Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Papa John’s International, Inc. (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 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
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
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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. 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 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 $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.
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Global Restaurant Sales Information
“Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. “Global system-wide restaurant sales growth” represents the change in such sales year-over-year. We believe North America, international and global restaurant and comparable sales growth and Global system-wide restaurant sales information is useful in analyzing our results since our franchisees pay royalties and marketing fund contributions that are based on a percentage of franchise sales. Comparable sales and Global system-wide restaurant sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation. Franchise sales also generate commissary revenue in the United States and in certain international markets. Franchise restaurant and comparable sales growth information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of franchise restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in the Company’s revenues.
Three Months Ended
Nine Months Ended
September 26, 2021
September 27, 2020
September 26, 2021
September 27, 2020
Comparable sales growth:
Domestic Company-owned restaurants
7.4%
18.2%
11.6%
15.6%
North America franchised restaurants
6.8%
25.6%
12.3%
20.0%
North America restaurants
6.9%
23.8%
12.1%
19.0%
International restaurants
8.3%
20.7%
17.1%
9.4%
Total comparable sales growth
7.3%
23.0%
13.4%
16.5%
System-wide restaurant sales growth:
(excluding the impact of foreign currency)
Domestic Company-owned restaurants
7.3%
8.3%
11.1%
7.3%
North America franchised restaurants
8.0%
26.2%
13.1%
20.4%
North America restaurants
7.9%
21.8%
12.7%
17.3%
International restaurants
21.4%
22.9%
28.2%
12.2%
Total global system-wide restaurant sales growth
11.2%
22.1%
16.2%
16.0%
Restaurant Progression
Three Months Ended
Nine Months Ended
September 26, 2021
September 27, 2020
September 26, 2021
September 27, 2020
North America Company-owned:
Beginning of period
589
598
588
598
Opened
2
—
2
1
Closed
—
(1)
—
(2)
Acquired
—
—
1
—
End of period
591
597
591
597
North America franchised:
Beginning of period
2,720
2,686
2,701
2,690
Opened
21
14
57
38
Closed
(9)
(11)
(25)
(39)
Sold
—
—
(1)
—
End of period
2,732
2,689
2,732
2,689
International franchised:
Beginning of period
2,214
2,063
2,111
2,107
Opened
71
40
210
83
Closed
(39)
(29)
(75)
(116)
End of period
2,246
2,074
2,246
2,074
Total restaurants – end of period
5,569
5,360
5,569
5,360
Trailing four quarters net store growth
209
17
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Results of Operations
The following table sets forth the various components of our Condensed Consolidated Statements of Operations expressed as a percentage of total revenues, except operating costs which are expressed as a percentage of the associated revenue component.
Three Months Ended
September 26, 2021
September 27, 2020
% of Related
% of Related
Increase
($ in thousands)
Revenues
Revenues
(Decrease)
Revenues:
Domestic Company-owned restaurant sales
$
191,584
$
178,371
North America franchise royalties and fees
31,933
25,281
North America commissary revenues
189,224
181,338
International revenues
38,408
33,440
Other revenues
61,633
54,511
Total revenues
512,782
472,941
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses
155,477
81.2%
144,803
81.1%
0.1%
North America commissary expenses
175,399
92.7%
167,937
92.6%
0.1%
International expenses
21,743
56.6%
19,370
57.9%
(1.3)%
Other expenses
56,039
90.9%
50,917
93.4%
(2.5)%
General and administrative expenses
54,070
10.5%
52,601
11.1%
(0.6)%
Depreciation and amortization
11,477
2.2%
12,764
2.7%
(0.5)%
Total costs and expenses
474,205
92.5%
448,392
94.8%
(2.3)%
Operating income
38,577
7.5%
24,549
5.2%
2.3%
Net interest expense
(3,979)
(0.8)%
(3,636)
(0.8)%
0.0%
Income before income taxes
$
34,598
6.7%
$
20,913
4.4%
2.3%
Nine Months Ended
September 26, 2021
September 27, 2020
% of Related
% of Related
Increase
($ in thousands)
Revenues
Revenues
(Decrease)
Revenues:
Domestic Company-owned restaurant sales
$
584,942
$
526,317
North America franchise royalties and fees
97,123
68,895
North America commissary revenues
560,743
504,379
International revenues
110,629
87,592
Other revenues
186,099
156,240
Total revenues
1,539,536
1,343,423
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses
465,658
79.6%
419,082
79.6%
0.0%
North America commissary expenses
518,310
92.4%
466,676
92.5%
(0.1)%
International expenses
62,791
56.8%
52,775
60.3%
(3.5)%
Other expenses
168,092
90.3%
148,219
94.9%
(4.6)%
General and administrative expenses
157,779
10.2%
148,680
11.1%
(0.9)%
Depreciation and amortization
36,830
2.4%
37,436
2.8%
(0.4)%
Total costs and expenses
1,409,460
91.6%
1,272,868
94.7%
(3.1)%
Operating income
130,076
8.4%
70,555
5.3%
3.1%
Net interest expense
(11,275)
(0.7)%
(11,230)
(0.8)%
0.1%
Income before income taxes
$
118,801
7.7%
$
59,325
4.5%
3.2%
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Revenues
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 $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 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 $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 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 $7.1 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.
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Costs and Expenses
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 $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 $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):
Three Months Ended
Nine Months Ended
Sep. 26,
Sep. 27,
Sep. 26,
Sep. 27,
2021
2020
2021
2020
Administrative expenses (a)
$
51,398
$
43,680
$
148,533
$
134,532
Strategic corporate reorganization costs (b)
2,153
—
9,364
—
Other general expenses (c)
519
8,921
(118)
14,148
General and administrative expenses
$
54,070
$
52,601
$
157,779
$
148,680
(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 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
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$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. The reconciliation of GAAP to non-GAAP financial results, as well as the Special items, are included in “Items Impacting Comparability; Non-GAAP Measures.” We believe this non-GAAP measure is important for comparability purposes.
Three Months Ended
Reported
Special
Adjusted
Reported
Adjusted
Sep. 26,
items
Sep. 26,
Sep. 27,
Increase
(In thousands)
2021
in 2021
2021
2020
(Decrease)
Domestic Company-owned restaurants
$
9,480
$
—
$
9,480
$
8,439
$
1,041
North America franchising
29,830
—
29,830
23,353
6,477
North America commissaries
9,598
—
9,598
8,208
1,390
International
9,618
—
9,618
7,986
1,632
All others
3,848
—
3,848
3,193
655
Unallocated corporate expenses
(23,158)
2,153
(21,005)
(26,921)
5,916
Elimination of intersegment losses (profits)
(639)
—
(639)
291
(930)
Total
$
38,577
$
2,153
$
40,730
$
24,549
$
16,181
Nine Months Ended
Reported
Special
Adjusted
Reported
Adjusted
Sep. 26,
items
Sep. 26,
Sep. 27,
Increase
(In thousands)
2021
in 2021
2021
2020
(Decrease)
Domestic Company-owned restaurants
$
40,165
$
—
$
40,165
$
33,852
$
6,313
North America franchising
90,791
—
90,791
62,855
27,936
North America commissaries
29,089
—
29,089
24,579
4,510
International
26,665
—
26,665
16,836
9,829
All others
14,860
—
14,860
5,030
9,830
Unallocated corporate expenses
(70,937)
9,364
(61,573)
(71,978)
10,405
Elimination of intersegment losses (profits)
(557)
—
(557)
(619)
62
Total
$
130,076
$
9,364
$
139,440
$
70,555
$
68,885
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
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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 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 $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 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
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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; Non-GAAP Measures” for additional information.
Items Impacting Comparability; Non-GAAP Measures
The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures (collectively defined as “Special items”). We present these non-GAAP measures because we believe the Special items in 2021 impact the comparability of our results of operations.
Three Months Ended
Nine Months Ended
September 26,
September 27,
September 26,
September 27,
(In thousands, except per share amounts)
2021
2020
2021
2020
GAAP operating income
$
38,577
$
24,549
$
130,076
$
70,555
Strategic corporate reorganization costs (1)
2,153
—
9,364
—
Adjusted operating income
$
40,730
$
24,549
$
139,440
$
70,555
GAAP net income/(loss) attributable to common shareholders
$
28,961
$
11,457
$
(20,423)
$
32,410
Strategic corporate reorganization costs (1)
2,153
—
9,364
—
Repurchase and conversion of Series B Preferred Stock (2)
—
—
109,852
—
Tax effect of strategic corporate reorganization costs (3)
(483)
—
(2,098)
—
Adjusted net income attributable to common shareholders
$
30,631
$
11,457
$
96,695
$
32,410
GAAP diluted earnings/(loss) per common share
$
0.79
$
0.35
$
(0.59)
$
0.99
Strategic corporate reorganization costs (1)
0.05
—
0.27
—
Repurchase and conversion of Series B Preferred Stock (2)
—
—
3.14
—
Tax effect of strategic corporate reorganization costs (3)
(0.01)
—
(0.06)
—
Adjusted diluted earnings per share
$
0.83
$
0.35
$
2.76
$
0.99
(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.
(3) The tax effect for strategic corporate reorganization costs was calculated by applying the 2021 marginal tax rate of 22.4%. There was no tax effect on the repurchase and conversion of the Series B Preferred Stock as the one-time charge was non-deductible for tax purposes.
The 2021 non-GAAP adjusted results shown above and within this document, which exclude Special items, should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP results. Management believes presenting certain financial information excluding Special items is important for purposes of comparison to prior year results. In addition, management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends.
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Liquidity and Capital Resources
Debt
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
Floating Rate Debt
Fixed Rates
April 30, 2018 through April 30, 2023
$
55 million
2.33
%
April 30, 2018 through April 30, 2023
$
35 million
2.36
%
April 30, 2018 through April 30, 2023
$
35 million
2.34
%
January 30, 2018 through August 30, 2022
$
100 million
1.99
%
January 30, 2018 through August 30, 2022
$
75 million
1.99
%
January 30, 2018 through August 30, 2022
$
50 million
2.00
%
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
September 26, 2021
Leverage ratio
Not to exceed 5.25 to 1.0
1.9 to 1.0
Interest coverage ratio
Not less than 2.00 to 1.0
5.0 to 1.0
Our leverage ratio is defined as outstanding debt divided by consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the most recent four fiscal quarters. 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 September 26, 2021.
Papa John’s Marketing Fund, Inc. (“PJMF”), our national marketing fund, has a $ 20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 with U.S. Bank National Association, as lender. 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 .
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Cash Flows
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.
Dividends
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);
● $3.0 million in preferred dividends on the Series B Preferred Stock (3.6% of the investment per annum);
● $1.5 million of common stock deemed dividend distributions in conjunction with the repurchase and conversion of the Series B Preferred Stock; and
● $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 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.
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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. We view free cash flow as an important financial measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. See “Items Impacting Comparability; Non-GAAP Measures” for a discussion of free cash flow.
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,
2021
2020
Net cash provided by operating activities
$
193,624
$
168,547
Purchases of property and equipment
(41,328)
(24,269)
Dividends paid to preferred stockholders (1)
(6,394)
(10,237)
Free cash flow
$
145,902
$
134,041
(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 .
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Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q and other Company communications that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws. 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 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. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:
● the ability of the Company to manage difficulties and opportunities associated with or related to the COVID-19 pandemic, including risks related to: the impact of governmental restrictions on freedom of movement and business operations including quarantines, social distancing requirements and mandatory business closures; changes in consumer demand or behavior; labor shortages at Company and/or franchised stores; impact of delayed new store openings, both domestically and internationally; our ability to navigate changing governmental programs and regulations relating to the pandemic; 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;
● 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;
● 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;
● risks related to social media, including publicity adversely and rapidly impacting our brand and reputation;
● aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors;
● changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending, including higher unemployment;
● the adverse impact on the Company or our results caused by global health concerns, product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our Company-owned or franchised restaurants or others in the restaurant industry;
● the effectiveness of our technology investments and changes in unit-level operations;
● the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites;
● increases in labor costs, food costs or sustained higher other operating costs. This could include increased employee compensation, including as a result of changes in minimum wage, benefits, insurance, tax rates, new regulatory requirements or increasing compliance costs;
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● increases in insurance claims and related costs for programs funded by the Company up to certain retention limits, including medical, owned and non-owned vehicles, workers’ compensation, general liability and property;
● disruption of our supply chain or commissary operations which could be caused by our sole source of supply of mozzarella cheese, desserts, garlic cups or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control, including COVID-19;
● increased risks associated with our international operations, including economic and political conditions and risks associated with the withdrawal of the United Kingdom from the European Union, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth;
● the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the European Union General Data Protection Regulation;
● the Company's ability to continue to pay dividends to stockholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline ;
● disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential Company, employee and customer information, including payment cards; and
● changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles.
For a discussion of these and other risks that may cause actual results to differ from expectations, refer to “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.