Papa Johns 2010 Annual Report Download - page 42

35
2010 Compared to 2009
Variable Interest Entities
Our operating results include BIBP’s operating results. The consolidation of BIBP had a significant
impact on our operating results in both 2010 and 2009 (pre-tax income of $21.0 million in 2010,
including a reduction in BIBP’s cost of sales of $14.2 million associated with PJFS’s agreement to pay to
BIBP for past cheese purchases an amount equal to its accumulated deficit, compared to pre-tax income
of $22.5 million in 2009).
Consolidation accounting requires the net impact from the consolidation of BIBP to be reflected
primarily in three separate components of our statement of income. The first component is the portion of
BIBP operating income or loss attributable to the amount of cheese purchased by Company-owned
restaurants during the period. This portion of BIBP operating income (loss) is reflected as a reduction
(increase) in the “Domestic Company-owned restaurant expenses - cost of sales” line item. This approach
effectively reports cost of sales for Company-owned restaurants as if the purchasing agreement with
BIBP did not exist and such restaurants were purchasing cheese at the spot market prices (i.e., the impact
of BIBP is eliminated in consolidation).
The second component of the net impact from the consolidation of BIBP is reflected in the caption “Loss
(income) from the franchise cheese-purchasing program, net of noncontrolling interest.” This line item
represents BIBP’s income or loss from purchasing cheese at the spot market price and selling to
franchised restaurants at a fixed quarterly price, net of any income or loss attributable to the
noncontrolling interest BIBP shareholders. The amount of income or loss attributable to the BIBP
shareholders depends on its cumulative shareholders’ equity balance and the change in such balance
during the reporting period. The third component is reflected as investment income or interest expense,
depending upon whether BIBP is in a net investment or net borrowing position during the reporting
period.
The following table summarizes the impact of BIBP prior to the required consolidating eliminations on
our consolidated statements of income for the years ended December 26, 2010 and December 27, 2009
(in thousands):
Year Ended
December 26,
2010
December 27,
2009
BIBP sales 153,014$ 142,407$
Cost of sales 131,549 118,825
General and administrative expenses 91 233
Total costs and expenses 131,640 119,058
Operating income 21,374 23,349
Interest expense (420) (806)
Income before income taxes (a)
20,954
$
22,543
$
(a)
Income before income taxes for the year ended December 26, 2010, was $6.8 million, excluding the
reduction in BIBP’s cost of sales of $14.2 million associated with PJFS’s agreement to pay to BIBP
for past cheese purchases an amount equal to its accumulated deficit.