August 3, 2023 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 25, 2023

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

Commission File Number: 0-21660

PAPA JOHN’S INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)


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


2002 Papa John’s Boulevard
Louisville, KY						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

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

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.o

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

At July 28, 2023, there were 32,736,862 shares of the Registrant’s common stock outstanding.

INDEX


		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets — June 25 , 2023 and December 25, 2022	1

	Condensed Consolidated Statements of Operations — Three and six months ended Ju ne 2 5 , 2023 and June 2 6 , 2022	2

	Condensed Consolidated Statements of Comprehensive Income — Three and six months ended June 2 5 , 2023 and June 2 6 , 2022	3

	Condensed Consolidated Statements of Stockholders’ Deficit — Three and six months ended June 2 5 , 2023 and June 2 6 , 2022	4

	Condensed Consolidated Statements of Cash Flows — Three and si x months ended June 2 5 , 2023 and June 2 6 , 2022	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	41

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 6.	Exhibits	43

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)	June 25, 2023		December 25, 2022
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	43,772	$	47,373
Accounts receivable, net	94,255		102,533
Notes receivable, current portion	4,850		6,848
Income tax receivable	2,097		8,780
Inventories	37,515		41,382
Prepaid expenses and other current assets	56,086		44,123
Assets held for sale (a)	3,427		—
Total current assets	242,002		251,039
Property and equipment, net	264,393		249,793
Finance lease right-of-use assets, net	34,418		24,941
Operating lease right-of-use assets	171,550		172,425
Notes receivable, less current portion, net	15,809		21,248
Goodwill	76,623		70,616

Other assets	68,848		74,165
Total assets	$	873,643	$	864,227

Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit
Current liabilities:
Accounts payable	$	55,351	$	62,316
Income and other taxes payable	8,148		8,766
Accrued expenses and other current liabilities	163,273		142,535
Current deferred revenue	19,587		21,272
Current finance lease liabilities	9,190		6,850
Current operating lease liabilities	25,715		23,418
Current portion of long-term debt	15,529		—

Total current liabilities	296,793		265,157
Deferred revenue	21,726		23,204
Long-term finance lease liabilities	26,486		19,022
Long-term operating lease liabilities	159,170		160,905
Long-term debt, less current portion, net	768,820		597,069

Other long-term liabilities	65,106		68,317
Total liabilities	1,338,101		1,133,674

Redeemable noncontrolling interests	1,021		1,217

Stockholders’ deficit:
Common stock ($0.01 par value per share; issued 49,209 at June 25, 2023 and 49,138 at December 25, 2022)	492		491
Additional paid-in capital	445,964		449,829
Accumulated other comprehensive loss	(7,289)		(10,135)
Retained earnings	207,461		195,856
Treasury stock (16,815 shares at June 25, 2023 and 14,402 shares at December 25, 2022, at cost)	(1,127,669)		(922,434)
Total stockholders’ deficit	(481,041)		(286,393)
Noncontrolling interests in subsidiaries	15,562		15,729
Total Stockholders’ deficit	(465,479)		(270,664)
Total Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit	$	873,643	$	864,227

(a) Represents vacant land adjacent to the Company’s Louisville office.

See accompanying notes.

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended				Six Months Ended
(In thousands, except per share amounts)	June 25, 2023		June 26, 2022		June 25, 2023		June 26, 2022

Revenues:
Domestic Company-owned restaurant sales	$	175,780	$	171,411	$	355,646	$	370,176
North America franchise royalties and fees	34,711		34,917		70,783		69,185
North America commissary revenues	206,980		219,383		419,546		429,062
International revenues	34,608		31,958		66,071		66,575
Other revenues	62,451		64,996		129,533		130,359
Total revenues	514,530		522,665		1,041,579		1,065,357
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses	143,705		142,026		291,489		303,687
North America commissary expenses	190,468		204,470		386,883		401,560
International expenses	20,435		19,236		37,746		39,150
Other expenses	58,996		60,648		120,074		121,203
General and administrative expenses	50,324		44,646		102,268		110,584
Depreciation and amortization	15,690		12,735		30,411		24,674
Total costs and expenses	479,618		483,761		968,871		1,000,858
Refranchising and impairment loss	—		—		—		(11,160)
Operating income	34,912		38,904		72,708		53,339
Net interest expense	(11,275)		(6,081)		(20,296)		(10,344)
Income before income taxes	23,637		32,823		52,412		42,995
Income tax expense	5,778		7,093		12,007		5,838
Net income before attribution to noncontrolling interests	17,859		25,730		40,405		37,157
Net income attributable to noncontrolling interests	(91)		(297)		(261)		(1,230)
Net income attributable to the Company	$	17,768	$	25,433	$	40,144	$	35,927

Calculation of net income for earnings per share:
Net income attributable to the Company	$	17,768	$	25,433	$	40,144	$	35,927
Dividends paid to participating securities	—		(82)		—		(141)
Net income attributable to participating securities	—		(111)		—		(93)
Net income attributable to common shareholders	$	17,768	$	25,240	$	40,144	$	35,693

Basic earnings per common share	$	0.55	$	0.71	$	1.20	$	1.00
Diluted earnings per common share	$	0.54	$	0.70	$	1.20	$	0.99

Basic weighted average common shares outstanding	32,563		35,624		33,359		35,775
Diluted weighted average common shares outstanding	32,650		35,824		33,487		36,032

Dividends declared per common share	$	0.42	$	0.35	$	0.84	$	0.70

See accompanying notes.

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended				Six Months Ended
(In thousands)	June 25, 2023		June 26, 2022		June 25, 2023		June 26, 2022

Net income before attribution to noncontrolling interests	$	17,859	$	25,730	$	40,405	$	37,157
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	405		(4,109)		1,847		(4,970)
Interest rate swaps (1)	1,514		1,877		1,850		3,589
Other comprehensive income (loss), before tax	1,919		(2,232)		3,697		(1,381)
Income tax effect:
Foreign currency translation adjustments	(93)		946		(425)		1,144
Interest rate swaps (2)	(349)		(432)		(426)		(826)
Income tax effect	(442)		514		(851)		318
Other comprehensive income (loss), net of tax	1,477		(1,718)		2,846		(1,063)
Comprehensive income before attribution to noncontrolling interests	19,336		24,012		43,251		36,094
Less: comprehensive income, redeemable noncontrolling interests	(59)		(18)		(105)		(528)
Less: comprehensive income, nonredeemable noncontrolling interests	(32)		(279)		(156)		(702)
Comprehensive income attributable to the Company	$	19,245	$	23,715	$	42,990	$	34,864

___________________________________

(1) Amounts reclassified out of accumulated other comprehensive income into net interest (expense) income include $(36) and $(243) for the three and six months ended June 25, 2023, respectively and $(735) and $(200) for the three and six months ended June 26, 2022, respectively.

(2) The income tax effects of amounts reclassified out of accumulated other comprehensive loss were $8 and $55 for the three and six months ended June 25, 2023, respectively and $165 and $45 for the three and six months ended June 26, 2022, respectively.

See accompanying notes.

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 (2)		Retained Earnings		Treasury Stock (3)		Noncontrolling Interests in Subsidiaries		Total Stockholders’ Deficit

For the three months ended June 25, 2023
Balance at March 26, 2023	32,356	$	492	$	443,686	$	(8,766)	$	203,569	$	(1,130,136)	$	15,830	$	(475,325)
Net income (1)	—	—		—		—		17,768		—		32		17,800
Other comprehensive income (loss), net of tax	—	—		—		1,477		—		—		—		1,477
Dividends on common stock	—	—		54		—		(13,876)		—		—		(13,822)
Exercise of stock options	2	—		68		—		—		—		—		68

Stock-based compensation expense	—	—		4,601		—		—		—		—		4,601
Issuance of restricted stock	30	—		(1,933)		—		—		1,933		—		—
Tax effect of restricted stock awards	(1)	—		(109)		—		—		—		—		(109)
Distributions to noncontrolling interests	—	—		—		—		—		—		(300)		(300)
Other	7	—		(403)		—		—		534		—		131
Balance at June 25, 2023	32,394	$	492	$	445,964	$	(7,289)	$	207,461	$	(1,127,669)	$	15,562	$	(465,479)

For the six months ended June 25, 2023
Balance at December 25, 2022	34,736	$	491	$	449,829	$	(10,135)	$	195,856	$	(922,434)	$	15,729	$	(270,664)
Net income (1)	—	—		—		—		40,144		—		156		40,300
Other comprehensive income (loss), net of tax	—	—		—		2,846		—		—		—		2,846
Dividends on common stock	—	—		54		—		(28,539)		—		—		(28,485)
Exercise of stock options	17	1		682		—		—		—		—		683
Acquisition of Company common stock	(2,523)	—		—		—		—		(212,444)		—		(212,444)
Stock-based compensation expense	—	—		8,498		—		—		—		—		8,498
Issuance of restricted stock	227	—		(6,542)		—		—		6,542		—		—
Tax effect of restricted stock awards	(73)	—		(6,108)		—		—		—		—		(6,108)
Distributions to noncontrolling interests	—	—		—		—		—		—		(323)		(323)
Other	10	—		(449)		—		—		667		—		218
Balance at June 25, 2023	32,394	$	492	$	445,964	$	(7,289)	$	207,461	$	(1,127,669)	$	15,562	$	(465,479)

(1) Net income to the Company for the three and six months ended June 25, 2023 excludes $59 and $105, respectively, allocable to the redeemable noncontrolling interests for our joint venture arrangements.

(2) At June 25, 2023, the accumulated other comprehensive loss of $7,289 was comprised of net unrealized foreign currency translation loss of $7,274 and net unrealized loss on the interest rate swap agreements of $15.

(3) Acquisition of Company common stock for the six months ended June 25, 2023 includes $2,804 of transaction costs directly attributable to share repurchases, including a 1% excise tax incurred under the Inflation Reduction Act of 2022.

See accompanying notes.

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 (2)		Retained Earnings		Treasury Stock		Noncontrolling Interests in Subsidiaries		Total Stockholders’ Deficit
For the three months ended June 26, 2022
Balance at March 27, 2022	35,675	$	491	$	436,225	$	(9,316)	$	181,124	$	(832,603)	$	15,635	$	(208,444)
Net income (1)	—	—		—		—		25,433		—		279		25,712
Other comprehensive income (loss), net of tax	—	—		—		(1,718)		—		—		—		(1,718)
Dividends on common stock	—	—		48		—		(12,623)		—		—		(12,575)
Exercise of stock options	22	—		1,167		—		—		—		—		1,167
Acquisition of Company common stock	(452)	—		—		—		—		(42,762)		—		(42,762)
Stock-based compensation expense	—	—		4,925		—		—		—		—		4,925
Issuance of restricted stock	2	—		(81)		—		—		81		—		—
Tax effect of restricted stock awards	(1)	—		(65)		—		—		—		—		(65)
Distributions to noncontrolling interests	—	—		—		—		—		—		(150)		(150)
Other	2	—		36		—		—		79		(3)		112
Balance at June 26, 2022	35,248	$	491	$	442,255	$	(11,034)	$	193,934	$	(875,205)	$	15,761	$	(233,798)

For the six months ended June 26, 2022
Balance at December 26, 2021	35,797	$	490	$	445,126	$	(9,971)	$	183,157	$	(806,472)	$	15,212	$	(172,458)
Net income (1)	—	—		—		—		35,927		—		702		36,629
Other comprehensive income (loss), net of tax	—	—		—		(1,063)		—		—		—		(1,063)
Dividends on common stock	—	—		95		—		(25,150)		—		—		(25,055)
Exercise of stock options	39	1		1,908		—		—		—		—		1,909
Acquisition of Company common stock	(753)	—		—		—		—		(75,471)		—		(75,471)
Stock-based compensation expense	—	—		9,100		—		—		—		—		9,100
Issuance of restricted stock	229	—		(6,450)		—		—		6,450		—		—
Tax effect of restricted stock awards	(70)	—		(7,527)		—		—		—		—		(7,527)
Distributions to noncontrolling interests	—	—		—		—		—		—		(150)		(150)
Other	6	—		3		—		—		288		(3)		288
Balance at June 26, 2022	35,248	$	491	$	442,255	$	(11,034)	$	193,934	$	(875,205)	$	15,761	$	(233,798)

(1) Net income to the Company for the three and six months ended June 26, 2022 excludes $18 and $528, respectively, allocable to the redeemable noncontrolling interests for our joint venture arrangements.

(2) At June 26, 2022, the accumulated other comprehensive loss of $11,034 was comprised of net unrealized foreign currency translation loss of $8,696 and net unrealized loss on the interest rate swap agreements of $2,338.

See accompanying notes.

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended
(In thousands)		June 25, 2023		June 26, 2022

Operating activities
Net income before attribution to noncontrolling interests		$	40,405	$	37,157
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for allowance for credit losses on accounts and notes receivable		595		15,558
Depreciation and amortization		30,411		24,674
Refranchising and impairment loss		—		11,160
Deferred income taxes		3,664		(2,993)
Stock-based compensation expense		8,498		9,100
Other		(452)		(2,071)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		4,299		(9,177)
Income tax receivable		6,683		5,369
Inventories		4,109		(3,815)
Prepaid expenses and other current assets		46		(3,901)
Other assets and liabilities		140		(5,379)
Accounts payable		(8,174)		12,742
Income and other taxes payable		(514)		(3,175)
Accrued expenses and other current liabilities		7,203		(37,456)
Deferred revenue		(3,178)		(2,208)
Net cash provided by operating activities		93,735		45,585
Investing activities
Purchases of property and equipment		(34,759)		(30,744)
Notes issued		(4,374)		(1,098)
Repayments of notes issued		3,224		6,743
Acquisitions, net of cash acquired		—		(1,250)
Proceeds from refranchising, net of cash transferred		—		13,588
Other		182		238
Net cash used in investing activities		(35,727)		(12,523)
Financing activities

Net proceeds of revolving credit facilities		186,529		55,000

Proceeds from exercise of stock options		682		1,908
Acquisition of Company common stock		(210,348)		(75,471)
Dividends paid to common stockholders		(28,485)		(25,101)
Tax payments for equity award issuances		(6,108)		(7,526)

Distributions to noncontrolling interests		(323)		(835)

Other		(3,567)		1,348
Net cash used in financing activities		(61,620)		(50,677)
Effect of exchange rate changes on cash and cash equivalents		11		(871)
Change in cash and cash equivalents		(3,601)		(18,486)
Cash and cash equivalents at beginning of period		47,373		70,610
Cash and cash equivalents at end of period		$	43,772	$	52,124

See accompanying notes.

Papa John’s International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 25, 2023

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” or “U.S. 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 six months ended June 25, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023. 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,” “Papa Johns” or in the first-person notations of “we,” “us” and “our”) for the year ended December 25, 2022.

In discussions of our business, “Domestic” is defined as within the contiguous United States, “North America” includes Canada, and “International” includes the rest of the world other than North America.

2. Significant Accounting Policies

Principles of Consolidation

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

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 and Canada 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 North America 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, “Consolidation.”

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 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, unredeemed gift card 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.

Noncontrolling Interests

Papa John’s has joint venture arrangements in which there are noncontrolling interests held by third parties that included 98 restaurants at June 25, 2023 and June 26, 2022, respectively. As further described in “Note 10. Divestitures” we divested our 51 percent interest in one joint venture in Texas that owned 90 restaurants in the second quarter of 2022. Consolidated net income is required to be reported separately at amounts attributable to both the Company and the noncontrolling interests.

Net income attributable to these joint ventures for the three and six months ended June 25, 2023 and June 26, 2022 was as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 25, 2023		June 26, 2022		June 25, 2023		June 26, 2022
Papa John’s International, Inc.	$	228	$	706	$	625	$	2,327
Noncontrolling interests	91		297		261		1,230
Total net income	$	319	$	1,003	$	886	$	3,557

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

Type of Joint Venture Arrangement

Location within the Condensed 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

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. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. The effective income tax rate includes the estimated domestic state effective income tax rate and applicable foreign income tax rates. The effective income tax rate is also impacted by various permanent items and credits, net of any related valuation allowances, and can vary based on changes in estimated annual income. Discrete items are recorded in the quarter in which they occur.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets and liabilities are netted by tax jurisdiction. 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 due to 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. Deferred tax assets and liabilities are recorded within Other assets and Other long-term liabilities on the Condensed Consolidated Balance Sheets.

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

Fair Value Measurements and Disclosures

The Company determines the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following three categories:

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

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

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

Fair value is a market-based measurement, not an entity-specific measurement. Considerable judgment is required to interpret market data to estimate fair value; accordingly, the fair values presented do not necessarily indicate what the Company or its debtholders could realize in a current market exchange.

Our financial assets and liabilities that were measured at fair value on a recurring basis as of June 25, 2023 and December 25, 2022 are as follows:


			Fair Value Measurements
(In thousands)	Carrying Value		Level 1		Level 2		Level 3
June 25, 2023
Financial assets:
Cash surrender value of life insurance policies (a)	$	27,228	$	27,228	$	—	$	—


Financial liabilities:
Interest rate swaps (b)	$	15	$	—	$	15	$	—

December 25, 2022
Financial assets:
Cash surrender value of life insurance policies (a)	$	30,120	$	30,120	$	—	$	—
Interest rate swaps (b)	$	986	$	—	$	986	$	—

___________________________________

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

(b)The fair value of our interest rate swaps is based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swaps, as well as considering published discount factors, and projected Secured Overnight Financing Rates (“SOFR”). Interest rate swaps entered into prior to the three months ended June 25, 2023 were based on London Interbank Offered Rates (“LIBOR”).

The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash and cash equivalents, accounts receivable, net of allowances, and accounts payable. The carrying value of notes receivable, net of allowances, also approximates fair value. The Company’s revolving credit facilities under the Company’s credit agreement approximate carrying value due to their variable market-based interest rate. The Company’s 3.875% senior notes are classified as a Level 2 fair value measurement since the Company estimates the fair value by using recent trading transactions, and have the following estimated fair values and carrying values (excluding the impact of unamortized debt issuance costs) as of June 25, 2023 and December 25, 2022:


	June 25, 2023				December 25, 2022
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
3.875% Senior Notes	$	400,000	$	335,000	$	400,000	$	339,500

Allowance for Credit Losses

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. Account and note balances are charged against the allowance after recovery efforts have ceased.

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


(In thousands)	Accounts Receivable		Notes Receivable
Balance at December 25, 2022	$	6,718	$	14,499
Current period provision for expected credit losses, net	568		27
Write-offs charged against the allowance	(753)		(147)
Balance at June 25, 2023	$	6,533	$	14,379

3. Leases

Lessor Operating Leases

The Company subleases certain retail space to our franchisees in the United Kingdom (“UK”), which are primarily operating leases. At June 25, 2023, we leased and subleased 368 Papa Johns restaurants to franchisees in the UK. The initial lease terms on the franchised sites in the UK 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. The initial lease terms of the franchisee subleases are generally five to ten years. Rental income, primarily derived from properties leased and subleased to franchisees in the UK, is recognized on a straight-line basis over the respective operating lease terms. The Company recognized total sublease income of $2.7 million and $5.6 million for the three and six months ended June 25, 2023, respectively, and $3.0 million and $6.0 million for the three and six months ended June 26, 2022, respectively, within Other revenues in the Condensed Consolidated Statements of Operations.

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 50 domestic leases. These leases have varying terms, the latest of which expires in 2036. As of June 25, 2023, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $8.2 million. This contingent liability is not included in the Condensed Consolidated Balance Sheets as it is not probable to occur. The fair value of the guarantee is not material.

Supplemental Cash Flow & Other Information

Supplemental cash flow information related to leases for the periods reported is as follows:


	Six Months Ended
(In thousands)	June 25, 2023		June 26, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	702	$	510
Financing cash flows from finance leases	$	3,669	$	2,508
Operating cash flows from operating leases (a)	$	18,738	$	18,363
Right-of-use assets obtained in exchange for new finance lease liabilities	$	14,129	$	569
Right-of-use assets obtained in exchange for new operating lease liabilities	$	12,128	$	31,369
Cash received from sublease income	$	5,278	$	5,623

___________________________________

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

4. Papa John’s Marketing Fund, Inc.

PJMF, which is a consolidated VIE 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 Condensed 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 utilized solely for the Company’s advertising and promotional programs, were as follows in the Condensed Consolidated Balance Sheets (in thousands):


	June 25, 2023		December 25, 2022
Assets
Current assets:
Cash and cash equivalents	$	4,337	$	17,174
Accounts receivable, net	13,722		14,780
Income tax receivable	56		—
Prepaid expenses and other current assets	15,230		1,815
Total current assets	33,345		33,769
Deferred income taxes	655		655
Total assets	$	34,000	$	34,424

Liabilities
Current liabilities:
Accounts payable	$	741	$	12,428
Income and other taxes payable	2		8
Accrued expenses and other current liabilities	29,000		17,928
Current portion of long-term debt	15,529		—
Current deferred revenue	3,648		4,395
Total current liabilities	48,920		34,759
Deferred revenue	2,282		2,503
Total liabilities	$	51,202	$	37,262

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 Condensed Consolidated Balance Sheets. During the three and six months ended June 25, 2023, the Company recognized $7.9 million and $16.3 million in revenue, respectively, related to deferred revenue compared to $8.3 million and $17.6 million for the three and six months ended June 26, 2022.

The following table includes a breakout of contract liability balances (in thousands):


	Contract Liabilities
	June 25, 2023		December 25, 2022		Change
Franchise fees and unredeemed gift card liabilities	$	28,409	$	30,710	$	(2,301)
Customer loyalty program obligations	12,904		13,766		(862)
Total contract liabilities	$	41,313	$	44,476	$	(3,163)

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 June 25, 2023 and December 25, 2022, the contract assets were approximately $7.0 million and $6.2 million, respectively. For the three and six months ended June 25, 2023, revenue was reduced approximately $0.9 million and $1.8 million, respectively, for the amortization of contract assets over the applicable contract terms. For the three and six months ended June 26, 2022, revenue was reduced approximately $1.1 million and $1.9 million, respectively, for the amortization of contract assets over the applicable contract terms. Contract assets are included in Prepaid expenses and other current assets and Other assets on the Condensed 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	$	3,172	$	2,823	$	2,635	$	2,380	$	2,087	$	6,054	$	19,151

At June 25, 2023, approximately $3.5 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 $5.9 million, included in Deferred revenue, will be recognized in Company-owned restaurant revenues when gift cards are redeemed. The Company will recognize redemption fee revenue in Other revenues when cards are redeemed at franchised restaurant locations.

The Company applies the practical expedient in ASC 606, “Revenue Recognition” and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

6. Common Stock

Shares Authorized and Outstanding

The Company has authorized 100.0 million shares of common stock as of June 25, 2023 and December 25, 2022. The Company’s outstanding shares of common stock outstanding, net of repurchased shares of common stock held as treasury stock, were 32.4 million shares at June 25, 2023, compared to 34.7 million shares at December 25, 2022.

Share Repurchase Program

On October 28, 2021, our Board of Directors (the “Board”) approved a share repurchase program with an indefinite duration for up to $425.0 million of the Company’s common stock. The following table summarizes our repurchase activity under our share repurchase programs for the three and six months ended June 25, 2023 and June 26, 2022:


(In thousands, except average price per share)	Total Number of Shares Purchased	Average Price Paid per Share		Aggregate Cost of Shares Purchased		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Three Months Ended
June 25, 2023	—	$	—	$	—	$	90,160
June 26, 2022	452	$	94.56	$	42,762	$	349,329

(In thousands, except average price per share)	Total Number of Shares Purchased	Average Price Paid per Share		Aggregate Cost of Shares Purchased (a)		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Six Months Ended
June 25, 2023	2,523	$	83.10	$	209,640	$	90,160
June 26, 2022	753	$	100.23	$	75,471	$	349,329

(a) Aggregate cost of shares purchased for the six months ended June 25, 2023 excludes $2.8 million of transaction costs directly attributable to share repurchases, including a 1% excise tax incurred under the Inflation Reduction Act of 2022. Of these costs, $2.1 million were classified as non-cash financing activities during the six months ended June 25, 2023.

The shares repurchased during the six months ended June 25, 2023 included 2,176,928 shares repurchased on March 1, 2023 from certain funds affiliated with, or managed by, Starboard Value LP (collectively, “Starboard”), at a price of $82.52 per share, for aggregate consideration of $179.6 million. The transaction was negotiated by an independent committee of the Board of Directors formed for the purpose of evaluating a possible transaction involving Starboard, and was approved by the full Board of Directors upon such independent committee’s recommendation. Starboard’s Chief Executive Officer is Jeffrey Smith, who previously served as the Company’s Chairman of the Board until his resignation on March 1, 2023.

The timing and volume of share repurchases under the Company’s share repurchase programs may be executed at the discretion of management on an opportunistic basis, subject to market and business conditions, regulatory requirements and other factors, or pursuant to trading plans or other arrangements. Repurchases under the programs may be made through open market, block, and privately negotiated transactions, including Rule 10b5-1 plans, at times and in such amounts as management deems appropriate. Repurchases under the Company’s share repurchase programs may be commenced or suspended from time to time at the Company’s discretion without prior notice. Funding for the share repurchase programs will be provided through our credit facility, operating cash flow, stock option exercises and cash and cash equivalents.

Dividends

The Company paid dividends of approximately $28.5 million ($0.84 per share) for the six months ended June 25, 2023. On July 31, 2023, our Board of Directors approved a 9.5% increase in the Company’s dividend rate per common share from $1.68 on an annual basis to $1.84 on an annual basis and subsequently declared a third quarter dividend of $0.46 per common share (approximately $15.1 million in the aggregate), which will be paid on August 25, 2023 to stockholders of record as of the close of business on August 14, 2023. The declaration and payment of any future dividends will be at the discretion of our Board.

7. Earnings per Share

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

Basic earnings per common share are computed by dividing net income attributable to common shareholders by the weighted-average common shares outstanding. Diluted earnings per common share are computed by dividing the net income attributable to common shareholders by the diluted weighted average common shares outstanding. Diluted weighted average common shares outstanding consist of basic weighted average common shares outstanding plus weighted average awards outstanding under our equity compensation plans, which are dilutive securities.

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


	Three Months Ended				Six Months Ended
	June 25, 2023		June 26, 2022		June 25, 2023		June 26, 2022
Basic earnings per common share
Net income attributable to the Company	$	17,768	$	25,433	$	40,144	$	35,927
Dividends paid to participating securities	—		(82)		—		(141)
Net income attributable to participating securities	—		(111)		—		(93)
Net income attributable to common shareholders	$	17,768	$	25,240	$	40,144	$	35,693

Basic weighted average common shares outstanding	32,563		35,624		33,359		35,775
Basic earnings per common share	$	0.55	$	0.71	$	1.20	$	1.00

Diluted earnings per common share
Net income attributable to common shareholders	$	17,768	$	25,240	$	40,144	$	35,693

Weighted average common shares outstanding	32,563		35,624		33,359		35,775
Dilutive effect of outstanding equity awards (a)	87		200		128		257
Diluted weighted average common shares outstanding	32,650		35,824		33,487		36,032
Diluted earnings per common share	$	0.54	$	0.70	$	1.20	$	0.99

___________________________________

(a) Excludes 103,000 and 49,000 shares underlying equity awards for the three and six months ended June 25, 2023, respectively, and 63,000 and 42,000 shares underlying equity awards for the three and six months ended June 26, 2022, respectively, as the effect of including such awards would have been anti-dilutive.

8. Debt

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


	June 25, 2023		December 25, 2022
Senior notes	$	400,000	$	400,000
Revolving facilities (a)	391,529		205,000
Outstanding debt	$	791,529	$	605,000
Unamortized debt issuance costs	(7,180)		(7,931)
Current portion of long-term debt	(15,529)		—
Total long-term debt, net	$	768,820	$	597,069

___________________________________

(a) Revolving facilities as of June 25, 2023 includes $15.5 million outstanding under the PJMF Revolving Facility as defined and discussed below.

Senior Notes

On September 14, 2021, the Company issued $400.0 million of 3.875% senior notes (the “Notes”) which will mature on September 15, 2029. Interest on the Notes is payable semi-annually in cash in arrears on March 15 and September 15 of each year at a fixed interest rate of 3.875% per annum. Refer to Note 12 of the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 25, 2022. for further description of the provisions and covenant requirements under the Senior Notes.

Credit Agreement

The Company’s amended and restated credit agreement, dated September 14, 2021 (the “Credit Agreement”) provides for a senior secured revolving credit facility in an aggregate available principal amount of $600.0 million (the “PJI Revolving Facility”), of which up to $40.0 million is available as swingline loans and up to $80.0 million is available as letters of credit. The PJI Revolving Facility will mature on September 14, 2026. The remaining availability under the PJI Revolving Facility was approximately $224.0 million as of June 25, 2023. Refer to Note 12 of the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 25, 2022 for further description of the provisions and covenant requirements under the Credit Agreement.

PJMF Revolving Facility

PJMF has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 with U.S. Bank National Association, as lender. The PJMF Revolving Facility is secured by substantially all assets of PJMF. The PJMF Revolving Facility matures on September 30, 2023, but is subject to annual amendments. The borrowings under the PJMF Revolving Facility accrue interest at a variable rate of a one month LIBOR plus 1.60%. The applicable interest rate on the PJMF Revolving facility was 6.8% for the three months ended June 25, 2023. As of June 25, 2023, the principal amount of debt outstanding under the PJMF Revolving Facility was approximately $15.5 million and is classified as Current portion of long-term debt in the Condensed Consolidated Balance Sheets. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the Credit Agreement.

Derivative Financial Instruments

During the three months ended June 25, 2023, the Company executed a new interest rate swap with an initial notional value of $100.0 million to replace the Company’s prior interest swaps, which had a notional value of $125.0 million and matured on April 30, 2023. The objective of the interest rate swap is to mitigate the Company’s exposure to the impact of interest rate changes associated with our variable rate debt under the PJI Revolving Facility. We have designated the interest rate swap as a cash flow hedge and will assess hedge effectiveness at regular intervals through the maturity date of June 30, 2025. The interest rate swaps are marked to market at each reporting date, and any unrealized gains or losses are included in Accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets and reclassified to Net interest

expense in the Condensed Consolidated Statements of Operations in the same period or periods during which the hedged transaction affect earnings.

As of June 25, 2023, we have the following interest rate swap agreements:

Effective Dates

Floating Rate Debt

Fixed Rates

June 23, 2023 through June 30, 2025

50 million

4.55%

June 23, 2023 through June 30, 2025

50 million

4.55%

The following table provides information on the location and amounts of our current and expired swaps in the accompanying condensed consolidated financial statements (in thousands):


	Interest Rate Swap Derivatives
Balance Sheet Location	Fair Value June 25, 2023		Fair Value December 25, 2022
Other current assets	$	—	$	986
Other long-term liabilities	$	15	$	—

The effect of derivative instruments on the accompanying condensed consolidated financial statements is as follows (in thousands):


Derivatives - Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in AOCL on Derivative		Location of (Loss) or Gain Reclassified from AOCL into Income	Amount of (Loss) or Gain Reclassified from AOCL into Income		Total Net Interest Expense on Condensed Consolidated Statements of Operations
Interest rate swaps for the three months ended:
June 25, 2023	$	1,165	Interest expense	$	(36)	$	(11,275)
June 26, 2022	$	1,445	Interest expense	$	(735)	$	(6,081)

Interest rate swaps for the six months ended:
June 25, 2023	$	1,424	Interest Expense	$	(243)	$	(20,296)
June 26, 2022	$	2,763	Interest Expense	$	(200)	$	(10,344)

Interest paid, including payments made or received under the swaps, was $5.7 million and $2.4 million for the three months ended June 25, 2023 and June 26, 2022, respectively, and $16.6 million and $12.6 million for the six months ended June 25, 2023 and June 26, 2022, respectively.

9. Litigation, Commitments and Contingencies

Litigation

The Company is involved in a number of lawsuits, claims, investigations and proceedings, including those specifically identified below, consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with ASC 450, “Contingencies,” the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s condensed consolidated financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Durling et al v. Papa John’s International, Inc., is a conditionally certified collective action filed in May 2016 in the United States District Court for the Southern District of New York, alleging that corporate restaurant delivery drivers were not properly reimbursed for vehicle mileage and expenses in accordance with the Fair Labor Standards Act. In July 2018,

the District Court granted a motion to certify a conditional corporate collective class and the opt-in notice process has been completed. As of the close of the opt-in period on October 29, 2018, 9,571 drivers opted into the collective class. On September 30, 2022, the parties reached a settlement in principle to resolve the case. On December 19, 2022, the District Court granted preliminary approval of the settlement, and following a hearing on July 27, 2023, the District Court granted final approval of the settlement. Pursuant to the terms of the settlement, which contemplated a total aggregate settlement amount of no more than $

Form: 10-Q

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