| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the fiscal year ended December 29, 2019
25, 2022
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
0-2166050
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Delaware |
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(State or other jurisdiction of |
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2002 Papa John’s Boulevard |
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Louisville, |
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Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $0.01 par value |
| PZZA |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒x No ☐o
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$2,906,744,039.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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Papa John’s has defined four reportable segments: domestic Company-owned All of our International restaurants North America commissaries (Quality Control Centers), North America franchising and international operations. North Americaare franchised. In discussions of our business, “Domestic” is defined as the United States and Canada. Domestic is defined aswithin the contiguous United States. International franchisees are defined as all franchise operations outsideStates, “North America” includes Canada, and “International” includes the rest of the United States and Canada. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 25” of “Notes to Consolidated Financial Statements” for financial information about our segments.
world other than North America.
Strategy
We are committed to delivering on our brand promise “BETTER INGREDIENTS. BETTER PIZZA.®” and creating a focused planbusiness strategy designed to drive sustainable long-term, profitable growth withgrowth. Papa John’s is driven by five priorities, as follows:
strategic priorities:
BuildingBuild a culture of leaders who believe in diversity, inclusivity diversity and winning. A diverse, inclusive environment is essential to attracting the talent that makes Papa John’s purpose is to bring people together with better pizza. ForJohns the world’s best pizza delivery company. See the “Human Capital” section below where we discuss our ongoing initiatives in this reason, we are committed to investing inarea.
improving unit economics.
ImprovingImprove unit-level profitability and viabilityperformance of our operationsCompany and franchisees.franchisee restaurants. We believe Papa John’s has an opportunityhave been intent on taking proactive steps to improve unit-level profitability fordrive profitable growth, especially under the benefit of our franchiseescurrent challenging operating environment. This includes growing ticket and our Company-owned restaurants,transactions through menu innovations, customer insights and ultimately the Company’s long-term outlook.strategic pricing actions. In addition to a plan for continued growth in comparable sales, we have begun taking steps that we believe can reduce costs and complexity in Papa John’s restaurants to make them more profitable, while maintaining the quality ofincreasing average unit volumes, our products and customer service. We expect these actions to contribute to the profitability of our Company-owned restaurants and the health of our franchise system.
Establishing our pizza as a high-quality pizza in the marketplace via commercial platforms. Papa John’s continues to pursue a differentiated product and marketing strategy, based on our “BETTER INGREDIENTS. BETTER PIZZA.” positioning. Our menu and marketing strategy focuses on the quality offurther sharpening our ingredientsexecution and increased product innovation. Domestic Papa John’s restaurants offer high-quality pizza along with side items, including breadsticks, cheesesticks, chicken poppersdriving BETTER customer experience for faster service while optimizing labor allocation, enhancing operational efficiencies and wings, dessert items and canned or bottled beverages. Papa John’s original crust pizza is prepared using fresh dough (never frozen) with six simple ingredients. Papa John’s pizzas are made from real cheese made from mozzarella; fresh-packed pizza sauce made from vine-ripened tomatoes (not from concentrate) and a proprietary mix of savory spices; and a choice of high-quality meat and vegetable toppings.
effectively managing margins.
Our promotional campaigns also include limited-time pizzas offerings, including specialty crusts and other product innovations. Recently we innovated our original crust for the first time ever with the launch of Garlic Parmesan Crust and in February 2020, we launched “Papadias,” a flatbread-style sandwich made from our original fresh dough filled with cheese and a choice of high-quality meats and vegetables.
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We also test new product offerings both domestically and internationally. The new products can become a part of the permanent menu if they meet certain internally established guidelines.
Our branding efforts seek to showcase our quality ingredients and high-quality products, delivering product innovations and communicating effectively through our marketing campaigns. We evaluate marketing investments with respect to their ability to activate and accelerate positive consumer sentiment, using campaigns that spotlight the Company’s differentiated focus on quality ingredients. We believe that our trademark “BETTER INGREDIENTS. BETTER PIZZA.” is important to our effort to differentiate our pizza in the marketplace.
LeveragingLeverage our technology infrastructure to positiondrive our business operations for success. operations.We useutilize technology to deliver a better customer experience, focusing on key strategies that offer benefits to the customer as well as improve operational efficiencies and inform our decision-making.
decision-making
Our technology initiatives build on. Approximately 85% of our past milestones, which include the introduction of digital ordering across all our U.S. delivery restaurants in 2001 and the launch of a domestic digital rewards program in 2010. In 2019, over 60% of domesticDomestic sales were placedare through digital channels. Technology investments have included enhanced digital orderingchannels, including website, apps, third party aggregators, and expanded mobile app capabilities. As we continuecentralized call centers, providing a significant competitive advantage when compared with other QSR models. We are continuously investing in technology to enhance our digital capabilities we have focused on technology investments that allow us to use data to target marketing programs to individualfor both our customers as well as customer segments. As an example, in 2019, we signed a delivery partnershipour employees. Our loyalty program (“Papa Rewards”) and one-to-one marketing platforms help us retain loyal customers and attract new ones. We also partner with Uber Eats. This partnership, along with our existing agreements with DoorDash and Postmates, means we work with three of the top four fooddomestic delivery aggregators to meet customer demand for our products. Aggregators have also helped navigate the labor shortage that the Company is experiencing by providing supplemental delivery drivers, especially during peak times when our delivery teams are working at full capacity. Our integrations with the aggregator marketplaces and our nationwide integration with a third-party delivery service provider have been key tools allowing us to continue to meet our customers in the United States, a strategy that differentiates us fromchannel of their choice.
Expanding our footprint both domestically and internationally.
Our strategy for global Papa John’s franchise unit growth focuses onowners benefit from our award-winning brand, food service capabilities and the ability of our franchisees to operate theirPapa John’s digital and delivery model.
total 3,376 North American restaurants open as of December 25, 2022, 522 units, or approximately 15%
Recent Business Matters
were Company-owned. In 2019,2022, the Company continued to focus on a strategic turnaround effort that includes the specific actions described below.
Starboard Investment. Beginning in the third quarter of 2018, the Company began evaluating a wide range of strategic opportunities that culminated in the strategic investment in the Company by certain funds affiliated with, or managed by, Starboard Value LP (“Starboard”). On February 3, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Starboard pursuant to which Starboard made a $200 million strategic investment in the Company’s newly designated Series B Convertible Preferred Stock (“Series B Preferred Stock”). In addition, on March 28, 2019, Starboard made an additional $50 million investment in the Series B Preferred Stock pursuant to an option that was included in the Securities Purchase Agreement. See “Note 8” of “Notes to Consolidated Financial Statements” for more information related to the Series B Preferred Stock and related transaction costs. The Company also issued $2.5 million of Series B Preferred Stock on the same terms as Starboard to certain franchisees of the Company. In connection with Starboard’s investment, Starboard was granted certain corporate governance rights, including the right to appoint two new independent directors, including Jeffrey C. Smith, Chief Executive Officer of Starboard, who was appointed Chairman of the Board.
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Franchisee Assistance and Marketing Investment. Beginning in the third quarter of 2018, the Company began providing various forms of increased support and financial assistance to the North America franchise system in response to declining North America sales. In July 2019, the Company announced a new program, developed with the support of the Company’s elected Franchise Advisory Council, to make investments in marketing and brand initiatives as well as to provide scheduled financial assistance for traditional North America franchisees beginning in the third quarter of 2019 and expected to continue through the third quarter of 2020. Under the program, the Company is making marketing investments to support the long-term strength of the brand. The Company has also extended financial assistance to its traditional North America franchisees in the form of lower royalties, royalty-based service incentives, and targeted relief through 2020, thus providing franchisees with certainty on the schedule of remaining royalty relief. The Company incurred significant costs (defined as “Special charges”) of approximately $36.8 million associated with this program in the last six months of 2019 and expects to incur $25 million to $30 million of Special charges associated with this program in 2020. For more details, see the Special charges detailed in “Items Impacting Comparability; Non-GAAP Measures” within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
New Management and Management Restructuring. In August 2019, the Company appointed Robert Lynch as the Company’s new President and Chief Executive Officer. On November 6, 2019, the Company also announced an executive management restructure, reducing the size of the senior management team with additions to the team as well as promotions and expanded roles for key leaders. The updated management structure is intended to align with the Company’s strategic focus described above. See “Information about our Executive Officers” below for additional details on current executive officers of the Company.
Positive Comparable Sales. As the Company continues to focus on its previously discussed strategic priorities, the Company has experienced recent improvement in North America restaurant comparable sales trends, with positive North America comparable sales for the last two fiscal quarters of 2019. Prior to the third quarter of 2019, North America comparable sales had been negative since the fourth quarter of 2017.
Restaurant Sales and Investment Costs
We are committed to maintaining sound restaurant unit economics. In 2019, the 609 domestic514 Domestic Company-owned restaurants included in the full year’s comparable restaurant base generated average annual unit sales of $1.05$1.3 million.
With only a few exceptions, domestic restaurants do not offer dine-in service,the United States, which reduces our restaurant capital investment. The average cash investment for the three domestic traditional Company-owned restaurants opened during 2019, exclusive of land, was approximately $322,000 per unit, comparedsupply pizza sauce, dough, food products, paper products, smallwares and cleaning supplies twice weekly to the $345,000 investment for the six domestic traditional units opened in 2018, excluding tenant allowances that we received.
We define a “traditional” domestic Papa John’s restaurant as a delivery and carryout unit that services a defined trade area. We consider the location of aeach traditional restaurant served. This system enables us to be importantmonitor and therefore devote significant resourcescontrol product quality and consistency while lowering food and other costs. We also have one QC Center in Canada, which produces and distributes fresh dough. We evaluate the QC Center system capacity in relation to existing restaurants’ volumes and planned restaurant growth, and facilities are developed or upgraded as operational or economic conditions warrant. To ensure consistent food quality, each Domestic franchisee is required to purchase dough and pizza sauce from our QC Centers and to purchase all other supplies from our QC Centers or other approved suppliers.
Consolidated Financial Statements” for financial information about our segments.
“Non-traditional” Papa John’s restaurants generally do not provide delivery service but rather provide walk-up or carryout service to a captive customer group within a designated facility, such as a food court at an airport, university or military base or an event-driven service at facilities such as sports stadiums or entertainment venues. Non-traditional units are
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designed to fit the unique requirements of the venue and may not offer the full range of menu items available in our traditional restaurants.
As of December 29, 2019, all of our international restaurants are franchised. Generally, our international Papa John’s restaurants are slightly smaller than our domestic restaurants and average between 900 and 1,400 square feet; however, in order to meet certain local customer preferences, some international restaurants have been opened in larger spaces to accommodate both dine-in and restaurant-based delivery service, ranging from 35 to 140 seats.
Development
At December 29, 2019,25, 2022, there were 5,395 5,706Papa John’s restaurants operating in 4948 countries and territories, as follows:
| Domestic Company-owned | Franchised North America | Total North America | International(a) | System-wide | ||||||||||||||||||||||||||||
| Beginning - December 26, 2021 | 600 | 2,739 | 3,339 | 2,311 | 5,650 | |||||||||||||||||||||||||||
| Opened | 10 | 76 | 86 | 292 | 378 | |||||||||||||||||||||||||||
| Closed | — | (49) | (49) | (85) | (134) | |||||||||||||||||||||||||||
| Sold | — | (2) | (2) | — | (2) | |||||||||||||||||||||||||||
| Acquired | 2 | — | 2 | — | 2 | |||||||||||||||||||||||||||
| Refranchised | (90) | 90 | — | — | — | |||||||||||||||||||||||||||
Suspended (a) | — | — | — | (188) | (188) | |||||||||||||||||||||||||||
| Ending - December 25, 2022 | 522 | 2,854 | 3,376 | 2,330 | 5,706 | |||||||||||||||||||||||||||
Net unit growth/(decline) (a) | (78) | 115 | 37 | 207 | 244 | |||||||||||||||||||||||||||
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| Domestic Company-owned | Franchised North America | Total North America | International | System-wide |
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Beginning - December 30, 2018 | 645 | 2,692 | 3,337 | 1,966 | 5,303 |
Opened | 3 | 76 | 79 | 233 | 312 |
Closed | (5) | (123) | (128) | (92) | (220) |
Acquired | 1 | 46 | 47 | - | 47 |
Sold | (46) | (1) | (47) | - | (47) |
Ending - December 29, 2019 | 598 | 2,690 | 3,288 | 2,107 | 5,395 |
Although most of our domesticAs previously disclosed, the Company has suspended corporate support for all franchised restaurants located in Russia. These suspended restaurants are excluded from net unit growth calculations.
Of the total 3,288 North American restaurants open as of December 29, 2019, 598 units, or approximately 18%, were Company-owned (including 192 restaurants owned in joint venture arrangements with franchisees in which the Company has a majority ownership position and control). Operating Company-owned restaurants allows us to improve operations, training, marketing and quality standards for the benefit of the entire system. From time to time, we evaluate the purchase or sale of units or markets, which could change the percentage of Company-owned units. During 2019, we sold 46 restaurants located primarily in Georgia and Florida, in each case to existing franchise groups.
All of the 2,107 international restaurants are franchised.
QC Center System and Supply Chain Management
All ingredients and toppings can be purchased by our Company-owned and domestic franchised restaurants from our North American Quality Control Center (“QC Center”) system, which delivers to individual restaurants twice weekly. To ensure consistent food quality, each domestic franchisee is required to purchase dough and pizza sauce from our QC Centers and to purchase all other supplies from our QC Centers or other approved suppliers. Internationally, the menu may be more diverse than in our domestic operations to meet local tastes and customs. Most QC Centers outside the U.S. are operated by franchisees pursuant to license agreements or by other third parties. The Company currently operates only one international QC Center, which is in the United Kingdom (“UK”). We provide significant assistance to licensed QC Centers in sourcing approved quality suppliers. All QC Centers are required to meet food safety and quality standards and to be in compliance with all applicable laws.
We design our operating and distribution systems, restaurant layout and designated delivery areas to ensure the quality of our food and customer service as well as efficiency of restaurant operating costs, which contributes to strong unit economics. Our QC Center system takes advantage of volume purchasing of food and supplies. The QC Center system
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also provides consistency and efficiencies of scale in fresh dough production. This eliminates the need for each restaurant to order food from multiple vendors and commit substantial labor and other resources to dough preparation.
Our North American QC Center system currently comprises 11 full-service regional production and distribution centers in the U.S. which supply pizza sauce, dough, food products, paper products, smallwares and cleaning supplies twice weekly to each traditional restaurant served. We also have one QC Center in Canada, which produces and distributes fresh dough. This system enables us to monitor and control product quality and consistency while lowering food and other costs. We evaluate the QC Center system capacity in relation to existing restaurants’ volumes and planned restaurant growth, and facilities are developed or upgraded as operational or economic conditions warrant.
We set quality standards for all products used in Papa John’s restaurants and designate approved outside suppliers of food and paper products that meet our quality standards. To ensure product quality and consistency, all domestic Papa John’s restaurants are required to purchase pizza sauce and dough from QC Centers. Franchisees may purchase other goods directly from our QC Centers or other approved suppliers. National purchasing agreements with most of our suppliers generally result in volume discounts that benefit Papa John’s restaurants. Within our North American QC Center system, products are primarily distributed to restaurants by leased refrigerated trucks operated by us.
Marketing Programs
Our branding efforts seek to showcase our quality ingredients and high-quality product, delivering product innovation and communicating it effectively through our marketing campaigns. We evaluate marketing investments with respect to their ability to activate and accelerate positive consumer sentiment, utilizing campaigns that spotlight the Company’s differentiated focus on quality ingredients. We believe that our trademark “BETTER INGREDIENTS. BETTER PIZZA.” is important to our effort to differentiate our pizza in the marketplace.
Our domestic marketing strategy consists of both national and local components. Our national strategy includes national advertising via television, print, direct mail, digital, mobile marketing and social media channels. Our digital marketing activities have increased significantly over the past several years in response to increasing customer use of online and mobile technology. Local advertising programs include television, radio, print, direct mail, store-to-door flyers, digital, mobile marketing and local social media channels.
In international markets, our marketing focuses on reaching customers who live or work within a small radius of a Papa John’s restaurant. Our international markets use a combination of advertising strategies, including television, radio, print, digital, mobile marketing and local social media depending on the size of the local market.
Our local restaurant-level marketing programs target potential customers within the delivery area of each restaurant through the use of local television, radio, print materials, targeted direct mail, store-to-door flyers, digital display advertising, email marketing, text messages and local social media. Local marketing efforts also include a variety of community-oriented activities within schools, sports venues and other organizations supported with some of the same advertising vehicles mentioned above. We also work with delivery aggregators to reach other customers.
Domestic Company-owned and franchised Papa John’s restaurants within a defined market may be required to join an area advertising cooperative (“Co-op”). Each member restaurant contributes a percentage of sales to the Co-op for market-wide programs, such as television, radio, digital and print advertising, and sports sponsorships. The rate of contribution and uses of the monies collected are determined by a majority vote of the Co-op’s members. The contribution rate for Co-ops generally may not be below 2% of sales without approval from Papa John’s.
The restaurant-level and Co-op marketing efforts are supported by media, print, digital and electronic advertising materials that are produced by Papa John’s Marketing Fund, Inc. (“PJMF”). PJMF is a consolidated nonstock corporation designed to operate at break-even for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants. PJMF produces and buys air time for Papa John’s national television commercials and advertises the Company’s products through digital media including banner advertising, paid search-engine advertising, mobile marketing, social media advertising and marketing, text messaging, and email. PJMF also engages in other brand-building activities, such as consumer research and public relations activities. Domestic Company-owned and franchised
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Papa John’s restaurants are required to contribute a certain minimum percentage of sales to PJMF. The contribution rate to PJMF can be set at up to 3% of sales, if approved by the governing board of PJMF, and beyond that level if approved by a supermajority of domestic restaurants. The domestic franchise system approved a new contribution rate of 4.75% effective at the beginning of 2019 and an additional 0.25% to 5.0% effective January 1, 2020.
Our proprietary domestic digital ordering platform allows customers to order online, including “plan ahead ordering,” Apple TV ordering and Spanish-language ordering capability. Digital payment platforms include VISA Checkout, PayPal, and Venmo PayShare. We provide enhanced mobile ordering for our customers, including Papa John’s iPhone® and Android® applications. We receive a percentage-based fee from North American franchisees for online sales, in addition to royalties, to defray development and operating costs associated with our digital ordering platform. We believe continued innovation and investment in the design and functionality of our online and mobile platforms is critical to the success of our brand. Our Papa Rewards® program, which was enhanced in 2018, is a customer loyalty program designed to increase loyalty and frequency of ordering. We offer this program domestically, in the UK, and in several other international markets.
We provide both Company-owned and franchised restaurants with pre-approved marketing materials and catalogs for the purchase of promotional items. We also provide direct marketing services to Company-owned and domestic franchised restaurants using customer information gathered by our proprietary point-of-sale technology (see “Company Operations —North America Point-of-Sale Technology”). In addition, we provide database tools, templates and training for operators to facilitate local email marketing and text messaging through our approved tools.
In international markets, our marketing focuses on customers who live or work within a small radius of a Papa John’s restaurant. Certain markets can effectively use television and radio as part of their marketing strategies. The majority of the marketing efforts include using digital marketing such as a display, search engine marketing, social media, mobile marketing, email and text messaging, and to a lesser extent, print material such as flyers, newspaper inserts, in-store marketing materials. Local marketing efforts, such as sponsoring or participating in community events, sporting events and school programs, are also used to build customer awareness.
Company Operations
Domestic Restaurant Personnel. A typical Papa John’s Company-owned domestic restaurant employs a restaurant manager and approximately 20 to 25 hourly team members, many of whom work part-time. The manager is responsible for the day-to-day operation of the restaurant and maintaining Company-established operating standards. We seek to hire experienced restaurant managers and staff and provide comprehensive training programs in areas such as operations and managerial skills. We also employ directors of operations who are responsible for overseeing an average of seven Company-owned restaurants. Senior management and corporate staff also support the field teams in many areas, including, but not limited to, quality assurance, food safety, training, marketing and technology. We seek to motivate and retain personnel by providing opportunities for advancement and performance-based financial incentives.
Training and Education. We believe training is very important to delivering consistent operational execution, and we create tools and materials for the operational training and development of both corporate and franchise team members. Operations personnel complete our management training program and ongoing development programs, including multi-unit training, in which instruction is given on all aspects of our systems and operations. In 2019, we created a tuition reimbursement program that provides another opportunity for our team members to advance their careers.
North America Point-of-Sale Technology. Our proprietary point-of-sale technology, “FOCUS”, is in place in all North America traditional Papa John’s restaurants. We believe this technology facilitates fast and accurate order-taking and pricing, and allows the restaurant manager to better monitor and control food and labor costs, including food inventory management and order placement from QC Centers. The system allows us to obtain restaurant operating information, providing us with timely access to sales and customer information. The FOCUS system is also integrated with our digital ordering solutions in all North America traditional Papa John’s restaurants.
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Franchise Program
Approval.Franchisees are approved on the basis of the applicant’s business background, restaurant operating experience and financial resources. We seek franchisees to enter into development agreements for single or multiple restaurants. We require each franchisee to complete our training program or to hire a full-time operator who completes the training and has either an equity interest or the right to acquire an equity interest in the franchise operation. For most non-traditional operations and for operations outside the United States, we will allow an approved operator bonus plan to substitute for the equity interest.
North America Development and Franchise Agreements. We enter into development agreements with our franchisees in North America for the openingopening of a specified number of restaurants within a defined period of time and specified geographic area. Our standard domestic development agreement includes a fee of $25,000 before consideration of any of the various incentives we offer. The franchise agreement is generally executed once a franchisee secures a location. Our current standard franchise agreement requires the franchisee to pay a royalty fee of 5% of sales, and the majority of our existing franchised restaurants have a 5% contractual royalty rate in effect. Incentives to franchisees offered from time to time including new store incentives, willmay reduce the actualcontractual royalty rate paid. As previously described, we provided financial assistance for traditional North America franchisees in 2018 and 2019 in the form of lower royalties, royalty-based service incentives, targeted relief as well as additional contributions to PJMF.
Over the past several years, we have offered various development incentive programs for domestic franchisees to accelerate unit openings. Such incentives included the following for 2019 traditional openings: (1) waiver of the standard one-time $25,000 franchise fee if the unit opens on time in accordance with the agreed-upon development schedule, or a reduced fee of $5,000 if the unit opens late; (2) the waiver of some or all of the 5% royalty fee for a period of time; (3) a credit for new store equipment; and (4) a credit to be applied toward a future food purchase, under certain circumstances. We believe development incentive programs have accelerated unit openings.
Substantially all existing franchise agreements have an initial 10-year term with a 10-year renewal option. We have the right to terminate a franchise agreement for a variety of reasons, including a franchisee’s failurefailure to make payments when due or failure to adhere to our operational policies and standards. Many state franchise laws limit our ability as a franchisor to terminate or refuse to renew a franchise.
We provide assistance to Papa John’s franchisees in selecting sites, developing restaurants and evaluating the physical specifications for typical restaurants. We provide layout and design services and recommendations for subcontractors, signage installers and telephone systems to Papa John’s franchisees. Our franchisees can purchase complete new store equipment packages through an approved third-party supplier. Each franchisee is responsible for selecting the location for its restaurants, but must obtain our approvalTable of the restaurant design and location based on traffic accessibility and visibility of the site and targeted demographic factors, including population density, income, age and traffic.
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agreement, the franchisee is required to pay total fees of $25,000 per restaurant: $5,000 at the time of signing the agreement and $20,000 when the restaurant opens or on the agreed-upon development date, whichever comes first. Additionally, under our current standard master franchise agreement, the master franchisee is required to pay $15,000 for each sub-franchised restaurant — $5,000 at the time of signing the agreement and $10,000 when the restaurant opens or on the agreed-upon development date, whichever comes first.
Our current standard international master franchise and development agreements provide for payment to us of a royalty fee of 5% of sales. For international markets with sub-franchise agreements, the effective sub-franchise royalty received by the Company is generally 3% of sales and the master franchisee generally receives a royalty of 2% of sales. The remaining terms applicable to the operation of individual restaurants are substantially equivalent to the terms of our domesticDomestic franchise agreement. Development agreements will be negotiated at other-than-standard terms for fees and royalties, and we may offer various development and royalty incentives to help drive net unit growth and results.
incentives.
Non-traditional Restaurant Development. We have 284 non-traditional domestic restaurants at December 29, 2019. Non-traditional restaurants generally cover venues or areas not originally targeted for traditional unit development, and our franchised non-traditional restaurants have terms differing from the standard agreements.
Franchisee Loans. Selected domestic and international franchisees have borrowed funds from us, principally for the purchase of restaurants from us or other franchisees or, in certain international markets, for construction and development of new restaurants. Loans made to franchisees can bear interest at fixed or floating rates and in most cases are secured by the fixtures, equipment and signage of the restaurant and/or are guaranteed by the franchise owners. At December 29, 2019, net loans outstanding totaled $40.8 million. See “Note 16” of “Notes to Consolidated Financial Statements” for additional information.
Domestic Franchise Training and Support. Our domestic field support structure consists of franchise business partners who are responsible for maintaining open communication with the franchise community, relaying operating and marketing information and new initiatives between franchisees and us.
Every franchisee is required to have a principal operator approved by us who completes our required training program. Principal operators for traditional restaurants are required to devote their full business time and efforts to the operation of the franchisee’s traditional restaurants. Each franchised restaurant manager is also required to complete our Company-certified management operations training program and we monitor ongoing compliance with training. Multi-unit franchisees are encouraged to appoint training store general managers or hire a full-time training coordinator certified to deliver Company-approved operational training programs.
International Franchise Operations Support. We employ or contract with international business directors who are responsible for supporting one or more franchisees. The international business directors usually report to regional vice presidents. Senior management and corporate staff also support the international field teams in many areas, including, but not limited to, food safety, quality assurance, marketing, technology, operations training and financial analysis.
Franchise Operations. All franchisees are required to operate their Papa John’s restaurants in compliance with our policies, standards and specifications, including matters such as menu items, ingredients, and restaurant design. Franchisees have full discretion in human resource practices, and generally have full discretion to determine the prices to be charged to customers, but we generally have the authority to set maximum price points for nationally advertised promotions.
Franchise Advisory Council. We Selected Domestic and International franchisees have aborrowed funds from us, principally for the purchase of restaurants from us or other franchisees or, in certain international markets, for construction and development of new restaurants. Loans made to franchisees can bear interest at fixed or floating rates and in most cases are secured by the fixtures, equipment and signage of the restaurant and/or are guaranteed by the franchise advisory council thatowners. At December 25, 2022, net loans outstanding totaled $28.1 million. See “Note 2. Significant Accounting Policies” of “Notes to Consolidated Financial Statements” for additional information.
We currently communicate with, and receive input from, Operations personnel complete our franchisees in several forms, including through the various councils, annual operations conferences, system communications, national conference calls, various regional meetings conducted with franchisees throughout the yearmanagement training program and ongoing communications from franchise business partnersdevelopment programs, including multi-unit training, in which instruction is given on all aspects of our systems and
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international business directors inMaryland Global Campus, among others. In 2022, we made enhancements to the field.program, including expanded educational offerings and less restrictive eligibility requirements. Employees working at least ten hours per week can now obtain their High School Diplomas, learn English as a second language, and earn associate’s, bachelor’s and/or master’s degrees. We also have periodic webcastsoffer a tuition reimbursement program that provides another opportunity for our team members to discuss current operational, marketingadvance their careers.
those at our corporate offices to those working in our warehouses and restaurants, receive annual safety training based on the requirements of their roles. Our QC Centers and restaurant operations undergo annual safety audits, as well as random safety checks by regional safety managers and field safety coordinators.
carryout continues. We continue to execute on our growth strategy and expand throughout the world.
non-US jurisdiction in which we operate.
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Trademarks, Copyrights and Domain Names
Our
Employees
As
operations and financial condition.
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Weoperations are impacted by global markets and economic conditions over which neither we nor our franchisees have experienced negative publicity and consumer sentiment beginningcontrol. An economic downturn or recession, including deterioration in late 2017 which has had andthe economic conditions in the U.S. or international markets where we compete, or a slowing or stalled recovery therefrom, may continue to have a negative impactmaterial adverse effect on our business, financial condition or results of operations, including a reduction in the demand for our products, longer payment cycles, slower adoption of new technologies and increased price competition. Poor economic conditions have in the past adversely affected and may have a long-term effect on our relationships with our customers, partners and franchisees.
The Company was the subject of significant negative media reports and negative consumer sentiment as a result of certain statements made by the Company’s founder and former spokesperson, John H. Schnatter. The resultant negative consumer sentiment continued into 2019.
The Company experienced a decline in sales and operating profits in the first half of 2019. Whilefuture affect the sales decline ended in the second half of 2019, we may experience flat sales growth or another decline if the negative consumer sentiment toward the Company continues or worsens. If the Company experiences further controversy or reputational harm, from the actions or statements of Mr. Schnatter or otherwise, it may take longer for our sales and consumer perceptionability of our brandfranchisees to improve.
We have incurredpay royalties or amounts owed and continue to incur costs related to addressingcould also disrupt our business and remediating the impact of negative consumer sentiments surrounding our brand, which has impacted and may continue to adversely affect our financial performance.
In connection with its efforts to remediateresults. Higher inflation, and improve consumer perception of the Company’s brand, the Company has incurred and expects to continue to incur significant non-recurringa related increase in costs, including costs related to branding initiatives, marketing and advertising expenses, franchise assistance and increased professional fees. For example, in July 2019, the Company announced a new program, developed with the support of the Company’s elected Franchise Advisory Council, to make investments in marketing and brand initiativesrising interest rates, as well as provide scheduled financial assistancecurrency restrictions and changes in foreign exchange rates, have impacted our franchisees and their ability to pay royalties, open new restaurants or operate existing restaurants profitably. As we navigate this environment, we may need to offer support for traditional North America franchisees beginning in the third quarter of 2019 and continuing through 2020. Under the program, the Company is making marketing investments to support the long-term strength of the brand. The Company also extended financial assistance to its traditional North Americacertain franchisees in the form of lower royalties, royalty-based service incentives,royalty relief, loans or other support, close unprofitable restaurants or markets, and/or consider other alternatives such as acquiring or purchasing franchise restaurants, QC Centers or operations to operate them until they can be refranchised. In addition, adverse macroeconomic conditions and targeted relief.other business-related changes in circumstances outside of our control may impact our ability to achieve our net unit development targets.
Our business and reputation have been negatively affected by the negative publicity resulting from Mr. Schnatter’s statements. If we are unable to rebuild the trust of our customers, franchisees, business partners and suppliers, and if further negative publicity continues, we could experience a substantial negative impact on our business. We have experienced claims and litigation as a consequence of these matters, including a shareholder class action in connection with a decline in our stock price and litigation with Mr. Schnatter. Related legal expenses of defending these claims have negatively impacted our operating results. Continuing higher legal fees, potential new claims, liabilities from existing cases and continuing negative publicity could continue to have a negative impact on operating results.
Our Board of Directors has adopted a limited duration stockholder rights agreement, which could delay or discourage a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors.
On April 30, 2019, the Company’s stockholders ratified the adoption by the Board of Directors of the Rights Agreement, dated as of July 22, 2018, as amended on February 3, 2019, March 6, 2019, and October 23, 2019 (as amended, the “Rights Agreement”). The original Rights Agreement adopted by the Board of Directors on July 22, 2018 had an expiration date of July 22, 2019 and a beneficial ownership trigger threshold of 15%. On February 3, 2019, in connection with the sale and issuance of the Series B Preferred Stock to Starboard described above, the original Rights Agreement was amended to exempt Starboard from being considered an “Acquiring Person” under the Rights Agreement solely as a result of its beneficial ownership of (i) shares of common stock beneficially owned by Starboard prior to the sale and issuance of the Series B Preferred Stock, (ii) shares of Series B Preferred Stock issued or issuable to Starboard under the terms of the Securities Purchase Agreement, and (iii) shares of the common stock (or in certain circumstances certain series of preferred stock) issuable upon conversion of the Series B Preferred Stock (or certain series of preferred stock issuable on conversion thereof) pursuant to the terms of the Certificate of Designation of Series B Preferred Stock. On March 6, 2019, the Rights Agreement was further amended to extend the term of the Rights Agreement to March 6, 2022, increase the beneficial
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ownership trigger threshold at which a person becomes an acquiring person from 15% to 20%, except for a “grandfathered person” provision, and make certain other changes. The Rights Agreement was further amended on October 23, 2019 to eliminate the “grandfathered person” provision as there are no stockholders that currently beneficially own 20% or more of the Company’s common stock.
The Rights Plan is intended to enable all of our stockholders to realize the full potential value of their investment in the Company and to protect the interests of the Company and its stockholders by reducing the likelihood that any person or group gains control of the Company through open market accumulation or other tactics without paying an appropriate control premium. The Rights Plan could render more difficult, or discourage, a merger, tender offer, or assumption of control of the Company that is not approved by our Board of Directors. The Rights Plan, however, should not interfere with any merger, tender or exchange offer or other business combination approved by our Board of Directors. In addition, the Rights Plan does not prevent our Board of Directors from considering any offer that it considers to be in the best interest of the Company’s stockholders.
Our profitability may suffer as a result of intense competition in our industry.
One of our competitive strengths is our “BETTER INGREDIENTS. BETTER PIZZA.®” brand promise. This means we may use ingredients that cost more than the ingredients some of our competitors may use. Because of our investment in higher-quality ingredients, we could have lower profit margins than some of our competitors if we are not able to establish a quality differentiator that resonates with consumers. Our sales may be particularly impacted as competitors increasingly emphasize lower-cost menu options.
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Food safety and quality concerns may negatively impact our business and profitability.
Our results depend upon our ability to differentiate our brand and our reputation for quality. Damage to our brand or reputation could negatively impact our business and financial results. Our brand has been highly rated in past U.S. surveys, and we strive to build the value of our brand as we develop international markets.
The successperception of the company’s efforts. Such media reports and negative publicity could impact customer or investor perception of our business dependsCompany or industry and can have a material adverse effect on our financial results.
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Persons or marketing partners who endorse our products could take actions that harm their reputations, which could also cause harmachieve progress with respect to our brand. From time to time, in response to changes ingoals within the scope of ESG on a timely basis, or at all, our reputation, business, environmentfinancial performance and the audience share of marketing channels, we expect to reallocate marketing resources across social media and other channels. That reallocation may notgrowth could be effective or as successful as the marketing and advertising allocations of our competitors, which could negatively impact the amount and timing of our revenues.
adversely affected.
The issuance of shares of our Series B Preferred Stock to Starboard and its permitted transferees dilutes the ownership and relative voting power of holders of our common stock and may adversely affect the market price of our common stock.
Pursuant to the Securities Purchase Agreement, the Company sold 250,000 shares of our newly designated Series B Preferred Stock to Starboard in 2019.
As of December 29, 2019, the shares held by Starboard represent approximately 14% of our outstanding common stock on an as-converted basis. The Series B Preferred Stock is convertible at the option of the holders at any time into shares of common stock based on the conversion rate determined by dividing $1,000, the stated value of the Series B Preferred Stock, by $50.06.
Because holders of our Series B Preferred Stock are entitled to vote, on an as-converted basis, together with holders of our common stock on all matters submitted to a vote of the holders of our common stock, the issuance of the Series B Preferred Stock to Starboard effectively reduces the relative voting power of the holders of our common stock.
In addition, the conversion of the Series B Preferred Stock into common stock would dilute the ownership interest of existing holders of our common stock. Furthermore, any sales in the public market of the common stock issuable upon conversion of the Series B Preferred Stock could adversely affect prevailing market prices of our common stock. Pursuant to a customary registration rights agreement with Starboard, we have registered for resale under the Securities Act of 1933 the shares of Series B Preferred Stock and any shares of common stock issued upon conversion of the Series B Preferred Stock. This registration may facilitate the resale of such securities into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales by Starboard of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.
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Our Series B Preferred Stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of, our common stockholders, which could adversely affect our liquidity and financial condition, result in the interests of holders of our Series B Preferred Stock differing from those of our common stockholders and delay or prevent an attempt to take over the Company.
Starboard and the other holders of our Series B Preferred Stock have a liquidation preference entitling them to be paid, before any payment may be made to holders of our common stock in connection with a liquidation event, an amount per share of Series B Preferred Stock equal to the greater of (i) the stated value thereof plus accrued and unpaid dividends and (ii) the amount that would have been received had such share of Series B Preferred Stock been converted into common stock immediately prior to such liquidation event.
Holders of Series B Preferred Stock are entitled to a preferential cumulative dividend at the rate of 3.6% per annum, payable quarterly in arrears. On the third anniversary of the date of issuance, each holder of Series B Preferred Stock will have the right to increase the dividend on the shares of Series B Preferred Stock held by such holder to 5.6%, and on the fifth anniversary of the date of issuance, each holder will have the right to increase the dividend on the shares of Series B Preferred Stock held by such holder to 7.6% (in each case subject to the Company’s right to redeem some or all of such shares of Series B Preferred Stock for cash).
The holders of our Series B Preferred Stock also have certain redemption rights or put rights, including the right on any date following November 6, 2026 to require us to repurchase all or any portion of the Series B Preferred Stock. Holders of the Series B Preferred Stock also have the right, subject to certain exceptions, to require us to repurchase all or any portion of the Series B Preferred Stock upon certain change of control events.
These dividend and share repurchase obligations could impact our liquidity and reduce the amount of cash flows available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. Our obligations to Starboard, as the initial holder of our Series B Preferred Stock, could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights could also result in divergent interests between Starboard and holders of our common stock. Furthermore, a sale of our Company, as a change of control event, may require us to repurchase Series B Preferred Stock, which could have the effect of making an acquisition of the Company more expensive and potentially deterring proposed transactions that may otherwise be beneficial to our stockholders.
Starboard may exercise influence over us, including through its ability to designate up to two members of our Board of Directors.
The transaction documents entered into in connection with the sale of the Series B Preferred Stock to Starboard grant to Starboard consent rights with respect to certain actions by us, including:
The Securities Purchase Agreement also imposes a number of affirmative and negative covenants on us. As a result, Starboard has the ability to influence the outcome of matters submitted for the vote of the holders of our common stock. Starboard and its affiliates are in the business of making or advising on investments in companies, including businesses that may directly or indirectly compete with certain portions of our business, and they may have interests that diverge from, or even conflict with, those of our other stockholders. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.
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In addition, the terms of the Governance Agreement grant Starboard certain rights to designate directors to be nominated for election by holders of our common stock. For so long as certain criteria set forth in the Governance Agreement are satisfied, including that Starboard beneficially own, in the aggregate, at least (i) 89,264 shares of Series B Preferred Stock or (ii) the lesser of 5.0% of the Company’s then-outstanding common stock (on an as-converted basis, if applicable) and 1,783,141 shares of issued and outstanding common stock (subject to adjustment for stock splits, reclassifications, combinations and similar adjustments), Starboard has the right to designate two directors for election to our Board, consisting of one nominee who is affiliated with Starboard and one independent nominee.
The directors designated by Starboard also are entitled to serve on committees of our Board, subject to applicable law and stock exchange rules. Notwithstanding the fact that all directors will be subject to fiduciary duties to us and to applicable law, the interests of the directors designated by Starboard may differ from the interests of our security holders as a whole or of our other directors.
We may not be able to raise the funds necessary to finance a required repurchase of our Series B Preferred Stock.
After November 6, 2026, each holder of Series B Preferred Stock will have the right, upon 90 days’ notice, to require the Company to repurchase all or any portion of the Series B Preferred Stock for cash at a price equal to $1,000 per share of Series B Preferred Stock plus all accrued but unpaid dividends. In addition, upon certain change of control events, holders of Series B Preferred Stock can require us, subject to certain exceptions, to repurchase any or all of their Series B Preferred Stock.
It is possible that we would not have sufficient funds to make any required repurchase of Series B Preferred Stock. Moreover, we may not be able to arrange financing to pay the repurchase price.
Changes in privacy or data protection laws could adversely affect our ability to market our products effectively.
We rely on a variety of direct marketing techniques, including email, text messages and postal mailings. Any future restrictions in federal, state or foreign laws regarding marketing and solicitation or domestic or international data protection laws that govern these activities could adversely affect the continuing effectiveness of email, text messages and postal mailing techniques and could force changes in our marketing strategies. If this occurs, we may need to develop alternative marketing strategies, which may not be as effective and could impact the amount and timing of our revenues.
We may not be able to execute our strategy or achieve our planned growth targets, which could negatively impact our business and our financial results.
Our growth strategy depends on our and our franchisees’ ability to open new restaurants and to operate them on a profitable basis. We expect substantially all of our international unit growth and much of our domestic unit growth to be franchised units. Accordingly, our profitability increasingly depends upon royalty revenues from franchisees. If our franchisees are not able to operate their businesses successfully under our franchised business model, our results could suffer. Additionally, we may fail to attract new qualified franchisees or existing franchisees may close underperforming locations. Planned growth targets and the ability to operate new and existing restaurants profitably are affected by economic, regulatory and competitive conditions and consumer buying habits. A decrease in sales, such as what we experienced in 2018 and the first half of 2019, or increased commodity or operating costs, including, but not limited to, employee compensation and benefits or insurance costs, could slow the rate of new store openings or increase the number of store closings. Our business is susceptible to adverse changes in local, national and global economic conditions, which could make it difficult for us to meet our growth targets. Additionally, we or our franchisees may face challenges securing financing, finding suitable store locations at acceptable terms or securing required domestic or foreign government permits and approvals. Declines in comparable sales, net store openings and related operating profits can impact our stock price. If we do not continue to improve future sales and operating results and meet our related growth targets or external expectations for net restaurant openings or our other strategic objectives in the future, our stock price could decline.
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Our franchisees remain dependent on the availability of financing to remodel or renovate existing locations, upgrade systems and enhance technology, or construct and open new restaurants. From time to time, the Company may provide financing to certain franchisees and prospective franchisees in order to mitigate store closings, allow new units to open, or complete required upgrades. If we are unable or unwilling to provide such financing, which is a function of, among other things, a franchisee’s creditworthiness, the number of new restaurant openings may be slower or the rate of closures may be higher than expected and our results of operations may be adversely impacted. To the extent we provide financing to franchisees, our results could be negatively impacted by negative performance of these franchisee loans.
We may be adversely impacted by increases in the cost of food ingredients and other costs.
Our dependence on a sole supplierChanges in privacy or a limited number of suppliers for some ingredientsdata protection laws could result in disruptions to our business.
Domestic restaurants purchase substantially all food and related products from our QC Centers. We are dependent on Leprino Foods Dairy Products Company (“Leprino”) as our sole supplier for cheese, one of our key ingredients. Leprino, one of the major pizza category suppliers of cheese in the United States, currently supplies all of our cheese domestically and substantially all of our cheese internationally. We also depend on a sole source for our supply of certain desserts and garlic sauce, which constitute less than 10% of our domestic Company-owned restaurant sales. While we have no other sole sources of supply for key ingredients or menu items, we do source other key ingredients from a limited number of suppliers. Alternative sources of cheese, desserts, other key ingredients or menu items may not be available on a timely basis or may not be available on terms as favorable to us as under our current arrangements.
Our Company-owned and franchised restaurants could also be harmed by supply chain interruptions including those caused by factors beyond our control or the control of our suppliers. Prolonged disruption in the supply of products from or to our QC Centers due to weather, climate change, natural disasters, crop disease, food safety incidents, regulatory compliance, labor dispute or interruption of service by carriers could increase costs, limit the availability of ingredients critical to our restaurant operations and have a significant impact on results. In particular, adverse weather or crop disease affecting the California tomato crop could disrupt the supply of pizza sauce to our and our franchisees’ restaurants. Insolvency of key suppliers could also cause similar business interruptions and negatively impact our business.
Natural disasters, hostilities, social unrest and other catastrophic events may disrupt our operations or supply chain.
The occurrence of a natural disaster, hostilities, cyber-attack, social unrest, terrorist activity, outbreak of epidemic, pandemic or contagious disease, such as coronavirus, or other catastrophic events may result in the closure of our restaurants (Company-owned or franchised), our corporate office, any of our QC Centers or the facilities of our suppliers, and can adversely affect consumer spending, consumer confidence levels and supply availability and costs, any of which could materially adversely affect our resultsability to market our products effectively.
For example, we are currently susceptible to risks to our operations from the outbreak of the coronavirusdirect marketing techniques, including email, text messages, social media and postal mailings. Any future restrictions in China. We currently have approximately 50 franchised stores closed in our China market due to the impact of the coronavirus. Although the impact offederal, state or foreign laws regarding marketing and solicitation or Domestic or International data protection laws that govern these stores is not currently material to our results of operations, at this point in time, there is significant uncertainty relating to the potential effect of coronavirus on our business. Infections may become more widespread, including to other countries where we have operations, and travel restrictions may remain or worsen, all of which could lead to lower sales, widespread store closures or delays in our supply chain, which could have a negative impact on our business and operating results.
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Changes in purchasing practices by our domestic franchisees could harm our commissary business.
Although our domestic franchisees currently purchase substantially all food products from our QC Centers, the only required QC Center purchases by franchisees are pizza sauce, dough and other items we may designate as proprietary or integral to our system. Any changes in purchasing practices by domestic franchisees, such as seeking alternative approved suppliers of ingredients or other food products,activities could adversely affect the financial resultscontinuing effectiveness of our QC Centersemail, text messages, social media and the Company.
Our current insurance may not be adequatepostal mailing techniques and we may experience claims in excess of our reserves.
Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability, property, and health insurance coverage provided to our employees are funded by the Company up to certain retention levels under our retention programs. Retention limits generally range from $100,000 to $1.0 million. These insurance programs may not be adequate to protect us, and it may be difficult or impossible to obtain additional coverage or maintain current coverage at a reasonable cost. We also have experienced claims volatility and high costs for our insurance programs. We estimate loss reserves based on historical trends, actuarial assumptions and other data available to us, but we may not be able to accurately estimate reserves. If we experience claims in excess of our projections, our business could be negatively impacted. Our franchisees could be similarly impacted by higher claims experience, hurting both their operating results and/or limiting their ability to maintain adequate insurance coverage at a reasonable cost.
Our international operations are subject to increased risks and other factors that may make it more difficult to achieve or maintain profitability or meet planned growth rates.
Our international operations could be negatively impacted by volatility and instability in international economic, political, security or health conditions in the countries in which the Company or our franchisees operate, especially in emerging markets. In addition, there are risks associated with differing business and social cultures and consumer preferences. We may face limited availability for restaurant locations, higher location costs and difficulties in franchisee selection and financing. We may be subject to difficulties in sourcing and importing high-quality ingredients (and ensuring food safety) in a cost-effective manner, hiring and retaining qualified team members, marketing effectively and adequately investing in information technology, especially in emerging markets.
Our international operations are also subject to additional risk factors, including import and export controls, compliance with anti-corruption and other foreign laws, difficulties enforcing intellectual property and contract rights in foreign jurisdictions, and the imposition of increased or new tariffs or trade barriers. We intend to continue to expand internationally, which would make the risks related to our international operations more significant over time.
Our international results, which are completely franchised, depend heavily on the operating capabilities and financial strength of our franchisees. Anyforce changes in the ability of our franchisees to run their stores profitably in accordance with our operating procedures, or to effectively sub-franchise stores, could result in brand damage, a higher number of restaurant closures and a reduction in the number of new restaurant openings.
Sales made by our franchisees in international markets and certain loans we provide to such franchisees are denominated in their local currencies, and fluctuations in the U.S. dollar occur relative to the local currencies. Accordingly, changes in currency exchange rates will cause our revenues, investment income and operating results to fluctuate. We have not historically hedged our exposure to foreign currency fluctuations. Our international revenues and earnings may be adversely impacted as the U.S. dollar rises against foreign currencies because the local currency will translate into fewer U.S. dollars. Additionally, the value of certain assets or loans denominated in local currencies may deteriorate. Other items denominated in U.S. dollars, including product imports or loans, may also become more expensive, putting pressure on franchisees’ cash flows.
We are subject to risks and uncertainties associated with the United Kingdom’s withdrawal from the European Union (referred to as “Brexit”), including implications for the free flow of labor and goods in the United Kingdom and the European Union and other financial, legal, tax and trade implications.
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Adverse global economic conditions subject us to additional risk.
Our financial condition and results of operations are impacted by global markets and economic conditions over which neither we nor our franchisees have control. An economic downturn, including deterioration in the economic conditions in the U.S. or international markets where we compete, may result in a reduction in the demand for our products, longer payment cycles, slower adoption of new technologies and increased price competition.
Poor economic conditions may adversely affect the ability of our franchisees to pay royalties or amounts owed and could also disrupt our business and adversely affect our results.
We are subject to debt covenant restrictions.
Our credit agreement contains affirmative and negative covenants, including financial covenants.marketing strategies. If a covenant violationthis occurs, or is expected to occur, we would be required to seek a waiver or amendment from the lenders under the credit agreement. The failure to obtain a waiver or amendment on a timely basis would result in our inability to borrow additional funds or obtain letters of credit under our credit agreement and allow the lenders under our credit agreement to declare our loan obligations due and payable, require us to cash collateralize outstanding letters of credit or increase our interest rate. If any of the foregoing events occur, we would need to refinance our debt, or renegotiate or restructure, the terms of the credit agreement.
With our indebtedness, we may have reduced availability of cash flow for other purposes. Increases in interest rates would also increase our debt service costs and could materially impact our profitability as well as the profitability of our franchisees.
Current debt levels under our existing credit facility may reduce available cash flow to plan for or react to business changes, changes in the industry or any general adverse economic conditions. Under our credit facility, we are exposed to variable interest rates. We have entered into interest rate swaps that fix a significant portion of our variable interest rate risk. However, by using a derivative instrument to hedge exposures to changes in interest rates, we also expose ourselves to credit risk. Credit risk is due to the possible failure of the counterparty to perform under the terms of the derivative contract.
Higher inflation, and a related increase in costs, including rising interest rates, could also impact our franchisees and their ability to open new restaurants or operate existing restaurants profitably.
In addition, the loans under our credit facility accrue interest at a per annum rate that may include, at the Company’s election, a spread over the London Interbank Offered Rate (“LIBOR”). In July 2017, the head of the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced its intention to phase out the use of LIBOR by the end of 2021. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. At this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Such developments and any other legal or regulatory changes in the method by which LIBOR is determined or the transition from LIBOR to a successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or methodologies applied in calculating LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination and, in certain situations, could result in LIBOR no longer being determined and published. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S.-dollar LIBOR with the Secured Overnight Financing Rate, or "SOFR", a new index calculated by short-term repurchase agreements, backed by Treasury securities. At this time, it is not possible to definitively predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates, including SOFR. If LIBOR ceases to exist, we may need to amenddevelop alternative marketing strategies, which may not be as effective and could impact the termsamount and timing of our credit facility or any future credit agreements extending beyond 2021 and indexed to LIBOR to replace LIBOR with SOFR or such other standard that is established, which could have a material adverse effect on us, including on our cost of funds, access to capital markets and financial results.
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Increasingly complex laws and regulations could adversely affect our business.
We operate in an increasingly complex regulatory environment, and the cost of regulatory compliance is increasing. Our failure, or the failure of any of our franchisees, to comply with applicable U.S. and international labor, health care, food, health and safety, consumer protection, anti-bribery and corruption, competition, environmental and other laws may result in civil and criminal liability, damages, fines and penalties. Enforcement of existing laws and regulations, changes in legal requirements, and/or evolving interpretations of existing regulatory requirements may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results. Increased regulatory scrutiny of food matters and product marketing claims, and increased litigation and enforcement actions may increase compliance and legal costs and create other obligations that could adversely affect our business, financial condition or operating results. Governments may also impose requirements and restrictions that impact our business. For example, some local government agencies have implemented ordinances that restrict the sale of certain food or drink products.
Compliance with new or additional domestic and international government laws or regulations, including the European Union General Data Protection Regulation (“GDPR”), which became effective in May 2018 could increase costs for compliance. These laws and regulations are increasing in complexity and number, change frequently and increasingly conflict among the various countries in which we operate, which has resulted in greater compliance risk and costs. If we fail to comply with these laws or regulations, we could be subject to reputational damage and significant litigation, monetary damages, regulatory enforcement actions or fines in various jurisdictions. For example, a failure to comply with the GDPR could result in fines up to the greater of €20 million or 4% of annual global revenues.
Higher labor costs, and increased competition for qualified team members increase the cost of doing business and ensuring adequate staffing in our restaurants.restaurants and QC Centers increase the cost of doing business. Additionally, changes in employment and labor laws, including health care legislation and minimum wage increases, could increase costs for our system-wide operations.
We depend on A significant increase in the continued servicefederal minimum wage requirement could adversely impact our financial condition and availabilityresults of key management personnel, and failure to successfully execute succession planning and attract talented team members could harmoperations.
In August 2019, the Company appointed Robert Lynch to serve as Chief Executive Officer. In addition to the Chief Executive Officer succession in 2019, we executedindustry have recently become unionized. If a reorganizationsignificant portion of our management team in the fall of 2019. If the new management team is not successful in executing our strategy, our operating resultscorporate or franchisee’s workforce were to become unionized, labor costs could increase and prospects for future growth
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may be adversely impacted. Failure to effectively identify, develop and retain other key personnel, recruit high-quality candidates and ensure smooth management and personnel transitions could also disrupt our business could be negatively affected by union requirements that increase costs, disrupt business, reduce flexibility and adversely affect the employer-employee relationship.Further, corporate or franchisees’ response to any union organizing efforts could negatively impact how our results.
brand is perceived.
We rely on third parties for certain business processes and services, and failure or inability of such third-party vendors to perform subjects us to risks, including business disruption and increased costs.
We depend on the performance of suppliers and other third parties in our business operations. Third-party business processes we utilize include information technology, gift card authorization and processing, other payment processing, benefits, and other accounting and business services. We conduct third-party due diligence and seek to obtain contractual assurance that our vendors will maintain adequate controls, such as adequate security against data breaches. However, the
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failure of our suppliers to maintain adequate controls or comply with our expectations and standards could have a material adverse effect on our business, financial condition, and operating results.
Failure to maintain the integrity of internal or customer data could result in damage to our reputation, loss of sales, and/or subject us to litigation, penalties or significant costs.
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continued ability to exclusively use our existing marks to increase brand awareness and further develop our brand, both domestically and abroad. We may not be able to adequately protect our intellectual property rights, and we may be required to pursue litigation to prevent consumer confusion and preserve our brand’s high-quality reputation. Litigation could result in high costs and diversion of resources, which could negatively affect our results of operations, regardless of the outcome.
operating results. A significant increase in the U.S. corporate tax rate could negatively impact our financial results.
As of December 29, 2019,25, 2022, there were 5,395 5,706Papa John’s restaurants worldwide. The following tables provide the locations of our restaurants. We define “North America” as the United States and Canada and “domestic”“Domestic” as the contiguous United States.
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Company (a) | Franchised | Total | ||||||||||||||||||
| Alabama | 3 | 88 | 91 | |||||||||||||||||
| Alaska | — | 10 | 10 | |||||||||||||||||
| Arizona | — | 67 | 67 | |||||||||||||||||
| Arkansas | — | 28 | 28 | |||||||||||||||||
| California | — | 175 | 175 | |||||||||||||||||
| Colorado | — | 47 | 47 | |||||||||||||||||
| Connecticut | — | 5 | 5 | |||||||||||||||||
| Delaware | — | 17 | 17 | |||||||||||||||||
| District of Columbia | — | 10 | 10 | |||||||||||||||||
| Florida | 41 | 259 | 300 | |||||||||||||||||
| Georgia | 90 | 98 | 188 | |||||||||||||||||
| Hawaii | — | 17 | 17 | |||||||||||||||||
| Idaho | — | 14 | 14 | |||||||||||||||||
| Illinois | 8 | 72 | 80 | |||||||||||||||||
| Indiana | 44 | 92 | 136 | |||||||||||||||||
| Iowa | — | 24 | 24 | |||||||||||||||||
| Kansas | 16 | 19 | 35 | |||||||||||||||||
| Kentucky | 42 | 64 | 106 | |||||||||||||||||
| Louisiana | — | 60 | 60 | |||||||||||||||||
| Maine | — | 3 | 3 | |||||||||||||||||
| Maryland | 60 | 42 | 102 | |||||||||||||||||
| Massachusetts | — | 7 | 7 | |||||||||||||||||
| Michigan | — | 32 | 32 | |||||||||||||||||
| Minnesota | — | 35 | 35 | |||||||||||||||||
| Mississippi | — | 34 | 34 | |||||||||||||||||
| Missouri | 41 | 27 | 68 | |||||||||||||||||
| Montana | — | 9 | 9 | |||||||||||||||||
| Nebraska | — | 13 | 13 | |||||||||||||||||
| Nevada | — | 25 | 25 | |||||||||||||||||
| New Hampshire | — | 3 | 3 | |||||||||||||||||
| New Jersey | — | 54 | 54 | |||||||||||||||||
| New Mexico | — | 17 | 17 | |||||||||||||||||
| New York | — | 85 | 85 | |||||||||||||||||
| North Carolina | 104 | 80 | 184 | |||||||||||||||||
| North Dakota | — | 10 | 10 | |||||||||||||||||
| Ohio | — | 161 | 161 | |||||||||||||||||
| Oklahoma | — | 36 | 36 | |||||||||||||||||
| Oregon | — | 14 | 14 | |||||||||||||||||
| Pennsylvania | — | 84 | 84 | |||||||||||||||||
| Rhode Island | — | 2 | 2 | |||||||||||||||||
| South Carolina | 9 | 77 | 86 | |||||||||||||||||
| South Dakota | — | 10 | 10 | |||||||||||||||||
| Tennessee | 38 | 80 | 118 | |||||||||||||||||
| Texas | — | 302 | 302 | |||||||||||||||||
| Utah | — | 32 | 32 | |||||||||||||||||
| Virginia | 26 | 119 | 145 | |||||||||||||||||
| Washington | — | 43 | 43 | |||||||||||||||||
| West Virginia | — | 23 | 23 | |||||||||||||||||
| Wisconsin | — | 25 | 25 | |||||||||||||||||
| Wyoming | — | 8 | 8 | |||||||||||||||||
| Total U.S. Papa John’s Restaurants | 522 | 2,658 | 3,180 | |||||||||||||||||
| Canada | — | 196 | 196 | |||||||||||||||||
| Total North America Papa John’s Restaurants | 522 | 2,854 | 3,376 | |||||||||||||||||
| | | | | | | |
|
| Company |
| Franchised |
| Total |
|
Alabama |
| 3 |
| 77 |
| 80 | |
Alaska |
| — |
| 11 |
| 11 | |
Arizona |
| — |
| 69 |
| 69 | |
Arkansas |
| — |
| 26 |
| 26 | |
California |
| — |
| 184 |
| 184 | |
Colorado |
| — |
| 46 |
| 46 | |
Connecticut |
| — |
| 5 |
| 5 | |
Delaware |
| — |
| 17 |
| 17 | |
District of Columbia |
| — |
| 11 |
| 11 | |
Florida |
| 39 |
| 246 |
| 285 | |
Georgia |
| 82 |
| 91 |
| 173 | |
Hawaii |
| — |
| 14 |
| 14 | |
Idaho |
| — |
| 14 |
| 14 | |
Illinois |
| 8 |
| 75 |
| 83 | |
Indiana |
| 43 |
| 92 |
| 135 | |
Iowa |
| — |
| 24 |
| 24 | |
Kansas |
| 15 |
| 19 |
| 34 | |
Kentucky |
| 44 |
| 67 |
| 111 | |
Louisiana |
| — |
| 59 |
| 59 | |
Maine |
| — |
| 3 |
| 3 | |
Maryland |
| 60 |
| 42 |
| 102 | |
Massachusetts |
| — |
| 8 |
| 8 | |
Michigan |
| — |
| 36 |
| 36 | |
Minnesota |
| — |
| 35 |
| 35 | |
Mississippi |
| — |
| 30 |
| 30 | |
Missouri |
| 42 |
| 29 |
| 71 | |
Montana |
| — |
| 9 |
| 9 | |
Nebraska |
| — |
| 13 |
| 13 | |
Nevada |
| — |
| 24 |
| 24 | |
New Hampshire |
| — |
| 2 |
| 2 | |
New Jersey |
| — |
| 52 |
| 52 | |
New Mexico |
| — |
| 16 |
| 16 | |
New York |
| — |
| 83 |
| 83 | |
North Carolina |
| 100 |
| 81 |
| 181 | |
North Dakota |
| — |
| 9 |
| 9 | |
Ohio |
| — |
| 161 |
| 161 | |
Oklahoma |
| — |
| 36 |
| 36 | |
Oregon |
| — |
| 13 |
| 13 | |
Pennsylvania |
| — |
| 79 |
| 79 | |
Rhode Island |
| — |
| 4 |
| 4 | |
South Carolina |
| 8 |
| 71 |
| 79 | |
South Dakota |
| — |
| 13 |
| 13 | |
Tennessee |
| 34 |
| 81 |
| 115 | |
Texas |
| 94 |
| 216 |
| 310 | |
Utah |
| — |
| 32 |
| 32 | |
Virginia |
| 26 |
| 120 |
| 146 | |
Washington |
| — |
| 43 |
| 43 | |
West Virginia |
| — |
| 22 |
| 22 | |
Wisconsin |
| — |
| 25 |
| 25 | |
Wyoming |
| — |
| 9 |
| 9 | |
Total U.S. Papa John’s Restaurants |
| 598 |
| 2,544 |
| 3,142 | |
Canada |
| — |
| 146 |
| 146 | |
Total North America Papa John’s Restaurants |
| 598 |
| 2,690 |
| 3,288 | |
26
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27
Company-owned Papa John’s restaurants include restaurantsrestaurants owned by majority-owned subsidiaries. There were 19298 such restaurants at December 29, 201925, 2022 (60 in Maryland, 94 in Texas, 26 in Virginia, and 12 in Georgia)Georgia).
| Franchised | ||||||||
| Azerbaijan | 13 | |||||||
| Bahrain | 21 | |||||||
| Bolivia | 5 | |||||||
| Cambodia | 7 | |||||||
| Cayman Islands | 2 | |||||||
| Chile | 148 | |||||||
| China | 262 | |||||||
| Colombia | 56 | |||||||
| Costa Rica | 51 | |||||||
| Cyprus | 8 | |||||||
| Dominican Republic | 19 | |||||||
| Ecuador | 29 | |||||||
| Egypt | 74 | |||||||
| El Salvador | 36 | |||||||
| Germany | 15 | |||||||
| Guam | 3 | |||||||
| Guatemala | 33 | |||||||
| Honduras | 6 | |||||||
| Iraq | 1 | |||||||
| Ireland | 80 | |||||||
| Israel | 25 | |||||||
| Kazakhstan | 7 | |||||||
| Kuwait | 35 | |||||||
| Kyrgyzstan | 3 | |||||||
| Mexico | 57 | |||||||
| Morocco | 7 | |||||||
| Netherlands | 32 | |||||||
| Nicaragua | 4 | |||||||
| Oman | 21 | |||||||
| Pakistan | 18 | |||||||
| Panama | 32 | |||||||
| Peru | 51 | |||||||
| Philippines | 15 | |||||||
| Poland | 7 | |||||||
| Portugal | 3 | |||||||
| Puerto Rico | 26 | |||||||
| Qatar | 50 | |||||||
| Saudi Arabia | 20 | |||||||
| South Korea | 241 | |||||||
| Spain | 88 | |||||||
| Trinidad | 9 | |||||||
| Tunisia | 11 | |||||||
| Turkey | 62 | |||||||
| United Arab Emirates | 82 | |||||||
| United Kingdom | 532 | |||||||
| Venezuela | 23 | |||||||
| Total International Papa John’s Restaurants | 2,330 | |||||||
We also maintain a Company-owned office and a full-service QC Center outside of London, UK, where our International operations are managed.
is incorporated by reference herein.
28
Information about ourAbout Our Executive Officers
| Name | Age (a) | Position | First Elected Executive Officer | |||||||||||||||||
| Robert M. Lynch | 46 | President and Chief Executive Officer | 2019 | |||||||||||||||||
| Ann B. Gugino | 50 | Chief Financial Officer | 2020 | |||||||||||||||||
| Amanda Clark | 43 | Chief International and Development Officer | 2020 | |||||||||||||||||
| Caroline M. Oyler | 57 | Chief Legal and Risk Officer and Corporate Secretary | 2018 | |||||||||||||||||
C. Max Wetzel (b) | 46 | Executive Vice President, Chief Operations Officer | 2019 | |||||||||||||||||
(a)Ages are as of January 1, 2023 | ||||||||||||||||||||
(b) On February 6, 2023, Mr. Wetzel notified the Company of his intention to resign from his position with the Company, effective March 17, 2023, to assume a chief executive officer position with another company. | ||||||||||||||||||||
| | | | | | |
| | | | | | First Elected |
Name | | Age | | Position | | Executive Officer |
| | | | | | |
Robert M. Lynch | | 43 | | President and Chief Executive Officer | | 2019 |
| | | | | | |
Joseph H. Smith IV | | 56 | | Chief Financial Officer | | 2018 |
| | | | | | |
Marvin Boakye | | 46 | | Chief People and Diversity Officer | | 2019 |
| | | | | | |
James A. Norberg | | 54 | | Chief Operating Officer | | 2019 |
| | | | | | |
Amanda Clark | | 40 | | Chief Development Officer | | 2020 |
| | | | | | |
Caroline M. Oyler | | 54 | | Chief Legal and Risk Officer | | 2018 |
| | | | | | |
Jack H. Swaysland | | 55 | | Chief Operating Officer, International | | 2018 |
| | | | | | |
C. Max Wetzel | | 43 | | Chief Commercial and Marketing Officer | | 2019 |
| | | | | | |
Steven R. Coke | | 41 | | Vice President of Investor Relations and Strategy | | 2020 |
| | | | | | |
(a) Ages are as of January 1, 2020 | | | | | | |
| | | | | | |
Robert M. Lynch was appointed as President and Chief Executive Officer in August 2019. Mr. Lynch joinsjoined Papa John’s fromafter serving as President of Arby’s Restaurant Group where he served as President since August 2017, and served as Brand President and Chief Marketing Officer from August 2013 to August 2017. Prior to Arby’s, he served as Vice President of Marketing at Taco Bell. Mr. Lynch has more than 20 years combined experience in the QSR and consumer packaged goods industries, and also held senior roles at HJ Heinz Company and Procter & Gamble.
Joseph H. Smith was appointed to Chief Financial Officer in April 2018 after servingOctober 2020. Ms. Gugino joined Papa John’s from Target Corporation where she served as the Company’s Senior Vice President, Global SalesFinancing Planning and Development from 2016Analysis since 2018, providing overall strategy, guidance, and direction in the development and execution of Target’s planning, analysis and capital investment portfolios. Prior to April 2018 andTarget, Ms. Gugino spent 18 years at Patterson Companies Inc., including four years as Executive Vice President Global Sales and Development from 2010 to 2016. Mr. Smith served as Vice President of Corporate Finance from 2005 to 2010 and as Senior Director of Corporate Budgeting and Finance from 2000 to 2005. Prior to joining Papa John's, Mr. Smith served as Corporate Controller for United Catalysts, Inc. from 1998 to 2000. Mr. Smith began his career in public accounting in 1985 at Ernst & Young. Mr. Smith is a licensed Certified Public Accountant. On November 6, 2019, the Company announced that Mr. Smith intends to depart the Company in March 2020. The Company is currently searching for his successor.
Chief Financial Officer.
Marvin Boakye was appointed Chief PeopleInternational and DiversityDevelopment Officer in November 2019May 2022 after previously serving as Papa John’s first Chief PeopleDevelopment Officer since January 2019. Mr. Boakye joinedjoining Papa John’s after serving as Vice President of Human Resources at petroleum company Andeavor, in Texas where he also led diversity, equity and inclusion. Prior to Andeavor, he was Chief Human Resources Officer for MTS Allstream, a telecommunications company now part of Bell Canada from June 2015 to March 2017. Prior to that, Mr. Boakye held senior human resources positions for organizations across the United States, Canada and Latin America, including at Goodyear and the Pulte Group, where he also helped start their diversity and inclusion organizations, as well as at The Home Depot.
Amanda Clarkwas appointed as Chief Development OfficerJohns in February 2020. Ms. Clark joinsjoined Papa John’sJohns from Taco Bell where she was responsible for design, consumer facing technology, merchandising, customer marketing, new concepts and company development, servingserved as Executive Vice President of Restaurant Experience from February 2019 to February 2020, 2020. She also served as
29
James H. Norberg was named Chief Operating Officer, North America in November 2019 after serving as Chief Restaurant Operations Officer since July 2019. Mr. Norberg, a Quick Service Restaurant (QSR) industry veteran, spent more than 30 years of his career at McDonald’s. His most recent role there was Executive Vice President and Chief Operations Officer from 2014 to 2015, where he managed operations for 14,000 U.S. restaurants. After his long tenure at McDonald’s, Norberg served as an independent strategic advisor from 2015 to 2019 to organizations in the restaurant, hospitality, entertainment and consumer goods categories. He serves as a member of the board of directors for Out & Equal Workplace Advocates, the world’s premier nonprofit organization dedicated to achieving lesbian, gay, bisexual, transgender, and queer workplace equality.
Caroline M. Oyler was appointed Corporate Secretary in July 2020 and Chief Legal and& Risk Officer in October 2018. Ms. Oyler previously served as Senior Vice President, Chief Legal Officer from May 2018 to October 2018 and Senior Vice President, General Counsel from May 2014 to May 2018. Additionally, Ms. Oyler served as Senior Vice President, Legal Affairs from November 2012 to May 2014. She joined2014 and as Vice President and Senior Counsel since joining the Company’s legal department in 1999. She also served as interim head of Human Resources from December 2008 to September 2009. Prior to joining Papa John’s,Johns, Ms. Oyler practiced law with the firm Wyatt, Tarrant and Combs LLP.
Jack H. Swaysland was appointed toExecutive Vice President, Chief Operating Officer International in May 2018 after serving as Senior Vice President, International since April 2016.2022. Mr. SwayslandWetzel previously served as Executive Vice President, InternationalChief Commercial Officer from April 2015 to April 2016, Regional Vice President, International from May 2013 to April 2015, and Vice President, International Operations from April 2010October 2021 to May 2013. Mr. Swaysland has served in various capacities of increasing responsibility in International Operations since joining the Company 13 years ago.
C. Max Wetzel was appointed2022 and as Chief Commercial and Marketing Officer infrom November 2019.2019 to October 2021. Mr. Wetzel joinsjoined Papa John’sJohns from PPG Architectural Coatings where he served as Vice President Consumer Brands and Business Transformation – USU.S. and Canada sincefrom July 2018. Also at PPG, Mr. Wetzel served as Vice President Home Centers and Global Strategic Marketing from June 2016 through July 2018 and as General Manager Home Centers and Chief Marketing Officer USU.S. & Canada starting in November 2014. Prior to PPG, Mr. Wetzel worked at H.J. Heinz Company for ten10 years in a variety of domestic and global roles, leading consumer-driven businesses, developing brand marketing strategies and delivering profitable growth.
On February 19, 2020, Steven R. Coke, the Company’s Vice President of Investor Relations and Strategy, was appointed to the position of principal financial and accounting officer of the Company on an interim basis, effective March 9, 2020, following the departure of Joseph H. Smith, the Company’s Chief Financial Officer. Mr. Coke has served as Vice President, Investor Relations and Strategy since 2018, and Vice President, Strategic Planning since January 2015, after serving as Senior Director, Strategy since April 2012 and Senior Director, Restaurant Finance since June 2011. He has served in various director and manager level positions with increasing responsibility in Finance since joining the Company in May 1998. He also served as interim principal financial and accounting officer from February 2018 to April 2018. Mr. Coke is a licensed Certified Public Accountant.
30
6, 2023.
A total
| Fiscal Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| 9/26/2022 - 10/23/2022 | — | $ | — | — | $ | 329,800 | ||||||||||||||||||||
| 10/24/2022 - 11/20/2022 | 88 | 82.51 | 88 | 322,559 | ||||||||||||||||||||||
| 11/21/2022 - 12/25/2022 | 273 | 83.34 | 273 | 299,800 | ||||||||||||||||||||||
| Total | 361 | $ | 83.14 | 361 | $ | 299,800 | ||||||||||||||||||||
our common stock either through a Rule 10b5-1 trading plan or otherwise.
31
32
 Papa Johns International, Inc.  NASDAQ U.S. Benchmark TR Index  NASDAQ Stocks (SIC 5800-5899 U.S. Companies) Eating and Drinking | ||||||||||||||||||||
| Dec. 30, 2018 | Dec. 29, 2019 | Dec. 27, 2020 | Dec. 26, 2021 | Dec. 25, 2022 | ||||||||||||||||
| Papa John’s International, Inc. | $73.35 | $119.07 | $163.58 | $250.26 | $161.12 | |||||||||||||||
| NASDAQ U.S. Benchmark, TR Index | $93.73 | $124.34 | $149.05 | $188.05 | $152.08 | |||||||||||||||
| NASDAQ Stocks - Eating and Drinking | $108.91 | $144.93 | $169.49 | $190.64 | $168.88 | |||||||||||||||
Item 6. Selected Financial Data
The selected financial data presented for each of the past five fiscal years were derived from our audited Consolidated Financial Statements. The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Consolidated Financial Statements” and Notes thereto included in Item 7 and Item 8, respectively, of this Form 10-K.
| | | | | | | | | | | | | | | |
| | | |||||||||||||
| | Year Ended(1) | |||||||||||||
|
| Dec. 29, |
| Dec. 30, |
| Dec. 31, |
| Dec. 30, |
| Dec. 25, | |||||
(In thousands, except per share data) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | |||||
|
| | 52 weeks |
| | 52 weeks (6) |
| | 53 weeks |
| | 52 weeks |
| | 52 weeks |
Income Statement Data | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | |
Domestic Company-owned restaurant sales | | $ | 652,053 | | $ | 692,380 | | $ | 816,718 | | $ | 815,931 | | $ | 756,307 |
North America franchise royalties and fees (2) | |
| 71,828 | |
| 79,293 | |
| 106,729 | |
| 102,980 | |
| 96,056 |
North America commissary | |
| 612,652 | |
| 609,866 | |
| 673,712 | |
| 623,883 | |
| 680,321 |
International (3) | |
| 102,924 | |
| 110,349 | |
| 114,021 | |
| 100,904 | |
| 104,691 |
Other revenues | |
| 179,791 | |
| 170,983 | |
| 72,179 | |
| 69,922 | |
| — |
Total revenues | |
| 1,619,248 | |
| 1,662,871 | |
| 1,783,359 | |
| 1,713,620 | |
| 1,637,375 |
| | | | | | | | | | | | | | | |
Refranchising and impairment gains/(losses), net | | | 4,739 | | | (289) | | | (1,674) | | | 10,222 | | | — |
Operating income (4) | |
| 24,535 | |
| 31,553 | |
| 151,017 | |
| 164,523 | |
| 136,307 |
Legal settlement | |
| — | |
| — | |
| — | |
| 898 | |
| (12,278) |
Investment income | |
| 1,104 | |
| 817 | |
| 608 | |
| 785 | |
| 794 |
Interest expense | |
| (20,593) | |
| (25,673) | |
| (11,283) | |
| (7,397) | |
| (5,676) |
Income before income taxes | |
| 5,046 | |
| 6,697 | |
| 140,342 | |
| 158,809 | |
| 119,147 |
Income tax (benefit) expense | |
| (611) | |
| 2,624 | |
| 33,817 | |
| 49,717 | |
| 37,183 |
Net income before attribution to noncontrolling interests | |
| 5,657 | |
| 4,073 | |
| 106,525 | |
| 109,092 | |
| 81,964 |
Income attributable to noncontrolling interests (5) | |
| (791) | |
| (1,599) | |
| (4,233) | |
| (6,272) | |
| (6,282) |
Net income attributable to the Company | | $ | 4,866 | | $ | 2,474 | | $ | 102,292 | | $ | 102,820 | | $ | 75,682 |
| | | | | | | | | | | | | | | |
Net (loss) income attributable to common shareholders | | $ | (7,633) | | $ | 2,474 | | $ | 103,288 | | $ | 102,967 | | $ | 75,422 |
Basic (loss) earnings per common share | | $ | (0.24) | | $ | 0.08 | | $ | 2.86 | | $ | 2.76 | | $ | 1.91 |
Diluted (loss) earnings per common share | | $ | (0.24) | | $ | 0.08 | | $ | 2.83 | | $ | 2.74 | | $ | 1.89 |
Basic weighted average common shares outstanding | |
| 31,632 | |
| 32,083 | |
| 36,083 | |
| 37,253 | |
| 39,458 |
Diluted weighted average common shares outstanding | |
| 31,632 | |
| 32,299 | |
| 36,522 | |
| 37,608 | |
| 40,000 |
Dividends declared per common share | | $ | 0.90 | | $ | 0.90 | | $ | 0.85 | | $ | 0.75 | | $ | 0.63 |
| | | | | | | | | | | | | | | |
Balance Sheet Data | | | | | | | | | | | | | | | |
Total assets | | $ | 730,721 | | $ | 595,897 | | $ | 555,553 | | $ | 512,565 | | $ | 494,058 |
Total debt | |
| 370,000 | |
| 625,009 | |
| 470,000 | |
| 300,575 | |
| 256,000 |
Series B Convertible Preferred Stock | | | 251,133 | | | — | | | — | | | — | | | — |
Redeemable noncontrolling interests | |
| 5,785 | |
| 5,464 | |
| 6,738 | |
| 8,461 | |
| 8,363 |
Total stockholders’ (deficit) equity | |
| (316,656) | |
| (304,013) | |
| (105,954) | |
| 9,801 | |
| 42,206 |
33
34
and Overview
We strive. The Company delivered its fourteenth consecutive quarter of Global system-wide restaurant sales growth and continues to obtain high-qualityexpand both domestically and internationally, as evidenced by our comparable sales and restaurant sites with good accessunit growth.
Detailed below isPapa Call call centers are a progression of new unit growth (decline)differentiator for our customers and provide attractive channels that promote customer retention and help us grow our customer base. In 2022, approximately 85% of our Domestic transactions came through these digital channels.
domestically. In 2022, we expanded our global footprint by 4.5%, with 244 net new units (excluding the 188 restaurants suspended in Russia in the first quarter of 2022 and discussed below). We expect this growth to accelerate in 2023 with global development to be between 270 to 310 net new units. Our view of our long-term unit opportunity, both domestically and internationally, continues to expand as we sign historic deals to develop within key areas. In 2022, we announced that we expect 1,400 to 1,800 net new Papa Johns restaurants worldwide from 2022 through the end of 2025. We plan to continue focusing on our strategic innovative products and restaurant development across our platforms to drive sustainable growth this year and beyond.
| | | | | |
| Domestic Company-owned | Franchised North America | Total North America | International | System-wide |
| | | | | |
Beginning - December 30, 2018 | 645 | 2,692 | 3,337 | 1,966 | 5,303 |
Opened | 3 | 76 | 79 | 233 | 312 |
Closed | (5) | (123) | (128) | (92) | (220) |
Acquired | 1 | 46 | 47 | - | 47 |
Sold | (46) | (1) | (47) | - | (47) |
Ending - December 29, 2019 | 598 | 2,690 | 3,288 | 2,107 | 5,395 |
Net unit growth (decline) - 2019 | (47) | (2) | (49) | 141 | 92 |
The average cash investmentdifferentiated brand positioning of Papa Johns and the agility of our business model have been critical to our success as we have had to navigate a constantly changing environment in recent years. Our brand positioning and ability to adapt are no less important today as we continue to adjust to a more inflationary and uncertain environment and consumers are increasingly seeking out value. As consumer demand for dining has softened over the three domestic traditional Company-owned restaurants opened during 2019 was approximately $322,000, exclusive of land and any tenant improvement allowancespast year, pizza offers tremendous value relative to other quick service restaurants. Using Papa Rewards, our loyalty program, we received, comparedare able to $345,000 average investment fortarget more price-sensitive customers with high-value promotions. At the six domestic traditional units opened in 2018. Average annual Company-owned sales forsame time, we have continued our most recent domestic comparable restaurant base were $1.05 million for 2019, compared to $1.07 million for 2018 and $1.19 million ($1.17 million on a 52-week basis) for 2017. The comparable sales for Company-owned restaurants were negative 2.7% in 2019, negative 9.0% in 2018 and positive 0.4% in 2017. “Comparable sales” represents sales generated by traditional restaurants open for the entire twelve-month period reported. The comparable sales for North America franchised units decreased 2.0% in 2019, 6.7% in 2018 and 0.1% in 2017. The comparable sales for system-wide International units increased 1.1% in 2019, decreased 1.6% in 2018, and increased 4.4% in 2017.
35
Recent Business Matters
In 2019, the Company continued to focus on a strategic turnaround effort that includes the specific actions described below.
Starboard Investment. Beginningits presence in the third quarter of 2018, the Company began evaluating a wide range of strategic opportunities that culminated in the strategic investment in the Company by certain funds affiliated with, or managed by, Starboard Value LP (“Starboard”). On February 3, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Starboard pursuant to which Starboard made a $200 million strategic investmentUK and is invested in the Company’s newly designated Series B Convertible Preferred Stock (“Series B Preferred Stock”)long-term success in this region. As we navigate this challenging economic environment, we will be investing in capabilities to improve our operations and will work to re-position the franchise base to further strengthen our UK business. The next step in our commitment includes a variety of support to help franchisees through this difficult time, including targeted marketing incentives of approximately $2 million to $3 million.
Franchisee Assistance and Marketing Investment. Beginningincreased demand for employees in the third quarterservice industry as the economy recovered last year. In early 2022, the Omicron variant further exacerbated the situation, given the spike in infection rates and number of 2018, the Company began providing various forms of increased support and financial assistance to the North America franchise system in response to declining North America sales. In July 2019, the Company announced a new program, developed with the support of the Company’s elected Franchise Advisory Council, to make investments in marketing and brand initiatives as well as to provide scheduled financial assistance for traditional North America franchisees beginning in the third quarter of 2019 and expectedpeople out sick or quarantined at home. Our team members have been working harder than ever to continue to safely serve their customers and communities and we have benefited from their dedication to manage through 2020. Understaffing constraints. We will continue to strive to be the program, the Company is making marketing investmentsemployer of choice in our industry and have taken many actions to create a strong culture and support the long-term strength of the brand. The Company has also extended financial assistance to its traditional North America franchisees in the form of lower royalties, royalty-based service incentives, and targeted relief through 2020, thus providing franchisees with certainty on the schedule of remaining royalty relief. The Company incurred significant costs (defined as “Special charges”) of approximately $36.8 million associated with this program in the last six months of 2019 and expects to incur $25 million to $30 million of Special charges associated with this program in 2020. For more details, see the Special charges detailed in “Items Impacting Comparability; Non-GAAP Measures” within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
our people.
New Management Restructure. In August 2019, the Company appointed Robert Lynch as the Company’s new President and Chief Executive Officer. On November 6, 2019, the Company also announced an executive management restructure. The updated management structure is intended to align with the Company’s strategic focus.
Positive Comparable Sales. As the Company continues to focus on its strategic priorities previously discussed, the Company has experienced recent improvement in North America restaurant comparable sales trends, with positive North America comparable sales for the last two fiscal quarters of 2019. Prior to the third quarter of 2019, North America comparable sales had been negative since the fourth quarter of 2017.
36
Presentation of Financial Results
Immaterial Restatement of Previously Issued Consolidated Financial Statements to include the Papa John’s Marketing Fund, Inc. (“PJMF”)
During the first quarter of 2019, the Company reassessed the governance structure and operating procedures of PJMF, a nonstock corporation designed to operate at break-even for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants, and determined the Company has the power to control certain significant activities of PJMF, a variable interest entity (“VIE”) in accordance with Accounting Standards Codification 810 (“ASC 810”), Consolidations. Therefore, the Company is the primary beneficiary of the VIE and per ASC 810 must consolidate PJMF. Prior to 2019, the Company did not consolidate PJMF. The Company has concluded the previous accounting policy to not consolidate was an immaterial error. The Company has corrected this immaterial error by restating the 2018 consolidated financial statements included herein to include PJMF. Fiscal 2017 was not restated as consolidating PJMF was not material to the results of operations. See “Note 2”, “Note 5” and “Note 27” of “Notes to Consolidated Financial Statements”, respectively, for additional information.
Revenue Recognition and Statement of Operations Presentation
Revenue is measured based on consideration specified in contracts with customers and excludes waivers or incentives and amounts collected on behalf of third parties, primarily sales tax. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Delivery costs, including freight associated with our domestic commissary and other sales, are accounted for as fulfillment costs and are included in operating costs.
The Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”), in the first quarter of 2018. Our 2017 revenue recognition follows ASC Topic 605, “Revenue Recognition.”
Allowance for Doubtful Accounts and Franchisee Notes Receivable
We establish reserves for uncollectible accounts receivable based on overall receivable aging levels and a specific evaluation of accounts receivable for franchisees and other customers with known financial difficulties. Balances are charged off against the allowance after recovery efforts have ceased.
We establish reserves for franchisee notes receivables to reduce the outstanding notes receivable to their net realizable values based on a review of each franchisee’s economic performance and market conditions after consideration of the fair value of the Company’s collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees.
Preferred Stock
On February 3, 2019, the Company entered into a Securities Purchase Agreement with Starboard Value LP (together with its affiliates, “Starboard”) pursuant to which Starboard made a $200 million strategic investment in the Company’s newly
37
designated Series B Preferred Stock, at a purchase price of $1,000 per share. In addition, on March 28, 2019, Starboard made an additional $50 million investment in the Series B Preferred Stock pursuant to an option that was included in the Securities Purchase Agreement. The Company also issued $2.5 million of Series B Preferred Stock on the same terms as Starboard to certain franchisees that represented to the Company that they qualify as an “accredited investor” as defined in Rule 501 of Regulation D promulgated under the Securities Act. The cash proceeds from the issuance of the Series B Preferred Stock was bifurcated between the option and preferred stock at the time of issuance based on a relative fair value allocation approach.
In accordance with applicable accounting guidance, the Company recorded a one-time mark-to-market temporary equity adjustment for the increase in fair value for the option exercised by Starboard and the shares purchased by franchisees for the period of time the option was outstanding.
Since the holders have the option to redeem their shares of Series B Preferred Stock from and after the eight-year anniversary of issuance, which right may or may not be exercised, the stock is considered contingently redeemable and, accordingly, is classified as temporary equity. This amount is reported net of related issuance costs. Over the initial eight-year term, the investment will be accreted to the related redemption value as an adjustment to Retained Earnings.
Losses are accrued We record the liability for losses based upon undiscounted estimates of the liability for claims incurred and for events that have occurred but have not been reported using certain third-party actuarial projections and our historical claims loss experience.
Noncontrolling Interests
At December 29, 2019, the Company has four joint ventures consisting of 192 restaurants, which have noncontrolling interests as compared to three joint ventures in 2018. Consolidated net income is required to be reported separately at amounts attributable to both the parent and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the parent company and the interests of the noncontrolling owners, including a disclosure on the face of the Consolidated Statements of Operations of income attributable to the noncontrolling interest holder.
The following summarizes the redemption feature, location and related accounting within the Consolidated Balance Sheets for these four joint venture arrangements:
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UK. See “Note 11”10. Allowance for Credit Losses” of “Notes to Consolidated Financial Statements”Statements for additionalfurther information.
38
Intangible Assets — Goodwill
We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Such tests are completed separately with respect to the goodwill of each of our reporting units, which includes our domestic Company-owned restaurants, United Kingdom (“PJUK”), China, and Preferred Marketing Solutions operations. We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist.
We elected to perform a qualitative assessment for our domestic Company-owned restaurants, United Kingdom, China, and Preferred Marketing Solutions operations in the fourth quarter of 2019. As a result of our qualitative analyses, we determined that it was more-likely-than-not that the fair values of our reporting units were greater than their carrying amounts. Subsequent to completing our goodwill impairment tests, no indicators of impairment were identified. See “Note 13” of “Notes to Consolidated Financial Statements” for additional information.
Income Tax Accounts and Tax Reserve
Reserves
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.
realize and were
On as of December 22, 2017,25, 2022 and December 26, 2021, respectively. The determination as to whether a deferred tax asset will be realized is based on the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, significantly decreasingevaluation of historical profitability, future market growth, future taxable income, the U.S. federal income tax rate for corporations effective January 1, 2018. On that same date, the Securities and Exchange Commission also issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effectsexpected timing of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, “Income Taxes.” As a result, we remeasured our deferredreversals of existing temporary differences and tax assets, liabilities and related valuation allowances in 2017. This remeasurement yielded a 2017 benefit of approximately $7.0 million due to the lower income tax rate.planning strategies. The Company completed its analysisassesses deferred taxes and the adequacy or need for a valuation allowance on a quarterly basis.
| Year Ended | ||||||||||||||
| Amounts below exclude the impact of foreign currency | December 25, 2022 | December 26, 2021 | ||||||||||||
| Comparable sales growth (decline): | ||||||||||||||
| Domestic Company-owned restaurants | (1.0) | % | 11.3 | % | ||||||||||
| North America franchised restaurants | 1.2 | % | 12.0 | % | ||||||||||
| North America restaurants | 0.7 | % | 11.8 | % | ||||||||||
| International restaurants | (5.3) | % | 13.0 | % | ||||||||||
| Total comparable sales growth (decline) | (0.8) | % | 12.1 | % | ||||||||||
| System-wide restaurant sales growth: | ||||||||||||||
| Domestic Company-owned restaurants | 1.3 | % | 11.1 | % | ||||||||||
| North America franchised restaurants | 2.5 | % | 13.0 | % | ||||||||||
| North America restaurants | 2.3 | % | 12.6 | % | ||||||||||
International restaurants (a) | 4.8 | % | 24.4 | % | ||||||||||
Total global system-wide restaurant sales growth (a) | 2.9 | % | 15.4 | % | ||||||||||
| Restaurant Progression | Year Ended | |||||||||||||
| December 25, 2022 | December 26, 2021 | |||||||||||||
| North America Company-owned: | ||||||||||||||
| Beginning of period | 600 | 588 | ||||||||||||
| Opened | 10 | 11 | ||||||||||||
| Acquired | 2 | — | ||||||||||||
| Refranchised | (90) | 1 | ||||||||||||
| End of period | 522 | 600 | ||||||||||||
| North America franchised: | ||||||||||||||
| Beginning of period | 2,739 | 2,701 | ||||||||||||
| Opened | 76 | 74 | ||||||||||||
| Closed | (49) | (35) | ||||||||||||
| Refranchised | 90 | — | ||||||||||||
| Sold | (2) | (1) | ||||||||||||
| End of period | 2,854 | 2,739 | ||||||||||||
| International franchised: | ||||||||||||||
| Beginning of period | 2,311 | 2,111 | ||||||||||||
| Opened | 292 | 304 | ||||||||||||
| Closed | (85) | (104) | ||||||||||||
Suspended (a) | (188) | — | ||||||||||||
| End of period | 2,330 | 2,311 | ||||||||||||
| Total restaurants – end of period | 5,706 | 5,650 | ||||||||||||
Full year net store growth (b) | 244 | 250 | ||||||||||||
As previously disclosed, the Company has suspended corporate support for all franchised restaurants located in Russia. These suspended restaurants are excluded from net unit growth calculations.
| (Dollars in thousands) | December 25, 2022 | December 26, 2021 | Increase (Decrease) | |||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Domestic Company-owned restaurant sales | $ | 708,389 | $ | 778,323 | (9.0) | % | ||||||||||||||
| North America franchise royalties and fees | 137,399 | 129,310 | 6.3 | % | ||||||||||||||||
| North America commissary revenues | 869,634 | 761,305 | 14.2 | % | ||||||||||||||||
| International revenues | 129,903 | 150,771 | (13.8) | % | ||||||||||||||||
| Other revenues | 256,778 | 248,712 | 3.2 | % | ||||||||||||||||
| Total revenues | $ | 2,102,103 | $ | 2,068,421 | 1.6 | % | ||||||||||||||
39
Items Impacting Comparability; Non-GAAP Measures
The below table reconciles our GAAP financial resultsended December 25, 2022, as compared to our adjusted (non-GAAP) financial results, excluding identified “Special items,” as detailed below. We present these non-GAAP measures because we believe the Special items impact the comparability of our results of operations. Additionally,prior year. Excluding the impact of the Company’s 53 week fiscal2022 refranchising, total revenues increased $86.9 million, or 4.4%, for the year ended December 25, 2022.
| (Dollars in thousands) | Year Ended | |||||||||||||||||||||||||||||||
| December 25, 2022 | % of Related Revenues | December 26, 2021 | % of Related Revenues | Increase (Decrease) in % of Revenues | ||||||||||||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||||||||||
| Operating costs (excluding depreciation and amortization shown separately below): | ||||||||||||||||||||||||||||||||
| Domestic Company-owned restaurant expenses | $ | 585,307 | 82.6 | % | $ | 621,871 | 79.9 | % | 2.7 | % | ||||||||||||||||||||||
| North America commissary expenses | 811,446 | 93.3 | % | 703,622 | 92.4 | % | 0.9 | % | ||||||||||||||||||||||||
| International expenses | 76,001 | 58.5 | % | 87,286 | 57.9 | % | 0.6 | % | ||||||||||||||||||||||||
| Other expenses | 238,810 | 93.0 | % | 226,320 | 91.0 | % | 2.0 | % | ||||||||||||||||||||||||
| General and administrative expenses | 217,412 | 10.3 | % | 212,265 | 10.3 | % | — | % | ||||||||||||||||||||||||
| Depreciation and amortization | 52,032 | 2.5 | % | 48,816 | 2.4 | % | 0.1 | % | ||||||||||||||||||||||||
| Total costs and expenses | 1,981,008 | 94.2 | % | 1,900,180 | 91.9 | % | 2.3 | % | ||||||||||||||||||||||||
| Refranchising and impairment loss | (12,065) | (0.6) | % | — | — | % | (0.6) | % | ||||||||||||||||||||||||
| Operating income | $ | 109,030 | 5.2 | % | $ | 168,241 | 8.1 | % | (2.9) | % | ||||||||||||||||||||||
| Year Ended | ||||||||||||||
| December 25, 2022 | December 26, 2021 | |||||||||||||
Administrative expenses (a) | $ | 181,538 | $ | 199,452 | ||||||||||
Strategic corporate reorganization costs (b) | — | 13,094 | ||||||||||||
Legal settlement accruals (c) | 15,000 | — | ||||||||||||
Additional specific accounts receivable and notes receivable provisions (d) | 18,376 | — | ||||||||||||
Other general expenses (e) | 2,498 | (281) | ||||||||||||
| General and administrative expenses | $ | 217,412 | $ | 212,265 | ||||||||||
(In thousands) | Year Ended December 25, 2022 | Year Ended December 26, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Reported | (a) Adjustments | Adjusted | Reported | (a) Adjustments | Adjusted | Reported Increase (Decrease) | Adjusted Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||
| Domestic Company-owned restaurants | $ | 15,966 | $ | 8,412 | $ | 24,378 | $ | 49,628 | $ | — | $ | 49,628 | $ | (33,662) | $ | (25,250) | ||||||||||||||||||||||||||||||||||
| North America franchising | 127,882 | — | 127,882 | 120,949 | — | 120,949 | 6,933 | 6,933 | ||||||||||||||||||||||||||||||||||||||||||
| North America commissaries | 42,531 | — | 42,531 | 39,873 | — | 39,873 | 2,658 | 2,658 | ||||||||||||||||||||||||||||||||||||||||||
| International | 17,891 | 9,644 | 27,535 | 34,896 | — | 34,896 | (17,005) | (7,361) | ||||||||||||||||||||||||||||||||||||||||||
| All others | 10,084 | — | 10,084 | 17,704 | — | 17,704 | (7,620) | (7,620) | ||||||||||||||||||||||||||||||||||||||||||
| Unallocated corporate expenses | (104,419) | 30,376 | (74,043) | (94,114) | 13,094 | (81,020) | (10,305) | 6,977 | ||||||||||||||||||||||||||||||||||||||||||
| Elimination of intersegment (profits) | (905) | — | (905) | (695) | — | (695) | (210) | (210) | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 109,030 | $ | 48,432 | $ | 157,462 | $ | 168,241 | $ | 13,094 | $ | 181,335 | $ | (59,211) | $ | (23,873) | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Year Ended | |||||||||||||||||||
| December 25, 2022 | December 26, 2021 | Change | ||||||||||||||||||
| Operating income | $ | 109,030 | $ | 168,241 | $ | (59,211) | ||||||||||||||
| Net interest expense | (25,261) | (17,293) | (7,968) | |||||||||||||||||
| Income before income taxes | 83,769 | 150,948 | (67,179) | |||||||||||||||||
| Income tax expense | 14,420 | 25,993 | (11,573) | |||||||||||||||||
| Net income before attribution to noncontrolling interests | 69,349 | 124,955 | (55,606) | |||||||||||||||||
| Net income attributable to noncontrolling interests | (1,577) | (4,939) | 3,362 | |||||||||||||||||
| Net income attributable to the Company | $ | 67,772 | $ | 120,016 | $ | (52,244) | ||||||||||||||
| Calculation of net income for earnings per share: | ||||||||||||||||||||
| Net income attributable to the Company | $ | 67,772 | $ | 120,016 | $ | (52,244) | ||||||||||||||
| Dividends on redemption of Series B Convertible Preferred Stock | — | (109,852) | 109,852 | |||||||||||||||||
| Dividends paid to participating securities | (306) | (6,091) | 5,785 | |||||||||||||||||
| Net income attributable to participating securities | (104) | — | (104) | |||||||||||||||||
| Net income attributable to common shareholders | $ | 67,362 | $ | 4,073 | $ | 63,289 | ||||||||||||||
| — | ||||||||||||||||||||
| Basic earnings per common share | $ | 1.90 | $ | 0.12 | $ | 1.78 | ||||||||||||||
| Diluted earnings per common share | $ | 1.89 | $ | 0.12 | $ | 1.77 | ||||||||||||||
| (Dollars in thousands) | Year Ended | |||||||||||||
| December 25, 2022 | December 26, 2021 | |||||||||||||
| Income before income taxes | $ | 83,769 | $ | 150,948 | ||||||||||
| Income tax expense | $ | 14,420 | $ | 25,993 | ||||||||||
| Effective tax rate | 17.2 | % | 17.2 | % | ||||||||||
for additional information.
| | | | | | | | | | |
| | | Year Ended | |||||||
| | | Dec. 29, |
| Dec. 30, |
| Dec. 31, | |||
(In thousands, except per share amounts) |
| | 2019 | | 2018 | | 2017 | |||
| | | | | | | (Note) | | | |
GAAP income before income taxes | | | $ | 5,046 | | $ | 6,697 | | $ | 140,342 |
Special items: | | |
| | |
| | |
| |
Special charges (1) | | | | 60,817 | | | 50,732 | | | — |
Refranchising (gains) losses, net (2)(4) | | | | (4,739) | | | 289 | | | 1,674 |
Adjusted income before income taxes | | | | 61,124 | | | 57,718 | | | 142,016 |
53rd week of operations | | | | — | | | — | | | (5,900) |
Adjusted income before income taxes - 52 weeks | | | $ | 61,124 | | $ | 57,718 | | $ | 136,116 |
| | | | | | | | | | |
GAAP net (loss) income attributable to common shareholders | | | $ | (7,633) | | $ | 2,474 | | $ | 102,292 |
Special items, net of income taxes: (3) | | | | | | | | | | |
Special charges (1) | | | | 48,519 | | | 38,957 | | | — |
Refranchising (gains) losses, net (2)(4) | | | | (3,677) | | | 222 | | | 1,323 |
Tax impact of China refranchising (4) | | | | — | | | 2,435 | | | — |
U.S. tax legislation effect on deferred taxes (5) | | | | — | | | — | | | (7,020) |
Equity compensation tax benefit (6) | | | | — | | | — | | | (1,879) |
Adjusted net income attributable to common shareholders | | | | 37,209 | | | 44,088 | | | 94,716 |
53rd week of operations | | | | — | | | — | | | (3,900) |
Adjusted net income attributable to common shareholders - 52 weeks | | | $ | 37,209 | | $ | 44,088 | | $ | 90,816 |
| | | | | | | | | | |
GAAP diluted (loss) earnings per share | | | $ | (0.24) | | $ | 0.08 | | $ | 2.83 |
Special items: | | | | | | | | | | |
Special charges (1) | | | | 1.53 | | | 1.21 | | | — |
Refranchising (gains) losses, net (2)(4) | | | | (0.12) | | | 0.01 | | | 0.04 |
Tax impact of China refranchising (2) | | | | — | | | 0.07 | | | — |
U.S. tax legislation effect on deferred taxes (5) | | | | — | | | — | | | (0.20) |
Equity compensation tax benefit (6) | | | | — | | | — | | | (0.05) |
Adjusted diluted earnings per share | | | $ | 1.17 | | $ | 1.37 | | $ | 2.62 |
53rd week of operations | | | | — | | | — | | | (0.11) |
Adjusted diluted earnings per share - 52 weeks | | | $ | 1.17 | | $ | 1.37 | | $ | 2.51 |
| | | | | | | | | | |
Note: The year ended December 30, 2018 has been restated
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| | | | | | |
| | | | | | |
| | Year Ended | ||||
| | December 29, | | December 30, | ||
| | 2019 | | 2018 | ||
Special charges before income taxes: | | | | | | |
Royalty relief (a) | | $ | 19,097 | | $ | 15,416 |
Marketing fund investments (b) | | | 27,500 | | | 10,000 |
Legal and advisory fees (c) | | | 5,921 | | | 19,475 |
Reimaging costs and write-off of branded assets (d) | | | - | | | 5,841 |
Other costs (e) | | | 2,385 | | | - |
Mark to market adjustment on option valuation (f) | | | 5,914 | | | - |
Total Special charges before income taxes | | $ | 60,817 | | $ | 50,732 |
these non-GAAP measures is useful to investors as they reflect metrics that our management team and Board of Directors utilize to evaluate our operating performance, allocate resources and administer employee incentive plans. The most directly comparable U.S. GAAP measures to adjusted operating income, adjusted net income attributable to common shareholders and adjusted diluted earnings per common share are operating income, net income attributable to common shareholders and diluted earnings per common share, respectively. These non-GAAP results previously shown and within this document, which exclude Special items,measures should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s U.S. GAAP results. Management believes presenting certainThe table below reconciles our GAAP financial information withoutresults to our non-GAAP financial measures.
| Year Ended | ||||||||||||||
| (In thousands, except per share amounts) | December 25, 2022 | December 26, 2021 | ||||||||||||
| Operating income | $ | 109,030 | $ | 168,241 | ||||||||||
Refranchising and impairment losses (a) | 26,702 | — | ||||||||||||
Legal settlements (b) | 15,000 | — | ||||||||||||
Costs associated with the termination of significant franchisees (c) | 5,223 | — | ||||||||||||
Strategic corporate reorganization costs (d) | — | 13,094 | ||||||||||||
Other costs (e) | 1,507 | — | ||||||||||||
| Adjusted operating income | $ | 157,462 | $ | 181,335 | ||||||||||
| Net income attributable to common shareholders | $ | 67,362 | $ | 4,073 | ||||||||||
Refranchising and impairment losses (a) | 26,702 | — | ||||||||||||
Legal settlements (b) | 15,000 | — | ||||||||||||
Costs associated with the termination of significant franchisees (c) | 5,223 | — | ||||||||||||
Strategic corporate reorganization costs (d) | — | 13,094 | ||||||||||||
Other costs (e) | 1,507 | — | ||||||||||||
Repurchase and conversion of Series B Preferred Stock (f) | — | 109,852 | ||||||||||||
Tax effect of adjustments (g) | (10,897) | (2,946) | ||||||||||||
Adjusted net income attributable to common shareholders (h) | $ | 104,897 | $ | 124,073 | ||||||||||
| Diluted earnings per common share | $ | 1.89 | $ | 0.12 | ||||||||||
Refranchising and impairment losses (a) | 0.75 | — | ||||||||||||
Legal settlements (b) | 0.42 | — | ||||||||||||
Costs associated with the termination of significant franchisees (c) | 0.15 | — | ||||||||||||
Strategic corporate reorganization costs (d) | — | 0.37 | ||||||||||||
Other costs (e) | 0.04 | — | ||||||||||||
Repurchase and conversion of Series B Preferred Stock (f) | — | 3.10 | ||||||||||||
Tax effect of adjustments (g) | (0.31) | (0.08) | ||||||||||||
Adjusted diluted earnings per common share (h) | $ | 2.94 | $ | 3.51 | ||||||||||
| Year Ended | ||||||||
| (In thousands) | December 25, 2022 | |||||||
Refranchising impairment loss (1) | $ | 8,412 | ||||||
Ukraine-related charge (2) | 17,385 | |||||||
UK lease impairment (3) | 905 | |||||||
| Total adjustment | $ | 26,702 | ||||||
allocation of undistributed earnings to participating securities.
41
In addition, we present free cash flow in this report, which is a non-GAAP measure. We definePlease see “Liquidity and Capital Resources – Free Cash Flow” for a discussion of why we believe free cash flow provides useful information regarding our financial condition and results of operations, and a reconciliation of free cash flow to the most directly comparable U.S. GAAP measure.
| 2022 | 2021 | |||||||||||||
| Total cash provided by (used in): | ||||||||||||||
| Operating activities | $ | 117,808 | $ | 184,675 | ||||||||||
| Investing activities | (62,793) | (63,512) | ||||||||||||
| Financing activities | (76,240) | (180,526) | ||||||||||||
| Change in cash and cash equivalents, excluding the effect of exchange rate changes on cash and cash equivalents | $ | (21,225) | $ | (59,363) | ||||||||||
| Permitted Ratio | Actual Ratio for the Year Ended December 25, 2022 | |||||||||||||
| Leverage ratio | Not to exceed 5.25 to 1.0 | 2.6 to 1.0 | ||||||||||||
| Interest coverage ratio | Not less than 2.00 to 1.0 | 4.1 to 1.0 | ||||||||||||
(In thousands, except average price per share) Year Ended | Total Number of Shares Purchased | Average Price Paid per Share | Aggregate Cost of Shares Purchased | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| December 25, 2022 | 1,343 | $ | 93.07 | $ | 125,000 | $ | 299,800 | |||||||||||||||||||
| December 26, 2021 | 594 | $ | 121.96 | $ | 72,499 | $ | 424,800 | |||||||||||||||||||
The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.
42
Percentage Relationships and Restaurant Data and Unit Progression
The following tables set forth the percentage relationship to total revenues, unless otherwise indicated, of certain income statement data, and certain restaurant data for the years indicated.
| | | | | | | |
| | Year Ended(1) |
| ||||
|
| Dec. 29, |
| Dec. 30, |
| Dec. 31, |
|
| | 2019 | | 2018 | | 2017 |
|
| | (52 weeks) | | (52 weeks) | | (53 weeks) | |
Income Statement Data: | | | | (Note) | | | |
Revenues: | | | | | | | |
Domestic Company-owned restaurant sales |
| 40.3 | % | 41.6 | % | 45.8 | % |
North America franchise royalties and fees |
| 4.4 | | 4.8 | | 6.0 | |
North America commissary |
| 37.8 | | 36.7 | | 37.8 | |
International |
| 6.4 | | 6.6 | | 6.4 | |
Other revenues |
| 11.1 | | 10.3 | | 4.0 | |
Total revenues |
| 100.0 | | 100.0 | | 100.0 | |
Costs and expenses: | | | | | | | |
Operating costs (excluding depreciation and amortization shown separately below): |
| | | | | | |
Domestic Company-owned restaurant operating expense (2) |
| 80.7 | | 83.4 | | 81.4 | |
North America commissary (3) |
| 92.9 | | 94.3 | | 93.7 | |
International operating expense (4) |
| 56.1 | | 61.4 | | 61.9 | |
Other expenses (5) |
| 97.7 | | 99.8 | | 96.1 | |
General and administrative expenses |
| 13.8 | | 11.6 | | 8.5 | |
Depreciation and amortization |
| 2.9 | | 2.8 | | 2.4 | |
Total costs and expenses |
| 98.8 | | 98.1 | | 91.4 | |
Refranchising and impairment gains (losses), net | | 0.3 | | — | | (0.1) | |
Operating income |
| 1.5 | | 1.9 | | 8.5 | |
Net interest expense |
| (1.2) | | (1.5) | | (0.6) | |
Income before income taxes |
| 0.3 | | 0.4 | | 7.9 | |
Income tax expense |
| — | | 0.2 | | 1.9 | |
Net income before attribution to noncontrolling interests |
| 0.3 | | 0.2 | | 6.0 | |
Net income attributable to noncontrolling interests |
| — | | (0.1) | | (0.3) | |
Net income attributable to the Company |
| 0.3 | % | 0.1 | % | 5.7 | % |
Note: The year ended December 30, 2018 has been restated to reflect the correction of an immaterial error to consolidate the operations of PJMF, as discussed in more detail in “Note 2”, “Note 5” and “Note 27” of “Notes to Consolidated Financial Statements”.
43
| | | | | | | | | | |
|
| Year Ended (1) | | |||||||
|
| Dec. 29, | | Dec. 30, | | Dec. 31, |
| |||
| | 2019 | | 2018 | | 2017 | | |||
| | (52 weeks) | | (52 weeks) | | (53 weeks) | | |||
Restaurant Data: | | | | | | | | | | |
Percentage (decrease) increase in comparable domestic Company-owned restaurant sales (6) |
| | (2.7) | % | | (9.0) | % | | 0.4 | % |
Number of domestic Company-owned restaurants included in the most recent full year’s comparable restaurant base |
| | 609 | | | 637 | | | 676 | |
Average sales for domestic Company-owned restaurants included in the most recent comparable restaurant base | | $ | 1,046,000 | | $ | 1,072,000 | | $ | 1,192,000 | |
| | | | | | | | | | |
Papa John’s Restaurant Progression: | | | | | | | | | | |
North America Company-owned: | | | | | | | | | | |
Beginning of period | |
| 645 | |
| 708 | |
| 702 | |
Opened | |
| 3 | |
| 6 | |
| 9 | |
Closed | |
| (5) | |
| (7) | |
| (3) | |
Acquired from franchisees | |
| 1 | |
| — | |
| 1 | |
Sold to franchisees (7) | | | (46) | | | (62) | | | (1) | |
End of period | |
| 598 | |
| 645 | |
| 708 | |
International Company-owned: | | | | | | | | | | |
Beginning of period | |
| — | |
| 35 | |
| 42 | |
Closed | |
| — | |
| (1) | |
| (7) | |
Sold to franchisees (7) | |
| — | |
| (34) | |
| — | |
End of period | |
| — | |
| — | |
| 35 | |
North America franchised: | | | | | | | | | | |
Beginning of period | |
| 2,692 | |
| 2,733 | |
| 2,739 | |
Opened | |
| 76 | |
| 83 | |
| 110 | |
Closed | |
| (123) | |
| (186) | |
| (116) | |
Acquired from Company (7) | | | 46 | | | 62 | | | 1 | |
Sold to Company | |
| (1) | |
| — | |
| (1) | |
End of period | |
| 2,690 | |
| 2,692 | |
| 2,733 | |
International franchised: | | | | | | | | | | |
Beginning of period | |
| 1,966 | |
| 1,723 | |
| 1,614 | |
Opened | |
| 233 | |
| 304 | |
| 257 | |
Closed | |
| (92) | |
| (95) | |
| (148) | |
Acquired from Company (7) | |
| — | |
| 34 | |
| — | |
End of period | |
| 2,107 | |
| 1,966 | |
| 1,723 | |
Total restaurants - end of period | |
| 5,395 | |
| 5,303 | |
| 5,199 | |
44
Results of Operations
2019 Compared to 2018
Discussion of Revenues. Consolidated revenues decreased $43.6 million, or 2.6%, to $1.62 billion in 2019, compared to $1.66 billion in 2018. Revenues are summarized in the following table (dollars in thousands).
| | | | | | | | | | | | |
| | | | | | | |
| ||||
| | Year Ended | | | | | ||||||
|
| Dec. 29, | | Dec. 30, |
| Increase |
| Percent | ||||
| | 2019 | | 2018 | | (Decrease) | | Change | ||||
| | | | | | | | | | | | |
Domestic Company-owned restaurant sales | | $ | 652,053 | | $ | 692,380 | | $ | (40,327) | | (5.8) | % |
North America franchise royalties and fees | |
| 71,828 | |
| 79,293 | |
| (7,465) | | (9.4) | % |
North America commissary | |
| 612,652 | |
| 609,866 | |
| 2,786 | | 0.5 | % |
International | |
| 102,924 | |
| 110,349 | |
| (7,425) | | (6.7) | % |
Other revenues | |
| 179,791 | |
| 170,983 | |
| 8,808 | | 5.2 | % |
Total Revenues | | $ | 1,619,248 | | $ | 1,662,871 | | $ | (43,623) | | (2.6) | % |
Domestic Company-owned restaurant sales decreased $40.3 million, or 5.8%, in 2019 primarily due to the refranchising of 46 restaurants in 2019 primarily located in South Florida and Georgia and 62 restaurants in Denver and Minnesota in 2018. Excluding the impact of refranchising, Domestic Company-owned restaurant sales decreased $10.3 million primarily due to negative comparable sales of 2.7%, partially offset by the favorable impact of the expiration of rewards associated with our Papa Rewards loyalty program. “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 decreased $7.5 million, or 9.4%, in 2019. Excluding the impact of refranchising, North American franchise royalties and fees decreased $8.2 million primarily due to higher royalty relief of $6.0 million over the comparable period, including $3.7 million in higher Special charges. The remaining decrease was primarily due to a decrease in comparable sales and equivalent units of 2.0% and 0.9%, respectively.
North America franchise restaurant sales decreased 1.6% to $2.10 billion for 2019. North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales. “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.
North America commissary sales increased $2.8 million, or 0.5%, primarily due to higher pricing associated with higher commodities costs. This increase was partially offset by lower restaurant sales volumes.
International revenues decreased $7.4 million, or 6.7%, in 2019. The decrease compared to the prior year was primarily due to reduced revenues from the refranchising of a QC Center in Mexico in the first quarter of 2019 and the Company-owned stores and the QC Center in China, which occurred during the second quarter of 2018. Excluding the impact of refranchising, International revenues increased $3.0 million primarily due to higher royalties and higher United Kingdom (“PJUK”) commissary revenue on higher comparable sales and increased equivalent units. These increases were partially offset by unfavorable foreign exchange rates of approximately $4.2 million.
International franchise restaurant sales increased 9.9% to $921.4 million in 2019, excluding the impact of foreign currency, primarily due to increases in equivalent units. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.
45
Other revenues increased $8.8 million, or 5.2% in 2019 due to higher marketing fund revenue primarily due to an increase in the PJMF contribution rate, higher online revenues and higher PJUK marketing fund revenues and head lease rental income, partially offset by lower revenues for Preferred Marketing Solutions, our print and promotions subsidiary.
Discussion of Operating Results
Income before income taxes is summarized in the following table on a reporting segment basis. Income before income taxes decreased approximately $1.7 million, or 24.7%, for the year ended December 29, 2019 as compared to the prior year. Excluding the previously discussed Special items, income before income taxes was $61.1 million, or a decrease of $3.4 million. Alongside the GAAP income before income taxes data, we have included “adjusted” income before income taxes for 2019 to exclude Special items. We believe this non-GAAP measure is important for purposes of comparison to prior year results.
| | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| |||||||||||||||||||
| | Reported | | | | | Adjusted | | Reported | | | | | Adjusted | | Adjusted | | |||||
|
| Dec. 29, | | Special | | Dec. 29, | | Dec. 30, | | Special | | Dec. 30, |
| Increase |
| |||||||
(In thousands) | | 2019 | | Items | | 2019 | | 2018 | | Items | | 2018 | | (Decrease) |
| |||||||
| | | | | | | | | | | | | | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 33,957 | | $ | (4,739) | | $ | 29,218 | | $ | 18,988 | | $ | (1,624) | | $ | 17,364 | | $ | 11,854 | |
North America commissaries | |
| 30,439 | |
| — | |
| 30,439 | |
| 27,961 | |
| — | |
| 27,961 | |
| 2,478 | |
North America franchising | |
| 64,362 | |
| 19,097 | |
| 83,459 | |
| 70,732 | |
| 15,416 | |
| 86,148 | |
| (2,689) | |
International | |
| 19,110 | |
| — | |
| 19,110 | |
| 14,399 | |
| 1,913 | |
| 16,312 | |
| 2,798 | |
All others | |
| (2,500) | |
| — | |
| (2,500) | |
| (6,082) | |
| — | |
| (6,082) | |
| 3,582 | |
Unallocated corporate expenses | |
| (139,355) | |
| 41,720 | |
| (97,635) | |
| (118,296) | |
| 35,316 | |
| (82,980) | |
| (14,655) | |
Elimination of intersegment profits | |
| (967) | |
| — | |
| (967) | |
| (1,005) | |
| — | |
| (1,005) | |
| 38 | |
Adjusted income before income taxes | | $ | 5,046 | | $ | 56,078 | | $ | 61,124 | | $ | 6,697 | | $ | 51,021 | | $ | 57,718 | | $ | 3,406 | |
The increase in adjusted income before income taxes of $3.4 million, or 5.9% for 2019 excluding Special items, was primarily due to the following:
46
Review of Consolidated Results
Revenues. For the reasons discussed above, consolidated revenues decreased $43.6 million, or 2.6%, to $1.62 billion in 2019, compared to $1.66 billion in 2018.
| | | | | | | | | | | | | |
| | Year Ended | | | | ||||||||
| | December 29, 2019 | | December 30, 2018 | | | | ||||||
| | | | % of Related | | | | % of Related | | Increase | |||
($ in thousands) | | | | Revenues | | | | Revenues | | (Decrease) | |||
Revenues: | | | | | | | (Note) | | | | | | |
Domestic Company-owned restaurant sales | | $ | 652,053 | | | | $ | 692,380 | | | | | |
North America franchise royalties and fees | | | 71,828 | | | | | 79,293 | | | | | |
North America commissary revenues | | | 612,652 | | | | | 609,866 | | | | | |
International revenues | | | 102,924 | | | | | 110,349 | | | | | |
Other revenues | | | 179,791 | | | | | 170,983 | | | | | |
Total revenues | | | 1,619,248 | | | | | 1,662,871 | | | | | |
Costs and expenses: | | | | | | | | | | | | | |
Operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | | | | | | |
Domestic Company-owned restaurant expenses | | | 526,237 | | 80.7% | | | 577,658 | | 83.4% | | | (2.7%) |
North America commissary expenses | | | 569,180 | | 92.9% | | | 575,103 | | 94.3% | | | (1.4%) |
International expenses | | | 57,702 | | 56.1% | | | 67,775 | | 61.4% | | | (5.3%) |
Other expenses | | | 175,592 | | 97.7% | | | 170,556 | | 99.8% | | | (2.1%) |
General and administrative expenses | | | 223,460 | | 13.8% | | | 193,534 | | 11.6% | | | 2.2% |
Depreciation and amortization | | | 47,281 | | 2.9% | | | 46,403 | | 2.8% | | | 0.1% |
Total costs and expenses | | | 1,599,452 | | 98.8% | | | 1,631,029 | | 98.1% | | | 0.7% |
Refranchising and impairment gains (losses), net | | | 4,739 | | 0.3% | | | (289) | | 0.0% | | | 0.3% |
Operating income | | | 24,535 | | 1.5% | | | 31,553 | | 1.9% | | | (0.4%) |
Investment income | | | 1,104 | | 0.1% | | | 817 | | 0.0% | | | 0.0% |
Interest expense | | | (20,593) | | (1.3%) | | | (25,673) | | (1.5%) | | | 0.2% |
Income before income taxes | | $ | 5,046 | | 0.3% | | $ | 6,697 | | 0.4% | | | (0.1%) |
Note: The year ended December 30, 2018 has been restated to reflect the correction of an immaterial error to consolidate the operations of PJMF, as discussed in more detail in “Note 2”, “Note 5” and “Note 27” of “Notes to Consolidated Financial Statements”.
Costs and expenses. Total costs and expenses were approximately $1.60 billion, or 98.8% of total revenues in 2019 compared to $1.63 billion, or 98.1%, in 2018. The increase in total costs and expenses, as a percentage of revenues, was primarily due to the following:
Domestic Company-owned restaurants expenses were $526.2 million in 2019, or 80.7% of related revenues, as compared to the prior year expenses of $577.7 million, or 83.4% of related revenues, in 2018 primarily due to a 1.0% benefit from lower food costs including the favorable impact of current year promotions, a 0.4% benefit from lower workers’
47
compensation, automobile and general insurance costs and a 0.5% benefit from lower advertising costs. In addition, restaurant expenses as percentage of revenues benefited from lower loyalty program costs due to the expiration of rewards.
North America commissary expenses were $569.2 million in 2019, or 92.9% of related revenues compared to $575.1 million in 2018, or 94.3% of related revenues in 2018. The 1.4% decrease in expenses, as a percent of related revenues, was primarily due to additional franchise support given to restaurants through lower pricing in 2018 that did not occur in 2019.
International expenses were $57.7 million in 2019, or 56.1% of related revenues, compared to prior year expenses of $67.8 million, or 61.4% of related revenues in 2018. The decrease of 5.3% in expenses, as a percent of related revenues, was primarily due to higher royalties and the divestiture of our China operations in the second quarter of 2018.
Other expenses were $175.6 million in 2019, or 97.7% of related revenues, compared to prior year expenses of $170.6 million, or 99.8% of related revenues in 2018. The 2.1% decrease in expenses, as a percentage of related revenues, is primarily due to higher revenues from our online and mobile ordering business as well as lower labor costs for Preferred Marketing Solutions. Other revenues and other expenses also include the revenues and expenses associated with the consolidations of PJMF, as previously discussed. See “Note 2”, “Note 5” and “Note 27” of “Notes to Consolidated Financial Statements,” respectively for additional information.
General and administrative (“G&A”) expenses were $223.5 million, or 13.8% of revenues for 2019 compared to $193.5 million, or 11.6% of revenues for 2018. G&A expenses consisted of the following (dollars in thousands):
| | | | | | |
| | | | | | |
| Year Ended | | ||||
| | December 29, | | | December 30, | |
| | 2019 | | | 2018 | |
Provision for uncollectible accounts and notes receivable (a) | $ | 2,764 | | $ | 3,338 | |
Loss on disposition of fixed assets | | 1,130 | | | 2,233 | |
Other (income) expense | | (915) | | | (1,691) | |
Other general expenses | | 2,979 | | | 3,880 | |
Special charges (b)(c) | | 41,322 | | | 35,316 | |
Administrative expenses (d) | | 179,159 | | | 154,338 | |
General and administrative expenses | $ | 223,460 | | $ | 193,534 | |
48
See “Items Impacting Comparability; Non-GAAP Measures” within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 19” of “Notes to Consolidated Financial Statements” for additional Special charges details.
Depreciation and amortization was $47.3 million, or 2.9% of revenues in 2019, as compared to $46.4 million, or 2.8% of revenues for 2019.
Refranchising and impairment gains/(losses), net. Refranchising gains of $4.7 million in 2019 were primarily associated with the refranchising of 19 Company-owned restaurants in Georgia and 24 Company-owned restaurants in South Florida. Net refranchising losses of $289,000 in 2018 were primarily due to the China refranchise of the 34 Company-owned restaurants and the QC Center in China, substantially offset by refranchising gains related to the refranchising of 62 Company-owned restaurants in North America in 2018. See “Note 12” of “Notes to the Consolidated Financial Statements” for additional information.
Interest expense. Interest expense decreased approximately $5.1 million for the year ended December 29, 2019 primarily due to a decrease in the average outstanding debt balance. Total debt outstanding was $370.0 million as of December 29, 2019. Outstanding debt at December 29, 2019 decreased $255.0 million from December 30, 2018 primarily due to the repayment of outstanding borrowings under our revolving credit facility using proceeds from the sale of Series B Preferred Stock.
Income (loss) before income taxes. For the reasons discussed above, income before income taxes decreased $1.7 million, or 24.7%, for the year ended December 29, 2019 over the prior year comparable periods. Excluding Special items, consolidated income before income taxes totaled $61.1 million, an increase of $3.4 million or 5.9%, for the year ended December 29, 2019.
Income tax (benefit) expense. The effective income tax rate for the year ended December 29, 2019 was negative 12.1%, compared to positive 39.2% for the year ended December 30, 2018.
| | | | | |
| | Year Ended | |||
| December 29, 2019 | | December 30, 2018 | ||
| | | | | |
Income before income taxes | $ | 5,046 | | $ | 6,697 |
Income tax (benefit) / expense | $ | (611) | | $ | 2,624 |
Effective tax rate | | (12.1%) | | | 39.2% |
The income tax benefit of $611,000 for 2019 is primarily related to higher excess tax benefits from equity-based compensation and other favorable tax credits. In 2018, income tax expense was $2.6 million, or an effective income tax rate of 39.2%. This included a significant tax impact from the China divestiture, as previously detailed in the Special items.
See “Items Impacting Comparability” and “Note 8”, “Note 12” and “Note 20” of “Notes to Consolidated Financial Statements,” respectively, for additional information.
Diluted (loss) earnings per share. Diluted loss per share was $0.24 for 2019 compared to diluted earnings per share of $0.08 in 2018. Excluding Special items, adjusted diluted earnings per share in 2019 was $1.17, a decrease of 14.6% versus 2018 adjusted diluted earnings per share of $1.37.
49
2018 Compared to 2017
Discussion of Revenues. Consolidated revenues decreased $120.5 million, or 6.8%, to $1.66 billion in 2018, compared to $1.78 billion in 2017. Excluding the revenues for the 53rd week of operations in 2017 of $30.9 million, consolidated revenues decreased $89.6 million, or 5.1%. Revenues are summarized in the following table (dollars in thousands).
| | | | | | | | | | | | |
| | Year Ended | | | | |
| |||||
|
| Dec. 30, |
| Dec. 31, |
| Increase |
| |||||
(In thousands) | | 2018 | | 2017 | | (Decrease) |
| |||||
| | | | | | | | | | | | |
Domestic Company-owned restaurant sales | | $ | 692,380 | | $ | 816,718 | | $ | (124,338) | | (15.2) | % |
North America franchise royalties and fees | |
| 79,293 | |
| 106,729 | |
| (27,436) | | (25.7) | % |
North America commissary | |
| 609,866 | |
| 673,712 | |
| (63,846) | | (9.5) | % |
International | |
| 110,349 | |
| 114,021 | |
| (3,672) | | (3.2) | % |
Other revenues | |
| 170,983 | |
| 72,179 | |
| 98,804 | | 136.9 | % |
Total Revenues | | $ | 1,662,871 | | $ | 1,783,359 | | $ | (120,488) | | (6.8) | % |
Domestic Company-owned restaurant sales decreased $124.3 million, or 15.2% in 2018. Excluding the benefit of the 53rd week of operations of $15.6 million in 2017, the Domestic Company-owned restaurant sales decreased $108.7 million, or 13.6% in 2018. These decreases were primarily due to the negative comparable sales of 9.0% and a reduction of revenues of $42.2 million from the refranchising of 62 Company-owned restaurants in 2018.“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 decreased $27.4 million, or 25.7% in 2018. Excluding the benefit of the 53rd week of operations of $1.9 million in 2017, the decrease was $25.5 million, or 24.4%, primarily due to short-term royalty reductions granted to the entire North America system as part of the franchise assistance program of approximately $15.4 million, which is included in the Special charges previously discussed. Royalties were further reduced by negative comparable sales of 6.7% in 2018. North America franchise restaurant systemwide sales decreased 7.4% or $169.6 million to $2.1 billion (5.4% or $120.9 million on a 52 week basis) primarily due to the negative comparable sales. 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 sales decreased $63.8 million, or 9.5% in 2018. Excluding the benefit of the 53rd week of operations of $10.8 million in 2017, the decrease was $53.0 million, or 8.0% primarily due to lower sales volumes attributable to lower restaurant sales. In addition, North America commissary revenues were reduced approximately $2.6 million due to required reporting of franchise new store equipment incentives as a reduction of revenue under Topic 606. These incentives were previously recorded as General and administrative expenses.
International revenues decreased approximately $3.7 million, or 3.2% in 2018. Excluding the benefit of the 53rd week of operations of $2.2 million in 2017, the decrease was $1.5 million, or 1.3%. These decreases are net of the favorable impact of foreign currency rates of approximately $2.7 million. The decrease was primarily due to the refranchising of the Company-owned restaurants and QC Center in China of approximately $8.1 million in 2018, lower franchise fees, development fees and lower revenues due to required reporting of franchise new store equipment incentives as a reduction of revenue after adoption of Topic 606, partially offset by higher royalties due to an increase in equivalent units. “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 systemwide sales increased 14.6% to $832.3 million in 2018, excluding the impact of foreign currency, due to the increase in 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 $98.8 million, or 136.9% in 2018 primarily due to the required reporting of franchise marketing fund revenues and expenses on a gross basis for the various funds we control, including PJMF, in accordance with Topic 606. The franchise marketing fund amounts were previously reported on a net basis. As we did not restate the 2017 amounts
50
in accordance with our adoption of Topic 606 using the modified retrospective approach, comparability between 2018 and 2017 amounts is reduced. See “Note 6” of “Notes to Consolidated Financial Statements” for more details. Additionally, PJMF was not a consolidated entity in 2017, as previously discussed, which impacts comparability. This increase was partially offset by lower revenues for Preferred Marketing Solutions, our print and promotions subsidiary.
Discussion of Operating Results
Income before income taxes is summarized in the following table on a reportable segment basis. Income before income taxes decreased approximately $133.6 million, or 95.2%, for the year ended December 30, 2018 as compared to the prior year. Excluding the previously discussed Special items for 2018 and 2017 as well as the 53rd week of operations in 2017, income before income taxes was $57.7 million, or a decrease of $78.4 million.
| | | | | | | | | | |
| | | | | | | | | | |
|
| Year Ended | ||||||||
| | Dec. 30, |
| Dec. 31 | | | Increase | |||
(In thousands) |
| 2018 |
| 2017 |
|
| (Decrease) | |||
Domestic Company-owned restaurants | | $ | 18,988 | | $ | 47,548 | | | $ | (28,560) |
North America commissaries | |
| 27,961 | |
| 47,844 | | |
| (19,883) |
North America franchising | | | 70,732 | | | 96,298 | | | | (25,566) |
International | | | 14,399 | | | 15,888 | | | | (1,489) |
All others | | | (6,082) | | | (179) | | | | (5,903) |
Unallocated corporate expenses | | | (118,296) | | | (66,099) | | | | (52,197) |
Elimination of intersegment profits | | | (1,005) | | | (958) | | | | (47) |
Total income (loss) before income taxes | | $ | 6,697 | | $ | 140,342 | | | $ | (133,645) |
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The decrease in total income before income taxes of $133.6 million was primarily due to the following:
51
Review of Consolidated Results
Revenues. For the reasons discussed above, consolidated revenues decreased $120.5 million, or 6.8%, to $1.66 billion in 2018, compared to $1.78 billion in 2017. Excluding the revenues for the 53rd week of operations in 2017 of $30.9 million, consolidated revenues decreased $89.6 million, or 5.1% primarily due to lower comparable sales as previously discussed. See Discussion of Revenues for additional information.
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| | Year Ended | | | | ||||||||
| | December 30, 2018 | | December 31, 2017 | | | | ||||||
| | | | % of Related | | | | % of Related | �� | Increase | |||
($ in thousands) | | | | Revenues | | | | Revenues | | (Decrease) | |||
Revenues: | | (Note) | | | | | | | | | | | |
Domestic Company-owned restaurant sales | | $ | 692,380 | | | | $ | 816,718 | | | | | |
North America franchise royalties and fees | | | 79,293 | | | | | 106,729 | | | | | |
North America commissary revenues | | | 609,866 | | | | | 673,712 | | | | | |
International revenues | | | 110,349 | | | | | 114,021 | | | | | |
Other revenues | | | 170,983 | | | | | 72,179 | | | | | |
Total revenues | | | 1,662,871 | | | | | 1,783,359 | | | | | |
Costs and expenses: | | | | | | | | | | | | | |
Operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | | | | | | |
Domestic Company-owned restaurant expenses | | | 577,658 | | 83.4% | | | 664,640 | | 81.4% | | | 2.0% |
North America commissary expenses | | | 575,103 | | 94.3% | | | 631,537 | | 93.7% | | | 0.6% |
International expenses | | | 67,775 | | 61.4% | | | 70,622 | | 61.9% | | | (0.5%) |
Other expenses | | | 170,556 | | 99.8% | | | 69,335 | | 96.1% | | | 3.7% |
General and administrative expenses | | | 193,534 | | 11.6% | | | 150,866 | | 8.5% | | | 3.1% |
Depreciation and amortization | | | 46,403 | | 2.8% | | | 43,668 | | 2.4% | | | 0.4% |
Total costs and expenses | | | 1,631,029 | | 98.1% | | | 1,630,668 | | 91.4% | | | 6.7% |
Refranchising and impairment gains (losses), net | | | (289) | | 0.0% | | | (1,674) | | (0.1%) | | | 0.1% |
Operating income | | | 31,553 | | 1.9% | | | 151,017 | | 8.5% | | | (6.6%) |
Investment income | | | 817 | | 0.0% | | | 608 | | 0.0% | | | 0.0% |
Interest expense | | | (25,673) | | (1.5%) | | | (11,283) | | (0.6%) | | | (0.9%) |
Income before income taxes | | $ | 6,697 | | 0.4% | | $ | 140,342 | | 7.9% | | | (7.5%) |
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Note: The year ended December 30, 2018 been restated to reflect the correction of an immaterial error to consolidate the operations of PJMF, as discussed in more detail in “Note 2”, “Note 5” and “Note 27” of “Notes to Consolidated Financial Statements”.
52
Costs and expenses. Total costs and expenses were approximately $1.63 billion, or 98.1% of total revenues in 2018 compared to $1.63 billion, or 91.4% in 2017. Excluding the 53rd week of operations in 2017, total costs and expenses were $1.61 billion, or 91.6% of related revenues.
Domestic Company-owned restaurant expenses were $577.7 million in 2018, or 83.4% of related revenues, compared to prior year expenses of $664.6 million, or 81.4% of related revenues. Excluding the 53rd week of operations in 2017, Domestic Company-owned restaurants expenses were $651.4 million, or 81.3% of related revenues. The 2.0% increase in expenses as a percent of related revenues, on a 52-week basis, was primarily attributable to the impact of negative comparable sales of 9.0%, higher labor costs including higher minimum wages, and increased non-owned automobile costs. Additionally, the adoption of Topic 606 increased restaurant expenses as a percentage of revenues due to the revised method of accounting for the customer loyalty program.
North America commissary expenses were $575.1 million in 2018, or 94.3% of related revenues, compared to $631.5 million, or 93.7% of related revenues in 2017. Excluding the 53rd week of operations in 2017, North America commissary expenses were $622.4 million, or 93.9% of related revenues. The 0.4% increase in expenses as a percent of related revenues, on a 52-week basis, was primarily due to the Company’s commitment to reduce its overall profit margin as additional support to franchisees. In addition, commissary expenses as a percent of revenues in 2018 were impacted 0.3% due to the required reporting of new store franchise equipment incentives as a revenue reduction under Topic 606. The impact of the equipment incentives is offset by a reduction in General and administrative costs.
International expenses were $67.8 million, or 61.4% of related revenues in 2018, compared to $70.6 million, or 61.9% of related revenues in 2017. Excluding the 53rd week of operations in 2017, International expenses were $69.1 million, or 61.8% of related revenues. The 0.4% decrease in expenses as a percent of related revenues, on a 52-week basis, was primarily due to the divestiture of our China operations in the second quarter of 2018.
Other expenses, including the impact of the 2018 consolidation of PJMF, were $170.6 million, or 99.8% of related revenues in 2018 compared to $69.3 million, or 96.1% of related revenues in 2017. Excluding the 53rd week of operations in 2017, Other expenses were $68.3 million, or 95.2% of related revenues. The consolidation of PJMF in 2018 increased other expenses $86.5 million in comparison to 2017, which also increased other expenses as a percentage of sales as PJMF operates at or near breakeven. The increase in expenses as a percent of related revenues, on a 52-week basis, was also due to higher costs related to various technology initiatives and increased advertising spend in the United Kingdom in 2018.
General and administrative (G&A) expenses were $193.5 million, or 11.6% of revenues for 2018, compared to $150.9 million, or 8.5% of revenues for 2017. The 53rd week of operations in 2017 increased general and administrative expenses by approximately $900,000. G&A costs consisted of the following (dollars in thousands):
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| Year Ended | ||||
| | December 30, | | | December 31, |
| | 2018 | | | 2017 |
Provision (credit) for uncollectible accounts and notes receivable (a) | $ | 3,338 | | $ | (1,441) |
Loss on disposition of fixed assets | | 2,233 | | | 2,493 |
Papa Rewards (b) | | - | | | 1,046 |
Franchise support initiative (c) | | 34 | | | 2,986 |
Other (income) expense | | (1,725) | | | 343 |
Other general expenses | | 3,880 | | | 5,427 |
Special charges (d) | | 35,316 | | | - |
Administrative expenses (e) | | 154,338 | | | 145,439 |
General and administrative expenses | $ | 193,534 | | $ | 150,866 |
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53
Depreciation and amortization was $46.4 million, or 2.8% of revenues in 2018, as compared to $43.7 million, or 2.4% of revenues for 2017. This increase of $2.7 million from 2017 was primarily due to additional depreciation on technology related investments and the impact associated with our Georgia QC Center, which opened in July of 2017.
Refranchising and impairment gains/(losses), net. The year ended December 30, 2018 includes a $289,000 loss primarily due to the China refranchise of the 34 Company-owned restaurants and the QC Center in China that occurred in 2018, substantially offset by refranchising gains related to the refranchising of 62 Company-owned restaurants in North America in 2018. The full year 2017 amount includes an impairment charge of $1.7 million related to our Company-owned stores in China. See “Note 12” of “Notes to Consolidated Financial Statements” for additional information.
Interest expense. Interest expense increased approximately $14.4 million primarily due to higher average outstanding debt balances, which is primarily due to share repurchases, as well as higher interest rates. The 53rd week of operations in 2017 increased interest expense for the year by approximately $300,000.
Income before income taxes.For the reasons discussed above, income before income taxes decreased approximately $133.6 million for the year ended December 30, 2018 over the prior year comparable period. Excluding Special items, consolidated income before income taxes totaled $57.7 million, a decrease of $84.3 million or 59.4%, for the year ended December 30, 2018.
Income tax expense. The effective income tax rates were 39.2% in 2018 and 24.1% in 2017. The increase in the effective income tax rate for 2018 was primarily attributable to the rate increase related to the China divestiture, as previously detailed in the Special items. Additionally, the rate for 2017 was decreased by the one-time benefit of approximately $7.0 million for the remeasurement of deferred tax assets and liabilities after the Tax Act was signed into law. See “Items Impacting Comparability” and “Note 12” and “Note 20” of “Notes to Consolidated Financial Statements” for additional information.
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| | Year Ended | |||
| December 30, 2018 | | December 31, 2017 | ||
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Income before income taxes | $ | 6,697 | | $ | 140,342 |
Income tax expense | $ | 2,624 | | $ | 33,817 |
Effective tax rate | | 39.2% | | | 24.1% |
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Diluted earnings per share. Diluted earnings per share (“EPS”) were $0.08 for 2018 compared to $2.83 in 2017. Excluding Special items, adjusted EPS in 2018 was $1.37, a decrease of 45.4% versus 2017 adjusted EPS of $2.51.
54
Liquidity and Capital Resources
Debt
The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $10.0 million was outstanding as of December 29, 2019, and a secured term loan facility with an outstanding balance of $360.0 million (the “Term Loan Facility”) and together with the Revolving Facility, the “PJI Facilities”. The PJI Facilities mature on August 30, 2022. The loans under the PJI Facilities accrue interest at a per annum rate equal to, at the Company’s election, either LIBOR plus a margin ranging from 125 to 250 basis points or a base rate (generally determined by a prime rate, federal funds rate or LIBOR plus 1.00%) plus a margin ranging from 25 to 150 basis points. 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”). The Credit Agreement governing the PJI Facilities (the “PJI Credit Agreement”) places certain customary restrictions upon the Company based on its financial covenants. These include limiting the repurchase of common stock and not increasing the cash dividend above the lesser of $0.225 per share per quarter or $35 million per fiscal year if the Company’s leverage ratio is above 3.75 to 1.0. Quarterly amortization payments are required to be made on the Term Loan Facility in the amount of $5.0 million. Loans outstanding under the PJI Facilities 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. Up to $35.0 million of the Revolving Facility may be advanced in certain agreed foreign currencies, including Euros, Pounds Sterling, Canadian Dollars, Japanese Yen, and Mexican Pesos.
The PJI Credit Agreement contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of the Leverage Ratio and a specified fixed charge coverage ratio. The PJI Credit Agreement allows for a permitted Leverage Ratio of 5.25 to 1.0 beginning in the third quarter of 2018, decreasing over time to 4.00 to 1.0 by 2022; and a fixed charge coverage ratio of 2.00 to 1.0 beginning in the third quarter of 2018 and increasing over time to 2.50 to 1.0 in 2021 and thereafter. We were in compliance with these financial covenants at December 29, 2019.
Under the PJI Credit Agreement, we have the option to increase the Revolving Facility or the Term Loan Facility in an aggregate amount of up to $300.0 million, subject to the Leverage Ratio of the Company not exceeding 4.00 to 1.00. The Company and certain direct and indirect domestic subsidiaries are required to grant a security interest in substantially all of the capital stock and equity interests of their respective domestic and first tier material foreign subsidiaries to secure the obligations owed under the PJI Facilities.
Our outstanding debt of $370.0 million at December 29, 2019 under the PJI Facilities was composed of $360.0 million outstanding under the Term Loan Facility and $10.0 million outstanding under the Revolving Facility. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at December 29, 2019 was approximately $343.8 million.
As of December 29, 2019, the Company had approximately $2.7 million in unamortized debt issuance costs, which are being amortized into interest expense over the term of the PJI Facilities.
We attempt to minimize interest risk exposure by fixing our rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions that participate in the PJI Credit Agreement. 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.
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We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities. In April 2019, we reduced the notional value of our swaps by $50.0 million as a result of paying down a substantial portion of debt under our Revolving Facility using the proceeds received from the sale of Series B Preferred Stock. The termination of $50.0 million of notional swap value was not significant to our results of operations.
As of December 29, 2019, we have the following interest rate swap agreements with a total notional value of $350 million:
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Our Credit Agreement contains affirmative and negative covenants, including the following financial covenants, as defined by the Credit Agreement:
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As stated above, our leverage ratio is defined as outstanding debt divided by consolidated 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 December 29, 2019.
PJMF has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 (as amended, the “PJMF Loan Agreement”) with U.S. Bank National Association, as lender (“U.S. Bank”). The PJMF Revolving Facility is secured by substantially all assets of PJMF. The PJMF Revolving Facility matures on September 30, 2020. 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 4.1%, 3.4%, and 2.5% in fiscal 2019, 2018, and 2017, respectively. There was no balance outstanding under the PJMF Revolving Facility as of December 29, 2019. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.
Cash Flows
Cash flow provided by operating activities was $61.7 million for 2019 as compared to $92.4 million in 2018. The decrease of approximately $30.7 million was primarily due to unfavorable working capital changes compared to the previous year including timing of payments of liabilities. The decrease in cash flow provided by operating activities in 2018 compared to 2017 was primarily due to lower net income, offset by favorable changes in working capital items.
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The Company’s free cash flow for the last threetwo years was as follows (in thousands):
| Year Ended | ||||||||||||||
| December 25, 2022 | December 26, 2021 | |||||||||||||
| Net cash provided by operating activities | $ | 117,808 | $ | 184,675 | ||||||||||
| Purchases of property and equipment | (78,391) | (68,559) | ||||||||||||
Dividends paid to preferred stockholders (a) | — | (6,394) | ||||||||||||
| Free cash flow | $ | 39,417 | $ | 109,722 | ||||||||||
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Net cash provided by operating activities | | $ | 61,749 | | $ | 92,454 | | $ | 134,975 | |
Purchases of property and equipment | | | (37,711) | | | (42,028) | | | (52,593) | |
Dividends paid to preferred shareholders | |
| (10,020) | |
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Free cash flow (a) | | $ | 14,018 | | $ | 50,426 | | $ | 82,382 | |
(a)
Cash flow used in investing activities was $32.6 Excludes $188.6 million in 2019 as compared to $38.8 millionof cash consideration paid for the same period in 2018. The decrease in cash flow used in investing activities was primarily due to $7.7 million in proceeds from the refranchising of our joint ventures in Denverrepurchase and Minnesota in 2018 as compared to $13.5 million in proceeds from the refranchising of stores mainly in the Florida and Georgia markets in 2019.
Cash flow used in financing activities was $34.6 million in 2019 as compared to $48.1 million for the same period in 2018. We require capital for the payment of cash dividends and share repurchases, which are funded by cash flow from operations, borrowings from our Credit Agreement and proceeds from the issuance of preferred stock. In the first quarter of 2019, we received gross proceeds of $252.5 million from the issuance of Series B Preferred Stock and incurred $7.5 million of direct costs associated with the issuance. The net proceedsconversion of the Series B Preferred Stock were primarily used to pay down our Revolving Facilities. The additional borrowing availability under the Revolving Facility as a result of the debt repayment is expected to provide financial flexibility that enables the Company to make investments in the businesssecond quarter of 2021.
Interest Payments
Funding for our share repurchase program that expired on February 27, 2019 was provided through our credit facilities, operating cash flow, stock option exercises and cash and cash equivalents. There were no share repurchases during 2019. For the year ended December 30, 2018, the Company purchased $158.0 million of stock comprising approximately 2.7 million shares.
The following is a summary of our repurchases of common stock for the last three years (in thousands, except average price per share):
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Year | | Repurchased | | Repurchased | | Share | | ||
2017 |
| 2,960 | | $ | 209,586 | | $ | 70.80 | |
2018 |
| 2,698 | | $ | 158,049 | | $ | 58.57 | |
2019 |
| — | | $ | — | | $ | — | |
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The Company recorded dividends of approximately $40.9 million for the year ended December 29, 2019 consisting of the following:
The Company paid common stock dividends of $29.0 million in 2018 ($0.90 per share) and $30.7 million in 2017 ($0.85 per share).
On January 29, 2020, our Board of Directors declared a first quarter dividend of $0.225 per share of common stock (approximately $7.3 million was paid Refer to common stockholders and $1.1 million was paid as “pass through” dividends to holders of Series B Preferred Stock on an “as converted basis”). The first quarter dividend on outstanding shares of Series B Preferred Stock was also declared on January 29, 2020. The common stock dividend was paid on February 21, 2020 to stockholders of record as of the close of business on February 10, 2020. The first quarter preferred dividend of $2.3 million will be paid to holders of Series B Preferred Stock on April 1, 2020.
On February 3, 2019, the Company entered into a Securities Purchase Agreement with Starboard pursuant to which Starboard made a $200 million strategic investment in Series B Preferred Stock. In addition, on March 28, 2019, Starboard made an additional $50 million investment in the Series B Preferred Stock pursuant to an option that was included in the Securities Purchase Agreement. See “Note 8”12. Debt” of “Notes to Consolidated Financial Statements” for morefurther information related to the Series B Preferred Stock and related transaction costs. The Company also issued $2.5 million of Series B Preferred Stock on the same terms as Starboard to certain franchisees of the Company.
Contractual Obligations
Contractualour obligations and paymentsthe timing of expected payments.
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Term Loan Facility (1) | | $ | 20,000 | | $ | 340,000 | | $ | — | | $ | — | | $ | 360,000 | |
Revolving Facilities (1) | | | — | | | 10,000 | | | — | | | — | | | 10,000 | |
Interest payments (2) | |
| 14,290 | |
| 24,280 | |
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| 40,276 | |
Total debt | |
| 34,290 | |
| 374,280 | |
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Operating leases (3) | |
| 32,809 | |
| 59,961 | |
| 39,221 | |
| 61,629 | |
| 193,620 | |
Finance leases (3) | | | 2,323 | | | 4,646 | | | 3,830 | | | 55 | | | 10,854 | |
Total contractual obligations | | $ | 69,422 | | $ | 438,887 | | $ | 44,757 | | $ | 61,684 | | $ | 614,750 | |
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The above table does not include the following:
Off-Balance Sheet Arrangements
We guarantee leases for certain Papa John’sJohns North American franchisees who have purchased restaurants that were previously Company-owned. We are contingently liable on these leases. TheseThe leases have varying terms, the latest of which expires in 2036. As of December 29, 2019,25, 2022, the estimatedestimate maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was approximately $19.2$9.2 million.
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Standby letters of credit | | $ | 46,200 | | $ | — | | $ | — | | $ | — | | $ | 46,200 | |
but have automatic renewal clauses. See “Note 14”12. Debt” and “Note 22”19. Litigation, Commitments and Contingencies” of “Notes to Consolidated Financial Statements” for additional information related to contractual and other commitments.
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These and other risk factors are discussed in detail in “Part I. Item 1A. — Risk Factors” of this Annual Report on Form 10-K.10-K, and they may be updated from time to time in our future reports filed with the Securities and Exchange Commission. 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.
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. The interest rate swaps were eligible for hedge accounting for part of the period. Our swaps are entered into with financial institutions that participate in the PJI We do not enter into contracts for trading purposes and do not use Foreign Currency Exchange Rate Risk Commodity Price Risk 2020 2019 2018 2017 Projected Block Block Block Market Price Price Price Quarter 1 $ 1.811 $ 1.490 $ 1.522 $ 1.613 Quarter 2 1.780 1.696 1.607 1.566 Quarter 3 1.825 1.898 1.592 1.642 Quarter 4 1.815 1.984 1.487 1.639 Full Year $ 1.808 $ 1.767 $ 1.552 $ 1.615 (PCAOB ID: 42) Critical Audit Matter Measurement and valuation of insurance reserves Description of the Matter claims. Auditing the measurement and valuation of the Insurance Reserves How We Addressed the Matter in Our Audit We have Balance Sheets Year ended December 29, December 30, December 31, (In thousands, except per share amounts) 2019 2018 2017 (Note) Revenues: Domestic Company-owned restaurant sales $ 652,053 $ 692,380 $ 816,718 North America franchise royalties and fees 71,828 79,293 106,729 North America commissary revenues 612,652 609,866 673,712 International revenues 102,924 110,349 114,021 Other revenues 179,791 170,983 72,179 Total revenues 1,619,248 1,662,871 1,783,359 Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses 526,237 577,658 664,640 North America commissary expenses 569,180 575,103 631,537 International expenses 57,702 67,775 70,622 Other expenses 175,592 170,556 69,335 General and administrative expenses 223,460 193,534 150,866 Depreciation and amortization 47,281 46,403 43,668 Total costs and expenses 1,599,452 1,631,029 1,630,668 Refranchising and impairment gains (losses), net 4,739 (289) (1,674) Operating income 24,535 31,553 151,017 Investment income 1,104 817 608 Interest expense (20,593) (25,673) (11,283) Income before income taxes 5,046 6,697 140,342 Income tax (benefit) expense (611) 2,624 33,817 Net income before attribution to noncontrolling interests 5,657 4,073 106,525 Net income attributable to noncontrolling interests (791) (1,599) (4,233) Net income attributable to the Company $ 4,866 $ 2,474 $ 102,292 Calculation of net (loss) income for earnings per share: Net income attributable to the Company $ 4,866 $ 2,474 $ 102,292 Preferred stock dividends and accretion (12,499) — — Change in noncontrolling interest redemption value — — 1,419 Net income attributable to participating securities — — (423) Net (loss) income attributable to common shareholders $ (7,633) $ 2,474 $ 103,288 Basic (loss) earnings per common share $ (0.24) $ 0.08 $ 2.86 Diluted (loss) earnings per common share $ (0.24) $ 0.08 $ 2.83 Basic weighted average common shares outstanding 31,632 32,083 36,083 Diluted weighted average common shares outstanding 31,632 32,299 36,522 Dividends declared per common share $ 0.90 $ 0.90 $ 0.85 Year ended December 29, December 30, December 31, (In thousands) 2019 2018 2017 (Note) Net income before attribution to noncontrolling interests $ 5,657 $ 4,073 $ 106,525 Other comprehensive (loss) income, before tax: Foreign currency translation adjustments (1) 1,638 (4,903) 4,570 Interest rate swaps (2) (10,783) 4,254 1,421 Other comprehensive (loss) income, before tax (9,145) (649) 5,991 Income tax effect: Foreign currency translation adjustments (1) (377) 1,110 (1,691) Interest rate swaps (3) 2,480 (1,032) (530) Income tax effect (4) 2,103 78 (2,221) Other comprehensive (loss) income, net of tax (7,042) (571) 3,770 Comprehensive (loss) income before attribution to noncontrolling interests (1,385) 3,502 110,295 Less: comprehensive loss (income), redeemable noncontrolling interests 519 488 (2,195) Less: comprehensive (income), nonredeemable noncontrolling interests (1,310) (2,087) (2,038) Comprehensive (loss) income attributable to the Company $ (2,176) $ 1,903 $ 106,062 See accompanying notes. December 29, December 30, (In thousands) 2019 2018 (Note) Assets Current assets: Cash and cash equivalents $ 27,911 $ 33,258 Accounts receivable (less allowance for doubtful accounts of $7,341 in 2019 and $4,205 in 2018) 80,921 78,118 Notes receivable, current portion 7,790 5,498 Income tax receivable 4,024 16,146 Inventories 27,529 27,203 Prepaid expenses and other current assets 33,371 36,054 Total current assets 181,546 196,277 Property and equipment, net 211,741 226,894 Finance lease right-of-use assets, net 9,383 — Operating lease right-of-use assets 148,229 — Notes receivable, less current portion (less allowance for doubtful accounts of $3,572 in 2019 and $3,369 in 2018) 33,010 23,259 Goodwill 80,340 84,516 Deferred income taxes, net 1,839 1,137 Other assets 64,633 63,814 Total assets $ 730,721 $ 595,897 Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit Current liabilities: Accounts payable $ 29,141 $ 27,106 Income and other taxes payable 7,599 6,590 Accrued expenses and other current liabilities 120,566 129,167 Current deferred revenue 5,624 6,022 Current finance lease liabilities 1,789 — Current operating lease liabilities 23,226 — Current portion of long-term debt 20,000 20,009 Total current liabilities 207,945 188,894 Deferred revenue 14,722 17,250 Long-term finance lease liabilities 7,629 — Long-term operating lease liabilities 125,297 — Long-term debt, less current portion, net 347,290 601,126 Deferred income taxes, net 2,649 7,852 Other long-term liabilities 84,927 79,324 Total liabilities 790,459 894,446 Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at December 29, 2019; 0 shares issued at December 30, 2018 251,133 — Redeemable noncontrolling interests 5,785 5,464 Stockholders’ deficit: Common stock ($0.01 par value per share; issued 44,748 at December 29, 2019 and 44,301 at December 30, 2018) 447 443 Additional paid-in capital 219,047 192,984 Accumulated other comprehensive loss (10,185) (3,143) Retained earnings 205,697 242,182 Treasury stock (12,854 shares at December 29, 2019 and 12,929 shares at December 30, 2018, at cost) (747,327) (751,704) Total stockholders’ deficit (332,321) (319,238) Noncontrolling interests in subsidiaries 15,665 15,225 Total Stockholders’ deficit (316,656) (304,013) Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and $ 730,721 $ 595,897 Papa John’s International, Inc. (Note) Common Accumulated Total Stock Additional Other Noncontrolling Stockholders’ Shares Common Paid-In Comprehensive Retained Treasury Interests in (Deficit) (In thousands) Outstanding Stock Capital Income (Loss) Earnings Stock Subsidiaries Equity Balance at December 25, 2016 36,683 $ 441 $ 172,573 $ (5,887) $ 219,278 $ (390,316) $ 13,712 $ 9,801 Net income (1) — — — — 102,292 — 2,038 104,330 Other comprehensive income — — — 3,770 — — — 3,770 Cash dividends on common stock — — 136 — (30,728) — — (30,592) Exercise of stock options 147 1 6,259 — — — — 6,260 Acquisition of Company common stock (2,960) — — — — (209,586) — (209,586) Stock-based compensation expense — — 10,413 — — — — 10,413 Issuance of restricted stock 54 — (2,427) — — 2,427 — — Tax effect of restricted stock awards — — (2,428) — — — — (2,428) Change in redemption value of noncontrolling interests — — — — 1,419 — — 1,419 Contributions from noncontrolling interests — — — — — — 2,956 2,956 Distributions to noncontrolling interests — — — — — — (2,949) (2,949) Other 7 — 259 — (10) 403 — 652 Balance at December 31, 2017 33,931 $ 442 $ 184,785 $ (2,117) $ 292,251 $ (597,072) $ 15,757 $ (105,954) Cumulative effect of adoption of ASU 2014-09 (2) — — — — (24,359) — — (24,359) Adjusted balance at January 1, 2018 33,931 442 184,785 (2,117) 267,892 (597,072) 15,757 (130,313) Net income (1) — — — — 2,474 — 1,874 4,348 Other comprehensive loss — — — (571) — — — (571) Adoption of ASU 2018-02 (3) — — — (455) 455 — — — Cash dividends on common stock — — 145 — (28,944) — — (28,799) Exercise of stock options 75 1 2,698 — — — — 2,699 Acquisition of Company common stock (2,697) — — — — (158,049) — (158,049) Stock-based compensation expense — — 9,936 — — — — 9,936 Issuance of restricted stock 56 — (3,005) — — 3,005 — — Tax effect of restricted stock awards — — (1,521) — — — — (1,521) Distributions to noncontrolling interests — — — — — — (2,406) (2,406) Other 7 — (54) — 305 412 — 663 Balance at December 30, 2018 (Restated) 31,372 $ 443 $ 192,984 $ (3,143) $ 242,182 $ (751,704) $ 15,225 $ (304,013) The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $10.0 million was outstanding as of December 29, 2019, and a secured term loan facility with an outstanding balance of $360.0 million (the “Term Loan Facility”) and together with the Revolving Facility, the “PJI Facilities”. The PJI Facilities mature on August 30, 2022. The loans under the PJI Facilities accrue interest at a per annum rate equal to, at the Company’s election, either LIBOR plus a margin ranging from 125 to 250 basis points or a base rate (generally determined by a prime rate, federal funds rate or LIBOR plus 1.00%) plus a margin ranging from 25 to 150 basis points. 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”). The Credit Agreement governing the PJI Facilities (the “PJI Credit Agreement”) places certain customary restrictions upon the Company based on its financial covenants. These include limiting the repurchase of common stock and not increasing the cash dividend above the lesser of $0.225 per share per quarter or $35 million per fiscal year if the Company’s leverage ratio is above 3.75 to 1.0. Quarterly amortization paymentsrequired to be made60on the Term Loan Facility in the amount of $5.0 million. Loans outstanding under the PJI Facilities 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. Up to $35.0 million of the Revolving Facility may be advanced in certain agreed foreign currencies, including Euros, Pounds Sterling, Canadian Dollars, Japanese Yen, and Mexican Pesos.The PJI Credit Agreement contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of the Leverage Ratio and a specified fixed charge coverage ratio. The PJI Credit Agreement allows for a permitted Leverage Ratio of 5.25 to 1.0 beginning in the third quarter of 2018, decreasing over time to 4.00 to 1.0 by 2022; and a fixed charge coverage ratio of 2.00 to 1.0 beginning in the third quarter of 2018 and increasing over time to 2.50 to 1.0 in 2021 and thereafter. We were in compliance with these financial covenants at December 29, 2019.Under the PJI Credit Agreement, we have the option to increase the Revolving Facility or the Term Loan Facility in an aggregate amount of up to $300.0 million, subjectexposed to the Leverage Ratioimpact of the Company not exceeding 4.00 to 1.00. The Company and certain direct and indirect domestic subsidiaries are required to grant a security interest in substantially all of the capital stock and equity interests of their respective domestic and first tier material foreign subsidiaries to secure the obligations owed under therate changes on our PJI Facilities. Our outstanding debt of $370.0 million at December 29, 2019 under the PJI Facilities was composed of $360.0 million outstanding under the Term Loan Facility and $10.0 million outstanding under the Revolving Facility. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at December 29, 2019 was approximately $343.8 million.As of December 29, 2019, the Company had approximately $2.7 million in unamortized debt issuance costs, which are being amortized into interest expense over the term of the PJI Facilities. Credit Agreement.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.interest rate swapsleveraged instruments. See “Note 12. Debt” of “Notes to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities. In April 2019, we reduced the notional value of our swaps by $50.0 million as a result of paying down a substantial portion of debt under our Revolving Facility using the proceeds received from the sale of Series B Preferred Stock. The termination of $50.0 million of notional swap value was not significant to our results of operations. As of December 29, 2019, we have the following interest rate swap agreements with a total notional value of $350 million:Effective DatesFloating Rate Debt Fixed RatesApril 30, 2018 through April 30, 2023$55 million2.33%April 30, 2018 through April 30, 2023$35 million2.36%April 30, 2018 through April 30, 2023$35 million2.34%January 30, 2018 through August 30, 2022$100 million1.99%January 30, 2018 through August 30, 2022$75 million1.99%January 30, 2018 through August 30, 2022$50 million2.00%The gain or loss on the swaps is recognized in Accumulated other comprehensive loss and reclassified into earnings as adjustments to interest expense in the same period or periods during which the swaps affect earnings. Gains or losses on the swaps representing hedge components excluded from the assessment of effectiveness are recognized in current earnings. The weighted average interest ratesConsolidated Financial Statements” for additional information on our PJI Facilities, including the impact of the interest rate swap agreements, were 4.1%, 3.9%,debt obligations and 2.7% in fiscal years 2019, 2018, and 2017, respectively. Interest paid, including payments made or received under the swaps, was $18.1 million in 2019, $23.5 million in 2018, and $10.8 million in 2017. As of December6129, 2019, the portion of the aggregate $6.2 million interest rate swap liability that would be reclassified into net interest expense during the next twelve months approximates $2.3 million. PJMF has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 (as amended, the “PJMF Loan Agreement”) with U.S. Bank National Association, as lender (“U.S. Bank”). The PJMF Revolving Facility is secured by substantially all assets of PJMF. The PJMF Revolving Facility matures on September 30, 2020. 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 4.1%, 3.4%, and 2.5% in fiscal 2019, 2018, and 2017, respectively. There was no balance outstanding under the PJMF Revolving Facility as of December 29, 2019. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. The Company has material contracts that are indexed to LIBOR and is monitoring this activity and evaluating the related risks. (loss) income and cash flows. Our internationalInternational operations principally consist of distribution sales to franchised Papa John’s restaurants located in the United KingdomUK and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our internationalInternational franchisees. Approximately 7.8%6.2% of our 20192022 revenues, 8.3%7.3% of our 20182021 revenues and 7.1%6.8% of our 2020 revenues for 2017 were derived from these International operations.$5.1$13.3 million on our consolidatedtotal revenues in 20192022, compared to a favorable impact of $3.3approximately $8.1 million in 2018.2021 and an unfavorable impact of approximately $0.6 million in 2020. Foreign currency exchange ratesrate fluctuations had an unfavorable impact of $1.3$2.0 million on our operating income before income taxes in 20192022 compared to a favorable impact of $1.4 million in 2021 and did not have a significantan unfavorable impact on 2018. An additionalof $1.0 million in 2020. A 10% adverse change in the foreign currency rates for our internationalInternational markets would result in an additional negative impact on annual revenue and operating income before income taxes of approximately $10.0$13.6 million and $2.3$1.5 million, respectively.62domesticDomestic Company-owned restaurants, which are accounted for as normal purchases; however, we still remain exposed to on-going commodity volatility.2019, 20182022, 2021 and 2017.2020. Also presented is the projected 20202023 average block price by quarter (based on the February 19, 202016, 2023 Chicago Mercantile Exchange cheese futures prices for 2020)prices):632023 2022 2021 2020 Projected
MarketBlock
PriceBlock
PriceBlock
PriceQuarter 1 $ 1.951 $ 1.966 $ 1.676 $ 1.857 Quarter 2 1.934 2.296 1.680 1.679 Quarter 3 2.066 1.938 1.676 2.262 Quarter 4 2.062 2.066 1.786 2.235 Full Year $ 2.003 $ 2.067 $ 1.705 $ 2.008 sheetsheets of Papa John’s International, Inc. and Subsidiaries (the Company) as of December 29, 2019,25, 2022 and December 26, 2021, the related consolidated statements of operations, comprehensive income, stockholders' deficit and cash flows for each of the three years in the period ended December 29, 2019 and December 31, 2017,25, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). We have not audited the consolidated balance sheet of the Company as of December 30, 2018, the related consolidated statements of operations, comprehensive income, stockholders’ deficit and cash flows for the year then ended, and the related notes and financial statement schedule listed in the Index at Item 15(a), as it relates to 2018. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2019,25, 2022 and December 26, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2019 and December 31, 2017,25, 2022, in conformity with U.S. generally accepted accounting principles.29, 2019,25, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)Framework), and our report dated February 26, 2020,23, 2023, expressed an unqualified opinion thereon.Adoption of Accounting Standards UpdatesAs discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases, as amended, and changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers, as amended. 64Mattersmattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.Preferred stock and option issuanceDescription of the MatterAs described in Note 8 to the consolidated financial statements, on February 3, 2019, the Company issued 200,000 shares (“Initial Issuance”) of newly designated Series B convertible preferred stock at a price of $1,000 per share (“Preferred Stock”) along with an option to the purchaser to purchase up to an additional 50,000 shares of Preferred Stock (“Option”), which was exercised prior to its maturity. The $200.0 million of cash proceeds from the Initial Issuance was bifurcated between the Option and Preferred Stock at the time of issuance based on a relative fair value allocation approach. Auditing the valuation of the Preferred Stock and Option was complex and required the involvement of specialists due to the judgmental nature of the assumptions (e.g., stock price volatility, maturity, discount of the conversion option) and the fair value model (e.g., lattice-model) used in the measurement process. These assumptions have a significant effect on the fair value measurement of the Option. How We Addressed the Matter in Our AuditWe tested controls related to the measurement and valuation of the Option and Preferred Stock. For example, we tested controls over management’s review of the valuation estimate, the significant valuation assumptions, and the data inputs (e.g., coupon rate, conversion ratio). The procedures included testing controls over management’s evaluation of the assumptions, including reviews of the stock price volatility and the discount rate. Our control testing also considered management’s review over the completeness and accuracy of the underlying data used in evaluating the measurement and valuation of the Option and Preferred Stock.To test the measurement and valuation of the Option and Preferred Stock, our audit procedures included, among others, evaluating the valuation methodology used, the significant assumptions discussed above, and the underlying data used by management. We involved a valuation specialist to assist with these procedures. For example, to evaluate the volatility rate, we recalculated the mathematical accuracy of the lookback period of the Company’s publicly traded equity for the various terms, and, to evaluate the discount rate we calculated a synthetic credit rating using a regression analysis.65Measurement and valuation of reserve for franchisee notes receivableDescription of the MatterAs described in Note 2 and 16 to the consolidated financial statements, the Company has a reserve for franchisee notes receivable of $3.6 million (“Reserve for Franchisee Notes Receivables”) against a gross balance of franchisee notes receivables of $44.4 million at December 29, 2019. The Reserve for Franchisee Notes Receivables is recorded to reduce the outstanding notes receivable to their net realizable values based on a review of each franchisee’s economic performance and market conditions after consideration of the fair value of the Company’s collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees. Auditing the valuation of the Reserve for Franchisee Notes Receivables is challenging due to the judgment inherent in estimating the fair value of the Company’s collateral rights, which has a significant effect on the measurement of the Reserve for Franchisee Notes Receivables. How We Addressed the Matter in Our AuditWe tested management’s controls related to the measurement and valuation of the Reserve for Franchisee Notes Receivables. For example, we tested controls over management’s review of the progression of outstanding notes receivable and the Reserve for Franchisee Notes Receivable and the overall review of the adequacy of the Reserve for Franchisee Notes Receivable. Where judgment was exercised by management, our audit procedures included testing controls over management’s evaluation of the assumptions, including the fair value of the collateral rights and guarantees where collateral was taken or personal guarantee given in connection with issuance of the applicable note. Our control testing also considered management’s review over the completeness and accuracy of the underlying data used in evaluating the measurement and valuation of the Reserve for Franchisee Notes Receivables.To test the measurement and valuation of the Reserve for Franchisee Notes Receivables, our audit procedures included, among others, evaluating the status of collection of scheduled payments for outstanding notes receivables, analyzing unit economics for franchisees to identify indicators of their financial health, evaluating the estimates of collateral value, and the underlying data used by management. For example, to evaluate the estimates of collateral value, we compared management’s estimates to those of recently executed market transactions to understand potential market adjustments within the estimation process. as of December 29, 2019, the Company has $75.2 million accrued for self-insurance reserves (“Insurance Reserves”). The Company is self-insured for certain obligations up to stated retention levels under its retention programs related to workers’ compensation, automobile, property and general liability programs and judgmentsprograms. As of December 25, 2022, the Company has $67.3 million accrued for self-insurance reserves (“Insurance Reserves”). Judgments and estimates are used by the Company in determining the potential value associated with incurred but not reported claims and for events that have occurred but have not been reported. 66wasis highly judgmental and complex due to the significant uncertainty in estimating the potential value of reported claims, estimating the number and potential value of incurred but not reported claims and the use of actuarial valuation methods. The reserve estimate is sensitive to actuarial assumptions (e.g., future emergence of losses, incurred but not reported claims) used to estimate the ultimate liability for reported claims and to estimate the fair value of claims that have been incurred but have not been reported.testingtests of details over the completeness and accuracy of claims data and vouching payments made to third parties. Furthermore, we involved our actuarial specialists to assist in the evaluation of the key assumptions and methodologies used by management to determine the Insurance Reserves./s/ Ernst & Young LLP served as the Company’s auditor consecutively since 2019.Louisville, KentuckyFebruary 26, 202067Report of Independent Registered Public Accounting FirmTo the Stockholders and Board of Directors
Papa John’s International, Inc.:Opinion on the ConsolidatedFinancial StatementsWe have audited the accompanying consolidated balance sheet of Papa John’s International, Inc. and subsidiaries (the Company) as of December 30, 2018, the related consolidated statements of operations, comprehensive income, stockholders’ deficit, and cash flows for the year ended December 30, 2018, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2018, and the results of its operations and its cash flows for the year ended December 30, 2018, in conformity with U.S. generally accepted accounting principles.Change in Accounting PrincipleAs discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers as of January 1, 2018 due to the adoption of Topic 606.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion./s/ KPMG LLPWe served as the Company’s auditor from 2018 tosince 2019.March 8, 2019, except for Notes 2 (third paragraph), 5, and 27, as to which the date is 26, 202068Statements of OperationsNote: The 2018 Consolidated Statement of Operations has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See “Note 2” of “Notes to Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.(In thousands, except per share amounts) December 25,
2022December 26,
2021Assets Current assets: Cash and cash equivalents $ 47,373 $ 70,610 Accounts receivable (less allowance for credit losses of $6,718 in 2022 and $2,364 in 2021) 102,533 81,370 Notes receivable, current portion 6,848 12,352 Income tax receivable 8,780 9,386 Inventories 41,382 34,981 Prepaid expenses and other current assets 44,123 46,310 Total current assets 251,039 255,009 Property and equipment, net 249,793 223,856 Finance lease right-of-use assets, net 24,941 20,907 Operating lease right-of-use assets 172,425 176,256 Notes receivable, less current portion (less allowance for credit losses of $14,499 in 2022 and $1,500 in 2021) 21,248 35,504 Goodwill 70,616 80,632 Deferred income taxes 1,920 5,156 Other assets 72,245 88,384 Total assets $ 864,227 $ 885,704 Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit Current liabilities: Accounts payable $ 62,316 $ 28,092 Income and other taxes payable 8,766 19,996 Accrued expenses and other current liabilities 142,535 190,116 Current deferred revenue 21,272 21,700 Current finance lease liabilities 6,850 4,977 Current operating lease liabilities 23,418 22,543 Total current liabilities 265,157 287,424 Deferred revenue 23,204 13,846 Long-term finance lease liabilities 19,022 16,580 Long-term operating lease liabilities 160,905 160,672 Long-term debt, net 597,069 480,730 Deferred income taxes — 258 Other long-term liabilities 68,317 93,154 Total liabilities 1,133,674 1,052,664 Redeemable noncontrolling interests 1,217 5,498 Stockholders’ deficit: Common stock ($0.01 par value per share; issued 49,138 at December 25, 2022 and 49,002 at December 26, 2021) 491 490 Additional paid-in capital 449,829 445,126 Accumulated other comprehensive loss (10,135) (9,971) Retained earnings 195,856 183,157 Treasury stock (14,402 shares at December 25, 2022 and 13,205 shares at December 26, 2021, at cost) (922,434) (806,472) Total stockholders’ deficit (286,393) (187,670) Noncontrolling interests in subsidiaries 15,729 15,212 Total Stockholders’ deficit (270,664) (172,458) Total Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit $ 864,227 $ 885,704 69Year ended (In thousands, except per share amounts) December 25,
2022December 26,
2021December 27,
2020Revenues: Domestic Company-owned restaurant sales $ 708,389 $ 778,323 $ 700,757 North America franchise royalties and fees 137,399 129,310 96,732 North America commissary revenues 869,634 761,305 680,793 International revenues 129,903 150,771 123,963 Other revenues 256,778 248,712 210,989 Total revenues 2,102,103 2,068,421 1,813,234 Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses 585,307 621,871 563,799 North America commissary expenses 811,446 703,622 630,937 International expenses 76,001 87,286 73,994 Other expenses 238,810 226,320 200,304 General and administrative expenses 217,412 212,265 204,242 Depreciation and amortization 52,032 48,816 49,705 Total costs and expenses 1,981,008 1,900,180 1,722,981 Refranchising and impairment loss (12,065) — — Operating income 109,030 168,241 90,253 Net interest expense (25,261) (17,293) (14,891) Income before income taxes 83,769 150,948 75,362 Income tax expense 14,420 25,993 14,748 Net income before attribution to noncontrolling interests 69,349 124,955 60,614 Net income attributable to noncontrolling interests (1,577) (4,939) (2,682) Net income attributable to the Company $ 67,772 $ 120,016 $ 57,932 Calculation of net income for earnings per share: Net income attributable to the Company $ 67,772 $ 120,016 $ 57,932 Dividends on redemption of Series B Convertible Preferred Stock — (109,852) — Dividends paid to participating securities (306) (6,091) (14,059) Net income attributable to participating securities (104) — (2,136) Net income attributable to common shareholders $ 67,362 $ 4,073 $ 41,737 Basic earnings per common share $ 1.90 $ 0.12 $ 1.29 Diluted earnings per common share $ 1.89 $ 0.12 $ 1.28 Basic weighted average common shares outstanding 35,497 35,007 32,421 Diluted weighted average common shares outstanding 35,717 35,337 32,717 Dividends declared per common share $ 1.54 $ 1.15 $ 0.90 (Loss) IncomeYear Ended (In thousands) December 25,
2022December 26,
2021December 27,
2020Net income before attribution to noncontrolling interests $ 69,349 $ 124,955 $ 60,614 Other comprehensive income (loss), before tax: Foreign currency translation adjustments (4,970) (1,397) 2,344 4,757 6,848 (7,517) Other comprehensive income (loss), before tax (213) 5,451 (5,173) Income tax effect: Foreign currency translation adjustments 1,143 321 (539) (1,094) (1,575) 1,729 Income tax effect 49 (1,254) 1,190 Other comprehensive income (loss), net of tax (164) 4,197 (3,983) Comprehensive income before attribution to noncontrolling interests 69,185 129,152 56,631 Less: comprehensive income, redeemable noncontrolling interests (574) (2,609) (824) Less: comprehensive income, nonredeemable noncontrolling interests (1,003) (2,330) (1,858) Comprehensive income attributable to the Company $ 67,608 $ 124,213 $ 53,949 On June 15, 2018, the Company refranchised 34 Company-owned restaurants and a quality control center located in China. In conjunction with the transaction, approximately $1,300 of accumulated other comprehensive income and $300 associated deferred tax related to foreign currency translation were reversed. See “Note 12” of “Notes to Consolidated Financial Statements” for additional information.(2)Amounts reclassified out of accumulated other comprehensive income (loss)loss into net interest expense included $660, ($22)2,384), ($5,965) and ($421)5,068) for the years ended December 29, 2019,25, 2022, December 30, 201826, 2021 and December 31, 2017,27, 2020, respectively.(3)(2)The income tax effects of amounts reclassified out of accumulated other comprehensive income (loss)loss were ($152), $5$536, $1,342 and $156$1,140 for the years ended December 29, 2019,25, 2022, December 30, 201826, 2021 and December 31, 2017,27, 2020, respectively.(4)As of January 1, 2018, we adopted ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” and reclassified stranded tax effects of approximately $455 to retained earnings in the first quarter of 2018. See “Note 2” of “Notes to Consolidated Financial Statements” for additional information.Note: The 2018 Consolidated Statement of Comprehensive Income has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See “Note 2” of “Notes to Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.70Balance Sheets
Stockholders’ deficitNote: The 2018 Consolidated Balance Sheet has been restated to reflect the consolidationStatements of Papa John’s Marketing Fund, Inc. See “Note 2” of “Notes to Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.See accompanying notes.71Papa John’s International, Inc. (In thousands) Common
Stock
Shares
OutstandingCommon
StockAdditional
Paid-In
CapitalRetained
EarningsTreasury
StockNoncontrolling
Interests in
SubsidiariesTotal
Stockholders’
DeficitBalance at December 29, 2019 31,894 $ 447 $ 219,047 $ (10,185) $ 205,697 $ (747,327) $ 15,665 $ (316,656) — — — — (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) — — — — 57,932 — 1,858 59,790 Other comprehensive loss, net of tax — — — (3,983) — — — (3,983) Cash dividends on common stock — — 141 — (29,503) — — (29,362) Cash dividends on preferred stock — — — — (13,649) — — (13,649) Exercise of stock options 540 6 30,616 — — — — 30,622 Acquisition of Company common stock (32) — — — — (2,701) — (2,701) Stock-based compensation expense — — 16,310 — — — — 16,310 Issuance of restricted stock 119 — (6,922) — — 6,922 — — Tax effect of restricted stock awards — — (3,974) — — — — (3,974) Distributions to noncontrolling interests — — — — — — (2,284) (2,284) Other 24 — (1,115) — (253) 1,382 — 14 Balance at December 27, 2020 32,545 $ 453 $ 254,103 $ (14,168) $ 219,158 $ (741,724) $ 15,239 $ (266,939) — — — — 120,016 — 2,330 122,346 Other comprehensive income, net of tax — — — 4,197 — — — 4,197 Repurchase and conversion of Series B Convertible Preferred Stock 3,489 35 174,631 — (110,498) — — 64,168 Cash dividends on common stock — — 158 — (40,514) — — (40,356) Cash dividends on preferred stock — — — — (4,121) — — (4,121) Exercise of stock options 212 2 11,967 — — — — 11,969 Acquisition of Company common stock (594) — — — — (72,499) — (72,499) Stock-based compensation expense — — 16,919 — — — — 16,919 Issuance of restricted stock 132 — (6,970) — — 6,970 — — Tax effect of restricted stock awards — — (5,847) — — — — (5,847) Distributions to noncontrolling interests — — — — — — (2,357) (2,357) Other 13 — 165 — (884) 781 — 62 Balance at December 26, 2021 35,797 $ 490 $ 445,126 $ (9,971) $ 183,157 $ (806,472) $ 15,212 $ (172,458) (Deficit) EquityPapa John’s International, Inc. (In thousands) Common
Stock
Shares
OutstandingCommon
StockAdditional
Paid-In
CapitalRetained
EarningsTreasury
StockNoncontrolling
Interests in
SubsidiariesTotal
Stockholders’
DeficitBalance at December 26, 2021 35,797 $ 490 $ 445,126 $ (9,971) $ 183,157 $ (806,472) $ 15,212 $ (172,458) — — — — 67,772 — 1,003 68,775 Other comprehensive income, net of tax — — — (164) — — — (164) Cash dividends on common stock — — 210 — (54,977) — — (54,767) Exercise of stock options 82 1 4,035 — — — — 4,036 Acquisition of Company common stock (1,343) — — — — (125,000) — (125,000) Stock-based compensation expense — — 18,388 — — — — 18,388 Issuance of restricted stock 285 — (8,443) — — 8,443 — — Tax effect of restricted stock awards (94) — (9,546) — — — — (9,546) Distributions to noncontrolling interests — — — — — — (486) (486) Other 9 — 59 — (96) 595 — 558 Balance at December 25, 2022 34,736 $ 491 $ 449,829 $ (10,135) $ 195,856 $ (922,434) $ 15,729 $ (270,664)
72
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ (Deficit) Equity (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Papa John’s International, Inc. | | | | | | | |||||||||||||||
|
| Common |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| |
| Total | ||
| | Stock | | | | | Additional | | Other | | | | | | | | Noncontrolling | | Stockholders’ | ||||
| | Shares | | Common | | Paid-In | | Comprehensive | | Retained | | Treasury | | Interests in | | (Deficit) | |||||||
(In thousands) | | Outstanding | | Stock | | Capital | | Loss | | Earnings | | Stock | | Subsidiaries | | Equity | |||||||
Balance at December 30, 2018 (Restated) |
| 31,372 | | $ | 443 | | $ | 192,984 | | $ | (3,143) | | $ | 242,182 | | $ | (751,704) | | $ | 15,225 | | $ | (304,013) |
Net income (1) |
| — | |
| — | |
| — | |
| — | |
| 4,866 | |
| — | |
| 1,310 | |
| 6,176 |
Other comprehensive loss |
| — | |
| — | |
| — | |
| (7,042) | |
| — | |
| — | |
| — | |
| (7,042) |
Cash dividends on common stock | | — | | | — | | | 209 | | | — | | | (28,761) | | | — | | | — | | | (28,552) |
Cash dividends on preferred stock |
| — | |
| — | |
| — | |
| — | |
| (10,020) | |
| — | |
| — | |
| (10,020) |
Dividends declared on preferred stock | | — | | | — | | | — | | | — | | | (2,273) | | | — | | | — | | | (2,273) |
Exercise of stock options |
| 447 | |
| 4 | |
| 16,006 | |
| — | |
| — | |
| — | |
| — | |
| 16,010 |
Stock-based compensation expense |
| — | |
| — | |
| 15,303 | |
| — | |
| — | |
| — | |
| — | |
| 15,303 |
Issuance of restricted stock |
| 63 | |
| — | |
| (3,681) | |
| — | |
| — | |
| 3,681 | |
| — | |
| — |
Tax effect of restricted stock awards |
| — | |
| — | |
| (1,433) | |
| — | |
| — | |
| — | |
| — | |
| (1,433) |
Distributions to noncontrolling interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (870) | |
| (870) |
Other |
| 12 | |
| — | |
| (341) | |
| — | |
| (297) | |
| 696 | |
| — | |
| 58 |
Balance at December 29, 2019 |
| 31,894 | | $ | 447 | | $ | 219,047 | | $ | (10,185) | | $ | 205,697 | | $ | (747,327) | | $ | 15,665 | | $ | (316,656) |
(1)Net income to the Company | ||
(2) | As of | ||
(3)At December 25, 2022, the accumulated other comprehensive loss of $10,135 was comprised of net unrealized foreign currency translation loss of $8,696 and a net unrealized loss on the interest rate swap agreements of $1,439. At December 26, 2021, the accumulated other comprehensive loss of $9,971 was comprised of net unrealized foreign currency translation loss of $4,869 and a net unrealized loss on the interest rate swap agreements of $5,102. At December 27, 2020, the accumulated other comprehensive loss of $14,168 was comprised of net unrealized foreign currency translation loss of $3,793 and a net unrealized loss on the interest rate swap agreements of $10,375. | |||
At December 31, 2017, the accumulated other comprehensive loss of $2,117 was comprised of net unrealized foreign currency translation loss of $2,523 and a net unrealized gain on the interest rate swap agreements of $406.
At December 30, 2018, the accumulated other comprehensive loss of $3,143 was comprised of net unrealized foreign currency translation loss of $6,859 and a net unrealized gain on the interest rate swap agreements of $3,716.
At December 29, 2019, the accumulated other comprehensive loss of $10,185 was comprised of net unrealized foreign currency translation loss of $5,598 and a net unrealized loss on the interest rate swap agreements of $4,587.
Note: The 2018 Consolidated Statement of Stockholders’ (Deficit) Equity has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See “Note 2” of “Notes to Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.
73
| | | | | | | | | | |
| | Year ended |
| |||||||
| | December 29, |
| December 30, |
| December 31, |
| |||
(In thousands) |
| 2019 | | 2018 | | 2017 |
| |||
| | | | | (Note) | | | | | |
Operating activities | | | | | | | | | | |
Net income before attribution to noncontrolling interests | | $ | 5,657 | | $ | 4,073 | | $ | 106,525 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Provision for uncollectible accounts and notes receivable | |
| 3,139 | |
| 6,849 | |
| 29 | |
Depreciation and amortization | |
| 47,281 | |
| 46,403 | |
| 43,668 | |
Deferred income taxes | |
| (3,764) | |
| 1,620 | |
| 498 | |
Preferred stock option mark-to-market adjustment | | | 5,914 | | | — | | | — | |
Stock-based compensation expense | |
| 15,303 | |
| 9,936 | |
| 10,413 | |
(Gain) loss on refranchising | | | (4,739) | | | 289 | | | — | |
Impairment loss | | | — | | | — | | | 1,674 | |
Other | |
| 3,203 | |
| 5,677 | |
| 3,375 | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | |
| (5,329) | |
| 2,157 | |
| (7,358) | |
Income tax receivable | | | 12,122 | | | (12,157) | | | (1,531) | |
Inventories | |
| (326) | |
| 3,093 | |
| (5,485) | |
Prepaid expenses | |
| 792 | |
| (1,039) | |
| (4,414) | |
Other current assets | |
| (277) | |
| 4,834 | |
| (1,158) | |
Other assets and liabilities | |
| (6,354) | |
| 1,464 | |
| (742) | |
Accounts payable | |
| 2,035 | |
| (400) | |
| (8,743) | |
Income and other taxes payable | |
| 1,009 | |
| (3,971) | |
| 1,897 | |
Accrued expenses and other current liabilities | |
| (11,331) | |
| 21,753 | |
| (3,012) | |
Deferred revenue | |
| (2,586) | |
| 1,873 | |
| (661) | |
Net cash provided by operating activities | |
| 61,749 | |
| 92,454 | |
| 134,975 | |
Investing activities | | | | | | | | | | |
Purchases of property and equipment | |
| (37,711) | |
| (42,028) | |
| (52,593) | |
Loans issued | |
| (15,864) | |
| (10,463) | |
| (8,103) | |
Repayments of loans issued | |
| 5,616 | |
| 5,805 | |
| 4,185 | |
Acquisitions, net of cash acquired | |
| — | |
| — | |
| (21) | |
Proceeds from divestitures of restaurants | |
| 13,495 | |
| 7,707 | |
| — | |
Other | |
| 1,889 | |
| 180 | |
| 34 | |
Net cash used in investing activities | |
| (32,575) | |
| (38,799) | |
| (56,498) | |
Financing activities | | | | | | | | | | |
Proceeds from issuance of preferred stock | | | 252,530 | | | — | | | — | |
Issuance costs associated with preferred stock | | | (7,527) | | | — | | | — | |
Proceeds from issuance of term loan | | | — | | | — | | | 400,000 | |
Repayments of term loan | | | (15,000) | | | (20,000) | | | (5,000) | |
Net (repayments) proceeds of revolving credit facilities | |
| (240,026) | |
| 163,585 | |
| (225,575) | |
Debt issuance costs | | | — | | | (1,913) | | | (3,181) | |
Dividends paid to common stockholders | | | (28,552) | | | (28,985) | | | (30,720) | |
Dividends paid to preferred stockholders | |
| (10,020) | |
| — | |
| — | |
Tax payments for equity award issuances | |
| (1,433) | |
| (1,521) | |
| (2,428) | |
Proceeds from exercise of stock options | |
| 16,010 | |
| 2,699 | |
| 6,260 | |
Acquisition of Company common stock | |
| — | |
| (158,049) | |
| (209,586) | |
Contributions from noncontrolling interest holders | |
| 840 | |
| — | |
| 2,956 | |
Distributions to noncontrolling interest holders | |
| (870) | |
| (4,269) | |
| (5,449) | |
Other | |
| (526) | |
| 356 | |
| 663 | |
Net cash used in financing activities | |
| (34,574) | |
| (48,097) | |
| (72,060) | |
Effect of exchange rate changes on cash and cash equivalents | |
| 53 | |
| (191) | |
| 365 | |
Change in cash and cash equivalents | |
| (5,347) | |
| 5,367 | |
| 6,782 | |
Cash and cash equivalents at beginning of period | |
| 33,258 | |
| 27,891 | |
| 15,563 | |
Cash and cash equivalents at end of period | | $ | 27,911 | | $ | 33,258 | | $ | 22,345 | |
Note: The 2018 Consolidated Statement of Cash Flows has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See “Note 2” of “Notes to Consolidated Financial Statements” under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.
Year ended (In thousands) December 25,
2022December 26,
2021December 27,
2020Operating activities Net income before attribution to noncontrolling interests $ 69,349 $ 124,955 $ 60,614 Adjustments to reconcile net income to net cash provided by operating activities: Provision (benefit) for allowance for credit losses on accounts and notes receivable 20,539 (852) (4,734) Depreciation and amortization 52,032 48,816 49,705 Refranchising and impairment loss 12,065 — — Deferred income taxes 2,798 3,753 (9,268) Stock-based compensation expense 18,388 16,919 16,310 Other 1,056 581 2,257 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (29,167) 4,023 (22,420) Income tax receivable 586 (8,113) 3,760 Inventories (7,496) (4,708) (2,736) Prepaid expenses and other current assets 5,587 2,866 2,884 Other assets and liabilities (13,458) (20,077) 20,879 Accounts payable (8,350) (9,278) 8,229 Income and other taxes payable (10,710) 9,733 2,664 Accrued expenses and other current liabilities 4,846 15,875 59,353 Deferred revenue (257) 182 (1,058) Net cash provided by operating activities 117,808 184,675 186,439 Investing activities Purchases of property and equipment (78,391) (68,559) (35,652) Notes issued (9,296) (16,132) (16,589) Repayments of notes issued 13,045 18,555 11,154 Acquisitions, net of cash acquired (1,219) (699) — Proceeds from refranchising, net of cash transferred 13,588 — — Other (520) 3,323 16 Net cash used in investing activities (62,793) (63,512) (41,071) Financing activities Proceeds from issuance of senior notes — 400,000 — Net proceeds of revolving credit facilities 115,000 80,000 — Debt issuance costs — (9,179) — Proceeds from exercise of stock options 4,036 11,969 30,622 Repurchase of Series B Convertible Preferred Stock — (188,647) — Acquisition of Company common stock (125,000) (72,499) (2,701) Dividends paid to common stockholders (54,767) (40,356) (29,362) Dividends paid to preferred stockholders — (6,394) (13,649) Tax payments for equity award issuances (9,546) (5,847) (3,974) Distributions to noncontrolling interests (1,211) (5,942) (2,420) Repayments of term loan — (340,000) (20,000) Other (4,752) (3,631) (1,977) Net cash used in financing activities (76,240) (180,526) (43,461) Effect of exchange rate changes on cash and cash equivalents (2,012) (231) 386 Change in cash and cash equivalents (23,237) (59,594) 102,293 Cash and cash equivalents at beginning of period 70,610 130,204 27,911 Cash and cash equivalents at end of period $ 47,373 $ 70,610 $ 130,204
74
Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s”John’s,” “Papa Johns” or in the first person notations of “we,” “us” and “our”), operates and franchises pizza delivery and carryout restaurants under the trademark “Papa John’s,” in 49 48countries and territories as of December 29, 2019. Substantially all25, 2022. Our revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties and sales of franchise and development rights, and sales to franchisees of food and paper products, printing and promotional items and information systems equipment, and software and related services used in their operations.
services. We generate revenues from the operation of our Quality Control Centers (“QC Centers”) which supply pizza sauce, dough, food products, paper products, smallwares and cleaning supplies to restaurants. We also derive revenue from contributions received into our national marketing funds.
Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction
Papa John’s domesticDomestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation that is designed to break evenoperate 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 domesticDomestic restaurants, of which approximately 80%85 percent are franchised.
During the first quarterfranchised, and does not have sufficient equity to fund its operations without these ongoing financial contributions. Based on an assessment of 2019, the Company reassessed the governance structure and operating procedures of PJMF, andthe Company determined that the Companyit has the power to control certain significant activities of PJMF, as defined byand therefore, is the primary beneficiary. The Company has consolidated PJMF in its financial results in accordance with Accounting Standards Codification (“ASC”) 810, (“ASC 810”), Consolidations“Consolidation. Therefore, the Company is the primary beneficiary of PJMF, and per ASC 810, must consolidate the VIE. Prior to 2019, the Company did not consolidate PJMF despite having power to control certain significant activities of PJMF. The Company has concluded the previous conclusion to not consolidate PJMF was an immaterial error and the Company has corrected this immaterial error by restating the 2018 consolidated financial statements and related notes included herein to include PJMF. See Note 27 for the immaterial impacts of this error correction in fiscal year 2018. Fiscal year 2017 was not restated, as consolidating PJMF was not material to the results of operations.
”
75
Revenue Recognition
The Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”), in the first quarterTable of 2018. Prior year revenue recognition follows ASC Topic 605, “Revenue Recognition.”
Dough reward expires.
76
The Company offers various incentive programs for franchisees including royalty incentives, new restaurant opening incentives (i.e. development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned or granted under these programs that are in the form of discounts.
Commissary Sales
Commissary salesrevenues are comprised of food and supplies sold to franchised restaurants and are recognized as revenue upon shipment of the related products to the franchisees. Payments are generally due within 30 days.
As noted above, thereThere are various incentive programs available to franchisees related to new restaurant openings including discounts on initial commissary orders and new store equipment incentives, at substantially no cost to franchisees. Commissary salesrevenues are reduced to reflect incentives in the form of direct discounts on initial commissary orders. The new store equipment incentive is also recorded as a reduction of commissary sales over the term of the incentive agreement, which is generally three to five years.
Fees for information services, including software maintenance fees, help desk fees and online ordering fees are recognized as revenue as such services are provided and are included in other revenue.
Revenues for printing, promotional items, and direct mail marketing services are recognized upon shipment of the related products to franchisees and other customers. Direct mail advertising discounts are also periodically offered by our Preferred Marketing Solutions subsidiary. Other revenues are reduced to reflect these advertising discounts.
Rental income, primarily derived from properties leased by the Company and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms, in accordance with ASC Topic 842, “Leases”, similar to previous guidance.
For periods prior to the adoption of Topic 606, the revenues
77
Operations.
As further described in Recent Accounting Pronouncements and Note 3, the Company adopted ASU 2016-02 “Leases (Topic 842)” in the first quarter of 2019.
determined to be spring-loaded.
See Recent Accounting Pronouncements for information on the impact of the adoption effective December 30, 2019, of the new credit loss accounting guidance, ASU 2016-13, “Credit Losses”.
78
reservean allowance for credit losses for franchisee notes receivables to reduce the outstanding notes receivable to their net realizable values based on a review of each franchisee’s economic performance and market conditions after consideration of the fair value of our underlying collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees. Note balances are charged off against the allowance after recovery efforts have ceased.
See Recent Accounting Pronouncements for information
Operations.
2021 and $46.6 million in 2020.
Deferred Income Tax Accounts and Tax Reserves
79
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.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, significantly decreasing the U.S. federal income tax rate for corporations effective January 1, 2018. On that same date, the Securities and Exchange Commission staff also issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, “Income Taxes.” As a result, we remeasured our deferred tax assets, liabilities and related valuation allowances in 2017. This remeasurement yielded a 2017 benefit of approximately $7.0 million due to the lower income tax rate. See Note 20 for additional information. Our net deferred income tax liability was approximately $800,000 at December 29, 2019.
We recognize all derivatives on the balance sheet at fair value. At inception and on an ongoing basis, we assess whether each derivative that qualifies for hedge accounting continues to be highly effective in offsetting changes in the cash flows of the hedged item. If the derivative meets the hedge criteria as defined by certain accounting standards, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income/(loss) until the hedged item is recognized in earnings.
In April 2019, we reduced2021, our interest rate swaps were de-designated as cash flow hedges following the notional valueissuance of our swaps by $50.0 millionthe Notes (as defined in “Note 12. Debt”) and remained undesignated as a resulthedges through June 26, 2022. For
Wederivative instruments previously recognized (loss) income of ($10.8) million (($8.3) million after tax) in 2019, $4.3 million ($3.2 million after tax) in 2018, and $1.4 million ($0.9 million after tax) in 2017 inaccumulated other comprehensive (loss)/income forloss (“AOCL”) will be reclassified into earnings as adjustments to interest expense on a straight-line basis over the net changeremaining life of the originally hedged transactions.
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Noncontrolling Interests
At
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See Notes 11 and 12 “Note 9. Noncontrolling Interests”for additional information regarding noncontrolling interests and divestitures.
interests.
Revenue from Contracts with Customers
In May 2014,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “RevenueASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying guidance on contract modifications and hedge accounting related to the expected market transition from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognitionLIBOR and other interbank offered rates to alternative reference rates if certain criteria are met. This guidance under GAAP, including industry-specific requirements,was effective beginning on March 12, 2020, and provides companies with a single revenue recognition frameworkamendments could be applied prospectively through December 31, 2022. The hedge accounting expedients may be applied, on an individual hedging relationship basis, to eligible hedge accounting relationships that existed as of the beginning of the effective date of this guidance, and to new eligible hedging relationships entered into after the effective date of this guidance; however, those expedients generally could not be applied to hedging relationships for recognizing revenue from contracts with customers. In March and April 2016, theperiods after December 31, 2022. The FASB issued additional amendments to Topic 606.This update and subsequently issued amendments require companies to recognize revenue at amounts that reflect the consideration to which the companies expect to be entitled in exchange for those goods or services at the time of transfer. Topic 606 requires that we assess contracts to determine each separate and distinct performance obligation. If a contract has multiple performance obligations, we allocate the transaction price using our best estimateASU 2022-06, “Deferral of the standalone selling priceSunset Date of Topic 848,” which deferred the sunset date from December 31, 2022 to each distinct good or service in the contract.
December 31, 2024. The Company adopted Topic 606 ascertain optional hedge accounting expedients provided by ASU 2020-04 during fiscal 2020. The adoption of January 1, 2018 underthis guidance did not have a material impact on the modified retrospective transition method.
Certain Tax Effects from Accumulated Other Comprehensive Income (Loss)
In February 2018, the FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): ReclassificationCompany’s consolidated financial position, results of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”)” (“ASU 2018-02”), which allows for an entity to reclassify disproportionate income tax in AOCI caused by the Tax Act to retained earnings. The guidance was effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company adopted ASU 2018-02 in the first quarter of 2018 by electing tooperations, or cash flows.
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reclassify the income tax effects from AOCI to retained earnings. The impact of the adoption was not material to our Consolidated Financial Statements.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”), which amends leasing guidance by requiring companies to recognize a right-of-use asset and a lease liability for all operating and financing leases with lease terms greater than twelve months. The lease liability is equal to the present value of lease payments. The right-of-use lease asset is based on the lease liability, subject to adjustment for prepaid and deferred rent and tenant incentives. For income statement purposes, leases will continue to be classified as operating or financing with lease expense in both cases calculated substantially the same as under the prior leasing guidance.
The Company adopted Topic 842 as of December 31, 2018 (the first day of fiscal 2019) under the modified retrospective transition method. See Notes 3 and 4 for additional information.
Accounting Standards to be Adopted in Future Periods
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected versus incurred losses for financial assets held. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. We will adopt the standard effective December 30, 2019. The Company is finalizing its assessment of the impact of adopting this standard on our consolidated financial statements. We do not expect the adoption of ASU 2016-13 to result in a material change to our consolidated financial statements.
The Company adopted ASU 2016-02 “Leases(Topic 842)” along with related clarifications and improvements effective at the beginning of fiscal 2019, using the modified retrospective transition method. There was no cumulative-effect adjustment to the Company's Consolidated Balance Sheet as of December 31, 2018. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Under the new guidance, right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease terms at the commencement dates. The Company uses its incremental borrowing rates as the discount rate for its leases, which is equal to the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. We have elected to use the portfolio approach in determining our incremental borrowing rate. The incremental borrowing rate for all existing leases as of the opening balance sheet date was based upon the remaining terms of the leases; the incremental borrowing rate for all new or amended leases is based upon the lease terms. The lease terms for all the Company’s leases include the contractually obligated period of the leases, plus any additional periods covered by Company options to extend the leases that the Company is reasonably certain to exercise.
The Company has elected the package of practical expedients permitted under the transition guidance, which among other things, allows us to carryforward our prior lease classifications under ASC 840, “Leases (Topic 840)”. We elected to combine lease and non-lease components and have not elected the hindsight practical expedient. Based upon the practical
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expedient election, leases with an initial term of 12 months or less, but greater than one month, will not be recorded on the balance sheet for select asset classes.
Adoption of Topic 842 did not have a material impact on our operating results or cash flows. Operating lease expense is recognized on a straight-line basis over the lease term and is included in Operating costs or General and administrative expenses. Variable lease payments are expensed as incurred.
The effects of the changes made to the Company’s Consolidated Balance Sheet as of December 31, 2018 (the first day of fiscal 2019) for the adoption of Topic 842 are as follows (in thousands):
| | | | | | | | |
| | Balance at | | Adjustments due to Topic 842 | | | | Balance at |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Prepaid expenses | $ | 30,376 | $ | (4,669) | | (a) | $ | 25,707 |
Other assets: | | | | | | | | |
Operating lease right-of-use assets | | - | | 161,027 | | (b) | | 161,027 |
Liabilities and stockholders' deficit | | | | | | | | |
Current liabilities: | | | | | | | | |
Current operating lease liabilities | | - | | 25,348 | | (c) | | 25,348 |
Long-term liabilities: | | | | | | | | |
Long-term operating lease liabilities | | - | | 137,511 | | (d) | | 137,511 |
Other long-term liabilities | | 79,324 | | (6,501) | | (e) | | 72,823 |
Changes in lessor accounting under the new standard did not have a significant financial impact on the recognition of rental income.
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4. Leases
The Company has significant leases that include most domestic Company-owned restaurant and commissary locations. Other domesticDomestic leases include tractor and trailer leases used by our distribution subsidiary as well as commissary equipment. Additionally, the Company leases a significant number of restaurants within the United Kingdom;Kingdom (“UK”); these restaurants are then subleased to the franchisees. The Company’s leases have terms as follows:
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Domestic Company-owned restaurants | Five years, plus at least | |||||||
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Domestic commissary locations | 10 years, plus at least | |||||||
Domestic and | Five to seven years | |||||||
Domestic and | Three to five years | |||||||
All leases entered into prior to the adoption of ASC 842 were classified as operating leases. During 2019, the Company entered into new domestic tractor and trailer leases. These leases were classified as finance leases and were included in the Finance lease right-of-use assets, net, Current finance lease liabilities, and Long-term finance lease liabilities captions on the Company’s Consolidated Balance Sheet.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in Operating costs or General and administrative expenses. Variable lease payments are expensed as incurred.
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| | | | December 29, | | | December 31, |
Leases | Classification | | | 2019 | | | 2018 |
Assets | | | | | | | |
Finance lease assets, net | Finance lease right-of-use assets, net | | $ | 9,383 | | $ | — |
Operating lease assets, net | Operating lease right-of-use assets | | | 148,229 | | | 161,027 |
Total lease assets | | | $ | 157,612 | | $ | 161,027 |
Liabilities | | | | | | | |
Current finance lease liabilities | Current finance lease liabilities | | $ | 1,789 | | $ | — |
Current operating lease liabilities | Current operating lease liabilities | | | 23,226 | | | 25,348 |
Noncurrent finance lease liabilities | Long-term finance lease liabilities | | | 7,629 | | | — |
Noncurrent operating lease liabilities | Long-term operating lease liabilities | | | 125,297 | | | 137,511 |
Total lease liabilities | | | $ | 157,941 | | $ | 162,859 |
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| Leases | Classification | December 25, 2022 | December 26, 2021 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Finance lease assets, net | Finance lease right-of-use assets, net | $ | 24,941 | $ | 20,907 | |||||||||||||||
| Operating lease assets, net | Operating lease right-of-use assets | 172,425 | 176,256 | |||||||||||||||||
| Total lease assets | $ | 197,366 | $ | 197,163 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current finance lease liabilities | Current finance lease liabilities | $ | 6,850 | $ | 4,977 | |||||||||||||||
| Current operating lease liabilities | Current operating lease liabilities | 23,418 | 22,543 | |||||||||||||||||
| Noncurrent finance lease liabilities | Long-term finance lease liabilities | 19,022 | 16,580 | |||||||||||||||||
| Noncurrent operating lease liabilities | Long-term operating lease liabilities | 160,905 | 160,672 | |||||||||||||||||
| Total lease liabilities | $ | 210,195 | $ | 204,772 | ||||||||||||||||
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(in thousands) | | | December 29, 2019 |
Finance lease: | | | |
Amortization of right-of-use assets | | $ | 815 |
Interest on lease liabilities | | | 251 |
Operating lease: | | | |
Operating lease cost | | | 42,487 |
Short-term lease cost | | | 2,704 |
Variable lease cost | | | 9,558 |
Total lease costs | | $ | 55,815 |
Sublease income | | | (10,879) |
Total lease costs, net of sublease income | | $ | 44,936 |
follows (in thousands):
| Year Ended December 25, 2022 | Year Ended December 26, 2021 | Year Ended December 27, 2020 | ||||||||||||||||||
| Finance lease: | ||||||||||||||||||||
| Amortization of right-of-use assets | $ | 5,704 | $ | 4,980 | $ | 2,342 | ||||||||||||||
| Interest on lease liabilities | 1,029 | 1,140 | 606 | |||||||||||||||||
| Operating lease: | ||||||||||||||||||||
| Operating lease cost | 42,815 | 43,072 | 40,026 | |||||||||||||||||
| Short-term lease cost | 4,171 | 2,032 | 3,960 | |||||||||||||||||
| Variable lease cost | 9,129 | 8,572 | 6,503 | |||||||||||||||||
| Total lease costs | 62,848 | 59,796 | 53,437 | |||||||||||||||||
| Sublease income | (11,654) | (12,039) | (10,407) | |||||||||||||||||
| Total lease costs, net of sublease income | $ | 51,194 | $ | 47,757 | $ | 43,030 | ||||||||||||||
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Fiscal Year | | Finance | | Operating | | Expected | |||
2020 | | $ | 2,323 | | $ | 32,809 | | $ | 9,412 |
2021 | | | 2,323 | | | 32,636 | | | 9,109 |
2022 | | | 2,323 | | | 27,325 | | | 8,752 |
2023 | | | 2,323 | | | 21,783 | | | 8,446 |
2024 | | | 1,507 | | | 17,438 | | | 8,168 |
Thereafter | | | 55 | | | 61,629 | | | 44,364 |
Total future minimum lease payments | | | 10,854 | | | 193,620 | | | 88,251 |
Less imputed interest | | | (1,436) | | | (45,097) | | | — |
Total present value of Lease Liabilities | | $ | 9,418 | | $ | 148,523 | | $ | 88,251 |
Future minimum lease payments and sublease income under contractually-obligated leases as of December 30, 201825, 2022 were as follows (in thousands):
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Fiscal Year | | Operating | | Expected | ||
2019 | | $ | 40,834 | | $ | 8,079 |
2020 | | | 36,631 | | | 8,061 |
2021 | | | 31,159 | | | 7,818 |
2022 | | | 25,188 | | | 7,462 |
2023 | | | 18,694 | | | 7,182 |
Thereafter | | | 57,304 | | | 42,518 |
Total future minimum lease payments | | $ | 209,810 | | $ | 81,120 |
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| Fiscal Year | Finance Lease Costs | Operating Lease Costs | Expected Sublease Income | |||||||||||||||||
| 2023 | $ | 7,849 | $ | 32,860 | $ | 10,303 | ||||||||||||||
| 2024 | 6,801 | 32,267 | 10,371 | |||||||||||||||||
| 2025 | 5,171 | 30,695 | 9,952 | |||||||||||||||||
| 2026 | 4,125 | 26,973 | 9,251 | |||||||||||||||||
| 2027 | 2,971 | 21,568 | 8,523 | |||||||||||||||||
| Thereafter | 1,440 | 92,002 | 42,089 | |||||||||||||||||
| Total future minimum lease payments | 28,357 | 236,365 | 90,489 | |||||||||||||||||
| Less imputed interest | (2,485) | (52,042) | — | |||||||||||||||||
| Total present value of lease liabilities | $ | 25,872 | $ | 184,323 | $ | 90,489 | ||||||||||||||
Supplemental
| (Dollars in thousands) | Year Ended | |||||||||||||||||||
| December 25, 2022 | December 26, 2021 | December 27, 2020 | ||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||
| Operating cash flows from finance leases | $ | 1,029 | $ | 1,140 | $ | 606 | ||||||||||||||
| Financing cash flows from finance leases | $ | 5,416 | $ | 4,566 | $ | 2,139 | ||||||||||||||
Operating cash flows from operating leases (a) | $ | 35,573 | $ | 38,530 | $ | 37,113 | ||||||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 9,875 | $ | 9,486 | $ | 9,152 | ||||||||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities (b) | $ | 53,869 | $ | 64,420 | $ | 30,266 | ||||||||||||||
| Cash received from sublease income | $ | 10,847 | $ | 11,597 | $ | 10,545 | ||||||||||||||
| Weighted-average remaining lease term (in years): | ||||||||||||||||||||
| Finance leases | 4.43 | 4.51 | 4.71 | |||||||||||||||||
| Operating leases | 8.44 | 8.30 | 7.00 | |||||||||||||||||
| Weighted-average discount rate: | ||||||||||||||||||||
| Finance leases | 4.59% | 5.08% | 5.34% | |||||||||||||||||
| Operating leases | 5.63% | 6.20% | 6.65% | |||||||||||||||||
25, 2021 associated with the lease commencement of our Atlanta, Georgia corporate office.
| | |
| | Year Ended |
(in thousands, except for weighted-average amounts) | | December 29, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from finance leases | $ | 269 |
Financing cash flows from finance leases | | 781 |
Operating cash flows from operating leases (a) | | 40,152 |
Right-of-use assets obtained in exchange for new finance lease liabilities | | 10,199 |
Right-of-use assets obtained in exchange for new operating lease liabilities | | 20,903 |
Cash received from sublease income | | 10,139 |
| | |
Weighted-average remaining lease term (in years): | | |
Finance leases | | 4.75 |
Operating leases | | 7.00 |
Weighted-average discount rate: | | |
Finance leases | | 6.38% |
Operating leases | | 6.94% |
| | |
(a) Included within the change in Other assets and liabilities within the Consolidated Statement of Cash Flows offset by non-cash operating lease asset amortization and liability accretion. | ||
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PJMF also has a wholly-owned subsidiary, Papa Card, Inc., which administers the Company’s gift card programs.
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| | December 29, | | December 30, | | | ||
| | 2019 | | 2018 | | | ||
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Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 4,569 | | $ | 13,790 | | |
Accounts receivable, net | | | 11,196 | | | 10,264 | | |
Income tax receivable | | | 103 | | | 73 | | |
Prepaid expenses | | | 1,316 | | | 441 | | |
Other current assets | | | - | | | 1 | | |
Total current assets | | | 17,184 | | | 24,569 | | |
Deferred income taxes, net | | | 410 | | | 381 | | |
Total assets | | $ | 17,594 | | $ | 24,950 | | |
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| | | | | | | | |
Liabilities | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 764 | | $ | 20 | | |
Accrued expenses and other current liabilities | | | 14,287 | | | 23,455 | | |
Deferred revenue current | | | 3,252 | | | 3,579 | | |
Debt | | | - | | | 9 | | |
Total current liabilities | | | 18,303 | | | 27,063 | | |
Deferred revenue | | | 2,094 | | | 2,571 | | |
Total liabilities | | $ | 20,397 | | $ | 29,634 | | |
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| December 25, 2022 | December 26, 2021 | |||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 17,174 | $ | 24,481 | ||||||||||
| Accounts receivable, net | 14,780 | 14,150 | ||||||||||||
| Income tax receivable | — | 300 | ||||||||||||
| Prepaid expenses and other current assets | 1,815 | 1,718 | ||||||||||||
| Total current assets | 33,769 | 40,649 | ||||||||||||
| Deferred income taxes | 655 | 614 | ||||||||||||
| Total assets | $ | 34,424 | $ | 41,263 | ||||||||||
| Liabilities | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 12,428 | $ | 140 | ||||||||||
| Income and other taxes payable | 8 | 2 | ||||||||||||
| Accrued expenses and other current liabilities | 17,928 | 40,154 | ||||||||||||
| Current deferred revenue | 4,395 | 4,317 | ||||||||||||
| Total current liabilities | 34,759 | 44,613 | ||||||||||||
| Deferred revenue | 2,503 | 2,478 | ||||||||||||
| Total liabilities | $ | 37,262 | $ | 47,091 | ||||||||||
6.5. Revenue Recognition
Adoption of Topic 606
The Company adopted Topic 606 in the first quarter of 2018 with an adjustment to retained earnings to reflect the cumulative impact of adoption. The correction of the immaterial error regarding the consolidation of PJMF impacted the cumulative adjustment from adoption as follows:
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| | January 1, 2018 | ||||
(In thousands) | | As Reported | | As Restated | ||
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Cumulative effect of adoption of Topic 606 | | $ | (21,527) | | $ | (24,359) |
The change to the cumulative effect of adoption on retained earnings is the result of the consolidation of PJMF in the Company’s consolidated financial statements effective as of the first quarter of 2018, as discussed in more detail in Note 2. This included a change in the timing of breakage revenue and commission expense recognition under Topic 606.
The adoption of the new guidance changed the reporting of contributions made to PJMF from franchisees and the related advertising fund expenditures, which were not previously included in the Consolidated Statements of Operations. The new guidance requires these advertising fund contributions and expenditures to be reported on a gross basis in the Consolidated Statements of Operations.
revenue.
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| | Contract Liabilities | |||||||
| | | December 29, 2019 | | | December 30, 2018 | | | Change |
Deferred revenue | | $ | 20,346 | | $ | 23,272 | | $ | (2,926) |
Customer loyalty program | | | 12,049 | | | 18,019 | | | (5,970) |
Total contract liabilities | | $ | 32,395 | | $ | 41,291 | | $ | (8,896) |
| Contract Liabilities | ||||||||||||||||||||
| December 25, 2022 | December 26, 2021 | Change | ||||||||||||||||||
| Franchise fees and unredeemed gift card liabilities | $ | 30,710 | $ | 20,410 | $ | 10,300 | ||||||||||||||
| Customer loyalty program obligations | 13,766 | 15,136 | (1,370) | |||||||||||||||||
| Total contract liabilities | $ | 44,476 | $ | 35,546 | $ | 8,930 | ||||||||||||||
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| | | | | | | | | | | | | | | | | | | | | |
| | | Performance Obligations by Period | ||||||||||||||||||
| | Less than 1 Year | | 1-2 Years | | 2-3 Years | | 3-4 Years | | 4-5 Years | | Thereafter | | Total | |||||||
Franchise fees | | $ | 2,372 | | $ | 2,174 | | $ | 1,966 | | $ | 1,681 | | $ | 1,433 | | $ | 3,456 | | $ | 13,082 |
| Performance Obligations by Period | |||||||||||||||||||||||||||||||||||||||||
| Less than 1 Year | 1-2 Years | 2-3 Years | 3-4 Years | 4-5 Years | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| Franchise fees | $ | 3,098 | $ | 2,927 | $ | 2,755 | $ | 2,524 | $ | 2,210 | $ | 7,120 | $ | 20,634 | |||||||||||||||||||||||||||
As of December 29, 2019 and December 30, 2018, the amount allocated to the Papa Rewards loyalty program is $12.0 million and $18.0 million, respectively, and is reflected in the Consolidated Balance Sheet as part of the contract liability included in Accrued expenses and other current liabilities. This will be recognized as revenue as the points are redeemed or expire, which is expected to occur within the next year.
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Shares Authorized and Outstanding
26, 2021.
Our
(In thousands, except average price per share) Year Ended | Total Number of Shares Purchased | Average Price Paid per Share | Aggregate Cost of Shares Purchased | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| December 25, 2022 | 1,343 | $ | 93.07 | $ | 125,000 | $ | 299,800 | |||||||||||||||||||
| December 26, 2021 | 594 | $ | 121.96 | $ | 72,499 | $ | 424,800 | |||||||||||||||||||
| December 27, 2020 | 32 | $ | 83.90 | $ | 2,701 | $ | 72,299 | |||||||||||||||||||
on Common Stock
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The Company paid common stock dividends of $29.0 million in 2018 and $30.7 million in 2017.
On January 29, 2020,26, 2023, our Board of Directors declared a first quarter 2023 dividend of $0.225$0.42 per common share, of common stock (approximately $7.3representing a $14.6 million was paid to common stockholders and $1.1 million was paid as “pass through” dividends to holders of Series B Preferred Stock on an “as converted basis”). The first quarteraggregate dividend on outstanding shares of Series B Preferred Stock was also declared on January 29, 2020. The common stock dividendthat was paid on February 21, 202017, 2023 to stockholders of record as of the close of business on February 10, 2020.6, 2023. The first quarter preferred dividenddeclaration and payment of $2.3 millionany future dividends will be paid to holdersat the discretion of Series B Preferred Stock on April 1, 2020.
Stockholder Rights Plan
On April 30, 2019, the Company’s stockholders ratified the adoption by theour Board of Directors of the Rights Agreement, dated as of July 22, 2018, as amended on February 3, 2019, March 6, 2019, and October 23, 2019 (as amended, the “Rights Agreement”). The original Rights Agreement adopted by the Board of Directors on July 22, 2018 had an expiration date of July 22, 2019 and a beneficial ownership trigger threshold of 15%. On February 3, 2019, in connection with the sale and issuance of the Series B Directors.
8. Series B Convertible Preferred Stock
On February 3, 2019,May 11, 2021, the Company entered into a Securities PurchaseShare Repurchase Agreement (the “Securities Purchase Agreement”) with certain funds affiliated with, or managed by, Starboard Value LP (together with its affiliates,(collectively, “Starboard”), pursuant to which (i) the Company repurchased from Starboard made a $200 million strategic investment in78,387 shares of the Company’s newly designatedSeries 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 at a purchase pricethat it owned into 3,458,360 shares of $1,000 per share. In addition, on March 28, 2019, Starboard made an additional $50 million investment in the Series B Preferred StockCompany’s common stock pursuant to an option that was included in the Securities Purchase Agreement. The cash proceeds fromterms of the issuanceCertificate of Designation of the Series B Preferred Stock. On June 3, 2021, the Company entered into agreements with certain franchisee investors to repurchase 1,000 shares of the outstanding Series B Preferred Stock to Starboard was bifurcated betweenand convert the option and preferred stock at the time of issuance based on a relative fair value allocation approach. The Company also issued $2.5 millionremaining 1,530 shares of Series B Preferred Stock oninto 30,769 shares of common stock. The Company paid Starboard and the same terms as Starboard to certain franchisees that represented tofranchisee investors aggregate one-time cash payments of $188.6 million for the Company that they qualify as an “accredited investor” as defined in Rule 501repurchase and conversion of Regulation D promulgated underall of the Securities Act.outstanding shares of Series B Preferred Stock. The initial dividend rate onexcess of the cash payment over the carrying value of the respective Series B Preferred Stock is 3.6% per annumredeemed resulted in $109.9 million of the stated value of $1,000 per share (the “Stated Value”), payable quarterly in arrears. The Series B Preferred Stock also participatesdividends on an as-converted basis in any regular or special dividends paid to common stockholders. If at any time, the Company reduces the regular dividend paid to common stockholders, the Series B Preferred Stock dividend will remain the same as if the common stock dividend had not been reduced. The Series B Preferred Stock is convertible at the option of the holders at any time into shares of common stock based on the conversion rate determined by dividing the Stated Value by $50.06. The Series B Preferred Stock is also redeemable for cash at the option of either party from and after the eight-year anniversary of issuance, subject to certain conditions.
The Series B Preferred Stock ranks (i) senior to all of the Common Stock and any other class or series of capital stock of the Company (including the Company’s Series A Junior Participating Preferred Stock), the terms of which do not expressly provide that such class or series ranks senior to or on a parity with the Series B Preferred Stock, (ii) on a parity basis with each other class or series of capital stock hereafter issued or authorized, the terms of which expressly provide that such class or series ranks on a parity basis with the Series B Preferred Stock and (iii) on a junior basis with each other class or
90
series of capital stock now or hereafter issued or authorized, the terms of which expressly provide that such class or series ranks on a senior basis to the Series B Preferred Stock.
Holders of the Series B Preferred Stock have the right to vote with common stockholders on an as-converted basis on all matters, without regard to limitations on conversion other than the Exchange Cap, which is equal to the issuance of greater than 19.99% of the number of shares of common stock outstanding, and subject to certain limitations in the Certificate of Designation for the Series B Preferred Stock.
Upon consummation of a change of control of the Company, the holdersredemption of Series B Preferred Stock havein the rightConsolidated Statement of Operations, which reduced net income attributable to requirecommon stockholders and also reduced diluted earnings per share by $3.10 for the year ended December 26, 2021.
Since the holders have the option to redeem theirconversion, there were no shares of Series B Preferred Stock from and after the eight-year anniversary of issuance, which mayauthorized or may not be exercised, the stock is considered contingently redeemable and, accordingly, is classified as temporary equity of $251.1 million on the Consolidated Balance Sheet as ofoutstanding at December 29, 2019. This amount is reported net of $7.5 million of related issuance costs. In accordance with applicable accounting guidance, the Company also recorded a one-time mark-to-market temporary equity adjustment of $5.9 million for the increase in fair value for both the $50.0 million option exercised by Starboard and the shares purchased by franchisees for the period of time the option was outstanding. The mark-to-market temporary equity adjustment was recorded in General and administrative expenses for $5.6 million (Starboard) and as a reduction to North America franchise royalties and fees of $0.3 million (Franchisees) within the Consolidated Statement of Operations with no associated tax benefit. Over the initial eight-year term, the $251.1 million investment will be accreted to the related redemption value of approximately $252.5 million as an adjustment to Retained Earnings.
25, 2022 or December 26, 2021.
| | | |
Balance at December 30, 2018 | | $ | — |
Issuance of preferred stock | | | 252,530 |
One-time mark-to-market adjustment | | | 5,914 |
Issuance costs | | | (7,527) |
Accretion | | | 216 |
Balance at December 29, 2019 | | $ | 251,133 |
The Company paid dividends of approximately $10.0 million to holders of
| Balance at December 27, 2020 | $ | 251,901 | |||
| Accretion | 629 | ||||
| Redemption | (252,530) | ||||
| Balance at December 26, 2021 | $ | — | |||
2021.
9. (Loss)
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stockholders. shareholders. Additionally, any accretion to the redemption value isfor 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 EPSearnings per share calculation.
Additionally, in accordance with ASC 480, “Distinguishing Liabilities from Equity”, the increase in the redemption value for the noncontrolling interest of 1 of our prior joint ventures reduced income attributable to common shareholders (and a decrease in redemption value increases income attributable to common shareholders). This joint venture was divested during 2018 and thus 0 change in redemption value occurred in 2019 or 2018. The change in noncontrolling interest redemption value was $1.4 million for the year ended December 31, 2017. See Note 11 for additional information.
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Basic earnings per common share | ||||||||||||||||||||
| Net income attributable to the Company | $ | 67,772 | $ | 120,016 | $ | 57,932 | ||||||||||||||
| Dividends on redemption of Series B Convertible Preferred Stock | — | (109,852) | — | |||||||||||||||||
| Dividends paid to participating securities | (306) | (6,091) | (14,059) | |||||||||||||||||
| Net income attributable to participating securities | (104) | — | (2,136) | |||||||||||||||||
| Net income attributable to common shareholders | $ | 67,362 | $ | 4,073 | $ | 41,737 | ||||||||||||||
| Basic weighted average common shares outstanding | 35,497 | 35,007 | 32,421 | |||||||||||||||||
| Basic earnings per common share | $ | 1.90 | $ | 0.12 | $ | 1.29 | ||||||||||||||
| Diluted earnings per common share | ||||||||||||||||||||
| Net income attributable to common shareholders | $ | 67,362 | $ | 4,073 | $ | 41,737 | ||||||||||||||
| Weighted average common shares outstanding | 35,497 | 35,007 | 32,421 | |||||||||||||||||
Dilutive effect of outstanding equity awards (a) | 220 | 330 | 296 | |||||||||||||||||
Diluted weighted average common shares outstanding (b) | 35,717 | 35,337 | 32,717 | |||||||||||||||||
| Diluted earnings per common share | $ | 1.89 | $ | 0.12 | $ | 1.28 | ||||||||||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | 2019 | | 2018 |
| 2017 | |||
| | | | | | | | | |
Basic (loss) earnings per common share: | | | | | | | | | |
Net income attributable to the Company | | $ | 4,866 | | $ | 2,474 | | $ | 102,292 |
Preferred stock dividends and accretion | | | (12,499) | | | — | | | — |
Change in noncontrolling interest redemption value | | | — | | | — | | | 1,419 |
Net income attributable to participating securities | |
| — | |
| — | |
| (423) |
Net (loss) income attributable to common shareholders | | $ | (7,633) | | $ | 2,474 | | $ | 103,288 |
| | | | | | | | | |
Basic weighted average common shares outstanding | |
| 31,632 | |
| 32,083 | |
| 36,083 |
Basic (loss) earnings per common share | | $ | (0.24) | | $ | 0.08 | | $ | 2.86 |
| | | | | | | | | |
Diluted (loss) earnings per common share: | | | | | | | | | |
Net (loss) income attributable to common shareholders | | $ | (7,633) | | $ | 2,474 | | $ | 103,288 |
| | | | | | | | | |
Weighted average common shares outstanding | |
| 31,632 | |
| 32,083 | |
| 36,083 |
Dilutive effect of outstanding equity awards (a) | |
| — | |
| 216 | |
| 439 |
Diluted weighted average common shares outstanding (b) | |
| 31,632 | |
| 32,299 | |
| 36,522 |
Diluted (loss) earnings per common share | | $ | (0.24) | | $ | 0.08 | | $ | 2.83 |
Shares subject to options to purchase common stock with an exercise price greater than the average market price for the year were not included in the computation of diluted earnings per common share because the effect would have been antidilutive. The weighted average number of shares subject to antidilutive options was 100,000 in 2020 (none in 2022 or 2021).
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| Carrying Value | Fair Value Measurements | |||||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
| December 25, 2022 | ||||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||
Cash surrender value of life insurance policies (a) | $ | 30,120 | $ | 30,120 | $ | — | $ | — | ||||||||||||||||||
Interest rate swaps (b) | $ | 986 | $ | — | $ | 986 | $ | — | ||||||||||||||||||
| December 26, 2021 | ||||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||
Cash surrender value of life insurance policies (a) | $ | 41,904 | $ | 41,904 | $ | — | $ | — | ||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||
Interest rate swaps (b) | $ | 5,536 | $ | — | $ | 5,536 | $ | — | ||||||||||||||||||
Certain assets and liabilitiesrate. The Company’s 3.875% senior notes are measured atclassified as a Level 2 fair value on a recurring basismeasurement since the Company estimates the fair value by using recent trading transactions, and are required to be classified and disclosed in one ofhave the following categories:
Our financial assetsestimated fair values and liabilities that were measured at fair value on a recurring basiscarrying values (excluding the impact of unamortized debt issuance costs) as of December 29, 201925, 2022 and December 30, 2018 are as follows (in thousands):
| | | | | | | | | | | | | |
| | Carrying | | Fair Value Measurements |
| ||||||||
|
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
December 29, 2019 | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | |
Cash surrender value of life insurance policies (a) | | $ | 33,220 | | $ | 33,220 | | $ | — | | $ | — | |
| | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | |
Interest rate swaps (b) | |
| 6,168 | |
| — | |
| 6,168 | |
| — | |
| | | | | | | | | | | | | |
December 30, 2018 | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | |
Cash surrender value of life insurance policies (a) | | $ | 27,751 | | $ | 27,751 | | $ | — | | $ | — | |
Interest rate swaps (b) | |
| 4,905 | |
| — | |
| 4,905 | |
| — | |
| December 25, 2022 | December 26, 2021 | |||||||||||||||||||||||||
| (in thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||||
| 3.875% Senior Notes | $ | 400,000 | $ | 339,500 | $ | 400,000 | $ | 396,000 | ||||||||||||||||||
There were 0 transfers among levels within the fair value hierarchy during fiscal 2019 or 2018.
2019 2018 2017 Papa John’s International, Inc. $ 2,560 $ 5,794 $ 7,181 Noncontrolling interests 791 1,599 4,233 Total income before income taxes $ 3,351 $ 7,393 $ 11,414 Balance at December 31, 2017 $ 6,738 Net loss (274) Distributions (1,000) Balance at December 30, 2018 $ 5,464 Net loss (519) Contributions 840 Distributions — Balance at December 29, 2019 $ 5,785 11.29, 2019, there were 192 restaurants that comprise 425, 2022, the Company had three joint venture arrangements comprising 98 restaurants as compared to 183 restaurants in 3four joint venture arrangements comprising 188 restaurants at December 30, 2018. In26, 2021. As further described in “Note 22. Divestitures,” the Company divested its 51 percent interest in one joint venture that owned 90 restaurants in the second quarter of 2019, the Company entered into a new joint venture. See Note 21 for more information.We are required to report the consolidated net income amounts attributable to the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the Consolidated Statements of Operations of income attributable to the noncontrolling interest holders.93 before income taxes attributable to these joint ventures for the years ended December 29, 2019,25, 2022, December 30, 201826, 2021 and December 31, 2017 were27, 2020 was as follows (in thousands):As of December 29, 2019, the noncontrolling interest holder of 2 joint ventures have the option to require the Company to purchase their interest, though not currently redeemable. Since redemption of the noncontrolling interests is outside of the Company’s control, the noncontrolling interests are presented in the caption “Redeemable noncontrolling interests” in the Consolidated Balance Sheets.2022 2021 2020 Papa John’s International, Inc. $ 3,136 $ 8,457 $ 5,654 Noncontrolling interests 1,577 4,939 2,682 Total net income $ 4,713 $ 13,396 $ 8,336 20192022 and 20182021 (in thousands):Balance at December 27, 2020 $ 6,474 Net income 2,609 Distributions (3,585) Balance at December 26, 2021 $ 5,498 Net income 574 Distributions (4,855) Balance at December 25, 2022 $ 1,217 The Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments12. DivestituresIn,” (“ASU 2016-13”) as of December 30, 2019 (the first day of fiscal 2020) under the third quartermodified retrospective transition method. Topic 326 requires measurement and recognition of 2019, the Company refranchised 19 Company-owned restaurantsexpected versus incurred losses for financial assets held. Financial instruments subject to Topic 326 include trade accounts receivable, notes receivable and interest receivable (classified as Other assets in Macon, Georgia for $5.6 million in cash proceeds. The sale resulted in a pre-tax gain of $1.7 million shown in Refranchising gains (losses), net on the Consolidated Statement of Operations.In connection with the divestiture, we wrote off an allocationBalance Sheets) from franchisees. The impact of the goodwill related to the domestic Company-owned restaurants reporting unit of $2.0 million, which represents the pro rata fair value of the refranchised restaurants in comparison to the total fair value of the Company-owned restaurants reporting unit.In the fourth quarter of 2019, the Company completed the refranchising of 23 Company-owned restaurants in South Florida for $7.5 million in cash proceeds. The sale resulted in a pre-tax gain of $2.9 million shown in Refranchising gains (losses), net on the Consolidated Statement of Operations. In connection with the divestiture, we wrote off an allocation of the goodwill related to the domestic Company-owned restaurants reporting unit of $2.4 million, which represents the pro rata fair value of the refranchised restaurants in comparison to the total fair value of the Company-owned restaurants reporting unit.Additionally, the Company completed the refranchising of 3 Company-owned restaurants during the fourth quarter of 2019. The refranchising gains (losses), net wereadoption was not material to our consolidated financial statements.operations.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 provision (benefit) for expected credit losses 16 (583) Write-offs charged against the allowance (1,274) (843) Recoveries collected — (285) Balance at December 26, 2021 $ 2,364 $ 1,500 6,474 14,066 Write-offs charged against the allowance (2,120) (1,042) Recoveries collected — (25) Balance at December 25, 2022 $ 6,718 $ 14,499
In The Company recorded $14.6 million of one-time, non-cash reserves in the first quarter of 2018, the Company refranchised 31 restaurants owned through a joint venture in the Denver, Colorado market. The Company held a 60% ownership share in the restaurants being refranchised. The noncontrolling interest portion of the joint venture arrangement was previously recorded at redemption value within the Consolidated Balance Sheet. Total consideration2022 for the asset sale of the restaurants was $4.8 million, consisting of cash proceeds of $3.7 million, including cash paid for various working capital items,certain accounts receivable and notes financed by Papa John’s for $1.1 million.
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In connectionreceivable primarily associated with the divestiture, we wrote off an allocation of the goodwill related to the domestic Company-owned restaurants reporting unit of $700,000, which represents the pro rata fair value of the refranchised restaurantsa master franchisee with operations principally in comparison to the total fair value of the Company-owned restaurants’ reporting unit. We recorded a pre-tax refranchising gain of approximately $690,000.
In the second quarter of 2018, the Company refranchised 34 Company-owned restaurants and a quality control center located in Beijing and Tianjin, China.Russia. The Company recorded an impairment$3.7 million of $1.7 millionone-time, non-cash reserves in 2017the second half of 2022 for certain accounts receivable and notes receivable primarily associated with the China operations. We recorded a pre-tax losstermination of approximately $1.9 million associated with the sale of the restaurants and reversed $1.3 million of accumulated other comprehensive income related to foreign currency translation as part of the disposal. The $1.9 million pre-tax loss in 2018 and impairment recorded in 2017 are recorded in refranchising and impairment gains (losses), net on the Consolidated Statements of Operations. In addition, we also had $2.4 million of additional tax expense associated with the China refranchisesignificant franchisees in the second quarterUK.
In the third quarter of 2018, the Company completed the refranchising of 31 stores owned through a joint venture in the Minneapolis, Minnesota market. The Company held a 70% ownership share in the restaurants being refranchised. Total consideration for the asset sale of the restaurants was $3.75 million.
In connection with the divestiture, we wrote off an allocation of the goodwill related to the domestic Company-owned restaurants reporting unit by approximately $600,000, which represents the pro rata fair value of the refranchised restaurants in comparison to the total fair value of the Company-owned restaurants’ reporting unit. We recorded a pre-tax refranchising gain of approximately $930,000 associated with the sale of the restaurants.
13.
| | | | | | | | | | | | | |
| | | | | | | | |
| ||||
| | Domestic Company- owned Restaurants | | International (a) | | All Others | | Total |
| ||||
| | | | | | | | | | | | | |
Balance as of December 31, 2017 | | $ | 70,048 | | $ | 16,408 | | $ | 436 | | $ | 86,892 | |
Divestitures (b) | | | (1,359) | | | — | | | — | | | (1,359) | |
Foreign currency adjustments | |
| — | |
| (1,017) | |
| — | |
| (1,017) | |
Balance as of December 30, 2018 | | | 68,689 | | | 15,391 | | | 436 | | | 84,516 | |
Divestitures (c) | | | (4,435) | | | — | | | — | | | (4,435) | |
Foreign currency adjustments | |
| — | |
| 259 | |
| — | |
| 259 | |
Balance as of December 29, 2019 | | $ | 64,254 | | $ | 15,650 | | $ | 436 | | $ | 80,340 | |
| Domestic Company- owned Restaurants | International (a) | All Others | Total | |||||||||||||||||||||||
| Balance at December 27, 2020 | $ | 64,254 | $ | 16,101 | $ | 436 | $ | 80,791 | ||||||||||||||||||
| Foreign currency adjustments | — | (159) | — | (159) | ||||||||||||||||||||||
| Balance at December 26, 2021 | $ | 64,254 | $ | 15,942 | $ | 436 | $ | 80,632 | ||||||||||||||||||
Acquisitions (b) | 1,161 | — | — | 1,161 | ||||||||||||||||||||||
Divestitures (c) | (9,908) | — | — | (9,908) | ||||||||||||||||||||||
| Foreign currency adjustments | — | (1,269) | — | (1,269) | ||||||||||||||||||||||
| Balance at December 25, 2022 | $ | 55,507 | $ | 14,673 | $ | 436 | $ | 70,616 | ||||||||||||||||||
For fiscal years 2019 and 2017, we performedpresented are net of accumulated impairment of $2.3 million associated with our PJUK reporting unit.
group. See “Note 22. Divestitures” for further information.
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14. Debt and Credit Arrangements
Long-term debt, net consists of the following (in thousands):
| | | | | | | |
| | | | December 29, | | | December 30, |
| | | | 2019 | | | 2018 |
Outstanding debt | | | $ | 370,000 | | $ | 625,009 |
Unamortized debt issuance costs | | | | (2,710) | | | (3,874) |
Current portion of long-term debt | | | | (20,000) | | | (20,009) |
Total long-term debt, less current portion, net | | | $ | 347,290 | | $ | 601,126 |
| December 25, 2022 | December 26, 2021 | |||||||||||||
| Senior notes | $ | 400,000 | $ | 400,000 | ||||||||||
| Revolving facilities | 205,000 | 90,000 | ||||||||||||
| Outstanding debt | 605,000 | 490,000 | ||||||||||||
| Unamortized debt issuance costs | (7,931) | (9,270) | ||||||||||||
| Total long-term debt, net | $ | 597,069 | $ | 480,730 | ||||||||||
interest rate on floating interest rate borrowings.
The PJIAmended Credit Agreement contains customary affirmative and negative covenants includingthat, 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. The Company is subject to the following financial covenants requiring the maintenance of the Leverage Ratio andcovenants: (1) a specified fixed charge coverage ratio. The PJI Credit Agreement allows for a permittedmaximum Leverage Ratio of 5.25 to 1.0 beginning1.00, 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 third quarter of 2018, decreasing over time to 4.00 to 1.0 by 2022;Company satisfies certain requirements, and (2) a fixed chargeminimum interest coverage ratio defined as Consolidated EBITDA (as defined in our credit agreement) plus consolidated rental expense to consolidated interest expense plus consolidated rental expense of 2.00 to 1.0 beginning in the third quarter of 2018 and increasing over time to 2.50 to 1.0 in 2021 and thereafter.1.00. We were in compliance with these financial covenants at December 29, 2019.
25, 2022.
Under
Our outstanding debt of $370.0 million at December 29, 2019 under the PJI Facilities was composed of $360.0 million outstanding under the Term Loan Facility and $10.0 million outstanding under the Revolving Facility. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at December 29, 2019 was approximately $343.8 million.
As of December 29, 2019, the Company had approximately $2.7 million in unamortized debt issuance costs, which are being amortized into interest expense over the termtermination of the PJI Facilities.
We attempt to minimize interest risk exposureRevolving Facility, acceleration of repayment obligations and the exercise of remedies by fixing our rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered intoLenders with financial institutions that participate in the PJI Credit Agreement. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk duerespect to the possible failure of the counterparty to perform under the terms of the derivative contract.
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We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities. In April 2019, we reduced the notional value of our swaps by $50.0 million as a result of paying down a substantial portion of debt under ourPJMF Revolving Facility using the proceeds received from the sale of Series B Preferred Stock. The termination of $50.0 million of notional swap value was not significant to our results of operations.
As of December 29, 2019, we have the following interest rate swap agreements with a total notional value of $350 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 | % |
The gain or loss on the swaps is recognized in Accumulated other comprehensive loss and reclassified into earnings as adjustments to interest expense in the same period or periods during which the swaps affect earnings. Gains or losses on the swaps representing hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The following table provides information on the location and amounts of our swaps in the accompanying Consolidated Financial Statements (in thousands):
| | | | | | |
| | Interest Rate Swap Derivatives | ||||
| | Fair Value | | Fair Value | ||
| | December 29, | | December 30, | ||
Balance Sheet Location | | 2019 | | 2018 | ||
| | | | | | |
Other current and long-term assets | | $ | — | | $ | 4,905 |
Other current and long-term liabilities | | $ | 6,168 | | $ | — |
The effect of derivative instruments on the accompanying Consolidated Financial Statements is as follows (in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | | ||
| | | | Location of Gain | | Amount of Gain | | | ||||
Derivatives - | | Amount of Gain or | | or (Loss) | | or (Loss) | | Total Interest Expense | ||||
Cash Flow | | (Loss) Recognized | | Reclassified from | | Reclassified from | | on Consolidated | ||||
Hedging | | in AOCI/AOCL | | AOCI/AOCL into | | AOCI/AOCL into | | Statements of | ||||
Relationships | | on Derivative | | Income | | Income | | Operations | ||||
| | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | |
2019 | | $ | (8,303) | | | Interest expense | | $ | 660 | | $ | (20,593) |
2018 | | $ | 3,222 | | | Interest expense | | $ | (22) | | $ | (25,673) |
2017 | | $ | 891 | | | Interest expense | | $ | (421) | | $ | (11,283) |
The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 4.1%, 3.9%, and 2.7% in fiscal 2019, 2018, and 2017, respectively. Interest paid, including payments made or received under the swaps, was $18.1 million in 2019, $23.5 million in 2018, and $10.8 million in 2017. As of December 29, 2019, the portion of the aggregate $6.2 million interest rate swap liability that would be reclassified into net interest expense during the next twelve months approximates $2.3 million.
97
at a variable rate of the one-month LIBOR plus 1.75%plus 1.60%. The applicable interest rates on the PJMF Revolving Facility were 4.1%, 3.4%, and 2.5% in fiscal 2019, 2018, and 2017, respectively. There was 0 balanceno debt outstanding under the PJMF Revolving Facility as of December 29, 2019.25, 2022 or December 26, 2021. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJIAmended Credit Agreement.
$125.0 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 | % | |||||||||
| Interest Rate Swap Derivatives | ||||||||||||||
| Balance Sheet Location | Fair Value December 25, 2022 | Fair Value December 26, 2021 | ||||||||||||
| Other current and long-term assets | $ | 986 | $ | — | ||||||||||
| Other current and long-term liabilities | $ | — | $ | 5,536 | ||||||||||
| Derivatives - Cash Flow Hedging Relationships | Amount of Gain or (Loss) Recognized in AOCL on Derivative | Location of (Loss) or Gain Reclassified from AOCL into Income | Amount of (Loss) or Gain Reclassified from AOCL into Income | Total Interest Expense on Consolidated Statements of Operations | ||||||||||||||||||||||
| Interest rate swaps: | ||||||||||||||||||||||||||
| 2022 | $ | 3,663 | Interest expense | $ | (2,384) | $ | (26,653) | |||||||||||||||||||
| 2021 | $ | 5,273 | Interest expense | $ | (5,965) | $ | (19,205) | |||||||||||||||||||
| 2020 | $ | (5,788) | Interest expense | $ | (5,068) | $ | (17,022) | |||||||||||||||||||
Net property
| | | | | | | |
|
| December 29, |
| December 30, |
| ||
| | 2019 |
| 2018 | | ||
Land | | $ | 33,349 | | $ | 33,833 | |
Buildings and improvements | |
| 91,514 | |
| 91,665 | |
Leasehold improvements | |
| 121,127 | |
| 125,192 | |
Equipment and other | |
| 423,556 | |
| 402,991 | |
Construction in progress | |
| 6,860 | |
| 11,491 | |
Total property and equipment | |
| 676,406 | |
| 665,172 | |
Accumulated depreciation and amortization | |
| (464,665) | |
| (438,278) | |
Net property and equipment | | $ | 211,741 | | $ | 226,894 | |
16. Notes Receivable
Selected domestic and international franchisees have borrowed funds from the Company, principally for use in the construction and development of their restaurants. In 2019 and 2018, the Company also provided certain franchisees with royalty payment plans. We have also entered into loan agreements with certain franchisees that purchased restaurants from us or from other franchisees. Loans outstanding were approximately $40.8 million and $28.8 million on a consolidated basis as of December 29, 2019 and December 30, 2018, respectively, net of allowance for doubtful accounts.
The majority of notes receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant and the ownership interests in the franchisee. Interest income recorded on franchisee loans was approximately $800,000 in 2019, $750,000 in 2018 and $579,000 in 2017 and is reported in investment income in the accompanying Consolidated Statements of Operations.
Based on our review of certain borrowers’ economic performance, underlying collateral value or guarantees, we established allowances of $3.6 million and $3.4 million as of December 29, 2019 and December 30, 2018, respectively, for potentially uncollectible notes receivable. The following summarizes changes in our notes receivable allowance for doubtful accounts (in thousands):
| | | | |
Balance as of December 31, 2017 |
| $ | 1,047 |
|
Recovered from costs and expenses | |
| (393) | |
Additions, net of notes written off | |
| 2,715 | |
Balance as of December 30, 2018 | |
| 3,369 | |
Recovered from costs and expenses | |
| (77) | |
Additions, net of notes written off | |
| 280 | |
Balance as of December 29, 2019 | | $ | 3,572 | |
| | | | |
98
| December 25, 2022 | December 26, 2021 | |||||||||||||
| Land | $ | 31,679 | $ | 31,032 | ||||||||||
| Buildings and improvements | 91,462 | 91,508 | ||||||||||||
| Leasehold improvements | 136,095 | 138,016 | ||||||||||||
| Equipment and other | 498,792 | 465,813 | ||||||||||||
| Construction in progress | 32,265 | 23,725 | ||||||||||||
| Total property and equipment | 790,293 | 750,094 | ||||||||||||
| Accumulated depreciation and amortization | (540,500) | (526,238) | ||||||||||||
| Property and equipment, net | $ | 249,793 | $ | 223,856 | ||||||||||
| December 25, 2022 | December 26, 2021 | |||||||||||||
| Marketing | $ | 36,858 | $ | 59,248 | ||||||||||
| Insurance reserves, current | 29,676 | 34,661 | ||||||||||||
| Salaries, benefits and bonuses | 21,934 | 48,728 | ||||||||||||
Legal settlement accrual (a) | 15,000 | — | ||||||||||||
| Purchases | 13,789 | 13,319 | ||||||||||||
| Other | 25,278 | 34,160 | ||||||||||||
| Total | $ | 142,535 | $ | 190,116 | ||||||||||
| | | | | | | |
|
| December 29, |
| December 30, |
| ||
| | 2019 | | 2018 | | ||
Insurance reserves, current | | $ | 32,028 | | $ | 33,769 | |
Salaries, benefits and bonuses | | | 22,659 | | | 12,979 | |
Marketing | |
| 15,930 | |
| 27,746 | |
Customer loyalty program | |
| 12,049 | |
| 18,019 | |
Purchases | |
| 10,768 | |
| 11,336 | |
Consulting and professional fees | |
| 7,180 | |
| 8,693 | |
Rent | |
| 4,274 | |
| 3,932 | |
Legal costs | | | 3,487 | | | 2,093 | |
Deposits | |
| 2,026 | |
| 1,415 | |
Utilities | |
| 405 | |
| 1,478 | |
Other | |
| 9,760 | |
| 7,707 | |
Total | | $ | 120,566 | | $ | 129,167 | |
See “Note 19. Litigation, Commitments and Contingencies” for additional information.
| December 25, 2022 | December 26, 2021 | |||||||||||||
| Insurance reserves | $ | 37,624 | $ | 53,551 | ||||||||||
Deferred compensation plan (a) | 28,285 | 36,170 | ||||||||||||
| Other | 2,408 | 3,433 | ||||||||||||
| Total | $ | 68,317 | $ | 93,154 | ||||||||||
| | | | | | | |
|
| | |
| | |
|
| | December 29, |
| December 30, | | ||
| | 2019 | | 2018 | | ||
Insurance reserves | | $ | 45,151 | | $ | 42,144 | |
Deferred compensation plan | |
| 33,220 | |
| 27,796 | |
Accrued rent (a) | | | — | | | 6,461 | |
Other | |
| 6,556 | |
| 2,923 | |
Total | | $ | 84,927 | | $ | 79,324 | |
(a) See Note 2 “Significant Accounting Policies” for Leases and Note 3 “Adoption of ASC 842, Leases”“Note 21. Employee Benefit Plans” for additional information regarding the change in accounting for accrued rent, which is now classified against right-of-use assets for operating leases.
on our non-qualified deferred compensation plan.
99
19. Other General Expenses
Other general expensesDecember 26,
2021December 27,
2020Employee severance and other employee transition costs $ 5,429 $ 4,775 Recruiting and professional fees 3,815 1,598 Relocation costs 3,100 267 Other costs 750 285 Total strategic corporate reorganization costs 13,094 6,925 Stock-based compensation forfeitures on unvested awards — (940) Total strategic corporate reorganization costs, net of stock forfeitures $ 13,094 $ 5,985
| | | | | | | | |
| | | | | Year Ended | | | |
| | December 29, | | | December 30, | | | December 31, |
| | 2019 | | | 2018 | | | 2017 |
Provision (credit) for uncollectible accounts and notes receivable (a) | $ | 2,764 | | $ | 3,338 | | $ | (1,441) |
Loss on disposition of fixed assets | | 1,130 | | | 2,233 | | | 2,493 |
Papa Rewards (b) | | - | | | - | | | 1,046 |
Franchise support initiative (c) | | - | | | 34 | | | 2,986 |
Other (income) expense | | (915) | | | (1,725) | | | 343 |
Other general expenses | | 2,979 | | | 3,880 | | | 5,427 |
Special charges (d)(e) | | 41,322 | | | 35,316 | | | - |
Administrative expenses (f)(g) | | 179,159 | | | 154,338 | | | 145,439 |
General and administrative expenses | $ | 223,460 | | $ | 193,534 | | $ | 150,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
| Balance at December 26, 2021 | Charges | Payments | Balance at December 25, 2022 | |||||||||||||||||||||||
| Employee severance and other employee transition costs | $ | 2,122 | $ | — | $ | (2,122) | $ | — | ||||||||||||||||||
| Recruiting and professional fees | 92 | — | (92) | — | ||||||||||||||||||||||
| Relocation costs | 740 | — | (740) | — | ||||||||||||||||||||||
| Total strategic corporate reorganization liability | $ | 2,954 | $ | — | $ | (2,954) | $ | — | ||||||||||||||||||
| Balance at December 27, 2020 | Charges | Payments | Balance at December 26, 2021 | |||||||||||||||||||||||
| Employee severance and other employee transition costs | $ | 4,615 | $ | 5,429 | $ | (7,922) | $ | 2,122 | ||||||||||||||||||
| Recruiting and professional fees | 145 | 3,815 | (3,868) | 92 | ||||||||||||||||||||||
| Relocation costs | 101 | 3,100 | (2,461) | 740 | ||||||||||||||||||||||
| Other costs | — | 750 | (750) | — | ||||||||||||||||||||||
| Total strategic corporate reorganization liability | $ | 4,861 | $ | 13,094 | $ | (15,001) | $ | 2,954 | ||||||||||||||||||
| | | | | | | | | |
| | 2019 |
| 2018 |
| 2017 | |||
Domestic (loss) income | | $ | (16,065) | | $ | (9,665) | | $ | 122,828 |
Foreign income | | | 21,111 | | | 16,362 | | | 17,514 |
Total income | | $ | 5,046 | | $ | 6,697 | | $ | 140,342 |
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Domestic income | $ | 65,434 | $ | 115,221 | $ | 48,616 | ||||||||||||||
| Foreign income | 18,335 | 35,727 | 26,746 | |||||||||||||||||
| Total income | $ | 83,769 | $ | 150,948 | $ | 75,362 | ||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | 3,496 | $ | 10,591 | $ | 16,400 | ||||||||||||||
| Foreign | 5,335 | 8,812 | 6,047 | |||||||||||||||||
| State and local | 2,791 | 2,837 | 1,569 | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | 4,243 | 2,430 | (7,375) | |||||||||||||||||
| Foreign | (1,152) | 769 | 357 | |||||||||||||||||
| State and local | (293) | 554 | (2,250) | |||||||||||||||||
| Total income tax expense | $ | 14,420 | $ | 25,993 | $ | 14,748 | ||||||||||||||
| | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
| |||
Current: | | | | | | | | | | |
Federal | | $ | (2,734) | | $ | (5,262) | | $ | 28,951 | |
Foreign | |
| 5,077 | |
| 4,736 | |
| 4,602 | |
State and local | |
| 810 | |
| 1,530 | |
| (234) | |
Deferred | |
| (3,764) | |
| 1,620 | |
| 498 | |
Total income taxes | | $ | (611) | | $ | 2,624 | | $ | 33,817 | |
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| Income Tax Expense (Benefit) | Income Tax Rate | Income Tax Expense (Benefit) | Income Tax Rate | Income Tax Expense (Benefit) | Income Tax Rate | |||||||||||||||||||||||||||||||||
| Tax at U.S. federal statutory rate | $ | 17,591 | 21.0 | % | $ | 31,699 | 21.0 | % | $ | 15,826 | 21.0 | % | ||||||||||||||||||||||||||
| State and local income taxes | 1,422 | 1.7 | % | 2,317 | 1.5 | % | 1,149 | 1.5 | % | |||||||||||||||||||||||||||||
| Foreign income taxes | 4,672 | 5.6 | % | 9,144 | 6.1 | % | 6,463 | 8.6 | % | |||||||||||||||||||||||||||||
| Income of consolidated partnerships attributable to noncontrolling interests | (355) | (0.4) | % | (1,110) | (0.7) | % | (603) | (0.8) | % | |||||||||||||||||||||||||||||
| Non-qualified deferred compensation plan expense (income) | 1,278 | 1.5 | % | (911) | (0.6) | % | (898) | (1.2) | % | |||||||||||||||||||||||||||||
| Excess tax (benefits) on equity awards | (3,902) | (4.7) | % | (3,697) | (2.5) | % | (2,029) | (2.7) | % | |||||||||||||||||||||||||||||
| Tax credits | (8,981) | (10.7) | % | (8,830) | (5.9) | % | (6,002) | (8.0) | % | |||||||||||||||||||||||||||||
| Non-deductible executive compensation | 2,450 | 2.9 | % | 2,636 | 1.7 | % | 1,314 | 1.7 | % | |||||||||||||||||||||||||||||
| Foreign-derived intangible income | (1,452) | (1.7) | % | (1,519) | (1.0) | % | (924) | (1.2) | % | |||||||||||||||||||||||||||||
| US deferred offset on foreign deferreds | 1,183 | 1.4 | % | 238 | 0.2 | % | — | — | % | |||||||||||||||||||||||||||||
| Other | 514 | 0.6 | % | (3,974) | (2.6) | % | 452 | 0.6 | % | |||||||||||||||||||||||||||||
| Total | $ | 14,420 | 17.2 | % | $ | 25,993 | 17.2 | % | $ | 14,748 | 19.5 | % | ||||||||||||||||||||||||||
| December 25, 2022 | December 26, 2021 | |||||||||||||
| Accrued liabilities | $ | 17,424 | $ | 14,802 | ||||||||||
| Accrued bonuses | 351 | 6,404 | ||||||||||||
| Other liabilities and asset reserves | 14,607 | 14,583 | ||||||||||||
| Equity awards | 7,905 | 7,323 | ||||||||||||
| Lease liabilities | 45,646 | 41,999 | ||||||||||||
| Other | 2,904 | 2,712 | ||||||||||||
| Net operating losses | 11,738 | 8,127 | ||||||||||||
| Foreign tax credit carryforwards | 20,198 | 18,611 | ||||||||||||
| Total deferred tax assets | 120,773 | 114,561 | ||||||||||||
| Valuation allowances | (32,052) | (28,598) | ||||||||||||
| Total deferred tax assets, net of valuation allowances | 88,721 | 85,963 | ||||||||||||
| Deferred expenses | (5,756) | (7,087) | ||||||||||||
| Accelerated depreciation | (31,098) | (23,858) | ||||||||||||
| Goodwill | (7,690) | (10,052) | ||||||||||||
| Right-of-use assets | (41,892) | (39,814) | ||||||||||||
| Other | (365) | (254) | ||||||||||||
| Total deferred tax liabilities | (86,801) | (81,065) | ||||||||||||
| Net deferred tax assets | $ | 1,920 | $ | 4,898 | ||||||||||
| | | | | | |
|
| December 29, |
| December 30, | ||
| | 2019 |
| 2018 | ||
Accrued liabilities | | $ | 16,686 | | $ | 16,828 |
Accrued bonuses | |
| 2,308 | |
| 724 |
Other assets and liabilities | |
| 16,244 | |
| 10,705 |
Equity awards | |
| 7,196 | |
| 5,862 |
Lease liability | | | 30,756 | | | — |
Other | |
| 2,418 | |
| 2,482 |
Net operating losses | |
| 8,205 | |
| 1,555 |
Foreign tax credit carryforwards | | | 10,049 | | | 7,230 |
Total deferred tax assets | | | 93,862 | | | 45,386 |
Valuation allowances | |
| (17,303) | |
| (8,183) |
Total deferred tax assets, net of valuation allowances | |
| 76,559 | |
| 37,203 |
| | | | | | |
Deferred expenses | |
| (9,521) | |
| (5,970) |
Accelerated depreciation | |
| (27,299) | |
| (24,239) |
Goodwill | |
| (9,510) | |
| (12,645) |
Right-of-use asset | | | (30,257) | | | — |
Other | |
| (782) | |
| (1,064) |
Total deferred tax liabilities | |
| (77,369) | |
| (43,918) |
Net deferred liability | | $ | (810) | | $ | (6,715) |
| | | | | | |
| Balance at December 27, 2020 | $ | 22,972 | |||
| Charged to costs and expenses | 5,658 | ||||
| Other | (32) | ||||
| Balance at December 26, 2021 | $ | 28,598 | |||
| Charged to costs and expenses | 3,454 | ||||
| Balance at December 25, 2022 | $ | 32,052 | |||
101
The Company had approximately $6.2$2.0 million and $5.3$1.4 million of state deferred tax assets related to state income tax credit carryforwards as of December 25, 2022 and December 26, 2021, respectively. Our ability to fully utilize these deferred tax assets related to state income tax credit carryforwards is dependent on our ability to generate earnings in future years in the respective state jurisdictions. In 2022, the Company provided a partial valuation allowance of $0.5 million against these state deferred tax assets as we believe that a portion of these state income tax credit carryforwards would not be realizable before expiration.
The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense for the years ended December 29, 2019, December 30, 201825, 2022 and December 31, 2017 is as follows in both dollars and as a percentage of income before income taxes ($ in thousands):
| | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | ||||||||||||
|
| Income Tax | | Income | | Income Tax | | Income | | Income Tax | | Income | | ||||||
| | Expense | | Tax Rate | | Expense | | Tax Rate | | Expense | | Tax Rate | | ||||||
| | | | | | | | | | | | | | | | | | | |
Tax at U.S. federal statutory rate | | $ | 1,060 |
| 21.0 | % | | $ | 1,406 |
| 21.0 | % | | $ | 49,120 |
| 35.0 | % | |
State and local income taxes | |
| 79 |
| 1.6 | % | |
| 150 |
| 2.2 | % | |
| 2,432 |
| 1.7 | % | |
Foreign income taxes | |
| 5,058 |
| 100.2 | % | |
| 4,879 |
| 72.9 | % | |
| 5,306 |
| 3.8 | % | |
Income of consolidated partnerships | | | | | | | | | | | | | | | | | | | |
attributable to noncontrolling interests | |
| (177) |
| (3.5) | % | |
| (371) |
| (5.6) | % | |
| (1,554) |
| (1.1) | % | |
Non-qualified deferred compensation plan | | | | | | | | | | | | | | | | | | | |
(income) loss | |
| (1,260) |
| (25.0) | % | |
| 483 |
| 7.2 | % | |
| (1,236) |
| (0.9) | % | |
Excess tax (benefits) expense on equity awards | | | (212) | | (4.2) | % | | | 447 | | 6.7 | % | | | (1,879) | | (1.4) | % | |
Preferred stock option mark-to-market adjustment | | | 1,338 | | 26.5 | % | | | — | | — | % | | | — | | — | % | |
Remeasurement of deferred taxes | | | — | | — | % | | | — | | — | % | | | (7,020) | | (5.0) | % | |
Tax credits | |
| (6,128) |
| (121.4) | % | |
| (6,945) |
| (103.7) | % | |
| (6,909) |
| (4.9) | % | |
Disposition of China | | | — | | — | % | | | 4,118 | | 61.5 | % | | | — | | — | % | |
Other | | | (369) | | (7.3) | % | | | (1,543) | | (23.0) | % | | | (4,443) | | (3.1) | % | |
Total | | $ | (611) |
| (12.1) | % | | $ | 2,624 |
| 39.2 | % | | $ | 33,817 |
| 24.1 | % | |
26, 2021, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act, (the “Tax Act”) was signed into law. The Tax Act contained substantial changes to the Internal Revenue Code, including a reduction of the corporate tax rate from 35% to 21% effective January 1, 2018. Upon enactment, 2017 deferred tax assets and liabilities were remeasured. This remeasurement yielded a benefit of approximately $7.0 million in the fourth quarter of 2017. At December 30, 2018, the Company had completed its analysis of the Tax Act. See Note 2 for additional information.
2020.
102
The Company had $1.6$1.2 million of unrecognized tax benefits at December 29, 201925, 2022 which, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending liability for unrecognized tax benefits excluding interest and penalties is as follows, which is recorded as an otherin Other long-term liabilityliabilities in the Consolidated Balance Sheets (in thousands):
| Balance at December 27, 2020 | $ | 1,030 | |||
| Additions for tax positions of prior years | 81 | ||||
| Reductions for tax positions of prior years | (215) | ||||
| Balance at December 26, 2021 | $ | 896 | |||
| Additions for tax positions of prior years | 331 | ||||
| Reductions for tax positions of prior years | (65) | ||||
| Balance at December 25, 2022 | $ | 1,162 | |||
| | | | |
Balance at December 31, 2017 |
| $ | 2,028 |
|
Additions for tax positions of prior years | |
| 510 | |
Reductions for tax positions of prior years | | | (515) | |
Reductions for lapse of statute of limitations | |
| — | |
Balance at December 30, 2018 | | | 2,023 | |
Additions for tax positions of prior years | | | 179 | |
Reductions for tax positions of prior years | | | (623) | |
Reductions for lapse of statute of limitations | |
| — | |
Balance at December 29, 2019 | | $ | 1,579 | |
21.
Certain of our officers and directors own equity interests in entities that franchise restaurants. Following is a summary of full-year transactions and year-end balances with franchisees owned by former officers and directors (in thousands):
| | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
| |||
Revenues from affiliates: | | | | | | | | | ||
North America commissary sales | | $ | 2,697 | | $ | 2,653 | | $ | 2,619 | |
Other sales | | | 587 | | | 650 | | | 336 | |
North America franchise royalties and fees | |
| 331 | |
| 429 | |
| 439 | |
Total | | $ | 3,615 | | $ | 3,732 | | $ | 3,394 | |
| | | | | | | |
|
| December 29, |
| December 30, |
| ||
| | 2019 | | 2018 |
| ||
Accounts receivable affiliates | | $ | 71 | | $ | 69 | |
The revenues from affiliates were at rates and terms available to independent franchisees.
Mr. O’Neal and the Company developed a co-branded extra-large pizza product using the Personality Rights under an amendment to the Original Endorsement Agreement signed July 27, 2020 (the “First Amendment”).
103
On May 27, 2019, Mr. O’Neal and the Company entered into a joint venture for the operation of 9 Atlanta-area Papa John’s restaurants that were previously Company-owned restaurants. The Company owns approximately 70% of the joint venture and Mr. O’Neal owns approximately 30% of the joint venture, which is consolidated into the Company’s financial statements. Mr. O’Neal contributed approximately $840,000 representing his pro rata capital contribution.
The Company paid $300,000 in 2018 and $446,000 in 2017 for charter aircraft services provided by an entity owned by a former board member.
22.
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,“Contingencies,” the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s 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.
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, (“the New York Court”), 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 New YorkDistrict 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. On September 30, 2022, the parties reached a settlement in principle to resolve the case. Pursuant to the terms of the proposed settlement, in exchange for the Company’s payment of a total aggregate settlement amount of no more than $20.0 million subject to a claims-made process, all claims in the action will be dismissed, the litigation will be terminated, and the Company will receive a release. The proposed settlement also includes resolution of a companion case, Hubbard, et al. v. Papa John’s International, Inc., pending in the United States District Court for the Western District of Kentucky. The proposed settlement is subject to a claims-made process whereby unclaimed funds revert to the Company, and the Company is only responsible for payments to class and collective action members who timely submit a claim form. Although the return rate for timely claims is unknown and not within the Company’s control, the Company estimates its actual exposure resulting from the settlement to be approximately $10.0 million and this amount was recorded in General and administrative expenses in the Consolidated Statements of Operations. On December 19, 2022, the District Court granted preliminary approval of the proposed settlement; however, the settlement remains subject to final approval by the District Court and contains certain customary contingencies. Subsequent to year end, the Company remitted $5.0 million to the settlement administrator as partial funding of the settlement in accordance with the terms of the applicable settlement agreement. The Company continues to deny any liability or wrongdoing in this matter and intends to vigorously defend this action. The Company has matter.
Danker v.In re Papa John’s International, Inc. et al.Employee & Franchise Employee Antitrust Litigation On August 30, 2018,is a putative class action lawsuit was filed in December 2018 in the United States District Court Southernfor the Western District of New York on behalfKentucky. The suit alleges that the “no-poaching” provision previously contained in the Company’s franchise agreement constituted an unlawful agreement or conspiracy in restraint of trade and commerce in violation of Section 1 of the Sherman Antitrust Act. On April 14, 2022, the parties reached a settlement in principle to resolve the case. Pursuant to the terms of the proposed settlement, in exchange for the Company’s payment of a classtotal aggregate settlement amount of investors who purchased or acquired stock$5.0 million and other non-monetary consideration, all claims in Papa John's throughthe action will be dismissed, the litigation will be terminated, and the Company will receive a period uprelease. The settlement amount was recorded in General and administrative expenses in the Consolidated Statements of Operations. The proposed settlement is subject to and including July 19, 2018. The complaint alleges violations of Sections l0(b) and 20(a) ofapproval by the Securities Exchange Act of 1934, as amended. The District Court has appointed the Oklahoma Law Enforcement Retirement System to lead the case and has also issued a scheduling order for the case to proceed. An amended complaint was filed on February 13, 2019, which the Company has moved to dismiss.contains certain customary contingencies. The Company believes that it has valid and meritorious defensescontinues to these suits and intends to vigorously defend against them. The Company has not recordeddeny any liability related to these lawsuits as of December 29, 2019 as it does not believe a loss is probable or reasonably estimable.wrongdoing in this matter.
23.
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granted in 2022, 2021 or 2020. Information pertaining to option activity during 20192022 is as follows (number of options and aggregate intrinsic value in thousands):
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | |||||||||||||||||||||||
| Outstanding at December 26, 2021 | 319 | $ | 54.65 | |||||||||||||||||||||||
| Exercised | (82) | 49.48 | ||||||||||||||||||||||||
| Cancelled | (2) | 45.29 | ||||||||||||||||||||||||
| Outstanding at December 25, 2022 | 235 | $ | 56.53 | 4.47 | $ | 6,452 | ||||||||||||||||||||
| Exercisable at December 25, 2022 | 235 | $ | 56.53 | 4.47 | $ | 6,452 | ||||||||||||||||||||
| | | | | | | | | | | |
|
|
|
|
| |
| Weighted |
|
| |
|
| | | | | | | Average | | | |
|
| | | | Weighted | | Remaining | | | |
| |
| | Number | | Average | | Contractual | | Aggregate |
| ||
| | of | | Exercise | | Term | | Intrinsic |
| ||
| | Options | | Price | | (In Years) | | Value |
| ||
Outstanding at December 30, 2018 |
| 1,614 | | $ | 54.27 | | | | | | |
Granted |
| 353 | |
| 44.05 | | | | | | |
Exercised |
| (448) | |
| 35.77 | | | | | | |
Cancelled |
| (314) | |
| 63.72 | | | | | | |
Outstanding at December 29, 2019 |
| 1,205 | | $ | 55.67 |
| 7.17 | | $ | 13,120 | |
Exercisable at December 29, 2019 |
| 653 | | $ | 58.48 |
| 5.90 | | $ | 5,704 | |
The following is a summary of the significant assumptions used in estimating the fair value of options granted in 2019, 2018 and 2017:
| | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
|
| | | | | | | |
Assumptions (weighted average): | | | | | | | |
Risk-free interest rate |
| 2.5 | % | 2.7 | % | 2.0 | % |
Expected dividend yield |
| 2.1 | % | 1.5 | % | 1.0 | % |
Expected volatility |
| 31.2 | % | 27.6 | % | 26.7 | % |
Expected term (in years) |
| 5.7 | | 5.6 | | 5.6 | |
The risk-free interest rate for the periods within the contractual life of an option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield was estimated as the annual dividend divided by the market price of the Company’s shares on the date of grant. Expected volatility was estimated using the Company’s historical share price volatility for a period similar to the expected life of the option.
Options granted generally vest in equal installments over three years and expire ten years after grant. The expected term for these options represents the period of time that options granted are expected to be outstanding and was calculated using historical experience.
The weighted average grant-date fair values of options granted during 2019, 2018 and 2017 was $11.69, $15.27 and $19.88, respectively. The Company granted options to purchase 353,000, 456,000 and 315,000 shares in 2019, 2018 and 2017, respectively.
Restricted Stock
105
have non-forfeitable dividend rights. We declared dividends totaling $310,000$467,000 ($1.54 per share) in 2022, $410,000 ($1.15 per share) in 2021 and $366,000 ($0.90 per share) in 2019, $185,000 ($0.90 per share) in 2018 and $128,000 ($0.85 per share) in 20172020 to holders of time-based restricted stock.
During 2019, weWe granted 113,00069,000, 11,000 and 15,000 restricted stock units that are time-based and vest over a period of one to three years.years in 2022, 2021 and 2020, respectively. Upon vesting, the units are issued from treasury stock. Total dividends declared for these awards were insignificant to the results of our operations.
2022, 2021 and 2020:
|
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The risk-free interest rate for the periods within the contractual life of the performance-based restricted stock unit is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility was estimated using the Company’s historical share price volatility for a period similar to the expected life of the performance-based restricted stock unit.
In 2018$113.90, $103.14 and 2017, the Company granted performance-based restricted stock awards under a three-year cliff vest, and the vesting$59.52, respectively.
| | | | | | |
|
|
|
| Weighted |
| |
| | | | Average |
| |
| | | | Grant-Date |
| |
| | Shares | | Fair Value |
| |
Total as of December 30, 2018 |
| 370 | | $ | 59.84 | |
Granted |
| 414 | |
| 46.14 | |
Forfeited |
| (74) | |
| 51.31 | |
Vested |
| (94) | |
| 62.45 | |
Total as of December 29, 2019 |
| 616 | | $ | 50.90 | |
106
| Shares | Weighted Average Grant-Date Fair Value | |||||||||||||
| Total as of December 26, 2021 | 582 | $ | 68.06 | |||||||||||
| Granted | 298 | 103.18 | ||||||||||||
| Forfeited | (82) | 89.87 | ||||||||||||
| Vested | (280) | 57.40 | ||||||||||||
| Total as of December 25, 2022 | 518 | $ | 91.23 | |||||||||||
24.21. Employee Benefit Plans
In late 2021, the Company adopted a Safe Harbor 401k Plan effective for the 2022 benefit year.
At our discretion, we
2020.
25.Consolidation.” Goodwill of $9.9 million was allocated to the disposal group based on relative fair value within the Domestic Company-owned restaurants reporting group. The $8.4 million of the one-time, non-cash refranchising loss was recorded in the first quarter of 2022 and realized upon consummation of the sale in the second quarter.
107
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Domestic Company-owned restaurants | $ | 708,389 | $ | 778,323 | $ | 700,757 | ||||||||||||||
| North America franchising | 137,399 | 129,310 | 96,732 | |||||||||||||||||
| North America commissaries | 869,634 | 761,305 | 680,793 | |||||||||||||||||
| International | 158,682 | 184,099 | 150,939 | |||||||||||||||||
| All others | 227,999 | 215,384 | 184,013 | |||||||||||||||||
| Total revenues | $ | 2,102,103 | $ | 2,068,421 | $ | 1,813,234 | ||||||||||||||
| Intersegment revenues: | ||||||||||||||||||||
| North America franchising | $ | 4,122 | $ | 4,179 | $ | 3,229 | ||||||||||||||
| North America commissaries | 217,570 | 215,393 | 192,332 | |||||||||||||||||
| All others | 70,283 | 75,366 | 83,635 | |||||||||||||||||
| Total intersegment revenues | $ | 291,975 | $ | 294,938 | $ | 279,196 | ||||||||||||||
| Depreciation and amortization: | ||||||||||||||||||||
| Domestic Company-owned restaurants | $ | 11,495 | $ | 11,728 | $ | 11,905 | ||||||||||||||
| North America commissaries | 13,299 | 11,974 | 9,660 | |||||||||||||||||
| International | 1,774 | 2,326 | 1,975 | |||||||||||||||||
| All others | 12,681 | 9,928 | 10,254 | |||||||||||||||||
| Unallocated corporate expenses | 12,783 | 12,860 | 15,911 | |||||||||||||||||
| Total depreciation and amortization | $ | 52,032 | $ | 48,816 | $ | 49,705 | ||||||||||||||
| Operating income: | ||||||||||||||||||||
Domestic Company-owned restaurants (a) | $ | 15,966 | $ | 49,628 | $ | 37,049 | ||||||||||||||
| North America franchising | 127,882 | 120,949 | 89,801 | |||||||||||||||||
| North America commissaries | 42,531 | 39,873 | 33,185 | |||||||||||||||||
International (b) | 17,891 | 34,896 | 24,034 | |||||||||||||||||
| All others | 10,084 | 17,704 | 7,043 | |||||||||||||||||
Unallocated corporate expenses (c) | (104,419) | (94,114) | (100,069) | |||||||||||||||||
| Elimination of intersegment (profits) | (905) | (695) | (790) | |||||||||||||||||
| Total operating income | $ | 109,030 | $ | 168,241 | $ | 90,253 | ||||||||||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 | |||
Revenues: | | | | | (Note) | | | | |
Domestic Company-owned restaurants | | $ | 652,053 | | $ | 692,380 | | $ | 816,718 |
North America commissaries | |
| 612,652 | |
| 609,866 | |
| 673,712 |
North America franchising | |
| 71,828 | |
| 79,293 | |
| 106,729 |
International | |
| 126,077 | |
| 131,268 | |
| 126,285 |
All others | |
| 156,638 | |
| 150,064 | |
| 59,915 |
Total revenues | | $ | 1,619,248 | | $ | 1,662,871 | | $ | 1,783,359 |
| | | | | | | | | |
Intersegment revenues: | | | | | | | | | |
North America commissaries | | $ | 187,073 | | $ | 201,325 | | $ | 244,699 |
North America franchising | |
| 2,782 | |
| 2,965 | |
| 3,342 |
International | |
| 191 | |
| 283 | |
| 273 |
All others | |
| 88,286 | |
| 72,066 | |
| 16,715 |
Total intersegment revenues | | $ | 278,332 | | $ | 276,639 | | $ | 265,029 |
| | | | | | | | | |
Depreciation and amortization: | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 12,883 | | $ | 15,411 | | $ | 15,484 |
North America commissaries | |
| 8,131 | |
| 7,397 | |
| 6,897 |
International | |
| 1,722 | |
| 1,696 | |
| 2,018 |
All others | |
| 10,738 | |
| 8,513 | |
| 5,276 |
Unallocated corporate expenses | |
| 13,807 | |
| 13,386 | |
| 13,993 |
Total depreciation and amortization | | $ | 47,281 | | $ | 46,403 | | $ | 43,668 |
| | | | | | | | | |
Income (loss) before income taxes: | | | | | | | | | |
Domestic Company-owned restaurants (1) | | $ | 33,957 | | $ | 18,988 | | $ | 47,548 |
North America commissaries (2) | |
| 30,439 | |
| 27,961 | |
| 47,844 |
North America franchising (3) | |
| 64,362 | |
| 70,732 | |
| 96,298 |
International (4) | |
| 19,110 | |
| 14,399 | |
| 15,888 |
All others (2) | |
| (2,500) | |
| (6,082) | |
| (179) |
Unallocated corporate expenses (2)(5) | |
| (139,355) | |
| (118,296) | |
| (66,099) |
Elimination of intersegment (profits) | |
| (967) | |
| (1,005) | |
| (958) |
Total income before income taxes | | $ | 5,046 | | $ | 6,697 | | $ | 140,342 |
Note: Fiscal year 2018 has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See Note 2 under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.
(b) Includes charges of $3.5 million related to one-time, non-cash reserves for certain accounts receivable and impairments of reacquired franchise rights due to the financial and operational impact of the conflict in Ukraine and $6.1 million of costs associated with the termination of significant franchisees in the UK, including the reserve of certain accounts and notes receivable and operating lease right-of-use assets impairment. See “Note 22. Divestitures” and “Note 10. Allowance for Credit Losses” for additional information. (c) For the year ended December 25, 2022, Unallocated corporate expenses includes $15.0 million for certain legal settlements, $13.9 million of one-time, non-cash reserves of certain notes receivable, and $1.5 million of advisory fees and severance costs associated with the transition of certain executives. For the year ended December 26, 2021, Unallocated corporate expense includes $13.1 million of reorganization costs. See “Note 16. Strategic Corporate Reorganization for Long-term Growth” for additional information. |
108
| | | | | | | | | | |
(In thousands) |
| 2019 |
| 2018 |
| 2017 |
| |||
| | | | | | | | | | |
Property and equipment: | | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 221,420 | | $ | 236,526 | | $ | 235,640 | |
North America commissaries | |
| 142,946 | |
| 140,309 | |
| 136,701 | |
International | |
| 16,031 | |
| 17,218 | |
| 17,257 | |
All others | |
| 84,167 | |
| 71,880 | |
| 58,977 | |
Unallocated corporate assets | |
| 211,842 | |
| 199,239 | |
| 191,924 | |
Accumulated depreciation and amortization | |
| (464,665) | |
| (438,278) | |
| (406,168) | |
Net property and equipment | | $ | 211,741 | | $ | 226,894 | | $ | 234,331 | |
| | | | | | | | | | |
Expenditures for property and equipment: | | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 8,811 | | $ | 13,568 | | $ | 15,245 | |
North America commissaries | |
| 3,773 | |
| 3,994 | |
| 14,767 | |
International | |
| 1,143 | |
| 986 | |
| 1,884 | |
All others | |
| 11,541 | |
| 13,438 | |
| 8,239 | |
Unallocated corporate | |
| 12,443 | |
| 10,042 | |
| 12,458 | |
Total expenditures for property and equipment | | $ | 37,711 | | $ | 42,028 | | $ | 52,593 | |
109
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Property and equipment, net: | ||||||||||||||||||||
| Domestic Company-owned restaurants | $ | 238,658 | $ | 241,050 | $ | 228,077 | ||||||||||||||
| North America commissaries | 149,920 | 149,218 | 145,282 | |||||||||||||||||
| International | 16,080 | 14,642 | 13,604 | |||||||||||||||||
| All others | 131,210 | 109,052 | 91,724 | |||||||||||||||||
| Unallocated corporate assets | 254,425 | 236,132 | 213,828 | |||||||||||||||||
| Accumulated depreciation and amortization | (540,500) | (526,238) | (491,620) | |||||||||||||||||
| Property and equipment, net | $ | 249,793 | $ | 223,856 | $ | 200,895 | ||||||||||||||
| Expenditures for property and equipment: | ||||||||||||||||||||
| Domestic Company-owned restaurants | $ | 23,057 | $ | 16,108 | $ | 12,848 | ||||||||||||||
| North America commissaries | 5,729 | 4,007 | 4,447 | |||||||||||||||||
| International | 5,175 | 1,979 | 1,065 | |||||||||||||||||
| All others | 18,296 | 18,645 | 11,700 | |||||||||||||||||
| Unallocated corporate | 26,134 | 27,820 | 5,592 | |||||||||||||||||
Total expenditures for property and equipment (a) | $ | 78,391 | $ | 68,559 | $ | 35,652 | ||||||||||||||
segment:
| Reportable Segments | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | Year Ended December 25, 2022 | |||||||||||||||||||||||||||||||||||||
| Major Products/Services Lines | Domestic Company-owned restaurants | North America franchising | North America commissaries | International | All others | Total | ||||||||||||||||||||||||||||||||
| Company-owned restaurant sales | $ | 708,389 | $ | — | $ | — | $ | — | $ | — | $ | 708,389 | ||||||||||||||||||||||||||
| Franchise royalties and fees | — | 141,521 | — | 49,422 | — | 190,943 | ||||||||||||||||||||||||||||||||
| Commissary sales | — | — | 1,087,204 | 80,481 | — | 1,167,685 | ||||||||||||||||||||||||||||||||
| Other revenues | — | — | — | 28,779 | 298,282 | 327,061 | ||||||||||||||||||||||||||||||||
| Eliminations | — | (4,122) | (217,570) | — | (70,283) | (291,975) | ||||||||||||||||||||||||||||||||
| Total segment revenues | 708,389 | 137,399 | 869,634 | 158,682 | 227,999 | 2,102,103 | ||||||||||||||||||||||||||||||||
International other revenues (a) | — | — | — | (28,779) | 28,779 | — | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 708,389 | $ | 137,399 | $ | 869,634 | $ | 129,903 | $ | 256,778 | $ | 2,102,103 | ||||||||||||||||||||||||||
| | | | | | | | | | | | |
| | Reportable Segments | ||||||||||
| | Year Ended December 29, 2019 | ||||||||||
Major Products/Services Lines | | Domestic Company-owned restaurants | | North America commissaries | | North America franchising | | International | | All others | | Total |
Company-owned restaurant sales | $ | 652,053 | $ | - | $ | - | $ | - | $ | - | $ | 652,053 |
Commissary sales | | - | | 799,725 | | - | | 64,179 | | - | | 863,904 |
Franchise royalties and fees | | - | | - | | 74,610 | | 38,745 | | - | | 113,355 |
Other revenues | | - | | - | | - | | 23,344 | | 244,924 | | 268,268 |
Eliminations | | - | | (187,073) | | (2,782) | | (191) | | (88,286) | | (278,332) |
Total segment revenues | $ | 652,053 | $ | 612,652 | $ | 71,828 | $ | 126,077 | $ | 156,638 | $ | 1,619,248 |
International other revenues (1) | | - | | - | | - | | (23,344) | | 23,344 | | - |
International eliminations (1) | | - | | - | | - | | 191 | | (191) | | - |
Total revenues | $ | 652,053 | $ | 612,652 | $ | 71,828 | $ | 102,924 | $ | 179,791 | $ | 1,619,248 |
| | | | | | | | | | | | |
| | Reportable Segments | ||||||||||
| | Year Ended December 30, 2018 (Note) | ||||||||||
Major Products/Services Lines | | Domestic Company-owned restaurants | | North America commissaries | | North America franchising | | International | | All others | | Total |
Company-owned restaurant sales | $ | 692,380 | $ | - | $ | - | $ | 6,237 | $ | - | $ | 698,617 |
Commissary sales | | - | | 811,191 | | - | | 68,124 | | - | | 879,315 |
Franchise royalties and fees | | - | | - | | 82,258 | | 35,988 | | - | | 118,246 |
Other revenues | | - | | - | | - | | 21,202 | | 222,130 | | 243,332 |
Eliminations | | - | | (201,325) | | (2,965) | | (283) | | (72,066) | | (276,639) |
Total segment revenues | $ | 692,380 | $ | 609,866 | $ | 79,293 | $ | 131,268 | $ | 150,064 | $ | 1,662,871 |
International other revenues (1) | | - | | - | | - | | (21,202) | | 21,202 | | - |
International eliminations (1) | | - | | - | | - | | 283 | | (283) | | - |
Total revenues | $ | 692,380 | $ | 609,866 | $ | 79,293 | $ | 110,349 | $ | 170,983 | $ | 1,662,871 |
| | | | | | | | | | | | |
Note: Fiscal year 2018 has been restated to reflect the consolidationTable of Papa John’s Marketing Fund, Inc. See Note 2 under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.
| Reportable Segments | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | Year Ended December 26, 2021 | |||||||||||||||||||||||||||||||||||||
| Major Products/Services Lines | Domestic Company-owned restaurants | North America franchising | North America commissaries | International | All others | Total | ||||||||||||||||||||||||||||||||
| Company-owned restaurant sales | $ | 778,323 | $ | — | $ | — | $ | — | $ | — | $ | 778,323 | ||||||||||||||||||||||||||
| Franchise royalties and fees | — | 133,489 | — | 53,148 | — | 186,637 | ||||||||||||||||||||||||||||||||
| Commissary sales | — | — | 976,698 | 97,623 | — | 1,074,321 | ||||||||||||||||||||||||||||||||
| Other revenues | — | — | — | 33,328 | 290,750 | 324,078 | ||||||||||||||||||||||||||||||||
| Eliminations | — | (4,179) | (215,393) | — | (75,366) | (294,938) | ||||||||||||||||||||||||||||||||
| Total segment revenues | 778,323 | 129,310 | 761,305 | 184,099 | 215,384 | 2,068,421 | ||||||||||||||||||||||||||||||||
International other revenues (a) | — | — | — | (33,328) | 33,328 | — | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 778,323 | $ | 129,310 | $ | 761,305 | $ | 150,771 | $ | 248,712 | $ | 2,068,421 | ||||||||||||||||||||||||||
| Reportable Segments | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | Year Ended December 27, 2020 | |||||||||||||||||||||||||||||||||||||
| Major Products/Services Lines | Domestic Company-owned restaurants | North America franchising | North America commissaries | International | All others | Total | ||||||||||||||||||||||||||||||||
| Company-owned restaurant sales | $ | 700,757 | $ | — | $ | — | $ | — | $ | — | $ | 700,757 | ||||||||||||||||||||||||||
| Franchise royalties and fees | — | 99,961 | — | 39,920 | — | 139,881 | ||||||||||||||||||||||||||||||||
| Commissary sales | — | — | 873,125 | 84,043 | — | 957,168 | ||||||||||||||||||||||||||||||||
| Other revenues | — | — | — | 26,976 | 267,648 | 294,624 | ||||||||||||||||||||||||||||||||
| Eliminations | — | (3,229) | (192,332) | — | (83,635) | (279,196) | ||||||||||||||||||||||||||||||||
| Total segment revenues | 700,757 | 96,732 | 680,793 | 150,939 | 184,013 | 1,813,234 | ||||||||||||||||||||||||||||||||
International other revenues (a) | — | — | — | (26,976) | 26,976 | — | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 700,757 | $ | 96,732 | $ | 680,793 | $ | 123,963 | $ | 210,989 | $ | 1,813,234 | ||||||||||||||||||||||||||
110
26. Quarterly Data - Unaudited, in Thousands, except Per Share Data
Our quarterly select financial data is as follows:
| | | | | | | | | | | | | |
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| ||||||||||
2019 |
| 1st |
| 2nd |
| 3rd |
| 4th |
| ||||
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Total revenues | | $ | 398,405 | | $ | 399,623 | | $ | 403,706 | | $ | 417,514 | |
Operating income (loss) | |
| 5,509 | |
| 14,231 | |
| 4,927 | |
| (132) | |
Net income (loss) attributable to the Company (a) | |
| (1,731) | |
| 8,354 | |
| 385 | |
| (2,142) | |
Basic (loss) earnings per common share (a) | | | (0.12) | | | 0.15 | | | (0.10) | | | (0.18) | |
Diluted (loss) earnings per common share (a) | | | (0.12) | | | 0.15 | | | (0.10) | | | (0.18) | |
Dividends declared per common share | | | 0.225 | | | 0.225 | | | 0.225 | | | 0.225 | |
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| | Quarter |
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2018 |
| 1st |
| 2nd |
| 3rd |
| 4th |
| ||||
| | (Note) | | (Note) | | (Note) | | (Note) | | ||||
Total revenues | | $ | 450,122 | | $ | 429,952 | | $ | 385,231 | | $ | 397,566 | |
Operating income (loss) | |
| 28,139 | |
| 24,910 | |
| (14,170) | |
| (7,326) | |
Net income (loss) attributable to the Company (b) | |
| 17,443 | |
| 11,199 | |
| (13,300) | |
| (12,868) | |
Basic earnings (loss) per common share (b) | | | 0.52 | | | 0.35 | | | (0.42) | | | (0.41) | |
Diluted earnings (loss) per common share (b) | | | 0.52 | | | 0.35 | | | (0.42) | | | (0.41) | |
Dividends declared per common share | | | 0.225 | | | 0.225 | | | 0.225 | | | 0.225 | |
Note: The quarterly 2018 information has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See Note 2 under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.
i. The first, second, third and fourth quarters of 2019 include after income tax losses of $13.5 million, $4.2 million, $11.0 million and $19.8 million, respectively, and unfavorable impacts on diluted EPS of $0.43, $0.13, $0.35 and $0.62, respectively, from Special charges. See Note 19 for additional information.
ii. The third and fourth quarters of 2019 include after tax gains of $1.3 million and $2.2 million, respectively, and favorable impacts on diluted EPS of $0.04 and $0.07, respectively, related to the Company’s refranchising of Company-owned restaurants.
i. The second quarter of 2018 includes an after income tax loss of $1.6 million and an unfavorable impact of $0.05 on basic and diluted EPS from the sale of our Company-owned stores in China. See Note 12 for additional information.
ii. The second quarter of 2018 also includes a tax increase of $2.4 million and an unfavorable impact of $0.07 on basic and diluted EPS related to the refranchising our China stores. See Note 20 for additional information.
iii. The third and fourth quarters of 2018 include after income tax losses of $19.3 million and $19.7 million, respectively, and unfavorable impacts on diluted EPS of $0.61 and $0.63, respectively, from Special charges. See Note 19 for additional information.
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Quarterly earnings per share on a full-year basis may not agree to the Consolidated Statements of Operations due to rounding.
111
27. Restatement of 2018 Consolidated Financial Statements
The following tables present the immaterial impact of consolidating Papa John’s Marketing Fund, Inc. in our 2018 consolidated financial statements. See Notes 2 and 5 for additional information.
| | | | | | | | | | |
Consolidated Balance Sheet | | | | |||||||
| | December 30, 2018 | | |||||||
(In thousands) | | As Reported | | Change | | As Restated | | |||
Cash and cash equivalents | | $ | 19,468 | | $ | 13,790 | | $ | 33,258 | |
Accounts receivable, net | | | 67,854 | | | 10,264 | | | 78,118 | |
Income tax receivable | | | 16,073 | | | 73 | | | 16,146 | |
Prepaid expenses | | | 29,935 | | | 441 | | | 30,376 | |
Other current assets | | | 5,677 | | | 1 | | | 5,678 | |
Total current assets | | | 171,708 | | | 24,569 | | | 196,277 | |
Deferred income taxes, net | | | 756 | | | 381 | | | 1,137 | |
Total assets | | | 570,947 | | | 24,950 | | | 595,897 | |
Accounts payable | | | 29,891 | | | (2,785) | | | 27,106 | |
Accrued expenses and other current liabilities | | | 105,712 | | | 23,455 | | | 129,167 | |
Current deferred revenue | | | 2,443 | | | 3,579 | | | 6,022 | |
Current portion of long-term debt | | | 20,000 | | | 9 | | | 20,009 | |
Total current liabilities | | | 164,636 | | | 24,258 | | | 188,894 | |
Deferred revenue | | | 14,679 | | | 2,571 | | | 17,250 | |
Total liabilities | | | 867,617 | | | 26,829 | | | 894,446 | |
Retained earnings | | | 244,061 | | | (1,879) | | | 242,182 | |
Total stockholders' deficit | | | (302,134) | | | (1,879) | | | (304,013) | |
Total liabilities, Series B preferred stock, redeemable noncontrolling interests, and stockholders' deficit | | | 570,947 | | | 24,950 | | | 595,897 | |
| | | | | | | | | |
| | Year Ended | |||||||
| | December 30, 2018 | |||||||
(In thousands, except per share amounts) | | As Reported | | Change | | As Restated | |||
Consolidated Statements of Operations | | | | | | | | | |
Other revenues | | $ | 81,428 | | $ | 89,555 | | $ | 170,983 |
Total revenues | | | 1,573,316 | | | 89,555 | | | 1,662,871 |
Domestic Company-owned restaurant expenses | | | 576,799 | | | 859 | | | 577,658 |
Other expenses | | | 84,016 | | | 86,540 | | | 170,556 |
General and administrative expenses | | | 192,551 | | | 983 | | | 193,534 |
Total costs and expenses | | | 1,542,647 | | | 88,382 | | | 1,631,029 |
Operating income | | | 30,380 | | | 1,173 | | | 31,553 |
Interest expense | | | (25,306) | | | (367) | | | (25,673) |
Income before income taxes | | | 5,891 | | | 806 | | | 6,697 |
Income tax expense | | | 2,646 | | | (22) | | | 2,624 |
Net income before attribution to noncontrolling interests | | | 3,245 | | | 828 | | | 4,073 |
Net income attributable to the Company | | | 1,646 | | | 828 | | | 2,474 |
Net income attributable to common shareholders | ��� | | 1,646 | | | 828 | | | 2,474 |
Basic earnings per common share | | | 0.05 | | | 0.03 | | | 0.08 |
Diluted earnings per common share | | | 0.05 | | | 0.03 | | | 0.08 |
Consolidated Statement of Cash Flows | | | | | | | | | |
Operating activities | | | | | | | | | |
Net income before attribution to noncontrolling interests | | $ | 3,245 | | $ | 828 | | $ | 4,073 |
Provision for uncollectible accounts and notes receivable | | | 4,761 | | | 2,088 | | | 6,849 |
Deferred income taxes | | | 1,705 | | | (85) | | | 1,620 |
Accounts receivable | | | 1,386 | | | 771 | | | 2,157 |
Income tax receivable | | | (12,170) | | | 13 | | | (12,157) |
Prepaid expenses | | | (2,165) | | | 1,126 | | | (1,039) |
Accounts payable | | | (1,694) | | | 1,294 | | | (400) |
Accrued expenses and other current liabilities | | | 10,273 | | | 11,480 | | | 21,753 |
Deferred revenue | | | (271) | | | 2,144 | | | 1,873 |
Net cash provided by operating activities | | | 72,795 | | | 19,659 | | | 92,454 |
Financing activities | | | | | | | | | |
Net proceeds (repayments) of revolving credit facilities | | | 175,000 | | | (11,415) | | | 163,585 |
Net cash used in financing activities | | | (36,682) | | | (11,415) | | | (48,097) |
Change in cash and cash equivalents | | | (2,877) | | | 8,244 | | | 5,367 |
Cash and cash equivalents at beginning of period | | | 22,345 | | | 5,546 | | | 27,891 |
Cash and cash equivalents at end of period | | | 19,468 | | | 13,790 | | | 33,258 |
112
Item 9.9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On June 10, 2019, we dismissed KPMG LLP as our independent registered public accounting firm and appointed Ernst & Young LLP as our independent registered public accounting firm for the Company’s fiscal year ended December 29, 2019. The engagement of Ernst & Young LLP was approved by the Audit Committee of the Board of Directors. We filed a Current Report on Form 8-K with the Securities and Exchange Commission on June 12, 2019 announcing the change in auditors, in which the filing is incorporated by reference herein. Our independent registered public accounting firms’ reports on our consolidated financial statements for each of the past two years did not contain adverse opinions or disclaimers of opinions, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
We have restated the Consolidated Financial Statements and related notes herein as of and for the year ended December 30, 2018 to reflect the correction of an immaterial error to consolidate the Papa John’s Marketing Fund, Inc (“PJMF”). During the first quarter of 2019, the Company reassessed the governance structure and operating procedures of PJMF and determined that the Company has the power to control certain significant activities of PJMF, and thus must consolidate this variable interest entity. See “Note 27” of “Notes to Consolidated Financial Statements” for additional information. KPMG LLP issued a dual-dated opinion on the previous year’s financial statements regarding this immaterial correction of an error.
In connection with the foregoing change in accountants, there was no disagreement of the type described in paragraph (a)(1)(iv) of Item 304 of Regulation S-K or any reportable event as described in paragraph (a)(1)(v) of such Item.
Evaluation of Disclosure Controls and Procedures
Management’s Report on our Internal Control over Financial Reporting
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission (“2013 Framework”). Based on our evaluation under the COSO 2013 Framework, and following the remediation of the material weaknesses described below, our management concluded that our internal control over financial reporting was effective as of December 29, 2019.
25, 2022.
113
As previously disclosed in Item 9A of our Annual Report on Form 10-K/A for the fiscal year ended December 30, 2018, the Company determined that material weaknesses existed as of December 30, 2018 in the Company’s internal control over financial reporting related to the consolidation of Papa John’s Marketing Fund, Inc. (“PJMF”), a variable interest entity (“VIE”), as follows:
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.
During the fourth quarter of 2019, management remediated the identified material weaknesses in internal control over financial reporting, including the material weakness related to the technical accounting expertise when evaluating VIE and complex consolidation matters. The results of PJMF were consolidated for the year ended December 29, 2019 with the related 2018 results restated. In addition, the applicable controls in place for PJMF have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Ernst & Young LLP, an independent registered public accounting firm, has audited the2022 Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of our internal control over financial reporting.
114
We have audited Papa John’s International, Inc. and Subsidiaries’ internal control over financial reporting as of December 29, 2019,25, 2022, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Papa John’s International, Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 29, 2019,25, 2022, based onthe COSO criteria.
115
| Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans, excluding securities reflected in column (a) | |||||||||||||||||
| Equity compensation plans approved by security holders | 235,185 | $ | 56.53 | 3,616,086 | ||||||||||||||||
| Equity compensation plans not approved by security holders * | 136,701 | |||||||||||||||||||
| Total | 371,886 | $ | 56.53 | 3,616,086 | ||||||||||||||||
| | | | | | | |
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| | |
| (c) |
| | (a) | | (b) | | Number of securities | |
| | Number of | | Weighted | | remaining available | |
| | securities to be | | average | | for future issuance | |
| | issued upon exercise | | exercise price | | under equity | |
| | of outstanding | | of outstanding | | compensation plans, | |
| | options, warrants | | options, warrants | | excluding securities | |
Plan Category | | and rights | | and rights | | reflected in column (a) | |
| | | | | | | |
Equity compensation plans approved by security holders |
| 1,204,958 | | $ | 55.67 |
| 5,301,680 |
Equity compensation plans not approved by security holders * |
| 162,667 | | | | | |
Total |
| 1,367,625 | | $ | 55.67 |
| 5,301,680 |
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Information regarding security ownership of certain beneficial owners and management and related stockholder matters appearing under the caption “Security Ownership of Certain Beneficial Owners and Management” is incorporated by reference from the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Report.
116
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
117
Schedule II - Valuation and Qualifying Accounts
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| | Balance at | | (recovered from) | | | | | | Balance at | |||
| | Beginning of | | Costs and | | Additions / | | | End of | ||||
Classification | | Year | | Expenses | | (Deductions) | | | Year | ||||
(in thousands) | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Fiscal year ended December 29, 2019 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | |
Reserve for uncollectible accounts receivable | | $ | 4,205 | | $ | 3,216 | | $ | (80) | (1) | | $ | 7,341 |
Reserve for franchisee notes receivable | |
| 3,369 | |
| (77) | |
| 280 | (1) | |
| 3,572 |
Valuation allowance on deferred tax assets | |
| 8,183 | |
| (295) | |
| 2,819 | | |
| 10,707 |
| | $ | 15,757 | | $ | 2,844 | | $ | 3,019 | | | $ | 21,620 |
| | | | | | | | | | | | | |
Fiscal year ended December 30, 2018 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | |
Reserve for uncollectible accounts receivable (2) | | $ | 2,271 | | $ | 7,242 | | $ | (5,308) | (1) | | $ | 4,205 |
Reserve for franchisee notes receivable | |
| 1,047 | |
| (393) | |
| 2,715 | (1) | |
| 3,369 |
Valuation allowance on deferred tax assets | |
| 7,415 | |
| (1,754) | |
| 2,522 | | |
| 8,183 |
| | $ | 10,733 | | $ | 5,095 | | $ | (71) | | | $ | 15,757 |
| | | | | | | | | | | | | |
Fiscal year ended December 31, 2017 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | |
Reserve for uncollectible accounts receivable | | $ | 1,486 | | $ | 1,744 | | $ | (959) | (1) | | $ | 2,271 |
Reserve for franchisee notes receivable | |
| 2,759 | |
| (1,715) | |
| 3 | (1) | |
| 1,047 |
Valuation allowance on deferred tax assets | |
| 5,462 | |
| (407) | |
| 2,360 | | |
| 7,415 |
| | $ | 9,707 | | $ | (378) | | $ | 1,404 | | | $ | 10,733 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(2) Fiscal year 2018 has been restated to reflect the consolidation of Papa John’s Marketing Fund, Inc. See Note 2 under the heading “Restatement of Previously Issued Consolidated Financial Statements for Immaterial Error Correction” for more details.
Item 16. Summary
None.
118
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| Certificate of Designation of Series A Junior Participating Preferred Stock of Papa John’s International, Inc. Exhibit 3.1 to our report on Form 8-K as filed on July 23, 2018 is incorporated herein by reference. |
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| Employment Agreement between Papa John’s International, Inc. and Robert Lynch effective August 26, 2019. Exhibit 10.1 to our report on Form 8-K as filed on August 28, 2019 is incorporated herein by reference. |
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| Papa John’s International, Inc. Deferred Compensation Plan, as amended through December 5, 2012. Exhibit 10.1 to our |
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* Compensatory plan required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
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| Date: February | PAPA JOHN’S INTERNATIONAL, INC. | |||||||||
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| President and Chief Executive Officer
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123
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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Laurette T. Koellner |
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/s/ Jocelyn C. Mangan |
| Director |
| February |
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Jocelyn C. Mangan |
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/s/ Sonya E. Medina |
| Director |
| February |
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Sonya E. Medina |
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/s/ Shaquille R. O’Neal |
| Director |
| February |
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Shaquille R. O’Neal |
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/s/ Anthony M. Sanfilippo |
| Director |
| February |
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Anthony M. Sanfilippo |
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124
