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Update to Significant Accounting Policies | 3 Months Ended
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Mar. 31, 2019
Update to Significant Accounting Policies |
Update to Significant Accounting Policies | 2.Update to Significant Accounting Policies Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant items that are subject to such estimates and assumptions include allowance for doubtful accounts and notes receivable, intangible assets, contract assets and contract liabilities, including the online customer loyalty program obligation, right-of-use assets and lease liabilities, gift card breakage, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates. Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation that is designed to break even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the domestic restaurants, of which approximately 80% are franchised. During the first quarter of 2019, the Company reassessed the governance structure and operating procedures of PJMF and determined that the Company has the power to control certain significant activities of PJMF, as defined by Accounting Standards Codification 810 (“ASC 810”), Consolidations. Therefore, the Company is the primary beneficiary of the VIE, and per ASC 810, must consolidate the VIE. Prior to 2019, the Company did not consolidate PJMF. The Company has concluded the previous accounting policy to not consolidate PJMF was an immaterial error and has determined that PJMF should be consolidated. The Company has corrected this immaterial error by restating the 2018 condensed consolidated financial statements and related notes included herein to include PJMF. Notes 5, 6, 9, 11, 13 and 14 have been updated to reflect the immaterial restatement. The immaterial impacts of this error correction in fiscal year 2018 are as follows:
Condensed Consolidated Balance Sheet (unaudited) |  |  |
|  | December 30, 2018 |
(In thousands) |  | As Reported |  | Change |  | As Restated |
Cash and cash equivalents |  | $ | 19,468 |  | $ | 13,790 |  | $ | 33,258 |
Accounts receivable, net |  |  | 67,854 |  |  | 10,264 |  |  | 78,118 |
Income tax receivable |  |  | 16,073 |  |  | 73 |  |  | 16,146 |
Prepaid expenses |  |  | 29,935 |  |  | 441 |  |  | 30,376 |
Other current assets |  |  | 5,677 |  |  | 1 |  |  | 5,678 |
Total current assets |  |  | 171,708 |  |  | 24,569 |  |  | 196,277 |
Deferred income taxes, net |  |  | 756 |  |  | 381 |  |  | 1,137 |
Total assets |  |  | 570,947 |  |  | 24,950 |  |  | 595,897 |
Accounts payable |  |  | 29,891 |  |  | (2,785) |  |  | 27,106 |
Accrued expenses and other current liabilities |  |  | 105,712 |  |  | 23,455 |  |  | 129,167 |
Deferred revenue current |  |  | 2,443 |  |  | 155 |  |  | 2,598 |
Current portion of long-term debt |  |  | 20,000 |  |  | 9 |  |  | 20,009 |
Total current liabilities |  |  | 164,636 |  |  | 20,834 |  |  | 185,470 |
Deferred revenue |  |  | 14,679 |  |  | 5,995 |  |  | 20,674 |
Total liabilities |  |  | 867,617 |  |  | 26,829 |  |  | 894,446 |
Retained earnings |  |  | 244,061 |  |  | (1,879) |  |  | 242,182 |
Total stockholders' equity (deficit) |  |  | (302,134) |  |  | (1,879) |  |  | (304,013) |
Total liabilities, redeemable noncontrolling interests, Series B preferred stock and stockholders' equity (deficit) |  |  | 570,947 |  |  | 24,950 |  |  | 595,897 |
Condensed Consolidated Statements of Operations: |  |
|  | Three Months Ended April 1, 2018
(In thousands, except per share amounts) |  | As Reported |  | Change |  | As Restated
Other revenues |  | $ | 20,494 |  | $ | 22,753 |  | $ | 43,247
Total revenues |  |  | 427,369 |  |  | 22,753 |  |  | 450,122
Domestic Company-owned restaurant expenses |  |  | 157,319 |  |  | 255 |  |  | 157,574
Other expenses |  |  | 20,958 |  |  | 21,409 |  |  | 42,367
General and administrative expenses |  |  | 39,729 |  |  | 267 |  |  | 39,996
Total costs and expenses |  |  | 400,256 |  |  | 21,931 |  |  | 422,187
Operating income |  |  | 27,317 |  |  | 822 |  |  | 28,139
Net interest expense |  |  | (4,955) |  |  | (120) |  |  | (5,075)
(Loss) income before income taxes |  |  | 22,362 |  |  | 702 |  |  | 23,064
Income tax expense |  |  | 4,982 |  |  | (4) |  |  | 4,978
Net (loss) income before attribution to noncontrolling interests |  |  | 17,380 |  |  | 706 |  |  | 18,086
Net (loss) income attributable to the Company |  |  | 16,737 |  |  | 706 |  |  | 17,443
Net (loss) income attributable to common shareholders |  |  | 16,662 |  |  | 706 |  |  | 17,368
Basic (loss) earnings per common share |  |  | 0.50 |  |  | 0.02 |  |  | 0.52
Diluted (loss) earnings per common share |  |  | 0.50 |  |  | 0.02 |  |  | 0.52
Condensed Consolidated Statement of Cash Flows |  |
|  | Three Months Ended April 1, 2018
(In thousands, except per share amounts) |  | As Reported |  | Change |  | As Restated
Operating activities |  |
Net income before attribution to noncontrolling interests |  | $ | 17,380 |  | $ | 706 |  | $ | 18,086
Accounts receivable |  |  | 86 |  |  | 2,589 |  |  | 2,675
Income tax receivable |  |  | 3,903 |  |  | (4) |  |  | 3,899
Prepaid expenses |  |  | (217) |  |  | 772 |  |  | 555
Other current assets |  |  | 5,097 |  |  | (6,361) |  |  | (1,264)
Other assets and liabilities |  |  | (514) |  |  | 989 |  |  | 475
Accounts payable |  |  | 1,209 |  |  | 1,354 |  |  | 2,563
Income and other taxes payable |  |  | (466) |  |  | - |  |  | (466)
Accrued expenses and other current liabilities |  |  | (3,103) |  |  | (656) |  |  | (3,759)
Deferred revenue |  |  | 220 |  |  | (3,694) |  |  | (3,474)
Net cash provided by operating activities |  |  | 41,036 |  |  | (4,305) |  |  | 36,731
Financing activities |  |  |  |  |  |  |  |  |
Net proceeds (repayments) of revolving credit facilities |  |  | 127,000 |  |  | 13,308 |  |  | 140,308
Net cash used in financing activities |  |  | (27,122) |  |  | 13,308 |  |  | (13,814)
Change in cash and cash equivalents |  |  | 9,590 |  |  | 9,003 |  |  | 18,593
Cash and cash equivalents at beginning of period |  |  | 22,345 |  |  | 5,546 |  |  | 27,891
Cash and cash equivalents at end of period |  |  | 31,935 |  |  | 14,549 |  |  | 46,484
Noncontrolling Interests Papa John’s has three joint venture arrangements in which there are noncontrolling interests held by third parties that include 183 restaurants at March 31, 2019. We are required to report the consolidated net income (loss) at amounts attributable to the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the Condensed Consolidated Statements of Operations attributable to the noncontrolling interest holders. The income before income taxes attributable to these joint ventures for the three months ended March 31, 2019 and April 1, 2018 was as follows (in thousands):
|  | Three Months Ended |
|  | March 31, |  | April 1, |
|  | 2019 |  | 2018 |
Papa John’s International, Inc. |  | $ | 464 |  | $ | 1,295 |
Noncontrolling interests |  |  | 133 |  |  | 643 |
Total income before income taxes |  | $ | 597 |  | $ | 1,938 |
The following summarizes the redemption feature, location and related accounting within the Condensed Consolidated Balance Sheets for these joint venture arrangements:
Type of Joint Venture Arrangement |  | Location within the Balance Sheets |  | Recorded Value
Joint venture with no redemption feature |  | Permanent equity |  | Carrying value
Joint ventures with option to require the Company to purchase the noncontrolling interest - not currently redeemable |  | Temporary equity |  | Carrying value
Revenue Recognition Other Revenues Franchise Marketing Fund revenues represent contributions collected by PJMF and various other international and domestic marketing funds (“Co-op” or “Co-operative”) where we have determined for purposes of accounting that we have control over the activities of the funds. PJMF funds its operations with ongoing financial support and contributions from the domestic restaurants, of which approximately 80% are franchised restaurant members. Contributions are based on a percentage of monthly restaurant sales and are billed monthly. Advertising fund contributions and expenditures are reported on a gross basis in the Condensed Consolidated Statements of Operations. For interim reporting purposes, PJMF and Co-op advertising costs are accrued and expensed when the related franchise advertising revenues are recognized. The Company and its franchisees sell gift cards that are redeemable for products in our restaurants. A subsidiary of PJMF manages the gift card program, and therefore, collects all funds from the activation of gift cards and reimburses franchisees for the redemption of gift cards in their restaurants. A liability for unredeemed gift cards is included in Deferred revenue in the Condensed Consolidated Balance Sheets. Gift card redemption revenues, which are based on a percentage of the franchise restaurant sales generated by the gift card, are recognized as gift cards are redeemed by customers. There are no expiration dates and we do not deduct non-usage fees from outstanding gift cards. While the franchisees continue to honor all gift cards presented for payment, the likelihood of redemption may be determined to be remote for certain cards due to long periods of inactivity. In these circumstances, the Company recognizes breakage revenue for amounts not subject to unclaimed property laws. Based upon our analysis of historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote. Breakage revenue is recognized over time in proportion to estimated redemption patterns. Commissions on gift cards sold by third parties are recorded as a reduction to Deferred revenue and a reduction to Other revenue based, upon estimated redemption patterns. Deferred Income Tax Accounts and Tax Reserves We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining 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. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. Discrete items are recorded in the quarter in which they occur. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax attribute carryforwards (e.g., net operating losses, capital losses, and foreign tax credits). The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. As of March 31, 2019, we had a net deferred liability of approximately $4.6 million. Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues on a quarterly basis to adjust for events, such as statute of limitations expirations, court or state rulings or audit settlements, which may impact our ultimate payment for such exposures. Fair Value Measurements and Disclosures The Company is required to determine the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Fair value is a market-based measurement, not an entity specific measurement. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash and cash equivalents, accounts receivable, net of allowances, and accounts payable. The carrying value of our notes receivable, net of allowances, also approximates fair value. The fair value of the amounts outstanding under our term debt and revolving credit facility approximate their carrying values due to the variable market-based interest rate (Level 2). Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following categories:
| · |  | Level 1: Quoted market prices in active markets for identical assets or liabilities.
| · |  | Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
| · |  | Level 3: Unobservable inputs that are not corroborated by market data.
Our financial assets that were measured at fair value on a recurring basis as of March 31, 2019 and December 30, 2018 are as follows (in thousands):
|  | Carrying |  | Fair Value Measurements |
|  | Value |  | Level 1 |  | Level 2 |  | Level 3 |
March 31, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Cash surrender value of life insurance policies (a) |  | $ | 31,080 |  | $ | 31,080 |  | $ | — |  | $ | — |
Interest rate swaps (b) |  |  | 396 |  |  | — |  |  | 396 |  |  | — |
December 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Cash surrender value of life insurance policies (a) |  | $ | 27,751 |  | $ | 27,751 |  | $ | — |  | $ | — |
Interest rate swaps (b) |  |  | 4,905 |  |  | — |  |  | 4,905 |  |  | — |
| (a) |  | Represents life insurance policies held in our non-qualified deferred compensation plan.
| (b) |  | The fair value of our interest rate swaps is based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swaps, as well as considering published discount factors, and projected London Interbank Offered Rates (“LIBOR”).
Our assets and liabilities that were measured at fair value on a non-recurring basis as of March 31, 2019 include assets and liabilities held for sale. The fair value was determined using a market-based approach with unobservable inputs (Level 3) less any estimated selling costs. Accounting Standards Adopted Leases In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”), which amends leasing guidance by requiring companies to recognize a right-of-use asset and a lease liability for all operating and financing leases with lease terms greater than twelve months. The lease liability is equal to the present value of lease payments. The lease asset is based on the lease liability, subject to adjustment for prepaid and deferred rent and tenant incentives. For income statement purposes, leases will continue to be classified as operating or financing with lease expense in both cases calculated substantially the same as under the prior leasing guidance. The Company adopted Topic 842 as of December 31, 2018 (the first day of fiscal 2019). See Notes 3 and 4 for additional information. Disclosure Update and Simplification In August 2018, the Securities and Exchange Commission (“SEC”) issued SEC Release No. 33-10532, Disclosure Update and Simplification, which updates and simplifies certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The update also expanded the disclosure requirements related to the analysis of stockholders' equity (deficit) for interim financial statements requiring an analysis of changes in each caption of stockholders' equity (deficit) presented in the balance sheet must be provided in a note or separate statement. The analysis must present a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income (loss) is required to be filed. This rule became effective on November 5, 2018, and as a result, the Company has included the Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended March 31, 2019 and April 1, 2018 in this quarterly report on Form 10Q. Accounting Standards to be Adopted in Future Periods Financial Instruments – Credit Losses In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected versus incurred losses for financial assets held. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact of adopting this standard on our condensed consolidated financial statements. Cloud Computing In August 2018, the FASB issued ASU No. 2018-15 “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Companies can choose to adopt the new guidance prospectively or retrospectively. The Company is currently in the process of evaluating the effects of this pronouncement on our condensed consolidated financial statements.

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