Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 3, 2022

Documents

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pzza-20220925_g1.jpg
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 25, 2022
OR
o    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-21660
PAPA JOHN’S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1203323
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
2002 Papa John’s Boulevard
Louisville, KY 40299-2367
(Address of principal executive offices)
(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 Name of each exchange on which registered:
Common stock, $0.01 par value PZZA The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x
Accelerated filer o
Non-accelerated filer o
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.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
At October 28, 2022, there were outstanding 35,328,153 shares of the registrant’s common stock, par value $0.01 per share.


INDEX
Page No.
i

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts) September 25,
2022		 December 26,
2021
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 36,618  $ 70,610 
Accounts receivable, net 95,855  81,370 
Notes receivable, current portion 7,556  12,352 
Income tax receivable 10,533  9,386 
Inventories 42,448  34,981 
Prepaid expenses and other current assets 46,514  46,310 
Total current assets 239,524  255,009 
Property and equipment, net 230,894  223,856 
Finance lease right-of-use assets, net 22,692  20,907 
Operating lease right-of-use assets 167,470  176,256 
Notes receivable, less current portion, net 17,397  35,504 
Goodwill 69,476  80,632 
Deferred income taxes 4,969  5,156 
Other assets 77,326  88,384 
Total assets $ 829,748  $ 885,704 
Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit
Current liabilities:
Accounts payable $ 44,263  $ 28,092 
Income and other taxes payable 18,171  19,996 
Accrued expenses and other current liabilities 152,893  190,116 
Current deferred revenue 19,925  21,700 
Current finance lease liabilities 6,072  4,977 
Current operating lease liabilities 22,403  22,543 
Total current liabilities 263,727  287,424 
Deferred revenue 22,987  13,846 
Long-term finance lease liabilities 17,468  16,580 
Long-term operating lease liabilities 155,952  160,672 
Long-term debt, less current portion, net 548,753  480,730 
Deferred income taxes 362  258 
Other long-term liabilities 77,912  93,154 
Total liabilities 1,087,161  1,052,664 
Redeemable noncontrolling interests 1,206  5,498 
Stockholders’ deficit:
Common stock ($0.01 par value per share; issued 49,112 at September 25, 2022 and 49,002 at December 26, 2021)
 491  490 
Additional paid-in capital 444,643  445,126 
Accumulated other comprehensive loss (13,868) (9,971)
Retained earnings 187,286  183,157 
Treasury stock (14,047 shares at September 25, 2022 and 13,205 shares at December 26, 2021, at cost)
 (892,818) (806,472)
Total stockholders’ deficit (274,266) (187,670)
Noncontrolling interests in subsidiaries 15,647  15,212 
Total Stockholders’ deficit (258,619) (172,458)
Total liabilities, Redeemable noncontrolling interests and Stockholders’ deficit $ 829,748  $ 885,704 
See accompanying notes.
1

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
(In thousands, except per share amounts) September 25,
2022		 September 26,
2021		 September 25,
2022		 September 26,
2021
Revenues:
Domestic Company-owned restaurant sales $ 166,050  $ 191,584  $ 536,226  $ 584,942 
North America franchise royalties and fees 33,712  31,933  102,897  97,123 
North America commissary revenues 216,115  189,224  645,177  560,743 
International revenues 30,735  38,408  97,310  110,629 
Other revenues 63,900  61,633  194,259  186,099 
Total revenues 510,512  512,782  1,575,869  1,539,536 
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses 138,299  155,477  441,986  465,658 
North America commissary expenses 203,129  175,399  604,689  518,310 
International expenses 18,196  21,743  57,346  62,791 
Other expenses 59,249  56,039  180,452  168,092 
General and administrative expenses 57,935  54,070  168,519  157,779 
Depreciation and amortization 13,338  11,477  38,012  36,830 
Total costs and expenses 490,146  474,205  1,491,004  1,409,460 
Refranchising and impairment loss (905) —  (12,065) — 
Operating income 19,461  38,577  72,800  130,076 
Net interest expense (7,623) (3,979) (17,967) (11,275)
Income before income taxes 11,838  34,598  54,833  118,801 
Income tax expense 3,374  4,057  9,212  19,387 
Net income before attribution to noncontrolling interests 8,464  30,541  45,621  99,414 
Net income attributable to noncontrolling interests (133) (1,285) (1,363) (4,021)
Net income attributable to the Company $ 8,331  $ 29,256  $ 44,258  $ 95,393 
Calculation of net income (loss) for earnings per share:
Net income attributable to the Company $ 8,331  $ 29,256  $ 44,258  $ 95,393 
Dividends on redemption of Series B Convertible Preferred Stock —  —  —  (109,852)
Dividends paid to participating securities (86) (137) (228) (5,964)
Net income attributable to participating securities —  (158) (34) — 
Net income (loss) attributable to common shareholders $ 8,245  $ 28,961  $ 43,996  $ (20,423)
Basic earnings (loss) per common share $ 0.23  $ 0.80  $ 1.23  $ (0.59)
Diluted earnings (loss) per common share $ 0.23  $ 0.79  $ 1.22  $ (0.59)
Basic weighted average common shares outstanding 35,259  36,387  35,602  34,619 
Diluted weighted average common shares outstanding 35,448  36,719  35,840  34,619 
Dividends declared per common share $ 0.42  $ 0.35  $ 1.12  $ 0.80 
See accompanying notes.
2

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
(In thousands) September 25,
2022		 September 26,
2021		 September 25,
2022		 September 26,
2021
Net income before attribution to noncontrolling interests $ 8,464  $ 30,541  $ 45,621  $ 99,414 
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments (4,849) (1,113) (9,819) 383 
Interest rate swaps (1)
1,169  1,535  4,758  5,147 
Other comprehensive (loss) income, before tax (3,680) 422  (5,061) 5,530 
Income tax effect:
Foreign currency translation adjustments 1,114  256  2,258  (88)
Interest rate swaps (2)
(268) (353) (1,094) (1,184)
Income tax effect 846  (97) 1,164  (1,272)
Other comprehensive (loss) income, net of tax (2,834) 325  (3,897) 4,258 
Comprehensive income before attribution to noncontrolling interests 5,630  30,866  41,724  103,672 
Less: comprehensive (income), redeemable noncontrolling interests (31) (692) (559) (2,192)
Less: comprehensive (income), nonredeemable noncontrolling interests (102) (593) (804) (1,829)
Comprehensive income attributable to the Company $ 5,497  $ 29,581  $ 40,361  $ 99,651 
_______________
(1)
Amounts reclassified out of accumulated other comprehensive loss into net interest expense include $1,650 and $1,850 for the three and nine months ended September 25, 2022, respectively, and $1,644 and $5,084 for the three and nine months ended September 26, 2021, respectively.
(2)
The income tax effects of amounts reclassified out of accumulated other comprehensive loss into net interest expense were $371 and $416 for the three and nine months ended September 25, 2022, respectively, and $368 and $1,139 for the three and nine months ended September 26, 2021, respectively.
See accompanying notes.
3

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit
(Unaudited)
Papa John’s International, Inc.
(In thousands) Common
Stock
Shares
Outstanding		 Common
Stock		 Additional
Paid-In
Capital		 Accumulated
Other
Comprehensive
Loss		 Retained
Earnings		 Treasury
Stock		 Noncontrolling
Interests in
Subsidiaries		 Total
Stockholders’
Deficit
For the three months ended September 25, 2022
Balance at June 26, 2022 35,248  $ 491  $ 442,255  $ (11,034) $ 193,934  $ (875,205) $ 15,761  $ (233,798)
Net income (1)
—  —  —  —  8,331  —  102  8,433 
Other comprehensive (loss), net of tax —  —  —  (2,834) —  —  —  (2,834)
Cash dividends on common stock —  —  57  —  (14,906) —  —  (14,849)
Exercise of stock options 16  —  823  —  —  —  —  823 
Acquisition of Company common stock (229) —  —  —  —  (19,529) —  (19,529)
Stock-based compensation expense —  —  5,146  —  —  —  —  5,146 
Issuance of restricted stock 50  —  (1,671) —  —  1,760  —  89 
Tax payments for equity award issuances (22) —  (1,900) —  —  —  —  (1,900)
Distributions to noncontrolling interests —  —  —  —  —  —  (216) (216)
Other 2  —  (67) —  (73) 156  —  16 
Balance at September 25, 2022 35,065  $ 491  $ 444,643  $ (13,868) $ 187,286  $ (892,818) $ 15,647  $ (258,619)
For the nine months ended September 25, 2022
Balance at December 26, 2021 35,797  $ 490  $ 445,126  $ (9,971) $ 183,157  $ (806,472) $ 15,212  $ (172,458)
Net income (1)
—  —  —  —  44,258  —  804  45,062 
Other comprehensive (loss), net of tax —  —  —  (3,897) —  —  —  (3,897)
Cash dividends on common stock —  —  153  —  (40,102) —  —  (39,949)
Exercise of stock options 55  1  2,730  —  —  —  —  2,731 
Acquisition of Company common stock (982) —  —  —  —  (95,000) —  (95,000)
Stock-based compensation expense —  —  14,246  —  —  —  —  14,246 
Issuance of restricted stock 279  —  (8,122) —  —  8,210  —  88 
Tax payments for equity award issuances (92) —  (9,426) —  —  —  —  (9,426)
Distributions to noncontrolling interests —  —  —  —  —  —  (366) (366)
Other 8  —  (64) —  (27) 444  (3) 350 
Balance at September 25, 2022 35,065  $ 491  $ 444,643  $ (13,868) $ 187,286  $ (892,818) $ 15,647  $ (258,619)
_______________
(1)    Net income to the Company for the three and nine months ended September 25, 2022 excludes income of $31 and $559 allocable to the redeemable noncontrolling interests for our joint venture arrangements.
At September 25, 2022, the accumulated other comprehensive loss of $13,868 was comprised of net unrealized foreign currency translation loss of $12,430 and net unrealized loss on the interest rate swap agreements of $1,438.
See accompanying notes.

4

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit (continued)
(Unaudited)
Papa John’s International, Inc.
(In thousands) Common
Stock
Shares
Outstanding		 Common
Stock		 Additional
Paid-In
Capital		 Accumulated
Other
Comprehensive
Loss		 Retained
Earnings		 Treasury
Stock		 Noncontrolling
Interests in
Subsidiaries		 Total
Stockholders’
Deficit
For the three months ended September 26, 2021
Balance at June 27, 2021 36,215  $ 489  $ 435,608  $ (10,235) $ 154,769  $ (743,819) $ 15,290  $ (147,898)
Net income (1)
—  —  —  —  29,256  —  593  29,849 
Other comprehensive income, net of tax —  —  —  325  —  —  —  325 
Cash dividends on common stock —  —  48  —  (12,845) —  —  (12,797)
Exercise of stock options 51  1  3,111  —  —  —  —  3,112 
Acquisition of Company common stock (103) —  —  —  —  (12,367) —  (12,367)
Stock-based compensation expense —  —  4,317  —  —  —  —  4,317 
Issuance of restricted stock 15  —  (873) —  —  873  —  — 
Tax payments for equity award issuances —  —  (1,423) —  —  —  —  (1,423)
Distributions to noncontrolling interests —  —  —  —  —  —  (594) (594)
Other 5  —  (46) —  198  278  —  430 
Balance at September 26, 2021 36,183  $ 490  $ 440,742  $ (9,910) $ 171,378  $ (755,035) $ 15,289  $ (137,046)
For the nine months ended September 26, 2021
Balance at December 27, 2020 32,545  $ 453  $ 254,103  $ (14,168) $ 219,158  $ (741,724) $ 15,239  $ (266,939)
Net income (1)
—  —  —  —  95,393  —  1,829  97,222 
Other comprehensive income, net of tax —  —  —  4,258  —  —  —  4,258 
Repurchase and conversion of Series B Convertible Preferred Stock 3,489  35  174,631  —  (110,498) —  —  64,168 
Cash dividends on common stock —  —  110  —  (27,750) —  —  (27,640)
Cash dividends on preferred stock —  —  —  —  (4,121) —  —  (4,121)
Exercise of stock options 199  2  11,209  —  —  —  —  11,211 
Acquisition of Company common stock (187) —  —  —  —  (20,555) —  (20,555)
Stock-based compensation expense —  —  12,519  —  —  —  —  12,519 
Issuance of restricted stock 125  —  (6,538) —  —  6,538  —  — 
Tax payments for equity award issuances —  —  (5,310) —  —  —  —  (5,310)
Distributions to noncontrolling interests —  —  —  —  —  —  (1,779) (1,779)
Other 12  —  18  —  (804) 706  —  (80)
Balance at September 26, 2021 36,183  $ 490  $ 440,742  $ (9,910) $ 171,378  $ (755,035) $ 15,289  $ (137,046)

(1)    Net income to the Company for the three and nine months ended September 26, 2021 excludes $692 and $2,192 allocable to the redeemable noncontrolling interests for our joint venture arrangements.
At September 26, 2021, the accumulated other comprehensive loss of $9,910 was comprised of net unrealized foreign currency translation loss of $3,499 and net unrealized loss on the interest rate swap agreements of $6,411.
See accompanying notes.
5

Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
(In thousands) September 25,
2022		 September 26,
2021
Operating activities
Net income before attribution to noncontrolling interests $ 45,621  $ 99,414 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (benefit) for allowance for credit losses on accounts and notes receivable 18,576  (920)
Depreciation and amortization 38,012  36,830 
Refranchising and impairment loss 12,065  — 
Deferred income taxes 519  (5,113)
Stock-based compensation expense 14,246  12,519 
Other (466) 1,052 
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (19,584) 5,955 
Income tax receivable (1,146) 674 
Inventories (8,185) (3,217)
Prepaid expenses and other current assets 2,065  11,277 
Other assets and liabilities (4,919) (8,627)
Accounts payable 16,188  5,014 
Income and other taxes payable (1,789) 15,958 
Accrued expenses and other current liabilities (32,404) 24,001 
Deferred revenue (2,246) (1,193)
Net cash provided by operating activities 76,553  193,624 
Investing activities
Purchases of property and equipment (48,424) (41,328)
Notes issued (2,248) (14,637)
Repayments of notes issued 8,125  15,352 
Acquisitions, net of cash acquired (1,346) (699)
Proceeds from refranchising, net of cash transferred 13,588  — 
Other 76  121 
Net cash used in investing activities (30,229) (41,191)
Financing activities
Proceeds from issuance of senior notes —  400,000 
Net proceeds of revolving credit facilities 66,999  15,000 
Debt issuance costs —  (9,179)
Proceeds from exercise of stock options 2,730  11,211 
Repurchase of Series B Convertible Preferred Stock —  (188,647)
Acquisition of Company common stock (95,000) (20,555)
Dividends paid to common stockholders (39,949) (27,640)
Dividends paid to preferred stockholders —  (6,394)
Tax payments for equity award issuances (9,426) (5,310)
Distributions to noncontrolling interests (1,090) (2,914)
Repayments of term loan —  (340,000)
Other (3,480) (2,630)
Net cash used in financing activities (79,216) (177,058)
Effect of exchange rate changes on cash and cash equivalents (1,100) 234 
Change in cash and cash equivalents (33,992) (24,391)
Cash and cash equivalents at beginning of period 70,610  130,204 
Cash and cash equivalents at end of period $ 36,618  $ 105,813 
See accompanying notes.
6

Papa John’s International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 25, 2022
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 25, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 25, 2022. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first-person notations of “we”, “us” and “our”) for the year ended December 26, 2021.
2. Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant items that are subject to such estimates and assumptions include allowance for credit losses on accounts and notes receivable, contract assets and contract liabilities, including the online customer loyalty program obligation and gift card breakage, right-of-use assets and lease liabilities, 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.
Variable Interest Entity
Papa John’s domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the domestic restaurants, of which approximately 85 percent are franchised, and does not have sufficient equity to fund its operations without these ongoing financial contributions. Based on an assessment of the governance structure and operating procedures of PJMF, the Company determined it has the power to control certain significant activities of PJMF, and therefore, is the primary beneficiary. The Company has consolidated PJMF in its financial results in accordance with Accounting Standards Codification (“ASC”) 810, “Consolidations.”
Noncontrolling Interests
Papa John’s has joint venture arrangements in which there are noncontrolling interests held by third parties that include 98 and 188 restaurants at September 25, 2022 and September 26, 2021, respectively. As further described in Note 10, we divested our 51 percent interest in one joint venture that owned 90-restaurants in the second quarter of 2022. The assets and liabilities associated with this joint venture arrangement were classified as held for sale at the end of the first quarter of 2022.
Consolidated net income is required to be reported separately at amounts attributable to both the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the Condensed Consolidated Statements of Operations of net income attributable to noncontrolling interests.
7

Net income attributable to these joint ventures for the three and nine months ended September 25, 2022 and September 26, 2021 was as follows (in thousands):
Three Months Ended Nine Months Ended
September 25,
2022		 September 26,
2021		 September 25,
2022		 September 26,
2021
Papa John’s International, Inc. $ 314  $ 2,171  $ 2,642  $ 6,816 
Noncontrolling interests 133  1,285  1,363  4,021 
Total net income $ 447  $