What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 149 added, 134 removed, 221 unchanged (56% of the section changed)

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(referred to as the “Company,” “Papa John’s” or in the first-person notations of “we,” “us” and “our”) began operations in 1984.

As of June 27, 2021, there were 5,523 Papa John’s restaurants (589 Company-owned and 4,934 franchised) operating in 49 countries and territories.

As of September 26, 2021, there were 5,569 Papa John’s restaurants (591 Company-owned and 4,978 franchised) operating in 50 countries and territories.

Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, contributions received from franchisees for domestic and international marketing funds we control, revenues for printing and promotional items, and information systems and related services used in their operations.

Recent Developments and Trends

Repurchase & Conversion of Series B Convertible Preferred Stock (“Series B Preferred Stock”) .

In the second quarter of 2021, t he Company repurchased 31.4% of the outstanding shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”), representing approximately 1.6 million shares of common stock on an as-converted basis, and the holders of the remaining outstanding shares of Series B Preferred Stock agreed to convert such shares into approximately 3.5 million shares of the Company’s common stock.

The Company made one-time cash payments of $188.6 million to the holders in exchange for the repurchase and conversion of the Series B Preferred Stock.

The excess of the cash payment over the carrying value of the shares of Series B Preferred Stock redeemed resulted in a decrease of $109.9 million to Net (loss) income attributable to common shareholders and reduced diluted earnings per share by $3.15 and $3.23 for the three and six months ended June 27, 2021, respectively, in the Condensed Consolidated Statement of Operations.

See “Items Impacting Comparability;

Non-GAAP Measures” for additional information.

There are no shares of Series B Preferred Stock outstanding as of the end of the quarter.

We plan to use our strong financial position to optimize our capital structure, support our long-term earnings growth and provide continued value creation for our shareholders.

The Company continued our culture of innovation in the second quarter of 2021 as we delivered an eighth consecutive quarter of system-wide sales growth.

Our two-year comparable sales were 33% in North America and 27% internationally.

New store openings also accelerated in the second quarter with the opening of 55 restaurants, net.

As interest has increased in our renewed brand, our expanding development pipeline is on track to be a key long-term growth driver.

We plan to focus on the continued strategy execution of innovation across our platforms to drive sustainable differentiation and growth this year and beyond.

Growth Strategy .

The Company delivered its ninth consecutive quarter of system-wide sales growth and continues to expand both domestically and internationally, as evidenced by our comparable sales and restaurant unit growth.

Our two-year comparable sales were 30.7% in North America and 29.0% internationally for the third quarter, driven by menu innovation and customer retention.

Additionally, new store openings continued to accelerate in the third quarter with the opening of 46 restaurants, net (169 net unit growth for the nine months ended September 26, 2021).

Our expanding development pipeline is on track to be a key long-term growth driver, with the largest domestic development deal in the history of the Company and an expanding international partnership both being announced in the third quarter.

We plan to focus on the continued strategy execution of innovation across our platforms to drive sustainable growth this year and beyond.

Capital Allocation Strategy.

During the quarter we executed on a key component of our capital allocation strategy with the issuance of $400.0 million of 3.875% senior notes which will mature on September 15, 2029 and the concurrent refinancing of our revolving credit facility.

Subsequent to the end of the quarter, we announced a new $425.0 million share repurchase program to further enhance shareholder returns as we continue to invest in our long-term growth.

These initiatives, paired with our previously announced annual dividend rate increase and the repurchase and conversion of all of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”) in the second quarter, strengthen our financial position, optimize our capital structure and provide value to our shareholders.

Coronavirus (“COVID-19”) and Related Market Impact.

The COVID-19 outbreak has presented evolving risks and developments domestically and internationally, as well as new opportunities for our business.

Our delivery and carryout model positioned us to continue to experience strong demand for our products.

Increased demand partly driven by the pandemic contributed to our strong sustainable comparable sales growth during the third quarter.

To ensure we can continue to meet the demand of our customers, we continue to monitor our supply chain and labor force availability.

Our ability to attract and retain hourly employees in our restaurants has become more challenging, especially as the job market has become more competitive.

We have continued to support these efforts through new hiring, referral and appreciation bonuses in the Company’s corporate restaurants and supply chain, holding national recruiting events, supplementing delivery drivers with delivery aggregator partnerships as needed and technology advancements.

We expect staffing and labor challenges to be a priority focus for us and we expect to continue investing in these initiatives during the remainder of the year.

We continue to focus on the safety of our team members, franchisees, and customers.

The Company has taken steps to mitigate the impact of the COVID-19 pandemic by implementing extra health and safety measures across our business, including No Contact Delivery and enhanced cleaning and sanitization measures, for the protection of both our customers and team members.

We believe the pandemic has accelerated our previously announced efforts to innovate and bring new and former customers to the Papa John’s system.

We believe that as the pandemic-related restrictions are lifted we will benefit in the long-term from the increase in customers we have experienced during the duration of the pandemic due to our menu innovation, customer loyalty programs and our offerings of high-quality pizza and other menu items.

Due to the substantial uncertainty related to the effects of the pandemic, its duration and the related market impacts, including the economic stimulus activity, we are unable to predict the specific impact the pandemic and related restrictions (including the lifting or re-imposing of restrictions due to the Delta variant or otherwise) will have on our results of operations, liquidity or long-term financial

condition, including whether and to what extent the increased demand for our products will continue.

For a discussion of the risks to our business presented by the COVID-19 pandemic, see the risk factors disclosed in the Company’s Annual Report on Form-10-K for the fiscal year ended December 27, 2020.

Strategic Corporate Reorganization for Long-term Growth.

In the third quarter of 2020, we announced plans to open an office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlanta, which is projected to open in the fall of 2021.

In the third quarter of 2020, we announced plans to open an office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlanta.

The Atlanta office is part of a broader strategic reorganization of corporate functions reflecting the Company’s ongoing transformation into a brand and culture that can effectively and efficiently deliver on the Company’s purpose, values and strategic business priorities.

Affected employees who do not relocate to Atlanta have been offered a separation package.

Affected employees who did not relocate to Atlanta were offered a separation package.

As a result, we expect to incur certain one-time corporate reorganization costs of approximately $17.0 to $20.0 million related to employee severance and transition, recruitment and relocation and other third-party costs through 2021.

Of that amount, we have incurred costs of approximately $13.2 million as of June 27, 2021 ($6.0 million in 2020 and $3.3 million and $7.2 million for the three and six months ended June 27, 2021, respectively).

Of that amount, we have incurred costs of approximately $15.3 million as of September 26, 2021 ($6.0 million in 2020 and $2.2 million and $9.4 million for the three and nine months ended September 26, 2021, respectively).

See “Items Impacting Comparability;

Non-GAAP Measures” for additional information.

Coronavirus (“COVID-19”).

The COVID-19 outbreak has presented evolving risks and developments domestically and internationally, as well as new opportunities for our business.

Our delivery and carryout model has positioned us to continue to experience strong demand for our products.

Increased demand partly driven by the pandemic contributed to our strong sustainable comparable sales growth during the second quarter.

To ensure we can continue to meet the demand of our customers, we continue to monitor our supply chain and have not experienced material disruptions.

Our primary focus continues to be the safety of our team members, franchisees, and customers.

We believe the pandemic has accelerated our previously announced efforts to innovate and bring new and former customers to the Papa John’s system.

We believe that as the pandemic-related restrictions are lifted we will benefit from the increase in customers we have experienced due to our menu innovation, customer loyalty programs and our offerings of high-quality pizza and other menu items.

Due to the substantial uncertainty related to the effects of the pandemic and its duration, we are unable to predict the specific impact the pandemic and related restrictions (including the lifting or re-imposing of restrictions due to the Delta variant or otherwise) will have on our results of operations, liquidity or long-term financial condition, including whether and to what extent the increased demand for our products will continue.

Global Restaurant Sales Information

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June 28, 2020

June 27, 2021

June 28, 2020

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September 26, 2021

September 27, 2020

September 26, 2021

September 27, 2020

Comparable sales growth:

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June 27, 2021

June 28, 2020

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September 27, 2020

September 26, 2021

September 27, 2020

North America Company-owned:

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June 27, 2021

June 28, 2020

September 26, 2021

September 27, 2020

($ in thousands)

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Income before income taxes

Six Months Ended

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June 28, 2020

Nine Months Ended

September 26, 2021

September 27, 2020

($ in thousands)

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Income before income taxes

Consolidated revenues increased $54.4 million, or 11.8% to $515.0 million, and $156.3 million, or 18.0% to $1.03 billion, for the three and six months ended June 27, 2021, respectively.

Domestic Company-owned restaurant sales increased $9.6 million, or 5.2%, and $45.4 million, or 13.1%, for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods.

The increases were primarily due to positive comparable sales increases of 5.6% and 13.8% for the three and six months ended June 27, 2021, respectively.

The comparable sales increases were significantly impacted by new product innovation, including the successful launch of our new Epic Stuffed Crust pizza in the first quarter of 2021.

The comparable sales increase for the six-month periods is partly due to higher demand that has been sustained during the pandemic, which was not reflected in the first quarter of 2020.

Consolidated revenues increased $39.8 million, or 8.4% to $512.8 million, and $196.1 million, or 14.6% to $1.54 billion, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods.

Domestic Company-owned restaurant sales increased $13.2 million, or 7.4%, and $58.6 million, or 11.1%, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods.

The increases were primarily due to positive comparable sales increases of 7.4% and 11.6% for the three and nine months ended September 26, 2021, respectively.

Comparable sales for the nine-month period were significantly impacted by new product innovation, including the successful launch of our new Epic Stuffed Crust pizza in the first quarter of 2021.

In addition, the increases are partly due to higher demand that has been sustained during the pandemic, which was not reflected in the first quarter of 2020.

“Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods.

North America franchise royalties and fees increased $8.3 million, or 34.3%, and $21.6 million, or 49.5% for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods.

The increases were primarily due to positive comparable sales increases of 5.2% and 15.1% for the three and six months ended June 27, 2021, respectively.

Additionally, the three and six months ended June 27, 2021 benefited from a higher effective royalty rate and higher franchise royalties of $5.1 million and $10.8 million, respectively, compared to the prior comparable periods primarily as a result of ending our temporary franchise assistance program in the third quarter of 2020.

North America franchise royalties and fees increased $6.7 million, or 26.3%, and $28.2 million, or 41.0% for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods.

The increases were primarily due to positive comparable sales increases of 6.8% and 12.3% for the three and nine months ended September 26, 2021, respectively.

Additionally, the three and nine months ended September 26, 2021 benefited from a higher effective royalty rate and higher franchise royalties of $3.5 million and $14.3 million, respectively, compared to the prior comparable periods primarily as a result of ending our temporary franchise assistance program in the third quarter of 2020.

The franchise assistance program was above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business.

North America franchise restaurant sales increased 6.4% to $708.6 million and 15.8% to $1.42 billion for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods.

North America franchise restaurant sales increased 8.0% to $693.9 million and 13.1% to $2.11 billion for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods.

North America franchise restaurant sales are not included in Company revenues;

however, our North America franchise royalties are derived from these sales.

North America commissary revenues increased $19.0 million, or 11.3%, and $48.5 million, or 15.0%, for the three and six months ended June 27, 2021, respectively, primarily due to higher volumes and higher pricing on higher commodities.

International revenues increased $9.5 million, or 33.9%, and $18.1 million, or 33.4%, for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods, primarily due to higher royalties from increased equivalent units, higher comparable sales of 21.2% and 22.2% for the three and six months ended June 27, 2021, respectively, and higher Papa John’s United Kingdom (“PJUK”) commissary revenues from higher equivalent units and higher comparable sales.

International revenues also increased $3.8 million and $5.8 million for three and six months ended June 27, 2021 due to favorable foreign exchange rates.

North America commissary revenues increased $7.9 million, or 4.3%, and $56.4 million, or 11.2%, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods primarily due to higher volumes.

The nine-month period also included higher pricing on higher commodities.

International revenues increased $5.0 million, or 14.9%, and $23.0 million, or 26.3%, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods, primarily due to higher royalties from increased equivalent units and higher comparable sales of 8.3% and 17.1% for the three and nine months ended September 26, 2021, respectively.

International revenues also increased $2.1 million and $7.9 million for three and nine months ended September 26, 2021 due to favorable foreign exchange rates.

“Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis.

International franchise restaurant sales increased 35.7% to $295.3 million and 32.2% to $586.4 million for the three and six months ended June 27, 2021, respectively, excluding the impact of foreign currency, primarily due to increases in comparable sales and equivalent units.

International franchise restaurant sales increased 21.4% to $320.3 million and 28.2% to $906.7 million for the three and nine months ended September 26, 2021, respectively, excluding the impact of foreign currency, primarily due to increases in comparable sales and equivalent units.

International franchise restaurant sales are not included in Company revenues;

however, our international royalty revenue is derived from these sales.

Other revenues increased $7.9 million, or 14.6%, and $22.7 million, or 22.4%, for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable period.

The increases were primarily due to higher marketing revenues from an increase in franchise sales and higher revenues from our technology platform, including our mobile ordering business which benefited from increased restaurant sales.

Other revenues increased $7.1 million, or 13.1%, and $29.9 million, or 19.1%, for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods.

The increases were primarily due to higher marketing fund revenues from an increase in franchise sales and higher revenues from our technology platform, including our mobile ordering business which benefited from increased restaurant sales.

Costs and Expenses

Total costs and expenses were approximately $470.4 million, or 91.3% of total revenues for the three months ended June 27, 2021, as compared to $430.1 million, or 93.4% of related revenues for the prior year comparable period.

For the six months ended June 27, 2021, total costs and expenses were approximately $935.3 million, or 91.1% of total revenues, as compared to $824.5 million, or 94.7% of total revenues for the prior year comparable period.

Total costs and expenses were approximately $474.2 million, or 92.5% of total revenues for the three months ended September 26, 2021, as compared to $448.4 million, or 94.8% of related revenues for the prior year comparable period.

For the nine months ended September 26, 2021, total costs and expenses were approximately $1.41 billion, or 91.6% of total revenues, as compared to $1.27 billion, or 94.7% of total revenues for the prior year comparable period.

The decreases in total costs and expenses, as a percentage of revenues, were primarily due to the following:

Domestic Company-owned restaurant expenses were $154.3 million, or 78.7% of related revenues for the three months ended June 27, 2021, as compared to $145.2 million, or 77.8% of related revenues for the prior year comparable period.

For the six months ended June 27, 2021, Domestic Company-owned restaurant expenses were $310.2 million or 78.9% of related revenues, compared to expenses of $274.3 million, or 78.8% of related revenues for the prior year comparable period.

The 0.9% and 0.1% increases in expenses, as a percentage of revenues, were primarily due to higher commodities costs and labor initiatives.

North America commissary expenses were $172.2 million, or 92.3% of related revenues, for the three months ended June 27, 2021, compared to $154.5 million, or 92.2% of related revenues for the comparable period in 2020.

North America commissary expenses were $342.9 million, or 92.3% of related revenues, for the six months ended June 27, 2021, compared to $298.7 million, or 92.5% of related revenues, for the prior year comparable period.

The 0.1% increase and 0.2% decrease in expenses, as a percentage of related revenues, for the three and six months ended June 27, 2021, were relatively consistent with the prior year comparable periods.

International expenses were $21.4 million, or 57.0% of related revenues for the three months ended June 27, 2021 compared to expenses of $18.3 million, or 65.2% of related revenues for the prior year comparable period.

International expenses were $41.0 million, or 56.8% of related revenues, for the six months ended June 27, 2021, compared to $33.4 million, or 61.7% of related revenues for the prior year comparable period.

The 8.2% and 4.9% decreases in expenses as a percentage of revenues were primarily due to lower operating costs on higher royalties due to 21.2% and 22.2% increases in comparable sales for the three and six months ended June 27, 2021, respectively.

Other expenses were $56.2 million, or 90.5% of related revenues for the three months ended June 27, 2021 compared to expenses of $51.3 million, or 94.7% of related revenues for the prior year comparable period.

For the six months ended June 27, 2021, Other expenses were $112.1 million, or 90.0% of related revenues, as compared to $97.3 million, or 95.6% of related revenues for the prior year comparable period.

Domestic Company-owned restaurant expenses were $155.5 million, or 81.2% of related revenues for the three months ended September 26, 2021, as compared to $144.8 million, or 81.1% of related revenues for the prior year comparable period.

For the nine months ended September 26, 2021, Domestic Company-owned restaurant expenses were $465.7 million or 79.6% of related revenues, compared to expenses of $419.1 million, or 79.6% of related revenues for the prior year comparable period.

The expenses, as a percentage of revenues, were relatively flat as labor and commodities pressures were offset by leveraging fixed costs on higher revenues.

North America commissary expenses were $175.4 million, or 92.7% of related revenues, for the three months ended September 26, 2021, compared to $167.9 million, or 92.6% of related revenues for the prior year comparable period.

North America commissary expenses were $518.3 million, or 92.4% of related revenues, for the nine months ended September 26, 2021, compared to $466.7 million, or 92.5% of related revenues, for the prior year comparable period.

International expenses were $21.7 million, or 56.6% of related revenues for the three months ended September 26, 2021 compared to expenses of $19.4 million, or 57.9% of related revenues for the prior year comparable period.

International expenses were $62.8 million, or 56.8% of related revenues, for the nine months ended September 26, 2021, compared to $52.8 million, or 60.3% of related revenues for the prior year comparable period.

The 1.3% and 3.5% decreases in expenses as a percentage of revenues were primarily due to lower operating costs on higher royalties due to 8.3% and 17.1% increases in comparable sales for the three and nine months ended September 26, 2021, respectively.

Other expenses were $56.0 million, or 90.9% of related revenues for the three months ended September 26, 2021 compared to expenses of $50.9 million, or 93.4% of related revenues for the prior year comparable period.

For the nine months ended September 26, 2021, Other expenses were $168.1 million, or 90.3% of related revenues, as compared to $148.2 million, or 94.9% of related revenues for the prior year comparable period.

The 2.5% and 4.6% decreases in expenses, as a percentage of related revenues, were primarily due to higher margins from our online and mobile ordering business from higher comparable sales.

General and administrative expenses (“G&A”) were $53.7 million, or 10.4% of revenues, and $103.7 million, or 10.1% of revenues, for the three and six months ended June 27, 2021, respectively, compared to $48.4 million, or 10.5% of revenues, and $96.1 million, or 11.0% of revenues for the prior year comparable periods, respectively.

General and administrative expenses (“G&A”) were $54.1 million, or 10.5% of revenues, and $157.8 million, or 10.2% of revenues, for the three and nine months ended September 26, 2021, respectively, compared to $52.6 million and $148.7 million, or 11.1% of revenues for both comparable periods in the prior year.

G&A consisted of the following (in thousands):

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Administrative expenses (a)

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General and administrative expenses

(a) The increases in administrative expenses of $3.2 million and $6.3 million for the three and six months ended June 27, 2021 compared to the prior year comparable periods were primarily due to higher professional and consulting fees and management incentive costs.

(b) Represents strategic reorganization costs associated with our new office in Atlanta, Georgia projected to open in the fall of 2021.

(a) The increases in administrative expenses of $7.7 million and $14.0 million for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods were primarily due to higher professional and legal fees and travel and labor costs.

(b) Represents strategic reorganization costs associated with our new office in Atlanta.

See “Note 10” of “Notes to Condensed Consolidated Financial Statements” for additional information.

(c) The decrease in other general expenses of $5.9 million for the six months ended June 27, 2021 is primarily due to our marketing fund investment of $5.0 million which was part of our previously announced franchise assistance program that concluded in the third quarter of 2020.

Depreciation and amortization expense was $12.5 million, or 2.4% of revenues, and $25.4 million, or 2.5% of revenues, for the three and six months ended June 27, 2021, respectively, compared to $12.4 million, or 2.7% of revenues, and $24.7 million, or 2.8% of revenues, for the prior year comparable periods, respectively.

Operating Income

Operating income increased approximately $14.1 million and $45.5 million for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods.

(c) The decreases in other general expenses of $8.4 million and $14.3 million for the three and nine months ended September 26, 2021, respectively, were primarily due to our marketing fund investments of $10.0 million and

$15.0 million for the three- and nine-month periods of 2020, respectively, which were part of our previously announced franchise assistance program that concluded in the third quarter of 2020.

Depreciation and amortization expense was $11.5 million, or 2.2% of revenues, and $36.8 million, or 2.4% of revenues, for the three and nine months ended September 26, 2021, respectively, compared to $12.8 million, or 2.7% of revenues, and $37.4 million, or 2.8% of revenues, for the prior year comparable periods, respectively.

The 0.5% and 0.4% decreases in expenses as a percentage of revenues, respectively, were primarily due to the timing of fully depreciated assets.

Operating Income by Segment

Operating income increased approximately $14.0 million and $59.5 million for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods.

Operating income is summarized in the following table on a reporting segment basis.

Alongside the GAAP operating income data, we have included “adjusted” operating income to exclude Special items.

Special items impacting operating income for 2021 include strategic corporate reorganization costs associated with our new office in Atlanta, Georgia projected to open in the fall of 2021.

Special items impacting operating income for 2021 include strategic corporate reorganization costs associated with our new office in Atlanta, Georgia.

The reconciliation of GAAP to non-GAAP financial results, as well as the Special items, are included in “Items Impacting Comparability;

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Elimination of intersegment losses (profits)

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Elimination of intersegment losses (profits)

The increase in operating income, excluding Special items, of $17.4 million, or 57.1%, and $52.7 million, or 114.6%, for the three- and six- month periods in 2021, respectively were primarily due to the following:

● Domestic Company-owned restaurants decreased $1.4 million for the three months ended June 27, 2021 as compared to the prior year comparable period primarily due to higher commodities costs and labor initiatives, partially offset by higher comparable sales of 5.6%.

For the six months ended June 27, 2021, Domestic Company-owned restaurants increased $5.3 million primarily due to higher profits from positive comparable sales of 13.8%, partially offset by higher commodities costs and labor initiatives.

● North America franchising increased $8.3 million and $21.5 million for the three and six months ended June 27, 2021, respectively, primarily due to higher comparable sales of 5.2% and 15.1% for the three- and six- month periods, respectively.

The three and six months ended June 27, 2021 also benefited from higher effective royalty rates as compared to the comparable periods primarily due to higher franchise royalties of $5.1 million and $10.8 million, respectively, as a result of our temporary royalty reduction program concluding in the third quarter of 2020, which was above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business.

● North America commissaries increased $1.1 million and $3.1 million for the three and six months ended June 27, 2021, respectively, primarily due to higher profits from higher volumes.

● International increased approximately $4.2 million and $8.2 million for the three and six months ended June 27, 2021, respectively, primarily due to higher royalty revenue from comparable sales of 21.2% and 22.2%, respectively, and increased equivalent units.

The effective royalty rates were also higher for the three-and-six-month periods of 2021 as the prior year comparable periods included royalty support provided to certain franchisees.

● All Others, which primarily includes our online and mobile ordering business and our marketing funds, increased $2.9 million and $9.2 million for the three and six months ended June 27, 2021 compared to the prior year comparable periods primarily due to higher revenues from our technology platform, including our mobile ordering business.

● Unallocated corporate expenses decreased approximately $1.6 million and $4.5 million for the three and six months ended June 27, 2021, respectively.

The decrease for the six-months ended June 27, 2021 was primarily due to our marketing fund investment of $5.0 million, which was part of our previously announced franchise assistance program that concluded in the third quarter of 2020.

The increase in operating income, excluding Special items, of $16.2 million, or 65.9%, and $68.9 million, or 97.6%, for the three- and nine- month periods in 2021, respectively, were primarily due to the following:

● Domestic Company-owned restaurants increased $1.0 million and $6.3 million for the three and nine months ended September 26, 2021, respectively, as compared to the prior year comparable periods primarily due to higher

profits from comparable sales increases of 7.4% and 11.6%, respectively.

These increases were partially offset by higher commodities costs and labor initiatives.

● North America franchising increased $6.5 million and $27.9 million for the three and nine months ended September 26, 2021, respectively, primarily due to higher comparable sales of 6.8% and 12.3% for the three- and nine- month periods, respectively.

The three and nine months ended September 26, 2021 also benefited from higher effective royalty rates as compared to the comparable periods primarily due to higher franchise royalties of $3.5 million and $14.3 million, respectively, as a result of our temporary royalty reduction program concluding in the third quarter of 2020, which was above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business.

● North America commissaries increased $1.4 million and $4.5 million for the three and nine months ended September 26, 2021, respectively, primarily due to higher profits from higher volumes.

● International increased approximately $1.6 million and $9.8 million for the three and nine months ended September 26, 2021, respectively, primarily due to higher royalty revenue from comparable sales of 8.3% and 17.1%, respectively, and increased equivalent units.

● All Others, which primarily includes our online and mobile ordering business and our marketing funds, increased $655,000 and $9.8 million for the three and nine months ended September 26, 2021, respectively, compared to the prior year comparable periods primarily due to higher revenues from our technology platform, including our mobile ordering business.

● Unallocated corporate expenses decreased approximately $5.9 million and $10.4 million for the three and nine months ended September 26, 2021, respectively.

These decreases were primarily due to our discretionary marketing fund investments of $10.0 million and $15.0 million for the three and nine months ended September 27, 2020, respectively, which were part of our previously announced franchise assistance program that concluded in the third quarter of 2020.

These decreases were partially offset by higher professional and legal fees and travel and labor costs.

Net Interest Expense

Net interest expense was relatively flat for the three months ended June 27, 2021 and decreased approximately $0.3 million for the six months ended June 27, 2021 due to lower interest rates, partially offset by a higher average outstanding debt primarily from a higher balance outstanding on our revolving credit facility drawn to partially fund the repurchase of Series B Preferred Stock.

Total debt outstanding was $425.0 million and $350.0 million as of June 27, 2021 and December 27, 2020, respectively.

Net interest expense increased $343,000 for the three months ended September 26, 2021 (consistent for the nine-month periods) due to higher average outstanding debt on our revolving credit facility drawn to partially fund the repurchase and conversion of our Series B Preferred Stock, partially offset by lower interest rates.

Total debt outstanding was $425.0 million and $350.0 million as of September 26, 2021 and December 27, 2020, respectively.

Income Before Income Taxes

For the reasons discussed above, income before income taxes increased approximately $14.1 million, or 52.3%, and $45.8 million, or 119.2%, for the three and six months ended June 27, 2021, respectively over the prior year comparable periods.

For the reasons discussed above, income before income taxes increased approximately $13.7 million, or 65.4%, and $59.5 million, or 100.3%, for the three and nine months ended September 26, 2021, respectively over the prior year comparable periods.

Income Tax Expense

The effective income tax rates were 18.0% and 18.2% for the three and six months ended June 27, 2021 representing decreases of 0.4% and 1.2%, respectively, from the prior year comparable periods.

The decreases in the effective rates were primarily due to higher excess tax benefits from stock option exercises and restricted shares vesting activity for the three and six months ended June 27, 2021.

Diluted (Loss) Earnings Per Common Share

Diluted loss per common share was $2.30 for the three months ended June 27, 2021, compared to diluted earnings per share of $0.48 in the prior year comparable period.

For the six months ended June 27, 2021, diluted loss per common share was $1.47, compared to diluted earnings per share of $0.65 for the prior year comparable period.

Excluding Special items, adjusted diluted earnings per common share were $0.93 and $1.94 for the three- and six-months ended June 27, 2021, respectively.

Diluted loss per common share for the three and six months ended June 27, 2021 included Special items of $3.15 and $3.23, respectively, from a reduction in net income attributable to common shareholders related to the repurchase and conversion of all shares of Series B Preferred Stock.

These reductions reflect the excess of the one-time cash payment over the carrying value of the Series B Preferred Stock.

The effective income tax rates were 11.7% and 16.3% for the three and nine months ended September 26, 2021 representing decreases of 9.9% and 3.9%, respectively, from the prior year comparable periods.

The decreases in the effective rates were primarily due to the finalization of our 2020 federal income tax return, which resulted in a $2.7 million benefit to tax expense, including immaterial prior year true-up adjustments, and higher excess tax benefits from stock option exercises and restricted shares vesting activity.

Diluted Earnings (Loss) Per Common Share

Diluted earnings per common share was $0.79 for the three months ended September 26, 2021, compared to diluted earnings per share of $0.35 in the prior year comparable period.

For the nine months ended September 26, 2021, diluted loss per common share was $0.59, compared to diluted earnings per share of $0.99 for the prior year comparable period.

Excluding Special items, adjusted diluted earnings per common share were $0.83 and $2.76 for the three and nine months ended September 26, 2021, respectively.

Diluted loss per common share for the nine months ended September 26, 2021 included Special items of $3.14 from a reduction in net income attributable to common shareholders related to the

repurchase and conversion of all shares of previously outstanding Series B Preferred Stock during the second quarter.

This reduction reflects the excess of the one-time cash payment over the carrying value of the Series B Preferred Stock.

See “Items Impacting Comparability;

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Three Months Ended

Six Months Ended

Nine Months Ended

September 26,

September 27,

September 26,

September 27,

(In thousands, except per share amounts)

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Adjusted operating income

GAAP net (loss)/income attributable to common shareholders

GAAP net income/(loss) attributable to common shareholders

Strategic corporate reorganization costs (1)

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Adjusted net income attributable to common shareholders

GAAP diluted (loss)/earnings per share

GAAP diluted earnings/(loss) per common share

Strategic corporate reorganization costs (1)

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Adjusted diluted earnings per share

(Note) The above table does not include the impact of allocation of undistributed earnings to participating securities for Special items.

(1) Represents strategic corporate reorganization costs associated with our new office in Atlanta, Georgia projected to open in the fall of 2021.

(Note) The above table does not include the impact of the allocation of undistributed earnings to participating securities for Special items.

(1) Represents strategic corporate reorganization costs associated with our new office in Atlanta, Georgia.

(2) Represents the one-time charge related to the repurchase and conversion of all shares of Series B Preferred Stock and includes related professional fees incurred as part of the transaction.

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Liquidity and Capital Resources

The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $95.0 million and $10.0 million was outstanding as of June 27, 2021 and December 27, 2020, respectively, and a secured term loan facility with an outstanding balance of $330.0 million and $340.0 million as of June 27, 2021 and December 27, 2020, respectively (the “Term Loan Facility” and together with the Revolving Facility, the “PJI Facilities”).

Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at June 27, 2021 was approximately $259.2 million.

We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities.

As of June 27, 2021, we have the following interest rate swap agreements with a total notional value of $350.0 million:

Our outstanding debt as of September 26, 2021 was $425.0 million, which was comprised of $400.0 million outstanding under our 3.875% senior notes due 2029 (the “Notes”) and $25.0 million under the PJI Revolving Facility (as defined below).

Including outstanding letters of credit, the remaining availability under the PJI Revolving Facility was approximately $572.3 million as of September 26, 2021.

On September 14, 2021, the Company issued $400.0 million of Notes which will mature on September 15, 2029.

Concurrently with the closing of the Notes, the Company entered into an amended and restated credit agreement (the “Amended Credit Agreement”) replacing the previous $800.0 million credit agreement (“Previous Credit Agreement”).

The Amended 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 net proceeds from the Notes, together with borrowings under the PJI Revolving Facility, were used to repay outstanding revolver and term loan borrowings under the Company’s Previous Credit Agreement.

As of September 26, 2021, we have the following interest rate swap agreements with a total notional value of $350.0 million:

Effective Dates

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January 30, 2018 through August 30, 2022

The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 3.2% for the three- and six- month periods ended June 27, 2021, compared to 3.8% for the three- and six- month periods ending June 28, 2020, respectively.

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

In September 2021, we de-designated $350.0 million of our interest rate swaps as cash flow hedges following the issuance of the Notes.

For these de-designated hedges, the portion of gains or losses on the derivative instruments previously recognized in accumulated other comprehensive loss will be reclassified into earnings as adjustments to interest expense on a straight-line basis over the remaining life of the originally hedged transactions.

Our Amended Credit Agreement contains affirmative and negative covenants, including the following financial covenants:

Actual Ratio as of

Permitted Ratio

June 27, 2021

September 26, 2021

Leverage ratio

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Our interest coverage ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters.

We were in compliance with all financial covenants as of June 27, 2021.

We were in compliance with all financial covenants as of September 26, 2021.

Papa John’s Marketing Fund, Inc.

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Bank National Association, as lender.

There was no debt outstanding under the PJMF Revolving Facility as of June 27, 2021 and December 27, 2020.

There was no debt outstanding under the PJMF Revolving Facility as of September 26, 2021 or December 27, 2020.

The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement .

Cash flow provided by operating activities was $128.0 million for the six months ended June 27, 2021 compared to $87.7 million for the corresponding period of 2020.

The increase of $40.3 million was primarily due to higher net income.

Cash flow used in investing activities was $19.5 million for the six months ended June 27, 2021 compared to $16.9 million for the same period in 2020, or an increase of $2.6 million.

The increase in cash flow used in investing activities was primarily due to an increase in capital expenditures, partially offset by lower notes issued and higher repayments.

Cash flow used in financing activities was $142.9 million for the six months ended June 27, 2021 compared to $22.8 million for the same period of 2020.

The increase of $120.1 million in cash flow used in financing activities was primarily due to the payment of cash consideration to Starboard and certain franchisees for the repurchase and conversion of all of the Company’s Series B Preferred Stock outstanding, offset by an increase in proceeds from our revolving credit facility.

The Company recorded dividends of approximately $20.4 million for the six months ended June 27, 2021 consisting of the following:

Cash flow provided by operating activities was $193.6 million for the nine months ended September 26, 2021 compared to $168.5 million for the corresponding period of 2020.

The increase of $25.1 million was primarily due to higher net income, offset by unfavorable working capital.

Cash flow used in investing activities was $41.2 million for the nine months ended September 26, 2021 compared to $28.6 million for the same period in 2020, or an increase of $12.6 million.

The increase in cash flow used in investing activities was primarily due to an increase in capital expenditures.

Cash flow used in financing activities was $177.1 million for the nine months ended September 26, 2021 compared to $27.4 million for the same period of 2020.

The increase of $149.7 million in cash flow used in financing activities was primarily due to the payment of cash consideration to affiliates of Starboard Value LP and certain franchisees for the repurchase and conversion of all of the Company’s Series B Preferred Stock outstanding which occurred during the second quarter of 2021, offset by net proceeds from the issuance of our Notes and refinancing of our revolving credit facility in the third quarter of 2021.

The Company recorded dividends of approximately $33.2 million for the nine months ended September 26, 2021 consisting of the following:

● $27.6 million paid to common stockholders ($0.80 per share);

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● $1.1 million in common stock “pass-through” dividends paid to Series B Preferred Stockholders on an as-converted basis ($0.45 per share).

On August 3, 2021, our Board of Directors approved a 55.6% increase in the Company’s dividend rate per common share, from $0.90 on an annual basis to $1.40 on an annual basis, and subsequently declared a third quarter dividend of $0.35 per common share, of which approximately $12.8 million will be paid to common stockholders.

The common share dividend will be paid on August 27, 2021 to stockholders of record as of the close of business on August 16, 2021.

On October 28, 2021, our Board of Directors declared a fourth quarter dividend of $0.35 per common share, of which approximately $12.8 million will be paid to common stockholders.

The common share dividend will be paid on November 19, 2021 to stockholders of record as of the close of business on November 9, 2021.

The declaration and payment of any future dividends will be at the discretion of our Board of Directors.

Free Cash Flow

Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the Condensed Consolidated Statements of Cash Flows) less the purchases of property and equipment and dividends paid to preferred stockholders.

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Non-GAAP Measures” for a discussion of free cash flow.

The Company’s free cash flow was as follows for the six-month periods of 2021 and 2020 (in thousands):

Six Months Ended

The Company’s free cash flow was as follows for the nine-month periods of 2021 and 2020 (in thousands):

Nine Months Ended

September 26,

September 27,

Net cash provided by operating activities

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Free cash flow

(1) This does not include the cash consideration paid for the repurchase and conversion of the Series B Preferred Stock .

See “Recent Developments and Trends” for additional information.

(1) Excludes $188.6 million of cash consideration paid for the repurchase and conversion of the Series B Preferred Stock in the second quarter of 2021 .

Forward-Looking Statements

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Generally, the use of words such as “expect,” “intend,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws.

Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the financial impact of the temporary business opportunities, disruptions and temporary changes in demand we are experiencing related to the current outbreak of the COVID-19 pandemic and the related restrictions, commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, the duration of changes in consumer behavior caused by the pandemic, our plans to open a new office in Atlanta, the associated reorganization costs and the related organizational, employment and real estate changes that are expected, royalty relief, the effectiveness of our menu innovations and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, and other financial and operational measures.

Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the financial impact of the temporary business opportunities, disruptions and temporary changes in demand we are experiencing related to the current outbreak of the novel coronavirus disease (COVID-19), commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, the duration of changes in consumer behavior caused by the pandemic, reorganization costs and the related organizational, employment and real estate changes from opening our new office in Atlanta, royalty relief, the effectiveness of our menu innovations and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, and other financial and operational measures.

Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control.

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impact of delayed new store openings, both domestically and internationally;

the overall contraction in global economic activity, including increased unemployment;

our ability to navigate changing governmental programs and regulations relating to the pandemic;

and the increased risk of phishing and other cyber-attacks;

● the uncertainty of whether and to what extent the increase in demand for our products that we are currently experiencing during the COVID-19 pandemic will continue following a cessation of the effects of the virus in the future;

and the increased risk of phishing, ransomware and other cyber-attacks;

● our ability to successfully implement or fully realize the anticipated benefits of our corporate reorganization and new office in Atlanta, Georgia and corporate reorganization in the timeframes we desire or within the expected range of expenses, or at all.

In addition, turnover in our support teams due to our relocation to Georgia could distract our employees, decrease employee morale, harm our reputation, and negatively impact the overall performance of our corporate support teams;

● increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to improve consumer sentiment and sales trends, and the risk that such initiatives will not be effective;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis