26, 2023 Delaware (I.R.S. Employer Identification Title of each class: Trading Symbol Name of each exchange on which registered: Common stock, $0.01 par value PZZA The NASDAQ Stock Market LLC Large Accelerated Filer Smaller reporting company Emerging growth company March 27, December 26, (In thousands, except per share amounts) 2022 2021 (Unaudited) Assets Current assets: Cash and cash equivalents $ 80,669 $ 70,610 Accounts receivable, net 81,229 81,370 Notes receivable, current portion 9,108 12,352 Income tax receivable 10,537 9,386 Inventories 38,992 34,981 Prepaid expenses and other current assets 46,461 46,310 Assets held for sale 19,273 — Total current assets 286,269 255,009 Property and equipment, net 216,253 223,856 Finance lease right-of-use assets, net 20,159 20,907 Operating lease right-of-use assets 177,767 176,256 Notes receivable, less current portion, net 22,634 35,504 Goodwill 71,593 80,632 Deferred income taxes 6,535 5,156 Other assets 84,416 88,384 Total assets $ 885,626 $ 885,704 Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit Current liabilities: Accounts payable $ 35,434 $ 28,092 Income and other taxes payable 27,973 19,996 Accrued expenses and other current liabilities 156,203 190,116 Current deferred revenue 19,649 21,700 Current finance lease liabilities 5,190 4,977 Current operating lease liabilities 20,938 22,543 Liabilities held for sale 13,247 — Total current liabilities 278,634 287,424 Deferred revenue 12,381 13,846 Long-term finance lease liabilities 15,696 16,580 Long-term operating lease liabilities 164,738 160,672 Long-term debt, less current portion, net 528,088 480,730 Deferred income taxes — 258 Other long-term liabilities 89,210 93,154 Total liabilities 1,088,747 1,052,664 Redeemable noncontrolling interests 5,323 5,498 Stockholders’ deficit: Common stock ($0.01 par value per share; issued 49,074 at March 27, 2022 and 49,002 at December 26, 2021) 491 490 Additional paid-in capital 436,225 445,126 Accumulated other comprehensive loss (9,316) (9,971) Retained earnings 181,124 183,157 Treasury stock (13,399 shares at March 27, 2022 and 13,205 shares at December 26, 2021, at cost) (832,603) (806,472) Total stockholders’ deficit (224,079) (187,670) Noncontrolling interests in subsidiaries 15,635 15,212 Total Stockholders’ deficit (208,444) (172,458) Total liabilities, Redeemable noncontrolling interests and Stockholders’ deficit $ 885,626 $ 885,704 Three Months Ended March 27, March 28, (In thousands, except per share amounts) 2022 2021 Revenues: Domestic Company-owned restaurant sales $ 198,765 $ 197,234 North America franchise royalties and fees 34,268 32,715 North America commissary revenues 209,679 184,878 International revenues 34,617 34,607 Other revenues 65,363 62,312 Total revenues 542,692 511,746 Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses 161,661 155,888 North America commissary expenses 197,090 170,684 International expenses 19,914 19,618 Other expenses 60,555 55,807 General and administrative expenses 65,937 50,011 Depreciation and amortization 11,940 12,876 Total costs and expenses 517,097 464,884 Refranchising and impairment loss (11,160) — Operating income 14,435 46,862 Net interest expense (4,264) (3,647) Income before income taxes 10,171 43,215 Income tax (benefit) expense (1,256) 7,932 Net income before attribution to noncontrolling interests 11,427 35,283 Net income attributable to noncontrolling interests (933) (1,400) Net income attributable to the Company $ 10,494 $ 33,883 Calculation of net income for earnings per share: Net income attributable to the Company $ 10,494 $ 33,883 Dividends paid to participating securities (60) (3,527) Net income attributable to participating securities — (3,243) Net income attributable to common shareholders $ 10,434 $ 27,113 Basic earnings per common share $ 0.29 $ 0.83 Diluted earnings per common share $ 0.29 $ 0.82 Basic weighted average common shares outstanding 35,927 32,756 Diluted weighted average common shares outstanding 36,236 33,090 Dividends declared per common share $ 0.350 $ 0.225 Three Months Ended March 27, March 28, (In thousands) 2022 2021 Net income before attribution to noncontrolling interests $ 11,427 $ 35,283 Other comprehensive income, before tax: Foreign currency translation adjustments (861) 1,059 Interest rate swaps (1) 1,712 1,795 Other comprehensive income, before tax 851 2,854 Income tax effect: Foreign currency translation adjustments 198 (244) Interest rate swaps (2) (394) (413) Income tax effect (196) (657) Other comprehensive income, net of tax 655 2,197 Comprehensive income before attribution to noncontrolling interests 12,082 37,480 Less: comprehensive (income), redeemable noncontrolling interests (510) (787) Less: comprehensive (income), nonredeemable noncontrolling interests (423) (613) Comprehensive income attributable to the Company $ 11,149 $ 36,080 Papa John’s International, Inc. Common Accumulated Stock Additional Other Noncontrolling Total (In thousands) Shares Common Paid-In Comprehensive Retained Treasury Interests in Stockholders’ For the three months ended March 27, 2022 Outstanding Stock Capital Loss Earnings Stock Subsidiaries Deficit Balance at December 26, 2021 35,797 $ 490 $ 445,126 $ (9,971) $ 183,157 $ (806,472) $ 15,212 $ (172,458) Net income (1) — — — — 10,494 — 423 10,917 Other comprehensive income, net of tax — — — 655 — — — 655 Cash dividends on common stock — — 47 — (12,655) — — (12,608) Exercise of stock options 17 — 741 — — — — 741 Acquisition of Company common stock (301) — — — — (32,709) — (32,709) Stock-based compensation expense — 1 4,175 — — — — 4,176 Issuance of restricted stock 228 — (6,369) — — 6,369 — — Tax payments for equity award issuances (69) — (7,461) — — — — (7,461) Other 3 — (34) — 128 209 — 303 Balance at March 27, 2022 35,675 $ 491 $ 436,225 $ (9,316) $ 181,124 $ (832,603) $ 15,635 $ (208,444) At March 27, 2022, the accumulated other comprehensive loss of $9,316 was comprised of net unrealized foreign currency translation loss of $5,533 and net unrealized loss on the interest rate swap agreements of $3,783. Papa John’s International, Inc. and Subsidiaries Cash Flows Papa John’s International, Inc. Common Accumulated Stock Additional Other Noncontrolling Total (In thousands) Shares Common Paid-In Comprehensive Retained Treasury Interests in Stockholders’ For the three months ended March 28, 2021 Outstanding Stock Capital Loss Earnings Stock Subsidiaries Deficit Balance at December 27, 2020 32,545 $ 453 $ 254,103 $ (14,168) $ 219,158 $ (741,724) $ 15,239 $ (266,939) Net income (1) — — — — 33,883 — 613 34,496 Other comprehensive income, net of tax — — — 2,197 — — — 2,197 Cash dividends on common stock — — 31 — (7,435) — — (7,404) Cash dividends on preferred stock — — — — (3,412) — — (3,412) Exercise of stock options 41 — 2,298 — — — — 2,298 Acquisition of Company common stock (15) — — — — (1,267) — (1,267) Stock-based compensation expense — — 4,113 — — — — 4,113 Issuance of restricted stock 104 — (5,371) — — 5,371 — — Tax effect of restricted stock awards — — (3,834) — — — — (3,834) Distributions to noncontrolling interests — — — — — — (570) (570) Other 6 — (55) — (75) 352 — 222 Balance at March 28, 2021 32,681 $ 453 $ 251,285 $ (11,971) $ 242,119 $ (737,268) $ 15,282 $ (240,100)
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-Q(Mark One)x☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended March 27, 2022ORoOR☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934Commission File Number: 0-21660PAPA JOHN’S INTERNATIONAL, INC.Delaware61-120332361-1203323 (State or other jurisdiction of incorporation or organization) incorporation or organization)number)Louisville, KY 40299-2367 (Address of principal executive offices) (Zip Code) 2002 Papa John’s BoulevardLouisville, Kentucky40299-2367(Address of principal executive offices)(502) (502) 261-7272Securities registered pursuant to Section 12(b) of the Act:Securities registered pursuant to Section 12(b) of the Act:Indicate by check mark whether the registrantRegistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ⌧x No ◻oIndicate by check mark whether the registrantRegistrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to submit such files). Yes ⌧x No ◻oIndicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ☒Accelerated filer ☐x Accelerated filer o Non-accelerated filer ☐o☐o☐oIf an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o◻Indicate by check mark whether the registrantRegistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No ☒xAt April 29, 2022,27, 2023, there were outstanding 35,794,90632,656,059 shares of the registrant’sRegistrant’s common stock par value $0.01 per share.outstanding.Page No.Page No.345689253839393940412iItem 1. Financial StatementsCondensed Consolidated Balance Sheets(In thousands, except per share amounts) March 26,
2023December 25,
2022(Unaudited) Assets Current assets: Cash and cash equivalents $ 46,708 $ 47,373 Accounts receivable, net 99,997 102,533 Notes receivable, current portion 7,207 6,848 Income tax receivable 5,957 8,780 Inventories 37,112 41,382 Prepaid expenses and other current assets 49,917 44,123 Total current assets 246,898 251,039 Property and equipment, net 253,144 249,793 Finance lease right-of-use assets, net 27,847 24,941 Operating lease right-of-use assets 170,148 172,425 Notes receivable, less current portion, net 21,242 21,248 Goodwill 70,788 70,616 Deferred income taxes 553 1,920 Other assets 74,241 72,245 Total assets $ 864,861 $ 864,227 Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit Current liabilities: Accounts payable $ 68,622 $ 62,316 Income and other taxes payable 8,180 8,766 Accrued expenses and other current liabilities 134,988 142,535 Current deferred revenue 20,508 21,272 Current finance lease liabilities 7,473 6,850 Current operating lease liabilities 24,959 23,418 Current portion of long-term debt 8,200 — Total current liabilities 272,930 265,157 Deferred revenue 21,733 23,204 Long-term finance lease liabilities 21,392 19,022 Long-term operating lease liabilities 157,211 160,905 Long-term debt, less current portion, net 797,362 597,069 Deferred income taxes 1,112 — Other long-term liabilities 67,183 68,317 Total liabilities 1,338,923 1,133,674 Redeemable noncontrolling interests 1,263 1,217 Stockholders’ deficit: Common stock ($0.01 par value per share; issued 49,207 at March 26, 2023 and 49,138 at December 25, 2022) 492 491 Additional paid-in capital 443,686 449,829 Accumulated other comprehensive loss (8,766) (10,135) Retained earnings 203,569 195,856 Treasury stock (16,851 shares at March 26, 2023 and 14,402 shares at December 25, 2022, at cost) (1,130,136) (922,434) Total stockholders’ deficit (491,155) (286,393) Noncontrolling interests in subsidiaries 15,830 15,729 Total Stockholders’ deficit (475,325) (270,664) Total Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit $ 864,861 $ 864,227 See accompanying notes.31Condensed Consolidated Statements of Operations(Unaudited)Three Months Ended (In thousands, except per share amounts) March 26,
2023March 27,
2022Revenues: Domestic Company-owned restaurant sales $ 179,866 $ 198,765 North America franchise royalties and fees 36,072 34,268 North America commissary revenues 212,566 209,679 International revenues 31,463 34,617 Other revenues 67,082 65,363 Total revenues 527,049 542,692 Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses 147,784 161,661 North America commissary expenses 196,415 197,090 International expenses 17,311 19,914 Other expenses 61,078 60,555 General and administrative expenses 51,944 65,937 Depreciation and amortization 14,721 11,940 Total costs and expenses 489,253 517,097 Refranchising and impairment loss — (11,160) Operating income 37,796 14,435 Net interest expense (9,021) (4,264) Income before income taxes 28,775 10,171 Income tax expense (benefit) 6,229 (1,256) Net income before attribution to noncontrolling interests 22,546 11,427 Net income attributable to noncontrolling interests (170) (933) Net income attributable to the Company $ 22,376 $ 10,494 Calculation of net income for earnings per share: Net income attributable to the Company $ 22,376 $ 10,494 Dividends paid to participating securities — (60) Net income attributable to common shareholders $ 22,376 $ 10,434 Basic earnings per common share $ 0.66 $ 0.29 Diluted earnings per common share $ 0.65 $ 0.29 Basic weighted average common shares outstanding 34,155 35,927 Diluted weighted average common shares outstanding 34,324 36,236 Dividends declared per common share $ 0.42 $ 0.35 See accompanying notes.42Condensed Consolidated Statements of Comprehensive Income(Unaudited)Three Months Ended (In thousands) March 26,
2023March 27,
2022Net income before attribution to noncontrolling interests $ 22,546 $ 11,427 Other comprehensive income (loss), before tax: Foreign currency translation adjustments 1,442 (861) Interest rate swaps (1)336 1,712 Other comprehensive income (loss), before tax 1,778 851 Income tax effect: Foreign currency translation adjustments (332) 198 Interest rate swaps (2)(77) (394) Income tax effect (409) (196) Other comprehensive income (loss), net of tax 1,369 655 Comprehensive income before attribution to noncontrolling interests 23,915 12,082 Less: comprehensive income, redeemable noncontrolling interests (46) (510) Less: comprehensive income, nonredeemable noncontrolling interests (124) (423) Comprehensive income attributable to the Company $ 23,745 $ 11,149 (Unaudited)(1) Amounts reclassified out of accumulated other comprehensive income into net interest (expense) income include $(207) and $535 for the three months ended March 26, 2023 and March 27, 2022, respectively.(1)Amounts reclassified out of accumulated other comprehensive loss into net interest expense include $535 and ($1,709) for the three months ended March 27, 2022 and March 28, 2021, respectively.(2) The income tax effects of amounts reclassified out of accumulated other comprehensive loss intowere $47 and $(120) for the three months ended March 26, 2023 and March 27, 2022, respectively.See accompanying notes.3Papa John’s International, Inc. and SubsidiariesCondensed Consolidated Statements of Stockholders’ Deficit(Unaudited)Papa John’s International, Inc. (In thousands) Common
Stock
Shares
OutstandingCommon
StockAdditional
Paid-In
CapitalAccumulatedOtherComprehensiveLoss (2)Retained
EarningsTreasuryStock (3)Noncontrolling
Interests in
SubsidiariesTotal
Stockholders’
DeficitFor the three months ended
March 26, 2023Balance at December 25, 2022 34,736 $ 491 $ 449,829 $ (10,135) $ 195,856 $ (922,434) $ 15,729 $ (270,664) Net income (1)— — — — 22,376 — 124 $ 22,500 Other comprehensive income (loss), net of tax — — — 1,369 — — — $ 1,369 Dividends on common stock — — — — (14,663) — — $ (14,663) Exercise of stock options 15 — 614 — — — — $ 614 Acquisition of Company common stock (2,523) — — — — (212,444) — $ (212,444) Stock-based compensation expense — 1 3,897 — — — — $ 3,898 Issuance of restricted stock 197 — (4,609) — — 4,609 — $ — Tax effect of restricted stock awards (72) — (5,999) — — — — $ (5,999) Distributions to noncontrolling interests — — — — — — (23) $ (23) Other 3 — (46) — — 133 — $ 87 Balance at March 26, 2023 32,356 $ 492 $ 443,686 $ (8,766) $ 203,569 $ (1,130,136) $ 15,830 $ (475,325) (1) Net income to the Company for the three months ended March 26, 2023 excludes $46 allocable to the redeemable noncontrolling interests for our joint venture arrangements.(2)At March 26, 2023, the accumulated other comprehensive loss of $8,766 was comprised of net unrealized foreign currency translation loss of $7,586 and net unrealized loss on the interest expense were ($120)rate swap agreements of $1,180.(3) Acquisition of Company common stock for the three months ended March 26, 2023 includes $2,804 of transaction costs directly attributable to share repurchases, including a 1% excise tax incurred under the Inflation Reduction Act of 2022.See accompanying notes.4Papa John’s International, Inc. and $385SubsidiariesCondensed Consolidated Statements of Stockholders’ Deficit (continued)(Unaudited)
___________________________________Papa John’s International, Inc. (In thousands) Common
Stock
Shares
OutstandingCommon
StockAdditional
Paid-In
CapitalAccumulatedOtherComprehensiveLoss (2)Retained
EarningsTreasury
StockNoncontrolling
Interests in
SubsidiariesTotal
Stockholders’
DeficitFor the three months ended
March 27, 2022Balance at December 26, 2021 35,797 $ 490 $ 445,126 $ (9,971) $ 183,157 $ (806,472) $ 15,212 $ (172,458) Net income (1)— — — — 10,494 — 423 $ 10,917 Other comprehensive income (loss), net of tax — — — 655 — — — $ 655 Dividends on common stock — — 47 — (12,527) — — $ (12,480) Exercise of stock options 17 — 741 — — — — $ 741 Acquisition of Company common stock (301) — — — — (32,709) — $ (32,709) Stock-based compensation expense — 1 4,175 — — — — $ 4,176 Issuance of restricted stock 228 — (6,369) — — 6,369 — $ — Tax effect of restricted stock awards (69) — (7,461) — — — — $ (7,461) Other 3 — (34) — — 209 — $ 175 Balance at March 27, 2022 35,675 $ 491 $ 436,225 $ (9,316) $ 181,124 $ (832,603) $ 15,635 $ (208,444) (1) Net income to the Company for the three months ended March 27, 2022 and March 28, 2021, respectively.excludes $510 allocable to the redeemable noncontrolling interests for our joint venture arrangements.(2)See accompanying notes.5Papa John’s International, Inc. and SubsidiariesCondensed Consolidated Statements of Stockholders’ Deficit(Unaudited)(1)Net income to the Company for the three months ended March 27, 2022 excludes $510 allocable to the redeemable noncontrolling interests for our joint venture arrangements.See accompanying notes.65Condensed Consolidated Statements of Stockholders’ Deficit (continued)(Unaudited)Three Months Ended (In thousands) March 26,
2023March 27,
2022Operating activities Net income before attribution to noncontrolling interests $ 22,546 $ 11,427 Adjustments to reconcile net income to net cash provided by operating activities: Provision for allowance for credit losses on accounts and notes receivable 513 15,167 Depreciation and amortization 14,721 11,940 Refranchising and impairment loss — 11,160 Deferred income taxes 2,031 (1,817) Stock-based compensation expense 3,898 4,176 Other 496 (2,135) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 2,182 (2,503) Income tax receivable 2,822 (1,151) Inventories 4,330 (4,731) Prepaid expenses and other current assets (4,351) 77 Other assets and liabilities 71 (654) Accounts payable (310) 7,359 Income and other taxes payable (512) 8,013 Accrued expenses and other current liabilities (5,413) (29,469) Deferred revenue (2,236) (1,465) Net cash provided by operating activities 40,788 25,394 Investing activities Purchases of property and equipment (18,410) (10,233) Notes issued (976) (272) Repayments of notes issued 1,069 3,432 Acquisitions, net of cash acquired — (1,250) Other 42 8 Net cash used in investing activities (18,275) (8,315) Financing activities Net proceeds of revolving credit facilities 208,200 47,000 Proceeds from exercise of stock options 614 741 Acquisition of Company common stock (209,640) (32,709) Dividends paid to common stockholders (14,603) (12,608) Tax payments for equity award issuances (5,999) (7,461) Distributions to noncontrolling interests (23) (685) Other (1,761) (1,065) Net cash used in financing activities (23,212) (6,787) Effect of exchange rate changes on cash and cash equivalents 34 (233) Change in cash and cash equivalents (665) 10,059 Cash and cash equivalents at beginning of period 47,373 70,610 Cash and cash equivalents at end of period $ 46,708 $ 80,669
At March 28, 2021, the accumulated other comprehensive loss of $11,971 was comprised of net unrealized foreign currency translation loss of $2,977 and net unrealized loss on the interest rate swap agreements of $8,994.
See accompanying notes.
7
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | |
| | | ||||
| | Three Months Ended | ||||
| | March 27, | | March 28, | ||
(In thousands) |
| 2022 |
| 2021 | ||
| | | | | | |
Operating activities | | | | | | |
Net income before attribution to noncontrolling interests | | $ | 11,427 | | $ | 35,283 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Provision (benefit) for allowance for credit losses on accounts and notes receivable | |
| 15,167 | |
| (1,098) |
Depreciation and amortization | |
| 11,940 | |
| 12,876 |
Refranchising and impairment loss | | | 11,160 | | | — |
Deferred income taxes | |
| (1,817) | |
| 2,586 |
Stock-based compensation expense | |
| 4,176 | |
| 4,113 |
Other | |
| (2,135) | |
| 325 |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
Accounts receivable | |
| (2,503) | |
| 13,349 |
Income tax receivable | | | (1,151) | | | 566 |
Inventories | |
| (4,731) | |
| 2,721 |
Prepaid expenses and other current assets | |
| 77 | |
| 711 |
Other assets and liabilities | |
| (654) | |
| (7,901) |
Accounts payable | |
| 7,359 | |
| (5,350) |
Income and other taxes payable | |
| 8,013 | |
| 15,045 |
Accrued expenses and other current liabilities | |
| (29,469) | |
| (9,736) |
Deferred revenue | |
| (1,465) | |
| (273) |
Net cash provided by operating activities | |
| 25,394 | |
| 63,217 |
Investing activities | | | | | | |
Purchases of property and equipment | |
| (10,233) | |
| (7,076) |
Notes issued | |
| (272) | |
| (3,417) |
Repayments of notes issued | |
| 3,432 | |
| 4,864 |
Acquisitions, net of cash acquired | |
| (1,250) | |
| (699) |
Other | |
| 8 | |
| 29 |
Net cash used in investing activities | |
| (8,315) | |
| (6,299) |
Financing activities | | | | | | |
Net proceeds of revolving credit facilities | |
| 47,000 | |
| 5,000 |
Proceeds from exercise of stock options | |
| 741 | |
| 2,298 |
Acquisition of Company common stock | |
| (32,709) | |
| (1,267) |
Dividends paid to common stockholders | | | (12,608) | | | (7,404) |
Dividends paid to preferred stockholders | |
| — | |
| (3,412) |
Tax payments for equity award issuances | |
| (7,461) | |
| (3,834) |
Distributions to noncontrolling interests | |
| (685) | |
| (1,705) |
Repayments of term loan | | | — | | | (5,000) |
Other | |
| (1,065) | |
| (756) |
Net cash used in financing activities | |
| (6,787) | |
| (16,080) |
Effect of exchange rate changes on cash and cash equivalents | |
| (233) | |
| 230 |
Change in cash and cash equivalents | |
| 10,059 | |
| 41,068 |
Cash and cash equivalents at beginning of period | |
| 70,610 | |
| 130,204 |
Cash and cash equivalents at end of period | | $ | 80,669 | | $ | 171,272 |
See accompanying notes.
8
Papa John’s International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
26, 2023
|
|
Use25, 2022.
our business, “Domestic” is defined as within the contiguous United States, “North America” includes Canada, and “International” includes the rest of the world other than North America.
transactions have been eliminated.
Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States and Canada 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 domesticNorth America restaurants, of which approximately 80%85 percent are franchised, (85% following the divestiture of the Company’s interest in 1 joint venture subsequent to the end of the first quarter that included 90 restaurants as discussed in Note 10) and does not have sufficient equity to fund its operations without these ongoing financial contributions. Based on an assessment of the governance structure and operating procedures of PJMF, the Company determined it has the power to control certain significant activities of PJMF, and therefore, is the primary beneficiary. The Company has consolidated PJMF in its financial results in accordance with Accounting Standards Codification (“ASC”) 810, “ConsolidationsConsolidation.”
Papa John’s has 4 joint venture arrangements in which there are noncontrolling interests held by third parties that includeincluded 98 and 188 restaurants at March 26, 2023 and March 27, 2022, and March 28, 2021. Subsequent to the end of the first quarter, the Companyrespectively. As further described in “Note 10. Divestitures” we divested itsour 51 percent interest in 1one joint venture in Texas that includedowned 90 restaurants. See Note 10 for additional information.
restaurants in the second quarter of 2022. Consolidated net income is required to be reported separately at amounts attributable to both the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of
9
the Company and the interests of the noncontrolling owners, including a disclosure on the face of the Condensed Consolidated Statements of Operations of net income attributable to noncontrolling interests.
| | | | | | |
| | | ||||
| | Three Months Ended | ||||
| | March 27, | | March 28, | ||
|
| 2022 |
| 2021 | ||
| | | | | | |
Papa John’s International, Inc. | | $ | 1,621 | | $ | 2,349 |
Noncontrolling interests | |
| 933 | |
| 1,400 |
Total net income | | $ | 2,554 | | $ | 3,749 |
| Three Months Ended | ||||||||||||||||||||||||||
| March 26, 2023 | March 27, 2022 | |||||||||||||||||||||||||
| Papa John’s International, Inc. | $ | 397 | $ | 1,621 | ||||||||||||||||||||||
| Noncontrolling interests | 170 | 933 | ||||||||||||||||||||||||
| Total net income | $ | 567 | $ | 2,554 | ||||||||||||||||||||||
|
|
|
|
| ||||||||||
|
|
| ||||||||||||
Type of Joint Venture Arrangement | Location within the Condensed Consolidated Balance Sheets | Recorded Value | ||||||||||||
|
|
|
|
| ||||||||||
Joint ventures with no redemption feature | Permanent equity | Carrying value | ||||||||||||
Joint ventures with option to require the Company to purchase the noncontrolling interest - not currently redeemable or redemption not probable | Temporary equity | Carrying value | ||||||||||||
10
Level 1: Quoted market prices in active markets for identical assets or liabilities.
| Fair Value Measurements | ||||||||||||||||||||||||||
| (In thousands) | Carrying Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| March 26, 2023 | ||||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||
Cash surrender value of life insurance policies (a) | $ | 30,337 | $ | 30,337 | $ | — | $ | — | ||||||||||||||||||
Interest rate swaps (b) | $ | 274 | $ | — | $ | 274 | $ | — | ||||||||||||||||||
| December 25, 2022 | ||||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||
Cash surrender value of life insurance policies (a) | $ | 30,120 | $ | 30,120 | $ | — | $ | — | ||||||||||||||||||
Interest rate swaps (b) | $ | 986 | $ | — | $ | 986 | $ | — | ||||||||||||||||||
| | | | | | | | | | | | | |
| | Carrying | | Fair Value Measurements |
| ||||||||
(in thousands) |
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
March 27, 2022 | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | |
Cash surrender value of life insurance policies (a) | | $ | 34,205 | | $ | 34,205 | | $ | — | | $ | — | |
| | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | |
Interest rate swaps (b) | | $ | 1,528 | | $ | — | | $ | 1,528 | | $ | — | |
| | | | | | | | | | | | | |
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 | | $ | — | |
The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash and cash equivalents, accounts receivable, net of allowances, and accounts payable. The carrying value of notes receivable, net of allowances, also approximates fair value. The Company’s revolving credit facilities under itsthe Company’s credit agreement approximate carrying value due to itstheir variable market-based interest rate. The Company’s 3.875%senior notes are classified as a Level 2 fair value measurement since the Company estimates the fair value by using recent trading transactions, and hashave the following estimated fair values and carrying values (excluding the impact of unamortized debt issuance costs) as of March 27, 202226, 2023 and December 26, 2021, respectively:
| | | | | | | | | | | | |
| | March 27, 2022 | | December 26, 2021 | ||||||||
| | Carrying | | Fair | | Carrying | | Fair | ||||
(in thousands) | | Value | | Value | | Value | | Value | ||||
3.875% Senior Notes | | $ | 400,000 | | $ | 362,000 | | $ | 400,000 | | $ | 396,000 |
11
| March 26, 2023 | December 25, 2022 | |||||||||||||||||||||||||
| (In thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||||
| 3.875% Senior Notes | $ | 400,000 | $ | 342,000 | $ | 400,000 | $ | 339,500 | ||||||||||||||||||
The following table summarizes changes in our allowances for credit losses for accounts receivable and notes receivable:
| | | | | | |
| | | | |||
(in thousands) | | Accounts Receivable | | Notes Receivable | ||
Balance at December 26, 2021 | | $ | 2,364 | | $ | 1,500 |
Current period provision for expected credit losses (1) | | | 2,613 | | | 12,560 |
Write-offs charged against the allowance | | | (126) | | | — |
Recoveries collected | | | — | | | (6) |
Balance at March 27, 2022 | | $ | 4,851 | | $ | 14,054 |
| (In thousands) | Accounts Receivable | Notes Receivable | ||||||||||||
| Balance at December 25, 2022 | $ | 6,718 | $ | 14,499 | ||||||||||
| Current period provision for expected credit losses | 609 | 24 | ||||||||||||
| Write-offs charged against the allowance | (228) | — | ||||||||||||
| Recoveries collected | (84) | (36) | ||||||||||||
| Balance at March 26, 2023 | $ | 7,015 | $ | 14,487 | ||||||||||
Operations.3. LeasesLessor Operating LeasesWe subleaseThe Company subleases certain retail space to our franchisees in the United Kingdom (“UK”), which are primarily operating leases. At March 27, 2022,26, 2023, we leased and subleased approximately 430446 Papa John’s restaurant propertiesJohns restaurants to franchisees in the United Kingdom.UK. The initial lease terms on the franchised sites in the United KingdomUK are generally 15 years. The Company has the option to negotiate an extension toward the end of the lease term at the landlord’s discretion. The initial lease terms of the franchisee subleases are generally five to ten years. Rental income, primarily derived from properties leased and subleased to franchisees in the United Kingdom,UK, is recognized on a straight-line basis over the respective operating lease terms. WeThe Company recognized total sublease income of $2.9 million and $3.0 million for the three months ended March 26, 2023 and $2.8 millionMarch 27, 2022, respectively, within Other revenues in the Condensed Consolidated Statements of Operations for the three months ended March 27, 2022 and March 28, 2021, respectively.Lease GuaranteesAs a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of approximately 6552 domestic leases. These leases have varying terms, the latest of which expires in 2036. As of March 27, 2022,26, 2023, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $10.8$8.7 million. This contingent liability is not included in the Condensed Consolidated Balance SheetSheets as it is not probable to occur. The fair value of the guarantee is not material.Subsequent to quarter-end, we refranchised 90 Company-owned restaurants held in a consolidated joint venture in Texas through the sale of our 51% ownership in the joint venture, as discussed in Note 10. As part of this transaction, we are contingently liable for payment of 12 of the 90 domestic leases, and the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees for these stores is approximately $1.6 million. 12
| Three Months Ended | ||||||||||||||
| (In thousands) | March 26, 2023 | March 27, 2022 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from finance leases | $ | 309 | $ | 262 | ||||||||||
| Financing cash flows from finance leases | $ | 1,743 | $ | 1,241 | ||||||||||
Operating cash flows from operating leases (a) | $ | 9,178 | $ | 9,612 | ||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 4,764 | $ | 569 | ||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 4,721 | $ | 20,801 | ||||||||||
| Cash received from sublease income | $ | 2,532 | $ | 3,092 | ||||||||||
| | | | | | |
| | Three Months Ended | ||||
(in thousands) | | March 27, 2022 | | March 28, 2021 | ||
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from finance leases | | $ | 262 | | $ | 278 |
Financing cash flows from finance leases | | | 1,241 | | | 1,059 |
Operating cash flows from operating leases (a) | | | 9,612 | | | 9,483 |
Right-of-use assets obtained in exchange for new finance lease liabilities | | | 569 | | | 7,014 |
Right-of-use assets obtained in exchange for new operating lease liabilities (b) | | | 20,801 | | | 28,428 |
Cash received from sublease income | | | 3,092 | | | 2,987 |
| | | | | | |
(a) Included within the change in Other assets and liabilities within the Condensed Consolidated Statements of Cash Flows offset by non-cash operating lease right-of-use asset amortization and lease liability accretion. | ||||||
(b) Includes right-of-use assets of approximately $14.5 million for the three months ended March 28, 2021 associated with the lease commencement of our Atlanta, Georgia corporate office. | ||||||
4. Included within the change in Other assets and liabilities within the Condensed Consolidated Statements of Cash Flows offset by non-cash operating lease right-of-use asset amortization and lease liability accretion.
PJMF also has a wholly-owned subsidiary, Papa Card, Inc., which administers the Company’s gift card programs.
| | | | | | |
| | | | | | |
| | March 27, | | December 26, | ||
| | 2022 | | 2021 | ||
| | | | | | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 24,136 | | $ | 24,481 |
Accounts receivable, net | | | 13,078 | | | 14,150 |
Income tax receivable | | | 44 | | | 300 |
Prepaid expenses and other current assets | | | 2,148 | | | 1,718 |
Total current assets | | | 39,406 | | | 40,649 |
Deferred income taxes | | | 604 | | | 614 |
Total assets | | $ | 40,010 | | $ | 41,263 |
| | | | | | |
| | | | | | |
Liabilities | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 2,868 | | $ | 140 |
Income and other taxes payable | | | 2 | | | 2 |
Accrued expenses and other current liabilities | | | 35,131 | | | 40,154 |
Current deferred revenue | | | 4,320 | | | 4,317 |
Total current liabilities | | | 42,321 | | | 44,613 |
Deferred revenue | | | 1,399 | | | 2,478 |
Total liabilities | | $ | 43,720 | | $ | 47,091 |
13
| March 26, 2023 | December 25, 2022 | |||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 16,076 | $ | 17,174 | ||||||||||
| Accounts receivable, net | 14,254 | 14,780 | ||||||||||||
| Prepaid expenses and other current assets | 7,638 | 1,815 | ||||||||||||
| Total current assets | 37,968 | 33,769 | ||||||||||||
| Deferred income taxes | 655 | 655 | ||||||||||||
| Total assets | $ | 38,623 | $ | 34,424 | ||||||||||
| Liabilities | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 13,589 | $ | 12,428 | ||||||||||
| Income and other taxes payable | 13 | 8 | ||||||||||||
| Accrued expenses and other current liabilities | 13,911 | 17,928 | ||||||||||||
| Current portion of long-term debt | 8,200 | — | ||||||||||||
| Current deferred revenue | 4,381 | 4,395 | ||||||||||||
| Total current liabilities | 40,094 | 34,759 | ||||||||||||
| Deferred revenue | 1,800 | 2,503 | ||||||||||||
| Total liabilities | $ | 41,894 | $ | 37,262 | ||||||||||
| | | | | | | | | |
| | Contract Liabilities | |||||||
| | | March 27, 2022 | | | December 26, 2021 | | | Change |
Franchise fees and unredeemed gift card liabilities | | $ | 18,731 | | $ | 20,410 | | $ | (1,679) |
Customer loyalty program obligations | | | 13,299 | | | 15,136 | | | (1,837) |
Total contract liabilities | | $ | 32,030 | | $ | 35,546 | | $ | (3,516) |
| Contract Liabilities | ||||||||||||||||||||
| March 26, 2023 | December 25, 2022 | Change | ||||||||||||||||||
| Franchise fees and unredeemed gift card liabilities | $ | 29,166 | $ | 30,710 | $ | (1,544) | ||||||||||||||
| Customer loyalty program obligations | 13,075 | 13,766 | (691) | |||||||||||||||||
| Total contract liabilities | $ | 42,241 | $ | 44,476 | $ | (2,235) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | Performance Obligations by Period | ||||||||||||||||||
| | Less than 1 Year | | 1-2 Years | | 2-3 Years | | 3-4 Years | | 4-5 Years | | Thereafter | | Total | |||||||
Franchise fees | | $ | 2,011 | | $ | 1,783 | | $ | 1,601 | | $ | 1,390 | | $ | 1,127 | | $ | 2,134 | | $ | 10,046 |
Approximately $3.0
| Performance Obligations by Period | ||||||||||||||||||||||||||||||||||||||||||||
| Less than 1 Year | 1-2 Years | 2-3 Years | 3-4 Years | 4-5 Years | Thereafter | Total | ||||||||||||||||||||||||||||||||||||||
| Franchise fees | $ | 3,052 | $ | 2,884 | $ | 2,702 | $ | 2,439 | $ | 2,165 | $ | 6,485 | $ | 19,727 | ||||||||||||||||||||||||||||||
The Company applies the practical expedient in ASC 606-10-50-14606, “Revenue Recognition” and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
14
| | | | | | | | | | | |
| | | | | | | | | | | Maximum Dollar |
| | Total | | | Average | | | Aggregate | | | Value of Shares |
| | Number | | | Price | | | Cost of | | | that May Yet Be |
(in thousands, except average price per share) | | of Shares | | | Paid per | | | Shares | | | Purchased Under the |
Three Months Ended | | Purchased | |
| Share | | | Purchased | | | Plans or Programs |
March 27, 2022 | | 301 | | $ | 108.76 | | $ | 32,709 | | $ | 392,091 |
March 28, 2021 | | 15 | | $ | 84.63 | | $ | 1,267 | | $ | 71,031 |
Subsequent to March 27, 2022, we acquired an additional 223,000 shares at an aggregate2022:
| (In thousands, except average price per share) | Total Number of Shares Purchased | Average Price Paid per Share | Aggregate Cost of Shares Purchased (a) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||
| March 26, 2023 | 2,523 | $ | 83.10 | $ | 209,640 | $ | 90,160 | |||||||||||||||||||
| March 27, 2022 | 301 | $ | 108.76 | $ | 32,709 | $ | 392,091 | |||||||||||||||||||
the Board until his resignation on March 1, 2023.
The Company recordedpaid dividends of approximately $12.6approximately $14.6 million ($0.350.42 per share) infor the first quarter of 2022.three months ended March 26, 2023. On April 26, 2022,25, 2023, our Board of Directors declared a secondfirst quarter dividend of $0.35$0.42 per common share (approximately $12.6$13.8 million in the aggregate), which will be paid on May 27, 202226, 2023 to stockholders of record as of the close of business on May 16, 2022.15, 2023. The declarationdeclaration and payment of any future dividends will be at the discretion of our Board of Directors.
Board.
15
are computed by dividing net income attributable to common shareholders by the weighted-average common shares outstanding. Diluted earnings per common share are computed by dividing the net income attributable to common shareholders by the diluted weighted average common shares outstanding. Diluted weighted average common shares outstanding consist of basic weighted average common shares outstanding plus weighted average awards outstanding under our equity compensation plans, which are dilutive securities.
follows (in thousands, except per share data):
| Three Months Ended | ||||||||||||||||||||||||||
| March 26, 2023 | March 27, 2022 | |||||||||||||||||||||||||
| Basic earnings per common share | ||||||||||||||||||||||||||
| Net income attributable to the Company | $ | 22,376 | $ | 10,494 | ||||||||||||||||||||||
| Dividends paid to participating securities | — | (60) | ||||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 22,376 | $ | 10,434 | ||||||||||||||||||||||
| Basic weighted average common shares outstanding | 34,155 | 35,927 | ||||||||||||||||||||||||
| Basic earnings per common share | $ | 0.66 | $ | 0.29 | ||||||||||||||||||||||
| Diluted earnings per common share | ||||||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 22,376 | $ | 10,434 | ||||||||||||||||||||||
| Weighted average common shares outstanding | 34,155 | 35,927 | ||||||||||||||||||||||||
Dilutive effect of outstanding equity awards (a) | 169 | 309 | ||||||||||||||||||||||||
| Diluted weighted average common shares outstanding | 34,324 | 36,236 | ||||||||||||||||||||||||
| Diluted earnings per common share | $ | 0.65 | $ | 0.29 | ||||||||||||||||||||||
| | | | | | |
| | Three Months Ended | ||||
| | March 27, | | March 28, | ||
| | 2022 |
| 2021 | ||
Basic earnings per common share (in thousands, except per share data) | | | | | | |
Net income attributable to the Company | | $ | 10,494 | | $ | 33,883 |
Dividends paid to participating securities | | | (60) | | | (3,527) |
Net income attributable to participating securities | |
| — | |
| (3,243) |
Net income attributable to common shareholders | | $ | 10,434 | | $ | 27,113 |
| | | | | | |
Basic weighted average common shares outstanding | |
| 35,927 | |
| 32,756 |
Basic earnings per common share | | $ | 0.29 | | $ | 0.83 |
| | | | | | |
Diluted earnings per common share (in thousands, except per share data) | | | | | | |
Net income attributable to common shareholders | | $ | 10,434 | | $ | 27,113 |
| | | | | | |
Weighted average common shares outstanding | |
| 35,927 | |
| 32,756 |
Dilutive effect of outstanding equity awards (a) | |
| 309 | |
| 334 |
Diluted weighted average common shares outstanding (b) | |
| 36,236 | |
| 33,090 |
Diluted earnings per common share | | $ | 0.29 | | $ | 0.82 |
16
| March 26, 2023 | December 25, 2022 | |||||||||||||
| Senior notes | $ | 400,000 | $ | 400,000 | ||||||||||
Revolving facilities (a) | 413,133 | 205,000 | ||||||||||||
| Outstanding debt | $ | 813,133 | $ | 605,000 | ||||||||||
| Unamortized debt issuance costs | (7,571) | (7,931) | ||||||||||||
| Current portion of long-term debt | (8,200) | — | ||||||||||||
| Total long-term debt, net | $ | 797,362 | $ | 597,069 | ||||||||||
| | | | | | | |
| | | | March 27, | | | December 26, |
| | | | 2022 | | | 2021 |
Senior notes | | | $ | 400,000 | | $ | 400,000 |
Revolving facilities | | | | 137,000 | | | 90,000 |
Outstanding debt | | | $ | 537,000 | | $ | 490,000 |
Unamortized debt issuance costs | | | | (8,912) | | | (9,270) |
Total long-term debt, net | | | $ | 528,088 | | $ | 480,730 |
Revolving facilities as of March 26, 2023 includes $8.2 million outstanding under the PJMF Revolving Facility as defined and discussed below.
Amended
The remaining availability under the PJI Revolving Facility was approximately $195.0 million as of March 26, 2023.
17
The Amended Credit Agreement contains customary affirmative and negative covenants that, among other things, require customary reporting obligations, and restrict, subject to certain exceptions, the incurrenceoccurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates. In addition, theThe Company will beis also subject to the following financial covenants: (1) a maximum Leverage Ratio of 5.25 to 1.00, subject to the Company’s election to increase the maximum Leverage Ratio by 0.50 to 1.00 in connection with material acquisitions if the Company satisfies certain requirements, and (2) a minimum interest coverage ratio defined as Consolidated EBITDA (as defined in the Credit Agreement) plus consolidated rental expense to consolidated interest expense plus consolidated rental expense of 2.00 to 1.00. We were in compliance with these financial covenants at March 27, 2022.
26, 2023.
| | | | | | | |
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 | % |
Our
| 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% | |||||||||||
18
The following table provides information on the location and amounts of our swaps in the accompanying condensed consolidated financial statements (in thousands):
| Interest Rate Swap Derivatives | ||||||||||||||
| Balance Sheet Location | Fair Value March 26, 2023 | Fair Value December 25, 2022 | ||||||||||||
| Other current assets | $ | 274 | $ | 986 | ||||||||||
| | | | | | |
| | Interest Rate Swap Derivatives | ||||
| | Fair Value | | Fair Value | ||
| | March 27, | | December 26, | ||
Balance Sheet Location | | 2022 | | 2021 | ||
Other current and long-term liabilities | | $ | 1,528 | | $ | 5,536 |
The effect of derivative instruments on the accompanying condensed consolidated financial statements is as follows (in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | | ||
| | | | Location of (Loss) | | Amount of (Loss) | | | ||||
Derivatives - | | Amount of Gain or | | or Gain | | or Gain | | Total Net Interest Expense | ||||
Cash Flow | | (Loss) Recognized | | Reclassified from | | Reclassified from | | on Condensed | ||||
Hedging | | in AOCL | | AOCL into | | AOCL into | | Consolidated Statements | ||||
Relationships | | on Derivative | | Income | | Income | | of Operations | ||||
Interest rate swaps for the three months ended: | ||||||||||||
March 27, 2022 | | $ | 1,318 | |
| Interest expense | | $ | 535 | | $ | (4,264) |
March 28, 2021 | | $ | 1,382 | |
| Interest expense | | $ | (1,709) | | $ | (3,647) |
| 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 Net Interest Expense on Condensed Consolidated Statements of Operations | ||||||||||||||||||||||
| Interest rate swaps: | ||||||||||||||||||||||||||
| March 26, 2023 | $ | 259 | Interest Expense | $ | (207) | $ | (9,021) | |||||||||||||||||||
| March 27, 2022 | $ | 1,318 | Interest Expense | $ | 535 | $ | (4,264) | |||||||||||||||||||
Contingencies
|
|
Litigation
The Company is involved in a number of lawsuits, claims, investigations and proceedings, including those specifically identified below, consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with ASC 450, “Contingencies,” the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s condensed consolidated financial statements. We review these provisions at least quarterly and adjust themthese provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.
In re Papa John’s Employee & Franchise Employee Antitrust Litigation is a putative class action filed in December 2018 in the United States District Court for the Western District of Kentucky. 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 (the “Legal 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 $5.0 million and other non-monetary consideration, all claims in the action will be dismissed, the litigation will be terminated, and the Company will receive a release. The proposed settlement is subject to approval by the District Court and contains certain customary contingencies. The Company continues to deny any liability or wrongdoing in this matter.
Durling et al v. Papa John’s International, Inc., is a conditionally certified collective action filed in May 2016 in the United States District Court for the Southern District of New York, alleging that corporate restaurant delivery drivers were not properly reimbursed for vehicle mileage and expenses in accordance with the Fair Labor Standards Act. In July 2018, the District Court granted a motion to certify a conditional corporate collective class and the opt-in notice process has been completed. As of the close of the opt-in period on October 29, 2018, 9,571 drivers opted into the collective class. 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. 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. On January 18, 2023, 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. As of March 26, 2023, $5.0 million remains in Accrued expenses and other accrued liabilities in the Condensed Consolidated Balance Sheets. The Company continues to deny any liability or wrongdoing in this mattermatter.
wrongdoing in this matter.
19
Assets and Liabilities Held for Sale
On March 28, 2022, we refranchised our 51% ownership interest in a 90-restaurant consolidated joint venture in Texas for $14.0 million, net of transaction costs. The assets and liabilities associatedIn connection with the joint venture are classified as held for sale in the Condensed Consolidated Balance Sheet as of March 27, 2022.
| | | |
|
| | |
| | | March 27, 2022 |
Current assets | | $ | 1,632 |
Property and equipment, net | | | 7,030 |
Operating lease right-of-use assets |
| | 8,924 |
Goodwill | | | 9,908 |
Other assets | | | 191 |
Loss on impairment | | | (8,412) |
Total assets held for sale | | $ | 19,273 |
| | | |
Accounts payable, taxes payable, accrued expenses and other | | $ | 1,632 |
Current deferred revenue | | | 1,930 |
Current operating lease liabilities | | | 2,338 |
Long-term operating lease liabilities | | | 7,097 |
Other long-term liabilities | | | 250 |
Total liabilities held for sale | | $ | 13,247 |
Upon reclassification of assets and liabilities held for sale,divestiture, we recorded a one-time, non-cash charge of $8.4 million in Refranchising and impairment loss in the Condensed Consolidated Statements of Operations, which reflects net sale proceeds of $14.0 million, the noncontrolling interest of $4.2 million, and the recognition of an unearned royalty stream of $12.2 million to be recognized as revenue over the 10-year term of the franchise agreement executed concurrent with the disposition in accordance with ASC 810, “Consolidation.Consolidation.” The impairment$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.
20
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We have 4four reportable segments: domesticDomestic Company-owned restaurants, North America franchising, North America commissaries, and internationalInternational operations. The domesticDomestic Company-owned restaurant segment consists of the operations of all domestic (“domestic” is defined as contiguous United States)Domestic Company-owned restaurants and derives its revenues principally from retail sales of pizza, Papadias, which are flatbread-style sandwiches, and side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. The North America commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to domestic Company-owned and franchised restaurants in the United States and Canada. The North America franchising segment consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and collection of royalties from our franchisees located in the United States and Canada. The internationalNorth America commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to Domestic Company-owned and franchised restaurants in the United States and Canada. The International segment principally consists 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. International franchisees are defined as all franchise operations outside of the United States and Canada. All other business units that do not meet the quantitative thresholds for determining reportable segments, which are not operating segments, we refer to as “all other,” which consists of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of printing and promotional items, franchise contributions to marketing funds and information systems and related services used in restaurant operations, including our point-of-sale system, online and other technology-based ordering platforms.
21
| Three Months Ended | ||||||||||||||||||||||||||
| (In thousands) | March 26, 2023 | March 27, 2022 | ||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Domestic Company-owned restaurants | $ | 179,866 | $ | 198,765 | ||||||||||||||||||||||
| North America franchising | 36,072 | 34,268 | ||||||||||||||||||||||||
| North America commissaries | 212,566 | 209,679 | ||||||||||||||||||||||||
| International | 38,704 | 42,707 | ||||||||||||||||||||||||
| All others | 59,841 | 57,273 | ||||||||||||||||||||||||
| Total revenues | $ | 527,049 | $ | 542,692 | ||||||||||||||||||||||
| Intersegment revenues: | ||||||||||||||||||||||||||
| North America franchising | $ | 1,052 | $ | 1,053 | ||||||||||||||||||||||
| North America commissaries | 51,817 | 58,507 | ||||||||||||||||||||||||
| All others | 16,835 | 19,379 | ||||||||||||||||||||||||
| Total intersegment revenues | $ | 69,704 | $ | 78,939 | ||||||||||||||||||||||
| Operating income: | ||||||||||||||||||||||||||
Domestic Company-owned restaurants (a) | $ | 6,650 | $ | 1,989 | ||||||||||||||||||||||
| North America franchising | 33,400 | 32,137 | ||||||||||||||||||||||||
| North America commissaries | 10,730 | 9,334 | ||||||||||||||||||||||||
International (b) | 7,232 | 4,455 | ||||||||||||||||||||||||
| All others | 3,157 | 3,719 | ||||||||||||||||||||||||
Unallocated corporate expenses (c) | (23,366) | (37,111) | ||||||||||||||||||||||||
| Elimination of intersegment (profits) losses | (7) | (88) | ||||||||||||||||||||||||
| Total operating income | $ | 37,796 | $ | 14,435 | ||||||||||||||||||||||
| (In thousands) | As of March 26, 2023 | |||||||||||||||||||||||||
| Property and equipment, net: | ||||||||||||||||||||||||||
| Domestic Company-owned restaurants | $ | 242,755 | ||||||||||||||||||||||||
| North America commissaries | 152,411 | |||||||||||||||||||||||||
| International | 17,118 | |||||||||||||||||||||||||
| All others | 135,467 | |||||||||||||||||||||||||
| Unallocated corporate assets | 257,368 | |||||||||||||||||||||||||
| Accumulated depreciation and amortization | (551,975) | |||||||||||||||||||||||||
| Total property and equipment, net | $ | 253,144 | ||||||||||||||||||||||||
Our segment information is as follows:
| | | | | | | |
| | | Three Months Ended | ||||
| | | March 27, | | March 28, | ||
(In thousands) | |
| 2022 |
| 2021 | ||
Revenues: | | | | | | | |
Domestic Company-owned restaurants | | | $ | 198,765 | | $ | 197,234 |
North America franchising | | |
| 34,268 | |
| 32,715 |
North America commissaries | | |
| 209,679 | |
| 184,878 |
International | | |
| 42,707 | |
| 42,604 |
All others | | |
| 57,273 | |
| 54,315 |
Total revenues | | | $ | 542,692 | | $ | 511,746 |
| | | | | | | |
Intersegment revenues: | | | | | | | |
North America franchising | | | $ | 1,053 | | $ | 1,060 |
North America commissaries | | | | 58,507 | | | 52,070 |
All others | | |
| 19,379 | |
| 19,148 |
Total intersegment revenues | | | $ | 78,939 | | $ | 72,278 |
| | | | | | | |
Operating income: | | | | | | | |
Domestic Company-owned restaurants (1) | | | $ | 1,989 | | $ | 15,324 |
North America franchising | | |
| 32,137 | |
| 30,443 |
North America commissaries | | |
| 9,334 | |
| 9,713 |
International (2) | | |
| 4,455 | |
| 8,364 |
All others | | |
| 3,719 | |
| 6,118 |
Unallocated corporate expenses (3) | | |
| (37,111) | |
| (23,162) |
Elimination of intersegment (profits) losses | | |
| (88) | |
| 62 |
Total operating income | | | $ | 14,435 | | $ | 46,862 |
| | | | | | | |
Property and equipment, net: | | | | | | | |
Domestic Company-owned restaurants | | | $ | 220,357 | | | |
North America commissaries | | | | 149,503 | | | |
International | | | | 14,857 | | | |
All others | | | | 112,037 | | | |
Unallocated corporate assets | | | | 234,115 | | | |
Accumulated depreciation and amortization | | | | (514,616) | | | |
Total property and equipment, net | | | $ | 216,253 | | | |
22
| Reportable Segments | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 26, 2023 | ||||||||||||||||||||||||||||||||||||||
| Major Products/Services Lines | Domestic Company-owned restaurants | North America franchising | North America commissaries | International | All others | Total | ||||||||||||||||||||||||||||||||
| Company-owned restaurant sales | $ | 179,866 | $ | — | $ | — | $ | — | $ | — | $ | 179,866 | ||||||||||||||||||||||||||
| Franchise royalties and fees | — | 37,124 | — | 12,491 | — | 49,615 | ||||||||||||||||||||||||||||||||
| Commissary sales | — | — | 264,383 | 18,972 | — | 283,355 | ||||||||||||||||||||||||||||||||
| Other revenues | — | — | — | 7,241 | 76,676 | 83,917 | ||||||||||||||||||||||||||||||||
| Eliminations | — | (1,052) | (51,817) | — | (16,835) | (69,704) | ||||||||||||||||||||||||||||||||
| Total segment revenues | 179,866 | 36,072 | 212,566 | 38,704 | 59,841 | 527,049 | ||||||||||||||||||||||||||||||||
International other revenues (a) | — | — | — | (7,241) | 7,241 | — | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 179,866 | $ | 36,072 | $ | 212,566 | $ | 31,463 | $ | 67,082 | $ | 527,049 | ||||||||||||||||||||||||||
| Reportable Segments | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 27, 2022 | ||||||||||||||||||||||||||||||||||||||
| Major Products/Services Lines | Domestic Company-owned restaurants | North America franchising | North America commissaries | International | All others | Total | ||||||||||||||||||||||||||||||||
| Company-owned restaurant sales | $ | 198,765 | $ | — | $ | — | $ | — | $ | — | $ | 198,765 | ||||||||||||||||||||||||||
| Franchise royalties and fees | — | 35,321 | — | 13,435 | — | 48,756 | ||||||||||||||||||||||||||||||||
| Commissary sales | — | — | 268,186 | 21,182 | — | 289,368 | ||||||||||||||||||||||||||||||||
| Other revenues | — | — | — | 8,090 | 76,652 | 84,742 | ||||||||||||||||||||||||||||||||
| Eliminations | — | (1,053) | (58,507) | — | (19,379) | (78,939) | ||||||||||||||||||||||||||||||||
| Total segment revenues | 198,765 | 34,268 | 209,679 | 42,707 | 57,273 | 542,692 | ||||||||||||||||||||||||||||||||
International other revenues (a) | — | — | — | (8,090) | 8,090 | — | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 198,765 | $ | 34,268 | $ | 209,679 | $ | 34,617 | $ | 65,363 | $ | 542,692 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | |
| | Reportable Segments | ||||||||||||||||
| | Three Months Ended March 27, 2022 | ||||||||||||||||
Major Products/Services Lines | | | Domestic Company-owned restaurants | | | North America franchising | | | North America commissaries | | | International | | | All others | | | Total |
Company-owned restaurant sales | | $ | 198,765 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 198,765 |
Franchise royalties and fees | | | - | | | 35,321 | | | - | | | 13,435 | | | - | | | 48,756 |
Commissary sales | | | - | | | - | | | 268,186 | | | 21,182 | | | - | | | 289,368 |
Other revenues | | | - | | | - | | | - | | | 8,090 | | | 76,652 | | | 84,742 |
Eliminations | | | - | | | (1,053) | | | (58,507) | | | - | | | (19,379) | | | (78,939) |
Total segment revenues | | $ | 198,765 | | $ | 34,268 | | $ | 209,679 | | $ | 42,707 | | $ | 57,273 | | $ | 542,692 |
International other revenues (1) | | | - | | | - | | | - | | | (8,090) | | | 8,090 | | | - |
Total revenues | | $ | 198,765 | | $ | 34,268 | | $ | 209,679 | | $ | 34,617 | | $ | 65,363 | | $ | 542,692 |
| | | | | | | | | | | | | | | | | | |
| | Reportable Segments | ||||||||||||||||
| | Three Months Ended March 28, 2021 | ||||||||||||||||
Major Products/Services Lines | | | Domestic Company-owned restaurants | | | North America franchising | | | North America commissaries | | | International | | | All others | | | Total |
Company-owned restaurant sales | | $ | 197,234 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 197,234 |
Franchise royalties and fees | | | - | | | 33,775 | | | - | | | 12,208 | | | - | | | 45,983 |
Commissary sales | | | - | | | - | | | 236,948 | | | 22,399 | | | - | | | 259,347 |
Other revenues | | | - | | | - | | | - | | | 7,997 | | | 73,463 | | | 81,460 |
Eliminations | | | - | | | (1,060) | | | (52,070) | | | - | | | (19,148) | | | (72,278) |
Total segment revenues | | $ | 197,234 | | $ | 32,715 | | $ | 184,878 | | $ | 42,604 | | $ | 54,315 | | $ | 511,746 |
International other revenues (1) | | | - | | | - | | | - | | | (7,997) | | | 7,997 | | | - |
Total revenues | | $ | 197,234 | | $ | 32,715 | | $ | 184,878 | | $ | 34,607 | | $ | 62,312 | | $ | 511,746 |
| | | | | | | | | | | | | | | | | | |
(a)Other revenues as reported in the Condensed Consolidated Statements of Operations include $7.2 million and $8.1 million of revenues |
23
Note 12. Related Party Transactions
Endorsement Agreement
On April 10, 2022, the Company and PJMF entered into an Endorsement Agreement (the “Endorsement Agreement”), effective March 15, 2022, with ABG-Shaq, LLC (“ABG-Shaq”), an entity affiliated with Shaquille O’Neal, for the personal services of Mr. O’Neal. Mr. O’Neal is a non-independent director of the Company.
The Endorsement Agreement replaces the previous Endorsement Agreement, effective March 15, 2019, by and between the Company, PJMF and ABG-Shaq, as amended (the “Prior Endorsement Agreement”) which expired by its terms on March 15, 2022. The terms of the Endorsement Agreement, which are detailed below, are substantially similar to the Prior Endorsement Agreement.
Pursuant to the Endorsement Agreement, the Company and PJMF received the right and license to use Mr. O’Neal’s name, nickname, initials, autograph, voice, video or film portrayals, photograph, likeness and certain other intellectual property rights (individually and collectively, the “Personality Rights”), in each case, solely as approved by ABG-Shaq, in connection with the advertising, promotion and sale of Papa John’s-branded products. Mr. O’Neal will also provide brand ambassador services related to appearances, social media and public relations matters. The Endorsement Agreement also renewed the offering of the co-branded extra-large pizza product developed among the Company, PJMF and ABG-Shaq under the Prior Endorsement Agreement, and provides that 1 U.S. dollar for each unit of the co-branded pizza sold in the United States willKingdom that provide no significant contribution to operating income but must be donated toreported on a gross basis under accounting requirements. The Papa John’s Foundationrelated expenses for Building Community and 1 Canadian dollar for each unit soldthese Other revenues are reported in Canada will be donated to a charity mutually agreed-upon betweenOther expenses in the parties.
As consideration for the rights and services granted under the Endorsement Agreement, the Company and PJMF agreed to pay to ABG-Shaq aggregate cash paymentsCondensed Consolidated Statements of $5.625 million over the three years of the Endorsement Agreement. The Company and PJMF will also pay ABG-Shaq a royalty fee for the co-branded pizza product if the total amount of royalties in a given contract year (calculated as $0.20 per co-branded pizza sold) exceeds the contractual cash payment for that year, in which case the amount of the royalty payment will be the excess of the royalties over the cash payment amount. The Company and PJMF will also pay expenses related to the marketing and personal services provided by Mr. O’Neal.
In addition, the Company agreed to grant 55,898 restricted stock units (the “RSUs”) to Mr. O’Neal (as agent of ABG) under the Company’s 2018 Omnibus Incentive Plan. The RSUs will vest into an equivalent number of shares of the Company’s common stock according to the following vesting schedule:
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The initial term of the Endorsement Agreement ends on March 15, 2025, with an option for a one-year extension upon the parties’ mutual agreement. The Endorsement Agreement also includes customary exclusivity, termination and indemnification clauses.
24
We believe that in addition to supporting both Company and franchised profitability and growth, these activities contribute to product quality and consistency throughout the Papa John’s system. refranchising will likely occur.Item 2.Management’s Discussion and Analysis of Financial Condition and Results of OperationsOverviewPapa 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 and, in certain international markets, dine-in and delivery restaurants under the trademark “Papa John’s.” Papa John’s began operations in 1984. As of March 27, 2022,26, 2023, there were 5,5245,733 Papa John’s restaurants in operation, consisting of 608520 Company-owned and 4,9165,213 franchised restaurants operating in 4948 countries and territories. 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. Additionally, we derive revenues from sales to franchisees of various items including food and paper products from our domesticDomestic Quality Control Centers (“QC Centers”), operation of our internationalInternational QC Center in the United(United Kingdom (“UK”), contributions received by Papa John’s Marketing Fund (“PJMF”) which is our national marketing fund, printing and promotional items and information systems equipment, and software and related services.In discussions of our business, “Domestic” is defined as within the contiguous United States, “North America” includes Canada, and “International” includes the rest of the world other than North America.The Company launched its NY Style pizza inhas focused on executing strategic priorities and building a foundation for long-term success, while navigating a challenging macroeconomic environment. Our progress and significant transactions during the first quarter of 2022. NY Style features eight oversized slices on2023 are described below.Growth Strategy. The Company delivered its fifteenth consecutive quarter of Global system-wide restaurant sales growth and continues to expand both domestically and internationally. This growth will be fueled by continued product innovation and our development strategy.Our expanding development pipeline is a thin foldable crust. NY Style pizza has provenkey long-term growth driver as we believe there is significant opportunity to be popular withoffer our differentiated, premium position to more customers globally and highly incremental to revenues. The combination of Epic Stuffed Crust and NY Style pizza has contributed to our positive results fordomestically. In the first quarter of 2022 as2023, we compare the periodopened 27 net new restaurants, for global unit growth of 0.5%. We expect this growth to the prior year’s record first quarter sales, our highestaccelerate in the history of the Company.2023 with global development to be between 270 to 310 net new units. Our digital innovation through Papa Rewards, our loyalty program, allows us to directly engage our customers with targeted personalized offers that drive higher frequency, higher ticket and higher customer satisfaction. Continued investment in one-to-one marketing capabilities is a big partview of our business plan for 2022long-term unit opportunity, both domestically and beyond. In addition, third-party delivery aggregators have been another focus of our digital innovation and strategy as they have helped us reach incremental, profitable customers, while providing supplemental delivery drivers, especially during peak times.Growth Strategy. The Company’s goalcontinuestobetotake market shareinthepizzacategorywhileleveragingourdifferentiatedstrategy and premiumpositiontoprotect marginsinthefaceofcommodityandlaborheadwinds.We accelerated our development outlook to be between280and320netnewrestaurantsgloballyin2022.Atthemidpointoftherange,thisrepresentsapproximately5%growthon ourtotalsystem-wideunitcount. Ourviewofourlong-termunitopportunity,bothdomesticallyandinternationally,continues to expand as we sign historicsignificant deals to develop within key areas andareas. In April 2023, we now expectannounced our future expansion into India through a development agreement to open 650 new restaurants in India by 2033. In 2022, we announced that we expect 1,400 to 1,800 net new Papa John’sJohns restaurants worldwide byfrom 2022 through the end of 2025, relative2025. We plan to continue focusing on our strategic innovative products and restaurant development across our platforms to drive sustainable growth this year and beyond.Operational Initiatives. We launched the start of 2021.On March 28,“Back to BETTER” initiative in late 2022, which focuses on improving operational execution at the Company sold its 51% controlling intereststore level in order to drive better financial performance. We have aligned the organization on improving out the door times, overall customer satisfaction, increasing orders and optimization. Running BETTER operations is intended to increase customer and employee satisfaction, as well as drive customer loyalty. We are seeing improvement in our restaurant level operating margins, and we experienced a joint venture between Papa Johns and Blue and Silver Ventures, Ltd. Sun Holdings, a leading multi-brand franchisee operator and one of Papa John’s largest domestic franchise partners, has assumed control of the 90 Papa John’s3.4% increase in comparable sales for Domestic Company-owned restaurants in Texas that operated under the joint venture. The Company recorded a $8.4 million impairment loss in the first quarter of 2022 related2023. We expect this initiative to continue throughout 2023.Global Market Conditions. Macroeconomic conditions in the divestiture. The strategic refranchising deal between Papa JohnsUK,the largest region in our International segment, continue to present challenges in light of ongoing inflation and Sun Holdings builds uponrising interest rates. Against this backdrop, the historic development agreement signed byCompany and franchisees have experienced declines in sales and profitability in the two partiesUK market. While uncertain how long these conditions will last, the Company is committed to its presence in September 2021, under which Sun Holdings will open 100 new restaurants across high-growth markets, includingthe UK and is invested in Texas, by 2029,the Company’s long-term success in this region. As we navigate this challenging economic environment, we are investing in capabilities to improve our operations and are working to reposition the franchise base to further strengthen our UK business. In addition to the restaurants it has acquired. Now with significant operational scale withtargeted marketing support announced in February, we continue to innovate and implement capabilities and strategies from the brand, we believe Sun HoldingsUS for the UK market. Also, as our franchise base is positionedrepositioned in a way that ensures our franchisees and this market are aligned to accelerate its development plansdrive long-term growth, strategic store closures and Papa John’s domestic growth.Share Repurchases. The agreement continues a rapid accelerationAs part of unitour long-term growth and development activity by Papa Johnscapital allocation strategy, we are committed to investing in the U.S.share repurchases to provide ongoing value and across the globe. In January, Papa Johns announced its biggest franchisee development agreement in the Company’s history – a partnership with FountainVest Partnersenhanced returns to open more than 1,350 new stores across South China by 2040.Suspension of Franchisee Support in Russia. The Company has no Company-owned restaurants in Russia or Ukraine. Out of the Company’s total 5,524 Company-owned and franchised restaurants worldwide, 188 franchised restaurants are located in Russia, all of which are operated and supplied through a master franchisee. In 2021, franchise royalties derived from these stores represented less than 1% of total company revenue, and therefore were not a material part of the Company’s business or results of operations.25
Papa John’s has suspended its corporate operations and support for franchised restaurants in Russia, and fully reserved all receivables from the aforementioned master franchisee. The Company recognized $17.4 million ($0.48 loss per diluted share) on a pre-tax basis in one-time, non-cash charges inDuring the first quarter relatedof 2023, the Company repurchased 2.5 million shares of common stock for $209.6 million pursuant to reservesits share repurchase program.
Coronavirus Pandemic and Related Market Impact.The restaurant industry has faced and managed staffing challenges since long before the pandemic. These challenges intensified with the increased demand for employees in the service industryfull Board upon such independent committee’s recommendation. Starboard’s Chief Executive Officer is Jeffrey Smith, who previously served 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 people out sick or quarantined at home. Throughout the first quarter, our restaurants have been at their lowest staffing levels since the beginningCompany’s Chairman of the pandemic. ThisBoard until his resignation on March 1, 2023.
26
Global Restaurant Sales and Unit Information
| | | | | | |
|
| Three Months Ended | ||||
|
| March 27, 2022 | | March 28, 2021 | ||
Comparable sales growth (decline): | | | | | | |
Domestic Company-owned restaurants | | | (1.2%) | | | 23.3% |
North America franchised restaurants | | | 2.8% | | | 27.1% |
North America restaurants | | | 1.9% | | | 26.2% |
International restaurants | | | 0.8% | | | 23.2% |
Total comparable sales growth | | | 1.6% | | | 25.4% |
System-wide restaurant sales growth: | | | | | | |
(excluding the impact of foreign currency) | | | | | | |
Domestic Company-owned restaurants | | | 0.8% | | | 22.2% |
North America franchised restaurants | | | 4.0% | | | 27.0% |
North America restaurants | | | 3.3% | | | 25.9% |
International restaurants | | | 11.6% | | | 28.9% |
Total global system-wide restaurant sales growth | | | 5.3% | | | 26.6% |
| | | | | | |
Restaurant Progression |
| Three Months Ended | ||||
|
| March 27, 2022 |
| March 28, 2021 | ||
North America Company-owned: | | | | | | |
Beginning of period | |
| 600 | |
| 588 |
Opened | |
| 7 | |
| — |
Acquired | |
| 1 | |
| 1 |
End of period | |
| 608 | |
| 589 |
North America franchised: | | | | | | |
Beginning of period | |
| 2,739 | |
| 2,701 |
Opened | |
| 15 | |
| 12 |
Closed | |
| (7) | |
| (3) |
Sold | | | (1) | | | (1) |
End of period | |
| 2,746 | |
| 2,709 |
International franchised: | | | | | | |
Beginning of period | |
| 2,311 | |
| 2,111 |
Opened | |
| 55 | |
| 68 |
Closed | |
| (8) | |
| (9) |
Suspended (a) | | | (188) | | | — |
End of period | |
| 2,170 | |
| 2,170 |
Total restaurants – end of period | |
| 5,524 | |
| 5,468 |
| | | | | | |
Trailing four quarters net store growth (b) | |
| 244 | | | 90 |
27
| Three Months Ended | ||||||||||||||||||||||||||
| Amounts below exclude the impact of foreign currency | March 26, 2023 | March 27, 2022 | ||||||||||||||||||||||||
| Comparable sales growth (decline): | ||||||||||||||||||||||||||
| Domestic Company-owned restaurants | 3.4% | (1.2)% | ||||||||||||||||||||||||
| North America franchised restaurants | (0.8)% | 2.8% | ||||||||||||||||||||||||
| North America restaurants | —% | 1.9% | ||||||||||||||||||||||||
| International restaurants | (5.8)% | 0.8% | ||||||||||||||||||||||||
| Total comparable sales growth (decline) | (1.3)% | 1.6% | ||||||||||||||||||||||||
| System-wide restaurant sales growth (decline): | ||||||||||||||||||||||||||
| Domestic Company-owned restaurants | 4.9% | 0.8% | ||||||||||||||||||||||||
| North America franchised restaurants | 0.8% | 4.0% | ||||||||||||||||||||||||
| North America restaurants | 1.6% | 3.3% | ||||||||||||||||||||||||
International restaurants (a) | 3.3% | 11.6% | ||||||||||||||||||||||||
| Total global system-wide restaurant sales growth (decline) | 2.0% | 5.3% | ||||||||||||||||||||||||
| Restaurant Progression | Three Months Ended | |||||||||||||||||||||||||
| March 26, 2023 | March 27, 2022 | |||||||||||||||||||||||||
| North America Company-owned: | ||||||||||||||||||||||||||
| Beginning of period | 522 | 600 | ||||||||||||||||||||||||
| Opened | — | 7 | ||||||||||||||||||||||||
| Closed | (2) | — | ||||||||||||||||||||||||
| Acquired | — | 1 | ||||||||||||||||||||||||
| End of period | 520 | 608 | ||||||||||||||||||||||||
| North America franchised: | ||||||||||||||||||||||||||
| Beginning of period | 2,854 | 2,739 | ||||||||||||||||||||||||
| Opened | 16 | 15 | ||||||||||||||||||||||||
| Closed | (6) | (7) | ||||||||||||||||||||||||
| Sold | — | (1) | ||||||||||||||||||||||||
| End of period | 2,864 | 2,746 | ||||||||||||||||||||||||
| International franchised: | ||||||||||||||||||||||||||
| Beginning of period | 2,330 | 2,311 | ||||||||||||||||||||||||
| Opened | 43 | 55 | ||||||||||||||||||||||||
| Closed | (24) | (8) | ||||||||||||||||||||||||
Suspended (a) | — | (188) | ||||||||||||||||||||||||
| End of period | 2,349 | 2,170 | ||||||||||||||||||||||||
| Total restaurants – end of period | 5,733 | 5,524 | ||||||||||||||||||||||||
Trailing four quarters net store growth (b) | 209 | 244 | ||||||||||||||||||||||||
Results of Operations
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | March 26, 2023 | March 27, 2022 | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||
| Domestic Company-owned restaurant sales | $ | 179,866 | $ | 198,765 | (9.5) | % | ||||||||||||||||||||||||||||||||
| North America franchise royalties and fees | 36,072 | 34,268 | 5.3 | % | ||||||||||||||||||||||||||||||||||
| North America commissary revenues | 212,566 | 209,679 | 1.4 | % | ||||||||||||||||||||||||||||||||||
| International revenues | 31,463 | 34,617 | (9.1) | % | ||||||||||||||||||||||||||||||||||
| Other revenues | 67,082 | 65,363 | 2.6 | % | ||||||||||||||||||||||||||||||||||
| Total revenues | $ | 527,049 | $ | 542,692 | (2.9) | % | ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | |
| | Three Months Ended | | | | ||||||||
| | March 27, 2022 | | March 28, 2021 | | | | ||||||
| | | | % of Related | | | | % of Related | | | Increase | ||
($ in thousands) | | | | Revenues | | | | Revenues | | | (Decrease) | ||
Revenues: | | | | | ��� | | | | | | | | |
Domestic Company-owned restaurant sales | | $ | 198,765 | | | | $ | 197,234 | | | | | |
North America franchise royalties and fees | | | 34,268 | | | | | 32,715 | | | | | |
North America commissary revenues | | | 209,679 | | | | | 184,878 | | | | | |
International revenues | | | 34,617 | | | | | 34,607 | | | | | |
Other revenues | | | 65,363 | | | | | 62,312 | | | | | |
Total revenues | | | 542,692 | | | | | 511,746 | | | | | |
Costs and expenses: | | | | | | | | | | | | | |
Operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | | | | | | |
Domestic Company-owned restaurant expenses | | | 161,661 | | 81.3% | | | 155,888 | | 79.0% | | | 2.3% |
North America commissary expenses | | | 197,090 | | 94.0% | | | 170,684 | | 92.3% | | | 1.7% |
International expenses | | | 19,914 | | 57.5% | | | 19,618 | | 56.7% | | | 0.8% |
Other expenses | | | 60,555 | | 92.6% | | | 55,807 | | 89.6% | | | 3.0% |
General and administrative expenses | | | 65,937 | | 12.1% | | | 50,011 | | 9.8% | | | 2.3% |
Depreciation and amortization | | | 11,940 | | 2.2% | | | 12,876 | | 2.5% | | | (0.3)% |
Total costs and expenses | | | 517,097 | | 95.3% | | | 464,884 | | 90.8% | | | 4.5% |
Refranchising and impairment loss | | | (11,160) | | (2.1)% | | | - | | 0.0% | | | (2.1)% |
Operating income | | | 14,435 | | 2.7% | | | 46,862 | | 9.2% | | | (6.5)% |
Net interest expense | | | (4,264) | | (0.8)% | | | (3,647) | | (0.7)% | | | (0.1)% |
Income before income taxes | | $ | 10,171 | | 1.9% | | $ | 43,215 | | 8.4% | | | (6.5)% |
impact to the comparable results of the
Revenues
of the “Notes to Condensed Consolidated Financial Statements”for additional information.
the 2022 refranchising, Domestic Company-owned restaurant sales increased $1.5$8.4 million, or 0.8%4.9%, for the first quarter of 2022 compared to the prior year comparable period. The increase wasthree months ended March 26, 2023, primarily due to highercomparable sales of 3.4% and an increase in equivalent units of 2.8%1.2
“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. “Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods.
North America franchise royalties and fees increased $1.6 million, or 4.7% for the first quarter of 2022. The increases were primarily due to positive comparable sales increases of 2.8% and higher equivalent units of 1.9% for the first quarter of 2022 on top of 27.1% comparable sales growth in the prior year period.
0.8%.
28
International revenues were relatively flatdecreased $3.2 million, or 9.1% for the first quarter of 2022 asthree months ended March 26, 2023, compared to the prior year period, primarily due to higherlower UK royalties from increased equivalent units and highercommissary revenues. The overall declines in our International revenue performance were largely attributable to lower comparable sales of 0.8%, offset by lower United Kingdom (“PJUK”) commissary revenues from lower PJUK comparable5.8% for the three months ended March 26, 2023, related to inflationary pressures in the UK market.
currency fluctuations, International franchise restaurant sales increased 11.6% to $337.4 million3.3% for the first quarter of 2022, excluding the impact of foreign currency, primarily due to increases in comparable sales and equivalent units.three months ended March 26, 2023. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.
point of sale hardware sales and higher equivalent units.
| (Dollars in thousands) | Three Months Ended | |||||||||||||||||||||||||||||||
| March 26, 2023 | % of Related Revenues | March 27, 2022 | % 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 | $ | 147,784 | 82.2 | % | $ | 161,661 | 81.3 | % | 0.9 | % | ||||||||||||||||||||||
| North America commissary expenses | 196,415 | 92.4 | % | 197,090 | 94.0 | % | (1.6) | % | ||||||||||||||||||||||||
| International expenses | 17,311 | 55.0 | % | 19,914 | 57.5 | % | (2.5) | % | ||||||||||||||||||||||||
| Other expenses | 61,078 | 91.0 | % | 60,555 | 92.6 | % | (1.6) | % | ||||||||||||||||||||||||
| General and administrative expenses | 51,944 | 9.9 | % | 65,937 | 12.1 | % | (2.2) | % | ||||||||||||||||||||||||
| Depreciation and amortization | 14,721 | 2.8 | % | 11,940 | 2.2 | % | 0.6 | % | ||||||||||||||||||||||||
| Total costs and expenses | 489,253 | 92.8 | % | 517,097 | 95.3 | % | (2.5) | % | ||||||||||||||||||||||||
| Refranchising and impairment loss | — | — | % | (11,160) | (2.1) | % | 2.1 | % | ||||||||||||||||||||||||
| Operating income | $ | 37,796 | 7.2 | % | $ | 14,435 | 2.7 | % | 4.5 | % | ||||||||||||||||||||||
utility expenses.
desserts.
Other expenses were $60.6 million for the first quarter of 2022, or 92.6% of related revenues, compared to expenses of $55.8 million, or 89.6% of related revenues for the first quarter of 2021. The 3.0% increase in expenses as a percentage of related revenues, wasdecreased 2.5%, primarily due to pricing adjustments stemming from higher commodity pricing driven by inflation, principally paper, dough and desserts.
platform initiatives to further enhance our digital capabilities and the customer experience.
| | | | | |
| Three Months Ended | ||||
| | Mar. 27, | | | March 28, |
| | 2022 | | | 2021 |
Administrative expenses (a) | $ | 46,090 | | $ | 46,082 |
Special items (b) (c) | | 19,636 | | | 3,883 |
Other general expenses | | 211 | | | 46 |
General and administrative expenses | $ | 65,937 | | $ | 50,011 |
(a)For the three months ended March 26, 2023, Administrative expenses increased $5.1 million, primarily due to higher labor and incentive compensation costs. (b)Represents expenses related to certain legal settlements. See “Note 9. Litigation, Commitments and Contingencies” to our “Notes to Condensed Consolidated Financial Statements” for additional information. (c)Represents a one-time, non-cash provision of $14.6 million on accounts receivable and notes receivable in connection with the conflict in Ukraine and related government actions in the first quarter of 2022. (d)Represents severance and related costs associated with the transition of certain executives. Depreciation and Amortization | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
29
Depreciation and amortization expense was $14.7 million, or 2.8% of revenues for the three months ended March 26, 2023, compared to $11.9 million, or 2.2% of revenues, in the first quarter of 2022, compared to $12.9 million, or 2.5% of revenues for the first quarter of 2021.
prior year period. The increase was primarily due to higher depreciation expense related to our investments in technology support initiatives.
Operating Income by Segment
Operating income decreased approximately $32.4
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | |||||||||||||||||||
|
| Reported |
| Special |
| Adjusted |
| Reported |
| Special |
| Adjusted |
| Adjusted | |||||||
| | Mar. 27, | | items | | Mar. 27, |
| Mar. 28, | | items | | Mar. 28, | | Increase | |||||||
(In thousands) |
| 2022 |
| in 2022 |
| 2022 |
| 2021 |
| in 2021 |
| 2021 |
| (Decrease) | |||||||
| | | | | | | | | | | | | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 1,989 | | $ | 8,412 | | $ | 10,401 | | $ | 15,324 | | $ | — | | $ | 15,324 | | $ | (4,923) |
North America franchising | | | 32,137 | | | — | | | 32,137 | | | 30,443 | | | — | | | 30,443 | | | 1,694 |
North America commissaries | | | 9,334 | |
| — | |
| 9,334 | | | 9,713 | |
| — | |
| 9,713 | |
| (379) |
International | | | 4,455 | | | 3,515 | | | 7,970 | | | 8,364 | | | — | | | 8,364 | | | (394) |
All others | | | 3,719 | | | — | | | 3,719 | | | 6,118 | | | — | | | 6,118 | | | (2,399) |
Unallocated corporate expenses | | | (37,111) | | | 18,869 | | | (18,242) | | | (23,162) | | | 3,883 | | | (19,279) | | | 1,037 |
Elimination of intersegment losses (profits) | | | (88) | | | — | | | (88) | | | 62 | | | — | | | 62 | | | (150) |
Total | | $ | 14,435 | | $ | 30,796 | | $ | 45,231 | | $ | 46,862 | | $ | 3,883 | | $ | 50,745 | | $ | (5,514) |
The decrease in operating income, excluding Special items, of $5.5 million, or 10.9% for the first quarter of 2022 was primarily due to the following:
30
Refranchising and impairment loss
In the first quarter of 2022, the Company recorded a one-time, non-cash refranchising and impairment loss of $11.2 million. On March 28, 2022, we refranchised our 51% ownership interest in a 90-restaurant consolidated joint venture between Papa Johns and Blue and Silver Ventures, Ltd in Texas for cash proceeds of $14.0 million, net of transaction costs. The assets and liabilities associated with the joint venture are classified as held for sale in the Condensed Consolidated Balance Sheet as of March 27, 2022 and we recorded a one-time, non-cash charge of $8.4 million in the first quarter. The Company also recorded an impairment loss of $2.8 million for reacquired franchise rights due to the financial and operational impact of the conflict in Ukraine and government actions taken in response to that conflict, including, but not limitedconflict. See “Note 10. Divestitures” of “Notes to international sanctions.
Net Interest Expense
Net interest expense increased $0.6 millionCondensed Consolidated Financial Statements” for additional information on these items.
| Three Months Ended March 26, 2023 | Three Months Ended March 27, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Reported | (a) Adjustments | Adjusted | Reported | (a) Adjustments | Adjusted | Reported Increase (Decrease) | Adjusted Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| Domestic Company-owned restaurants | $ | 6,650 | $ | — | $ | 6,650 | $ | 1,989 | $ | 8,412 | $ | 10,401 | $ | 4,661 | $ | (3,751) | ||||||||||||||||||||||||||||||||||
| North America franchising | 33,400 | — | 33,400 | 32,137 | — | 32,137 | 1,263 | 1,263 | ||||||||||||||||||||||||||||||||||||||||||
| North America commissaries | 10,730 | — | 10,730 | 9,334 | — | 9,334 | 1,396 | 1,396 | ||||||||||||||||||||||||||||||||||||||||||
| International | 7,232 | — | 7,232 | 4,455 | 3,515 | 7,970 | 2,777 | (738) | ||||||||||||||||||||||||||||||||||||||||||
| All others | 3,157 | — | 3,157 | 3,719 | — | 3,719 | (562) | (562) | ||||||||||||||||||||||||||||||||||||||||||
| Unallocated corporate expenses | (23,366) | 1,356 | (22,010) | (37,111) | 18,869 | (18,242) | 13,745 | (3,768) | ||||||||||||||||||||||||||||||||||||||||||
| Elimination of intersegment (profits) | (7) | — | (7) | (88) | — | (88) | 81 | 81 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 37,796 | $ | 1,356 | $ | 39,152 | $ | 14,435 | $ | 30,796 | $ | 45,231 | $ | 23,361 | $ | (6,079) | ||||||||||||||||||||||||||||||||||
Income Before Income Taxes
For the reasons discussed above, income before income taxes decreased approximately $33.0 million for the first quarter of 2022 over the first quarter of 2021.
Income Tax (Benefit) Expense
The effective income tax rate was negative 12.3% for the three months ended March 27, 202226, 2023 compared to 18.4%$14.4 million for the prior year comparable period.period, an increase of $23.4 million. Adjusted operating income was $39.2 million for the three months ended March 26, 2023 compared to $45.2 million for the prior year period, a decrease of $6.1 million. The decrease in adjusted operating income in 2023 compared to 2022 was primarily due to the following:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| (In thousands, except per share amounts) | March 26, 2023 | March 27, 2022 | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| Operating income | $ | 37,796 | $ | 14,435 | $ | 23,361 | ||||||||||||||||||||||||||||||||
| Net interest expense | (9,021) | (4,264) | (4,757) | |||||||||||||||||||||||||||||||||||
| Income before income taxes | 28,775 | 10,171 | 18,604 | |||||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 6,229 | (1,256) | 7,485 | |||||||||||||||||||||||||||||||||||
| Net income before attribution to noncontrolling interests | 22,546 | 11,427 | 11,119 | |||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (170) | (933) | 763 | |||||||||||||||||||||||||||||||||||
| Net income attributable to the Company | $ | 22,376 | $ | 10,494 | $ | 11,882 | ||||||||||||||||||||||||||||||||
| Calculation of net income for earnings per share: | ||||||||||||||||||||||||||||||||||||||
| Net income attributable to the Company | $ | 22,376 | $ | 10,494 | $ | 11,882 | ||||||||||||||||||||||||||||||||
| Dividends paid to participating securities | — | (60) | 60 | |||||||||||||||||||||||||||||||||||
| Net income attributable to participating securities | — | — | — | |||||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 22,376 | $ | 10,434 | $ | 11,942 | ||||||||||||||||||||||||||||||||
| Basic earnings per common share | $ | 0.66 | $ | 0.29 | $ | 0.37 | ||||||||||||||||||||||||||||||||
| Diluted earnings per common share | $ | 0.65 | $ | 0.29 | $ | 0.36 | ||||||||||||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||
| (Dollars in thousands) | March 26, 2023 | March 27, 2022 | ||||||||||||||||||||||||
| Income before income taxes | $ | 28,775 | $ | 10,171 | ||||||||||||||||||||||
| Income tax expense (benefit) | $ | 6,229 | $ | (1,256) | ||||||||||||||||||||||
| Effective tax rate | 21.6 | % | (12.3) | % | ||||||||||||||||||||||
Texas on March 28, 2022.
| | | | | |
| | Quarter Ended | |||
| March 27, 2022 | | March 28, 2021 | ||
| | | | | |
Income before income taxes | $ | 10,171 | | $ | 43,215 |
Income tax (benefit) expense | $ | (1,256) | | $ | 7,932 |
Effective tax rate | | -12.3% | | | 18.4% |
Impact of Inflation
Given the accelerating inflationary environment and short-term commodity volatility experienced in the first quarter of 2022, there have been and may continue to be increases in food costs and labor costs which have and could further impact our profitability. Factors such as inflation, increased food costs, increased labor and employee health and benefit costs, increased rent costs and increased energy costs have and may continue to adversely affect our operating costs and
31
profitability. Severe increases in inflation could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of operations. To the extent permitted by competition, increased costs are recovered through a combination of selective menu price increases, product mix, and/or implementing operational improvements.
Items Impacting Comparability; Non-GAAP Measures
The table below reconciles our GAAP financial results to our adjusted financial results, which arediluted earnings per common share, respectively. These non-GAAP measures. We present these non-GAAP measures because we believe the Special items impact the comparability of our results of operations. See “Note 2”, “Note 9”, and “Note 10” of “Notes to Condensed Consolidated Financial Statements,” for additional information about the Special items.
| | | | | | |
| | Three Months Ended | ||||
| | March 27, | | March 28, | ||
(In thousands, except per share amounts) |
| 2022 |
| 2021 | ||
| | | | | | |
GAAP operating income | | $ | 14,435 | | $ | 46,862 |
Refranchising and impairment loss (1) | | | 25,796 | | | — |
Legal settlement (2) | | | 5,000 | | | — |
Strategic corporate reorganization costs (3) | | | — | | | 3,883 |
Adjusted operating income | | $ | 45,231 | | $ | 50,745 |
| | | | | | |
GAAP net income attributable to common shareholders | | $ | 10,434 | | $ | 27,113 |
Refranchising and impairment loss (1) | | | 25,796 | | | — |
Legal settlement (2) | | | 5,000 | | | — |
Strategic corporate reorganization costs (3) | | | — | | | 3,883 |
Tax effect of Non-GAAP adjustment on special items (4) | | | (6,929) | | | (874) |
Adjusted net income attributable to common shareholders | | $ | 34,301 | | $ | 30,122 |
| | | | | | |
GAAP diluted earnings per common share | | $ | 0.29 | | $ | 0.82 |
Refranchising and impairment loss (1) | | | 0.71 | | | — |
Legal settlement (2) | | | 0.14 | | | — |
Strategic corporate reorganization costs (3) | | | — | | | 0.12 |
Tax effect of Non-GAAP adjustment on special items (4) | | | (0.19) | | | (0.03) |
Adjusted diluted earnings per common share | | $ | 0.95 | | $ | 0.91 |
(Note) The above table does not include the impact of allocation of undistributed earnings to participating securities for Special items.
The 2022 non-GAAP adjusted results shown above and within this document, which exclude Special items, should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s U.S. GAAP results. Management believes presentingThe table below reconciles our GAAP financial results to our non-GAAP financial measures.
| Three Months Ended | ||||||||||||||||||||||||||
| (In thousands, except per share amounts) | March 26, 2023 | March 27, 2022 | ||||||||||||||||||||||||
| Operating income | $ | 37,796 | $ | 14,435 | ||||||||||||||||||||||
Refranchising and impairment losses (a) | — | 25,796 | ||||||||||||||||||||||||
Legal settlement (b) | — | 5,000 | ||||||||||||||||||||||||
Other costs (c) | 1,356 | — | ||||||||||||||||||||||||
| Adjusted operating income | $ | 39,152 | $ | 45,231 | ||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 22,376 | $ | 10,434 | ||||||||||||||||||||||
Refranchising and impairment losses (a) | — | 25,796 | ||||||||||||||||||||||||
Legal settlement (b) | — | 5,000 | ||||||||||||||||||||||||
Other costs (c) | 1,356 | — | ||||||||||||||||||||||||
Tax effect of adjustments (d) | (309) | (6,929) | ||||||||||||||||||||||||
Adjusted net income attributable to common shareholders (e) | $ | 23,423 | $ | 34,301 | ||||||||||||||||||||||
| Diluted earnings per common share | $ | 0.65 | $ | 0.29 | ||||||||||||||||||||||
Refranchising and impairment losses (a) | — | 0.71 | ||||||||||||||||||||||||
Legal settlement (b) | — | 0.14 | ||||||||||||||||||||||||
Other costs (c) | 0.04 | — | ||||||||||||||||||||||||
Tax effect of adjustments (d) | (0.01) | (0.19) | ||||||||||||||||||||||||
Adjusted diluted earnings per common share (e) | $ | 0.68 | $ | 0.95 | ||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||
| (In thousands) | March 27, 2022 | |||||||||||||||||||||||||
Refranchising impairment loss (1) | $ | 8,412 | ||||||||||||||||||||||||
Ukraine-related charge (2) | 17,384 | |||||||||||||||||||||||||
| Total adjustment | $ | 25,796 | ||||||||||||||||||||||||
32
Liquidity and Capital Resources
investing for growth
(in thousands):
| Three Months Ended | ||||||||||||||
| March 26, 2023 | March 27, 2022 | |||||||||||||
| Total cash provided by (used in): | ||||||||||||||
| Operating activities | $ | 40,788 | $ | 25,394 | ||||||||||
| Investing activities | (18,275) | (8,315) | ||||||||||||
| Financing activities | (23,212) | (6,787) | ||||||||||||
| Change in cash and cash equivalents, excluding the effect of exchange rate changes on cash and cash equivalents | $ | (699) | $ | 10,292 | ||||||||||
| | | | | | |
| | Three Months Ended | ||||
| | March 27, | | March 28, | ||
| | 2022 | | 2021 | ||
Total cash provided by (used in): | | | | | | |
Operating activities | | $ | 25,394 | | $ | 63,217 |
Investing activities | | | (8,315) | | | (6,299) |
Financing activities | | | (6,787) | | | (16,080) |
Change in cash and cash equivalents, excluding the impact of foreign currency | | $ | 10,292 | | $ | 40,838 |
Cash flow
lower volumes.
Cash flow
$47.0 million from the PJI Revolving Facility.
26, 2023.
33
financial covenants, as shown in the following table, that could restrict or impose constraints on the liquidity of our business:
|
|
|
|
| ||||||||||
|
|
|
|
| ||||||||||
|
|
|
| Actual Ratio as of March 26, 2023 | ||||||||||
|
|
| ||||||||||||
Leverage ratio | Not to exceed 5.25 to 1.0 |
| ||||||||||||
|
|
|
|
| ||||||||||
Interest coverage ratio | Not less than 2.00 to 1.0 |
| ||||||||||||
26, 2023.
Papa John’s Marketing Fund, Inc. (“PJMF”), our national marketing fund,
27, 2022:
| (In thousands, except average price per share) | Total Number of Shares Purchased | Average Price Paid per Share | Aggregate Cost of Shares Purchased (a) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||
| March 26, 2023 | 2,523 | $ | 83.10 | $ | 209,640 | $ | 90,160 | |||||||||||||||||||
| March 27, 2022 | 301 | $ | 108.76 | $ | 32,709 | $ | 392,091 | |||||||||||||||||||
| | | | | | | | | | | |
| | | | | | | | | | | Maximum Dollar |
| | Total | | | Average | | | Aggregate | | | Value of Shares |
| | Number | | | Price | | | Cost of | | | that May Yet Be |
(in thousands, except average price per share) | | of Shares | | | Paid per | | | Shares | | | Purchased Under the |
Three Months Ended | | Purchased | |
| Share | | | Purchased | | | Plans or Programs |
March 27, 2022 | | 301 | | $ | 108.76 | | $ | 32,709 | | $ | 392,091 |
March 28, 2021 | | 15 | | $ | 84.63 | | $ | 1,267 | | $ | 71,031 |
Subsequent to The shares repurchased during the three months ended March 27, 2022, we acquired an additional 223,00026, 2023 included 2,176,928 shares repurchased on March 1, 2023 from Starboard at ana price of $82.52 per share for aggregate costconsideration of $23.0$179.6 million. Approximately $369.1 million remained available under the Company’s share repurchase program as of April 29, 2022.
34
Dividends
The Company recordedpaid aggregate dividends to common stockholders of approximately$14.6 million ($0.42 per share) and $12.6 million ($0.35 per share) infor the first quarter of 2022. Onthree months ended March 26, 2023 and March 27, 2022, respectively. On April 26, 2022,25, 2023, our Board of Directors declared a second quarter dividend of $0.35$0.42 per common share approximately $12.6(approximately $13.8 million in the aggregate,aggregate), which will be paid on May 27, 202226, 2023 to stockholders of record as of the close of business on May 16, 2022.15, 2023. The declaration and payment of any future dividends will be at the discretion of our Board of Directors.
Free Cash Flow
| Three Months Ended | ||||||||||||||
| March 26, 2023 | March 27, 2022 | |||||||||||||
| Net cash provided by operating activities | $ | 40,788 | $ | 25,394 | ||||||||||
| Purchases of property and equipment | (18,410) | (10,233) | ||||||||||||
| Free cash flow | $ | 22,378 | $ | 15,161 | ||||||||||
35
•the ability of the Company to manage challenging macroeconomic conditions in the United States and internationally, including the United Kingdom; •the ability of the Company to manage staffing and labor shortages at Company and/or franchised restaurants and our quality control centers; •increases in labor costs, food costs or sustained higher other operating costs, including as a result of supply chain disruption, inflation or climate change; •the potential for delayed new store openings, both domestically and internationally; • |
| the increased risk of phishing, ransomware |
36
For a discussion of these and other cyber-attacks;
37
operations for the three months ended March 26, 2023 and March 27, 2022, respectively. respectively. The following table presents the actual average block price for cheese by quarter through the first quarter of 2022 2021 Projected Actual Block Price Block Price Quarter 1 $ 1.966 $ 1.676 Quarter 2 2.352 1.680 Quarter 3 2.374 1.676 Quarter 4 2.318 1.786 Full Year $ 2.253 * $ 1.705 The Company is involved in a number of lawsuits, claims, investigations and proceedings consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with Financial Accounting Standards Board Accounting Standards Codification 450, Total Number Maximum Dollar Total Average of Shares Purchased Value of Shares Number Price as Part of Publicly that May Yet Be of Shares Paid per Announced Plans Purchased Under the Fiscal Period Purchased Share or Programs Plans or Programs 12/27/2021 - 1/23/2022 52 $ 126.26 52 $ 418,204 1/24/2022 - 2/20/2022 59 $ 118.87 59 $ 411,196 2/21/2022 - 3/27/2022 190 $ 100.80 190 $ 392,091 Total 301 $ 108.76 301 $ 392,091 Exhibit Description 10.1 31.1 31.2 32.1 32.2 101 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).Item 3.Quantitative and Qualitative Disclosures About Market RiskInterest Rate RiskWe are exposed to the impact of interest rate changes on our PJI Revolving Facility. We attempt to minimize interest rate risk exposure by fixing our interest rate through the utilization of interest rate swaps, which are derivative financial instruments. The interest rate swaps were de-designated following the issuance of the Notes in the third quarter of 2021. Our swaps are entered into with financial institutions that participate in the PJI Revolving Facility. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract. We do not enter into contracts for trading purposes and do not use leveraged instruments. The market risks associated with our debt obligations as of March 27, 202226, 2023 have not changed from those reported in “Part II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021.25, 2022. See “Note 8”8. Debt” of “Notes to Condensed Consolidated Financial Statements” for additional information on our debt obligations and derivative instruments.Foreign Currency Exchange Rate RiskWe are exposed to foreign currency exchange rate fluctuations from our operations outside of the United States, which can adversely impact our revenues, net income and cash flows. Our 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. For each of the periods presented, between 6%Approximately 6.0% and 7%6.4% of our revenues were derived from these operations.We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had an unfavorable impact of approximately $1.2$2.9 million on International revenues for first quarter of 2022 compared to a favorablethe three months ended March 26, 2023, and an unfavorable impact of approximately $1.9$1.2 million infor the first quarter of 2021.three months ended March 27, 2022. Foreign currency exchange rate fluctuations had an unfavorable impact of approximately $0.6 million on operating income infor the first quarter ofthree months ended March 26, 2023 and March 27, 2022, compared to a favorable impact of $0.5 million in the first quarter of 2021.Commodity Price RiskIn the ordinary course of business, the food and paper products we purchase, including cheese (our largest individual food cost item)ingredient cost), are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our control. We have pricing agreements with some of our vendors, including forward pricing agreements for a portion of our cheese purchases for our domesticDomestic Company-owned restaurants, which are accounted for as normal purchases; however, we remain exposed to on-goingongoing commodity volatility.383320222023 and the projected average block price by quarter for 20222023 (based on the April 29, 202227, 2023 Chicago Mercantile Exchange cheese futures market prices):2023 2022 Projected
Block PriceActual
Block PriceQuarter 1 $ 1.960 $ 1.966 Quarter 2 1.844 2.296 Quarter 3 1.980 1.938 Quarter 4 2.026 2.066 Full Year $ 1.953 (a) $ 2.067 ___________________________________*The full year estimate is based on futures prices and does not include the impact of forward pricing agreements we have for a portion of our cheese purchases for our domestic Company-owned restaurants. Additionally, the price charged to restaurants can vary somewhat by quarter from the actual block price based upon our monthly pricing mechanism.(a) The full year estimate is based on futures prices and does not include the impact of forward pricing agreements we have for a portion of our cheese purchases for our domestic Company-owned restaurants. Additionally, the price charged to restaurants can vary somewhat by quarter from the actual block price based upon our monthly pricing mechanism. Item 4. Controls and ProceduresUnder the supervision and with the participation of the Company’s management, including its chief executive officer and chiefprincipal financial and accounting officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, the chief executive officer and chiefprincipal financial and accounting officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.Changes in Internal Control Over Financial ReportingDuring the most recently completed fiscal quarter, there was no change made in the Company’s internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.Item 1. Legal Proceedings“Contingencies”“Contingencies”, the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s condensed consolidated financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. The legal proceedings described in Note 9“Note 9. Litigation, Commitments and Contingencies” of “Notes to Condensed Consolidated Financial Statements” within “Part I. Item 1. Financial Statements” of this Form 10-Q are incorporated herein by reference.Item 1A. Risk FactorsExcept as set forth below, thereThere have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2021. Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine.The global economy has been negatively impacted by the military conflict in Ukraine. Furthermore, governments in the U.S., United Kingdom, and European Union have each imposed export controls on certain products and financial and3934economic sanctions on certain industry sectors and parties in Russia. The Company has no company-owned restaurants in Russia or Ukraine and has suspended corporate support for its master franchisee in Russia, which operates and supplies all 188 franchised Papa John’s restaurants there. The Company is unable to predict how long the current environment will last or if it will resume corporate support to impacted franchised restaurants. As all assets related to the Russia master franchisee and franchised restaurants have been fully reserved or impaired, we do not expect further financial statement charges for the Russia operation.Like other businesses, we have experienced some increased costs for transportation, energy, and commodities due in part to the negative impact of the military conflict in Ukraine on the global economy. Further escalation of geopolitical tensions, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain. In addition, the effects of the ongoing conflict could heighten many of our known risks described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021.Item 2. Unregistered Sales of Equity Securities and Use of ProceedsShare Repurchase ProgramOn October 28, 2021, our Board of Directors approved a share repurchase program with an indefinite duration for up to $425.0 million of the Company’s common stock. Funding for the share repurchase program iswas provided through our operating cash flows and our $600.0 million PJI Revolving Facility.The following table summarizes our repurchase activity by fiscal period during the first quarterthree months ended March 27, 202226, 2023 (in thousands, except per share amounts):Fiscal Period Total
Number
of Shares
PurchasedAverage
Price
Paid per
ShareTotal Number
of Shares Purchased
as Part of Publicly
Announced Plans
or ProgramsMaximum Dollar
Value of Shares
that May Yet Be
Purchased Under the
Plans or Programs12/26/2022 - 1/22/2023 147 $ 82.63 147 $ 287,637 1/23/2023 - 2/19/2023 182 $ 89.22 182 $ 271,419 2/20/2022 - 3/26/2023 2,194 $ 82.62 2,194 $ 90,160 Total 2,523 $ 83.10 2,523 $ 90,160 The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program. There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise.Subsequent to March 27, 2022, we acquired an additional 223,000 shares at an aggregate cost of $23.0 million. Approximately $369.1 million remained available under the Company’s share repurchase program as of April 29, 2022.Repurchases of Stock for Tax WithholdingsDuring the fiscal quarter ended March 27, 2022,26, 2023, the Company acquired approximately 69,00072,000 shares of its common stock from employees to satisfy minimum tax withholding obligations that arose upon (i) vesting of restricted stock granted pursuant to approved plans and (ii) distribution of shares of common stock issued pursuant to deferred compensation obligations.4035Item 6. ExhibitsExhibit
Number10.2Endorsement Agreement executed April 10, 2022, and effective March 15, 2022, by and among,the sellers listed on the one hand, ABG-Shaq, LLC, for the personal servicesschedule of Shaquille O’Neal, and, on the other hand, Papa John’s Marketing Fund, Inc. and Papa John’s International, Inc.sellers attached thereto. Exhibit 10.1 to our reportCurrent Report on Form 8-KForm 8-K as filed on April 13, 2022March 2, 2023 is incorporated herein by referencereference..Financial statements from the quarterly report on Form 10-Q of Papa John’s International, Inc. for the quarter ended March 27, 2022,26, 2023, filed on May 5, 2022,4, 2023, formatted in iXBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Deficit, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.104 4136Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.PAPA JOHN’S INTERNATIONAL, INC. (Registrant)(Registrant)Date: May 5, 2022/s/ Ann B. GuginoAnn B. GuginoChief Financial OfficerDate: May 4, 2023 /s/ Chris Collins Chris Collins Principal Financial and Accounting Officer 4237