SEC Filing | Papa John's International, Inc.

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pzza-20230326

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 March 26, 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 April 27, 2023, there were 32,656,059 shares of the Registrant’s common stock outstanding.

INDEX


		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets — March 26 , 202 3 and December 2 5 , 20 2 2	1

	Condensed Consolidated Statements of Operations — Three months ended March 26, 2023 and March 27, 2022	2

	Condensed Consolidated Statements of Comprehensive Income — Three months ended March 2 6 , 202 3 and March 27 , 2022	3

	Condensed Consolidated Statements of Stockholders’ Deficit — Three months ended March 2 6 , 202 3 and March 27 , 2022	4

	Condensed Consolidated Statements of Cash Flows — Three months ended March 26 , 202 3 and March 2 7 , 2022	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 6.	Exhibits	36

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)	March 26, 2023		December 25, 2022
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	46,708	$	47,373
Accounts receivable, net	99,997		102,533
Notes receivable, current portion	7,207		6,848
Income tax receivable	5,957		8,780
Inventories	37,112		41,382
Prepaid expenses and other current assets	49,917		44,123

Total current assets	246,898		251,039
Property and equipment, net	253,144		249,793
Finance lease right-of-use assets, net	27,847		24,941
Operating lease right-of-use assets	170,148		172,425
Notes receivable, less current portion, net	21,242		21,248
Goodwill	70,788		70,616
Deferred income taxes	553		1,920
Other assets	74,241		72,245
Total assets	$	864,861	$	864,227

Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit
Current liabilities:
Accounts payable	$	68,622	$	62,316
Income and other taxes payable	8,180		8,766
Accrued expenses and other current liabilities	134,988		142,535
Current deferred revenue	20,508		21,272
Current finance lease liabilities	7,473		6,850
Current operating lease liabilities	24,959		23,418
Current portion of long-term debt	8,200		—

Total current liabilities	272,930		265,157
Deferred revenue	21,733		23,204
Long-term finance lease liabilities	21,392		19,022
Long-term operating lease liabilities	157,211		160,905
Long-term debt, less current portion, net	797,362		597,069
Deferred income taxes	1,112		—
Other long-term liabilities	67,183		68,317
Total liabilities	1,338,923		1,133,674

Redeemable noncontrolling interests	1,263		1,217

Stockholders’ deficit:
Common stock ($0.01 par value per share; issued 49,207 at March 26, 2023 and 49,138 at December 25, 2022)	492		491
Additional paid-in capital	443,686		449,829
Accumulated other comprehensive loss	(8,766)		(10,135)
Retained earnings	203,569		195,856
Treasury stock (16,851 shares at March 26, 2023 and 14,402 shares at December 25, 2022, at cost)	(1,130,136)		(922,434)
Total stockholders’ deficit	(491,155)		(286,393)
Noncontrolling interests in subsidiaries	15,830		15,729
Total Stockholders’ deficit	(475,325)		(270,664)
Total Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit	$	864,861	$	864,227

See accompanying notes.

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended
(In thousands, except per share amounts)		March 26, 2023		March 27, 2022

Revenues:
Domestic Company-owned restaurant sales		$	179,866	$	198,765
North America franchise royalties and fees		36,072		34,268
North America commissary revenues		212,566		209,679
International revenues		31,463		34,617
Other revenues		67,082		65,363
Total revenues		527,049		542,692
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses		147,784		161,661
North America commissary expenses		196,415		197,090
International expenses		17,311		19,914
Other expenses		61,078		60,555
General and administrative expenses		51,944		65,937
Depreciation and amortization		14,721		11,940
Total costs and expenses		489,253		517,097
Refranchising and impairment loss		—		(11,160)
Operating income		37,796		14,435
Net interest expense		(9,021)		(4,264)
Income before income taxes		28,775		10,171
Income tax expense (benefit)		6,229		(1,256)
Net income before attribution to noncontrolling interests		22,546		11,427
Net income attributable to noncontrolling interests		(170)		(933)
Net income attributable to the Company		$	22,376	$	10,494

Calculation of net income for earnings per share:
Net income attributable to the Company		$	22,376	$	10,494
Dividends paid to participating securities		—		(60)

Net income attributable to common shareholders		$	22,376	$	10,434

Basic earnings per common share		$	0.66	$	0.29
Diluted earnings per common share		$	0.65	$	0.29

Basic weighted average common shares outstanding		34,155		35,927
Diluted weighted average common shares outstanding		34,324		36,236

Dividends declared per common share		$	0.42	$	0.35

See accompanying notes.

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended
(In thousands)		March 26, 2023		March 27, 2022

Net income before attribution to noncontrolling interests		$	22,546	$	11,427
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		1,442		(861)
Interest rate swaps (1)		336		1,712
Other comprehensive income (loss), before tax		1,778		851
Income tax effect:
Foreign currency translation adjustments		(332)		198
Interest rate swaps (2)		(77)		(394)
Income tax effect		(409)		(196)
Other comprehensive income (loss), net of tax		1,369		655
Comprehensive income before attribution to noncontrolling interests		23,915		12,082
Less: comprehensive income, redeemable noncontrolling interests		(46)		(510)
Less: comprehensive income, nonredeemable noncontrolling interests		(124)		(423)
Comprehensive income attributable to the Company		$	23,745	$	11,149

___________________________________

(1) Amounts reclassified out of accumulated other comprehensive income into net interest (expense) income include $(207) and $535 for the three months ended March 26, 2023 and March 27, 2022, respectively.

(2) The income tax effects of amounts reclassified out of accumulated other comprehensive loss were $47 and $(120) for the three months ended March 26, 2023 and March 27, 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 March 26, 2023















Balance at December 25, 2022	34,736	$	491	$	449,829	$	(10,135)	$	195,856	$	(922,434)	$	15,729	$	(270,664)
Net income (1)	—	—		—		—		22,376		—		124		$	22,500
Other comprehensive income (loss), net of tax	—	—		—		1,369		—		—		—		$	1,369
Dividends on common stock	—	—		—		—		(14,663)		—		—		$	(14,663)
Exercise of stock options	15	—		614		—		—		—		—		$	614
Acquisition of Company common stock	(2,523)	—		—		—		—		(212,444)		—		$	(212,444)
Stock-based compensation expense	—	1		3,897		—		—		—		—		$	3,898
Issuance of restricted stock	197	—		(4,609)		—		—		4,609		—		$	—
Tax effect of restricted stock awards	(72)	—		(5,999)		—		—		—		—		$	(5,999)
Distributions to noncontrolling interests	—	—		—		—		—		—		(23)		$	(23)
Other	3	—		(46)		—		—		133		—		$	87
Balance at March 26, 2023	32,356	$	492	$	443,686	$	(8,766)	$	203,569	$	(1,130,136)	$	15,830	$	(475,325)

___________________________________

(1) Net income to the Company for the three months ended March 26, 2023 excludes $46 allocable to the redeemable noncontrolling interests for our joint venture arrangements.

(2) At March 26, 2023, the accumulated other comprehensive loss of $8,766 was comprised of net unrealized foreign currency translation loss of $7,586 and net unrealized loss on the interest rate swap agreements of $1,180.

(3) Acquisition of Company common stock for the three months ended March 26, 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 March 27, 2022














Balance at December 26, 2021	35,797	$	490	$	445,126	$	(9,971)	$	183,157	$	(806,472)	$	15,212	$	(172,458)
Net income (1)	—	—		—		—		10,494		—		423		$	10,917
Other comprehensive income (loss), net of tax	—	—		—		655		—		—		—		$	655
Dividends on common stock	—	—		47		—		(12,527)		—		—		$	(12,480)
Exercise of stock options	17	—		741		—		—		—		—		$	741
Acquisition of Company common stock	(301)	—		—		—		—		(32,709)		—		$	(32,709)
Stock-based compensation expense	—	1		4,175		—		—		—		—		$	4,176
Issuance of restricted stock	228	—		(6,369)		—		—		6,369		—		$	—
Tax effect of restricted stock awards	(69)	—		(7,461)		—		—		—		—		$	(7,461)

Other	3	—		(34)		—		—		209		—		$	175
Balance at March 27, 2022	35,675	$	491	$	436,225	$	(9,316)	$	181,124	$	(832,603)	$	15,635	$	(208,444)

___________________________________

(1) Net income to the Company for the three months ended March 27, 2022 excludes $510 allocable to the redeemable noncontrolling interests for our joint venture arrangements.

(2) At March 27, 2022, the accumulated other comprehensive loss of $9,316 was comprised of net unrealized foreign currency translation loss of $5,533 and net unrealized loss on the interest rate swap agreements of $3,783.

See accompanying notes.

Papa John’s International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended
(In thousands)		March 26, 2023		March 27, 2022

Operating activities
Net income before attribution to noncontrolling interests		$	22,546	$	11,427
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for allowance for credit losses on accounts and notes receivable		513		15,167
Depreciation and amortization		14,721		11,940
Refranchising and impairment loss		—		11,160
Deferred income taxes		2,031		(1,817)
Stock-based compensation expense		3,898		4,176
Other		496		(2,135)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		2,182		(2,503)
Income tax receivable		2,822		(1,151)
Inventories		4,330		(4,731)
Prepaid expenses and other current assets		(4,351)		77
Other assets and liabilities		71		(654)
Accounts payable		(310)		7,359
Income and other taxes payable		(512)		8,013
Accrued expenses and other current liabilities		(5,413)		(29,469)
Deferred revenue		(2,236)		(1,465)
Net cash provided by operating activities		40,788		25,394
Investing activities
Purchases of property and equipment		(18,410)		(10,233)
Notes issued		(976)		(272)
Repayments of notes issued		1,069		3,432
Acquisitions, net of cash acquired		—		(1,250)

Other		42		8
Net cash used in investing activities		(18,275)		(8,315)
Financing activities

Net proceeds of revolving credit facilities		208,200		47,000

Proceeds from exercise of stock options		614		741
Acquisition of Company common stock		(209,640)		(32,709)
Dividends paid to common stockholders		(14,603)		(12,608)
Tax payments for equity award issuances		(5,999)		(7,461)

Distributions to noncontrolling interests		(23)		(685)

Other		(1,761)		(1,065)
Net cash used in financing activities		(23,212)		(6,787)
Effect of exchange rate changes on cash and cash equivalents		34		(233)
Change in cash and cash equivalents		(665)		10,059
Cash and cash equivalents at beginning of period		47,373		70,610
Cash and cash equivalents at end of period		$	46,708	$	80,669

See accompanying notes.

Papa John’s International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 26, 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 months ended March 26, 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 and 188 restaurants at March 26, 2023 and March 27, 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. 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.

Net income attributable to these joint ventures for the three months ended March 26, 2023 and March 27, 2022 was as follows (in thousands):


	Three Months Ended
		March 26, 2023		March 27, 2022
Papa John’s International, Inc.		$	397	$	1,621
Noncontrolling interests		170		933
Total net income		$	567	$	2,554

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 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 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 March 26, 2023 and December 25, 2022 are as follows:


			Fair Value Measurements
(In thousands)	Carrying Value		Level 1		Level 2		Level 3
March 26, 2023
Financial assets:
Cash surrender value of life insurance policies (a)	$	30,337	$	30,337	$	—	$	—
Interest rate swaps (b)	$	274	$	—	$	274	$	—



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 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 March 26, 2023 and December 25, 2022:


	March 26, 2023				December 25, 2022
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
3.875% Senior Notes	$	400,000	$	342,000	$	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 off 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	609		24
Write-offs charged against the allowance	(228)		—
Recoveries collected	(84)		(36)
Balance at March 26, 2023	$	7,015	$	14,487

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 March 26, 2023, we leased and subleased 446 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 $2.9 million and $3.0 million for the three months ended March 26, 2023 and March 27, 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 52 domestic leases. These leases have varying terms, the latest of which expires in 2036. As of March 26, 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 $8.7 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:


	Three Months Ended
(In thousands)	March 26, 2023		March 27, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	309	$	262
Financing cash flows from finance leases	$	1,743	$	1,241
Operating cash flows from operating leases (a)	$	9,178	$	9,612
Right-of-use assets obtained in exchange for new finance lease liabilities	$	4,764	$	569
Right-of-use assets obtained in exchange for new operating lease liabilities	$	4,721	$	20,801
Cash received from sublease income	$	2,532	$	3,092

___________________________________

(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):


	March 26, 2023		December 25, 2022
Assets
Current assets:
Cash and cash equivalents	$	16,076	$	17,174
Accounts receivable, net	14,254		14,780

Prepaid expenses and other current assets	7,638		1,815
Total current assets	37,968		33,769
Deferred income taxes	655		655
Total assets	$	38,623	$	34,424

Liabilities
Current liabilities:
Accounts payable	$	13,589	$	12,428
Income and other taxes payable	13		8
Accrued expenses and other current liabilities	13,911		17,928
Current portion of long-term debt	8,200		—
Current deferred revenue	4,381		4,395
Total current liabilities	40,094		34,759
Deferred revenue	1,800		2,503
Total liabilities	$	41,894	$	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 months ended March 26, 2023 and March 27, 2022, the Company recognized $8.4 million and $9.3 million in revenue, respectively, related to deferred revenue.

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


	Contract Liabilities
	March 26, 2023		December 25, 2022		Change
Franchise fees and unredeemed gift card liabilities	$	29,166	$	30,710	$	(1,544)
Customer loyalty program obligations	13,075		13,766		(691)
Total contract liabilities	$	42,241	$	44,476	$	(2,235)

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 March 26, 2023 and December 25, 2022, the contract assets were approximately $7.0 million and $6.2 million, respectively. For the three months ended March 26, 2023 and March 27, 2022, revenue was reduced approximately $0.9 million and $0.8 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	$	3,052	$	2,884	$	2,702	$	2,439	$	2,165	$	6,485	$	19,727

At March 26, 2023, approximately $3.3 million of area development fees related to unopened stores and international unearned royalties are included in Deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings and franchisees’ revenues. Gift card liabilities of approximately $6.2 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 March 26, 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 March 26, 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 months ended March 26, 2023 and March 27, 2022:







(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
Three Months Ended
March 26, 2023	2,523	$	83.10	$	209,640	$	90,160
March 27, 2022	301	$	108.76	$	32,709	$	392,091

(a) Aggregate cost of shares purchased for the three months ended March 26, 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. These costs were classified as non-cash financing activities during the three months ended March 26, 2023.

The shares repurchased during the three months ended March 26, 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 $14.6 million ($0.42 per share) for the three months ended March 26, 2023. On April 25, 2023, our Board of Directors declared a first quarter dividend of $0.42 per common share (approximately $13.8 million in the aggregate), which will be paid on May 26, 2023 to stockholders of record as of the close of business on May 15, 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
		March 26, 2023		March 27, 2022
Basic earnings per common share
Net income attributable to the Company		$	22,376	$	10,494
Dividends paid to participating securities		—		(60)

Net income attributable to common shareholders		$	22,376	$	10,434

Basic weighted average common shares outstanding		34,155		35,927
Basic earnings per common share		$	0.66	$	0.29

Diluted earnings per common share
Net income attributable to common shareholders		$	22,376	$	10,434

Weighted average common shares outstanding		34,155		35,927
Dilutive effect of outstanding equity awards (a)		169		309
Diluted weighted average common shares outstanding		34,324		36,236
Diluted earnings per common share		$	0.65	$	0.29

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(a) Excludes 22,000 and 21,000 equity awards for the three months ended March 26, 2023 and March 27, 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):


	March 26, 2023		December 25, 2022
Senior notes	$	400,000	$	400,000
Revolving facilities (a)	413,133		205,000
Outstanding debt	$	813,133	$	605,000
Unamortized debt issuance costs	(7,571)		(7,931)
Current portion of long-term debt	(8,200)		—
Total long-term debt, net	$	797,362	$	597,069

___________________________________

(a) Revolving facilities as of March 26, 2023 includes $8.2 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.

The Company may redeem the Notes, in whole or in part, at any time on or after September 15, 2024 at established redemption prices ranging from 97 to 194 basis points depending on when the Notes are redeemed. At any time prior to September 15, 2024, the Company may also redeem up to 40% of the Notes with net cash proceeds of certain equity offerings at a redemption price equal to 103.875% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, excluding the redemption date. In addition, at any time prior to September 15, 2024, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest and an applicable “make-whole” premium. The Notes also contain customary redemption provisions related to asset sales and certain change of control transactions.

The Indenture governing the Notes contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Notes and certain provisions related to bankruptcy events. The Indenture also contains customary negative covenants.

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 $195.0 million as of March 26, 2023.

Up to $50.0 million of the PJI Revolving Facility may be advanced in certain agreed foreign currencies, including Euros, Pounds Sterling, Canadian Dollars, Japanese Yen, and Mexican Pesos. Additionally, the Credit Agreement includes an accordion feature allowing for a future increase of the PJI Revolving Facility and/or incremental term loans in an aggregate amount of up to $500.0 million, subject to certain conditions, including obtaining commitments from one or more new or existing lenders to provide such increased amounts and ongoing compliance with financial covenants.

Loans under the PJI Revolving Facility accrue interest at a per annum rate equal to, at the Company’s election, either a LIBOR rate plus a margin ranging from 1.25% to 2.00% or a base rate (generally determined according to the greater of a prime rate, federal funds rate plus 0.50%, or a LIBOR rate plus 1.00%) plus a margin ranging from 0.25% to 1.00%. In each case, the actual margin is determined according to a ratio of the Company’s total indebtedness to an earnings calculation, Consolidated EBITDA (as defined in our credit agreement), for the then most recently ended four quarter period (the “Leverage Ratio”). An unused commitment fee ranging from 18 to 30 basis points per annum, determined according to the Leverage Ratio, applies to the underutilized commitments under the PJI Revolving Facility. Loans outstanding under the PJI Revolving Facility may be prepaid at any time without premium or penalty, subject to customary breakage costs in the case of borrowings for which a LIBOR rate election is in effect. The Credit Agreement also contains

provisions specifying alternative interest rate calculations to be used at such time as LIBOR ceases to be available as a benchmark for establishing the interest rate on floating interest rate borrowings.

The Credit Agreement contains customary affirmative and negative covenants that, among other things, require customary reporting obligations, and restrict, subject to certain exceptions, the occurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates. The Company is also subject to the following financial covenants: (1) a maximum Leverage Ratio of 5.25 to 1.00, subject to the Company’s election to increase the maximum Leverage Ratio by 0.50 to 1.00 in connection with material acquisitions if the Company satisfies certain requirements, and (2) a minimum interest coverage ratio defined as Consolidated EBITDA (as defined in the Credit Agreement) plus consolidated rental expense to consolidated interest expense plus consolidated rental expense of 2.00 to 1.00. We were in compliance with these financial covenants at March 26, 2023.

Obligations under the Credit Agreement are guaranteed by certain direct and indirect material domestic subsidiaries of the Company (the “Guarantors”) and are secured by a security interest in substantially all of the capital stock and equity interests of the Company’s and the Guarantors’ Domestic and first tier material foreign subsidiaries. The Credit Agreement contains customary events of default including, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, judgment defaults, and the occurrence of certain change of control events. The occurrence of an event of default may result in the termination of the PJI Revolving Facility, acceleration of repayment obligations and the exercise of remedies by the Lenders with respect to the Guarantors.

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 le