UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~March 29, ~~2014~~2015

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

Commission File Number: 0-21660

PAPA JOHN’S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		61-1203323
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification
~~incorporation or organization)~~		number)

2002 Papa Johns Boulevard

Louisville, Kentucky 40299-2367

(Address of principal executive offices)

(502) 261-7272

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o

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

At ~~July 29, 2014,~~April 28, 2015, there were outstanding ~~40,926,449~~39,783,131 shares of the registrant’s common stock, par value $0.01 per share.

Table of Contents

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets ~~– June~~— March 29, ~~2014~~2015 and December ~~29, 2013~~28, 2014	2

	Condensed Consolidated Statements of Income –— Three ~~and Six~~ Months Ended ~~June~~March 29, ~~2014~~2015 and ~~June~~March 30, ~~2013~~2014	3

	Consolidated Statements of Comprehensive Income –— Three ~~and Six~~ Months Ended ~~June~~March 29, ~~2014~~2015 and ~~June~~March 30, ~~2013~~2014	4

	Consolidated Statements of Cash Flows ~~– Six~~— Three Months Ended ~~June~~March 29, ~~2014~~2015 and ~~June~~March 30, ~~2013~~2014	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2523

Item 4.	Controls and Procedures	2624

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	2624

Item 1A.	Risk Factors	2725

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2725

Item 6.	Exhibits	2826

Table of Contents

~~PART 1. FINANCIAL INFORMATION~~

Item 1. Financial Statements

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)	June 29, 2014			December 29, 2013			March 29, 2015			December 28, 2014
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	19,971		$	13,670		$	23,524		$	20,122
Accounts receivable, net	48,377			53,203			56,187			56,047
Notes receivable, net	5,862			3,566			6,103			6,106
Income taxes receivable							3,628			9,527
Inventories	31,895			23,035			26,354			27,394
Deferred income taxes	7,673			8,004			7,576			8,248
Prepaid expenses	14,156			14,336			15,982			18,736
Other current assets	9,646			9,226			10,132			9,828
Total current assets	137,580			125,040			149,486			156,008
Property and equipment, net	218,448			212,097			216,080			219,457
Notes receivable, less current portion, net	11,534			13,239			12,482			12,801
Goodwill	82,106			79,391			81,421			82,007
Deferred income taxes							3,914			3,914
Other assets	35,532			34,524			38,594			38,616
Total assets	$	485,200		$	464,291		$	501,977		$	512,803

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	33,719		$	35,653		$	35,009		$	38,832
Income and other taxes payable	5,824			4,401			9,804			9,637
Accrued expenses and other current liabilities	54,468			57,807			55,521			58,293
Total current liabilities	94,011			97,861			100,334			106,762
Deferred revenue	5,579			5,827			3,906			4,257
Long-term debt	210,000			157,900			231,000			230,451
Deferred income taxes	12,928			14,660			20,508			22,188
Other long-term liabilities	45,644			42,835			44,130			41,875
Total liabilities	368,162			319,083			399,878			405,533

Redeemable noncontrolling interests	8,433			7,024			8,798			8,555

Stockholders’ equity:
Preferred stock ($0.01 par value per share; no shares issued)	—			—			—			—
Common stock ($0.01 par value per share; issued 43,152 at June 29, 2014 and 42,796 at December 29, 2013)	432			428
Common stock ($0.01 par value per share; issued 43,523 at March 29, 2015 and 43,331 at December 28, 2014)							435			433
Additional paid-in capital	139,705			137,552			148,981			147,912
Accumulated other comprehensive income	2,765			2,463
Accumulated other comprehensive (loss) income							(982		)	671
Retained earnings	66,944			41,297			109,616			92,876
Treasury stock (2,297 shares at June 29, 2014 and 1,129 shares at December 29, 2013, at cost)	(101,830		)	(44,066		)
Treasury stock (3,879 shares at March 29, 2015 and 3,549 shares at December 28, 2014, at cost)							(177,216		)	(155,659		)
Total stockholders’ equity, net of noncontrolling interests	108,016			137,674			80,834			86,233
Noncontrolling interests in subsidiaries	589			510			12,467			12,482
Total stockholders’ equity	108,605			138,184			93,301			98,715
Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	485,200		$	464,291		$	501,977		$	512,803

See accompanying notes.

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

	Three Months Ended						Six Months Ended						Three Months Ended
(In thousands, except per share amounts)	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013			March 29, 2015			March 30, 2014

North America revenues:
Domestic Company-owned restaurant sales	$	170,000		$	155,153		$	348,193		$	313,051		$	197,287		$	178,193
Franchise royalties	20,983			20,230			43,597			40,963			25,359			22,614
Franchise and development fees	132			219			276			765			265			144
Domestic commissary sales	150,581			140,003			314,628			283,897			162,333			164,047
Other sales	13,595			12,444			26,345			25,051			21,614			12,750
International revenues:
Royalties and franchise and development fees	6,317			5,391			12,096			10,458			6,498			5,779
Restaurant and commissary sales	19,256			15,746			37,106			30,605			18,928			17,850
Total revenues	380,864			349,186			782,241			704,790			432,284			401,377
Costs and expenses:
Domestic Company-owned restaurant expenses:
Cost of sales	42,030			37,825			87,186			74,898			47,504			45,156
Salaries and benefits	45,805			42,053			93,388			85,325			53,658			47,583
Advertising and related costs	15,354			14,677			31,610			29,470			16,770			16,256
Occupancy costs	9,446			8,939			18,757			17,650
Other restaurant operating expenses	25,220			22,431			50,507			45,176
Occupancy costs and other restaurant operating expenses													37,100			34,598
Total domestic Company-owned restaurant expenses	137,855			125,925			281,448			252,519			155,032			143,593
Domestic commissary expenses:
Cost of sales	118,470			107,676			247,394			218,599			125,126			128,924
Salaries and benefits	6,847			6,084			13,871			12,100
Other commissary operating expenses	16,215			15,185			32,070			30,646
Salaries and benefits and other commissary operating expenses													24,610			22,879
Total domestic commissary expenses	141,532			128,945			293,335			261,345			149,736			151,803
Other operating expenses	13,221			11,132			24,652			22,584			20,603			11,431
International restaurant and commissary expenses	15,876			12,983			30,761			25,636			15,478			14,885
General and administrative expenses	33,562			33,126			70,528			66,284			41,933			36,966
Other general expenses	1,964			1,597			3,497			2,782			1,816			1,533
Depreciation and amortization	9,855			8,530			19,019			17,067			10,041			9,164
Total costs and expenses	353,865			322,238			723,240			648,217			394,639			369,375
Operating income	26,999			26,948			59,001			56,573			37,645			32,002
Net interest (expense) income	(763		)	(340		)	(1,355		)	332			(1,209		)	(592		)
Income before income taxes	26,236			26,608			57,646			56,905			36,436			31,410
Income tax expense	8,397			8,563			19,266			18,541			12,197			10,869
Net income before attribution to noncontrolling interests	17,839			18,045			38,380			38,364			24,239			20,541
Income attributable to noncontrolling interests	(1,091		)	(895		)	(2,321		)	(1,908		)	(2,003		)	(1,230		)
Net income attributable to the Company	$	16,748		$	17,150		$	36,059		$	36,456		$	22,236		$	19,311

Calculation of income for earnings per share:
Net income attributable to the Company	$	16,748		$	17,150		$	36,059		$	36,456		$	22,236		$	19,311
Increase in noncontrolling interest redemption value	(31		)	—			(39		)	—
Decrease (increase) in noncontrolling interest redemption value													70			(8		)
Net income attributable to participating securities	(81		)	—			(218		)	—			(100		)	(137		)
Net income attributable to common shareholders	$	16,636		$	17,150		$	35,802		$	36,456		$	22,206		$	19,166

Basic earnings per common share	$	0.40		$	0.39		$	0.86		$	0.83		$	0.56		$	0.46
Diluted earnings per common share	$	0.40		$	0.39		$	0.85		$	0.81		$	0.55		$	0.45

Basic weighted average common shares outstanding	41,225			43,484			41,501			43,996			39,827			41,778
Diluted weighted average common shares outstanding	41,970			44,500			42,332			45,086			40,510			42,696

Dividends declared per common share	$	0.125		$	—		$	0.250		$	—		$	0.14		$	0.125

See accompanying notes.

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended						Six Months Ended						Three Months Ended
(In thousands)	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013			March 29, 2015			March 30, 2014

Net income before attribution to noncontrolling interests	$	17,839		$	18,045		$	38,380		$	38,364		$	24,239		$	20,541
Other comprehensive income (loss), before tax:												��
Foreign currency translation adjustments	959			(586		)	926			(1,721		)	(1,541		)	(33		)
Interest rate swaps (1)	(404		)	190			(447		)	73			(1,084		)	(43		)
Other comprehensive income (loss), before tax	555			(396		)	479			(1,648		)	(2,625		)	(76		)
Income tax effect:
Foreign currency translation adjustments	(355		)	217			(343		)	637			570			12
Interest rate swaps (2)	149			(71		)	165			(27		)	401			16
Income tax effect	(206		)	146			(178		)	610			971			28
Other comprehensive income (loss), net of tax	349			(250		)	301			(1,038		)	(1,654		)	(48		)
Comprehensive income before attribution to noncontrolling interests	18,188			17,795			38,681			37,326			22,585			20,493
Comprehensive income, redeemable noncontrolling interests	(1,086		)	(895		)	(2,341		)	(1,908		)
Comprehensive (loss) income, nonredeemable noncontrolling interests	(5		)	—			20			—
Comprehensive (income) loss, redeemable noncontrolling interests													(1,313		)	(1,255		)
Comprehensive (income) loss, nonredeemable noncontrolling interests													(690		)	25
Comprehensive income attributable to the Company	$	17,097		$	16,900		$	36,360		$	35,418		$	20,582		$	19,263

(1) Amounts reclassified out of accumulated other comprehensive income (“AOCI”) into net interest (expense) income included ~~$250~~$394 and ~~$499~~$249 for the three ~~and six~~ months ended ~~June~~March 29, ~~2014, respectively~~2015 and ~~$44 and $88 for the three and six months ended June~~March 30, ~~2013,~~2014, respectively.

(2) The income tax effects of amounts reclassified out of AOCI into net interest (expense) income were ~~$93~~$146 and ~~$185~~$92 for the three ~~and six~~ months ended ~~June~~March 29, ~~2014, respectively~~2015 and ~~$16 and $32 for the three and six months ended June~~March 30, ~~2013,~~2014, respectively.

See accompanying notes.

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended						Three Months Ended
(In thousands)	June 29, 2014			June 30, 2013			March 29, 2015			March 30, 2014

Operating activities
Net income before attribution to noncontrolling interests	$	38,380		$	38,364		$	24,239		$	20,541
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable	936			780			659			145
Depreciation and amortization	19,019			17,067			10,041			9,164
Deferred income taxes	6,298			8,256			5,055			6,170
Stock-based compensation expense	3,612			3,784			2,264			2,190
Excess tax benefit on equity awards	(7,890		)	(3,803		)	(5,091		)	(4,900		)
Other	2,270			694			1,180			1,110
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	3,400			496			(1,312		)	(854		)
Income taxes receivable							5,899			—
Inventories	(7,295		)	456			1,043			(3,210		)
Prepaid expenses	180			2,000			2,755			1,919
Other current assets	(152		)	(37		)	(303		)	(204		)
Other assets and liabilities	(17		)	(1,954		)	(154		)	(795		)
Accounts payable	(1,934		)	(3,896		)	(3,828		)	(1,311		)
Income and other taxes payable	1,423			(9,022		)	167			3,268
Accrued expenses and other current liabilities	(3,970		)	(5,870		)	(2,291		)	(6,958		)
Deferred revenue	305			(83		)	(74		)	403
Net cash provided by operating activities	54,565			47,232			40,249			26,678

Investing activities
Purchases of property and equipment	(26,239		)	(25,493		)	(7,558		)	(11,137		)
Loans issued	(2,642		)	(3,103		)	(506		)	(1,758		)
Repayments of loans issued	1,880			2,908			1,083			1,164
Acquisitions, net of cash acquired	(3,179		)	—			(341		)	—
Other	3			319			20			7
Net cash used in investing activities	(30,177		)	(25,369		)	(7,302		)	(11,724		)

Financing activities
Net proceeds on line of credit facility	52,100			44,983			549			19,267
Cash dividends paid	(10,404		)	—			(5,545		)	(5,240		)
Excess tax benefit on equity awards	7,890			3,803			5,091			4,900
Tax payments for equity award issuances	(7,498		)	(1,841		)	(5,557		)	(3,233		)
Proceeds from exercise of stock options	3,361			3,696			2,210			2,989
Acquisition of Company common stock	(63,304		)	(58,806		)	(24,765		)	(32,800		)
Contributions from noncontrolling interest holders	100			450
Distributions to noncontrolling interest holders	(600		)	(1,750		)	(1,705		)	(300		)
Other	293			(468		)	253			223
Net cash used in financing activities	(18,062		)	(9,933		)	(29,469		)	(14,194		)
Effect of exchange rate changes on cash and cash equivalents	(25		)	(90		)	(76		)	(42		)
Change in cash and cash equivalents	6,301			11,840			3,402			718
Cash and cash equivalents at beginning of period	13,670			16,396			20,122			13,670
Cash and cash equivalents at end of period	$	19,971		$	28,236		$	23,524		$	14,388

See accompanying notes.

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~June~~March 29, ~~2014~~2015

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the ~~six~~three months ended ~~June~~March 29, ~~2014~~2015 are not necessarily indicative of the results that may be expected for the fiscal year ended December ~~28, 2014.~~27, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the ~~“Company,”~~“Company”, “Papa John’s” or in the first person notations of ~~“we,”~~“we”, “us” and “our”) for the year ended December ~~29, 2013.~~28, 2014.

2. Significant Accounting Policies

~~Reclassifications~~

Certain prior year amounts in the condensed consolidated statements of income have been reclassified to conform to the current year presentation, which had no effect on current or previously reported net income.

Noncontrolling Interests

Papa John’s has joint ventures in which there are noncontrolling interests, including the following as of ~~June~~March 29, ~~2014~~2015 and ~~June~~March 30, ~~2013:~~2014:

	Number of Restaurants	Restaurant Locations	Papa John’s Ownership		Noncontrolling Interest Ownership		Number of Restaurants	Restaurant Locations	Papa John’s Ownership		Noncontrolling Interest Ownership
June 29, 2014
March 29, 2015
Star Papa, LP	81	Texas	51	%	49	%	84	Texas	51	%	49	%
Colonel’s Limited, LLC	52	Maryland and Virginia	70	%	30	%	56	Maryland and Virginia	70	%	30	%
PJ Minnesota, LLC	34	Minnesota	80	%	20	%	35	Minnesota	70	%	30	%
PJ Denver, LLC	25	Colorado	60	%	40	%	25	Colorado	60	%	40	%

June 30, 2013
March 30, 2014
Star Papa, LP	78	Texas	51	%	49	%	80	Texas	51	%	49	%
Colonel’s Limited, LLC	52	Maryland and Virginia	70	%	30	%	52	Maryland and Virginia	70	%	30	%
PJ Minnesota, LLC	31	Minnesota	80	%	20	%	34	Minnesota	80	%	20	%
PJ Denver, LLC	24	Colorado	60	%	40	%	25	Colorado	60	%	40	%

We are required to report consolidated net income at amounts attributable to the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the condensed consolidated statements of income attributable to the noncontrolling interest holder.

Table of Contents

The income before income taxes attributable to ~~the~~these joint ventures for the three ~~and six~~ months ended ~~June~~March 29, ~~2014~~2015 and ~~June~~March 30, ~~2013~~2014 was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 29,		June 30,		June 29,		June 30,		March 29,		March 30,
	2014		2013		2014		2013		2015		2014

Papa John’s International, Inc.	$	1,744	$	1,284	$	3,592	$	2,792	$	3,010	$	1,848
Noncontrolling interests	1,091		895		2,321		1,908		2,003		1,230
Total income before income taxes	$	2,835	$	2,179	$	5,913	$	4,700	$	5,013	$	3,078

The following summarizes the redemption feature, location within the condensed consolidated balance sheets and the value at which the noncontrolling interests are recorded for each joint venture as of ~~June~~March 29, ~~2014:~~2015:

Joint Venture	Redemption Feature	Location within the Condensed Consolidated Balance Sheets	Recorded Value

~~Colonel’s Limited, LLC~~	~~Mandatorily redeemable~~	~~Other long-term liabilities~~	~~Redemption value~~
Star Papa, LP	Redeemable	Temporary equity	Carrying value
PJ Denver, LLC	Redeemable	Temporary equity	Redemption value
Colonel’s Limited, LLC	No redemption feature	Permanent equity	Carrying value
PJ Minnesota, LLC	No redemption feature	Permanent equity	Carrying value

The Colonel’s Limited, LLC agreement contains a mandatory redemption clause and, accordingly, the Company has recorded this noncontrolling interest as a liability at its redemption value in other long-term liabilities. The redemption value is adjusted at each reporting date and any change is recorded in interest expense. We recorded interest income of $48,000 and interest expense of $36,000 in the second quarter of 2014 and 2013, respectively, and interest income of $21,000 and $773,000 in the first six months of 2014 and 2013 respectively. The redemption value was $11.1 million as of June 29, 2014 and $10.8 million as of December 29, 2013.

~~The~~ noncontrolling interest holders of two ~~other~~ joint ventures have the option to require the Company to purchase their interests. 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 condensed consolidated balance sheets and include the following joint ventures:

· The Star Papa, LP agreement contains a redemption feature that is not currently redeemable, but it is probable to become redeemable in the future. Due to specific valuation provisions contained in the agreement, this noncontrolling interest has been recorded at its carrying value.

· The PJ Denver, LLC agreement contains a redemption feature that is currently redeemable and, therefore, this noncontrolling interest has been recorded at its current redemption value. The change in redemption value is recorded as an adjustment to “Redeemable noncontrolling interests” and “Retained earnings” in the condensed consolidated balance sheets.

The following summarizes changes in these redeemable noncontrolling interests (in thousands):

Balance at December 29, 2013	$	7,024
Balance at December 28, 2014			$	8,555
Net income	1,370		1,313
Distributions			(1,000		)
Change in redemption value	39		(70		)
Balance at June 29, 2014	$	8,433
Balance at March 29, 2015			$	8,798

~~We have a fourth joint venture,~~The noncontrolling interests of our Colonel’s Limited, LLC and PJ Minnesota, LLC ~~that had a redemption feature until a contract amendment removed the redemption feature~~joint ventures are recorded at carrying value in “Stockholders’ equity” in the ~~fourth quarter of 2013. The~~condensed consolidated balance sheets at both March 29, 2015 and December 28, 2014, as the noncontrolling interest ~~was reclassified from~~holders’ agreements had no redemption features.

Table of Contents

~~temporary equity to “Stockholders’ equity” in the condensed consolidated balance sheet at December 29, 2013, at carrying value.~~

Deferred Income Tax Accounts and Tax Reserves

We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. Discrete items are recorded in the quarter in which they occur.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. As a result, our effective tax rate may fluctuate. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. As of ~~June~~March 29, ~~2014,~~2015, we had a net deferred tax liability of approximately ~~$5.3~~$9.0 million.

Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues on a quarterly basis to adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures.

Fair Value Measurements and Disclosures

The Company is required to determine the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Fair value is a market-based measurement, not an entity specific measurement. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash, accounts receivable and accounts payable. The fair value of our notes receivable net of allowances also approximates carrying value. The fair value of the amount outstanding under our revolving credit facility approximates its carrying value due to its variable market-based interest rate. These assets and liabilities are categorized as Level 1 as defined below.

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 categories:

· Level 1: Quoted market prices in active markets for identical assets or liabilities.

· Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

· Level 3: Unobservable inputs that are not corroborated by market data.

Table of Contents

Our financial assets and liabilities that were measured at fair value on a recurring basis as of ~~June~~March 29, ~~2014~~2015 and December ~~29, 2013~~28, 2014 are as follows (in thousands):

	Carrying		Fair Value Measurements						Carrying		Fair Value Measurements
	Value		Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3

June 29, 2014
Financial assets:
Cash surrender value of life insurance policies (a)	$	17,613	$	17,613	$	—	$	—
Interest rate swap (b)	41		—		41		—

Financial liabilities:
Interest rate swap (b)	584		—		584		—

December 29, 2013
March 29, 2015
Financial assets:
Cash surrender value of life insurance policies (a)	$	16,798	$	16,798	$	—	$	—	$	18,806	$	18,806	$	—	$	—

Financial liabilities:
Interest rate swap (b)	76		—		76		—
Interest rate swaps (b)									1,470		—		1,470		—

December 28, 2014
Financial assets:
Cash surrender value of life insurance policies (a)									$	18,238	$	18,238	$	—	$	—

Financial liabilities:
Interest rate swaps (b)									376		—		376		—

(a) Represents life insurance policies held in our non-qualified deferred compensation plan.

(b) The fair ~~values~~value of our interest rate swaps are based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swaps, as well as considering published discount factors, and projected London Interbank Offered Rates (“LIBOR”).

There were no transfers among levels within the fair value hierarchy during the ~~six~~three months ended ~~June~~March 29, ~~2014.~~2015.

Variable Interest ~~Entities~~Entity

Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants. PJMF is a variable interest entity as it does not have sufficient equity to fund its operations without ongoing financial support and contributions from its members. Based on the ownership and governance structure and operating procedures of PJMF, we have determined that we do not have the power to direct the most significant activities of PJMF and therefore are not the primary beneficiary. Accordingly, we determined that consolidation of PJMF is not appropriate.

~~Recent Accounting Pronouncement~~Revenue from Contract with Customers

In May 2014, the Financial Accounting Standards Board issued “Revenue from Contracts with Customers” (Accounting Standards ~~update~~Update (“ASU”) 2014-09), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. This update requires companies to recognize revenue at amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services at the time of transfer. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. Such estimates may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Companies can either apply a full retrospective adoption or a modified retrospective adoption.

Table of Contents

We are required to adopt the new requirements in the first quarter of ~~2017.~~2017; however, the Financial Accounting Standards Board recently issued a proposal to deter the effective date and thus the Company’s adoption to the first quarter of 2018. We are ~~currently~~ evaluating the method of adoption and its impact of the new requirements on our consolidated financial statements. We currently do not believe the impact will be significant.

~~Table of Contents~~

3.~~Stockholders’ Equity~~

In the fourth quarter of 2013, we completed a two-for-one stock split of our outstanding shares in the form of a stock dividend. The stock dividend was distributed on December 27, 2013 with approximately 21.0 million shares of stock distributed. In conjunction with the stock split, we also retired shares held in treasury. The per-share and share amounts for 2013 in the accompanying condensed consolidated financial statements and notes to the financial statements have been adjusted to reflect the stock split.

4. Calculation of Earnings Per Share

We compute earnings per share using the two-class method. The two-class method requires an earnings allocation formula that determines earnings per share for common shareholders and participating security holders according to dividends declared and participating rights in undistributed earnings. We consider time-based restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights. Under the two-class method, undistributed earnings allocated to participating securities are subtracted from net income attributable to the Company in determining net income attributable to common shareholders.

Additionally, in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity, the ~~increase~~change in the redemption value for the noncontrolling interest of PJ Denver, LLC ~~reduces~~increases or decreases income attributable to common shareholders.

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

	Three Months Ended					Six Months Ended					Three Months Ended
	June 29,			June 30,		June 29,			June 30,		March 29,			March 30,
	2014			2013		2014			2013		2015			2014

Basic earnings per common share:
Net income attributable to the Company	$	16,748		$	17,150	$	36,059		$	36,456	$	22,236		$	19,311
Increase in noncontrolling interest redemption value	(31		)	—		(39		)	—
Decrease (increase) in noncontrolling interest redemption value											70			(8		)
Net income attributable to participating securities	(81		)	—		(218		)	—		(100		)	(137		)
Net income attributable to common shareholders	$	16,636		$	17,150	$	35,802		$	36,456	$	22,206		$	19,166

Weighted average common shares outstanding	41,225			43,484		41,501			43,996		39,827			41,778
Basic earnings per common share	$	0.40		$	0.39	$	0.86		$	0.83	$	0.56		$	0.46

Diluted earnings per common share:
Net income attributable to common shareholders	$	16,636		$	17,150	$	35,802		$	36,456	$	22,206		$	19,166

Weighted average common shares outstanding	41,225			43,484		41,501			43,996		39,827			41,778
Dilutive effect of outstanding equity awards (a)	745			1,016		831			1,090		683			918
Diluted weighted average common shares outstanding	41,970			44,500		42,332			45,086		40,510			42,696
Diluted earnings per common share	$	0.40		$	0.39	$	0.85		$	0.81	$	0.55		$	0.45

(a) Excludes ~~284~~112 awards at March 29, 2015 and ~~176~~102 awards ~~for the three and six months ended June 29,~~at March 30, 2014, ~~and 218 and 151 awards for the three and six months ended June 30, 2013,~~ as the effect of including such awards would have been antidilutive.

4.Debt

Our debt is comprised entirely of an unsecured revolving line of credit (“Credit Facility”). The outstanding balance was $231.0 million as of March 29, 2015 and $230.5 million as of December 28, 2014. On October 31, 2014, we amended our Credit Facility to increase the amount available to $400 million from the previous $300 million availability and to extend the maturity date from April 30, 2018 to October 31, 2019. Additionally, we have the option to increase the Credit Facility an additional $100 million. The interest rate charged on outstanding

Table of Contents

5.~~Debt~~

~~Our debt is comprised entirely of a revolving line of credit. The outstanding balance was $210.0 million as of June 29, 2014 and $157.9 million as of December 29, 2013.~~

In September 2010, we entered into a five-year, $175 million unsecured revolving credit facility, which was amended in November 2011 to extend the maturity date to November 30, 2016. On April 30, 2013, we amended and restated our revolving credit facility to increase the amount available for borrowing thereunder to $300 million and extend the maturity date to April 30, 2018. The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points. The remaining availability under the ~~revolving credit facility,~~Credit Facility, reduced for outstanding letters of credit, was approximately ~~$67.5~~$147.7 million as of ~~June~~March 29, ~~2014.~~2015.

The ~~revolving credit facility~~Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At ~~June~~March 29, ~~2014,~~2015, we were in compliance with these covenants.

~~In August 2011, we entered into an~~We use interest rate ~~swap agreement that resulted in a fixed rate~~swaps to hedge against the effects of ~~0.53%, instead of the variable rate of LIBOR, with a notional amount of $50 million and a maturity date of August 2013. On December 31, 2012, we amended our~~potential interest rate ~~swap agreement to extend~~increases on borrowings under our Credit Facility. We currently have the ~~maturity date to December 30, 2015. The amendment resulted in a change to the fixed rate (to 0.56% from 0.53%) but did not impact the notional amount of the~~following interest rate swap agreement. On July 30, 2013, we terminated the $50 million swap and entered into a new $75 million swap. The new swap has an interest rate of 1.42% and a maturity date of April 30, 2018, which coincides with the maturity date of our revolving credit facility. The termination of the previous swap did not have a material impact on our 2013 results. In May 2014, we entered into a $50 million forward interest rate swap with an interest rate of 1.36%, an effective date of December 30, 2014 and a maturity date of April 30, 2018.swaps:

Effective Dates	Floating Rate Debt	Fixed Rates

July 30, 2013 through April 30, 2018	$75 million	1.42	%

December 30, 2014 through April 30, 2018	$50 million	1.36	%

Our swaps are derivative instruments that are designated as cash flow hedges because the swaps provide a hedge against the effects of rising interest rates on borrowings. The effective portion of the gain or loss on the swaps is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the swaps affect earnings. Gains or losses on the swaps representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Amounts payable or receivable under the swaps are accounted for as adjustments to interest expense. As of ~~June~~March 29, ~~2014,~~2015, the swaps are highly effective cash flow hedges with no ineffectiveness for the ~~three- and six-month periods~~three month period ended ~~June~~March 29, ~~2014.~~2015.

The weighted average interest ~~rates~~rate for ~~our revolving credit facility,~~the Credit Facility, including the impact of the previously mentioned ~~swap agreement, were 1.7%~~swaps, was 2.1% and ~~1.6%~~1.5% for the three ~~and six~~ months ended ~~June~~March 29, 2015 and March 30, 2014, respectively. Interest paid, including payments made or received under the ~~swap,~~swaps, was ~~$853,000~~$1.3 million and ~~$424,000~~$717,000 for the three months ended ~~June~~March 29, ~~2014~~2015 and ~~June~~March 30, ~~2013, respectively, and $1.6 million and $802,000 for the six months ended June 29,~~ 2014, ~~and June 30, 2013,~~ respectively. As of ~~June~~March 29, ~~2014,~~2015, the portion of the ~~$543,000 net~~$1.5 million interest rate swap liability that would be reclassified into earnings during the next twelve months as interest expense approximates ~~$142,000.~~$477,000.

6.5. Litigation

~~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 financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of

~~Table of Contents~~

negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective action filed in August 2009 in the United States District Court, Eastern District of Missouri, alleging that delivery drivers were not reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act. Approximately 3,900 drivers out of a potential class size of 28,800 have opted into the action. ~~Additionally, in~~In late December 2013, the District Court granted a motion for class certification in five additional states, which ~~will add~~added approximately 15,000 plaintiffs to the case. The trial is scheduled for August 2015.

Table of Contents

We intend to vigorously defend against all claims in this lawsuit. However, given the inherent uncertainties of this litigation, the outcome of this case cannot be predicted and the amount of any potential loss cannot be reasonably estimated. A negative outcome in this case could have a material adverse effect on the Company.

7.6. Segment Information

We have five reportable segments: domestic Company-owned restaurants, domestic commissaries, North America franchising, international operations, and “all other” units.

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

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

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

Table of Contents

Our segment information is as follows (in thousands):

	Three Months Ended						Six Months Ended						Three Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013			March 29, 2015			March 30, 2014

Revenues from external customers:
Domestic Company-owned restaurants	$	170,000		$	155,153		$	348,193		$	313,051		$	197,287		$	178,193
Domestic commissaries	150,581			140,003			314,628			283,897			162,333			164,047
North America franchising	21,115			20,449			43,873			41,728			25,624			22,758
International	25,573			21,137			49,202			41,063			25,426			23,629
All others	13,595			12,444			26,345			25,051			21,614			12,750
Total revenues from external customers	$	380,864		$	349,186		$	782,241		$	704,790		$	432,284		$	401,377

Intersegment revenues:
Domestic commissaries	$	51,592		$	46,115		$	106,313		$	92,912		$	57,887		$	54,721
North America franchising	583			552			1,187			1,105			671			604
International	90			73			158			140			75			68
All others	8,087			3,318			11,817			6,486			3,932			3,730
Total intersegment revenues	$	60,352		$	50,058		$	119,475		$	100,643		$	62,565		$	59,123

Income (loss) before income taxes:
Domestic Company-owned restaurants	$	10,651		$	8,175		$	23,936		$	19,131		$	18,480		$	13,285
Domestic commissaries	6,846			9,642			17,277			19,805			11,800			10,431
North America franchising	17,882			17,396			37,366			35,618			22,319			19,484
International	1,903			866			2,635			1,207			1,344			732
All others	(442		)	1,153			148			1,812			443			590
Unallocated corporate expenses	(10,702		)	(10,413		)	(23,163		)	(19,931		)	(17,205		)	(12,461		)
Elimination of intersegment losses (profits)	98			(211		)	(553		)	(737		)
Elimination of intersegment profit													(745		)	(651		)
Total income before income taxes	$	26,236		$	26,608		$	57,646		$	56,905		$	36,436		$	31,410

Property and equipment:
Domestic Company-owned restaurants	$	203,632											$	210,463
Domestic commissaries	105,711												109,062
International	27,711												25,454
All others	43,113												47,079
Unallocated corporate assets	161,786												170,893
Accumulated depreciation and amortization	(323,505		)										(346,871		)
Net property and equipment	$	218,448											$	216,080

Table of Contents

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

Overview

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”) began operations in 1984. At ~~June~~March 29, ~~2014,~~2015, there were ~~4,487~~4,699 Papa John’s restaurants ~~(731~~(739 Company-owned and ~~3,756~~3,960 franchised) operating in all 50 states and in 37 international countries and territories. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, printing and promotional items, risk management services, and information systems and related services used in their operations.

The results of operations are based on the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of consolidated financial statements requires management to select accounting policies for critical accounting areas and make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact ~~the~~our operating results. See “Notes 1 and 2” of “Notes to Condensed Consolidated Financial Statements” for a discussion of the basis of presentation and the significant accounting policies.

Restaurant Progression

	Three Months Ended				Six Months Ended				Three Months Ended
	June 29, 2014		June 30, 2013		June 29, 2014		June 30, 2013		March 29, 2015		March 30, 2014

Papa John’s Restaurant Progression:
North America Company-owned:
Beginning of period	666		649		665		648		686		665
Opened	2		5		4		6		3		2
Closed	(1	)	—		(2	)	—		—		(1	)
Acquired from franchisees	5		—		5		—
Acquired									2		—
End of period	672		654		672		654		691		666
International Company-owned:
Beginning of period	58		50		58		48		49		58
Opened	1		1		1		3
Closed									(1	)	—
End of period	59		51		59		51		48		58
North America franchised:
Beginning of period	2,615		2,572		2,621		2,556		2,654		2,621
Opened	28		32		49		63		18		21
Closed	(24	)	(16	)	(51	)	(31	)	(20	)	(27	)
Sold to Company	(5	)	—		(5	)	—
Divested									(2	)	—
End of period	2,614		2,588		2,614		2,588		2,650		2,615
International franchised:
Beginning of period	1,101		926		1,084		911		1,274		1,084
Opened	46		43		69		69		50		23
Closed	(5	)	(10	)	(11	)	(21	)	(14	)	(6	)
End of period	1,142		959		1,142		959		1,310		1,101
Total restaurants - end of period	4,487		4,252		4,487		4,252		4,699		4,440

Table of Contents

FOCUS System

~~The~~As of March 29, 2015, the Company ~~is implementing a~~had implemented its new, proprietary point-of-sale system (“FOCUS”) in substantially all domestic ~~system-wide~~ restaurants. ~~As of June 29, 2014, we had installed FOCUS in 383 restaurants (369 Company-owned and 14 franchised), with the majority of the installations expected to occur by the end of 2014.~~

The costs related to implementing FOCUS are projected to decrease income before income taxes by approximately $5.0 million in 2014, or an $0.08 negative impact on diluted earnings per share, as compared to 2013. FOCUS had the following impact on our condensed consolidated statements of income for the three ~~and six~~ months ended ~~June~~March 29, 2015 and March 30, 2014 (in thousands):

Three Months

Six Months

June 29,

June 29,

2014

2014

Other sales (a)

$
123

$
135

Other operating expenses (b)

(462
)
(651
)
Depreciation and amortization (c)

(529
)
(579
)
Net decrease in income before income taxes

$
(868
)
$
(1,095
)

Diluted earnings per common share

$
(0.01
)
$
(0.02
)

	Three Months Ended
	Mar. 29,			Mar. 30,
	2015			2014

Franchise royalties (a)	$	(570	)	$	—
Other sales (b)	8,540			12
Other operating expenses (c)	(8,529		)	(189		)
Depreciation and amortization (d)	(1,237		)	(50		)
Net decrease in income before income taxes	$	(1,796	)	$	(227	)

Diluted earnings per common share	$	(0.03	)	$	(0.01	)

(a)Royalty incentive program tied to franchisee rollout of FOCUS.

(b) Represents revenues for equipment installed at domestic franchised restaurants.

~~(b)~~(c) Includes cost of sales associated with equipment installed at franchised restaurants and other costs to support the rollout of the program.

~~(c)~~(d) Includes depreciation expense for both the capitalized software and for equipment installed at Company-owned ~~restaurants.~~

~~Total income before income taxes and other measures excluding FOCUS system rollout costs included within this filing~~restaurants, which are not measures defined by GAAP. These non-GAAP measures should not be construed as substitutes for or better indicators of the company’s performance than the company’s GAAP results. Management believes presenting income before income taxes and other measures excluding the FOCUS system rollout costs is important for purposes of comparisonbeing depreciated over five to prior year results and analyzing each segment’s operating results. In addition, management uses these non-GAAP measures to allocate resources and analyze trends and underlying operating performance of the Company.

As part of the rollout, we have partnered with a third party to offer a financing option for this system to our franchisees. The arrangement with the third party requires us to offer a guarantee for the loans. The term of these loans will be fiveseven years, or less and will require us to perform under the guarantee when a franchisee has a late payment in excess of 60 days. The guarantee is limited to the greater of 10% of all loans or 100% of all loans that have higher risk profiles. Higher risk loan profiles are determined based on pre-established criteria including length of time in business, credit rating, and other factors. As part of this program, we have the ability to decline funding on higher risk loans.

~~We will record a liability for the estimated fair value of the guarantee. As of June 29, 2014, we have no recorded liability as the FOCUS franchise rollout has just started.~~

~~Table of Contents~~respectively.

Results of Operations

Summary of Operating Results - Segment Review

Discussion of Revenues

Consolidated revenues were ~~$380.9~~$432.3 million for the ~~three months ended June 29, 2014,~~first quarter of 2015, an increase of ~~$31.7~~$30.9 million, or ~~9.1%,~~7.7% over the corresponding ~~2013 period. For the six months ended June 29,~~ 2014 ~~total revenues were $782.2 million, an increase of $77.5 million, or 11.0%, over the corresponding 2013~~ period. The ~~increases~~increase in revenues for the ~~three and six months ended June 29, 2014, were~~first quarter of 2015 was primarily due to the following:

· Domestic Company-owned restaurant sales increased ~~$14.8~~$19.1 million, or ~~9.6%~~10.7%, ~~and $35.1 million, or 11.2% for the three and six months ended June 29, 2014, respectively,~~ primarily due to ~~increases~~an increase of ~~7.5% and 9.5%~~8.1% in comparable ~~sales.~~sales during the first quarter of 2015 and a 3.2% increase in equivalent units. “Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods.

· North America franchise royalty revenue increased approximately ~~$750,000, or 3.7%, and $2.6~~$2.7 million, or ~~6.4%~~12.1%, ~~for the three and six months ended June 29, 2014, respectively,~~ primarily due to ~~increases~~an increase of ~~5.4% and 7.2%~~6.0% in comparable sales ~~partially offset by increases in~~and due to reduced levels of royalty incentives ~~to franchisees for meeting certain development and performance targets.~~in the first quarter of 2015.

· Domestic commissary sales ~~increased $10.6~~decreased $1.7 million, or ~~7.6%~~1.0%, ~~and $30.7 million, or 10.8%, for the three and six months ended June 29, 2014, respectively, due to increases in the~~as lower revenues associated with lower cheese prices ~~of certain commodities, primarily cheese, and~~were somewhat offset by increases in sales ~~volumes for the six-month period.~~volumes.

·Other sales increased $8.9 million, or 69.5%, primarily due to FOCUS equipment sales to franchisees.

Table of Contents

· International royalties and franchise and development fees increased approximately ~~$900,000,~~$700,000, or ~~17.2%~~12.4%, ~~and $1.6 million, or 15.7%, for the three and six months ended June 29, 2014, respectively,~~ primarily due to ~~increases~~an increase in ~~the number of restaurants~~units and ~~increases in~~ comparable sales of ~~8.6% and 7.6%~~8.0%, calculated on a constant dollar basis. The increase was somewhat offset by the negative impact of foreign currency exchange rates.

· International restaurant and commissary sales increased ~~$3.5~~$1.1 million, or ~~22.3%~~6.0%, ~~and $6.5 million, or 21.2%, respectively,~~ primarily due to ~~increases~~an increase in ~~China Company-owned restaurant sales, due to increases in units, and increases in our United Kingdom~~ commissary revenues ~~due to~~from increases in units and higher comparable sales. This increase was partially offset by lower sales at China Company-owned restaurants due to the disposition of eleven restaurants in 2014. Additionally, sales were negatively impacted by foreign currency exchange rates.

Discussion of Operating Results

~~Second~~First quarter ~~2014~~2015 income before income taxes was ~~$26.2~~$36.4 million, compared to ~~$26.6~~$31.4 million in the prior year comparable period, or a decrease of $372,000, or 1.4%. Excluding FOCUS rollout costs of $868,000, income before income taxes increased $496,000, or 1.9%. Income before income taxes was $57.6 million for the six months ended June 29, 2014, compared to $56.9 million for the prior year comparable period, or an16.0% increase ~~of $741,000, or 1.3%. Excluding FOCUS rollout costs of $1.1 million, income before income taxes increased $1.8 million, or 3.2%. See the FOCUS System section for additional information.~~

~~Table of Contents~~

~~Income before income taxes is~~as summarized in the following table on a reporting segment basis (in thousands):

	Three Months Ended									Six Months Ended									Three Months Ended
	June 29,			June 30,			Increase			June 29,			June 30,			Increase			March 29,			March 30,			Increase
	2014			2013			(Decrease)			2014			2013			(Decrease)			2015			2014			(Decrease)

Domestic Company-owned restaurants	$	10,651		$	8,175		$	2,476		$	23,936		$	19,131		$	4,805		$	18,480		$	13,285		$	5,195
Domestic commissaries	6,846			9,642			(2,796		)	17,277			19,805			(2,528		)	11,800			10,431			1,369
North America franchising	17,882			17,396			486			37,366			35,618			1,748			22,319			19,484			2,835
International	1,903			866			1,037			2,635			1,207			1,428			1,344			732			612
All others	(442		)	1,153			(1,595		)	148			1,812			(1,664		)	443			590			(147		)
Unallocated corporate expenses	(10,702		)	(10,413		)	(289		)	(23,163		)	(19,931		)	(3,232		)	(17,205		)	(12,461		)	(4,744		)
Elimination of intersegment losses (profits)	98			(211		)	309			(553		)	(737		)	184
Elimination of intersegment profits																			(745		)	(651		)	(94		)
Total income before income taxes(a)	$	26,236		$	26,608		$	(372	)	$	57,646		$	56,905		$	741		$	36,436		$	31,410		$	5,026
FOCUS system rollout costs (a)	868			—			868			1,095			—			1,095
Total income before income taxes, excluding FOCUS system rollout costs (b)	$	27,104		$	26,608		$	496		$	58,741		$	56,905		$	1,836

(a) Includes FOCUS system rollout costs of approximately $1.8 million and $200,000 for the three months ended March 29, 2015 and March 30, 2014, respectively. See the ~~FOCUS~~Focus System section ~~for additional information.~~

~~(b)Represents a measure that is not defined by accounting principles generally accepted in the United States (“GAAP”) . See the FOCUS System section~~above for additional information.

The ~~decrease of $372,000, or 1.4%, and~~ increase of ~~$741,000,~~$5.0 million, or ~~1.3%~~16.0%, ~~including FOCUS rollout costs, for the three- and six-month periods, respectively, were~~in income before income taxes was primarily due to the following:

· Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ income before income taxes increased ~~approximately $2.5~~$5.2 million ~~and $4.8 million for~~in the ~~three and six months ended June 29, 2014, respectively, compared to the corresponding prior year periods.~~first quarter of 2015. The ~~increases were~~increase was primarily due to the ~~7.5% and 9.5% increases~~8.1% increase in comparable sales ~~partially offset by the impact of~~and higher profits from lower commodity costs. The market price for cheese averaged ~~$2.13 and $2.17~~$1.54 per pound for the ~~three- and six-month periods in 2014,~~first quarter of 2015, compared to ~~$1.78 and $1.72~~$2.21 per pound in the prior ~~year comparable periods.~~year. This was slightly offset by higher depreciation expense associated with FOCUS equipment of approximately $500,000.

· Domestic Commissary Segment. Domestic commissaries’ income before income taxes ~~decreased~~increased approximately ~~$2.8~~$1.4 million ~~and $2.5 million for the three and six months ended June 29, 2014, respectively, compared to the corresponding prior year periods. The decrease for the three-month period was~~ primarily due to a lower margin of approximately $800,000, higher insurance claims costs of approximately $1.1 million and higher costs associated with various ongoing commissary initiatives. The decrease for the six-month period was due to the previously mentioned higher costs, partially offset by incremental profits from higher ~~sales. We manage commissary results on a full year basis and anticipate the 2014 full year profit margin will approximate 2013.~~restaurant volumes.

· North America Franchising Segment. North America Franchising income before income taxes increased ~~$486,000 and $1.7~~approximately $2.8 million ~~for the three and six months ended June 29, 2014, respectively, compared to the corresponding prior year periods. The increases were~~ primarily due to higher royalties ~~from~~attributable to the ~~5.4% and 7.2%~~6.0% comparable sales ~~partially offset by the previously mentioned increases in~~increase and reduced levels of royalty incentives.

· International Segment. Income before income taxes increased approximately ~~$1.0 million and $1.4 million for the three and six months ended June 29, 2014, respectively, compared to the corresponding prior year periods. The increases were~~$600,000 primarily due to ~~increases~~the previously mentioned increase in units and comparable sales ~~increases~~ of ~~8.6% and 7.6%~~7.7%, which resulted in both higher ~~royalties and increases in United Kingdom profits. These increases were partially offset by unfavorable results at our China Company-owned restaurant operations.~~

1716

Table of Contents

royalties and contributed to an increase of approximately $300,000 in United Kingdom profits. The increase was somewhat offset by the impact of negative foreign currency exchange rates.

· All Others Segment. The “All Others” reporting segment income before income taxes, which primarily includes our online and mobile ordering business and our wholly-owned print and promotions subsidiary, Preferred Marketing Solutions, ~~decreased approximately $1.6 million and $1.7 million for~~was relatively consistent at $443,000 in the ~~three and six months ended June 29, 2014, respectively,~~first quarter of 2015, compared to $590,000 in the ~~corresponding~~ prior year periods. The decreases were primarily due to higher infrastructure costs to support our digital ordering business and a lower margin at our print and promotions business from a discounted direct mail campaign provided to domestic franchised restaurants.year.

· Unallocated Corporate ~~Expenses.~~Segment. Unallocated corporate expenses increased approximately ~~$300,000 and $3.2~~$4.7 million for the ~~three and six months ended June 29, 2014, respectively,~~first quarter of 2015, as compared to the corresponding ~~2013 periods.~~quarter in 2014. The components of unallocated corporate expenses were as follows (in thousands):

	Three Months Ended								Six Months Ended									Three Months Ended
	June 29,			June 30,		Increase			June 29,			June 30,			Increase			March 29,			March 30,			Increase
	2014			2013		(Decrease)			2014			2013			(Decrease)			2015			2014			(Decrease)

General and administrative (a)	$	8,146		$	8,358	$	(212	)	$	18,475		$	17,045		$	1,430		$	13,953		$	10,329		$	3,624
Net interest expense (income) (b)	781			376		405			1,386			(283		)	1,669			1,248			604			644
Depreciation	1,839			1,638		201			3,614			3,391			223			2,080			1,775			305
Other (income) expense	(502		)	41		(543		)	(895		)	(222		)	(673		)	(760		)	(392		)	(368		)
FOCUS system rollout costs (c)	438			—		438			583			—			583			684			145			539
Total unallocated corporate expenses	$	10,702		$	10,413	$	289		$	23,163		$	19,931		$	3,232		$	17,205		$	12,461		$	4,744

(a) The increase in unallocated general and administrative costs ~~for the six-month period~~ was primarily due to higher ~~salaries~~legal, insurance and ~~benefits and equity~~management incentive compensation costs.

(b) The increase in net interest expense (income) was primarily due to a higher average outstanding debt balance with a higher effective interest rate. ~~Additionally, the 2013 six-month period included an approximate $773,000 benefit from a decrease in the redemption value of a mandatorily redeemable noncontrolling interest in a joint venture.~~

(c) Includes depreciation expense for capitalized FOCUS software development costs and other costs to support the rollout of the program.

Diluted earnings per share were ~~as follows for~~$0.55 in the ~~three and six months ended June 29, 2014 and June 30, 2013:~~

Three Months Ended

Six Months Ended

June 29,
2014

June 30,
2013

Increase

June 29,
2014

June 30,
2013

Increase

Diluted earnings per share as reported (a)

$
0.40

$
0.39

$
0.01

$
0.85

$
0.81

$
0.04

FOCUS system rollout costs

0.01

—

0.01

0.02

—

0.02

Diluted earnings per share, excluding Focus system rollout costs (b)

$
0.41

$
0.39

$
0.02

$
0.87

$
0.81

$
0.06

~~(a)~~first quarter of 2015, compared to $0.45 in the first quarter of 2014. Diluted earnings per share increased ~~$0.02 and $0.05 for the three- and six-month periods, respectively,~~$0.03 due to ~~reductions~~the 5.1% reduction in weighted average shares ~~outstanding (a 5.7% reduction for the three-month period and a 6.1% reduction for the six-month period).~~

~~(b)Represents a measure that is not defined by GAAP. See the FOCUS System section for additional information.~~

~~Table of Contents~~outstanding.

Review of Consolidated Operating Results

Revenues. Domestic Company-owned restaurant sales were ~~$170.0~~$197.3 million for the ~~three months ended June 29, 2014,~~first quarter of 2015, an increase of $19.1 million, or 10.7%, compared to ~~$155.2 million for~~ the ~~same period in 2013, and $348.2 million for the six months ended June 29,~~first quarter of 2014, ~~compared to $313.1 million for the same period in 2013. The increases of $14.8 million and $35.1 million were~~ primarily due to the previously mentioned ~~increases~~increase of ~~7.5% and 9.5%~~8.1% in comparable sales and ~~increases of 2.5% and 2.3%~~a 3.2% increase in equivalent ~~units during the three and six months ended June 29, 2014, respectively.~~units. “Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis.

North America franchise royalties were ~~$21.0 million and $43.6~~$25.4 million for the ~~three and six months ended June 29, 2014, respectively, representing increases~~first quarter of ~~approximately $750,000, or 3.7%, and $2.6~~2015, an increase of $2.7 million, or ~~6.4%~~12.1%, ~~from~~compared to the ~~comparable periods~~first quarter of 2014. The increase was primarily due to an increase in North America franchise sales and reduced levels of royalty incentives in the ~~prior year. The increases in royalties were primarily due the previously mentioned increases~~first quarter of 5.4% and 7.2% in comparable sales and increases of 1.1% and 1.5% in equivalent units during the three and six months ended June 29, 2014, partially offset by increases in royalty incentives for meeting certain development and performance targets.2015. North America franchise sales increased ~~6.6%~~6.2% to ~~$496.7~~$562.5 million ~~for~~in the ~~three months ended June 29, 2014, compared to $466.2~~first quarter of 2015, from $529.7 million ~~for~~in the same ~~period~~quarter of 2014, primarily due to a 6.0% increase in ~~2013, and increased 8.5% to $1.03 billion for the six months ended June 29, 2014, compared to $946.3 million for the same period in 2013.~~comparable sales. Franchise restaurant sales are not included in Company revenues; however, our domestic royalty revenue is derived from these sales.

Average weekly sales for comparable units include restaurants that were open throughout the periods presented below. The comparable sales base for domestic Company-owned and North America franchised restaurants,

Table of Contents

respectively, includes restaurants acquired by the Company or divested to franchisees during the previous twelve months. Average weekly sales for non-comparable units include restaurants that were not open throughout the periods presented below and include non-traditional sites. Average weekly sales for non-traditional units not subject to continuous operations are calculated based upon actual days open.

~~Table of Contents~~

The comparable sales base and average weekly sales for ~~2014~~2015 and ~~2013~~2014 for domestic Company-owned and North America franchised restaurants consisted of the following:

Three Months Ended

June 29, 2014

June 30, 2013

Company

Franchised

Company

Franchised

Total domestic units (end of period)

672

2,614

654

2,588

Equivalent units

664

2,518

648

2,493

Comparable sales base units

643

2,295

633

2,266

Comparable sales base percentage

96.9
%
91.1
%
97.7
%
90.9
%
Average weekly sales - comparable units

$
19,923

$
15,654

$
18,604

$
14,885

Average weekly sales - total non-comparable units (a)

$
13,084

$
10,226

$
10,880

$
9,381

Average weekly sales - all units

$
19,710

$
15,173

$
18,430

$
14,383

	Six Months Ended												Three Months Ended
	June 29, 2014						June 30, 2013						March 29, 2015						March 30, 2014
	Company			Franchised			Company			Franchised			Company			Franchised			Company			Franchised

Total domestic units (end of period)	672			2,614			654			2,588			691			2,650			666			2,615
Equivalent units	660			2,522			646			2,486			678			2,542			657			2,525
Comparable sales base units	641			2,298			633			2,253			663			2,341			639			2,300
Comparable sales base percentage	97.1		%	91.1		%	98.0		%	90.6		%	97.8		%	92.1		%	97.3		%	91.1		%
Average weekly sales - comparable units	$	20,503		$	16,166		$	18,794		$	15,136		$	22,570		$	17,566		$	21,087		$	16,678
Average weekly sales - total non-comparable units (a)	$	13,133		$	10,426		$	11,495		$	9,870
Average weekly sales - total non-comparable units *													$	14,481		$	10,644		$	13,191		$	10,624
Average weekly sales - all units	$	20,289		$	15,656		$	18,652		$	14,643		$	22,390		$	17,019		$	20,875		$	16,138

~~(a)~~* Includes ~~157~~123 traditional units and ~~191~~214 non-traditional units ~~as of June~~at March 29, ~~2014~~2015 and ~~175~~152 traditional units and ~~169~~190 non-traditional units ~~as of June~~at March 30, ~~2013.~~2014.

Domestic commissary sales ~~increased 7.6%~~decreased 1.0% to ~~$150.6~~$162.3 million for the ~~three months ended June 29, 2014,~~first quarter of 2015, from ~~$140.0~~$164.0 million in the comparable ~~2013 period and increased 10.8% to $314.6 million for the six months ended June 29,~~ 2014 ~~from $283.9 million in the comparable 2013 period. The increases were primarily~~quarter, due to decreases in cheese prices, which were somewhat offset by increases in sales volumes. PJ Food Service (“PJFS”) pricing for cheese is based on a fixed dollar markup; when cheese prices decrease, revenues will decrease with no overall impact on the ~~prices of certain commodities, primarily cheese, and increases in restaurant sales volumes for the six-month period.~~related dollar margin.

Other sales increased ~~approximately $1.2~~$8.9 million ~~or 9.2%, and $1.3~~to $21.6 million ~~or 5.2%, for~~in the ~~three and six months ended June 29, 2014, respectively,~~first quarter of 2015 primarily due to ~~increases in~~FOCUS equipment sales to franchisees. See the FOCUS System section above for additional information.

International royalties and franchise and development fees increased approximately ~~$900,000,~~$700,000, or ~~17.2%~~12.4%, ~~for the three months ended June 29, 2014, and increased $1.6 million, or 15.7%, for the six months ended June 29, 2014, from the prior comparable periods. The increases were~~primarily due to ~~increases~~a 19.0% increase in franchised units and a comparable sales increase of ~~8.6% and 7.6%~~8.0%, calculated on a constant dollar ~~basis, for~~basis. This was somewhat offset by the ~~three- and six-month periods, respectively.~~negative impact of foreign currency exchange rates. International franchise restaurant sales were ~~$140.1~~$142.5 million ~~for~~in the ~~three months ended June 29, 2014,~~first quarter of 2015, compared to ~~$110.8~~$130.8 million ~~for~~in the ~~same period in 2013, and $270.9 million for the six months ended June 29, 2014, compared to $218.4 million for the same period in 2013.~~prior year. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.

International restaurant and commissary sales increased ~~$3.5~~$1.1 million, or ~~22.3%~~6.0%, ~~for the three months ended June 29, 2014, and increased $6.5 million, or 21.2%, for the six months ended June 29, 2014, from the prior comparable periods. The increases are~~primarily due to ~~increases~~an increase in ~~China Company-owned restaurant sales, due to increases in units, and increases in our United Kingdom~~ commissary revenues ~~due to both~~from increases in units and higher comparable sales. This increase was partially offset by lower sales at ~~our franchised United Kingdom restaurants.~~China Company-owned restaurants due to the disposition of eleven restaurants in 2014. Additionally, sales were negatively impacted by foreign currency exchange rates.

Costs and expenses. The restaurant operating margin for domestic Company-owned units was 21.4% in the first quarter of 2015 compared to 19.4% in the first quarter of 2014. The restaurant operating margin increase of 2.0% consisted of the following differences:

20·Cost of sales was 1.3% lower in the first quarter of 2015 due to lower commodity costs, primarily cheese.

·Salaries and benefits were 0.5% higher due to higher bonuses paid to general managers.

·Advertising and related costs were 0.6% lower primarily due to lower discretionary spending.

Table of Contents

~~Costs and expenses.~~ The restaurant operating margins for domestic Company-owned units were relatively consistent at 18.9% for the three months ended June 29, 2014, compared to 18.8% for the same period in 2013, and 19.2% for the six months ended June 29, 2014, compared to 19.3% for the same period in 2013. The margins were comprised of the following changes for the three and six months ended June 29, 2014:

·Cost of sales was 0.3% and 1.1% higher for the three and six months ended June 29, 2014, as compared to the same periods in 2013, primarily due to higher commodity costs, primarily cheese and meats, somewhat offset by a higher ticket average.

·Salaries and benefits were 0.2% and 0.4% lower as a percentage of sales for the three and six months ended June 29, 2014, as compared to the same periods in 2013. The decreases were primarily due to the benefit of higher sales.

·Advertising and related costs as a percentage of sales were 0.4% and 0.3% lower for the three and six months ended June 29, 2014, as compared to the same periods in 2013, primarily due to the benefit of higher sales.

· Occupancy costs and other restaurant operating costs ~~on a combined basis,~~ were relatively consistent (20.4% and 20.3% for the three months ended June 29, 2014 and June 30, 2013, respectively, and 19.9% and 20.0% for the six months ended June 29, 2014 and June 30, 2013, respectively).0.6% lower primarily due to lower mileage reimbursement from lower gas prices.

Domestic commissary operating margin was ~~6.0%~~7.8% in the first quarter of 2015, compared to 7.5% for the ~~three months ended June 29, 2014, compared to 7.9% for the corresponding~~same period in ~~2013, and 6.8% for the six months ended June 29,~~ 2014, ~~compared to 7.9% for the corresponding period in 2013~~ and consisted of the following differences:

· Cost of sales was ~~1.8% and 1.6% higher as a percentage of sales~~1.5% lower for the ~~three and six months ended June 29, 2014~~first quarter of 2015, primarily due to ~~higher~~lower cheese costs which have a fixed-dollar markup. As cheese prices are ~~higher,~~lower, food cost as a percentage of sales is ~~higher. In addition, commissary margins were lower for the three-month period.~~lower.

· Salaries and benefits ~~were 4.5%~~ and 4.3% for the three-month periods of 2014 and 2013, respectively, and 4.4% and 4.3% for the six-month periods of 2014 and 2013, respectively. The higher costs were attributable to ongoing commissary initiatives, including in-house distribution.

·~~Other~~other commissary operating expenses were ~~0.1% and 0.6% lower~~1.2% higher as a percentage of ~~sales. The~~sales primarily due to the lower overall PJFS pricing, as previously discussed. Domestic commissaries also had higher driver compensation and insurance costs that were somewhat offset by lower fuel costs.

Other operating expenses as a percentage of other sales were ~~due~~95.3% in the first quarter of 2015, compared to 89.7% for the same period in 2014. The higher ~~sales from higher commodities, including cheese prices. Total~~ operating expenses ~~increased in dollars~~were primarily due to the low margin associated with sales of FOCUS systems to franchisees, the impact of a reduced cost direct mail campaign offered to our domestic restaurants by Preferred Marketing Solutions in the first quarter of 2015, and higher ~~insurance claims~~infrastructure costs ~~of $1.1 million.~~to support our online operations.

International restaurant and commissary expenses were ~~82.4%~~81.8% of international restaurant and commissary sales in the ~~second~~first quarter of ~~2014~~2015, as compared to ~~82.5%~~83.4% in the ~~second~~first quarter of ~~2013 and were 82.9% for the six months ended June 29, 2014 as compared to 83.8% for the corresponding 2013 period.~~2014. The ~~decreases~~decrease as a percentage of sales ~~were primarily due to lower operating expenses in the United Kingdom~~was primarily due to the benefit of higher ~~sales.~~commissary sales volumes and a higher commissary margin.

General and administrative ~~(“G&A”)~~ costs ~~of $33.6~~were $41.9 million, or ~~8.8%,~~9.7% of revenues ~~for~~in the ~~three months ended June 29, 2014, were relatively consistent with G&A costs~~first quarter of ~~$33.1~~2015, as compared to $37.0 million, or ~~9.5%,~~9.2% of revenues, ~~for~~in the same period ~~in 2013. G&A costs were $70.5 million, or 9.0%,~~ of ~~revenues for the six months ended June 29, 2014, compared to $66.3 million, or 9.4%, of revenues for the same period in 2013.~~2014. The increase ~~of $4.2 million for the six-month period~~ was primarily due to ~~the following:~~

·~~Unallocated corporate general~~higher legal, insurance and ~~administrative expenses increased due to higher salaries and benefits and equity~~management incentive compensation costs.

·~~Domestic Company-owned restaurant supervisor bonuses increased due to higher sales.~~

·~~International~~ Additionally, international general and administrative costs ~~increased~~were higher due to ~~infrastructure and promotional activity costs.~~

·~~Domestic commissaries general and administrative costs increased due to higher salaries, benefits and travel costs~~an increase in advertising spending to support ~~in-house distribution and other on-going commissary initiatives.~~

~~Table of Contents~~our franchise operations.

Other general expenses ~~reflected net expense~~were $1.8 million in the first quarter of ~~$2.0 million for the three months ended June 29, 2014,~~2015 compared to ~~$1.6~~$1.5 million for the comparable period in ~~2013, and $3.5 million for the six months ended June 29,~~ 2014 ~~compared to $2.8 million for the comparable period in 2013,~~ as detailed below (in thousands):

	Three Months Ended								Six Months Ended								Three Months Ended
	June 29,			June 30,			Increase		June 29,			June 30,			Increase		March 29,		March 30,		Increase
	2014			2013			(Decrease)		2014			2013			(Decrease)		2015		2014		(Decrease)

Franchise and development incentives (a)	$	1,229		$	1,050		$	179	$	2,532		$	2,111		$	421	$	1,344	$	1,303	$	41
Supplier marketing income	(250		)	(250		)	—		(500		)	(500		)	—
Other	985			797			188		1,465			1,171			294		472		230		242
Total other general expenses	$	1,964		$	1,597		$	367	$	3,497		$	2,782		$	715	$	1,816	$	1,533	$	283

(a) ~~Represents~~Primarily represents equipment incentives provided to domestic franchisees for opening new restaurants. The equipment is amortized over the term of the agreement, which is generally two to three years.

Depreciation and amortization was ~~$9.9~~$10.0 million ~~(2.6%~~(2.3% of revenues) for the ~~three months ended June 29, 2014, compared to $8.5~~first quarter of 2015 and $9.2 million ~~(2.4%~~(2.3% of revenues) for the ~~same 2013 period, and $19.0 million (2.4%~~first quarter of ~~revenues) for the six months ended June 29, 2014, compared to $17.1 million (2.4% of revenues) for the 2013 period.~~2014. The ~~increases in depreciation expense were~~increase is primarily due to incremental depreciation ~~related to both our New Jersey dough production capital expenditures and our~~from FOCUS capitalized software costs and equipment costs at Company-owned restaurants.

Net interest (expense) income.Net interest ~~(expense) income consisted of the following for the three and six months ended June 29, 2014 and June 30, 2013 (in thousands):~~

Three Months Ended

Six Months Ended

June 29,

June 30,

(Increase)

June 29,

June 30,

(Increase)

2014

2013

Decrease

2014

2013

Decrease

Interest expense - line of credit (a)

$
(975
)
$
(457
)
$
(518
)
$
(1,711
)
$
(779
)
$
(932
)
Investment income

164

153

11

335

338

(3
)
Change in redemption value of mandatorily redeemable noncontrolling interest in a joint venture (b)

48

(36
)
84

21

773

(752
)
Net interest (expense) income

$
(763
)
$
(340
)
$
(423
)
$
(1,355
)
$
332

$
(1,687
)

~~(a)The increase in interest~~ expense ~~for the three and six months ended June 29, 2014 was~~increased approximately $600,000 primarily due to a higher average outstanding debt balance and a higher effective interest rate.

~~(b)~~19

~~The first quarter~~Table of ~~2013 included a benefit from a decrease in the redemption value of a joint venture.~~Contents

Income tax expense. ~~Our~~The effective income tax ~~rates were 32.0% and 33.4%~~rate was 33.5% for the ~~three~~first quarter of 2015 and ~~six months ended June 29, 2014, respectively, representing a decrease of 0.2%~~34.6% for the ~~three-month~~same period ~~and an increase of 0.8% for the six-month period.~~in 2014. Our effective income tax rate may fluctuate from quarter to quarter for various reasons. The 2015 rate includes a higher benefit from various tax ~~rate~~deductions, including the U.S. federal manufacturing deduction.

Other Items

Litigation Matters

The Company is currently party to a conditionally certified collective action lawsuit (“Perrin”) that is scheduled for trial in August 2015. We intend to vigorously defend against all claims in this lawsuit. However, given the ~~first six months~~inherent uncertainties of ~~2014 was primarily due to~~this litigation, the ~~prior year including both favorable state tax settlements~~outcome of this case cannot be predicted and the ~~reinstatement~~amount of ~~certain 2012 tax credits under~~any potential loss cannot be reasonably estimated. A negative outcome in this case could have a material adverse effect on the ~~American Taxpayer Relief Act~~Company. For additional details see “Note 5” of ~~2012.~~“Notes to Condensed Consolidated Financial Statements.”

Liquidity and Capital Resources

Our debt is comprised entirely of ~~a $300 million~~an unsecured revolving credit facility (“Credit Facility”) with a maturity date of ~~April 30, 2018.~~October 31, 2019. Outstanding balances under this ~~facility~~$400 million Credit Facility were ~~$210.0~~$231.0 million as of ~~June~~March 29, ~~2014~~2015 and ~~$157.9~~$230.5 million as of December ~~29, 2013. The increase in the outstanding balance was primarily due to borrowings to fund increased share repurchases.~~28, 2014.

The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points. The increment over LIBOR and the commitment fee are

~~Table of Contents~~

determined quarterly based upon the ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined by the ~~revolving credit facility.~~Credit Facility. The remaining availability under the ~~revolving credit facility,~~Credit Facility, reduced for outstanding letters of credit, was approximately ~~$67.5~~$147.7 million as of ~~June~~March 29, ~~2014.~~2015.

We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our ~~revolving credit facility. On July 30, 2013, we terminated our $50 million~~Credit Facility. We currently have the following interest rate ~~swap agreement, which had a fixed rate~~swaps as of 0.56% instead of the variable rate of LIBOR. Upon termination of the $50 million swap, we entered into a $75 million swap with an interest rate of 1.42% and a maturity date of April 30, 2018, which coincides with the maturity date of our revolving credit facility. In May 2014, we entered into a $50 million forward interest rate swap with an interest rate of 1.36%, an effective date of December 30, 2014 and a maturity date of April 30, 2018. See the notes to condensed consolidated financial statements for additional information.March 29, 2015:

Effective Dates	Floating Rate Debt	Fixed Rates

July 30, 2013 through April 30, 2018	$75 million	1.42	%

December 30, 2014 through April 30, 2018	$50 million	1.36	%

Our ~~revolving credit facility~~Credit Facility contains affirmative and negative covenants, including the following financial covenants, as defined by the revolving credit facility:

		Actual Ratio for the
		Quarter Ended
	Permitted Ratio	~~June~~March 29, ~~2014~~2015

Leverage Ratio	Not to exceed 3.0 to 1.0	1.5 to 1.0

Interest Coverage Ratio	Not less than 3.5 to 1.0	~~4.9~~5.0 to 1.0

Our leverage ratio is defined as outstanding debt divided by 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 covenants as of ~~June~~March 29, ~~2014.~~2015.

Cash flow provided by operating activities was ~~$54.6~~$40.2 million for the ~~six~~three months ended ~~June~~March 29, ~~2014,~~2015, compared to ~~$47.2~~$26.7 million for the same period in ~~2013.~~2014. The increase of approximately ~~$7.3~~$13.6 million iswas primarily due to higher net income and favorable changes in working ~~capital.~~capital and other operating activities, including higher depreciation and amortization expense. The prior year included higher inventory levels of equipment to support the rollout of FOCUS to our domestic franchised restaurants.

Table of Contents

Our free cash flow, a non-GAAP financial measure, for the ~~six~~three months ended ~~June~~March 29, ~~2014~~2015 and ~~June~~March 30, ~~2013~~2014 was as follows (in thousands):

	Six Months Ended						Three Months Ended
	June 29,			June 30,			March 29,			March 30,
	2014			2013			2015			2014

Net cash provided by operating activities	$	54,565		$	47,232		$	40,249		$	26,678
Purchases of property and equipment(a)	(26,239		)	(25,493		)	(7,558		)	(11,137		)
Free cash flow ~~(a)~~(b)	$	28,326		$	21,739		$	32,691		$	15,541

(a)We require capital primarily for the development, acquisition, renovation and maintenance of restaurants, the development, renovation and maintenance of commissary facilities and equipment and the enhancement of corporate systems and facilities, including technological enhancements such as our FOCUS system. The decrease of approximately $3.6 million is primarily due to the prior year including FOCUS equipment costs for domestic Company-owned restaurants and FOCUS software development costs.

(b) Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the consolidated statements of cash flows) less the purchases of property and equipment. 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.

~~Table of Contents~~

We require capital primarily for the development, acquisition, renovation and maintenance of restaurants, the development, renovation and maintenance of commissary facilities and equipment and the enhancement of corporate systems and facilities, including technological enhancements such as our FOCUS system. Capital expenditures were $26.2 million for the six months ended June 29, 2014, compared to $25.5 million for the six months ended June 30, 2013.

We also require capital for share repurchases and the payment of cash dividends, which are funded by cash flow from operations and borrowings on our revolving credit facility. We repurchased ~~$63.3~~$24.8 million and ~~$58.8~~$32.8 million of common stock for the ~~six~~three months ended ~~June~~March 29, ~~2014~~2015 and ~~June~~March 30, ~~2013,~~2014, respectively. Subsequent to ~~June~~March 29, ~~2014,~~2015, through ~~July 29, 2014,~~April 28, 2015, we repurchased an additional ~~$8.5~~$8.3 million of common stock. As of ~~July 29, 2014, approximately $50.1~~April 28, 2015, $96.4 million remained available for repurchase under our Board of Directors’ authorization.

We paid a cash ~~dividend~~dividends of ~~approximately~~$5.6 million ($0.14 per common share) and $5.2 million ($0.125 per common share) ~~during~~in the ~~second~~first quarter of ~~2014.~~2015 and 2014, respectively. Subsequent to the ~~second~~first quarter, on ~~July 31, 2014,~~April 29, 2015, our Board of Directors ~~approved a 12% increase in the Company’s dividend rate per common share, from $0.50 on an annual basis to $0.56 on an annual basis, and~~ declared a ~~third~~second quarter dividend of $0.14 per common share (approximately ~~$5.7~~$5.6 million based on current shareholders of record). The dividend will be paid on ~~August~~May 22, ~~2014~~2015 to shareholders of record as of the close of business on ~~August 13, 2014.~~May 11, 2015. The declaration and payment of any future dividends will be at the discretion of our Board of Directors, subject to the Company’s financial results, cash requirements, and other factors deemed relevant by our Board of Directors.

Forward-Looking Statements

Certain matters discussed in this report, including information within Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “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 may relate to projections or guidance concerning business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, capital expenditures, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks,

Table of Contents

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:

· aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales; and new product and concept developments by food industry competitors;

· changes in consumer preferences or consumer buying habits, including the impact of adverse ~~general~~ economic ~~conditions, such as increasing tax rates;~~conditions;

· the impact that product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns, including potential epidemics, could have system-wide on our restaurants or our results;

· failure to maintain our brand strength and quality ~~reputation;~~reputation and risks related to our better ingredients marketing strategy;

· the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably;

· increases in or sustained high costs of food ingredients or other restaurant costs. This could include increased employee compensation, benefits, insurance, tax rates, regulatory compliance and similar ~~costs,~~costs; including increased costs resulting from federal health care legislation;

· disruption of our supply chain or commissary operations which could be caused by our sole source of supply of cheese or limited source of suppliers for other key ingredients or more generally due to weather, drought, disease, geopolitical or other disruptions beyond our control;

· increased risks associated with our international operations, including economic and political conditions, ~~and~~ instability in our international markets, fluctuations in currency exchange rates, and difficulty in meeting planned sales targets and new store growth. This could include our expansion into emerging or underpenetrated markets, such as China,

~~Table of Contents~~

where we have a Company-owned presence. Based on prior experience in underpenetrated markets, operating losses are likely to occur as the market is being established;

· �� the impact of changes in interest rates on the Company or our franchisees;

· the credit performance of our franchise loan or guarantee programs;

· the impact of the resolution of current or future claims and ~~litigation;~~litigation, in particular the Perrin litigation that is scheduled for trial in August 2015 (see “Note 5” of “Notes to Condensed Consolidated Financial Statements” for additional information);

· current or proposed legislation impacting our business;

·~~the impact of changes in currency exchange and interest rates;~~

· failure to effectively execute succession planning, and our reliance on the multiple roles of our Founder, Chairman, President and Chief Executive Officer, who also serves as our brand spokesperson; and

· disruption of critical business or information technology systems, and risks associated with systems failures and data privacy and security breaches, including theft of Company, employee and customer information. This would include the increased risk associated with the rollout of FOCUS. If prolonged and widespread technological problems are experienced during the rollout, our domestic operations could be disrupted, which could adversely impact sales.

For a discussion of these and other risks that may cause actual results to differ from expectations, refer to “Part I. Item 1A. — Risk Factors” in our Annual Report on Form 10-K for the year ended December ~~29, 2013,~~28, 2014, as well as subsequent filings. 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.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our debt is comprised entirely of a revolving credit facility (“Credit Facility”) with ~~available borrowings~~outstanding balances of ~~$300 million and a maturity date of April 30, 2018. The outstanding balance under this facility was $210.0~~$231.0 million as of ~~June~~March 29, ~~2014~~2015 and ~~$157.9~~$230.5 million as of December ~~29, 2013.~~28, 2014. On October 31, 2014, we amended our Credit Facility to increase the amount available from $300 million to $400 million and extend the maturity date from April 30, 2018 to October 31, 2019. The amendment also allows for an additional $100 million in borrowings. The interest rate charged on outstanding balances is LIBOR plus 75 to 175 basis points. The commitment fee on the unused balance ranges from 15 to 25 basis points.

We attempt to minimize interest risk exposure and to lower our overall long-term borrowing costs for changes in interest rates through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions and have reset dates and critical terms that match those of the underlying debt. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. We minimize the credit risk by entering into transactions with high-quality counterparties whose credit rating is evaluated on a quarterly basis.

~~On July 30, 2013, we terminated our $50 million~~We currently have the following interest rate ~~swap agreement, which had a fixed rate~~swaps outstanding as of 0.56% instead of the variable rate of LIBOR. Upon termination of the $50 million swap, we entered into a $75 million swap with an interest rate of 1.42% and a maturity date of April 30, 2018, which coincides with the maturity date of our revolving credit facility. In May 2014, we entered into a $50 million forward interest rate swap with an interest rate of 1.36%, an effective date of December 30, 2014 and a maturity date of April 30, 2018.March 29, 2015:

Effective Dates	Floating Rate Debt	Fixed Rates

July 30, 2013 through April 30, 2018	$75 million	1.42	%

December 30, 2014 through April 30, 2018	$50 million	1.36	%

The effective interest rate on borrowings under the ~~revolving line of credit,~~Credit Facility, including the impact of the interest rate ~~swap agreement,~~swaps, was ~~1.6%~~2.1% as of ~~June~~March 29, ~~2014.~~2015. An increase in the present interest rate of 100 basis points on the ~~line of credit~~outstanding balance ~~outstanding~~ as of ~~June~~March 29, ~~2014,~~2015, including the impact of ~~both~~the interest rate swaps, would increase interest expense by ~~approximately $850,000.~~$1.1 million.

Foreign Currency Exchange Rate Risk

We currently do not enter into financial instruments to manage foreign currency exchange ~~rates since only 6.3% of our total revenues are derived from sales~~rates. Sales to customers and royalties outside the United ~~States.~~

~~Table~~States represent approximately 6% of ~~Contents~~our total revenues.

Commodity Price Risk

In the ordinary course of business, the food and paper products we purchase, including cheese (historically representing 35% to 40% of our food 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.

Table of Contents

The following table presents the actual average block price for cheese by quarter through the ~~second~~first quarter of ~~2014~~2015 and the projected average block price for cheese by quarter through ~~2014~~2015 (based on the ~~July 29, 2014~~April 28, 2015 Chicago Mercantile Exchange cheese futures market prices):

	2014			2013		2015			2014
	Projected			Actual		Projected			Actual
	Block Price			Block Price		Block Price			Block Price

Quarter 1	$	2.212		$	1.662	$	1.538		$	2.212
Quarter 2	2.131			1.784		1.643		*	2.131
Quarter 3	2.029		*	1.740		1.773		*	2.141
Quarter 4	1.944		*	1.849		1.798		*	1.991
Full Year	$	2.079	*	$	1.759	$	1.688	*	$	2.119

* Amounts are estimates based on futures prices.

Item 4. Controls and Procedures

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in a number of lawsuits, claims, investigations and proceedings, 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 Accounting Standards Codification 450, ~~“Contingencies,”~~Contingencies, the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

~~Table of Contents~~

Approximately 3,900 drivers out of a potential class size of 28,800 have opted into the action. ~~Additionally, in~~In late December 2013, the District Court granted a motion for class certification in five additional states, which ~~will add~~added approximately 15,000 plaintiffs to the case. The trial is scheduled for August 2015.

Table of Contents

Item 1A. Risk Factors

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December ~~29, 2013.~~28, 2014.

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

Our Board of Directors has authorized the repurchase of up to ~~$1.2~~$1.325 billion of common stock under a share repurchase program that began on December 9, 1999 and expires on December 31, ~~2014.~~2015. Through ~~June~~March 29, ~~2014,~~2015, a total of ~~104.4~~106.0 million shares with an aggregate cost of ~~$1.1~~$1.2 billion and an average price of ~~$10.94~~$11.51 per share have been repurchased under this program. Subsequent to ~~June~~March 29, ~~2014,~~2015, through ~~July 29, 2014,~~April 28, 2015, we acquired an additional ~~202,000~~135,000 shares at an aggregate cost of ~~$8.5~~$8.3 million. As of ~~July 29, 2014,~~April 28, 2015, approximately ~~$50.1~~$96.4 million remained available for repurchase of common stock under this authorization.

The following table summarizes our repurchases by fiscal period during the three months ended ~~June 29, 2014~~March 28, 2015 (in thousands, except per-share amounts):

Total Number

Maximum Dollar

Total

Average

of Shares

Value of Shares

Number

Price

Purchased as Part of

that May Yet Be

of Shares

Paid per

Publicly Announced

Purchased Under the

Fiscal Period

Purchased

Share

Plans or Programs

Plans or Programs

03/31/2014 - 04/27/2014

325

$
50.38

104,024

$
72,683

04/28/2014 - 05/25/2014

138

$
43.51

104,162

$
66,687

05/26/2014 - 06/29/2014

190

$
42.74

104,352

$
58,571

				Total Number	Maximum Dollar
	Total	Average		of Shares	Value of Shares
	Number	Price		Purchased as Part of	that May Yet Be
	of Shares	Paid per		Publicly Announced	Purchased Under the
Fiscal Period	Purchased	Share		Plans or Programs	Plans or Programs

12/29/2014 - 01/25/2015	122	$	58.86	105,732	$	122,268
01/26/2015 - 02/22/2015	121	$	62.76	105,853	$	114,688
02/23/2015 - 03/29/2015	159	$	62.75	106,012	$	104,709

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

During fiscal quarter ended March 29, 2015, the Company acquired approximately 33,000 shares of its common stock from employees to satisfy minimum tax withholding obligations that arose upon vesting of restricted stock granted pursuant to approved plans.

2725

Table of Contents

~~Item 6.~~

Item 6. Exhibits

	Exhibit
	Number		Description

	~~3.1~~10.1		~~Amended~~Employment Agreement between Papa John’s International, Inc. and ~~Restated Certificate of Incorporation.~~Steve M. Ritchie effective March 1, 2015. Exhibit 10.1 to our report on Form 10-K as filed on February 24, 2015 is incorporated herein by reference.

10.2		Employment Agreement between Papa John’s International, Inc. and Lance F. Tucker effective March 1, 2015. Exhibit 10.2 to our report on Form 10-K as filed on February 24, 2015 is incorporated herein by reference.

10.3		Employment Agreement between Papa John’s International, Inc. and Timothy C. O’Hern effective March 1, 2015. Exhibit 10.3 to our report on Form 10-K as filed on February 24, 2015 is incorporated herein by reference.

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

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

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

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

	101		Financial statements from the quarterly report on Form 10-Q of Papa John’s International, Inc. for the quarter ended ~~June~~March 29, ~~2014,~~2015, filed on ~~August~~May 5, ~~2014,~~2015, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.

2826

Table of Contents

SIGNATURE

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

	PAPA JOHN’S INTERNATIONAL, INC.
	(Registrant)


Date: ~~August~~May 5, ~~2014~~2015	/s/ Lance F. Tucker
	Lance F. Tucker
	Senior Vice President, Chief Financial
	Officer, Chief ~~Financial~~Administrative Officer
	~~Chief Administrative Officer~~ and Treasurer

2927

	Three Months			Six Months
	June 29,			June 29,
	2014			2014

Other sales (a)	$	123		$	135
Other operating expenses (b)	(462		)	(651		)
Depreciation and amortization (c)	(529		)	(579		)
Net decrease in income before income taxes	$	(868	)	$	(1,095	)

Diluted earnings per common share	$	(0.01	)	$	(0.02	)