| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 27, 2020
25, 2022
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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Delaware |
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(State or other jurisdiction of |
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incorporation or organization) |
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2002 Papa John’s Boulevard |
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Louisville, |
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Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $0.01 par value |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒x No ☐o
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.Act ☐o
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$2,906,744,039.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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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.
Strategy
We are committed to delivering on our brand promise “BETTER INGREDIENTS. BETTER PIZZA.®” and a business strategy designed to drive sustainable long-term, profitable growth.
Papa John’s is driven by five strategic priorities:
A diverse, inclusive environment is essential to attracting the talent that makes Papa Johns the world’s best pizza delivery company. See the “Human Capital” section below where we discuss our ongoing initiatives in this area.
. We have been intent on taking proactive steps to drive profitable growth, especially under the current challenging operating environment. This includes growing ticket and transactions through menu innovations, customer insights and strategic pricing actions. In addition to increasing average unit volumes, our strategy focuses on further sharpening our execution and driving BETTER customer experience for faster service while optimizing labor allocation, enhancing operational efficiencies and effectively managing margins.
We care about Our integrations with the healthaggregator marketplaces and safetyour nationwide integration with a third-party delivery service provider have been key tools allowing us to continue to meet our customers in the channel of their choice.
We continue to expandpursue a growth strategy by expanding our footprint, both domestically and internationally. OurWe partner with large local investors to expand into new regions and markets, seeking to ensure our partners are aligned with our strategic priorities and committed to the Papa Johns brand. Nearly all of our top-25 North American franchisees now have development agreements in place. Internationally, our teams
Our success depends on our ability to recruit, motivatePapa John’s digital and retain a highly qualified workforce in an intensely competitive environment. We believe that increasing diversity in our workforce will also help us drive innovation that reflects and resonates with the increasing diversity of our customers domestically and globally.
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Segment Overview
Of the total 3,2893,376 North American restaurants open as of December 27, 2020, 58825, 2022, 522 units, or approximately 18%15%, were Company-owned. In 2020,2022, the 579 domestic514 Domestic Company-owned restaurants included in the full year’s comparable restaurant base generated average annual unit sales of $1.2$1.3 million. We are committed to maintaining sound restaurant unit economics.
North America franchising
The North America franchising segment consists
International
are franchised. The International segment principally consists of distribution sales to franchised Papa John’s restaurants located in the United Kingdom (“UK”)UK 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. As of December 27, 2020, there were 2,111 international restaurants, all of which are franchised. The Company currently operates one internationalInternational QC Center, which is in the UK. Other QC Centers outside the U.S.North America are operated by franchisees pursuant to license agreements or by other third parties.
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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.
platforms, and printing and promotional items.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 23”23. Segment Information” of “Notes to Consolidated Financial Statements” for financial information about our segments.
Development
At December 27, 2020,25, 2022, there were 5,400 5,706Papa John’s restaurants operating in 48 countries and territories, as follows:
Domestic Company-owned | Franchised North America | Total North America | International(a) | System-wide | ||||||||||||||||||||||||||||
Beginning - December 26, 2021 | 600 | 2,739 | 3,339 | 2,311 | 5,650 | |||||||||||||||||||||||||||
Opened | 10 | 76 | 86 | 292 | 378 | |||||||||||||||||||||||||||
Closed | — | (49) | (49) | (85) | (134) | |||||||||||||||||||||||||||
Sold | — | (2) | (2) | — | (2) | |||||||||||||||||||||||||||
Acquired | 2 | — | 2 | — | 2 | |||||||||||||||||||||||||||
Refranchised | (90) | 90 | — | — | — | |||||||||||||||||||||||||||
Suspended (a) | — | — | — | (188) | (188) | |||||||||||||||||||||||||||
Ending - December 25, 2022 | 522 | 2,854 | 3,376 | 2,330 | 5,706 | |||||||||||||||||||||||||||
Net unit growth/(decline) (a) | (78) | 115 | 37 | 207 | 244 |
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| Domestic Company-owned | Franchised North America | Total North America | International | System-wide |
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Beginning - December 29, 2019 | 598 | 2,690 | 3,288 | 2,107 | 5,395 |
Opened | 2 | 62 | 64 | 156 | 220 |
Closed | (12) | (51) | (63) | (152) | (215) |
Ending - December 27, 2020 | 588 | 2,701 | 3,289 | 2,111 | 5,400 |
Net unit growth (decline) - 2020 | (10) | 11 | 1 | 4 | 5 |
Although most of our domestic Company-owned marketsAs previously disclosed, the Company has suspended corporate support for all franchised restaurants located in Russia. These suspended restaurants are well-penetrated, ourexcluded from net unit growth calculations.
As of December 27, 2020, we have development agreements with our franchisees for approximately 210 additional North America restaurants, the majority of which are committed to open over the next two years, and 1,250 additional international franchised restaurants, the majority of which are scheduled to open over the next six years.
North America Development and Franchise Agreements. We enter into development agreements with our franchisees in North America for the openingopening of a specified number of restaurants within a defined period of time and specified geographic area. The franchise agreement is generally executed once a franchisee secures a location. Our current standard franchise agreement requires the franchisee to pay a royalty fee of 5% of sales, and the majority of our existing franchised restaurants have a 5% contractual royalty rate in effect. Incentives to franchisees offered from time to time including new store incentives, willmay reduce the contractual royalty rate paid. We provided financial assistance for traditional North America franchisees in 2018, 2019 and 2020 in the form of lower royalties, royalty-based service incentives, targeted relief as well as additional contributions to Papa John’s Marketing Fund (“PJMF”).
Over the past several years, we have offered various development incentive programs for domestic franchisees to accelerate unit openings. Such incentives included the following for 2020 traditional openings: (1) waiver of all or part of the standard one-time franchise fee; (2) waiver of all or part of the 5% royalty fee for a period of time; (3) credit for new store equipment; and (4) credit to be applied toward a future food purchase, under certain circumstances. We believe development incentive programs have accelerated unit openings, and we expect to continue to utilize such development incentives.
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Substantially all existing franchise agreements have an initial 10-year term with a 10-year renewal option. We have the right to terminate a franchise agreement for a variety of reasons, including a franchisee’s failurefailure to make payments when due or failure to adhere to our operational policies and standards. Many state franchise laws limit our ability as a franchisor to terminate or refuse to renew a franchise.
Our current standard international master franchise and development agreements provide for payment to us of a royalty fee of 5% of sales. For international markets with sub-franchise agreements, the effective sub-franchise royalty received by the Company is generally 3% of sales and the master franchisee generally receives a royalty of 2% of sales. The remaining terms applicable to the operation of individual restaurants are substantially equivalent to the terms of our domesticDomestic franchise agreement. Development agreements will be negotiated at other-than-standard terms for fees and royalties, and we may offer various development and royalty incentives to help drive net unit growth and results.
incentives.
Franchise Operations. All franchisees are required to operate their Papa John’s restaurants in compliance with our policies, standards and specifications, including matters such as menu items, ingredients, and restaurant design. Franchisees have full discretion in human resource practices, and generally have full discretion to determine the prices to be charged to customers, but we generally have the authority to set maximum price points for nationally advertised promotions.
Franchisee Loans. Selected domesticDomestic and internationalInternational franchisees have borrowed funds from us, principally for the purchase of restaurants from us or other franchisees or, in certain international markets, for construction and development of new restaurants. Loans made to franchisees can bear interest at fixed or floating rates and in most cases are secured by the fixtures, equipment and signage of the restaurant and/or are guaranteed by the franchise owners. At December 27, 2020,25, 2022, net loans outstanding totaled $47.9 million. See$28.1 million. See “Note 2”2. Significant Accounting Policies” of “Notes“Notes to Consolidated Financial Statements”Statements” for additional information.
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Human Capital
.
Our commitment
pizza lovers. We are building a culture that both reflects our corporate values of leaders who believePeople First and Everyone Belongs and creates a competitive advantage in inclusivity, diversityattracting and winning.retaining talent. Across our restaurants, Quality Control Centers and corporate hubs, Papa Johns team members are valued for their contributions, treated equitably, encouraged to share their feedback and ideas, provided the tools needed to ensure their safety and total wellness and given ample opportunities to grow in their careers. After being recognized by Forbes in 2021 as one of America’s Best Employers for Diversity, Papa John’s joined Forbes’ annual list of the World’s Best employers in 2022. We were honored to rank #1 amongst all pizza companies and #2 in the entire restaurant category. Also, for the second year in a row, we received a score of 100 on the Human Rights Campaign Foundation’s 2022 Corporate Equality Index.
groups with leaders engaging across the organization.
primary care services for adults, adolescents and children.
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Industry and Competition
carryout continues. We continue to execute on our growth strategy and expand throughout the world.
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Trademarks, Copyrights and Domain Names
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therapies or the speed of vaccine distribution. To the extent that the COVID-19 pandemic continueson the broader economy and how consumer behavior may change, and whether such change is temporary or worsens, restrictions imposed by governments may not be lifted, or additional restrictions may be imposed. As a result, businesses such as our restaurants or QC Centers may be required to shut down, our employees may be prohibited from working, and our supply chains may be interrupted. It may be challenging to obtain and process ingredients and raw materials to support our business needs. In addition, individuals have and may continue to become ill, quarantined or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations or taxes which could adversely impact our business, financial condition or results of operations. Further, if our customers’ economic conditions are similarly affected, they might delay or reduce purchases from us, which could adversely affect our business, financial condition or results of operations.
permanent.
Moreover, during To the duration ofextent that COVID-19 continues to adversely affect the COVID-19 pandemic, we have experienced a significant increase in comparable salesU.S. and revenues. The circumstances that have contributed to the acceleration of the growth ofglobal economy, our business, stemming from the effectsfinancial conditions or results of the COVID-19 pandemicoperations, it may not continuealso heighten other risks described in the future once the impact of the COVID-19 pandemic tapers, particularly as a vaccine becomes widely available, and customers are no longer subject to shelter-in-place or social distancing mandates. We expect the growth rates in comparable sales and revenues to slow or decline.
this section.
One of our competitive strengths is our “BETTER INGREDIENTS. BETTER PIZZA.®” brand promise. This means we may use ingredients that cost more than the ingredients some of our competitors may use. Because of our investment in higher-quality ingredients, we could have lower profit margins than some of our competitors if we are not able to establish a quality differentiator that resonates with consumers. Our sales may be particularly impacted as competitors increasingly emphasize lower-cost menu options.
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Changes in consumer preferences or discretionary consumer spending could adversely impact our results.
Our results depend upon our ability to differentiate our brand and our reputation for quality. Damage to our brand or reputation could negatively impact our business and financial results. Our brand has been highly rated in certainpast U.S. surveys, and we strive to build the value of our brand as we develop international markets.
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In addition, we frequently use social media to communicate with consumers and the public in general. Failure to use social media effectively could lead to a decline in brand value and revenue. Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our brand, exposure of personally identifiable information, fraud, hoaxes or malicious dissemination of false information.
Changes in privacy or data protection laws could adversely affect our ability to market our products effectively.
Our international operations are subject to increased risks and other factors that may make it more difficult to achieve or maintain profitability or meet planned growth rates.
Our international operations could be negatively impacted by volatility and instability in international economic, political, security or health conditions in the countries in which the Company or our franchisees operate, especially in emerging markets. In addition, there are risks associated with differing business and social cultures and consumer preferences. We may face limited availability for restaurant locations, higher location costs and difficulties in franchisee selection and financing. We may be subject to difficulties in sourcing and importing high-quality ingredients (and ensuring food safety) in a cost-effective manner, hiring and retaining qualified team members, marketing effectively and adequately investing in information technology, especially in emerging markets.
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Our international operations are also subject to additional risk factors, including import and export controls, compliance with anti-corruption and other foreign laws, difficulties enforcing intellectual property and contract rights in foreign jurisdictions, and the imposition of increased or new tariffs or trade barriers. We intend to continue to expand internationally, which would make the risks related to our international operations more significant over time.
Our international restaurants’ results, which are completely franchised, depend heavily on the operating capabilities and financial strength of our franchisees. Any changes in the ability of our franchisees to run their stores profitably in accordance with our operating standards, or to effectively sub-franchise restaurants, could result in brand damage, a higher number of restaurant closures and a reduction in the number of new restaurant openings.
Sales made by our franchisees in international markets and certain loans we provide to such franchisees are denominated in their local currencies, and fluctuations in the U.S. dollar occur relative to the local currencies. Accordingly, changes in currency exchange rates will cause our revenues, investment income and operating results to fluctuate. We have not historically hedged our exposure to foreign currency fluctuations. Our international revenues and earnings may be adversely impacted as the U.S. dollar rises against foreign currencies because the local currency will translate into fewer U.S. dollars. Additionally, the value of certain assets or loans denominated in local currencies may deteriorate. Other items denominated in U.S. dollars, including product imports or loans, may also become more expensive, putting pressure on franchisees’ cash flows.
We are subject to risks and uncertainties associated with the United Kingdom’s withdrawal from the European Union (referred to as “Brexit”), including implications for the free flow of labor and goods in the United Kingdom and the European Union and other financial, legal, tax and trade implications.
Adverse global economic conditions subject us to additional risk.
Our financial condition and results of operations are impacted by global markets and economic conditions over which neither we nor our franchisees have control. An economic downturn, including deterioration in the economic conditions in the U.S. or international markets where we compete, may result in a reduction in the demand for our products, longer payment cycles, slower adoption of new technologies and increased price competition.
Poor economic conditions may adversely affect the ability of our franchisees to pay royalties or amounts owed and could also disrupt our business and adversely affect our results.
Higher labor costs, and increased competition for qualified team members increase the cost of doing business and ensuring adequate staffing in our restaurants and QC Centers.Centers increase the cost of doing business. Additionally, changes in employment and labor laws, including health care legislation and minimum wage increases, could increase costs for our system-wide operations.
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A significant number of hourly personnel are paid at rates close toat or above the federal and state minimum wage requirements. Accordingly, the enactment of additional state or local minimum wage increases above federal wage rates or regulations related to exempt employees has increased and could continue to increase labor costs for our domesticDomestic system-wide
Further, corporate or franchisees’ response to any union organizing efforts could negatively impact how our brand is perceived.
On September 17, 2020, we announced plans to openretention.
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Persons
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crop disease affecting the California tomato crop could disrupt the supply of pizza sauce to our and our franchisees’ restaurants. Insolvency of key suppliers could also cause similar business interruptions and negatively impact our business.
In addition, any prolonged disruption in the operations of any of our QC facilities, whether due to technical, systems, operational or labor difficulties, destruction or damage to the facility, real estate issues, limited capacity or other reasons, could adversely affect our business and operating results.
variable rates of interest;
Withat all.
Current debt levels under our existing credit facility may reduce available cash flow to plan for or react to business changes, changes in the industry or any general adverse economic conditions. Under our credit facility, weprofitability.
Higher inflation, and a related increase in costs, including rising interest rates, could also impact our franchisees and their ability to open new restaurants or operate existing restaurants profitably.
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In addition, the loans under our credit facility accrue interest at a per annum rate that may include, at the Company’s election, a spread over the London Interbank Offered Rate (“LIBOR”). In July 2017, the head of the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced its intention to phase out the use of LIBOR by the end of 2021. However, the Intercontinental Exchange Benchmark Administration, in its capacity as administrator of USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other than one-week and two-month tenors) by 18 months to June 2023. Notwithstanding this possible extension, a joint statement by key regulatory authorities calls on banks to cease entering into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S.-dollar LIBOR with the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements, backed by Treasury securities. Although SOFR appears to be the preferred replacement rate for U.S. dollar LIBOR, at this time, it is not possible to definitively predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates, including SOFR. The cessation of LIBOR will require us to amend the terms of our credit facility or any future credit agreements extending beyond June 2023 and indexed to LIBOR to replace LIBOR with SOFR or such other standard that is established, which could have a material adverse effect on us, including on our cost of funds, access to capital markets and financial results.
Investment Risks
Our Board of Directors has adopted a limited duration stockholder rights agreement, which could delay or discourage a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors.
On April 30, 2019, the Company’s stockholders ratified the adoption by the Board of Directors of the Rights Agreement, dated as of July 22, 2018, as amended on February 3, 2019, March 6, 2019, and October 23, 2019 (as amended, the “Rights Agreement”). The original Rights Agreement adopted by the Board of Directors on July 22, 2018 had an expiration date of July 22, 2019 and a beneficial ownership trigger threshold of 15%. On February 3, 2019, in connection with the sale and issuance of shares of the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”) to certain funds affiliated with, or managed by, Starboard Value LP (collectively, “Starboard”), the original Rights Agreement was amended to exempt Starboard from being considered an “Acquiring Person” under the Rights Agreement solely as a result of its beneficial ownership of (i) shares of common stock beneficially owned by Starboard prior to the sale and issuance of the Series B Preferred Stock, (ii) shares of Series B Preferred Stock issued or issuable to Starboard under the terms of the Securities Purchase Agreement, dated February 3, 2019, with Starboard (the “Securities Purchase Agreement”), and (iii) shares of the common stock (or in certain circumstances certain series of preferred stock) issuable upon conversion of the Series B Preferred Stock (or certain series of preferred stock issuable on conversion thereof) pursuant to the terms of the Certificate of Designation of Series B Preferred Stock. On March 6, 2019, the Rights Agreement was further amended to extend the term of the Rights Agreement to March 6, 2022, increase the beneficial ownership trigger threshold at which a person becomes an acquiring person from 15% to 20%, except for a “grandfathered person” provision, and make certain other changes. The Rights Agreement was further amended on October 23, 2019 to eliminate the “grandfathered person” provision as there are no stockholders that currently beneficially own 20% or more of the Company’s common stock.
The Rights Agreement is intended to enable all of our stockholders to realize the full potential value of their investment in the Company and to protect the interests of the Company and its stockholders by reducing the likelihood that any person or group gains control of the Company through open market accumulation or other tactics without paying an appropriate control premium. The Rights Agreement could render more difficult, or discourage, a merger, tender offer, or assumption of control of the Company that is not approved by our Board of Directors. The Rights Agreement, however, should not interfere with any merger, tender or exchange offer or other business combination approved by our Board of Directors. In addition, the Rights Agreement does not prevent our Board of Directors from considering any offer that it considers to be in the best interest of the Company’s stockholders.
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The issuance of shares of our Series B Preferred Stock to Starboard and its permitted transferees dilutes the ownership and relative voting power of holders of our common stock and may adversely affect the market price of our common stock.
Pursuant to the Securities Purchase Agreement, the Company sold 250,000 shares of our newly designated Series B Preferred Stock to Starboard in 2019.
As of December 27, 2020, the shares held by Starboard represent 13.3% of our outstanding common stock on an as-converted basis. The Series B Preferred Stock is convertible at the option of the holders at any time into shares of common stock based on the conversion rate determined by dividing $1,000, the stated value of the Series B Preferred Stock, by $50.06.
Because holders of our Series B Preferred Stock are entitled to vote, on an as-converted basis, together with holders of our common stock on all matters submitted to a vote of the holders of our common stock, the issuance of the Series B Preferred Stock to Starboard effectively reduces the relative voting power of the holders of our common stock.
In addition, the conversion of the Series B Preferred Stock into common stock would dilute the ownership interest of existing holders of our common stock. Furthermore, any sales in the public market of the common stock issuable upon conversion of the Series B Preferred Stock could adversely affect prevailing market prices of our common stock. Pursuant to a customary registration rights agreement with Starboard, we have registered for resale under the Securities Act of 1933 the shares of Series B Preferred Stock and any shares of common stock issued upon conversion of the Series B Preferred Stock. This registration may facilitate the resale of such securities into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales by Starboard of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.
Our Series B Preferred Stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of, our common stockholders, which could adversely affect our liquidity and financial condition, result in the interests of holders of our Series B Preferred Stock differing from those of our common stockholders and delay or prevent an attempt to take over the Company.
Starboard and the other holders of our Series B Preferred Stock have a liquidation preference entitling them to be paid, before any payment may be made to holders of our common stock in connection with a liquidation event, an amount per share of Series B Preferred Stock equal to the greater of (i) the stated value thereof plus accrued and unpaid dividends and (ii) the amount that would have been received had such share of Series B Preferred Stock been converted into common stock immediately prior to such liquidation event.
Holders of Series B Preferred Stock are entitled to a preferential cumulative dividend at the rate of 3.6% per annum, payable quarterly in arrears. On the third anniversary of the date of issuance, each holder of Series B Preferred Stock will have the right to increase the dividend on the shares of Series B Preferred Stock held by such holder to 5.6%, and on the fifth anniversary of the date of issuance, each holder will have the right to increase the dividend on the shares of Series B Preferred Stock held by such holder to 7.6% (in each case subject to the Company’s right to redeem some or all of such shares of Series B Preferred Stock for cash).
The holders of our Series B Preferred Stock also have certain redemption rights or put rights, including the right on any date following November 6, 2026 to require us to repurchase all or any portion of the Series B Preferred Stock. Holders of the Series B Preferred Stock also have the right, subject to certain exceptions, to require us to repurchase all or any portion of the Series B Preferred Stock upon certain change of control events.
These dividend and share repurchase obligations could impact our liquidity and reduce the amount of cash flows available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. Our obligations to Starboard, as the initial holder of our Series B Preferred Stock, could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights could also result in divergent interests between Starboard and holders of our common stock. Furthermore, a sale of our Company, as a change of control event, may require us to repurchase Series B Preferred Stock, which could have the
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effect of making an acquisition of the Company more expensive and potentially deterring proposed transactions that may otherwise be beneficial to our stockholders.
Starboard may exercise influence over us, including through its ability to designate up to two members of our Board of Directors.
The transaction documents entered into in connection with the sale of the Series B Preferred Stock to Starboard grant to Starboard consent rights with respect to certain actions by us, including:
The Securities Purchase Agreement also imposes a number of affirmative and negative covenants on us. As a result, Starboard has the ability to influence the outcome of matters submitted for the vote of the holders of our common stock. Starboard and its affiliates are in the business of making or advising on investments in companies, including businesses that may directly or indirectly compete with certain portions of our business, and they may have interests that diverge from, or even conflict with, those of our other stockholders. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.
In addition, the terms of the Governance Agreement grant Starboard certain rights to designate directors to be nominated for election by holders of our common stock. For so long as certain criteria set forth in the Governance Agreement are satisfied, including that Starboard beneficially own, in the aggregate, at least (i) 89,264 shares of Series B Preferred Stock or (ii) the lesser of 5.0% of the Company’s then-outstanding common stock (on an as-converted basis, if applicable) and 1,783,141 shares of issued and outstanding common stock (subject to adjustment for stock splits, reclassifications, combinations and similar adjustments), Starboard has the right to designate two directors for election to our Board, consisting of one nominee who is affiliated with Starboard and one independent nominee.
The directors designated by Starboard also are entitled to serve on committees of our Board, subject to applicable law and stock exchange rules. Notwithstanding the fact that all directors will be subject to fiduciary duties to us and to applicable law, the interests of the directors designated by Starboard may differ from the interests of our security holders as a whole or of our other directors.
We may not be able to raise the funds necessary to finance a required repurchase of our Series B Preferred Stock.
After November 6, 2026, each holder of Series B Preferred Stock will have the right, upon 90 days’ notice, to require the Company to repurchase all or any portion of the Series B Preferred Stock for cash at a price equal to $1,000 per share of Series B Preferred Stock plus all accrued but unpaid dividends. In addition, upon certain change of control events, holders of Series B Preferred Stock can require us, subject to certain exceptions, to repurchase any or all of their Series B Preferred Stock.
It is possible that we would not have sufficient funds to make any required repurchase of Series B Preferred Stock. Moreover, we may not be able to arrange financing to pay the repurchase price.
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the type of packaging and utensils that may be used.
Compliance with new or additional domesticDomestic and internationalInternational government laws or regulations, including the European Union General Data Protection Regulation (“GDPR”) and, the California Consumer Privacy Act (“CCPA”), the California Privacy Rights Act (“CPRA”), and several other data privacy and biometric laws adopted by U.S. states, which could increase costs for compliance. These laws and regulations are increasing in complexity and number, change frequently and increasingly conflict among the various states and countries in which we operate, which has resulted in greater compliance risk and costs. If we fail to comply with these laws or regulations, weit could bedamage our brand and subject the Company to reputational damage, and significant litigation, monetary damages, regulatory enforcement actions or fines in various jurisdictions. For example, a failure to comply with the GDPR could result in fines up to the greater of €20 million or 4% of annual global revenues.
These initiatives or goals could be difficult and expensive to implement, the technologies needed to implement them may not be cost effective and may not advance at a sufficient pace, and we could be criticized for the accuracy, adequacy or completeness of any disclosure.
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to mitigate the risks of these events or compensate for losses related to these events, which could damage our business and reputation and be expensive and difficult to remedy or repair.
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We may not be able to adequately protect our intellectual property rights, which could negatively affect our results of operations.
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As of December 27, 2020,25, 2022, there were 5,400 5,706Papa John’s restaurants worldwide. The following tables provide the locations of our restaurants. We define “North America” as the United States and Canada and “domestic”“Domestic” as the contiguous United States.
Company (a) | Franchised | Total | ||||||||||||||||||
Alabama | 3 | 88 | 91 | |||||||||||||||||
Alaska | — | 10 | 10 | |||||||||||||||||
Arizona | — | 67 | 67 | |||||||||||||||||
Arkansas | — | 28 | 28 | |||||||||||||||||
California | — | 175 | 175 | |||||||||||||||||
Colorado | — | 47 | 47 | |||||||||||||||||
Connecticut | — | 5 | 5 | |||||||||||||||||
Delaware | — | 17 | 17 | |||||||||||||||||
District of Columbia | — | 10 | 10 | |||||||||||||||||
Florida | 41 | 259 | 300 | |||||||||||||||||
Georgia | 90 | 98 | 188 | |||||||||||||||||
Hawaii | — | 17 | 17 | |||||||||||||||||
Idaho | — | 14 | 14 | |||||||||||||||||
Illinois | 8 | 72 | 80 | |||||||||||||||||
Indiana | 44 | 92 | 136 | |||||||||||||||||
Iowa | — | 24 | 24 | |||||||||||||||||
Kansas | 16 | 19 | 35 | |||||||||||||||||
Kentucky | 42 | 64 | 106 | |||||||||||||||||
Louisiana | — | 60 | 60 | |||||||||||||||||
Maine | — | 3 | 3 | |||||||||||||||||
Maryland | 60 | 42 | 102 | |||||||||||||||||
Massachusetts | — | 7 | 7 | |||||||||||||||||
Michigan | — | 32 | 32 | |||||||||||||||||
Minnesota | — | 35 | 35 | |||||||||||||||||
Mississippi | — | 34 | 34 | |||||||||||||||||
Missouri | 41 | 27 | 68 | |||||||||||||||||
Montana | — | 9 | 9 | |||||||||||||||||
Nebraska | — | 13 | 13 | |||||||||||||||||
Nevada | — | 25 | 25 | |||||||||||||||||
New Hampshire | — | 3 | 3 | |||||||||||||||||
New Jersey | — | 54 | 54 | |||||||||||||||||
New Mexico | — | 17 | 17 | |||||||||||||||||
New York | — | 85 | 85 | |||||||||||||||||
North Carolina | 104 | 80 | 184 | |||||||||||||||||
North Dakota | — | 10 | 10 | |||||||||||||||||
Ohio | — | 161 | 161 | |||||||||||||||||
Oklahoma | — | 36 | 36 | |||||||||||||||||
Oregon | — | 14 | 14 | |||||||||||||||||
Pennsylvania | — | 84 | 84 | |||||||||||||||||
Rhode Island | — | 2 | 2 | |||||||||||||||||
South Carolina | 9 | 77 | 86 | |||||||||||||||||
South Dakota | — | 10 | 10 | |||||||||||||||||
Tennessee | 38 | 80 | 118 | |||||||||||||||||
Texas | — | 302 | 302 | |||||||||||||||||
Utah | — | 32 | 32 | |||||||||||||||||
Virginia | 26 | 119 | 145 | |||||||||||||||||
Washington | — | 43 | 43 | |||||||||||||||||
West Virginia | — | 23 | 23 | |||||||||||||||||
Wisconsin | — | 25 | 25 | |||||||||||||||||
Wyoming | — | 8 | 8 | |||||||||||||||||
Total U.S. Papa John’s Restaurants | 522 | 2,658 | 3,180 | |||||||||||||||||
Canada | — | 196 | 196 | |||||||||||||||||
Total North America Papa John’s Restaurants | 522 | 2,854 | 3,376 |
| | | | | | |
|
| Company (1) |
| Franchised |
| Total |
Alabama |
| 3 |
| 80 |
| 83 |
Alaska |
| — |
| 11 |
| 11 |
Arizona |
| — |
| 69 |
| 69 |
Arkansas |
| — |
| 26 |
| 26 |
California |
| — |
| 178 |
| 178 |
Colorado |
| — |
| 47 |
| 47 |
Connecticut |
| — |
| 5 |
| 5 |
Delaware |
| — |
| 17 |
| 17 |
District of Columbia |
| — |
| 11 |
| 11 |
Florida |
| 39 |
| 247 |
| 286 |
Georgia |
| 82 |
| 94 |
| 176 |
Hawaii |
| — |
| 14 |
| 14 |
Idaho |
| — |
| 14 |
| 14 |
Illinois |
| 8 |
| 72 |
| 80 |
Indiana |
| 43 |
| 93 |
| 136 |
Iowa |
| — |
| 24 |
| 24 |
Kansas |
| 15 |
| 19 |
| 34 |
Kentucky |
| 40 |
| 66 |
| 106 |
Louisiana |
| — |
| 60 |
| 60 |
Maine |
| — |
| 3 |
| 3 |
Maryland |
| 60 |
| 42 |
| 102 |
Massachusetts |
| — |
| 7 |
| 7 |
Michigan |
| — |
| 35 |
| 35 |
Minnesota |
| — |
| 35 |
| 35 |
Mississippi |
| — |
| 33 |
| 33 |
Missouri |
| 41 |
| 28 |
| 69 |
Montana |
| — |
| 9 |
| 9 |
Nebraska |
| — |
| 13 |
| 13 |
Nevada |
| — |
| 24 |
| 24 |
New Hampshire |
| — |
| 3 |
| 3 |
New Jersey |
| — |
| 52 |
| 52 |
New Mexico |
| — |
| 16 |
| 16 |
New York |
| — |
| 84 |
| 84 |
North Carolina |
| 99 |
| 80 |
| 179 |
North Dakota |
| — |
| 9 |
| 9 |
Ohio |
| — |
| 160 |
| 160 |
Oklahoma |
| — |
| 36 |
| 36 |
Oregon |
| — |
| 14 |
| 14 |
Pennsylvania |
| — |
| 78 |
| 78 |
Rhode Island |
| — |
| 4 |
| 4 |
South Carolina |
| 8 |
| 78 |
| 86 |
South Dakota |
| — |
| 13 |
| 13 |
Tennessee |
| 34 |
| 83 |
| 117 |
Texas |
| 90 |
| 212 |
| 302 |
Utah |
| — |
| 30 |
| 30 |
Virginia |
| 26 |
| 121 |
| 147 |
Washington |
| — |
| 42 |
| 42 |
West Virginia |
| — |
| 22 |
| 22 |
Wisconsin |
| — |
| 24 |
| 24 |
Wyoming |
| — |
| 9 |
| 9 |
Total U.S. Papa John’s Restaurants |
| 588 |
| 2,546 |
| 3,134 |
Canada |
| — |
| 155 |
| 155 |
Total North America Papa John’s Restaurants |
| 588 |
| 2,701 |
| 3,289 |
23
|
|
|
|
|
|
|
|
| ||||||
| Franchised | |||||||
Azerbaijan |
| |||||||
Bahrain |
| |||||||
|
| |||||||
Bolivia | 5 | |||||||
|
| |||||||
|
| |||||||
|
| |||||||
|
| |||||||
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| |||||||
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| |||||||
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| |||||||
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| |||||||
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| |||||||
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| |||||||
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| |||||||
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| |||||||
| 6 | |||||||
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| |||||||
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| ||||||
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| |||||||
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| |||||||
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| |||||||
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| |||||||
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| ||||||
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| |||||||
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| |||||||
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| |||||||
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| |||||||
|
| |||||||
|
| |||||||
|
| |||||||
|
| |||||||
Trinidad | 9 | |||||||
Tunisia | 11 | |||||||
Turkey | 62 | |||||||
United Arab Emirates |
| |||||||
United Kingdom |
| |||||||
Venezuela |
| |||||||
Total International Papa John’s Restaurants |
|
|
24
On September 17, 2020, we announced plans to open an office in Atlanta, Georgia which will be in a leased space. Certain corporate functions, including menu innovation, marketing, digital customer experience, human resources, diversity, equity and inclusion, communications, operations, development, financial planning and analysis and investor relations will be relocated to the Atlanta office. Our information technology, finance, supply chain, and legal teams will continue to operate in our Louisville, Kentucky office, which remains critical to our success. We also maintain a Company-owned office and a full-service QC Center outside of London, United Kingdom (“UK”),UK, where our internationalInternational operations are managed. For additional information, see “Note 17” of “Notes to Consolidated Financial Statements”.
25
Information about ourAbout Our Executive Officers
Name | Age (a) | Position | First Elected Executive Officer | |||||||||||||||||
Robert M. Lynch | 46 | President and Chief Executive Officer | 2019 | |||||||||||||||||
Ann B. Gugino | 50 | Chief Financial Officer | 2020 | |||||||||||||||||
Amanda Clark | 43 | Chief International and Development Officer | 2020 | |||||||||||||||||
Caroline M. Oyler | 57 | Chief Legal and Risk Officer and Corporate Secretary | 2018 | |||||||||||||||||
C. Max Wetzel (b) | 46 | Executive Vice President, Chief Operations Officer | 2019 | |||||||||||||||||
(a)Ages are as of January 1, 2023 | ||||||||||||||||||||
(b) On February 6, 2023, Mr. Wetzel notified the Company of his intention to resign from his position with the Company, effective March 17, 2023, to assume a chief executive officer position with another company. |
| | | | | | |
| | | | | | First Elected |
Name | | Age (a) | | Position | | Executive Officer |
| | | | | | |
Robert M. Lynch | | 44 | | President and Chief Executive Officer | | 2019 |
| | | | | | |
Ann B. Gugino | | 48 | | Chief Financial Officer | | 2020 |
| | | | | | |
Marvin Boakye | | 47 | | Chief People and Diversity Officer | | 2019 |
| | | | | | |
Amanda Clark | | 41 | | Chief Development Officer | | 2020 |
| | | | | | |
James A. Norberg | | 55 | | Chief Operating Officer, North America | | 2019 |
| | | | | | |
Caroline M. Oyler | | 55 | | Chief Legal and Risk Officer | | 2018 |
| | | | | | |
Jack H. Swaysland | | 56 | | Chief Operating Officer, International | | 2018 |
| | | | | | |
C. Max Wetzel | | 44 | | Chief Commercial and Marketing Officer | | 2019 |
| | | | | | |
(a) Ages are as of January 1, 2021 | | | | | | |
| | | | | | |
Robert M. Lynch was appointed as President and Chief Executive Officer in August 2019. Mr. Lynch joined Papa John’s after serving as President of Arby’s Restaurant Group since August 2017, and served as Brand President and Chief Marketing Officer from August 2013 to August 2017. Prior to Arby’s, he served as Vice President of Marketing at Taco Bell. Mr. Lynch has more than 20 years combined experience in the QSR and consumer packaged goods industries, and also held senior roles at HJ Heinz Company and Procter & Gamble.
Ann B. Gugino was appointed to Chief Financial Officer in October 2020. Ms. Gugino joinsjoined Papa John’s from Target Corporation where she served as Senior Vice President, Financing Planning and Analysis since 2018, providing overall strategy, guidance, and direction in the development and execution of Target’s planning, analysis and capital investment portfolios. Prior to Target, Ms. Gugino spent 18 years at Patterson Companies Inc., including four years as Executive Vice President and Chief Financial Officer.
Marvin Boakye was appointed Chief PeopleInternational and DiversityDevelopment Officer in November 2019May 2022 after previously serving as Papa John’s first Chief PeopleDevelopment Officer since January 2019. Mr. Boakye joinedjoining Papa John’s after serving as Vice President of Human Resources at petroleum company Andeavor, in Texas where he also led diversity, equity and inclusion. Prior to Andeavor, he was Chief Human Resources Officer for MTS Allstream, a telecommunications company now part of Bell Canada from June 2015 to March 2017. Prior to that, Mr. Boakye held senior human resources positions for organizations across the United States, Canada and Latin America, including at Goodyear, the Pulte Group and The Home Depot.
Amanda Clarkwas appointed as Chief Development OfficerJohns in February 2020. Ms. Clark joinsjoined Papa John’sJohns from Taco Bell where she was responsible for design, consumer facing technology, merchandising, customer marketing, new concepts and company development, servingserved as Executive Vice President of Restaurant Experience from February 2019 to February 2020, 2020. She also served as
James A. Norberg was named Chief Operating Officer, North America in November 2019 after serving as Chief Restaurant Operations Officer since July 2019. Mr. Norberg, a QSR industry veteran, spent more than 30 years of his career at McDonald’s. His most recent role there was Executive Vice President and Chief Operations Officer from 2014 to 2015,
26
where he managed operations for 14,000 U.S. restaurants. After his long tenure at McDonald’s, Norberg served as an independent strategic advisor from 2015 to 2019 to organizations in the restaurant, hospitality, entertainment and consumer goods categories. He serves as a member of the board of directors for Out & Equal Workplace Advocates, the world’s premier nonprofit organization dedicated to achieving lesbian, gay, bisexual, transgender, and queer workplace equality.
Caroline M. Oyler was appointed Corporate Secretary in July 2020 and Chief Legal and& Risk Officer in October 2018. Ms. Oyler previously served as Senior Vice President, Chief Legal Officer from May 2018 to October 2018 and Senior Vice President, General Counsel from May 2014 to May 2018. Additionally, Ms. Oyler served as Senior Vice President, Legal Affairs from November 2012 to May 2014. She joined2014 and as Vice President and Senior Counsel since joining the Company’s legal department in 1999. She also served as interim head of Human Resources from December 2008 to September 2009. Prior to joining Papa John’s,Johns, Ms. Oyler practiced law with the firm Wyatt, Tarrant and Combs LLP.
Jack H. Swaysland was appointed toExecutive Vice President, Chief Operating Officer International in May 2018 after serving as Senior Vice President, International since April 2016.2022. Mr. SwayslandWetzel previously served as Executive Vice President, InternationalChief Commercial Officer from April 2015 to April 2016, Regional Vice President, International from May 2013 to April 2015, and Vice President, International Operations from April 2010October 2021 to May 2013. Mr. Swaysland has served in various capacities of increasing responsibility in International Operations since joining the Company 13 years ago.
C. Max Wetzel was appointed2022 and as Chief Commercial and Marketing Officer infrom November 2019.2019 to October 2021. Mr. Wetzel joined Papa John’s after servingJohns from PPG Architectural Coatings where he served as Vice President Consumer Brands and Business Transformation – U.S. and Canada sincefrom July 2018 at PPG Architectural Coatings.2018. Also at PPG, Mr. Wetzel served as Vice President Home Centers and Global Strategic Marketing from June 2016 through July 2018 and as General Manager Home Centers and Chief Marketing Officer U.S. & Canada starting in November 2014. Prior to PPG, Mr. Wetzel worked at H.J. Heinz Company for ten10 years in a variety of domestic and global roles, leading consumer-driven businesses, developing brand marketing strategies and delivering profitable growth.
27
6, 2023.
Our
flows and our $600.0 million PJI Revolving Facility.
The following table summarizes our repurchase activity by fiscal period during the fourth quarter ended December 27, 202025, 2022 (in thousands, except per share amounts):
| | | | | | | | | | | |
| |
| |
| | |
| Total Number |
| Maximum Dollar | |
| | | Total | | Average | | of Shares Purchased | | Value of Shares | ||
| | | Number | | Price | | as Part of Publicly | | that May Yet Be | ||
| | | of Shares | | Paid per | | Announced Plans | | Purchased Under the | ||
Fiscal Period | |
| Purchased |
| Share |
| or Programs |
| Plans or Programs | ||
| | | | | | | | | | | |
11/23/2020 - 12/27/2020 | |
| 32 | | $ | 83.90 |
| 32 | | $ | 72,299 |
Fiscal Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
9/26/2022 - 10/23/2022 | — | $ | — | — | $ | 329,800 | ||||||||||||||||||||
10/24/2022 - 11/20/2022 | 88 | 82.51 | 88 | 322,559 | ||||||||||||||||||||||
11/21/2022 - 12/25/2022 | 273 | 83.34 | 273 | 299,800 | ||||||||||||||||||||||
Total | 361 | $ | 83.14 | 361 | $ | 299,800 |
16, 2023.
28
29
Papa Johns International, Inc. NASDAQ U.S. Benchmark TR Index NASDAQ Stocks (SIC 5800-5899 U.S. Companies) Eating and Drinking | ||||||||||||||||||||
Dec. 30, 2018 | Dec. 29, 2019 | Dec. 27, 2020 | Dec. 26, 2021 | Dec. 25, 2022 | ||||||||||||||||
Papa John’s International, Inc. | $73.35 | $119.07 | $163.58 | $250.26 | $161.12 | |||||||||||||||
NASDAQ U.S. Benchmark, TR Index | $93.73 | $124.34 | $149.05 | $188.05 | $152.08 | |||||||||||||||
NASDAQ Stocks - Eating and Drinking | $108.91 | $144.93 | $169.49 | $190.64 | $168.88 |
Item 6. Selected Financial Data
The selected financial data presented for each of the past five fiscal years were derived from our audited Consolidated Financial Statements. The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Consolidated Financial Statements” and Notes thereto included in Item 7 and Item 8, respectively, of this Form 10-K.
| | | | | | | | | | | | | | | |
| | Year Ended (1) | |||||||||||||
|
| Dec. 27, |
| Dec. 29, |
| Dec. 30, |
| Dec. 31, |
| Dec. 30, | |||||
(In thousands, except per share data) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | |||||
|
| | 52 weeks |
| | 52 weeks |
| | 52 weeks |
| | 53 weeks |
| | 52 weeks |
Income Statement Data | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | |
Domestic Company-owned restaurant sales | | $ | 700,757 | | $ | 652,053 | | $ | 692,380 | | $ | 816,718 | | $ | 815,931 |
North America franchise royalties and fees (2) | |
| 96,732 | |
| 71,828 | |
| 79,293 | |
| 106,729 | |
| 102,980 |
North America commissary revenues | |
| 680,793 | |
| 612,652 | |
| 609,866 | |
| 673,712 | |
| 623,883 |
International revenues (3) | |
| 123,963 | |
| 102,924 | |
| 110,349 | |
| 114,021 | |
| 100,904 |
Other revenues | |
| 210,989 | |
| 179,791 | |
| 170,983 | |
| 72,179 | |
| 69,922 |
Total revenues | |
| 1,813,234 | |
| 1,619,248 | |
| 1,662,871 | |
| 1,783,359 | |
| 1,713,620 |
| | | | | | | | | | | | | | | |
Refranchising and impairment gains/(losses), net | | | — | | | 4,739 | | | (289) | | | (1,674) | | | 10,222 |
Operating income (4) | |
| 90,253 | |
| 24,535 | |
| 31,553 | |
| 151,017 | |
| 164,523 |
Legal settlement | |
| — | |
| — | |
| — | |
| — | |
| 898 |
Investment income | |
| 2,131 | |
| 1,104 | |
| 817 | |
| 608 | |
| 785 |
Interest expense | |
| (17,022) | |
| (20,593) | |
| (25,673) | |
| (11,283) | |
| (7,397) |
Income before income taxes | |
| 75,362 | |
| 5,046 | |
| 6,697 | |
| 140,342 | |
| 158,809 |
Income tax expense (benefit) | |
| 14,748 | |
| (611) | |
| 2,624 | |
| 33,817 | |
| 49,717 |
Net income before attribution to noncontrolling interests | |
| 60,614 | |
| 5,657 | |
| 4,073 | |
| 106,525 | |
| 109,092 |
Net income attributable to noncontrolling interests (5) | |
| (2,682) | |
| (791) | |
| (1,599) | |
| (4,233) | |
| (6,272) |
Net income attributable to the Company | | $ | 57,932 | | $ | 4,866 | | $ | 2,474 | | $ | 102,292 | | $ | 102,820 |
| | | | | | | | | | | | | | | |
Net income (loss) attributable to common shareholders | | $ | 41,737 | | $ | (7,633) | | $ | 2,474 | | $ | 103,288 | | $ | 102,967 |
Basic earnings (loss) per common share | | $ | 1.29 | | $ | (0.24) | | $ | 0.08 | | $ | 2.86 | | $ | 2.76 |
Diluted earnings (loss) per common share | | $ | 1.28 | | $ | (0.24) | | $ | 0.08 | | $ | 2.83 | | $ | 2.74 |
Basic weighted average common shares outstanding | |
| 32,421 | |
| 31,632 | |
| 32,083 | |
| 36,083 | |
| 37,253 |
Diluted weighted average common shares outstanding | |
| 32,717 | |
| 31,632 | |
| 32,299 | |
| 36,522 | |
| 37,608 |
Dividends declared per common share | | $ | 0.90 | | $ | 0.90 | | $ | 0.90 | | $ | 0.85 | | $ | 0.75 |
| | | | | | | | | | | | | | | |
Balance Sheet Data | | | | | | | | | | | | | | | |
Total assets | | $ | 872,770 | | $ | 730,721 | | $ | 595,897 | | $ | 555,553 | | $ | 512,565 |
Total debt | |
| 350,000 | |
| 370,000 | |
| 625,009 | |
| 470,000 | |
| 300,575 |
Series B Convertible Preferred Stock | | | 251,901 | | | 251,133 | | | — | | | — | | | — |
Redeemable noncontrolling interests | |
| 6,474 | |
| 5,785 | |
| 5,464 | |
| 6,738 | |
| 8,461 |
Total stockholders’ (deficit) equity | |
| (266,939) | |
| (316,656) | |
| (304,013) | |
| (105,954) | |
| 9,801 |
30
31
and Overview
We strive to obtain high-quality restaurant sites with good access and visibility and to enhance the appearance and quality of our restaurants. We believe these factors improve our image and brand awareness. Detailed below are progressions of our Domestic and International restaurants over the last two fiscal years:
| | | | | |
| Domestic Company-owned | Franchised North America | Total North America | International | System-wide |
| | | | | |
Beginning - December 30, 2018 | 645 | 2,692 | 3,337 | 1,966 | 5,303 |
Opened | 3 | 76 | 79 | 233 | 312 |
Closed | (5) | (123) | (128) | (92) | (220) |
Acquired | 1 | 46 | 47 | - | 47 |
Sold | (46) | (1) | (47) | - | (47) |
Ending - December 29, 2019 | 598 | 2,690 | 3,288 | 2,107 | 5,395 |
Opened | 2 | 62 | 64 | 156 | 220 |
Closed | (12) | (51) | (63) | (152) | (215) |
Ending - December 27, 2020 | 588 | 2,701 | 3,289 | 2,111 | 5,400 |
Innovation. Beginning in the fourthThe Company delivered its fourteenth consecutive quarter of 2019, the Company has embraced a new culture of innovation, delivering multiple new product innovationsGlobal system-wide restaurant sales growth and marketing successes. In 2020, we launched Garlic Parmesan Crust Pizza, toasted handheld “Papadias” flatbread-style sandwiches, Jalapeno Popper Rolls,continues to expand both domestically and the Shaq-a-Roni pizza. Of particular highlight, the Shaq-a-Roni pizza was launchedinternationally, as part of a fund-raiser for The Papa John’s Foundation, in collaboration with Shaquille O’Neal,evidenced by our board membercomparable sales and restaurant owner. The Shaq-a-Roni pizza was a differentiated, high-value product, with a charitable component that supported meaningful causes aligned with our brand’s values. In the fourth quarter of 2020, we also tested unit growth.Epic Stuffed Crust, which was officially launched in 2021. Epic Stuffed Crust was the Company’s biggest new product launch to date
32
Novel Coronavirus (“COVID-19”).The COVID-19 outbreak begandifferentiated and allows us to result in disruption in certainadjust our offerings depending on what customers want – whether that is extending a Limited-Time-Offer or building upon existing platforms. We believe our digital innovations, like our website, digital app, third-party aggregator partnerships and Papa Call call centers are a differentiator for our customers and provide attractive channels that promote customer retention and help us grow our customer base. In 2022, approximately 85% of our international markets beginningDomestic transactions came through these digital channels.
Our primary focus continues to bedeclined in light of ongoing inflation, rising interest rates and the safety of our team members, franchisees, and customers. Therecent energy crisis. Against this backdrop, the Company has taken stepsexperienced increasing declines in sales and profitability in the UK market. While uncertain how long these conditions will last, the Company is committed to mitigateits presence in the impactUK and is invested in the Company’s long-term success in this region. As we navigate this challenging economic environment, we will be investing in capabilities to improve our operations and will work to re-position the franchise base to further strengthen our UK business. The next step in our commitment includes a variety of support to help franchisees through this difficult time, including targeted marketing incentives of approximately $2 million to $3 million.
Of the Company’s 2,111 international franchised stores, approximately 65 stores were temporarily closed asGeneral and administrative expenses of December 27, 2020, principally in Latin America and Europe, in accordance with government policies. In North America, almost all traditional restaurants remain open and fully operational. A number of non-traditional restaurants located in universities and stadiums are temporarily closed; these non-traditional locations are not significant to our revenues and operating results.
We believe the pandemic has accelerated our previously announced efforts to innovate and bring new and former customers to the Papa John’s system. We believe that even after the pandemic-related restrictions are lifted we will benefit from the increase in customers we have experienced due to our menu innovation, customer loyalty programs and our offerings of high-quality pizza and other menu items. Due to the substantial uncertainty$14.6 million. All assets related to the effectsfranchised operations in Russia have been fully reserved or impaired, so there are no additional Russia related charges for reserves, write-offs, or impairments of amounts recorded on the pandemicConsolidated Balance Sheet.
Strategic Corporate Reorganization for Long-term Growth. In the third quarter of 2020, we announced plans to open an office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlantaemployees in the summerservice industry as the economy recovered last year. In early 2022, the Omicron variant further exacerbated the situation, given the spike in infection rates and number of 2021. The Atlanta office is part of a broader strategic reorganization of corporate functions reflecting the Company’s ongoing transformation into a brand and culture that can effectively and efficiently deliver on the Company’s purpose, values and strategic business priorities. Affected employees who do not relocate to Atlantapeople out sick or quarantined at home. Our team members have been offeredworking harder than ever to continue to safely serve their customers and communities and we have benefited from their dedication to manage through staffing constraints. We will continue to strive to be the employer of choice in our industry and have taken many actions to create a separation package. As a result, we expect to incur certain one-time corporate reorganization costs of approximately $15.0 to $20.0 million related to employee severancestrong culture and transition, recruitment and relocation and other third-party costs through 2021. Of that amount, we incurred costs of approximately $6.0 million in 2020.
support our people.
33
Presentation of Financial Results
reported claims and the number and potential value of incurred but not reported claims.
As
Year Ended | ||||||||||||||
Amounts below exclude the impact of foreign currency | December 25, 2022 | December 26, 2021 | ||||||||||||
Comparable sales growth (decline): | ||||||||||||||
Domestic Company-owned restaurants | (1.0) | % | 11.3 | % | ||||||||||
North America franchised restaurants | 1.2 | % | 12.0 | % | ||||||||||
North America restaurants | 0.7 | % | 11.8 | % | ||||||||||
International restaurants | (5.3) | % | 13.0 | % | ||||||||||
Total comparable sales growth (decline) | (0.8) | % | 12.1 | % | ||||||||||
System-wide restaurant sales growth: | ||||||||||||||
Domestic Company-owned restaurants | 1.3 | % | 11.1 | % | ||||||||||
North America franchised restaurants | 2.5 | % | 13.0 | % | ||||||||||
North America restaurants | 2.3 | % | 12.6 | % | ||||||||||
International restaurants (a) | 4.8 | % | 24.4 | % | ||||||||||
Total global system-wide restaurant sales growth (a) | 2.9 | % | 15.4 | % |
Restaurant Progression | Year Ended | |||||||||||||
December 25, 2022 | December 26, 2021 | |||||||||||||
North America Company-owned: | ||||||||||||||
Beginning of period | 600 | 588 | ||||||||||||
Opened | 10 | 11 | ||||||||||||
Acquired | 2 | — | ||||||||||||
Refranchised | (90) | 1 | ||||||||||||
End of period | 522 | 600 | ||||||||||||
North America franchised: | ||||||||||||||
Beginning of period | 2,739 | 2,701 | ||||||||||||
Opened | 76 | 74 | ||||||||||||
Closed | (49) | (35) | ||||||||||||
Refranchised | 90 | — | ||||||||||||
Sold | (2) | (1) | ||||||||||||
End of period | 2,854 | 2,739 | ||||||||||||
International franchised: | ||||||||||||||
Beginning of period | 2,311 | 2,111 | ||||||||||||
Opened | 292 | 304 | ||||||||||||
Closed | (85) | (104) | ||||||||||||
Suspended (a) | (188) | — | ||||||||||||
End of period | 2,330 | 2,311 | ||||||||||||
Total restaurants – end of period | 5,706 | 5,650 | ||||||||||||
Full year net store growth (b) | 244 | 250 |
(Dollars in thousands) | December 25, 2022 | December 26, 2021 | Increase (Decrease) | |||||||||||||||||
Revenues: | ||||||||||||||||||||
Domestic Company-owned restaurant sales | $ | 708,389 | $ | 778,323 | (9.0) | % | ||||||||||||||
North America franchise royalties and fees | 137,399 | 129,310 | 6.3 | % | ||||||||||||||||
North America commissary revenues | 869,634 | 761,305 | 14.2 | % | ||||||||||||||||
International revenues | 129,903 | 150,771 | (13.8) | % | ||||||||||||||||
Other revenues | 256,778 | 248,712 | 3.2 | % | ||||||||||||||||
Total revenues | $ | 2,102,103 | $ | 2,068,421 | 1.6 | % |
(Dollars in thousands) | Year Ended | |||||||||||||||||||||||||||||||
December 25, 2022 | % of Related Revenues | December 26, 2021 | % of Related Revenues | Increase (Decrease) in % of Revenues | ||||||||||||||||||||||||||||
Costs and expenses: | ||||||||||||||||||||||||||||||||
Operating costs (excluding depreciation and amortization shown separately below): | ||||||||||||||||||||||||||||||||
Domestic Company-owned restaurant expenses | $ | 585,307 | 82.6 | % | $ | 621,871 | 79.9 | % | 2.7 | % | ||||||||||||||||||||||
North America commissary expenses | 811,446 | 93.3 | % | 703,622 | 92.4 | % | 0.9 | % | ||||||||||||||||||||||||
International expenses | 76,001 | 58.5 | % | 87,286 | 57.9 | % | 0.6 | % | ||||||||||||||||||||||||
Other expenses | 238,810 | 93.0 | % | 226,320 | 91.0 | % | 2.0 | % | ||||||||||||||||||||||||
General and administrative expenses | 217,412 | 10.3 | % | 212,265 | 10.3 | % | — | % | ||||||||||||||||||||||||
Depreciation and amortization | 52,032 | 2.5 | % | 48,816 | 2.4 | % | 0.1 | % | ||||||||||||||||||||||||
Total costs and expenses | 1,981,008 | 94.2 | % | 1,900,180 | 91.9 | % | 2.3 | % | ||||||||||||||||||||||||
Refranchising and impairment loss | (12,065) | (0.6) | % | — | — | % | (0.6) | % | ||||||||||||||||||||||||
Operating income | $ | 109,030 | 5.2 | % | $ | 168,241 | 8.1 | % | (2.9) | % | ||||||||||||||||||||||
Year Ended | ||||||||||||||
December 25, 2022 | December 26, 2021 | |||||||||||||
Administrative expenses (a) | $ | 181,538 | $ | 199,452 | ||||||||||
Strategic corporate reorganization costs (b) | — | 13,094 | ||||||||||||
Legal settlement accruals (c) | 15,000 | — | ||||||||||||
Additional specific accounts receivable and notes receivable provisions (d) | 18,376 | — | ||||||||||||
Other general expenses (e) | 2,498 | (281) | ||||||||||||
General and administrative expenses | $ | 217,412 | $ | 212,265 |
(In thousands) | Year Ended December 25, 2022 | Year Ended December 26, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
Reported | (a) Adjustments | Adjusted | Reported | (a) Adjustments | Adjusted | Reported Increase (Decrease) | Adjusted Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||
Domestic Company-owned restaurants | $ | 15,966 | $ | 8,412 | $ | 24,378 | $ | 49,628 | $ | — | $ | 49,628 | $ | (33,662) | $ | (25,250) | ||||||||||||||||||||||||||||||||||
North America franchising | 127,882 | — | 127,882 | 120,949 | — | 120,949 | 6,933 | 6,933 | ||||||||||||||||||||||||||||||||||||||||||
North America commissaries | 42,531 | — | 42,531 | 39,873 | — | 39,873 | 2,658 | 2,658 | ||||||||||||||||||||||||||||||||||||||||||
International | 17,891 | 9,644 | 27,535 | 34,896 | — | 34,896 | (17,005) | (7,361) | ||||||||||||||||||||||||||||||||||||||||||
All others | 10,084 | — | 10,084 | 17,704 | — | 17,704 | (7,620) | (7,620) | ||||||||||||||||||||||||||||||||||||||||||
Unallocated corporate expenses | (104,419) | 30,376 | (74,043) | (94,114) | 13,094 | (81,020) | (10,305) | 6,977 | ||||||||||||||||||||||||||||||||||||||||||
Elimination of intersegment (profits) | (905) | — | (905) | (695) | — | (695) | (210) | (210) | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 109,030 | $ | 48,432 | $ | 157,462 | $ | 168,241 | $ | 13,094 | $ | 181,335 | $ | (59,211) | $ | (23,873) |
(Dollars in thousands) | Year Ended | |||||||||||||||||||
December 25, 2022 | December 26, 2021 | Change | ||||||||||||||||||
Operating income | $ | 109,030 | $ | 168,241 | $ | (59,211) | ||||||||||||||
Net interest expense | (25,261) | (17,293) | (7,968) | |||||||||||||||||
Income before income taxes | 83,769 | 150,948 | (67,179) | |||||||||||||||||
Income tax expense | 14,420 | 25,993 | (11,573) | |||||||||||||||||
Net income before attribution to noncontrolling interests | 69,349 | 124,955 | (55,606) | |||||||||||||||||
Net income attributable to noncontrolling interests | (1,577) | (4,939) | 3,362 | |||||||||||||||||
Net income attributable to the Company | $ | 67,772 | $ | 120,016 | $ | (52,244) | ||||||||||||||
Calculation of net income for earnings per share: | ||||||||||||||||||||
Net income attributable to the Company | $ | 67,772 | $ | 120,016 | $ | (52,244) | ||||||||||||||
Dividends on redemption of Series B Convertible Preferred Stock | — | (109,852) | 109,852 | |||||||||||||||||
Dividends paid to participating securities | (306) | (6,091) | 5,785 | |||||||||||||||||
Net income attributable to participating securities | (104) | — | (104) | |||||||||||||||||
Net income attributable to common shareholders | $ | 67,362 | $ | 4,073 | $ | 63,289 | ||||||||||||||
— | ||||||||||||||||||||
Basic earnings per common share | $ | 1.90 | $ | 0.12 | $ | 1.78 | ||||||||||||||
Diluted earnings per common share | $ | 1.89 | $ | 0.12 | $ | 1.77 |
(Dollars in thousands) | Year Ended | |||||||||||||
December 25, 2022 | December 26, 2021 | |||||||||||||
Income before income taxes | $ | 83,769 | $ | 150,948 | ||||||||||
Income tax expense | $ | 14,420 | $ | 25,993 | ||||||||||
Effective tax rate | 17.2 | % | 17.2 | % |
Year Ended | ||||||||||||||
(In thousands, except per share amounts) | December 25, 2022 | December 26, 2021 | ||||||||||||
Operating income | $ | 109,030 | $ | 168,241 | ||||||||||
Refranchising and impairment losses (a) | 26,702 | — | ||||||||||||
Legal settlements (b) | 15,000 | — | ||||||||||||
Costs associated with the termination of significant franchisees (c) | 5,223 | — | ||||||||||||
Strategic corporate reorganization costs (d) | — | 13,094 | ||||||||||||
Other costs (e) | 1,507 | — | ||||||||||||
Adjusted operating income | $ | 157,462 | $ | 181,335 | ||||||||||
Net income attributable to common shareholders | $ | 67,362 | $ | 4,073 | ||||||||||
Refranchising and impairment losses (a) | 26,702 | — | ||||||||||||
Legal settlements (b) | 15,000 | — | ||||||||||||
Costs associated with the termination of significant franchisees (c) | 5,223 | — | ||||||||||||
Strategic corporate reorganization costs (d) | — | 13,094 | ||||||||||||
Other costs (e) | 1,507 | — | ||||||||||||
Repurchase and conversion of Series B Preferred Stock (f) | — | 109,852 | ||||||||||||
Tax effect of adjustments (g) | (10,897) | (2,946) | ||||||||||||
Adjusted net income attributable to common shareholders (h) | $ | 104,897 | $ | 124,073 | ||||||||||
Diluted earnings per common share | $ | 1.89 | $ | 0.12 | ||||||||||
Refranchising and impairment losses (a) | 0.75 | — | ||||||||||||
Legal settlements (b) | 0.42 | — | ||||||||||||
Costs associated with the termination of significant franchisees (c) | 0.15 | — | ||||||||||||
Strategic corporate reorganization costs (d) | — | 0.37 | ||||||||||||
Other costs (e) | 0.04 | — | ||||||||||||
Repurchase and conversion of Series B Preferred Stock (f) | — | 3.10 | ||||||||||||
Tax effect of adjustments (g) | (0.31) | (0.08) | ||||||||||||
Adjusted diluted earnings per common share (h) | $ | 2.94 | $ | 3.51 |
Year Ended | ||||||||
(In thousands) | December 25, 2022 | |||||||
Refranchising impairment loss (1) | $ | 8,412 | ||||||
Ukraine-related charge (2) | 17,385 | |||||||
UK lease impairment (3) | 905 | |||||||
Total adjustment | $ | 26,702 |
2022 | 2021 | |||||||||||||
Total cash provided by (used in): | ||||||||||||||
Operating activities | $ | 117,808 | $ | 184,675 | ||||||||||
Investing activities | (62,793) | (63,512) | ||||||||||||
Financing activities | (76,240) | (180,526) | ||||||||||||
Change in cash and cash equivalents, excluding the effect of exchange rate changes on cash and cash equivalents | $ | (21,225) | $ | (59,363) |
Permitted Ratio | Actual Ratio for the Year Ended December 25, 2022 | |||||||||||||
Leverage ratio | Not to exceed 5.25 to 1.0 | 2.6 to 1.0 | ||||||||||||
Interest coverage ratio | Not less than 2.00 to 1.0 | 4.1 to 1.0 |
(In thousands, except average price per share) Year Ended | Total Number of Shares Purchased | Average Price Paid per Share | Aggregate Cost of Shares Purchased | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
December 25, 2022 | 1,343 | $ | 93.07 | $ | 125,000 | $ | 299,800 | |||||||||||||||||||
December 26, 2021 | 594 | $ | 121.96 | $ | 72,499 | $ | 424,800 | |||||||||||||||||||
Year Ended | ||||||||||||||
December 25, 2022 | December 26, 2021 | |||||||||||||
Net cash provided by operating activities | $ | 117,808 | $ | 184,675 | ||||||||||
Purchases of property and equipment | (78,391) | (68,559) | ||||||||||||
Dividends paid to preferred stockholders (a) | — | (6,394) | ||||||||||||
Free cash flow | $ | 39,417 | $ | 109,722 |
2023 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
Projected Market | Block Price | Block Price | Block Price | |||||||||||||||||||||||
Quarter 1 | $ | 1.951 | $ | 1.966 | $ | 1.676 | $ | 1.857 | ||||||||||||||||||
Quarter 2 | 1.934 | 2.296 | 1.680 | 1.679 | ||||||||||||||||||||||
Quarter 3 | 2.066 | 1.938 | 1.676 | 2.262 | ||||||||||||||||||||||
Quarter 4 | 2.062 | 2.066 | 1.786 | 2.235 | ||||||||||||||||||||||
Full Year | $ | 2.003 | $ | 2.067 | $ | 1.705 | $ | 2.008 |
Measurement and valuation of insurance reserves | |||||
Description of the Matter | As described in Note 2 to the consolidated financial statements, the Company is self-insured for certain obligations up to stated retention levels under its retention programs related to workers’ compensation, automobile, property and general liability programs. As of December 25, 2022, the Company has $67.3 million accrued for self-insurance reserves (“Insurance Reserves”). Judgments and estimates are used by the Company in determining the potential value associated with incurred but not reported claims. Auditing the measurement and valuation of the Insurance Reserves is highly judgmental and complex due to the significant uncertainty in estimating the potential value of reported claims, estimating the number and potential value of incurred but not reported claims and the use of actuarial valuation methods. The reserve estimate is sensitive to actuarial assumptions (e.g., future emergence of losses, incurred but not reported claims) used to estimate the ultimate liability for reported claims and claims that have been incurred but have not been reported. | ||||
How We Addressed the Matter in Our Audit | We tested controls related to the measurement and valuation of the Insurance Reserves. For example, we tested controls over management’s review of the assumptions and methods used to establish the estimate, the underlying data, significant actuarial assumptions and the related reconciliations. To test the measurement and valuation of the Insurance Reserves, our audit procedures included, among others, performing transactional tests of details over the completeness and accuracy of claims data and vouching payments made to third parties. Furthermore, we involved our actuarial specialists to assist in the evaluation of the key assumptions and methodologies used by management to determine the Insurance Reserves. |
(In thousands, except per share amounts) | December 25, 2022 | December 26, 2021 | ||||||||||||
Assets | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 47,373 | $ | 70,610 | ||||||||||
Accounts receivable (less allowance for credit losses of $6,718 in 2022 and $2,364 in 2021) | 102,533 | 81,370 | ||||||||||||
Notes receivable, current portion | 6,848 | 12,352 | ||||||||||||
Income tax receivable | 8,780 | 9,386 | ||||||||||||
Inventories | 41,382 | 34,981 | ||||||||||||
Prepaid expenses and other current assets | 44,123 | 46,310 | ||||||||||||
Total current assets | 251,039 | 255,009 | ||||||||||||
Property and equipment, net | 249,793 | 223,856 | ||||||||||||
Finance lease right-of-use assets, net | 24,941 | 20,907 | ||||||||||||
Operating lease right-of-use assets | 172,425 | 176,256 | ||||||||||||
Notes receivable, less current portion (less allowance for credit losses of $14,499 in 2022 and $1,500 in 2021) | 21,248 | 35,504 | ||||||||||||
Goodwill | 70,616 | 80,632 | ||||||||||||
Deferred income taxes | 1,920 | 5,156 | ||||||||||||
Other assets | 72,245 | 88,384 | ||||||||||||
Total assets | $ | 864,227 | $ | 885,704 | ||||||||||
Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | 62,316 | $ | 28,092 | ||||||||||
Income and other taxes payable | 8,766 | 19,996 | ||||||||||||
Accrued expenses and other current liabilities | 142,535 | 190,116 | ||||||||||||
Current deferred revenue | 21,272 | 21,700 | ||||||||||||
Current finance lease liabilities | 6,850 | 4,977 | ||||||||||||
Current operating lease liabilities | 23,418 | 22,543 | ||||||||||||
Total current liabilities | 265,157 | 287,424 | ||||||||||||
Deferred revenue | 23,204 | 13,846 | ||||||||||||
Long-term finance lease liabilities | 19,022 | 16,580 | ||||||||||||
Long-term operating lease liabilities | 160,905 | 160,672 | ||||||||||||
Long-term debt, net | 597,069 | 480,730 | ||||||||||||
Deferred income taxes | — | 258 | ||||||||||||
Other long-term liabilities | 68,317 | 93,154 | ||||||||||||
Total liabilities | 1,133,674 | 1,052,664 | ||||||||||||
Redeemable noncontrolling interests | 1,217 | 5,498 | ||||||||||||
Stockholders’ deficit: | ||||||||||||||
Common stock ($0.01 par value per share; issued 49,138 at December 25, 2022 and 49,002 at December 26, 2021) | 491 | 490 | ||||||||||||
Additional paid-in capital | 449,829 | 445,126 | ||||||||||||
Accumulated other comprehensive loss | (10,135) | (9,971) | ||||||||||||
Retained earnings | 195,856 | 183,157 | ||||||||||||
Treasury stock (14,402 shares at December 25, 2022 and 13,205 shares at December 26, 2021, at cost) | (922,434) | (806,472) | ||||||||||||
Total stockholders’ deficit | (286,393) | (187,670) | ||||||||||||
Noncontrolling interests in subsidiaries | 15,729 | 15,212 | ||||||||||||
Total Stockholders’ deficit | (270,664) | (172,458) | ||||||||||||
Total Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit | $ | 864,227 | $ | 885,704 |
Year ended | ||||||||||||||||||||
(In thousands, except per share amounts) | December 25, 2022 | December 26, 2021 | December 27, 2020 | |||||||||||||||||
Revenues: | ||||||||||||||||||||
Domestic Company-owned restaurant sales | $ | 708,389 | $ | 778,323 | $ | 700,757 | ||||||||||||||
North America franchise royalties and fees | 137,399 | 129,310 | 96,732 | |||||||||||||||||
North America commissary revenues | 869,634 | 761,305 | 680,793 | |||||||||||||||||
International revenues | 129,903 | 150,771 | 123,963 | |||||||||||||||||
Other revenues | 256,778 | 248,712 | 210,989 | |||||||||||||||||
Total revenues | 2,102,103 | 2,068,421 | 1,813,234 | |||||||||||||||||
Costs and expenses: | ||||||||||||||||||||
Operating costs (excluding depreciation and amortization shown separately below): | ||||||||||||||||||||
Domestic Company-owned restaurant expenses | 585,307 | 621,871 | 563,799 | |||||||||||||||||
North America commissary expenses | 811,446 | 703,622 | 630,937 | |||||||||||||||||
International expenses | 76,001 | 87,286 | 73,994 | |||||||||||||||||
Other expenses | 238,810 | 226,320 | 200,304 | |||||||||||||||||
General and administrative expenses | 217,412 | 212,265 | 204,242 | |||||||||||||||||
Depreciation and amortization | 52,032 | 48,816 | 49,705 | |||||||||||||||||
Total costs and expenses | 1,981,008 | 1,900,180 | 1,722,981 | |||||||||||||||||
Refranchising and impairment loss | (12,065) | — | — | |||||||||||||||||
Operating income | 109,030 | 168,241 | 90,253 | |||||||||||||||||
Net interest expense | (25,261) | (17,293) | (14,891) | |||||||||||||||||
Income before income taxes | 83,769 | 150,948 | 75,362 | |||||||||||||||||
Income tax expense | 14,420 | 25,993 | 14,748 | |||||||||||||||||
Net income before attribution to noncontrolling interests | 69,349 | 124,955 | 60,614 | |||||||||||||||||
Net income attributable to noncontrolling interests | (1,577) | (4,939) | (2,682) | |||||||||||||||||
Net income attributable to the Company | $ | 67,772 | $ | 120,016 | $ | 57,932 | ||||||||||||||
Calculation of net income for earnings per share: | ||||||||||||||||||||
Net income attributable to the Company | $ | 67,772 | $ | 120,016 | $ | 57,932 | ||||||||||||||
Dividends on redemption of Series B Convertible Preferred Stock | — | (109,852) | — | |||||||||||||||||
Dividends paid to participating securities | (306) | (6,091) | (14,059) | |||||||||||||||||
Net income attributable to participating securities | (104) | — | (2,136) | |||||||||||||||||
Net income attributable to common shareholders | $ | 67,362 | $ | 4,073 | $ | 41,737 | ||||||||||||||
Basic earnings per common share | $ | 1.90 | $ | 0.12 | $ | 1.29 | ||||||||||||||
Diluted earnings per common share | $ | 1.89 | $ | 0.12 | $ | 1.28 | ||||||||||||||
Basic weighted average common shares outstanding | 35,497 | 35,007 | 32,421 | |||||||||||||||||
Diluted weighted average common shares outstanding | 35,717 | 35,337 | 32,717 | |||||||||||||||||
Dividends declared per common share | $ | 1.54 | $ | 1.15 | $ | 0.90 |
Year Ended | ||||||||||||||||||||
(In thousands) | December 25, 2022 | December 26, 2021 | December 27, 2020 | |||||||||||||||||
Net income before attribution to noncontrolling interests | $ | 69,349 | $ | 124,955 | $ | 60,614 | ||||||||||||||
Other comprehensive income (loss), before tax: | ||||||||||||||||||||
Foreign currency translation adjustments | (4,970) | (1,397) | 2,344 | |||||||||||||||||
Interest rate swaps (1) | 4,757 | 6,848 | (7,517) | |||||||||||||||||
Other comprehensive income (loss), before tax | (213) | 5,451 | (5,173) | |||||||||||||||||
Income tax effect: | ||||||||||||||||||||
Foreign currency translation adjustments | 1,143 | 321 | (539) | |||||||||||||||||
Interest rate swaps (2) | (1,094) | (1,575) | 1,729 | |||||||||||||||||
Income tax effect | 49 | (1,254) | 1,190 | |||||||||||||||||
Other comprehensive income (loss), net of tax | (164) | 4,197 | (3,983) | |||||||||||||||||
Comprehensive income before attribution to noncontrolling interests | 69,185 | 129,152 | 56,631 | |||||||||||||||||
Less: comprehensive income, redeemable noncontrolling interests | (574) | (2,609) | (824) | |||||||||||||||||
Less: comprehensive income, nonredeemable noncontrolling interests | (1,003) | (2,330) | (1,858) | |||||||||||||||||
Comprehensive income attributable to the Company | $ | 67,608 | $ | 124,213 | $ | 53,949 |
Papa John’s International, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Common Stock Shares Outstanding | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss (3) | Retained Earnings | Treasury Stock | Noncontrolling Interests in Subsidiaries | Total Stockholders’ Deficit | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 29, 2019 | 31,894 | $ | 447 | $ | 219,047 | $ | (10,185) | $ | 205,697 | $ | (747,327) | $ | 15,665 | $ | (316,656) | |||||||||||||||||||||||||||||||||||
Cumulative effect of adoption of ASU 2016-13 (2) | — | — | — | — | (1,066) | — | — | (1,066) | ||||||||||||||||||||||||||||||||||||||||||
Adjusted balance at December 30, 2019 | 31,894 | $ | 447 | $ | 219,047 | $ | (10,185) | $ | 204,631 | $ | (747,327) | $ | 15,665 | $ | (317,722) | |||||||||||||||||||||||||||||||||||
Net income (1) | — | — | — | — | 57,932 | — | 1,858 | 59,790 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | (3,983) | — | — | — | (3,983) | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends on common stock | — | — | 141 | — | (29,503) | — | — | (29,362) | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends on preferred stock | — | — | — | — | (13,649) | — | — | (13,649) | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 540 | 6 | 30,616 | — | — | — | — | 30,622 | ||||||||||||||||||||||||||||||||||||||||||
Acquisition of Company common stock | (32) | — | — | — | — | (2,701) | — | (2,701) | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 16,310 | — | — | — | — | 16,310 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | 119 | — | (6,922) | — | — | 6,922 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Tax effect of restricted stock awards | — | — | (3,974) | — | — | — | — | (3,974) | ||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (2,284) | (2,284) | ||||||||||||||||||||||||||||||||||||||||||
Other | 24 | — | (1,115) | — | (253) | 1,382 | — | 14 | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 27, 2020 | 32,545 | $ | 453 | $ | 254,103 | $ | (14,168) | $ | 219,158 | $ | (741,724) | $ | 15,239 | $ | (266,939) | |||||||||||||||||||||||||||||||||||
Net income (1) | — | — | — | — | 120,016 | — | 2,330 | 122,346 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | 4,197 | — | — | — | 4,197 | ||||||||||||||||||||||||||||||||||||||||||
Repurchase and conversion of Series B Convertible Preferred Stock | 3,489 | 35 | 174,631 | — | (110,498) | — | — | 64,168 | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends on common stock | — | — | 158 | — | (40,514) | — | — | (40,356) | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends on preferred stock | — | — | — | — | (4,121) | — | — | (4,121) | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 212 | 2 | 11,967 | — | — | — | — | 11,969 | ||||||||||||||||||||||||||||||||||||||||||
Acquisition of Company common stock | (594) | — | — | — | — | (72,499) | — | (72,499) | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 16,919 | — | — | — | — | 16,919 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | 132 | — | (6,970) | — | — | 6,970 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Tax effect of restricted stock awards | — | — | (5,847) | — | — | — | — | (5,847) | ||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (2,357) | (2,357) | ||||||||||||||||||||||||||||||||||||||||||
Other | 13 | — | 165 | — | (884) | 781 | — | 62 | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 26, 2021 | 35,797 | $ | 490 | $ | 445,126 | $ | (9,971) | $ | 183,157 | $ | (806,472) | $ | 15,212 | $ | (172,458) |
Papa John’s International, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Common Stock Shares Outstanding | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss (3) | Retained Earnings | Treasury Stock | Noncontrolling Interests in Subsidiaries | Total Stockholders’ Deficit | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 26, 2021 | 35,797 | $ | 490 | $ | 445,126 | $ | (9,971) | $ | 183,157 | $ | (806,472) | $ | 15,212 | $ | (172,458) | |||||||||||||||||||||||||||||||||||
Net income (1) | — | — | — | — | 67,772 | — | 1,003 | 68,775 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | (164) | — | — | — | (164) | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends on common stock | — | — | 210 | — | (54,977) | — | — | (54,767) | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 82 | 1 | 4,035 | — | — | — | — | 4,036 | ||||||||||||||||||||||||||||||||||||||||||
Acquisition of Company common stock | (1,343) | — | — | — | — | (125,000) | — | (125,000) | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 18,388 | — | — | — | — | 18,388 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | 285 | — | (8,443) | — | — | 8,443 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Tax effect of restricted stock awards | (94) | — | (9,546) | — | — | — | — | (9,546) | ||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (486) | (486) | ||||||||||||||||||||||||||||||||||||||||||
Other | 9 | — | 59 | — | (96) | 595 | — | 558 | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 25, 2022 | 34,736 | $ | 491 | $ | 449,829 | $ | (10,135) | $ | 195,856 | $ | (922,434) | $ | 15,729 | $ | (270,664) |
(1)Net income to the Company for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 excludes $574, $2,609 and $824, respectively, allocable to the redeemable noncontrolling interests for our joint venture arrangements. | ||
(2)As of December 30, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” See “Note 10. Allowance for Credit Losses” of “Notes to Consolidated Financial Statements” for additional information. | ||
(3)At December 25, 2022, the accumulated other comprehensive loss of $10,135 was comprised of net unrealized foreign currency translation loss of $8,696 and a net unrealized loss on the interest rate swap agreements of $1,439. At December 26, 2021, the accumulated other comprehensive loss of $9,971 was comprised of net unrealized foreign currency translation loss of $4,869 and a net unrealized loss on the interest rate swap agreements of $5,102. At December 27, 2020, the accumulated other comprehensive loss of $14,168 was comprised of net unrealized foreign currency translation loss of $3,793 and a net unrealized loss on the interest rate swap agreements of $10,375. |
Year ended | ||||||||||||||||||||
(In thousands) | December 25, 2022 | December 26, 2021 | December 27, 2020 | |||||||||||||||||
Operating activities | ||||||||||||||||||||
Net income before attribution to noncontrolling interests | $ | 69,349 | $ | 124,955 | $ | 60,614 | ||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
Provision (benefit) for allowance for credit losses on accounts and notes receivable | 20,539 | (852) | (4,734) | |||||||||||||||||
Depreciation and amortization | 52,032 | 48,816 | 49,705 | |||||||||||||||||
Refranchising and impairment loss | 12,065 | — | — | |||||||||||||||||
Deferred income taxes | 2,798 | 3,753 | (9,268) | |||||||||||||||||
Stock-based compensation expense | 18,388 | 16,919 | 16,310 | |||||||||||||||||
Other | 1,056 | 581 | 2,257 | |||||||||||||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||||||||||
Accounts receivable | (29,167) | 4,023 | (22,420) | |||||||||||||||||
Income tax receivable | 586 | (8,113) | 3,760 | |||||||||||||||||
Inventories | (7,496) | (4,708) | (2,736) | |||||||||||||||||
Prepaid expenses and other current assets | 5,587 | 2,866 | 2,884 | |||||||||||||||||
Other assets and liabilities | (13,458) | (20,077) | 20,879 | |||||||||||||||||
Accounts payable | (8,350) | (9,278) | 8,229 | |||||||||||||||||
Income and other taxes payable | (10,710) | 9,733 | 2,664 | |||||||||||||||||
Accrued expenses and other current liabilities | 4,846 | 15,875 | 59,353 | |||||||||||||||||
Deferred revenue | (257) | 182 | (1,058) | |||||||||||||||||
Net cash provided by operating activities | 117,808 | 184,675 | 186,439 | |||||||||||||||||
Investing activities | ||||||||||||||||||||
Purchases of property and equipment | (78,391) | (68,559) | (35,652) | |||||||||||||||||
Notes issued | (9,296) | (16,132) | (16,589) | |||||||||||||||||
Repayments of notes issued | 13,045 | 18,555 | 11,154 | |||||||||||||||||
Acquisitions, net of cash acquired | (1,219) | (699) | — | |||||||||||||||||
Proceeds from refranchising, net of cash transferred | 13,588 | — | — | |||||||||||||||||
Other | (520) | 3,323 | 16 | |||||||||||||||||
Net cash used in investing activities | (62,793) | (63,512) | (41,071) | |||||||||||||||||
Financing activities | ||||||||||||||||||||
Proceeds from issuance of senior notes | — | 400,000 | — | |||||||||||||||||
Net proceeds of revolving credit facilities | 115,000 | 80,000 | — | |||||||||||||||||
Debt issuance costs | — | (9,179) | — | |||||||||||||||||
Proceeds from exercise of stock options | 4,036 | 11,969 | 30,622 | |||||||||||||||||
Repurchase of Series B Convertible Preferred Stock | — | (188,647) | — | |||||||||||||||||
Acquisition of Company common stock | (125,000) | (72,499) | (2,701) | |||||||||||||||||
Dividends paid to common stockholders | (54,767) | (40,356) | (29,362) | |||||||||||||||||
Dividends paid to preferred stockholders | — | (6,394) | (13,649) | |||||||||||||||||
Tax payments for equity award issuances | (9,546) | (5,847) | (3,974) | |||||||||||||||||
Distributions to noncontrolling interests | (1,211) | (5,942) | (2,420) | |||||||||||||||||
Repayments of term loan | — | (340,000) | (20,000) | |||||||||||||||||
Other | (4,752) | (3,631) | (1,977) | |||||||||||||||||
Net cash used in financing activities | (76,240) | (180,526) | (43,461) | |||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (2,012) | (231) | 386 | |||||||||||||||||
Change in cash and cash equivalents | (23,237) | (59,594) | 102,293 | |||||||||||||||||
Cash and cash equivalents at beginning of period | 70,610 | 130,204 | 27,911 | |||||||||||||||||
Cash and cash equivalents at end of period | $ | 47,373 | $ | 70,610 | $ | 130,204 |
to ten years for restaurant, commissary and other equipment, twenty to forty years for buildings and improvements, and five years for technology and communication assets). Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the respective leases, including the first renewal period (generally five to ten years).
As of December 27, 2020 and December 29, 2019, our insurance reserves were $82.0 million and $75.2 million, respectively.
34
Intangible Assets — Goodwill
We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Such tests are completed separately with respect to the goodwill of each ofDecember 25, 2022, our reporting units. We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist.
We elected to perform a qualitative assessment for our operations in the fourth quarter of 2020. As a result of our qualitative analyses, we determined that itinsurance reserve was more-likely-than-not that the fair values of our reporting units were greater than their carrying amounts. Subsequent to completing our goodwill impairment tests, no indicators of impairment were identified. See “Note 12” of “Notes to Consolidated Financial Statements” for additional information.
Income Tax Accounts and Tax Reserves
Papa John’s is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining Papa John’s provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax attribute carryforwards (e.g., net operating losses, capital losses, and foreign tax credits). The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.
Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures. We recognized a decrease in income tax expense of $500,000 and $400,000 in 2020 and 2019, respectively, associated with the finalization of certain income tax matters. See “Note 18” of “Notes to Consolidated Financial Statements” for additional information.
Fiscal Year
Our fiscal year ends on the last Sunday in December of each year. All fiscal years presented in the accompanying Consolidated Financial Statements consist of 52 weeks.
35
Results of Operations
2020 Compared to 2019
This section of this Form 10-K generally discusses fiscal 2020 and 2019 items and year-to-year comparisons between fiscal 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between fiscal 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019.
Discussion of Revenues. Consolidated revenues increased $194.0$67.3 million or 12.0%, to $1.81 billion in 2020, compared to $1.62 billion in 2019. Revenues are summarized in the following table (dollars in thousands).
| | | | | | | | | | | | |
| | | | | | | |
| ||||
| | Year Ended | | | | | ||||||
|
| Dec. 27, | | Dec. 29, |
| |
| Percent | ||||
| | 2020 | | 2019 | | Increase | | Change | ||||
Domestic Company-owned restaurant sales | | $ | 700,757 | | $ | 652,053 | | $ | 48,704 | | 7.5 | % |
North America franchise royalties and fees | |
| 96,732 | |
| 71,828 | |
| 24,904 | | 34.7 | % |
North America commissary revenues | |
| 680,793 | |
| 612,652 | |
| 68,141 | | 11.1 | % |
International revenues | |
| 123,963 | |
| 102,924 | |
| 21,039 | | 20.4 | % |
Other revenues | |
| 210,989 | |
| 179,791 | |
| 31,198 | | 17.4 | % |
Total revenues | | $ | 1,813,234 | | $ | 1,619,248 | | $ | 193,986 | | 12.0 | % |
Domestic Company-owned restaurant sales increased $48.7 million, or 7.5%, in 2020. Excluding the impact of refranchising 46 restaurants in 2019 primarily located in South Florida and Georgia, Domestic Company-owned restaurant sales increased $79.2 million, or 12.7%. The increase was primarily due to positive comparable sales of 14.2%, partially offset by the 2019 favorable impact from the expiration of customer rewards associated with our Papa Rewards loyalty program of $6.0 million. “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 $24.9 million, or 34.7%, in 2020. Excluding the impact of refranchising, North America franchise royalties and fees increased $22.9 million, or 31.9%. The increase was primarily due to positive comparable sales of 18.6%. Franchise royalties and fees in 2020 also reflect a higher effective royalty rate due to lower temporary royalty relief which was part of our franchise assistance program (see “Temporary Franchise Support”).
North America franchise restaurant sales increased 18.6% to $2.49 billion for 2020 compared to prior year. North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales.
North America commissary revenues increased $68.1 million, or 11.1%, primarily due to higher volumes and pricing associated with higher commodities costs, primarily cheese.
International revenues increased $21.0 million, or 20.4%, in 2020 primarily due to higher PJUK commissary revenues and higher royalties from higher comparable sales of 12.6%.
International franchise restaurant sales increased 15.5% to $1.0 billion in 2020, excluding the impact of foreign currency, primarily due to increases in comparable sales. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.
Other revenues, which primarily includes our North America marketing funds, online and mobile ordering business and our wholly-owned print and promotions subsidiary, increased $31.2 million, or 17.4% in 2020 primarily due to higher marketing fund revenues from an increase in franchise sales and an increase in the national marketing fund contribution rate in 2020 and higher online revenues from increased restaurant sales.
36
Discussion of Operating Results
Operating income is summarized in the following table on a reporting segment basis. Operating income increased approximately $65.7 million for the year ended December 27, 2020 as compared to the prior year. Alongside the GAAP operating income data, we have included “adjusted” operating income to exclude Special items. Special items for 2020 include strategic corporate reorganization costs associated with our new office in Atlanta, Georgia projected to open in the summer of 2021. The reconciliation of GAAP to non-GAAP financial results, as well as the Special items, are included in “Items Impacting Comparability; Non-GAAP Measures.” We believe these non-GAAP measures are important for comparability purposes.
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | |||||||||||||||||||
|
| Reported |
| Special |
| Adjusted |
| Reported |
| Special |
| Adjusted |
| Adjusted | |||||||
| | Dec. 27, | | items | | Dec. 27, |
| Dec. 29, | | items | | Dec. 29, | | Increase | |||||||
(In thousands) |
| 2020 |
| in 2020 |
| 2020 |
| 2019 |
| in 2019 |
| 2019 |
| (Decrease) | |||||||
| | | | | | | | | | | | | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 37,049 | | $ | — | | $ | 37,049 | | $ | 33,957 | | $ | (4,739) | | $ | 29,218 | | $ | 7,831 |
North America franchising | | | 89,801 | | | — | | | 89,801 | | | 64,362 | | | — | | | 64,362 | | | 25,439 |
North America commissaries | | | 33,185 | |
| — | |
| 33,185 | | | 30,690 | |
| — | |
| 30,690 | |
| 2,495 |
International | | | 24,034 | | | — | | | 24,034 | | | 18,738 | | | — | | | 18,738 | | | 5,296 |
All others | | | 7,043 | | | — | | | 7,043 | | | (1,966) | | | — | | | (1,966) | | | 9,009 |
Unallocated corporate expenses | | | (100,069) | | | 5,985 | | | (94,084) | | | (120,280) | | | 14,221 | | | (106,059) | | | 11,975 |
Elimination of intersegment profits | | | (790) | | | — | | | (790) | | | (966) | | | — | | | (966) | | | 176 |
Adjusted operating income | | $ | 90,253 | | $ | 5,985 | | $ | 96,238 | | $ | 24,535 | | $ | 9,482 | | $ | 34,017 | | $ | 62,221 |
The increase in operating income of $65.7 million, and increase in adjusted operating income of $62.2 million in 2020, excluding Special items, was primarily due to the following:
37
Review of Consolidated Results
Revenues. For the reasons discussed above, consolidated revenues increased $194.0 million, or 12.0%, to $1.81 billion in 2020, compared to $1.62 billion in 2019.
| | | | | | | | | | | | | |
| | Year Ended | | | | ||||||||
| | December 27, 2020 | | December 29, 2019 | | | | ||||||
| | | | % of Related | | | | % of Related | | | Increase | ||
($ in thousands) | | | | Revenues | | | | Revenues | | | (Decrease) | ||
Revenues: | | | | | | | | | | | | | |
Domestic Company-owned restaurant sales | | $ | 700,757 | | | | $ | 652,053 | | | | | |
North America franchise royalties and fees | | | 96,732 | | | | | 71,828 | | | | | |
North America commissary revenues | | | 680,793 | | | | | 612,652 | | | | | |
International revenues | | | 123,963 | | | | | 102,924 | | | | | |
Other revenues | | | 210,989 | | | | | 179,791 | | | | | |
Total revenues | | | 1,813,234 | | | | | 1,619,248 | | | | | |
Costs and expenses: | | | | | | | | | | | | | |
Operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | | | | | | |
Domestic Company-owned restaurant expenses | | | 563,799 | | 80.5% | | | 526,237 | | 80.7% | | | (0.2%) |
North America commissary expenses | | | 630,937 | | 92.7% | | | 569,180 | | 92.9% | | | (0.2%) |
International expenses | | | 73,994 | | 59.7% | | | 57,702 | | 56.1% | | | 3.6% |
Other expenses | | | 200,304 | | 94.9% | | | 175,592 | | 97.7% | | | (2.8%) |
General and administrative expenses | | | 204,242 | | 11.3% | | | 223,460 | | 13.8% | | | (2.5%) |
Depreciation and amortization | | | 49,705 | | 2.7% | | | 47,281 | | 2.9% | | | (0.2%) |
Total costs and expenses | | | 1,722,981 | | 95.0% | | | 1,599,452 | | 98.8% | | | (3.8%) |
Refranchising gains | | | - | | 0.0% | | | 4,739 | | 0.3% | | | (0.3%) |
Operating income | | | 90,253 | | 5.0% | | | 24,535 | | 1.5% | | | 3.5% |
Investment income | | | 2,131 | | 0.1% | | | 1,104 | | 0.1% | | | 0.0% |
Interest expense | | | (17,022) | | (0.9%) | | | (20,593) | | (1.3%) | | | 0.4% |
Income before income taxes | | $ | 75,362 | | 4.2% | | $ | 5,046 | | 0.3% | | | 3.9% |
| | | | | | | | | | | | | |
Costs and expenses. Total costs and expenses were approximately $1.7 billion, or 95.0% of total revenues in 2020 compared to $1.6 billion, or 98.8%, in 2019. The decrease in total costs and expenses, as a percentage of revenues, was primarily due to the following:
Domestic Company-owned restaurants expenses were $563.8 million in 2020, or 80.5% of related revenues, as compared to the prior year expenses of $526.2 million, or 80.7% of related revenues, in 2019. The 0.2% decrease, as a percentage of revenues, was primarily due to lower food costs, including the favorable impact of current year promotions which more than offset higher commodities costs and lower operating expenses on higher sales. These decreases were partially offset by higher bonus expense and the 2019 favorable impact of the expiration of customer rewards with our Papa Rewards loyalty program.
North America commissary expenses were $630.9 million in 2020, or 92.7% of related revenues compared to $569.2 million in 2019, or 92.9% of related revenues in 2019. The 0.2% decrease in expenses, as a percentage of related revenues, was primarily due to lower operating costs on higher volumes and lower delivery costs.
International expenses were $74.0 million in 2020, or 59.7% of related revenues, compared to prior year expenses of $57.7 million, or 56.1% of related revenues in 2019. The increase of 3.6% in expenses, as a percentage of related revenues, was primarily due to the higher mix of United Kingdom commissary revenues which have a lower overall margin and lower revenues resulting from increased royalty support provided to certain franchisees.
38
Other expenses were $200.3 million in 2020, or 94.9% of related revenues, compared to prior year expenses of $175.6 million, or 97.7% of related revenues in 2019. The 2.8% decrease in expenses, as a percentage of related revenues, was primarily due to higher margins from our online and mobile ordering business, partially offset by lower revenues at our printing subsidiary.
General and administrative (“G&A”) expenses were $204.2 million, or 11.3% of revenues for 2020 compared to $223.5 million, or 13.8% of revenues for 2019. G&A expenses consisted of the following (dollars in thousands):
| | | | | | |
| | Year Ended | ||||
| | | December 27, | | | December 29, |
| | | 2020 | | | 2019 |
Administrative expenses (a) | | $ | 185,202 | | $ | 179,122 |
Special items (b) (c) | | | 5,985 | | | 13,859 |
Other general expenses (d) | | | 13,055 | | | 30,479 |
General and administrative expenses | | $ | 204,242 | | $ | 223,460 |
See “Items Impacting Comparability; Non-GAAP Measures” for additional information regarding the Special items.
Depreciation and amortization. Depreciation and amortization expense was $49.7 million, or 2.7% of revenues in 2020, as compared to $47.3 million, or 2.9% of revenues for 2019.
Refranchising gains. Refranchising gains of $4.7 million in 2019 were primarily associated with the refranchising of 19 Company-owned restaurants in Georgia and 24 Company-owned restaurants in South Florida. See “Note 11” of “Notes to the Consolidated Financial Statements” for additional information.
Interest expense. Interest expense decreased approximately $3.6 million for the year ended December 27, 2020 primarily due to a decrease in the average outstanding debt balance and lower interest rates. Total debt outstanding was $350.0$88.1 million as of December 27, 2020. Outstanding debt at December 27, 2020 decreased $20.0 million from December 29, 201926, 2021 primarily duerelated to repayments on our secured term loan facility.
Income before income taxes. Income before income taxes was $75.4 million in 2020, compared to $5.0 million in 2019, or an increase of $70.4 million due to the reasons discussed above.
39
Income tax expense (benefit). The effective income tax rate was 19.6% for 2020, compared to (12.1%) for 2019. The effective rate was higher in 2020 due to the impact of similar tax creditauto liability and workers’ compensation claims. Of these amounts, on higher income before income taxes. The 2019 income tax rate included a non-deductible $5.9 million expense associated with the one-time mark-to-market increase in the fair value of the Starboard option to purchase Series B Preferred Stock, as previously mentioned. The following compares income tax expense (benefit) for 2020 and 2019:
| | | | | |
| | Year Ended | |||
| December 27, 2020 | | December 29, 2019 | ||
| | | | | |
Income before income taxes | $ | 75,362 | | $ | 5,046 |
Income tax expense (benefit) | $ | 14,748 | | $ | (611) |
Effective tax rate | | 19.6% | | | (12.1%) |
See “Items Impacting Comparability; Non-GAAP Measures” and “Note 7” and “Note 18” of “Notes to Consolidated Financial Statements,” for additional information.
Diluted earnings (loss) per share. Diluted earnings per common share was $1.28 for 2020, compared to diluted loss per common share of $0.24 in 2019, representing an increase of $1.52. Excluding Special items, adjusted diluted earnings per common share was $1.40, compared to $0.03 in 2019, representing an increase of $1.37. Diluted earnings per common share was reduced by approximately $0.07 per share in 2020 ($0.09 impact when excluding Special items) due to income attributable to participating securities, including Series B Preferred Stockholders, based on undistributed earnings for 2020. See “Note 8” of “Notes to Consolidated Financial Statements” for additional information.
40
Items Impacting Comparability; Non-GAAP Measures
The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures (collectively defined as “Special items”). The non-GAAP adjusted results shown below and within this Form 10-K, which exclude the Special items, should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP results. Management believes presenting certain financial information excluding the Special items is important for purposes of comparison to prior year results. In addition, management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends. See “Results of Operations” for further analysis regarding the impact of the Special items, and “Note 8”, “Note 11”, and “Note 18” of “Notes to Consolidated Financial Statements,” respectively, for additional information about the Special items.
Note: Effective as of the first quarter of 2020, the Company modified its presentation of adjusted (non-GAAP) financial results to no longer present certain financial assistance provided to the North America system in the form of royalty relief and discretionary marketing fund investments as Special charges. This financial assistance, which began in the third quarter of 2018 in response to declining sales in North America, concluded in the third quarter of 2020, as announced in a formal plan in July 2019. The adjusted financial results for the Company’s fiscal year ended December 29, 2019 have been revised to remove these items. See “Temporary Franchise Support” below for additional information regarding this change in presentation.
| | | | | | |
| | Year Ended | ||||
| | Dec. 27, |
| Dec. 29, | ||
(In thousands, except per share amounts) | | 2020 | | 2019 | ||
| | | | | | (Note) |
GAAP operating income | | $ | 90,253 | | $ | 24,535 |
Strategic corporate reorganization costs (1) | | | 5,985 | | | — |
Special charges: | |
| | |
| |
Legal and advisory fees (2) | | | — | | | 5,922 |
Mark-to-market adjustment on option valuation (3) | | | — | | | 5,914 |
Other costs (4) | | | — | | | 2,385 |
Refranchising gains | | | — | | | (4,739) |
Adjusted operating income | | $ | 96,238 | | $ | 34,017 |
| | | | | | |
GAAP net income (loss) attributable to common shareholders | | $ | 41,737 | | $ | (7,633) |
Strategic corporate reorganization costs (1) | | | 5,985 | | | — |
Special charges: | | | | | | |
Legal and advisory fees (2) | | | — | | | 5,922 |
Mark-to-market adjustment on option valuation (3) | | | — | | | 5,914 |
Other costs (4) | | | — | | | 2,385 |
Refranchising gains | | | — | | | (4,739) |
Tax effect of Non-GAAP items (5) (6) | | | (1,346) | | | (799) |
Two-class impact for Non-GAAP adjustment to net income (7) | | | (662) | | | — |
Adjusted net income attributable to common shareholders | | $ | 45,714 | | $ | 1,050 |
| | | | | | |
GAAP diluted earnings (loss) per share | | $ | 1.28 | | $ | (0.24) |
Strategic corporate reorganization costs (1) | | | 0.18 | | | — |
Special charges: | | | | | | |
Legal and advisory fees (2) | | | — | | | 0.19 |
Mark-to-market adjustment on option valuation (3) | | | — | | | 0.19 |
Other costs (4) | | | — | | | 0.07 |
Refranchising gains | | | — | | | (0.15) |
Tax effect of Non-GAAP items (5) (6) | | | (0.04) | | | (0.03) |
Two-class impact for Non-GAAP adjustment to earnings per share (7) | | | (0.02) | | | — |
Adjusted diluted earnings per share | | $ | 1.40 | | $ | 0.03 |
41
The non-GAAP adjusted results shown above and within this document, which exclude the Special items, should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP results. Management believes presenting certain financial information excluding the Special items is important for purposes of comparability. In addition, management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends. See “Results of Operations” for further analysis regarding the impact of the Special items.
Temporary Franchise Support. Beginning in the third quarter of 2018, the Company began providing various forms of support and financial assistance to the North America franchise system in response to declining North America sales. In July 2019, the Company announced a formal relief program to provide our North America franchisees with certainty regarding the availability and schedule of the temporary relief which concluded in the third quarter of 2020. The Company provided royalty relief and discretionary marketing fund investments to franchisees in North America, included herein as “Temporary Franchise Support” of $29.3 million (or approximately $0.69 per diluted share) for 2020, compared to $46.6 million (or approximately $1.14 per diluted share) for 2019, as follows (in thousands):
| | | | | | |
| | | | | | |
| | Year Ended | ||||
| | December 27, | | December 29, | ||
| | 2020 | | 2019 | ||
Royalty relief (a) | | $ | 14,270 | | $ | 19,096 |
Marketing fund investments (b) | | | 15,000 | | | 27,500 |
Total Temporary Franchise Support | | $ | 29,270 | | $ | 46,596 |
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In addition, we present free cash flow in this report, which is a non-GAAP measure. We define free cash flow as net cash provided by operating activities (from the Consolidated Statements of Cash Flows) less the purchases of property and equipment and dividends paid to preferred stockholders. We view free cash flow as an important measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of our performance than the Company’s GAAP measures. See “Liquidity and Capital Resources” for a reconciliation of free cash flow to the most directly comparable GAAP measure.
The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.
Liquidity and Capital Resources
Debt
The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $10.0 million was outstanding as of December 27, 2020, and a secured term loan facility with an outstanding balance of $340.0 million (the “Term Loan Facility”) and together with the Revolving Facility, the “PJI Facilities”. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at December 27, 2020 was approximately $344.2 million.
We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities. As of December 27, 2020, we have the following interest rate swap agreements with a total notional value of $350.0 million:
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The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 3.8% and 4.1% in fiscal 2020 and 2019, respectively.
Our PJI Credit Agreement contains affirmative and negative covenants, including the following financial covenants, as defined by the PJI Credit Agreement:
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Our leverage ratio is defined as outstanding debt divided by consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all financial covenants as of December 27, 2020.
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Papa John’s Marketing Fund, Inc. (“PJMF”) our national marketing fund, has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 (as amended, the “PJMF Loan Agreement”) with U.S. Bank National Association, as lender. There was no balance outstanding under the PJMF Revolving Facility as of December 27, 2020 and December 29, 2019. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.
See “Note 13” of “Notes to Consolidated Financial Statements” for additional information.
Cash Flows
Cash flow provided by operating activities was $186.4 million for 2020 as compared to $61.7 million in 2019. The increase of approximately $124.7 million was primarily due to higher net income and favorable working capital changes including timing of payments.
Cash flow used in investing activities was $41.1 million in 2020 as compared to $32.6 million for the same period in 2019. The increase in cash flow used in investing activities was primarily due to proceeds from the refranchising of restaurants in 2019. This was somewhat offset by higher note repayments from franchisees in 2020.
Cash flow used in financing activities was $43.5 million in 2020 as compared to $34.6 million for the same period in 2019. The increase in cash flow used in financing activities was primarily due to the timing of repayments on our Term Loan Facility, repurchases of common stock and higher dividends paid to preferred stockholders, offset by higher cash proceeds received from the exercise of stock options. In 2019, we also received $252.5 million in proceeds from the issuance of Series B Preferred Stock, which was primarily used for net repayments on our Revolving Facility of $240.0 million.
The Company recorded dividends of approximately $43.1 million for the year ended December 27, 2020 consisting of the following:
The Company paid common stock dividends of $28.6 million, common stock “pass-through” dividends to Series B Preferred Stockholders of $4.3$29.7 million and $5.7$34.7 million in preferred dividends on the Series B Preferred Stock in 2019.
On January 25, 2021, our Board of Directors declared a first quarter dividend of $0.225 per share of common stock (approximately $7.4 million was paid to common stockholders and $1.1 million was paid as “pass through” dividends to holders of Series B Preferred Stock on an as-converted basis). The first quarter dividend on outstanding shares of Series B Preferred Stock was also declared on January 25, 2021. The common stock dividend was paid on February 19, 2021 to stockholders of record as of the close of business on February 8, 2021. The first quarter preferred dividend of $2.3 million will be paid to holders of Series B Preferred Stock on April 1, 2021.
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We also use free cash flow, a non-GAAP measure, defined as net cash provided by operating activities (from the Consolidated Statements of Cash Flows) less the purchases of property and equipment and dividends paid to preferred stockholders. We view free cash flow as an important measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. See “Items Impacting Comparability; Non-GAAP Measures” for a discussion of free cash flow. The Company’s free cash flow for the last two years was as follows (in thousands):
| | | | | | |
| | Year Ended | ||||
| | Dec. 27, |
| Dec. 29, | ||
|
| 2020 | | 2019 | ||
| | | | | | |
Net cash provided by operating activities | | $ | 186,439 | | $ | 61,749 |
Purchases of property and equipment | | | (35,652) | | | (37,711) |
Dividends paid to preferred stockholders | |
| (13,649) | |
| (10,020) |
Free cash flow | | $ | 137,138 | | $ | 14,018 |
Contractual Obligations
Contractual obligations and payments as of December 27, 2020 due by year are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| |||||||||||||
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| Less than |
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| | |
| After 5 |
| | |
| ||
| | 1 Year | | 1-3 Years | | 3-5 Years | | Years | | Total |
| |||||
Contractual Obligations: | | | | | | | | | | | | | | | | |
Term Loan Facility (1) | | $ | 20,000 | | $ | 320,000 | | $ | — | | $ | — | | $ | 340,000 | |
Revolving Facility (1) | | | — | | | 10,000 | | | — | | | — | | | 10,000 | |
Interest payments (2) | |
| 12,669 | |
| 10,048 | |
| 1,602 | |
| — | |
| 24,319 | |
Total debt | | $ | 32,669 | | $ | 340,048 | | $ | 1,602 | | $ | — | | $ | 374,319 | |
Operating leases (3) | |
| 32,456 | |
| 58,224 | |
| 39,072 | |
| 61,024 | |
| 190,776 | |
Finance leases (3) | | | 4,348 | | | 8,682 | | | 5,092 | | | 1,054 | | | 19,176 | |
Total contractual obligations | | $ | 69,473 | | $ | 406,954 | | $ | 45,766 | | $ | 62,078 | | $ | 584,271 | |
The above table does not include the following:
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Off-Balance Sheet Arrangements
We guarantee leases for certain Papa John’s North American franchisees who have purchased restaurants that were previously Company-owned. We are contingently liable on these leases. These leases have varying terms, the latest of which expires in 2036. As of December 27, 2020, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was approximately $14.3 million.
We have certain other commercial commitments where payment is contingent upon the occurrence of certain events. With our insurance programs, we are party to standby letters of credit with off-balance sheet risk as follows by year (in thousands):
| | | | | | | | | | | | | | | |
| | Amount of Commitment Expiration Per Period | |||||||||||||
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| Less than |
| 1-3 |
| 3-5 |
| After |
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| | ||||
| | 1 Year | | Years | | Years | | 5 Years | | Total | |||||
Standby letters of credit | | $ | 45,840 | | $ | — | | $ | — | | $ | — | | $ | 45,840 |
See “Note 13” and “Note 20” of “Notes to Consolidated Financial Statements” for additional information related to contractual and other commitments.
Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-Kcurrent liabilities and other Company communications that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “intend,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the financial impact of the temporary business opportunities, disruptions and temporary changes in demand we are experiencing related to the current outbreak of the novel coronavirus disease (COVID-19), including our cash on hand and access to our credit facilities, commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, the duration of changes in consumer behavior caused by the pandemic, the duration and number of temporary store closures, our plans to open an office in Atlanta, the associated reorganization costs and the related organizational, employment and real estate changes that are expected, royalty relief, the effectiveness of menu innovations and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:
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These and other risk factors are discussed in detail in “Part I. Item 1A. — Risk Factors” of this Annual Report on Form 10-K. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to the impact of interest rate changes on our Revolving Facility and our Term Loan Facility, which comprise the PJI Facilities. 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. Our swaps are entered into with financial institutions that participate in the PJI Facilities. 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. See “Note 13” of “Notes to Consolidated Financial Statements” for additional information on our debt obligations and derivative instruments.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate fluctuations from our operations outside of the United States, which can adversely impact our revenues, net income and cash flows. Our international operations principally consist of distribution sales to franchised Papa John’s restaurants located in the United Kingdom and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. Approximately 6.8% of our 2020 revenues, 7.8% of our 2019 revenues and 8.3% of our revenues for 2018 were derived from these international operations.
We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had an unfavorable impact of approximately $600,000 on our consolidated revenues in 2020 compared to an unfavorable impact of $5.1 million in 2019. Foreign currency exchange rates had an unfavorable impact of $1.0 million on our operating income in 2020 compared to an unfavorable impact of $1.3 million in 2019. An additional 10% adverse change in the foreign currency rates for our international markets would result in an additional negative impact on annual revenue and operating income of approximately $13.3$37.6 million and $2.7$53.6 million respectively.
Commodity Price Risk
In the ordinary course of business, the food and paper products we purchase, including cheese (our largest 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 domestic Company-owned restaurants, which are accounted for as normal purchases; however, we still remain exposed to on-going commodity volatility.
The following table presents the actual average block price for cheese by quarterwere recorded in 2020, 2019 and 2018. Also presented is the projected 2021 average block price by quarter (basedOther long-term liabilities on the February 17, 2021 Chicago Mercantile Exchange cheese futures prices for 2021):
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| 2021 |
| 2020 |
| 2019 |
| 2018 | ||||
| | Projected | | Block | | Block | | Block | ||||
| | Market | | Price | | Price | | Price | ||||
| | | | | | | | | | | | |
Quarter 1 | | $ | 1.814 | | $ | 1.857 | | $ | 1.490 | | $ | 1.522 |
Quarter 2 | |
| 1.802 | |
| 1.679 | |
| 1.696 | |
| 1.607 |
Quarter 3 | |
| 1.834 | |
| 2.262 | |
| 1.898 | |
| 1.592 |
Quarter 4 | |
| 1.818 | |
| 2.235 | |
| 1.984 | |
| 1.487 |
Full Year | | $ | 1.817 | | $ | 2.008 | | $ | 1.767 | | $ | 1.552 |
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Papa John’s International, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Papa John’s International, Inc. and Subsidiaries (the Company) as of December 27, 2020 and December 29, 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders' deficit and cash flows for each of the two years in the period ended December 27, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 27, 2020 and December 29, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 27, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 27, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated February 25, 2021, expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases, as amended.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Papa John’s International, Inc.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated statements of operations, comprehensive income, stockholders’ deficit, and cash flows of Papa John’s International, Inc. and subsidiaries (the Company) for the year ended December 30, 2018, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 30, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2018 to 2019.
Louisville, Kentucky
March 8, 2019
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Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | |
| | Year ended | |||||||
|
| December 27, |
| December 29, |
| December 30, | |||
(In thousands, except per share amounts) |
| 2020 | | 2019 | | 2018 | |||
| | | | | | | | | |
Revenues: | | | | | | | | | |
Domestic Company-owned restaurant sales | | $ | 700,757 | | $ | 652,053 | | $ | 692,380 |
North America franchise royalties and fees | |
| 96,732 | |
| 71,828 | |
| 79,293 |
North America commissary revenues | |
| 680,793 | |
| 612,652 | |
| 609,866 |
International revenues | |
| 123,963 | | | 102,924 | | | 110,349 |
Other revenues | | | 210,989 | | | 179,791 | | | 170,983 |
Total revenues | |
| 1,813,234 | |
| 1,619,248 | |
| 1,662,871 |
Costs and expenses: | | | | | | | | | |
Operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | | |
Domestic Company-owned restaurant expenses | | | 563,799 | | | 526,237 | | | 577,658 |
North America commissary expenses | | | 630,937 | | | 569,180 | | | 575,103 |
International expenses | | | 73,994 | | | 57,702 | | | 67,775 |
Other expenses | | | 200,304 | | | 175,592 | | | 170,556 |
General and administrative expenses | |
| 204,242 | |
| 223,460 | |
| 193,534 |
Depreciation and amortization | |
| 49,705 | |
| 47,281 | |
| 46,403 |
Total costs and expenses | |
| 1,722,981 | |
| 1,599,452 | |
| 1,631,029 |
Refranchising gains (losses) | |
| — | |
| 4,739 | |
| (289) |
Operating income | |
| 90,253 | |
| 24,535 | |
| 31,553 |
Investment income | | | 2,131 | | | 1,104 | | | 817 |
Interest expense | |
| (17,022) | | | (20,593) | | | (25,673) |
Income before income taxes | |
| 75,362 | |
| 5,046 | |
| 6,697 |
Income tax expense (benefit) | |
| 14,748 | |
| (611) | |
| 2,624 |
Net income before attribution to noncontrolling interests | |
| 60,614 | |
| 5,657 | |
| 4,073 |
Net income attributable to noncontrolling interests | |
| (2,682) | |
| (791) | |
| (1,599) |
Net income attributable to the Company | | $ | 57,932 | | $ | 4,866 | | $ | 2,474 |
| | | | | | | | | |
Calculation of net income (loss) for earnings (loss) per share: | | | | | | | | | |
Net income attributable to the Company | | $ | 57,932 | | $ | 4,866 | | $ | 2,474 |
Dividends paid to participating securities and accretion | |
| (14,059) | |
| (12,499) | |
| — |
Net income attributable to participating securities | |
| (2,136) | |
| — | |
| — |
Net income (loss) attributable to common shareholders | | $ | 41,737 | | $ | (7,633) | | $ | 2,474 |
| | | | | | | | | |
Basic earnings (loss) per common share | | $ | 1.29 | | $ | (0.24) | | $ | 0.08 |
Diluted earnings (loss) per common share | | $ | 1.28 | | $ | (0.24) | | $ | 0.08 |
| | | | | | | | | |
Basic weighted average common shares outstanding | |
| 32,421 | |
| 31,632 | |
| 32,083 |
Diluted weighted average common shares outstanding | |
| 32,717 | |
| 31,632 | |
| 32,299 |
| | | | | | | | | |
Dividends declared per common share | | $ | 0.90 | | $ | 0.90 | | $ | 0.90 |
See accompanying notes.
53
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | |
| Year Ended | |||||||
| December 27, |
| December 29, |
| December 30, | |||
(In thousands) | 2020 | | 2019 | | 2018 | |||
| | | | | | | | |
Net income before attribution to noncontrolling interests | $ | 60,614 | | $ | 5,657 | | $ | 4,073 |
Other comprehensive loss, before tax: | | | | | | | | |
Foreign currency translation adjustments (1) | | 2,344 | | | 1,638 | | | (4,903) |
Interest rate swaps (2) |
| (7,517) | |
| (10,783) | |
| 4,254 |
Other comprehensive loss, before tax |
| (5,173) | |
| (9,145) | |
| (649) |
Income tax effect: | | | | | | | | |
Foreign currency translation adjustments (1) |
| (539) | |
| (377) | |
| 1,110 |
Interest rate swaps (3) |
| 1,729 | |
| 2,480 | |
| (1,032) |
Income tax effect (4) |
| 1,190 | |
| 2,103 | |
| 78 |
Other comprehensive loss, net of tax |
| (3,983) | |
| (7,042) | |
| (571) |
Comprehensive income (loss) before attribution to noncontrolling interests |
| 56,631 | |
| (1,385) | |
| 3,502 |
Less: comprehensive (income) loss, redeemable noncontrolling interests |
| (824) | |
| 519 | |
| 488 |
Less: comprehensive (income), nonredeemable noncontrolling interests |
| (1,858) | |
| (1,310) | |
| (2,087) |
Comprehensive income (loss) attributable to the Company | $ | 53,949 | | $ | (2,176) | | $ | 1,903 |
See accompanying notes.
54
Papa John’s International, Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | |
| | | ||||
|
| December 27, |
| December 29, | ||
(In thousands, except per share amounts) | | 2020 | | 2019 | ||
| | | | | ||
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 130,204 | | $ | 27,911 |
Accounts receivable (less allowance for credit losses of $3,622 in 2020 and $7,341 in 2019) | | | 90,135 | | | 70,462 |
Notes receivable, current portion | |
| 11,318 | |
| 7,790 |
Income tax receivable | | | 1,273 | | | 4,024 |
Inventories | |
| 30,265 | |
| 27,529 |
Prepaid expenses and other current assets | |
| 43,212 | |
| 43,830 |
Total current assets | |
| 306,407 | |
| 181,546 |
Property and equipment, net | |
| 200,895 | |
| 211,741 |
Finance lease right-of-use assets, net | | | 16,840 | | | 9,383 |
Operating lease right-of-use assets | | | 148,110 | | | 148,229 |
Notes receivable, less current portion (less allowance for credit losses of $3,211 in 2020 and $3,572 in 2019) | |
| 36,538 | |
| 33,010 |
Goodwill | |
| 80,791 | |
| 80,340 |
Deferred income taxes | | | 10,800 | | | 1,839 |
Other assets | |
| 72,389 | |
| 64,633 |
Total assets | | $ | 872,770 | | $ | 730,721 |
| | | | | | |
Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 37,370 | | $ | 29,141 |
Income and other taxes payable | |
| 10,263 | |
| 7,599 |
Accrued expenses and other current liabilities | |
| 174,563 | |
| 108,517 |
Current deferred revenue | | | 19,590 | | | 17,673 |
Current finance lease liabilities | | | 3,545 | | | 1,789 |
Current operating lease liabilities | | | 23,538 | | | 23,226 |
Current portion of long-term debt | | | 20,000 | | | 20,000 |
Total current liabilities | |
| 288,869 | |
| 207,945 |
Deferred revenue | |
| 13,664 | |
| 14,722 |
Long-term finance lease liabilities | | | 13,531 | | | 7,629 |
Long-term operating lease liabilities | | | 124,666 | | | 125,297 |
Long-term debt, less current portion, net | |
| 328,292 | |
| 347,290 |
Deferred income taxes | |
| 948 | |
| 2,649 |
Other long-term liabilities | |
| 111,364 | |
| 84,927 |
Total liabilities | |
| 881,334 | |
| 790,459 |
| | | | | | |
Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at December 27, 2020 and December 29, 2019 | | | 251,901 | | | 251,133 |
Redeemable noncontrolling interests | |
| 6,474 | |
| 5,785 |
| | | | | | |
Stockholders’ deficit: | | | | | | |
Common stock ($0.01 par value per share; issued 45,288 at December 27, 2020 and 44,748 at December 29, 2019) | | | 453 | | | 447 |
Additional paid-in capital | |
| 254,103 | |
| 219,047 |
Accumulated other comprehensive loss | |
| (14,168) | |
| (10,185) |
Retained earnings | |
| 219,158 | |
| 205,697 |
Treasury stock (12,743 shares at December 27, 2020 and 12,854 shares at December 29, 2019, at cost) | |
| (741,724) | |
| (747,327) |
Total stockholders’ deficit | |
| (282,178) | |
| (332,321) |
Noncontrolling interests in subsidiaries | |
| 15,239 | |
| 15,665 |
Total Stockholders’ deficit | |
| (266,939) | |
| (316,656) |
Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and | | $ | 872,770 | | $ | 730,721 |
See accompanying notes.
55
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Deficit
| | | | | | | | | | | | | | | | | | | | | | | |
| | Papa John’s International, Inc. | | | | | | | |||||||||||||||
|
| Common |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| |
| | ||
| | Stock | | | | | Additional | | Other | | | | | | | | Noncontrolling | | Total | ||||
| | Shares | | Common | | Paid-In | | Comprehensive | | Retained | | Treasury | | Interests in | | Stockholders’ | |||||||
(In thousands) | | Outstanding | | Stock | | Capital | | Loss | | Earnings | | Stock | | Subsidiaries | | Deficit | |||||||
Balance at December 31, 2017 |
| 33,931 | | $ | 442 | | $ | 184,785 | | $ | (2,117) | | $ | 292,251 | | $ | (597,072) | | $ | 15,757 | | $ | (105,954) |
Cumulative effect of adoption of ASU 2014-09 (1) | | — | | | — | | | — | | | — | | | (24,359) | | | — | | | — | | | (24,359) |
Adjusted balance at January 1, 2018 | | 33,931 | | | 442 | | | 184,785 | | | (2,117) | | | 267,892 | | | (597,072) | | | 15,757 | | | (130,313) |
Net income (2) |
| — | |
| — | |
| — | |
| — | |
| 2,474 | |
| — | |
| 1,874 | |
| 4,348 |
Other comprehensive loss, net of tax |
| — | |
| — | |
| — | |
| (571) | |
| — | |
| — | |
| — | |
| (571) |
Adoption of ASU 2018-02 (3) | | — | | | — | | | — | | | (455) | | | 455 | | | — | | | — | | | — |
Cash dividends on common stock | | — | |
| — | |
| 145 | |
| — | |
| (28,944) | |
| — | |
| — | |
| (28,799) |
Exercise of stock options |
| 75 | |
| 1 | |
| 2,698 | |
| — | |
| — | |
| — | |
| — | |
| 2,699 |
Acquisition of Company common stock |
| (2,697) | |
| — | |
| — | |
| — | |
| — | |
| (158,049) | |
| — | |
| (158,049) |
Stock-based compensation expense | | — | |
| — | |
| 9,936 | |
| — | |
| — | |
| — | |
| — | |
| 9,936 |
Issuance of restricted stock |
| 56 | |
| — | |
| (3,005) | |
| — | |
| — | |
| 3,005 | |
| — | |
| — |
Tax effect of restricted stock awards |
| — | |
| — | |
| (1,521) | |
| — | |
| — | |
| — | |
| — | |
| (1,521) |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (2,406) | |
| (2,406) |
Other |
| 7 | |
| — | |
| (54) | |
| — | |
| 305 | |
| 412 | |
| — | |
| 663 |
Balance at December 30, 2018 |
| 31,372 | | $ | 443 | | $ | 192,984 | | $ | (3,143) | | $ | 242,182 | | $ | (751,704) | | $ | 15,225 | | $ | (304,013) |
Net income (2) |
| — | |
| — | |
| — | |
| — | |
| 4,866 | |
| — | |
| 1,310 | |
| 6,176 |
Other comprehensive loss, net of tax |
| — | |
| — | |
| — | |
| (7,042) | |
| — | |
| — | |
| — | |
| (7,042) |
Cash dividends on common stock |
| — | |
| — | |
| 209 | |
| — | |
| (28,761) | |
| — | |
| — | |
| (28,552) |
Cash dividends on preferred stock | | — | | | — | | | — | | | — | | | (10,020) | | | — | | | — | | | (10,020) |
Dividends declared on preferred stock | | — | | | — | | | — | | | — | | | (2,273) | | | — | | | — | | | (2,273) |
Exercise of stock options |
| 447 | |
| 4 | |
| 16,006 | |
| — | |
| — | |
| — | |
| — | |
| 16,010 |
Stock-based compensation expense |
| — | |
| — | |
| 15,303 | |
| — | |
| — | |
| — | |
| — | |
| 15,303 |
Issuance of restricted stock |
| 63 | |
| — | |
| (3,681) | |
| — | |
| — | |
| 3,681 | |
| — | |
| — |
Tax effect of restricted stock awards |
| — | |
| — | |
| (1,433) | |
| — | |
| — | |
| — | |
| — | |
| (1,433) |
Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (870) | | | (870) |
Other |
| 12 | |
| — | |
| (341) | |
| — | |
| (297) | |
| 696 | |
| — | |
| 58 |
Balance at December 29, 2019 |
| 31,894 | | $ | 447 | | $ | 219,047 | | $ | (10,185) | | $ | 205,697 | | $ | (747,327) | | $ | 15,665 | | $ | (316,656) |
56
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Deficit (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Papa John’s International, Inc. | | | | | | | |||||||||||||||
|
| Common |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| |
| | | |
| | Stock | | | | | Additional | | Other | | | | | | | | Noncontrolling | | Total | ||||
| | Shares | | Common | | Paid-In | | Comprehensive | | Retained | | Treasury | | Interests in | | Stockholders’ | |||||||
(In thousands) | | Outstanding | | Stock | | Capital | | Loss | | Earnings | | Stock | | Subsidiaries | | Deficit | |||||||
Balance at December 29, 2019 |
| 31,894 | | $ | 447 | | $ | 219,047 | | $ | (10,185) | | $ | 205,697 | | $ | (747,327) | | $ | 15,665 | | $ | (316,656) |
Cumulative effect of adoption: ASU 2016-13 (4) | | — | | | — | | | — | | | — | | | (1,066) | | | — | | | — | | | (1,066) |
Adjusted balance at December 30, 2019 | | 31,894 | | | 447 | | | 219,047 | | | (10,185) | | | 204,631 | | | (747,327) | | | 15,665 | | | (317,722) |
Net income (2) |
| — | |
| — | |
| — | |
| — | |
| 57,932 | |
| — | |
| 1,858 | |
| 59,790 |
Other comprehensive loss, net of tax |
| — | |
| — | |
| — | |
| (3,983) | |
| — | |
| — | |
| — | |
| (3,983) |
Cash dividends on common stock | | — | | | — | | | 141 | | | — | | | (29,503) | | | — | | | — | | | (29,362) |
Cash dividends on preferred stock |
| — | |
| — | |
| — | |
| — | |
| (13,649) | |
| — | |
| — | |
| (13,649) |
Exercise of stock options |
| 540 | |
| 6 | |
| 30,616 | |
| — | |
| — | |
| — | |
| — | |
| 30,622 |
Acquisition of Company common stock | | (32) | | | — | | | — | | | — | | | — | | | (2,701) | | | — | | | (2,701) |
Stock-based compensation expense |
| — | |
| — | |
| 16,310 | |
| — | |
| — | |
| — | |
| — | |
| 16,310 |
Issuance of restricted stock |
| 119 | |
| — | |
| (6,922) | |
| — | |
| — | |
| 6,922 | |
| — | |
| — |
Tax effect of restricted stock awards |
| — | |
| — | |
| (3,974) | |
| — | |
| — | |
| — | |
| — | |
| (3,974) |
Distributions to noncontrolling interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (2,284) | |
| (2,284) |
Other |
| 24 | |
| — | |
| (1,115) | |
| — | |
| (253) | |
| 1,382 | |
| — | |
| 14 |
Balance at December 27, 2020 |
| 32,545 | | $ | 453 | | $ | 254,103 | | $ | (14,168) | | $ | 219,158 | | $ | (741,724) | | $ | 15,239 | | $ | (266,939) |
At December 30, 2018, the accumulated other comprehensive loss of $3,143 was comprised of net unrealized foreign currency translation loss of $6,859 and a net unrealized gain on the interest rate swap agreements of $3,716.
At December 29, 2019, the accumulated other comprehensive loss of $10,185 was comprised of net unrealized foreign currency translation loss of $5,598 and a net unrealized loss on the interest rate swap agreements of $4,587.
At December 27, 2020, the accumulated other comprehensive loss of $14,168 was comprised of net unrealized foreign currency translation loss of $3,793 and a net unrealized loss on the interest rate swap agreements of $10,375.
See accompanying notes.
57
Papa John’s International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | |
| | Year ended | |||||||
| | December 27, |
| December 29, |
| December 30, | |||
(In thousands) |
| 2020 | | 2019 | | 2018 | |||
| | | | | | | | ||
Operating activities | | | | | | | | | |
Net income before attribution to noncontrolling interests | | $ | 60,614 | | $ | 5,657 | | $ | 4,073 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
(Credit) provision for allowance for credit losses on accounts and notes receivable | |
| (4,734) | |
| 3,139 | |
| 6,849 |
Depreciation and amortization | |
| 49,705 | |
| 47,281 | |
| 46,403 |
Deferred income taxes | |
| (9,268) | |
| (3,764) | |
| 1,620 |
Preferred stock option mark-to-market adjustment | | | — | | | 5,914 | | | — |
Stock-based compensation expense | |
| 16,310 | |
| 15,303 | |
| 9,936 |
(Gain) loss on refranchising | | | — | | | (4,739) | | | 289 |
Other | |
| 2,257 | |
| 3,203 | |
| 5,677 |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | |
| (22,420) | |
| (6,181) | |
| 2,157 |
Income tax receivable | | | 3,760 | | | 12,122 | | | (12,157) |
Inventories | |
| (2,736) | |
| (326) | |
| 3,093 |
Prepaid expenses and other current assets | |
| 2,884 | |
| 1,367 | |
| 3,795 |
Other assets and liabilities | |
| 20,879 | |
| (6,354) | |
| 1,464 |
Accounts payable | |
| 8,229 | |
| 2,035 | |
| (400) |
Income and other taxes payable | |
| 2,664 | |
| 1,009 | |
| (3,971) |
Accrued expenses and other current liabilities | |
| 59,353 | |
| (11,331) | |
| 21,753 |
Deferred revenue | |
| (1,058) | |
| (2,586) | |
| 1,873 |
Net cash provided by operating activities | |
| 186,439 | |
| 61,749 | |
| 92,454 |
Investing activities | | | | | | | | | |
Purchases of property and equipment | |
| (35,652) | |
| (37,711) | |
| (42,028) |
Notes issued | |
| (16,589) | |
| (15,864) | |
| (10,463) |
Repayments of notes issued | |
| 11,154 | |
| 5,616 | |
| 5,805 |
Proceeds from divestitures of restaurants | |
| — | |
| 13,495 | |
| 7,707 |
Other | |
| 16 | |
| 1,889 | |
| 180 |
Net cash used in investing activities | |
| (41,071) | |
| (32,575) | |
| (38,799) |
Financing activities | | | | | | | | | |
Repayments of term loan | | | (20,000) | | | (15,000) | | | (20,000) |
Net (repayments) proceeds of revolving credit facilities | |
| — | |
| (240,026) | |
| 163,585 |
Debt issuance costs | | | — | | | — | | | (1,913) |
Proceeds from exercise of stock options | |
| 30,622 | |
| 16,010 | |
| 2,699 |
Dividends paid to common stockholders | | | (29,362) | | | (28,552) | | | (28,985) |
Dividends paid to preferred stockholders | |
| (13,649) | |
| (10,020) | |
| — |
Tax payments for equity award issuances | |
| (3,974) | |
| (1,433) | |
| (1,521) |
Acquisition of Company common stock | |
| (2,701) | |
| — | |
| (158,049) |
Proceeds from issuance of preferred stock | | | — | | | 252,530 | | | — |
Issuance costs associated with preferred stock | | | — | | | (7,527) | | | — |
Contributions from noncontrolling interests | |
| — | |
| 840 | |
| — |
Distributions to noncontrolling interests | |
| (2,420) | |
| (870) | |
| (4,269) |
Other | |
| (1,977) | |
| (526) | |
| 356 |
Net cash used in financing activities | |
| (43,461) | |
| (34,574) | |
| (48,097) |
Effect of exchange rate changes on cash and cash equivalents | |
| 386 | |
| 53 | |
| (191) |
Change in cash and cash equivalents | |
| 102,293 | |
| (5,347) | |
| 5,367 |
Cash and cash equivalents at beginning of period | |
| 27,911 | |
| 33,258 | |
| 27,891 |
Cash and cash equivalents at end of period | | $ | 130,204 | | $ | 27,911 | | $ | 33,258 |
See accompanying notes.
58
Papa John’s International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business
Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”), operates and franchises pizza delivery and carryout restaurants under the trademark “Papa John’s,” in 48 countries and territories as of December 27, 2020. 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, printing and promotional items and information systems equipment, and software and related services. We generated revenues from the operation of our Quality Control Centers (“QC Centers”) which supply pizza sauce, dough, food products, paper products, smallwares and cleaning supplies to restaurants. We also derived revenue from contributions received by our North America Marketing funds.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Papa John’s International, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated.
Fiscal Year
Our fiscal year ends on the last Sunday in December of each year. All fiscal years presented consist of 52 weeks.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Significant items that are subject to such estimates and assumptions include the allowance for credit losses on accounts and notes receivable, intangible assets, contract assets and contract liabilities including the customer loyalty program obligation, right-of-use assets and lease liabilities, gift card breakage, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates.
Revenue Recognition
Revenue is measured based on consideration specified in contracts with customers and excludes waivers or incentives and amounts collected on behalf of third parties, primarily sales tax. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Delivery costs, including freight associated with our domestic commissary and other sales, are accounted for as fulfillment costs and are included in operating costs.
The following describes principal activities, separated by major product or service, from which the Company generates its revenues:
Domestic Company-owned Restaurant Sales
The domestic Company-owned restaurants principally generate revenue from retail sales of high-quality pizza, Papadias, which are flatbread-style sandwiches, and side items including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. Revenues from Company-owned restaurants are recognized when the products are delivered to or carried out by customers.
59
Our North American customer loyalty program, Papa Rewards, is a spend-based program that rewards customers with points for each purchase. Papa Rewards points are accumulated and redeemed for dollar off discounts (“Papa Dough”) to be used on future purchases within a six-month expiration window. The accrued liability in the Consolidated Balance Sheets as of December 25, 2022 and corresponding reduction of Company-owned restaurant sales in the Consolidated Statements of Operations, is for the estimated reward redemptions at domestic Company-owned restaurants based upon estimated redemption patterns. The liability related to Papa Rewards is calculated using the estimated redemption value for which the points and accumulated rewards are expected to be redeemed. Revenue is recognized when the customer redeems the Papa Dough reward and when the points or Papa Dough reward expires.
Franchise Royalties and Fees
Franchise royalties, which are based on a percentage of franchise restaurant sales, are recognized as sales occur. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other behaviors, including acceleration of restaurant remodels or equipment upgrades, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty rate.December 26, 2021, respectively. Our current standard franchise agreement requires the franchisee to pay a royalty fee of 5% of sales, and the majority ofreserves include claim costs above our existing franchised restaurantsretention that have a 5% contractual royalty ratecorresponding receivable. Our insurance receivable for claims above retention totaled $38.4 million and $48.1 million as of December 25, 2022 and December 26, 2021, respectively. Of these amounts, approximately $17.0 million and $18.7 million were recorded in effect. Incentives offered from time to time, including new store incentives, will reduce the contractual royalty rate paid. Franchise royalties are billedPrepaid expenses and other current assets, and $21.4 million and $29.4 million were recorded in Other assets on a monthly basis.
The majority of initial franchise license fees and area development exclusivity fees are from international locations. Initial franchise license fees are billed at the store opening date. Area development exclusivity fees are billed upon execution of the development agreements which grant the right to develop franchised restaurants in future periods in specific geographic areas. Area development exclusivity fees are included in Deferred revenue in the Consolidated Balance Sheets and allocated on a pro rata basis to all stores opened under that specific development agreement. The pre-opening services provided to franchisees do not contain separate and distinct performance obligations from the franchise right; thus, the fees collected will be amortized on a straight-line basis beginning at the store opening date through the term of the franchise agreement, which is typically 10 years. Franchise license renewal fees for both domestic and international locations, which generally occur every 10 years, are billed before the renewal date. Fees received for future license renewal periods are included in deferred revenue in the Consolidated Balance Sheets and amortized over the life of the renewal period.
The Company offers various incentive programs for franchisees including royalty incentives, new restaurant opening incentives (i.e. development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned or granted under these programs that are in the form of discounts.
Commissary Revenues
Commissary revenues are comprised of food and supplies sold to franchised restaurants and are recognized as revenue upon shipment of the related products to the franchisees. Payments are generally due within 30 days.
As noted above, there are various incentive programs available to franchisees related to new restaurant openings including discounts on initial commissary orders and new store equipment incentives, at substantially no cost to franchisees. Commissary revenues are reduced to reflect incentives in the form of direct discounts on initial commissary orders. The new store equipment incentive is also recorded as a reduction of commissary sales over the term of the incentive agreement, which is generally three to five years.
Other Revenues
Franchise Marketing Fund revenues represent a required established percentage of monthly restaurant sales collected by Papa John’s Marketing Fund, Inc. (“PJMF”), which is our national marketing fund, and various other international and domestic marketing funds (“Co-op” or “Co-operative” Funds) where we have determined for purposes of accounting that we have control over the significant activities of the funds. PJMF funds its operations with ongoing financial support and contributions from domestic Papa John’s restaurants, of which approximately 80% are franchised restaurant members. Contributions are based on a percentage of monthly restaurant sales and are billed monthly. When we are determined to be the principal in these arrangements, advertising fund contributions and expenditures are reported on a gross basis in the
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Consolidated Statements of Operations. Our obligation related to these funds is to develop and conduct advertising activities in a specific country, region, or market, including the placement of electronic and print materials.
There are no expiration dates and we do not deduct non-usage fees from outstanding gift cards. While the Company and the franchisees continue to honor all gift cards presented for payment, the likelihood of redemption may be determined to be remote for certain cards due to long periods of inactivity. In these circumstances, the Company recognizes breakage revenue for amounts not subject to unclaimed property laws. Based upon our analysis of historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote. Breakage revenue is recognized over time in proportion to estimated redemption patterns as Other revenues. Commissions on gift cards sold by third parties are recorded as a reduction to Deferred revenue and a reduction to Other revenues based upon estimated redemption patterns.
Fees for information services, including software maintenance fees, help desk fees, centralized call center fees, and online ordering fees are recognized as revenue as such services are provided and are included in Other revenues.
Revenues for printing, promotional items, and direct mail marketing services are recognized upon shipment of the related products to franchisees and other customers. Direct mail advertising discounts are also periodically offered by our Preferred Marketing Solutions subsidiary. Other revenues are reduced to reflect these advertising discounts.
Rental income, primarily derived from properties leased by the Company and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms.
Advertising and Related Costs
Domestic Company-owned advertising and related costs of $56.7 million, $54.3 million and $60.8 million in 2020, 2019, and 2018, respectively, include the costs of domestic Company-owned local restaurant activities such as mail coupons, door hangers and promotional items and advertising activities administered through PJMF and various local market cooperative advertising funds. PJMF is responsible for developing and conducting marketing and advertising for the domestic Papa John’s system. The Co-op Funds are responsible for developing and conducting advertising activities in a specific market, including the placement of electronic and print materials developed by PJMF. During 2020 and 2019, the Company contributed additional amounts of $15.0 million and $27.5 million, respectively, to PJMF, representing incremental discretionary marketing fund investments in excess of contractual Company-owned restaurant-level contributions as part of our temporary financial support package to our franchisees. The marketing fund investments are included in General and administrative expenses within the accompanying Consolidated Statements of Operations.
Leases
Lease expense is recognized on a straight-line basis over the expected life of the lease term for operating leases, whereas lease expense follows an accelerated expense recognition for finance leases. A lease term often includes option periods, available at the inception of the lease. Lease expense is comprised of operating and finance lease costs, short-term lease costs, and variable lease costs, which primarily include common area maintenance, real estate taxes, and insurance for the Company’s real estate leases. Lease costs also include variable rent, which is primarily related to the Company’s supply chain tractor and trailer leases that are based on a rate per mile.
The Company adopted ASU 2016-02 “Leases (Topic 842)” in the first quarter of 2019 and prior periods have not been restated and continue to be reported under the accounting standards in effect for those periods.
Stock-Based Compensation
Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures, and is recognized over the vesting period (graded vesting over three years). Restricted stock is valued based on the market price of the Company’s shares on the date of grant. Stock options are valued using a Black-Scholes option pricing model. Our specific assumptions for estimating the fair value of options are included in Note 21.
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Cash Equivalents
Cash equivalents consist of highly liquid investments with maturity of three months or less at date of purchase. These investments are carried at cost, which approximates fair value.
Accounts Receivable
Substantially all accounts receivable is due from franchisees for purchases of food, paper products, point of sale equipment, printing and promotional items, information systems and related services, marketing and royalties. Credit is extended based on an evaluation of the franchisee’s financial condition and collateral is generally not required. An allowance for credit losses is an estimate, even if remote, based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics and macroeconomic factors. Account balances are charged off against the allowance after recovery efforts have ceased.
See Recent Accounting Pronouncements for information regarding the adoption and related accounting impact of ASU 2016-13, “Credit Losses”, which was effective December 30, 2019.
Notes Receivable
The Company has provided financing to select domestic and international franchisees principally for use in the construction and development of their restaurants and for the purchase of restaurants from the Company or other franchisees. Most notes receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant and the ownership interests in the franchise. The Company has provided long-term financing to certain franchisees with royalty payment plans. We establish an allowance for credit losses for franchisee notes receivables to reduce the outstanding notes receivable to their net realizable values based on a review of each franchisee’s economic performance and market conditions after consideration of the fair value of our underlying collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees. Note balances are charged off against the allowance after recovery efforts have ceased.
Interest income recorded on franchisee loans was approximately $2.1 million in 2020, $800,000 in 2019 and $750,000 in 2018 and is reported in Investment income in the accompanying Consolidated Statements of Operations.
See Recent Accounting Pronouncements for information regarding the adoption and related accounting impact of ASU 2016-13, “Credit Losses”, which was effective December 30, 2019.
Inventories
Inventories, which consist of food products, paper goods and supplies, smallwares, and printing and promotional items, are stated at the lower of cost, determined under the first-in, first-out (FIFO) method, or net realizable value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (generally five to ten years for restaurant, commissary and other equipment, twenty to forty years for buildings and improvements, and five years for technology and communication assets). Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the respective leases, including the first renewal period (generally five to ten years).
Depreciation expense was $46.6 million in 2020, $45.9 million in 2019 and $45.6 million in 2018.
Deferred Costs
We capitalize certain information systems development and related costs that meet established criteria. Amounts capitalized, which are included in property and equipment, are amortized principally over periods not exceeding five years
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upon completion of the related information systems project. Total costs capitalized were approximately $3.3 million in 2020, $3.5 million in 2019 and $4.3 million in 2018. The unamortized information systems development costs approximated $10.5 million and $11.5 million as of December 27, 202025, 2022 and December 29, 2019,26, 2021, respectively.
Intangible Assets — Goodwill
We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Such tests are completed separately with respect to the goodwill of each of our reporting units, which includes our domestic Company-owned restaurants, United Kingdom (“PJUK”), China, and Preferred Marketing Solutions operations. We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist.
We elected to perform a qualitative assessment for our domestic Company-owned restaurants, PJUK, China, and Preferred Marketing Solutions operations in the fourth quarter of 2020. As a result of our qualitative analyses, we determined that it was more-likely-than-not that the fair values of our reporting units were greater than their carrying amounts. Subsequent to completing our goodwill impairment tests, no indicators of impairment were identified. See Note 12 for additional information.
Deferred Income Tax Accounts and Tax Reserves
We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax attribute carryforwards (e.g., net operating losses, capital losses, and foreign tax credits). The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.
Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures. See Note 18 for additional information.
Insurance Reserves
Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability, property, and health insurance coverage provided to our employees are funded by the Company up to certain retention levels under our retention programs. Retention limits generally range from $1,000 to $1.0 million.
Losses are accrued based upon undiscounted estimates of the liability for claims incurred and for events that have occurred but have not been reported using certain third-party actuarial projections and our claims loss experience. The determination of the recorded insurance reserves is highly judgmental and complex due to the significant uncertainty in the potential value of reported claims and the number and potential value of incurred but not reported claims, the application of significant judgment in making those estimates and the use of various actuarial valuation methods. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims differ significantly from historical trends used to estimate the insurance reserves recorded by the Company. The Company records estimated losses above retention within its reserve with a corresponding receivable for expected amounts due from insurance carriers.
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We recognize all derivatives on the balance sheet at fair value. At inception and on an ongoing basis, we assess whether each derivative that qualifies for hedge accounting continues to be highly effective in offsetting changes in the cash flows of the hedged item. If the derivative meets the hedge criteria as defined by certain accounting standards, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income/(loss) until the hedged item is recognized in earnings.
In 2019, we reduced2021, our interest rate swaps were de-designated as cash flow hedges following the notional valueissuance of our swaps by $50.0 millionthe Notes (as defined in “Note 12. Debt”) and remained undesignated as a resulthedges through June 26, 2022. For
Wederivative instruments previously recognized (loss) income of ($7.5) million (($5.8) million after tax) in 2020, ($10.8) million (($8.3) million after tax) in 2019, and $4.3 million ($3.2 million after tax) in 2018 inaccumulated other comprehensive loss for(“AOCL”) will be reclassified into earnings as adjustments to interest expense on a straight-line basis over the net changeremaining life of the originally hedged transactions.
any unrealized gains or losses are included in AOCL and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings.
At
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See Notes 10 and 11 “Note 9. Noncontrolling Interests”for additional information regarding noncontrolling interests and divestitures.
interests.
Financial Instruments – Credit Losses
The Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”) as of December 30, 2019 (the first day of fiscal 2020) under the modified retrospective transition method. Topic 326 requires measurement and recognition of expected versus incurred losses for financial assets held. Financial instruments subject to ASU 2016-13 include trade accounts receivable, notes receivable
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and interest receivable (classified as Other assets in the Consolidated Balance Sheets) from franchisees. The impact of the adoption was not material to our consolidated financial statements.
Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors. Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer. Accounts and notes receivable balances are charged off against the allowance for credit losses after recovery efforts have ceased.
The following table summarizes changes in our allowances for credit losses for accounts receivable, notes receivable and interest receivable:
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(in thousands) | | Accounts Receivable | | Notes Receivable | | Interest Receivable | |||
Balance at December 29, 2019 | | $ | 7,341 | | $ | 3,572 | | $ | 910 |
Cumulative effect of adoption of ASU 2016-13 | | | 912 | | | 463 | | | — |
Balance at December 30, 2019 | | | 8,253 | | | 4,035 | | | 910 |
Current period (credit) provision for expected credit losses | | | (3,843) | | | (191) | | | 144 |
Write-offs charged against the allowance | | | (788) | | | (843) | | | — |
Recoveries collected | | | — | | | (844) | | | — |
Transfers | | | — | | | 1,054 | | | (1,054) |
Balance at December 27, 2020 | | $ | 3,622 | | $ | 3,211 | | $ | — |
Reference Rate Reform – Hedging
In March 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying guidance on contract modifications and hedge accounting related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates if certain criteria are met. This guidance was effective beginning on March 12, 2020, and the Company may elect to apply the amendments could be applied prospectively through December 31, 2022. The hedge accounting expedients may be applied, on an individual hedging relationship basis, to eligible hedge accounting relationships that existed as of the beginning of the effective date of this guidance, and to new eligible hedging relationships entered into after the effective date of this guidance; however, those expedients generally cannotcould not be applied to hedging relationships for periods after December 31, 2022. The FASB issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848,” which deferred the sunset date from December 31, 2022 to December 31, 2024. The Company adopted certain optional hedge accounting expedients provided by ASU 2020-04 during fiscal 2020. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
Accounting Standards to be Adopted in Future Periods
Convertible Instruments
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This ASU amends FASB’s guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share (“EPS”) guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2021 and interim periods therein, with early adoption permitted. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.
Reclassifications
Certain prior year amounts in the Consolidated Balance Sheet and Consolidated Statement of Cash Flows have been reclassified to conform to the current year presentation.
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Domestic Company-owned restaurants | Five years, plus at least | |||||||
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Domestic commissary locations | 10 years, plus at least | |||||||
Domestic and | Five to seven years | |||||||
Domestic and | Three to five years |
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| | | | | December 27, | | | December 29, |
Leases | | Classification | | | 2020 | | | 2019 |
Assets | | | | | | | | |
Finance lease assets, net | | Finance lease right-of-use assets, net | | $ | 16,840 | | $ | 9,383 |
Operating lease assets, net | | Operating lease right-of-use assets | | | 148,110 | | | 148,229 |
Total lease assets | | | | $ | 164,950 | | $ | 157,612 |
Liabilities | | | | | | | | |
Current finance lease liabilities | | Current finance lease liabilities | | $ | 3,545 | | $ | 1,789 |
Current operating lease liabilities | | Current operating lease liabilities | | | 23,538 | | | 23,226 |
Noncurrent finance lease liabilities | | Long-term finance lease liabilities | | | 13,531 | | | 7,629 |
Noncurrent operating lease liabilities | | Long-term operating lease liabilities | | | 124,666 | | | 125,297 |
Total lease liabilities | | | | $ | 165,280 | | $ | 157,941 |
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Leases | Classification | December 25, 2022 | December 26, 2021 | |||||||||||||||||
Assets | ||||||||||||||||||||
Finance lease assets, net | Finance lease right-of-use assets, net | $ | 24,941 | $ | 20,907 | |||||||||||||||
Operating lease assets, net | Operating lease right-of-use assets | 172,425 | 176,256 | |||||||||||||||||
Total lease assets | $ | 197,366 | $ | 197,163 | ||||||||||||||||
Liabilities | ||||||||||||||||||||
Current finance lease liabilities | Current finance lease liabilities | $ | 6,850 | $ | 4,977 | |||||||||||||||
Current operating lease liabilities | Current operating lease liabilities | 23,418 | 22,543 | |||||||||||||||||
Noncurrent finance lease liabilities | Long-term finance lease liabilities | 19,022 | 16,580 | |||||||||||||||||
Noncurrent operating lease liabilities | Long-term operating lease liabilities | 160,905 | 160,672 | |||||||||||||||||
Total lease liabilities | $ | 210,195 | $ | 204,772 |
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease expense is comprised of operating and finance lease costs, short-term lease costs, and variable lease costs, which primarily include common area maintenance, real estate taxes, and insurance for the Company’s real estate leases.
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(in thousands) | | | December 27, 2020 | | | December 29, 2019 |
Finance lease: | | | | | | |
Amortization of right-of-use assets | | $ | 2,342 | | $ | 815 |
Interest on lease liabilities | | | 606 | | | 251 |
Operating lease: | | | | | | |
Operating lease cost | | | 40,026 | | | 42,487 |
Short-term lease cost | | | 3,960 | | | 2,704 |
Variable lease cost | | | 6,503 | | | 9,558 |
Total lease costs | | $ | 53,437 | | $ | 55,815 |
Sublease income | | | (10,407) | | | (10,879) |
Total lease costs, net of sublease income | | $ | 43,030 | | $ | 44,936 |
follows (in thousands):
Year Ended December 25, 2022 | Year Ended December 26, 2021 | Year Ended December 27, 2020 | ||||||||||||||||||
Finance lease: | ||||||||||||||||||||
Amortization of right-of-use assets | $ | 5,704 | $ | 4,980 | $ | 2,342 | ||||||||||||||
Interest on lease liabilities | 1,029 | 1,140 | 606 | |||||||||||||||||
Operating lease: | ||||||||||||||||||||
Operating lease cost | 42,815 | 43,072 | 40,026 | |||||||||||||||||
Short-term lease cost | 4,171 | 2,032 | 3,960 | |||||||||||||||||
Variable lease cost | 9,129 | 8,572 | 6,503 | |||||||||||||||||
Total lease costs | 62,848 | 59,796 | 53,437 | |||||||||||||||||
Sublease income | (11,654) | (12,039) | (10,407) | |||||||||||||||||
Total lease costs, net of sublease income | $ | 51,194 | $ | 47,757 | $ | 43,030 |
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Fiscal Year | | Finance | | Operating | | Expected | |||
2021 | | $ | 4,348 | | $ | 32,456 | | $ | 10,246 |
2022 | | | 4,344 | | | 31,973 | | | 10,073 |
2023 | | | 4,338 | | | 26,251 | | | 9,778 |
2024 | | | 3,361 | | | 21,730 | | | 9,534 |
2025 | | | 1,731 | | | 17,342 | | | 9,057 |
Thereafter | | | 1,054 | | | 61,024 | | | 46,642 |
Total future minimum lease payments | | | 19,176 | | | 190,776 | | | 95,330 |
Less imputed interest | | | (2,100) | | | (42,572) | | | — |
Total present value of lease liabilities (a) | | $ | 17,076 | | $ | 148,204 | | $ | 95,330 |
Fiscal Year | Finance Lease Costs | Operating Lease Costs | Expected Sublease Income | |||||||||||||||||
2023 | $ | 7,849 | $ | 32,860 | $ | 10,303 | ||||||||||||||
2024 | 6,801 | 32,267 | 10,371 | |||||||||||||||||
2025 | 5,171 | 30,695 | 9,952 | |||||||||||||||||
2026 | 4,125 | 26,973 | 9,251 | |||||||||||||||||
2027 | 2,971 | 21,568 | 8,523 | |||||||||||||||||
Thereafter | 1,440 | 92,002 | 42,089 | |||||||||||||||||
Total future minimum lease payments | 28,357 | 236,365 | 90,489 | |||||||||||||||||
Less imputed interest | (2,485) | (52,042) | — | |||||||||||||||||
Total present value of lease liabilities | $ | 25,872 | $ | 184,323 | $ | 90,489 |
Lessor Operating Leases
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Supplemental
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(in thousands) | | | December 27, 2020 | | | December 29, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from finance leases | | $ | 606 | | $ | 269 |
Financing cash flows from finance leases | | | 2,139 | | | 781 |
Operating cash flows from operating leases (a) | | | 37,113 | | | 40,152 |
Right-of-use assets obtained in exchange for new finance lease liabilities | | | 9,152 | | | 10,199 |
Right-of-use assets obtained in exchange for new operating lease liabilities | | | 30,266 | | | 20,903 |
Cash received from sublease income | | | 10,545 | | | 10,139 |
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Weighted-average remaining lease term (in years): | | | | | | |
Finance leases | | | 4.71 | | | 4.75 |
Operating leases | | | 7.00 | | | 7.00 |
Weighted-average discount rate: | | | | | | |
Finance leases | | | 5.34% | | | 6.38% |
Operating leases | | | 6.65% | | | 6.94% |
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(a) Included within the change in Other assets and liabilities within the Consolidated Statements of Cash Flows offset by non-cash operating lease right-of-use asset amortization and lease liability accretion. |
(Dollars in thousands) | Year Ended | |||||||||||||||||||
December 25, 2022 | December 26, 2021 | December 27, 2020 | ||||||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||
Operating cash flows from finance leases | $ | 1,029 | $ | 1,140 | $ | 606 | ||||||||||||||
Financing cash flows from finance leases | $ | 5,416 | $ | 4,566 | $ | 2,139 | ||||||||||||||
Operating cash flows from operating leases (a) | $ | 35,573 | $ | 38,530 | $ | 37,113 | ||||||||||||||
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 9,875 | $ | 9,486 | $ | 9,152 | ||||||||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities (b) | $ | 53,869 | $ | 64,420 | $ | 30,266 | ||||||||||||||
Cash received from sublease income | $ | 10,847 | $ | 11,597 | $ | 10,545 | ||||||||||||||
Weighted-average remaining lease term (in years): | ||||||||||||||||||||
Finance leases | 4.43 | 4.51 | 4.71 | |||||||||||||||||
Operating leases | 8.44 | 8.30 | 7.00 | |||||||||||||||||
Weighted-average discount rate: | ||||||||||||||||||||
Finance leases | 4.59% | 5.08% | 5.34% | |||||||||||||||||
Operating leases | 5.63% | 6.20% | 6.65% |
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| | December 27, | | December 29, | | | ||
| | 2020 | | 2019 | | | ||
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Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 9,394 | | $ | 4,569 | | |
Accounts receivable, net | | | 23,711 | | | 11,196 | | |
Income tax receivable | | | 192 | | | 103 | | |
Prepaid expenses and other current assets | | | 1,914 | | | 1,316 | | |
Total current assets | | | 35,211 | | | 17,184 | | |
Deferred income taxes, net | | | 588 | | | 410 | | |
Total assets | | $ | 35,799 | | $ | 17,594 | | |
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Liabilities | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 5,429 | | $ | 764 | | |
Income and other taxes payable | | | 2 | | | - | | |
Accrued expenses and other current liabilities | | | 32,578 | | | 14,287 | | |
Current deferred revenue | | | 3,938 | | | 3,252 | | |
Total current liabilities | | | 41,947 | | | 18,303 | | |
Deferred revenue | | | 2,419 | | | 2,094 | | |
Total liabilities | | $ | 44,366 | | $ | 20,397 | | |
December 25, 2022 | December 26, 2021 | |||||||||||||
Assets | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 17,174 | $ | 24,481 | ||||||||||
Accounts receivable, net | 14,780 | 14,150 | ||||||||||||
Income tax receivable | — | 300 | ||||||||||||
Prepaid expenses and other current assets | 1,815 | 1,718 | ||||||||||||
Total current assets | 33,769 | 40,649 | ||||||||||||
Deferred income taxes | 655 | 614 | ||||||||||||
Total assets | $ | 34,424 | $ | 41,263 | ||||||||||
Liabilities | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | 12,428 | $ | 140 | ||||||||||
Income and other taxes payable | 8 | 2 | ||||||||||||
Accrued expenses and other current liabilities | 17,928 | 40,154 | ||||||||||||
Current deferred revenue | 4,395 | 4,317 | ||||||||||||
Total current liabilities | 34,759 | 44,613 | ||||||||||||
Deferred revenue | 2,503 | 2,478 | ||||||||||||
Total liabilities | $ | 37,262 | $ | 47,091 |
| | | | | | | | | |
| | Contract Liabilities | |||||||
| | | December 27, 2020 | | | December 29, 2019 | | | Change |
Franchise fees and unredeemed gift cards | | $ | 19,890 | | $ | 20,346 | | $ | (456) |
Customer loyalty program | | | 13,364 | | | 12,049 | | | 1,315 |
Total contract liabilities | | $ | 33,254 | | $ | 32,395 | | $ | 859 |
69
Contract Liabilities | ||||||||||||||||||||
December 25, 2022 | December 26, 2021 | Change | ||||||||||||||||||
Franchise fees and unredeemed gift card liabilities | $ | 30,710 | $ | 20,410 | $ | 10,300 | ||||||||||||||
Customer loyalty program obligations | 13,766 | 15,136 | (1,370) | |||||||||||||||||
Total contract liabilities | $ | 44,476 | $ | 35,546 | $ | 8,930 |
Our contract assets consist primarily of equipment incentives provided to franchisees. Equipment incentives are related to the future value of commissary revenue the Company will receive over the term of the incentive agreement. As of December 27, 202025, 2022 and December 29, 2019,26, 2021, the contract assets were approximately $5.1$4.5 million and $6.0$5.8 million, respectively. For the years ended December 27, 202025, 2022 and December 29, 2019, respectively,26, 2021, revenue was reduced approximately $3.2$3.4 million and $3.5$3.0 million, respectively, for the amortization of contract assets over the applicable contract terms. Contract assets are included in Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | | | | | |
| | | Performance Obligations by Period | ||||||||||||||||||
| | Less than 1 Year | | 1-2 Years | | 2-3 Years | | 3-4 Years | | 4-5 Years | | Thereafter | | Total | |||||||
Franchise fees | | $ | 2,288 | | $ | 2,090 | | $ | 1,822 | | $ | 1,591 | | $ | 1,352 | | $ | 2,857 | | $ | 12,000 |
Performance Obligations by Period | |||||||||||||||||||||||||||||||||||||||||
Less than 1 Year | 1-2 Years | 2-3 Years | 3-4 Years | 4-5 Years | Thereafter | Total | |||||||||||||||||||||||||||||||||||
Franchise fees | $ | 3,098 | $ | 2,927 | $ | 2,755 | $ | 2,524 | $ | 2,210 | $ | 7,120 | $ | 20,634 |
|
|
Shares Authorized and Outstanding
26, 2021.
Our
The Company repurchased 2.7 million shares for $158.0 million in 2018, which were funded through a credit facility, operating cash flow, stock option exercises,years ended December 25, 2022, December 26, 2021 and cash and cash equivalents. There were 0 share repurchases during fiscal 2019.
December 27, 2020, respectively:
(In thousands, except average price per share) Year Ended | Total Number of Shares Purchased | Average Price Paid per Share | Aggregate Cost of Shares Purchased | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
December 25, 2022 | 1,343 | $ | 93.07 | $ | 125,000 | $ | 299,800 | |||||||||||||||||||
December 26, 2021 | 594 | $ | 121.96 | $ | 72,499 | $ | 424,800 | |||||||||||||||||||
December 27, 2020 | 32 | $ | 83.90 | $ | 2,701 | $ | 72,299 |
16, 2023.
70
under the Company’s share repurchase programprograms may be commenced or suspended from time to time at the Company’s discretion without prior notice. Funding for the share repurchase programprograms will be provided through our credit facility, operating cash flow, stock option exercises and cash and cash equivalents.
on Common Stock
The Company paid common stock dividends of $28.6 million and $29.0 million in 2019 and 2018, respectively. Additionally, the Company paid common stock “pass-through” dividends to Series B Preferred Stockholders of $4.3 million and $5.7 million in preferred dividends on the Series B Preferred Stock in 2019. There were 0 dividends to holders of Series B Preferred stock in 2018.
7. Series B Convertible Preferred Stock
The initial dividend rate on the Series B Preferred Stock is 3.6% per annum of the stated value of $1,000 per share (the “Stated Value”), payable quarterly in arrears. On the third anniversary of the date of issuance, each holder of Series B Preferred Stock will have the right to increase the dividend on theremaining 171,613 shares of Series B Preferred Stock to 5.6%, and on the fifth anniversarythat it owned into 3,458,360 shares of the dateCompany’s common stock pursuant to the terms of issuance, each holder will have the rightCertificate of Designation of the Series B Preferred Stock. On June 3, 2021, the Company entered into agreements with certain franchisee investors to increaserepurchase 1,000 shares of the dividend onoutstanding Series B Preferred Stock and convert the remaining 1,530 shares of Series B Preferred Stock to 7.6%, subject in each case tointo 30,769 shares of common stock. The Company paid Starboard and the Company’s right to redeem some orfranchisee investors aggregate one-time cash payments of $188.6 million for the repurchase and conversion of all of suchthe outstanding shares of Series B Preferred Stock for cash.Stock. The excess of the cash payment over the carrying value of the respective Series B Preferred Stock also participatesredeemed resulted in $109.9 million of dividends on an as-converted basis in any regular or special dividends paid to common stockholders. If at any time, the Company reduces the regular dividend paid to common stockholders, the Series B Preferred Stock dividend will remain the same as if the common stock dividend had not been reduced.
The Series B Preferred Stock is convertible at the option of the holders at any time into shares of common stock based on the conversion rate determined by dividing the Stated Value by $50.06. The Series B Preferred Stock is redeemable for cash at the option of either party from and after the eight-year anniversary of issuance, subject to certain conditions. Holders of the Series B Preferred Stock also have the right, subject to certain exceptions, to require us to repurchase all or any portion of the Series B Preferred Stock upon certain change of control events.
71
Holders of the Series B Preferred Stock have the right to vote with common stockholders on an as-converted basis on all matters, without regard to limitations on conversion other than the Exchange Cap, which is equal to the issuance of greater than 19.99% of the number of shares of common stock outstanding, and subject to certain limitations in the Certificate of Designation for the Series B Preferred Stock.
Upon consummation of a change of control of the Company, the holdersredemption of Series B Preferred Stock havein the rightConsolidated Statement of Operations, which reduced net income attributable to requirecommon stockholders and also reduced diluted earnings per share by $3.10 for the year ended December 26, 2021.
Since the holders have the option to redeem theirconversion, there were no shares of Series B Preferred Stock from and after the eight-year anniversary of issuance, which mayauthorized or may not be exercised, the stock is considered contingently redeemable and, accordingly, is classified as temporary equity of $251.9 million on the Consolidated Balance Sheet as ofoutstanding at December 27, 2020. This amount is reported net of $7.5 million of related issuance costs. In accordance with applicable accounting guidance, the Company also recorded a one-time mark-to-market temporary equity adjustment of $5.9 million in 2019 for the increase in fair value for both the $50.0 million option exercised by Starboard and the shares purchased by franchisees for the period of time the option was outstanding. The mark-to-market temporary equity adjustment was recorded in General and administrative expenses for $5.6 million (Starboard) and as a reduction to North America franchise royalties and fees of $0.3 million (Franchisees) within the Consolidated Statement of Operations in 2019 with no associated tax benefit. Over the initial eight-year term, the $251.9 million investment will be accreted to the related redemption value of approximately $252.5 million as an adjustment to Retained Earnings.
25, 2022 or December 26, 2021.
| | | |
Balance at December 30, 2018 | | $ | — |
Issuance of preferred stock | | | 252,530 |
One-time mark-to-market adjustment | | | 5,914 |
Issuance costs | | | (7,527) |
Accretion | | | 216 |
Balance at December 29, 2019 | | $ | 251,133 |
Tax deduction on issuance costs | | | 702 |
Accretion | | | 66 |
Balance at December 27, 2020 | | $ | 251,901 |
72
Balance at December 27, 2020 | $ | 251,901 | |||
Accretion | 629 | ||||
Redemption | (252,530) | ||||
Balance at December 26, 2021 | $ | — |
2022 | 2021 | 2020 | ||||||||||||||||||
Basic earnings per common share | ||||||||||||||||||||
Net income attributable to the Company | $ | 67,772 | $ | 120,016 | $ | 57,932 | ||||||||||||||
Dividends on redemption of Series B Convertible Preferred Stock | — | (109,852) | — | |||||||||||||||||
Dividends paid to participating securities | (306) | (6,091) | (14,059) | |||||||||||||||||
Net income attributable to participating securities | (104) | — | (2,136) | |||||||||||||||||
Net income attributable to common shareholders | $ | 67,362 | $ | 4,073 | $ | 41,737 | ||||||||||||||
Basic weighted average common shares outstanding | 35,497 | 35,007 | 32,421 | |||||||||||||||||
Basic earnings per common share | $ | 1.90 | $ | 0.12 | $ | 1.29 | ||||||||||||||
Diluted earnings per common share | ||||||||||||||||||||
Net income attributable to common shareholders | $ | 67,362 | $ | 4,073 | $ | 41,737 | ||||||||||||||
Weighted average common shares outstanding | 35,497 | 35,007 | 32,421 | |||||||||||||||||
Dilutive effect of outstanding equity awards (a) | 220 | 330 | 296 | |||||||||||||||||
Diluted weighted average common shares outstanding (b) | 35,717 | 35,337 | 32,717 | |||||||||||||||||
Diluted earnings per common share | $ | 1.89 | $ | 0.12 | $ | 1.28 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| 2020 | | 2019 |
| 2018 | |||
| | | | | | | | |
Basic earnings (loss) per common share | | | | | | | | |
Net income attributable to the Company | $ | 57,932 | | $ | 4,866 | | $ | 2,474 |
Dividends paid to participating securities and accretion | | (14,059) | | | (12,499) | | | — |
Net income attributable to participating securities |
| (2,136) | |
| — | |
| — |
Net income (loss) attributable to common shareholders | $ | 41,737 | | $ | (7,633) | | $ | 2,474 |
| | | | | | | | |
Basic weighted average common shares outstanding |
| 32,421 | |
| 31,632 | |
| 32,083 |
Basic earnings (loss) per common share | $ | 1.29 | | $ | (0.24) | | $ | 0.08 |
| | | | | | | | |
Diluted earnings (loss) per common share | | | | | | | | |
Net income (loss) attributable to common shareholders | $ | 41,737 | | $ | (7,633) | | $ | 2,474 |
| | | | | | | | |
Weighted average common shares outstanding |
| 32,421 | |
| 31,632 | |
| 32,083 |
Dilutive effect of outstanding equity awards (a) |
| 296 | |
| — | |
| 216 |
Diluted weighted average common shares outstanding (b) |
| 32,717 | |
| 31,632 | |
| 32,299 |
Diluted earnings (loss) per common share | $ | 1.28 | | $ | (0.24) | | $ | 0.08 |
Shares subject to options to purchase common stock with an exercise price greater than the average market price for the year were not included in the computation of diluted earnings per common share because the effect would have been antidilutive. The weighted average number of shares subject to antidilutive options was 100,000 in 2020 (none in 2022 or 2021).
73
Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Carrying Value | Fair Value Measurements | |||||||||||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
December 25, 2022 | ||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||
Cash surrender value of life insurance policies (a) | $ | 30,120 | $ | 30,120 | $ | — | $ | — | ||||||||||||||||||
Interest rate swaps (b) | $ | 986 | $ | — | $ | 986 | $ | — | ||||||||||||||||||
December 26, 2021 | ||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||
Cash surrender value of life insurance policies (a) | $ | 41,904 | $ | 41,904 | $ | — | $ | — | ||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||
Interest rate swaps (b) | $ | 5,536 | $ | — | $ | 5,536 | $ | — |
| | | | | | | | | | | | | |
| | Carrying | | Fair Value Measurements |
| ||||||||
|
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
December 27, 2020 | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | |
Cash surrender value of life insurance policies (a) | | $ | 37,578 | | $ | 37,578 | | $ | — | | $ | — | |
| | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | |
Interest rate swaps (b) | |
| 13,452 | |
| — | |
| 13,452 | |
| — | |
| | | | | | | | | | | | | |
December 29, 2019 | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | |
Cash surrender value of life insurance policies (a) | | $ | 33,220 | | $ | 33,220 | | $ | — | | $ | — | |
| | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | |
Interest rate swaps (b) | |
| 6,168 | |
| — | |
| 6,168 | |
| — | |
There were 0no transfers among levels within the fair value hierarchy during fiscal 20202022 or 2019.
74
December 25, 2022 | December 26, 2021 | |||||||||||||||||||||||||
(in thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||||
3.875% Senior Notes | $ | 400,000 | $ | 339,500 | $ | 400,000 | $ | 396,000 |
10. Noncontrolling Interests
Papa John’s has 4December 25, 2022, the Company had three joint venture arrangements in which there are noncontrolling interests held by third parties. Thesecomprising 98 restaurants as compared to four joint venture arrangements includecomprising 188 restaurants and 192 restaurants at December 27, 2020 and December 29, 2019 respectively. 26, 2021. As further described in “Note 22. Divestitures,” the Company divested its 51 percent interest in one joint venture that owned 90 restaurants in the second quarter of 2022.
| | | | | | | | | | | |
| | | | | | | | | | ||
|
| 2020 |
| 2019 |
| 2018 | | | |||
| | | | | | | | | | | |
Papa John’s International, Inc. | | $ | 5,654 | | $ | 2,560 | | $ | 5,794 | | |
Noncontrolling interests | |
| 2,682 | |
| 791 | |
| 1,599 | | |
Total net income | | $ | 8,336 | | $ | 3,351 | | $ | 7,393 | | |
As of December 27, 2020, the noncontrolling interest holder of 2 joint ventures have the option to require the Company to purchase their interest, though not currently redeemable. Since redemption of the noncontrolling interests is outside of the Company’s control, the noncontrolling interests are presented in the caption “Redeemable noncontrolling interests” in the Consolidated Balance Sheets.
2022 | 2021 | 2020 | ||||||||||||||||||
Papa John’s International, Inc. | $ | 3,136 | $ | 8,457 | $ | 5,654 | ||||||||||||||
Noncontrolling interests | 1,577 | 4,939 | 2,682 | |||||||||||||||||
Total net income | $ | 4,713 | $ | 13,396 | $ | 8,336 |
Balance at December 27, 2020 | $ | 6,474 | |||
Net income | 2,609 | ||||
Distributions | (3,585) | ||||
Balance at December 26, 2021 | $ | 5,498 | |||
Net income | 574 | ||||
Distributions | (4,855) | ||||
Balance at December 25, 2022 | $ | 1,217 |
| | | | |
Balance at December 30, 2018 |
| $ | 5,464 |
|
Net loss | |
| (519) | |
Contributions | | | 840 | |
Balance at December 29, 2019 |
| $ | 5,785 |
|
Net income | | | 824 | |
Distributions | |
| (135) | |
Balance at December 27, 2020 | | $ | 6,474 | |
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
11. Divestitures
In,” (“ASU 2016-13”) as of December 30, 2019 (the first day of fiscal 2020) under the fourth quartermodified retrospective transition method. Topic 326 requires measurement and recognition of 2019, the Company completed the refranchising of 23 Company-owned restaurantsexpected versus incurred losses for financial assets held. Financial instruments subject to Topic 326 include trade accounts receivable, notes receivable and interest receivable (classified as Other assets in South Florida for $7.5 million in cash proceeds. The sale resulted in a pre-tax gain of $2.9 million shown in Refranchising gains (losses), net on the Consolidated Statement of Operations. In connection with the divestiture, we wrote off an allocationBalance Sheets) from franchisees. The impact of the goodwill relatedadoption was not material to our consolidated financial statements.
In the third quarter of 2019, the Company refranchised 19 Company-owned restaurants in Macon, Georgiaour allowances for $5.6 million in cash proceeds. The sale resulted in a pre-tax gain of $1.7 million shown in Refranchising gains (losses), net on the Consolidated Statement of Operations. In connection with the divestiture, we wrote off an allocation of the goodwill related to the domestic Company-owned restaurants reporting unit of $2.0 million, which represents the pro rata fair value of the refranchised restaurants in comparison to the total fair value of the Company-owned restaurants reporting unit.
In the third quarter of 2018, the Company completed the refranchising of 31 stores owned through a joint venture in the Minneapolis, Minnesota market. The Company held a 70% ownership share in the restaurants being refranchised. Total considerationcredit losses for the asset sale of the restaurants was $3.75 million. In connection with the divestiture, we wrote off an allocation of the goodwill related to the domestic Company-owned restaurants reporting unit by approximately $600,000, which represents the pro rata fair value of the refranchised restaurants in comparison to the total fair value of the Company-owned restaurants’ reporting unit. We recorded a pre-tax refranchising gain of approximately $930,000 associated with the sale of the restaurants.
(In thousands) | Accounts Receivable | Notes Receivable | ||||||||||||||||||
Balance at December 27, 2020 | $ | 3,622 | $ | 3,211 | ||||||||||||||||
Current period provision (benefit) for expected credit losses | 16 | (583) | ||||||||||||||||||
Write-offs charged against the allowance | (1,274) | (843) | ||||||||||||||||||
Recoveries collected | — | (285) | ||||||||||||||||||
Balance at December 26, 2021 | $ | 2,364 | $ | 1,500 | ||||||||||||||||
Current period provision for expected credit losses (a) | 6,474 | 14,066 | ||||||||||||||||||
Write-offs charged against the allowance | (2,120) | (1,042) | ||||||||||||||||||
Recoveries collected | — | (25) | ||||||||||||||||||
Balance at December 25, 2022 | $ | 6,718 | $ | 14,499 |
75
In the second quarter of 2018, the Company refranchised 34 Company-owned restaurants and a quality control center located in Beijing and Tianjin, China. The Company recorded an impairment of $1.7 million in 2017 associated with the China operations. We recorded a pre-tax loss of approximately $1.9 million associated with the sale of the restaurants and reversed $1.3$14.6 million of accumulated other comprehensive income related to foreign currency translation as part of the disposal. The $1.9 million pre-tax lossone-time, non-cash reserves in 2018 and impairment recorded in 2017 are recorded in refranchising and impairment gains (losses), net on the Consolidated Statements of Operations. In addition, we also had $2.4 million of additional tax expense associated with the China refranchise in the second quarter of 2018. This additional tax expense is primarily attributable to the required recapture of operating losses previously taken by the Company.
In the first quarter of 2018, the2022 for certain accounts receivable and notes receivable primarily associated with a master franchisee with operations principally in Russia. The Company refranchised 31 restaurants owned through a joint venturerecorded $3.7 million of one-time, non-cash reserves in the Denver, Colorado market. The Company held a 60% ownership sharesecond half of 2022 for certain accounts receivable and notes receivable primarily associated with the termination of significant franchisees in the restaurants being refranchised. The noncontrolling interest portionUK.
In connection with the divestiture, we wrote off an allocation of the goodwill related to the domestic Company-owned restaurants reporting unit of $700,000, which represents the pro rata fair value of the refranchised restaurants in comparison to the total fair value of the Company-owned restaurants’ reporting unit. We recorded a pre-tax refranchising gain of approximately $690,000.
12.
| | | | | | | | | | | | | |
| | | | | | | | |
| ||||
| | Domestic Company- owned Restaurants | | International (a) | | All Others | | Total |
| ||||
| | | | | | | | | | | | | |
Balance as of December 30, 2018 | | $ | 68,689 | | $ | 15,391 | | $ | 436 | | $ | 84,516 | |
Divestitures (b) | | | (4,435) | | | — | | | — | | | (4,435) | |
Foreign currency adjustments | |
| — | |
| 259 | |
| — | |
| 259 | |
Balance as of December 29, 2019 | | | 64,254 | | | 15,650 | | | 436 | | | 80,340 | |
Foreign currency adjustments | |
| — | |
| 451 | | | — | |
| 451 | |
Balance as of December 27, 2020 | | $ | 64,254 | | $ | 16,101 | | $ | 436 | | $ | 80,791 | |
Domestic Company- owned Restaurants | International (a) | All Others | Total | |||||||||||||||||||||||
Balance at December 27, 2020 | $ | 64,254 | $ | 16,101 | $ | 436 | $ | 80,791 | ||||||||||||||||||
Foreign currency adjustments | — | (159) | — | (159) | ||||||||||||||||||||||
Balance at December 26, 2021 | $ | 64,254 | $ | 15,942 | $ | 436 | $ | 80,632 | ||||||||||||||||||
Acquisitions (b) | 1,161 | — | — | 1,161 | ||||||||||||||||||||||
Divestitures (c) | (9,908) | — | — | (9,908) | ||||||||||||||||||||||
Foreign currency adjustments | — | (1,269) | — | (1,269) | ||||||||||||||||||||||
Balance at December 25, 2022 | $ | 55,507 | $ | 14,673 | $ | 436 | $ | 70,616 |
76
13. Debt
Long-term debt, net consists of the following (in thousands):
| | | | | | | |
| | | | December 27, | | | December 29, |
| | | | 2020 | | | 2019 |
Outstanding debt | | | $ | 350,000 | | $ | 370,000 |
Unamortized debt issuance costs | | | | (1,708) | | | (2,710) |
Current portion of long-term debt | | | | (20,000) | | | (20,000) |
Total long-term debt, net | | | $ | 328,292 | | $ | 347,290 |
December 25, 2022 | December 26, 2021 | |||||||||||||
Senior notes | $ | 400,000 | $ | 400,000 | ||||||||||
Revolving facilities | 205,000 | 90,000 | ||||||||||||
Outstanding debt | 605,000 | 490,000 | ||||||||||||
Unamortized debt issuance costs | (7,931) | (9,270) | ||||||||||||
Total long-term debt, net | $ | 597,069 | $ | 480,730 |
interest rate on floating interest rate borrowings.
The PJIAmended Credit Agreement contains customary affirmative and negative covenants includingthat, among other things, require customary reporting obligations, and restrict, subject to certain exceptions, the incurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates. The Company is subject to the following financial covenants requiring the maintenance of the Leverage Ratio andcovenants: (1) a specified fixed charge coverage ratio. The PJI Credit Agreement allows for a permittedmaximum Leverage Ratio of 4.755.25 to 1.0, decreasing over time1.00, subject to 4.00the Company’s election to 1.0increase the maximum Leverage Ratio by 2022;0.50 to 1.00 in connection with material acquisitions if the Company satisfies certain requirements, and (2) a fixed chargeminimum interest coverage ratio defined as Consolidated EBITDA (as defined in our credit agreement) plus consolidated rental expense to consolidated interest expense plus consolidated rental expense of 2.252.00 to 1.0, which increases to 2.50 to 1.0 in 2021 and thereafter.1.00. We were in compliance with these financial covenants at December 27, 2020.
25, 2022.
Under
Our outstanding debt of $350.0 million at December 27, 2020 under the PJI Facilities was composed of $340.0 million outstanding under the Term Loan Facility and $10.0 million outstanding under the Revolving Facility. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at December 27, 2020 was approximately $344.2 million.
As of December 27, 2020, the Company had approximately $1.7 million in unamortized debt issuance costs, which are being amortized into interest expense over the termtermination of the PJI Facilities.
We attempt to minimize interest rate risk exposureRevolving Facility, acceleration of repayment obligations and the exercise of remedies by fixing our rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered intoLenders with financial institutions that participate in the PJI Credit Agreement. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk duerespect to the possible failure of the counterparty to perform under the terms of the derivative contract.
We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities.
77
As of December 27, 2020, we have the following interest rate swap agreements with a total notional value of $350.0 million:
| | | | | | | |
Effective Dates |
| Floating Rate Debt |
| Fixed Rates |
| ||
April 30, 2018 through April 30, 2023 | | $ | 55 | million | | 2.33 | % |
April 30, 2018 through April 30, 2023 | | $ | 35 | million | | 2.36 | % |
April 30, 2018 through April 30, 2023 | | $ | 35 | million | | 2.34 | % |
January 30, 2018 through August 30, 2022 | | $ | 100 | million | | 1.99 | % |
January 30, 2018 through August 30, 2022 | | $ | 75 | million | | 1.99 | % |
January 30, 2018 through August 30, 2022 | | $ | 50 | million | | 2.00 | % |
The gain or loss on the swaps is recognized in Accumulated other comprehensive loss and reclassified into earnings as adjustments to interest expense in the same period or periods during which the swaps affect earnings. Gains or losses on the swaps representing hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The following table provides information on the location and amounts of our swaps in the accompanying Consolidated Financial Statements (in thousands):
| | | | | | |
| | Interest Rate Swap Derivatives | ||||
| | Fair Value | | Fair Value | ||
| | December 27, | | December 29, | ||
Balance Sheet Location | | 2020 | | 2019 | ||
Other current and long-term liabilities | | $ | 13,452 | | $ | 6,168 |
The effect of derivative instruments on the accompanying Consolidated Financial Statements is as follows (in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | | ||
| | | | Location of Gain | | Amount of Gain | | | ||||
Derivatives - | | Amount of Gain or | | or (Loss) | | or (Loss) | | Total Interest Expense | ||||
Cash Flow | | (Loss) Recognized | | Reclassified from | | Reclassified from | | on Consolidated | ||||
Hedging | | in AOCL | | AOCL into | | AOCL into | | Statements of | ||||
Relationships | | on Derivative | | Income | | Income | | Operations | ||||
Interest rate swaps: | | | | | | | | | | | | |
2020 | | $ | (5,788) | | | Interest expense | | $ | (5,068) | | $ | (17,022) |
2019 | | $ | (8,303) | | | Interest expense | | $ | 660 | | $ | (20,593) |
2018 | | $ | 3,222 | | | Interest expense | | $ | (22) | | $ | (25,673) |
| | | | | | | | | | | | |
The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 3.8%, 4.1%, and 3.9% in fiscal 2020, 2019, and 2018, respectively. Interest paid, including payments made or received under the swaps, was $15.8 million in 2020, $18.1 million in 2019, and $23.5 million in 2018. As of December 27, 2020, the portion of the aggregate $13.5 million interest rate swap liability that would be reclassified into interest expense during the next twelve months approximates $7.2 million.
PJMF has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 (as amended, the “PJMF Loan Agreement”) with U.S. Bank National Association, as lender. The PJMF Revolving Facility is
78
Effective Dates | Floating Rate Debt | Fixed Rates | ||||||||||||
April 30, 2018 through April 30, 2023 | $ | 55 | million | 2.33 | % | |||||||||
April 30, 2018 through April 30, 2023 | $ | 35 | million | 2.36 | % | |||||||||
April 30, 2018 through April 30, 2023 | $ | 35 | million | 2.34 | % |
Interest Rate Swap Derivatives | ||||||||||||||
Balance Sheet Location | Fair Value December 25, 2022 | Fair Value December 26, 2021 | ||||||||||||
Other current and long-term assets | $ | 986 | $ | — | ||||||||||
Other current and long-term liabilities | $ | — | $ | 5,536 |
Derivatives - Cash Flow Hedging Relationships | Amount of Gain or (Loss) Recognized in AOCL on Derivative | Location of (Loss) or Gain Reclassified from AOCL into Income | Amount of (Loss) or Gain Reclassified from AOCL into Income | Total Interest Expense on Consolidated Statements of Operations | ||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||||
2022 | $ | 3,663 | Interest expense | $ | (2,384) | $ | (26,653) | |||||||||||||||||||
2021 | $ | 5,273 | Interest expense | $ | (5,965) | $ | (19,205) | |||||||||||||||||||
2020 | $ | (5,788) | Interest expense | $ | (5,068) | $ | (17,022) |
| | | | | | | |
|
| December 27, |
| December 29, |
| ||
| | 2020 |
| 2019 | | ||
Land | | $ | 33,381 | | $ | 33,349 | |
Buildings and improvements | |
| 91,335 | |
| 91,514 | |
Leasehold improvements | |
| 123,167 | |
| 121,127 | |
Equipment and other | |
| 436,678 | |
| 423,556 | |
Construction in progress | |
| 7,954 | |
| 6,860 | |
Total property and equipment | |
| 692,515 | |
| 676,406 | |
Accumulated depreciation and amortization | |
| (491,620) | |
| (464,665) | |
Property and equipment, net | | $ | 200,895 | | $ | 211,741 | |
15.
December 25, 2022 | December 26, 2021 | |||||||||||||
Land | $ | 31,679 | $ | 31,032 | ||||||||||
Buildings and improvements | 91,462 | 91,508 | ||||||||||||
Leasehold improvements | 136,095 | 138,016 | ||||||||||||
Equipment and other | 498,792 | 465,813 | ||||||||||||
Construction in progress | 32,265 | 23,725 | ||||||||||||
Total property and equipment | 790,293 | 750,094 | ||||||||||||
Accumulated depreciation and amortization | (540,500) | (526,238) | ||||||||||||
Property and equipment, net | $ | 249,793 | $ | 223,856 |
December 25, 2022 | December 26, 2021 | |||||||||||||
Marketing | $ | 36,858 | $ | 59,248 | ||||||||||
Insurance reserves, current | 29,676 | 34,661 | ||||||||||||
Salaries, benefits and bonuses | 21,934 | 48,728 | ||||||||||||
Legal settlement accrual (a) | 15,000 | — | ||||||||||||
Purchases | 13,789 | 13,319 | ||||||||||||
Other | 25,278 | 34,160 | ||||||||||||
Total | $ | 142,535 | $ | 190,116 |
| | | | | | | |
|
| December 27, |
| December 29, |
| ||
| | 2020 | | 2019 | | ||
Marketing | | $ | 47,885 | | $ | 15,930 | |
Salaries, benefits and bonuses | |
| 46,352 | |
| 24,627 | |
Insurance reserves, current | | | 32,947 | | | 30,025 | |
Purchases | |
| 16,550 | |
| 10,768 | |
Interest rate swaps, current portion | | | 6,970 | | | 2,061 | |
Strategic corporate reorganization costs | | | 4,861 | | | — | |
Deposits | |
| 3,782 | |
| 2,026 | |
Consulting and professional fees | |
| 3,148 | |
| 10,667 | |
Rent | |
| 3,080 | |
| 4,274 | |
Other | |
| 8,988 | |
| 8,139 | |
Total | | $ | 174,563 | | $ | 108,517 | |
See “Note 19. Litigation, Commitments and Contingencies” for additional information.
| | | | | | | |
|
| | |
| | |
|
| | December 27, |
| December 29, | | ||
| | 2020 | | 2019 | | ||
Insurance reserves | | $ | 49,002 | | $ | 45,151 | |
Deferred compensation plan | |
| 35,793 | |
| 33,220 | |
Employer payroll taxes (1) | | | 18,473 | | | — | |
Other | |
| 8,096 | |
| 6,556 | |
Total | | $ | 111,364 | | $ | 84,927 | |
79
December 25, 2022 | December 26, 2021 | |||||||||||||
Insurance reserves | $ | 37,624 | $ | 53,551 | ||||||||||
Deferred compensation plan (a) | 28,285 | 36,170 | ||||||||||||
Other | 2,408 | 3,433 | ||||||||||||
Total | $ | 68,317 | $ | 93,154 |
The opening of Employees whose positions were relocated to the office innew Atlanta and related organizational changes are projected to be completed by the summer of 2021. All affected employeesoffice were either offered an opportunity to continue with the organization or were offered a severance package. As a result, we expect to incur certainincurred one-time corporate reorganization costs of approximately $15.0 to $20.0$13.1 million related to employee severance and transition, recruitment$6.0 million through December 26, 2021 and relocation, and third party and otherDecember 27, 2020, respectively, as detailed in the table below (in thousands). There were no additional corporate reorganization costs through 2021.
incurred during the year ended December 25, 2022.
December 26, 2021 | December 27, 2020 | |||||||||||||||||||
Employee severance and other employee transition costs | $ | 5,429 | $ | 4,775 | ||||||||||||||||
Recruiting and professional fees | 3,815 | 1,598 | ||||||||||||||||||
Relocation costs | 3,100 | 267 | ||||||||||||||||||
Other costs | 750 | 285 | ||||||||||||||||||
Total strategic corporate reorganization costs | 13,094 | 6,925 | ||||||||||||||||||
Stock-based compensation forfeitures on unvested awards | — | (940) | ||||||||||||||||||
Total strategic corporate reorganization costs, net of stock forfeitures | $ | 13,094 | $ | 5,985 |
Strategic corporate reorganization costs recorded for the year ended December 27, 2020 consist of the following:
| | |
| Year Ended | |
| Dec. 27, | |
| 2020 | |
Employee severance and other employee transition costs | $ | 4,775 |
Recruiting and professional fees | | 1,598 |
Other costs | | 552 |
Total strategic corporate reorganization costs | | 6,925 |
Stock-based compensation forfeitures on unvested awards | | (940) |
Total strategic corporate reorganization costs, net of stock forfeitures | $ | 5,985 |
| | | | | | | | | | | |
| Balance at | | | | | | | | Balance at | ||
| Dec. 29 | | | | | | | | Dec. 27 | ||
| 2019 | | Charges | | Payments | | 2020 | ||||
Employee severance and other employee transition costs | $ | — | | $ | 4,775 | | $ | (160) | | $ | 4,615 |
Recruiting and professional fees | | — | | | 1,598 | | | (1,453) | | | 145 |
Other costs | | — | | | 552 | | | (451) | | | 101 |
Total strategic corporate reorganization liability | $ | — | | $ | 6,925 | | $ | (2,064) | | $ | 4,861 |
We expect to recognize additional costs associated with the corporate reorganization in25, 2022 and December 26, 2021, respectively (in thousands):
Balance at December 26, 2021 | Charges | Payments | Balance at December 25, 2022 | |||||||||||||||||||||||
Employee severance and other employee transition costs | $ | 2,122 | $ | — | $ | (2,122) | $ | — | ||||||||||||||||||
Recruiting and professional fees | 92 | — | (92) | — | ||||||||||||||||||||||
Relocation costs | 740 | — | (740) | — | ||||||||||||||||||||||
Total strategic corporate reorganization liability | $ | 2,954 | $ | — | $ | (2,954) | $ | — |
80
Balance at December 27, 2020 | Charges | Payments | Balance at December 26, 2021 | |||||||||||||||||||||||
Employee severance and other employee transition costs | $ | 4,615 | $ | 5,429 | $ | (7,922) | $ | 2,122 | ||||||||||||||||||
Recruiting and professional fees | 145 | 3,815 | (3,868) | 92 | ||||||||||||||||||||||
Relocation costs | 101 | 3,100 | (2,461) | 740 | ||||||||||||||||||||||
Other costs | — | 750 | (750) | — | ||||||||||||||||||||||
Total strategic corporate reorganization liability | $ | 4,861 | $ | 13,094 | $ | (15,001) | $ | 2,954 |
| | | | | | | | | |
| | 2020 |
| 2019 |
| 2018 | |||
Domestic income (loss) | | $ | 48,616 | | $ | (16,065) | | $ | (9,665) |
Foreign income | | | 26,746 | | | 21,111 | | | 16,362 |
Total income | | $ | 75,362 | | $ | 5,046 | | $ | 6,697 |
2022 | 2021 | 2020 | ||||||||||||||||||
Domestic income | $ | 65,434 | $ | 115,221 | $ | 48,616 | ||||||||||||||
Foreign income | 18,335 | 35,727 | 26,746 | |||||||||||||||||
Total income | $ | 83,769 | $ | 150,948 | $ | 75,362 |
2022 | 2021 | 2020 | ||||||||||||||||||
Current: | ||||||||||||||||||||
Federal | $ | 3,496 | $ | 10,591 | $ | 16,400 | ||||||||||||||
Foreign | 5,335 | 8,812 | 6,047 | |||||||||||||||||
State and local | 2,791 | 2,837 | 1,569 | |||||||||||||||||
Deferred: | ||||||||||||||||||||
Federal | 4,243 | 2,430 | (7,375) | |||||||||||||||||
Foreign | (1,152) | 769 | 357 | |||||||||||||||||
State and local | (293) | 554 | (2,250) | |||||||||||||||||
Total income tax expense | $ | 14,420 | $ | 25,993 | $ | 14,748 |
| | | | | | | | | | |
|
| 2020 |
| 2019 |
| 2018 |
| |||
Current: | | | | | | | | | | |
Federal | | $ | 16,400 | | $ | (2,734) | | $ | (5,262) | |
Foreign | |
| 6,047 | |
| 5,077 | |
| 4,736 | |
State and local | |
| 1,569 | |
| 810 | |
| 1,530 | |
Deferred: | | | | | | | | | | |
Federal | | | (7,375) | | | (1,989) | | | 2,256 | |
Foreign | | | 357 | | | (662) | | | (153) | |
State and local | | | (2,250) | | | (1,113) | | | (483) | |
Total income tax expense (benefit) | | $ | 14,748 | | $ | (611) | | $ | 2,624 | |
2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
Income Tax Expense (Benefit) | Income Tax Rate | Income Tax Expense (Benefit) | Income Tax Rate | Income Tax Expense (Benefit) | Income Tax Rate | |||||||||||||||||||||||||||||||||
Tax at U.S. federal statutory rate | $ | 17,591 | 21.0 | % | $ | 31,699 | 21.0 | % | $ | 15,826 | 21.0 | % | ||||||||||||||||||||||||||
State and local income taxes | 1,422 | 1.7 | % | 2,317 | 1.5 | % | 1,149 | 1.5 | % | |||||||||||||||||||||||||||||
Foreign income taxes | 4,672 | 5.6 | % | 9,144 | 6.1 | % | 6,463 | 8.6 | % | |||||||||||||||||||||||||||||
Income of consolidated partnerships attributable to noncontrolling interests | (355) | (0.4) | % | (1,110) | (0.7) | % | (603) | (0.8) | % | |||||||||||||||||||||||||||||
Non-qualified deferred compensation plan expense (income) | 1,278 | 1.5 | % | (911) | (0.6) | % | (898) | (1.2) | % | |||||||||||||||||||||||||||||
Excess tax (benefits) on equity awards | (3,902) | (4.7) | % | (3,697) | (2.5) | % | (2,029) | (2.7) | % | |||||||||||||||||||||||||||||
Tax credits | (8,981) | (10.7) | % | (8,830) | (5.9) | % | (6,002) | (8.0) | % | |||||||||||||||||||||||||||||
Non-deductible executive compensation | 2,450 | 2.9 | % | 2,636 | 1.7 | % | 1,314 | 1.7 | % | |||||||||||||||||||||||||||||
Foreign-derived intangible income | (1,452) | (1.7) | % | (1,519) | (1.0) | % | (924) | (1.2) | % | |||||||||||||||||||||||||||||
US deferred offset on foreign deferreds | 1,183 | 1.4 | % | 238 | 0.2 | % | — | — | % | |||||||||||||||||||||||||||||
Other | 514 | 0.6 | % | (3,974) | (2.6) | % | 452 | 0.6 | % | |||||||||||||||||||||||||||||
Total | $ | 14,420 | 17.2 | % | $ | 25,993 | 17.2 | % | $ | 14,748 | 19.5 | % |
| | | | | | |
|
| December 27, |
| December 29, | ||
| | 2020 |
| 2019 | ||
Accrued liabilities | | $ | 17,740 | | $ | 16,686 |
Accrued bonuses | |
| 6,155 | |
| 2,308 |
Other liabilities and asset reserves | |
| 18,763 | |
| 16,244 |
Equity awards | |
| 6,760 | |
| 7,196 |
Lease liabilities | | | 32,374 | | | 30,756 |
Other | |
| 2,563 | |
| 2,418 |
Net operating losses | |
| 8,139 | |
| 8,205 |
Foreign tax credit carryforwards | | | 14,405 | | | 10,049 |
Total deferred tax assets | | | 106,899 | | | 93,862 |
Valuation allowances | |
| (22,972) | |
| (17,303) |
Total deferred tax assets, net of valuation allowances | |
| 83,927 | |
| 76,559 |
| | | | | | |
Deferred expenses | |
| (9,623) | |
| (9,521) |
Accelerated depreciation | |
| (21,337) | |
| (27,299) |
Goodwill | |
| (9,801) | |
| (9,510) |
Right-of-use assets | | | (32,065) | | | (30,257) |
Other | |
| (1,249) | |
| (782) |
Total deferred tax liabilities | |
| (74,075) | |
| (77,369) |
Net deferred tax assets (liabilities) | | $ | 9,852 | | $ | (810) |
| | | | | | |
81
December 25, 2022 | December 26, 2021 | |||||||||||||
Accrued liabilities | $ | 17,424 | $ | 14,802 | ||||||||||
Accrued bonuses | 351 | 6,404 | ||||||||||||
Other liabilities and asset reserves | 14,607 | 14,583 | ||||||||||||
Equity awards | 7,905 | 7,323 | ||||||||||||
Lease liabilities | 45,646 | 41,999 | ||||||||||||
Other | 2,904 | 2,712 | ||||||||||||
Net operating losses | 11,738 | 8,127 | ||||||||||||
Foreign tax credit carryforwards | 20,198 | 18,611 | ||||||||||||
Total deferred tax assets | 120,773 | 114,561 | ||||||||||||
Valuation allowances | (32,052) | (28,598) | ||||||||||||
Total deferred tax assets, net of valuation allowances | 88,721 | 85,963 | ||||||||||||
Deferred expenses | (5,756) | (7,087) | ||||||||||||
Accelerated depreciation | (31,098) | (23,858) | ||||||||||||
Goodwill | (7,690) | (10,052) | ||||||||||||
Right-of-use assets | (41,892) | (39,814) | ||||||||||||
Other | (365) | (254) | ||||||||||||
Total deferred tax liabilities | (86,801) | (81,065) | ||||||||||||
Net deferred tax assets | $ | 1,920 | $ | 4,898 |
Balance at December 27, 2020 | $ | 22,972 | |||
Charged to costs and expenses | 5,658 | ||||
Other | (32) | ||||
Balance at December 26, 2021 | $ | 28,598 | |||
Charged to costs and expenses | 3,454 | ||||
Balance at December 25, 2022 | $ | 32,052 |
The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense (benefit) for the years ended December 27, 2020, December 29, 2019 and December 30, 2018 is as follows in both dollars and as a percentage of income before income taxes ($ in thousands):
| | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | ||||||||||||
|
| Income Tax | | Income | | Income Tax | | Income | | Income Tax | | Income | | ||||||
| | Expense | | Tax Rate | | (Benefit) | | Tax Rate | | Expense | | Tax Rate | | ||||||
| | | | | | | | | | | | | | | | | | | |
Tax at U.S. federal statutory rate | | $ | 15,826 | | 21.0 | % | | $ | 1,060 |
| 21.0 | % | | $ | 1,406 |
| 21.0 | % | |
State and local income taxes | |
| 1,149 | | 1.5 | % | |
| 79 |
| 1.6 | % | |
| 150 |
| 2.2 | % | |
Foreign income taxes | |
| 6,463 | | 8.6 | % | |
| 5,058 |
| 100.2 | % | |
| 4,879 |
| 72.9 | % | |
Income of consolidated partnerships | | | | | | | | | | | | | | | | | | | |
attributable to noncontrolling interests | |
| (603) | | (0.8) | % | |
| (177) |
| (3.5) | % | |
| (371) |
| (5.6) | % | |
Non-qualified deferred compensation plan | | | | | | | | | | | | | | | | | | | |
(income) loss | |
| (898) | | (1.2) | % | |
| (1,260) |
| (25.0) | % | |
| 483 |
| 7.2 | % | |
Excess tax (benefits) expense on equity awards | | | (2,029) | | (2.7) | % | | | (212) | | (4.2) | % | | | 447 | | 6.7 | % | |
Preferred stock option mark-to-market adjustment | | | — | | — | % | | | 1,338 | | 26.5 | % | | | — | | — | % | |
Tax credits | |
| (6,002) | | (8.0) | % | |
| (6,128) |
| (121.4) | % | |
| (6,945) |
| (103.7) | % | |
Disposition of China | | | — | | — | % | | | — | | — | % | | | 4,118 | | 61.5 | % | |
Other | | | 842 | | 1.1 | % | | | (369) | | (7.3) | % | | | (1,543) | | (23.0) | % | |
Total | | $ | 14,748 |
| 19.6 | % | | $ | (611) |
| (12.1) | % | | $ | 2,624 |
| 39.2 | % | |
2020.
82
The Company had $1.0$1.2 million of unrecognized tax benefits at December 27, 202025, 2022 which, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending liability for unrecognized tax benefits excluding interest and penalties is as follows, which is recorded as an otherin Other long-term liabilityliabilities in the Consolidated Balance Sheets (in thousands):
Balance at December 27, 2020 | $ | 1,030 | |||
Additions for tax positions of prior years | 81 | ||||
Reductions for tax positions of prior years | (215) | ||||
Balance at December 26, 2021 | $ | 896 | |||
Additions for tax positions of prior years | 331 | ||||
Reductions for tax positions of prior years | (65) | ||||
Balance at December 25, 2022 | $ | 1,162 |
| | | | |
Balance at December 30, 2018 |
| $ | 2,023 |
|
Additions for tax positions of prior years | |
| 179 | |
Reductions for tax positions of prior years | | | (623) | |
Reductions for lapse of statute of limitations | |
| — | |
Balance at December 29, 2019 | | | 1,579 | |
Additions for tax positions of prior years | | | 60 | |
Reductions for tax positions of prior years | | | (426) | |
Reductions for lapse of statute of limitations | |
| (183) | |
Balance at December 27, 2020 | | $ | 1,030 | |
19.
Mr. O’Neal and the Company developed a co-branded extra-large pizza product using the Personality Rights under an amendment to the Original Endorsement Agreement signed July 27, 2020 (the “First Amendment”).
On May 27, 2019, Mr. O’Neal and the Company entered into a joint venture for the operation of 9 Atlanta-area Papa John’s restaurants that were previously Company-owned restaurants. The Company owns approximately 70% of the joint venture and Mr. O’Neal owns approximately 30% of the joint venture, which is consolidated into the Company’s financial statements. Mr. O’Neal contributed approximately $840,000 representing his pro rata capital contribution.
83
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 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.
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 and this amount was recorded in General and administrative expenses in the Consolidated Statements of Operations. On December 19, 2022, the District Court granted preliminary approval of the proposed settlement; however, the settlement remains subject to final approval by the District Court and contains certain customary contingencies. Subsequent to year end, the Company remitted $5.0 million to the settlement administrator as partial funding of the settlement in accordance with the terms of the applicable settlement agreement. The Company continues to deny any liability or wrongdoing in this matter and is vigorously defending this action. The Company has 0t recorded any liability related to this lawsuit as of December 27, 2020 as it does not believe a loss is probable or reasonably estimable.
matter.
Danker v.In re Papa John’s International, Inc. et al.Employee & Franchise Employee Antitrust LitigationOn August 30, 2018, is a putative class action lawsuit was filed in December 2018 in the United States District Court Southernfor the Western District of New York on behalfKentucky. The suit alleges that the “no-poaching” provision previously contained in the Company’s franchise agreement constituted an unlawful agreement or conspiracy in restraint of trade and commerce in violation of Section 1 of the Sherman Antitrust Act. On April 14, 2022, the parties reached a settlement in principle to resolve the case. Pursuant to the terms of the proposed settlement, in exchange for the Company’s payment of a classtotal aggregate settlement amount of investors who purchased or acquired stock$5.0 million and other non-monetary consideration, all claims in Papa John's throughthe action will be dismissed, the litigation will be terminated, and the Company will receive a period uprelease. The settlement amount was recorded in General and administrative expenses in the Consolidated Statements of Operations. The proposed settlement is subject to and including July 19, 2018. The complaint alleged violations of Sections 10(b) and 20(a) ofapproval by the Securities Exchange Act of 1934, as amended. The District Court appointed the Oklahoma Law Enforcement Retirement System to lead the case. An amended complaint was filed on February 13, 2019, which the Company moved to dismiss. On March 16, 2020, the Court granted the Company’s motion to dismiss, on the ground that the complaint failed to state any viable cause of action. The Plaintiffs subsequently filed a second amended complaint on April 30, 2020, which the Company moved to dismiss.and contains certain customary contingencies. The Company believes that it has valid and meritorious defensescontinues to the second amended complaint and intends to vigorously defend against the case. The Company has 0t recordeddeny any liability related toor wrongdoing in this lawsuit as of December 27, 2020 as it does not believe a loss is probable or reasonably estimablematter.. Subsequent to December 27, 2020, on February 3, 2021, the Company’s motion to dismiss the case was granted with prejudice.
21.
2025.
84
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | |||||||||||||||||||||||
Outstanding at December 26, 2021 | 319 | $ | 54.65 | |||||||||||||||||||||||
Exercised | (82) | 49.48 | ||||||||||||||||||||||||
Cancelled | (2) | 45.29 | ||||||||||||||||||||||||
Outstanding at December 25, 2022 | 235 | $ | 56.53 | 4.47 | $ | 6,452 | ||||||||||||||||||||
Exercisable at December 25, 2022 | 235 | $ | 56.53 | 4.47 | $ | 6,452 |
| | | | | | | | | | | |
|
|
|
|
| |
| Weighted |
|
| |
|
| | | | | | | Average | | | |
|
| | | | Weighted | | Remaining | | | |
| |
| | Number | | Average | | Contractual | | Aggregate |
| ||
| | of | | Exercise | | Term | | Intrinsic |
| ||
| | Options | | Price | | (In Years) | | Value |
| ||
Outstanding at December 29, 2019 |
| 1,205 | | $ | 55.67 | | | | | | |
Exercised |
| (541) | |
| 56.73 | | | | | | |
Cancelled |
| (100) | |
| 54.70 | | | | | | |
Outstanding at December 27, 2020 |
| 564 | | $ | 54.82 |
| 6.58 | | $ | 18,453 | |
Exercisable at December 27, 2020 |
| 337 | | $ | 59.31 |
| 5.68 | | $ | 9,512 | |
The following is a summary of the significant assumptions used in estimating the fair value of options granted in 2019 and 2018 (none in 2020):
| | | | | |
|
| 2019 |
| 2018 |
|
| | | | | |
Assumptions (weighted average): | | | | | |
Risk-free interest rate |
| 2.5 | % | 2.7 | % |
Expected dividend yield |
| 2.1 | % | 1.5 | % |
Expected volatility |
| 31.2 | % | 27.6 | % |
Expected term (in years) |
| 5.7 | | 5.6 | |
The risk-free interest rate for the periods within the contractual life of an option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield was estimated as the annual dividend divided by the market price of the Company’s shares on the date of grant. Expected volatility was estimated using the Company’s historical share price volatility for a period similar to the expected life of the option.
Options granted generally vest in equal installments over three years and expire ten years after grant. The expected term for these options represents the period of time that options granted are expected to be outstanding and was calculated using historical experience.
The weighted average grant-date fair values of options granted during 2019 and 2018 was $11.69 and $15.27, respectively. The Company granted options to purchase 353,000 and 456,000 shares in 2019 and 2018, respectively. There were 0 options granted in 2020.
Restricted Stock
85
The 2020 and 2019 performance-based restricted stock units require the achievement of certain performance and market factors, which consist of the Company’s Total Shareholder Return (“TSR”) relative to a predetermined peer group. The grant-date fair value of the performance-based restricted stock units was determined through the use of a Monte Carlo simulation model.
| | | | | |
|
| 2020 | | 2019 | |
| | | | | |
Assumptions: | | | | | |
Risk-free interest rate |
| 0.9 | % | 2.5 | % |
Expected volatility |
| 36.3 | % | 33.9 | % |
2020:
Assumptions: | 2022 | 2021 | 2020 | |||||||||||||||||
Risk-free interest rate | 1.5 | % | 0.2 | % | 0.9 | % | ||||||||||||||
Expected volatility | 45.0 | % | 48.3 | % | 36.3 | % |
In 2018, the Company granted performance-based restricted stock awards under a three-year cliff vest, and the vestingTable of the awards is dependent upon the Company’s achievement of a compounded annual growth rate of earnings per share and the achievement of certain sales and unit growth metrics. Upon vesting, the shares are issued from authorized shares.Contents
| | | | | | |
|
|
|
| Weighted |
| |
| | | | Average |
| |
| | | | Grant-Date |
| |
| | Shares | | Fair Value |
| |
Total as of December 29, 2019 |
| 616 | | $ | 50.90 | |
Granted |
| 314 | | | 61.31 | |
Forfeited |
| (64) | | | 52.44 | |
Vested |
| (199) | | | 54.63 | |
Total as of December 27, 2020 |
| 667 | | $ | 54.33 | |
22.
Shares | Weighted Average Grant-Date Fair Value | |||||||||||||
Total as of December 26, 2021 | 582 | $ | 68.06 | |||||||||||
Granted | 298 | 103.18 | ||||||||||||
Forfeited | (82) | 89.87 | ||||||||||||
Vested | (280) | 57.40 | ||||||||||||
Total as of December 25, 2022 | 518 | $ | 91.23 |
In late 2021, the Company adopted a Safe Harbor 401k Plan effective for the 2022 benefit year.
86
At our discretion, weWe contributed a matching payment of 2.1%4.0% in 2020, 2.1% in 2019 and 1.5% in 2018,2022, up to a maximum of 6%6.0% of a participating employee’s earnings deferred into the 401(k) Plan. At our discretion, the Company contributed 4.0% in 2021 and 2.1% in 2020, up to a maximum of 6.0% of a participating employee’s earnings deferred into both the 401(k) Plan and the non-qualified deferred compensation plan. Such costs were $4.4 million in 2022, $3.5 million in 2021 and $1.8 million in 2020, $1.52020.
accordance with ASC 810, “
.” Goodwill of $9.9 million was allocated to the disposal group based on relative fair value within the Domestic Company-owned restaurants reporting group. The $8.4 million of the one-time, non-cash refranchising loss was recorded in the first quarter of 2022 and realized upon consummation of the sale in the second quarter.
During the fourth quarterTable of 2020, we updatedContents
(In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
Revenues: | ||||||||||||||||||||
Domestic Company-owned restaurants | $ | 708,389 | $ | 778,323 | $ | 700,757 | ||||||||||||||
North America franchising | 137,399 | 129,310 | 96,732 | |||||||||||||||||
North America commissaries | 869,634 | 761,305 | 680,793 | |||||||||||||||||
International | 158,682 | 184,099 | 150,939 | |||||||||||||||||
All others | 227,999 | 215,384 | 184,013 | |||||||||||||||||
Total revenues | $ | 2,102,103 | $ | 2,068,421 | $ | 1,813,234 | ||||||||||||||
Intersegment revenues: | ||||||||||||||||||||
North America franchising | $ | 4,122 | $ | 4,179 | $ | 3,229 | ||||||||||||||
North America commissaries | 217,570 | 215,393 | 192,332 | |||||||||||||||||
All others | 70,283 | 75,366 | 83,635 | |||||||||||||||||
Total intersegment revenues | $ | 291,975 | $ | 294,938 | $ | 279,196 | ||||||||||||||
Depreciation and amortization: | ||||||||||||||||||||
Domestic Company-owned restaurants | $ | 11,495 | $ | 11,728 | $ | 11,905 | ||||||||||||||
North America commissaries | 13,299 | 11,974 | 9,660 | |||||||||||||||||
International | 1,774 | 2,326 | 1,975 | |||||||||||||||||
All others | 12,681 | 9,928 | 10,254 | |||||||||||||||||
Unallocated corporate expenses | 12,783 | 12,860 | 15,911 | |||||||||||||||||
Total depreciation and amortization | $ | 52,032 | $ | 48,816 | $ | 49,705 | ||||||||||||||
Operating income: | ||||||||||||||||||||
Domestic Company-owned restaurants (a) | $ | 15,966 | $ | 49,628 | $ | 37,049 | ||||||||||||||
North America franchising | 127,882 | 120,949 | 89,801 | |||||||||||||||||
North America commissaries | 42,531 | 39,873 | 33,185 | |||||||||||||||||
International (b) | 17,891 | 34,896 | 24,034 | |||||||||||||||||
All others | 10,084 | 17,704 | 7,043 | |||||||||||||||||
Unallocated corporate expenses (c) | (104,419) | (94,114) | (100,069) | |||||||||||||||||
Elimination of intersegment (profits) | (905) | (695) | (790) | |||||||||||||||||
Total operating income | $ | 109,030 | $ | 168,241 | $ | 90,253 |
reorganization costs. See “Note 16. Strategic Corporate Reorganization for Long-term Growth” for additional information.
87
Our segment information is as follows:
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(In thousands) | | 2020 | | 2019 | | 2018 | | |||
Revenues: | | | | | | (Note) | | | (Note) | |
Domestic Company-owned restaurants | | $ | 700,757 | | $ | 652,053 | | $ | 692,380 | |
North America franchising | |
| 96,732 | |
| 71,828 | |
| 79,293 | |
North America commissaries | |
| 680,793 | |
| 612,652 | |
| 609,866 | |
International | |
| 150,939 | |
| 126,077 | |
| 131,268 | |
All others | |
| 184,013 | |
| 156,638 | |
| 150,064 | |
Total revenues | | $ | 1,813,234 | | $ | 1,619,248 | | $ | 1,662,871 | |
| | | | | | | | | | |
Intersegment revenues: | | | | | | | | | | |
North America franchising | | $ | 3,229 | | $ | 2,782 | | $ | 2,965 | |
North America commissaries | | | 192,332 | | | 187,073 | | | 201,325 | |
International | |
| - | |
| 191 | |
| 283 | |
All others | |
| 83,635 | |
| 88,286 | |
| 72,066 | |
Total intersegment revenues | | $ | 279,196 | | $ | 278,332 | | $ | 276,639 | |
| | | | | | | | | | |
Depreciation and amortization: | | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 11,905 | | $ | 12,883 | | $ | 15,411 | |
North America commissaries | |
| 9,660 | |
| 8,131 | |
| 7,397 | |
International | |
| 1,975 | |
| 1,722 | |
| 1,696 | |
All others | |
| 10,254 | |
| 10,738 | |
| 8,513 | |
Unallocated corporate expenses | |
| 15,911 | |
| 13,807 | |
| 13,386 | |
Total depreciation and amortization | | $ | 49,705 | | $ | 47,281 | | $ | 46,403 | |
| | | | | | | | | | |
Operating income: | | | | | | | | | | |
Domestic Company-owned restaurants (1) | | $ | 37,049 | | $ | 33,957 | | $ | 18,988 | |
North America franchising | |
| 89,801 | |
| 64,362 | |
| 70,732 | |
North America commissaries | |
| 33,185 | |
| 30,690 | |
| 27,961 | |
International (2) | |
| 24,034 | |
| 18,738 | |
| 14,203 | |
All others | |
| 7,043 | |
| (1,966) | |
| (5,716) | |
Unallocated corporate expenses (3) | |
| (100,069) | |
| (120,280) | |
| (93,610) | |
Elimination of intersegment (profits) | |
| (790) | |
| (966) | |
| (1,005) | |
Total operating income | | $ | 90,253 | | $ | 24,535 | | $ | 31,553 | |
| | | | | | | | | | |
(Note) During the fourth quarter of 2020, we updated our segment profit measure to operating income. Amounts in 2019 and 2018 have been recast to reflect this change.
88
(In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
Property and equipment, net: | ||||||||||||||||||||
Domestic Company-owned restaurants | $ | 238,658 | $ | 241,050 | $ | 228,077 | ||||||||||||||
North America commissaries | 149,920 | 149,218 | 145,282 | |||||||||||||||||
International | 16,080 | 14,642 | 13,604 | |||||||||||||||||
All others | 131,210 | 109,052 | 91,724 | |||||||||||||||||
Unallocated corporate assets | 254,425 | 236,132 | 213,828 | |||||||||||||||||
Accumulated depreciation and amortization | (540,500) | (526,238) | (491,620) | |||||||||||||||||
Property and equipment, net | $ | 249,793 | $ | 223,856 | $ | 200,895 | ||||||||||||||
Expenditures for property and equipment: | ||||||||||||||||||||
Domestic Company-owned restaurants | $ | 23,057 | $ | 16,108 | $ | 12,848 | ||||||||||||||
North America commissaries | 5,729 | 4,007 | 4,447 | |||||||||||||||||
International | 5,175 | 1,979 | 1,065 | |||||||||||||||||
All others | 18,296 | 18,645 | 11,700 | |||||||||||||||||
Unallocated corporate | 26,134 | 27,820 | 5,592 | |||||||||||||||||
Total expenditures for property and equipment (a) | $ | 78,391 | $ | 68,559 | $ | 35,652 |
| | | | | | | | | | |
(In thousands) |
| 2020 |
| 2019 |
| 2018 |
| |||
| | | | | | | | | | |
Property and equipment, net: | | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 228,077 | | $ | 221,420 | | $ | 236,526 | |
North America commissaries | |
| 145,282 | |
| 142,946 | |
| 140,309 | |
International | |
| 13,604 | |
| 16,031 | |
| 17,218 | |
All others | |
| 91,724 | |
| 84,167 | |
| 71,880 | |
Unallocated corporate assets | |
| 213,828 | |
| 211,842 | |
| 199,239 | |
Accumulated depreciation and amortization | |
| (491,620) | |
| (464,665) | |
| (438,278) | |
Property and equipment, net | | $ | 200,895 | | $ | 211,741 | | $ | 226,894 | |
| | | | | | | | | | |
Expenditures for property and equipment: | | | | | | | | | | |
Domestic Company-owned restaurants | | $ | 12,848 | | $ | 8,811 | | $ | 13,568 | |
North America commissaries | |
| 4,447 | |
| 3,773 | |
| 3,994 | |
International | |
| 1,065 | |
| 1,143 | |
| 986 | |
All others | |
| 11,700 | |
| 11,541 | |
| 13,438 | |
Unallocated corporate | |
| 5,592 | |
| 12,443 | |
| 10,042 | |
Total expenditures for property and equipment | | $ | 35,652 | | $ | 37,711 | | $ | 42,028 | |
Disaggregation of Revenue
| | | | | | | | | | | | | | | | | | |
| | Reportable Segments | ||||||||||||||||
| | Year Ended December 27, 2020 | ||||||||||||||||
Major Products/Services Lines | | | Domestic Company-owned restaurants | | | North America franchising | | | North America commissaries | | | International | | | All others | | | Total |
Company-owned restaurant sales | | $ | 700,757 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 700,757 |
Franchise royalties and fees | | | - | | | 99,961 | | | - | | | 39,920 | | | - | | | 139,881 |
Commissary sales | | | - | | | - | | | 873,125 | | | 84,043 | | | - | | | 957,168 |
Other revenues | | | - | | | - | | | - | | | 26,976 | | | 267,648 | | | 294,624 |
Eliminations | | | - | | | (3,229) | | | (192,332) | | | - | | | (83,635) | | | (279,196) |
Total segment revenues | | $ | 700,757 | | $ | 96,732 | | $ | 680,793 | | $ | 150,939 | | $ | 184,013 | | $ | 1,813,234 |
International other revenues (1) | | | - | | | - | | | - | | | (26,976) | | | 26,976 | | | - |
Total revenues | | $ | 700,757 | | $ | 96,732 | | $ | 680,793 | | $ | 123,963 | | $ | 210,989 | | $ | 1,813,234 |
| | | | | | | | | | | | | | | | | | |
| | Reportable Segments | ||||||||||||||||
| | Year Ended December 29, 2019 | ||||||||||||||||
Major Products/Services Lines | | | Domestic Company-owned restaurants | | | North America franchising | | | North America commissaries | | | International | | | All others | | | Total |
Company-owned restaurant sales | | $ | 652,053 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 652,053 |
Franchise royalties and fees | | | - | | | 74,610 | | | - | | | 38,745 | | | - | | | 113,355 |
Commissary sales | | | - | | | - | | | 799,725 | | | 64,179 | | | - | | | 863,904 |
Other revenues | | | - | | | - | | | - | | | 23,344 | | | 244,924 | | | 268,268 |
Eliminations | | | - | | | (2,782) | | | (187,073) | | | (191) | | | (88,286) | | | (278,332) |
Total segment revenues | | $ | 652,053 | | $ | 71,828 | | $ | 612,652 | | $ | 126,077 | | $ | 156,638 | | $ | 1,619,248 |
International other revenues (1) | | | - | | | - | | | - | | | (23,344) | | | 23,344 | | | - |
International eliminations (1) | | | - | | | - | | | - | | | 191 | | | (191) | | | - |
Total revenues | | $ | 652,053 | | $ | 71,828 | | $ | 612,652 | | $ | 102,924 | | $ | 179,791 | | $ | 1,619,248 |
| | | | | | | | | | | | | | | | | | |
89
Reportable Segments | ||||||||||||||||||||||||||||||||||||||
(In thousands) | Year Ended December 25, 2022 | |||||||||||||||||||||||||||||||||||||
Major Products/Services Lines | Domestic Company-owned restaurants | North America franchising | North America commissaries | International | All others | Total | ||||||||||||||||||||||||||||||||
Company-owned restaurant sales | $ | 708,389 | $ | — | $ | — | $ | — | $ | — | $ | 708,389 | ||||||||||||||||||||||||||
Franchise royalties and fees | — | 141,521 | — | 49,422 | — | 190,943 | ||||||||||||||||||||||||||||||||
Commissary sales | — | — | 1,087,204 | 80,481 | — | 1,167,685 | ||||||||||||||||||||||||||||||||
Other revenues | — | — | — | 28,779 | 298,282 | 327,061 | ||||||||||||||||||||||||||||||||
Eliminations | — | (4,122) | (217,570) | — | (70,283) | (291,975) | ||||||||||||||||||||||||||||||||
Total segment revenues | 708,389 | 137,399 | 869,634 | 158,682 | 227,999 | 2,102,103 | ||||||||||||||||||||||||||||||||
International other revenues (a) | — | — | — | (28,779) | 28,779 | — | ||||||||||||||||||||||||||||||||
Total revenues | $ | 708,389 | $ | 137,399 | $ | 869,634 | $ | 129,903 | $ | 256,778 | $ | 2,102,103 |
| | Reportable Segments | ||||||||||||||||
| | Year Ended December 30, 2018 | ||||||||||||||||
Major Products/Services Lines | | | Domestic Company-owned restaurants | | | North America franchising | | | North America commissaries | | | International | | | All others | | | Total |
Company-owned restaurant sales | | $ | 692,380 | | $ | - | | $ | - | | $ | 6,237 | | $ | - | | $ | 698,617 |
Franchise royalties and fees | | | - | | | 82,258 | | | - | | | 35,988 | | | - | | | 118,246 |
Commissary sales | | | - | | | - | | | 811,191 | | | 68,124 | | | - | | | 879,315 |
Other revenues | | | - | | | - | | | - | | | 21,202 | | | 222,130 | | | 243,332 |
Eliminations | | | - | | | (2,965) | | | (201,325) | | | (283) | | | (72,066) | | | (276,639) |
Total segment revenues | | $ | 692,380 | | $ | 79,293 | | $ | 609,866 | | $ | 131,268 | | $ | 150,064 | | $ | 1,662,871 |
International other revenues (1) | | | - | | | - | | | - | | | (21,202) | | | 21,202 | | | - |
International eliminations (1) | | | - | | | - | | | - | | | 283 | | | (283) | | | - |
Total revenues | | $ | 692,380 | | $ | 79,293 | | $ | 609,866 | | $ | 110,349 | | $ | 170,983 | | $ | 1,662,871 |
(a)Other revenues as reported in |
90
24. Quarterly Data - Unaudited, in Thousands, except Per Share Data
Our quarterly select financial data is as follows:
| | | | | | | | | | | | |
| | Quarter | ||||||||||
2020 |
| 1st |
| 2nd |
| 3rd |
| 4th | ||||
| | | | | | | | | | | | |
Total revenues | | $ | 409,859 | | $ | 460,623 | | $ | 472,941 | | $ | 469,811 |
Operating income (a) | |
| 15,472 | |
| 30,534 | |
| 24,549 | |
| 19,698 |
Net income attributable to the Company (a) | |
| 8,443 | |
| 20,614 | |
| 15,708 | |
| 13,167 |
Basic earnings per common share (a) | | | 0.15 | | | 0.49 | | | 0.35 | | | 0.29 |
Diluted earnings per common share (a) | | | 0.15 | | | 0.48 | | | 0.35 | | | 0.28 |
Dividends declared per common share | | | 0.225 | | | 0.225 | | | 0.225 | | | 0.225 |
| | | | | | | | | | | | |
| | Quarter | ||||||||||
2019 |
| 1st |
| 2nd |
| 3rd |
| 4th | ||||
| | | | | | | | | ||||
Total revenues | | $ | 398,405 | | $ | 399,623 | | $ | 403,706 | | $ | 417,514 |
Operating income (loss) (b) | |
| 5,509 | |
| 14,231 | |
| 4,927 | |
| (132) |
Net (loss) income attributable to the Company (b) | |
| (1,731) | |
| 8,354 | |
| 385 | |
| (2,142) |
Basic (loss) earnings per common share (b) | | | (0.12) | | | 0.15 | | | (0.10) | | | (0.18) |
Diluted (loss) earnings per common share (b) | | | (0.12) | | | 0.15 | | | (0.10) | | | (0.18) |
Dividends declared per common share | | | 0.225 | | | 0.225 | | | 0.225 | | | 0.225 |
i. The fourth quarter of 2020 includes costs of $6.0 million, after tax loss of $4.0 million and basic and diluted loss per common share of $0.12 from strategic corporate reorganization costs.
i. The first, second, and third quarters of 2019 include costs of $11.0 million, $400,000 and $2.8 million, respectively; after tax losses of $9.8 million, $0.4 million, and $2.2 million, respectively; and basic and diluted loss per common share of $0.31, $0.01, and $0.07, respectively, from Special charges.
ii. The third and fourth quarters of 2019 include gains of $1.7 million and $2.9 million, respectively; after tax gains of $1.3 million and $2.2 million, respectively; and basic and diluted earnings per common share of $0.04 and $0.07, respectively, related to the Company’s refranchising of Company-owned restaurants.
Quarterly earnings per share on a full-year basis may not agree to the Consolidated Statements of Operations dueinclude $28.8 million, $33.3 million and $27.0 million of revenue for the years ended December 25, 2022, December 26, 2021, and December 27, 2020 respectively, that are part of the International reporting segment. These amounts include marketing fund contributions and sublease rental income from International franchisees in the UK that provide no significant contribution to rounding.
income before income taxes but must be reported on a gross basis under accounting requirements. The related expenses for these Other revenues are reported in Other expenses in the Consolidated Statements of Operations.
None.
91
Evaluation of Disclosure Controls and Procedures
Management’s Report on our Internal Control over Financial Reporting
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission (“2013 Framework”). Based on our evaluation under the COSO 2013 Framework, our management concluded that our internal control over financial reporting was effective as of December 27, 2020.
25, 2022.
Changes in Internal Control over Financial Reporting
92
We have audited Papa John’s International, Inc. and Subsidiaries’ internal control over financial reporting as of December 27, 2020,25, 2022, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Papa John’s International, Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 27, 2020,25, 2022, based onthe COSO criteria.
93
Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans, excluding securities reflected in column (a) | |||||||||||||||||
Equity compensation plans approved by security holders | 235,185 | $ | 56.53 | 3,616,086 | ||||||||||||||||
Equity compensation plans not approved by security holders * | 136,701 | |||||||||||||||||||
Total | 371,886 | $ | 56.53 | 3,616,086 |
| | | | | | | |
|
| |
| | |
| (c) |
| | (a) | | (b) | | Number of securities | |
| | Number of | | Weighted | | remaining available | |
| | securities to be | | average | | for future issuance | |
| | issued upon exercise | | exercise price | | under equity | |
| | of outstanding | | of outstanding | | compensation plans, | |
| | options, warrants | | options, warrants | | excluding securities | |
Plan Category | | and rights | | and rights | | reflected in column (a) | |
| | | | | | | |
Equity compensation plans approved by security holders |
| 563,938 | | $ | 54.82 |
| 4,738,169 |
Equity compensation plans not approved by security holders * |
| 143,024 | | | | | |
Total |
| 706,962 | | $ | 54.82 |
| 4,738,169 |
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Information regarding security ownership of certain beneficial owners and management and related stockholder matters appearing under the caption “Security Ownership of Certain Beneficial Owners and Management” is incorporated by reference from the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Report.
94
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
95
Schedule II - Valuation and Qualifying Accounts
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| | Beginning of | | Costs and | | Additions / | | | End of | ||||
Classification | | Year | | Expenses | | (Deductions) | | | Year | ||||
(in thousands) | | | | | | | | | | | | | |
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Fiscal year ended December 27, 2020 | | | | | | | | | | | | | |
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Deducted from asset accounts: | | | | | | | | | | | | | |
Valuation allowance on deferred tax assets | | $ | 17,303 | | $ | 1,313 | | $ | 4,356 | | | $ | 22,972 |
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Fiscal year ended December 29, 2019 | | | | | | | | | | | | | |
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Deducted from asset accounts: | | | | | | | | | | | | | |
Reserve for uncollectible accounts receivable | | $ | 4,205 | | $ | 3,216 | | $ | (80) | (1) | | $ | 7,341 |
Reserve for franchisee notes receivable | |
| 3,369 | |
| (77) | |
| 280 | (1) | |
| 3,572 |
Valuation allowance on deferred tax assets | | | 8,183 | | | 6,301 | | | 2,819 | | | | 17,303 |
| | $ | 15,757 | | $ | 9,440 | | $ | 3,019 | | | $ | 28,216 |
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Fiscal year ended December 30, 2018 | | | | | | | | | | | | | |
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Deducted from asset accounts: | | | | | | | | | | | | | |
Reserve for uncollectible accounts receivable | | $ | 2,271 | | $ | 7,242 | | $ | (5,308) | (1) | | $ | 4,205 |
Reserve for franchisee notes receivable | |
| 1,047 | |
| (393) | |
| 2,715 | (1) | |
| 3,369 |
Valuation allowance on deferred tax assets | | | 7,415 | | | (1,754) | | | 2,522 | | | | 8,183 |
| | $ | 10,733 | | $ | 5,095 | | $ | (71) | | | $ | 15,757 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Item 16. Summary
None.
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3.1 |
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| Certificate of Designation of Series A Junior Participating Preferred Stock of Papa John’s International, Inc. Exhibit 3.1 to our report on Form 8-K as filed on July 23, 2018 is incorporated herein by reference. |
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| Description of Registrant’s securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. |
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10.1 |
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10.2 |
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| Employment Agreement between Papa John’s International, Inc. and Robert Lynch effective August 26, 2019. Exhibit 10.1 to our report on Form 8-K as filed on August 28, 2019 is incorporated herein by reference. |
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| Papa John’s International, Inc. Deferred Compensation Plan, as amended through December 5, 2012. Exhibit 10.1 to our
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10.11* |
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32.2** |
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101 | Financial statements from the Annual Report on Form 10-K of Papa John’s International, Inc. for the year ended December |
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104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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* Compensatory plan required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
100
Date: February | PAPA JOHN’S INTERNATIONAL, INC. | |||||||||
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| /s/ Robert M. Lynch |
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| Robert M. Lynch |
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| President and Chief Executive Officer
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101
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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/s/ Jeffrey C. Smith |
| Chairman |
| February |
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Jeffrey C. Smith |
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/s/ Robert M. Lynch |
| President and Chief Executive Officer |
| February |
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Robert M. Lynch |
| (Principal Executive Officer and Director) |
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/s/ Ann B. Gugino |
| Chief Financial Officer |
| February |
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Ann B. Gugino |
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/s/ Christopher L. Coleman |
| Director |
| February |
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Christopher L. Coleman |
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/s/ Olivia F. Kirtley |
| Director |
| February |
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Olivia F. Kirtley |
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/s/ Laurette T. Koellner |
| Director |
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Laurette T. Koellner |
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/s/ Jocelyn C. Mangan |
| Director |
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Jocelyn C. Mangan |
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/s/ Sonya E. Medina |
| Director |
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Sonya E. Medina |
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/s/ Shaquille R. O’Neal |
| Director |
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Shaquille R. O’Neal |
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/s/ Anthony M. Sanfilippo |
| Director |
| February |
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Anthony M. Sanfilippo |
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102