Papa Johns 2004 Annual Report Download - page 40

Download and view the complete annual report

Please find page 40 of the 2004 Papa Johns annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 82

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82

39
for the sole purpose of reducing cheese price volatility to domestic system-wide restaurants. Under this
arrangement, domestic Company-owned and franchised restaurants are able to purchase cheese at a fixed
price per pound throughout a given quarter, based in part on historical average cheese prices. Gains and
losses incurred by BIBP are used as a factor in determining adjustments to the selling price to restaurants
over time. Accordingly, for any given quarter, the price paid by the domestic Company-owned and
franchised restaurants may be less than or greater than the prevailing average market price.
As a result of the adoption of FIN 46, Papa John’s began consolidating the operating results of BIBP in
2004. Consolidation accounting requires the portion of BIBP operating income (loss) related to domestic
Company-owned restaurants to be reflected as a reduction (increase) in the “Domestic Company-owned
restaurant expenses – cost of sales” line item, thus reflecting the actual market price of cheese had the
purchasing arrangement not existed. The consolidation of BIBP had a significant impact on our operating
results in 2004 and is expected to have a significant impact on future operating results depending on the
prevailing spot block market price of cheese as compared to the price charged to domestic restaurants.
Over time, we expect BIBP to achieve break-even financial results.
The following table presents the actual average block price for cheese and the BIBP block price by
quarter for 2004, 2003 and 2002:
2004 2003 2002 2004 2003 2002
Quarter 1 1.426$ 1.115$ 1.254$ 1.220$ 1.159$ 1.403$
Quarter 2 2.012 1.134 1.205 1.326 1.122 1.323
Quarter 3 1.528 1.536 1.129 1.556 1.242 1.450
Quarter 4 1.617 1.474 1.155 1.535 1.217 1.290
Full Year 1.646$ 1.315$ 1.186$ 1.409$ 1.185$ 1.367$
BIBP Block PriceActual Block Price
The following table presents the 2004 impact by quarter on our pre-tax income due to consolidating
BIBP. Additionally, based on the Chicago Mercantile Exchange milk futures market prices as of March
1, 2005, and the actual first and second quarter 2005 and projected third and fourth quarter 2005 cheese
costs to restaurants as determined by the BIBP pricing formula, the consolidation of BIBP is projected to
increase (decrease) our pre-tax income as follows in 2005 (in thousands):
2004 2005
Quarter 1 (1,645)$ (1,700)$ *
Quarter 2 (18,342) (1,800) *
Quarter 3 (506) 2,700 *
Quarter 4 (2,966) 4,400 *
Full Year
(23,459)
$
3,600
$
*
*The projections above are based upon current futures market prices. Historically, actual results have
differed significantly from previous projections using the futures market prices.
Over the long term, we expect to purchase cheese at a price approximating the actual average market
price and therefore we do not generally make use of financial instruments to hedge commodity prices.