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Adoption of ASU 2014-09, "Revenue from Contracts with Customers" | 3 Months Ended
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Apr. 01, 2018
Adoption of ASU 2014-09, "Revenue from Contracts with Customers" |
Adoption of ASU 2014-09, "Revenue from Contracts with Customers" | 3. Adoption of ASU 2014-09, “Revenue from Contracts with Customers” The Company adopted ASU 2014-09 and Topic 606 using the modified retrospective transition method effective January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented in accordance with Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605, Revenue Recognition. The cumulative effect adjustment of $21.5 million was recorded as a reduction to retained earnings as of January 1, 2018 to reflect the impact of adopting Topic 606. The impact of applying Topic 606 for the quarter ended April 1, 2018, was an increase in revenues of $2.4 million and a decrease of $0.5 million in pre-tax income. The adoption of Topic 606 did not impact the recognition and reporting of our three largest sources of revenue: sales from Company-owned restaurants, commissary sales, or continuing royalties or other revenues from franchisees that are based on a percentage of the franchise sales. The items impacted by the adoption include the presentation and amount of our loyalty program costs, the timing of franchise and development fees revenue recognition, and the presentation of various Domestic co-operative and International advertising funds as further described below. Cumulative adjustment from adoption As noted above, an after-tax reduction of $21.5 million was recorded to retained earnings to reflect the cumulative impact of adopting Topic 606. This is comprised of $10.8 million related to franchise fees, $8.0 million related to the customer loyalty program and $2.7 million related to marketing funds. The following chart presents the specific line items impacted by the cumulative adjustment.
|  |  |  |  |  |  |  | Adjusted
|  | As Reported |  |  |  |  |  | Balance Sheet
|  | December 31, |  |  | Total |  |  | at January 1,
(In thousands, except per share amounts) |  | 2017 |  |  | Adjustments |  |  | 2018
Assets |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 22,345 |  | $ | 4,279 |  | $ | 26,624
Accounts receivable, net |  |  | 64,644 |  |  | 493 |  |  | 65,137
Notes receivable, net |  |  | 4,333 |  |  | — |  |  | 4,333
Income tax receivable |  |  | 3,903 |  |  | — |  |  | 3,903
Inventories |  |  | 30,620 |  |  | — |  |  | 30,620
Prepaid expenses |  |  | 28,522 |  |  | (4,959) |  |  | 23,563
Other current assets |  |  | 9,494 |  |  | — |  |  | 9,494
Assets held for sale |  |  | 6,133 |  |  | — |  |  | 6,133
Total current assets |  |  | 169,994 |  |  | (187) |  |  | 169,807
Property and equipment, net |  |  | 234,331 |  |  | — |  |  | 234,331
Notes receivable, less current portion, net |  |  | 15,568 |  |  | — |  |  | 15,568
Goodwill |  |  | 86,892 |  |  | — |  |  | 86,892
Deferred income taxes, net |  |  | 585 |  |  | — |  |  | 585
Other assets |  |  | 48,183 |  |  | (907) |  |  | 47,276
Total assets |  | $ | 555,553 |  | $ | (1,094) |  | $ | 554,459
Liabilities and stockholders’ equity (deficit) |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |
Accounts payable |  | $ | 32,006 |  | $ | (2,161) |  | $ | 29,845
Income and other taxes payable |  |  | 10,561 |  |  | — |  |  | 10,561
Accrued expenses and other current liabilities |  |  | 70,293 |  |  | 15,860 |  |  | 86,153
Deferred revenue current |  |  | — |  |  | 2,400 |  |  | 2,400
Current portion of long-term debt |  |  | 20,000 |  |  | — |  |  | 20,000
Total current liabilities |  |  | 132,860 |  |  | 16,099 |  |  | 148,959
Deferred revenue |  |  | 2,652 |  |  | 10,798 |  |  | 13,450
Long-term debt, less current portion, net |  |  | 446,565 |  |  | — |  |  | 446,565
Deferred income taxes, net |  |  | 12,546 |  |  | (6,464) |  |  | 6,082
Other long-term liabilities |  |  | 60,146 |  |  | — |  |  | 60,146
Total liabilities |  |  | 654,769 |  |  | 20,433 |  |  | 675,202
Redeemable noncontrolling interests |  |  | 6,738 |  |  | — |  |  | 6,738
Stockholders’ equity (deficit): |  |  |  |  |  |  |  |  |
Preferred stock ($0.01 par value per share; no shares issued) |  |  | — |  |  | — |  |  | —
Common stock ($0.01 par value per share; issued 44,221 at December 31, 2017 |  |  | 442 |  |  | — |  |  | 442
Additional paid-in capital |  |  | 184,785 |  |  | — |  |  | 184,785
Accumulated other comprehensive loss |  |  | (2,117) |  |  | — |  |  | (2,117)
Retained earnings |  |  | 292,251 |  |  | (21,527) |  |  | 270,724
Treasury stock (10,290 shares at December 31, 2017, at cost) |  |  | (597,072) |  |  | — |  |  | (597,072)
Total stockholders’ equity (deficit), net of noncontrolling interests |  |  | (121,711) |  |  | (21,527) |  |  | (143,238)
Noncontrolling interests in subsidiaries |  |  | 15,757 |  |  | — |  |  | 15,757
Total stockholders’ equity (deficit) |  |  | (105,954) |  |  | (21,527) |  |  | (127,481)
Total liabilities, redeemable noncontrolling interests and stockholders’ equity (deficit) |  | $ | 555,553 |  | $ | (1,094) |  | $ | 554,459
The impact of adoption for the first quarter of 2018 is as follows:
|  | As Reported |  |  |  |  |  | Balance Sheet
|  | April 1, |  |  | Total |  |  | Without Adoption
(In thousands, except per share amounts) |  | 2018 |  |  | Adjustments |  |  | of Topic 606
Assets |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 31,935 |  | $ | (3,422) |  | $ | 28,513
Accounts receivable, net |  |  | 62,949 |  |  | (376) |  |  | 62,573
Notes receivable, net |  |  | 4,662 |  |  | — |  |  | 4,662
Income tax receivable |  |  | — |  |  | — |  |  | —
Inventories |  |  | 28,285 |  |  | — |  |  | 28,285
Prepaid expenses |  |  | 27,990 |  |  | 4,398 |  |  | 32,388
Other current assets |  |  | 17,529 |  |  | — |  |  | 17,529
Assets held for sale |  |  | 5,900 |  |  | — |  |  | 5,900
Total current assets |  |  | 179,250 |  |  | 600 |  |  | 179,850
Property and equipment, net |  |  | 229,576 |  |  | — |  |  | 229,576
Notes receivable, less current portion, net |  |  | 16,084 |  |  | — |  |  | 16,084
Goodwill |  |  | 86,746 |  |  | — |  |  | 86,746
Deferred income taxes, net |  |  | 614 |  |  | — |  |  | 614
Other assets |  |  | 67,547 |  |  | 907 |  |  | 68,454
Total assets |  | $ | 579,817 |  | $ | 1,507 |  | $ | 581,324
Liabilities and stockholders’ equity (deficit) |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |
Accounts payable |  | $ | 31,072 |  | $ | 1,237 |  | $ | 32,309
Income and other taxes payable |  |  | 10,094 |  |  | — |  |  | 10,094
Accrued expenses and other current liabilities |  |  | 92,890 |  |  | (14,854) |  |  | 78,036
Deferred revenue current |  |  | 2,400 |  |  | (2,400) |  |  | —
Current portion of long-term debt |  |  | 20,000 |  |  | — |  |  | 20,000
Total current liabilities |  |  | 156,456 |  |  | (16,017) |  |  | 140,439
Deferred revenue |  |  | 13,671 |  |  | (11,027) |  |  | 2,644
Long-term debt, less current portion, net |  |  | 568,770 |  |  | — |  |  | 568,770
Deferred income taxes, net |  |  | 6,125 |  |  | 6,593 |  |  | 12,718
Other long-term liabilities |  |  | 76,993 |  |  | — |  |  | 76,993
Total liabilities |  |  | 822,015 |  |  | (20,451) |  |  | 801,564
Redeemable noncontrolling interests |  |  | 7,037 |  |  | — |  |  | 7,037
Stockholders’ equity (deficit): |  |  |  |  |  |  |  |  |
Preferred stock ($0.01 par value per share; no shares issued) |  |  | — |  |  | — |  |  | —
Common stock ($0.01 par value per share; issued 44,268 at April 1, 2018) |  |  | 443 |  |  | — |  |  | 443
Additional paid-in capital |  |  | 163,198 |  |  | — |  |  | 163,198
Accumulated other comprehensive income (loss) |  |  | 4,110 |  |  | — |  |  | 4,110
Retained earnings |  |  | 280,853 |  |  | 21,958 |  |  | 302,811
Treasury stock (12,245 shares at April 1, 2018, at cost) |  |  | (714,097) |  |  | — |  |  | (714,097)
Total stockholders’ equity (deficit), net of noncontrolling interests |  |  | (265,493) |  |  | 21,958 |  |  | (243,535)
Noncontrolling interests in subsidiaries |  |  | 16,258 |  |  | — |  |  | 16,258
Total stockholders’ equity (deficit) |  |  | (249,235) |  |  | 21,958 |  |  | (227,277)
Total liabilities, redeemable noncontrolling interests and stockholders’ equity (deficit) |  | $ | 579,817 |  | $ | 1,507 |  | $ | 581,324
|  | As Reported |  |  |  |  |
|  | Three Months Ended |  |  |  |  | Income Statement
|  | April 1, |  | Total |  | Without Adoption of
(In thousands, except per share amounts) |  | 2018 |  | Adjustments |  | Topic 606
Revenues: |  |  |  |  |  |  |  |  |
Domestic Company-owned restaurant sales |  | $ | 190,242 |  | $ | 264 |  | $ | 190,506
North America franchise royalties and fees |  |  | 24,806 |  |  | 38 |  |  | 24,844
North America commissary |  |  | 161,713 |  |  | — |  |  | 161,713
International |  |  | 30,114 |  |  | 149 |  |  | 30,263
Other revenues |  |  | 20,494 |  |  | (2,887) |  |  | 17,607
Total revenues |  |  | 427,369 |  |  | (2,436) |  |  | 424,933
Costs and expenses: |  |  |  |  |  |  |  |  |
Operating costs (excluding depreciation and amortization shown separately below): |  |  |  |  |  |  |  |  |
Domestic Company-owned restaurant expenses |  |  | 157,319 |  |  | (66) |  |  | 157,253
North America commissary |  |  | 151,681 |  |  | — |  |  | 151,681
International expenses |  |  | 19,030 |  |  | — |  |  | 19,030
Other expenses |  |  | 20,958 |  |  | (3,359) |  |  | 17,599
General and administrative expenses |  |  | 39,729 |  |  | 504 |  |  | 40,233
Depreciation and amortization |  |  | 11,539 |  |  | — |  |  | 11,539
Total costs and expenses |  |  | 400,256 |  |  | (2,921) |  |  | 397,335
Refranchising and impairment gains/(losses), net |  |  | 204 |  |  | — |  |  | 204
Operating income |  |  | 27,317 |  |  | 485 |  |  | 27,802
Net Interest expense |  |  | (4,955) |  |  | — |  |  | (4,955)
Income before income taxes |  |  | 22,362 |  |  | 485 |  |  | 22,847
Income tax expense |  |  | 4,982 |  |  | 112 |  |  | 5,094
Net income before attribution to noncontrolling interests |  |  | 17,380 |  |  | 373 |  |  | 17,753
Income attributable to noncontrolling interests |  |  | (643) |  |  | — |  |  | (643)
Net income attributable to the Company |  | $ | 16,737 |  | $ | 373 |  | $ | 17,110
Calculation of income for earnings per share: |  |  |  |  |  |  |  |  |
Net income attributable to the Company |  | $ | 16,737 |  | $ | 373 |  | $ | 17,110
Change in noncontrolling interest redemption value |  |  | — |  |  | — |  |  | —
Net income attributable to participating securities |  |  | (75) |  |  | — |  |  | (75)
Net income attributable to common shareholders |  | $ | 16,662 |  | $ | 373 |  | $ | 17,035
Basic earnings per common share |  | $ | 0.50 |  | $ | 0.01 |  | $ | 0.51
Diluted earnings per common share |  | $ | 0.50 |  | $ | 0.01 |  | $ | 0.51
Basic weighted average common shares outstanding |  |  | 33,279 |  |  | 33,279 |  |  | 33,279
Diluted weighted average common shares outstanding |  |  | 33,552 |  |  | 33,552 |  |  | 33,552
Transaction Price Allocated to the Remaining Performance Obligations The following table (in thousands) includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied at the end of the reporting period.
|  |  | Performance Obligations by Period
|  | Less than 1 Year |  | 1-2 Years |  | 2-3 Years |  | 3-4 Years |  | 4-5 Years |  | Thereafter |  | Total
Franchise Fees |  | $ | 2,400 |  | $ | 2,141 |  | $ | 1,909 |  | $ | 1,681 |  | $ | 1,461 |  | $ | 3,835 |  | $ | 13,427
An additional $2.6 million of area development fees related to unopened stores is included in deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings. As of April 1, 2018, the amount allocated to the Papa Rewards loyalty program is $15.0 million and is reflected in the Condensed Consolidated Balance Sheet as part of the contract liability. This will be recognized as revenue as the points are redeemed, which is expected to occur within the next year. If participants earn and redeem points at a consistent rate, there would be minimal change to the liability. The Company applies the practical expedient in ASU paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

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- Definition The entire disclosure of changes in accounting principles, including adoption of new accounting pronouncements, that describes the new methods, amount and effects on financial statement line items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 250 -URI http://asc.fasb.org/topic&trid=2122394 + Details
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