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PAPA JOHNS INTERNATIONAL INC - Quarter Report: 2021 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 26, 2021

OR

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-21660

PAPA JOHN’S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

61-1203323

(State or other jurisdiction of

(I.R.S. Employer Identification

incorporation or organization)

number)

2002 Papa John’s Boulevard

Louisville, Kentucky 40299-2367

(Address of principal executive offices)

(502) 261-7272

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol

Name of each exchange on which registered:

Common stock, $0.01 par value

PZZA

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes  No 

Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

At October 29, 2021, there were outstanding 36,363,904 shares of the registrant’s common stock, par value $0.01 per share.

Table of Contents

INDEX

Page No.

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets — September 26, 2021 and December 27, 2020

3

Condensed Consolidated Statements of Operations — Three and Nine months ended September 26, 2021 and September 27, 2020

4

Condensed Consolidated Statements of Comprehensive Income — Three and Nine months ended September 26, 2021 and September 27, 2020

5

Condensed Consolidated Statements of Stockholders’ Deficit — Three and Nine months ended September 26, 2021 and September 27, 2020

6

Condensed Consolidated Statements of Cash Flows — Nine months ended September 26, 2021 and September 27, 2020

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4.

Controls and Procedures

40

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 6.

Exhibits

42

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

    

September 26,

    

December 27,

(In thousands, except per share amounts)

2021

2020

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

105,813

$

130,204

Accounts receivable, net

79,534

90,135

Notes receivable, current portion

 

13,075

 

11,318

Income tax receivable

599

1,273

Inventories

 

33,490

 

30,265

Prepaid expenses and other current assets

 

39,249

 

43,212

Total current assets

 

271,760

 

306,407

Property and equipment, net

 

209,072

 

200,895

Finance lease right-of-use assets, net

21,917

16,840

Operating lease right-of-use assets

174,119

148,110

Notes receivable, less current portion, net

 

37,263

 

36,538

Goodwill

 

80,906

 

80,791

Deferred income taxes

13,926

10,800

Other assets

 

80,991

 

72,389

Total assets

$

889,954

$

872,770

Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit

Current liabilities:

Accounts payable

$

42,384

$

37,370

Income and other taxes payable

 

26,221

 

10,263

Accrued expenses and other current liabilities

 

201,528

 

174,563

Current deferred revenue

20,617

19,590

Current finance lease liabilities

4,914

3,545

Current operating lease liabilities

22,455

23,538

Current portion of long-term debt

20,000

Total current liabilities

 

318,119

 

288,869

Deferred revenue

 

12,471

 

13,664

Long-term finance lease liabilities

17,555

13,531

Long-term operating lease liabilities

157,359

124,666

Long-term debt, less current portion, net

 

414,915

 

328,292

Deferred income taxes

 

178

 

948

Other long-term liabilities

 

98,872

 

111,364

Total liabilities

 

1,019,469

 

881,334

Series B Convertible Preferred Stock; $0.01 par value; no shares authorized, issued or outstanding at September 26, 2021, compared to 260.0 shares authorized, 252.5 shares issued and outstanding at December 27, 2020

251,901

Redeemable noncontrolling interests

 

7,531

 

6,474

Stockholders’ deficit:

Common stock ($0.01 par value per share; issued 48,989 at September 26, 2021 and 45,288 at December 27, 2020)

490

453

Additional paid-in capital

 

440,742

 

254,103

Accumulated other comprehensive loss

 

(9,910)

 

(14,168)

Retained earnings

 

171,378

 

219,158

Treasury stock (12,806 shares at September 26, 2021 and 12,743 shares at December 27, 2020, at cost)

 

(755,035)

 

(741,724)

Total stockholders’ deficit

 

(152,335)

 

(282,178)

Noncontrolling interests in subsidiaries

 

15,289

 

15,239

Total Stockholders’ deficit

 

(137,046)

 

(266,939)

Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and
Stockholders’ deficit

$

889,954

$

872,770

See accompanying notes.

3

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

    

Three Months Ended

Nine Months Ended

September 26,

September 27,

September 26,

September 27,

(In thousands, except per share amounts)

    

2021

    

2020

    

2021

    

2020

Revenues:

Domestic Company-owned restaurant sales

$

191,584

$

178,371

$

584,942

$

526,317

North America franchise royalties and fees

 

31,933

 

25,281

 

97,123

 

68,895

North America commissary revenues

 

189,224

 

181,338

 

560,743

 

504,379

International revenues

 

38,408

33,440

 

110,629

 

87,592

Other revenues

61,633

54,511

186,099

156,240

Total revenues

 

512,782

 

472,941

 

1,539,536

 

1,343,423

Costs and expenses:

Operating costs (excluding depreciation and amortization shown separately below):

Domestic Company-owned restaurant expenses

155,477

144,803

465,658

419,082

North America commissary expenses

175,399

167,937

518,310

466,676

International expenses

21,743

19,370

62,791

52,775

Other expenses

56,039

50,917

168,092

148,219

General and administrative expenses

 

54,070

 

52,601

 

157,779

 

148,680

Depreciation and amortization

 

11,477

 

12,764

 

36,830

 

37,436

Total costs and expenses

 

474,205

 

448,392

 

1,409,460

 

1,272,868

Operating income

 

38,577

 

24,549

 

130,076

 

70,555

Net interest expense

 

(3,979)

(3,636)

 

(11,275)

 

(11,230)

Income before income taxes

 

34,598

 

20,913

 

118,801

 

59,325

Income tax expense

 

4,057

 

4,516

 

19,387

 

11,984

Net income before attribution to noncontrolling interests

 

30,541

 

16,397

 

99,414

 

47,341

Net income attributable to noncontrolling interests

 

(1,285)

 

(689)

 

(4,021)

 

(2,576)

Net income attributable to the Company

$

29,256

$

15,708

$

95,393

$

44,765

Calculation of net income (loss) for earnings per share:

Net income attributable to the Company

$

29,256

$

15,708

$

95,393

$

44,765

Dividends on redemption of Series B Convertible Preferred Stock

(109,852)

Dividends paid to participating securities

 

(137)

 

(3,548)

 

(5,964)

 

(10,546)

Net income attributable to participating securities

 

(158)

 

(703)

 

 

(1,809)

Net income (loss) attributable to common shareholders

$

28,961

$

11,457

$

(20,423)

$

32,410

Basic earnings (loss) per common share

$

0.80

$

0.35

$

(0.59)

$

1.00

Diluted earnings (loss) per common share

$

0.79

$

0.35

$

(0.59)

$

0.99

Basic weighted average common shares outstanding

 

36,387

 

32,616

 

34,619

 

32,347

Diluted weighted average common shares outstanding

 

36,719

 

32,971

 

34,619

 

32,643

Dividends declared per common share

$

0.350

$

0.225

$

0.800

$

0.675

See accompanying notes.

4

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended

Nine Months Ended

September 26,

September 27,

September 26,

September 27,

(In thousands)

    

2021

    

2020

    

2021

    

2020

Net income before attribution to noncontrolling interests

$

30,541

$

16,397

$

99,414

$

47,341

Other comprehensive income (loss), before tax:

Foreign currency translation adjustments

(1,113)

1,721

383

(1,438)

Interest rate swaps (1)

 

1,535

 

1,647

 

5,147

 

(9,375)

Other comprehensive income (loss), before tax

 

422

 

3,368

 

5,530

 

(10,813)

Income tax effect:

Foreign currency translation adjustments

 

256

 

(395)

 

(88)

 

332

Interest rate swaps (2)

 

(353)

 

(379)

 

(1,184)

 

2,156

Income tax effect

 

(97)

 

(774)

 

(1,272)

 

2,488

Other comprehensive income (loss), net of tax

 

325

 

2,594

 

4,258

 

(8,325)

Comprehensive income before attribution to noncontrolling interests

 

30,866

 

18,991

 

103,672

 

39,016

Less: comprehensive (income), redeemable noncontrolling interests

 

(692)

 

(301)

 

(2,192)

 

(1,184)

Less: comprehensive (income), nonredeemable noncontrolling interests

 

(593)

 

(388)

 

(1,829)

 

(1,392)

Comprehensive income attributable to the Company

$

29,581

$

18,302

$

99,651

$

36,440

(1)Amounts reclassified out of accumulated other comprehensive loss into net interest expense include ($1,644) and ($5,084) for the three and nine months ended September 26, 2021, respectively, and ($1,674) and ($3,376) for the three and nine months ended September 27, 2020, respectively.

(2)The income tax effects of amounts reclassified out of accumulated other comprehensive loss into net interest expense were $368 and $1,139 for the three and nine months ended September 26, 2021, respectively, and $378 and $763 for the three and nine months ended September 27, 2020, respectively.

See accompanying notes.

5

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(Unaudited)

Papa John’s International, Inc.

    

Common

    

    

    

    

    

Accumulated

    

    

    

    

    

    

    

Stock

Additional

Other

Noncontrolling

Total

(In thousands)

Shares

Common

Paid-In

Comprehensive

Retained

Treasury

Interests in

Stockholders’

For the three months ended September 26, 2021

Outstanding

Stock

Capital

Loss

Earnings

Stock

Subsidiaries

Deficit

Balance at June 27, 2021

36,215

$

489

$

435,608

$

(10,235)

$

154,769

$

(743,819)

$

15,290

$

(147,898)

Net income (1)

29,256

593

29,849

Other comprehensive income, net of tax

325

325

Cash dividends on common stock

48

(12,845)

(12,797)

Exercise of stock options

51

1

3,111

3,112

Acquisition of Company common stock

(103)

(12,367)

(12,367)

Stock-based compensation expense

4,317

4,317

Issuance of restricted stock

15

(873)

873

Tax effect of restricted stock awards

(1,423)

(1,423)

Distributions to noncontrolling interests

(594)

(594)

Other

5

(46)

198

278

430

Balance at September 26, 2021

 

36,183

$

490

$

440,742

$

(9,910)

$

171,378

$

(755,035)

$

15,289

$

(137,046)

For the nine months ended September 26, 2021

Balance at December 27, 2020

 

32,545

$

453

$

254,103

$

(14,168)

$

219,158

$

(741,724)

$

15,239

$

(266,939)

Net income (1)

 

 

 

 

 

95,393

 

 

1,829

 

97,222

Other comprehensive income, net of tax

 

 

 

 

4,258

 

 

 

 

4,258

Repurchase and conversion of Series B Convertible Preferred Stock

3,489

35

174,631

(110,498)

64,168

Cash dividends on common stock

110

(27,750)

(27,640)

Cash dividends on preferred stock

 

 

 

 

 

(4,121)

 

 

 

(4,121)

Exercise of stock options

 

199

 

2

 

11,209

 

 

 

 

 

11,211

Acquisition of Company common stock

(187)

(20,555)

(20,555)

Stock-based compensation expense

 

 

 

12,519

 

 

 

 

 

12,519

Issuance of restricted stock

 

125

 

 

(6,538)

 

 

 

6,538

 

 

Tax effect of restricted stock awards

(5,310)

(5,310)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(1,779)

 

(1,779)

Other

 

12

 

 

18

 

 

(804)

 

706

 

 

(80)

Balance at September 26, 2021

36,183

$

490

$

440,742

$

(9,910)

$

171,378

$

(755,035)

$

15,289

$

(137,046)

(1)Net income to the Company for the three and nine months ended September 26, 2021 excludes $692 and $2,192, respectively, allocable to the redeemable noncontrolling interests for our joint venture arrangements.

At September 26, 2021, the accumulated other comprehensive loss of $9,910 was comprised of net unrealized foreign currency translation loss of $3,499 and net unrealized loss on the interest rate swap agreements of $6,411.

See accompanying notes.

6

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit (continued)

(Unaudited)

Papa John’s International, Inc.

    

Common

    

    

    

    

    

Accumulated

    

    

    

    

    

    

    

Stock

Additional

Other

Noncontrolling

Total

(In thousands)

Shares

Common

Paid-In

Comprehensive

Retained

Treasury

Interests in

Stockholders’

For the three months ended September 27, 2020

Outstanding

Stock

Capital

Loss

Earnings

Stock

Subsidiaries

Deficit

Balance at June 28, 2020

 

32,349

$

451

$

243,577

$

(21,104)

$

212,104

$

(742,600)

$

15,724

$

(291,848)

Net income (2)

 

 

 

 

 

15,708

 

 

388

 

16,096

Other comprehensive income, net of tax

 

 

 

 

2,594

 

 

 

 

2,594

Cash dividends on common stock

 

 

 

78

 

 

(7,414)

 

 

 

(7,336)

Cash dividends on preferred stock

(3,412)

(3,412)

Exercise of stock options

 

131

 

1

 

7,499

 

 

 

 

 

7,500

Stock-based compensation expense

 

 

 

4,328

 

 

 

 

 

4,328

Issuance of restricted stock

 

2

 

 

(105)

 

 

 

105

 

 

Tax effect of restricted stock awards

 

 

 

(86)

 

 

 

 

(86)

Distributions to noncontrolling interests

(697)

(697)

Other

 

3

 

 

(81)

 

 

(75)

 

172

 

 

16

Balance at September 27, 2020

 

32,485

$

452

$

255,210

$

(18,510)

$

216,911

$

(742,323)

$

15,415

$

(272,845)

For the nine months ended September 27, 2020

Balance at December 29, 2019

 

31,894

$

447

$

219,047

$

(10,185)

$

205,697

$

(747,327)

$

15,665

$

(316,656)

Cumulative effect of adoption of ASU 2016-13 (1)

 

 

 

 

 

(1,066)

 

 

 

(1,066)

Adjusted Balance at December 30, 2019

 

31,894

$

447

$

219,047

$

(10,185)

$

204,631

$

(747,327)

$

15,665

$

(317,722)

Net income (2)

 

 

 

 

 

44,765

 

 

1,392

 

46,157

Other comprehensive loss, net of tax

 

 

 

 

(8,325)

 

 

 

 

(8,325)

Cash dividends on common stock

 

 

 

210

 

 

(22,066)

 

 

 

(21,856)

Cash dividends on preferred stock

 

 

 

 

(10,237)

 

 

 

(10,237)

Exercise of stock options

 

505

 

5

 

29,199

 

 

 

 

 

29,204

Stock-based compensation expense

 

 

 

13,071

 

 

 

 

 

13,071

Issuance of restricted stock

 

79

 

 

(4,573)

 

 

 

4,573

 

 

Tax effect of restricted stock awards

 

 

 

(1,665)

 

 

 

 

(1,665)

Distributions to noncontrolling interests

(1,642)

(1,642)

Other

 

7

 

 

(79)

 

 

(182)

 

431

 

 

170

Balance at September 27, 2020

 

32,485

$

452

$

255,210

$

(18,510)

$

216,911

$

(742,323)

$

15,415

$

(272,845)

(1)As of December 30, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”.
(2)Net income to the Company for the three and nine months ended September 27, 2020 excludes $301 and $1,184, respectively, allocable to the redeemable noncontrolling interests for our joint venture arrangements.

At September 27, 2020, the accumulated other comprehensive loss of $18,510 was comprised of net unrealized foreign currency translation loss of $6,705 and net unrealized loss on the interest rate swap agreements of $11,805.

See accompanying notes.

7

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended

September 26,

September 27,

(In thousands)

    

2021

    

2020

Operating activities

Net income before attribution to noncontrolling interests

$

99,414

$

47,341

Adjustments to reconcile net income to net cash provided by operating activities:

Benefit for allowance for credit losses on accounts and notes receivable

 

(920)

 

(334)

Depreciation and amortization

 

36,830

 

37,436

Deferred income taxes

 

(5,113)

 

(4,696)

Stock-based compensation expense

 

12,519

 

13,071

Other

 

1,052

 

1,233

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable

 

5,955

 

(4,378)

Income tax receivable

674

3,131

Inventories

 

(3,217)

 

(1,173)

Prepaid expenses and other current assets

 

11,277

 

14,393

Other assets and liabilities

 

(8,627)

 

18,080

Accounts payable

 

5,014

 

3,147

Income and other taxes payable

 

15,958

 

2,435

Accrued expenses and other current liabilities

 

24,001

 

40,112

Deferred revenue

 

(1,193)

 

(1,251)

Net cash provided by operating activities

 

193,624

 

168,547

Investing activities

Purchases of property and equipment

 

(41,328)

 

(24,269)

Notes issued

 

(14,637)

 

(13,240)

Repayments of notes issued

 

15,352

 

8,906

Acquisitions, net of cash acquired

 

(699)

 

Other

 

121

 

15

Net cash used in investing activities

 

(41,191)

 

(28,588)

Financing activities

Proceeds from issuance of senior notes

400,000

Repayment of term loan

(340,000)

(15,000)

Net proceeds (repayments) of revolving credit facilities

 

15,000

 

(5,000)

Debt issuance costs

(9,179)

Proceeds from exercise of stock options

 

11,211

 

29,204

Dividends paid to common stockholders

(27,640)

(21,856)

Dividends paid to preferred stockholders

 

(6,394)

 

(10,237)

Tax payments for equity award issuances

 

(5,310)

 

(1,665)

Repurchase of Series B Convertible Preferred Stock

(188,647)

Acquisition of Company common stock

 

(20,555)

 

Distributions to noncontrolling interests

 

(2,914)

 

(1,778)

Other

 

(2,630)

 

(1,105)

Net cash used in financing activities

 

(177,058)

 

(27,437)

Effect of exchange rate changes on cash and cash equivalents

 

234

 

(383)

Change in cash and cash equivalents

 

(24,391)

 

112,139

Cash and cash equivalents at beginning of period

 

130,204

 

27,911

Cash and cash equivalents at end of period

$

105,813

$

140,050

See accompanying notes.

8

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 26, 2021

1.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 26, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2021.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first-person notations of “we”, “us” and “our”) for the year ended December 27, 2020.

2.

Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP 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 credit losses on accounts and notes receivable, intangible assets, contract assets and contract liabilities, including the online customer loyalty program obligation and gift card breakage, right-of-use assets and lease liabilities, 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.

Variable Interest Entity

Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at 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, and does not have sufficient equity to fund its operations without these ongoing financial contributions. Based on an assessment of the governance structure and operating procedures of PJMF, the Company determined it has the power to control certain significant activities of PJMF, and therefore, is the primary beneficiary. The Company has consolidated PJMF in its financial results in accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations.”

Noncontrolling Interests

Papa John’s has four joint venture arrangements in which there are noncontrolling interests held by third parties that include 188 and 192 restaurants at September 26, 2021 and September 27, 2020, respectively.

Consolidated net income is required to be reported separately at amounts attributable to both 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 of net income attributable to noncontrolling interests.

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Net income attributable to these joint ventures for the three and nine months ended September 26, 2021 and September 27, 2020 was as follows (in thousands):

    

    

Three Months Ended

Nine Months Ended

September 26,

September 27,

September 26,

September 27,

    

2021

    

2020

    

2021

    

2020

Papa John’s International, Inc.

$

2,171

$

1,292

$

6,816

$

4,743

Noncontrolling interests

 

1,285

 

689

 

4,021

 

2,576

Total net income

$

3,456

$

1,981

$

10,837

$

7,319

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 ventures with no redemption feature

 

Permanent equity

 

Carrying value

Joint ventures with option to require the Company to purchase the noncontrolling interest - not currently redeemable or redemption not probable

 

Temporary equity

 

Carrying value

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. The effective income tax rate includes the estimated domestic state effective income tax rate and applicable foreign income tax rates.  The effective income tax rate is also impacted by various permanent items and credits, net of any related valuation allowances, and can vary based on changes in estimated annual income. 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.  

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 determines 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.  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 three 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.

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Fair value is a market-based measurement, not an entity-specific measurement. Considerable judgment is required to interpret market data to estimate fair value; accordingly, the fair values presented do not necessarily indicate what the Company or its debtholders could realize in a current market exchange.

Our financial assets and liabilities that were measured at fair value on a recurring basis as of September 26, 2021 and December 27, 2020 are as follows:

Carrying

Fair Value Measurements

 

(in thousands)

    

Value

    

Level 1

    

Level 2

    

Level 3

 

September 26, 2021

Financial assets:

Cash surrender value of life insurance policies (a)

$

40,482

$

40,482

$

$

Financial liabilities:

Interest rate swaps (b)

8,162

8,162

December 27, 2020

Financial assets:

Cash surrender value of life insurance policies (a)

$

37,578

$

37,578

$

$

Financial liabilities:

Interest rate swaps (b)

13,452

13,452

(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”).

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 notes receivable, net of allowances, also approximates fair value.  The Company’s revolving credit facilities and term debt under the Previous Credit Facility approximate carrying value due to their variable market-based interest rate.  The Company’s 3.875% senior notes are classified as a Level 2 fair value measurement since the Company estimates the fair value by using recent trading transactions, and have the following estimated fair values and carrying values (excluding the impact of unamortized debt issuance costs) as of September 26, 2021 and December 27, 2020, respectively:

September 26, 2021

December 27, 2020

Carrying

Fair

Carrying

Fair

(in thousands)

Value

Value

Value

Value

3.875% Senior Notes

$

400,000

$

401,000

$

$

Allowance for Credit Losses

Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors. Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer.  Account and note balances are charged off against the allowance after recovery efforts have ceased.  

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The following table summarizes changes in our allowances for credit losses for accounts receivable and notes receivable:

(in thousands)

Accounts Receivable

Notes Receivable

Balance at December 27, 2020

$

3,622

$

3,211

Current period benefit for expected credit losses

(80)

(563)

Write-offs charged against the allowance

(1,212)

(843)

Recoveries collected

(277)

Balance at September 26, 2021

$

2,330

$

1,528

3. Leases

Lessor Operating Leases

We sublease certain retail space to our franchisees in the United Kingdom which are primarily operating leases.  At September 26, 2021, we leased and subleased approximately 410 Papa John’s restaurants to franchisees in the United Kingdom. The initial lease terms on the franchised sites in the United Kingdom are generally 15 years.  The Company has the option to negotiate an extension toward the end of the lease term at the landlord’s discretion.  Rental income, primarily derived from properties leased and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms.  We recognized total sublease income of $9.0 million and $7.6 million within Other revenues in the Condensed Consolidated Statements of Operations for the nine months ended September 26, 2021 and September 27, 2020, respectively.

Lease Guarantees

As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of 71 domestic leases. These leases have varying terms, the latest of which expires in 2036. As of September 26, 2021, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $12.1 million.  This contingent liability is not included in the Condensed Consolidated Balance Sheet as it is not probable to occur.  The fair value of the guarantee is not material.

Supplemental Cash Flow & Other Information

Supplemental cash flow information related to leases for the periods reported is as follows:

Nine Months Ended

(in thousands)

September 26, 2021

September 27, 2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from finance leases

$

864

$

435

Financing cash flows from finance leases

3,358

1,438

Operating cash flows from operating leases (a)

28,830

27,965

Right-of-use assets obtained in exchange for new finance lease liabilities

9,190

1,056

Right-of-use assets obtained in exchange for new operating lease liabilities (b)

52,462

18,421

Cash received from sublease income

8,728

7,641

(a) Included within the change in Other assets and liabilities within the Condensed Consolidated Statements of Cash Flows offset by non-cash operating lease right-of-use asset amortization and lease liability accretion.

(b) Includes right-of-use assets of approximately $21.8 million for the nine months ended September 26, 2021 associated with the lease commencement of our Atlanta, Georgia corporate office.

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4. Papa John’s Marketing Fund, Inc.

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 for all participating domestic restaurants.  Contributions and expenditures are reported on a gross basis in the Condensed Consolidated Statements of Operations within Other revenues and Other expenses.

Assets and liabilities of PJMF, which are restricted in their use, included in the Condensed Consolidated Balance Sheets were as follows (in thousands):

September 26,

December 27,

2021

2020

Assets

Current assets:

Cash and cash equivalents

$

32,629

$

9,394

Accounts receivable, net

13,078

23,711

Income tax receivable

191

192

Prepaid expenses and other current assets

1,802

1,914

Total current assets

47,700

35,211

Deferred income taxes

595

588

Total assets

$

48,295

$

35,799

Liabilities

Current liabilities:

Accounts payable

$

9,810

$

5,429

Income and other taxes payable

2

2

Accrued expenses and other current liabilities

39,663

32,578

Current deferred revenue

3,235

3,938

Total current liabilities

52,710

41,947

Deferred revenue

1,881

2,419

Total liabilities

$

54,591

$

44,366

5. Revenue Recognition

Contract Balances

Our contract liabilities primarily relate to franchise fees, unredeemed gift card liabilities, and loyalty program obligations, which we classify as Deferred revenue on the Condensed Consolidated Balance Sheets.  During the three and nine months ended September 26, 2021, the Company recognized $9.2 million and $27.3 million in revenue, respectively, related to deferred revenue, compared to $8.4 million and $24.7 million for the three and nine months ended September 27, 2020.

The following table includes a breakout of contract liability balances (in thousands):

Contract Liabilities

September 26, 2021

December 27, 2020

Change

Franchise fees and unredeemed gift card liabilities

$

17,949

$

19,890

$

(1,941)

Customer loyalty program obligations

15,139

13,364

1,775

Total contract liabilities

$

33,088

$

33,254

$

(166)

Our contract assets consist primarily of equipment incentives provided to franchisees.  Equipment incentives are related to the future value of commissary revenue the Company will receive over the term of the incentive agreement.  As of September 26, 2021 and December 27, 2020, the contract assets were approximately $5.6 million and $5.1 million, respectively.  For the three and nine months ended September 26, 2021, revenue was reduced approximately $0.8 million

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and $2.2 million, respectively, for the amortization of contract assets over the applicable contract terms.  Contract assets are included in Prepaid expenses and other current assets and Other assets on the Condensed Consolidated Balance Sheets.

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

$

2,242

$

2,003

$

1,766

$

1,550

$

1,294

$

2,477

$

11,332

Approximately $1.5 million of area development fees related to unopened stores and international unearned royalties are included in Deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings and franchisees’ revenues. Gift card liabilities of approximately $5.1 million, included in Deferred revenue, will be recognized in Company-owned restaurant revenues when gift cards are redeemed. The Company will recognize redemption fee revenue in Other revenues when cards are redeemed at franchised restaurant locations.  

The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

6. Common Stock and Series B Convertible Preferred Stock

Shares Authorized and Outstanding

The Company has authorized 5.0 million shares of preferred stock (of which none were issued or outstanding at September 26, 2021 and December 27, 2020, respectively) and 100.0 million shares of common stock as of September 26, 2021 and December 27, 2020, respectively.  There were 36.2 million shares of the Company’s common stock outstanding at September 26, 2021 compared to 32.5 million shares at December 27, 2020.

During the second quarter of 2021, the Company entered into a Share Repurchase Agreement with certain funds affiliated with, or managed by, Starboard Value LP (collectively, “Starboard”), pursuant to which (i) the Company repurchased from Starboard 78,387 shares of the Series B Convertible Preferred Stock, par value $0.01 per share, of the Company (“Series B Preferred Stock”) and (ii) Starboard converted the remaining 171,613 shares of Series B Preferred Stock that it owned into 3,458,360 shares of the Company’s common stock pursuant to the terms of the Certificate of Designation of the Series B Preferred Stock.  Additionally, the Company entered into agreements with certain franchisee investors to repurchase 1,000 shares of the outstanding Series B Preferred Stock and convert the remaining 1,530 shares of Series B Preferred Stock into 30,769 shares of common stock.  The Company paid Starboard and the franchisee investors aggregate one-time cash payments of $188.6 million for the repurchase and conversion of all of the outstanding shares of Series B Preferred Stock.  The excess of the cash payment over the carrying value of the respective Series B Preferred Stock redeemed resulted in $109.9 million of dividends on redemption of Series B Convertible Preferred Stock in the Condensed Consolidated Statement of Operations, which reduced net income attributable to common stockholders during the second quarter of 2021.  Diluted earnings per share for the nine months ended September 26, 2021 was reduced by $3.14 as a result of this transaction.  

On August 3, 2021, the Company filed a Certificate of Elimination (the “Certificate of Elimination”) with the Secretary of State of the State of Delaware to eliminate the Series B Preferred Stock. No shares of Series B Preferred Stock were issued or outstanding following the repurchase and conversion thereof in the second quarter of 2021. Effective upon filing, the Certificate of Elimination eliminated from the Company’s Amended and Restated Certificate of Incorporation all matters set forth in the Certificate of Designation with respect to the Series B Preferred Stock. The shares that were designated to such series were returned to the status of authorized but unissued shares of preferred stock, par value $0.01 per share, of the Company, without designation as to series.

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Share Repurchase Program

Our Board of Directors has authorized the repurchase of up to $75.0 million of common stock under a share repurchase program that began on November 4, 2020 and is effective through December 26, 2021.  Through September 26, 2021, a total of approximately 219,000 shares with an aggregate cost of $23.3 million and an average price of $106.16 per share were repurchased under this program.  Funding for the share repurchase program has been provided through our operating cash flows.  Subsequent to September 26, 2021, we acquired an additional 158,000 shares at an aggregate cost of $19.8 million and an average price of $125.50 per share.  Approximately $31.9 million remained available under this share repurchase program as of October 29, 2021.

Subsequent to the end of the third quarter, on October 28, 2021, our Board of Directors approved a new share repurchase program for up to $425.0 million of the Company’s common stock, with an indefinite duration. This represents approximately 9.4% of the Company’s currently outstanding common stock based on the closing stock price as of October 29, 2021.  The new share repurchase program will initially operate alongside the Company’s existing $75.0 million share repurchase authorization, which expires on December 26, 2021.

The timing and volume of share repurchases under the Company’s share repurchase programs may be executed at the discretion of management on an opportunistic basis, subject to market and business conditions, regulatory requirements and other factors, or pursuant to trading plans or other arrangements. Repurchases under the programs may be made through open market, block, and privately negotiated transactions, including Rule 10b5-1 plans, at times and in such amounts as management deems appropriate. Repurchases under the Company’s share repurchase programs may be commenced or suspended from time to time at the Company’s discretion without prior notice.  Funding for the share repurchase programs will be provided through our credit facility, operating cash flow, stock option exercises and cash and cash equivalents.  

Dividends

The Company recorded dividends of approximately $33.2 million for the nine months ended September 26, 2021 consisting of the following:

$27.6 million paid to common stockholders ($0.80 per share);
$3.0 million in preferred dividends on the Series B Preferred Stock (3.6% of the investment per annum);
$1.5 million of common stock deemed dividend distributions in conjunction with the repurchase and conversion of the Series B Preferred Stock; and
$1.1 million in common stock “pass-through” dividends paid to Series B Preferred Stockholders on an as-converted basis ($0.45 per share).

On October 28, 2021, our Board of Directors declared a fourth quarter dividend of $0.35 per common share, of which approximately $12.8 million will be paid to common stockholders.  The common share dividend will be paid on November 19, 2021 to stockholders of record as of the close of business on November 9, 2021.  The declaration and payment of any future dividends will be at the discretion of our Board of Directors.

7. Earnings (Loss) Per Share

We compute earnings (loss) per share using the two-class method. The two-class method requires an earnings allocation formula that determines earnings (loss) per share for common shareholders and participating security holders according to dividends declared and participating rights in undistributed earnings. The shares of Series B Preferred Stock, which were repurchased by the Company or converted into shares of common stock during the second quarter of 2021, and time-based restricted stock awards are participating securities because holders of such shares have non-forfeitable dividend rights and participate in undistributed earnings with common stock. Under the two-class method, total dividends provided to the holders of participating securities and undistributed earnings allocated to participating securities, are subtracted from net income attributable to the Company in determining net income (loss) attributable to common shareholders.  Additionally, any accretion to the redemption value for the Series B Preferred Stock or cash payments in excess of their respective carrying values upon redemption was treated as a deemed dividend in the two-class earnings per share calculation.

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The calculations of basic and diluted earnings (loss) per common share are as follows (in thousands, except per-share data):

Three Months Ended

Nine Months Ended

September 26,

September 27,

September 26,

September 27,

2021

    

2020

    

2021

    

2020

Basic earnings (loss) per common share

Net income attributable to the Company

$

29,256

$

15,708

$

95,393

$

44,765

Dividends on redemption of Series B Convertible Preferred Stock

(109,852)

Dividends paid to participating securities

(137)

(3,548)

(5,964)

(10,546)

Net income attributable to participating securities

 

(158)

 

(703)

 

 

(1,809)

Net income (loss) attributable to common shareholders

$

28,961

$

11,457

$

(20,423)

$

32,410

Basic weighted average common shares outstanding

 

36,387

 

32,616

 

34,619

 

32,347

Basic earnings (loss) per common share

$

0.80

$

0.35

$

(0.59)

$

1.00

Diluted earnings (loss) per common share

Net income (loss) attributable to common shareholders

$

28,961

$

11,457

$

(20,423)

$

32,410

Weighted average common shares outstanding

 

36,387

 

32,616

 

34,619

 

32,347

Dilutive effect of outstanding equity awards (a)

 

332

 

355

 

 

296

Diluted weighted average common shares outstanding (b)

 

36,719

 

32,971

 

34,619

 

32,643

Diluted earnings (loss) per common share

$

0.79

$

0.35

$

(0.59)

$

0.99

(a)Excludes 132 equity awards for the nine months ended September 27, 2020, as the effect of including such awards would have been anti-dilutive.
(b)The Company had 252.5 shares of Series B Preferred Stock outstanding at September 27, 2020 (none at September 26, 2021). For the fully diluted calculation, the Series B Preferred stock dividends were added back to net income attributable to common shareholders.  The Company then applied the if-converted method to calculate dilution on the Series B Preferred Stock, which resulted in 5.0 million additional common shares for September 27, 2020.  This calculation was anti-dilutive for the September 27, 2020 period and as such was excluded.

8.

Debt

Long-term debt, net, consists of the following (in thousands):

September 26,

December 27,

2021

2020

Outstanding debt

$

425,000

$

350,000

Unamortized debt issuance costs

(10,085)

(1,708)

Current portion of long-term debt

(20,000)

Total long-term debt, net

$

414,915

$

328,292

Our outstanding debt as of September 26, 2021 was $425.0 million, which was comprised of $400.0 million outstanding under our 3.875% senior notes due 2029 (the “Notes”) and $25.0 million under the PJI Revolving Facility (as defined below). Including outstanding letters of credit, the remaining availability under the PJI Revolving Facility was approximately $572.3 million as of September 26, 2021.  

Senior Notes

On September 14, 2021, the Company issued $400.0 million of Notes which will mature on September 15, 2029.  The Notes are guaranteed by each of the Company’s existing and future domestic restricted subsidiaries that are guarantors or borrowers under the Amended Credit Agreement (as defined below) or other certain indebtedness. The Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), or to persons outside the United States under Regulation S of

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the Securities Act. Interest on the Notes will be payable semi-annually in cash in arrears on March 15 and September 15 of each year, commencing on March 15, 2022, at a fixed interest rate of 3.875% per annum.  In connection with the Notes, the Company recorded $7.1 million of debt issuance costs, which are being amortized into net interest expense over the term of the Notes.

The net proceeds from the Notes, together with borrowings under the Amended Credit Agreement (as defined below), were used to repay outstanding revolver and term loan borrowings under the Company’s Previous Credit Agreement (as defined below).

The Company may redeem the Notes, in whole or in part, at any time on or after September 15, 2024 at established redemption prices ranging from 97 to 194 basis points depending on when the Notes are redeemed.  At any time prior to September 15, 2024, the Company may also redeem up to 40% of the Notes with net cash proceeds of certain equity offerings at a redemption price equal to 103.875% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, excluding the redemption date.  In addition, at any time prior to September 15, 2024, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest and an applicable “make-whole” premium.  The Notes also contain customary redemption provisions related to asset sales and certain change of control transactions.

The Indenture governing the Notes contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Notes and certain provisions related to bankruptcy events.  The Indenture also contains customary negative covenants.

Amended Credit Agreement

Concurrently with the closing of the Notes, the Company entered into an amended and restated credit agreement (the “Amended Credit Agreement”) replacing the previous $800.0 million credit agreement (“Previous Credit Agreement”).  The Amended Credit Agreement provides for a senior secured revolving credit facility in an aggregate available principal amount of $600.0 million (the “PJI Revolving Facility”), of which up to $40.0 million is available as swingline loans and up to $80.0 million is available as letters of credit.  The PJI Revolving Facility will mature on September 14, 2026.  In connection with the Amended Credit Agreement, the Company recorded $2.1 million of debt issuance costs, which are being amortized into net interest expense over the term of the Amended Credit Agreement.

Up to $50.0 million of the PJI Revolving Facility may be advanced in certain agreed foreign currencies, including Euros, Pounds Sterling, Canadian Dollars, Japanese Yen, and Mexican Pesos.  Additionally, the Amended Credit Agreement includes an accordion feature allowing for a future increase of the PJI Revolving Facility and/or incremental term loans in an aggregate amount of up to $500.0 million, subject to certain conditions, including obtaining commitments from one or more new or existing lenders to provide such increased amounts and ongoing compliance with financial covenants. 

Loans under the PJI Revolving Facility accrue interest at a per annum rate equal to, at the Company’s election, either a LIBOR rate plus a margin ranging from 1.25% to 2.00% or a base rate (generally determined according to the greater of a prime rate, federal funds rate plus 0.50%, or a LIBOR rate plus 1.00%) plus a margin ranging from 0.25% to 1.00%.  In each case, the actual margin is determined according to a ratio of the Company’s total indebtedness to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for the then most recently ended four quarter period (the “Leverage Ratio”).  An unused commitment fee ranging from 18 to 30 basis points per annum, determined according to the Leverage Ratio, applies to the unutilized commitments under the PJI Revolving Facility.  Loans outstanding under the PJI Revolving Facility may be prepaid at any time without premium or penalty, subject to customary breakage costs in the case of borrowings for which a LIBOR rate election is in effect.  The Amended Credit Agreement also contain provisions specifying alternative interest rate calculations to be used at such time as LIBOR ceases to be available as a benchmark for establishing the interest rate on floating interest rate borrowings.

The Amended Credit Agreement contains customary affirmative and negative covenants that, among other things, require customary reporting obligations, and restrict, subject to certain exceptions, the incurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates. In addition, the Company

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will be subject to the following financial covenants: (1) a maximum Leverage Ratio of 5.25 to 1.00, subject to the Company’s election to increase the maximum Leverage Ratio by 0.50 to 1.00 in connection with material acquisitions if the Company satisfies certain requirements, and (2) a minimum interest coverage ratio defined as EBITDA plus consolidated rental expense to consolidated interest expense plus consolidated rental expense of 2.00 to 1.00.  We were in compliance with these financial covenants at September 26, 2021.

Obligations under the Amended Credit Agreement are guaranteed by certain direct and indirect material domestic subsidiaries of the Company (the “Guarantors”) and are secured by a security interest in substantially all of the capital stock and equity interests of the Company’s and the Guarantors’ domestic and first tier material foreign subsidiaries.  The Amended Credit Agreement contains customary events of default including, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, judgment defaults, and the occurrence of certain change of control events. The occurrence of an event of default may result in the termination of the PJI Revolving Facility, acceleration of repayment obligations and the exercise of remedies by the Lenders with respect to the subsidiary guarantors.

PJMF Revolving Facility

PJMF has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 with U.S. Bank National Association, as lender. The PJMF Revolving Facility is secured by substantially all assets of PJMF. The PJMF Revolving Facility matures on September 30, 2022.  The borrowings under the PJMF Revolving Facility accrue interest at a variable rate of the one-month LIBOR plus 1.75%.  The applicable interest rates on the PJMF Revolving Facility were 1.9% and 2.7% for the three and nine months ended September 27, 2020, respectively. There was no debt outstanding under the PJMF Revolving Facility as of September 26, 2021 or December 27, 2020. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.

Derivative Financial Instruments

As of September 26, 2021, we have the following interest rate swap agreements with a total notional value of $350.0 million:

Effective Dates

    

Floating Rate Debt

    

Fixed Rates

 

April 30, 2018 through April 30, 2023

$

55

million  

2.33

%

April 30, 2018 through April 30, 2023

$

35

million  

2.36

%

April 30, 2018 through April 30, 2023

$

35

million  

2.34

%

January 30, 2018 through August 30, 2022

$

100

million  

1.99

%

January 30, 2018 through August 30, 2022

$

75

million  

1.99

%

January 30, 2018 through August 30, 2022

$

50

million  

2.00

%

In September 2021, we de-designated $350.0 million of our interest rate swaps as cash flow hedges following the issuance of the Notes. For these de-designated hedges, the portion of gains or losses on the derivative instruments previously recognized in accumulated other comprehensive loss (“AOCL”) will be reclassified into earnings as adjustments to interest expense on a straight-line basis over the remaining life of the originally hedged transactions.

The following table provides information on the location and amounts of our swaps in the accompanying condensed consolidated financial statements (in thousands):

Interest Rate Swap Derivatives

Fair Value

Fair Value

September 26,

December 27,

Balance Sheet Location

2021

2020

Other current and long-term liabilities

$

8,162

$

13,452

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The effect of derivative instruments on the accompanying condensed consolidated financial statements is as follows (in thousands):

Location of Gain

Amount of Gain

Derivatives -

Amount of Gain or

or (Loss)

or (Loss)

Total Net Interest Expense

Cash Flow

(Loss) Recognized

Reclassified from

Reclassified from

on Condensed

Hedging

in AOCL

AOCL into

AOCL into

Consolidated Statements

Relationships

on Derivative

Income

Income

of Operations

Interest rate swaps for the three months ended:

September 26, 2021

$

1,182

 

Interest expense

$

(1,644)

$

(3,979)

September 27, 2020

$

1,268

 

Interest expense

$

(1,674)

$

(3,636)

Interest rate swaps for the nine months ended:

September 26, 2021

$

3,963

Interest expense

$

(5,084)

$

(11,275)

September 27, 2020

$

(7,219)

 

Interest expense

$

(3,376)

$

(11,230)

Interest paid, including payments made or received under the swaps, was $4.1 million and $3.9 million for the three months ended September 26, 2021 and September 27, 2020, respectively, and $11.1 million and $12.0 million for the nine months ended September 26, 2021 and September 27, 2020, respectively.

9.

Commitments and Contingencies

Litigation

The Company is involved in a number of lawsuits, claims, investigations and proceedings, including those specifically identified below, consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with ASC 450, “Contingencies” the Company has made accruals with respect to these matters where appropriate, which are reflected in the Company’s condensed consolidated financial statements.  We review these provisions at least quarterly and adjust them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Durling et al v. Papa John’s International, Inc., is a conditionally certified collective action filed in May 2016 in the United States District Court for the Southern District of New York, alleging that corporate restaurant delivery drivers were not properly reimbursed for vehicle mileage and expenses in accordance with the Fair Labor Standards Act. In July 2018, the District Court granted a motion to certify a conditional corporate collective class and the opt-in notice process has been completed.  As of the close of the opt-in period on October 29, 2018, 9,571 drivers opted into the collective class.  The Company continues to deny any liability or wrongdoing in this matter and intends to vigorously defend this action.  The Company has not recorded any liability related to this lawsuit as of September 26, 2021 as it does not believe a loss is probable or reasonably estimable.

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10.  Strategic Corporate Reorganization for Long-term Growth

On September 17, 2020, we announced plans to open an office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlanta. The space is designed to drive continued menu innovation and optimize integration across marketing, communications, customer experience, operations, human resources, diversity, equity and inclusion, financial planning and analysis, investor relations and development functions.  Our information technology, finance, supply chain, and legal teams will continue to operate in our Louisville, Kentucky office, which remains critical to our success. We also maintain an office outside of London, United Kingdom, where our international operations are managed.  All affected employees were either offered an opportunity to continue with the organization or were offered a severance package. As a result, we expect to incur certain one-time corporate reorganization costs of approximately $17.0 to $20.0 million related to employee severance and transition, recruitment and relocation, and third party and other costs through 2021.  Of these costs, we have cumulatively incurred approximately $15.3 million through September 26, 2021 which include $8.3 million of employee severance and other employee transition costs, $4.0 million of recruiting and professional fees, $2.9 million of relocation costs, and $1.0 million of other costs, offset by ($0.9) million of stock-based compensation forfeitures on unvested awards.

We record severance as a one-time termination benefit and recognize the expense ratably over the employees’ required future service period. All other costs, including employee transition costs, recruitment and relocation costs, and third-party costs, are recognized in the period incurred. All strategic corporate reorganization costs have been recorded in General and administrative expenses on the Condensed Consolidated Statement of Operations.

As of September 26, 2021 and December 27, 2020, the estimate of incurred but unpaid strategic corporate reorganization costs are included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.  The following table summarizes the activity for the nine months ended September 26, 2021:

Balance at

Balance at

December 27,

September 26,

2020

Charges

Payments

2021

Employee severance and other employee transition costs

$

4,615

$

3,576

$

(7,235)

$

956

Recruiting and professional fees

145

2,431

(2,576)

Relocation costs

101

2,608

(1,677)

1,032

Other costs

749

(749)

Total strategic corporate reorganization liability

$

4,861

$

9,364

$

(12,237)

$

1,988

We expect to recognize additional costs associated with the corporate reorganization in the remainder of 2021 of approximately $2.0 to $5.0 million.

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11.

Segment Information

We have four reportable segments: domestic Company-owned restaurants, North America franchising, North America commissaries, and international operations. The domestic Company-owned restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States) Company-owned restaurants and derives its revenues principally from retail sales of pizza, Papadias, which are flatbread-style sandwiches, and side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. The North America commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants in the United States and Canada. The North America franchising segment consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and collection of royalties from our franchisees located in the United States and Canada. The international segment principally consists of distribution sales to franchised Papa John’s restaurants located in the United Kingdom and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. International franchisees are defined as all franchise operations outside of the United States and Canada. All other business units that do not meet the quantitative thresholds for determining reportable segments, which are not operating segments, we refer to as “all other,” which consists of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of printing and promotional items, franchise contributions to marketing funds and information systems and related services used in restaurant operations, including our point-of-sale system, online and other technology-based ordering platforms.

Generally, we evaluate performance and allocate resources based on operating income and intercompany eliminations. Certain administrative and capital costs are allocated to segments based upon predetermined rates or estimated resource usage. We account for intercompany sales and transfers as if the sales or transfers were to third parties and eliminate the activity in consolidation.

Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our consolidated revenues.

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Our segment information is as follows:

Three Months Ended

Nine Months Ended

September 26,

September 27,

September 26,

September 27,

(In thousands)

    

2021

    

2020

    

2021

    

2020

Revenues:

Domestic Company-owned restaurants

$

191,584

$

178,371

$

584,942

$

526,317

North America franchising

 

31,933

 

25,281

 

97,123

 

68,895

North America commissaries

 

189,224

 

181,338

 

560,743

 

504,379

International

 

46,880

 

40,328

 

135,761

 

106,846

All others

 

53,161

 

47,623

 

160,967

 

136,986

Total revenues

$

512,782

$

472,941

$

1,539,536

$

1,343,423

Intersegment revenues:

North America franchising

$

1,037

$

824

$

3,138

$

2,291

North America commissaries

53,454

50,306

158,952

142,169

All others

 

18,522

 

27,168

 

56,613

 

66,509

Total intersegment revenues

$

73,013

$

78,298

$

218,703

$

210,969

Operating income:

Domestic Company-owned restaurants

$

9,480

$

8,439

$

40,165

$

33,852

North America franchising

 

29,830

 

23,353

 

90,791

 

62,855

North America commissaries

 

9,598

 

8,208

 

29,089

 

24,579

International

 

9,618

 

7,986

 

26,665

 

16,836

All others

 

3,848

 

3,193

 

14,860

 

5,030

Unallocated corporate expenses

 

(23,158)

 

(26,921)

 

(70,937)

 

(71,978)

Elimination of intersegment losses (profits)

 

(639)

 

291

 

(557)

 

(619)

Total operating income

$

38,577

$

24,549

$

130,076

$

70,555

Property and equipment, net:

Domestic Company-owned restaurants

$

237,155

North America commissaries

147,186

International

15,026

All others

103,054

Unallocated corporate assets

229,359

Accumulated depreciation and amortization

(522,708)

Total property and equipment, net

$

209,072

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Disaggregation of Revenue

In the following tables, revenues are disaggregated by major product/service line. The tables also include a reconciliation of the disaggregated revenues by the reportable segment (in thousands):

Reportable Segments

Three Months Ended September 26, 2021

Major Products/Services Lines

Domestic Company-owned restaurants

North America franchising

North America commissaries

International

All others

Total

Company-owned restaurant sales

$

191,584

$

-

$

-

$

-

$

-

$

191,584

Franchise royalties and fees

-

32,970

-

14,031

-

47,001

Commissary sales

-

-

242,678

24,377

-

267,055

Other revenues

-

-

-

8,472

71,683

80,155

Eliminations

-

(1,037)

(53,454)

-

(18,522)

(73,013)

Total segment revenues

$

191,584

$

31,933

$

189,224

$

46,880

$

53,161

$

512,782

International other revenues (1)

-

-

-

(8,472)

8,472

-

Total revenues

$

191,584

$

31,933

$

189,224

$

38,408

$

61,633

$

512,782

Reportable Segments

Three Months Ended September 27, 2020

Major Products/Services Lines

Domestic Company-owned restaurants

North America franchising

North America commissaries

International

All others

Total

Company-owned restaurant sales

$

178,371

$

-

$

-

$

-

$

-

$

178,371

Franchise royalties and fees

-

26,105

-

10,703

-

36,808

Commissary sales

-

-

231,644

22,737

-

254,381

Other revenues

-

-

-

6,888

74,791

81,679

Eliminations

-

(824)

(50,306)

-

(27,168)

(78,298)

Total segment revenues

$

178,371

$

25,281

$

181,338

$

40,328

$

47,623

$

472,941

International other revenues (1)

-

-

-

(6,888)

6,888

-

Total revenues

$

178,371

$

25,281

$

181,338

$

33,440

$

54,511

$

472,941

Reportable Segments

Nine Months Ended September 26, 2021

Major Products/Services Lines

Domestic Company-owned restaurants

North America franchising

North America commissaries

International

All others

Total

Company-owned restaurant sales

$

584,942

$

-

$

-

$

-

$

-

$

584,942

Franchise royalties and fees

-

100,261

-

39,396

-

139,657

Commissary sales

-

-

719,695

71,233

-

790,928

Other revenues

-

-

-

25,132

217,580

242,712

Eliminations

-

(3,138)

(158,952)

-

(56,613)

(218,703)

Total segment revenues

$

584,942

$

97,123

$

560,743

$

135,761

$

160,967

$

1,539,536

International other revenues (1)

-

-

-

(25,132)

25,132

-

Total revenues

$

584,942

$

97,123

$

560,743

$

110,629

$

186,099

$

1,539,536

Reportable Segments

Nine Months Ended September 27, 2020

Major Products/Services Lines

Domestic Company-owned restaurants

North America franchising

North America commissaries

International

All others

Total

Company-owned restaurant sales

$

526,317

$

-

$

-

$

-

$

-

$

526,317

Franchise royalties and fees

-

71,186

-

27,962

-

99,148

Commissary sales

-

-

646,548

59,630

-

706,178

Other revenues

-

-

-

19,254

203,495

222,749

Eliminations

-

(2,291)

(142,169)

-

(66,509)

(210,969)

Total segment revenues

$

526,317

$

68,895

$

504,379

$

106,846

$

136,986

$

1,343,423

International other revenues (1)

-

-

-

(19,254)

19,254

-

Total revenues

$

526,317

$

68,895

$

504,379

$

87,592

$

156,240

$

1,343,423

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(1)Other revenues as reported in the Condensed Consolidated Statements of Operations include $8.5 million and $25.1 million of revenue for the three and nine months ended September 26, 2021, respectively, and $6.9 million and $19.3 million of revenue for the three and nine months ended September 27, 2020, respectively, that are part of the international reporting segment. These amounts include marketing fund contributions and sublease rental income from international franchisees in the United Kingdom that provide no significant contribution to operating income but must be reported on a gross basis under accounting requirements. The related expenses for these Other revenues are reported in Other expenses in the Condensed Consolidated Statements of Operations.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first-person notations of “we,” “us” and “our”) began operations in 1984. As of September 26, 2021, there were 5,569 Papa John’s restaurants (591 Company-owned and 4,978 franchised) operating in 50 countries and territories. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, contributions received from franchisees for domestic and international marketing funds we control, revenues for printing and promotional items, and information systems and related services used in their operations.

Recent Developments and Trends  

Growth Strategy. The Company delivered its ninth consecutive quarter of system-wide sales growth and continues to expand both domestically and internationally, as evidenced by our comparable sales and restaurant unit growth.  Our two-year comparable sales were 30.7% in North America and 29.0% internationally for the third quarter, driven by menu innovation and customer retention.  Additionally, new store openings continued to accelerate in the third quarter with the opening of 46 restaurants, net (169 net unit growth for the nine months ended September 26, 2021).  Our expanding development pipeline is on track to be a key long-term growth driver, with the largest domestic development deal in the history of the Company and an expanding international partnership both being announced in the third quarter.  We plan to focus on the continued strategy execution of innovation across our platforms to drive sustainable growth this year and beyond.

Capital Allocation Strategy.  During the quarter we executed on a key component of our capital allocation strategy with the issuance of $400.0 million of 3.875% senior notes which will mature on September 15, 2029 and the concurrent refinancing of our revolving credit facility. Subsequent to the end of the quarter, we announced a new $425.0 million share repurchase program to further enhance shareholder returns as we continue to invest in our long-term growth. These initiatives, paired with our previously announced annual dividend rate increase and the repurchase and conversion of all of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”) in the second quarter, strengthen our financial position, optimize our capital structure and provide value to our shareholders.

Coronavirus (“COVID-19”) and Related Market Impact. The COVID-19 outbreak has presented evolving risks and developments domestically and internationally, as well as new opportunities for our business. Our delivery and carryout model positioned us to continue to experience strong demand for our products. Increased demand partly driven by the pandemic contributed to our strong sustainable comparable sales growth during the third quarter. To ensure we can continue to meet the demand of our customers, we continue to monitor our supply chain and labor force availability. Our ability to attract and retain hourly employees in our restaurants has become more challenging, especially as the job market has become more competitive. We have continued to support these efforts through new hiring, referral and appreciation bonuses in the Company’s corporate restaurants and supply chain, holding national recruiting events, supplementing delivery drivers with delivery aggregator partnerships as needed and technology advancements. We expect staffing and labor challenges to be a priority focus for us and we expect to continue investing in these initiatives during the remainder of the year. We continue to focus on the safety of our team members, franchisees, and customers. The Company has taken steps to mitigate the impact of the COVID-19 pandemic by implementing extra health and safety measures across our business, including No Contact Delivery and enhanced cleaning and sanitization measures, for the protection of both our customers and team members.

We believe the pandemic has accelerated our previously announced efforts to innovate and bring new and former customers to the Papa John’s system. We believe that as the pandemic-related restrictions are lifted we will benefit in the long-term from the increase in customers we have experienced during the duration of the pandemic due to our menu innovation, customer loyalty programs and our offerings of high-quality pizza and other menu items.  Due to the substantial uncertainty related to the effects of the pandemic, its duration and the related market impacts, including the economic stimulus activity, we are unable to predict the specific impact the pandemic and related restrictions (including the lifting or re-imposing of restrictions due to the Delta variant or otherwise) will have on our results of operations, liquidity or long-term financial

25

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condition, including whether and to what extent the increased demand for our products will continue.  For a discussion of the risks to our business presented by the COVID-19 pandemic, see the risk factors disclosed in the Company’s Annual Report on Form-10-K for the fiscal year ended December 27, 2020.

Strategic Corporate Reorganization for Long-term Growth.  In the third quarter of 2020, we announced plans to open an office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlanta. The Atlanta office is part of a broader strategic reorganization of corporate functions reflecting the Company’s ongoing transformation into a brand and culture that can effectively and efficiently deliver on the Company’s purpose, values and strategic business priorities. Affected employees who did not relocate to Atlanta were offered a separation package. As a result, we expect to incur certain one-time corporate reorganization costs of approximately $17.0 to $20.0 million related to employee severance and transition, recruitment and relocation and other third-party costs through 2021. Of that amount, we have incurred costs of approximately $15.3 million as of September 26, 2021 ($6.0 million in 2020 and $2.2 million and $9.4 million for the three and nine months ended September 26, 2021, respectively).  See “Items Impacting Comparability; Non-GAAP Measures” for additional information.

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Table of Contents

Global Restaurant Sales Information

“Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. “Global system-wide restaurant sales growth” represents the change in such sales year-over-year. We believe North America, international and global restaurant and comparable sales growth and Global system-wide restaurant sales information is useful in analyzing our results since our franchisees pay royalties and marketing fund contributions that are based on a percentage of franchise sales. Comparable sales and Global system-wide restaurant sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation. Franchise sales also generate commissary revenue in the United States and in certain international markets. Franchise restaurant and comparable sales growth information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of franchise restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in the Company’s revenues.

Three Months Ended

Nine Months Ended

  

September 26, 2021

  

September 27, 2020

  

September 26, 2021

  

September 27, 2020

Comparable sales growth:

Domestic Company-owned restaurants

7.4%

18.2%

11.6%

15.6%

North America franchised restaurants

6.8%

25.6%

12.3%

20.0%

North America restaurants

6.9%

23.8%

12.1%

19.0%

International restaurants

8.3%

20.7%

17.1%

9.4%

Total comparable sales growth

7.3%

23.0%

13.4%

16.5%

System-wide restaurant sales growth:

(excluding the impact of foreign currency)

Domestic Company-owned restaurants

7.3%

8.3%

11.1%

7.3%

North America franchised restaurants

8.0%

26.2%

13.1%

20.4%

North America restaurants

7.9%

21.8%

12.7%

17.3%

International restaurants

21.4%

22.9%

28.2%

12.2%

Total global system-wide restaurant sales growth

11.2%

22.1%

16.2%

16.0%

Restaurant Progression

Three Months Ended

Nine Months Ended

   

September 26, 2021

   

September 27, 2020

   

September 26, 2021

   

September 27, 2020

North America Company-owned:

Beginning of period

 

589

 

598

 

588

 

598

Opened

 

2

 

 

2

 

1

Closed

 

 

(1)

 

 

(2)

Acquired

 

 

 

1

 

End of period

 

591

 

597

 

591

 

597

North America franchised:

Beginning of period

 

2,720

 

2,686

 

2,701

 

2,690

Opened

 

21

 

14

 

57

 

38

Closed

 

(9)

 

(11)

 

(25)

 

(39)

Sold

(1)

End of period

 

2,732

 

2,689

 

2,732

 

2,689

International franchised:

Beginning of period

 

2,214

 

2,063

 

2,111

 

2,107

Opened

 

71

 

40

 

210

 

83

Closed

 

(39)

 

(29)

 

(75)

 

(116)

End of period

 

2,246

 

2,074

 

2,246

 

2,074

Total restaurants – end of period

 

5,569

 

5,360

 

5,569

 

5,360

Trailing four quarters net store growth

 

209

 

17

 

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Results of Operations

The following table sets forth the various components of our Condensed Consolidated Statements of Operations expressed as a percentage of total revenues, except operating costs which are expressed as a percentage of the associated revenue component.

Three Months Ended

September 26, 2021

September 27, 2020

% of Related

% of Related

Increase

($ in thousands)

Revenues

Revenues

(Decrease)

Revenues:

Domestic Company-owned restaurant sales

$

191,584

$

178,371

North America franchise royalties and fees

31,933

25,281

North America commissary revenues

189,224

181,338

International revenues

38,408

33,440

Other revenues

61,633

54,511

Total revenues

512,782

472,941

Costs and expenses:

Operating costs (excluding depreciation and amortization shown separately below):

Domestic Company-owned restaurant expenses

155,477

81.2%

144,803

81.1%

0.1%

North America commissary expenses

175,399

92.7%

167,937

92.6%

0.1%

International expenses

21,743

56.6%

19,370

57.9%

(1.3)%

Other expenses

56,039

90.9%

50,917

93.4%

(2.5)%

General and administrative expenses

54,070

10.5%

52,601

11.1%

(0.6)%

Depreciation and amortization

11,477

2.2%

12,764

2.7%

(0.5)%

Total costs and expenses

474,205

92.5%

448,392

94.8%

(2.3)%

Operating income

38,577

7.5%

24,549

5.2%

2.3%

Net interest expense

(3,979)

(0.8)%

(3,636)

(0.8)%

0.0%

Income before income taxes

$

34,598

6.7%

$

20,913

4.4%

2.3%

Nine Months Ended

September 26, 2021

September 27, 2020

% of Related

% of Related

Increase

($ in thousands)

Revenues

Revenues

(Decrease)

Revenues:

Domestic Company-owned restaurant sales

$

584,942

$

526,317

North America franchise royalties and fees

97,123

68,895

North America commissary revenues

560,743

504,379

International revenues

110,629

87,592

Other revenues

186,099

156,240

Total revenues

1,539,536

1,343,423

Costs and expenses:

Operating costs (excluding depreciation and amortization shown separately below):

Domestic Company-owned restaurant expenses

465,658

79.6%

419,082

79.6%

0.0%

North America commissary expenses

518,310

92.4%

466,676

92.5%

(0.1)%

International expenses

62,791

56.8%

52,775

60.3%

(3.5)%

Other expenses

168,092

90.3%

148,219

94.9%

(4.6)%

General and administrative expenses

157,779

10.2%

148,680

11.1%

(0.9)%

Depreciation and amortization

36,830

2.4%

37,436

2.8%

(0.4)%

Total costs and expenses

1,409,460

91.6%

1,272,868

94.7%

(3.1)%

Operating income

130,076

8.4%

70,555

5.3%

3.1%

Net interest expense

(11,275)

(0.7)%

(11,230)

(0.8)%

0.1%

Income before income taxes

$

118,801

7.7%

$

59,325

4.5%

3.2%

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Revenues

Consolidated revenues increased $39.8 million, or 8.4% to $512.8 million, and $196.1 million, or 14.6% to $1.54 billion, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods.

Domestic Company-owned restaurant sales increased $13.2 million, or 7.4%, and $58.6 million, or 11.1%, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods. The increases were primarily due to positive comparable sales increases of 7.4% and 11.6% for the three and nine months ended September 26, 2021, respectively. Comparable sales for the nine-month period were significantly impacted by new product innovation, including the successful launch of our new Epic Stuffed Crust pizza in the first quarter of 2021. In addition, the  increases are partly due to higher demand that has been sustained during the pandemic, which was not reflected in the first quarter of 2020.  “Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods.  

North America franchise royalties and fees increased $6.7 million, or 26.3%, and $28.2 million, or 41.0% for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods.  The increases were primarily due to positive comparable sales increases of 6.8% and 12.3% for the three and nine months ended September 26, 2021, respectively. Additionally, the three and nine months ended September 26, 2021 benefited from a higher effective royalty rate and higher franchise royalties of $3.5 million and $14.3 million, respectively, compared to the prior comparable periods primarily as a result of ending our temporary franchise assistance program in the third quarter of 2020.  The franchise assistance program was above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business.

North America franchise restaurant sales increased 8.0% to $693.9 million and 13.1% to $2.11 billion for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods. North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales.

North America commissary revenues increased $7.9 million, or 4.3%, and $56.4 million, or 11.2%, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods primarily due to higher volumes.  The nine-month period also included higher pricing on higher commodities.

International revenues increased $5.0 million, or 14.9%, and $23.0 million, or 26.3%, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods, primarily due to higher royalties from increased equivalent units and higher comparable sales of 8.3% and 17.1% for the three and nine months ended September 26, 2021, respectively. International revenues also increased $2.1 million and $7.9 million for three and nine months ended September 26, 2021 due to favorable foreign exchange rates.  “Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis.  

International franchise restaurant sales increased 21.4% to $320.3 million and 28.2% to $906.7 million for the three and nine months ended September 26, 2021, respectively, excluding the impact of foreign currency, primarily due to increases in comparable sales and equivalent units. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.

Other revenues increased $7.1 million, or 13.1%, and $29.9 million, or 19.1%, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods. The increases were primarily due to higher marketing fund revenues from an increase in franchise sales and higher revenues from our technology platform, including our mobile ordering business which benefited from increased restaurant sales.  

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Costs and Expenses

Total costs and expenses were approximately $474.2 million, or 92.5% of total revenues for the three months ended September 26, 2021, as compared to $448.4 million, or 94.8% of related revenues for the prior year comparable period. For the nine months ended September 26, 2021, total costs and expenses were approximately $1.41 billion, or 91.6% of total revenues, as compared to $1.27 billion, or 94.7% of total revenues for the prior year comparable period. The decreases in total costs and expenses, as a percentage of revenues, were primarily due to the following:

Domestic Company-owned restaurant expenses were $155.5 million, or 81.2% of related revenues for the three months ended September 26, 2021, as compared to $144.8 million, or 81.1% of related revenues for the prior year comparable period.  For the nine months ended September 26, 2021, Domestic Company-owned restaurant expenses were $465.7 million or 79.6% of related revenues, compared to expenses of $419.1 million, or 79.6% of related revenues for the prior year comparable period.  The expenses, as a percentage of revenues, were relatively flat as labor and commodities pressures were offset by leveraging fixed costs on higher revenues.  

North America commissary expenses were $175.4 million, or 92.7% of related revenues, for the three months ended September 26, 2021, compared to $167.9 million, or 92.6% of related revenues for the prior year comparable period.  North America commissary expenses were $518.3 million, or 92.4% of related revenues, for the nine months ended September 26, 2021, compared to $466.7 million, or 92.5% of related revenues, for the prior year comparable period.

International expenses were $21.7 million, or 56.6% of related revenues for the three months ended September 26, 2021 compared to expenses of $19.4 million, or 57.9% of related revenues for the prior year comparable period. International expenses were $62.8 million, or 56.8% of related revenues, for the nine months ended September 26, 2021, compared to $52.8 million, or 60.3% of related revenues for the prior year comparable period. The 1.3% and 3.5% decreases in expenses as a percentage of revenues were primarily due to lower operating costs on higher royalties due to 8.3% and 17.1% increases in comparable sales for the three and nine months ended September 26, 2021, respectively.

Other expenses were $56.0 million, or 90.9% of related revenues for the three months ended September 26, 2021 compared to expenses of $50.9 million, or 93.4% of related revenues for the prior year comparable period. For the nine months ended September 26, 2021, Other expenses were $168.1 million, or 90.3% of related revenues, as compared to $148.2 million, or 94.9% of related revenues for the prior year comparable period. The 2.5% and 4.6% decreases in expenses, as a percentage of related revenues, were primarily due to higher margins from our online and mobile ordering business from higher comparable sales.

General and administrative expenses (“G&A”) were $54.1 million, or 10.5% of revenues, and $157.8 million, or 10.2% of revenues, for the three and nine months ended September 26, 2021, respectively, compared to $52.6 million and $148.7 million, or 11.1% of revenues for both comparable periods in the prior year.  G&A consisted of the following (in thousands):

Three Months Ended

Nine Months Ended

Sep. 26,

Sep. 27,

Sep. 26,

Sep. 27,

2021

2020

2021

2020

Administrative expenses (a)

$

51,398

$

43,680

$

148,533

$

134,532

Strategic corporate reorganization costs (b)

2,153

9,364

Other general expenses (c)

519

8,921

(118)

14,148

General and administrative expenses

$

54,070

$

52,601

$

157,779

$

148,680

(a)The increases in administrative expenses of $7.7 million and $14.0 million for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods were primarily due to higher professional and legal fees and travel and labor costs.
(b)Represents strategic reorganization costs associated with our new office in Atlanta.  See “Note 10” of “Notes to Condensed Consolidated Financial Statements” for additional information.
(c)The decreases in other general expenses of $8.4 million and $14.3 million for the three and nine months ended September 26, 2021, respectively, were primarily due to our marketing fund investments of $10.0 million and

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$15.0 million for the three- and nine-month periods of 2020, respectively, which were part of our previously announced franchise assistance program that concluded in the third quarter of 2020.

Depreciation and amortization expense was $11.5 million, or 2.2% of revenues, and $36.8 million, or 2.4% of revenues, for the three and nine months ended September 26, 2021, respectively, compared to $12.8 million, or 2.7% of revenues, and $37.4 million, or 2.8% of revenues, for the prior year comparable periods, respectively.  The 0.5% and 0.4% decreases in expenses as a percentage of revenues, respectively, were primarily due to the timing of fully depreciated assets.

Operating Income by Segment

Operating income increased approximately $14.0 million and $59.5 million for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods.  Operating income is summarized in the following table on a reporting segment basis.  Alongside the GAAP operating income data, we have included “adjusted” operating income to exclude Special items. Special items impacting operating income for 2021 include strategic corporate reorganization costs associated with our new office in Atlanta, Georgia. The reconciliation of GAAP to non-GAAP financial results, as well as the Special items, are included in “Items Impacting Comparability; Non-GAAP Measures.” We believe this non-GAAP measure is important for comparability purposes.    

Three Months Ended

Reported

Special

Adjusted

Reported

Adjusted

    

Sep. 26,

items

Sep. 26,

Sep. 27,

Increase

(In thousands)

2021

in 2021

2021

2020

(Decrease)

Domestic Company-owned restaurants

$

9,480

$

$

9,480

$

8,439

$

1,041

North America franchising

 

29,830

 

 

29,830

 

23,353

 

6,477

North America commissaries

 

9,598

 

 

9,598

 

8,208

 

1,390

International

 

9,618

 

 

9,618

 

7,986

 

1,632

All others

 

3,848

 

 

3,848

 

3,193

 

655

Unallocated corporate expenses

 

(23,158)

 

2,153

 

(21,005)

 

(26,921)

 

5,916

Elimination of intersegment losses (profits)

 

(639)

 

 

(639)

 

291

 

(930)

Total

$

38,577

$

2,153

$

40,730

$

24,549

$

16,181

Nine Months Ended

    

Reported

    

Special

    

Adjusted

 

Reported

    

Adjusted

Sep. 26,

items

Sep. 26,

 

Sep. 27,

Increase

(In thousands)

    

2021

    

in 2021

    

2021

  

2020

    

(Decrease)

Domestic Company-owned restaurants

$

40,165

$

$

40,165

$

33,852

$

6,313

North America franchising

90,791

90,791

62,855

27,936

North America commissaries

29,089

 

 

29,089

24,579

 

4,510

International

26,665

26,665

16,836

9,829

All others

14,860

14,860

5,030

9,830

Unallocated corporate expenses

(70,937)

9,364

(61,573)

(71,978)

10,405

Elimination of intersegment losses (profits)

(557)

(557)

(619)

62

Total

$

130,076

$

9,364

$

139,440

$

70,555

$

68,885

The increase in operating income, excluding Special items, of $16.2 million, or 65.9%, and $68.9 million, or 97.6%, for the three- and nine- month periods in 2021, respectively, were primarily due to the following:

Domestic Company-owned restaurants increased $1.0 million and $6.3 million for the three and nine months ended September 26, 2021, respectively, as compared to the prior year comparable periods primarily due to higher

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profits from comparable sales increases of 7.4% and 11.6%, respectively.  These increases were partially offset by higher commodities costs and labor initiatives.  
North America franchising increased $6.5 million and $27.9 million for the three and nine months ended September 26, 2021, respectively, primarily due to higher comparable sales of 6.8% and 12.3% for the three- and nine- month periods, respectively.  The three and nine months ended September 26, 2021 also benefited from higher effective royalty rates as compared to the comparable periods primarily due to higher franchise royalties of $3.5 million and $14.3 million, respectively, as a result of our temporary royalty reduction program concluding in the third quarter of 2020, which was above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business.  
North America commissaries increased $1.4 million and $4.5 million for the three and nine months ended September 26, 2021, respectively, primarily due to higher profits from higher volumes.
International increased approximately $1.6 million and $9.8 million for the three and nine months ended September 26, 2021, respectively, primarily due to higher royalty revenue from comparable sales of 8.3% and 17.1%, respectively, and increased equivalent units. 
All Others, which primarily includes our online and mobile ordering business and our marketing funds, increased $655,000 and $9.8 million for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods primarily due to higher revenues from our technology platform, including our mobile ordering business.
Unallocated corporate expenses decreased approximately $5.9 million and $10.4 million for the three and nine months ended September 26, 2021, respectively.  These decreases were primarily due to our discretionary marketing fund investments of $10.0 million and $15.0 million for the three and nine months ended September 27, 2020, respectively, which were part of our previously announced franchise assistance program that concluded in the third quarter of 2020.  These decreases were partially offset by higher professional and legal fees and travel and labor costs.  

Net Interest Expense

Net interest expense increased $343,000 for the three months ended September 26, 2021 (consistent for the nine-month periods) due to higher average outstanding debt on our revolving credit facility drawn to partially fund the repurchase and conversion of our Series B Preferred Stock, partially offset by lower interest rates. Total debt outstanding was $425.0 million and $350.0 million as of September 26, 2021 and December 27, 2020, respectively.

Income Before Income Taxes  

For the reasons discussed above, income before income taxes increased approximately $13.7 million, or 65.4%, and $59.5 million, or 100.3%, for the three and nine months ended September 26, 2021, respectively over the prior year comparable periods.

Income Tax Expense

The effective income tax rates were 11.7% and 16.3% for the three and nine months ended September 26, 2021 representing decreases of 9.9% and 3.9%, respectively, from the prior year comparable periods. The decreases in the effective rates were primarily due to the finalization of our 2020 federal income tax return, which resulted in a $2.7 million benefit to tax expense, including immaterial prior year true-up adjustments, and higher excess tax benefits from stock option exercises and restricted shares vesting activity.

Diluted Earnings (Loss) Per Common Share

Diluted earnings per common share was $0.79 for the three months ended September 26, 2021, compared to diluted earnings per share of $0.35 in the prior year comparable period.  For the nine months ended September 26, 2021, diluted loss per common share was $0.59, compared to diluted earnings per share of $0.99 for the prior year comparable period. Excluding Special items, adjusted diluted earnings per common share were $0.83 and $2.76 for the three and nine months ended September 26, 2021, respectively.  Diluted loss per common share for the nine months ended September 26, 2021 included Special items of $3.14 from a reduction in net income attributable to common shareholders related to the

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repurchase and conversion of all shares of previously outstanding Series B Preferred Stock during the second quarter.  This reduction reflects the excess of the one-time cash payment over the carrying value of the Series B Preferred Stock.  See “Items Impacting Comparability; Non-GAAP Measures” for additional information.

Items Impacting Comparability; Non-GAAP Measures

The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures (collectively defined as “Special items”).  We present these non-GAAP measures because we believe the Special items in 2021 impact the comparability of our results of operations.

Three Months Ended

Nine Months Ended

September 26,

September 27,

September 26,

September 27,

(In thousands, except per share amounts)

    

2021

    

2020

2021

    

2020

GAAP operating income

$

38,577

$

24,549

$

130,076

$

70,555

Strategic corporate reorganization costs (1)

2,153

9,364

Adjusted operating income

$

40,730

$

24,549

$

139,440

$

70,555

GAAP net income/(loss) attributable to common shareholders

$

28,961

$

11,457

$

(20,423)

$

32,410

Strategic corporate reorganization costs (1)

2,153

9,364

Repurchase and conversion of Series B Preferred Stock (2)

109,852

Tax effect of strategic corporate reorganization costs (3)

(483)

(2,098)

Adjusted net income attributable to common shareholders

$

30,631

$

11,457

$

96,695

$

32,410

GAAP diluted earnings/(loss) per common share

$

0.79

$

0.35

$

(0.59)

$

0.99

Strategic corporate reorganization costs (1)

0.05

0.27

Repurchase and conversion of Series B Preferred Stock (2)

3.14

Tax effect of strategic corporate reorganization costs (3)

(0.01)

(0.06)

Adjusted diluted earnings per share

$

0.83

$

0.35

$

2.76

$

0.99

 

(Note) The above table does not include the impact of the allocation of undistributed earnings to participating securities for Special items.

(1)Represents strategic corporate reorganization costs associated with our new office in Atlanta, Georgia.
(2)Represents the one-time charge related to the repurchase and conversion of all shares of Series B Preferred Stock and includes related professional fees incurred as part of the transaction.
(3)The tax effect for strategic corporate reorganization costs was calculated by applying the 2021 marginal tax rate of 22.4%. There was no tax effect on the repurchase and conversion of the Series B Preferred Stock as the one-time charge was non-deductible for tax purposes.

The 2021 non-GAAP adjusted results shown above and within this document, which exclude Special items, should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP results. Management believes presenting certain financial information excluding Special items is important for purposes of comparison to prior year results. In addition, management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends.

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Table of Contents

Liquidity and Capital Resources

Debt

Our outstanding debt as of September 26, 2021 was $425.0 million, which was comprised of $400.0 million outstanding under our 3.875% senior notes due 2029 (the “Notes”) and $25.0 million under the PJI Revolving Facility (as defined below). Including outstanding letters of credit, the remaining availability under the PJI Revolving Facility was approximately $572.3 million as of September 26, 2021.

On September 14, 2021, the Company issued $400.0 million of Notes which will mature on September 15, 2029.  Concurrently with the closing of the Notes, the Company entered into an amended and restated credit agreement (the “Amended Credit Agreement”) replacing the previous $800.0 million credit agreement (“Previous Credit Agreement”).  The Amended Credit Agreement provides for a senior secured revolving credit facility in an aggregate available principal amount of $600.0 million (the “PJI Revolving Facility”), of which up to $40.0 million is available as swingline loans and up to $80.0 million is available as letters of credit.  The PJI Revolving Facility will mature on September 14, 2026.  

The net proceeds from the Notes, together with borrowings under the PJI Revolving Facility, were used to repay outstanding revolver and term loan borrowings under the Company’s Previous Credit Agreement.

As of September 26, 2021, we have the following interest rate swap agreements with a total notional value of $350.0 million:  

Effective Dates

    

Floating Rate Debt 

    

Fixed Rates

 

April 30, 2018 through April 30, 2023

$

55 million

 

2.33

%

April 30, 2018 through April 30, 2023

$

35 million

 

2.36

%

April 30, 2018 through April 30, 2023

$

35 million

 

2.34

%

January 30, 2018 through August 30, 2022

$

100 million

1.99

%

January 30, 2018 through August 30, 2022

$

75 million

1.99

%

January 30, 2018 through August 30, 2022

$

50 million

2.00

%

In September 2021, we de-designated $350.0 million of our interest rate swaps as cash flow hedges following the issuance of the Notes. For these de-designated hedges, the portion of gains or losses on the derivative instruments previously recognized in accumulated other comprehensive loss will be reclassified into earnings as adjustments to interest expense on a straight-line basis over the remaining life of the originally hedged transactions.

Our Amended Credit Agreement contains affirmative and negative covenants, including the following financial covenants:

Actual Ratio as of

    

Permitted Ratio

    

September 26, 2021

Leverage ratio

 

Not to exceed 5.25 to 1.0

 

1.9 to 1.0

Interest coverage ratio

 

Not less than 2.00 to 1.0

 

5.0 to 1.0

Our leverage ratio is defined as outstanding debt divided by consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all financial covenants as of September 26, 2021.  

Papa John’s Marketing Fund, Inc. (“PJMF”), our national marketing fund, has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 with U.S. Bank National Association, as lender.  There was no debt outstanding under the PJMF Revolving Facility as of September 26, 2021 or December 27, 2020. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.

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Table of Contents

Cash Flows

Cash flow provided by operating activities was $193.6 million for the nine months ended September 26, 2021 compared to $168.5 million for the corresponding period of 2020. The increase of $25.1 million was primarily due to higher net income, offset by unfavorable working capital.  

Cash flow used in investing activities was $41.2 million for the nine months ended September 26, 2021 compared to $28.6 million for the same period in 2020, or an increase of $12.6 million. The increase in cash flow used in investing activities was primarily due to an increase in capital expenditures.

Cash flow used in financing activities was $177.1 million for the nine months ended September 26, 2021 compared to $27.4 million for the same period of 2020.  The increase of $149.7 million in cash flow used in financing activities was primarily due to the payment of cash consideration to affiliates of Starboard Value LP and certain franchisees for the repurchase and conversion of all of the Company’s Series B Preferred Stock outstanding which occurred during the second quarter of 2021, offset by net proceeds from the issuance of our Notes and refinancing of our revolving credit facility in the third quarter of 2021.

Dividends

The Company recorded dividends of approximately $33.2 million for the nine months ended September 26, 2021 consisting of the following:

$27.6 million paid to common stockholders ($0.80 per share);
$3.0 million in preferred dividends on the Series B Preferred Stock (3.6% of the investment per annum);
$1.5 million of common stock deemed dividend distributions in conjunction with the repurchase and conversion of the Series B Preferred Stock; and
$1.1 million in common stock “pass-through” dividends paid to Series B Preferred Stockholders on an as-converted basis ($0.45 per share).

On October 28, 2021, our Board of Directors declared a fourth quarter dividend of $0.35 per common share, of which approximately $12.8 million will be paid to common stockholders.  The common share dividend will be paid on November 19, 2021 to stockholders of record as of the close of business on November 9, 2021.  The declaration and payment of any future dividends will be at the discretion of our Board of Directors.

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Free Cash Flow

Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the Condensed Consolidated Statements of Cash Flows) less the purchases of property and equipment and dividends paid to preferred stockholders. We view free cash flow as an important financial measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures.  See “Items Impacting Comparability; Non-GAAP Measures” for a discussion of free cash flow.  

The Company’s free cash flow was as follows for the nine-month periods of 2021 and 2020 (in thousands):

Nine Months Ended

    

September 26,

    

September 27,

2021

2020

Net cash provided by operating activities

$

193,624

$

168,547

Purchases of property and equipment

(41,328)

(24,269)

Dividends paid to preferred stockholders (1)

 

(6,394)

 

(10,237)

Free cash flow

$

145,902

$

134,041

(1)  Excludes $188.6 million of cash consideration paid for the repurchase and conversion of the Series B Preferred Stock in the second quarter of 2021.

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Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q and other Company communications that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws.  Generally, the use of words such as “expect,” “intend,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the financial impact of the temporary business opportunities, disruptions and temporary changes in demand we are experiencing related to the current outbreak of the novel coronavirus disease (COVID-19), commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, the duration of changes in consumer behavior caused by the pandemic, reorganization costs and the related organizational, employment and real estate changes from opening our new office in Atlanta, royalty relief, the effectiveness of our menu innovations and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:

the ability of the Company to manage difficulties and opportunities associated with or related to the COVID-19 pandemic, including risks related to: the impact of governmental restrictions on freedom of movement and business operations including quarantines, social distancing requirements and mandatory business closures; changes in consumer demand or behavior; labor shortages at Company and/or franchised stores; impact of delayed new store openings, both domestically and internationally; our ability to navigate changing governmental programs and regulations relating to the pandemic; and the increased risk of phishing, ransomware and other cyber-attacks;
our ability to successfully implement or fully realize the anticipated benefits of our corporate reorganization and new office in Atlanta, Georgia and corporate reorganization in the timeframes we desire or within the expected range of expenses, or at all. In addition, turnover in our support teams due to our relocation to Georgia could distract our employees, decrease employee morale, harm our reputation, and negatively impact the overall performance of our corporate support teams;
the uncertainty of whether and to what extent the increase in demand for our products that we are currently experiencing during the COVID-19 pandemic will continue following a cessation of the effects of the virus in the future;
increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to improve consumer sentiment and sales trends, and the risk that such initiatives will not be effective;
risks related to social media, including publicity adversely and rapidly impacting our brand and reputation;
aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors;
changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending, including higher unemployment;  
the adverse impact on the Company or our results caused by global health concerns, product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our Company-owned or franchised restaurants or others in the restaurant industry;
the effectiveness of our technology investments and changes in unit-level operations;
the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites;
increases in labor costs, food costs or sustained higher other operating costs. This could include increased employee compensation, including as a result of changes in minimum wage, benefits, insurance, tax rates, new regulatory requirements or increasing compliance costs;

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increases in insurance claims and related costs for programs funded by the Company up to certain retention limits, including medical, owned and non-owned vehicles, workers’ compensation, general liability and property;
disruption of our supply chain or commissary operations which could be caused by our sole source of supply of mozzarella cheese, desserts, garlic cups or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control, including COVID-19;
increased risks associated with our international operations, including economic and political conditions and risks associated with the withdrawal of the United Kingdom from the European Union, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth;
the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the European Union General Data Protection Regulation;
the Company's ability to continue to pay dividends to stockholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline;
disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential Company, employee and customer information, including payment cards; and
changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles.

For a discussion of these and other risks that may cause actual results to differ from expectations, refer to “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.  

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to the impact of interest rate changes on our PJI Revolving Facility. We attempt to minimize interest rate risk exposure by fixing our interest rate through the utilization of interest rate swaps, which are derivative financial instruments. As previously mentioned, these interest rate swaps were eligible for hedge accounting for part of the period and were de-designated following the issuance of the Notes. Our swaps are entered into with financial institutions that participate in the PJI Revolving Facility. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract.  We do not enter into contracts for trading purposes and do not use leveraged instruments. The market risks associated with our debt obligations as of September 26, 2021 have not changed from those reported in “Part II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020. See “Note 8” of “Notes to Condensed Consolidated Financial Statements” for additional information on our debt obligations and derivative instruments.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate fluctuations from our operations outside of the United States, which can adversely impact our revenues, net income and cash flows. Our international operations principally consist of distribution sales to franchised Papa John’s restaurants located in the United Kingdom and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. Approximately 7% of our revenues were derived from these operations for the three and nine months ended September 26, 2021 and September 27, 2020.

We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had a favorable impact of approximately $2.1 million and $7.9 million on International revenues for the three and nine months ended September 26, 2021, respectively, and a favorable impact of approximately $650,000 and an unfavorable impact of approximately $1.4 million for the three and nine months ended September 27, 2020, respectively.  Foreign currency exchange rate fluctuations had a favorable impact of approximately $400,000 and $1.7 million on operating income for the three and nine months ended September 26, 2021, respectively, and an unfavorable impact of $120,000 and $1.1 million on operating income for the three and nine months ended September 27, 2020, respectively.

Commodity Price Risk

In the ordinary course of business, the food and paper products we purchase, including cheese (our largest individual food cost item), are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our control. We have pricing agreements with some of our vendors, including forward pricing agreements for a portion of our cheese purchases for our domestic Company-owned restaurants, which are accounted for as normal purchases; however, we remain exposed to on-going commodity volatility.

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The following table presents the actual average block price for cheese by quarter through the third quarter of 2021 and the projected average block price by quarter for 2021 (based on the October 29, 2021 Chicago Mercantile Exchange cheese futures market prices):

2021

2020

Projected

Actual

    

Block Price

    

Block Price

Quarter 1

 

$

1.676

 

$

1.857

Quarter 2

 

1.680

 

1.679

Quarter 3

 

1.676

 

2.262

Quarter 4

 

1.780

 

2.235

Full Year

 

$

1.703

*  

$

2.008

*The full year estimate is based on futures prices and does not include the impact of forward pricing agreements we have for a portion of our cheese purchases for our domestic Company-owned restaurants.  Additionally, the price charged to restaurants can vary somewhat by quarter from the actual block price based upon our monthly pricing mechanism.

Item 4.   Controls and Procedures

Under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, the chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the most recently completed fiscal quarter, there was no change made in the Company’s internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is involved in a number of lawsuits, claims, investigations and proceedings consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with Financial Accounting Standards Board Accounting Standards Codification 450, “Contingencies”, the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s condensed consolidated financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.  The legal proceedings described in Note 9 of “Notes to the Condensed Consolidated Financial Statements” are incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2020.  

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchase Program

Our Board of Directors has authorized the repurchase of up to $75.0 million of common stock under a share repurchase program that began on November 4, 2020 and is effective through December 26, 2021.  Through September 26, 2021, a total of 219,000 shares with an aggregate cost of $23.3 million and an average price of $106.16 per share were repurchased under this program.  Funding for the share repurchase program has been provided through our operating cash flows.  Subsequent to September 26, 2021, we acquired an additional 158,000 shares at an aggregate cost of $19.8 million.  Approximately $31.9 million remained available for repurchase of common stock under this authorization as of October 29, 2021.  

The following table summarizes our repurchase activity by fiscal period during the three months ended September 26, 2021 (in thousands, except per share amounts):

    

    

    

Total Number

    

Maximum Dollar

Total

Average

of Shares Purchased

Value of Shares

Number

Price

as Part of Publicly

that May Yet Be

of Shares

Paid per

Announced Plans

Purchased Under the

Fiscal Period

    

Purchased

    

Share

    

or Programs

    

Plans or Programs

6/28/2021 - 7/25/2021

 

41

$

104.47

 

157

$

59,800

7/26/2021 - 8/22/2021

 

$

 

$

8/23/2021 - 9/26/2021

 

62

$

129.42

 

219

$

51,743

The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program. There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise.

Subsequent to the end of the third quarter, on October 28, 2021, our Board of Directors approved a new share repurchase program for up to $425.0 million of the Company’s common stock, with an indefinite duration.  The new share repurchase program will initially operate alongside the Company’s existing $75.0 million share repurchase authorization, which expires on December 26, 2021.

Repurchases of Stock for Tax Withholdings

During the fiscal quarter ended September 26, 2021, the Company acquired approximately 11,500 shares of its common stock from employees to satisfy minimum tax withholding obligations that arose upon (i) vesting of restricted stock granted pursuant to approved plans and (ii) distribution of shares of common stock issued pursuant to deferred compensation obligations.

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Item 6. Exhibits

Exhibit

Number

    

Description

3.1

Certificate of Elimination of Series B Convertible Preferred Stock of Papa John’s International, Inc., effective August 3, 2021. Exhibit 3.1 to our report on Form 10-Q for the fiscal quarter ended June 27,2021 is incorporated herein by reference.

4.1

Indenture dated September 14, 2021, among Papa John’s International, Inc., each of the guarantors party thereto and Truist Bank, as trustee.  Exhibit 4.1 to our report on Form 8-K as filed on September 14, 2021 is incorporated herein by reference.

4.2

Form of 3.875% Senior Notes due 2029.  Exhibit 4.2 to our report on Form 8-K as filed on September 14, 2021 is incorporated herein by reference.

10.1

Amended and Restated Credit Agreement, dated September 14, 2021, among Papa John’s International, Inc., each of the guarantors and lenders party thereto, and JPMorgan Chase Bank, Inc., as administrative agent. Exhibit 10.1 to our report on Form 8-K as filed on September 14, 2021 is incorporated by reference.

10.2

Amendment No. 2 to the March 15, 2019 Endorsement Agreement for personal services of Shaquille O’Neal by and among ABG-Shaq, LLC, Papa John’s Marketing Fund, Inc. and Papa John’s International, Inc., effective July 29, 2021. Exhibit 10.2 to our report on Form 10-Q for the fiscal quarter ended June 27, 2021 is incorporated herein by reference.

10.3

Papa John’s International, Inc. Nonqualified Deferred Compensation Plan, as amended and restated effective October 28, 2021.

31.1

Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

Financial statements from the quarterly report on Form 10-Q of Papa John’s International, Inc. for the quarter ended September 26, 2021, filed on November 4, 2021, formatted in iXBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Deficit, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    

PAPA JOHN’S INTERNATIONAL, INC.

(Registrant)

Date: November 4, 2021

/s/ Ann B. Gugino

Ann B. Gugino

Chief Financial Officer

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