What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 278 added, 286 removed, 159 unchanged (78% of the section changed)

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Our revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, and sales of franchise and development rights.

Additionally, approximately 46% to 48% of our North America revenues in each of the last two fiscal years were derived from sales to franchisees of various items including food and paper products from our domestic Quality Control Centers (“QC Centers”), printing and promotional items and information systems equipment, and software and related services.

We also derive revenues from the operation of our international QC center in the United Kingdom and from contributions received by Papa John’s Marketing Fund (“PJMF”), our national marketing fund.

Additionally, approximately 47% of our North America revenues in each of the last two fiscal years were derived from sales to franchisees of various items including food and paper products from our domestic Quality Control Centers (“QC Centers”), operation of our international QC Center in the United Kingdom (“UK”), contributions received by Papa John’s Marketing Fund (“PJMF”) which is our national marketing fund, printing and promotional items and information systems equipment, and software and related services.

We believe that in addition to supporting both Company and franchised profitability and growth, these activities contribute to product quality and consistency throughout the Papa John’s system.

We strive to obtain high-quality restaurant sites with good access and visibility and to enhance the appearance and quality of our restaurants.

We believe these factors improve our image and brand awareness.

Detailed below are progressions of our Domestic and International restaurants over the last two fiscal years:

Domestic Company-owned

Franchised North America

Total North America

International

Beginning - December 30, 2018

Ending - December 29, 2019

Ending - December 27, 2020

Recent Business Matters

In 2020, the Company focused on executing the strategic priorities and building a foundation for long-term success, including the specific items described below.

Beginning in the fourth quarter of 2019, the Company has embraced a new culture of innovation, delivering multiple new product innovations and marketing successes.

In 2020, we launched Garlic Parmesan Crust Pizza, toasted handheld “Papadias” flatbread-style sandwiches, Jalapeno Popper Rolls, and the Shaq-a-Roni pizza.

Of particular highlight, the Shaq-a-Roni pizza was launched as part of a fund-raiser for The Papa John’s Foundation, in collaboration with Shaquille O’Neal, our board member and restaurant owner.

The Shaq-a-Roni pizza was a differentiated, high-value product, with a charitable component that supported meaningful causes aligned with our brand’s values.

In the fourth quarter of 2020, we also tested Epic Stuffed Crust, which was officially launched in 2021.

Epic Stuffed Crust was the Company’s biggest new product launch to date and builds upon our original fresh, never frozen, six-ingredient dough.

Product innovation is not only an important part of our plan for 2021 to continue building sales but also represents another platform for our longer-term strategy and opportunity.

Novel Coronavirus (“COVID-19”).

The COVID-19 outbreak began to result in disruption in certain of our international markets beginning in January 2020.

Subsequently, the outbreak was characterized as a pandemic by the World Health Organization on March 11, 2020 and declared a national emergency in the United States during the same timeframe.

The 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.

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.

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 have expanded our employee benefits to include free virtual doctor visits and paid special bonuses to many of our front-line team members.

This is in addition to existing employee benefits of no-cost mental health support, affordable health plan options and access to the Papa John’s Team Member Emergency Relief Fund, if and when needed.

In addition, the Company hired thousands of new restaurant team members in 2020 to help meet demand and serve our customers.

Of the Company’s 2,111 international franchised stores, approximately 65 stores were temporarily closed as of December 27, 2020, principally in Latin America and Europe, in accordance with government policies.

In North America, almost all traditional restaurants remain open and fully operational.

A number of non-traditional restaurants located in universities and stadiums are temporarily closed;

these non-traditional locations are not significant to our revenues and operating results.

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 even after 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 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 Item 1A.

Risk Factors of this Form 10-K.

In 2021, the Company focused on executing strategic priorities and building a foundation for long-term success, including the specific items described below.

Growth Strategy .

The Company delivered its tenth 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 increases were 29.4% in North America and 25.6% internationally, driven by menu innovation and customer retention.

Product innovation is an important part of our plan to continue building sales and also represents our platform for longer-term strategy and opportunity.

Additionally, our expanding development pipeline is on track to be a key long-term growth driver.

In 2021, we announced one of our largest domestic development deals to open 100 new locations in high growth markets in Texas and the South by 2029.

We also announced our expanded partnership with Drake Food Service International to open over 220 Papa John’s restaurants internationally by 2025, and most recently announced a partnership with FountainVest Partners to open more than 1,350 new stores across South China by 2040, the largest franchisee development agreement in Papa John’s history.

We plan to continue focusing on our strategic innovative products and restaurant development across our platforms to drive sustainable growth this year and beyond.

Capital Allocation Strategy.

During 2021, we executed on key components of our capital structure and allocation strategy by aligning our capital structure to support the long-term growth potential of the Company.

During the fourth quarter of 2021, we announced a $425.0 million share repurchase program.

Earlier in the year, we issued $400.0 million of 3.875% senior notes which will mature on September 15, 2029 and concurrently refinanced our revolving credit facility.

We also increased our annual dividend rate and completed the repurchase and conversion of all of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”).

This strategic capital realignment will allow us to deliver on our broader growth strategy and provide ongoing 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 changes in consumer behavior during the pandemic contributed to our strong comparable sales growth during 2021 and 2020.

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

We have recently experienced inflation in commodities prices, including food ingredients, which has increased our operating expenses.

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

We have continued to address labor shortages during 2021 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 labor and inflationary cost challenges, including the impact on store development, to be a continued priority focus for us in 2022.

We continue to monitor the progression of the COVID-19 pandemic and state, local and federal government regulatory and public health responses thereto, including the federal

Occupational Health and Safety Administration’s efforts to implement a nationwide vaccine requirement for large employers.

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

While 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 program and our offerings of high-quality pizza and other menu items, we do not expect to be able to maintain the same level of annual growth rates in comparable sales and revenues in the future.

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 in the summer of 2021.

Our corporate office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlanta opened in October 2021.

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.

As a result, we expect to incur certain one-time corporate reorganization costs of approximately $15.0 to $20.0 million related to employee severance and transition, recruitment and relocation and other third-party costs through 2021.

Of that amount, we incurred costs of approximately $6.0 million in 2020.

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

As a result, we incurred certain one-time corporate reorganization costs of approximately $19.1 million related to employee severance and transition, recruitment and relocation and other third-party costs from the fourth quarter of 2020 through 2021.

Of that amount, we incurred costs of approximately $13.1 million in 2021 and $6.0 million in 2020.

Looking forward to 2022, our one-time corporate reorganization costs are substantially complete and we do not anticipate that any significant remaining reorganization costs will be incurred.

See “Items Impacting Comparability;

Non-GAAP Measures” for additional information.

Presentation of Financial Results

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The preparation of Consolidated Financial Statements requires management to select accounting policies for critical accounting areas as well as estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements.

The Company’s significant accounting policies, including recently issued accounting pronouncements, are more fully described in “Note 2” of “Notes to Consolidated Financial Statements.” Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results.

We have identified the following accounting policies and related judgments as critical to understanding the results of our operations:

Allowance for Credit Losses on Accounts and Franchisee Notes Receivable

As of December 27, 2020, accounts receivable was $93.8 million with an allowance for credit losses of $3.6 million and franchisee notes receivable was $51.1 million with an allowance for credit losses of $3.2 million.

As of December 29, 2019, accounts receivable was $77.8 million with an allowance for credit losses of $7.3 million and franchisee notes receivable was $44.4 million with an allowance for credit losses of $3.6 million.

Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors.

The allowance for credit losses on franchisee note receivables is based on review of each franchisee’s economic performance and market conditions after consideration of the fair value of our underlying collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees.

Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer.

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

The Company’s significant accounting policies, including recently issued accounting pronouncements, are more fully described in “Note 2” of “Notes to Consolidated Financial Statements.” A number of our significant accounting policies are critical due to the fact that they involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results.

Allowance for Credit Losses on Franchisee Notes Receivable

The Company has provided financing (recorded as notes receivable) to select domestic and international franchisees principally for use in the construction and development of their restaurants and for the purchase of restaurants from the Company or other franchisees.

Most notes receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant and the ownership interests in the franchise.

The Company has also provided long-term financing to certain franchisees with royalty payment plans.

The Company establishes an allowance for credit losses on franchisee notes receivables when it is more likely than not that some portion or all of the balance will not be realized.

The allowance for credit losses on notes receivable is highly judgmental and subjective based on management’s judgments of each franchisee’s economic performance and future market conditions.

The Company considers each individual note receivable separately for evaluation of its allowance for credit losses which represent specific reserve calculations, except for certain notes receivable issued related to equipment development incentives where a general portfolio reserve exists supported by historical write-off experiences.

Included in the terms of the notes receivable agreements, the Company is provided collateral rights of the franchisee’s stores (e.g., underlying franchise business, property and equipment) and personal guarantees from the operators to recover the carrying value of the outstanding note receivable in the event collectability concerns arise.

As a result, the Company also considers the fair value of the underlying collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees when assessing the allowance for credit losses (which may require third-party valuations of fair value).

Further, the Company also considers overall franchisee credit quality, which is monitored through the timing of payments compared

to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer, including metrics such as comparable store sales of the franchisees operations and weekly per store sales averages.

Notes receivable balances are charged off against the allowance after recovery efforts have ceased.

Franchisee notes receivable was $49.4 million with an allowance for credit losses of $1.5 million as of December 26, 2021 compared to $51.1 million with an allowance for credit losses of $3.2 million as of December 27, 2020.

Insurance Reserves

Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability, property, and health insurance coverage provided to our employees are funded by the Company up to certain retention levels under our retention programs.

Retention limits generally range from $1,000 to $1.0 million.

As of December 27, 2020 and December 29, 2019, our insurance reserves were $82.0 million and $75.2 million, respectively.

Losses are accrued based upon undiscounted estimates of the liability for claims incurred and for events that have occurred but have not been reported using certain third-party actuarial projections and our claims loss experience.

The determination of the recorded insurance reserves is highly judgmental and complex due to the significant uncertainty in the potential value of reported claims and the number and potential value of incurred but not reported claims, the application of significant judgment in making those estimates and the use of various actuarial valuation methods.

The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims differ significantly from historical trends used to estimate the insurance reserves recorded by the Company.

The Company records estimated losses above retention within its reserve with a corresponding receivable for expected amounts due from insurance carriers.

Intangible Assets — Goodwill

We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.

Such tests are completed separately with respect to the goodwill of each of our reporting units.

We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist.

We elected to perform a qualitative assessment for our operations in the fourth quarter of 2020.

As a result of our qualitative analyses, we determined that it was more-likely-than-not that the fair values of our reporting units were greater than their carrying amounts.

Subsequent to completing our goodwill impairment tests, no indicators of impairment were identified.

See “Note 12” of “Notes to Consolidated Financial Statements” for additional information.

Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability and property insurance coverage provided to our employees are funded by the Company up to certain retention.

Retention limits range up to $1.0 million.

We record the liability for losses based upon undiscounted estimates of the liability for claims incurred and for events that have occurred but have not been reported using certain third-party actuarial projections and our historical claims loss experience.

As of December 26, 2021, our insurance reserves were $88.1 million as compared to $82.0 million at December 27, 2020.

Our insurance reserves primarily relate to auto liability and workers’ compensation claims and includes the gross up of claims above our retention levels, with a corresponding receivable recorded in Prepaid and other current assets and Other assets on the Consolidated Balance Sheets.

The insurance reserves represent the mid-point of the range as determined by our actuarial analysis, which considered various actuarial valuation methodologies.

The determination of the recorded insurance reserves is highly complex due to the significant uncertainty in the potential value of reported claims and the number and potential value of incurred but not reported claims.

Income Tax Accounts and Tax Reserves

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The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted.

Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize.

Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize and were $28.6 million and $23.0 million as of December 26, 2021 and December 27, 2020, respectively.

The determination as to whether a deferred tax asset will be realized is based on the evaluation of historical profitability, future market growth, future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.

The Company assesses deferred taxes and the adequacy or need for a valuation allowance on a quarterly basis.

Tax authorities periodically audit the Company.

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We evaluate these issues and adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures.

We recognized a decrease in income tax expense of $500,000 and $400,000 in 2020 and 2019, respectively, associated with the finalization of certain income tax matters.

In the event the Company is unable to generate future taxable income, there is a material change in the actual effective tax rates, the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then we could be required to increase the valuation allowance against deferred tax assets, resulting in an increase in income tax expense and the effective tax rate.

Each change of income tax expense of $1.5 million would impact the fiscal 2021 effective tax rate by one percentage point.

See “Note 17” of “Notes to Consolidated Financial Statements” for additional information.

Global Restaurant Sales and Unit 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” represents total restaurant sales for all company-owned and franchised stores open during the comparable periods, and “Global system-wide restaurant sales growth” represents the change in total system restaurant 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.

December 26, 2021

December 27, 2020

Comparable sales growth:

Domestic Company-owned restaurants

North America franchised restaurants

North America restaurants

International restaurants

Total comparable sales growth

System-wide restaurant sales growth:

(excluding the impact of foreign currency)

Domestic Company-owned restaurants

North America franchised restaurants

North America restaurants

International restaurants

Total global system-wide restaurant sales growth

Restaurant Progression

December 26, 2021

December 27, 2020

North America Company-owned:

Beginning of period

End of period

North America franchised:

Beginning of period

End of period

International franchised:

Beginning of period

End of period

Total restaurants – end of period

Full year net store growth

Our fiscal year ends on the last Sunday in December of each year.

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2021 Compared to 2020

This section of this Form 10-K generally discusses fiscal 2020 and 2019 items and year-to-year comparisons between fiscal 2020 and 2019.

Discussions of 2018 items and year-to-year comparisons between fiscal 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019.

Discussion of Revenues.

Consolidated revenues increased $194.0 million, or 12.0%, to $1.81 billion in 2020, compared to $1.62 billion in 2019.

Revenues are summarized in the following table (dollars in thousands).

Domestic Company-owned restaurant sales

North America franchise royalties and fees

North America commissary revenues

International revenues

Other revenues

Total revenues

Domestic Company-owned restaurant sales increased $48.7 million, or 7.5%, in 2020.

Excluding the impact of refranchising 46 restaurants in 2019 primarily located in South Florida and Georgia, Domestic Company-owned restaurant sales increased $79.2 million, or 12.7%.

The increase was primarily due to positive comparable sales of 14.2%, partially offset by the 2019 favorable impact from the expiration of customer rewards associated with our Papa Rewards loyalty program of $6.0 million.

“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 $24.9 million, or 34.7%, in 2020.

Excluding the impact of refranchising, North America franchise royalties and fees increased $22.9 million, or 31.9%.

The increase was primarily due to positive comparable sales of 18.6%.

Franchise royalties and fees in 2020 also reflect a higher effective royalty rate due to lower temporary royalty relief which was part of our franchise assistance program (see “Temporary Franchise Support”).

North America franchise restaurant sales increased 18.6% to $2.49 billion for 2020 compared to prior year.

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 $68.1 million, or 11.1%, primarily due to higher volumes and pricing associated with higher commodities costs, primarily cheese.

International revenues increased $21.0 million, or 20.4%, in 2020 primarily due to higher PJUK commissary revenues and higher royalties from higher comparable sales of 12.6%.

International franchise restaurant sales increased 15.5% to $1.0 billion in 2020, excluding the impact of foreign currency, primarily due to increases in comparable sales.

International franchise restaurant sales are not included in Company revenues;

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

Other revenues, which primarily includes our North America marketing funds, online and mobile ordering business and our wholly-owned print and promotions subsidiary, increased $31.2 million, or 17.4% in 2020 primarily due to higher marketing fund revenues from an increase in franchise sales and an increase in the national marketing fund contribution rate in 2020 and higher online revenues from increased restaurant sales.

Discussion of Operating Results

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

Operating income increased approximately $65.7 million for the year ended December 27, 2020 as compared to the prior year.

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

Special items for 2020 include strategic corporate reorganization costs associated with our new office in Atlanta, Georgia projected to open in the summer of 2021.

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 these non-GAAP measures are important for comparability purposes.

(In thousands)

Domestic Company-owned restaurants

North America franchising

North America commissaries

International

Unallocated corporate expenses

Elimination of intersegment profits

Adjusted operating income

The increase in operating income of $65.7 million, and increase in adjusted operating income of $62.2 million in 2020, excluding Special items, was primarily due to the following:

● Domestic Company-owned Restaurants Segment.

Domestic Company-owned restaurants operating income increased $7.8 million for 2020 as compared to the prior year comparable period.

The increase was primarily due to higher profits from positive comparable sales of 14.2%, partially offset by labor initiatives and bonus expenses, including a special end-of-year bonus for front-line team members, and higher commodities costs.

Additionally, 2019 benefited from the expiration of customer rewards associated with our Papa Rewards loyalty program of $6.0 million.

● North America Franchising Segment.

North America franchising operating income increased $25.4 million for 2020, primarily due to higher comparable sales of 18.6%.

The fiscal year 2020 also benefited from a higher effective royalty rate compared to 2019 primarily due to lower royalty relief in 2020 as discussed in “Temporary Franchise Support.”

● North America Commissaries Segment.

North America commissaries operating income increased $2.5 million in 2020, primarily due to higher profits from higher volumes, partially offset by the bonus for front-line team members.

● International Segment.

International operating income increased $5.3 million for 2020 compared to the prior year primarily due to higher royalty revenue, PJUK commissary income attributable to increased units and higher comparable sales and lower travel costs due to COVID-19.

These increases were partially offset by lower revenues received from certain franchisees as a result of royalty support, higher bonuses and the unfavorable impact of foreign exchange rates.

● All Others.

All Others operating income increased $9.0 million primarily due to higher online revenues, partially offset by timing of marketing spend in the prior year.

● Unallocated Corporate Expenses.

Unallocated corporate expenses decreased approximately $12.0 million in 2020 compared to 2019 primarily due to lower marketing fund investments of $12.5 million as discussed in “Temporary Franchise Support”.

Review of Consolidated Results

For the reasons discussed above, consolidated revenues increased $194.0 million, or 12.0%, to $1.81 billion in 2020, compared to $1.62 billion in 2019.

This section of this Annual Report on Form 10-K generally discusses fiscal 2021 and 2020 items and year-to-year comparisons between fiscal 2021 and 2020.

Discussion of 2019 items and year-to-year comparisons between fiscal 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on From 10-K for the fiscal year ended December 27, 2020.

The following table sets forth the various components of the 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.

December 26, 2021

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Total costs and expenses

Refranchising gains

Operating income

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Income before income taxes

Consolidated revenues increased $255.2 million, or 14.1%, to $2.07 billion in 2021, compared to $1.81 billion in 2020.

Domestic Company-owned restaurant sales increased $77.6 million, or 11.1%, in 2021.

The increase was primarily due to positive comparable sales of 11.3%, which were positively impacted by new product innovation, including the successful launch of our new Epic Stuffed Crust pizza in the first quarter of 2021, and due to higher demand that has been sustained during the pandemic, which was not reflected in the first quarter of 2020.

North America franchise royalties and fees increased $32.6 million, or 33.7%, in 2021.

The increase was primarily due to positive comparable sales of 12.0% and a higher effective royalty rate from higher franchise royalties of $14.3 million in 2021 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 13.0% to $2.8 billion for 2021 compared to prior year.

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 $80.5 million, or 11.8%, primarily due to higher volumes and higher pricing from higher commodities costs.

International revenues increased $26.8 million, or 21.6% in 2021 primarily due to higher royalties from increased equivalent units and higher comparable sales of 13.0%.

International revenues also increased $8.1 million in 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 24.4% to $1.2 billion in 2021, excluding the impact of foreign currency, primarily due to increases in comparable sales and net new restaurant openings.

International franchise restaurant sales are not included in Company revenues;

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

Other revenues, which primarily includes our national marketing funds, online and mobile ordering business and our wholly-owned print and promotions subsidiary, increased $37.7 million, or 17.9% in 2021 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 $1.7 billion, or 95.0% of total revenues in 2020 compared to $1.6 billion, or 98.8%, in 2019.

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

Domestic Company-owned restaurants expenses were $563.8 million in 2020, or 80.5% of related revenues, as compared to the prior year expenses of $526.2 million, or 80.7% of related revenues, in 2019.

The 0.2% decrease, as a percentage of revenues, was primarily due to lower food costs, including the favorable impact of current year promotions which more than offset higher commodities costs and lower operating expenses on higher sales.

These decreases were partially offset by higher bonus expense and the 2019 favorable impact of the expiration of customer rewards with our Papa Rewards loyalty program.

North America commissary expenses were $630.9 million in 2020, or 92.7% of related revenues compared to $569.2 million in 2019, or 92.9% of related revenues in 2019.

The 0.2% decrease in expenses, as a percentage of related revenues, was primarily due to lower operating costs on higher volumes and lower delivery costs.

International expenses were $74.0 million in 2020, or 59.7% of related revenues, compared to prior year expenses of $57.7 million, or 56.1% of related revenues in 2019.

The increase of 3.6% in expenses, as a percentage of related revenues, was primarily due to the higher mix of United Kingdom commissary revenues which have a lower overall margin and lower revenues resulting from increased royalty support provided to certain franchisees.

Other expenses were $200.3 million in 2020, or 94.9% of related revenues, compared to prior year expenses of $175.6 million, or 97.7% of related revenues in 2019.

The 2.8% decrease in expenses, as a percentage of related revenues, was primarily due to higher margins from our online and mobile ordering business, partially offset by lower revenues at our printing subsidiary.

Total costs and expenses were approximately $1.90 billion, or 91.9% of total revenues in 2021, as compared to $1.7 billion, or 95.0% of total revenues for the prior year.

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

Domestic Company-owned restaurant expenses were $621.9 million or 79.9% of related revenues in 2021, compared to expenses of $563.8 million, or 80.5% of related revenues for the prior year.

The 0.6% decrease in expenses, as a percentage of revenues, was primarily due to leveraging fixed costs on higher revenues, partially offset by higher commodity and labor costs.

North America commissary expenses were $703.6 million, or 92.4% of related revenues in 2021, compared to $630.9 million, or 92.7% of related revenues, for the prior year.

The 0.3% decrease in expenses, as a percentage of revenues, was primarily due to leveraging fixed costs on higher revenues.

International expenses were $87.3 million, or 57.9% of related revenues, for 2021 compared to $74.0 million, or 59.7% of related revenues for the prior year.

The 1.8% decrease in expenses as a percentage of revenues was primarily due to lower operating costs on higher royalties from a 13.0% increase in comparable sales for 2021 and the favorable impact of foreign currency exchange rates in 2021.

Other expenses were $226.3 million, or 91.0% of related revenues in 2021, as compared to $200.3 million, or 94.9% of related revenues for the prior year.

The 3.9% decrease in expenses, as a percentage of related revenues, was primarily due to higher margins from our technology platform, including our mobile ordering business.

General and administrative (“G&A”) expenses were $212.3 million, or 10.3% of revenues for 2021 compared to $204.2 million, or 11.3% of revenues for 2020.

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Administrative expenses (a)

Special items (b) (c)

Other general expenses (d)

Special items (b)

Other general expenses (c)

General and administrative expenses

(a) The increase in administrative expenses of $6.1 million for the year ended December 27, 2020 compared to prior year was primarily due to higher management incentive costs, partially offset by reduced travel costs due to COVID-19 restrictions and lower professional and consulting fees.

(b) Represents $6.0 million in strategic reorganization costs for the year ended December 27, 2020 associated with our new office in Atlanta, Georgia projected to open in the summer of 2021.

See “Note 17” of “Notes to Consolidated Financial Statements” for additional information.

(1) $5.9 million of legal and advisory fees primarily associated with the review of a wide range of strategic opportunities that culminated in a strategic investment in the Company by funds affiliated with, or managed by, Starboard Value LP (“Starboard”);

(2) $5.6 million related to a one-time mark-to-market adjustment from the increase in value of the Starboard option to purchase shares of the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”) that culminated in the purchase of $50.0 million of Series B Preferred Stock in late March.

(a) The increase in administrative expenses of $14.3 million for the year ended December 26, 2021 compared to prior year was primarily due to higher professional and legal fees and travel and labor costs.

(b) Represents $13.1 million and $6.0 million in strategic reorganization costs for the years ended December 26, 2021 and December 27, 2020, respectively, associated with the opening of our new office in Atlanta, Georgia.

See “Note 16” of “Notes to Consolidated Financial Statements” for additional information.

(3) $2.4 million that includes severance costs for the Company’s former CEO as well as costs related to the termination of a license agreement for intellectual property no longer being utilized.

(d) The decrease in other general expenses of $17.4 million was primarily due to lower discretionary marketing fund investments and lower provisions for uncollectible accounts and notes receivable.

(c) The decrease in other general expenses of $13.3 million in 2021 was primarily due to discretionary marketing fund investments of $15.0 million which was part of our temporary franchisee assistance program that concluded in the third quarter of 2020.

See “Items Impacting Comparability;

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Depreciation and amortization expense was $48.8 million, or 2.4% of revenues in 2021, as compared to $49.7 million, or 2.7% of revenues for 2020.

Refranchising gains.

Refranchising gains of $4.7 million in 2019 were primarily associated with the refranchising of 19 Company-owned restaurants in Georgia and 24 Company-owned restaurants in South Florida.

See “Note 11” of “Notes to the Consolidated Financial Statements” for additional information.

The 0.3% decrease is primarily due to higher revenues in 2021.

Operating Income by Segment

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

Operating income increased approximately $78.0 million for the year ended December 26, 2021 as compared to the prior year.

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

Special items in 2021 and 2020 consist of strategic corporate reorganization costs associated with our corporate 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 these non-GAAP measures are important for comparability purposes.

(In thousands)

Domestic Company-owned restaurants

North America franchising

North America commissaries

International

Unallocated corporate expenses

Elimination of intersegment (profits)

The increase in operating income, excluding Special items, of $85.1 million, or 88.4% in 2021 compared to 2020 was primarily due to the following:

● Domestic Company-owned restaurants increased $12.6 million in 2021 primarily due to higher profits from comparable sales increases of 11.3%, partially offset by higher commodities and labor costs.

● North America franchising increased $31.1 million in 2021 primarily due to higher comparable sales of 12.0% and a higher effective royalty rate from higher franchise royalties of $14.3 million driven by the conclusion of our temporary royalty reduction program in the third quarter of 2020.

This temporary royalty support was above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business.

● North America commissaries increased $6.7 million in 2021 primarily due to higher profits from higher volumes.

● International increased approximately $10.9 million in 2021 primarily due to higher royalty revenue from comparable sales of 13.0% and increased equivalent units.

● All Others, which primarily includes our online and mobile ordering business and our marketing funds, increased $10.7 million in 2021 primarily due to higher revenues from our technology platform, including our mobile ordering business.

● Unallocated corporate expenses decreased approximately $13.1 million in 2021 primarily due to our discretionary marketing fund investments of $15.0 million in 2020 which was part of our previously announced franchise assistance program that concluded in the third quarter of 2020.

This decrease was partially offset by higher travel and labor costs.

Interest expense .

Interest expense decreased approximately $3.6 million for the year ended December 27, 2020 primarily due to a decrease in the average outstanding debt balance and lower interest rates.

Total debt outstanding was $350.0 million as of December 27, 2020.

Outstanding debt at December 27, 2020 decreased $20.0 million from December 29, 2019 primarily due to repayments on our secured term loan facility.

Interest expense increased approximately $2.2 million for the year ended December 26, 2021 primarily due to higher interest rate for our senior notes and higher average outstanding debt on our revolving credit facility drawn to partially fund the repurchase and conversion of our Series B Preferred Stock.

Total debt outstanding was $490.0 million and $350.0 million as of December 26, 2021 and December 27, 2020, respectively.

Income before income taxes.

Income before income taxes was $150.9 million in 2021, compared to $75.4 million in 2020, or an increase of $75.5 million due to the reasons discussed above.

Income tax expense (benefit) .

Income tax expense.

The effective income tax rate was 17.2% for 2021, compared to 19.6% for 2020.

The effective rate was higher in 2020 due to the impact of similar tax credit amounts on higher income before income taxes.

The 2019 income tax rate included a non-deductible $5.9 million expense associated with the one-time mark-to-market increase in the fair value of the Starboard option to purchase Series B Preferred Stock, as previously mentioned.

The following compares income tax expense (benefit) for 2020 and 2019:

The effective rate was lower in 2021 due to the finalization of our 2020 federal income tax return, which resulted in a $2.7 million benefit to income tax expense.

The rate also included excess tax benefits from stock option exercise and restricted shares vesting activity.

The following compares income tax expense for 2021 and 2020:

December 26, 2021

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Income before income taxes

Income tax expense (benefit)

Income tax expense

Effective tax rate

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Non-GAAP Measures” and “Note 7” and “Note 17” of “Notes to Consolidated Financial Statements,” for additional information.

Diluted earnings (loss) per share.

Diluted earnings per common share was $1.28 for 2020, compared to diluted loss per common share of $0.24 in 2019, representing an increase of $1.52.

Excluding Special items, adjusted diluted earnings per common share was $1.40, compared to $0.03 in 2019, representing an increase of $1.37.

Diluted earnings per common share was reduced by approximately $0.07 per share in 2020 ($0.09 impact when excluding Special items) due to income attributable to participating securities, including Series B Preferred Stockholders, based on undistributed earnings for 2020.

See “Note 8” of “Notes to Consolidated Financial Statements” for additional information.

Diluted earnings per share.

Diluted earnings per common share was $0.12 for 2021 compared to diluted earnings per common share of $1.28 in 2020, representing a decrease of $1.16.

Excluding Special items, adjusted diluted earnings per common share was $3.51 in 2021, compared to $1.40 in 2020, representing an increase of $2.11.

Diluted earnings per common share for the year ended December 26, 2021 included $3.10 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 “Note 6” and “Note 7” of “Notes to Consolidated Financial Statements” for additional information.

Items Impacting Comparability;

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The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures (collectively defined as “Special items”).

The non-GAAP adjusted results shown below and within this Form 10-K, which exclude the 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 the 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.

See “Results of Operations” for further analysis regarding the impact of the Special items, and “Note 8”, “Note 11”, and “Note 18” of “Notes to Consolidated Financial Statements,” respectively, for additional information about the Special items.

Effective as of the first quarter of 2020, the Company modified its presentation of adjusted (non-GAAP) financial results to no longer present certain financial assistance provided to the North America system in the form of royalty relief and discretionary marketing fund investments as Special charges.

This financial assistance, which began in the third quarter of 2018 in response to declining sales in North America, concluded in the third quarter of 2020, as announced in a formal plan in July 2019.

The adjusted financial results for the Company’s fiscal year ended December 29, 2019 have been revised to remove these items.

See “Temporary Franchise Support” below for additional information regarding this change in presentation.

We present these non-GAAP measures because we believe the Special items impact the comparability of our results of operations.

See “Note 6”, “Note 16”, and “Note 17” of “Notes to Consolidated Financial Statements,” for additional information about the Special items.

(In thousands, except per share amounts)

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Strategic corporate reorganization costs (1)

Special charges:

Legal and advisory fees (2)

Mark-to-market adjustment on option valuation (3)

Other costs (4)

Refranchising gains

Adjusted operating income

GAAP net income (loss) attributable to common shareholders

GAAP net income attributable to common shareholders

Strategic corporate reorganization costs (1)

Special charges:

Legal and advisory fees (2)

Mark-to-market adjustment on option valuation (3)

Other costs (4)

Refranchising gains

Tax effect of Non-GAAP items (5) (6)

Repurchase and conversion of Series B Preferred Stock (2)

Tax effect of strategic corporate reorganization costs (3)

Two-class impact for Non-GAAP adjustment to net income (4)

Adjusted net income attributable to common shareholders

GAAP diluted earnings (loss) per share

GAAP diluted earnings per common share

Strategic corporate reorganization costs (1)

Special charges:

Legal and advisory fees (2)

Mark-to-market adjustment on option valuation (3)

Other costs (4)

Refranchising gains

Tax effect of Non-GAAP items (5) (6)

Two-class impact for Non-GAAP adjustment to earnings per share (7)

Adjusted diluted earnings per share

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

(2) Represents advisory and legal costs incurred in 2019 primarily associated with the review of a wide range of strategic opportunities that culminated in the strategic investment in the Company by affiliates of Starboard Value LP (“Starboard”) as well as certain litigation costs associated with legal proceedings initiated by our founder.

(3) Represents a one-time mark-to-market adjustment of $5.9 million primarily related to the increase in the fair value of the Starboard option to purchase Series B Preferred Stock that culminated in the purchase of additional preferred stock in late March 2019.

(4) Includes severance costs for our former CEO and costs related to the termination of a license agreement for intellectual property no longer being utilized.

(5) The tax effect for strategic corporate reorganization costs was calculated by applying the 2020 full year marginal tax rate of 22.5%.

(6) The tax effect for Legal and advisory fees, Other costs, and Refranchising gains was calculated by applying the 2019 full year marginal rate of 22.4%.

The mark-to-market adjustment on option valuation was non-deductible for tax purposes.

Repurchase and conversion of Series B Preferred Stock (2)

Tax effect of strategic corporate reorganization costs (3)

Two-class impact for Non-GAAP adjustment to net income (4)

Adjusted diluted earnings per common share

(Note) The above table does not include the impact of the allocation of undistributed earnings to participating securities for Special items in 2021.

(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 marginal tax rate of 22.5% for 2021 and 2020, respectively.

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.

(4) Represents an adjustment to the allocation of undistributed earnings to participating securities for the strategic corporate reorganization costs.

The non-GAAP adjusted results shown above and within this document, which exclude the 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 the Special items is important for purposes of comparability.

In addition, management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends.

See “Results of Operations” for further analysis regarding the impact of the Special items.

Temporary Franchise Support.

Beginning in the third quarter of 2018, the Company began providing various forms of support and financial assistance to the North America franchise system in response to declining North America sales.

In July 2019, the Company announced a formal relief program to provide our North America franchisees with certainty regarding the availability and schedule of the temporary relief which concluded in the third quarter of 2020.

The Company provided royalty relief and discretionary marketing fund investments to franchisees in North America, included herein as “Temporary Franchise Support” of $29.3 million (or approximately $0.69 per diluted share) for 2020, compared to $46.6 million (or approximately $1.14 per diluted share) for 2019, as follows (in thousands):

Royalty relief (a)

Marketing fund investments (b)

Total Temporary Franchise Support

(a) Represents financial assistance provided to the North America system in the form of temporary royalty reductions that are above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business.

These royalty reductions are not an expense, but rather consist of the amount of waived royalties that the Company would otherwise have been entitled to absent the waiver.

The waived royalties are not included in North America franchise royalties and fees revenues.

(b) Represents incremental discretionary marketing fund investments in excess of contractual Company-owned restaurant-level contributions, which were made as part of the temporary financial support package to our franchisees.

The marketing fund investments are included in Unallocated corporate expenses.

Management believes presenting certain financial information excluding the Special items is important for purposes of comparing our historical operating results and providing transparency in how we evaluate our operating performance.

Management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends.

In addition, we present free cash flow in this report, which is a non-GAAP measure.

We define free cash flow as net cash provided by operating activities (from the 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 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 our performance than the Company’s GAAP measures.

See “Liquidity and Capital Resources” for a reconciliation of free cash flow to the most directly comparable GAAP measure.

Please see “Liquidity and Capital Resources – Free Cash Flow” for a discussion of why we believe free cash flow provides useful information regarding our financial condition and results of operations, and a reconciliation of free cash flow to the most directly comparable GAAP measure.

The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.

Liquidity and Capital Resources

The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $10.0 million was outstanding as of December 27, 2020, and a secured term loan facility with an outstanding balance of $340.0 million (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 December 27, 2020 was approximately $344.2 million.

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

As of December 27, 2020, we have the following interest rate swap agreements with a total notional value of $350.0 million:

Effective Dates

Floating Rate Debt

April 30, 2018 through April 30, 2023

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 3.8% and 4.1% in fiscal 2020 and 2019, respectively.

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

The table below summarizes our cash flows from continuing operations for each of the last two fiscal years (in thousands):

Total cash provided by (used in):

Operating activities

Investing activities

Financing activities

Change in cash and cash equivalents, excluding the impact of foreign currency

Operating Activities

Total cash provided by operating activities was $184.7 million for the year ended December 26, 2021 which was generally consistent with the prior year comparable period.

The Company benefited from strong comparable sales growth of 12.1% in 2021 driven by our product innovation, customer retention and expansion both domestically and internationally, which more than doubled our net income to $125.0 million from $60.6 million a year ago.

This was offset by unfavorable changes in working capital, including the repayment of previously deferred employer payroll taxes from the Coronavirus Aid, Relief, and Economic Security Act and the timing of payments associated with our national marketing fund.

Investing Activities

Cash flow used in investing activities was $63.5 million in 2021 compared to $41.1 million in 2020.

The increase of $22.4 million was primarily driven by a $32.9 million increase in capital spend as part of our long-term growth strategy and expansion both domestically and internationally, including expenditures for the buildout of our corporate office located in Atlanta, Georgia, information technology upgrades for our corporate and restaurant facilities, and the development of Company-owned restaurants.

This was partially offset by higher repayments from notes issued to franchisees.

Financing Activities

Cash flow used in financing activities was $180.5 million in 2021 compared to $43.5 million in 2020, an increase of $137.0 million.

During 2021, the Company executed a new capital allocation strategy to optimize its capital structure, accelerating our long-term earnings potential and providing ongoing value to our shareholders.

This strategy included cash consideration paid for the repurchase of the Company’s outstanding shares of Series B Preferred stock totaling $188.6 million, share repurchases made under the Company’s share repurchase programs of $72.5 million, and an increase to our dividend rate per common share, from $0.90 to $1.40 on an annual basis.

These cash uses were partially offset by net proceeds of $60.0 million from the issuance of our 3.875% senior notes due 2029 and refinancing of our revolving credit facility, and also $80.0 million in net proceeds received from our revolving credit facility which were mainly used to fund our share repurchases.

On September 14, 2021, the Company issued $400.0 million of 3.875% senior notes (the “Notes”) which will mature on September 15, 2029.

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

Our outstanding debt as of December 26, 2021 was $490.0 million, which was comprised of $400.0 million outstanding under the Notes and $90.0 million outstanding under the PJI Revolving Facility.

Remaining availability under the PJI Revolving Facility was approximately $510.0 million as of December 26, 2021.

Our Amended Credit Agreement contains affirmative and negative covenants that, among other things, require customary reporting obligations and restrict, subject to certain exceptions, the incurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates.

The Company is also subject to certain financial covenants, as shown in the following table, that could restrict or impose constraints on the liquidity of our business:

Actual Ratio for the

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

In addition, the Indenture governing the Notes contains customary covenants that, among other things and subject to certain exceptions, limit our ability and the ability of certain of our subsidiaries to:

incur additional indebtedness and guarantee indebtedness;

pay dividends or make other distributions or repurchase or redeem our capital stock;

prepay, redeem or repurchase certain debt;

issue certain preferred stock or similar equity securities;

make loans and investments;

enter into transactions with affiliates;

enter into agreements restricting our subsidiaries’ ability to pay dividends;

and consolidate, merge or sell all or substantially all of our assets.

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 (as amended, the “PJMF Loan Agreement”) with U.S.

(“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 balance outstanding under the PJMF Revolving Facility as of December 27, 2020 and December 29, 2019.

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

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

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

See “Note 12” of “Notes to Consolidated Financial Statements” for additional information.

Cash flow provided by operating activities was $186.4 million for 2020 as compared to $61.7 million in 2019.

The increase of approximately $124.7 million was primarily due to higher net income and favorable working capital changes including timing of payments.

Cash flow used in investing activities was $41.1 million in 2020 as compared to $32.6 million for the same period in 2019.

The increase in cash flow used in investing activities was primarily due to proceeds from the refranchising of restaurants in 2019.

This was somewhat offset by higher note repayments from franchisees in 2020.

Cash flow used in financing activities was $43.5 million in 2020 as compared to $34.6 million for the same period in 2019.

The increase in cash flow used in financing activities was primarily due to the timing of repayments on our Term Loan Facility, repurchases of common stock and higher dividends paid to preferred stockholders, offset by higher cash proceeds received from the exercise of stock options.

In 2019, we also received $252.5 million in proceeds from the issuance of Series B Preferred Stock, which was primarily used for net repayments on our Revolving Facility of $240.0 million.

Share Repurchases

As part of our long-term growth and capital allocation strategy, we are committed to investing in share repurchases to provide ongoing value and enhanced returns to our shareholders.

On October 28, 2021, our Board of Directors approved a share repurchase program with an indefinite duration for up to $425.0 million of the Company’s common stock.

The share repurchase program operated alongside our previous $75.0 million share repurchase authorization, which began on November 4, 2020 and expired on December 26, 2021.

The following table summarizes our repurchase activity for the years ended December 26, 2021 and December 27, 2020:

Maximum Dollar

Value of Shares

that May Yet Be

(in thousands, except average price per share)

Purchased Under the

Plans or Programs

December 26, 2021

December 27, 2020

Subsequent to year-end, we acquired an additional 109,000 shares at an aggregate cost of $13.3 million.

Approximately $411.5 million remained available under the Company’s share repurchase program as of February 17, 2022.

The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program.

There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise.

The Company recorded dividends of approximately $46.0 million for the year ended December 26, 2021 consisting of the following:

● $40.4 million paid to common stockholders ($1.15 per share);

● $4.6 million in common stock “pass-through” dividends paid to Series B Preferred Stockholders on an as-converted basis ($0.90 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;

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

The Company paid common stock dividends of $29.4 million, common stock “pass-through” dividends to Series B Preferred Stockholders of $4.6 million, and $9.1 million in preferred dividends on the Series B Preferred Stock in 2020.

On January 25, 2021, our Board of Directors declared a first quarter dividend of $0.225 per share of common stock (approximately $7.4 million was paid to common stockholders and $1.1 million was paid as “pass through” dividends to holders of Series B Preferred Stock on an as-converted basis).

The first quarter dividend on outstanding shares of Series B Preferred Stock was also declared on January 25, 2021.

The common stock dividend was paid on February 19, 2021 to stockholders of record as of the close of business on February 8, 2021.

The first quarter preferred dividend of $2.3 million will be paid to holders of Series B Preferred Stock on April 1, 2021.

We also use free cash flow, a non-GAAP measure, defined as net cash provided by operating activities (from the 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 measure because it is one factor that management uses in determining the amount of cash available for discretionary investment.

On January 27, 2022, our Board of Directors declared a first quarter dividend of $0.35 per share of common stock, representing an approximate $12.7 million aggregate dividend that was paid on February 18, 2022 to common stockholders of record as of the close of business on February 7, 2022.

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 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 for the last two years was as follows (in thousands):

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Free cash flow

Contractual Obligations

Contractual obligations and payments as of December 27, 2020 due by year are as follows (in thousands):

(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.

Cash Requirements

The Company believes that its balances of cash and cash equivalents and borrowing capacity, along with cash generated by operations, will be sufficient to satisfy its cash requirements, cash dividends, interest payments and share repurchases over the next twelve months and beyond.

The Company’s material cash requirements as of December 26, 2021 include the following contractual obligations (in thousands):

Payments Due by Period

Contractual Obligations:

Term Loan Facility (1)

3.875% Senior Notes

Revolving Facility

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Total contractual obligations

(1) We utilize interest rate swaps to hedge our variable rate debt.

At December 27, 2020, we had an interest rate swap liability of $13.5 million recorded in Accrued expenses and other current liabilities and Other long-term liabilities in the Consolidated Balance Sheet.

(1) Interest payments assume an outstanding debt balance of $490.0 million.

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(2) See “Note 3” of “Notes to Consolidated Financial Statements” for additional information.

The above amounts exclude future expected sub-lease income in the United Kingdom.

The above amounts exclude variable-based rents and future expected sub-lease income in the UK.

The above table does not include the following:

● Unrecognized tax benefits of $1.0 million since we are not able to make reasonable estimates of the period of cash settlement with respect to the taxing authority.

● Unrecognized tax benefits of $0.9 million, including interest and penalties, since we are not able to make reasonable estimates of the period of cash settlement with respect to the taxing authority.

● Redeemable noncontrolling interests of $5.5 million as we are not able to predict the timing of the redemptions.

● Expected minimum lease payments of approximately $33.0 million associated with our new office in Atlanta, Georgia which is expected to commence in fiscal 2021.

● Expected capital expenditures of approximately $75.0 million to $85.0 million in 2022, which the Company expects to spend primarily on the buildout and development of Company-owned stores and technological enhancements.

Impact of Inflation

From time to time, we experience the impacts of inflation, which cause increased food, labor and benefits costs and higher operating expenses.

To the extent permitted by competition, increased costs are recovered through a combination of menu price increases and/or implementing other cost reductions.

Off-Balance Sheet Arrangements

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We have certain other commercial commitments where payment is contingent upon the occurrence of certain events.

With our insurance programs, we are party to standby letters of credit with off-balance sheet risk as follows by year (in thousands):

With our insurance programs, we are party to surety bonds with off-balance sheet risk as follows by year (in thousands):

Amount of Commitment Expiration Per Period

Standby letters of credit

The surety bond arrangements expire within one year but have automatic renewal clauses.

See “Note 12” and “Note 19” of “Notes to Consolidated Financial Statements” for additional information related to contractual and other commitments.

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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 novel coronavirus disease (COVID-19), including our cash on hand and access to our credit facilities, 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, the duration and number of temporary store closures, our plans to open an office in Atlanta, the associated reorganization costs and the related organizational, employment and real estate changes that are expected, royalty relief, the effectiveness of 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 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, labor shortages, inflation, 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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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 ability of the Company to manage difficulties and opportunities associated with or related to the COVID-19 pandemic or the cessation thereof in the future, 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;

the virus’s impact on the availability of our workforce;

the potential disruption of our supply chain;

changes in consumer demand or behavior;

labor shortages at Company and/or franchised stores and our quality control centers;

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

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

our liquidity position;

vaccine mandates;

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

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

● the assumption that the store closures in international markets and non-traditional restaurants in North America are not expected to be permanent;

the assumption that our delivery restaurants will continue to stay open and be deemed essential businesses by national, state and local authorities in most of the jurisdictions in which we operate;

● 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;

● 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;

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

● our ability to fully realize the anticipated benefits of our corporate reorganization and new office in Atlanta, Georgia;

● increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to boost 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;

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● 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;

● increases in labor costs, food costs or sustained higher other operating costs, including as a result of supply chain disruption and inflation.

This could also include increased employee compensation, including as a result of labor shortages, changes in minimum wage, benefits, insurance, tax rates, new regulatory requirements or increasing compliance costs;

● 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;

● increased risks associated with our international operations, including economic and political conditions and risks associated with the withdrawal of the UK 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;

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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-K

Item 7. Management’s Discussion and Analysis