Edgar Filing: PAPA JOHNS INTERNATIONAL INC

a50683860.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

	(Mark One)
	[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended June 30, 2013

[ ]

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-21660

PAPA JOHN'S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

	Delaware	61-1203323
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification number)

2002 Papa Johns Boulevard

Louisville, Kentucky 40299-2367

(Address of principal executive offices)

(502) 261-7272

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]	Accelerated filer [ ]
Non-accelerated filer [ ]	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

At July 30, 2013, there were outstanding 21,732,784 shares of the registrant’s common stock, par value $0.01 per share.

INDEX

PART I.	FINANCIAL INFORMATION	Page No.


Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – June 30, 2013 and December 30, 2012	2

	Consolidated Statements of Income – Three and Six Months Ended June 30, 2013 and June 24, 2012	3

	Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2013 and June 24, 2012	4

	Consolidated Statements of Stockholders' Equity – Six Months Ended June 30, 2013 and June 24, 2012	5

	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2013 and June 24, 2012	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	26

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 6.	Exhibits	28

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(In thousands)	June 30, 2013			December 30, 2012
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	28,236		$	16,396
Accounts receivable, net		43,235			44,647
Notes receivable		3,440			4,577
Inventories		21,722			22,178
Deferred income taxes		7,715			10,279
Prepaid expenses		10,782			12,782
Other current assets		7,804			7,767
Total current assets		122,934			118,626
Property and equipment, net		201,942			196,661
Notes receivable, less current portion, net		13,839			12,536
Goodwill		78,088			78,958
Other assets		32,675			31,627
Total assets	$	449,478		$	438,408

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	28,728		$	32,624
Income and other taxes payable		1,407			10,429
Accrued expenses and other current liabilities		51,950			60,528
Total current liabilities		82,085			103,581
Deferred revenue		6,736			7,329
Long-term debt		133,241			88,258
Deferred income taxes		11,955			10,672
Other long-term liabilities		40,858			40,674
Total liabilities		274,875			250,514

Redeemable noncontrolling interests		6,846			6,380

Stockholders’ equity:
Preferred stock		-			-
Common stock		373			371
Additional paid-in capital		288,214			280,905
Accumulated other comprehensive income		786			1,824
Retained earnings		392,917			356,461
Treasury stock		(514,533	)		(458,047	)
Total stockholders’ equity		167,757			181,514
Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	449,478		$	438,408

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	Three Months Ended						Six Months Ended
(In thousands, except per share amounts)	June 30, 2013			June 24, 2012			June 30, 2013			June 24, 2012

North America revenues:
Domestic Company-owned restaurant sales	$	155,153		$	143,527		$	313,051		$	287,342
Franchise royalties		20,230			19,101			40,963			39,619
Franchise and development fees		219			206			765			428
Domestic commissary sales		140,003			126,593			283,897			264,203
Other sales		12,444			11,771			25,051			24,029
International revenues:
Royalties and franchise and development fees		5,391			4,701			10,458			9,187
Restaurant and commissary sales		15,746			12,680			30,605			25,047
Total revenues		349,186			318,579			704,790			649,855
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales		37,825			32,881			74,898			65,337
Salaries and benefits		42,053			39,839			85,325			78,652
Advertising and related costs		14,677			13,278			29,470			25,977
Occupancy costs		8,939			8,619			17,650			16,517
Other operating expenses		22,431			20,830			45,176			41,248
Total domestic Company-owned restaurant expenses		125,925			115,447			252,519			227,731
Domestic commissary and other expenses:
Cost of sales		114,045			104,412			231,823			217,250
Salaries and benefits		10,264			9,218			20,331			18,221
Other operating expenses		15,768			13,498			31,775			27,804
Total domestic commissary and other expenses		140,077			127,128			283,929			263,275
International operating expenses		12,983			10,975			25,636			21,367
General and administrative expenses		33,126			31,463			66,284			63,059
Other general expenses		1,597			1,135			2,782			6,809
Depreciation and amortization		8,530			8,104			17,067			16,031
Total costs and expenses		322,238			294,252			648,217			598,272
Operating income		26,948			24,327			56,573			51,583
Net interest (expense) income		(340	)		(861	)		332			(597	)
Income before income taxes		26,608			23,466			56,905			50,986
Income tax expense		8,563			8,005			18,541			17,218
Net income, including redeemable noncontrolling interests		18,045			15,461			38,364			33,768
Income attributable to redeemable noncontrolling interests		(895	)		(1,172	)		(1,908	)		(2,498	)
Net income, net of redeemable noncontrolling interests	$	17,150		$	14,289		$	36,456		$	31,270

Basic earnings per common share	$	0.79		$	0.60		$	1.66		$	1.31
Earnings per common share - assuming dilution	$	0.77		$	0.59		$	1.62		$	1.29

Basic weighted average shares outstanding		21,742			23,733			21,998			23,893
Diluted weighted average shares outstanding		22,250			24,112			22,543			24,270

See accompanying notes.

Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)


	Three Months Ended						Six Months Ended
(In thousands)	June 30, 2013			June 24, 2012			June 30, 2013			June 24, 2012

Net income, including redeemable noncontrolling interests	$	18,045		$	15,461		$	38,364		$	33,768
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		(586	)		(445	)		(1,721	)		(154	)
Interest rate swap		190			(9	)		73			(137	)
Other comprehensive income (loss), before tax		(396	)		(454	)		(1,648	)		(291	)
Income tax effect:
Foreign currency translation adjustments		217			-			637			-
Interest rate swap		(71	)		3			(27	)		51
Income tax effect		146			3			610			51
Other comprehensive income (loss), net of tax		(250	)		(451	)		(1,038	)		(240	)
Comprehensive income, including redeemable
noncontrolling interests		17,795			15,010			37,326			33,528
Comprehensive income, redeemable noncontrolling interests		(895	)		(1,172	)		(1,908	)		(2,498	)
Comprehensive income, net of redeemable
noncontrolling interests	$	16,900		$	13,838		$	35,418		$	31,030

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Unaudited)

	Common								Accumulated
	Stock					Additional			Other								Total
	Shares			Common		Paid-In			Comprehensive			Retained		Treasury			Stockholders'
(In thousands)	Outstanding			Stock		Capital			Income (Loss)			Earnings		Stock			Equity


Balance at December 25, 2011		24,019		$	367	$	262,456		$	1,849		$	294,801	$	(353,826	)	$	205,647
Comprehensive income:
Net income, net of redeemable
noncontrolling interests (1)		-			-		-			-			31,270		-			31,270
Other comprehensive loss		-			-		-			(240	)		-		-			(240	)
Comprehensive income																		31,030
Exercise of stock options		361			4		10,396			-			-		-			10,400
Tax effect of equity awards		-			-		468			-			-		-			468
Acquisition of Company
common stock		(957	)		-		-			-			-		(38,728	)		(38,728	)
Stock-based compensation expense		-			-		3,218			-			-		-			3,218
Issuance of restricted stock		34			-		(1,541	)		-			-		1,541			-
Other		-			-		(134	)		-			-		259			125
Balance at June 24, 2012		23,457		$	371	$	274,863		$	1,609		$	326,071	$	(390,754	)	$	212,160

Balance at December 30, 2012		22,241		$	371	$	280,905		$	1,824		$	356,461	$	(458,047	)	$	181,514
Comprehensive income:
Net income, net of redeemable
noncontrolling interests (1)		-			-		-			-			36,456		-			36,456
Other comprehensive loss		-			-		-			(1,038	)		-		-			(1,038	)
Comprehensive income																		35,418
Exercise of stock options		223			2		3,694			-			-		-			3,696
Tax effect of equity awards		-			-		1,963			-			-		-			1,963
Acquisition of Company
common stock		(978	)		-		-			-			-		(58,806	)		(58,806	)
Stock-based compensation expense		-			-		3,784			-			-		-			3,784
Issuance of restricted stock		68			-		(2,148	)		-			-		2,148			-
Other		-			-		16			-			-		172			188
Balance at June 30, 2013		21,554		$	373	$	288,214		$	786		$	392,917	$	(514,533	)	$	167,757

(1)	Net income at June 30, 2013 and June 24, 2012 is net of $1,908 and $2,498, respectively, allocable to the redeemable noncontrolling interests for our joint venture arrangements.

At June 24, 2012, the accumulated other comprehensive income of $1,609 was comprised of unrealized foreign currency translation gains of $1,718, offset by a net

unrealized loss on the interest rate swap agreement of $80 and a $29 pension plan liability.

At June 30, 2013, the accumulated other comprehensive income of $786 was comprised of unrealized foreign currency translation gains of $806, offset by a net

unrealized loss on the interest rate swap agreement of $20.

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
(In thousands)	June 30, 2013			June 24, 2012

Operating activities
Net income, including redeemable noncontrolling interests	$	38,364		$	33,768
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable		780			719
Depreciation and amortization		17,067			16,031
Deferred income taxes		8,256			1,797
Stock-based compensation expense		3,784			3,218
Excess tax benefit on equity awards		(3,803	)		(1,471	)
Other		694			2,872
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		496			(75	)
Inventories		456			533
Prepaid expenses		2,000			(338	)
Other current assets		(37	)		755
Other assets and liabilities		(1,954	)		756
Accounts payable		(3,896	)		(587	)
Income and other taxes payable		(9,022	)		75
Accrued expenses and other current liabilities		(5,870	)		3,297
Deferred revenue		(83	)		3,812
Net cash provided by operating activities		47,232			65,162

Investing activities
Purchases of property and equipment		(25,493	)		(15,046	)
Loans issued		(3,103	)		(1,206	)
Repayments of loans issued		2,908			1,730
Acquisitions, net of cash acquired		-			(5,908	)
Proceeds from divestitures of restaurants		-			948
Other		319			(4	)
Net cash used in investing activities		(25,369	)		(19,486	)

Financing activities
Net proceeds (repayments) on line of credit facility		44,983			(1,489	)
Excess tax benefit on equity awards		3,803			1,471
Tax payments for restricted stock issuances		(1,841	)		(822	)
Proceeds from exercise of stock options		3,696			10,400
Acquisition of Company common stock		(58,806	)		(38,728	)
Contributions from redeemable noncontrolling interest holders		450			-
Distributions to redeemable noncontrolling interest holders		(1,750	)		(1,930	)
Other		(468	)		125
Net cash used in financing activities		(9,933	)		(30,973	)
Effect of exchange rate changes on cash and cash equivalents		(90	)		(20	)
Change in cash and cash equivalents		11,840			14,683
Cash and cash equivalents at beginning of period		16,396			18,942
Cash and cash equivalents at end of period	$	28,236		$	33,625

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2013

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ended December 29, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) for the year ended December 30, 2012.

2.	Significant Accounting Policies

Accumulated Other Comprehensive Income

Effective December 31, 2012, we adopted Accounting Standards Update 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” on a prospective basis. The updated standard requires the reporting of reclassifications out of accumulated other comprehensive income (“AOCI”). We are required to disclose the effect of significant items reclassified out of AOCI into our consolidated statements of income either parenthetically in the consolidated statements of income for each caption impacted or in a note to the condensed consolidated financial statements. For the three and six months ended June 30, 2013 and June 24, 2012, we did not have any significant amounts reclassified out of AOCI.

Noncontrolling Interests

The Consolidation topic of the Accounting Standards Codification (“ASC”) requires all entities to report noncontrolling interests in subsidiaries separate from the equity of the parent company. The Consolidation topic further requires that consolidated net income be reported at amounts attributable to the parent and the noncontrolling interest, rather than expensing the income attributable to the noncontrolling interest holder. 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 for income attributable to the noncontrolling interest holder.

Papa John’s has joint ventures in which there are redeemable noncontrolling interests, including the following as of June 30, 2013 and June 24, 2012:

	Number of Restaurants		Restaurant Locations	Papa John's Ownership			Reedeemable Noncontrolling Interest Ownership
June 30, 2013
Star Papa, LP		78	Texas		51	%		49	%
Colonel's Limited, LLC		52	Maryland and Virginia		70	%		30	%
PJ Minnesota, LLC		31	Minnesota		80	%		20	%
PJ Denver, LLC		24	Colorado		60	%		40	%

June 24, 2012
Star Papa, LP		76	Texas		51	%		49	%
Colonel's Limited, LLC		52	Maryland and Virginia		70	%		30	%

The income before income taxes attributable to the joint ventures for the three and six months ended June 30, 2013 and June 24, 2012 was as follows (in thousands):

	Three Months				Six Months
	June 30,		June 24,		June 30,		June 24,
	2013		2012		2013		2012

Papa John's International, Inc.	$	1,284	$	1,854	$	2,792	$	3,897
Noncontrolling interests		895		1,172		1,908		2,498
Total income before income taxes	$	2,179	$	3,026	$	4,700	$	6,395

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 net interest expense. The redemption value was $11.2 million as of June 30, 2013 and $11.8 million as of December 30, 2012.

As part of the other joint venture agreements, the noncontrolling interest holders 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 condensed 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 Minnesota, LLC and PJ Denver, LLC agreements contain redemption features that are currently redeemable and, therefore, these noncontrolling interests have been recorded at their current redemption values, which approximate their carrying values.

A reconciliation of the beginning and ending recorded values of the redeemable noncontrolling interests for the six months ended June 30, 2013 is as follows (in thousands):

Balance at December 30, 2012	$	6,380
Net income		1,016
Contributions from redeemable noncontrolling interest holders		450
Distributions to redeemable noncontrolling interest holders		(1,000	)
Balance at June 30, 2013	$	6,846

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. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. Discrete items are recorded in the quarter in which they occur.

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. As a result, our effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. As of June 30, 2013, we had a net deferred tax liability of approximately $4.2 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 on a quarterly basis to adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures.

Fair Value Measurements and Disclosures

The Company is 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. 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 June 30, 2013 and December 30, 2012 are as follows (in thousands):

	Balance Sheet	Carrying		Fair Value Measurements
	Location	Value		Level 1		Level 2		Level 3

June 30, 2013
Financial assets:
Cash surrender value of
life insurance policies *	Other assets	$	15,155	$	15,155	$	-	$	-

Financial liabilities:
Interest rate swap	Other long-term liabilities		31		-		31		-

December 30, 2012
Financial assets:
Cash surrender value of
life insurance policies *	Other assets	$	13,551	$	13,551	$	-	$	-

Financial liabilities:
Interest rate swap	Other long-term liabilities		104		-		104		-

* Represents life insurance policies held in our non-qualified deferred compensation plan.

There were no transfers among levels within the fair value hierarchy during the six months ended June 30, 2013.

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”).

Subsequent Events

Dividend

On August 2, 2013, our Board of Directors approved the initiation of quarterly cash dividends to its shareholders. A quarterly dividend of $0.25 per common share will be paid on September 20, 2013 to shareholders of record as of the close of business on September 6, 2013. Future dividends will be subject to Board declaration.

Interest Rate Swap

On July 30, 2013, we terminated our existing $50 million interest rate swap and entered into a new $75 million interest rate swap through April 30, 2018. See Note 3 for additional information.

There were no other subsequent events that required recognition or disclosure.

Debt

Our debt is comprised entirely of a revolving credit facility. The outstanding balance under this facility was $133.2 million as of June 30, 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. Outstanding balances are charged a percentage margin of 75 basis points to 175 basis points over LIBOR or other bank rates at our option. The remaining availability under the revolving credit facility, reduced for outstanding letters of credit, was approximately $147.2 million as of June 30, 2013.

The revolving credit facility has affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At June 30, 2013, we were in compliance with these covenants.

In August 2011, we entered into an interest rate swap agreement that provided for a fixed rate of 0.53%, as compared to 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 of interest (to 0.56% from 0.53%) but did not impact the notional amount of the interest rate swap agreement. The amendment and restatement of our revolving credit facility on April 30, 2013 did not impact our interest rate swap.

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 AOCI 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 June 30, 2013, the swap is a highly effective cash flow hedge with no ineffectiveness for the three- and six-month periods ended June 30, 2013.

The weighted average interest rates for our revolving credit facility, including the impact of the swap agreement, were 1.1% for the three and six months ended June 30, 2013 and 1.3% for the three and six months ended June 24, 2012. Interest paid, including payments made or received under the swap, was $424,000 and $232,000 for the three months ended June 30, 2013 and June 24, 2012, respectively, and $802,000 and $482,000 for the six months ended June 30, 2013 and June 24, 2012, respectively.

On July 30, 2013, we terminated our existing $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 existing swap will not have a material impact on our third quarter and full year results.

4.	Calculation of Earnings Per Share

The calculations of basic earnings per common share and earnings per common share – assuming dilution are as follows (in thousands, except per-share data):

	Three Months Ended				Six Months Ended
	June 30,		June 24,		June 30,		June 24,
	2013		2012		2013		2012

Basic earnings per common share:
Net income, net of redeemable noncontrolling interests	$	17,150	$	14,289	$	36,456	$	31,270
Weighted average shares outstanding		21,742		23,733		21,998		23,893
Basic earnings per common share	$	0.79	$	0.60	$	1.66	$	1.31

Earnings per common share - assuming dilution:
Net income, net of redeemable noncontrolling interests	$	17,150	$	14,289	$	36,456	$	31,270

Weighted average shares outstanding		21,742		23,733		21,998		23,893
Dilutive effect of outstanding equity awards		508		379		545		377
Diluted weighted average shares outstanding		22,250		24,112		22,543		24,270
Earnings per common share - assuming dilution	$	0.77	$	0.59	$	1.62	$	1.29

Shares subject to options to purchase common stock with an exercise price greater than the average market price for the quarter are not included in the computation of earnings per common share – assuming dilution because the effect would be antidilutive. The weighted average number of shares subject to antidilutive options was 218,000 and 151,000 for the three and six months ended June 30, 2013, respectively (none for the three and six months ended June 24, 2012).

5.	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 condensed consolidated 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.

On February 13, 2013, the parties tentatively agreed to the financial terms of a settlement of the litigation. The court preliminarily approved the terms in June 2013 but final court approval is not expected until later in the year. A reasonable estimate of the total cost of the settlement was provided for at December 30, 2012. Actual costs will be impacted by the claimant participation rate, but we do not expect actual costs to be materially different from our estimates. We expect the majority of the settlement payments to be 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 reimbursed for mileage and expenses in violation of the Fair Labor Standards Act. Approximately 3,900 drivers out of a potential class size of 28,800 have opted into the action. A motion to certify five additional state classes is pending and could result in another 14,000 plaintiffs if granted.

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.

6.	Segment Information

We have defined five reportable segments: domestic Company-owned restaurants, domestic commissaries, North America franchising, international operations, and “all other” units.

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.

Generally, we evaluate performance and allocate resources based on profit or loss from operations before income taxes and intercompany 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.

Our segment information is as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 30, 2013			June 24, 2012			June 30, 2013			June 24, 2012

Revenues from external customers:
Domestic Company-owned restaurants	$	155,153		$	143,527		$	313,051		$	287,342
Domestic commissaries		140,003			126,593			283,897			264,203
North America franchising		20,449			19,307			41,728			40,047
International		21,137			17,381			41,063			34,234
All others		12,444			11,771			25,051			24,029
Total revenues from external customers	$	349,186		$	318,579		$	704,790		$	649,855

Intersegment revenues:
Domestic commissaries	$	46,115		$	39,953		$	92,912		$	81,490
North America franchising		552			561			1,105			1,110
International		73			56			140			110
All others		3,318			2,664			6,486			5,685
Total intersegment revenues	$	50,058		$	43,234		$	100,643		$	88,395

Income (loss) before income taxes:
Domestic Company-owned restaurants	$	8,175		$	9,358		$	19,131		$	21,679
Domestic commissaries		9,642			7,978			19,805			19,144
North America franchising		17,396			16,619			35,618			34,759
International		866			320			1,207			592
All others		1,153			471			1,812			866
Unallocated corporate expenses		(10,413	)		(10,799	)		(19,931	)		(25,583	)
Elimination of intersegment profits		(211	)		(481	)		(737	)		(471	)
Total income before income taxes	$	26,608		$	23,466		$	56,905		$	50,986

Property and equipment:
Domestic Company-owned restaurants	$	188,119
Domestic commissaries		102,498
International		24,546
All others		39,187
Unallocated corporate assets		150,018
Accumulated depreciation and amortization		(302,426	)
Net property and equipment	$	201,942

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) began operations in 1985. At June 30, 2013, there were 4,252 Papa John’s restaurants (705 Company-owned and 3,547 franchised) operating in all 50 states and 34 countries. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, printing and promotional items, risk management services, and information systems and related services used in their operations.

The results of operations are based on the preparation of consolidated financial statements 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 and make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results. See “Notes 1 and 2” of “Notes to Condensed Consolidated Financial Statements” for a discussion of the basis of presentation and the significant accounting policies.

Non-GAAP Measures

In connection with a 2012 multi-year supplier agreement, the Company received a $5.0 million supplier marketing payment in the first quarter of 2012, which the Company then contributed to the Papa John’s Marketing Fund (“PJMF”), an unconsolidated, non-profit corporation, for the benefit of domestic restaurants. The Company’s contribution to PJMF was fully expensed in the first quarter of 2012. The Company is recognizing the supplier marketing payment evenly as income over the five-year term of the agreement ($250,000 per quarter).

PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as advertising credits in the first quarter of 2012. Our domestic Company-owned restaurants’ portion of the 2012 advertising credits resulted in an increase in income before income taxes of approximately $1.0 million.

The overall impact of the two transactions described above, which are collectively defined as the “Incentive Contribution,” increased income before income taxes for the three and six months ended June 30, 2013, by $250,000 and $500,000, respectively, increased income before income taxes by $250,000 for the three months ended June 24, 2012, and reduced income before income taxes by $3.5 million for the six months ended June 24, 2012.

The following table reconciles our GAAP financial results to the adjusted financial results, excluding the impact of the Incentive Contribution, for the three and six months ended June 30, 2013 and June 24, 2012:

	Three Months Ended									Six Months Ended
	June 30,			June 24,			Increase			June 30,			June 24,		Increase
(In thousands, except per share amounts)	2013			2012			(Decrease)			2013			2012		(Decrease)

Income before income taxes, as reported	$	26,608		$	23,466		$	3,142		$	56,905		$	50,986	$	5,919
Incentive Contribution		(250	)		(250	)		-			(500	)		3,471		(3,971	)
Income before income taxes, excluding Incentive Contribution	$	26,358		$	23,216		$	3,142		$	56,405		$	54,457	$	1,948

Net income, as reported	$	17,150		$	14,289		$	2,861		$	36,456		$	31,270	$	5,186
Incentive Contribution		(164	)		(164	)		-			(329	)		2,275		(2,604	)
Net income, excluding Incentive
Contribution	$	16,986		$	14,125		$	2,861		$	36,127		$	33,545	$	2,582

Earnings per diluted share, as reported	$	0.77		$	0.59		$	0.18		$	1.62		$	1.29	$	0.33
Incentive Contribution		(0.01	)		-			(0.01	)		(0.02	)		0.09		(0.11	)
Earnings per diluted share, excluding Incentive Contribution	$	0.76		$	0.59		$	0.17		$	1.60		$	1.38	$	0.22

The financial measures we present in this report, which exclude the Incentive Contribution, are non-GAAP measures and should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. Management believes presenting the financial information excluding the impact of the Incentive Contribution is important for purposes of comparison to prior year results. In addition, management uses these non-GAAP measures to allocate resources, and analyze trends and underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for various levels of management, were based on financial measures that excluded the Incentive Contribution. The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures. See “Discussion of Operating Results” below for further analysis regarding the impact of the Incentive Contribution.

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.

Restaurant Progression

	Three Months Ended						Six Months Ended
	June 30, 2013			June 24, 2012			June 30, 2013			June 24, 2012

North America Company-owned:
Beginning of period		649			597			648			598
Opened		5			-			6			-
Closed		-			(2	)		-			(3	)
Acquired from franchisees		-			56			-			56
Sold to franchisees		-			(8	)		-			(8	)
End of period		654			643			654			643
International Company-owned:
Beginning of period		50			29			48			30
Opened		1			4			3			4
Closed		-			-			-			(1	)
End of period		51			33			51			33
North America franchised:
Beginning of period		2,572			2,498			2,556			2,463
Opened		32			35			63			82
Closed		(16	)		(10	)		(31	)		(22	)
Acquired from Company		-			8			-			8
Sold to Company		-			(56	)		-			(56	)
End of period		2,588			2,475			2,588			2,475
International franchised:
Beginning of period		926			809			911			792
Opened		43			28			69			51
Closed		(10	)		(15	)		(21	)		(21	)
End of period		959			822			959			822
Total restaurants - end of period		4,252			3,973			4,252			3,973

Results of Operations

Summary of Operating Results - Segment Review

Discussion of Revenues

Consolidated revenues were $349.2 million for the three months ended June 30, 2013, an increase of $30.6 million, or 9.6%, over the corresponding 2012 period. For the six months ended June 30, 2013, total revenues were $704.8 million, an increase of $54.9 million, or 8.5%, over the corresponding 2012 period. The increases in revenues for the three and six months ended June 30, 2013, were primarily due to the following:

●

Domestic Company-owned restaurant sales increased $11.6 million, or 8.1%, and $25.7 million, or 8.9%, for the three and six months ended June 30, 2013, respectively, primarily due to increases in comparable sales of 6.0% and 4.9% and the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012. “Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods.

●

North America franchise royalty revenue increased approximately $1.1 million, or 5.9%, and $1.3 million, or 3.4%, for the three and six months ended June 30, 2013, respectively, primarily due to increases in comparable sales of 2.6% and 1.7% and increases in net franchise units over the prior year. These increases were partially offset by reduced royalties attributable to the Company’s net acquisition of the 50 restaurants noted above.

●	Domestic commissary sales increased $13.4 million, or 10.6%, and $19.7 million, or 7.5%, for the three and six months ended June 30, 2013, respectively, primarily due to increases in sales volumes as well as increases in the prices of commodities.
●	International revenues increased $3.8 million, or 21.6%, and increased $6.8 million, or 19.9%, for the three and six months ended June 30, 2013, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 6.8% and 7.5%, calculated on a constant dollar basis.

Discussion of Operating Results

Second quarter 2013 income before income taxes was $26.6 million compared to $23.5 million in the prior year, or a 13.4% increase. Income before income taxes was $56.9 million for the six months ended June 30, 2013, compared to $51.0 million for the prior year, or an 11.6% increase. The Incentive Contribution (see ”Non-GAAP Measures” above) increased income before income taxes by $250,000 and $500,000 for the three and six months ended June 30, 2013 and increased income before income taxes by $250,000 for the three-month period in 2012 and reduced income before income taxes by $3.5 million for the six-month period in 2012. Excluding the net impact of the Incentive Contribution, income before income taxes was $26.4 million for the second quarter of 2013, an increase of $3.1 million or 13.5%, from $23.2 million in the same period in the prior year and was $56.4 million for the six-month period in 2013, an increase of $1.9 million or 3.6%, from $54.5 million in the same period in the prior year. Income before income taxes is summarized in the following table on a reporting segment basis (in thousands):

	Three Months Ended									Six Months Ended
	June 30,			June 24,			Increase			June 30,			June 24,			Increase
	2013			2012			(Decrease)			2013			2012			(Decrease)

Domestic Company-owned restaurants (a)	$	8,175		$	9,358		$	(1,183	)	$	19,131		$	21,679		$	(2,548	)
Domestic commissaries		9,642			7,978			1,664			19,805			19,144			661
North America franchising		17,396			16,619			777			35,618			34,759			859
International		866			320			546			1,207			592			615
All others		1,153			471			682			1,812			866			946
Unallocated corporate expenses (b)		(10,413	)		(10,799	)		386			(19,931	)		(25,583	)		5,652
Elimination of intersegment profit		(211	)		(481	)		270			(737	)		(471	)		(266	)
Total income before income taxes	$	26,608		$	23,466		$	3,142		$	56,905		$	50,986		$	5,919

(a)	Includes the benefit of a $1.0 million advertising credit from PJMF related to the Incentive Contribution for the six months ended June 24, 2012.

(b)	Includes the impact of the Incentive Contribution in 2013 ($250,000 increase for the three-month period and a $500,000 increase for the six-month period) and 2012 ($250,000 increase for the three-month period and a $4.5 million reduction for the six-month period).

Income before income taxes increased $3.1 million and $5.9 million for the three and six months ended June 30, 2013, respectively ($3.1 million and $1.9 million, respectively, excluding the net impact of the Incentive Contribution). The changes in income before income taxes were due to the following:

●	Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ income before income taxes decreased $1.2 million and $1.5 million for the three and six months ended June 30, 2013, respectively, excluding the $1.0 million advertising credit from PJMF in 2012. These decreases were primarily due to higher commodity costs, somewhat offset by incremental profits associated with higher comparable sales of 6.0% and 4.9%. Additionally, the six-month period of 2012 benefited from significant supplier incentives.

●	Domestic Commissary Segment. Domestic commissaries’ income before income taxes increased approximately $1.7 million and $700,000 for the three and six months ended June 30, 2013, respectively. The increase of approximately $1.7 million for the three-month period was primarily due to higher volumes and a higher gross margin. The increase of approximately $700,000 for the six-month period was due to higher volumes, partially offset by the higher than usual margin in the first quarter of 2012. We manage commissary results on a full year basis and anticipate the 2013 full year margin will approximate 2012.

●	North America Franchising Segment. North America Franchising income before income taxes increased approximately $800,000 and $900,000 for the three and six months ended June 30, 2013, respectively. The increases were due to the previously mentioned royalty revenue increases, partially offset by an increase in development incentive costs and reduced royalties attributable to the Company’s acquisition of the Denver and Minneapolis restaurants.

●	International Segment. Income before income taxes increased approximately $500,000 and $600,000 for the three and six months ended June 30, 2013, respectively. The increases were primarily due to higher royalties attributable to the 6.8% and 7.5% comparable sales increases and net unit growth and improvements in our United Kingdom results. The improvement for the six-month period was partially offset by higher expenses in China associated with new Company-owned restaurants.

●	All Others Segment. The “All Others” reporting segment income before income taxes increased approximately $700,000 and $900,000 for the three- and six-month periods, respectively, as compared to the corresponding 2012 periods. These increases were primarily due to an improvement in our online operating results due to higher online sales volumes.

●	Unallocated Corporate Segment. Unallocated corporate expenses decreased approximately $386,000 and $5.7 million for the three and six months ended June 30, 2013, respectively, compared to the corresponding 2012 periods. The components of unallocated corporate expenses were as follows (in thousands):