Docoh
Loading...

PZZA Papa John`s International

Filed: 25 Feb 21, 8:02am

PJ_Secondary_Logo_CMYK

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 27, 2020

or

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

For the transition period from                                            to                                          

Commission File Number: 0-2166050

PAPA JOHN’S INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

61-1203323

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

2002 Papa John’s Boulevard

Louisville, Kentucky

40299-2367

(Address of principal executive offices)

(Zip Code)

(502) 261-7272

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

(Title of Each Class)

    

Trading Symbol(s)

    

(Name of each exchange on which registered)

Common Stock, $0.01 par value

PZZA

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  No

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer  

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

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

The aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the closing sale price on The NASDAQ Stock Market as of the last business day of the Registrant’s most recently completed second fiscal quarter, June 28, 2020, was $2,554,281,121.

As of February 17, 2021, there were 32,928,113 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held April 27, 2021 are incorporated by reference into Part III of this annual report where indicated.

PART I

Item 1.  Business

General

Papa John’s International, Inc., a Delaware corporation (referred to as the “Company”, “Papa John’s” or in the first person notations of “we”, “us” and “our”), operates and franchises pizza delivery and carryout restaurants and, in certain international markets, dine-in and delivery restaurants under the trademark “Papa John’s”.  Papa John’s began operations in 1984.  At December 27, 2020, there were 5,400 Papa John’s restaurants in operation, consisting of 588 Company-owned and 4,812 franchised restaurants operating in 48 countries and territories.  Our Company-owned restaurants include 188 restaurants operated under four joint venture arrangements.  All of the 2,111 international restaurants are franchised.  

Strategy

We are committed to delivering on our brand promise “BETTER INGREDIENTS. BETTER PIZZA.®” and a business strategy designed to drive sustainable long-term, profitable growth.  

We believe that using high quality ingredients leads to superior quality pizzas. Our original crust pizza dough is made from six simple ingredients and is fresh, never frozen. We also top our pizzas with real cheese made from mozzarella, pizza sauce made with vine-ripened tomatoes, and meat free of fillers. Our marketing and menu strategies emphasize the quality of our ingredients and our new product innovations to accelerate sales. Our menu innovations in 2020 included Garlic Parmesan Crust, toasted handheld “Papadias” flatbread-style sandwiches, and Jalapeno Popper Rolls, followed by Epic Stuffed Crust Pizza in the first quarter of 2021. New product innovations are designed to increase sales without adding costs or significant operational complexity to our restaurants.

We utilize technology to deliver a better customer experience, improve operational efficiencies and inform our decision-making. Our loyalty and one-to-one marketing platforms help us retain loyal customers and attract new ones.  We also partner with three of the four top domestic delivery aggregators to meet customer demand for our products. The novel coronavirus (“COVID-19”) pandemic has accelerated customer demand for our products through alternate delivery channels, and these changes have enabled us to meet customer demand during the pandemic, especially during peak times when our delivery teams are working at full capacity.

We care about the health and safety of our team members and customers. The Company has taken steps to mitigate the impact of the COVID-19 pandemic by implementing extra health and safety measures across our business, including No Contact Delivery and enhanced cleaning and sanitization measures. We offered virtual doctor’s visits for team members and paid special bonuses to many of our front-line employees in addition to existing benefits such as no-cost mental health support and affordable health plan options.

We continue to expand our footprint, both domestically and internationally. Our growth is dependent on maintaining a strong franchise system and improving unit economics. We seek to attract and retain franchisees with experience in restaurant or retail operations and with the financial resources and management capability to open single or multiple locations. While each Papa John’s franchisee manages and operates its own restaurants and business, we devote significant resources to providing franchisees with assistance in restaurant operations, quality assurance, technology, training, marketing, site selection and restaurant design. The COVID-19 pandemic has negatively impacted our ability to open stores, both domestically and internationally, but we have expended additional resources to drive our development efforts when the pandemic subsides.  We expect overall unit growth to come increasingly from international markets.

Our success depends on our ability to recruit, motivate and retain a highly qualified workforce in an intensely competitive environment. We believe that increasing diversity in our workforce will also help us drive innovation that reflects and resonates with the increasing diversity of our customers domestically and globally.  

3

Segment Overview

Papa John’s has defined four reportable segments: Domestic Company-owned restaurants, North America commissaries (Quality Control Centers), North America franchising and International operations.

Domestic Company-owned Restaurants

The Domestic Company-owned restaurant segment consists of the operations of all domestic Company-owned restaurants (“domestic” is defined as the contiguous United States) and derives its revenues principally from retail sales of pizza, “Papadias”, which are flatbread-style sandwiches, and side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages.

Of the total 3,289 North American restaurants open as of December 27, 2020, 588 units, or approximately 18%, were Company-owned.  In 2020, the 579 domestic Company-owned restaurants included in the full year’s comparable restaurant base generated average annual unit sales of $1.2 million. We are committed to maintaining sound restaurant unit economics.  

Operating Company-owned restaurants allows us to improve operations, training, marketing and quality standards for the benefit of the entire system.

North America commissary

The North America commissary segment comprises 11 full-service regional dough production and distribution Quality Control Centers (“QC Centers”) in the United States (“U.S.”), which supply pizza sauce, dough, food products, paper products, smallwares and cleaning supplies twice weekly to each traditional restaurant served. This system enables us to monitor and control product quality and consistency while lowering food and other costs. We also have one QC Center in Canada, which produces and distributes fresh dough.  We evaluate the QC Center system capacity in relation to existing restaurants’ volumes and planned restaurant growth, and facilities are developed or upgraded as operational or economic conditions warrant. To ensure consistent food quality, each domestic franchisee is required to purchase dough and pizza sauce from our QC Centers and to purchase all other supplies from our QC Centers or other approved suppliers.

North America franchising

The North America franchising segment consists of our franchise sales and support activities and derives its revenues from the sale of franchise and development rights and the collection of royalties from our franchisees located in the United States and Canada. Our North American franchised restaurants, which included 2,377 restaurants in the full year’s comparable base for 2020, generated average annual unit sales of $1.0 million.  These sales, while not included in the Company’s revenues, contribute to our royalty revenues, franchisee marketing fund contributions, and commissary revenue.  

International

The International segment principally consists of distribution sales to franchised Papa John’s restaurants located in the United Kingdom (“UK”) and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. International franchisees are defined as all franchise operations outside of the United States and Canada. As of December 27, 2020, there were 2,111 international restaurants, all of which are franchised. The Company currently operates one international QC Center, which is in the UK. Other QC Centers outside the U.S. are operated by franchisees pursuant to license agreements or by other third parties.

All others

All other business units that do not meet the quantitative thresholds for determining reportable segments, which are not operating segments, we refer to as “all others,” which consists of operations that derive revenues from the sale, principally

4

to Company-owned and franchised restaurants, of printing and promotional items, franchise contributions to marketing funds and information systems and related services used in restaurant operations, including our point-of-sale system, online and other technology-based ordering platforms.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 23” of “Notes to Consolidated Financial Statements” for financial information about our segments.

Development

At December 27, 2020, there were 5,400 Papa John’s restaurants operating in 48 countries and territories, as follows:

Domestic Company-owned

Franchised North America

Total North America

International

System-wide

Beginning - December 29, 2019

598

2,690

3,288

2,107

5,395

Opened

2

62

64

156

220

Closed

(12)

(51)

(63)

(152)

(215)

Ending - December 27, 2020

588

2,701

3,289

2,111

5,400

Net unit growth (decline) - 2020

(10)

11

1

4

5

Although most of our domestic Company-owned markets are well-penetrated, our Company-owned restaurant growth strategy is to continue to open domestic restaurants in existing markets as appropriate, thereby increasing consumer awareness and enabling us to take advantage of operational and marketing scale efficiencies. Our experience in developing markets indicates that market penetration through the opening of multiple restaurants in a particular market results in increased average restaurant sales in that market over time. We have co-developed domestic markets with some franchisees or divided markets among franchisees and will continue to use market co-development in the future, where appropriate.

As of December 27, 2020, we have development agreements with our franchisees for approximately 210 additional North America restaurants, the majority of which are committed to open over the next two years, and 1,250 additional international franchised restaurants, the majority of which are scheduled to open over the next six years.

Franchise Program

We continue to attract qualified and experienced franchisees, whom we consider to be a vital part of our system’s continued growth. We believe our relationship with our franchisees is fundamental to the performance of our brand and we strive to maintain a collaborative relationship with our franchisees.  Franchisees are approved on the basis of the applicant’s business background, restaurant operating experience and financial resources.

North America Development and Franchise Agreements.  We enter into development agreements with our franchisees in North America for the opening of a specified number of restaurants within a defined period of time and specified geographic area. The franchise agreement is generally executed once a franchisee secures a location. Our current standard franchise agreement requires the franchisee to pay a royalty fee of 5% of sales, and the majority of our existing franchised restaurants have a 5% contractual royalty rate in effect. Incentives offered from time to time, including new store incentives, will reduce the contractual royalty rate paid. We provided financial assistance for traditional North America franchisees in 2018, 2019 and 2020 in the form of lower royalties, royalty-based service incentives, targeted relief as well as additional contributions to Papa John’s Marketing Fund (“PJMF”).

Over the past several years, we have offered various development incentive programs for domestic franchisees to accelerate unit openings. Such incentives included the following for 2020 traditional openings: (1) waiver of all or part of the standard one-time franchise fee; (2) waiver of all or part of the 5% royalty fee for a period of time; (3) credit for new store equipment; and (4) credit to be applied toward a future food purchase, under certain circumstances. We believe development incentive programs have accelerated unit openings, and we expect to continue to utilize such development incentives.

5

Substantially all existing franchise agreements have an initial 10-year term with a 10-year renewal option. We have the right to terminate a franchise agreement for a variety of reasons, including a franchisee’s failure to make payments when due or failure to adhere to our operational policies and standards. Many state franchise laws limit our ability as a franchisor to terminate or refuse to renew a franchise.

International Development and Franchise Agreements.  In international markets, we have either a development agreement or a master franchise agreement with a franchisee for the opening of a specified number of restaurants within a defined period of time and specified geographic area. Under a master franchise agreement, the franchisee has the right to sub-franchise a portion of the development to one or more sub-franchisees approved by us.

Our current standard international master franchise and development agreements provide for payment to us of a royalty fee of 5% of sales. For international markets with sub-franchise agreements, the effective sub-franchise royalty received by the Company is generally 3% of sales and the master franchisee generally receives a royalty of 2% of sales. The remaining terms applicable to the operation of individual restaurants are substantially equivalent to the terms of our domestic franchise agreement. Development agreements will be negotiated at other-than-standard terms for fees and royalties, and we may offer various development and royalty incentives to help drive net unit growth and results.

Franchise Operations. All franchisees are required to operate their Papa John’s restaurants in compliance with our policies, standards and specifications, including matters such as menu items, ingredients, and restaurant design. Franchisees have full discretion in human resource practices, and generally have full discretion to determine the prices to be charged to customers, but we generally have the authority to set maximum price points for nationally advertised promotions.

Franchisee Loans. Selected domestic and international franchisees have borrowed funds from us, principally for the purchase of restaurants from us or other franchisees or, in certain international markets, for construction and development of new restaurants. Loans made to franchisees can bear interest at fixed or floating rates and in most cases are secured by the fixtures, equipment and signage of the restaurant and/or are guaranteed by the franchise owners. At December 27, 2020, net loans outstanding totaled $47.9 million. See “Note 2” of “Notes to Consolidated Financial Statements” for additional information.

Marketing Programs

Our domestic marketing strategy consists of both national and local components. Our national strategy includes national advertising via television, print, direct mail, digital, mobile marketing and social media channels. Our digital marketing activities have increased significantly over the past several years in response to increasing customer use of online and mobile technology. Local advertising programs include television, radio, print, direct mail, store-to-door flyers, digital, mobile marketing and local social media channels.

Domestic Company-owned and franchised Papa John’s restaurants within a defined market may be required to join an area advertising cooperative (“Co-op”). Each member restaurant contributes a percentage of sales to the Co-op for market-wide programs, such as television, radio, digital and print advertising, and sports sponsorships. The rate of contribution and uses of the monies collected are determined by a majority vote of the Co-op’s members.

The restaurant-level and Co-op marketing efforts are supported by media, print, digital and electronic advertising materials that are produced by PJMF, our national marketing fund. PJMF is a consolidated nonstock corporation, designed to operate at break-even for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants. PJMF produces and buys air time for Papa John’s national television commercials and advertises the Company’s products through digital media including banner advertising, paid search-engine advertising, mobile marketing, social media advertising and marketing, text messaging, and email.  PJMF also engages in other brand-building activities, such as consumer research and public relations activities. Domestic Company-owned and franchised Papa John’s restaurants are required to contribute a certain minimum percentage of sales to PJMF.  

In international markets, our marketing focuses on reaching customers who live or work within a small radius of a Papa John’s restaurant. Our international markets use a combination of advertising strategies, including television, radio, print, digital, mobile marketing and local social media depending on the size of the local market.

6

Human Capital

Our team members are critical to our success. As of December 27, 2020, we employed approximately 16,700 persons, of whom approximately 14,200 were team members at Company-owned restaurants, approximately 700 were management personnel at Company-owned restaurants, approximately 700 were corporate personnel and approximately 1,100 were QC Center and our print and promotions subsidiary personnel. Most restaurant team members work part-time and are paid on an hourly basis.

Our franchisees are independent business owners, so their employees are not our employees and therefore are not included in our employee count.  We estimate the total number of persons in Papa John’s system, including our team members, franchisees and the team members of franchisees, was approximately 130,000 as of December 27, 2020.

Diversity, Equity and Inclusion

Our commitment to diversity, equity and inclusion is rooted in our belief that having a Papa John's family that fully reflects and celebrates the global nature of our brand is the right way to do business.

We are building a culture of leaders who believe in inclusivity, diversity and winning. We’re implementing initiatives to diversify our workforce and leadership pipeline, embed policies and practices that ensure fairness and instill and reward behaviors across the organization that foster belonging and increase employee engagement. Out of the 11 members of our Executive Leadership Team, four are female, one is Lesbian Gay Bisexual Transgender Queer or Questioning (“LGBTQ”) and two are Black.  We have also initiated multiple corporate initiatives over the past several years. Some examples are our affordable healthcare plans and free virtual healthcare visits available to all part-time and full-time team members; the launch of The Papa John’s Foundation for Building Community; our inaugural Day of Service with Boys and Girls Clubs of America; and the creation of eight employee resource affinity groups.

Talent Attraction, Retention and Development

To help our team members succeed in their roles and to ensure consistent operational execution, we emphasize continuous training and development opportunities, including providing innovative tools and materials for the operational training and development of team members.  Operations personnel complete our management training program and ongoing development programs, including multi-unit training, in which instruction is given on all aspects of our systems and operations.  In addition, to further support our team members’ development, we have established our Dough & Degrees program, which allows our team members to earn a college degree for free or at a reduced tuition in partnership with Purdue University Global and the University of Maryland Global Campus. We also offer a tuition reimbursement program that provides another opportunity for our team members to advance their careers. We also previously announced the planned 2021 opening of an office in Atlanta, Georgia to tap into the diverse, deep talent pool in the region.

Workplace Health and Safety

As part of the Company’s enterprise-wide safety management system, we invest in training, technology and people to protect both our customers and team members.  All Papa John’s team members, from those at our corporate office to those working in our warehouses and restaurants, receive annual safety training based on the requirements of their roles. Both QC Centers and restaurant operations undergo annual safety audits, as well as random safety checks by regional safety managers and field safety coordinators.

We have also taken steps to mitigate the impact of the COVID-19 pandemic on our team members and our customers by implementing extra health and safety measures across our business, including No Contact Delivery and enhanced cleaning and sanitization measures. 

7

Industry and Competition

The United States Quick Service Restaurant pizza (“QSR Pizza”) industry is mature and highly competitive with respect to price, service, location, food quality, customer loyalty programs and product innovation. The QSR Pizza category is largely fragmented and competitors include international, national and regional chains, as well as a large number of local independent pizza operators, any of which can utilize a growing number of food delivery services.  Some of our competitors have been in existence for substantially longer periods than Papa John’s, have substantially greater resources than Papa John’s and can have higher levels of restaurant penetration and stronger, more developed brand awareness in markets where we compete. Competition from delivery aggregators and other food delivery concepts continues to increase both domestically and internationally.

With respect to the sale of franchises, we compete with many franchisors of restaurants and other business concepts. There is also active competition for management personnel, drivers and hourly team members, and attractive commercial real estate sites suitable for Papa John’s restaurants.

Government Regulation

We, along with our franchisees, are subject to various federal, state, local and international laws affecting the operation of our respective businesses, including laws and regulations related to our marketing and advertising as well as the preparation and sale of food, food safety and menu labeling. Each Papa John’s restaurant is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining, or the failure to obtain, required licenses or approvals could delay or prevent the opening of a new restaurant in a particular area. Our QC Centers are licensed and subject to regulation by state and local health and fire codes, and the operation of our trucks is subject to federal and state transportation regulations. We are also subject to federal and state environmental regulations. In addition, our domestic operations are subject to various federal and state laws governing such matters as minimum wage requirements, benefits, taxation, working conditions, citizenship requirements, and overtime.

We are subject to Federal Trade Commission (“FTC”) regulation and various state laws regulating the offer and sale of franchises. The laws of several states also regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires us to furnish to prospective franchisees a franchise disclosure document containing prescribed information. State laws that regulate the franchisor-franchisee relationship presently exist in a significant number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the U.S. franchisor-franchisee relationship in certain respects if such bills were enacted. State laws often limit, among other things, the duration and scope of non-competition provisions and the ability of a franchisor to terminate or refuse to renew a franchise. Some foreign countries also have disclosure requirements and other laws regulating franchising and the franchisor-franchisee relationship. National, state and local government regulations or initiatives, including health care legislation, “living wage,” or other current or proposed regulations, and increases in minimum wage rates affect Papa John’s as well as others within the restaurant industry. We are also subject to applicable laws in each non-U.S. jurisdiction in which we operate.

Privacy and Data Protection

We are subject to privacy and data protection laws and regulations globally. The legal and regulatory landscape for privacy and data protection continues to evolve, and there has been an increase in attention given to privacy and data protection issues with the potential to impact our business. This includes recently enacted laws and regulations in the U.S. and in other countries which require notification to individuals and government authorities of breaches involving certain categories of personal information. Any changes in privacy and data protection laws or regulations could also adversely impact the way we use e-mail, text messages and other marketing techniques and could require changes in our marketing strategies. We have a privacy policy posted on our website at www.papajohns.com. The security of our financial data, customer information and other personal information is a priority for us.

8

Trademarks, Copyrights and Domain Names

We protect our intellectual property through a combination of patents, copyrights, trademarks and trade secrets, foreign intellectual property laws, confidentiality agreements and other contractual provisions. We have also registered, and applied for the registration of, U.S. and international trademarks, service marks, domain names and copyrights. From time to time, we are made aware of the use by other persons in certain geographical areas of names and marks that are the same as or substantially similar to our marks. It is our policy to pursue registration of our marks whenever possible and to vigorously oppose any infringement of our marks.

We hold copyrights in authored works used in our business, including advertisements, packaging, training, website, and promotional materials. In addition, we have registered and maintain Internet domain names, including “papajohns.com,” and country code domains patterned as papajohns.cc, or a close variation thereof, with “.cc” representing a specific country code.

Impact of COVID-19

Please refer to “Recent Business Matters” within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of recent business developments, including the impact the COVID-19 pandemic is having on our business and results of operations and financial condition.

Additional Information

All of our periodic and current reports filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), are available, free of charge, through our website located at www.papajohns.com.  These reports include our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. These reports are available through our website as soon as reasonably practicable after we electronically file them with the SEC. We also make available free of charge on our website our Corporate Governance Guidelines, Board Committee Charters, and our Code of Ethics, which applies to Papa John’s directors, officers and employees. Printed copies of such documents are also available free of charge upon written request to Investor Relations, Papa John’s International, Inc., P.O. Box 99900, Louisville, KY 40269-0900. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us, at www.sec.gov. The references to these website addresses do not constitute incorporation by reference of the information contained on the websites, which should not be considered part of this document.

Item 1A. Risk Factors

We are subject to risks that could have a negative effect on our business, financial condition and results of operations. These risks could cause actual operating results to differ from those expressed in certain “forward-looking statements” contained in this Form 10-K as well as in other Company communications. You should carefully consider the following risk factors together with all other information included in this Form 10-K and our other publicly filed documents.

Industry Risks

We are subject to risks related to pandemic outbreaks, including COVID-19, which may have a material adverse effect on our business, financial condition and results of operations.

We are subject to risks related to the global COVID-19 pandemic, which has had, and is expected to continue to have, significant adverse impacts on economic and market conditions. In response to the pandemic, governments and other authorities around the world have imposed measures to attempt to control the spread of COVID-19, including restrictions on freedom of movement and business operations such as travel bans, social distancing requirements, including limitations on gatherings, shelter-in-place orders and quarantines, and mandated business closures, which have resulted in significant changes in commercial activity and consumer behavior. We cannot predict when the effects of the pandemic will subside, how long there will be continuing resurgences or mutations of the virus or the effectiveness of vaccines and treatment

9

therapies or the speed of vaccine distribution. To the extent that the COVID-19 pandemic continues or worsens, restrictions imposed by governments may not be lifted, or additional restrictions may be imposed. As a result, businesses such as our restaurants or QC Centers may be required to shut down, our employees may be prohibited from working, and our supply chains may be interrupted. It may be challenging to obtain and process ingredients and raw materials to support our business needs. In addition, individuals have and may continue to become ill, quarantined or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations or taxes which could adversely impact our business, financial condition or results of operations. Further, if our customers’ economic conditions are similarly affected, they might delay or reduce purchases from us, which could adversely affect our business, financial condition or results of operations.

The potential adverse effects of COVID-19 also could include, but may not be limited to, our ability to meet consumer demand through the continued availability of our workforce; adverse impacts from new laws and regulations affecting our business; increased cyber risks and reliance on technology infrastructure to support our business and operations, including through remote-work protocols; fluctuations in foreign currency markets credit risks of our customers and counterparties; and impairment of long-lived assets, the carrying value of goodwill or other indefinite-lived intangible assets.  However, given the evolving health, economic, social, and governmental environments, the specific impact that COVID-19 could have on these risks remains uncertain.

Moreover, during the duration of the COVID-19 pandemic, we have experienced a significant increase in comparable sales and revenues. The circumstances that have contributed to the acceleration of the growth of our business stemming from the effects of the COVID-19 pandemic may not continue in the future once the impact of the COVID-19 pandemic tapers, particularly as a vaccine becomes widely available, and customers are no longer subject to shelter-in-place or social distancing mandates.  We expect the growth rates in comparable sales and revenues to slow or decline.

Our profitability may suffer as a result of intense competition in our industry.

The QSR Pizza industry is mature and highly competitive. Competition is based on price, service, location, food quality, brand recognition and loyalty, product innovation, effectiveness of marketing and promotional activity, use of technology, and the ability to identify and satisfy consumer preferences. We may need to reduce the prices for some of our products to respond to competitive and customer pressures, which may adversely affect our profitability. When commodity and other costs increase, we may be limited in our ability to increase prices. With the significant level of competition and the pace of innovation, we may be required to increase investment spending in several areas, particularly marketing and technology, which can decrease profitability.

In addition to competition with our larger competitors, we face competition from new competitors such as fast casual pizza concepts. We also face competitive pressures from an array of food delivery concepts and aggregators delivering for quick service or dine in restaurants, using new delivery technologies or delivering for competitors who previously did not have delivery capabilities, some of which may have more effective marketing. The emergence or growth of new competitors, in the pizza category or in the food service industry generally, may make it difficult for us to maintain or increase our market share and could negatively impact our sales and our system-wide restaurant operations.   We also face increasing competition from other home delivery services and grocery stores that offer an increasing variety of prepped or prepared meals in response to consumer demand. As a result, our sales can be directly and negatively impacted by actions of our competitors, the emergence or growth of new competitors, consumer sentiment or other factors outside our control.

One of our competitive strengths is our “BETTER INGREDIENTS. BETTER PIZZA.®” brand promise. This means we may use ingredients that cost more than the ingredients some of our competitors may use. Because of our investment in higher-quality ingredients, we could have lower profit margins than some of our competitors if we are not able to establish a quality differentiator that resonates with consumers. Our sales may be particularly impacted as competitors increasingly emphasize lower-cost menu options.

10

Changes in consumer preferences or discretionary consumer spending could adversely impact our results.

Changes in consumer preferences and trends could negatively affect us (for example, changes in consumer perceptions of certain ingredients that could cause consumers to avoid pizza or some of its ingredients in favor of foods that are or are perceived as healthier, lower-calorie, or lower in carbohydrates or otherwise based on their ingredients or nutritional content).  Preferences for a dining experience such as fast casual pizza concepts could also adversely affect our restaurant business and reduce the effectiveness of our marketing and technology initiatives. Also, our success depends to a significant extent on numerous factors affecting consumer confidence and discretionary consumer income and spending, such as general economic conditions, customer sentiment and the level of employment. Any factors that could cause consumers to spend less on food or shift to lower-priced products could reduce sales or inhibit our ability to maintain or increase pricing, which could adversely affect our operating results.

Food safety and quality concerns may negatively impact our business and profitability.

Incidents or reports of food- or water-borne illness or other food safety issues, investigations or other actions by food safety regulators, food contamination or tampering, employee hygiene and cleanliness failures, improper franchisee or employee conduct, or presence of communicable disease at our restaurants (both Company-owned and franchised), QC Centers, or suppliers could lead to product liability or other claims. If we were to experience any such incidents or reports, our brand and reputation could be negatively impacted. This could result in a significant decrease in customer traffic and could negatively impact our revenues and profits. Similar incidents or reports occurring at quick service restaurants unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.

We rely on our domestic and international suppliers, as do our franchisees, to provide quality ingredients and to comply with applicable laws and industry standards. A failure of one of our domestic or international suppliers to meet our quality standards, or meet domestic or international food industry standards, could result in a disruption in our supply chain and negatively impact our brand and our results.

Failure to preserve the value and relevance of our brand could have a negative impact on our financial results.

Our results depend upon our ability to differentiate our brand and our reputation for quality. Damage to our brand or reputation could negatively impact our business and financial results. Our brand has been highly rated in certain U.S. surveys, and we strive to build the value of our brand as we develop international markets.  

Consumer perceptions of our brand are affected by a variety of factors, such as the nutritional content and preparation of our food, the quality of the ingredients we use, our corporate culture, our policies and systems related to diversity, equity and inclusion, our business practices and the manner in which we source the commodities we use. Consumer acceptance of our offerings is subject to change for a variety of reasons, and some changes can occur rapidly.  Consumer perceptions may also be affected by third parties, including former employees and executives, presenting or promoting adverse commentary or portrayals of our industry, our brand, our suppliers or our franchisees, or otherwise making statements, disclosing information or taking actions that could damage our reputation.  If we are unsuccessful in managing incidents that erode consumer trust or confidence, particularly if such incidents receive considerable publicity or result in litigation, our brand value and financial results could be negatively impacted.

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could adversely impact our business.

In recent years, there has been a marked increase in the use of social media platforms, including blogs, chat platforms, social media websites, and other forms of internet-based communications that allow individuals access to a broad audience of consumers and other persons. The rising popularity of social media and other consumer-oriented technologies has increased the speed and accessibility of information dissemination. The dissemination of negative information via social media could harm our business, brand, reputation, marketing partners, financial condition, and results of operations, regardless of the information’s accuracy.

11

In addition, we frequently use social media to communicate with consumers and the public in general. Failure to use social media effectively could lead to a decline in brand value and revenue. Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our brand, exposure of personally identifiable information, fraud, hoaxes or malicious dissemination of false information.

Our franchise business model presents a number of risks.

Our success increasingly relies on the financial success and cooperation of our franchisees, yet we have limited influence over their operations. Our franchisees manage their businesses independently, and therefore are responsible for the day-to-day operation of their restaurants. The revenues we realize from franchised restaurants are largely dependent on the ability of our franchisees to grow their sales. If our franchisees do not experience sales growth, our revenues and margins could be negatively affected. Also, if sales trends worsen for franchisees, especially in emerging markets and/or high cost markets, their financial results may deteriorate, which could result in, among other things, higher levels of required financial support from us, higher numbers of restaurant closures, reduced numbers of restaurant openings, delayed or reduced payments to us, or increased franchisee assistance, which reduces our revenues.

Our success also increasingly depends on the willingness and ability of our franchisees to remain aligned with us on operating, promotional and marketing plans. Franchisees’ ability to continue to grow is also dependent in large part on the availability of franchisee funding at reasonable interest rates and may be negatively impacted by the financial markets in general or by the creditworthiness of our franchisees. Our operating performance could also be negatively affected if our franchisees experience food safety or other operational problems or project an image inconsistent with our brand and values, particularly if our contractual and other rights and remedies are limited, costly to exercise or subjected to litigation. If franchisees do not successfully operate restaurants in a manner consistent with our required standards, the brand’s image and reputation could be harmed, which in turn could hurt our business and operating results.

We may be adversely impacted by increases in the cost of food ingredients and other costs.

We are exposed to fluctuations in prices of commodities. An increase in the cost or sustained high levels of the cost of cheese or other commodities could adversely affect the profitability of our system-wide restaurant operations, particularly if we are unable to increase the selling price of our products to offset increased costs. Cheese, representing our largest food cost, and other commodities can be subject to significant cost fluctuations due to weather, availability, global demand and other factors that are beyond our control. Additionally, increases in labor, mileage, insurance, fuel, and other costs could adversely affect the profitability of our restaurant and QC Center businesses. Many of the factors affecting costs in our system-wide restaurant operations are beyond our control, and we may not be able to adequately mitigate these costs or pass along these costs to our customers or franchisees, given the significant competitive pricing pressures we face.

Changes in privacy or data protection laws could adversely affect our ability to market our products effectively.

We rely on a variety of direct marketing techniques, including email, text messages and postal mailings. Any future restrictions in federal, state or foreign laws regarding marketing and solicitation or domestic or international data protection laws that govern these activities could adversely affect the continuing effectiveness of email, text messages and postal mailing techniques and could force changes in our marketing strategies. If this occurs, we may need to develop alternative marketing strategies, which may not be as effective and could impact the amount and timing of our revenues.

Our international operations are subject to increased risks and other factors that may make it more difficult to achieve or maintain profitability or meet planned growth rates.

Our international operations could be negatively impacted by volatility and instability in international economic, political, security or health conditions in the countries in which the Company or our franchisees operate, especially in emerging markets. In addition, there are risks associated with differing business and social cultures and consumer preferences. We may face limited availability for restaurant locations, higher location costs and difficulties in franchisee selection and financing. We may be subject to difficulties in sourcing and importing high-quality ingredients (and ensuring food safety) in a cost-effective manner, hiring and retaining qualified team members, marketing effectively and adequately investing in information technology, especially in emerging markets.

12

Our international operations are also subject to additional risk factors, including import and export controls, compliance with anti-corruption and other foreign laws, difficulties enforcing intellectual property and contract rights in foreign jurisdictions, and the imposition of increased or new tariffs or trade barriers. We intend to continue to expand internationally, which would make the risks related to our international operations more significant over time.

Our international restaurants’ results, which are completely franchised, depend heavily on the operating capabilities and financial strength of our franchisees. Any changes in the ability of our franchisees to run their stores profitably in accordance with our operating standards, or to effectively sub-franchise restaurants, could result in brand damage, a higher number of restaurant closures and a reduction in the number of new restaurant openings.  

Sales made by our franchisees in international markets and certain loans we provide to such franchisees are denominated in their local currencies, and fluctuations in the U.S. dollar occur relative to the local currencies. Accordingly, changes in currency exchange rates will cause our revenues, investment income and operating results to fluctuate. We have not historically hedged our exposure to foreign currency fluctuations. Our international revenues and earnings may be adversely impacted as the U.S. dollar rises against foreign currencies because the local currency will translate into fewer U.S. dollars.  Additionally, the value of certain assets or loans denominated in local currencies may deteriorate. Other items denominated in U.S. dollars, including product imports or loans, may also become more expensive, putting pressure on franchisees’ cash flows.

We are subject to risks and uncertainties associated with the United Kingdom’s withdrawal from the European Union (referred to as “Brexit”), including implications for the free flow of labor and goods in the United Kingdom and the European Union and other financial, legal, tax and trade implications.

Adverse global economic conditions subject us to additional risk.

Our financial condition and results of operations are impacted by global markets and economic conditions over which neither we nor our franchisees have control. An economic downturn, including deterioration in the economic conditions in the U.S. or international markets where we compete, may result in a reduction in the demand for our products, longer payment cycles, slower adoption of new technologies and increased price competition.

Poor economic conditions may adversely affect the ability of our franchisees to pay royalties or amounts owed and could also disrupt our business and adversely affect our results.

Higher labor costs and increased competition for qualified team members increase the cost of doing business and ensuring adequate staffing in our restaurants and QC Centers. Additionally, changes in employment and labor laws, including health care legislation and minimum wage increases, could increase costs for our system-wide operations.

Our success depends in part on our and our franchisees’ ability to recruit, motivate, train and retain a qualified workforce to work in our restaurants in an intensely competitive environment. Increased costs associated with recruiting, motivating and retaining qualified employees to work in Company-owned and franchised restaurants have had, and may in the future have, a negative impact on our Company-owned restaurant margins and the margins of franchised restaurants.  Competition for qualified drivers for both our restaurants and supply-chain function also continues to increase as more companies compete for drivers or enter the delivery space, including third party aggregators. Additionally, economic actions, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect us (including our ability to recruit and retain talent) or our franchisees and suppliers. Social media may be used to foster negative perceptions of employment with our Company in particular or in our industry generally, and to promote strikes or boycotts.

We are also subject to federal, state and foreign laws governing such matters as minimum wage requirements, overtime compensation, benefits, working conditions, citizenship requirements and discrimination and family and medical leave and employee related litigation. Labor costs and labor-related benefits are primary components in the cost of operation of our restaurants and QC Centers.  Labor shortages, increased employee turnover and health care mandates could increase our system-wide labor costs.

13

A significant number of hourly personnel are paid at rates close to the federal and state minimum wage requirements. Accordingly, the enactment of additional state or local minimum wage increases above federal wage rates or regulations related to exempt employees has increased and could continue to increase labor costs for our domestic system-wide operations. A significant increase in the federal minimum wage requirement could adversely impact our financial condition and results of operations.

We rely on information technology to operate our businesses and maintain our competitiveness, and any failure to invest in or adapt to technological developments or industry trends could harm our business.

We rely heavily on information systems, including digital ordering solutions, through which over half of our domestic sales originate. We also rely heavily on point-of-sale processing in our Company-owned and franchised restaurants for data collection and payment systems for the collection of cash, credit and debit card transactions, and other processes and procedures. Our ability to efficiently and effectively manage our business depends on the reliability and capacity of these technology systems. In addition, we anticipate that consumers will continue to have more options to place orders digitally, both domestically and internationally.  We plan to continue to invest in enhancing and improving the functionality and features of our information technology systems.  However, we cannot ensure that our initiatives will be beneficial to the extent, or within the timeframes, expected or that the estimated improvements will be realized as anticipated or at all.  Our failure to adequately invest in new technology, adapt to technological developments and industry trends, particularly our digital ordering capabilities, could result in a loss of customers and related market share. Notwithstanding adequate investment in new technology, our marketing and technology initiatives may not be successful in improving our comparable sales results. Additionally, we are in an environment where the technology life cycle is short and consumer technology demands are high, which requires continued reinvestment in technology that will increase the cost of doing business and will increase the risk that our technology may not be customer-centric or could become obsolete, inefficient or otherwise incompatible with other systems.

We rely on our international franchisees to maintain their own point-of-sale and online ordering systems, which are often purchased from third-party vendors, potentially exposing international franchisees to more operational risk, including cyber and data privacy risks and governmental regulation compliance risks.

Company Risks

Our reorganization activities will increase our expenses, may not be successful, and may adversely impact employee hiring and retention.

On September 17, 2020, we announced plans to open an office in Atlanta, Georgia.  As a result, we have incurred and will incur certain non-recurring corporate reorganization costs in 2020 and 2021, and these expenses have impacted and will adversely impact our results of operations during the relevant periods and will reduce our cash position. Additionally, the amount of these estimated expenses, as well as our ability to achieve the anticipated benefits of our corporate reorganization, are subject to assumptions and uncertainties.  If we do not realize the anticipated benefits from these measures, or if we incur costs greater than anticipated, our financial condition and operating results may be adversely affected.

In addition, turnover in our corporate office support teams due to certain functions relocating to our office in Georgia could distract our employees, decrease employee morale, harm our reputation, and negatively impact the overall performance of our corporate support teams. As a result of these or other similar risks, our business, results of operations and financial condition may be adversely affected.

We may not be able to effectively market our products or maintain key marketing partnerships.

The success of our business depends on the effectiveness of our marketing and promotional plans. We may not be able to effectively execute our national or local marketing plans, particularly if we experienced lower sales that would result in reduced levels of marketing funds.  We may be required to expend additional funds to effectively improve consumer sentiment and sales, and we may also be required to engage in additional activities to retain customers or attract new

14

customers to the brand. Such marketing expenses and promotional activities, which could include discounting our products, could adversely impact our results.

Persons or marketing partners who endorse our products could take actions that harm their reputations, which could also cause harm to our brand. From time to time, in response to changes in the business environment and the audience share of marketing channels, we expect to reallocate marketing resources across social media and other channels. That reallocation may not be effective or as successful as the marketing and advertising allocations of our competitors, which could negatively impact the amount and timing of our revenues.

We may not be able to execute our strategy or achieve our planned growth targets, which could negatively impact our business and our financial results.

Our growth strategy depends on our and our franchisees’ ability to open new restaurants and to operate them on a profitable basis. We expect substantially all of our international unit growth and much of our domestic unit growth to be franchised units. Accordingly, our profitability increasingly depends upon royalty revenues from franchisees. If our franchisees are not able to operate their businesses successfully under our franchised business model, our results could suffer. Additionally, we may fail to attract new qualified franchisees or existing franchisees may close underperforming locations. Planned growth targets and the ability to operate new and existing restaurants profitably are affected by economic, regulatory and competitive conditions and consumer buying habits. A decrease in sales, such as what we experienced in 2018 and the first half of 2019, or increased commodity or operating costs, including, but not limited to, employee compensation and benefits or insurance costs, could slow the rate of new store openings or increase the number of store closings. Our business is susceptible to adverse changes in local, national and global economic conditions, which could make it difficult for us to meet our growth targets. Additionally, we or our franchisees may face challenges securing financing, finding suitable store locations at acceptable terms or securing required domestic or foreign government permits and approvals.  Declines in comparable sales, net store openings and related operating profits can impact our stock price.  If we do not continue to improve future sales and operating results and meet our related growth targets or external expectations for net restaurant openings or our other strategic objectives in the future, our stock price could decline.

Our franchisees remain dependent on the availability of financing to remodel or renovate existing locations, upgrade systems and enhance technology, or construct and open new restaurants. From time to time, the Company may provide financing to certain franchisees and prospective franchisees in order to mitigate store closings, allow new units to open, or complete required upgrades. If we are unable or unwilling to provide such financing, which is a function of, among other things, a franchisee’s creditworthiness, the number of new restaurant openings may be slower or the rate of closures may be higher than expected and our results of operations may be adversely impacted. To the extent we provide financing to franchisees, our results could be negatively impacted by negative performance of these franchisee loans.

Our dependence on a sole supplier or a limited number of suppliers for some ingredients could result in disruptions to our business.

Domestic restaurants purchase substantially all food and related products from our QC Centers. We are dependent on Leprino Foods Dairy Products Company (“Leprino”) as our sole supplier for mozzarella cheese, one of our key ingredients. Leprino, one of the major pizza category suppliers of cheese in the United States, currently supplies all of our mozzarella cheese domestically and substantially all of our mozzarella cheese internationally. We also depend on a sole source for our supply of certain desserts and garlic sauce, which constitute less than 10% of our domestic Company-owned restaurant sales. While we have no other sole sources of supply for key ingredients or menu items, we do source other key ingredients from a limited number of suppliers. Alternative sources of mozzarella cheese, desserts, other key ingredients or menu items may not be available on a timely basis or may not be available on terms as favorable to us as under our current arrangements.

Our Company-owned and franchised restaurants could also be harmed by supply chain interruptions including those caused by factors beyond our control or the control of our suppliers.  Prolonged disruption in the supply of products from or to our QC Centers due to weather, climate change, natural disasters, COVID-19, crop disease, food safety incidents, regulatory compliance, labor dispute or interruption of service by carriers could increase costs, limit the availability of ingredients critical to our restaurant operations and have a significant impact on results. In particular, adverse weather or

15

crop disease affecting the California tomato crop could disrupt the supply of pizza sauce to our and our franchisees’ restaurants. Insolvency of key suppliers could also cause similar business interruptions and negatively impact our business.

We rely on third parties for certain business processes and services, and failure or inability of such third-party vendors to perform subjects us to risks, including business disruption and increased costs.

We depend on the performance of suppliers and other third parties in our business operations. Third-party business processes we utilize include information technology, gift card authorization and processing, other payment processing, benefits, and other accounting and business services.  We conduct third-party due diligence and seek to obtain contractual assurance that our vendors will maintain adequate controls, such as adequate security against data breaches.  However, the failure of our suppliers to maintain adequate controls or comply with our expectations and standards could have a material adverse effect on our business, financial condition, and operating results.

Changes in purchasing practices by our domestic franchisees could harm our commissary business.

Although our domestic franchisees currently purchase substantially all food products from our QC Centers, the only required QC Center purchases by franchisees are pizza sauce, dough and other items we may designate as proprietary or integral to our system. Any changes in purchasing practices by domestic franchisees, such as seeking alternative approved suppliers of ingredients or other food products, could adversely affect the financial results of our QC Centers and the Company.

Our current insurance may not be adequate and we may experience claims in excess of our reserves.

Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability, property, and health insurance coverage provided to our employees are funded by the Company up to certain retention levels under our retention programs. Retention limits generally range from $1,000 to $1.0 million. These insurance programs may not be adequate to protect us, and it may be difficult or impossible to obtain additional coverage or maintain current coverage at a reasonable cost. We also have experienced claims volatility and high costs for our insurance programs.  We estimate loss reserves based on historical trends, actuarial assumptions and other data available to us, but we may not be able to accurately estimate reserves. If we experience claims in excess of our projections, our business could be negatively impacted.  Our franchisees could be similarly impacted by higher claims experience, hurting both their operating results and/or limiting their ability to maintain adequate insurance coverage at a reasonable cost.

We are subject to debt covenant restrictions.

Our credit agreement contains affirmative and negative covenants, including financial covenants.  If a covenant violation occurs or is expected to occur, we would be required to seek a waiver or amendment from the lenders under the credit agreement.  The failure to obtain a waiver or amendment on a timely basis would result in our inability to borrow additional funds or obtain letters of credit under our credit agreement and allow the lenders under our credit agreement to declare our loan obligations due and payable, require us to cash collateralize outstanding letters of credit or increase our interest rate. If any of the foregoing events occur, we would need to refinance our debt, or renegotiate or restructure, the terms of the credit agreement.

With our indebtedness, we may have reduced availability of cash flow for other purposes. Increases in interest rates would also increase our debt service costs and could materially impact our profitability as well as the profitability of our franchisees.

Current debt levels under our existing credit facility may reduce available cash flow to plan for or react to business changes, changes in the industry or any general adverse economic conditions.  Under our credit facility, we are exposed to variable interest rates.  We have entered into interest rate swaps that fix a significant portion of our variable interest rate risk.  However, by using a derivative instrument to hedge exposures to changes in interest rates, we also expose ourselves to credit risk. Credit risk is due to the possible failure of the counterparty to perform under the terms of the derivative contract.  

Higher inflation, and a related increase in costs, including rising interest rates, could also impact our franchisees and their ability to open new restaurants or operate existing restaurants profitably.

16

In addition, the loans under our credit facility accrue interest at a per annum rate that may include, at the Company’s election, a spread over the London Interbank Offered Rate (“LIBOR”). In July 2017, the head of the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced its intention to phase out the use of LIBOR by the end of 2021.  However, the Intercontinental Exchange Benchmark Administration, in its capacity as administrator of USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other than one-week and two-month tenors) by 18 months to June 2023.  Notwithstanding this possible extension, a joint statement by key regulatory authorities calls on banks to cease entering into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021.  The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S.-dollar LIBOR with the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements, backed by Treasury securities.  Although SOFR appears to be the preferred replacement rate for U.S. dollar LIBOR, at this time, it is not possible to definitively predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates, including SOFR. The cessation of LIBOR will require us to amend the terms of our credit facility or any future credit agreements extending beyond June 2023 and indexed to LIBOR to replace LIBOR with SOFR or such other standard that is established, which could have a material adverse effect on us, including on our cost of funds, access to capital markets and financial results.

Investment Risks

Our Board of Directors has adopted a limited duration stockholder rights agreement, which could delay or discourage a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors.

On April 30, 2019, the Company’s stockholders ratified the adoption by the Board of Directors of the Rights Agreement, dated as of July 22, 2018, as amended on February 3, 2019, March 6, 2019, and October 23, 2019 (as amended, the “Rights Agreement”). The original Rights Agreement adopted by the Board of Directors on July 22, 2018 had an expiration date of July 22, 2019 and a beneficial ownership trigger threshold of 15%. On February 3, 2019, in connection with the sale and issuance of shares of the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”) to certain funds affiliated with, or managed by, Starboard Value LP (collectively, “Starboard”), the original Rights Agreement was amended to exempt Starboard from being considered an “Acquiring Person” under the Rights Agreement solely as a result of its beneficial ownership of (i) shares of common stock beneficially owned by Starboard prior to the sale and issuance of the Series B Preferred Stock, (ii) shares of Series B Preferred Stock issued or issuable to Starboard under the terms of the Securities Purchase Agreement, dated February 3, 2019, with Starboard (the “Securities Purchase Agreement”), and (iii) shares of the common stock (or in certain circumstances certain series of preferred stock) issuable upon conversion of the Series B Preferred Stock (or certain series of preferred stock issuable on conversion thereof) pursuant to the terms of the Certificate of Designation of Series B Preferred Stock.  On March 6, 2019, the Rights Agreement was further amended to extend the term of the Rights Agreement to March 6, 2022, increase the beneficial ownership trigger threshold at which a person becomes an acquiring person from 15% to 20%, except for a “grandfathered person” provision, and make certain other changes.  The Rights Agreement was further amended on October 23, 2019 to eliminate the “grandfathered person” provision as there are no stockholders that currently beneficially own 20% or more of the Company’s common stock.  

The Rights Agreement is intended to enable all of our stockholders to realize the full potential value of their investment in the Company and to protect the interests of the Company and its stockholders by reducing the likelihood that any person or group gains control of the Company through open market accumulation or other tactics without paying an appropriate control premium. The Rights Agreement could render more difficult, or discourage, a merger, tender offer, or assumption of control of the Company that is not approved by our Board of Directors. The Rights Agreement, however, should not interfere with any merger, tender or exchange offer or other business combination approved by our Board of Directors. In addition, the Rights Agreement does not prevent our Board of Directors from considering any offer that it considers to be in the best interest of the Company’s stockholders.

17

The issuance of shares of our Series B Preferred Stock to Starboard and its permitted transferees dilutes the ownership and relative voting power of holders of our common stock and may adversely affect the market price of our common stock.

Pursuant to the Securities Purchase Agreement, the Company sold 250,000 shares of our newly designated Series B Preferred Stock to Starboard in 2019.

As of December 27, 2020, the shares held by Starboard represent 13.3% of our outstanding common stock on an as-converted basis.  The Series B Preferred Stock is convertible at the option of the holders at any time into shares of common stock based on the conversion rate determined by dividing $1,000, the stated value of the Series B Preferred Stock, by $50.06.  

 

Because holders of our Series B Preferred Stock are entitled to vote, on an as-converted basis, together with holders of our common stock on all matters submitted to a vote of the holders of our common stock, the issuance of the Series B Preferred Stock to Starboard effectively reduces the relative voting power of the holders of our common stock.

In addition, the conversion of the Series B Preferred Stock into common stock would dilute the ownership interest of existing holders of our common stock. Furthermore, any sales in the public market of the common stock issuable upon conversion of the Series B Preferred Stock could adversely affect prevailing market prices of our common stock. Pursuant to a customary registration rights agreement with Starboard, we have registered for resale under the Securities Act of 1933 the shares of Series B Preferred Stock and any shares of common stock issued upon conversion of the Series B Preferred Stock. This registration may facilitate the resale of such securities into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales by Starboard of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.

Our Series B Preferred Stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of, our common stockholders, which could adversely affect our liquidity and financial condition, result in the interests of holders of our Series B Preferred Stock differing from those of our common stockholders and delay or prevent an attempt to take over the Company.

 

Starboard and the other holders of our Series B Preferred Stock have a liquidation preference entitling them to be paid, before any payment may be made to holders of our common stock in connection with a liquidation event, an amount per share of Series B Preferred Stock equal to the greater of (i) the stated value thereof plus accrued and unpaid dividends and (ii) the amount that would have been received had such share of Series B Preferred Stock been converted into common stock immediately prior to such liquidation event.

 

Holders of Series B Preferred Stock are entitled to a preferential cumulative dividend at the rate of 3.6% per annum, payable quarterly in arrears. On the third anniversary of the date of issuance, each holder of Series B Preferred Stock will have the right to increase the dividend on the shares of Series B Preferred Stock held by such holder to 5.6%, and on the fifth anniversary of the date of issuance, each holder will have the right to increase the dividend on the shares of Series B Preferred Stock held by such holder to 7.6% (in each case subject to the Company’s right to redeem some or all of such shares of Series B Preferred Stock for cash).

 

The holders of our Series B Preferred Stock also have certain redemption rights or put rights, including the right on any date following November 6, 2026 to require us to repurchase all or any portion of the Series B Preferred Stock. Holders of the Series B Preferred Stock also have the right, subject to certain exceptions, to require us to repurchase all or any portion of the Series B Preferred Stock upon certain change of control events.

 

These dividend and share repurchase obligations could impact our liquidity and reduce the amount of cash flows available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. Our obligations to Starboard, as the initial holder of our Series B Preferred Stock, could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights could also result in divergent interests between Starboard and holders of our common stock. Furthermore, a sale of our Company, as a change of control event, may require us to repurchase Series B Preferred Stock, which could have the

18

effect of making an acquisition of the Company more expensive and potentially deterring proposed transactions that may otherwise be beneficial to our stockholders.

Starboard may exercise influence over us, including through its ability to designate up to two members of our Board of Directors.

The transaction documents entered into in connection with the sale of the Series B Preferred Stock to Starboard grant to Starboard consent rights with respect to certain actions by us, including:

amending our organizational documents in a manner that would have an adverse effect on the Series B Preferred Stock;
issuing securities that are senior to, or equal in priority with, the Series B Preferred Stock; and
increasing the maximum number of directors on our Board to more than eleven persons or twelve persons, subject to the terms of the Governance Agreement (the “Governance Agreement”) entered into in connection with the Securities Purchase Agreement.

The Securities Purchase Agreement also imposes a number of affirmative and negative covenants on us. As a result, Starboard has the ability to influence the outcome of matters submitted for the vote of the holders of our common stock. Starboard and its affiliates are in the business of making or advising on investments in companies, including businesses that may directly or indirectly compete with certain portions of our business, and they may have interests that diverge from, or even conflict with, those of our other stockholders. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

In addition, the terms of the Governance Agreement grant Starboard certain rights to designate directors to be nominated for election by holders of our common stock. For so long as certain criteria set forth in the Governance Agreement are satisfied, including that Starboard beneficially own, in the aggregate, at least (i) 89,264 shares of Series B Preferred Stock or (ii) the lesser of 5.0% of the Company’s then-outstanding common stock (on an as-converted basis, if applicable) and 1,783,141 shares of issued and outstanding common stock (subject to adjustment for stock splits, reclassifications, combinations and similar adjustments), Starboard has the right to designate two directors for election to our Board, consisting of one nominee who is affiliated with Starboard and one independent nominee.

The directors designated by Starboard also are entitled to serve on committees of our Board, subject to applicable law and stock exchange rules. Notwithstanding the fact that all directors will be subject to fiduciary duties to us and to applicable law, the interests of the directors designated by Starboard may differ from the interests of our security holders as a whole or of our other directors.

We may not be able to raise the funds necessary to finance a required repurchase of our Series B Preferred Stock. 

After November 6, 2026, each holder of Series B Preferred Stock will have the right, upon 90 days’ notice, to require the Company to repurchase all or any portion of the Series B Preferred Stock for cash at a price equal to $1,000 per share of Series B Preferred Stock plus all accrued but unpaid dividends. In addition, upon certain change of control events, holders of Series B Preferred Stock can require us, subject to certain exceptions, to repurchase any or all of their Series B Preferred Stock.

It is possible that we would not have sufficient funds to make any required repurchase of Series B Preferred Stock. Moreover, we may not be able to arrange financing to pay the repurchase price.

19

General Risks

Natural disasters, hostilities, social unrest, severe weather and other catastrophic events may disrupt our operations or supply chain.

The occurrence of a natural disaster, hostilities, cyber-attack, social unrest, terrorist activity, outbreak of epidemic, pandemic or contagious disease, power outages, severe weather (such as tornados, hurricanes, blizzards, ice storms, floods, heat waves, etc.) or other catastrophic events may disrupt our operations or supply chain and result in the closure of our restaurants (Company-owned or franchised), our corporate offices, any of our QC Centers or the facilities of our suppliers, and can adversely affect consumer spending, consumer confidence levels and supply availability and costs, any of which could materially adversely affect our results of operations.

Increasingly complex laws and regulations could adversely affect our business.

We operate in an increasingly complex regulatory environment, and the cost of regulatory compliance is increasing. Our failure, or the failure of any of our franchisees, to comply with applicable U.S. and international labor, health care, food, health and safety, consumer protection, anti-bribery and corruption, competition, environmental and other laws may result in civil and criminal liability, damages, fines and penalties. Enforcement of existing laws and regulations, changes in legal requirements, and/or evolving interpretations of existing regulatory requirements may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results. Increased regulatory scrutiny of food matters and product marketing claims, and increased litigation and enforcement actions may increase compliance and legal costs and create other obligations that could adversely affect our business, financial condition or operating results. Governments may also impose requirements and restrictions that impact our business. For example, some local government agencies have implemented ordinances that restrict the sale of certain food or drink products.

Compliance with new or additional domestic and international government laws or regulations, including the European Union General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act (“CCPA”) which could increase costs for compliance.  These laws and regulations are increasing in complexity and number, change frequently and increasingly conflict among the various countries in which we operate, which has resulted in greater compliance risk and costs. If we fail to comply with these laws or regulations, we could be subject to reputational damage and significant litigation, monetary damages, regulatory enforcement actions or fines in various jurisdictions. For example, a failure to comply with the GDPR could result in fines up to the greater of €20 million or 4% of annual global revenues.  

Disruptions of our critical business or information technology systems could harm our ability to compete and conduct our business.

Our critical business and information technology systems have in the past, and could in the future be damaged or interrupted by power loss, various technological failures, user errors, cyber-attacks, sabotage or acts of God. In particular, the Company and our franchisees have experienced occasional interruptions of our digital ordering solutions, which make online ordering unavailable or slow to respond, negatively impacting sales and the experience of our customers. If our digital ordering solutions do not perform with adequate speed and security, our customers may be less inclined to return to our digital ordering solutions.

Part of our technology infrastructure, such as our domestic point-of-sale system, is specifically designed for us and our operational systems, which could cause unexpected costs, delays or inefficiencies when infrastructure upgrades are needed or prolonged and widespread technological difficulties occur. Significant portions of our technology infrastructure, particularly in our digital ordering solutions, are provided by third parties, and the performance of these systems is largely beyond our control. Occasionally, we have experienced or could experience temporary disruptions in our business due to third-party systems failing to adequately perform. Failure to manage future failures of these systems, particularly as our online sales grow, could harm our business and the satisfaction of our customers. Such third-party systems could be disrupted either through system failure or if third party vendor patents and contractual agreements do not afford us protection against similar technology. In addition, we may not have or be able to obtain adequate protection or insurance

20

to mitigate the risks of these events or compensate for losses related to these events, which could damage our business and reputation and be expensive and difficult to remedy or repair.

Failure to maintain the integrity of internal or customer data could result in damage to our reputation, loss of sales, and/or subject us to litigation, penalties or significant costs.

We are subject to a number of privacy and data protection laws and regulations. We collect and retain large volumes of internal and customer data, including credit card data and other personally identifiable information of our employees and customers housed in the various information systems we use. Constantly changing information security threats, particularly persistent cyber security threats, pose risks to the security of our systems and networks, and the confidentiality, availability and integrity of our data and the availability and integrity of our critical business functions.  As techniques used in cyber-attacks evolve, we may not be able to timely detect threats or anticipate and implement adequate security measures. The integrity and protection of the customer, employee, franchisee and Company data are critical to us. Our information technology systems and databases, and those provided by our third-party vendors, including international vendors, have been and will continue to be subject to computer viruses, malware attacks, unauthorized user attempts, phishing and denial of service and other malicious cyber-attacks. The failure to prevent fraud or security breaches or to adequately invest in data security could harm our business and revenues due to the reputational damage to our brand. Such a breach could also result in litigation, regulatory actions, penalties, and other significant costs to us and have a material adverse effect on our financial results. These costs could be significant and well in excess of, or not covered by, our cyber insurance coverage.

We have been and will continue to be subject to various types of investigations and litigation, including collective and class action litigation, which could subject us to significant damages or other remedies.

We are subject to the risk of investigations and litigation from various parties, including vendors, customers, franchisees, state and federal agencies, stockholders and employees. From time to time, we are involved in a number of lawsuits, claims, investigations, and proceedings consisting of securities, antitrust, intellectual property, employment, consumer, personal injury, corporate governance, commercial and other matters arising in the ordinary course of business.

We have been subject to claims in cases containing collective and class action allegations. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss and defense costs relating to such lawsuits may not be accurately estimated. Litigation trends involving personal injury, employment law, intellectual property and the relationship between franchisors and franchisees may increase our cost of doing business. We evaluate all of the claims and proceedings involving us to assess the expected outcome, and where possible, we estimate the amount of potential losses to us. In many cases, particularly collective and class action cases, we may not be able to estimate the amount of potential losses and/or our estimates may prove to be insufficient. These assessments are made by management based on the information available at the time made and require the use of a significant amount of judgment, and actual outcomes or losses may materially differ. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, such litigation may be expensive to defend and may divert resources away from our operations and negatively impact earnings. Further, we may not be able to obtain adequate insurance to protect us from these types of litigation matters or extraordinary business losses.

We may be subject to harassment or discrimination claims and legal proceedings. Our Code of Ethics and Business Conduct policies prohibit harassment and discrimination in the workplace, in sexual or in any other form.  To monitor and enforce these policies, we have ongoing programs for workplace training and compliance, and we investigate and take disciplinary action with respect to alleged violations.  Nevertheless, actions by our team members could violate those policies. Franchisees and suppliers are also required to comply with all applicable laws and govern themselves with integrity.  Any violations (or perceptions thereof) by our franchisees or suppliers could have a negative impact on consumer perceptions of us and our business and create reputational or other harm to the Company.  

21

We may not be able to adequately protect our intellectual property rights, which could negatively affect our results of operations.

We depend on the Papa John’s brand name and rely on a combination of trademarks, service marks, copyrights, and similar intellectual property rights to protect and promote our brand. We believe the success of our business depends on our continued ability to exclusively use our existing marks to increase brand awareness and further develop our brand, both domestically and abroad. We may not be able to adequately protect our intellectual property rights, and we may be required to pursue litigation to prevent consumer confusion and preserve our brand’s high-quality reputation. Litigation could result in high costs and diversion of resources, which could negatively affect our results of operations, regardless of the outcome.

We may be subject to impairment charges.

Impairment charges are possible due to the nature and timing of decisions we make about underperforming assets or markets, or if previously opened or acquired restaurants perform below our expectations. This could result in a decrease in our reported asset value and reduction in our net income.

We operate globally and changes in tax laws could adversely affect our results.

We operate globally and changes in tax laws could adversely affect our results. We have international operations and generate substantial revenues and profits in foreign jurisdictions. The domestic and international tax environments continue to evolve as a result of tax changes in various jurisdictions in which we operate and changes in the tax laws in certain countries, including the United States, could impact our future operating results. A significant increase in the U.S. corporate tax rate could negatively impact our financial results.

Item 1B. Unresolved Staff Comments

None.

22

Item 2. Properties

As of December 27, 2020, there were 5,400 Papa John’s restaurants worldwide. The following tables provide the locations of our restaurants. We define “North America” as the United States and Canada and “domestic” as the contiguous United States.

North America Restaurants:

    

Company (1)

    

Franchised

    

Total

Alabama

 

3

 

80

 

83

Alaska

 

 

11

 

11

Arizona

 

 

69

 

69

Arkansas

 

 

26

 

26

California

 

 

178

 

178

Colorado

 

 

47

 

47

Connecticut

 

 

5

 

5

Delaware

 

 

17

 

17

District of Columbia

 

 

11

 

11

Florida

 

39

 

247

 

286

Georgia

 

82

 

94

 

176

Hawaii

 

 

14

 

14

Idaho

 

 

14

 

14

Illinois

 

8

 

72

 

80

Indiana

 

43

 

93

 

136

Iowa

 

 

24

 

24

Kansas

 

15

 

19

 

34

Kentucky

 

40

 

66

 

106

Louisiana

 

 

60

 

60

Maine

 

 

3

 

3

Maryland

 

60

 

42

 

102

Massachusetts

 

 

7

 

7

Michigan

 

 

35

 

35

Minnesota

 

 

35

 

35

Mississippi

 

 

33

 

33

Missouri

 

41

 

28

 

69

Montana

 

 

9

 

9

Nebraska

 

 

13

 

13

Nevada

 

 

24

 

24

New Hampshire

 

 

3

 

3

New Jersey

 

 

52

 

52

New Mexico

 

 

16

 

16

New York

 

 

84

 

84

North Carolina

 

99

 

80

 

179

North Dakota

 

 

9

 

9

Ohio

 

 

160

 

160

Oklahoma

 

 

36

 

36

Oregon

 

 

14

 

14

Pennsylvania

 

 

78

 

78

Rhode Island

 

 

4

 

4

South Carolina

 

8

 

78

 

86

South Dakota

 

 

13

 

13

Tennessee

 

34

 

83

 

117

Texas

 

90

 

212

 

302

Utah

 

 

30

 

30

Virginia

 

26

 

121

 

147

Washington

 

 

42

 

42

West Virginia

 

 

22

 

22

Wisconsin

 

 

24

 

24

Wyoming

 

 

9

 

9

Total U.S. Papa John’s Restaurants

 

588

 

2,546

 

3,134

Canada

 

 

155

 

155

Total North America Papa John’s Restaurants

 

588

 

2,701

 

3,289

(1)Company-owned Papa John’s restaurants include restaurants owned by majority-owned subsidiaries. There were 188 such restaurants at December 27, 2020 (60 in Maryland, 90 in Texas, 26 in Virginia, and 12 in Georgia).

23

International Restaurants:

    

Franchised

Azerbaijan

    

9

Bahrain

 

19

Belarus

 

21

Bolivia

 

5

Cayman Islands

 

2

Chile

 

115

China

 

211

Colombia

 

54

Costa Rica

 

32

Cyprus

 

7

Dominican Republic

 

18

Ecuador

 

21

Egypt

 

57

El Salvador

 

24

France

 

4

Guam

 

3

Guatemala

 

16

Iraq

 

1

Ireland

 

79

Israel

 

6

Kazakhstan

 

6

Korea

 

193

Kuwait

 

40

Kyrgyzstan

 

3

Mexico

 

80

Morocco

5

Netherlands

 

30

Nicaragua

 

4

Oman

 

8

Pakistan

10

Panama

 

19

Peru

 

45

Philippines

 

15

Poland

 

6

Portugal

3

Puerto Rico

 

26

Qatar

 

30

Russia

 

182

Saudi Arabia

 

7

Spain

 

69

Trinidad

 

9

Tunisia

 

9

Turkey

 

55

United Arab Emirates

 

56

United Kingdom

 

467

Venezuela

 

30

Total International Papa John’s Restaurants (1)

2,111

(1)Of the Company’s 2,111 international franchised restaurants, approximately 65 stores were temporarily closed as of December 27, 2020, principally in Latin America and Europe, in accordance with government policies as a result of the COVID-19 outbreak.

24

Most Papa John’s Company-owned restaurants are located in leased space. The initial term of most domestic restaurant leases is five years with most leases providing for one or more options to renew for at least one additional term. Generally, the leases are triple net leases, which require us to pay all or a portion of the cost of insurance, taxes and utilities. As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are also contingently liable for payment of approximately 80 domestic leases.

Nine of our 12 North America QC Centers are located in leased space.  Our remaining three locations are in buildings we own. Additionally, our corporate office and our printing operations located in Louisville, KY are in buildings owned by us.  

On September 17, 2020, we announced plans to open an office in Atlanta, Georgia which will be in a leased space.  Certain corporate functions, including menu innovation, marketing, digital customer experience, human resources, diversity, equity and inclusion, communications, operations, development, financial planning and analysis and investor relations will be relocated to the Atlanta office. Our information technology, finance, supply chain, and legal teams will continue to operate in our Louisville, Kentucky office, which remains critical to our success. We also maintain a Company-owned office outside of London, United Kingdom (“UK”), where our international operations are managed.  For additional information, see “Note 17” of “Notes to Consolidated Financial Statements”.

At December 27, 2020, we leased and subleased approximately 385 Papa John’s restaurant sites to franchisees in the UK. The initial lease terms on the franchised sites in the United Kingdom are generally 15 years. The initial lease terms of the franchisee subleases are generally five to ten years. We own a full-service QC Center in the UK.  See “Note 3” of “Notes to Consolidated Financial Statements” for additional information.

Item 3. Legal Proceedings

The information contained in “Note 20, Litigation, Commitments and Contingencies” of “Notes to Consolidated Financial Statements” is incorporated by reference herein.

Item 4. Mine Safety Disclosures

None.

25

Information about our Executive Officers

Set forth below are the current executive officers of Papa John’s:

First Elected

Name

Age (a)

Position

Executive Officer

Robert M. Lynch

44

President and Chief Executive Officer

2019

Ann B. Gugino

48

Chief Financial Officer

2020

Marvin Boakye

47

Chief People and Diversity Officer

2019

Amanda Clark

41

Chief Development Officer

2020

James A. Norberg

55

Chief Operating Officer, North America

2019

Caroline M. Oyler

55

Chief Legal and Risk Officer

2018

Jack H. Swaysland

56

Chief Operating Officer, International

2018

C. Max Wetzel

44

Chief Commercial and Marketing Officer

2019

(a) Ages are as of January 1, 2021

Robert M. Lynch was appointed as President and Chief Executive Officer in August 2019. Mr. Lynch joined Papa John’s after serving as President of Arby’s Restaurant Group since August 2017, and served as Brand President and Chief Marketing Officer from August 2013 to August 2017.  Prior to Arby’s, he served as Vice President of Marketing at Taco Bell. Mr. Lynch has more than 20 years combined experience in the QSR and consumer packaged goods industries, and also held senior roles at HJ Heinz Company and Procter & Gamble.

Ann B. Gugino was appointed to Chief Financial Officer in October 2020.  Ms. Gugino joins Papa John’s from Target Corporation where she served as Senior Vice President, Financing Planning and Analysis since 2018, providing overall strategy, guidance, and direction in the development and execution of Target’s planning, analysis and capital investment portfolios.  Prior to Target, Ms. Gugino spent 18 years at Patterson Companies Inc., including four years as Executive Vice President and Chief Financial Officer.

Marvin Boakye was appointed Chief People and Diversity Officer in November 2019 after previously serving as Papa John’s first Chief People Officer since January 2019. Mr. Boakye joined Papa John’s after serving as Vice President of Human Resources at petroleum company Andeavor, in Texas where he also led diversity, equity and inclusion. Prior to Andeavor, he was Chief Human Resources Officer for MTS Allstream, a telecommunications company now part of Bell Canada from June 2015 to March 2017. Prior to that, Mr. Boakye held senior human resources positions for organizations across the United States, Canada and Latin America, including at Goodyear, the Pulte Group and The Home Depot.

Amanda Clark was appointed as Chief Development Officer in February 2020.  Ms. Clark joins Papa John’s from Taco Bell, where she was responsible for design, consumer facing technology, merchandising, customer marketing, new concepts and company development, serving as Executive Vice President Restaurant Experience from February 2019 to February 2020, Senior Vice President North America Development from May 2017 to February 2019 and the General Manager for Taco Bell Canada from November 2015 to August 2018. Previously, Ms. Clark served in roles of increasing responsibility in Brand Marketing at Taco Bell since 2013. Prior to joining Taco Bell, Ms. Clark worked at Procter and Gamble in various marketing roles for nearly 12 years on P&G brands including Olay, Pampers and Oral-B.

James A. Norberg was named Chief Operating Officer, North America in November 2019 after serving as Chief Restaurant Operations Officer since July 2019. Mr. Norberg, a QSR industry veteran, spent more than 30 years of his career at McDonald’s. His most recent role there was Executive Vice President and Chief Operations Officer from 2014 to 2015,

26

where he managed operations for 14,000 U.S. restaurants. After his long tenure at McDonald’s, Norberg served as an independent strategic advisor from 2015 to 2019 to organizations in the restaurant, hospitality, entertainment and consumer goods categories. He serves as a member of the board of directors for Out & Equal Workplace Advocates, the world’s premier nonprofit organization dedicated to achieving lesbian, gay, bisexual, transgender, and queer workplace equality.

Caroline M. Oyler was appointed Chief Legal and Risk Officer in October 2018. Ms. Oyler previously served as Senior Vice President, Chief Legal Officer from May 2018 to October 2018 and Senior Vice President, General Counsel from May 2014 to May 2018. Additionally, Ms. Oyler served as Senior Vice President, Legal Affairs from November 2012 to May 2014.  She joined the Company’s legal department in 1999. She also served as interim head of Human Resources from December 2008 to September 2009. Prior to joining Papa John’s, Ms. Oyler practiced law with the firm Wyatt, Tarrant and Combs LLP. 

Jack H. Swaysland was appointed to Chief Operating Officer, International in May 2018 after serving as Senior Vice President, International since April 2016. Mr. Swaysland previously served as Vice President, International from April 2015 to April 2016, Regional Vice President, International from May 2013 to April 2015, and Vice President, International Operations from April 2010 to May 2013. Mr. Swaysland has served in various capacities of increasing responsibility in International Operations since joining the Company 13 years ago.

C. Max Wetzel was appointed Chief Commercial and Marketing Officer in November 2019. Mr. Wetzel joined Papa John’s after serving as Vice President Consumer Brands and Business Transformation – U.S. and Canada since July 2018 at PPG Architectural Coatings. Also at PPG, Mr. Wetzel served as Vice President Home Centers and Global Strategic Marketing from June 2016 through July 2018 and as General Manager Home Centers and Chief Marketing Officer U.S. & Canada starting in November 2014. Prior to PPG, Mr. Wetzel worked at H.J. Heinz Company for ten years in a variety of domestic and global roles, leading consumer-driven businesses, developing brand marketing strategies and delivering profitable growth.

There are no family relationships between any of the directors or executive officers of the Company.

27

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock trades on The NASDAQ Global Select Market tier of The NASDAQ Stock Market under the symbol PZZA.  As of February 17, 2021, there were 1,297 record holders of common stock. However, there are significantly more beneficial owners of our common stock than there are record holders.

On January 25, 2021, our Board of Directors declared a first quarter dividend of $0.225 per share of common stock (approximately $7.4 million was paid to common stockholders and $1.1 million was paid as “pass through” dividends to holders of Series B Preferred Stock on an “as converted basis”).  The first quarter dividend on outstanding shares of Series B Preferred Stock was also declared on January 25, 2021.  The common stock dividend was paid on February 19, 2021 to stockholders of record as of the close of business on February 8, 2021.  The first quarter preferred dividend of $2.3 million will be paid to holders of Series B Preferred Stock on April 1, 2021.

We anticipate continuing the payment of quarterly cash dividends. The actual amount of such dividends is subject to declaration by our Board of Directors and will depend upon future earnings, results of operations, capital requirements, our financial condition and other relevant factors. There can be no assurance that the Company will continue to pay quarterly cash dividends at the current rate or at all.

Our Board of Directors has authorized the repurchase of up to $75.0 million of common stock under a share repurchase program that began on November 4, 2020 and is effective through December 31, 2021.  In fiscal 2020, a total of 32,000 shares with an aggregate cost of $2.7 million and an average price of $83.90 per share were repurchased under this program.  Funding for the share repurchase program has been provided through our operating cash flows.  

The following table summarizes our repurchase activity by fiscal period during the fourth quarter ended December 27, 2020 (in thousands, except per share amounts):

    

    

    

Total Number

    

Maximum Dollar

Total

Average

of Shares Purchased

Value of Shares

Number

Price

as Part of Publicly

that May Yet Be

of Shares

Paid per

Announced Plans

Purchased Under the

Fiscal Period

    

Purchased

    

Share

    

or Programs

    

Plans or Programs

11/23/2020 - 12/27/2020

 

32

$

83.90

 

32

$

72,299

Subsequent to year-end, we acquired an additional 15,000 shares at an aggregate cost of $1.3 million.  Approximately $71.0 million remained available under the Company’s share repurchase program as of February 17, 2021.

The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program. There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise.

The information required by Item 5 with respect to securities authorized for issuance under equity compensation plans is incorporated herein by reference to Part III, Item 12 of this Form 10-K.

28

Stock Performance Graph

The following performance graph compares the cumulative shareholder return of the Company’s common stock for the five-year period between December 27, 2015 and December 27, 2020 to (i) the NASDAQ Stock Market (U.S.) Index and (ii) a group of the Company’s peers consisting of U.S. companies listed on NASDAQ with standard industry classification (SIC) codes 5800-5899 (eating and drinking places).  Management believes the companies included in this peer group appropriately reflect the scope of the Company’s operations and match the competitive market in which the Company operates. The graph assumes the value of the investments in the Company’s common stock and in each index was $100 on December 27, 2015, and that all dividends were reinvested.

Graphic

29

Item 6. Selected Financial Data

The selected financial data presented for each of the past five fiscal years were derived from our audited Consolidated Financial Statements. The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Consolidated Financial Statements” and Notes thereto included in Item 7 and Item 8, respectively, of this Form 10-K.

Year Ended (1)

    

Dec. 27,

    

Dec. 29,

    

Dec. 30,

    

Dec. 31,

    

Dec. 30,

(In thousands, except per share data)

2020

2019

2018

2017

2016

 

52 weeks

 

52 weeks

 

52 weeks

 

53 weeks

 

52 weeks

Income Statement Data

Revenues:

Domestic Company-owned restaurant sales

$

700,757

$

652,053

$

692,380

$

816,718

$

815,931

North America franchise royalties and fees (2)

 

96,732

 

71,828

 

79,293

 

106,729

 

102,980

North America commissary revenues

 

680,793

 

612,652

 

609,866

 

673,712

 

623,883

International revenues (3)

 

123,963

 

102,924

 

110,349

 

114,021

 

100,904

Other revenues

 

210,989

 

179,791

 

170,983

 

72,179

 

69,922

Total revenues

 

1,813,234

 

1,619,248

 

1,662,871

 

1,783,359

 

1,713,620

Refranchising and impairment gains/(losses), net

4,739

(289)

(1,674)

10,222

Operating income (4)

 

90,253

 

24,535

 

31,553

 

151,017

 

164,523

Legal settlement

 

 

 

 

 

898

Investment income

 

2,131

 

1,104

 

817

 

608

 

785

Interest expense

 

(17,022)

 

(20,593)

 

(25,673)

 

(11,283)

 

(7,397)

Income before income taxes

 

75,362

 

5,046

 

6,697

 

140,342

 

158,809

Income tax expense (benefit)

 

14,748

 

(611)

 

2,624

 

33,817

 

49,717

Net income before attribution to noncontrolling interests

 

60,614

 

5,657

 

4,073

 

106,525

 

109,092

Net income attributable to noncontrolling interests (5)

 

(2,682)

 

(791)

 

(1,599)

 

(4,233)

 

(6,272)

Net income attributable to the Company

$

57,932

$

4,866

$

2,474

$

102,292

$

102,820

Net income (loss) attributable to common shareholders

$

41,737

$

(7,633)

$

2,474

$

103,288

$

102,967

Basic earnings (loss) per common share

$

1.29

$

(0.24)

$

0.08

$

2.86

$

2.76

Diluted earnings (loss) per common share

$

1.28

$

(0.24)

$

0.08

$

2.83

$

2.74

Basic weighted average common shares outstanding

 

32,421

 

31,632

 

32,083

 

36,083

 

37,253

Diluted weighted average common shares outstanding

 

32,717

 

31,632

 

32,299

 

36,522

 

37,608

Dividends declared per common share

$

0.90

$

0.90

$

0.90

$

0.85

$

0.75

Balance Sheet Data

Total assets

$

872,770

$

730,721

$

595,897

$

555,553

$

512,565

Total debt

 

350,000

 

370,000

 

625,009

 

470,000

 

300,575

Series B Convertible Preferred Stock

251,901

251,133

Redeemable noncontrolling interests

 

6,474

 

5,785

 

5,464

 

6,738

 

8,461

Total stockholders’ (deficit) equity

 

(266,939)

 

(316,656)

 

(304,013)

 

(105,954)

 

9,801

30

(1)We operate on a 52-53 week fiscal year ending on the last Sunday of December of each year. All fiscal years consisted of 52 weeks with the exception of the 2017 fiscal year which consisted of 53 weeks. The additional week resulted in additional revenues of approximately $30.9 million and additional operating income of approximately $6.2 million, or $0.17 per diluted share for 2017.
(2)North America franchise royalties were derived from franchised restaurant sales of $2.49 billion in 2020, $2.10 billion in 2019, $2.13 billion in 2018, $2.30 billion in 2017 ($2.25 billion on a 52-week basis), and $2.20 billion in 2016.
(3)Includes international royalties and fees, restaurant sales for international Company-owned restaurants, and international commissary revenues.  International royalties were derived from franchised restaurant sales of $994.8 million in 2020, $884.4 million in 2019, $832.3 million in 2018, $761.3 million in 2017 ($744.0 million on a 52-week basis), and $648.9 million in 2016. Restaurant sales for international Company-owned restaurants were $6.2 million in 2018, $13.7 million in 2017 ($13.4 million on a 52-week basis), and $14.5 million in 2016 (none in 2020 and 2019).
(4)The Company incurred $14.2 million and $25.3 million of Special charges in 2019 and 2018, respectively.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
(5)Represents the noncontrolling interests’ allocation of income for our joint venture arrangements.

31

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

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 December 27, 2020, there were 5,400 Papa John’s restaurants in operation, consisting of 588 Company-owned and 4,812 franchised restaurants. Our revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, and sales of franchise and development rights. Additionally, approximately 46% to 48% of our North America revenues in each of the last two fiscal years were derived from sales to franchisees of various items including food and paper products from our domestic Quality Control Centers (“QC Centers”), printing and promotional items and information systems equipment, and software and related services.  We also derive revenues from the operation of our international QC center in the United Kingdom and from contributions received by Papa John’s Marketing Fund (“PJMF”), our national marketing fund.  We believe that in addition to supporting both Company and franchised profitability and growth, these activities contribute to product quality and consistency throughout the Papa John’s system.

We strive to obtain high-quality restaurant sites with good access and visibility and to enhance the appearance and quality of our restaurants. We believe these factors improve our image and brand awareness. Detailed below are progressions of our Domestic and International restaurants over the last two fiscal years:

Domestic Company-owned

Franchised North America

Total North America

International

System-wide

Beginning - December 30, 2018

645

2,692

3,337

1,966

5,303

Opened

3

76

79

233

312

Closed

(5)

(123)

(128)

(92)

(220)

Acquired

1

46

47

-

47

Sold

(46)

(1)

(47)

-

(47)

Ending - December 29, 2019

598

2,690

3,288

2,107

5,395

Opened

2

62

64

156

220

Closed

(12)

(51)

(63)

(152)

(215)

Ending - December 27, 2020

588

2,701

3,289

2,111

5,400

Recent Business Matters

In 2020, the Company focused on executing the strategic priorities and building a foundation for long-term success, including the specific items described below.

Innovation.  Beginning in the fourth quarter of 2019, the Company has embraced a new culture of innovation, delivering multiple new product innovations and marketing successes.  In 2020, we launched Garlic Parmesan Crust Pizza, toasted handheld “Papadias” flatbread-style sandwiches, Jalapeno Popper Rolls, and the Shaq-a-Roni pizza.  Of particular highlight, the Shaq-a-Roni pizza was launched as part of a fund-raiser for The Papa John’s Foundation, in collaboration with Shaquille O’Neal, our board member and restaurant owner.  The Shaq-a-Roni pizza was a differentiated, high-value product, with a charitable component that supported meaningful causes aligned with our brand’s values. In the fourth quarter of 2020, we also tested Epic Stuffed Crust, which was officially launched in 2021.  Epic Stuffed Crust was the Company’s biggest new product launch to date and builds upon our original fresh, never frozen, six-ingredient dough.  Product innovation is not only an important part of our plan for 2021 to continue building sales but also represents another platform for our longer-term strategy and opportunity.

32

Novel Coronavirus (“COVID-19”). The COVID-19 outbreak began to result in disruption in certain of our international markets beginning in January 2020. Subsequently, the outbreak was characterized as a pandemic by the World Health Organization on March 11, 2020 and declared a national emergency in the United States during the same timeframe.  The outbreak has presented evolving risks and developments domestically and internationally, as well as new opportunities for our business. Our delivery and carryout model has positioned us to continue to experience strong demand for our products. To ensure we can continue to meet the demand of our customers, we continue to monitor our supply chain and have not experienced material disruptions.

Our primary focus continues to be the safety of our team members, franchisees, and customers. The Company has taken steps to mitigate the impact of the COVID-19 pandemic by implementing extra health and safety measures across our business, including No Contact Delivery and enhanced cleaning and sanitization measures, for the protection of both our customers and team members. We have expanded our employee benefits to include free virtual doctor visits and paid special bonuses to many of our front-line team members. This is in addition to existing employee benefits of no-cost mental health support, affordable health plan options and access to the Papa John’s Team Member Emergency Relief Fund, if and when needed. In addition, the Company hired thousands of new restaurant team members in 2020 to help meet demand and serve our customers.

Of the Company’s 2,111 international franchised stores, approximately 65 stores were temporarily closed as of December 27, 2020, principally in Latin America and Europe, in accordance with government policies. In North America, almost all traditional restaurants remain open and fully operational. A number of non-traditional restaurants located in universities and stadiums are temporarily closed; these non-traditional locations are not significant to our revenues and operating results.

We believe the pandemic has accelerated our previously announced efforts to innovate and bring new and former customers to the Papa John’s system. We believe that even after the pandemic-related restrictions are lifted we will benefit from the increase in customers we have experienced due to our menu innovation, customer loyalty programs and our offerings of high-quality pizza and other menu items. Due to the substantial uncertainty related to the effects of the pandemic and its duration, we are unable to predict the specific impact the pandemic and related restrictions will have on our results of operations, liquidity or long-term financial condition, including whether and to what extent the increased demand for our products will continue.  For a discussion of the risks to our business presented by the COVID-19 pandemic, see Item 1A. Risk Factors of this Form 10-K.

Strategic Corporate Reorganization for Long-term Growth. In the third quarter of 2020, we announced plans to open an office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlanta in the summer of 2021. The Atlanta office is part of a broader strategic reorganization of corporate functions reflecting the Company’s ongoing transformation into a brand and culture that can effectively and efficiently deliver on the Company’s purpose, values and strategic business priorities. Affected employees who do not relocate to Atlanta have been offered a separation package. As a result, we expect to incur certain one-time corporate reorganization costs of approximately $15.0 to $20.0 million related to employee severance and transition, recruitment and relocation and other third-party costs through 2021. Of that amount, we incurred costs of approximately $6.0 million in 2020.

33

Presentation of Financial Results

Critical Accounting Policies and Estimates  

The results of operations are based on our Consolidated Financial Statements, which were prepared 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 as well as estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements. The Company’s significant accounting policies, including recently issued accounting pronouncements, are more fully described in “Note 2” of “Notes to Consolidated Financial Statements.” Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results. We have identified the following accounting policies and related judgments as critical to understanding the results of our operations:

Allowance for Credit Losses on Accounts and Franchisee Notes Receivable

As of December 27, 2020, accounts receivable was $93.8 million with an allowance for credit losses of $3.6 million and franchisee notes receivable was $51.1 million with an allowance for credit losses of $3.2 million. As of December 29, 2019, accounts receivable was $77.8 million with an allowance for credit losses of $7.3 million and franchisee notes receivable was $44.4 million with an allowance for credit losses of $3.6 million.   Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors. The allowance for credit losses on franchisee note receivables is based on review of each franchisee’s economic performance and market conditions after consideration of the fair value of our underlying collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees. Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer.  Account and note receivable balances are charged off against the allowance after recovery efforts have ceased.  

Insurance Reserves

Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability, property, and health insurance coverage provided to our employees are funded by the Company up to certain retention levels under our retention programs. Retention limits generally range from $1,000 to $1.0 million.  

As of December 27, 2020 and December 29, 2019, our insurance reserves were $82.0 million and $75.2 million, respectively.  Losses are accrued based upon undiscounted estimates of the liability for claims incurred and for events that have occurred but have not been reported using certain third-party actuarial projections and our claims loss experience. The determination of the recorded insurance reserves is highly judgmental and complex due to  the significant uncertainty in the potential value of reported claims and the number and potential value of incurred but not reported claims, the application of significant judgment in making those estimates and the use of various actuarial valuation methods. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims differ significantly from historical trends used to estimate the insurance reserves recorded by the Company. The Company records estimated losses above retention within its reserve with a corresponding receivable for expected amounts due from insurance carriers.  

34

Intangible Assets — Goodwill

We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Such tests are completed separately with respect to the goodwill of each of our reporting units.  We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist.

We elected to perform a qualitative assessment for our operations in the fourth quarter of 2020.  As a result of our qualitative analyses, we determined that it was more-likely-than-not that the fair values of our reporting units were greater than their carrying amounts.  Subsequent to completing our goodwill impairment tests, no indicators of impairment were identified.  See “Note 12” of “Notes to Consolidated Financial Statements” for additional information.

Income Tax Accounts and Tax Reserves

Papa John’s is subject to income taxes in the United States and several foreign jurisdictions.  Significant judgment is required in determining Papa John’s provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax attribute carryforwards (e.g., net operating losses, capital losses, and foreign tax credits). The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.

Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures. We recognized a decrease in income tax expense of $500,000 and $400,000 in 2020 and 2019, respectively, associated with the finalization of certain income tax matters. See “Note 18” of “Notes to Consolidated Financial Statements” for additional information.  

Fiscal Year

Our fiscal year ends on the last Sunday in December of each year. All fiscal years presented in the accompanying Consolidated Financial Statements consist of 52 weeks.

35

Results of Operations

2020 Compared to 2019

This section of this Form 10-K generally discusses fiscal 2020 and 2019 items and year-to-year comparisons between fiscal 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between fiscal 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019.

Discussion of Revenues.  Consolidated revenues increased $194.0 million, or 12.0%, to $1.81 billion in 2020, compared to $1.62 billion in 2019.  Revenues are summarized in the following table (dollars in thousands).

 

Year Ended

    

Dec. 27,

Dec. 29,

    

    

Percent

2020

2019

Increase

Change

Domestic Company-owned restaurant sales

$

700,757

$

652,053

$

48,704

7.5

%

North America franchise royalties and fees

 

96,732

 

71,828

 

24,904

34.7

%

North America commissary revenues

 

680,793

 

612,652

 

68,141

11.1

%

International revenues

 

123,963

 

102,924

 

21,039

20.4

%

Other revenues

 

210,989

 

179,791

 

31,198

17.4

%

Total revenues

$

1,813,234

$

1,619,248

$

193,986

12.0

%

Domestic Company-owned restaurant sales increased $48.7 million, or 7.5%, in 2020. Excluding the impact of refranchising 46 restaurants in 2019 primarily located in South Florida and Georgia, Domestic Company-owned restaurant sales increased $79.2 million, or 12.7%.  The increase was primarily due to positive comparable sales of 14.2%, partially offset by the 2019 favorable impact from the expiration of customer rewards associated with our Papa Rewards loyalty program of $6.0 million. “Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods.  

North America franchise royalties and fees increased $24.9 million, or 34.7%, in 2020. Excluding the impact of refranchising, North America franchise royalties and fees increased $22.9 million, or 31.9%.  The increase was primarily due to positive comparable sales of 18.6%.  Franchise royalties and fees in 2020 also reflect a higher effective royalty rate due to lower temporary royalty relief which was part of our franchise assistance program (see “Temporary Franchise Support”).

North America franchise restaurant sales increased 18.6% to $2.49 billion for 2020 compared to prior year.  North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales.

North America commissary revenues increased $68.1 million, or 11.1%, primarily due to higher volumes and pricing associated with higher commodities costs, primarily cheese.  

International revenues increased $21.0 million, or 20.4%, in 2020 primarily due to higher PJUK commissary revenues and higher royalties from higher comparable sales of 12.6%.

International franchise restaurant sales increased 15.5% to $1.0 billion in 2020, excluding the impact of foreign currency, primarily due to increases in comparable sales. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.

Other revenues, which primarily includes our North America marketing funds, online and mobile ordering business and our wholly-owned print and promotions subsidiary, increased $31.2 million, or 17.4% in 2020 primarily due to higher marketing fund revenues from an increase in franchise sales and an increase in the national marketing fund contribution rate in 2020 and higher online revenues from increased restaurant sales.

36

Discussion of Operating Results

Operating income is summarized in the following table on a reporting segment basis.  Operating income increased approximately $65.7 million for the year ended December 27, 2020 as compared to the prior year. Alongside the GAAP operating income data, we have included “adjusted” operating income to exclude Special items. Special items for 2020 include strategic corporate reorganization costs associated with our new office in Atlanta, Georgia projected to open in the summer of 2021. The reconciliation of GAAP to non-GAAP financial results, as well as the Special items, are included in “Items Impacting Comparability; Non-GAAP Measures.”  We believe these non-GAAP measures are important for comparability purposes.

Year Ended

    

Reported

    

Special

    

Adjusted

 

Reported

    

Special

    

Adjusted

    

Adjusted

Dec. 27,

items

Dec. 27,

 

Dec. 29,

items

Dec. 29,

Increase

(In thousands)

    

2020

    

in 2020

    

2020

  

2019

    

in 2019

    

2019

    

(Decrease)

Domestic Company-owned restaurants

$

37,049

$

$

37,049

$

33,957

$

(4,739)

$

29,218

$

7,831

North America franchising

89,801

89,801

64,362

64,362

25,439

North America commissaries

33,185

 

 

33,185

30,690

 

 

30,690

 

2,495

International

24,034

24,034

18,738

18,738

5,296

All others

7,043

7,043

(1,966)

(1,966)

9,009

Unallocated corporate expenses

(100,069)

5,985

(94,084)

(120,280)

14,221

(106,059)

11,975

Elimination of intersegment profits

(790)

(790)

(966)

(966)

176

Adjusted operating income

$

90,253

$

5,985

$

96,238

$

24,535

$

9,482

$

34,017

$

62,221

The increase in operating income of $65.7 million, and increase in adjusted operating income of $62.2 million in 2020, excluding Special items, was primarily due to the following:

Domestic Company-owned Restaurants Segment.  Domestic Company-owned restaurants operating income increased $7.8 million for 2020 as compared to the prior year comparable period. The increase was primarily due to higher profits from positive comparable sales of 14.2%, partially offset by labor initiatives and bonus expenses, including a special end-of-year bonus for front-line team members, and higher commodities costs.  Additionally, 2019 benefited from the expiration of customer rewards associated with our Papa Rewards loyalty program of $6.0 million.

North America Franchising Segment.  North America franchising operating income increased $25.4 million for 2020, primarily due to higher comparable sales of 18.6%.  The fiscal year 2020 also benefited from a higher effective royalty rate compared to 2019 primarily due to lower royalty relief in 2020 as discussed in “Temporary Franchise Support.”

North America Commissaries Segment.  North America commissaries operating income increased $2.5 million in 2020, primarily due to higher profits from higher volumes, partially offset by the bonus for front-line team members.

International Segment.  International operating income increased $5.3 million for 2020 compared to the prior year primarily due to higher royalty revenue, PJUK commissary income attributable to increased units and higher comparable sales and lower travel costs due to COVID-19.  These increases were partially offset by lower revenues received from certain franchisees as a result of royalty support, higher bonuses and the unfavorable impact of foreign exchange rates.

All Others.  All Others operating income increased $9.0 million primarily due to higher online revenues, partially offset by timing of marketing spend in the prior year.

37

Unallocated Corporate Expenses.  Unallocated corporate expenses decreased approximately $12.0 million in 2020 compared to 2019 primarily due to lower marketing fund investments of $12.5 million as discussed in “Temporary Franchise Support”.

Review of Consolidated Results

Revenues.  For the reasons discussed above, consolidated revenues increased $194.0 million, or 12.0%, to $1.81 billion in 2020, compared to $1.62 billion in 2019.

Year Ended

December 27, 2020

December 29, 2019

% of Related

% of Related

Increase

($ in thousands)

Revenues

Revenues

(Decrease)

Revenues:

Domestic Company-owned restaurant sales

$

700,757

$

652,053

North America franchise royalties and fees

96,732

71,828

North America commissary revenues

680,793

612,652

International revenues

123,963

102,924

Other revenues

210,989

179,791

Total revenues

1,813,234

1,619,248

Costs and expenses:

Operating costs (excluding depreciation and amortization shown separately below):

Domestic Company-owned restaurant expenses

563,799

80.5%

526,237

80.7%

(0.2%)

North America commissary expenses

630,937

92.7%

569,180

92.9%

(0.2%)

International expenses

73,994

59.7%

57,702

56.1%

3.6%

Other expenses

200,304

94.9%

175,592

97.7%

(2.8%)

General and administrative expenses

204,242

11.3%

223,460

13.8%

(2.5%)

Depreciation and amortization

49,705

2.7%

47,281

2.9%

(0.2%)

Total costs and expenses

1,722,981

95.0%

1,599,452

98.8%

(3.8%)

Refranchising gains

-

0.0%

4,739

0.3%

(0.3%)

Operating income

90,253

5.0%

24,535

1.5%

3.5%

Investment income

2,131

0.1%

1,104

0.1%

0.0%

Interest expense

(17,022)

(0.9%)

(20,593)

(1.3%)

0.4%

Income before income taxes

$

75,362

4.2%

$

5,046

0.3%

3.9%

Costs and expenses. Total costs and expenses were approximately $1.7 billion, or 95.0% of total revenues in 2020 compared to $1.6 billion, or 98.8%, in 2019.  The decrease in total costs and expenses, as a percentage of revenues, was primarily due to the following:

Domestic Company-owned restaurants expenses were $563.8 million in 2020, or 80.5% of related revenues, as compared to the prior year expenses of $526.2 million, or 80.7% of related revenues, in 2019.  The 0.2% decrease, as a percentage of revenues, was primarily due to lower food costs, including the favorable impact of current year promotions which more than offset higher commodities costs and lower operating expenses on higher sales. These decreases were partially offset by higher bonus expense and the 2019 favorable impact of the expiration of customer rewards with our Papa Rewards loyalty program.

North America commissary expenses were $630.9 million in 2020, or 92.7% of related revenues compared to $569.2 million in 2019, or 92.9% of related revenues in 2019.  The 0.2% decrease in expenses, as a percentage of related revenues, was primarily due to lower operating costs on higher volumes and lower delivery costs.

International expenses were $74.0 million in 2020, or 59.7% of related revenues, compared to prior year expenses of $57.7 million, or 56.1% of related revenues in 2019.  The increase of 3.6% in expenses, as a percentage of related revenues, was primarily due to the higher mix of United Kingdom commissary revenues which have a lower overall margin and lower revenues resulting from increased royalty support provided to certain franchisees.  

38

Other expenses were $200.3 million in 2020, or 94.9% of related revenues, compared to prior year expenses of $175.6 million, or 97.7% of related revenues in 2019. The 2.8% decrease in expenses, as a percentage of related revenues, was primarily due to higher margins from our online and mobile ordering business, partially offset by lower revenues at our printing subsidiary.

General and administrative (“G&A”) expenses were $204.2 million, or 11.3% of revenues for 2020 compared to $223.5 million, or 13.8% of revenues for 2019. G&A expenses consisted of the following (dollars in thousands):

Year Ended

December 27,

December 29,

2020

2019

Administrative expenses (a)

$

185,202

$

179,122

Special items (b) (c)

5,985

13,859

Other general expenses (d)

13,055

30,479

General and administrative expenses

$

204,242

$

223,460

(a)The increase in administrative expenses of $6.1 million for the year ended December 27, 2020 compared to prior year was primarily due to higher management incentive costs, partially offset by reduced travel costs due to COVID-19 restrictions and lower professional and consulting fees.
(b)Represents $6.0 million in strategic reorganization costs for the year ended December 27, 2020 associated with our new office in Atlanta, Georgia projected to open in the summer of 2021.  See “Note 17” of “Notes to Consolidated Financial Statements” for additional information.
(c)The Special items for the year ended December 29, 2019 include the following:
(1)$5.9 million of legal and advisory fees primarily associated with the review of a wide range of strategic opportunities that culminated in a strategic investment in the Company by funds affiliated with, or managed by, Starboard Value LP (“Starboard”);
(2)$5.6 million related to a one-time mark-to-market adjustment from the increase in value of the Starboard option to purchase shares of the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”) that culminated in the purchase of $50.0 million of Series B Preferred Stock in late March.  See “Note 7” of “Notes to Consolidated Financial Statements” for additional information; and
(3)$2.4 million that includes severance costs for the Company’s former CEO as well as costs related to the termination of a license agreement for intellectual property no longer being utilized.
(d)The decrease in other general expenses of $17.4 million was primarily due to lower discretionary marketing fund investments and lower provisions for uncollectible accounts and notes receivable.

See “Items Impacting Comparability; Non-GAAP Measures” for additional information regarding the Special items.  

Depreciation and amortization.  Depreciation and amortization expense was $49.7 million, or 2.7% of revenues in 2020, as compared to $47.3 million, or 2.9% of revenues for 2019.  

Refranchising gains.  Refranchising gains of $4.7 million in 2019 were primarily associated with the refranchising of 19 Company-owned restaurants in Georgia and 24 Company-owned restaurants in South Florida.  See “Note 11” of “Notes to the Consolidated Financial Statements” for additional information.    

Interest expense. Interest expense decreased approximately $3.6 million for the year ended December 27, 2020 primarily due to a decrease in the average outstanding debt balance and lower interest rates. Total debt outstanding was $350.0 million as of December 27, 2020.  Outstanding debt at December 27, 2020 decreased $20.0 million from December 29, 2019 primarily due to repayments on our secured term loan facility.

Income before income taxes.  Income before income taxes was $75.4 million in 2020, compared to $5.0 million in 2019, or an increase of $70.4 million due to the reasons discussed above.

39

Income tax expense (benefit).  The effective income tax rate was 19.6% for 2020, compared to (12.1%) for 2019. The effective rate was higher in 2020 due to the impact of similar tax credit amounts on higher income before income taxes. The 2019 income tax rate included a non-deductible $5.9 million expense associated with the one-time mark-to-market increase in the fair value of the Starboard option to purchase Series B Preferred Stock, as previously mentioned. The following compares income tax expense (benefit) for 2020 and 2019:

Year Ended

December 27, 2020

December 29, 2019

Income before income taxes

$

75,362

$

5,046

Income tax expense (benefit)

$

14,748

$

(611)

Effective tax rate

19.6%

(12.1%)

See “Items Impacting Comparability; Non-GAAP Measures” and “Note 7” and “Note 18” of “Notes to Consolidated Financial Statements,” for additional information.

Diluted earnings (loss) per share. Diluted earnings per common share was $1.28 for 2020, compared to diluted loss per common share of $0.24 in 2019, representing an increase of $1.52.  Excluding Special items, adjusted diluted earnings per common share was $1.40, compared to $0.03 in 2019, representing an increase of $1.37. Diluted earnings per common share was reduced by approximately $0.07 per share in 2020 ($0.09 impact when excluding Special items) due to income attributable to participating securities, including Series B Preferred Stockholders, based on undistributed earnings for 2020. See “Note 8” of “Notes to Consolidated Financial Statements” for additional information.

40

Items Impacting Comparability; Non-GAAP Measures

The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures (collectively defined as “Special items”). The non-GAAP adjusted results shown below and within this Form 10-K, which exclude the Special items, should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP results.  Management believes presenting certain financial information excluding the Special items is important for purposes of comparison to prior year results.  In addition, management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends. See “Results of Operations” for further analysis regarding the impact of the Special items, and “Note 8”, “Note 11”, and “Note 18” of “Notes to Consolidated Financial Statements,” respectively, for additional information about the Special items.

Note: Effective as of the first quarter of 2020, the Company modified its presentation of adjusted (non-GAAP) financial results to no longer present certain financial assistance provided to the North America system in the form of royalty relief and discretionary marketing fund investments as Special charges. This financial assistance, which began in the third quarter of 2018 in response to declining sales in North America, concluded in the third quarter of 2020, as announced in a formal plan in July 2019. The adjusted financial results for the Company’s fiscal year ended December 29, 2019 have been revised to remove these items. See “Temporary Franchise Support” below for additional information regarding this change in presentation.

Year Ended

Dec. 27,

    

Dec. 29,

(In thousands, except per share amounts)

2020

2019

(Note)

GAAP operating income

$

90,253

$

24,535

Strategic corporate reorganization costs (1)

5,985

Special charges:

 

 

Legal and advisory fees (2)

5,922

Mark-to-market adjustment on option valuation (3)

5,914

Other costs (4)

2,385

Refranchising gains

(4,739)

Adjusted operating income

$

96,238

$

34,017

GAAP net income (loss) attributable to common shareholders

$

41,737

$

(7,633)

Strategic corporate reorganization costs (1)

5,985

Special charges:

Legal and advisory fees (2)

5,922

Mark-to-market adjustment on option valuation (3)

5,914

Other costs (4)

2,385

Refranchising gains

(4,739)

Tax effect of Non-GAAP items (5) (6)

(1,346)

(799)

Two-class impact for Non-GAAP adjustment to net income (7)

(662)

Adjusted net income attributable to common shareholders

$

45,714

$

1,050

GAAP diluted earnings (loss) per share

$

1.28

$

(0.24)

Strategic corporate reorganization costs (1)

0.18

Special charges:

Legal and advisory fees (2)

0.19

Mark-to-market adjustment on option valuation (3)

0.19

Other costs (4)

0.07

Refranchising gains

(0.15)

Tax effect of Non-GAAP items (5) (6)

(0.04)

(0.03)

Two-class impact for Non-GAAP adjustment to earnings per share (7)

(0.02)

Adjusted diluted earnings per share

$

1.40

$

0.03

41

(1)Represents strategic corporate reorganization costs associated with our new office in Atlanta, Georgia projected to open in the summer of 2021.
(2)Represents advisory and legal costs incurred in 2019 primarily associated with the review of a wide range of strategic opportunities that culminated in the strategic investment in the Company by affiliates of Starboard Value LP (“Starboard”) as well as certain litigation costs associated with legal proceedings initiated by our founder.  
(3)Represents a one-time mark-to-market adjustment of $5.9 million primarily related to the increase in the fair value of the Starboard option to purchase Series B Preferred Stock that culminated in the purchase of additional preferred stock in late March 2019.
(4)Includes severance costs for our former CEO and costs related to the termination of a license agreement for intellectual property no longer being utilized.
(5)The tax effect for strategic corporate reorganization costs was calculated by applying the 2020 full year marginal tax rate of 22.5%.
(6)The tax effect for Legal and advisory fees, Other costs, and Refranchising gains was calculated by applying the 2019 full year marginal rate of 22.4%. The mark-to-market adjustment on option valuation was non-deductible for tax purposes.
(7)Represents an adjustment to the allocation of undistributed earnings to participating securities for the strategic corporate reorganization costs.

The non-GAAP adjusted results shown above and within this document, which exclude the Special items, should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP results.  Management believes presenting certain financial information excluding the Special items is important for purposes of comparability.  In addition, management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends. See “Results of Operations” for further analysis regarding the impact of the Special items.

Temporary Franchise Support. Beginning in the third quarter of 2018, the Company began providing various forms of support and financial assistance to the North America franchise system in response to declining North America sales. In July 2019, the Company announced a formal relief program to provide our North America franchisees with certainty regarding the availability and schedule of the temporary relief which concluded in the third quarter of 2020. The Company provided royalty relief and discretionary marketing fund investments to franchisees in North America, included herein as “Temporary Franchise Support” of $29.3 million (or approximately $0.69 per diluted share) for 2020, compared to $46.6 million (or approximately $1.14 per diluted share) for 2019, as follows (in thousands):

Year Ended

December 27,

December 29,

2020

2019

Royalty relief (a)

$

14,270

$

19,096

Marketing fund investments (b)

15,000

27,500

Total Temporary Franchise Support

$

29,270

$

46,596

(a)Represents financial assistance provided to the North America system in the form of temporary royalty reductions that are above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business. These royalty reductions are not an expense, but rather consist of the amount of waived royalties that the Company would otherwise have been entitled to absent the waiver.  The waived royalties are not included in North America franchise royalties and fees revenues.
(b)Represents incremental discretionary marketing fund investments in excess of contractual Company-owned restaurant-level contributions, which were made as part of the temporary financial support package to our franchisees. The marketing fund investments are included in Unallocated corporate expenses.

42

In addition, we present free cash flow in this report, which is a non-GAAP measure. We define free cash flow as net cash provided by operating activities (from the Consolidated Statements of Cash Flows) less the purchases of property and equipment and dividends paid to preferred stockholders. We view free cash flow as an important measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of our performance than the Company’s GAAP measures. See “Liquidity and Capital Resources” for a reconciliation of free cash flow to the most directly comparable GAAP measure.

The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.

Liquidity and Capital Resources

Debt

The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $10.0 million was outstanding as of December 27, 2020, and a secured term loan facility with an outstanding balance of $340.0 million (the “Term Loan Facility”) and together with the Revolving Facility, the “PJI Facilities”. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at December 27, 2020 was approximately $344.2 million.  

We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities.  As of December 27, 2020, we have the following interest rate swap agreements with a total notional value of $350.0 million:

Effective Dates

    

Floating Rate Debt 

    

Fixed Rates

 

April 30, 2018 through April 30, 2023

$

55 million

 

2.33

%

April 30, 2018 through April 30, 2023

$

35 million

 

2.36

%

April 30, 2018 through April 30, 2023

$

35 million

 

2.34

%

January 30, 2018 through August 30, 2022

$

100 million

1.99

%

January 30, 2018 through August 30, 2022

$

75 million

1.99

%

January 30, 2018 through August 30, 2022

$

50 million

2.00

%

The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 3.8% and 4.1% in fiscal 2020 and 2019, respectively.  

Our PJI Credit Agreement contains affirmative and negative covenants, including the following financial covenants, as defined by the PJI Credit Agreement:

    

    

Actual Ratio for the

Year Ended

Permitted Ratio

December 27, 2020

Leverage ratio

 

Not to exceed 4.75 to 1.0

 

2.4 to 1.0

Interest coverage ratio

 

Not less than 2.25 to 1.0

 

3.8 to 1.0

Our leverage ratio is defined as outstanding debt divided by consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the most recent four fiscal quarters.  Our interest coverage ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all financial covenants as of December 27, 2020.

43

Papa John’s Marketing Fund, Inc. (“PJMF”) our national marketing fund, has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 (as amended, the “PJMF Loan Agreement”) with U.S. Bank National Association, as lender.  There was no balance outstanding under the PJMF Revolving Facility as of December 27, 2020 and December 29, 2019.  The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.

See “Note 13” of “Notes to Consolidated Financial Statements” for additional information.

Cash Flows

Cash flow provided by operating activities was $186.4 million for 2020 as compared to $61.7 million in 2019. The increase of approximately $124.7 million was primarily due to higher net income and favorable working capital changes including timing of payments.  

Cash flow used in investing activities was $41.1 million in 2020 as compared to $32.6 million for the same period in 2019. The increase in cash flow used in investing activities was primarily due to proceeds from the refranchising of restaurants in 2019.  This was somewhat offset by higher note repayments from franchisees in 2020.

Cash flow used in financing activities was $43.5 million in 2020 as compared to $34.6 million for the same period in 2019. The increase in cash flow used in financing activities was primarily due to the timing of repayments on our Term Loan Facility, repurchases of common stock and higher dividends paid to preferred stockholders, offset by higher cash proceeds received from the exercise of stock options.  In 2019, we also received $252.5 million in proceeds from the issuance of Series B Preferred Stock, which was primarily used for net repayments on our Revolving Facility of $240.0 million.

The Company recorded dividends of approximately $43.1 million for the year ended December 27, 2020 consisting of the following:

$29.4 million paid to common stockholders ($0.90 per share);
$4.6 million in common stock “pass-through” dividends paid to Series B Preferred Stockholders on an as-converted basis ($0.90 per share); and
$9.1 million in preferred dividends on the Series B Preferred Stock (3.6% of the investment per annum).

The Company paid common stock dividends of $28.6 million, common stock “pass-through” dividends to Series B Preferred Stockholders of $4.3 million, and $5.7 million in preferred dividends on the Series B Preferred Stock in 2019.

On January 25, 2021, our Board of Directors declared a first quarter dividend of $0.225 per share of common stock (approximately $7.4 million was paid to common stockholders and $1.1 million was paid as “pass through” dividends to holders of Series B Preferred Stock on an as-converted basis).  The first quarter dividend on outstanding shares of Series B Preferred Stock was also declared on January 25, 2021.  The common stock dividend was paid on February 19, 2021 to stockholders of record as of the close of business on February 8, 2021.  The first quarter preferred dividend of $2.3 million will be paid to holders of Series B Preferred Stock on April 1, 2021.

44

We also use free cash flow, a non-GAAP measure, defined as net cash provided by operating activities (from the Consolidated Statements of Cash Flows) less the purchases of property and equipment and dividends paid to preferred stockholders. We view free cash flow as an important measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. See “Items Impacting Comparability; Non-GAAP Measures” for a discussion of free cash flow.  The Company’s free cash flow for the last two years was as follows (in thousands):

Year Ended

Dec. 27,

    

Dec. 29,

 

2020

2019

Net cash provided by operating activities

$

186,439

$

61,749

Purchases of property and equipment

(35,652)

(37,711)

Dividends paid to preferred stockholders

 

(13,649)

 

(10,020)

Free cash flow

$

137,138

$

14,018

Contractual Obligations

Contractual obligations and payments as of December 27, 2020 due by year are as follows (in thousands):

Payments Due by Period

 

    

Less than

    

    

    

After 5

    

 

1 Year

1-3 Years

3-5 Years

Years

Total

 

Contractual Obligations:

Term Loan Facility (1)

$

20,000

$

320,000

$

$

$

340,000

Revolving Facility (1)

10,000

10,000

Interest payments (2)

 

12,669

 

10,048

 

1,602

 

 

24,319

Total debt

$

32,669

$

340,048

$

1,602

$

$

374,319

Operating leases (3)

 

32,456

 

58,224

 

39,072

 

61,024

 

190,776

Finance leases (3)

4,348

8,682

5,092

1,054

19,176

Total contractual obligations

$

69,473

$

406,954

$

45,766

$

62,078

$

584,271

(1)We utilize interest rate swaps to hedge our variable rate debt. At December 27, 2020, we had an interest rate swap liability of $13.5 million recorded in Accrued expenses and other current liabilities and Other long-term liabilities in the Consolidated Balance Sheet.
(2)Interest payments assume an outstanding debt balance of $350.0 million. Interest payments are calculated based on LIBOR plus the applicable margin in effect at December 27, 2020, and includes the impact of interest rate swap agreements in effect. The actual interest rates on our variable rate debt and the amount of our indebtedness could vary from those used to compute the above interest payments. See “Note 13” of “Notes to Consolidated Financial Statements” for additional information concerning our debt and credit arrangements.
(3)See “Note 3” of “Notes to Consolidated Financial Statements” for additional information.  The above amounts exclude future expected sub-lease income in the United Kingdom.  

The above table does not include the following:

Unrecognized tax benefits of $1.0 million since we are not able to make reasonable estimates of the period of cash settlement with respect to the taxing authority.
Redeemable noncontrolling interests of $6.5 million as we are not able to predict the timing of the redemptions.
Expected minimum lease payments of approximately $33.0 million associated with our new office in Atlanta, Georgia which is expected to commence in fiscal 2021.

45

Off-Balance Sheet Arrangements

We guarantee leases for certain Papa John’s North American franchisees who have purchased restaurants that were previously Company-owned.  We are contingently liable on these leases. These leases have varying terms, the latest of which expires in 2036.  As of December 27, 2020, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was approximately $14.3 million.

We have certain other commercial commitments where payment is contingent upon the occurrence of certain events. With our insurance programs, we are party to standby letters of credit with off-balance sheet risk as follows by year (in thousands):

Amount of Commitment Expiration Per Period

    

Less than

    

1-3

    

3-5

    

After

    

    

1 Year

Years

Years

5 Years

Total

Standby letters of credit

$

45,840

$

$

$

$

45,840

See “Note 13” and “Note 20” of “Notes to Consolidated Financial Statements” for additional information related to contractual and other commitments.

Forward-Looking Statements

Certain matters discussed in this Annual Report on Form 10-K and other Company communications that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “intend,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the financial impact of the temporary business opportunities, disruptions and temporary changes in demand we are experiencing related to the current outbreak of the novel coronavirus disease (COVID-19), including our cash on hand and access to our credit facilities, commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, the duration of changes in consumer behavior caused by the pandemic, the duration and number of temporary store closures, our plans to open an office in Atlanta, the associated reorganization costs and the related organizational, employment and real estate changes that are expected, royalty relief, the effectiveness of menu innovations and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:

the ability of the Company to manage difficulties and opportunities associated with or related to the COVID-19 pandemic, including risks related to: the impact of governmental restrictions on freedom of movement and business operations including quarantines, social distancing requirements and mandatory business closures; the virus’s impact on the availability of our workforce; the potential disruption of our supply chain; changes in consumer demand or behavior; impact of delayed new store openings, both domestically and internationally; the overall contraction in global economic activity, including increased unemployment; our liquidity position; our ability to navigate changing governmental programs and regulations relating to the pandemic; and the increased risk of phishing and other cyber-attacks;
the assumption that the store closures in international markets and non-traditional restaurants in North America are not expected to be permanent; the assumption that our delivery restaurants will continue to stay open and be deemed essential businesses by national, state and local authorities in most of the jurisdictions in which we operate;

46

the uncertainty of whether and to what extent the increase in demand for our products that we are currently experiencing during the COVID-19 pandemic will continue following a cessation of the effects of the virus in the future;
our ability to successfully implement or fully realize the anticipated benefits of our corporate reorganization and new office in Atlanta, Georgia and corporate reorganization in the timeframes we desire or within the expected range of expenses, or at all. In addition, turnover in our support teams due to our relocation to Georgia could distract our employees, decrease employee morale, harm our reputation, and negatively impact the overall performance of our corporate support teams;
increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to improve consumer sentiment and sales trends, and the risk that such initiatives will not be effective;
risks related to social media, including publicity adversely and rapidly impacting our brand and reputation;
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 the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending, including higher unemployment;  
the adverse impact on the Company or our results caused by global health concerns, 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;
the effectiveness of our technology investments and changes in unit-level operations;
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 labor costs, food costs or sustained higher other operating costs. This could include increased employee compensation, including as a result of changes in minimum wage, 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 vehicles, 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 mozzarella cheese, desserts, garlic cups or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control, including COVID-19;
increased risks associated with our international operations, including economic and political conditions and risks associated with the withdrawal of the United Kingdom from the European Union, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth;
the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the European Union General Data Protection Regulation;
the Company's ability to continue to pay dividends to stockholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline;
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; and
changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles.

These and other risk factors are discussed in detail in “Part I. Item 1A. — Risk Factors” of this Annual Report on Form 10-K. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.

47

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to the impact of interest rate changes on our Revolving Facility and our Term Loan Facility, which comprise the PJI Facilities. We attempt to minimize interest rate risk exposure by fixing our interest rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions that participate in the PJI Facilities. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract.  We do not enter into contracts for trading purposes and do not use leveraged instruments. See “Note 13” of “Notes to Consolidated Financial Statements” for additional information on our debt obligations and derivative instruments.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate fluctuations from our operations outside of the United States, which can adversely impact our revenues, net income and cash flows. Our international operations principally consist of distribution sales to franchised Papa John’s restaurants located in the United Kingdom and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. Approximately 6.8% of our 2020 revenues, 7.8% of our 2019 revenues and 8.3% of our revenues for 2018 were derived from these international operations.

We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had an unfavorable impact of approximately $600,000 on our consolidated revenues in 2020 compared to an unfavorable impact of $5.1 million in 2019.  Foreign currency exchange rates had an unfavorable impact of $1.0 million on our operating income in 2020 compared to an unfavorable impact of $1.3 million in 2019. An additional 10% adverse change in the foreign currency rates for our international markets would result in an additional negative impact on annual revenue and operating income of approximately $13.3 million and $2.7 million, respectively.

Commodity Price Risk

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

The following table presents the actual average block price for cheese by quarter in 2020, 2019 and 2018. Also presented is the projected 2021 average block price by quarter (based on the February 17, 2021 Chicago Mercantile Exchange cheese futures prices for 2021):

    

2021

    

2020

    

2019

    

2018

Projected

Block

Block

Block

Market

Price

Price

Price

Quarter 1

$

1.814

$

1.857

$

1.490

$

1.522

Quarter 2

 

1.802

 

1.679

 

1.696

 

1.607

Quarter 3

 

1.834

 

2.262

 

1.898

 

1.592

Quarter 4

 

1.818

 

2.235

 

1.984

 

1.487

Full Year

$

1.817

$

2.008

$

1.767

$

1.552

48

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Papa John’s International, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Papa John’s International, Inc. and Subsidiaries (the Company) as of December 27, 2020 and December 29, 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders' deficit and cash flows for each of the two years in the period ended December 27, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”).  In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 27, 2020 and December 29, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 27, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 27, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated February 25, 2021, expressed an unqualified opinion thereon.

Adoption of ASU No. 2016-02

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases, as amended.  

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.  

49

Measurement and valuation of reserve for franchisee notes receivable

Description of the Matter

As described in Note 2 to the consolidated financial statements, the Company has a reserve for franchisee notes receivable of $3.2 million (“Reserve for Franchisee Notes Receivables”) against a gross balance of franchisee notes receivables of $51.1 million at December 27, 2020.  The Reserve for Franchisee Notes Receivables is estimated to reduce the outstanding notes receivable for expected credit losses after consideration of the fair value of the Company’s collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees as well as a review of each franchisee’s economic performance, historical loss information, current market conditions, and future economic conditions.  

Auditing the valuation of the Reserve for Franchisee Notes Receivables is challenging due to the judgment inherent in estimating the fair value of the Company’s collateral rights, which has a significant effect on the measurement of the Reserve for Franchisee Notes Receivables.  

How We Addressed the Matter in Our Audit

We tested management’s controls related to the measurement and valuation of the Reserve for Franchisee Notes Receivables.  For example, we tested controls over management’s review of the progression of outstanding notes receivable and the Reserve for Franchisee Notes Receivable and the overall review of the adequacy of the Reserve for Franchisee Notes Receivable.  Where judgment was exercised by management, our audit procedures included testing controls over management’s evaluation of the assumptions, including the fair value of the collateral rights and guarantees where collateral was taken or personal guarantee given in connection with issuance of the applicable note.  Our control testing also considered management’s review over the completeness and accuracy of the underlying data used in evaluating the measurement and valuation of the Reserve for Franchisee Notes Receivables.

To test the measurement and valuation of the Reserve for Franchisee Notes Receivables, our audit procedures included, among others, evaluating the status of collection of scheduled payments for outstanding notes receivables, analyzing unit economics for franchisees to identify indicators of their financial health, evaluating the estimates of collateral value, and the underlying data used by management.  For example, to evaluate the estimates of collateral value, we compared management’s estimates to those of recently executed market transactions to understand potential market adjustments within the estimation process.

Measurement and valuation of insurance reserves

Description of the Matter

As described in Note 2 to the consolidated financial statements, as of December 27, 2020, the Company has $82.0 million accrued for self-insurance reserves (“Insurance Reserves”). The Company is self-insured for certain obligations up to stated retention levels under its retention programs related to workers’ compensation, automobile, property and general liability programs and judgments and estimates are used by the Company in determining the potential value associated with reported claims and for events that have occurred but have not been reported.  

50

Auditing the valuation of the Insurance Reserves was highly judgmental and complex due to the significant uncertainty in estimating the potential value of reported claims, estimating the number and potential value of incurred but not reported claims and the use of actuarial valuation methods.  The reserve estimate is sensitive to actuarial assumptions (e.g., future emergence of losses, incurred but not reported claims) used to estimate the ultimate liability for reported claims and to estimate the fair value of claims that have been incurred but have not been reported.

How We Addressed the Matter in Our Audit

We tested controls related to the measurement and valuation of the Insurance Reserves. For example, we tested controls over management’s review of the assumptions and methods used to establish the estimate, the underlying data, significant actuarial assumptions and the related reconciliations.  

To test the measurement and valuation of the Insurance Reserves, our audit procedures included, among others, performing transactional testing over the completeness and accuracy of claims data and vouching payments made to third parties.  Furthermore, we involved our actuarial specialists to assist in the evaluation of the key assumptions and methodologies used by management to determine the Insurance Reserves.  

/s/ Ernst & Young LLP

We have served as the Company’s auditor consecutively since 2019.

Louisville, Kentucky

February 25, 2021

51

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Papa John’s International, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of operations, comprehensive income, stockholders’ deficit, and cash flows of Papa John’s International, Inc. and subsidiaries (the Company) for the year ended December 30, 2018, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 30, 2018, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ KPMG LLP

We served as the Company’s auditor from 2018 to 2019.

Louisville, Kentucky

March 8, 2019

52

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Operations

Year ended

    

December 27,

    

December 29,

    

December 30,

(In thousands, except per share amounts)

    

2020

2019

2018

Revenues:

Domestic Company-owned restaurant sales

$

700,757

$

652,053

$

692,380

North America franchise royalties and fees

 

96,732

 

71,828

 

79,293

North America commissary revenues

 

680,793

 

612,652

 

609,866

International revenues

 

123,963

102,924

110,349

Other revenues

210,989

179,791

170,983

Total revenues

 

1,813,234

 

1,619,248

 

1,662,871

Costs and expenses:

Operating costs (excluding depreciation and amortization shown separately below):

Domestic Company-owned restaurant expenses

563,799

526,237

577,658

North America commissary expenses

630,937

569,180

575,103

International expenses

73,994

57,702

67,775

Other expenses

200,304

175,592

170,556

General and administrative expenses

 

204,242

 

223,460

 

193,534

Depreciation and amortization

 

49,705

 

47,281

 

46,403

Total costs and expenses

 

1,722,981

 

1,599,452

 

1,631,029

Refranchising gains (losses)

 

 

4,739

 

(289)

Operating income

 

90,253

 

24,535

 

31,553

Investment income

2,131

1,104

817

Interest expense

 

(17,022)

(20,593)

(25,673)

Income before income taxes

 

75,362

 

5,046

 

6,697

Income tax expense (benefit)

 

14,748

 

(611)

 

2,624

Net income before attribution to noncontrolling interests

 

60,614

 

5,657

 

4,073

Net income attributable to noncontrolling interests

 

(2,682)

 

(791)

 

(1,599)

Net income attributable to the Company

$

57,932

$

4,866

$

2,474

Calculation of net income (loss) for earnings (loss) per share:

Net income attributable to the Company

$

57,932

$

4,866

$

2,474

Dividends paid to participating securities and accretion

 

(14,059)

 

(12,499)

 

Net income attributable to participating securities

 

(2,136)

 

 

Net income (loss) attributable to common shareholders

$

41,737

$

(7,633)

$

2,474

Basic earnings (loss) per common share

$

1.29

$

(0.24)

$

0.08

Diluted earnings (loss) per common share

$

1.28

$

(0.24)

$

0.08

Basic weighted average common shares outstanding

 

32,421

 

31,632

 

32,083

Diluted weighted average common shares outstanding

 

32,717

 

31,632

 

32,299

Dividends declared per common share

$

0.90

$

0.90

$

0.90

See accompanying notes.

53

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Year Ended

December 27,

    

December 29,

    

December 30,

(In thousands)

2020

2019

2018

Net income before attribution to noncontrolling interests

$

60,614

$

5,657

$

4,073

Other comprehensive loss, before tax:

Foreign currency translation adjustments (1)

2,344

1,638

(4,903)

Interest rate swaps (2)

 

(7,517)

 

(10,783)

 

4,254

Other comprehensive loss, before tax

 

(5,173)

 

(9,145)

 

(649)

Income tax effect:

Foreign currency translation adjustments (1)

 

(539)

 

(377)

 

1,110

Interest rate swaps (3)

 

1,729

 

2,480

 

(1,032)

Income tax effect (4)

 

1,190

 

2,103

 

78

Other comprehensive loss, net of tax

 

(3,983)

 

(7,042)

 

(571)

Comprehensive income (loss) before attribution to noncontrolling interests

 

56,631

 

(1,385)

 

3,502

Less: comprehensive (income) loss, redeemable noncontrolling interests

 

(824)

 

519

 

488

Less: comprehensive (income), nonredeemable noncontrolling interests

 

(1,858)

 

(1,310)

 

(2,087)

Comprehensive income (loss) attributable to the Company

$

53,949

$

(2,176)

$

1,903

(1)On June 15, 2018, the Company refranchised 34 Company-owned restaurants and a quality control center located in China.  In conjunction with the transaction, approximately $1,300 of accumulated other comprehensive income and $300 associated deferred tax related to foreign currency translation were reversed.  See “Note 11” of “Notes to Consolidated Financial Statements” for additional information.

(2)Amounts reclassified out of accumulated other comprehensive loss into interest expense included ($5,068), $660 and ($22) for the years ended December 27, 2020, December 29, 2019 and December 30, 2018, respectively.

(3)The income tax effects of amounts reclassified out of accumulated other comprehensive loss were $1,140, ($152), and $5 for the years ended December 27, 2020, December 29, 2019 and December 30, 2018, respectively.

(4)As of January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” and reclassified stranded tax effects of approximately $455 to retained earnings in the first quarter of 2018.  

See accompanying notes.

54

Papa John’s International, Inc. and Subsidiaries

Consolidated Balance Sheets

    

December 27,

    

December 29,

(In thousands, except per share amounts)

2020

2019

Assets

Current assets:

Cash and cash equivalents

$

130,204

$

27,911

Accounts receivable (less allowance for credit losses of $3,622 in 2020 and $7,341 in 2019)

90,135

70,462

Notes receivable, current portion

 

11,318

 

7,790

Income tax receivable

1,273

4,024

Inventories

 

30,265

 

27,529

Prepaid expenses and other current assets

 

43,212

 

43,830

Total current assets

 

306,407

 

181,546

Property and equipment, net

 

200,895

 

211,741

Finance lease right-of-use assets, net

16,840

9,383

Operating lease right-of-use assets

148,110

148,229

Notes receivable, less current portion (less allowance for credit losses of $3,211 in 2020 and $3,572 in 2019)

 

36,538

 

33,010

Goodwill

 

80,791

 

80,340

Deferred income taxes

10,800

1,839

Other assets

 

72,389

 

64,633

Total assets

$

872,770

$

730,721

Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit

Current liabilities:

Accounts payable

$

37,370

$

29,141

Income and other taxes payable

 

10,263

 

7,599

Accrued expenses and other current liabilities

 

174,563

 

108,517

Current deferred revenue

19,590

17,673

Current finance lease liabilities

3,545

1,789

Current operating lease liabilities

23,538

23,226

Current portion of long-term debt

20,000

20,000

Total current liabilities

 

288,869

 

207,945

Deferred revenue

 

13,664

 

14,722

Long-term finance lease liabilities

13,531

7,629

Long-term operating lease liabilities

124,666

125,297

Long-term debt, less current portion, net

 

328,292

 

347,290

Deferred income taxes

 

948

 

2,649

Other long-term liabilities

 

111,364

 

84,927

Total liabilities

 

881,334

 

790,459

Series B Convertible Preferred Stock; $0.01 par value; 260.0 shares authorized, 252.5 shares issued and outstanding at December 27, 2020 and December 29, 2019

251,901

251,133

Redeemable noncontrolling interests

 

6,474

 

5,785

Stockholders’ deficit:

Common stock ($0.01 par value per share; issued 45,288 at December 27, 2020 and 44,748 at December 29, 2019)

453

447

Additional paid-in capital

 

254,103

 

219,047

Accumulated other comprehensive loss

 

(14,168)

 

(10,185)

Retained earnings

 

219,158

 

205,697

Treasury stock (12,743 shares at December 27, 2020 and 12,854 shares at December 29, 2019, at cost)

 

(741,724)

 

(747,327)

Total stockholders’ deficit

 

(282,178)

 

(332,321)

Noncontrolling interests in subsidiaries

 

15,239

 

15,665

Total Stockholders’ deficit

 

(266,939)

 

(316,656)

Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and
Stockholders’ deficit

$

872,770

$

730,721

See accompanying notes.

55

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Deficit

Papa John’s International, Inc.

    

Common

    

    

    

    

    

Accumulated

    

    

    

    

    

    

    

Stock

Additional

Other

Noncontrolling

Total

Shares

Common

Paid-In

Comprehensive

Retained

Treasury

Interests in

Stockholders’

(In thousands)

Outstanding

Stock

Capital

Loss

Earnings

Stock

Subsidiaries

Deficit

Balance at December 31, 2017

 

33,931

$

442

$

184,785

$

(2,117)

$

292,251

$

(597,072)

$

15,757

$

(105,954)

Cumulative effect of adoption of ASU 2014-09 (1)

(24,359)

(24,359)

Adjusted balance at January 1, 2018

33,931

442

184,785

(2,117)

267,892

(597,072)

15,757

(130,313)

Net income (2)

 

 

 

 

 

2,474

 

 

1,874

 

4,348

Other comprehensive loss, net of tax

 

 

 

 

(571)

 

 

 

 

(571)

Adoption of ASU 2018-02 (3)

(455)

455

Cash dividends on common stock

 

 

145

 

 

(28,944)

 

 

 

(28,799)

Exercise of stock options

 

75

 

1

 

2,698

 

 

 

 

 

2,699

Acquisition of Company common stock

 

(2,697)

 

 

 

 

 

(158,049)

 

 

(158,049)

Stock-based compensation expense

 

 

9,936

 

 

 

 

 

9,936

Issuance of restricted stock

 

56

 

 

(3,005)

 

 

 

3,005

 

 

Tax effect of restricted stock awards

 

 

 

(1,521)

 

 

 

 

 

(1,521)

Distributions to noncontrolling interests

(2,406)

 

(2,406)

Other

 

7

 

 

(54)

 

 

305

 

412

 

 

663

Balance at December 30, 2018

 

31,372

$

443

$

192,984

$

(3,143)

$

242,182

$

(751,704)

$

15,225

$

(304,013)

Net income (2)

 

 

 

 

 

4,866

 

 

1,310

 

6,176

Other comprehensive loss, net of tax

 

 

 

 

(7,042)

 

 

 

 

(7,042)

Cash dividends on common stock

 

 

 

209

 

 

(28,761)

 

 

 

(28,552)

Cash dividends on preferred stock

(10,020)

(10,020)

Dividends declared on preferred stock

(2,273)

(2,273)

Exercise of stock options

 

447

 

4

 

16,006

 

 

 

 

 

16,010

Stock-based compensation expense

 

 

 

15,303

 

 

 

 

 

15,303

Issuance of restricted stock

 

63

 

 

(3,681)

 

 

 

3,681

 

 

Tax effect of restricted stock awards

 

 

 

(1,433)

 

 

 

 

 

(1,433)

Distributions to noncontrolling interests

(870)

(870)

Other

 

12

 

 

(341)

 

 

(297)

 

696

 

 

58

Balance at December 29, 2019

 

31,894

$

447

$

219,047

$

(10,185)

$

205,697

$

(747,327)

$

15,665

$

(316,656)

56

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Deficit (continued)

Papa John’s International, Inc.

    

Common

    

    

    

    

    

Accumulated

    

    

    

    

    

    

    

Stock

Additional

Other

Noncontrolling

Total

Shares

Common

Paid-In

Comprehensive

Retained

Treasury

Interests in

Stockholders’

(In thousands)

Outstanding

Stock

Capital

Loss

Earnings

Stock

Subsidiaries

Deficit

Balance at December 29, 2019

 

31,894

$

447

$

219,047

$

(10,185)

$

205,697

$

(747,327)

$

15,665

$

(316,656)

Cumulative effect of adoption: ASU 2016-13 (4)

(1,066)

(1,066)

Adjusted balance at December 30, 2019

31,894

447

219,047

(10,185)

204,631

(747,327)

15,665

(317,722)

Net income (2)

 

 

 

 

 

57,932

 

 

1,858

 

59,790

Other comprehensive loss, net of tax

 

 

 

 

(3,983)

 

 

 

 

(3,983)

Cash dividends on common stock

141

(29,503)

(29,362)

Cash dividends on preferred stock

 

 

 

 

 

(13,649)

 

 

 

(13,649)

Exercise of stock options

 

540

 

6

 

30,616

 

 

 

 

 

30,622

Acquisition of Company common stock

(32)

(2,701)

(2,701)

Stock-based compensation expense

 

 

 

16,310

 

 

 

 

 

16,310

Issuance of restricted stock

 

119

 

 

(6,922)

 

 

 

6,922

 

 

Tax effect of restricted stock awards

 

 

 

(3,974)

 

 

 

 

 

(3,974)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(2,284)

 

(2,284)

Other

 

24

 

 

(1,115)

 

 

(253)

 

1,382

 

 

14

Balance at December 27, 2020

 

32,545

$

453

$

254,103

$

(14,168)

$

219,158

$

(741,724)

$

15,239

$

(266,939)

(1)As of January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers”. 
(2)Net income to the Company at December 27, 2020, December 29, 2019 and December 30, 2018 excludes $824, ($519) and ($488), respectively, allocable to the redeemable noncontrolling interests for our joint venture arrangements.
(3)As of January 1, 2018, the Company adopted ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” and reclassified stranded tax effects of approximately $455 to retained earnings in the first quarter of 2018.  
(4)As of December 30, 2019, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”.  See “Note 2” of “Notes to Consolidated Financial Statements” for additional information.

At December 30, 2018, the accumulated other comprehensive loss of $3,143 was comprised of net unrealized foreign currency translation loss of $6,859 and a net unrealized gain on the interest rate swap agreements of $3,716.

At December 29, 2019, the accumulated other comprehensive loss of $10,185 was comprised of net unrealized foreign currency translation loss of $5,598 and a net unrealized loss on the interest rate swap agreements of $4,587.

At December 27, 2020, the accumulated other comprehensive loss of $14,168 was comprised of net unrealized foreign currency translation loss of $3,793 and a net unrealized loss on the interest rate swap agreements of $10,375.

See accompanying notes.

57

Papa John’s International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Year ended

December 27,

    

December 29,

    

December 30,

(In thousands)

    

2020

2019

2018

Operating activities

Net income before attribution to noncontrolling interests

$

60,614

$

5,657

$

4,073

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

(Credit) provision for allowance for credit losses on accounts and notes receivable

 

(4,734)

 

3,139

 

6,849

Depreciation and amortization

 

49,705

 

47,281

 

46,403

Deferred income taxes

 

(9,268)

 

(3,764)

 

1,620

Preferred stock option mark-to-market adjustment

5,914

Stock-based compensation expense

 

16,310

 

15,303

 

9,936

(Gain) loss on refranchising

(4,739)

289

Other

 

2,257

 

3,203

 

5,677

Changes in operating assets and liabilities:

Accounts receivable

 

(22,420)

 

(6,181)

 

2,157

Income tax receivable

3,760

12,122

(12,157)

Inventories

 

(2,736)

 

(326)

 

3,093

Prepaid expenses and other current assets

 

2,884

 

1,367

 

3,795

Other assets and liabilities

 

20,879

 

(6,354)

 

1,464

Accounts payable

 

8,229

 

2,035

 

(400)

Income and other taxes payable

 

2,664

 

1,009

 

(3,971)

Accrued expenses and other current liabilities

 

59,353

 

(11,331)

 

21,753

Deferred revenue

 

(1,058)

 

(2,586)

 

1,873

Net cash provided by operating activities

 

186,439

 

61,749

 

92,454

Investing activities

Purchases of property and equipment

 

(35,652)

 

(37,711)

 

(42,028)

Notes issued

 

(16,589)

 

(15,864)

 

(10,463)

Repayments of notes issued

 

11,154

 

5,616

 

5,805

Proceeds from divestitures of restaurants

 

 

13,495

 

7,707

Other

 

16

 

1,889

 

180

Net cash used in investing activities

 

(41,071)

 

(32,575)

 

(38,799)

Financing activities

Repayments of term loan

(20,000)

(15,000)

(20,000)

Net (repayments) proceeds of revolving credit facilities

 

 

(240,026)

 

163,585

Debt issuance costs

(1,913)

Proceeds from exercise of stock options

 

30,622

 

16,010

 

2,699

Dividends paid to common stockholders

(29,362)

(28,552)

(28,985)

Dividends paid to preferred stockholders

 

(13,649)

 

(10,020)

 

Tax payments for equity award issuances

 

(3,974)

 

(1,433)

 

(1,521)

Acquisition of Company common stock

 

(2,701)

 

 

(158,049)

Proceeds from issuance of preferred stock

252,530

Issuance costs associated with preferred stock

(7,527)

Contributions from noncontrolling interests

 

 

840

 

Distributions to noncontrolling interests

 

(2,420)

 

(870)

 

(4,269)

Other

 

(1,977)

 

(526)

 

356

Net cash used in financing activities

 

(43,461)

 

(34,574)

 

(48,097)

Effect of exchange rate changes on cash and cash equivalents

 

386

 

53

 

(191)

Change in cash and cash equivalents

 

102,293

 

(5,347)

 

5,367

Cash and cash equivalents at beginning of period

 

27,911

 

33,258

 

27,891

Cash and cash equivalents at end of period

$

130,204

$

27,911

$

33,258

See accompanying notes.

58

Papa John’s International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Description of Business

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first person notations of “we,” “us” and “our”), operates and franchises pizza delivery and carryout restaurants under the trademark “Papa John’s,” in 48 countries and territories as of December 27, 2020. Our revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties and sales of franchise and development rights, printing and promotional items and information systems equipment, and software and related services. We generated revenues from the operation of our Quality Control Centers (“QC Centers”) which supply pizza sauce, dough, food products, paper products, smallwares and cleaning supplies to restaurants. We also derived revenue from contributions received by our North America Marketing funds.

2. Significant Accounting Policies

Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts of Papa John’s International, Inc. and its subsidiaries.  All intercompany balances and transactions have been eliminated.

Fiscal Year

Our fiscal year ends on the last Sunday in December of each year. All fiscal years presented consist of 52 weeks.

Use of Estimates

The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Significant items that are subject to such estimates and assumptions include the allowance for credit losses on accounts and notes receivable, intangible assets, contract assets and contract liabilities including the customer loyalty program obligation, right-of-use assets and lease liabilities, gift card breakage, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates.

Revenue Recognition

Revenue is measured based on consideration specified in contracts with customers and excludes waivers or incentives and amounts collected on behalf of third parties, primarily sales tax.  The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.  Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.  Delivery costs, including freight associated with our domestic commissary and other sales, are accounted for as fulfillment costs and are included in operating costs.

The following describes principal activities, separated by major product or service, from which the Company generates its revenues:

Domestic Company-owned Restaurant Sales

The domestic Company-owned restaurants principally generate revenue from retail sales of high-quality pizza, Papadias, which are flatbread-style sandwiches, and side items including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. Revenues from Company-owned restaurants are recognized when the products are delivered to or carried out by customers.

59

Our North American customer loyalty program, Papa Rewards, is a spend-based program that rewards customers with points for each purchase.  Papa Rewards points are accumulated and redeemed for dollar off discounts (“Papa Dough”) to be used on future purchases within a six-month expiration window. The accrued liability in the Consolidated Balance Sheets, and corresponding reduction of Company-owned restaurant sales in the Consolidated Statements of Operations, is for the estimated reward redemptions at domestic Company-owned restaurants based upon estimated redemption patterns. The liability related to Papa Rewards is calculated using the estimated redemption value for which the points and accumulated rewards are expected to be redeemed. Revenue is recognized when the customer redeems the Papa Dough reward and when the points or Papa Dough reward expires.

Franchise Royalties and Fees

Franchise royalties, which are based on a percentage of franchise restaurant sales, are recognized as sales occur.  Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other behaviors, including acceleration of restaurant remodels or equipment upgrades, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty rate.  Our current standard franchise agreement requires the franchisee to pay a royalty fee of 5% of sales, and the majority of our existing franchised restaurants have a 5% contractual royalty rate in effect.  Incentives offered from time to time, including new store incentives, will reduce the contractual royalty rate paid.  Franchise royalties are billed on a monthly basis.

The majority of initial franchise license fees and area development exclusivity fees are from international locations. Initial franchise license fees are billed at the store opening date.  Area development exclusivity fees are billed upon execution of the development agreements which grant the right to develop franchised restaurants in future periods in specific geographic areas.  Area development exclusivity fees are included in Deferred revenue in the Consolidated Balance Sheets and allocated on a pro rata basis to all stores opened under that specific development agreement. The pre-opening services provided to franchisees do not contain separate and distinct performance obligations from the franchise right; thus, the fees collected will be amortized on a straight-line basis beginning at the store opening date through the term of the franchise agreement, which is typically 10 years. Franchise license renewal fees for both domestic and international locations, which generally occur every 10 years, are billed before the renewal date. Fees received for future license renewal periods are included in deferred revenue in the Consolidated Balance Sheets and amortized over the life of the renewal period.

The Company offers various incentive programs for franchisees including royalty incentives, new restaurant opening incentives (i.e. development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned or granted under these programs that are in the form of discounts.

Commissary Revenues

Commissary revenues are comprised of food and supplies sold to franchised restaurants and are recognized as revenue upon shipment of the related products to the franchisees. Payments are generally due within 30 days.

As noted above, there are various incentive programs available to franchisees related to new restaurant openings including discounts on initial commissary orders and new store equipment incentives, at substantially no cost to franchisees.  Commissary revenues are reduced to reflect incentives in the form of direct discounts on initial commissary orders. The new store equipment incentive is also recorded as a reduction of commissary sales over the term of the incentive agreement, which is generally three to five years.

Other Revenues

Franchise Marketing Fund revenues represent a required established percentage of monthly restaurant sales collected by Papa John’s Marketing Fund, Inc. (“PJMF”), which is our national marketing fund, and various other international and domestic marketing funds (“Co-op” or “Co-operative” Funds) where we have determined for purposes of accounting that we have control over the significant activities of the funds.  PJMF funds its operations with ongoing financial support and contributions from domestic Papa John’s restaurants, of which approximately 80% are franchised restaurant members.  Contributions are based on a percentage of monthly restaurant sales and are billed monthly.  When we are determined to be the principal in these arrangements, advertising fund contributions and expenditures are reported on a gross basis in the

60

Consolidated Statements of Operations.  Our obligation related to these funds is to develop and conduct advertising activities in a specific country, region, or market, including the placement of electronic and print materials.

There are no expiration dates and we do not deduct non-usage fees from outstanding gift cards.  While the Company and the franchisees continue to honor all gift cards presented for payment, the likelihood of redemption may be determined to be remote for certain cards due to long periods of inactivity.  In these circumstances, the Company recognizes breakage revenue for amounts not subject to unclaimed property laws.  Based upon our analysis of historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote.  Breakage revenue is recognized over time in proportion to estimated redemption patterns as Other revenues.  Commissions on gift cards sold by third parties are recorded as a reduction to Deferred revenue and a reduction to Other revenues based upon estimated redemption patterns.

Fees for information services, including software maintenance fees, help desk fees, centralized call center fees, and online ordering fees are recognized as revenue as such services are provided and are included in Other revenues.

Revenues for printing, promotional items, and direct mail marketing services are recognized upon shipment of the related products to franchisees and other customers. Direct mail advertising discounts are also periodically offered by our Preferred Marketing Solutions subsidiary. Other revenues are reduced to reflect these advertising discounts.

Rental income, primarily derived from properties leased by the Company and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms.  

Advertising and Related Costs

Domestic Company-owned advertising and related costs of $56.7 million, $54.3 million and $60.8 million in 2020, 2019, and 2018, respectively, include the costs of domestic Company-owned local restaurant activities such as mail coupons, door hangers and promotional items and advertising activities administered through PJMF and various local market cooperative advertising funds. PJMF is responsible for developing and conducting marketing and advertising for the domestic Papa John’s system. The Co-op Funds are responsible for developing and conducting advertising activities in a specific market, including the placement of electronic and print materials developed by PJMF.  During 2020 and 2019, the Company contributed additional amounts of $15.0 million and $27.5 million, respectively, to PJMF, representing incremental discretionary marketing fund investments in excess of contractual Company-owned restaurant-level contributions as part of our temporary financial support package to our franchisees.  The marketing fund investments are included in General and administrative expenses within the accompanying Consolidated Statements of Operations.

Leases

Lease expense is recognized on a straight-line basis over the expected life of the lease term for operating leases, whereas lease expense follows an accelerated expense recognition for finance leases. A lease term often includes option periods, available at the inception of the lease.  Lease expense is comprised of operating and finance lease costs, short-term lease costs, and variable lease costs, which primarily include common area maintenance, real estate taxes, and insurance for the Company’s real estate leases.  Lease costs also include variable rent, which is primarily related to the Company’s supply chain tractor and trailer leases that are based on a rate per mile.

The Company adopted ASU 2016-02 “Leases (Topic 842)” in the first quarter of 2019 and prior periods have not been restated and continue to be reported under the accounting standards in effect for those periods.

Stock-Based Compensation

Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures, and is recognized over the vesting period (graded vesting over three years). Restricted stock is valued based on the market price of the Company’s shares on the date of grant. Stock options are valued using a Black-Scholes option pricing model. Our specific assumptions for estimating the fair value of options are included in Note 21.

61

Cash Equivalents

Cash equivalents consist of highly liquid investments with maturity of three months or less at date of purchase. These investments are carried at cost, which approximates fair value.

Accounts Receivable

Substantially all accounts receivable is due from franchisees for purchases of food, paper products, point of sale equipment, printing and promotional items, information systems and related services, marketing and royalties. Credit is extended based on an evaluation of the franchisee’s financial condition and collateral is generally not required. An allowance for credit losses is an estimate, even if remote, based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics and macroeconomic factors.  Account balances are charged off against the allowance after recovery efforts have ceased.

See Recent Accounting Pronouncements for information regarding the adoption and related accounting impact of ASU 2016-13, “Credit Losses”, which was effective December 30, 2019.

Notes Receivable

The Company has provided financing to select domestic and international franchisees principally for use in the construction and development of their restaurants and for the purchase of restaurants from the Company or other franchisees. Most notes receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant and the ownership interests in the franchise.  The Company has provided long-term financing to certain franchisees with royalty payment plans.  We establish an allowance for credit losses for franchisee notes receivables to reduce the outstanding notes receivable to their net realizable values based on a review of each franchisee’s economic performance and market conditions after consideration of the fair value of our underlying collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees. Note balances are charged off against the allowance after recovery efforts have ceased.  

Interest income recorded on franchisee loans was approximately $2.1 million in 2020, $800,000 in 2019 and $750,000 in 2018 and is reported in Investment income in the accompanying Consolidated Statements of Operations.

See Recent Accounting Pronouncements for information regarding the adoption and related accounting impact of ASU 2016-13, “Credit Losses”, which was effective December 30, 2019.

Inventories

Inventories, which consist of food products, paper goods and supplies, smallwares, and printing and promotional items, are stated at the lower of cost, determined under the first-in, first-out (FIFO) method, or net realizable value.

Property and Equipment

Property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (generally five to ten years for restaurant, commissary and other equipment, twenty to forty years for buildings and improvements, and five years for technology and communication assets).  Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the respective leases, including the first renewal period (generally five to ten years).

Depreciation expense was $46.6 million in 2020, $45.9 million in 2019 and $45.6 million in 2018.

Deferred Costs

We capitalize certain information systems development and related costs that meet established criteria. Amounts capitalized, which are included in property and equipment, are amortized principally over periods not exceeding five years

62

upon completion of the related information systems project. Total costs capitalized were approximately $3.3 million in 2020, $3.5 million in 2019 and $4.3 million in 2018. The unamortized information systems development costs approximated $10.5 million and $11.5 million as of December 27, 2020 and December 29, 2019, respectively.

Intangible Assets — Goodwill

We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Such tests are completed separately with respect to the goodwill of each of our reporting units, which includes our domestic Company-owned restaurants, United Kingdom (“PJUK”), China, and Preferred Marketing Solutions operations.  We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist.

We elected to perform a qualitative assessment for our domestic Company-owned restaurants, PJUK, China, and Preferred Marketing Solutions operations in the fourth quarter of 2020.  As a result of our qualitative analyses, we determined that it was more-likely-than-not that the fair values of our reporting units were greater than their carrying amounts.  Subsequent to completing our goodwill impairment tests, no indicators of impairment were identified.  See Note 12 for additional information.

Deferred Income Tax Accounts and Tax Reserves

We are subject to income taxes in the United States and several foreign jurisdictions.  Significant judgment is required in determining the provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax attribute carryforwards (e.g., net operating losses, capital losses, and foreign tax credits). The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.

Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures. See Note 18 for additional information.

Insurance Reserves

Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability, property, and health insurance coverage provided to our employees are funded by the Company up to certain retention levels under our retention programs. Retention limits generally range from $1,000 to $1.0 million.

Losses are accrued based upon undiscounted estimates of the liability for claims incurred and for events that have occurred but have not been reported using certain third-party actuarial projections and our claims loss experience. The determination of the recorded insurance reserves is highly judgmental and complex due to the significant uncertainty in the potential value of reported claims and the number and potential value of incurred but not reported claims, the application of significant judgment in making those estimates and the use of various actuarial valuation methods. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims differ significantly from historical trends used to estimate the insurance reserves recorded by the Company. The Company records estimated losses above retention within its reserve with a corresponding receivable for expected amounts due from insurance carriers.  

63

Derivative Financial Instruments

We recognize all derivatives on the balance sheet at fair value. At inception and on an ongoing basis, we assess whether each derivative that qualifies for hedge accounting continues to be highly effective in offsetting changes in the cash flows of the hedged item. If the derivative meets the hedge criteria as defined by certain accounting standards, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income/(loss) until the hedged item is recognized in earnings.

In 2019, we reduced the notional value of our swaps by $50.0 million as a result of paying down a substantial portion of debt under our Revolving Facility using the proceeds received from the sale of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”). The termination of $50.0 million of notional swap value was not significant to our results of operations.

We recognized (loss) income of ($7.5) million (($5.8) million after tax) in 2020, ($10.8) million (($8.3) million after tax) in 2019, and $4.3 million ($3.2 million after tax) in 2018 in other comprehensive loss for the net change in the fair value of our interest rate swaps. See Note 13 for additional information on our debt and credit arrangements.

Noncontrolling Interests

At December 27, 2020, the Company had 4 joint ventures consisting of 188 restaurants, which have noncontrolling interests. Consolidated net income is required to be reported separately at amounts attributable to both the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the Consolidated Statements of Operations of income attributable to the noncontrolling interest holder.

The following summarizes the redemption feature, location and related accounting within the Consolidated Balance Sheets for these 4 joint venture arrangements:

    

    

Type of Joint Venture Arrangement

    

Location within the Consolidated Balance Sheets

    

Recorded Value

Joint ventures with no redemption feature

 

Permanent equity

 

Carrying value

Joint ventures with option to require the Company to purchase the noncontrolling interest - not currently redeemable or redemption not probable

 

Temporary equity

 

Carrying value

See Notes 10 and 11 for additional information regarding noncontrolling interests and divestitures.

Foreign Currency Translation

The local currency is the functional currency for each of our foreign subsidiaries. Revenues and expenses are translated into U.S. dollars using monthly average exchange rates, while assets and liabilities are translated using year-end exchange rates and historical rates. The resulting translation adjustments are included as a component of accumulated other comprehensive loss, net of income taxes.

Recent Accounting Pronouncements

Financial Instruments – Credit Losses

The Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”) as of December 30, 2019 (the first day of fiscal 2020) under the modified retrospective transition method.  Topic 326 requires measurement and recognition of expected versus incurred losses for financial assets held.  Financial instruments subject to ASU 2016-13 include trade accounts receivable, notes receivable

64

and interest receivable (classified as Other assets in the Consolidated Balance Sheets) from franchisees. The impact of the adoption was not material to our consolidated financial statements.

Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors. Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer.  Accounts and notes receivable balances are charged off against the allowance for credit losses after recovery efforts have ceased.  

The following table summarizes changes in our allowances for credit losses for accounts receivable, notes receivable and interest receivable:

(in thousands)

Accounts Receivable

Notes Receivable

Interest Receivable

Balance at December 29, 2019

$

7,341

$

3,572

$

910

Cumulative effect of adoption of ASU 2016-13

912

463

Balance at December 30, 2019

8,253

4,035

910

Current period (credit) provision for expected credit losses

(3,843)

(191)

144

Write-offs charged against the allowance

(788)

(843)

Recoveries collected

(844)

Transfers

1,054

(1,054)

Balance at December 27, 2020

$

3,622

$

3,211

$

Reference Rate Reform – Hedging

In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying guidance on contract modifications and hedge accounting related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates if certain criteria are met. This guidance was effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022.  The hedge accounting expedients may be applied, on an individual hedging relationship basis, to eligible hedge accounting relationships that existed as of the beginning of the effective date of this guidance, and to new eligible hedging relationships entered into after the effective date of this guidance; however, those expedients generally cannot be applied to hedging relationships for periods after December 31, 2022.  The Company adopted certain optional hedge accounting expedients provided by ASU 2020-04 during fiscal 2020.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.  

Accounting Standards to be Adopted in Future Periods

Convertible Instruments

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.”  This ASU amends FASB’s guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share (“EPS”) guidance for both Subtopics.  The ASU will be effective for annual reporting periods after December 15, 2021 and interim periods therein, with early adoption permitted.  The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

Reclassifications

Certain prior year amounts in the Consolidated Balance Sheet and Consolidated Statement of Cash Flows have been reclassified to conform to the current year presentation.  

65

3.    Leases

The Company has significant leases that include most domestic Company-owned restaurant and commissary locations.  Other domestic leases include tractor and trailer leases used by our distribution subsidiary as well as commissary equipment.  Additionally, the Company leases a significant number of restaurants within the United Kingdom; these restaurants are then subleased to the franchisees.  The Company’s leases have terms as follows:

Average lease term

Domestic Company-owned restaurants

Five years, plus at least 1 renewal

United Kingdom franchise-owned restaurants

15 years

Domestic commissary locations

10 years, plus at least 1 renewal

Domestic and international tractors and trailers

Five to seven years

Domestic and international commissary and office equipment

Three to five years

The Company determines if an arrangement is or contains a lease at contract inception and recognizes a right-of-use asset and a lease liability at the lease commencement date.  Leases with an initial term of 12 months or less but greater than one month are not recorded on the balance sheet for select asset classes.  The lease liability is measured at the present value of future lease payments as of the lease commencement date, or the opening balance sheet date for leases existing at adoption of Topic 842 (the first day of fiscal 2019).  The right-of-use asset recognized is based on the lease liability adjusted for prepaid and deferred rent and unamortized lease incentives.  An operating lease right-of-use asset is amortized on a straight-line basis over the lease term and is recognized as a single lease cost against the operating lease liability.  A finance lease right-of-use asset is amortized on a straight-line basis, with interest costs reported separately, over the lesser of the useful life of the leased asset or lease term.  Operating lease expense is recognized on a straight-line basis over the lease term and is included in Operating costs or General and administrative expenses.  Variable lease payments are expensed as incurred.

The Company uses its incremental borrowing rates as the discount rate for its leases, which is equal to the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.  We have elected to use the portfolio approach in determining our incremental borrowing rate. The incremental borrowing rate for all existing leases as of the date of adoption of Topic 842 was based upon the remaining terms of the leases; the incremental borrowing rate for all new or amended leases is based upon the lease terms.  The lease terms for all the Company’s leases include the contractually obligated period of the leases, plus any additional periods covered by Company options to extend the leases that the Company is reasonably certain to exercise.

Certain leases provide that the lease payments may be increased annually based on the fixed rate terms or adjustable terms such as the Consumer Price Index.  Future base rent escalations that are not contractually quantifiable as of the lease commencement date are not included in our lease liability.

The following schedule details the total right-of-use assets and lease liabilities on the Consolidated Balance Sheets as of December 27, 2020 and December 29, 2019 (in thousands):

December 27,

December 29,

Leases

Classification

2020

2019

Assets

Finance lease assets, net

Finance lease right-of-use assets, net

$

16,840

$

9,383

Operating lease assets, net

Operating lease right-of-use assets

148,110

148,229

Total lease assets

$

164,950

$

157,612

Liabilities

Current finance lease liabilities

Current finance lease liabilities

$

3,545

$

1,789

Current operating lease liabilities

Current operating lease liabilities

23,538

23,226

Noncurrent finance lease liabilities

Long-term finance lease liabilities

13,531

7,629

Noncurrent operating lease liabilities

Long-term operating lease liabilities

124,666

125,297

Total lease liabilities

$

165,280

$

157,941

66

Lease expense for lease payments is recognized on a straight-line basis over the lease term.  Lease expense is comprised of operating and finance lease costs, short-term lease costs, and variable lease costs, which primarily include common area maintenance, real estate taxes, and insurance for the Company’s real estate leases.  Lease costs also include variable rent, which is primarily related to the Company’s supply chain tractor and trailer leases that are based on a rate per mile.  Lease expense for the years ended December 27, 2020 and December 29, 2019 are as follows:

Year Ended

Year Ended

(in thousands)

December 27, 2020

December 29, 2019

Finance lease:

Amortization of right-of-use assets

$

2,342

$

815

Interest on lease liabilities

606

251

Operating lease:

Operating lease cost

40,026

42,487

Short-term lease cost

3,960

2,704

Variable lease cost

6,503

9,558

Total lease costs

$

53,437

$

55,815

Sublease income

(10,407)

(10,879)

Total lease costs, net of sublease income

$

43,030

$

44,936

Future minimum lease payments under contractually-obligated leases and associated sublease income as of December 27, 2020 are as follows (in thousands):

Fiscal Year

Finance
Lease
Costs

Operating
Lease
Costs

Expected
Sublease
Income

2021

$

4,348

$

32,456

$

10,246

2022

4,344

31,973

10,073

2023

4,338

26,251

9,778

2024

3,361

21,730

9,534

2025

1,731

17,342

9,057

Thereafter

1,054

61,024

46,642

Total future minimum lease payments

19,176

190,776

95,330

Less imputed interest

(2,100)

(42,572)

Total present value of lease liabilities (a)

$

17,076

$

148,204

$

95,330

(a)Excludes expected minimum lease payments of approximately $33.0 million associated with our new office in Atlanta, Georgia which is expected to commence in fiscal 2021.

Lessor Operating Leases

We sublease certain retail space to our franchisees in the United Kingdom which are primarily operating leases.  At December 27, 2020, we leased and subleased 385 Papa John’s restaurants to franchisees in the United Kingdom.  The initial lease terms on the franchised sites in the United Kingdom are generally 15 years.  The Company has the option to negotiate an extension toward the end of the lease term at the landlord’s discretion.  Rental income, primarily derived from properties leased and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms, in accordance with Topic 842, similar to previous guidance.

67

Lease Guarantees

As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of approximately 80 domestic leases. These leases have varying terms, the latest of which expires in 2036.  As of December 27, 2020, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $14.3 million.  This contingent liability is not included in the Consolidated Balance Sheet or future minimum lease obligation.  The fair value of the guarantee is not material.

There were no leases recorded between related parties.

Supplemental Cash Flow & Other Information

Supplemental cash flow information related to leases for the years ended December 27, 2020 and December 29, 2019 are as follows:

Year Ended

(in thousands)

December 27, 2020

December 29, 2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from finance leases

$

606

$

269

Financing cash flows from finance leases

2,139

781

Operating cash flows from operating leases (a)

37,113

40,152

Right-of-use assets obtained in exchange for new finance lease liabilities

9,152

10,199

Right-of-use assets obtained in exchange for new operating lease liabilities

30,266

20,903

Cash received from sublease income

10,545

10,139

Weighted-average remaining lease term (in years):

Finance leases

4.71

4.75

Operating leases

7.00

7.00

Weighted-average discount rate:

Finance leases

5.34%

6.38%

Operating leases

6.65%

6.94%

(a) Included within the change in Other assets and liabilities within the Consolidated Statements of Cash Flows offset by non-cash operating lease right-of-use asset amortization and lease liability accretion.

68

4. Papa John’s Marketing Fund, Inc.

PJMF, which is a consolidated variable interest entity where the Company has been identified as the primary beneficiary, collects a percentage of revenues from Company-owned and franchised restaurants in the United States, for the purpose of designing and administering advertising and promotional programs for all participating domestic restaurants.  Contributions and expenditures are reported on a gross basis in the Consolidated Statements of Operations within Other revenues and Other expenses.  PJMF also has a wholly-owned subsidiary, Papa Card, Inc., which administers the Company’s gift card programs.

Assets and liabilities of PJMF, which are restricted in their use, included in the Consolidated Balance Sheets were as follows (in thousands):

December 27,

December 29,

2020

2019

Assets

Current assets:

Cash and cash equivalents

$

9,394

$

4,569

Accounts receivable, net

23,711

11,196

Income tax receivable

192

103

Prepaid expenses and other current assets

1,914

1,316

Total current assets

35,211

17,184

Deferred income taxes, net

588

410

Total assets

$

35,799

$

17,594

Liabilities

Current liabilities:

Accounts payable

$

5,429

$

764

Income and other taxes payable

2

-

Accrued expenses and other current liabilities

32,578

14,287

Current deferred revenue

3,938

3,252

Total current liabilities

41,947

18,303

Deferred revenue

2,419

2,094

Total liabilities

$

44,366

$

20,397

5.  Revenue Recognition

Contract Balances

Our contract liabilities primarily relate to franchise fees, unredeemed gift card liabilities, and loyalty program obligations, which we classify as Deferred revenue on the Consolidated Balance Sheets.  During the years ended December 27, 2020 and December 29, 2019, the Company recognized $33.2 million and $34.0 million in revenue, respectively, related to deferred revenue.

The contract liability balances are included in the following (in thousands):

Contract Liabilities

December 27, 2020

December 29, 2019

Change

Franchise fees and unredeemed gift cards

$

19,890

$

20,346

$

(456)

Customer loyalty program

13,364

12,049

1,315

Total contract liabilities

$

33,254

$

32,395

$

859

69

Our contract assets consist primarily of equipment incentives provided to franchisees.  Equipment incentives are related to the future value of commissary revenue the Company will receive over the term of the incentive agreement.  As of December 27, 2020 and December 29, 2019, the contract assets were approximately $5.1 million and $6.0 million, respectively. For the years ended December 27, 2020 and December 29, 2019, respectively, revenue was reduced approximately $3.2 million and $3.5 million for the amortization of contract assets over the applicable contract terms. Contract assets are included in Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheets.

Transaction Price Allocated to the Remaining Performance Obligations

The following table (in thousands) includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied at the end of the reporting period.

Performance Obligations by Period

Less than 1 Year

1-2 Years

2-3 Years

3-4 Years

4-5 Years

Thereafter

Total

Franchise fees

$

2,288

$

2,090

$

1,822

$

1,591

$

1,352

$

2,857

$

12,000

Approximately $1.5 million of area development fees related to unopened stores and international unearned royalties are included in Deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings and franchisees’ revenues. Gift card liabilities of approximately $6.4 million, included in Deferred revenue, will be recognized in Company-owne