Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended

Nine Months Ended

(In thousands)

Sept. 27, 2015

Sept. 28, 2014

Sept. 27, 2015

Sept. 28, 2014

Net income before attribution to noncontrolling interests

$
18,976

$
16,962

$
55,683

$
55,342

Other comprehensive income (loss), before tax:

Foreign currency translation adjustments

(1,700
)
(1,634
)
(1,125
)
(708
)
Interest rate swaps (1)

(1,386
)
694

(2,011
)
247

Other comprehensive income (loss), before tax

(3,086
)
(940
)
(3,136
)
(461
)
Income tax effect:

Foreign currency translation adjustments

629

605

416

262

Interest rate swaps (2)

513

(256
)
744

(91
)
Income tax effect

1,142

349

1,160

171

Other comprehensive income (loss), net of tax

(1,944
)
(591
)
(1,976
)
(290
)
Comprehensive income before attribution to noncontrolling interests

17,032

16,371

53,707

55,052

Comprehensive loss, redeemable noncontrolling interests

(587
)
(724
)
(2,915
)
(3,066
)
Comprehensive (loss) income, nonredeemable noncontrolling interests

(418
)
(163
)
(1,781
)
(142
)
Comprehensive income attributable to the Company

$
16,027

$
15,484

$
49,011

$
51,844

~~(1)~~ Amounts reclassified out of accumulated other comprehensive income (“AOCI”) into net interest (expense) income included $390 and $1,177 for the three and nine months ended September 27, 2015, respectively, and $250 and $749 for the three and nine months ended September 28, 2014, respectively.

~~(2)~~ ~~The income tax effects of amounts reclassified out of AOCI into net interest (expense) income were $145 and $436 for the three and nine months ended September 27,~~



	Three Months Ended				Six Months Ended
(In thousands)	June 26, 2016		June 28, 2015		June 26, 2016		June 28, 2015

Net income before attribution to noncontrolling interests	$	24,112	$	12,468	$	52,163	$	36,707
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments		(1,441)		2,116		(3,513)		575
Interest rate swaps (1)		(2,760)		459		(6,049)		(625)
Other comprehensive (loss) income, before tax		(4,201)		2,575		(9,562)		(50)
Income tax effect:
Foreign currency translation adjustments		533		(783)		1,300		(213)
Interest rate swaps (2)		1,021		(170)		2,238		231
Income tax effect		1,554		(953)		3,538		18
Other comprehensive (loss) income, net of tax		(2,647)		1,622		(6,024)		(32)
Comprehensive income before attribution to noncontrolling interests		21,465		14,090		46,139		36,675
Comprehensive loss, redeemable noncontrolling interests		(881)		(1,015)		(2,125)		(2,328)
Comprehensive loss, nonredeemable noncontrolling interests		(690)		(673)		(1,315)		(1,363)
Comprehensive income attributable to the Company	$	19,894	$	12,402	$	42,699	$	32,984

(1)

Amounts reclassified out of accumulated other comprehensive loss into net interest expense included $311 and $628 for the three and six months ended June 26, 2016, respectively and $393 and $787 for the three and six months ended June 28, 2015.

(2)

The income tax effects of amounts reclassified out of accumulated other comprehensive loss into net interest expense were $115 and $232 for the three and six months ended June 26, 2016, respectively and $145 and $291 for the three and six months ended June 28, 2015, ~~respectively, and $92 and $277 for the three and nine months ended September 28, 2014,~~ respectively.

See accompanying notes.

~~See accompanying notes.~~5

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended

(In thousands)

Sept. 27, 2015

Sept. 28, 2014

Operating activities

Net income before attribution to noncontrolling interests

$
55,683

$
55,342

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

Provision for uncollectible accounts and notes receivable

813

1,714

Depreciation and amortization

30,638

29,539

Deferred income taxes

2,259

7,687

Stock-based compensation expense

7,124

5,958

Excess tax benefit on equity awards

(9,884
)
(8,493
)
Other

3,268

3,916

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable

(1,994
)
(6,861
)
Income taxes receivable

8,731

—

Inventories

2,178

(9,792
)
Prepaid expenses

2,033

2,461

Other current assets

367

(313
)
Other assets and liabilities

819

3,887

Accounts payable

(3,380
)
(1,380
)
Income and other taxes payable

375

6,434

Accrued expenses and other current liabilities

20,508

(5,163
)
Deferred revenue

200

(110
)
Net cash provided by operating activities

119,738

84,826

Investing activities

Purchases of property and equipment

(26,508
)
(37,700
)
Loans issued

(2,497
)
(5,221
)
Repayments of loans issued

3,961

3,371

Acquisitions, net of cash acquired

(491
)
(4,264
)
Other

406

25

Net cash used in investing activities

(25,129
)
(43,789
)

Financing activities

Net proceeds on line of credit facility

8,549

66,784

Cash dividends paid

(17,950
)
(16,119
)
Excess tax benefit on equity awards

9,884

8,493

Tax payments for equity award issuances

(10,947
)
(7,540
)
Proceeds from exercise of stock options

4,569

4,752

Acquisition of Company common stock

(80,166
)
(94,152
)
Contributions from noncontrolling interest holders

683

1,086

Distributions to noncontrolling interest holders

(4,950
)
(1,200
)
Other

377

423

Net cash used in financing activities

(89,951
)
(37,473
)
Effect of exchange rate changes on cash and cash equivalents

(339
)
(86
)
Change in cash and cash equivalents

4,319

3,478

Cash and cash equivalents at beginning of period

20,122

13,670

Cash and cash equivalents at end of period

$
24,441

$
17,148


	Six Months Ended
(In thousands)	June 26, 2016		June 28, 2015
Operating activities
Net income before attribution to noncontrolling interests	$	52,163	$	36,707
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable		247		631
Depreciation and amortization		19,775		20,177
Deferred income taxes		3,786		(3,064)
Stock-based compensation expense		4,893		4,985
Other		1,883		2,239
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		6,680		1,682
Income taxes receivable		(472)		(1,281)
Inventories		(877)		3,474
Prepaid expenses		2,548		999
Other current assets		1,269		293
Other assets and liabilities		(1,724)		(773)
Accounts payable		(8,654)		(3,877)
Income and other taxes payable		3,703		72
Accrued expenses and other current liabilities		(11,425)		15,495
Deferred revenue		1,328		223
Net cash provided by operating activities		75,123		77,982
Investing activities
Purchases of property and equipment		(24,001)		(16,501)
Loans issued		(1,630)		(1,571)
Repayments of loans issued		5,382		2,787
Acquisitions, net of cash acquired		(11,202)		(491)
Other		165		348
Net cash used in investing activities		(31,286)		(15,428)
Financing activities
Net proceeds from issuance of long-term debt		61,375		3,549
Cash dividends paid		(13,130)		(11,083)
Excess tax benefit on equity awards		4,490		9,488
Tax payments for equity award issuances		(5,831)		(10,654)
Proceeds from exercise of stock options		2,812		3,915
Acquisition of Company common stock		(96,355)		(52,083)
Distributions to noncontrolling interest holders		(3,200)		(3,667)
Other		391		319
Net cash used in financing activities		(49,448)		(60,216)
Effect of exchange rate changes on cash and cash equivalents		(129)		(13)
Change in cash and cash equivalents		(5,740)		2,325
Cash and cash equivalents at beginning of period		21,006		20,122
Cash and cash equivalents at end of period	$	15,266	$	22,447

See accompanying notes.

6

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)~~(Unaudited)~~

~~September 27, 2015~~June 26, 2016

1.Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the ~~nine~~three and six months ended ~~September 27, 2015~~June 26, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ended December ~~27, 2015.~~25, 2016. 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 ~~28, 2014.~~27, 2015.

2.Significant Accounting Policies

Noncontrolling Interests

Papa John’s has four joint ~~ventures~~venture arrangements in which there are noncontrolling interests ~~including the following as of September 27, 2015~~held by third parties. These joint ventures include 215 restaurants at June 26, 2016 and ~~September~~206 restaurants at June 28, ~~2014:~~

Number of
Restaurants

Restaurant Locations

Papa John’s
Ownership

Noncontrolling
Interest
Ownership

September 27, 2015

Star Papa, LP

85

Texas

51
%
49
%
Colonel’s Limited, LLC

61

Maryland and Virginia

70
%
30
%
PJ Minnesota, LLC

35

Minnesota

70
%
30
%
PJ Denver, LLC

27

Colorado

60
%
40
%

September 28, 2014

Star Papa, LP

82

Texas

51
%
49
%
Colonel’s Limited, LLC

56

Maryland and Virginia

70
%
30
%
PJ Minnesota, LLC

34

Minnesota

70
%
30
%
PJ Denver, LLC

25

Colorado

60
%
40
%

2015. We are required to report the 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.

The income before income taxes attributable to these joint ventures for the three and ~~nine~~six months ended ~~September 27,~~June 26, 2016 and June 28, 2015 ~~and September 28, 2014~~ was as follows (in thousands):



	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	Sept. 27,		Sept. 28,		Sept. 27,		Sept. 28,		June 26,		June 28,		June 26,		June 28,
	2015		2014		2015		2014		2016		2015		2016		2015

Papa John’s International, Inc.	$	1,570	$	1,387	$	7,240	$	4,979	$	2,529	$	2,660	$	5,289	$	5,670
Noncontrolling interests	1,005		887		4,696		3,208			1,571		1,688		3,440		3,691
Total income before income taxes	$	2,575	$	2,274	$	11,936	$	8,187	$	4,100	$	4,348	$	8,729	$	9,361

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Table of Contents

The following summarizes the redemption feature, location and related accounting within the condensed consolidated balance ~~sheets and the value at which the noncontrolling interests are recorded for each joint venture as of September 27, 2015:~~sheets:

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

Type of Joint Venture Arrangement	Location within the Condensed Consolidated Balance Sheets	Recorded Value

~~Star Papa, LP~~	~~Redeemable~~	~~Temporary equity~~	~~Carrying value~~
~~PJ Denver, LLC~~	~~Redeemable~~	~~Temporary equity~~	~~Redemption value~~
~~Colonel’s Limited, LLC~~	NoJoint venture with no redemption feature	Permanent equity	Carrying value
~~PJ Minnesota, LLC~~Option to require the Company to purchase their interest - currently redeemable	~~No redemption feature~~Temporary equity	~~Permanent~~Redemption value*
Option to require the Company to purchase their interest - not currently redeemable	Temporary equity	Carrying value

The noncontrolling interest holders of two 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 28, 2014

$
8,555

Net income

2,915

Distributions

(3,004
)
Change in redemption value

(192
)
Balance at September 27, 2015

$
8,274

The noncontrolling interests of our Colonel’s Limited, LLC and PJ Minnesota, LLC joint ventures are recorded at carrying value in “Stockholders’ equity” in the condensed consolidated balance sheets at both September 27, 2015 and December 28, 2014, as the noncontrolling interest holders’ agreements had no redemption features.

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 ~~September 27, 2015,~~June 26, 2016, we had a net deferred tax liability of approximately ~~$1.2 million.~~$300,000.

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~~carrying value of our notes receivable net of allowances also approximates ~~carrying~~fair 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 1: Quoted market prices in active markets for identical assets or liabilities.~~

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

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

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Table of Contents

Our financial assets and liabilities that were measured at fair value on a recurring basis as of ~~September~~June 26, 2016 and December 27, 2015 ~~and December 28, 2014~~ are as follows (in thousands):

Carrying

Fair Value Measurements

Value

Level 1

Level 2

Level 3

September 27, 2015

Financial assets:

Cash surrender value of life insurance policies (a)

$
17,412

$
17,412

$
—

$
—

Financial liabilities:

Interest rate swaps (b)

2,417

—

2,417

—

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

—


	Carrying		Fair Value Measurements
	Value		Level 1		Level 2		Level 3

June 26, 2016
Financial assets:
Cash surrender value of life insurance policies (a)	$	19,838	$	19,838	$	—	$	—

Financial liabilities:
Interest rate swaps (b)		8,331		—		8,331		—

December 27, 2015
Financial assets:
Cash surrender value of life insurance policies (a)	$	17,916	$	17,916	$	—	$	—

Financial liabilities:
Interest rate swaps (b)		2,262		—		2,262		—

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

~~(b)~~ ~~The fair values~~

(a)

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

(b)

The fair 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 ~~nine~~six months ended ~~September 27, 2015.~~June 26, 2016.

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, consolidation of PJMF is not appropriate.

~~Revenue from Contracts with Customers~~Accounting Standards Adopted

Deferred Debt Issuance Costs

In ~~May 2014,~~April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03 “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The update requires that deferred debt issuance costs be reported as a reduction to long-term debt (previously reported in other noncurrent assets). We adopted ASU 2015-03 in the first quarter of 2016 and for all retrospective periods, as required. The impact of the adoption was not material to our condensed consolidated financial statements. See Debt Footnote for more details.

Accounting Standards to be Adopted in Future Periods

Employee Share-Based Payments

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax

9

Table of Contents

withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for the Company beginning in fiscal 2017, with early application permitted. Based on the significance of our employee stock compensation program, we expect the adoption could have a material impact to our condensed consolidated statements of income.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases,” (“ASU 2016-02”) which amends leasing guidance by requiring companies to recognize a right-of-use asset and a lease liability for all operating and capital leases (financing) with lease terms greater than twelve months. The lease liability will be equal to the present value of lease payments. The lease asset will be based on the lease liability, subject to adjustment, such as for initial direct costs. For income statement purposes, leases will continue to be classified as operating or capital (financing) with lease expense in both cases calculated substantially the same as under the prior leasing guidance. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 (fiscal 2019 for the Company), and early adoption is permitted. The Company has not yet determined the effect of the adoption on its condensed consolidated financial statements.

Revenue from Contract with Customers

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers” ~~(Accounting Standards Update 2014-09)~~(“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.

We are required to adopt ~~the new requirements~~ASU 2014-09 in the first quarter of ~~2018 based on the FASB’s decision to defer the effective date by one year.~~2018. We are currently evaluating the method of adoption and ~~its~~ impact of the new requirements on our condensed consolidated financial statements. We currently do not believe the impact will be significant.

Reclassifications

Certain prior year captions have been combined in the condensed consolidated statement of income and certain amounts within the consolidated statement of cash flows have been reclassified to conform to the current year presentation.

3.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~~“Distinguishing Liabilities from ~~Equity~~Equity”, the change in the redemption value for the noncontrolling interest of ~~PJ Denver, LLC~~one of our joint ventures increases or decreases income attributable to common shareholders.

10

Table of Contents

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

Three Months Ended

Nine Months Ended

Sept. 27,

Sept. 28,

Sept. 27,

Sept. 28,

2015

2014

2015

2014

Basic earnings per common share:

Net income attributable to the Company

$
17,971

$
16,075

$
50,987

$
52,134

Decrease (increase) in noncontrolling interest redemption value

49

(42
)
192

(81
)
Net income attributable to participating securities

(73
)
(77
)
(223
)
(295
)
Net income attributable to common shareholders

$
17,947

$
15,956

$
50,956

$
51,758

Weighted average common shares outstanding

39,394

40,739

39,640

41,248

Basic earnings per common share

$
0.46

$
0.39

$
1.29

$
1.25

Diluted earnings per common share:

Net income attributable to common shareholders

$
17,947

$
15,956

$
50,956

$
51,758

Weighted average common shares outstanding

39,394

40,739

39,640

41,248

Dilutive effect of outstanding equity awards (a)

501

647

570

773

Diluted weighted average common shares outstanding

39,895

41,386

40,210

42,021

Diluted earnings per common share

$
0.45

$
0.39

$
1.27

$
1.23


	Three Months Ended				Six Months Ended
	June 26,		June 28,		June 26,		June 28,
	2016		2015		2016		2015

Basic earnings per common share:
Net income attributable to the Company	$	22,541	$	10,780	$	48,723	$	33,016
Change in noncontrolling interest redemption value		279		73		499		143
Net income attributable to participating securities		(91)		(50)		(201)		(150)
Net income attributable to common shareholders	$	22,729	$	10,803	$	49,021	$	33,009

Weighted average common shares outstanding		37,203		39,692		37,567		39,764
Basic earnings per common share	$	0.61	$	0.27	$	1.30	$	0.83

Diluted earnings per common share:
Net income attributable to common shareholders	$	22,729	$	10,803	$	49,021	$	33,009

Weighted average common shares outstanding		37,203		39,692		37,567		39,764
Dilutive effect of outstanding equity awards (a)		304		525		337		604
Diluted weighted average common shares outstanding		37,507		40,217		37,904		40,368
Diluted earnings per common share	$	0.61	$	0.27	$	1.29	$	0.82

(a) Excludes ~~219~~689 and ~~234~~566 awards for the three and ~~nine~~six months ended ~~September 27, 2015~~June 26, 2016 and ~~270~~292 and ~~208~~198 awards for the three and ~~nine~~six months ended ~~September~~June 28, ~~2014, because their inclusion~~2015, as the effect of including such awards would have ~~had an antidilutive effect.~~been antidilutive.

4.~~Debt~~Acquisition of Restaurants

In the first quarter of 2016, we completed the acquisition of 20 franchised Papa John’s restaurants located in Alabama, Florida and Kentucky in two separate transactions with an aggregate purchase price of $11.2 million. These acquisitions were accounted for by the purchase method of accounting, whereby operating results subsequent to the acquisition date are included in our consolidated financial results.

The aggregate purchase price of the acquisitions has been allocated as follows (in thousands):


Property and equipment	$	1,028
Franchise rights		1,230
Goodwill		8,837
Other		107
Total purchase price	$	11,202

The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill for the domestic Company-owned restaurants segment and is eligible for deduction over 15 years under U.S. tax regulations.

5.Debt

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


		June 26,		December 27,
		2016		2015
Outstanding debt	$	317,375	$	256,000
Debt issuance costs		(891)		(854)
Total long-term debt	$	316,484	$	255,146

11

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Our outstanding debt is comprised entirely of ~~borrowings under our~~an unsecured revolving line of credit (“Credit Facility”)~~. The outstanding balance was $239.0 million as~~ with an expiration date of ~~September 27, 2015 and $230.5 million as of December 28, 2014. On~~ October 31, ~~2014,~~2019. On June 8, 2016, we ~~amended~~exercised our ~~Credit Facility~~option to increase the amount available under our Credit Facility to ~~$400~~$500 million from the previous ~~$300~~$400 million availability. Including outstanding letters of credit, the remaining availability ~~and to extend the maturity date from April 30, 2018 to October 31, 2019. Additionally, we have the option to increase~~under the Credit Facility ~~an additional $100 million.~~ was approximately $157.7 million as of June 26, 2016.

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 Credit Facility, reduced for outstanding letters of credit, was approximately $138.5 million as of September 27, 2015.~~

The Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified fixed charges and leverage ratios. At ~~September 27, 2015,~~June 26, 2016, we were in compliance with these covenants.

We ~~use~~attempt to minimize interest risk exposure by fixing our rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions and have reset dates and critical terms that match those of our existing debt and the anticipated critical terms of future debt. By using a derivative instrument to hedge ~~against~~exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the ~~effects~~failure of ~~potential~~the counterparty to perform under the terms of the derivative contract.

As of June 26, 2016, we have the following interest rate ~~increases on borrowings under our Credit Facility. During the quarter ended September 27, 2015, we executed~~swap agreements, including three ~~additional~~ forward starting swaps ~~for $125.0 million~~executed in 2015 that become effective in 2018 upon expiration of the two existing swaps for ~~$125.0 million. As of September 27, 2015,~~ ~~we have the following interest rate swap agreements:~~$125 million:

~~Effective Dates~~	~~Debt Amount~~	~~Fixed Rates~~

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

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

~~April 30, 2018 through April 30, 2023~~	~~$55 million~~	~~2.33~~	%

~~April 30, 2018 through April 30, 2023~~	~~$35 million~~	~~2.36~~	%

~~April 30, 2018 through April 30, 2023~~	~~$35 million~~	~~2.34~~	%

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 newly executed forward starting swaps are also deemed cash flow hedges based upon our intent to replace the existing facility that matures in 2019 with new variable rate debt. As of September 27, 2015, the swaps were highly effective cash flow hedges with no ineffectiveness for the three and nine month periods ended September 27, 2015. The newly executed forward starting swaps are deemed effective given the probability of future forecasted interest payments.

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.


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	%
April 30, 2018 through April 30, 2023	$	55	million	2.33	%
April 30, 2018 through April 30, 2023	$	35	million	2.36	%
April 30, 2018 through April 30, 2023	$	35	million	2.34	%

The weighted average interest ~~rate for~~rates on the Credit Facility, including the impact of the ~~previously mentioned swaps,~~interest rate swap agreements, were ~~2.0%~~2.1% and ~~1.8%~~2.0% for the three months ended ~~September 27,~~June 26, 2016 and June 28, 2015, ~~and September 28, 2014,~~ respectively, and ~~2.0%~~2.1% and ~~1.7%~~2.0% for the ~~nine~~six months ended ~~September 27,~~June 26, 2016 and June 28, 2015, ~~and September 28, 2014,~~ respectively. Interest paid, including payments made or received under the swaps, was ~~$1.3~~$1.8 million and ~~$1.0~~$1.3 million for the three months ended ~~September 27,~~June 26, 2016 and June 28, 2015, ~~and September 28, 2014,~~ respectively, and ~~$3.9~~$3.4 million and $2.6 million for the ~~nine~~six months ended ~~September 27,~~June 26, 2016 and June 28, 2015, ~~and September 28, 2014,~~ respectively. As of ~~September 27, 2015,~~June 26, 2016, the portion of the ~~$2.4~~$8.3 million interest rate swap liability that would be reclassified into earnings during the next twelve months as interest expense approximates ~~$715,000.~~

5.~~Litigation~~

~~Litigation~~$1.0 million.

The Company is involved in a number of lawsuits, claims, investigations and proceedings, including the matter 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 negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.6.Segment Information

Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective and class action filed in August 2009 in the United States District Court, Eastern District of Missouri (“the Court”), alleging that delivery drivers were not properly reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act (“FLSA”). Approximately 3,900 drivers out of a potential class size of 28,800 opted into the action. In late December 2013, the Court granted a motion for class certification in five additional states, which added approximately 15,000 plaintiffs to the case. The trial, originally scheduled for August 2015, was stayed in June 2015, pending U.S. Supreme Court review of another relevant case regarding certification. After the stay

was granted, the parties reached a settlement in principle, which has been preliminarily approved by the Court in September 2015. The Court has scheduled a final approval hearing in January 2016. The Company continues to deny any liability or wrongdoing in this matter. In accordance with this preliminary settlement agreement, the Company recorded a pre-tax expense of $12.3 million in June 2015 under the provisions of ASC 450, Contingencies. There was no impact for the quarter ended September 27, 2015. This amount is separately reported as Legal settlement expense in the condensed consolidated statements of income.

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~~including breadsticks, cheesesticks, chicken poppers and wings, dessert items and 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

12

Table of Contents

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.

Our segment information is as follows (in thousands):


	Three Months Ended						Nine Months Ended						Three Months Ended				Six Months Ended
	Sept. 27, 2015			Sept. 28, 2014			Sept. 27, 2015			Sept. 28, 2014			June 26, 2016		June 28, 2015		June 26, 2016		June 28, 2015

Revenues from external customers:
Domestic Company-owned restaurants	$	180,059		$	169,076		$	563,308		$	517,269		$	204,248	$	185,962	$	409,927	$	383,249
Domestic commissaries	145,863			149,224			457,203			463,852				150,895		149,007		306,849		311,340
North America franchising	22,285			22,348			71,185			66,221				25,302		23,276		51,778		48,900
International	27,001			26,392			78,753			75,594				28,460		26,326		55,915		51,752
All others	14,076			23,359			50,110			49,704				14,059		14,420		27,090		36,034
Total revenues from external customers	$	389,284		$	390,399		$	1,220,559		$	1,172,640		$	422,964	$	398,991	$	851,559	$	831,275

Intersegment revenues:
Domestic commissaries	$	53,398		$	53,830		$	165,744		$	160,143		$	57,722	$	54,459	$	116,048	$	112,346
North America franchising	643			574			1,985			1,761				739		671		1,452		1,342
International	73			78			223			236				67		75		132		150
All others	3,833			6,421			11,459			18,238				4,075		3,694		8,172		7,626
Total intersegment revenues	$	57,947		$	60,903		$	179,411		$	180,378		$	62,603	$	58,899	$	125,804	$	121,464

Income (loss) before income taxes:
Domestic Company-owned restaurants	$	8,088		$	8,133		$	41,185		$	32,069		$	15,325	$	14,617	$	35,512	$	33,097
Domestic commissaries	10,192			8,897			32,694			26,174				11,682		10,702		23,228		22,502
North America franchising	19,172			19,023			61,545			56,389				22,445		20,054		46,025		42,373
International	3,184			1,436			6,807			4,071				2,875		2,279		5,913		3,623
All others	(556		)	(298		)	(230		)	(150		)		425		(117)		476		326
Unallocated corporate expenses (1)	(13,482		)	(12,242		)	(60,636		)	(35,405		)
Elimination of intersegment losses (profits)	(341		)	(731		)	(1,141		)	(1,284		)
Unallocated corporate expenses														(17,079)		(29,949)		(33,411)		(47,154)
Elimination of intersegment profit														(473)		(55)		(1,134)		(800)
Total income before income taxes	$	26,257		$	24,218		$	80,224		$	81,864		$	35,200	$	17,531	$	76,609	$	53,967

Property and equipment:
Domestic Company-owned restaurants	$	215,945											$	227,023
Domestic commissaries	109,532													112,666
International	21,266													16,854
All others	49,541													50,949
Unallocated corporate assets	176,089													186,922
Accumulated depreciation and amortization	(363,236		)											(376,886)
Net property and equipment	$	209,137											$	217,528

~~The Company has decided to refranchise the China market and is planning a sale~~

Table of its existing China operations, consisting of the Company-owned restaurants and a commissary. We expect to sell the business within the next 12 months; upon completion of the sale, the Company will not have any Company-owned international restaurants. We have classified the assets as held for sale within the condensed consolidated balance sheet. Upon the transfer of these assets to held for sale, no loss was recognized as their fair value exceeded their carrying value. The following summarizes the associated assets that are classified as held for sale (in thousands):Contents

September 27, 2015

Inventories

$
808

Prepaid expenses

790

Net property and equipment

5,406

Goodwill

1,719

Other assets

832

Total assets held for sale

$
9,555

The Company-owned China operations have incurred losses before income taxes of $0.4 million and $1.4 million for the three months ended September 27, 2015 and September 28, 2014, respectively, and losses before income taxes of $0.9 million and $2.3 million for the nine months ended September 27, 2015 and September 28, 2014, respectively. The losses for the three and nine months ended September 28, 2014, include an impairment charge of $0.7 million for eight Company-owned restaurants in China. These results are reported in our International segment.

8.~~Subsequent Event - Acquisition~~

In October 2015, the Company signed a letter of intent to purchase 19 domestic franchised Papa John’s restaurants in the Southeast for approximately $11.0 million. The transaction is expected to be completed in the first quarter of 2016.

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 ~~September 27, 2015,~~June 26, 2016, there were ~~4,786~~4,935 Papa John’s restaurants ~~(744~~(776 Company-owned and ~~4,042~~4,159 franchised) operating in all 50 states and ~~in 38~~43 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

Nine Months Ended

Sept. 27, 2015

Sept. 28, 2014

Sept. 27, 2015

Sept. 28, 2014

North America Company-owned:

Beginning of period

693

672

686

665

Opened

4

5

8

9

Closed

—

(1
)
—

(3
)
Acquired from franchisees

—

7

3

12

End of period

697

683

697

683

International Company-owned:

Beginning of period

48

59

49

58

Opened

—

—

—

1

Closed

(1
)
(1
)
(2
)
(1
)
End of period

47

58

47

58

North America franchised:

Beginning of period

2,653

2,614

2,654

2,621

Opened

31

37

68

86

Closed

(20
)
(14
)
(55
)
(65
)
Sold to Company

—

(7
)
(3
)
(12
)
End of period

2,664

2,630

2,664

2,630

International franchised:

Beginning of period

1,340

1,142

1,274

1,084

Opened

50

54

142

123

Closed

(12
)
(30
)
(38
)
(41
)
End of period

1,378

1,166

1,378

1,166

Total restaurants - end of period

4,786

4,537

4,786

4,537


	Three Months Ended				Six Months Ended
	June 26, 2016		June 28, 2015		June 26, 2016		June 28, 2015

Papa John’s Restaurant Progression:
North America Company-owned:
Beginning of period		729		691		707		686
Opened		5		1		7		4
Acquired		—		1		20		3
End of period		734		693		734		693
International Company-owned:
Beginning of period		44		48		45		49
Closed		(2)		—		(3)		(1)
End of period		42		48		42		48
North America franchised:
Beginning of period		2,661		2,650		2,681		2,654
Opened		23		19		41		37
Closed		(16)		(15)		(34)		(35)
Divested		—		(1)		(20)		(3)
End of period		2,668		2,653		2,668		2,653
International franchised:
Beginning of period		1,469		1,310		1,460		1,274
Opened		46		42		70		92
Closed		(24)		(12)		(39)		(26)
End of period		1,491		1,340		1,491		1,340
Total restaurants - end of period		4,935		4,734		4,935		4,734

~~Item Impacting Comparability; Non-GAAP Measure~~

~~The following table reconciles our GAAP financial results to the adjusted (non-GAAP) financial results, excluding the legal settlement expense for~~ ~~Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc.,~~ a conditionally certified collective and class action, for the three and nine months ended September 27, 2015. We present these non-GAAP measures because we believe the legal settlement impacts the comparability of our results of operations. For additional information about the legal settlement, see “Note 5” of “Notes to Condensed Consolidated Financial Statements.”14

Three Months Ended

Nine Months Ended

Sept. 27,

Sept. 28,

Sept. 27,

Sept. 28,

(In thousands, except per share amounts)

2015

2014

2015

2014

Income before income taxes, as reported

$
26,257

$
24,218

$
80,224

$
81,864

Legal settlement expense

—

—

12,278

—

Income before income taxes, as adjusted

$
26,257

$
24,218

$
92,502

$
81,864

Net income, as reported

$
17,971

$
16,075

$
50,987

$
52,134

Legal settlement expense

—

—

7,986

—

Net income, as adjusted

$
17,971

$
16,075

$
58,973

$
52,134

Diluted earnings per share, as reported

$
0.45

$
0.39

$
1.27

$
1.23

Legal settlement expense

—

—

0.20

—

Diluted earnings per share, as adjusted

$
0.45

$
0.39

$
1.47

$
1.23

~~The non-GAAP results shown above and within this document, which exclude the legal settlement, should not be construed as a substitute for or a better indicator~~Table of ~~the Company’s performance than the Company’s GAAP results. Management believes presenting certain financial information without the legal settlement is important for purposes~~Contents

Results of ~~comparison to prior year results. In addition, management uses this metric to evaluate the Company’s underlying operating performance and to analyze trends.~~Operations

~~FOCUS System~~Income Statement Presentation

~~As of September 27, 2015, we~~We have ~~implemented~~streamlined our ~~new, proprietary point-of-sale system (“FOCUS”)~~income statement presentation by combining certain income statement captions in ~~our domestic restaurants. FOCUS had~~ the ~~following impact on our~~ condensed consolidated statements of income ~~for the three~~ and ~~nine months ended September 27, 2015 and September 28, 2014 (in thousands):~~

Three Months Ended

Nine Months Ended

Sept 27,

Sept. 28,

Sept 27,

Sept. 28,

2015

2014

2015

2014

Franchise royalties (a)

$
(673
)
$
(63
)
$
(1,980
)
$
(68
)
Other sales (b)

38

9,708

9,846

9,848

Other operating expenses (c)

(56
)
(9,773
)
(9,959
)
(10,424
)
Depreciation and amortization (d)

(1,261
)
(1,064
)
(3,737
)
(1,643
)
Net decrease in income before income taxes

$
(1,952
)
$
(1,192
)
$
(5,830
)
$
(2,287
)

Diluted earnings per common share

$
(0.04
)
$
(0.02
)
$
(0.10
)
$
(0.04
)

~~(a)~~ ~~Royalty incentive program tied~~have conformed prior year amounts to ~~franchise rollout of FOCUS.~~

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

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

~~(d)~~ ~~Includes depreciation expense for both the capitalized software and for equipment installed at Company-owned restaurants, which are being depreciated over five to seven years, respectively.~~this new presentation.

~~Results~~Review of ~~Operations~~

~~Summary of~~Consolidated Operating Results ~~- Segment Review~~

~~Discussion of Revenues~~

Consolidated revenues were $389.3 million for the three months ended September 27, 2015, a decrease of $1.1 million, or 0.3%, over the corresponding 2014 period. The decrease for the three month period was primarily due to lower FOCUS equipment sales and lower PJ Food Service (“PJFS”) sales as a result of lower commodity costs. For the nine months ended September 27, 2015, total revenues were $1.22 billion, an increase of $47.9 million, or 4.1%, over the corresponding 2014 period. The changes in revenues for the three and nine months ended September 27, 2015, compared to the corresponding periods in 2014, were primarily due to the following:

·Revenues. Domestic Company-owned restaurant sales increased ~~$11.0~~$18.3 million, or ~~6.5%~~9.8%, and ~~$46.0~~$26.7 million, or ~~8.9%~~7.0%, for the three and ~~nine~~six months ended ~~September 27, 2015,~~June 26, 2016, respectively, primarily due to increases of ~~4.7%~~5.6% and ~~6.8%~~3.2% in comparable sales and increases of ~~2.8%~~5.1% and ~~2.9%~~4.6% in equivalent units during the three and ~~nine~~six months ended ~~September 27, 2015, respectively. “Comparable sales” represents~~June 26, 2016, including 20 restaurants acquired from franchisees during the ~~change in year-over-year sales for the same base of restaurants for the same fiscal periods.~~first quarter. “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 royalty revenue decreased approximately $50,000, or 0.2%,~~ “Comparable sales” represents the change in year-over-year sales for the ~~three months ended September 27, 2015 as~~same base of restaurants for the ~~increase in revenue from a 2.4% increase in~~same fiscal periods.

Domestic franchise ~~comparable sales was offset by higher royalty incentives. Revenues~~royalties and fees increased ~~$4.8~~$2.0 million, or ~~7.3%, for the nine months ended September 27, 2015 primarily due to an increase of 4.4% in franchise comparable sales~~8.7% and ~~due to lower royalty incentives.~~

· ~~International royalties and franchise and development fees increased approximately $80,000, or 1.2%, and $1.1~~$2.9 million, or ~~6.0%,~~5.9% for the three and ~~nine~~six months ended ~~September 27, 2015, respectively,~~June 26, 2016, respectively. The increase was primarily due to increases in comparable sales of 4.5% and 2.1% for the ~~number~~three and six months, respectively, as well as reduced levels of ~~franchised restaurants~~royalty incentives in 2016. Domestic franchise restaurant sales increased 4.3% to $545.5 million and ~~increases~~2.2% to $1.1 billion for the three and six months ended June 26, 2016, respectively. The increase is primarily due to the increase in comparable sales noted above. Franchise restaurant sales are not included in Company revenues; however, our domestic royalty revenue is derived from these sales.

Domestic commissary and other sales increased $1.5 million, or 0.9% and decreased $13.4 million, or 3.9% for the three and six months ended June 26, 2016, respectively. The increase of ~~8.5%~~$1.5 million for the second quarter was primarily due to a $1.9 million increase in domestic commissary sales from an increase in volumes, partially offset by lower pricing for certain commodities, including cheese, and ~~7.8%,~~an increase in online fee revenue for our online and mobile ordering business. These increases were partially offset by the prior year inclusion of approximately $1.3 million for point-of-sale system (“FOCUS”) equipment sales to franchisees which had no significant impact on 2015 operating results. The decrease for the comparable six month period was due to a $9.8 million decrease in FOCUS equipment sales and a decrease in commissary sales of $4.5 million associated with lower pricing for certain commodities, partially offset by higher domestic commissary sales volumes.

International revenues increased approximately $2.1 million, or 8.1% and $4.2 million, or 8.0% for the three and six months ended June 26, 2016, respectively, primarily due to the following:

·

The three and six month periods of 2016 include sublease rental revenue in the United Kingdom of approximately $1.7 million and $3.3 million, respectively, which was shown net of the rental expenses in the corresponding periods of the prior year. The change had no impact on income before income taxes.

·

Higher royalties and commissary revenues resulted from an increase in the number of restaurants and an increase in comparable sales of 5.3% and 5.5% for the three and six months ended June 26, 2016, calculated on a constant dollar basis. International franchise restaurant sales increased 7.7% to $161.8 million, and 8.0% to $316.1 million for the three and six month periods. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.

·

These increases were somewhat offset by lower China Company-owned restaurant revenues of $1.3 million and $2.6 million for the three and six month periods, respectively, primarily due to negative comparable sales and fewer restaurants.

The negative impact of foreign currency exchange rates ~~reduced our~~was approximately $2.2 million and $4.0 million on international revenues ~~by approximately $800,000 and $2.1 million for the three- and nine-month periods.~~

· ~~International restaurant and commissary sales increased approximately $500,000, or 2.7%, and $2.0 million, or 3.6%,~~ for the three and ~~nine~~six months ended ~~September 27,~~June 26, 2016.

15

Table of Contents

Costs and expenses. The operating margin for domestic Company-owned restaurants was 20.0% and 20.8% in the three and six months ended June 26, 2016, respectively, compared to 20.8% and 21.1% in the corresponding 2015 periods, and consisted of the following (dollars in thousands):


		Three Months Ended						Six Months Ended
	June 26, 2016			June 28, 2015			June 26, 2016			June 28, 2015

Restaurant sales	$	204,248		$	185,962		$	409,927		$	383,249

Cost of sales		46,329	22.7%		43,289	23.3%		93,530	22.8%		90,793	23.7%
Other operating expenses		117,140	57.4%		104,067	56.0%		231,249	56.4%		211,595	55.2%
Total expenses	$	163,469	80.0%	$	147,356	79.2%	$	324,779	79.2%	$	302,388	78.9%

Margin	$	40,779	20.0%	$	38,606	20.8%	$	85,148	20.8%	$	80,861	21.1%

Domestic Company-owned restaurants cost of sales were approximately 0.6% and 0.9% lower as a percentage of sales for the three and six months ended June 26, 2016, respectively, primarily due to ~~an increase in United Kingdom commissary revenues from increases in units~~lower commodity costs, including cheese, meats and dough. Domestic restaurants other operating expenses were approximately 1.4% and 1.2% higher ~~comparable sales. This increase was partially offset by lower~~as a percentage of sales at China Company-owned restaurants due to the disposition of eleven restaurants in 2014 and negative comparable sales. Additionally, sales were negatively impacted $1.3 million and $3.8 million for the three- and nine month periods, respectively, by foreign currency exchange rates.

· ~~Other sales decreased approximately $9.3 million, or 39.7%, and increased $400,000, or 0.8%,~~ for the three and ~~nine~~six months ended ~~September 27,~~June 26, 2016, respectively, primarily due to higher insurance costs.

The domestic commissary and other operating margins were 7.7% and 7.4% for the three and six months ended June 26, 2016, respectively, compared to 7.5% and 7.4% in the corresponding periods of the prior year and consisted of the following (dollars in thousands):


		Three Months Ended
	June 26, 2016							June 28, 2015
		Revenues		Expenses		Margin $	Margin %		Revenues		Expenses		Margin $	Margin %
Domestic commissary	$	150,895	$	139,616	$	11,279	7.5%	$	149,007	$	137,558	$	11,449	7.7%
All others		14,059		12,642		1,417	10.1%		14,420		13,648		772	5.4%
Domestic commissary and other	$	164,954	$	152,258	$	12,696	7.7%	$	163,427	$	151,206	$	12,221	7.5%

		Six Months Ended
		June 26, 2016							June 28, 2015
		Revenues		Expenses		Margin $	Margin %		Revenues		Expenses		Margin $	Margin %
Domestic commissary	$	306,849	$	284,189	$	22,660	7.4%	$	311,340	$	287,294	$	24,046	7.7%
All others		27,090		24,875		2,215	8.2%		36,034		34,251		1,783	4.9%
Domestic commissary and other	$	333,939	$	309,064	$	24,875	7.4%	$	347,374	$	321,545	$	25,829	7.4%

Domestic commissary margins were 0.2% and 0.3% lower for the three and six months ended June 26, 2016, respectively, primarily due to the reclassification of certain expenses from general and administrative to operating expenses beginning in the first quarter of 2016, which had no impact on commissary income before income taxes. The “All others” margins were 4.7% and 3.3% higher for the three and six month periods, respectively, primarily due to the

16

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prior year including FOCUS equipment sales to franchisees, which had no significant margin, and improved operating results at Preferred Marketing Solutions.

The international operating margins were 37.6% and 36.8% in the three and six months ended June 26, 2016, respectively, compared to 38.3% and 38.7% versus the corresponding 2015 periods. The lower margins were primarily due to a decrease in restaurant, commissary and other margins of 1.7% and 2.7% for the three and six months ended June 26, 2016 primarily due to the gross presentation of certain sublease rental income and expenses. These amounts were shown net in the prior year; the change in presentation had no impact on income before income taxes. This lower margin was substantially offset by the benefit of higher royalties and fees.

The international operating margins consisted of the following (dollars in thousands):


		Three Months Ended
	June 26, 2016							June 28, 2015
	Revenues		Expenses			Margin $ (a)	Margin %	Revenues		Expenses			Margin $	Margin %
Royalties and franchise development fees	$	7,397	$	-	$	7,397		$	6,641	$	-	$	6,641
Restaurant, commissary and other		21,063		17,752		3,311	15.7%		19,685		16,250		3,435	17.4%
Total international	$	28,460	$	17,752	$	10,708	37.6%	$	26,326	$	16,250	$	10,076	38.3%

		Six Months Ended
	June 26, 2016							June 28, 2015
	Revenues		Expenses			Margin $ (a)	Margin %	Revenues		Expenses			Margin $	Margin %
Royalties and franchise development fees	$	14,265	$	-	$	14,265		$	13,139	$	-	$	13,139
Restaurant, commissary and other		41,650		35,342		6,308	15.1%		38,613		31,728		6,885	17.8%
Total international	$	55,915	$	35,342	$	20,573	36.8%	$	51,752	$	31,728	$	20,024	38.7%

(a)

The negative impact of foreign currency exchange rates on income before income taxes was approximately $500,000 and $1.2 million for the three and six months ended June 26, 2016, respectively.

General and administrative (G&A) expenses were $42.6 million, or 10.1% of revenues for the three months ended June 26, 2016, which approximated G&A of $43.0 million, or 10.8%, of revenues for the same period in 2015. G&A expenses were $82.9 million, or 9.7% of revenues for the six months ended June 26, 2016, compared to $86.8 million, or 10.4% of revenues for the same period in 2015. The decrease of $3.9 million for the ~~three-month~~six month period was primarily due to ~~higher FOCUS equipment sales to franchisees in 2014. FOCUS equipment sales had no significant impact on operating income results. See~~ the ~~“FOCUS System” section above for additional information.~~following:

·

Corporate G&A costs decreased primarily due to lower legal costs.

·

Domestic Company-owned restaurant supervisor bonuses decreased due to lower comparable sales bonus payouts, primarily in the first quarter of 2016.

·

International G&A costs decreased primarily due to lower advertising spending; in the prior year, advertising levels were higher with the launch of the United Kingdom Quality Guarantee in 2015.

·Depreciation and amortization. ~~Domestic commissary sales decreased $3.4~~Depreciation and amortization was $10.0 million, or ~~2.3%, and $6.6~~2.4% of revenues for the three months ended June 26, 2016, compared to $10.1 million, or ~~1.4%~~2.5% of revenues for the same period in 2015, and $19.8 million, or 2.3% of revenues for the six months ended June 26, 2016, compared to $20.2 million, or 2.4% of revenues for the same period in 2015.

Legal settlement expense. The 2015 legal settlement expense represents a pre-tax expense of $12.3 million for a collective and class action, Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc.,including approximately 19,000 drivers, which alleged delivery drivers were not reimbursed in accordance with the Fair Labor Standards Act.

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Table of Contents

Net interest expense. Net interest expense increased approximately $400,000 and $700,000 for the three and ~~nine~~six months ended ~~September 27,~~June 26, 2016, respectively, primarily due to higher average outstanding debt balances.

Income tax expense. The effective income tax rates were 31.5% and 31.9% for the three and six months ended June 26, 2016, respectively, representing an increase of 2.6% for the three month period and no change from the prior year six month period. The legal settlement reduced our 2015 ~~respectively, as lower revenues associated with lower cheese prices~~income tax rates by approximately 2.5% and 0.5% for the three and six month periods, respectively. Our effective income tax rates may fluctuate from quarter to quarter for various reasons, including the timing of various deductions and credits.

Diluted earnings per share. Diluted earnings per share were ~~somewhat offset~~$0.61 for the three months ended June 26, 2016, compared to $0.27 in the corresponding prior year period. Diluted earnings per share were $1.29 for the six months ended June 26, 2016, compared to $0.82 in the corresponding prior year period. Diluted earnings per share for the three and six months ended June 28, 2015 were negatively impacted by ~~increases in restaurant sales volumes.~~$0.20 due to the 2015 legal settlement.

Discussion of Operating Results by Segment

~~Third quarter 2015 income before income taxes was $26.3 million compared to $24.2 million in the prior year comparable period, or an increase~~See “Review of ~~8.4%. Income before income taxes was $80.2 million~~Consolidated Operating Results” above for the nine months ended September 27, 2015, compared to $81.9 million for the prior year comparable period. Excluding the previously discussed legal settlement, income before income taxes was $92.5 million for the nine months ended September 28, 2015, or an increase of 13.0%. revenue highlights.

Income before income taxes is summarized in the following table on a reporting segment basis. Alongside the GAAP income before income taxes data, we have included “adjusted” income before income taxes ~~for the nine-month period of 2015~~ to exclude the 2015 legal settlement ~~expense.~~expense previously discussed. We believe this non-GAAP measure is important for purposes of comparing to prior year results.

Three Months Ended

Sept. 27,

Sept. 28,

Increase

(In thousands)

2015

2014

(Decrease)

Domestic company-owned restaurants

$
8,088

$
8,133

$
(45
)
Domestic commissaries

10,192

8,897

1,295

North America franchising

19,172

19,023

149

International

3,184

1,436

1,748

All others

(556
)
(298
)
(258
)
Unallocated corporate expenses

(13,482
)
(12,242
)
(1,240
)
Elimination of intersegment profits

(341
)
(731
)
390

Total income before income taxes (a)

$
26,257

$
24,218

$
2,039

Nine Months Ended

As Reported

Legal

Adjusted

Adjusted

Sept. 27,

Settlement

Sept. 27,

Sept. 28,

Increase

(In thousands)

2015

Expense

2015

2014

(Decrease)

Domestic company-owned restaurants

$
41,185

$
—

$
41,185

$
32,069

$
9,116

Domestic commissaries

32,694

—

32,694

26,174

6,520

North America franchising

61,545

—

61,545

56,389

5,156

International

6,807

—

6,807

4,071

2,736

All others

(230
)
—

(230
)
(150
)
(80
)
Unallocated corporate expenses

(60,636
)
12,278

(48,358
)
(35,405
)
(12,953
)
Elimination of intersegment losses

(1,141
)
—

(1,141
)
(1,284
)
143

Total income before income taxes (a)

$
80,224

$
12,278

$
92,502

$
81,864

$
10,638

~~(a)~~ ~~Includes FOCUS system costs~~ Management uses this metric to evaluate the underlying operating performance of ~~approximately $2.0 million and $1.2 million for~~ the three months ended September 27, 2015 and September 28, 2014, respectively, and approximately $5.8 million and $2.3 million for the nine months ended September 27, 2015 and September 28, 2014, respectively. See the “Focus System” section above for additional information.

~~The increases of $2.0 million, or 8.4%, and $10.6 million, or 13.0%, excluding the legal settlement, for the three- and nine-month periods in 2015, respectively, were primarily due to the following:~~

·~~Domestic Company-owned Restaurant Segment.~~ ~~Domestic Company-owned restaurants’~~business. Adjusted income before income taxes ~~were relatively flat~~should not be construed as a substitute for or a better indicator of our performance than the ~~third~~Company’s GAAP measure.

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Second quarter of 2015, compared to the same quarter of the prior year, as higher profits from the 4.7% increase in comparable sales and lower commodity costs were offset by incremental insurance expense of approximately $2.9 million primarily from higher non-owned automobile claims costs. Income2016 income before income taxes ~~increased approximately $9.1~~was $35.2 million ~~for the nine-month period,~~ compared to ~~the corresponding prior year period, as higher profits from the 6.8% increase in comparable sales and lower commodity costs were partially offset by incremental insurance costs of $3.9~~$17.5 million ~~and higher depreciation expense of $1.1 million associated with FOCUS~~

~~equipment. The market price for cheese averaged $1.68 and $1.62 per pound for the three- and nine-month periods in 2015, compared to $2.14 and $2.16 per pound~~ in the prior ~~year~~ comparable ~~periods.~~

·~~Domestic Commissary Segment.~~ ~~Domestic commissaries’~~year. Excluding the 2015 legal settlement, income before income taxes increased ~~approximately $1.3~~18.1%, or $5.4 million, ~~and $6.5~~as compared to $29.8 million for the three and nine months ended September 27, 2015, respectively, compared to the corresponding prior year periods primarily due to higher margins and incremental profits from higher restaurant volumes. These increases were partially offset by incremental insurance expensesecond quarter of ~~approximately $1.6 million and $2.2~~2015. Income before income taxes was $76.6 million for the ~~three and nine-month periods, respectively, primarily from higher automobile claims costs.~~

·~~North America Franchising Segment.~~ ~~North America Franchising~~six months ended June 26, 2016, compared to $54.0 million for the prior comparable period. Excluding the 2015 legal settlement, income before income taxes ~~was $149,000 higher for the third quarter of 2015,~~increased 15.6%, or $10.4 million, as compared to ~~the same quarter of the prior year, as higher royalties from the 2.4% comparable sales increase were substantially offset by higher royalty incentives. Income before income taxes increased $5.2~~$66.2 million for the ~~nine~~six months ended ~~September 27, 2015, compared to the corresponding prior year period, due to higher royalties from the 4.4% comparable sales increase and lower royalty incentives.~~June 28, 2015.


	Three Months Ended
			As Reported		Legal		Adjusted		Adjusted
	June 26,		June 28,		Settlement		June 28,		Increase
(In thousands)	2016		2015		Expense		2015		(Decrease)

Domestic Company-owned restaurants	$	15,325	$	14,617	$	—	$	14,617	$	708
Domestic commissaries		11,682		10,702		—		10,702		980
North America franchising		22,445		20,054		—		20,054		2,391
International		2,875		2,279		—		2,279		596
All others		425		(117)		—		(117)		542
Unallocated corporate expenses		(17,079)		(29,949)		12,278		(17,671)		592
Elimination of intersegment profits		(473)		(55)		—		(55)		(418)
Total income before income taxes	$	35,200	$	17,531	$	12,278	$	29,809	$	5,391

	Six Months Ended
			As Reported		Legal		Adjusted		Adjusted
	June 26,		June 28,		Settlement		June 28,		Increase
(In thousands)	2016		2015		Expense		2015		(Decrease)

Domestic Company-owned restaurants	$	35,512	$	33,097	$	—	$	33,097	$	2,415
Domestic commissaries		23,228		22,502		—		22,502		726
North America franchising		46,025		42,373		—		42,373		3,652
International		5,913		3,623		—		3,623		2,290
All others		476		326		—		326		150
Unallocated corporate expenses		(33,411)		(47,154)		12,278		(34,876)		1,465
Elimination of intersegment profits		(1,134)		(800)		—		(800)		(334)
Total income before income taxes	$	76,609	$	53,967	$	12,278	$	66,245	$	10,364

·~~International Segment.~~ Income before income taxes increased approximately $1.7 million and $2.7 million for the three and nine months ended September 27, 2015, respectively, compared to the corresponding prior year periods. The increases were primarily due to increasesChanges in units and comparable sales increases of 8.0% and 7.5%, which resulted in both higher royalties and increases of approximately $1.4 million and $1.9 million in United Kingdom results for the three- and nine-month periods, respectively. These increases were somewhat offset by the impact of negative foreign currency exchange rates of approximately $900,000 and $2.2 million for the three- and nine-month periods, respectively. Additionally, the 2014 periods include an impairment charge of approximately $700,000 for eight Company-owned restaurants in China.

·~~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 $250,000 and $80,000 for~~are summarized on a segment basis as follows excluding the ~~three and nine months ended September 27,~~ 2015 respectively, compared to the corresponding prior year periods. The decrease of approximately $250,000 for the three-month period was primarily due to higher infrastructure costs to support our online and mobile ordering business, partially offset by higher online volumes. The decrease of approximately $80,000 for the nine-month period was primarily due to reduced operating results at Preferred Marketing Solutions, primarily associated with an increased number of discounted direct mail campaigns, partially offset by improvements in our online and mobile ordering business due to higher online volumes.legal settlement:

·

Domestic Company-owned Restaurant Segment. Domestic Company-owned restaurants’ income before income taxes increased approximately $700,000 and $2.4 million for the three and six months ended June 26, 2016, respectively, compared to the corresponding prior year periods. The increase was primarily due to 5.6% and 3.2% increases in comparable sales for the three and six months ended June 26, 2016 and lower commodity costs. These increases were partially offset by higher non-owned automobile claim costs.

·

Domestic Commissary Segment. Domestic commissaries’ income before income taxes increased approximately $1.0 million and $700,000 for the three and six months ended June 26, 2016, respectively, primarily due to higher sales volumes.

·

North America Franchising Segment. North America franchising income before income taxes increased approximately $2.4 million and $3.7 million for the three and six months ended June 26, 2016, respectively. The increases were primarily due to increases of 4.5% and 2.1% in comparable sales for the three and six months ended June 26, 2016, respectively. In addition, sales and development incentives are lower in 2016.

·

International Segment. International income before income taxes increased approximately $600,000 and $2.3 million for the three and six months ended June 26, 2016, respectively. The increases were primarily due to an increase in the number of restaurants and an increase in comparable sales, which resulted in higher royalties. The United Kingdom profits also increased from lower advertising costs; in the prior year, advertising costs were higher with the launch of the Quality Guarantee in 2015. These increases were somewhat offset by the

·~~Unallocated Corporate Expenses.~~ Unallocated corporate expenses increased approximately $1.2 million and $13.0 million for the three and nine months ended September 27, 2015, respectively, compared to the corresponding 2014 periods. The increase of $1.2 million for the third quarter was primarily due to higher health insurance claims costs. The increase of $13.0 million for the nine-month period was primarily due to higher salaries and benefits, including an increase in health insurance claims costs, and increased legal and interest costs. In addition, management incentive compensation costs have increased in 2015 due to higher annual operating results.

Diluted earnings per share were $0.45 for the three months ended September 27, 2015, compared to $0.39 in the corresponding prior year period. Diluted earnings per share were $1.27 ($1.47, excluding the $0.20 legal settlement), for the nine months ended September 27, 2015, compared to $1.23 in the corresponding prior year period. Diluted earnings per share increased $0.02 and $0.07 for the three- and nine-month periods, respectively, due to reductions in shares outstanding (a 3.6% reduction for the three-month period and a 4.3% reduction for the nine-month period). Additionally, FOCUS system costs reduced diluted earnings per share by $0.04 and $0.02 for the three months ended September 27, 2015 and September 28, 2014, respectively, and $0.10 and $0.04 for the nine months ended September 27, 2015 and September 28, 2014, respectively.

~~Review of Consolidated Operating Results~~

~~Revenues.~~ Domestic Company-owned restaurant sales were $180.1 million for the three months ended September 27, 2015, compared to $169.1 million for the same period in 2014, and $563.3 million for the nine months ended September 27, 2015, compared to $517.3 million for the same period in 2014. The increases of $11.0 million and $46.0 million were primarily due to the previously mentioned increases of 4.7% and 6.8% in comparable sales and increases of 2.8% and 2.9% in equivalent units during the three and nine months ended September 27, 2015, respectively.

North America franchise royalties were $22.1 million and $70.5 million for the three and nine months ended September 27, 2015, respectively, representing a decrease of approximately $50,000, or 0.2%, and an increase of $4.8 million, or 7.3%, from the comparable periods in the prior year. The decrease for the three-month period was primarily due to increased levels of royalty incentives which more than offset the higher royalties from an increase in North America franchise sales. The increase for the nine-month period was primarily due to higher royalties from the increase in North America franchise sales and reduced levels of royalty incentives. North America franchise sales increased 3.1% to $499.2 million for the three months ended September 27, 2015, compared to $484.3 million for the same period in 2014, and increased 4.9% to $1.585 billion for the nine months ended September 27, 2015, compared to $1.511 billion for the same period in 2014. The increases were primarily due to the 2.4% and 4.4% increases in comparable sales for the three- and nine-month periods, respectively. Franchise restaurant sales are not included in Company revenues~~; however, our domestic royalty revenue is derived from these sales.~~19

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, 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

negative impact of foreign currency exchange rates of approximately $500,000 and $1.2 million for the three and six month periods in 2016.

·

All Others Segment. The “All others” segment, which primarily includes our online and mobile ordering business and our wholly-owned print and promotions subsidiary, Preferred Marketing Solutions, increased approximately $500,000 and $200,000 for the three and six months ended June 26, 2016. The increases were primarily due to improved operating results at Preferred Marketing Solutions.

·

Unallocated Corporate Segment. Unallocated corporate expenses decreased approximately $600,000 and $1.5 million for the three and six months ended June 26, 2016, respectively. The decreases were primarily due to lower legal costs.

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

Three Months Ended

September 27, 2015

September 28, 2014

Company

Franchised

Company

Franchised

Total domestic units (end of period)

697

2,664

683

2,630

Equivalent units

685

2,521

667

2,496

Comparable sales base units

668

2,355

649

2,311

Comparable sales base percentage

97.5
%
93.4
%
97.3
%
92.6
%
Average weekly sales - comparable units

$
20,382

$
15,596

$
19,628

$
15,306

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

$
13,525

$
10,073

$
15,081

$
10,179

Average weekly sales - all units

$
20,208

$
15,234

$
19,504

$
14,926

~~(a) Includes 124 traditional and 214 non-traditional units as of September 27, 2015 and 150 traditional and 204 non-traditional units as of September 28, 2014.~~

Nine Months Ended

September 27, 2015

September 28, 2014

Company

Franchised

Company

Franchised

Total domestic units (end of period)

697

2,664

683

2,630

Equivalent units

682

2,536

662

2,513

Comparable sales base units

665

2,348

644

2,302

Comparable sales base percentage

97.5
%
92.6
%
97.3
%
91.6
%
Average weekly sales - comparable units

$
21,369

$
16,482

$
20,209

$
15,879

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

$
13,686

$
10,324

$
13,759

$
10,356

Average weekly sales - all units

$
21,184

$
16,204

$
20,026

$
15,415

~~(a)~~ ~~Includes 124 traditional and 214 non-traditional units as of September 27, 2015 and 150 traditional and 204 non-traditional units as of September 28, 2014.~~

Domestic commissary sales decreased 2.3% to $145.9 million for the three months ended September 27, 2015, from $149.2 million in the comparable 2014 period and decreased 1.4% to $457.2 million for the nine months ended September 27, 2015, from $463.9 million in the comparable 2014 period. The decreases were primarily due to decreases in cheese prices, which were somewhat offset by increases in sales volumes. PJFS pricing for cheese is based on a fixed dollar markup; when cheese prices decrease, revenues will decrease with no overall impact on the related dollar margin.

~~Other sales decreased approximately $9.3 million, or 39.7%, and increased approximately $400,000, or 0.8%, for the three and nine months ended September 27, 2015, from the prior comparable periods.~~ ~~The decrease for the three-month period was primarily due to lower FOCUS equipment sales to franchisees. See the “FOCUS System” section above for additional information.~~

~~International~~ royalties and franchise and development fees increased approximately $80,000, or 1.2%, for the three months ended September 27, 2015, and increased $1.1 million, or 6.0%, for the nine months ended September 27, 2015, from the prior comparable periods. The increases were due to increases in units and comparable sales of 8.5% and 7.8%, calculated on a constant dollar basis, for the three- and nine-month periods, respectively. The negative impact of foreign currency exchange rates reduced our revenues by approximately $800,000 and $2.1 million for the three- and nine-month periods. International franchise sales were $146.1 million for the three months ended September 27, 2015, compared to $139.4 million for the same period in 2014, representing an increase of 4.8%. International franchise sales for the nine months ended September 27, 2015 increased 7.0% to $438.9 million compared to $410.3 million for the same period in 2014. International franchise sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.

International restaurant and commissary sales increased approximately $500,000, or 2.7%, for the three months ended September 27, 2015, and increased $2.0 million, or 3.6%, for the nine months ended September 27, 2015, from the prior comparable periods. The increases were primarily due to higher commissary revenues from increases in units and comparable sales. The increases were partially offset by lower sales at China Company-owned restaurants due to the disposition of eleven restaurants in 2014 and negative comparable sales. Additionally, sales were negatively impacted $1.3 million and $3.8 million for the three- and nine month periods, respectively, by foreign currency exchange rates.

~~Costs and expenses.~~ The restaurant operating margin for domestic Company-owned units was 17.5% for the three months ended September 27, 2015, compared to 17.6% for the same period in 2014, and was 20.0% for the nine months ended September 27, 2015, compared to 18.6% for the same period in 2014. The margins were comprised of the following changes for the three and nine months ended September 27, 2015, as compared to the same periods in 2014:

· ~~Cost of sales were 1.7% and 1.5% lower for the three and nine months ended September 27, 2015, as compared to the same periods in 2014, primarily due to lower commodity costs, primarily cheese.~~

· ~~Salaries and benefits were 0.8% and 0.7% higher for the three and nine months ended September 27, 2015, primarily due to higher bonuses paid to general managers and minimum wage increases.~~

· Advertising and related costs were 0.3% lower for the nine months ended September 27, 2015 (no change for the third quarter) primarily due to lower discretionary spending and the benefit of higher sales.

· Occupancy costs and other restaurant operating costs were 1.0% higher and 0.2% lower for the three and nine months ended September 27, 2015. The higher operating expenses for the three months ended were due to the previously mentioned increase in non-owned automobile insurance claims costs, partially offset by lower mileage reimbursement due to lower gas prices.

Domestic commissary margin was 7.3% for the three months ended September 27, 2015, compared to 6.8% for the corresponding period in 2014, and 7.6% for the nine months ended September 27, 2015, compared to 6.8% for the corresponding period in 2014 and consisted of the following differences:

· Cost of sales were 2.1% and 2.0% lower for the three and nine months ended September 27, 2015 primarily due to lower cheese costs which have a fixed-dollar markup. As cheese prices are lower, food cost as a percentage of sales is lower.

· Salaries and benefits and other commissary operating expenses were 1.6% and 1.1% higher as a percentage of sales. This is primarily due to the previously discussed incremental automobile insurance claims costs of $1.6 million and $2.2 million for the three- and nine-month periods of 2015, respectively. Additionally, PJFS revenues are lower due to lower cheese prices, which increases overall salaries and benefits and other commissary operating expenses as a percentage of sales.

Other operating expenses as a percentage of other sales were 95.7% for the three months ended September 27, 2015 compared to 97.6% for the corresponding period in 2014 and 95.2% for the nine months ended September 27, 2015 compared to 95.5% in the prior comparable periods. The lower operating expenses for the quarter were primarily due to the decreasing number of franchise FOCUS systems sales, and related operating expenses, as we finished the rollout. Overall, FOCUS systems sales have a low margin. The nine month results reflect the impact of an increased number of direct mail campaigns offered to our domestic restaurants by Preferred Marketing Solutions.

International restaurant and commissary expenses as a percentage of sales were 81.4% for the third quarter of 2015 and 84.2% in the third quarter of 2014. For the nine months ended September 27, 2015, expenses were 81.9% as compared to 83.4% for the corresponding 2014 period. The decreases as a percentage of sales for the three- and nine-month periods were primarily due to the benefit of higher commissary sales volumes and higher commissary margins.

General and administrative (G&A) costs were $36.1 million, or 9.3%, of revenues for the three months ended September 27, 2015, compared to $33.7 million, or 8.6%, of revenues for the same period in 2014. G&A costs were $120.0 million, or 9.8%, of revenues for the nine months ended September 27, 2015, compared to $104.2 million, or 8.9%, of revenues for the same period in 2014. The increase of $2.4 million for the three-month period was primarily due to higher insurance claims costs, primarily health insurance, and international support costs. The increase of $15.8 million for the nine-month period was primarily due to the following:

· Corporate G&A costs increased primarily due to higher salaries and benefits, including an increase in health insurance claims costs, increased legal costs, and higher management incentive compensation due to higher annual operating results.

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

· ~~International G&A costs increased primarily due to incremental advertising spending and other international support costs.~~

Other general expenses decreased approximately $1.5 million and $2.2 million for the three and nine months ended September 27, 2015, respectively, primarily due to lower provisions for uncollectible accounts and notes receivable and the $700,000 impairment charge in the prior year for eight Company-owned restaurants in China.

Depreciation and amortization was $10.5 million (2.7% of revenues) for the three months ended September 27, 2015, compared to $10.5 million (2.7% of revenues) for the same 2014 period, and $30.6 million (2.5% of revenues) for the nine months ended September 27, 2015, compared to $29.5 million (2.5% of revenues) for the 2014 period. The nine-month period of 2015 includes higher depreciation from both FOCUS capitalized software costs and Company-owned restaurants equipment costs.

~~Legal settlement expense.~~ This line item consists of $12.3 million of settlement costs in the nine month period of 2015 for a conditionally certified collective and class action alleging our delivery drivers were not properly reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act (“FLSA”). For additional information, see “Note 5” of “Notes to Condensed Consolidated Financial Statements.”

~~Net interest expense.~~ Net interest expense increased approximately $200,000 and $1.3 million for the three and nine months ended September 27, 2015, respectively, primarily due to a higher average outstanding debt balance and higher effective interest rates.

~~Income tax expense.~~ Our effective income tax rates were 27.7% and 30.6% for the three and nine months ended September 27, 2015, respectively, representing decreases from the prior year comparable periods of 2.2% and 1.8% for the three- and nine-month periods, respectively. The rates for 2015 include higher benefits from various tax deductions and credits, including the U.S. federal manufacturing deduction.

~~Planned Sale of China Company-owned Operations~~

The Company has decided to refranchise the China market and is planning a sale of its existing China operations, consisting of the Company-owned restaurants and a commissary. We expect to sell the business within the next 12 months; upon completion of the sale, the Company will not have any Company-owned international restaurants.

The Company-owned China operations have incurred losses before income taxes of $0.4 million and $1.4 million for the three months ended September 27, 2015 and September 28, 2014, respectively, and losses before income taxes of $0.9 million and $2.3 million for the nine months ended September 27, 2015 and September 28, 2014, respectively, which are recorded in our International segment. The losses for the three and nine months ended September 28, 2014, include an impairment charge of $0.7 million for eight Company-owned restaurants in China. We do not expect the sale of our China operations to have a significant impact on our financial results.

~~See “Note 7” of “Notes to Condensed Consolidated Financial Statements” for additional information.~~

Liquidity and Capital Resources

Debt

Our debt is comprised entirely of ~~borrowings under our~~an unsecured revolving line of credit ~~facility~~ (“Credit Facility”) with ~~a maturity date~~outstanding balances of ~~October 31, 2019. Outstanding balances under this $400 million Credit Facility were $239.0~~$317.4 million as of ~~September 27, 2015~~June 26, 2016 and ~~$230.5~~$256.0 million as of December ~~28, 2014.~~27, 2015. On June 8, 2016, we exercised our option to increase the amount available under our Credit Facility to $500 million from the previous $400 million availability. The increase in the outstanding debt balance from December 27, 2015 was primarily due to borrowings to fund share repurchases, pay dividends, acquire restaurants and pay the 2015 legal settlement.

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~~spread over LIBOR and the commitment fee are determined quarterly based upon the ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined by the Credit Facility. The remaining availability under the Credit Facility, reduced for outstanding letters of credit, was approximately ~~$138.5~~$157.7 million as of ~~September 27, 2015.~~June 26, 2016.

~~We use~~As of June 26, 2016, we have the following interest rate ~~swaps to hedge against the effects of potential interest rate increases on borrowings under our Credit Facility. During the quarter ended September 27, 2015, we executed~~swap agreements, including three ~~additional~~ forward starting

swaps ~~for $125.0 million~~executed in 2015 that become effective in 2018 upon expiration of the two existing swaps for ~~$125.0 million. As of September 27, 2015,~~ ~~we have the following interest rate swap agreements:~~$125 million:

~~Effective Dates~~	~~Debt Amount~~		~~Fixed Rates~~

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	%

April 30, 2018 through April 30, 2023	$	55 million		2.33	%

April 30, 2018 through April 30, 2023	$	35 million		2.36	%

April 30, 2018 through April 30, 2023	$	35 million		2.34	%

Our 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	~~September 27, 2015~~June 26, 2016

Leverage Ratio	Not to exceed 3.0 to 1.0	~~1.6~~1.79 to 1.0

Interest Coverage Ratio	Not less than 3.5 to 1.0	~~4.7~~4.84 to 1.0

Our leverage ratio is defined as outstanding debt divided by consolidated EBITDA for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all covenants as of ~~September 27, 2015.~~June 26, 2016.

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Cash Flows

Cash flow provided by operating activities was ~~$119.7~~$75.1 million for the ~~nine~~six months ended ~~September 27, 2015,~~June 26, 2016, compared to ~~$84.8~~$78.0 million for the same period in ~~2014.~~2015. The ~~increase~~decrease of approximately ~~$34.9~~$2.9 million was primarily due to ~~higher operating income~~the payment of approximately $12.5 million in the first quarter of 2016 for the previously discussed legal settlement and ~~favorable~~unfavorable changes in ~~inventory and other~~ working capital ~~items. The prior year included~~items, partially offset by higher ~~inventory levels of equipment to support the rollout of FOCUS to our domestic franchised restaurants. The~~ ~~Perrin~~ ~~legal settlement does not currently impact cash provided by operating activities as it has not yet been paid. Payments will begin in 2016 following court approval.~~net income.

Our free cash flow, a non-GAAP financial measure, ~~for the nine months ended September 27, 2015 and September 28, 2014~~ was as follows for the six months ended June 26, 2016 and June 28, 2015 (in thousands):

Nine Months Ended

Sept. 27,

Sept. 28,

2015

2014

Net cash provided by operating activities

$
119,738

$
84,826

Purchases of property and equipment (a)

(26,508
)
(37,700
)
Free cash flow (b)

$
93,230

$
47,126


	Six Months Ended
	June 26,		June 28,
	2016		2015

Net cash provided by operating activities	$	75,123	$	77,982
Purchases of property and equipment		(24,001)		(16,501)
Free cash flow (a)	$	51,122	$	61,481

(a)

~~(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 $11.2 million is primarily due to the prior year including FOCUS equipment costs for domestic Company-owned restaurants and higher levels of 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 ~~dividends, share repurchases and~~ 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.

Cash flow used in investing activities was $31.3 million for the six months ended June 26, 2016, compared to $15.4 million for the same period in 2015, or an increase of $15.9 million. The increase in cash flow used in investing activities was primarily due to the acquisition of 20 restaurants from franchisees for approximately $11.2 million in the first quarter of 2016.

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.~~Credit Facility. We repurchased ~~$80.2~~$96.4 million and ~~$94.2~~$52.1 million of common stock for the ~~nine~~six months ended ~~September 27,~~June 26, 2016 and June 28, 2015, ~~and September 28, 2014,~~ respectively. Subsequent to ~~September 27, 2015,~~June 26, 2016, through ~~October 27, 2015,~~July 26, 2016, we repurchased an additional ~~$13.2~~$4.7 million of common stock. As of ~~October 27, 2015, approximately $161.1~~July 26, 2016, $108.7 million remained available for repurchase under our Board of Directors’ authorization.

We paid cash dividends of ~~$18.0~~$13.1 million ($~~0.455~~0.35 per common share) and ~~$16.1~~$11.1 million ($~~0.39~~0.28 per common share) for the ~~nine~~six months ended ~~September 27,~~June 26, 2016 and June 28, 2015, ~~and September 28, 2014,~~ respectively. Subsequent to the ~~third~~second quarter on ~~October 30, 2015,~~July 28, 2016, our Board of Directors declared a ~~fourth~~third quarter dividend of ~~$0.175~~$0.20 per common share (approximately ~~$6.9~~$7.4 million ~~in total~~ based on current ~~outstanding shares)~~shareholders of record). The dividend will be paid on ~~November 20, 2015~~August 19, 2016 to shareholders of record as of the close of business on ~~November 10, 2015.~~August 8, 2016. 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,” “intend”, “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements may relate to projections or guidance concerning business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, unit level performance, capital expenditures, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks,

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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 economic 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 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; including increased costs resulting from federal health care legislation;

· increases in insurance claims and related costs for programs funded by the company up to certain retention limits, including medical, owned and non-owned automobiles, workers’ compensation, general liability and property;

· disruption of our supply chain or commissary operations which could be caused by our sole source of supply of 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, 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 where we have a Company-owned presence;

· ~~the impact of increases in interest rates on the Company or our franchisees;~~

· ~~the credit performance of our franchise loan programs;~~

· ~~the impact of the resolution of current or future claims and litigation;~~

· ~~current or proposed legislation impacting our business;~~

· ~~failure to effectively execute succession planning, and our reliance on the multiple roles of our Founder, Chairman 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.

·

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

·

changes in consumer preferences or consumer buying habits, including changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending;

·

the adverse impact on the Company or our results caused by product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our Company-owned or franchised restaurants or others in the restaurant industry;

·

failure to maintain our brand strength, quality reputation and consumer enthusiasm for our better ingredients marketing and advertising strategy;

·

the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites;

·

increases in food costs or sustained higher other operating costs. This could include increased employee compensation, benefits, insurance, tax rates, new regulatory requirements or increasing compliance costs;

·

increases in insurance claims and related costs for programs funded by the Company up to certain retention limits, including medical, owned and non-owned automobiles, workers’ compensation, general liability and property;

·

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

·

increased risks associated with our international operations, including economic and political conditions, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, and difficulty in meeting planned sales targets and new store growth;

·

the impact of current or future claims and litigation, including labor and employment-related claims;

·

current or proposed legislation impacting our business;

·

failure to effectively execute succession planning, and our reliance on the multiple roles of our Founder, chairman and chief executive officer, who also serves as our brand spokesperson; and

·

disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential Company, employee and customer information, including payment cards.

For a discussion of these and other risks that may cause actual results to differ from expectations, refer to ~~“Part~~“Part I. Item 1A. —– Risk Factors” in our Annual Report on Form 10-K for the year ended December ~~28, 2014,~~27, 2015, 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.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our debt is comprised entirely of ~~borrowings under our~~an unsecured revolving line of credit ~~facility (“Credit Facility”)~~ with outstanding balances of ~~$239.0~~$317.4 million as of ~~September 27, 2015~~June 26, 2016 and ~~$230.5~~$256.0 million as of December ~~28, 2014. On~~27, 2015 and a maturity date of October 31, ~~2014,~~2019. On June 8, 2016, we ~~amended~~exercised our option under the Credit Facility to increase the amount available to $500 million from ~~$300 million to~~the previous $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.~~availability. 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~~by fixing our ~~overall long-term borrowing costs for changes in interest rates~~rate 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~~our existing debt and ~~we anticipate~~the anticipated critical terms ~~match on~~of future 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.

~~During~~22

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As of June 26, 2016, we have the ~~quarter ended September 27, 2015, we executed~~following interest rate swap agreements, including three ~~additional~~ forward starting swaps ~~for $125.0 million~~executed in 2015 that become effective in 2018 upon expiration of the two existing swaps for ~~$125.0 million. As of September 27, 2015,~~ ~~we have the following interest rate swap agreements:~~$125 million:

~~Effective Dates~~	~~Debt Amount~~	~~Fixed Rates~~

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

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

~~April 30, 2018 through April 30, 2023~~	~~$55 million~~	~~2.33~~	%

~~April 30, 2018 through April 30, 2023~~	~~$35 million~~	~~2.36~~	%

~~April 30, 2018 through April 30, 2023~~	~~$35 million~~	~~2.34~~	%


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	%
April 30, 2018 through April 30, 2023	$	55	million	2.33	%
April 30, 2018 through April 30, 2023	$	35	million	2.36	%
April 30, 2018 through April 30, 2023	$	35	million	2.34	%

The ~~effective~~weighted average interest rate on ~~borrowings under~~ the Credit Facility, including the impact of the interest rate ~~swaps,~~swap agreements, was ~~2.0% for the third quarter~~2.1% as of ~~2015.~~June 26, 2016. An increase in the present interest rate of 100 basis points on the Credit Facility balance outstanding ~~balance~~ as of ~~September 27, 2015,~~June 26, 2016, including the impact of the interest rate swaps, would increase interest expense by ~~$1.1~~$1.9 million.

Foreign Currency Exchange Rate Risk

We ~~currently do not enter into any financial instruments~~are exposed to ~~manage~~ foreign currency exchange ~~rates. Sales to customers and royalties~~rate fluctuations from our operations outside of the United States, ~~represent approximately~~which can adversely impact our revenues, net income and cash flows. Our international operations principally consist 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. For each of the periods presented, between 6% and 7% of our ~~total revenues.~~revenues were derived from these operations.

We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had a negative impact on our revenues of approximately $2.2 million and $2.0 million for the three months ended June 26, 2016 and June 28, 2015, respectively, and $4.0 million and $3.8 million for the six months ended June 26, 2016 and June 28, 2015, respectively. Foreign currency exchange rate fluctuations had a negative impact on our income before income taxes of $500,000 and $700,000 for the three months ended June 26, 2016 and June 28, 2015, respectively, and $1.2 million and $1.3 million for the six months ended June 26, 2016 and June 28, 2015, respectively. The recent referendum by United Kingdom voters known as Brexit may cause additional volatility in currency exchange rates. The future impact of Brexit on our operations included in the European Union could also include but may not be limited to future trade, tariff, and regulatory changes. As of June 26, 2016, 5 of our 43 international country operations are included in the European Union.

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

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The following table presents the actual average block price for cheese by quarter through the ~~third~~second quarter of ~~2015~~2016 and the projected average block price for cheese ~~for the fourth~~by quarter ~~of 2015~~through 2016 (based on the ~~October 27, 2015~~July 26, 2016 Chicago Mercantile Exchange cheese futures market prices):


	2015			2014		2016			2015
	Projected			Actual		Projected			Actual
	Block Price			Block Price		Block Price			Block Price

Quarter 1	$	1.538		$	2.212	$	1.473		$	1.538
Quarter 2	1.630			2.131			1.405			1.630
Quarter 3	1.684			2.141			1.712			1.684
Quarter 4	1.676			1.991			1.727			1.602
Full Year	$	1.632	*	$	2.119	$	1.579	*	$	1.614

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

Item 4.Controls and Procedures

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

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 the matter 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 consolidated financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. is a conditionally certified collective and class action filed in August 2009 in the United States District Court, Eastern District of Missouri (“the Court”), alleging that delivery drivers were not properly reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act (“FLSA”). Approximately 3,900 drivers out of a potential class size of 28,800 opted into the action. In late December 2013, the Court granted a motion for class certification in five additional states, which added approximately 15,000 plaintiffs to the case. The trial, originally scheduled for August 2015, was stayed in June 2015, pending U.S. Supreme Court review of another relevant case regarding certification. After the stay was granted, the parties reached a settlement in principle, which has been preliminarily approved by the Court in September 2015. The Court has scheduled a final approval hearing in January 2016. The Company continues to deny any liability or wrongdoing in this matter. In accordance with this preliminary settlement agreement, the Company recorded a pre-tax expense of $12.3 million in June 2015 under the provisions of ASC 450, Contingencies. There was no impact for the quarter ended September 27, 2015. This amount is separately reported as Legal settlement expense in the condensed consolidated statements of income.

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 ~~28, 2014.~~27, 2015.

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

Our Board of Directors has authorized the repurchase of up to ~~$1.45~~$1.525 billion of common stock under a share repurchase program that began on December 9, 1999 and expires on ~~December 31, 2016.~~February 28, 2017. Through ~~September 27, 2015,~~June 26, 2016, a total of ~~106.8~~109.2 million shares with an aggregate cost of ~~$1.3~~$1.4 billion and an average price of ~~$11.94~~$12.92 per share have been repurchased under this program. Subsequent to ~~September 27, 2015,~~June 26, 2016, through ~~October 27, 2015,~~July 26, 2016, we acquired an additional ~~192,000~~68,000 shares at an aggregate cost of ~~$13.2~~$4.7 million. As of ~~October 27, 2015,~~July 26, 2016, approximately ~~$161.1~~$108.7 million remained available for repurchase of common stock under this authorization.

24

Table of Contents

The following table summarizes our repurchases by fiscal period during the three months ended ~~September 27, 2015~~June 26 2016 (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

06/29/2015 - 07/26/2015

99

$
76.28

106,527

$
194,808

07/27/2015 - 08/23/2015

97

$
73.87

106,624

$
187,680

08/24/2015 - 09/27/2015

194

$
68.86

106,818

$
174,308

Our share repurchase authorization increased from $1.325 billion to $1.45 billion as of October 30, 2015. For presentation purposes, the maximum dollar value of shares that may be purchased was adjusted retroactively to September 27, 2015.


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

03/28/2016 - 04/24/2016	254	$	55.64	108,996	$	129,517
04/25/2016 - 05/22/2016	154	$	58.33	109,150	$	120,540
05/23/2016 - 06/26/2016	113	$	63.59	109,263	$	113,326

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 ~~the~~ fiscal quarter ended ~~September 27, 2015,~~June 26, 2016, the Company acquired approximately ~~4,100~~3,000 shares of its common stock from employees to satisfy minimum tax withholding obligations that arose upon (i) vesting of restricted stock granted pursuant to approved plans and (ii) distribution of shares of common stock issued pursuant to deferred compensation obligations.

~~Item 5. Other Information.~~

On October 30, 2015, our Board of Directors, upon recommendation of the Corporate Governance and Nominating Committee, adopted amendments to the Company’s Amended and Restated Bylaws that provide for a forum selection provision identifying Delaware as the exclusive forum for certain disputes.

The Board of Directors believes that this amendment is in the best interests of the Company and its stockholders, and could provide protection for the Company against having to defend potentially concurrent multi-jurisdictional litigation in non-Delaware courts that would subject the Company to, among other things, the risk of conflicting outcomes and the potential of litigating in inconvenient forums. The amendment could therefore help the Company avoid excessive costs and inefficiencies that may occur from certain types of multi-jurisdictional litigation.

In addition, our Board approved certain other non-material changes to our Bylaws that are primarily clerical in nature and designed to update and conform our Bylaws with the current Delaware General Corporation Law, including, among other things, notice and record dates and other procedural requirements for stockholder and director meetings.

The foregoing is a summary of the amendments to the Bylaws and is qualified in its entirety by the Amended and Restated Bylaws, a copy of which is included as Exhibit 3.1 to this Form 10-Q and is incorporated into this Item 5 by reference.

Item 6. Exhibits

Exhibit
Number		Description

~~3.1~~10.1		Second Amendment to First Amended and Restated ~~By-Laws~~Credit Agreement by and among Papa John’s International, Inc., the Guarantors party thereto, PNC Bank, National Association, as a lender and in its capacity as Administrative Agent for the lenders; JPMorgan Chase Bank, N.A., as a lender and in its capacity as Co-Syndication Agent for the lenders; Bank of America, N.A., as a lender and in its capacity as Documentation Agent for the lenders; U.S. Bank, National Association, as a lender and in its capacity as Co-Syndication Agent for the lenders; and Branch Banking and Trust Company, as a lender. Exhibit 10.1 to our Report on Form 8-K as filed on June 10, 2016 is incorporated herein by reference.
31.1
~~31.1~~		Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

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

101		Financial statements from the quarterly report on Form 10-Q of Papa John’s International, Inc. for the quarter ended ~~September 27, 2015,~~June 26, 2016, filed on ~~November 3, 2015,~~August 2, 2016, 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.

25

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: ~~November 3, 2015~~August 2, 2016		/s/ Lance F. Tucker
		Lance F. Tucker
		Senior Vice President,
		Chief Financial Officer,
		Chief Administrative Officer and Treasurer

31

26

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

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


							June 26,		December 27,
(In thousands, except per share amounts)	September 27, 2015			December 28, 2014			2016		2015
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	24,441		$	20,122		$	15,266	$	21,006
Accounts receivable, net	56,445			56,047				56,357		63,320
Notes receivable, net	7,738			6,106				4,715		7,816
Income taxes receivable	796			9,527				744		272
Inventories	24,335			27,394				22,531		21,564
Deferred income taxes	9,990			8,248
Prepaid expenses	15,914			18,736				17,841		20,372
Other current assets	9,462			9,828				8,148		8,941
Assets held for sale	9,555			—				8,823		9,299
Total current assets	158,676			156,008				134,425		152,590
Property and equipment, net	209,137			219,457				217,528		214,044
Notes receivable, less current portion, net	10,444			12,801				9,906		11,105
Goodwill	79,913			82,007				87,266		79,657
Deferred income taxes	3,021			3,914				1,713		2,415
Other assets	33,426			38,616				36,385		34,247
Total assets	$	494,617		$	512,803		$	487,223	$	494,058

Liabilities and stockholders’ equity
Liabilities and stockholders’ (deficit) equity
Current liabilities:
Accounts payable	$	35,546		$	38,832		$	34,928	$	43,492
Income and other taxes payable	10,012			9,637				12,231		8,527
Accrued expenses and other current liabilities	78,562			58,293				68,887		80,918
Total current liabilities	124,120			106,762				116,046		132,937
Deferred revenue	3,627			4,257				3,965		3,190
Long-term debt	239,000			230,451
Long-term debt, net								316,484		255,146
Deferred income taxes	14,251			22,188				2,002		4,610
Other long-term liabilities	44,034			41,875				58,019		47,606
Total liabilities	425,032			405,533				496,516		443,489

Redeemable noncontrolling interests	8,274			8,555				7,989		8,363

Stockholders’ equity:
Stockholders’ (deficit) equity:
Preferred stock ($0.01 par value per share; no shares issued)	—			—				—		—
Common stock ($0.01 par value per share; issued 43,708 at September 27, 2015 and 43,331 at December 28, 2014)	437			433
Common stock ($0.01 par value per share; issued 43,940 at June 26, 2016 and 43,731 at December 27, 2015)								440		437
Additional paid-in capital	155,170			147,912				161,849		158,348
Accumulated other comprehensive income (loss)	(1,305		)	671
Accumulated other comprehensive loss								(7,850)		(1,836)
Retained earnings	126,045			92,876				179,882		143,789
Treasury stock (4,673 shares at September 27, 2015 and 3,549 shares at December 28, 2014, at cost)	(232,032		)	(155,659		)
Total stockholders’ equity, net of noncontrolling interests	48,315			86,233
Treasury stock (7,054 shares at June 26, 2016 and 5,308 shares at December 27, 2015, at cost)								(364,742)		(271,557)
Total stockholders’ (deficit) equity, net of noncontrolling interests								(30,421)		29,181
Noncontrolling interests in subsidiaries	12,996			12,482				13,139		13,025
Total stockholders’ equity	61,311			98,715
Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	494,617		$	512,803
Total stockholders’ (deficit) equity								(17,282)		42,206
Total liabilities, redeemable noncontrolling interests and stockholders’ (deficit) equity							$	487,223	$	494,058

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets — ~~September~~June 26, 2016 and December 27, 2015 ~~and December 28, 2014~~	2 3

	Condensed Consolidated Statements of Income — Three and ~~Nine~~Six Months Ended ~~September 27,~~June 26, 2016 and June 28, 2015 ~~and September 28, 2014~~	3 4

	Consolidated Statements of Comprehensive Income — Three and ~~Nine~~Six Months Ended ~~September 27,~~June 26, 2016 and June 28, 2015 ~~and September 28, 2014~~	4 5

	Consolidated Statements of Cash Flows — ~~Nine~~Six Months Ended ~~September 27,~~June 26, 2016 and June 28, 2015 ~~and September 28, 2014~~	5 6

	Notes to Condensed Consolidated Financial Statements	6 7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26 22

Item 4.	Controls and Procedures	28 24

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	28 24

Item 1A.	Risk Factors	28 24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28 24

~~Item. 5~~	~~Other Information~~	29

Item 6.	Exhibits	30 25

	Three Months Ended						Nine Months Ended
(In thousands)	Sept. 27, 2015			Sept. 28, 2014			Sept. 27, 2015			Sept. 28, 2014

Net income before attribution to noncontrolling interests	$	18,976		$	16,962		$	55,683		$	55,342
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	(1,700		)	(1,634		)	(1,125		)	(708		)
Interest rate swaps (1)	(1,386		)	694			(2,011		)	247
Other comprehensive income (loss), before tax	(3,086		)	(940		)	(3,136		)	(461		)
Income tax effect:
Foreign currency translation adjustments	629			605			416			262
Interest rate swaps (2)	513			(256		)	744			(91		)
Income tax effect	1,142			349			1,160			171
Other comprehensive income (loss), net of tax	(1,944		)	(591		)	(1,976		)	(290		)
Comprehensive income before attribution to noncontrolling interests	17,032			16,371			53,707			55,052
Comprehensive loss, redeemable noncontrolling interests	(587		)	(724		)	(2,915		)	(3,066		)
Comprehensive (loss) income, nonredeemable noncontrolling interests	(418		)	(163		)	(1,781		)	(142		)
Comprehensive income attributable to the Company	$	16,027		$	15,484		$	49,011		$	51,844

	Number of Restaurants	Restaurant Locations	Papa John’s Ownership		Noncontrolling Interest Ownership
September 27, 2015
Star Papa, LP	85	Texas	51	%	49	%
Colonel’s Limited, LLC	61	Maryland and Virginia	70	%	30	%
PJ Minnesota, LLC	35	Minnesota	70	%	30	%
PJ Denver, LLC	27	Colorado	60	%	40	%

September 28, 2014
Star Papa, LP	82	Texas	51	%	49	%
Colonel’s Limited, LLC	56	Maryland and Virginia	70	%	30	%
PJ Minnesota, LLC	34	Minnesota	70	%	30	%
PJ Denver, LLC	25	Colorado	60	%	40	%

Balance at December 28, 2014	$	8,555
Net income	2,915
Distributions	(3,004		)
Change in redemption value	(192		)
Balance at September 27, 2015	$	8,274

	Carrying		Fair Value Measurements
	Value		Level 1		Level 2		Level 3

September 27, 2015
Financial assets:
Cash surrender value of life insurance policies (a)	$	17,412	$	17,412	$	—	$	—

Financial liabilities:
Interest rate swaps (b)	2,417		—		2,417		—

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		—

	Three Months Ended						Nine Months Ended
	Sept 27,			Sept. 28,			Sept 27,			Sept. 28,
	2015			2014			2015			2014

Franchise royalties (a)	$	(673	)	$	(63	)	$	(1,980	)	$	(68	)
Other sales (b)	38			9,708			9,846			9,848
Other operating expenses (c)	(56		)	(9,773		)	(9,959		)	(10,424		)
Depreciation and amortization (d)	(1,261		)	(1,064		)	(3,737		)	(1,643		)
Net decrease in income before income taxes	$	(1,952	)	$	(1,192	)	$	(5,830	)	$	(2,287	)

Diluted earnings per common share	$	(0.04	)	$	(0.02	)	$	(0.10	)	$	(0.04	)

	Nine Months Ended
	As Reported			Legal		Adjusted						Adjusted
	Sept. 27,			Settlement		Sept. 27,			Sept. 28,			Increase
(In thousands)	2015			Expense		2015			2014			(Decrease)

Domestic company-owned restaurants	$	41,185		$	—	$	41,185		$	32,069		$	9,116
Domestic commissaries	32,694			—		32,694			26,174			6,520
North America franchising	61,545			—		61,545			56,389			5,156
International	6,807			—		6,807			4,071			2,736
All others	(230		)	—		(230		)	(150		)	(80		)
Unallocated corporate expenses	(60,636		)	12,278		(48,358		)	(35,405		)	(12,953		)
Elimination of intersegment losses	(1,141		)	—		(1,141		)	(1,284		)	143
Total income before income taxes (a)	$	80,224		$	12,278	$	92,502		$	81,864		$	10,638

				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

06/29/2015 - 07/26/2015	99	$	76.28	106,527	$	194,808
07/27/2015 - 08/23/2015	97	$	73.87	106,624	$	187,680
08/24/2015 - 09/27/2015	194	$	68.86	106,818	$	174,308