to higher net income and favorable working capital
changes, including deferred income taxes.
The Company’s free cash flow for the last three years was as follows (in thousands):
Dec. 29,
2013
Year Ended
Dec. 30,
2012
Dec. 25,
2011
Net cash provided by operating activities
Purchase of property and equipment (a)
Free cash flow (b)
$
101,360
(50,750)
50,610
$
$
104,379
(42,628)
61,751
$
$
101,008
(29,319)
71,689
$
(a) The increased purchases of property and equipment in 2013 and 2012 primarily relate to
expenditures on equipment for New Jersey dough production, technology investments, including
our new domestic POS system, (“FOCUS”), and China new store builds.
(b) We define free cash flow as net cash provided by operating activities (from the consolidated
statements of cash flows) less the purchases of property and equipment. See “Items Impacting
Comparability; Non-GAAP Measures” for more information about this non-GAAP measure, its
limitations and why we present free cash flow alongside the most directly comparable GAAP
measure.
We require capital primarily for the development, acquisition, renovation and maintenance of restaurants,
the development, renovation and maintenance of commissary facilities and equipment and the
enhancement of corporate systems and facilities, including technological enhancements. Purchases of
property and equipment amounted to $50.8 million, $42.6 million, and $29.3 million in 2013, 2012 and
2011, respectively, and are summarized by operating segment in “Note 20” of “Notes to Consolidated
Financial Statements.”
46
We also require capital for share repurchases and the payment of cash dividends. The following is a
summary of our common share repurchases, as adjusted for the stock split, for the last three years (in
thousands, except average price per share):
Fiscal
Year
2011
2012
2013
Number of
Shares
Repurchased
4,168
4,552
3,538
Total Cash
Paid
$65,323
$106,095
$118,569
Average
Price Per
Share
$15.67
$23.31
$33.51
Subsequent to December 29, 2013, we acquired an additional 236,000 shares at an aggregate cost of $11.0
million. Approximately $110.9 million remained available under the Company’s share repurchase
program as of February 18, 2014.
During the year ended December 29, 2013, we paid cash dividends of $10.8 million. Additionally, on
January 30, 2014, our Board of Directors declared a first quarter 2014 cash dividend of $0.125 per share,
or approximately $5.2 million. The dividend was paid on February 21, 2014 to shareholders of record as
of the close of business on February 10, 2014. The declaration and payment of any future dividends will
be at the discretion of the Board of Directors, subject to the Company’s financial results, cash
requirements, and other factors deemed relevant by the Board of Directors.
Contractual obligations and payments as of December 29, 2013 due by year are as follows (in thousands):
Payments Due by Period
Less than 1
Year
1-3 Years
3-5 Years
After 5
Years
Total
Contractual Obligations:
Revolving line of credit (1)
Interest payments (2)
Total debt
Operating leases
Total contractual obligations
$
-
2,389
2,389
38,304
40,693
$
$
-
4,778
4,778
63,867
68,645
$
$
$
157,900
3,186
161,086
41,639
202,725
$
-
-
-
41,441
41,441
$
$
$
157,900
10,353
168,253
185,251
353,504
(1) We utilize an interest rate swap to hedge against $75.0 million of our variable rate debt. The value of
our interest rate swap was $76,000 at December 29, 2013 and was recorded in other long-term
liabilities in the consolidated balance sheet.
(2) Represents estimated interest payments on our revolving line of credit balance outstanding as of
December 29, 2013. The interest payments assume the outstanding balance on our $300.0 million
unsecured revolving line of credit will remain at $157.9 million until the maturity date of April 30,
2018. Interest payments are calculated based on LIBOR plus the applicable margin in effect at
December 29, 2013, and considers the amended interest rate swap agreement in effect until April 30,
2018 (interest rate of 1.42%). The actual interest rates on our variable rate debt and the amount of our
indebtedness could vary from those used to compute the above interest payments. See “Note 9” of
“Notes to Consolidated Financial Statements” for additional information concerning our debt and
credit arrangements.
47
The above table does not include the following:
• Unrecognized tax benefits of $2.7 million since we are not able to make reasonable estimates of
the period of cash settlement with respect to the taxing authority.
• Redeemable and mandatorily redeemable noncontrolling interests of $17.8 million as we are not
able to predict the timing of the redemptions.
Off-Balance Sheet Arrangements
The off-balance sheet arrangements that are reasonably likely to have a current or future effect on the
Company’s financial condition are operating leases of Company-owned restaurant sites, QC Centers,
office space and transportation equipment.
We guarantee leases for certain Papa John’s domestic franchisees, who purchased restaurants that were
previously Company-owned, as well as approximately 30 leases in the United Kingdom in connection
with the 2006 sale of our former Perfect Pizza operations. We are contingently liable on these leases.
These leases have varying terms, the latest of which expires in 2018. As of December 29, 2013, the
estimated maximum amount of undiscounted payments the Company could be required to make in the
event of nonpayment by the primary lessees was $2.7 million, net of amounts reserved of approximately
$100,000 related to the Perfect Pizza operations. No liability has been recorded related to the other
guarantees.
We have certain other commercial commitments where payment is contingent upon the occurrence of
certain events. Such commitments include the following by year (in thousands):
Amount of Commitment Expiration Per Period
3-5
Years
After
5 Years
1-3
Years
Less than
1 Year
Total
Other Commercial Commitments:
Standby letters of credit
$
20,710
$
-
$
-
$
-
$
20,710
We are party to standby letters of credit with off-balance sheet risk associated with our insurance
programs. See “Notes 9, 12 and 17” of “Notes to Consolidated Financial Statements” for additional
information related to contractual and other commitments.
Forward-Looking Statements
Certain matters discussed in this report, including information within Management’s Discussion and
Analysis of Financial Condition and Results of Operations constitute forward-looking statements within
the meaning of the federal securities laws. Generally, the use of words such as “expect,” “estimate,”
“believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking
statements that we intend to be included within the safe harbor protections provided by the federal
securities laws. Such forward-looking statements may relate to projections or guidance concerning
business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs,
profit margins, unit growth, capital expenditures, and other financial and operational measures. Such
statements are not guarantees of future performance and involve certain risks, uncertainties and
assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual
outcomes and results may differ materially from those matters expressed or implied in such forward-
48
looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking
statements include, but are not limited to:
•
•
•
•
•
aggressive changes in pricing or other marketing or promotional strategies by competitors which
may adversely affect sales; and new product and concept developments by food industry
competitors;
changes in consumer preferences and adverse general economic and political conditions,
including increasing tax rates, and their resulting impact on consumer buying habits;
the impact that product recalls, food quality or safety issues, and general public health concerns
could have on our restaurants;
failure to maintain our brand strength and quality reputation;
the ability of the Company and its franchisees to meet planned growth targets and operate new
and existing restaurants profitably;
increases in or sustained high costs of food ingredients and other commodities;
•
• disruption of our supply chain or our commissary operations due to sole or limited source of
•
•
•
•
•
•
suppliers or weather, drought, disease or other disruption beyond our control;
increased risks associated with our international operations, including economic and political
conditions in our international markets and difficulty in meeting planned sales targets and new
store growth for our international operations, including our expansion into emerging or
underpenetrated markets, such as China, where we have a Company-owned presence. Based on
prior experience in underpenetrated markets, operating losses are likely to occur as the market is
being established;
increased employee compensation, benefits, insurance, tax rates, regulatory compliance and
similar costs, including increased costs resulting from federal health care legislation;
the credit performance of our franchise loan program;
the impact of the resolution of current or future claims and litigation, and current or proposed
legislation impacting our business;
the impact of changes in currency exchange and interest rates;
failure to effectively execute succession planning, and our reliance on the services of our Founder
and Chief Executive Officer, who also serves as our brand spokesperson;
• disruption of critical business or information technology systems, and risks associated with data
privacy and security breaches, including theft of Company and customer information. This
would include the increased risk associated with the planned rollout of our new domestic POS
system. If prolonged and widespread technological problems are experienced during the rollout,
our domestic corporate and franchise operations could be disrupted, which could adversely
impact sales.
These and other risk factors are discussed in detail in “Part I. Item 1A. – Risk Factors” of this Annual
Report on Form 10-K. We undertake no obligation to update publicly any forward-looking statements,
whether as a result of future events, new information or otherwise, except as required by law.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our debt is comprised entirely of a revolving credit facility. On April 30, 2013, we amended and restated
our revolving credit facility to increase the amount available for borrowing thereunder to $300 million,
from $175 million, and extend the maturity date to April 30, 2018. The outstanding balance under this
facility was $157.9 million as of December 29, 2013 and $88.3 million as of December 30, 2012. The
interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee
on the unused balance ranges from 15 to 25 basis points.
49
We attempt to minimize interest risk exposure and to lower our overall borrowing costs for changes in
interest rates through the utilization of interest rate swaps, which are derivative financial instruments. Our
swaps are entered into with financial institutions and have reset dates and critical terms that match those
of the underlying debt. By using a derivative instrument to hedge exposures to changes in interest rates,
we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms
of the derivative contract. We minimize the credit risk by entering into transactions with high-quality
counterparties whose credit rating is evaluated on a quarterly basis.
In August 2011, we entered into an interest rate swap agreement that resulted in a fixed rate of 0.53%,
instead of the variable rate of LIBOR, with a notional amount of $50.0 million and a maturity date of
August 2013. On December 31, 2012, we amended our interest rate swap agreement to extend the
maturity date to December 30, 2015. The amendment resulted in a change to the fixed rate (to 0.56%
from 0.53%) but did not impact the notional amount of the interest rate swap agreement. On July 30,
2013, we terminated the $50 million swap and entered into a new $75 million swap. The new swap has an
interest rate of 1.42% and a maturity date of April 30, 2018, which coincides with the maturity date of our
revolving credit facility. The termination of the previous swap did not have a material impact on our 2013
results.
The effective interest rate on the revolving line of credit, including the impact of the interest rate swap
agreement, was 1.5% as of December 29, 2013. An increase in the present interest rate of 100 basis points
on the line of credit balance outstanding as of December 29, 2013, including the impact of the interest
rate swap, would increase interest expense by $829,000.
Foreign Currency Exchange Rate Risk
We do not enter into financial instruments to manage foreign currency exchange rates since only 6.2% of
our total revenues are derived from sales to customers and royalties outside the United States.
Commodity Price Risk
In the ordinary course of business, the food and paper products we purchase, including cheese
(historically representing 35% to 40% of our food cost), are subject to seasonal fluctuations, weather,
availability, demand and other factors that are beyond our control. We have pricing agreements with some
of our vendors, including forward pricing agreements for a portion of our cheese purchases for our
domestic Company-owned restaurants, which are accounted for as normal purchases; however, we still
remain exposed to on-going commodity volatility.
The following table presents the actual average block price for cheese by quarter in 2013, 2012 and 2011.
Also presented is the projected full-year 2014 average block price (based on the February 18, 2014
Chicago Mercantile Exchange cheese futures prices for 2014):
2014
Projected
Market
2013
Block
Price
2012
Block
Price
2011
Block
Price
$
$
$
$
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Full Year
2.135
1.911
1.851
1.789
1.922
1.662
1.784
1.740
1.849
1.759
$
$
$
$
1.695
1.736
2.006
1.760
1.799
1.522
1.539
1.750
1.939
1.692
50
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Papa John’s International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Papa John’s International, Inc. and
Subsidiaries as of December 29, 2013 and December 30, 2012, and the related consolidated statements of
income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the
period ended December 29, 2013. Our audits also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements and schedule based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Papa John’s International, Inc. and Subsidiaries at December 29, 2013
and December 30, 2012, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 29, 2013, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Papa John’s International, Inc. and Subsidiaries’ internal control over financial
reporting as of December 29, 2013, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992
Framework) and our report dated February 25, 2014, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 25, 2014
51
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
North America revenues:
Domestic Company-owned restaurant sales
Franchise royalties
Franchise and development fees
Domestic commissary sales
Other sales
International revenues:
Royalties and franchise and development fees
Restaurant and commissary sales
Total revenues
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales
Salaries and benefits
Advertising and related costs
Occupancy costs
Other restaurant operating expenses
Total domestic Company-owned restaurant expenses
Domestic commissary expenses:
Cost of sales
Salaries and benefits
Other commissary operating expenses
Total domestic commissary expenses
Other operating expenses
International restaurant and commissary expenses
General and administrative expenses
Other general expenses
Depreciation and amortization
Total costs and expenses
Operating income
Investment income
Interest expense
Income before income taxes
Income tax expense
Net income before attribution to noncontrolling interests
Income attributable to noncontrolling interests
Net income attributable to the Company
Calculation of income for earnings per share:
Net income attributable to the Company
Increase in noncontrolling interest redemption value
Net income attributable to participating securities
Net income attributable to common shareholders
Basic earnings per common share
Earnings per common share - assuming dilution
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
December 29,
2013
Years Ended
December 30,
2012
December 25,
2011
$
635,317
81,692
1,181
578,870
53,322
$
592,203
79,567
806
545,924
51,223
$
525,841
73,694
722
508,155
50,912
21,979
66,661
1,439,022
19,881
53,049
1,342,653
16,327
42,231
1,217,882
156,237
173,316
59,172
36,546
92,280
517,551
137,378
163,260
54,583
34,734
85,847
475,802
126,887
142,093
49,035
32,278
75,558
425,851
448,693
25,123
60,526
534,342
48,011
56,609
134,228
6,673
35,105
1,332,519
106,503
589
(983)
106,109
33,130
72,979
(3,442)
69,537
$
426,531
22,237
55,266
504,034
45,455
44,853
131,591
8,313
32,798
1,242,846
99,807
750
(2,162)
98,395
32,393
66,002
(4,342)
61,660
$
397,323
20,713
50,932
468,968
46,316
35,674
111,608
9,767
32,681
1,130,865
87,017
755
(2,981)
84,791
26,324
58,467
(3,732)
54,735
$
$
69,537
$
61,660
$
54,735
(510)
-
-
(530)
68,497
$
-
61,660
$
-
54,735
$
$
$
1.58
1.55
$
$
1.31
1.29
$
$
1.09
1.08
43,387
44,243
46,916
47,810
50,086
50,620
Dividends declared per common share
$
0.25
$
-
$
-
Supplemental data (see Note 16):
Revenues - affiliates
See accompanying notes.
$
3,259
$
29,310
$
28,078
52
Papa John's International, Inc. and S ubsidiaries
Consolidated S tatements of Comprehensive Income
(In thousands)
Years Ended
December 29, December 30, December 25,
2012
2011
2013
Net income before attribution to noncontrolling interests
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments
Interest rate swaps (1)
Defined benefit pension plan
Other comprehensive income (loss), before tax
Income tax effect:
Foreign currency translation adjustments
Interest rate swaps (2)
Defined benefit pension plan
Income tax effect
Other comprehensive income (loss), net of tax
Comprehensive income before attribution to noncontrolling interests
Comprehensive income, redeemable noncontrolling interests
Comprehensive income, nonredeemable noncontrolling interests
Comprehensive income attributable to the Company
$
72,979
$
66,002
$
58,467
1,065
(51)
-
1,014
(394)
19
-
(375)
639
73,618
(3,466)
24
70,176
$
1,128
(114)
45
1,059
864
258
(45)
1,077
(1,110)
42
(16)
(1,084)
(25)
65,977
(4,342)
-
61,635
$
-
(93)
16
(77)
1,000
59,467
(3,732)
-
55,735
$
(1) Amounts reclassified out of accumulated other comprehensive income (“AOCI”) into interest expense included
$501, $150 and $341 for the years ended December 29, 2013, December 30, 2012 and December 25, 2011, respectively.
(2) The income tax effects of amounts reclassified out of AOCI into interest expense were $185, $55 and $126
for the years ended December 29, 2013, December 30, 2012 and December 25, 2011, respectively.
See accompanying notes.
53
Papa John’s International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable (less allowance for doubtful
accounts of $4,318 in 2013 and $3,057 in 2012)
Accounts receivable - affiliates (no allowance for doubtful
accounts in 2013 and 2012)
Notes receivable (no allowance for doubtful accounts in 2013 and 2012)
Inventories
Deferred income taxes
Prepaid expenses
Other current assets
Total current assets
Net property and equipment
Notes receivable, less current portion (less allowance for doubtful
accounts of $3,387 in 2013 and $5,028 in 2012)
Goodwill
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Income and other taxes payable
Accrued expenses and other current liabilities
Total current liabilities
Deferred revenue
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Redeemable noncontrolling interests
Stockholders’ equity:
Years Ended
December 29,
2013
December 30,
2012
$
13,670
$
16,396
52,919
43,585
284
3,566
23,035
8,004
14,336
9,226
125,040
212,097
1,062
4,577
22,178
10,279
12,782
7,767
118,626
196,661
13,239
79,391
34,524
464,291
$
12,536
78,958
31,627
438,408
$
$
35,653
4,401
57,807
97,861
5,827
157,900
14,660
42,835
319,083
$
32,624
10,429
60,528
103,581
7,329
88,258
10,672
40,674
250,514
7,024
6,380
Preferred stock ($0.01 par value per share; no shares issued)
Common stock ($0.01 par value per share; issued 42,796 in 2013 and 74,176 in 2012)
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Treasury stock (1,129 shares in 2013 and 29,694 shares in 2012, at cost)
Total stockholders' equity, net of noncontrolling interests
Noncontrolling interests in subsidiaries
Total stockholders' equity
Total liabilities, redeemable noncontrolling interests and stockholders' equity
-
428
137,552
2,463
41,297
(44,066)
137,674
510
138,184
464,291
$
-
742
280,534
1,824
356,461
(458,047)
181,514
-
181,514
438,408
$
See accompanying notes.
54
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands)
Balance at December 26, 2010
Net income attributable to the Company (1)
Other comprehensive income
Exercise of stock options
Tax effect of equity awards
Acquisition of Company common stock
Stock-based compensation expense
Issuance of restricted stock
Other
Balance at December 25, 2011
Net income attributable to the Company (1)
Other comprehensive income
Exercise of stock options
Tax effect of equity awards
Acquisition of Company common stock
Stock-based compensation expense
Issuance of restricted stock
Other
Balance at December 30, 2012
Net income attributable to the Company (1)
Other comprehensive income
Cash dividends paid
Exercise of stock options
Tax effect of equity awards
Acquisition of Company common stock
Retirement of Company common stock
Stock-based compensation expense
Issuance of restricted stock
Change in redemption value of
noncontrolling interests
Reclassification from temporary equity to
permanent equity
Contributions from noncontrolling interests
Other
Balance at December 29, 2013
Common
Stock
Shares
Outstanding
50,878
-
-
1,144
-
(4,168)
-
184
-
48,038
-
-
864
-
(4,552)
-
132
-
44,482
-
-
-
570
-
(3,536)
-
-
138
Papa John's International, Inc.
Common
Stock
Additional
Paid-In
Capital
$
722
-
-
12
-
-
-
-
-
734
-
-
8
-
-
-
-
-
742
-
-
-
6
-
-
(320)
-
-
$
245,019
-
-
14,030
(1,400)
-
6,704
(2,253)
(11)
262,089
-
-
12,256
933
-
6,905
(1,582)
(67)
280,534
-
-
41
6,859
1,172
-
(156,380)
7,409
(2,187)
Accumulated
Other
Comprehensive
Income (Loss)
849
$
-
1,000
-
-
-
-
-
-
1,849
-
(25)
-
-
-
-
-
-
1,824
-
639
-
-
-
-
-
-
-
Retained
Earnings
240,066
$
54,735
-
-
-
-
-
-
-
294,801
61,660
-
-
-
-
-
-
-
356,461
69,537
-
(10,751)
-
-
-
(373,440)
-
-
$
Treasury
Stock
(291,048)
-
-
-
-
(65,323)
-
2,253
292
(353,826)
-
-
-
-
(106,095)
-
1,582
292
(458,047)
-
-
-
-
-
(118,569)
530,140
-
2,187
Noncontrolling
Interests in
Subsidiaries
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(24)
-
-
-
-
-
-
-
-
Total
Stockholders’
Equity
$
195,608
54,735
1,000
14,042
(1,400)
(65,323)
6,704
-
281
205,647
61,660
(25)
12,264
933
(106,095)
6,905
-
225
181,514
69,513
639
(10,710)
6,865
1,172
(118,569)
-
7,409
-
-
-
-
-
(510)
-
-
(510)
-
-
13
41,667
-
-
-
428
$
-
-
104
137,552
$
-
-
-
2,463
$
-
-
-
41,297
$
-
-
223
(44,066)
$
434
100
-
$
510
434
100
327
138,184
$
(1) Net income to the Company at December 29, 2013, December 30, 2012 and December 25, 2011 excludes $3,442, $4,342 and
$3,732, respectively, allocable to the noncontrolling interests for our joint venture arrangements.
At December 25, 2011, the accumulated other comprehensive income of $1,849 was comprised of unrealized foreign currency
translation gains of $1,872, a net unrealized gain on the interest rate swap agreement of $6, offset by a $29 pension plan liability.
At December 30, 2012, the accumulated other comprehensive income of $1,824 was comprised of unrealized foreign currency
translation gains of $1,889, offset by a net unrealized loss on the interest rate swap agreement of $65.
At December 29, 2013, the accumulated other comprehensive income of $2,463 was comprised of unrealized foreign currency
translation gains of $2,561, offset by a net unrealized loss on the interest rate swap agreement of $98.
See accompanying notes.
55
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Operating activities
Net income before attribution to noncontrolling interests
Adjustments to reconcile net income to net cash provided by operating activities:
December 29,
2013
Years Ended
December 30,
2012
December 25,
2011
$
72,979
$
66,002
$
58,467
Disposition and impairment losses
Provision for uncollectible accounts and notes receivable
Depreciation and amortization
Deferred income taxes
Stock-based compensation expense
Excess tax benefit on equity awards
Other
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
Inventories
Prepaid expenses
Other current assets
Other assets and liabilities
Accounts payable
Income and other taxes payable
Accrued expenses and other current liabilities
Deferred revenue
Net cash provided by operating activities
Investing activities
Purchases of property and equipment
Loans issued
Repayments of loans issued
Acquisitions, net of cash acquired
Proceeds from divestitures of restaurants
Other
Net cash used in investing activities
Financing activities
Net proceeds (repayments) on line of credit facility
Cash dividends paid
Excess tax benefit on equity awards
Tax payments for equity award issuances
Proceeds from exercise of stock options
Acquisition of Company common stock
Contributions from noncontrolling interest holders
Distributions to noncontrolling interest holders
Other
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes.
-
1,921
35,105
10,603
7,409
(4,755)
2,767
(11,058)
(857)
(1,553)
(1,458)
(3,728)
3,029
(6,027)
(2,536)
(481)
101,360
(50,750)
(6,095)
7,068
-
-
339
(49,438)
269
1,674
32,798
2,035
6,905
(1,967)
2,961
(18,048)
(1,947)
(2,572)
(1,667)
(3,952)
(342)
6,460
12,209
3,561
104,379
(42,628)
(4,903)
3,642
(6,175)
908
36
(49,120)
1,200
1,037
32,681
9,345
6,704
(741)
4,556
(4,298)
(2,689)
(2,514)
1,486
(877)
1,397
2,180
(5,685)
(1,241)
101,008
(29,319)
(3,492)
5,357
-
-
68
(27,386)
69,642
(10,797)
4,755
(3,584)
6,865
(118,569)
950
(3,650)
(327)
(54,715)
67
(2,726)
16,396
13,670
$
36,769
-
1,967
(855)
12,264
(106,095)
2,052
(4,256)
225
(57,929)
124
(2,546)
18,942
16,396
$
(47,511)
-
741
(1,041)
14,042
(65,323)
-
(3,669)
160
(102,601)
92
(28,887)
47,829
18,942
$
56
Papa John’s International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business
Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person
notations of “we,” “us” and “our”) operates and franchises pizza delivery and carryout restaurants under
the trademark “Papa John’s,” currently in all 50 states and 34 countries. Substantially all revenues are
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, and 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.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Papa John’s and its
subsidiaries. The results of our Company-owned operations in China were consolidated one month in
arrears until fiscal 2013. The inclusion of the additional month of operations in fiscal 2013 resulted in
$2.1 million of incremental international revenues and an incremental loss before income taxes of
$215,000 reported in the international segment. This change in our consolidation policy did not have a
material impact to our financial results for any of the years presented. All intercompany balances and
transactions have been eliminated.
Fiscal Year
Our fiscal year ends on the last Sunday in December of each year. All fiscal years presented consist of 52
weeks except for the 2012 fiscal year, which consists of 53 weeks.
Variable Interest Entities
Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s
Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even for the purpose
of designing and administering advertising and promotional programs for all participating domestic
restaurants. PJMF is a variable interest entity (“VIE”) as it does not have sufficient equity to fund its
operations without ongoing financial support and contributions from its members. Based on the
ownership and governance structure and operating procedures of PJMF, we have determined that we do
not have the power to direct the most significant activities of PJMF and are therefore not the primary
beneficiary. Accordingly, we determined that consolidation is not appropriate.
In connection with a new multi-year supplier agreement, the Company received a $5.0 million supplier
marketing payment in 2012. The Company is recognizing the supplier marketing payment evenly as
income over the five-year term of the agreement ($1.0 million per year). The Company then contributed
the supplier marketing payment to PJMF for the benefit of domestic restaurants. The Company’s
contribution to PJMF was fully expensed in 2012. PJMF elected to distribute the $5.0 million supplier
marketing payment to the domestic system as advertising credits in 2012. Our domestic Company-owned
restaurants’ portion of the advertising credits resulted in an increase in income before income taxes of
approximately $1.0 million in 2012.
57
2. Significant Accounting Policies (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. Significant items that
are subject to such estimates and assumptions include allowance for doubtful accounts and notes
receivable, intangible assets, online customer loyalty program obligation, insurance reserves and tax
reserves. Although management bases its estimates on historical experience and assumptions that are
believed to be reasonable under the circumstances, actual results could significantly differ from these
estimates.
Reclassifications
Certain prior year amounts in the consolidated statements of income have been reclassified to conform to
the current year presentation, which had no effect on current or previously reported net income.
Revenue Recognition
Retail sales from Company-owned restaurants and franchise royalties, which are based on a percentage of
franchise restaurant sales, are recognized as revenues when the products are delivered to or carried out by
customers. Franchise fees are recognized when a franchised restaurant begins operations, at which time
we have performed our obligations related to such fees. Fees received pursuant to development
agreements which grant the right to develop franchised restaurants in future periods in specific geographic
areas are deferred and recognized on a pro rata basis as franchised restaurants subject to the development
agreements begin operations.
Domestic production and distribution revenues are comprised of food, promotional items and supplies
sold to franchised restaurants located in the United States and are recognized as revenue upon shipment of
the related products to the franchisees. Information services, including software maintenance fees, help
desk fees and online ordering fees are recognized as revenue as related services are provided and are
included in other sales. Insurance commissions are recognized as revenue over the term of the policy
period and are included in other sales.
International revenues are comprised of restaurant sales, royalties and fees received from foreign
franchisees and the sale and distribution of food to foreign franchisees, and are recognized consistently
with the policies applied for revenues generated in the United States.
Advertising and Related Costs
Advertising and related costs include the costs of domestic Company-owned local restaurant activities
such as mail coupons, door hangers and promotional items and contributions to PJMF and various local
market cooperative advertising funds (“Co-op Funds”). Contributions by domestic Company-owned and
franchised restaurants to PJMF and the Co-op Funds are based on an established percentage of monthly
restaurant revenues. PJMF is responsible for developing and conducting marketing and advertising for the
domestic Papa John’s system. The Co-op Funds are responsible for developing and conducting
advertising activities in a specific market, including the placement of electronic and print materials
developed by PJMF. We recognize domestic Company-owned restaurant contributions to PJMF and the
Co-op Funds in which we do not have a controlling interest in the period in which the contribution
accrues. The net assets of the Co-op Funds in which we possess majority voting rights, and thus control
the cooperatives, are included in our consolidated balance sheets.
58
2. Significant Accounting Policies (continued)
Leases
Lease expense is recognized on a straight-line basis over the expected life of the lease term. A lease term
often includes option periods, available at the inception of the lease, when failure to renew the lease
would impose a penalty to us. Such penalty may include the recognition of impairment on our leasehold
improvements should we choose not to continue the use of the leased property.
Stock-Based Compensation
Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures, and is
recognized over the vesting period (generally in equal installments over three years). Restricted stock is
valued based on the market price of the Company’s shares on the date of grant. Stock options are valued
using a Black-Scholes option pricing model. Our specific assumptions for estimating the fair value of
options are included in Note 18.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturity of three months or less at date of
purchase. These investments are carried at cost, which approximates fair value.
Accounts Receivable
Substantially all accounts receivable are due from franchisees for purchases of food, paper products,
restaurant equipment, printing and promotional items, risk management services, information systems and
related services, and royalties. Credit is extended based on an evaluation of the franchisee’s financial
condition and, generally, collateral is not required. A reserve for uncollectible accounts is established as
deemed necessary based upon overall accounts receivable aging levels and a specific review of accounts
for franchisees with known financial difficulties. Account balances are charged off against the allowance
after recovery efforts have ceased.
Notes Receivable
The Company provides financing to select franchisees principally for use in the acquisition, construction
and development of their restaurants and for the purchase of restaurants from the Company. Notes
receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant
and the ownership interests in the franchise. We establish an allowance based on a review of each
borrower’s economic performance and underlying collateral value. Note balances are charged off against
the allowance after recovery efforts have ceased.
Inventories
Inventories, which consist of food products, paper goods and supplies, smallwares, and printing and
promotional items, are stated at the lower of cost, determined under the first-in, first-out (FIFO) method,
or market.
59
2. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets (generally five to ten years for restaurant, commissary and other
equipment, and 20 to 40 years for buildings and improvements). Leasehold improvements are amortized
over the terms of the respective leases, including the first renewal period (generally five to ten years).
Depreciation expense was $34.5 million in 2013, $32.1 million in 2012 and $31.9 million in 2011.
Deferred Costs
We defer certain information systems development and related costs that meet established criteria.
Amounts deferred, which are included in property and equipment, are amortized principally over periods
not exceeding five years beginning in the month subsequent to completion of the related information
systems project. Total costs deferred were approximately $3.3 million in 2013, $2.7 million in 2012 and
$1.5 million in 2011. The unamortized information systems development costs approximated $7.5 million
and $5.8 million as of December 29, 2013 and December 30, 2012, respectively.
Intangible Assets – Goodwill
We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or
circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying
amount. Such tests are completed separately with respect to the goodwill of each of our reporting units.
We may perform a qualitative assessment or move directly to the quantitative assessment for any
reporting unit in any period if we believe that it is more efficient or if impairment indicators exist.
We applied the qualitative assessment for our domestic Company-owned restaurants and China reporting
unit, which is included in our international reporting segment. As a result of our qualitative analysis, we
determined that it was more-likely-than-not that the fair value of our domestic Company-owned
restaurants and China reporting unit were greater than their carrying amounts. With respect to the
reporting unit for our subsidiary located in the United Kingdom (“PJUK”), which represents $15.7
million of goodwill as of December 29, 2013, we bypassed the qualitative assessment and performed the
two-step quantitative goodwill impairment test, which indicated the fair value significantly exceeded the
carrying amount. The fair value was calculated using an income approach that projected net cash flow,
with various growth assumptions, over a ten-year discrete period and a terminal value, which were
discounted using appropriate rates. The selected discount rate considers the risk and nature of our PJUK
reporting unit’s cash flow and the rates of return market participants would require to invest their capital
in the PJUK reporting unit.
Subsequent to completing our annual qualitative and quantitative goodwill impairment tests, no
indications of impairment were identified.
60
2. Significant Accounting Policies (continued)
Deferred Income Tax Accounts 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.
The provision for income taxes includes income taxes paid, currently payable or receivable and those
deferred.
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 new tax is enacted. Valuation allowances are established when necessary on a
jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.
Tax authorities periodically audit the Company. We record reserves and related interest and penalties for
identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute
of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for
such exposures.
Insurance Reserves
Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles,
property, and health insurance coverage provided to our employees are funded by the Company up to
certain retention levels. Losses are accrued based upon undiscounted 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 differ significantly from historical trends used to estimate the insurance reserves recorded
by the Company.
Derivative Financial Instruments
We recognize all derivatives on the balance sheet at fair value. At inception and on an ongoing basis, we
assess whether each derivative that qualifies for hedge accounting continues to be highly effective in
offsetting changes in the cash flows of the hedged item. If the derivative meets the hedge criteria as
defined by certain accounting standards, depending on the nature of the hedge, changes in the fair value
of the derivative are either offset against the change in fair value of assets, liabilities or firm
commitments through earnings or recognized in accumulated other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value, if
any, is immediately recognized in earnings.
We recognized a loss of $51,000 ($32,000 after tax) in 2013, a loss of $114,000 ($72,000 after tax) in
2012 and income of $258,000 ($165,000 after tax) in 2011, in accumulated other comprehensive income
for the net change in the fair value of our interest rate swap. See Note 9 for additional information on our
debt and credit arrangements.
61
2. Significant Accounting Policies (continued)
Noncontrolling Interests
The Company has the following four joint ventures in which there are noncontrolling interests:
Joint Venture
Redemption Feature
Location within the
Consolidated Balance Sheet
Colonel’s Limited, LLC Mandatorily redeemable Other long-term liabilities
Star Papa, LP
PJ Denver, LLC
PJ Minnesota, LLC
Redeemable
Redeemable
No redemption feature
Temporary equity
Temporary equity
Permanent equity
Recorded value
Redemption value
Carrying value
Redemption value
Carrying value
Consolidated net income is required to be reported separately at amounts attributable to both the parent
and the noncontrolling interest. Additionally, disclosures are required to clearly identify and distinguish
between the interests of the parent company and the interests of the noncontrolling owners, including a
disclosure on the face of the consolidated statements of income attributable to the noncontrolling interest
holder.
See Note 6 for additional information regarding noncontrolling interests.
Foreign Currency Translation
The local currency is the functional currency for our foreign subsidiaries located in the United Kingdom,
Mexico and China. Earnings and losses are translated into U.S. dollars using monthly average exchange
rates, while assets and liabilities are translated using year-end exchange rates. The resulting translation
adjustments are included as a component of accumulated other comprehensive income (loss) net of
income taxes.
3. Stockholders’ Equity
Shares Authorized and Outstanding
The Company has authorized 5.0 million preferred shares and 50.0 million common shares (such
authorization was not impacted by the two-for-one stock split described below). The Company’s
outstanding common shares, net of repurchased Company stock, were 41.7 million shares at December
29, 2013 and 44.5 million shares at December 30, 2012. There were no preferred shares issued or
outstanding at December 29, 2013 and December 30, 2012.
Two-for-one Stock Split and Treasury Retirement
On October 29, 2013, our Board of Directors approved a two-for-one stock split of our outstanding
shares. The stock split was effected in the form of a stock dividend and entitled each shareholder of
record at the close of business on December 12, 2013 to receive one additional share for every
outstanding share of stock held on the record date. The stock dividend was distributed on December 27,
2013 with approximately 21.0 million shares of stock distributed. All per share and share amounts in the
accompanying consolidated financial statements and notes to the financial statements have been adjusted
to reflect the stock split.
In conjunction with the stock split, we retired shares held in treasury as of October 29, 2013, the date of
approval by our Board of Directors.
62
3. Stockholders’ Equity (continued)
Share Repurchase Program
Our Board of Directors has authorized the repurchase of up to $1.2 billion of common stock under a share
repurchase program that began on December 9, 1999 and expires on December 31, 2014. Funding for the
share repurchase program has been provided through a credit facility, operating cash flow, stock option
exercises and cash and cash equivalents.
We repurchased 3.5 million and 4.6 million shares of our common stock for $118.6 million and $106.1
million in 2013 and 2012, respectively.
Subsequent to year end through February 18, 2014, the Company acquired an additional 236,000 shares at
an aggregate cost of $11.0 million. As of February 18, 2014, $110.9 million was available for repurchase
of common stock under this authorization.
Cash Dividend
The Company initiated quarterly cash dividends to its shareholders during 2013. The Company paid a
$0.125 per share dividend on September 20, 2013 (record date of September 6, 2013) and a second
$0.125 dividend on November 22, 2013 (record date of November 11, 2013). The combined payment for
both dividends was approximately $10.8 million.
Subsequent to fiscal 2013, on January 30, 2014, our Board of Directors declared a first quarter 2014 cash
dividend of $0.125 per share, or approximately $5.2 million. The dividend was paid on February 21, 2014
to shareholders of record as of the close of business on February 10, 2014.
4. Earnings per Share
We compute earnings per share using the two-class method. The two-class method requires an earnings
allocation formula that determines earnings per share for common shareholders and participating security
holders according to dividends declared and participating rights in undistributed earnings. We consider
time-based restricted stock awards to be participating securities because holders of such shares have non-
forfeitable dividend rights. Under the two-class method, undistributed earnings allocated to participating
securities are subtracted from net income attributable to the Company in determining net income
attributable to common shareholders.
Additionally, in accordance with ASC 480, Distinguishing Liabilities from Equity, the increase in the
redemption value for the noncontrolling interest of PJ Denver, LLC reduces income attributable to
common shareholders.
Basic earnings per common share is computed by dividing net income attributable to common
shareholders by the weighted-average common shares outstanding. Earnings per common share –
assuming dilution is computed by dividing the net income attributable to common shareholders by the
diluted weighted average common shares outstanding. Diluted weighted average common shares
outstanding consists of basic weighted average common shares outstanding plus weighted average awards
outstanding under our equity compensation plans, which are dilutive securities.
63
4. Earnings per Share (continued)
The calculations of basic earnings per common share and earnings per common share – assuming dilution
for the years ended December 29, 2013, December 30, 2012 and December 25, 2011 are as follows (in
thousands, except per share data):
2013
2012
2011
Basic earnings per common share:
Net income attributable to the Company
Increase in noncontrolling interest redemption value
Net income attributable to participating securities
Net income attributable to common shareholders
$
$
$
69,537
(510)
(530)
68,497
61,660
-
-
61,660
$
$
$
54,735
-
-
54,735
Weighted average common shares outstanding
Basic earnings per common share
43,387
1.58
$
46,916
1.31
$
50,086
1.09
$
Earnings per common share - assuming dilution:
Net income attributable to common shareholders
$
68,497
$
61,660
$
54,735
Weighted average common shares outstanding
Dilutive effect of outstanding equity awards
Diluted weighted average common shares outstanding
Earnings per common share - assuming dilution
43,387
856
44,243
1.55
$
46,916
894
47,810
1.29
$
50,086
534
50,620
1.08
$
Shares subject to options to purchase common stock with an exercise price greater than the average
market price for the year were not included in the computation of earnings per common share – assuming
dilution because the effect would have been antidilutive. The weighted average number of shares subject
to antidilutive options was 129,000 in 2013 and 273,000 in 2011 (none in 2012).
See Note 6 for additional information regarding our noncontrolling interests and Note 18 for equity
awards, including restricted stock.
5. Fair Value Measurements and Disclosures
We are required to determine the fair value of financial assets and liabilities based on the price that would
be received to sell the asset or paid to transfer the liability to a market participant. Fair value is a market-
based measurement, not an entity specific measurement. The fair value of certain assets and liabilities
approximates carrying value because of the short-term nature of the accounts, including cash, accounts
receivable and accounts payable. The fair value of our notes receivable net of allowances also
approximates carrying value. The fair value of the amount outstanding under our revolving credit facility
approximates its carrying value due to its variable market-based interest rate. These assets and liabilities
are categorized as Level 1 as defined below.
64
5. Fair Value Measurements and Disclosures (continued)
Certain assets and liabilities are measured at fair value on a recurring basis and are required to 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 were measured at fair value on a recurring basis as of December
29, 2013 and December 30, 2012 are as follows (in thousands):
Carrying
Value
Fair Value Measurements
Level 2
Level 1
Level 3
December 29, 2013
Financial assets:
Cash surrender value of life insurance policies (a)
Financial liabilities:
Interest rate swap (b)
December 30, 2012
Financial assets:
Cash surrender value of life insurance policies (a)
Financial liabilities:
Interest rate swap (b)
$
16,798
$
16,798
$
-
$
-
76
-
76
-
$
13,551
$
13,551
$
-
$
-
104
-
104
-
(a) Represents life insurance policies held in our non-qualified deferred compensation plan.
(b) The fair value of our interest rate swap is based on the sum of all future net present value cash flows.
The future cash flows are derived based on the terms of our interest rate swap, as well as considering
published discount factors, and projected London Interbank Offered Rates (“LIBOR”).
There were no transfers among levels within the fair value hierarchy during fiscal 2013 or 2012.
65
6. Noncontrolling Interests
Papa John’s has joint ventures in which there are noncontrolling interests, consisting of the following as
of December 29, 2013, December 30, 2012 and December 25, 2011:
Number of
Restaurants
Restaurant
Locations
Papa John's
Ownership
Noncontrolling
Interest
Ownership
December 29, 2013
Star Papa, LP
Colonel's Limited, LLC
PJ Minnesota, LLC
PJ Denver, LLC
December 30, 2012
Star Papa, LP
Colonel's Limited, LLC
PJ Minnesota, LLC
PJ Denver, LLC
December 25, 2011
Star Papa, LP
Colonel's Limited, LLC
81
52
33
25
78
52
30
22
76
52
Texas
Maryland and Virginia
Minnesota
Colorado
Texas
Maryland and Virginia
Minnesota
Colorado
Texas
Maryland and Virginia
51%
70%
80%
60%
51%
70%
80%
60%
51%
70%
49%
30%
20%
40%
49%
30%
20%
40%
49%
30%
The income before income taxes attributable to these joint ventures for the last three years was as follows
(in thousands):
2013
2012
2011
Papa John's International, Inc.
Noncontrolling interests
Total income before income taxes
$
$
5,121
3,442
8,563
$
6,823
4,342
11,165
$
$
$
6,184
3,732
9,916
The Colonel’s Limited, LLC agreement contains a mandatory redemption clause and, accordingly, the
Company has recorded this noncontrolling interest as a liability at its redemption value in other long-term
liabilities. The redemption value is adjusted at each reporting date and any change is recorded in interest
expense. The adjustment to interest expense was income of $1.1 million in 2013, $1.0 million of expense
in 2012 and $1.5 million of expense in 2011. The redemption value was $10.8 million as of December 29,
2013 and $11.8 million as of December 30, 2012.
66
6. Noncontrolling Interests (continued)
The noncontrolling interest holders of two other joint ventures have the option to require the Company to
purchase their interests. Since redemption of the noncontrolling interests is outside of the Company’s
control, the noncontrolling interests are presented in the caption “Redeemable noncontrolling interests” in
the consolidated balance sheets and include the following joint ventures:
• The Star Papa, LP agreement contains a redemption feature that is not currently redeemable, but
it is probable to become redeemable in the future. Due to specific valuation provisions contained
in the agreement, this noncontrolling interest has been recorded at its carrying value.
• The PJ Denver, LLC agreement contains a redemption feature that is currently redeemable and,
therefore, this noncontrolling interest has been recorded at its current redemption value. The
change in redemption value is recorded as an adjustment to “Redeemable noncontrolling
interests” and “Retained earnings” in the consolidated balance sheets.
We have a fourth joint venture, PJ Minnesota, LLC, that had a redemption feature until a contract
amendment removed the redemption feature in the fourth quarter of 2013. The noncontrolling interest was
reclassified from temporary equity to “Stockholders’ equity” in the consolidated balance sheet at
December 29, 2013, at carrying value.
The following summarizes changes in our redeemable noncontrolling interests (in thousands):
$
$
3,965
2,363
2,052
(2,000)
6,380
1,718
850
(2,000)
510
(434)
7,024
$
Balance at December 25, 2011
Net income
Contributions from redeemable noncontrolling interest holders
Distributions to redeemable noncontrolling interest holders
Balance at December 30, 2012
Net income
Contributions from redeemable noncontrolling interest holders
Distributions to redeemable noncontrolling interest holders
Change in redemption value
Reclassification from temporary equity to permanent equity
Balance at December 29, 2013
67
7. Acquisitions
During 2012, we acquired 56 franchised Papa John’s restaurants located in the Denver and Minneapolis
markets. The purchase price, which was paid in cash, was $5.2 million net of divestiture proceeds of
$700,000 from the sale of six restaurants located in the Denver market to an existing franchisee. This
business combination was accounted for by the purchase method of accounting, whereby operating results
subsequent to the acquisition date are included in our consolidated financial results.
The purchase price of the acquisition has been allocated based on fair value estimates as follows (in
thousands):
Property and equipment
Reacquired franchise right
Goodwill
Other, including cash
Total purchase price
$
1,602
245
3,830
239
5,916
$
The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to
goodwill, all of which is eligible for deduction over 15 years under the U.S. tax regulations.
In July 2012, Papa John’s and a third party formed a limited liability company (PJ Minnesota, LLC) to
operate the previously acquired Minneapolis restaurants. The Company’s equity (80% ownership) in the
operations was funded by the contribution of the acquired restaurants, while the third party’s equity (20%
ownership) was funded through a $275,000 loan issued by Papa John’s and a $25,000 cash contribution.
There was no gain or loss on this transaction. We are required to fully consolidate the financial results of
this limited liability company. See Note 6 for additional information.
In September 2012, Papa John’s and a third party formed a limited liability company (PJ Denver, LLC) to
operate the previously acquired Denver restaurants. The Company’s equity (60% ownership) in the
operations was funded by the contribution of the acquired restaurants and cash (total value of $2.5
million), while the third party’s equity (40% ownership) was funded by a cash contribution of $1.7
million. There was no gain or loss on this transaction. We are required to fully consolidate the financial
results of this limited liability company. See Note 6 for additional information.
There were no significant acquisitions during 2013 or 2011.
68
8. Goodwill
The following summarizes changes to the Company’s goodwill, by reporting segment (in thousands):
Domestic
Company-
owned
Restaurants
International (a)
$
$
All
Others
436
$
-
-
-
436
-
$
436
Total
$
75,085
3,943
(636)
566
78,958
433
79,391
19,389
-
-
566
19,955
433
20,388
$
$
$
Balance as of December 25, 2011
Acquisitions (b)
Divestitures
Foreign currency adjustments
Balance as of December 30, 2012
Foreign currency adjustments
Balance as of December 29, 2013
55,260
3,943
(636)
-
58,567
-
58,567
(a) The international goodwill balances for all years presented are net of accumulated impairment of $2.3
million associated with our PJUK reporting unit, which was recorded in fiscal 2008.
(b) Includes 56 restaurants located in the Denver and Minneapolis markets and one restaurant in another
market.
For fiscal years 2011-2013, we performed a qualitative analysis for our domestic Company-owned
restaurants and our China reporting unit. For our PJUK reporting unit, which is included in the
international reporting segment, we performed a quantitative analysis. Upon completion of our goodwill
impairment tests in 2011-2013, no impairment charges were recorded.
9. Debt and Credit Arrangements
Our debt is comprised entirely of a revolving credit facility. The outstanding balance under this facility
was $157.9 million as of December 29, 2013 and $88.3 million as of December 30, 2012.
In September 2010, we entered into a five-year, $175 million unsecured revolving credit facility, which
was amended in November 2011 to extend the maturity date to November 30, 2016. On April 30, 2013,
we amended and restated our revolving credit facility to increase the amount available for borrowing
thereunder to $300 million and extend the maturity date to April 30, 2018. The interest rate charged on
outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance
ranges from 15 to 25 basis points. The remaining availability under the revolving credit facility, reduced
for outstanding letters of credit, was approximately $121.4 million as of December 29, 2013.
The credit facility contains customary affirmative and negative covenants, including financial covenants
requiring the maintenance of specified fixed charges and leverage ratios. At December 29, 2013, we were
in compliance with these covenants.
69
9. Debt and Credit Arrangements (continued)
In August 2011, we entered into an interest rate swap agreement that resulted in a fixed rate of 0.53%,
instead of the variable rate of LIBOR, with a notional amount of $50.0 million and a maturity date of
August 2013. On December 31, 2012, we amended our interest rate swap agreement to extend the
maturity date to December 30, 2015. The amendment resulted in a change to the fixed rate (to 0.56%
from 0.53%) but did not impact the notional amount of the interest rate swap agreement. On July 30,
2013, we terminated the $50 million swap and entered into a new $75 million swap. The new swap has an
interest rate of 1.42% and a maturity date of April 30, 2018, which coincides with the maturity date of our
revolving credit facility. The termination of the previous swap did not have a material impact on our 2013
results.
Our swap is a derivative instrument that is designated as a cash flow hedge because the swap provides a
hedge against the effects of rising interest rates on borrowings. The effective portion of the gain or loss on
the swap is reported as a component of accumulated other comprehensive income and reclassified into
earnings in the same period or periods during which the swap affects earnings. Gains or losses on the
swap representing either hedge ineffectiveness or hedge components excluded from the assessment of
effectiveness are recognized in current earnings. Amounts payable or receivable under the swap are
accounted for as adjustments to interest expense. As of December 29, 2013, the swap is a highly effective
cash flow hedge with no ineffectiveness during the period ended December 29, 2013.
The following table provides information on the location and amounts of our swaps in the accompanying
consolidated financial statements (in thousands):
Liability Derivatives
Balance Sheet Location
Fair Value
Dec. 29,
2013
Fair Value
Dec. 30,
2012
Interest rate swaps
Other long-term liabilities
$
76
$
104
There were no derivatives that were not designated as hedging instruments.
70
9. Debt and Credit Arrangements (continued)
The effect of derivative instruments on the accompanying consolidated financial statements is as follows
(in thousands):
Amount of Gain
or (Loss)
Recognized in
Accumulated
OCI on
Derivative
(Effective
Portion)
Location of Gain
or (Loss)
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)
Amount of Gain
or (Loss)
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)
Derivatives -
Cash Flow
Hedging
Relationships
Interest rate swaps:
Location of Gain
or (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
Amount of Gain
or (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
2013
2012
2011
$
$
$
(32)
(72)
165
Interest expense
Interest expense
Interest expense
$
$
$
(501)
(150)
(341)
Interest expense
Interest expense
Interest expense
$
-
$
-
$
65
The weighted average interest rates for the credit facilities, including the impact of the previously
mentioned swap agreements, were 1.4%, 1.3% and 1.9% in fiscal 2013, 2012 and 2011, respectively.
Interest paid, including payments made or received under the swaps, was $2.0 million in 2013, $967,000
in 2012 and $1.6 million in 2011. As of December 29, 2013, the portion of the $76,000 liability
associated with the interest rate swap that would be reclassified into earnings during the next 12 months
as interest expense approximates $17,000.
10. Net Property and Equipment
Net property and equipment consists of the following (in thousands):
2013
2012
$
$
33,000
86,763
106,487
280,381
20,155
526,786
(314,689)
212,097
32,776
86,219
96,652
249,055
23,262
487,964
(291,303)
196,661
$
$
Land
Buildings and improvements
Leasehold improvements
Equipment and other
Construction in progress
Total property and equipment
Accumulated depreciation and amortization
Net property and equipment
71
11. Notes Receivable
Selected franchisees have borrowed funds from the Company, principally for use in the acquisition,
construction and development of their restaurants. We have also entered into loan agreements with certain
franchisees that purchased restaurants from us or from other franchisees. Loans outstanding were
approximately $16.8 million and $17.1 million on a consolidated basis as of December 29, 2013 and
December 30, 2012, respectively, net of allowance for doubtful accounts.
Notes receivable bear interest at fixed or floating rates and are generally secured by the assets of each
restaurant and the ownership interests in the franchisee. The carrying amounts of the loans approximate
fair value. Interest income recorded on franchisee loans was approximately $527,000 in 2013, $631,000
in 2012 and $665,000 in 2011 and is reported in investment income in the accompanying consolidated
statements of income.
Based on our review of certain borrowers’ economic performance and underlying collateral value, we
established allowances of $3.4 million and $5.0 million as of December 29, 2013 and December 30, 2012,
respectively, for potentially uncollectible notes receivable. The following summarizes changes in our
notes receivable allowance for doubtful accounts (in thousands):
Balance as of December 25, 2011
Charged to costs and expenses
Deductions, including notes written off
Balance as of December 30, 2012
Recovered from costs and expenses
Deductions, including notes written off
Balance as of December 29, 2013
12. Insurance Reserves
$
5,905
280
(1,157)
5,028
(495)
(1,146)
3,387
$
The following table summarizes changes in our insurance program reserves (in thousands):
Balance as of December 25, 2011
Expense
Payments
Balance as of December 30, 2012
Expense
Payments
Balance as of December 29, 2013
$
19,278
27,728
(24,703)
22,303
23,187
(26,025)
19,465
$
We are a party to standby letters of credit with off-balance sheet risk associated with our insurance
programs. The total amount committed under letters of credit for these programs was $20.6 million at
December 29, 2013.
72
13. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
2013
2012
Salaries, benefits and bonuses
Purchases
Insurance reserves, current
Rent
Customer loyalty program
Consulting and professional fees
Utilities
Deposits
Marketing
Other
Total
$
$
20,166
10,349
7,907
7,024
1,682
1,670
1,381
1,370
1,353
4,905
57,807
22,370
9,903
11,532
6,314
1,137
1,766
1,240
761
1,079
4,426
60,528
$
$
14. Other Long-term Liabilities
Other long-term liabilities consist of the following (in thousands):
2013
2012
Deferred compensation plan
Insurance reserves
Mandatorily redeemable noncontrolling interests
Other
Total
$
$
15,798
11,558
10,786
4,693
42,835
12,775
10,771
11,837
5,291
40,674
$
$
15. Income Taxes
A summary of the provision for income taxes follows (in thousands):
2013
2012
2011
Current:
Federal
Foreign
State and local
Deferred (federal and state)
Total
$
$
$
19,731
1,974
822
10,603
33,130
26,065
1,669
2,624
2,035
32,393
$
$
$
14,383
1,273
850
9,818
26,324
73
15. Income Taxes (continued)
Significant deferred tax assets (liabilities) follow (in thousands):
Accrued liabilities
Accrued bonuses
Other assets and liabilities
Equity awards
Other
Foreign net operating losses
Valuation allowance on foreign net operating
losses and foreign deferred tax assets
Total deferred tax assets
Deferred expenses
Accelerated depreciation
Goodwill
Other
Total deferred tax liabilities
Net deferred (liability) asset
2013
2012
$
10,584
4,153
10,209
5,974
3,992
7,233
$
10,412
5,365
11,492
5,377
4,643
7,896
(7,682)
34,463
(8,240)
36,945
(5,655)
(16,838)
(13,953)
(4,673)
(41,119)
(6,656)
$
(4,581)
(15,966)
(12,269)
(4,522)
(37,338)
(393)
$
The Company had approximately $34.0 million and $32.5 million of foreign tax net operating loss
carryovers as of December 29, 2013 and December 30, 2012, respectively, for which a full valuation
allowance has been provided. A substantial majority of our foreign tax net operating losses do not have an
expiration date.
The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense for the
years ended December 29, 2013, December 30, 2012 and December 25, 2011 is as follows in both dollars
and as a percentage of income before income taxes ($ in thousands):
2013
2012
2011
Income Tax
Expense
Income
Tax Rate
Income Tax
Expense
Income
Tax Rate
Income Tax
Expense
Income
Tax Rate
Tax at U.S. federal statutory rate
State and local income taxes
Foreign income taxes
Settlement of certain tax issues
Income of consolidated partnerships
attributable to noncontrolling interests
Non-qualified deferred compensation
plan (income) loss
Tax credits and other
Total
$
37,138
1,820
1,974
(909)
35.0%
1.7%
1.9%
(0.9%)
$
34,438
1,936
1,669
305
35.0%
2.0%
1.7%
0.3%
$
29,677
1,702
1,273
(711)
35.0%
2.0%
1.5%
(0.9%)
(1,263)
(1.2%)
(1,604)
(1.6%)
(1,379)
(1.6%)
(599)
(5,031)
33,130
$
(0.6%)
(4.7%)
31.2%
(355)
(3,996)
32,393
$
(0.4%)
(4.1%)
32.9%
153
(4,391)
26,324
$
0.2%
(5.2%)
31.0%
74
15. Income Taxes (continued)
Income taxes paid were $29.3 million in 2013, $25.3 million in 2012 and $15.6 million in 2011.
The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign
jurisdictions. The Company, with few exceptions, is no longer subject to U.S. federal, state and local, or
non-U.S. income tax examinations by tax authorities for years before 2009. The Company is currently
undergoing examinations by various tax authorities. The Company anticipates that the finalization of
these current examinations and other issues could result in a decrease in the liability for unrecognized tax
benefits (and a decrease of income tax expense) of approximately $287,000 during the next 12 months.
The Company had $2.7 million of unrecognized tax benefits at December 29, 2013 of which, if
recognized, would affect the effective tax rate. A reconciliation of the beginning and ending liability for
unrecognized tax benefits is as follows (in thousands):
Balance at December 25, 2011
Additions for tax positions of prior years
Reductions for lapse of statute of limitations
Balance at December 30, 2012
Additions for tax positions of prior years
Reductions for lapse of statute of limitations
Settlements
Balance at December 29, 2013
$
2,988
664
(222)
3,430
170
(241)
(698)
2,661
$
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a part of
income tax expense. The Company’s 2013 and 2012 income tax expense includes interest benefits of
$140,000 and $137,000, respectively. The Company has accrued approximately $707,000 and $846,000
for the payment of interest and penalties as of December 29, 2013 and December 30, 2012, respectively.
16. Related Party Transactions
Certain of our officers and directors own equity interests in entities that franchise restaurants. Following
is a summary of full-year transactions and year-end balances with franchisees owned by related parties,
PJMF and Papa Card, Inc. (in thousands):
2013
2012
2011
Revenues from affiliates:
Commissary sales
Other sales
Franchise royalties
Franchise and development fees
Total
$
$
$
2,426
482
351
-
3,259
23,145
2,394
3,771
-
29,310
22,132
2,352
3,579
15
28,078
$
$
$
Accounts receivable - affiliates
$
284
$
1,062
$
682
The revenues from affiliates were at rates and terms available to independent franchisees. Additionally,
the table excludes transactions and balances in 2013 for a former non-management director.
75
16. Related Party Transactions (continued)
We paid $1.1 million in 2013, $1.1 million in 2012 and $1.0 million in 2011 for charter aircraft services
provided by an entity owned by our Founder, Chairman and Chief Executive Officer.
On November 12, 2013, we repurchased $38.6 million of our common stock (1.0 million shares at the
closing price of $38.61 per share) from our Founder, Chairman and Chief Executive Officer.
17. Litigation, Commitments and Contingencies
Litigation
The Company is involved in a number of lawsuits, claims, investigations and proceedings, including
those specifically identified below, consisting of intellectual property, employment, consumer,
commercial and other matters arising in the ordinary course of business. In accordance with ASC 450
“Contingencies,” the Company has made accruals with respect to these matters, where appropriate, which
are reflected in the Company’s financial statements. We review these provisions at least quarterly and
adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel
and other information and events pertaining to a particular case.
Agne v. Papa John’s International, Inc. et al. is a class action filed on May 28, 2010 in the United States
District Court for the Western District of Washington seeking damages for violations of the Telephone
Consumer Protection Act and Washington State telemarketing laws alleging, among other things that
several Papa John’s franchisees retained a vendor to send unsolicited commercial text message offers
primarily in Washington and Oregon. The court granted plaintiff’s motion for class certification in
November 2012; we filed a petition for permission to appeal the court’s ruling on class certification to the
United States Court of Appeals for the Ninth Circuit.
In February 2013, the parties tentatively agreed to the financial terms of a settlement of the litigation. The
court preliminarily approved the terms in June 2013 and granted final approval of the settlement and fee
award in October 2013, following the close of the claims period. The actual settlement cost was $2.9
million, and all settlement and fee payments were made in 2013.
Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective
action filed in August 2009 in the United States District Court, Eastern District of Missouri, alleging that
delivery drivers were not reimbursed for mileage and expenses in accordance with the Fair Labor
Standards Act. Approximately 3,900 drivers out of a potential class size of 28,800 have opted into the
action. Additionally, in late December 2013, the District Court granted a motion for class certification in
five additional states, which could add an additional 5,000 to 10,000 plaintiffs to the case.
We intend to vigorously defend against all claims in this lawsuit. However, given the inherent
uncertainties of litigation, the outcome of this case cannot be predicted and the amount of any potential
loss cannot be reasonably estimated. A negative outcome in this case could have a material adverse effect
on the Company.
76
17. Litigation, Commitments and Contingencies (continued)
Leases
We lease office, retail and commissary space under operating leases, which have an average term of five
years and provide for at least one renewal. Certain leases further provide that the lease payments may be
increased annually based on the fixed rate terms or adjustable terms such as the Consumer Price Index.
PJUK, our subsidiary located in the United Kingdom, leases certain retail space, which is primarily
subleased to our franchisees. We also lease the tractors and trailers used by our distribution subsidiary,
PJFS, for an average period of seven years. Total lease expense was $33.2 million in 2013, $28.7 million
in 2012 and $25.7 million in 2011, net of sublease payments received.
We subleased certain sites to our Papa John’s franchisees located in the United Kingdom in 2013, 2012
and 2011 and received payments of $4.9 million, $3.8 million and $3.7 million, respectively, which are
netted with international operating expenses.
Future gross lease costs, future expected sublease payments and net lease costs as of December 29, 2013,
are as follows (in thousands):
Gross Lease
Costs
Future
Expected
Sublease
Payments
Net Lease
Costs
$
$
$
38,304
34,444
29,423
24,088
17,551
41,441
185,251
5,508
5,003
4,735
4,582
4,444
26,214
50,486
32,796
29,441
24,688
19,506
13,107
15,227
134,765
$
$
$
Year
2014
2015
2016
2017
2018
Thereafter
Total
As a result of assigning our interest in obligations under property leases as a condition of the
refranchising of certain restaurants, we are contingently liable for payment of approximately 25 domestic
leases. These leases have varying terms, the latest of which expires in 2018. As of December 29, 2013,
the estimated maximum amount of undiscounted payments the Company could be required to make in the
event of nonpayment by the primary lessee was $1.6 million. As the fair value of the guarantees is not
considered significant, no liability has been recorded.
In connection with the 2006 sale of our former Perfect Pizza operations in the United Kingdom, we
remain contingently liable for payment of approximately 30 leases, which have varying terms with most
expiring by the end of 2015. As the initial party to the lease agreements, we are liable to the extent the
primary obligor does not satisfy its payment obligations. As of December 29, 2013, the estimated
maximum amount of undiscounted rental payments we would be required to make in the event of non-
payment under these leases is approximately $1.1 million, net of amounts reserved of approximately
$100,000.
The Company’s headquarters facility is leased under a capital lease arrangement with the City of
Jeffersontown, Kentucky in connection with the issuance of $80.2 million in Industrial Revenue Bonds.
The bonds are held 100% by the Company and, accordingly, the bond obligation and investment and
related interest income and expense are eliminated in the consolidated financial statements resulting in the
Company’s net investment cost being reported in net property and equipment.
77
18. Equity Compensation
We award stock options and restricted stock (both time- and performance-based) from time to time under
the Papa John’s International, Inc. 2011 Omnibus Incentive Plan and other such agreements as may arise.
There are approximately 7.8 million shares of common stock authorized for issuance and remaining
available under the 2011 Omnibus Incentive Plan as of December 29, 2013, which includes 4.0 million
shares transferred from the Papa John’s International, Inc. 2008 Omnibus Incentive Plan. Option awards
are granted with an exercise price equal to the market price of the Company’s stock at the date of grant.
Options outstanding as of December 29, 2013 generally expire five or ten years from the date of grant and
vest over a three-year period.
We recorded stock-based employee compensation expense of $7.4 million in 2013, $6.9 million in 2012
and $6.7 million in 2011. The total income tax benefit recognized in the income statement for share-based
compensation arrangements was $2.7 million in 2013, $2.4 million in 2012 and $2.2 million in 2011. At
December 29, 2013, there was $5.9 million of unrecognized compensation cost related to nonvested
option awards and restricted stock, of which the Company expects to recognize $4.4 million in 2014, $1.3
million in 2015 and $193,000 in 2016.
Stock Options
Options exercised included 697,000 shares in 2013, 864,000 shares in 2012 and 1.1 million shares in
2011. The total intrinsic value of the options exercised during 2013, 2012 and 2011 was $13.1 million,
$7.5 million and $4.6 million, respectively. Cash received upon the exercise of stock options was $6.9
million, $12.3 million and $14.0 million during 2013, 2012 and 2011, respectively, and the related tax
benefits realized were approximately $4.8 million, $2.6 million and $1.7 million during the corresponding
periods.
Information pertaining to option activity during 2013 is as follows (number of options and aggregate
intrinsic value in thousands):
Weighted
Average
Weighted Remaining
Outstanding at December 30, 2012
Granted
Exercised
Cancelled
Outstanding at December 29, 2013
Exercisable at December 29, 2013
Number Average Contractual Aggregate
Intrinsic
Value
Term
(In Years)
Exercise
Price
$14.39
27.14
13.59
20.41
$17.39
$13.61
4.27
1.56
$58,030
$37,084
of
Options
2,400
498
(697)
(97)
2,104
1,182
78
18. Equity Compensation (continued)
The following is a summary of the significant assumptions used in estimating the fair value of options
granted in 2013, 2012 and 2011:
Assumptions (weighted average):
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
2013
2012
2011
1.1%
0.1%
37.5%
6.0
1.1%
0.0%
37.8%
6.0
1.5%
0.0%
41.2%
3.7
The risk-free interest rate for the periods within the contractual life of an option is based on the U.S.
Treasury yield curve in effect at the time of grant. The expected dividend yield was estimated as the
annual dividend divided by the market price of the Company’s shares on the date of grant. Expected
volatility was estimated by using the Company’s historical share price volatility for a period similar to the
expected life of the option.
Options granted in 2013 and 2012 generally vest in equal installments over three years and expire ten
years after grant. The expected term for these options represents the period of time that options granted
are expected to be outstanding and was calculated using the simplified method prescribed by Securities
and Exchange Commission rules and regulations as there was insufficient historical detail to be used as an
alternative basis to estimating the term. The expected term for options granted in 2011 that expire five
years from the grant date was based on an analysis of actual historical exercises and forfeitures.
The weighted average grant-date fair values of options granted during 2013, 2012 and 2011 was $9.87,
$7.04 and $4.75, respectively. The Company granted 498,000, 508,000 and 806,000 options in 2013,
2012 and 2011, respectively.
Restricted Stock
In 2013, 2012 and 2011, we granted shares of restricted stock that were time-based and generally vest in
equal installments over three years. These restricted shares are intended to focus participants on our long-
range objectives, while at the same time serving as a retention mechanism. We consider time-based
restricted stock awards to be participating securities because holders of such shares have non-forfeitable
dividend rights. In 2013, we declared dividends totaling $86,000 ($0.25 per share) to holders of time-
based restricted stock. Additionally, we granted approximately 111,000 shares of performance-based
restricted stock units to executive management. These awards cliff-vest at the end of three years, in
February 2015, based upon the Company’s achievement of a compounded annual growth rate of earnings
per share and the achievement of certain sales and unit growth metrics. The fair value of both time- and
performance-based restricted stock is based on the market price of the Company’s shares on the grant
date.
79
18. Equity Compensation (continued)
Information pertaining to restricted stock activity during 2013, 2012 and 2011 is as follows (shares in
thousands):
Weighted
Average
Grant-Date
Fair Value
$
13.31
14.54
13.50
13.64
14.10
18.59
15.46
13.89
16.31
27.09
18.56
15.51
20.39
$
Shares
568
320
(156)
(232)
500
266
(74)
(156)
536
160
(70)
(203)
423
Total as of December 26, 2010
Granted
Forfeited
Vested
Total as of December 25, 2011
Granted
Forfeited
Vested
Total as of December 30, 2012
Granted
Forfeited
Vested
Total as of December 29, 2013
19. Employee Benefit Plans
We have established the Papa John’s International, Inc. 401(k) Plan (the “401(k) Plan”), as a defined
contribution benefit plan, in accordance with Section 401(k) of the Internal Revenue Code. The 401(k)
Plan is open to employees who meet certain eligibility requirements and allows participating employees
to defer receipt of a portion of their compensation and contribute such amount to one or more investment
funds. At our discretion, we may make matching contribution payments, which are subject to vesting
based on an employee’s length of service with us.
In addition, we maintain a non-qualified deferred compensation plan available to certain employees and
directors. Under this plan, the participants may defer a certain amount of their compensation, which is
credited to the participants’ accounts. The participant-directed investments associated with this plan are
included in other long-term assets ($16.8 million and $13.6 million at December 29, 2013 and December
30, 2012, respectively) and the associated liabilities ($15.8 million and $12.8 million at December 29,
2013 and December 30, 2012, respectively) are included in other long-term liabilities in the
accompanying consolidated balance sheets.
At our discretion, we contributed a matching payment of 1.5%, up to a maximum of 6% deferred, in
2013, 2012 and 2011 of a participating employee’s earnings deferred into both the 401(k) Plan and the
non-qualified deferred compensation plan. Such costs were $691,000 in 2013, $630,000 in 2012 and
$550,000 in 2011.
PJUK, the Company’s United Kingdom subsidiary, provided a pension plan that was frozen in 1999.
There are 11 participants in the PJUK pension plan. The Company recorded expense of $60,000,
$154,000 and $268,000 associated with the pension plan for the fiscal years ended 2013, 2012 and 2011,
respectively. The pension plan was fully funded at December 29, 2013. The Company is taking steps to
transfer the remaining assets and liabilities of the pension plan to an outside insurance company.
80
20. Segment Information
We have five reportable segments for all years presented: domestic Company-owned restaurants,
domestic commissaries, North America franchising, international operations, and “all other” units. In
2011, we had a sixth segment, variable interest entities (“VIEs”).
The domestic Company-owned 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 poppers, chicken
wings, dessert pizza 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 North America 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 franchisees located in the United States and Canada. 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, Mexico and China 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. International franchisees are defined as all franchise
operations outside of the United States and Canada. All other business units that do not meet the
quantitative thresholds for determining reportable segments, which are not operating segments, we refer
to as our “all other” segment, which consists 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, including our online
and other technology-based ordering platforms. In 2011, our VIE segment consisted of 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 operated through February 2011.
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 activity 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. The accounting policies of the segments are the same as those described in the summary of
significant accounting policies (see Note 2).
81
20. Segment Information (continued)
Our segment information is as follows:
(In thousands)
2013
2012
2011
Revenues from external customers:
Domestic Company-owned restaurants
Domestic commissaries
North America franchising
International
All others
Total revenues from external customers
Intersegment revenues:
Domestic commissaries
North America franchising
International
Variable interest entities (1)
All others
Total intersegment revenues
Depreciation and amortization:
Domestic Company-owned restaurants
Domestic commissaries
International
All others
Unallocated corporate expenses
Total depreciation and amortization
Income (loss) before income taxes:
Domestic Company-owned restaurants
Domestic commissaries
North America franchising
International
All others
Unallocated corporate expenses
Elimination of intersegment profits
Total income before income taxes
$
$
$
635,317
578,870
82,873
88,640
53,322
1,439,022
592,203
545,924
80,373
72,930
51,223
1,342,653
$
$
$
525,841
508,155
74,416
58,558
50,912
1,217,882
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
171,212
2,267
229
-
11,606
185,314
13,242
4,738
2,824
4,801
7,193
32,798
38,114
34,317
69,332
3,063
2,889
(48,958)
(362)
98,395
151,423
2,163
215
25,117
10,468
189,386
12,965
4,633
2,398
4,663
8,022
32,681
28,980
30,532
66,222
(165)
(441)
(39,727)
(610)
84,791
191,756
2,222
280
-
14,197
208,455
13,284
5,690
3,966
5,320
6,845
35,105
34,590
37,804
70,201
2,803
3,490
(41,025)
(1,754)
106,109
$
$
$
(1) The intersegment revenues for variable interest entities of $25.1 million in 2011 are attributable to
BIBP, which operated as an independent, franchisee-owned corporation. BIBP purchased cheese at
the market price and sold it to our distribution subsidiary, PJ Food Service, Inc. (“PJFS”), at a fixed
price. PJFS in turn sold cheese to Papa John’s restaurants (both Company-owned and franchised) at a
set price. PJFS purchased $25.1 million of cheese for the three months ended March 27, 2011. Prior
to the termination of the purchasing agreement with BIBP in 2011, we recognized the operating
losses generated by BIBP when BIBP’s shareholders’ equity was in a net deficit position. Further, we
recognized the subsequent operating income generated by BIBP up to the amount of any losses
previously recognized. Prior to ceasing operating activities, BIBP operated at break-even for the three
months ended March 27, 2011.
82
20. Segment Information (continued)
(In thousands)
2013
2012
2011
Property and equipment:
Domestic Company-owned restaurants
Domestic commissaries
International
All others
Unallocated corporate assets
Accumulated depreciation and amortization
Net property and equipment
Expenditures for property and equipment:
Domestic Company-owned restaurants
Domestic commissaries
International
All others
Unallocated corporate
Total expenditures for property and equipment
$
$
$
195,526
104,509
27,225
41,064
158,462
(314,689)
212,097
13,149
9,791
3,754
4,689
19,367
50,750
184,322
101,082
22,389
37,221
142,950
(291,303)
196,661
9,319
14,314
4,865
3,342
10,788
42,628
$
$
$
$
$
$
176,506
85,714
17,413
33,984
132,098
(263,805)
181,910
14,094
5,612
1,733
1,792
6,088
29,319
$
$
$
21. Quarterly Data - Unaudited, in Thousands, except Per Share Data
Our quarterly select financial data is as follows:
2013
1st
2nd
3rd
4th
Quarter
Total revenues
Operating income
Net income attributable to the Company
Basic earnings per common share
Earnings per common share - assuming dilution
Dividends declared per common share
$
355,604
29,625
19,306
0.43
$
$
0.42
$
-
$
349,186
26,948
17,150
0.39
$
$
0.39
$
-
$
346,342
21,448
14,276
0.33
0.32
0.125
$
$
$
$
387,890
28,482
18,805
0.42
0.41
0.125
$
$
$
2012
1st
2nd
3rd
4th
Quarter
Total revenues
Operating income
Net income attributable to the Company
Basic earnings per common share
Earnings per common share - assuming dilution
$
331,276
27,256
16,981
0.35
0.35
$
$
$
318,579
24,327
14,289
0.30
0.30
$
$
$
325,514
21,205
13,031
0.28
0.27
$
$
$
367,284
27,019
17,359
0.38
0.37
$
$
83
21. Quarterly Data - Unaudited, in Thousands, except Per Share Data (continued)
All quarterly information above except for the fourth quarter of 2012 is presented in 13-week periods.
The fourth quarter of 2012 includes a 14-week period, which increased revenues approximately $21.5
million and increased operating income approximately $4.1 million, or $0.05 per diluted share. The
Incentive Contribution reduced first quarter 2012 operating income by approximately $3.7 million, or
$0.05 per diluted share, and increased each of the second, third and fourth quarters of 2012 and each
quarter of 2013 by approximately $250,000. The impact of the 53rd week of operations in 2012 was
substantially offset by the Incentive Contribution on a full-year basis. See “Items Impacting
Comparability; Non-GAAP Measures” of “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for additional information.
Quarterly earnings per share on a full-year basis may not agree to the consolidated statements of income
due to rounding.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon this evaluation, the CEO and CFO
concluded that the Company’s disclosure controls and procedures are effective.
(b) Management’s Report on our Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. Our internal
control system is designed to provide reasonable assurance to our management and the board of directors
regarding the preparation and fair presentation of published financial statements. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Under the supervision and with the participation of our management, including our CEO and CFO, we
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
1992 framework established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the 1992
framework established in Internal Control – Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 29, 2013.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated
Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an
attestation report, included herein, on the effectiveness of our internal control over financial reporting.
84
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Papa John’s International, Inc. and Subsidiaries
We have audited Papa John’s International, Inc. and Subsidiaries’ internal control over financial reporting
as of December 29, 2013, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the
COSO criteria). Papa John’s International, Inc. and Subsidiaries’ management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting included in the accompanying “Management’s Report on our
Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Papa John’s International, Inc. and Subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 29, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 29, 2013 and December 30, 2012,
and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash
flows for each of the three years in the period ended December 29, 2013 of Papa John’s International, Inc.
and Subsidiaries and our report dated February 25, 2014 expressed an unqualified opinion thereon.
Louisville, Kentucky
February 25, 2014
/s/ Ernst & Young LLP
85
(c) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December
29, 2013 that have materially affected, or are likely to materially affect, the Company’s internal control
over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information regarding executive officers is included above under the caption “Executive Officers of the
Registrant” at the end of Part I of this Report. Other information regarding directors, executive officers
and corporate governance appearing under the captions “Corporate Governance,” “Item 1, Election of
Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Executive Compensation /
Compensation Discussion and Analysis” is incorporated by reference from the Company’s definitive
proxy statement, which will be filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year covered by this Report.
We have adopted a written code of ethics that applies to our directors, officers and employees. We intend
to post all required disclosures concerning any amendments to, or waivers from, our code of ethics on our
website to the extent permitted by NASDAQ. Our code of ethics can be found on our website, which is
located at www.papajohns.com.
Item 11. Executive Compensation
Information regarding executive compensation appearing under the captions “Executive Compensation /
Compensation Discussion and Analysis,” “Compensation Committee Report” and “Certain Relationships
and Related Transactions – Compensation Committee Interlocks and Insider Participation” is
incorporated by reference from the Company’s definitive proxy statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by
this Report.
86
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The following table provides information as of December 29, 2013 regarding the number of shares of the
Company’s common stock that may be issued under the Company’s equity compensation plans.
(a)
Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
(b)
Weighted
average
exercise price
of outstanding
options, warrants
and rights
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans,
excluding securities
reflected in column (a)
2,103,932
164,486
2,268,418
$17.39
$17.39
7,848,244
7,848,244
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders *
Total
* Represents shares of common stock issuable pursuant to the non-qualified deferred compensation plan.
The weighted average exercise price (column b) does not include any assumed price for issuance of shares
pursuant to the non-qualified deferred compensation plan.
Information regarding security ownership of certain beneficial owners and management and related
stockholder matters appearing under the caption “Security Ownership of Certain Beneficial Owners and
Management” is incorporated by reference from the Company’s definitive proxy statement, which will be
filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year
covered by this Report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions, and director independence appearing
under the captions “Corporate Governance” and “Certain Relationships and Related Transactions” is
incorporated by reference from the Company’s definitive proxy statement, which will be filed with the
Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by
this Report.
Item 14. Principal Accounting Fees and Services
Information regarding principal accounting fees and services appearing under the caption “Ratification of
the Selection of Independent Auditors” is incorporated by reference from the Company’s definitive proxy
statement, which will be filed with the Securities and Exchange Commission no later than 120 days after
the end of the fiscal year covered by this Report.
87
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements:
The following consolidated financial statements, notes related thereto and reports of independent auditors
are included in Item 8 of this Report:
• Reports of Independent Registered Public Accounting Firm
• Consolidated Statements of Income for the years ended December 29, 2013, December 30, 2012
and December 25, 2011
• Consolidated Statements of Comprehensive Income for the years ended December 29, 2013,
December 30, 2012 and December 25, 2011
• Consolidated Balance Sheets as of December 29, 2013 and December 30, 2012
• Consolidated Statements of Stockholders’ Equity for the years ended December 29, 2013,
December 30, 2012 and December 25, 2011
• Consolidated Statements of Cash Flows for the years ended December 29, 2013, December 30,
2012 and December 25, 2011
• Notes to Consolidated Financial Statements
88
(a)(2) Financial Statement Schedules:
Schedule II – Valuation and Qualifying Accounts
(in thousands)
Classification
Fiscal year ended December 29, 2013:
Deducted from asset accounts:
Reserve for uncollectible accounts receivable
Reserve for franchisee notes receivable
Valuation allowance on foreign net operating losses
Fiscal year ended December 30, 2012:
Deducted from asset accounts:
Reserve for uncollectible accounts receivable
Reserve for franchisee notes receivable
Valuation allowance on foreign net operating losses
Fiscal year ended December 25, 2011:
Deducted from asset accounts:
Reserve for uncollectible accounts receivable
Reserve for franchisee notes receivable
Valuation allowance on foreign net operating losses
Balance at
Beginning of
Year
Charged to
(recovered from)
Costs and
Expenses
Additions /
(Deductions)
Balance at
End of
Year
$
$
$
$
$
$
$
$
3,057
5,028
8,240
16,325
3,034
5,905
7,474
16,413
2,795
9,951
8,123
20,869
$
$
$
$
2,416
(495)
(558)
1,363
1,394
280
766
2,440
1,072
(35)
(649)
388
(1)
(1)
(1)
(1)
(1)
(1)
$
$
(1,155)
(1,146)
-
(2,301)
$
$
(1,371)
(1,157)
-
(2,528)
$
(833)
(4,011)
-
(4,844)
$
$
4,318
3,387
7,682
15,387
$
$
3,057
5,028
8,240
16,325
$
$
3,034
5,905
7,474
16,413
$
(1) Uncollectible accounts written off, net of recoveries and reclassifications between accounts and notes receivable reserves.
All other schedules for which provision is made in the applicable accounting regulation of the Securities
and Exchange Commission are not required under the related instructions or are inapplicable and,
therefore, have been omitted.
(a)(3) Exhibits:
The exhibits listed in the accompanying index to Exhibits are filed as part of this Form 10-K.
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: February 25, 2014
PAPA JOHN’S INTERNATIONAL, INC.
By:
/s/ John H. Schnatter
John H. Schnatter
Founder, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John H. Schnatter
John H. Schnatter
Founder, Chairman and
Chief Executive Officer
(Principal Executive Officer)
February 25, 2014
/s/ Norborne P. Cole, Jr.
Norborne P. Cole, Jr.
Director
February 25, 2014
/s/ Christopher L. Coleman Director
Christopher L. Coleman
/s/ Philip Guarascio
Philip Guarascio
/s/ Olivia F. Kirtley
Olivia F. Kirtley
Director
Director
/s/ Mark S. Shapiro
Mark S. Shapiro
Director
February 25, 2014
February 25, 2014
February 25, 2014
February 25, 2014
/s/ W. Kent Taylor
W. Kent Taylor
/s/ Lance F. Tucker
Lance F. Tucker
Director
February 25, 2014
Senior Vice President, Chief
Financial Officer, Chief Administrative
Officer and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
February 25, 2014
90
Exhibit
Number
3.1
3.2
3.3
4.1
4.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
EXHIBIT INDEX
Description of Exhibit
Our Amended and Restated Certificate of Incorporation. Exhibit 3.1 to our Registration
Statement on Form S-1 (Registration No. 33-61366) is incorporated herein by reference.
Our Certificate of Amendment of Amended and Restated Certificate of Incorporation.
Exhibit 3 to our Quarterly Report on Form 10-Q for the quarterly period ended June 29,
1997, is incorporated herein by reference.
Our Restated By-Laws. Exhibit 3.1 to our report on Form 8-K dated December 5, 2007 is
incorporated herein by reference.
Specimen Common Stock Certificate. Exhibit 4.1 to our Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (Commission File No. 0-21660) is incorporated
herein by reference.
Amended and Restated Certificate of Incorporation and Restated By-Laws (see Exhibits
3.1, 3.2 and 3.3 above) are incorporated herein by reference.
Employment Agreement between Papa John’s International, Inc. and Stephen M. Ritchie
Effective March 5, 2012, as Amended December 21, 2012.
Papa John’s International, Inc. Deferred Compensation Plan, as amended through
December 5, 2012. Exhibit 10.1 to our report on Form 10-K as filed on February 28,
2013 is incorporated herein by reference.
Employment Agreement between Papa John’s International, Inc. and Anthony N.
Thompson Effective March 5, 2012, as Amended December 21, 2012. Exhibit 10.2 to
our report on Form 10-K as filed on February 28, 2013 is incorporated herein by
reference.
Employment Agreement between Papa John’s International, Inc. and Lance F. Tucker
Effective March 5, 2012, as Amended December 21, 2012. Exhibit 10.3 to our report on
Form 10-K as filed on February 28, 2013 is incorporated herein by reference.
Employment Agreement between Papa John’s International, Inc. and Timothy C. O’Hern
Effective March 5, 2012, as Amended December 21, 2012. Exhibit 10.5 to our report on
Form 10-K as filed on February 28, 2013 is incorporated herein by reference.
Papa John’s International, Inc. 2008 Omnibus Incentive Plan. Exhibit 10.1 to our
Registration Statement on Form S-8 (Registration No. 333-150762) dated May 5, 2008 is
incorporated herein by reference.
Papa John’s International, Inc. 2011 Omnibus Incentive Plan. Exhibit 4.1 to our report
on Form 8-K as filed on May 3, 2011 is incorporated herein by reference.
91
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16
10.17
Agreement for Service as Chairman between John H. Schnatter and Papa John’s
International, Inc. Exhibit 10.1 to our report on Form 8-K as filed on August 15, 2007 is
incorporated herein by reference.
Agreement for Service as Founder between John H. Schnatter and Papa John’s
International, Inc. Exhibit 10.1 to our report on Form 8-K as filed on August 15, 2007 is
incorporated herein by reference.
Amendment and Restated Exclusive License Agreement between John H. Schnatter and
Papa John’s International, Inc. Exhibit 10.1 to our report on Form 8-K as filed on May
19, 2008 is incorporated herein by reference.
Papa John’s International, Inc. Severance Pay Plan. Exhibit 10.1 to our report on Form
10-Q filed on May 1, 2012, is incorporated herein by reference.
Employment Agreement between Papa John’s International, Inc. and Andrew M. Varga
Effective March 5, 2012, as Amended December 21, 2012. Exhibit 10.4 to our report on
Form 10-K as filed on February 28, 2013 is incorporated herein by reference.
Transition Agreement and Release between Papa John’s International, Inc. and Andrew
M. Varga dated April 19, 2013. Exhibit 10.1 to our Report on Form 8-K/A as filed on
April 23, 2013 is incorporated herein by reference.
Employment Agreement between Papa John’s International, Inc. and Christopher J.
Sternberg dated March 5, 2012. Exhibit 10.2 to our Report on Form 8-K as filed on
March 7, 2012 is incorporated herein by reference.
Separation and Consulting Agreement and Release between Christopher J. Sternberg and
Papa John’s International, Inc. Exhibit 10.1 to our report on Form 10-Q as filed on July
31, 2012 is incorporated herein by reference.
$300,000,000 Revolving Credit Facility / First Amended and Restated Credit Agreement
dated April 30, 2013 by and among Papa John’s International, Inc., the Guarantors Party
thereto, RSC Insurance Services, Ltd., a Bermuda company, the Banks party thereto,
PNC Bank, National Association, as Administrative Agent, JPMorgan Chase Bank, N.A.,
as Co-Syndication Agent, U.S. Bank National Association, as Co-Syndication Agent,
Bank of America, N.A., as Documentation Agent, PNC Capital Markets LLC, as Joint
Lead Arranger and as Joint Bookrunner, and J.P. Morgan Securities LLC, as Joint Lead
Arranger and as Joint Bookrunner. Exhibit 10.1 to our Report on Form 8-K as filed on
May 6, 2013 is incorporated herein by reference.
$175,000,000 Revolving Credit Facility by and among Papa John’s International, Inc.,
the Guarantors party thereto, RSC Insurance Services, Ltd., a Bermuda company, the
Banks party thereto, PNC Bank, National Association, as Administrative Agent,
JPMorgan Chase Bank, N.A., as Syndication Agent, U.S. Bank, National Association, as
Co-Documentation Agent, Bank of America, N.A., as Co-Documentation Agent, Fifth
Third Bank, as Co-Documentation Agent, PNC Capital Markets LLC, as Joint Lead
Arranger and as Joint Bookrunner, and J.P. Morgan Securities LLC, as Joint Lead
Arranger and as Joint Bookrunner dated September 2, 2010. Exhibit 10.1 to our report on
Form 8-K as filed on September 9, 2010 is incorporated by reference.
92
10.18
21
23
31.1
31.2
32.1
32.2
101
First Amendment to Credit Agreement by and among Papa John’s International, Inc. the
Guarantors party thereto, RSC Insurance Services, Ltd., a Bermuda company, PNC Bank,
National Association, as a Bank and as Administrative Agent, JPMorgan Chase Bank,
N.A., as a Bank and as Syndication Agent, Bank of America, N.A., as a Bank and as Co-
Documentation Agent, Fifth Third Bank, as a Bank and as Co-Documentation Agent,
U.S. Bank, National Association, as a Bank and as Co-Documentation Agent, and Branch
Banking and Trust Company, as a Bank, dated November 30, 2011. Exhibit 10.1 to our
report on Form 8-K filed December 1, 2011 is incorporated by reference.
Subsidiaries of the Company.
Consent of Ernst & Young LLP.
Section 302 Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-
15(e).
Section 302 Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-
15(e).
Section 906 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.
Section 906 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.
Financial statements from the Annual Report on Form 10-K of Papa John’s International,
Inc. for the year ended December 29, 2013, filed on February 25, 2014, formatted in
XBRL: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of
Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated
Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and
(vi) the Notes to Consolidated Financial Statements.
__________________
*Compensatory plan required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
The Exhibits to this Annual Report on Form 10-K are not contained herein. The Company will
furnish a copy of any of the Exhibits to a stockholder upon written request to Investor Relations,
Papa John’s International, Inc., P.O. Box 99900, Louisville, KY 40269-0900.
93
TO OUR SHAREHOLDERS,
FRANCHISEES, SUPPLY
PARTNERS AND
TEAM MEMBERS:
As Papa John’s celebrates its Thirtieth Anniversary, I’m
proud to say we have never lost sight of our founding
principle – the unrelenting focus on superior-quality
products to drive a loyal customer base. In a very real way,
we’ve always kept our “eye on the pie” for the past thirty
years. At the end of the day, nothing sells like the truth;
and, our customers take notice of our better ingredients,
better pizza promise because they do taste the difference
between mediocrity and superiority. To that end, I am both
proud and pleased to report the results for 2013, another
outstanding year for Papa John’s.
Papa John’s achieved a 20.2% increase in EPS and an increase
Under the outstanding leadership of Papa John’s President and
of $700 million in market capitalization in 2013. Over the past five
COO Tony Thompson, the company’s 2013 accomplishments are
years, EPS has grown an average of 20% per year and the market
unparalleled – the result of exceptional execution of our strategy
capitalization has gone from $500 million to more than $2 billion.
across all aspects of our growing business
We have also reinvested approximately $50 million per year for the
last several years back into property, plant and equipment to first
and foremost protect and enhance the “Quality Moat” around the
brand castle, further enhance productivity and innovations, and
last but not least, drive future international success. With 28%
combined ownership of the company’s stock, our Board and senior
management team are highly vested in the continued long-term
success of Papa John’s.
$1.70
$1.50
$1.30
$1.10
$0.90
$0.70
$0.50
Earnings Per Share
$1.55
$1.29
$1.08
$0.92
$0.69
2009
2010
2011
2012
2013
PJI Market
Capitalization
1,908,930
1,221,700
905,040
704,660
629,080
Quality and Service Leadership: There’s no better place
to start than our system wide quality and service performance,
driven by the exceptional execution of our world class operations
team led by Steve Ritchie, Papa John’s Senior Vice President, Global
Operations. We spend a great deal of time and money each year
to ensure our restaurants are making and delivering the industry’s
highest quality pizzas with world class customer service. We did not
disappoint in 2013. Our quality and service scores were higher than
any year in our history, which led to Papa John’s earning the highest
rating in the prestigious American Customer Satisfaction Index for
the 12th time in the last 14 years. Superior quality products and a
focus on customer service were the primary drivers behind our 4%
comparable North American sales increase in 2013, driving the
fifth straight year of pretax income growth in Papa John’s North
American Franchise segment.
Digital Leadership: In 2013, Papa John’s became the
first national pizza company to near 50% of domestic system
sales through digital channels, building on its unmatched history
of technology “firsts.” Papa John’s was the first national pizza
company to offer systemwide online ordering (2001); the first
to offer systemwide text ordering (2007); and the first and only
pizza company to offer a digital rewards program, Papa Rewards
(2010). Our dedication to innovation through technology has been
and remains a commitment of Papa John’s leadership.
Online Sales Mix
Domestic Restaurants
46%
40%
33%
28%
25%
History of Digital
Leadership
2014
INDUSTRY
FIRST
1st
MOBILE-
OPTIMIZED
EGIFT CARD
ORDERING
50%+
1997
FIRST ONLINE
ORDER
(PILOT IN NORTH
CAROLINA)
$5 BILLION
IN U.S. DIGITAL SALES
OVER 45% OF U.S.
TOTAL SALES FROM
DIGITAL SALES
KINDLE FIRE
ORDERING app*
ANDROID
ORDERING app*
2013
INDUSTRY
FIRST
1st
2012
2011
$
$2 BILLION
IN U.S. DIGITAL SALES*
DIGITAL LOYALTY
REWARDS PROGRAM
iOS ORDERING app
2010
INDUSTRY
FIRST
1st
NATIONWIDE
ONLINE ORDERING
2001
INDUSTRY
FIRST
1st
LOCAL SPECIAL
ONLINE OFFERS*
NATIONWIDE 24/7
“PLAN AHEAD”
ONLINE ORDERING* 24/7
2006
INDUSTRY
FIRST
1st
NATIONWIDE
MOBILE TEXT
ORDERING*
2007
INDUSTRY
FIRST
1st
$
$1 BILLION
IN U.S. DIGITAL SALES
NATIONWIDE MOBILE
WEB ORDERING
INDUSTRY
FIRST
1st
2008
*ALL U.S. DELIVERY RESTAURANTS. Kindle Fire and the Amazon “a” logo are registered
trademarks of Amazon Technologies, Inc. Android is a registered trademark of Google, Inc.
The Apple logo is a registered trademark of Apple, Inc.
Leadership in Giving Back: Having been blessed
in so many ways, we feel it is important to give back to the
communities that we serve. The Salvation Army is our national
charitable partner, and in 2013 we joined with them to support
the victims and aid workers recovering from several disasters
including the devastating tornados that hit Oklahoma City.
Papa John’s work with the Salvation Army along with our local
charitable efforts, and the numerous relief efforts, fundraisers,
and humanitarian projects our franchisees participated in, totaled
hundreds-of-thousands-of-dollars in monetary and product
donations last year. We also positively impacted the lives of our
friends and neighbors in communities throughout the country and
world. Our system is grateful for and humbled by our success,
and we will continue to support and positively impact the people
in these communities that support us so strongly.
International Growth: In 2013, Papa John’s continued to
build international momentum with a 7.5% international comparable
sales increase and 183 net unit openings around the world. We
passed the one-thousandth international restaurant milestone in
the third quarter, and finished the year with 1,142 restaurants open
outside of North America. Strong sales momentum and market
penetration continues in the UK, Russia, Latin America, China and
the Middle East.
1,100
1,000
900
800
700
600
500
400
300
1,200 Ending Store Count
International
1142
959
822
709
635
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
Note: The results for 2009 and 2010 are presented on a non-GAAP basis for comparability purposes. See the Investor Relations section of our website which contains the GAAP to non-GAAP reconciliations.
Directors
John H. Schnatter
Founder, Chairman and CEO
Corporate
Information
Corporate Headquarters
2002 Papa John’s Boulevard
Louisville, Kentucky 40299
502-261-7272
Stock Listing
Papa John’s stock is listed on The NASDAQ Global
Select Market under the ticker symbol PZZA
Annual Meeting
The annual meeting of stockholders will be held
Tuesday, April 29, 2014, 11:00 A.M. (E.D.T) at:
Papa John’s International, Inc.
2002 Papa John’s Boulevard
Louisville, Kentucky 40299
Independent Public Accountants
Ernst & Young LLP
Transfer Agent
Computershare Shareholder Services
211 Quality Circle, Suite 210
College Station, TX 77845
www.computershare.com/investor
800-622-6757 (US, Canada, Puerto Rico)
781-575-4735 (non-US)
Investor Relations
Lance F. Tucker
SVP, Chief Financial Officer, Chief Administrative
Officer, and Treasurer
502-261-4218
Corporate Communications – Media
Relations
Robert C. Kraut
SVP, Chief Marketing Officer
502-261-4318
Forward-Looking Statements
This report includes non-historical or “forward
looking” statements concerning future events or
conditions. Important risk factors, which could
cause actual results to differ materially from these
statements, are set forth in Item 1A. Risk Factors in
the accompanying Form 10-K.
For More Information
To learn more about Papa John’s, or to order
online, visit our website at www.papajohns.com
Mark S. Shapiro (1)(3*)
Executive Producer, Dick Clark Productions
W. Kent Taylor (2)
Founder, Chairman and CEO of Texas Roadhouse, Inc.
Christopher L. Coleman (1)(3)
Managing Director, Rothschild – London
Olivia F. Kirtley (1*)(2)
Business Consultant
Philip Guarascio (3)
Chairman and CEO of PG Ventures LLC,
a marketing consulting firm
Norborne P. Cole, Jr. (2*)(4)
Business Consultant
NUMBERS INDICATE BOARD COMMITTEES:
( 1 ) Audit Committee
( 2 ) Compensation Committee
( 3 ) Corporate Governance and Nominating Committee
( 4 ) Lead Independent Director
*Committee Chair
Papa John’s 37
International Markets
Executive Leadership Team
Cayman Islands
Dominican Republic
United Kingdom
Ireland
Puerto Rico
Cyprus
Russia
Turkey
Jordan
Lebanon
Azerbaijan
South Korea
China
Canada
Mexico
Trinidad
Venezuela
El Salvador
Guatemala
Nicaragua
Costa Rica
Chile
Panama
Colombia
Ecuador
Peru
Egypt
Saudi Arabia
Note: 2013 Markets entered – Guatemala
Guam
Philippines
India
Malaysia
Kuwait
Bahrain
Qatar
United Arab Emirates
Oman
ANNUAL
REPORT
2013
R ING R
E
T
T
E
B
D
E
I E NTS. BE
T
T
E
R
P
I
Z
Z
A
.
John H. Schnatter
Founder, Chairman and
Chief Executive Officer
Steve M. Ritchie
SVP, Global Operations and Global OST
Timothy C. O’Hern
SVP, Chief Development Officer
Sean A. Muldoon
SVP, R&D, QA and Supply Chain
Caroline Miller Oyler
SVP, Legal Affairs
Robert C. Kraut
SVP, Chief Marketing Officer
Anthony N. Thompson
President and Chief Operating Officer
Lance F. Tucker
SVP, Chief Financial Officer,
Chief Administrative Officer,
and Treasurer
Cynthia McClellan
SVP, Information Systems
and Project Management Office
R. Shane Hutchins
SVP, PJ Food Service, Inc.
Robert Smith
VP, Global Human Resources
I E NTS.BE
I E NTS. BE
NG R
R ING R
D
D
E
E
E
E
R
T
T
T
T
B
P
I
E
T
T
E
Note: International Locations as of December 30, 2012
Note: International Locations as of December 30, 2012
2012 Markets entered – Azerbaijan, Guam, Lebanon
2012 Markets entered – Azerbaijan, Guam, Lebanon
Z
Z
A
.