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Adoption of ASU 2014-09, "Revenue from Contracts with Customers" | 6 Months Ended
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Jul. 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 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 three and six months ended July 1, 2018, was an increase in revenues of $1.8 million and $4.3 million respectively and a decrease in pre-tax income of $1.4 million and $1.9 million, respectively. 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 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 in the first quarter of 2018 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’ (deficit), net of noncontrolling interests |  |  | (121,711) |  |  | (21,527) |  |  | (143,238)
Noncontrolling interests in subsidiaries |  |  | 15,757 |  |  | — |  |  | 15,757
Total stockholders’ (deficit) |  |  | (105,954) |  |  | (21,527) |  |  | (127,481)
Total liabilities, redeemable noncontrolling interests and stockholders’ (deficit) |  | $ | 555,553 |  | $ | (1,094) |  | $ | 554,459
The impact of adoption for the second quarter of 2018 is as follows:
|  | As Reported |  |  |  |  |  | Balance Sheet
|  | July 1, |  |  | Total |  |  | Without Adoption
(In thousands, except per share amounts) |  | 2018 |  |  | Adjustments |  |  | of Topic 606
Assets |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 25,719 |  | $ | (3,130) |  | $ | 22,589
Accounts receivable, net |  |  | 62,973 |  |  | (359) |  |  | 62,614
Notes receivable, net |  |  | 5,180 |  |  | — |  |  | 5,180
Income tax receivable |  |  | — |  |  | — |  |  | —
Inventories |  |  | 27,109 |  |  | — |  |  | 27,109
Prepaid expenses |  |  | 26,729 |  |  | 4,827 |  |  | 31,556
Other current assets |  |  | 7,223 |  |  | — |  |  | 7,223
Assets held for sale |  |  | 2,786 |  |  | — |  |  | 2,786
Total current assets |  |  | 157,719 |  |  | 1,338 |  |  | 159,057
Property and equipment, net |  |  | 227,722 |  |  | — |  |  | 227,722
Notes receivable, less current portion, net |  |  | 15,648 |  |  | — |  |  | 15,648
Goodwill |  |  | 85,064 |  |  | — |  |  | 85,064
Deferred income taxes, net |  |  | 709 |  |  | — |  |  | 709
Other assets |  |  | 71,309 |  |  | 907 |  |  | 72,216
Total assets |  | $ | 558,171 |  | $ | 2,245 |  | $ | 560,416
Liabilities and stockholders’ equity (deficit) |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |
Accounts payable |  | $ | 33,307 |  | $ | 1,493 |  | $ | 34,800
Income and other taxes payable |  |  | 8,904 |  |  | — |  |  | 8,904
Accrued expenses and other current liabilities |  |  | 81,197 |  |  | (15,457) |  |  | 65,740
Deferred revenue current |  |  | 2,426 |  |  | (2,426) |  |  | —
Current portion of long-term debt |  |  | 20,000 |  |  | — |  |  | 20,000
Total current liabilities |  |  | 145,834 |  |  | (16,390) |  |  | 129,444
Deferred revenue |  |  | 15,329 |  |  | (11,157) |  |  | 4,172
Long-term debt, less current portion, net |  |  | 556,387 |  |  | — |  |  | 556,387
Deferred income taxes, net |  |  | 5,140 |  |  | 6,682 |  |  | 11,822
Other long-term liabilities |  |  | 78,515 |  |  | — |  |  | 78,515
Total liabilities |  |  | 801,205 |  |  | (20,865) |  |  | 780,340
Redeemable noncontrolling interests |  |  | 7,356 |  |  | — |  |  | 7,356
Stockholders’ equity (deficit): |  |  |  |  |  |  |  |  |
Preferred stock ($0.01 par value per share; no shares issued) |  |  | — |  |  | — |  |  | —
Common stock ($0.01 par value per share; issued 44,280 at July 1, 2018) |  |  | 443 |  |  | — |  |  | 443
Additional paid-in capital |  |  | 188,026 |  |  | — |  |  | 188,026
Accumulated other comprehensive income (loss) |  |  | 2,240 |  |  | — |  |  | 2,240
Retained earnings |  |  | 285,460 |  |  | 23,091 |  |  | 308,551
Treasury stock (12,733 shares at July 1, 2018, at cost) |  |  | (742,695) |  |  | — |  |  | (742,695)
Total stockholders’ (deficit), net of noncontrolling interests |  |  | (266,526) |  |  | 23,091 |  |  | (243,435)
Noncontrolling interests in subsidiaries |  |  | 16,136 |  |  | 19 |  |  | 16,155
Total stockholders’ (deficit) |  |  | (250,390) |  |  | 23,110 |  |  | (227,280)
Total liabilities, redeemable noncontrolling interests and stockholders’ (deficit) |  | $ | 558,171 |  | $ | 2,245 |  | $ | 560,416
|  | As Reported |  |  |  |  |
|  | Three Months Ended |  |  |  |  | Income Statement
|  | July 1, |  | Total |  | Without Adoption of
(In thousands, except per share amounts) |  | 2018 |  | Adjustments |  | Topic 606
Revenues: |  |  |  |  |  |  |  |  |
Domestic Company-owned restaurant sales |  | $ | 181,379 |  | $ | 812 |  | $ | 182,191
North America franchise royalties and fees |  |  | 23,912 |  |  | 82 |  |  | 23,994
North America commissary |  |  | 153,455 |  |  | — |  |  | 153,455
International |  |  | 29,069 |  |  | 175 |  |  | 29,244
Other revenues |  |  | 20,144 |  |  | (2,883) |  |  | 17,261
Total revenues |  |  | 407,959 |  |  | (1,814) |  |  | 406,145
Costs and expenses: |  |  |  |  |  |  |  |  |
Operating costs (excluding depreciation and amortization shown separately below): |  |  |  |  |  |  |  |  |
Domestic Company-owned restaurant expenses |  |  | 147,781 |  |  | (272) |  |  | 147,509
North America commissary |  |  | 143,300 |  |  | — |  |  | 143,300
International expenses |  |  | 18,248 |  |  | — |  |  | 18,248
Other expenses |  |  | 20,698 |  |  | (2,951) |  |  | 17,747
General and administrative expenses |  |  | 38,712 |  |  | 34 |  |  | 38,746
Depreciation and amortization |  |  | 11,731 |  |  | — |  |  | 11,731
Total costs and expenses |  |  | 380,470 |  |  | (3,189) |  |  | 377,281
Refranchising loss, net |  |  | (2,122) |  |  | — |  |  | (2,122)
Operating income |  |  | 25,367 |  |  | 1,375 |  |  | 26,742
Net Interest expense |  |  | (5,662) |  |  | — |  |  | (5,662)
Income before income taxes |  |  | 19,705 |  |  | 1,375 |  |  | 21,080
Income tax expense |  |  | 7,040 |  |  | 306 |  |  | 7,346
Net income before attribution to noncontrolling interests |  |  | 12,665 |  |  | 1,069 |  |  | 13,734
Income attributable to noncontrolling interests |  |  | (874) |  |  | — |  |  | (874)
Net income attributable to the Company |  | $ | 11,791 |  | $ | 1,069 |  | $ | 12,860
Calculation of income for earnings per share: |  |  |  |  |  |  |  |  |
Net income attributable to the Company |  | $ | 11,791 |  | $ | 1,069 |  | $ | 12,860
Net income attributable to participating securities |  |  | (72) |  |  | — |  |  | (72)
Net income attributable to common shareholders |  | $ | 11,719 |  | $ | 1,069 |  | $ | 12,788
Basic earnings per common share |  | $ | 0.37 |  | $ | 0.03 |  | $ | 0.40
Diluted earnings per common share |  | $ | 0.36 |  | $ | 0.03 |  | $ | 0.40
Basic weighted average common shares outstanding |  |  | 31,941 |  |  | 31,941 |  |  | 31,941
Diluted weighted average common shares outstanding |  |  | 32,175 |  |  | 32,175 |  |  | 32,175
|  | As Reported |  |  |  |  |
|  | Six Months Ended |  |  |  |  | Income Statement
|  | July 1, |  | Total |  | Without Adoption of
(In thousands, except per share amounts) |  | 2018 |  | Adjustments |  | Topic 606
Revenues: |  |  |  |  |  |  |  |  |
Domestic Company-owned restaurant sales |  | $ | 371,621 |  | $ | 1,076 |  | $ | 372,697
North America franchise royalties and fees |  |  | 48,718 |  |  | 120 |  |  | 48,838
North America commissary |  |  | 315,168 |  |  | — |  |  | 315,168
International |  |  | 59,183 |  |  | 324 |  |  | 59,507
Other revenues |  |  | 40,638 |  |  | (5,770) |  |  | 34,868
Total revenues |  |  | 835,328 |  |  | (4,250) |  |  | 831,078
Costs and expenses: |  |  |  |  |  |  |  |  |
Operating costs (excluding depreciation and amortization shown separately below): |  |  |  |  |  |  |  |  |
Domestic Company-owned restaurant expenses |  |  | 305,100 |  |  | (338) |  |  | 304,762
North America commissary |  |  | 294,981 |  |  | — |  |  | 294,981
International expenses |  |  | 37,278 |  |  | — |  |  | 37,278
Other expenses |  |  | 41,656 |  |  | (6,310) |  |  | 35,346
General and administrative expenses |  |  | 78,441 |  |  | 538 |  |  | 78,979
Depreciation and amortization |  |  | 23,270 |  |  | — |  |  | 23,270
Total costs and expenses |  |  | 780,726 |  |  | (6,110) |  |  | 774,616
Refranchising loss, net |  |  | (1,918) |  |  | — |  |  | (1,918)
Operating income |  |  | 52,684 |  |  | 1,860 |  |  | 54,544
Net Interest expense |  |  | (10,617) |  |  | — |  |  | (10,617)
Income before income taxes |  |  | 42,067 |  |  | 1,860 |  |  | 43,927
Income tax expense |  |  | 12,022 |  |  | 418 |  |  | 12,440
Net income before attribution to noncontrolling interests |  |  | 30,045 |  |  | 1,442 |  |  | 31,487
Income attributable to noncontrolling interests |  |  | (1,517) |  |  | — |  |  | (1,517)
Net income attributable to the Company |  | $ | 28,528 |  | $ | 1,442 |  | $ | 29,970
Calculation of income for earnings per share: |  |  |  |  |  |  |  |  |
Net income attributable to the Company |  | $ | 28,528 |  | $ | 1,442 |  | $ | 29,970
Net income attributable to participating securities |  |  | (147) |  |  | — |  |  | (147)
Net income attributable to common shareholders |  | $ | 28,381 |  | $ | 1,442 |  | $ | 29,823
Basic earnings per common share |  | $ | 0.87 |  | $ | 0.04 |  | $ | 0.91
Diluted earnings per common share |  | $ | 0.86 |  | $ | 0.04 |  | $ | 0.91
Basic weighted average common shares outstanding |  |  | 32,610 |  |  | 32,610 |  |  | 32,610
Diluted weighted average common shares outstanding |  |  | 32,860 |  |  | 32,860 |  |  | 32,860
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 |  | $ | 2,426 |  | $ | 2,179 |  | $ | 1,948 |  | $ | 1,732 |  | $ | 1,503 |  | $ | 3,795 |  | $ | 13,583
An additional $4.2 million of area development fees related to unopened stores and unearned royalties are included in deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings and franchisee’s revenues. As of July 1, 2018, the amount allocated to the Papa Rewards loyalty program is $15.8 million and is reflected in the Condensed Consolidated Balance Sheet as part of the contract liability included in accrued expenses and other current liabilities. This will be recognized as revenue as the points are redeemed, which is expected to occur within the next year. 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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