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Table of Contents

Graphic

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 29, 2020

OR

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, Kentucky 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  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 (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  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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

At April 28, 2020, there were outstanding 32,466,249 shares of the registrant’s common stock, par value $0.01 per share.

Table of Contents

INDEX

Page No.

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets — March 29, 2020 and December 29, 2019

3

Condensed Consolidated Statements of Operations — Three months ended March 29, 2020 and March 31, 2019

4

Condensed Consolidated Statements of Comprehensive Loss — Three months ended March 29, 2020 and March 31, 2019

5

Condensed Consolidated Statements of Stockholders’ Deficit — Three months ended March 29, 2020 and March 31, 2019

6

Condensed Consolidated Statements of Cash Flows — Three months ended March 29, 2020 and March 31, 2019

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

38

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 6.

Exhibits

39

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

    

March 29,

    

December 29,

(In thousands, except per share amounts)

2020

2019

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

36,376

$

27,911

Accounts receivable, net

77,607

80,921

Notes receivable, current portion

 

9,343

 

7,790

Income tax receivable

4,101

4,024

Inventories

 

29,810

 

27,529

Prepaid expenses and other current assets

 

27,956

 

33,371

Total current assets

 

185,193

 

181,546

Property and equipment, net

 

205,035

 

211,741

Finance lease right-of-use assets, net

9,365

9,383

Operating lease right-of-use assets

144,160

148,229

Notes receivable, less current portion, net

 

36,527

 

33,010

Goodwill

 

79,739

 

80,340

Deferred income taxes

1,694

1,839

Other assets

 

56,555

 

64,633

Total assets

$

718,268

$

730,721

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

Current liabilities:

Accounts payable

$

33,745

$

29,141

Income and other taxes payable

 

8,167

 

7,599

Accrued expenses and other current liabilities

 

121,835

 

120,566

Current deferred revenue

6,250

5,624

Current finance lease liabilities

1,913

1,789

Current operating lease liabilities

23,118

23,226

Current portion of long-term debt

20,623

20,000

Total current liabilities

 

215,651

 

207,945

Deferred revenue

 

12,694

 

14,722

Long-term finance lease liabilities

7,555

7,629

Long-term operating lease liabilities

121,368

125,297

Long-term debt, less current portion, net

 

342,611

 

347,290

Deferred income taxes

 

607

 

2,649

Other long-term liabilities

 

86,227

 

84,927

Total liabilities

 

786,713

 

790,459

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

251,893

251,133

Redeemable noncontrolling interests

 

5,962

 

5,785

Stockholders’ deficit:

Common stock ($0.01 par value per share; issued 44,775 at March 29, 2020 and 44,748 at December 29, 2019)

448

447

Additional paid-in capital

 

220,187

 

219,047

Accumulated other comprehensive loss

 

(20,768)

 

(10,185)

Retained earnings

 

202,287

 

205,697

Treasury stock (12,805 shares at March 29, 2020 and 12,854 shares at December 29, 2019, at cost)

 

(744,463)

 

(747,327)

Total stockholders’ deficit

 

(342,309)

 

(332,321)

Noncontrolling interests in subsidiaries

 

16,009

 

15,665

Total Stockholders’ deficit

 

(326,300)

 

(316,656)

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

$

718,268

$

730,721

See accompanying notes.

3

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

    

Three Months Ended

March 29,

March 31,

(In thousands, except per share amounts)

    

2020

    

2019

Revenues:

Domestic Company-owned restaurant sales

$

161,440

$

161,803

North America franchise royalties and fees

 

19,440

 

17,530

North America commissary revenues

 

155,422

 

148,904

International revenues

 

26,059

25,667

Other revenues

47,498

44,501

Total revenues

 

409,859

 

398,405

Costs and expenses:

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

Domestic Company-owned restaurant expenses

129,111

133,053

North America commissary expenses

144,272

138,557

International expenses

15,101

14,305

Other expenses

45,957

44,097

General and administrative expenses

 

47,651

 

51,135

Depreciation and amortization

 

12,295

 

11,749

Total costs and expenses

 

394,387

 

392,896

Operating income

 

15,472

 

5,509

Net interest expense

 

(3,967)

(6,276)

Income (loss) before income taxes

 

11,505

 

(767)

Income tax expense

 

2,512

 

831

Net income (loss) before attribution to noncontrolling interests

 

8,993

 

(1,598)

Net income attributable to noncontrolling interests

 

(550)

 

(133)

Net income (loss) attributable to the Company

$

8,443

$

(1,731)

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

Net income (loss) attributable to the Company

$

8,443

$

(1,731)

Preferred stock dividends and accretion

 

(3,471)

 

(2,070)

Net income (loss) attributable to common shareholders

$

4,972

$

(3,801)

Basic earnings (loss) per common share

$

0.15

$

(0.12)

Diluted earnings (loss) per common share

$

0.15

$

(0.12)

Basic weighted average common shares outstanding

 

32,093

 

31,554

Diluted weighted average common shares outstanding

 

32,320

 

31,554

Dividends declared per common share

$

0.225

$

0.225

See accompanying notes.

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Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

Three Months Ended

March 29,

    

March 31,

(In thousands)

 

2020

2019

Net income (loss) before attribution to noncontrolling interests

$

8,993

$

(1,598)

Other comprehensive loss, before tax:

Foreign currency translation adjustments

(2,825)

1,733

Interest rate swaps (1)

 

(10,919)

 

(3,955)

Other comprehensive loss, before tax

 

(13,744)

 

(2,222)

Income tax effect:

Foreign currency translation adjustments

 

650

 

(399)

Interest rate swaps (2)

 

2,511

 

918

Income tax effect

 

3,161

 

519

Other comprehensive loss, net of tax

 

(10,583)

 

(1,703)

Comprehensive loss before attribution to noncontrolling interests

 

(1,590)

 

(3,301)

Less: comprehensive (income) loss, redeemable noncontrolling interests

 

(176)

 

119

Less: comprehensive (income), nonredeemable noncontrolling interests

 

(374)

 

(252)

Comprehensive loss attributable to the Company

$

(2,140)

$

(3,434)

(1)Amounts reclassified out of accumulated other comprehensive loss into net interest expense included ($330) and $148 for the three months ended March 29, 2020 and March 31, 2019, respectively.

(2)The income tax effects of amounts reclassified out of accumulated other comprehensive loss were $80 and $94 for the three months ended March 29, 2020 and March 31, 2019, respectively.

See accompanying notes.

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Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(Unaudited)

Papa John’s International, Inc.

    

Common

    

    

    

    

    

Accumulated

    

    

    

    

    

    

    

Stock

Additional

Other

Noncontrolling

Total

(In thousands)

Shares

Common

Paid-In

Comprehensive

Retained

Treasury

Interests in

Stockholders’

For the three months ended March 29, 2020

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 of ASU 2016-13 (1)

(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)

8,443

374

8,817

Other comprehensive loss

(10,583)

(10,583)

Cash dividends on common stock

55

(7,292)

(7,237)

Cash dividends on preferred stock

(3,412)

(3,412)

Exercise of stock options

27

1

1,240

1,241

Stock-based compensation expense

3,950

3,950

Issuance of restricted stock

47

(2,707)

2,707

Tax effect of restricted stock awards

(1,383)

(1,383)

Distributions to noncontrolling interests

(30)

(30)

Other

3

(15)

(83)

157

59

Balance at March 29, 2020

 

31,971

$

448

$

220,187

$

(20,768)

$

202,287

$

(744,463)

$

16,009

$

(326,300)

(1)As of December 30, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”.
(2)Net income to the Company at March 29, 2020 excludes $176 allocable to the redeemable noncontrolling interests for our joint venture arrangements.

At March 29, 2020, the accumulated other comprehensive loss of $20,768 was comprised of net unrealized foreign currency translation loss of $7,774 and net unrealized loss on the interest rate swap agreements of $12,994.

See accompanying notes.

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Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit (continued)

(Unaudited)

Papa John’s International, Inc.

 

    

Common

    

    

    

    

    

Accumulated

    

    

    

    

    

    

    

 

Stock

Additional

Other

Noncontrolling

Total

 

(In thousands)

Shares

Common

Paid-In

Comprehensive

Retained

Treasury

Interests in

Stockholders’

 

For the three months ended March 31, 2019

Outstanding

Stock

Capital

Loss

Earnings

Stock

Subsidiaries

Deficit

 

Balance at December 30, 2018

 

31,372

$

443

$

192,984

$

(3,143)

$

242,182

$

(751,704)

$

15,225

$

(304,013)

Net loss (1)

 

 

 

 

 

(1,731)

 

 

252

 

(1,479)

Other comprehensive loss

 

 

 

 

(1,703)

 

 

 

 

(1,703)

Cash dividends on common stock

 

 

 

36

 

 

(7,161)

 

 

 

(7,125)

Cash dividends on preferred stock

(2,040)

(2,040)

Exercise of stock options

 

3

 

 

51

 

 

 

 

 

51

Stock-based compensation expense

 

 

 

3,731

 

 

 

 

 

3,731

Issuance of restricted stock

 

42

 

 

(2,454)

 

 

 

2,454

 

 

Tax effect of restricted stock awards

 

 

 

(869)

 

 

 

 

(869)

Distributions to noncontrolling interests

(19)

(19)

Other

 

3

 

 

(236)

 

 

189

 

255

 

 

208

Balance at March 31, 2019

 

31,420

$

443

$

193,243

$

(4,846)

$

231,439

$

(748,995)

$

15,458

$

(313,258)

(1)Net loss to the Company at March 31, 2019 excludes ($119) allocable to the redeemable noncontrolling interests for our joint venture arrangements.

At March 31, 2019, the accumulated other comprehensive loss of $4,846 was comprised of net unrealized foreign currency translation loss of $5,525, partially offset by net unrealized gain on the interest rate swap agreements of $679.

See accompanying notes.

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Table of Contents

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three months ended

March 29,

    

March 31,

(In thousands)

    

2020

2019

Operating activities

Net income (loss) before attribution to noncontrolling interests

$

8,993

$

(1,598)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Provision (credit) for uncollectible accounts and notes receivable

 

768

 

(50)

Depreciation and amortization

 

12,295

 

11,749

Deferred income taxes

 

1,185

 

(1,309)

Preferred stock option mark-to-market adjustment

5,914

Stock-based compensation expense

 

3,950

 

3,731

Other

 

234

 

838

Changes in operating assets and liabilities:

Accounts receivable

 

(1,839)

 

(3,443)

Income tax receivable

932

10,715

Inventories

 

(2,281)

 

810

Prepaid expenses

 

6,118

 

7,888

Other current assets

 

(532)

 

(13,855)

Other assets and liabilities

 

2,670

 

(3,258)

Accounts payable

 

4,604

 

8,108

Income and other taxes payable

 

568

 

746

Accrued expenses and other current liabilities

 

(1,903)

 

(11,003)

Deferred revenue

 

(2,028)

 

(2,170)

Net cash provided by operating activities

 

33,734

 

13,813

Investing activities

Purchases of property and equipment

 

(5,933)

 

(8,658)

Loans issued

 

(7,413)

 

(859)

Repayments of loans issued

 

3,790

 

925

Other

 

1

 

329

Net cash used in investing activities

 

(9,555)

 

(8,263)

Financing activities

Proceeds from issuance of preferred stock

252,530

Repayments of term loan

(5,000)

(5,000)

Net proceeds (repayments) of revolving credit facilities

 

640

 

(240,026)

Dividends paid to common stockholders

(7,237)

(7,125)

Dividends paid to preferred stockholders

 

(3,412)

 

(2,040)

Issuance costs associated with preferred stock

(7,179)

Tax payments for equity award issuances

 

(1,383)

 

(869)

Proceeds from exercise of stock options

 

1,241

 

51

Distributions to noncontrolling interest holders

 

(30)

 

(19)

Other

 

(350)

 

50

Net cash used in financing activities

 

(15,531)

 

(9,627)

Effect of exchange rate changes on cash and cash equivalents

 

(183)

 

92

Change in cash and cash equivalents

 

8,465

 

(3,985)

Cash and cash equivalents at beginning of period

 

27,911

 

33,258

Cash and cash equivalents at end of period

$

36,376

$

29,273

See accompanying notes.

8

Table of Contents

Papa John’s International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 29, 2020

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 months ended March 29, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 27, 2020.  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 29, 2019.

2.

Update to 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 doubtful accounts and notes receivable, intangible assets, contract assets and contract liabilities, including the online 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.

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 80% 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 four joint venture arrangements in which there are noncontrolling interests held by third parties that include 192 restaurants at March 29, 2020.  At March 31, 2019, there were 183 restaurants held in three joint ventures.

Consolidated net income (loss) 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 income attributable to the noncontrolling interest holders.

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Table of Contents

The income before income taxes attributable to these joint ventures for the three months ended March 29, 2020 and March 31, 2019 was as follows (in thousands):

    

    

Three Months Ended

March 29,

March 31,

    

2020

    

2019

Papa John’s International, Inc.

$

1,131

$

464

Noncontrolling interests

 

550

 

133

Total income before income taxes

$

1,681

$

597

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 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 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. 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 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 on a quarterly basis to adjust for events, such as statute of limitations expirations, court or state rulings or audit settlements, which may impact our ultimate payment for such exposures.

Fair Value Measurements and Disclosures

The Company is required to determine the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Fair value is a market-based measurement, not an entity-specific measurement. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash 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 fair value of the amounts outstanding under our term debt and revolving credit facility approximate their carrying values due to the variable market-based interest rate (Level 2).

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Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.

Our financial assets and liabilities that were measured at fair value on a recurring basis as of March 29, 2020 and December 29, 2019 are as follows (in thousands):

Carrying

Fair Value Measurements

 

    

Value

    

Level 1

    

Level 2

    

Level 3

 

March 29, 2020

Financial assets:

Cash surrender value of life insurance policies (a)

$

27,787

$

27,787

$

$

Financial liabilities:

Interest rate swaps (b)

 

17,020

 

 

17,020

 

December 29, 2019

Financial assets:

Cash surrender value of life insurance policies (a)

$

33,220

$

33,220

$

$

Financial liabilities:

Interest rate swaps (b)

 

6,168

 

 

6,168

 

(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 London Interbank Offered Rates (“LIBOR”).

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Table of Contents

Accounting Standards Adopted

Financial Instruments – Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected versus incurred losses for financial assets held. The Company adopted ASU 2016-13 as of December 30, 2019 (the first day of fiscal 2020) under the modified retrospective transition method. Financial instruments subject to ASU 2016-13 include trade accounts receivable, notes receivable and interest receivable (classified as Other assets in the Condensed Consolidated Balance Sheet) from franchisees. The impact of the adoption was not material to our condensed consolidated financial statements. Upon adoption, the Company recorded a cumulative effect adjustment to retained earnings of $1.1 million, net of $0.3 million of income taxes, on the opening Condensed Consolidated Balance Sheet as of December 30, 2019.

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.  

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

911

463

-

Balance at December 30, 2019

8,253

4,035

910

Current period provision for expected credit losses

625

-

144

Write-offs charged against the allowance

(380)

-

-

Recoveries collected

-

(22)

-

Balance at March 29, 2020

$

8,498

$

4,013

$

1,054

Accounting Standards to be Adopted in Future Periods

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 is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. This guidance was effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements and related disclosures.

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3. Leases

Lessor Operating Leases

We sublease certain retail space to our franchisees in the United Kingdom which are primarily operating leases.  At March 29, 2020, we leased and subleased approximately 370 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.  We recognized total sublease income of $2.5 million and $2.3 million as of March 29, 2020 and March 31, 2019, respectively.

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 113 domestic leases. These leases have varying terms, the latest of which expires in 2036. As of March 29, 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 $17.9 million.  This contingent liability is not included in the Condensed Consolidated Balance Sheet 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:

Three Months Ended

(in thousands)

March 29, 2020

March 31, 2019

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

Operating cash flows from finance leases

$

151

$

Financing cash flows from finance leases

466

Operating cash flows from operating leases (a)

9,480

10,116

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

19

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

7,451

1,040

Cash received from sublease income

2,494

2,061

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

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4. Papa John’s Marketing Fund, Inc.

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 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.

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

March 29,

December 29,

2020

2019

Assets

Current assets:

Cash and cash equivalents

$

3,677

$

4,569

Accounts receivable, net

10,408

11,196

Income tax receivable

103

103

Prepaid expenses

649

1,316

Total current assets

14,837

17,184

Deferred income taxes, net

419

410

Total assets

$

15,256

$

17,594

Liabilities

Current liabilities:

Accounts payable

$

755

$

764

Accrued expenses and other current liabilities

12,478

14,287

Current deferred revenue

3,914