Edgar Filing: PAPA JOHNS INTERNATIONAL INC

a6811588.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 26, 2011

[ ]	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 [ ]

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 27, 2011, there were outstanding 25,308,455 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 26, 2011 and December 26, 2010	2

	Consolidated Statements of Income – Three and Six Months Ended June 26, 2011 and June 27, 2010	3

	Consolidated Statements of Stockholders' Equity – Six Months Ended June 26, 2011 and June 27, 2010	4

	Consolidated Statements of Cash Flows – Six Months Ended June 26, 2011 and June 27, 2010	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 6.	Exhibits	31

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


(In thousands)	June 26, 2011			December 26, 2010
	(Unaudited)			(Note)
Assets
Current assets:
Cash and cash equivalents	$	20,106		$	46,225
Accounts receivable, net		26,471			25,357
Inventories		15,583			17,402
Prepaid expenses		10,277			10,009
Other current assets		3,710			3,732
Deferred income taxes		7,626			9,647
Total current assets		83,773			112,372
Investments		1,714			1,604
Net property and equipment		182,788			186,594
Notes receivable, net		15,281			17,354
Goodwill		74,746			74,697
Other assets		22,393			23,320
Total assets	$	380,695		$	415,941

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	29,599		$	31,569
Income and other taxes payable		6,868			6,140
Accrued expenses		49,813			52,978
Total current liabilities		86,280			90,687
Unearned franchise and development fees		6,651			6,596
Long-term debt		48,000			99,017
Other long-term liabilities		12,478			12,100
Deferred income taxes		3,485			341
Stockholders’ equity:
Preferred stock		-			-
Common stock		365			361
Additional paid-in capital		256,705			245,380
Accumulated other comprehensive loss		1,608			849
Retained earnings		271,703			243,152
Treasury stock		(315,108	)		(291,048	)
Total stockholders' equity, net of noncontrolling interests		215,273			198,694
Noncontrolling interests in subsidiaries		8,528			8,506
Total stockholders’ equity		223,801			207,200
Total liabilities and stockholders’ equity	$	380,695		$	415,941

Note: The balance sheet at December 26, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements.

See accompanying notes.

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 26, 2011			June 27, 2010			June 26, 2011			June 27, 2010
North America revenues:
Domestic Company-owned restaurant sales	$	127,641		$	124,594		$	266,312		$	254,238
Franchise royalties		18,103			17,440			37,834			35,485
Franchise and development fees		124			106			309			311
Domestic commissary sales		121,027			113,936			248,699			226,576
Other sales		12,370			13,023			25,817			27,536
International revenues:
Royalties and franchise and development fees		4,049			3,153			7,811			6,319
Restaurant and commissary sales		10,220			8,395			19,219			15,968
Total revenues		293,534			280,647			606,001			566,433
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales		30,162			27,020			62,262			54,306
Salaries and benefits		34,367			34,192			72,016			69,595
Advertising and related costs		11,898			11,149			24,687			22,553
Occupancy costs		7,939			7,930			15,808			15,770
Other operating expenses		18,492			17,844			38,407			36,034
Total domestic Company-owned restaurant expenses		102,858			98,135			213,180			198,258
Domestic commissary and other expenses:
Cost of sales		103,529			95,195			209,972			190,487
Salaries and benefits		8,651			8,568			17,662			17,300
Other operating expenses		13,084			11,841			26,669			23,541
Total domestic commissary and other expenses		125,264			115,604			254,303			231,328
Income from the franchise cheese-purchasing program,
net of noncontrolling interest		-			(2,173	)		-			(4,982	)
International operating expenses		8,756			7,430			16,484			14,206
General and administrative expenses		27,617			28,990			56,691			56,850
Other general expenses		1,459			1,687			2,240			3,977
Depreciation and amortization		8,425			8,175			16,737			16,055
Total costs and expenses		274,379			257,848			559,635			515,692
Operating income		19,155			22,799			46,366			50,741
Investment income		205			197			382			428
Interest expense		(293	)		(1,333	)		(901	)		(2,577	)
Income before income taxes		19,067			21,663			45,847			48,592
Income tax expense		6,014			7,560			15,245			16,525
Net income, including noncontrolling interests		13,053			14,103			30,602			32,067
Less: income attributable to noncontrolling interests		(929	)		(911	)		(2,051	)		(2,000	)
Net income, net of noncontrolling interests	$	12,124		$	13,192		$	28,551		$	30,067

Basic earnings per common share	$	0.48		$	0.49		$	1.12		$	1.12
Earnings per common share - assuming dilution	$	0.47		$	0.49		$	1.11		$	1.11

Basic weighted average shares outstanding		25,464			26,760			25,474			26,901
Diluted weighted average shares outstanding		25,685			26,971			25,713			27,036

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Unaudited)

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

Balance at December 27, 2009		26,930		$	358	$	231,720		$	(1,084	)	$	191,212	$	(245,337	)	$	8,168		$	185,037
Comprehensive income:
Net income		-			-		-			-			30,067		-			2,000			32,067
Change in valuation of interest rate
swap agreements, net of tax of $646		-			-		-			1,149			-		-			-			1,149
Foreign currency translation		-			-		-			(1,437	)		-		-			-			(1,437	)
Comprehensive income																					31,779
Exercise of stock options		273			2		4,838			-			-		285			-			5,125
Tax effect of non-qualified
stock options		-			-		179			-			-		-			-			179
Acquisition of Company common stock		(975	)		-		-			-			-		(24,417	)		-			(24,417	)
Net contributions (distributions) -
noncontrolling interests		-			-		-			-			-		-			(870	)		(870	)
Stock-based compensation expense		-			-		3,549			-			-		-			-			3,549
Issuance of restricted stock		30			-		(854	)		-			-		817			-			(37	)
Other		-			-		2,153			-			-		-			-			2,153
Balance at June 27, 2010		26,258		$	360	$	241,585		$	(1,372	)	$	221,279	$	(268,652	)	$	9,298		$	202,498

Balance at December 26, 2010		25,439		$	361	$	245,380		$	849		$	243,152	$	(291,048	)	$	8,506		$	207,200
Comprehensive income:
Net income		-			-		-			-			28,551		-			2,051			30,602
Change in valuation of interest rate
swap agreements, net of tax of $89		-			-		-			159			-		-			-			159
Foreign currency translation		-			-		-			600			-		-			-			600
Comprehensive income																					31,361
Exercise of stock options		444			4		10,659			-			-		-			-			10,663
Tax effect of non-qualified
stock options		-			-		(496	)		-			-		-			-			(496	)
Acquisition of Company common stock		(817	)		-		-			-			-		(26,162	)		-			(26,162	)
Net contributions (distributions) -
noncontrolling interests		-			-		-			-			-		-			(2,029	)		(2,029	)
Stock-based compensation expense		-			-		3,903			-			-		-			-			3,903
Issuance of restricted stock		76			-		(2,683	)		-			-		1,884			-			(799	)
Other		-			-		(58	)		-			-		218			-			160
Balance at June 26, 2011		25,142		$	365	$	256,705		$	1,608		$	271,703	$	(315,108	)	$	8,528		$	223,801

At June 27, 2010, the accumulated other comprehensive loss of $1,372 was comprised of a net unrealized loss on the interest rate swap agreements of $1,413 and a $52 pension plan liability for PJUK, offset by unrealized foreign currency translation gains of $93.

At June 26, 2011, accumulated other comprehensive income of $1,608 was comprised of unrealized foreign currency translation gains.

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended
(In thousands)	June 26, 2011			June 27, 2010
Operating activities
Net income, net of noncontrolling interests	$	28,551		$	30,067
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for uncollectible accounts and notes receivable		(7	)		713
Depreciation and amortization		16,737			16,055
Deferred income taxes		4,332			(250	)
Stock-based compensation expense		3,903			3,549
Excess tax benefit related to exercise of non-qualified stock options		(403	)		(242	)
Other		316			368
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(1,965	)		(1,764	)
Inventories		1,819			298
Prepaid expenses		(268	)		(1,559	)
Other current assets		22			106
Other assets and liabilities		1,258			(329	)
Accounts payable		(1,970	)		(851	)
Income and other taxes payable		728			4,529
Accrued expenses		(3,032	)		(5,432	)
Unearned franchise and development fees		55			428
Net cash provided by operating activities		50,076			45,686
Investing activities
Purchase of property and equipment		(12,422	)		(16,871	)
Purchase of investments		(205	)		(548	)
Proceeds from sale or maturity of investments		95			240
Loans issued		(1,684	)		(460	)
Loan repayments		3,920			1,943
Proceeds from divestitures of restaurants		-			36
Other		51			11
Net cash used in investing activities		(10,245	)		(15,649	)
Financing activities
Net repayments on line of credit facility		(51,000	)		-
Excess tax benefit related to exercise of non-qualified stock options		403			242
Proceeds from exercise of stock options		10,663			5,125
Acquisition of Company common stock		(26,162	)		(24,417	)
Noncontrolling interests, net of contributions and distributions		22			1,130
Other		42			114
Net cash used in financing activities		(66,032	)		(17,806	)
Effect of exchange rate changes on cash and cash equivalents		82			22
Change in cash and cash equivalents		(26,119	)		12,253
Cash and cash equivalents at beginning of period		46,225			25,457
Cash and cash equivalents at end of period	$	20,106		$	37,710

See accompanying notes.

Papa John's International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 26, 2011

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 six months ended June 26, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ended December 25, 2011. 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 26, 2010.

2.	Significant Accounting Policies

Noncontrolling Interests

The Consolidation topic of the Accounting Standards Codification (“ASC”) requires all entities to report noncontrolling 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 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 had two joint venture arrangements as of June 26, 2011 and June 27, 2010, which were as follows:

	Restaurants		Restaurants						Noncontrolling
	as of		as of		Restaurant	Papa John's			Interest
	June 26, 2011		June 27, 2010		Locations	Ownership *			Ownership *

Star Papa, LP		75		75	Texas		51	%		49	%
Colonel's Limited, LLC		52		52	Maryland and Virginia		70	%		30	%


*The ownership percentages were the same for both the 2011 and 2010 periods presented in the accompanying consolidated financial statements.

The pre-tax income attributable to the joint ventures for the three and six months ended June 26, 2011 and June 27, 2010 was as follows:

	Three Months Ended				Six Months Ended
	June 26,		June 27,		June 26,		June 27,
(In thousands)	2011		2010		2011		2010

Papa John's International, Inc.	$	1,518	$	1,447	$	3,316	$	3,094
Noncontrolling interests		929		911		2,051		2,000
Total pre-tax income	$	2,447	$	2,358	$	5,367	$	5,094

The noncontrolling interest holders’ equity in the joint venture arrangements totaled $8.5 million as of June 26, 2011 and December 26, 2010.

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 June 26, 2011, we had a net deferred tax asset balance of $4.1 million. We have not provided a valuation allowance for the deferred tax assets since we believe it is more likely than not that future earnings will be sufficient to ensure the realization of the net deferred 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, which may impact our ultimate payment for such exposures.

Reclassification of Hawaii, Alaska and Canada

In 2011, we realigned management responsibility and financial reporting for Hawaii, Alaska and Canada from our International business segment to Domestic franchising in order to better leverage existing infrastructure and systems. As a result, we renamed the Domestic franchising segment “North America franchising” in the first quarter of 2011. Certain prior year amounts have been reclassified in our Consolidated Statements of Income and in our segment information to conform to the current year presentation.

Subsequent Events

We evaluated subsequent events through the date the financial statements were issued and filed with this Form 10-Q. See Note 7 “Commitments and Contingencies” for information concerning contingent lease liabilities. There were no other subsequent events that required recognition or disclosure.

3.	Accounting for Variable Interest Entities

The Consolidation topic of the ASC provides a framework for identifying variable interest entities (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”) is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. The variable interest holder is also required to make disclosures about VIEs in which it has a significant variable interest even when it is not required to consolidate.

Through February 2011, we had a cheese purchasing arrangement with BIBP Commodities, Inc. (BIBP), a special-purpose entity formed at the direction of our Franchise Advisory Council, for the sole purpose of reducing cheese price volatility to domestic system-wide restaurants. BIBP is an independent, franchisee-owned corporation. BIBP purchased cheese at the market price and sold it to our distribution subsidiary, PJ Food Service, Inc. (“PJFS”), at a fixed price. PJFS in turn sold cheese to Papa John’s restaurants (both domestic Company-owned and franchised) at a fixed monthly price. PJFS purchased $25.1 million of cheese from BIBP for the three months ended March 27, 2011 and purchased $37.4 million and $76.5 million of cheese for the three and six months ended June 27, 2010, respectively. PJFS did not purchase cheese from BIBP in the three months ended June 26, 2011 due to the termination of the purchasing agreement with BIBP in February 2011 described below.

As the primary beneficiary of BIBP, a VIE, we recognized the operating losses generated by BIBP when BIBP’s shareholders’ equity was in a net deficit position. Further, we recognized the subsequent operating income generated by BIBP up to the amount of any losses previously recognized. Prior to ceasing operating activities, BIBP operated at breakeven for the three months ended March 27, 2011. We recognized pre-tax income of $2.7 million ($1.7 million net of tax, or $0.06 per diluted share) and $6.2 million ($3.9 million net of tax, or $0.14 per diluted share) for the three and six months ended June 27, 2010, respectively, from the consolidation of BIBP.

In February 2011, we terminated the purchasing agreement with BIBP and BIBP no longer has operating activities. Over 99% of our domestic franchisees have entered into a cheese purchasing agreement with PJFS. The cheese purchasing agreement requires participating domestic franchisees to purchase cheese through PJFS, or to pay the franchisee’s portion of any accumulated cheese liability upon ceasing to purchase cheese from PJFS when a liability exists. The cheese purchasing agreement specifies that PJFS will charge the franchisees a predetermined price for cheese on a monthly basis. Any difference between the amount charged to franchisees and the actual price paid by PJFS for cheese is recorded as a receivable from or a payable to the franchisees, to be repaid based upon a predetermined formula outlined in the agreement.

Debt

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

	June 26,		December 26,
	2011		2010

Revolving line of credit	$	48,000	$	99,000
Other		-		17
Total long-term debt	$	48,000	$	99,017

In September 2010, we entered into 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, was $113.6 million as of June 26, 2011 and $59.1 million as of December 26, 2010. 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 June 26, 2011 and December 26, 2010.

We had two interest rate swap agreements (Swaps) that expired in January 2011. As of June 26, 2011, the Company had no swap agreements. The Swaps provided for fixed rates of 4.98% and 3.74%, as compared to LIBOR, on the following amount of floating rate debt:

	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%

The Swaps were derivative instruments that were designated as cash flow hedges because they provided 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 was reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the Swaps affected 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 were accounted for as adjustments to interest expense.

The weighted average interest rate for our Revolving Credit Facility, including the impact of the previously mentioned Swaps through January 2011, was 1.21% and 5.03% for the three months ended June 26, 2011 and June 27, 2010, respectively, and 2.40% and 5.03% for the six months ended June 26, 2011 and June 27, 2010, respectively. Interest paid, including payments made or received under the Swaps, was $248,000 and $1.3 million for the three months ended June 26, 2011 and June 27, 2010, respectively, and $1.1 million and $2.6 million for the six months ended June 26, 2011 and June 27, 2010, respectively.

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				Six Months Ended
	June 26,		June 27,		June 26,		June 27,
	2011		2010		2011		2010

Basic earnings per common share:
Net income	$	12,124	$	13,192	$	28,551	$	30,067
Weighted average shares outstanding		25,464		26,760		25,474		26,901
Basic earnings per common share	$	0.48	$	0.49	$	1.12	$	1.12

Earnings per common share - assuming dilution:
Net income	$	12,124	$	13,192	$	28,551	$	30,067

Weighted average shares outstanding		25,464		26,760		25,474		26,901
Dilutive effect of outstanding compensation awards		221		211		239		135
Diluted weighted average shares outstanding		25,685		26,971		25,713		27,036
Earnings per common share - assuming dilution	$	0.47	$	0.49	$	1.11	$	1.11

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 earnings per common share – assuming dilution because the effect would have been antidilutive. The weighted average number of shares subject to the antidilutive options was 269,000 and 1.5 million for the three-month periods ended June 26, 2011 and June 27, 2010, respectively. The weighted average number of shares subject to the antidilutive options for the six-month periods ended June 26, 2011 and June 27, 2010 was 355,000 and 1.5 million, respectively.

6. Comprehensive Income

Comprehensive income is comprised of the following:

	Three Months Ended					Six Months Ended
(In thousands)	June 26, 2011			June 27, 2010		June 26, 2011		June 27, 2010

Net income, including noncontrolling interests	$	13,053		$	14,103	$	30,602	$	32,067
Change in valuation of interest rate swap
agreements, net of tax		-			647		159		1,149
Foreign currency translation gain (loss)		(514	)		325		600		(1,437	)
Comprehensive income	$	12,539		$	15,075	$	31,361	$	31,779

7. Commitments and Contingencies

Lease Agreements

As a condition of the sale of our former Perfect Pizza operations in the United Kingdom (UK) in March 2006, we remain contingently liable for payment under approximately 50 lease agreements for Perfect Pizza’s restaurant sites, for which the Perfect Pizza franchisees and franchisor are primarily liable, and one distribution center lease, for which the Perfect Pizza franchisor is primarily liable. As the initial party to the lease agreements, we are liable to the extent that the primary obligor does not satisfy its payment obligations. The leases have varying terms, the latest of which expires in 2017, with most expiring by the end of 2014. As of June 26, 2011 the estimated maximum amount of undiscounted payments we would be required to make in the event of non-payment under all such leases was approximately $4.3 million.

On August 1, 2011 the High Court of Justice Chancery Division, Birmingham District Registry entered an order placing Perfect Pizza in administration, thereby providing Perfect Pizza with protection from its creditors in accordance with UK insolvency law. On the same date, we were informed that the administrators entered into an agreement to sell substantially all of the business and assets of Perfect Pizza. The agreement contemplates the buyer assuming a number of the Perfect Pizza leases in the transaction during an option period of up to nine months after the closing. Given the significant uncertainty we are unable to reasonably estimate any potential liability and therefore no amount has been recorded in the consolidated financial statements as of June 26, 2011.

Contingencies

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.

8. Segment Information

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

The domestic Company-owned restaurant segment consists of the operations of all domestic (“domestic” is defined as restaurants operating in the United States) Company-owned restaurants and derives its revenues principally from retail sales of pizza and other food and beverage products 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 Company-owned and franchised restaurants. The North America franchising segment consists of our franchise sales and support activities and derives its revenues from the sale of franchise and development rights and the 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, 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 United States and Canada. 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. 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.

As previously noted, beginning in 2011, we realigned management responsibility for Hawaii, Alaska and Canada from International to Domestic franchising in order to better leverage existing infrastructure and systems. As a result, we renamed the Domestic franchising segment “North America franchising” in the first quarter of 2011. The prior year data in the following table has been reclassified from International to North America franchising to conform to the current year presentation.

Our segment information is as follows:

	Three Months Ended						Six Months Ended
(In thousands)	June 26, 2011			June 27, 2010			June 26, 2011			June 27, 2010
Revenues from external customers:
Domestic Company-owned restaurants	$	127,641		$	124,594		$	266,312		$	254,238
Domestic commissaries		121,027			113,936			248,699			226,576
North America franchising *		18,227			17,546			38,143			35,796
International *		14,269			11,548			27,030			22,287
All others		12,370			13,023			25,817			27,536
Total revenues from external customers	$	293,534		$	280,647		$	606,001		$	566,433

Intersegment revenues:
Domestic commissaries	$	35,872		$	33,234		$	73,972		$	66,878
North America franchising		535			511			1,083			1,015
International		58			356			105			689
Variable interest entities		-			37,362			25,117			76,504
All others		2,571			2,709			5,126			5,859
Total intersegment revenues	$	39,036		$	74,172		$	105,403		$	150,945

Income (loss) before income taxes:
Domestic Company-owned restaurants	$	7,421		$	8,656		$	18,304		$	20,101
Domestic commissaries		4,321			8,036			13,875			15,184
North America franchising *		16,240			15,699			34,249			32,050
International *		(250	)		(1,322	)		(1,066	)		(2,854	)
Variable interest entities		-			2,678			-			6,163
All others		(298	)		178			(676	)		1,127
Unallocated corporate expenses		(8,517	)		(12,129	)		(18,286	)		(22,959	)
Elimination of intersegment profits		150			(133	)		(553	)		(220	)
Total income before income taxes	$	19,067		$	21,663		$	45,847		$	48,592
Income attributable to noncontrolling interests		(929	)		(911	)		(2,051	)		(2,000	)
Total income before income taxes, net
of noncontrolling interests	$	18,138		$	20,752		$	43,796		$	46,592

Property and equipment:
Domestic Company-owned restaurants	$	170,386
Domestic commissaries		83,364
International		18,417
All others		35,680
Unallocated corporate assets		128,398
Accumulated depreciation and amortization		(253,457	)
Net property and equipment	$	182,788

*The results for the three and six months ended June 27, 2010 for franchised restaurants operating in Hawaii, Alaska, and Canada have been reclassified from International to North America franchising to conform to the current year presentation. The impact of the reclassification was to increase North America franchising revenues and income before income taxes by $305,000 and $250,000, respectively, for the three months ended June 27, 2010, and $773,000 and $680,000, respectively, for the six months ended June 27, 2010, with corresponding decreases in the International operating segment results.

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 26, 2011, there were 3,733 Papa John’s restaurants (618 Company-owned and 3,115 franchised) operating in all 50 states and 32 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.

Results of Operations and Critical Accounting Policies and Estimates

The results of operations are based on the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires management to select accounting policies for critical accounting areas and make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results. We have identified the following accounting policies and related judgments as critical to understanding the results of our operations:

Allowance for Doubtful Accounts and Notes Receivable

We establish reserves for uncollectible accounts and notes receivable based on overall receivable aging levels and a specific evaluation of accounts and notes for franchisees 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, current 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 June 26, 2011, we had a net investment of $22.4 million associated with our United Kingdom subsidiary (PJUK). The goodwill allocated to this entity was $15.2 million at June 26, 2011. We have previously recorded goodwill impairment charges for this entity. We believe PJUK will continue to improve its operating results, including efforts to increase Papa John’s brand awareness in the United Kingdom, improve sales and profitability for individual franchised restaurants and increase net PJUK franchised unit openings over the next several years. If our continued growth initiatives with PJUK 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 undiscounted estimates of the aggregate retained liability for claims incurred using certain third-party actuarial projections and our claims loss experience. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims significantly differ from historical trends used to estimate the insurance reserves recorded by the Company.

Deferred Income Tax Accounts and Tax Reserves

Papa John’s is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining Papa John’s provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. Deferred tax assets and liabilities are determined based on differences between the 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 June 26, 2011, we had a net deferred income tax asset balance of $4.1 million. We have not provided a valuation allowance for the deferred tax assets since we believe it is more likely than not that future earnings will be sufficient to ensure the realization of the net deferred tax assets for federal and state purposes.

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

BIBP is a franchisee-owned corporation that conducted a cheese-purchasing program on behalf of Company-owned and franchised restaurants operating in the United States through February 2011. As the primary beneficiary, we consolidate the operating results of BIBP. BIBP operated at breakeven for the first two months of 2011 and recognized pre-tax income of $2.7 million and $6.2 million for the three and six months ended June 27, 2010, respectively.

Consolidation accounting required the net impact from the consolidation of BIBP to be reflected primarily in three separate components of our statement of income. The first component was 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 was reflected as a reduction in the “Domestic Company-owned restaurant expenses - cost of sales” line item. This approach effectively reported 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 was eliminated in consolidation).

The second component of the net impact from the consolidation of BIBP was reflected in the caption “Loss (income) from the franchise cheese-purchasing program, net of noncontrolling interest.” This line item represented 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 noncontrolling interest BIBP shareholders. The amount of income or loss attributable to the BIBP shareholders depended on its cumulative shareholders’ equity balance and the change in such balance during the reporting period. The third component was reflected as interest expense, when BIBP was in a 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 six months ended June 26, 2011 and June 27, 2010 (in thousands):

	Three Months Ended					Six Months Ended
	June 26, 2011		June 27, 2010			June 26, 2011		June 27, 2010

BIBP sales	$	-	$	37,362		$	25,117	$	76,504

Cost of sales		-		34,555			25,100		70,049
General and administrative expenses		-		12			17		41
Total costs and expenses		-		34,567			25,117		70,090
Operating income		-		2,795			-		6,414
Interest expense		-		(117	)		-		(251	)
Income before income taxes	$	-	$	2,678		$	-	$	6,163

In February 2011, we terminated the purchasing arrangement with BIBP and BIBP no longer has operating activities. Over 99% of our domestic franchisees have entered into a cheese purchasing agreement with PJFS. The cheese purchasing agreement requires participating domestic franchisees to purchase cheese through PJFS, or to pay the franchisee’s portion of any accumulated cheese liability upon ceasing to purchase cheese from PJFS when a liability exists. The cheese purchasing agreement specifies that PJFS will charge the franchisees a predetermined price for cheese on a monthly basis. Any difference between the amount charged to franchisees and the actual price paid by PJFS for cheese will be recorded as a receivable from or a payable to the franchisees, to be repaid based upon a predetermined formula outlined in the agreement.

Non-GAAP Measures

The financial measures we present in this report that exclude the impact of the consolidation of BIBP are not measures defined within accounting principles generally accepted in the United States (“GAAP”). These non-GAAP measures should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. We believe the financial information excluding the impact of the consolidation of BIBP is important for purposes of comparison to prior period results. We analyze our business performance and trends excluding the impact of the consolidation of BIBP because the results of BIBP are not indicative of the principal operating activities of the Company. In addition, annual cash bonuses, and certain long-term incentive programs for various levels of management, were based on financial measures that excluded BIBP. The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.

In addition, we present free cash flow in this report, which is not a term defined by GAAP. Free cash flow is defined as net cash provided by operating activities (from the consolidated statements of cash flows) excluding the impact of BIBP, 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.

Restaurant Progression:

	Three Months Ended						Six Months Ended
	June 26, 2011			June 27, 2010			June 26, 2011			June 27, 2010
North America Company-owned:
Beginning of period		592			591			591			588
Opened		3			-			4			4
Closed		-			(1	)		-			(2	)
End of period		595			590			595			590
International Company-owned:
Beginning of period		21			27			21			26
Opened		2			4			2			4
Acquired from franchisees		-			-			-			1
Sold to franchisees		-			(2	)		-			(2	)
End of period		23			29			23			29
North America franchised (a):
Beginning of period		2,371			2,252			2,346			2,246
Opened		35			46			67			82
Closed		(13	)		(15	)		(20	)		(45	)
End of period		2,393			2,283			2,393			2,283
International franchised:
Beginning of period		703			621			688			609
Opened		26			23			49			47
Closed		(7	)		(32	)		(15	)		(43	)
Acquired from Company		-			2			-			2
Sold to Company		-			-			-			(1	)
End of period		722			614			722			614
Total restaurants - end of period		3,733			3,516			3,733			3,516

(a)

The restaurant unit data for the three and six months ended June 27, 2010 has been adjusted to reflect the reclassification of restaurants operating in Hawaii, Alaska and Canada from International franchised to North America franchised. There were 59 restaurants reclassified from International to North America franchised as of June 27, 2010.

Franchise Support Incentives

In December 2010, our domestic franchisees voted in favor of a proposal to increase the national marketing fund contribution rate for 2011 to 2013 (“National Marketing Fund Agreement”). The primary terms of the National Marketing Fund Agreement are as follows:

National Marketing Fund Contribution Rate – Domestic Company-owned and franchised restaurants will contribute 4.0% of sales to the marketing fund in 2011 and have agreed to a minimum contribution rate in 2012 and 2013. The Company expects this agreement to primarily represent a shift, or a slight increase, in total marketing expenditures, and believes an increase in marketing expenditures on a national basis will improve the consistency of the overall marketing message and favorably impact brand awareness.

BIBP Accumulated Deficit – BIBP had an accumulated deficit (representing prior purchases of cheese by PJFS from BIBP at below market prices) of $14.2 million at December 26, 2010. PJFS agreed to pay to BIBP the amount equal to the accumulated deficit at December 26, 2010. Accordingly, BIBP recorded a decrease of $14.2 million in cost of sales and PJFS recorded a corresponding increase in cost of sales in the 2010 financial statements. This transaction did not have any impact on the Company's 2010 consolidated income statement results since both PJFS and BIBP were fully consolidated with the Company’s financial results.

·	Cheese Purchasing Agreement – As previously discussed, in order to facilitate franchisees' planning of food costs and promotions going forward, PJFS agreed to charge a fixed monthly price for cheese to franchisees who signed a cheese purchasing agreement with PJFS.

·	Online Ordering System Fees – The Company agreed to reduce the online ordering fee paid by domestic franchisees by 0.5% for 2011, and agreed to limit the fee for 2012 and 2013.

Royalty Rebate Program – The standard royalty rate in 2011 is 5.0% of sales. Franchisees can earn up to a 0.25% quarterly royalty rebate for 2011 to 2013 by meeting certain sales growth targets; they can earn an additional 0.20% royalty rebate in 2011 by making specified re-imaging restaurant lobby investments. The Company agreed to consider a similar capital investment-based royalty rebate opportunity for franchisees in 2012 and 2013 as well.

We offer the following franchise support initiatives in addition to the National Marketing Fund Agreement initiatives discussed above:

·	We provide food cost relief by lowering the commissary margin on certain commodities sold by PJFS to the franchise system and by providing incentive rebate opportunities.

·	We provide targeted royalty relief and local marketing support to assist certain identified franchisees or markets.

·	We provide restaurant opening incentives.

·	We provide financing on a selected basis to assist new or existing franchisees with the acquisition of troubled franchise restaurants.

In 2010, we provided additional system-wide national marketing contributions, additional system-wide local print marketing contributions and certain other system-wide incentives.

Results of Operations

Summary of Operating Results – Segment Review

Discussion of Revenues

Total revenues were $293.5 million for the second quarter of 2011, representing an increase of 4.6% from revenues of $280.6 million for the same quarter in 2010. For the six months ended June 26, 2011, total revenues were $606.0 million, representing an increase of 7.0% from revenues of $566.4 million for the comparable period in 2010. The increases were primarily due to the following:

·	Domestic Company-owned restaurant sales increased $3.0 million, or 2.4%, and $12.1 million, or 4.7%, for the three and six months ended June 26, 2011, respectively, due to increases in comparable sales of 2.1% and 4.4%.

North America franchise royalty revenues increased approximately $700,000, or 3.8%, and $2.3 million, or 6.6%, for the three and six months ended June 26, 2011, respectively, due to net increases in franchise units over the prior year. The year-to-date increase was also favorably impacted by an increase of 2.9% in comparable sales (comparable sales decreased 0.1% for the second quarter of 2011).

Domestic commissary sales increased $7.1 million, or 6.2%, and $22.1 million, or 9.8%, for the three and six months ended June 26, 2011, respectively. The increases were primarily due to increases in the selling prices of certain commodities. Sales volumes were lower for the three-month period and higher for the six-month period, compared to the prior year results.

International revenues increased $2.7 million, or 23.6%, and $4.7 million, or 21.3%, for the three and six months ended June 26, 2011, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 4.8% and 5.2%, calculated on a constant dollar basis. These increases were partially offset by the prior year’s inclusion of revenues from company-owned restaurants located in the United Kingdom, which were sold in the third quarter of 2010.

The increases above were partially offset by decreases in other sales of $650,000 and $1.7 million for the three and six months ended June 26, 2011, respectively, primarily resulting from a decline in sales at our print and promotions subsidiary, Preferred Marketing Solutions, and an online fee reduction charged to our domestic franchisees in connection with the National Marketing Fund Agreement.

Discussion of Operating Results

Our income before income taxes, net of noncontrolling interests, totaled $18.1 million for the three months ended June 26, 2011, compared to $20.8 million for the same period in 2010 ($18.1 million in the corresponding period in 2010, excluding the impact of BIBP, or flat with the second quarter of 2011), and $43.8 million for the six months ended June 26, 2011, compared to $46.6 million for the same period in 2010 ($40.4 million in the corresponding period in 2010, excluding the impact of BIBP, or an increase of $3.4 million or 8.3%). Income before income taxes, net of noncontrolling interests is summarized in the following table on an operating segment basis (in thousands):

	Three Months Ended									Six Months Ended
	June 26,			June 27,			Increase			June 26,			June 27,			Increase
	2011			2010			(Decrease)			2011			2010			(Decrease)

Domestic Company-owned restaurants	$	7,421		$	8,656		$	(1,235	)	$	18,304		$	20,101		$	(1,797	)
Domestic commissaries		4,321			8,036			(3,715	)		13,875			15,184			(1,309	)
North America franchising *		16,240			15,699			541			34,249			32,050			2,199
International *		(250	)		(1,322	)		1,072			(1,066	)		(2,854	)		1,788
All others		(298	)		178			(476	)		(676	)		1,127			(1,803	)
Unallocated corporate expenses		(8,517	)		(12,129	)		3,612			(18,286	)		(22,959	)		4,673
Elimination of intersegment losses (profits)		150			(133	)		283			(553	)		(220	)		(333	)
Income before income taxes, excluding
variable interest entities		19,067			18,985			82			45,847			42,429			3,418
BIBP, a variable interest entity		-			2,678			(2,678	)		-			6,163			(6,163	)
Total income before income taxes		19,067			21,663			(2,596	)		45,847			48,592			(2,745	)
Income attributable to noncontrolling
interests		(929	)		(911	)		(18	)		(2,051	)		(2,000	)		(51	)
Total income before income taxes,
net of noncontrolling interests	$	18,138		$	20,752		$	(2,614	)	$	43,796		$	46,592		$	(2,796	)

*In 2011, we realigned management responsibility for Hawaii, Alaska and Canada from International to Domestic franchising in order to better leverage existing infrastructure and systems. As a result, we renamed the Domestic franchising segment “North America franchising”. The prior year income before income taxes for these restaurants has been reclassified from International to North America franchising to conform to the current year presentation. The impact of the reclassification was to increase North America franchising income before income taxes by $250,000 and $680,000 for the three and six months ended June 27, 2010, respectively, with corresponding decreases in the International operating segment results.

Changes in pre-tax income, net of noncontrolling interests, for the three and six months ended June 26, 2011, respectively, excluding the impact of BIBP, are summarized on a segment basis as follows:

Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ operating income was $7.4 million for the three months ended June 26, 2011, compared to $8.7 million for the comparable 2010 period, and $18.3 million for the six months ended June 26, 2011, compared to $20.1 million for the comparable 2010 period. The decreases of $1.2 million and $1.8 million in the three- and six-month periods of 2011, respectively, were primarily due to increased commodity and advertising costs. The increased costs were partially offset by the profits from higher comparable sales.

Domestic Commissary Segment. Domestic commissaries’ operating income decreased $3.7 million for the second quarter of 2011 and decreased $1.3 million for the six months ended June 26, 2011 over the comparable 2010 periods. The decrease for the second quarter was primarily due to a lower gross margin, lower volumes and an increase in distribution costs resulting from higher fuel prices. For the six-month period, the higher dollar margin attributable to higher sales volumes was more than offset by an increase in distribution costs due to higher volumes and fuel prices.

North America Franchising Segment. North America franchising operating income increased approximately $500,000 and $2.2 million for the three- and six-month periods of 2011, respectively, as compared to the comparable 2010 periods. The increases were due to the previously mentioned royalty revenue increases, partially offset by an increase in development incentive costs.

International Segment. The operating loss in the international segment for the second quarter of 2011 was $250,000, compared to an operating loss of $1.3 million for the prior year comparable quarter and was a loss of $1.1 million compared to a loss of $2.9 million for the six months ended June 26, 2011 and June 27, 2010, respectively. The improvements in operating results of $1.1 million and $1.8 million, respectively, were primarily due to increased royalties due to growth in the number of units and comparable sales increases of 4.8% and 5.2% for the three- and six-month periods, respectively. Additionally, the prior year results included start-up costs associated with our company-owned commissary in the United Kingdom that opened during 2010.

All Others Segment. The “All others” segment reported losses of $298,000 and $676,000 for the three and six months ended June 26, 2011, respectively. The “All others” reporting segment operating results declined approximately $500,000 and $1.8 million for the three- and six-month periods, respectively, as compared to the corresponding 2010 periods. The decreases were primarily due to a decline in the operating results of our online ordering (“eCommerce”) business. Our eCommerce operations had both lower revenues, due to a reduction in the online ordering fee charged to domestic franchised restaurants (the fee was reduced by 0.5% in 2011), and an increase in infrastructure and support costs attributable to the new online ordering system introduced in the fourth quarter of 2010.

Unallocated Corporate Segment. Unallocated corporate expenses decreased $3.6 million and $4.7 million for the three and six months ended June 26, 2011, respectively, as compared to the corresponding periods in the prior year. The components of unallocated corporate expenses were as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 26,		June 27,		Increase		June 26,	June 27,	Increase
	2011		2010		(decrease)		2011	2010	(decrease)

General and administrative (a)	$	5,972	$	8,118	$	(2,146