Edgar Filing: PAPA JOHNS INTERNATIONAL INC

a6488868.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 September 26, 2010

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

Commission File Number: 0-21660

PAPA JOHN'S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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

2002 Papa Johns Boulevard

Louisville, Kentucky 40299-2367

(Address of principal executive offices)

(502) 261-7272

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o

Indicate by check mark whether the registrant 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

At October 27, 2010, there were outstanding 25,773,729 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 –
	September 26, 2010 and December 27, 2009		2

	Consolidated Statements of Income – Three and Nine
	Months Ended September 26, 2010 and September 27, 2009		3

	Consolidated Statements of Stockholders' Equity – Nine
	Months Ended September 26, 2010 and September 27, 2009		4

	Consolidated Statements of Cash Flows – Nine Months
	Ended September 26, 2010 and September 27, 2009		5

	Notes to Condensed Consolidated Financial Statements		6

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28

Item 4.	Controls and Procedures		30

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30

Item 6.	Exhibits		33

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

(In thousands)	September 26, 2010			December 27, 2009
	(Unaudited)			(Note)
Assets
Current assets:
Cash and cash equivalents	$	28,180		$	25,457
Accounts receivable, net		24,713			22,119
Inventories		16,112			15,576
Prepaid expenses		7,398			8,695
Other current assets		3,367			3,748
Deferred income taxes		9,532			8,408
Total current assets		89,302			84,003
Investments		1,629			1,382
Net property and equipment		186,256			187,971
Notes receivable, net		17,379			16,359
Deferred income taxes		5,557			6,804
Goodwill		75,015			75,066
Other assets		22,738			22,141
Total assets	$	397,876		$	393,726

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	24,871		$	26,990
Income and other taxes payable		11,353			5,854
Accrued expenses		50,035			54,241
Total current liabilities		86,259			87,085
Unearned franchise and development fees		6,478			5,668
Long-term debt, net of current portion		99,023			99,050
Other long-term liabilities		12,854			16,886
Stockholders’ equity:
Preferred stock		-			-
Common stock		360			358
Additional paid-in capital		242,491			231,720
Accumulated other comprehensive income (loss)		680			(1,084	)
Retained earnings		229,127			191,212
Treasury stock		(287,329	)		(245,337	)
Total stockholders' equity, net of noncontrolling interests		185,329			176,869
Noncontrolling interests		7,933			8,168
Total stockholders’ equity		193,262			185,037
Total liabilities and stockholders’ equity	$	397,876		$	393,726

Note: The balance sheet at December 27, 2009 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements. See Note 2 for modifications made as a result of adopting recent accounting pronouncements.




See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended						Nine Months Ended
(In thousands, except per share amounts)	Sept. 26, 2010			Sept. 27, 2009			Sept. 26, 2010			Sept. 27, 2009
Domestic revenues:
Company-owned restaurant sales	$	120,414		$	122,023		$	374,652		$	378,694
Franchise royalties		16,346			15,028			51,222			45,053
Franchise and development fees		94			144			241			450
Commissary sales		111,884			96,375			338,460			310,453
Other sales		12,138			11,949			39,674			40,699
International revenues:
Royalties and franchise and development fees		3,678			3,173			10,770			9,796
Restaurant and commissary sales		8,572			7,648			24,540			20,628
Total revenues		273,126			256,340			839,559			805,773
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales		27,245			23,990			81,551			73,784
Salaries and benefits		33,320			35,821			102,915			110,181
Advertising and related costs		11,264			11,284			33,817			33,933
Occupancy costs		8,494			8,171			24,264			23,809
Other operating expenses		18,184			17,455			54,218			52,264
Total domestic Company-owned restaurant expenses		98,507			96,721			296,765			293,971
Domestic commissary and other expenses:
Cost of sales		94,422			78,599			284,909			257,707
Salaries and benefits		8,533			8,592			25,833			26,061
Other operating expenses		12,002			11,523			35,543			33,140
Total domestic commissary and other expenses		114,957			98,714			346,285			316,908
Loss (income) from the franchise cheese-purchasing program,
net of noncontrolling interest		409			(4,171	)		(4,573	)		(16,736	)
International operating expenses		7,627			6,573			21,833			17,837
General and administrative expenses		27,133			29,303			83,983			86,628
Other general expenses		2,643			1,829			6,620			9,244
Depreciation and amortization		8,067			7,745			24,122			23,343
Total costs and expenses		259,343			236,714			775,035			731,195
Operating income		13,783			19,626			64,524			74,578
Investment income		173			149			601			425
Interest expense		(1,416	)		(1,386	)		(3,993	)		(4,242	)
Income before income taxes		12,540			18,389			61,132			70,761
Income tax expense		4,020			5,753			20,545			24,092
Net income, including noncontrolling interests		8,520			12,636			40,587			46,669
Less: income attributable to noncontrolling interests		(672	)		(897	)		(2,672	)		(2,914	)
Net income, net of noncontrolling interests	$	7,848		$	11,739		$	37,915		$	43,755

Basic earnings per common share	$	0.30		$	0.42		$	1.43		$	1.57
Earnings per common share - assuming dilution	$	0.30		$	0.42		$	1.42		$	1.57

Basic weighted average shares outstanding		25,951			27,919			26,586			27,783
Diluted weighted average shares outstanding		26,081			28,011			26,743			27,952

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Unaudited)

	Papa John's International, Inc.
								Accumulated
	Common					Additional		Other											Total
	Stock Shares			Common		Paid-In		Comprehensive			Retained		Treasury			Noncontrolling			Stockholders'
(In thousands)	Outstanding			Stock		Capital		Income (Loss)			Earnings		Stock			Interests			Equity

Balance at December 28, 2008		27,637		$	352	$	216,553	$	(3,818	)	$	133,759	$	(216,860	)	$	8,252		$	138,238
Comprehensive income:
Net income		-			-		-		-			43,755		-			2,914			46,669
Change in valuation of interest rate
swap agreements, net of tax of $519		-			-		-		921			-		-			-			921
Other, net		-			-		-		1,304			-		-			-			1,304
Comprehensive income																				48,894
Exercise of stock options		598			6		9,649		-			-		-			-			9,655
Tax effect related to exercise of
non-qualified stock options		-			-		770		-			-		-			-			770
Acquisition of treasury stock		(275	)		-		-		-			-		(4,958	)		-			(4,958	)
Distributions to noncontrolling
interests		-			-		-		-			-		-			(2,805	)		(2,805	)
Stock-based compensation expense		-			-		4,258		-			-		-			-			4,258
Balance at September 27, 2009		27,960		$	358	$	231,230	$	(1,593	)	$	177,514	$	(221,818	)	$	8,361		$	194,052

Balance at December 27, 2009		26,930		$	358	$	231,720	$	(1,084	)	$	191,212	$	(245,337	)	$	8,168		$	185,037
Comprehensive income:
Net income		-			-		-		-			37,915		-			2,672			40,587
Change in valuation of interest rate
swap agreements, net of tax of $973		-			-		-		1,730			-		-			-			1,730
Other, net		-			-		-		34			-		-			-			34
Comprehensive income																				42,351
Exercise of stock options		283			2		5,017		-			-		285			-			5,304
Acquisition of treasury stock		(1,738	)		-		-		-			-		(43,215	)		-			(43,215	)
Distributions to noncontrolling
interests		-			-		-		-			-		-			(2,907	)		(2,907	)
Stock-based compensation expense		-			-		4,491		-			-		-			-			4,491
Other		121			-		1,263		-			-		938			-			2,201
Balance at September 26, 2010		25,596		$	360	$	242,491	$	680		$	229,127	$	(287,329	)	$	7,933		$	193,262

At September 27, 2009, accumulated other comprehensive loss of $1,593 was comprised of a net unrealized loss on the interest rate swap agreements of $3,029 and an $88 pension plan liability for PJUK, partially offset by unrealized foreign currency translation gains of $1,524.

At September 26, 2010, accumulated other comprehensive income of $680 was comprised of unrealized foreign currency translation gains of $1,565, partially offset by a net unrealized loss on the interest rate swap agreements of $833 and a $52 pension plan liability for PJUK.


See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
(In thousands)	Sept. 26, 2010			Sept. 27, 2009
Operating activities
Net income, net of noncontrolling interests	$	37,915		$	43,755
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable		1,257			2,467
Depreciation and amortization		24,122			23,343
Deferred income taxes		(850	)		5,590
Stock-based compensation expense		4,491			4,258
Excess tax benefit related to exercise of non-qualified stock options		(242	)		(987	)
Other		303			1,443
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(4,094	)		(126	)
Inventories		(525	)		(329	)
Prepaid expenses		1,309			3,582
Other current assets		381			1,938
Other assets and liabilities		(397	)		(1,487	)
Accounts payable		(2,119	)		(3,556	)
Income and other taxes payable		5,499			3,297
Accrued expenses		(5,701	)		(671	)
Unearned franchise and development fees		810			(251	)
Net cash provided by operating activities		62,159			82,266
Investing activities
Purchases of property and equipment		(23,608	)		(21,002	)
Purchases of investments		(548	)		(1,187	)
Proceeds from sale or maturity of investments		301			225
Loans issued		(1,736	)		(11,577	)
Loan repayments		2,444			5,396
Acquisitions		-			(464	)
Proceeds from divestitures of restaurants		1,423			830
Other		10			108
Net cash used in investing activities		(21,714	)		(27,671	)
Financing activities
Net repayments from line of credit facility		-			(24,500	)
Net repayments from short-term debt - variable interest entities		-			(6,200	)
Excess tax benefit related to exercise of non-qualified stock options		242			987
Proceeds from exercise of stock options		5,304			9,655
Acquisition of Company common stock		(43,215	)		(4,958	)
Noncontrolling interests, net of contributions and distributions		(235	)		109
Other		104			(21	)
Net cash used in financing activities		(37,800	)		(24,928	)
Effect of exchange rate changes on cash and cash equivalents		78			157
Change in cash and cash equivalents		2,723			29,824
Cash and cash equivalents at beginning of period		25,457			10,917
Cash and cash equivalents at end of period	$	28,180		$	40,741

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

September 26, 2010

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine months ended September 26, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ended December 26, 2010. 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 27, 2009.

2. Significant Accounting Policies

Recently Adopted Accounting Principle

In 2009, the Financial Accounting Standards Board (“FASB”) amended the consolidation principles associated with variable interest entities (“VIEs”) accounting by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in the VIE with a qualitative approach. The qualitative approach is focused on identifying which company has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity.

Based on the amended consolidation principles, beginning in fiscal 2010, we are no longer required to consolidate certain franchise entities to which we have extended loans. Accordingly, we did not consolidate the financial results of certain franchise entities in the accompanying financial statements for the three and nine months ended September 26, 2010 and have retrospectively applied the provisions to prior period financial statements. The retrospective application resulted in the exclusion of $3.4 million of assets in our accompanying consolidated balance sheet at December 27, 2009 (there was no impact on our consolidated statements of stockholders’ equity from this new accounting pronouncement). Additionally, our consolidated income statement has been adjusted to exclude $10.4 million and $27.3 million of revenues for the three and nine months ended September 27, 2009, respectively, associated with these entities. The operating results of these previously consolidated entities had no impact on Papa John’s operating results or earnings per share for the three and nine months ended September 27, 2009.

Noncontrolling Interests

The Consolidation topic of the Accounting Standards Codification (“ASC”) requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements, but 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 minority 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 had two joint venture arrangements as of September 26, 2010 and September 27, 2009, which were as follows:

Restaurants

Noncontrolling

as of

Restaurant

Papa John's

Interest

Sept. 26, 2010

Locations

Ownership *

Star Papa, LP

Texas

51%

49%

Colonel's Limited, LLC

Maryland and Virginia

70%

30%

*The ownership percentages were the same for both the 2010 and 2009 periods presented in the accompanying consolidated financial statements.

The pre-tax income attributable to the joint ventures for the three and nine months ended September 26, 2010 and September 27, 2009 was as follows:

	Three Months Ended				Nine Months Ended
	Sept. 26,		Sept. 27,		Sept. 26,		Sept. 27,
(In thousands)	2010		2009		2010		2009

Papa John's International, Inc.	$	1,146	$	1,420	$	4,240	$	4,696
Noncontrolling interests		672		897		2,672		2,914
Total pre-tax income	$	1,818	$	2,317	$	6,912	$	7,610

The noncontrolling interest holders’ equity in the joint venture arrangements totaled $7.9 million as of September 26, 2010 and $8.2 million as of December 27, 2009.

Deferred Income Tax Assets 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 enactment date changes. As a result, our effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.

As of September 26, 2010, we had a net deferred tax asset balance of $15.1 million, of which approximately $5.1 million relates to the net operating loss carryforward of BIBP Commodities, Inc. (“BIBP”). We have not provided a valuation allowance for the deferred income tax assets associated with our domestic operations, including BIBP, since we believe it is more likely than not that future earnings will be sufficient to ensure the realization of the net deferred income tax assets for federal and state purposes.

Certain tax authorities periodically audit the Company’s income tax filings. We provide reserves for potential exposures. We evaluate these issues on a quarterly basis to adjust for events, such as court rulings or audit settlements that may impact our ultimate payment for such exposures.

Modification of our Non-qualified Deferred Compensation Plan

During the first quarter of 2010, we modified the provisions of our non-qualified deferred compensation plan. Previously, participants who elected an investment in phantom Papa John’s stock were paid in cash upon settlement of their investment balance. Effective the first quarter of 2010, we began settling future distributions of the deemed investment balances in Papa John’s stock through the issuance of Company stock. Accordingly, during the first quarter of 2010, we reclassified $2.0 million from other long-term liabilities to paid-in capital in the accompanying consolidated financial statements.

Subsequent Events

The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission in this Form 10-Q. There were no subsequent events that required recognition or disclosure.

3. Accounting for Variable Interest Entities

The Consolidation topic of the ASC provides a framework for identifying VIEs and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements.

In general, a VIE is a corporation, partnership, limited liability company, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

Consolidation of a VIE is required if a party with an ownership, contractual or other financial interest in the VIE (“a variable interest holder”) has both of the following characteristics: (1) has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (2) is obligated to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. Disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest is also required. See Note 2 for the impact on our financial statements from the FASB’s recent amendment to VIE accounting.

We have a purchasing arrangement with BIBP, a special-purpose entity formed at the direction of our Franchise Advisory Council, for the sole purpose of reducing cheese price volatility to domestic system-wide restaurants. BIBP is an independent, franchisee-owned corporation. BIBP purchases cheese at the market price and sells it to our distribution subsidiary, PJ Food Service, Inc. (“PJFS”), at a fixed price. PJFS in turn sells cheese to Papa John’s restaurants (both Company-owned and franchised) at a fixed monthly price. PJFS purchased $37.1 million and $113.6 million of cheese from BIBP for the three and nine months ended September 26, 2010, respectively, compared to $35.5 million and $106.5 million in the 2009 comparable periods, respectively.

We are deemed the primary beneficiary of BIBP, a VIE, for accounting purposes. We recognize the operating losses generated by BIBP if BIBP’s shareholders’ equity is in a net deficit position. Further, we recognize the subsequent operating income generated by BIBP up to the amount of any losses previously recognized. We recognized a pre-tax loss of $658,000 ($417,000 net of tax, or $0.02 per diluted share) and pre-tax income of $5.5 million ($3.5 million net of tax, or $0.13 per diluted share) for the three and nine months ended September 26, 2010, respectively, and pre-tax income of $5.1 million ($3.2 million net of tax, or $0.12 per share) and $21.0 million ($13.3 million net of tax, or $0.48 per share) for the three and nine months ended September 27, 2009, respectively, from the consolidation of BIBP. The impact on future operating income from the consolidation of BIBP is expected to continue to be significant for any given reporting period due to the anticipated volatility of the cheese market, but is not expected to be cumulatively significant over time.

At September 26, 2010, BIBP had a $10.0 million line of credit with a commercial bank, which is guaranteed by Papa John’s (no balance was outstanding as of September 26, 2010). In addition, Papa John’s agreed to provide additional funding in the form of a line of credit to BIBP. As of September 26, 2010, BIBP had $18.5 million of short-term debt outstanding under the line of credit from Papa John’s (the $18.5 million outstanding balance under the Papa John’s line of credit is eliminated upon consolidation of the financial results of BIBP with Papa John’s).

The following table summarizes the balance sheets for BIBP as of September 26, 2010 and December 27, 2009:

	September 26,			December 27,
(In thousands)	2010			2009

Assets:
Cash and cash equivalents	$	2,906		$	3,857
Accounts receivable - Papa John's		916			469
Inventory and other current assets		1,534			1,917
Deferred income taxes		5,132			7,064
Total assets	$	10,488		$	13,307

Liabilities and stockholders' equity (deficit):
Accounts payable and accrued expenses	$	1,409		$	1,596
Short-term debt - Papa John's		18,538			24,633
Total liabilities		19,947			26,229
Stockholders' equity (deficit)		(9,459	)		(12,922	)
Total liabilities and stockholders' equity (deficit)	$	10,488		$	13,307

4. Debt

Our debt is comprised of the following (in thousands):

	September 26,		December 27,
	2010		2009

Revolving line of credit	$	99,000	$	99,000
Other		23		50
Total debt		99,023		99,050
Less: current portion of debt		-		-
Long-term debt	$	99,023	$	99,050

In September 2010, we executed a five-year, unsecured Revolving Credit Facility (“New Credit Facility”) totaling $175.0 million that replaced a $175.0 million unsecured Revolving Credit Facility (“Old Credit Facility”). Under the New Credit Facility, outstanding balances accrue interest at 100.0 to 175.0 basis points over the London Interbank Offered Rate (LIBOR) or other bank-developed rates, at our option. The commitment fee on the unused balance ranges from 17.5 to 25.0 basis points. The increment over LIBOR and the commitment fee are determined quarterly based upon the ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the New Credit Facility. Outstanding balances under the Old Credit Facility accrued interest at 50.0 to 100.0 basis points over LIBOR or other bank developed rates, at our option. The commitment fee on the unused balance ranged from 12.5 to 20.0 basis points. The remaining availability under our New Credit Facility, reduced for certain outstanding letters of credit, approximated $59.7 million as of September 26, 2010 and $58.0 million as of December 27, 2009. The fair value of our outstanding debt approximates the carrying value since our debt agreements are variable-rate instruments.

The New Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. We were in compliance with all covenants at September 26, 2010.

We presently have two interest rate swap agreements (“swaps”) that provide fixed interest rates, as compared to LIBOR, as follows:

	Floating Rate Debt	Fixed Rates
The first interest rate swap agreement:
January 16, 2007 to January 15, 2009	$60 million	4.98%
January 15, 2009 to January 15, 2011	$50 million	4.98%

The second interest rate swap agreement:
January 31, 2009 to January 31, 2011	$50 million	3.74%

Our swaps are derivative instruments that are designated as cash flow hedges because the swaps provide a hedge against the effects of rising interest rates on present and/or forecasted future borrowings. The effective portion of the gain or loss on the swaps is reported as a component of accumulated other comprehensive income (loss) (“OCI”) and reclassified into earnings in the same period or periods during which the swaps affect earnings. Gains or losses on the swaps representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Amounts payable or receivable under the swaps are accounted for as adjustments to interest expense.

The following tables provide information on the location and amounts of our swaps in the accompanying consolidated financial statements (in thousands):

Fair Values of Derivative Instruments:

	Liability Derivatives
		Fair Value		Fair Value
Type of Derivative	Balance Sheet Location	Sept. 26, 2010		Dec. 27, 2009

Interest rate swaps	Other long-term liabilities	$	1,341	$	4,044

There were no derivatives that were not designated as hedging instruments under the provisions of the ASC topic, Derivatives and Hedging.

Effect of Derivative Instruments on the Consolidated Financial Statements:

Derivatives - Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)		Classification 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)			Classification 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)

Interest rate swaps:

Three months ended:
Sept. 26, 2010	$	581	Interest expense	$	(1,023	)	Not applicable	$	0
Sept. 27, 2009	$	348	Interest expense	$	(1,030	)	Interest expense	$	(40	)

Nine months ended:
Sept. 26, 2010	$	1,730	Interest expense	$	(3,094	)	Not applicable	$	0
Sept. 27, 2009	$	921	Interest expense	$	(2,996	)	Interest expense	$	(40	)

The weighted average interest rate for our borrowings under our New Credit Facility and our Old Credit Facility, including the impact of the previously mentioned interest rate swap agreements, was 5.20% and 4.98% for the three months ended September 26, 2010 and September 27, 2009, respectively, and 5.09% and 4.75% for the nine months ended September 26, 2010 and September 27, 2009, respectively. Interest paid, including payments made or received under the swaps, was $1.4 million and $4.0 million for the three and nine months ended September 26, 2010, respectively, compared to $1.3 million and $4.1 million for the three and nine months ended September 27, 2009, respectively. The interest rate swap liability of $1.3 million as of September 26, 2010 will be reclassified into earnings during the next four months as interest expense.

5. 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				Nine Months Ended
	Sept. 26,		Sept. 27,		Sept. 26,		Sept. 27,
	2010		2009		2010		2009

Basic earnings per common share:
Net income	$	7,848	$	11,739	$	37,915	$	43,755
Weighted average shares outstanding		25,951		27,919		26,586		27,783
Basic earnings per common share	$	0.30	$	0.42	$	1.43	$	1.57

Earnings per common share - assuming dilution:
Net income	$	7,848	$	11,739	$	37,915	$	43,755

Weighted average shares outstanding		25,951		27,919		26,586		27,783
Dilutive effect of outstanding compensation awards		130		92		157		169
Diluted weighted average shares outstanding		26,081		28,011		26,743		27,952
Earnings per common share - assuming dilution	$	0.30	$	0.42	$	1.42	$	1.57

Shares subject to options to purchase common stock with an exercise price greater than the average market price for the quarter were not included in the computation of the dilutive effect of common stock options because the effect would have been antidilutive. The weighted average number of shares subject to the antidilutive options was 1.7 million and 1.4 million for the three-month periods ending September 26, 2010 and September 27, 2009, respectively. The weighted average number of shares subject to the antidilutive options for the nine-month periods ending September 26, 2010 and September 27, 2009 was 1.5 million and 1.4 million, respectively.

6. Comprehensive Income

Comprehensive income is comprised of the following:

	Three Months Ended					Nine Months Ended
(In thousands)	Sept. 26, 2010		Sept. 27, 2009			Sept. 26, 2010		Sept. 27, 2009

Net income, including noncontrolling interests	$	8,520	$	12,636		$	40,587	$	46,669
Change in valuation of interest rate swap
agreements, net of tax		581		348			1,730		921
Foreign currency translation		1,471		(956	)		34		1,304
Comprehensive income	$	10,572	$	12,028		$	42,351	$	48,894

7. Notes Receivable

Selected franchisees have borrowed funds from our subsidiary, Capital Delivery, Ltd., 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.

Loans outstanding, net of allowance for doubtful accounts, were approximately $17.4 million as of September 26, 2010 and $16.4 million as of December 27, 2009. We have recorded reserves of $7.4 million and $7.6 million as of September 26, 2010 and December 27, 2009, respectively, for potentially uncollectible notes receivable. We concluded the reserves were necessary due to certain borrowers’ economic performance and underlying collateral value.

8. Contingencies

In connection with the 2006 sale of our former Perfect Pizza operations in the United Kingdom, we remain contingently liable for payment under 62 lease arrangements, primarily associated with Perfect Pizza restaurant sites for which the Perfect Pizza franchisor is primarily liable. The leases have varying terms, the latest of which expires in 2017. As of September 26, 2010, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the new owner of Perfect Pizza and associated franchisees was approximately $4.8 million. We have not recorded a liability with respect to such leases at September 26, 2010, as our cross-default provisions with the Perfect Pizza franchisor significantly reduce the risk that we will be required to make payments under these leases.

We are subject to claims and legal actions in the ordinary course of business. We believe that all such claims and actions currently pending against us are either adequately covered by insurance or would not have a material adverse effect on us if decided in a manner unfavorable to us.

9. Segment Information

We have defined six reportable segments: domestic Company-owned restaurants, domestic commissaries, domestic franchising, international, variable interest entities (“VIEs”) and “all other” units.

The domestic restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States) Company-owned restaurants and derives its revenues principally from retail sales of pizza and side items, such as breadsticks, cheesesticks, chicken strips, chicken wings, dessert 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 domestic franchising segment consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and collection of royalties from our domestic franchisees. The international operations segment principally consists of our Company-owned restaurants and distribution sales to franchised Papa John’s restaurants located in the United Kingdom, China and Mexico and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. International franchisees are defined as all franchise operations outside of the 48 contiguous United States. BIBP is a variable interest entity in which we are deemed the primary beneficiary, as defined in Note 3, and is the only activity reflected in the VIE segment for both periods presented. All other business units that do not meet the quantitative thresholds for determining reportable segments consist of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of printing and promotional items, risk management services, and information systems and related services used in restaurant operations, 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 eliminations. Certain administrative and capital costs are allocated to segments based upon predetermined rates or actual estimated resource usage. We account for intercompany sales and transfers as if the sales or transfers were to third parties and eliminate the related profit in consolidation.

Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our consolidated revenues.

Our segment information is as follows:

	Three Months Ended						Nine Months Ended
(In thousands)	Sept. 26, 2010			Sept. 27, 2009			Sept. 26, 2010			Sept. 27, 2009
Revenues from external customers:
Domestic Company-owned restaurants	$	120,414		$	122,023		$	374,652		$	378,694
Domestic commissaries		111,884			96,375			338,460			310,453
Domestic franchising		16,440			15,172			51,463			45,503
International		12,250			10,821			35,310			30,424
All others		12,138			11,949			39,674			40,699
Total revenues from external customers	$	273,126		$	256,340		$	839,559		$	805,773

Intersegment revenues:
Domestic commissaries	$	32,376		$	35,892		$	99,254		$	101,401
Domestic franchising		494			480			1,509			1,494
International		163			280			852			790
Variable interest entities		37,052			35,483			113,556			106,483
All others		2,854			2,878			8,713			8,661
Total intersegment revenues	$	72,939		$	75,013		$	223,884		$	218,829

Income (loss) before income taxes:
Domestic Company-owned restaurants	$	5,503		$	7,439		$	25,604		$	27,982
Domestic commissaries		5,393			5,767			20,577			22,635
Domestic franchising		14,361			13,127			45,731			39,633
International		(1,007	)		(904	)		(3,180	)		(2,528	)
Variable interest entities		(658	)		5,104			5,505			20,983
All others		60			(103	)		1,187			911
Unallocated corporate expenses		(11,004	)		(11,991	)		(33,963	)		(38,689	)
Elimination of intersegment profits		(108	)		(50	)		(329	)		(166	)
Total income before income taxes	$	12,540		$	18,389		$	61,132		$	70,761
Income attributable to noncontrolling interests		(672	)		(897	)		(2,672	)		(2,914	)
Total income before income taxes, net
of noncontrolling interests	$	11,868		$	17,492		$	58,460		$	67,847

Property and equipment:
Domestic Company-owned restaurants	$	164,388
Domestic commissaries		80,527
International		16,357
All others		33,191
Unallocated corporate assets		125,327
Accumulated depreciation and amortization		(233,534	)
Net property and equipment	$	186,256

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

Results of Operations and Critical Accounting Policies and Estimates

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) began operations in 1985. At September 26, 2010, there were 3,583 Papa John’s restaurants (610 Company-owned and 2,973 franchised) operating in all 50 states and 29 countries. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, printing and promotional items, risk management services, and information systems and related services used in their operations.

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. 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. These reserves and corresponding write-offs could significantly increase if the identified franchisees and other customers begin to or continue to experience deteriorating financial results.

Long-Lived and Intangible Assets

The recoverability of long-lived assets is evaluated if impairment indicators exist. Indicators of impairment include historical financial performance, operating trends and our future operating plans. If impairment indicators exist, we evaluate the recoverability of long-lived assets on an operating unit basis (e.g., an individual restaurant) based on undiscounted expected future cash flows before interest for the expected remaining useful life of the operating unit. Recorded values for long-lived assets that are not expected to be recovered through undiscounted future cash flows are written down to current fair value, which is generally determined from estimated discounted future net cash flows for assets held for use or estimated net realizable value for assets held for sale.

The recoverability of indefinite-lived intangible assets (i.e., goodwill) is evaluated annually or more frequently if impairment indicators exist, on a reporting unit basis by comparing the estimated fair value to its carrying value. Our estimated fair value for Company-owned restaurants is comprised of two components. The first component is the estimated cash sales price that would be received at the time of the sale and the second component is an investment in the continuing franchise agreement, representing the discounted value of future royalties less any incremental direct operating costs that would be collected under the ten-year franchise agreement.

At September 26, 2010, we had a net investment of approximately $20.7 million associated with our United Kingdom subsidiary (PJUK). The goodwill allocated to this entity approximated $15.0 million at September 26, 2010. We have previously recorded goodwill impairment charges for this entity. We have developed plans for PJUK to continue to improve its operating results. The plans include efforts to increase Papa John’s brand awareness in the United Kingdom, improve sales and profitability for individual restaurants and increase net PJUK franchised unit openings over the next several years. We will continue to periodically evaluate our progress in achieving these plans.

If our growth initiatives with PJUK and certain domestic markets are not successful, future impairment charges could be recorded.

Insurance Reserves

Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles and health insurance coverage provided to our employees are self-insured up to certain individual and aggregate reinsurance levels. Losses are accrued based upon estimates of the aggregate retained liability for claims incurred using certain third-party actuarial projections and our claims loss experience. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims significantly differ from historical trends used to estimate the insurance reserves recorded by the Company.

From October 2000 through September 2004, our captive insurance company, which provided insurance to our franchisees, was self-insured. In October 2004, a third-party commercial insurance company began providing fully-insured coverage to franchisees participating in the franchise insurance program. Accordingly, this arrangement eliminates our risk of loss for franchise insurance coverage written after September 2004. Our operating income is still subject to potential adjustments for changes in estimated insurance reserves for policies written from the inception of the captive insurance company in October 2000 to September 2004. Such adjustments, if any, will be determined in part based upon periodic actuarial valuations.

Deferred Income Tax Assets and Tax Reserves

As of September 26, 2010, we had a net deferred income tax asset balance of $15.1 million, of which approximately $5.1 million relates to the net operating loss carryforward of BIBP Commodities, Inc. (“BIBP”). We have not provided a valuation allowance for the deferred income tax assets associated with our domestic operations, including BIBP, since we believe it is more likely than not that future earnings will be sufficient to ensure the realization of the net deferred income tax assets for federal and state purposes.

Certain tax authorities periodically audit the Company. We provide reserves for potential exposures. We evaluate these issues on a quarterly basis to adjust for events, such as court rulings or audit settlements that may impact our ultimate payment for such exposures.

Consolidation of BIBP Commodities, Inc. as a Variable Interest Entity

BIBP is a franchisee-owned corporation that conducts a cheese-purchasing program on behalf of domestic Company-owned and franchised restaurants. We consolidate the financial results of BIBP, since we are the primary beneficiary, as defined. We recognized a pre-tax loss of approximately $700,000 and pre-tax income of $5.5 million for the three and nine months ended September 26, 2010, respectively, compared to pre-tax income of $5.1 million and $21.0 million for the same periods in 2009, respectively, from the consolidation of BIBP. We expect the consolidation of BIBP to continue to have a significant impact on Papa John’s operating income in future periods due to the volatility of cheese prices, but BIBP’s operating results are not expected to be cumulatively significant over time. Papa John’s will recognize the losses generated by BIBP if the shareholders’ equity of BIBP is in a net deficit position. Further, Papa John’s will recognize subsequent income generated by BIBP up to the amount of BIBP losses previously recognized by Papa John’s.

Recent Accounting Pronouncements

Based on the amended consolidation principles, beginning in fiscal 2010, we are no longer required to consolidate certain franchise entities to which we have extended loans. Accordingly, we did not consolidate the financial results of certain franchise entities in the accompanying financial statements for the three and nine months ended September 26, 2010 and have retrospectively applied the provisions to prior period financial statements. The retrospective application resulted in the exclusion of $3.4 million of assets in our accompanying consolidated balance sheet at December 27, 2009 (there was no impact on our consolidated statements of stockholders equity from this new accounting pronouncement). Additionally, our consolidated income statement for the three and nine months ended September 27, 2009 has been adjusted to exclude $10.4 million and $27.3 million of revenues, respectively, associated with these entities. The operating results of the entities had no impact on Papa John’s operating results or earnings per share for the three and nine months ended September 27, 2009.

Restaurant Progression:

	Three Months Ended						Nine Months Ended
	Sept. 26, 2010			Sept. 27, 2009			Sept. 26, 2010			Sept. 27, 2009

Papa John's Restaurant Progression:
Domestic Company-owned:
Beginning of period		590			589			588			592
Opened		-			2			4			5
Closed		-			(1	)		(2	)		(6	)
Acquired from franchisees		-			-			-			11
Sold to franchisees		-			-			-			(12	)
End of period		590			590			590			590
International Company-owned:
Beginning of period		29			23			26			23
Opened		2			-			6			1
Closed		(1	)		-			(1	)		(1	)
Acquired from franchisees		-			-			1			-
Sold to franchisees		(10	)		-			(12	)		-
End of period		20			23			20			23
Domestic franchised:
Beginning of period		2,224			2,192			2,193			2,200
Opened		44			33			120			58
Closed		(10	)		(13	)		(55	)		(47	)
Acquired from Company		-			-			-			12
Sold to Company		-			-			-			(11	)
End of period		2,258			2,212			2,258			2,212
International franchised:
Beginning of period		673			614			662			565
Opened		37			26			90			88
Closed		(5	)		(7	)		(48	)		(20	)
Acquired from Company		10			-			12			-
Sold to Company		-			-			(1	)		-
End of period		715			633			715			633
Total restaurants - end of period		3,583			3,458			3,583			3,458

Results of Operations

Variable Interest Entities

As required by the Consolidation topic of the ASC, our operating results include BIBP’s operating results. The consolidation of BIBP had a significant impact on our operating results for the nine months ended September 26, 2010 and for the full year of 2009, and is expected to have a significant impact on our future operating results, including the full year of 2010, and income statement presentation as described below.

Consolidation accounting requires the net impact from the consolidation of BIBP to be reflected primarily in three separate components of our statement of income. The first component is the portion of BIBP operating income or loss attributable to the amount of cheese purchased by Company-owned restaurants during the period. This portion of BIBP operating income (loss) is reflected as a reduction (increase) in the “Domestic Company-owned restaurant expenses - cost of sales” line item. This approach effectively reports cost of sales for Company-owned restaurants as if the purchasing arrangement with BIBP did not exist and such restaurants were purchasing cheese at the spot market prices (i.e., the impact of BIBP is eliminated in consolidation).

The second component of the net impact from the consolidation of BIBP is reflected in the caption “Income from the franchise cheese-purchasing program, net of noncontrolling interest.” This line item represents BIBP’s income or loss from purchasing cheese at the spot market price and selling to franchised restaurants at a fixed monthly price, net of any income or loss attributable to the minority interest BIBP shareholders. The amount of income or loss attributable to the BIBP shareholders depends on its cumulative shareholders’ equity balance and the change in such balance during the reporting period. The third component is reflected as investment income or interest expense, depending upon whether BIBP is in a net investment or net borrowing position during the reporting period.

The following table summarizes the impact of BIBP, prior to the required consolidating eliminations, on our consolidated statements of income for the three and nine months ended September 26, 2010 and September 27, 2009 (in thousands):

	Three Months Ended						Nine Months Ended
	Sept. 26, 2010			Sept. 27, 2009			Sept. 26, 2010			Sept. 27, 2009

BIBP sales	$	37,052		$	35,483		$	113,556		$	106,483

Operating expenses		37,580			30,070			107,629			84,652
General and administrative expenses		25			137			66			187
Total costs and expenses		37,605			30,207			107,695			84,839
Operating (loss) income		(553	)		5,276			5,861			21,644
Interest expense		(105	)		(172	)		(356	)		(661	)
(Loss) income before income taxes	$	(658	)	$	5,104		$	5,505		$	20,983

Non-GAAP Measures

The financial information we present in this report that excludes the impact of the consolidation of BIBP are not measures that are defined within GAAP. These non-GAAP measures should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. We believe the financial information excluding the impact of the consolidation of BIBP is important for purposes of comparison to prior periods and development of future projections and earnings growth prospects. We analyze our business performance and trends excluding the impact of the consolidation of BIBP because the results of BIBP are not indicative of our principal operating activities. In addition, annual cash bonuses, and certain long-term incentive programs for various levels of management, are based on financial measures that exclude BIBP. The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.

Summary of Operating Results

Total revenues were $273.1 million for the third quarter of 2010, representing an increase of 6.5% from revenues of $256.3 million for the same period in 2009. For the nine months ended September 26, 2010, total revenues were $839.6 million, representing an increase of 4.2% from revenues of $805.8 million for the comparable period in 2009. The increases of $16.8 million and $33.8 million in revenues for the three and nine months ended September 26, 2010, respectively, were primarily due to the following:

Franchise royalties revenue increased $1.3 million and $6.2 million for the three and nine months ended September 26, 2010, respectively, primarily due to an increase in the royalty rate (the standard royalty rate for the majority of domestic franchise restaurants increased from 4.25% to 4.50% in September 2009 and increased to 4.75% in the first quarter of 2010).

Domestic commissary sales increased $15.5 million and $28.0 million for the three and nine months ended September 26, 2010, respectively. The increase for the three-month period was due to higher commodities costs, substantially all of which were passed through in pricing to our franchised restaurants, and an increase in sales volumes. The increase for the nine-month period was due to an increase in volumes, partially offset by lower pricing as our commissaries reduced their margins (commodities costs were flat for the nine-month period).