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 March 27, 2022, there were 5,524 Papa John’s restaurants in operation, consisting of 608 Company-owned and 4,916 franchised restaurants operating in 49 countries and territories. 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, we derive revenues 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, 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.
Recent Developments and Trends
Innovation. The Company launched its NY Style pizza in the first quarter of 2022. NY Style features eight oversized slices on a thin foldable crust. NY Style pizza has proven to be popular with customers and highly incremental to revenues. The combination of Epic Stuffed Crust and NY Style pizza has contributed to our positive results for the first quarter of 2022 as we compare the period to the prior year’s record first quarter sales, our highest in the history of the Company. Our digital innovation through Papa Rewards, our loyalty program, allows us to directly engage our customers with targeted personalized offers that drive higher frequency, higher ticket and higher customer satisfaction. Continued investment in one-to-one marketing capabilities is a big part of our business plan for 2022 and beyond. In addition, third-party delivery aggregators have been another focus of our digital innovation and strategy as they have helped us reach incremental, profitable customers, while providing supplemental delivery drivers, especially during peak times.
Growth Strategy . The Company’s goal continues to be to take market share in the pizza category while leveraging our differentiated strategy and premium position to protect margins in the face of commodity and labor headwinds. We accelerated our development outlook to be between 280 and 320 net new restaurants globally in 2022. At the midpoint of the range, this represents approximately 5% growth on our total system-wide unit count. Our view of our long-term unit opportunity, both domestically and internationally, continues to expand as we sign historic deals to develop within key areas and we now expect to open 1,400 to 1,800 net new Papa John’s restaurants worldwide by the end of 2025, relative to the start of 2021.
On March 28, 2022, the Company sold its 51% controlling interest in a joint venture between Papa Johns and Blue and Silver Ventures, Ltd. Sun Holdings, a leading multi-brand franchisee operator and one of Papa John’s largest domestic franchise partners, has assumed control of the 90 Papa John’s restaurants in Texas that operated under the joint venture. The Company recorded a $8.4 million impairment loss in the first quarter of 2022 related to the divestiture. The strategic refranchising deal between Papa Johns and Sun Holdings builds upon the historic development agreement signed by the two parties in September 2021, under which Sun Holdings will open 100 new restaurants across high-growth markets, including in Texas, by 2029, in addition to the restaurants it has acquired. Now with significant operational scale with the brand, we believe Sun Holdings is positioned to accelerate its development plans and Papa John’s domestic growth.
The agreement continues a rapid acceleration of unit growth and development activity by Papa Johns in the U.S. and across the globe. In January, Papa Johns announced its biggest franchisee development agreement in the Company’s history – a partnership with FountainVest Partners to open more than 1,350 new stores across South China by 2040.
Suspension of Franchisee Support in Russia. The Company has no Company-owned restaurants in Russia or Ukraine. Out of the Company’s total 5,524 Company-owned and franchised restaurants worldwide, 188 franchised restaurants are located in Russia, all of which are operated and supplied through a master franchisee. In 2021, franchise royalties derived from these stores represented less than 1% of total company revenue, and therefore were not a material part of the Company’s business or results of operations.
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Papa John’s has suspended its corporate operations and support for franchised restaurants in Russia, and fully reserved all receivables from the aforementioned master franchisee. The Company recognized $17.4 million ($0.48 loss per diluted share) on a pre-tax basis in one-time, non-cash charges in the first quarter related to reserves for certain loans and impairments of reacquired franchised rights due to the conflict in Ukraine and subsequent international government actions and sanctions, which were recorded as Refranchising and impairment loss of $2.8 million and General and administrative expenses of $14.6 million. All assets related to the franchised operations in Russia have been fully reserved or impaired so there will be no additional Russia related charges for reserves, write-offs, or impairments of amounts recorded on the Condensed Consolidated Balance Sheet.
Coronavirus Pandemic and Related Market Impact. The restaurant industry has faced and managed staffing challenges since long before the pandemic. These challenges intensified with the increased demand for employees in the service industry as the economy recovered last year. In early 2022, the Omicron variant further exacerbated the situation, given the spike in infection rates and number of people out sick or quarantined at home. Throughout the first quarter, our restaurants have been at their lowest staffing levels since the beginning of the pandemic. This has impacted customer service and, in limited cases, our ability to deliver or take orders. We continue to proactively communicate to our loyal customers, providing updates and conveying our gratitude for their patience. Our team members have been working harder than ever to continue to safely serve their customers and communities and we have benefited from their dedication to manage through staffing constraints. We will continue to strive to be employer of choice in our industry and have taken many actions to create a strong culture and support our people. We have invested in wages and continue to offer our team members hiring and referral bonuses as well as expanded health, wellness, paid time off and access to college education. More and more employees are taking advantage of Dough & Degrees, our college tuition program, which provides access to an online degree free of charge to corporate team members.
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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. Comparable sales exclude sales of restaurants that were not open during both the current and prior year fiscal periods and franchisees for which we suspended corporate support during the quarter ended March 27, 2022. “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.
Three Months Ended
March 27, 2022
March 28, 2021
Comparable sales growth (decline):
Domestic Company-owned restaurants
(1.2%)
23.3%
North America franchised restaurants
2.8%
27.1%
North America restaurants
1.9%
26.2%
International restaurants
0.8%
23.2%
Total comparable sales growth
1.6%
25.4%
System-wide restaurant sales growth:
(excluding the impact of foreign currency)
Domestic Company-owned restaurants
0.8%
22.2%
North America franchised restaurants
4.0%
27.0%
North America restaurants
3.3%
25.9%
International restaurants
11.6%
28.9%
Total global system-wide restaurant sales growth
5.3%
26.6%
Restaurant Progression
Three Months Ended
March 27, 2022
March 28, 2021
North America Company-owned:
Beginning of period
600
588
Opened
7
—
Acquired
1
1
End of period
608
589
North America franchised:
Beginning of period
2,739
2,701
Opened
15
12
Closed
(7)
(3)
Sold
(1)
(1)
End of period
2,746
2,709
International franchised:
Beginning of period
2,311
2,111
Opened
55
68
Closed
(8)
(9)
Suspended (a)
(188)
—
End of period
2,170
2,170
Total restaurants – end of period
5,524
5,468
Trailing four quarters net store growth (b)
244
90
(a) Represents all franchised restaurants located in Russia, for which the Company has suspended corporate support.
(b) Excludes suspended restaurants.
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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
March 27, 2022
March 28, 2021
% of Related
% of Related
Increase
($ in thousands)
Revenues
Revenues
(Decrease)
Revenues:
Domestic Company-owned restaurant sales
$
198,765
$
197,234
North America franchise royalties and fees
34,268
32,715
North America commissary revenues
209,679
184,878
International revenues
34,617
34,607
Other revenues
65,363
62,312
Total revenues
542,692
511,746
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses
161,661
81.3%
155,888
79.0%
2.3%
North America commissary expenses
197,090
94.0%
170,684
92.3%
1.7%
International expenses
19,914
57.5%
19,618
56.7%
0.8%
Other expenses
60,555
92.6%
55,807
89.6%
3.0%
General and administrative expenses
65,937
12.1%
50,011
9.8%
2.3%
Depreciation and amortization
11,940
2.2%
12,876
2.5%
(0.3)%
Total costs and expenses
517,097
95.3%
464,884
90.8%
4.5%
Refranchising and impairment loss
(11,160)
(2.1)%
-
0.0%
(2.1)%
Operating income
14,435
2.7%
46,862
9.2%
(6.5)%
Net interest expense
(4,264)
(0.8)%
(3,647)
(0.7)%
(0.1)%
Income before income taxes
$
10,171
1.9%
$
43,215
8.4%
(6.5)%
Revenues
Consolidated revenues increased $30.9 million, or 6.0% to $542.7 million for the first quarter of 2022, compared to $511.7 million for the first quarter of 2021.
Domestic Company-owned restaurant sales increased $1.5 million, or 0.8% for the first quarter of 2022 compared to the prior year comparable period. The increase was primarily due to higher equivalent units of 2.8%, partially offset by negative comparable sales of 1.2% lapping 23.3% comparable sales growth in the prior year period.
“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. “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 $1.6 million, or 4.7% for the first quarter of 2022. The increases were primarily due to positive comparable sales increases of 2.8% and higher equivalent units of 1.9% for the first quarter of 2022 on top of 27.1% comparable sales growth in the prior year period.
North America franchise restaurant sales increased 4.0% to $739.7 million in the first quarter of 2022 compared to the prior year comparable period. 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 $24.8 million, or 13.4% for the first quarter of 2022, primarily due to higher pricing from higher commodities.
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International revenues were relatively flat for the first quarter of 2022 as compared to prior year, primarily due to higher royalties from increased equivalent units and higher comparable sales of 0.8%, offset by lower United Kingdom (“PJUK”) commissary revenues from lower PJUK comparable sales and $1.2 million due to unfavorable foreign exchange rates.
International franchise restaurant sales increased 11.6% to $337.4 million for the first quarter of 2022, 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 $3.1 million, or 4.9%, for the first quarter of 2022 primarily due to higher revenues from our technology platform, including our mobile ordering business which benefited from increased North America restaurant sales.
Costs and Expenses
Total costs and expenses were approximately $517.1 million, or 95.3% of total revenues for the first quarter of 2022, compared to $464.9 million, or 90.8% of related revenues for the first quarter of 2021. The increase in total costs and expenses, as a percentage of revenues, was primarily due to the following:
Domestic Company-owned restaurant expenses were $161.7 million for the first quarter of 2022, or 81.3% of related revenues, as compared to $155.9 million, or 79.0% of related revenues for the first quarter of 2021. The expenses, as a percentage of revenues, increased 2.3% due to higher labor expense and food costs.
North America commissary expenses were $197.1 million for the first quarter of 2022, or 94.0% of related revenues, compared to $170.7 million, or 92.3% of related revenues for the first quarter of 2021. The 1.7% increase in expenses, as a percentage of related revenues, was primarily due to commodities and inflation.
International expenses were $19.9 million for the first quarter of 2022, or 57.5% of related revenues, compared to expenses of $19.6 million, or 56.7% of related revenues for the first quarter of 2021. The 0.8% increase in expenses as a percentage of revenues was primarily due to higher commodities costs in the PJUK commissary, partially offset by lower operating costs on higher revenues.
Other expenses were $60.6 million for the first quarter of 2022, or 92.6% of related revenues, compared to expenses of $55.8 million, or 89.6% of related revenues for the first quarter of 2021. The 3.0% increase in expenses, as a percentage of related revenues, was primarily due to timing of expenditures on technology initiatives.
General and administrative expenses (“G&A”) were $65.9 million, or 12.1% of revenues in the first quarter of 2022, compared to $50.0 million, or 9.8% of revenues for the first quarter of 2021. G&A consisted of the following (in thousands):
Three Months Ended
Mar. 27,
March 28,
2022
2021
Administrative expenses (a)
$
46,090
$
46,082
Special items (b) (c)
19,636
3,883
Other general expenses
211
46
General and administrative expenses
$
65,937
$
50,011
(a) Administrative expenses were relatively flat for the first quarter of 2022 as compared to the prior year comparable period.
(b) Special items for the first quarter of 2022 include $14.6 million one-time, non-cash provisions on accounts receivable and notes receivable in connection with the conflict in Ukraine and related government actions. See “Note 2” of “Notes to Condensed Consolidated Financial Statements” for further information. We also recorded a $5.0 million charge associated with the Legal Settlement discussed in “Note 9” of “Notes to Condensed Consolidated Financial Statements” and within “Part 1. Item 1. Financial Statements.”
(c) Special items of $3.9 million for the first quarter of 2021 includes strategic reorganization costs associated with our new office in Atlanta which concluded in 2021.
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Depreciation and amortization expense was $11.9 million, or 2.2% of revenues in the first quarter of 2022, compared to $12.9 million, or 2.5% of revenues for the first quarter of 2021.
Operating Income by Segment
Operating income decreased approximately $32.4 million for the three months ended March 27, 2022 compared to the prior year comparable period. 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 2022 include an $8.4 million refranchising loss associated with the sale of our ownership interest in a joint venture including 90 restaurants, $2.8 million for the impairment of certain reacquired franchise rights and $14.6 million of reserves on certain accounts receivable and notes receivable resulting from the conflict in Ukraine and subsequent government actions, and $5.0 million for the Legal Settlement. Special items impacting operating income for 2021 included 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
Special
Adjusted
Adjusted
Mar. 27,
items
Mar. 27,
Mar. 28,
items
Mar. 28,
Increase
(In thousands)
2022
in 2022
2022
2021
in 2021
2021
(Decrease)
Domestic Company-owned restaurants
$
1,989
$
8,412
$
10,401
$
15,324
$
—
$
15,324
$
(4,923)
North America franchising
32,137
—
32,137
30,443
—
30,443
1,694
North America commissaries
9,334
—
9,334
9,713
—
9,713
(379)
International
4,455
3,515
7,970
8,364
—
8,364
(394)
All others
3,719
—
3,719
6,118
—
6,118
(2,399)
Unallocated corporate expenses
(37,111)
18,869
(18,242)
(23,162)
3,883
(19,279)
1,037
Elimination of intersegment losses (profits)
(88)
—
(88)
62
—
62
(150)
Total
$
14,435
$
30,796
$
45,231
$
46,862
$
3,883
$
50,745
$
(5,514)
The decrease in operating income, excluding Special items, of $5.5 million, or 10.9% for the first quarter of 2022 was primarily due to the following:
● Domestic Company-owned restaurants decreased $4.9 million for the first quarter of 2022 primarily due to higher commodities costs and labor initiatives.
● North America franchising increased $1.7 million for the first quarter of 2022, primarily due to higher comparable sales of 2.8% and higher equivalent units of 1.9%.
● North America commissaries were relatively flat for the first quarter of 2022 as higher revenues from pricing offset higher commodities costs.
● International decreased approximately $0.4 million for the first quarter of 2022, primarily due to higher commodity costs were partially offset by higher royalty revenue from increased comparable sales of 0.8% and higher equivalent units.
● All Others, which primarily includes our online and mobile ordering business and our marketing funds, decreased $2.4 million for the first quarter of 2022 primarily due to timing of expenditures for technology initiatives.
● Unallocated corporate expenses decreased approximately $1.0 million for the first quarter of 2021 primarily due to compensation costs and professional fees, partially offset by higher labor costs and costs related to corporate headquarters re-opening.
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Refranchising and impairment loss
In the first quarter of 2022, the Company recorded a one-time, non-cash refranchising and impairment loss of $11.2 million. On March 28, 2022, we refranchised our 51% ownership interest in a 90-restaurant consolidated joint venture between Papa Johns and Blue and Silver Ventures, Ltd in Texas for cash proceeds of $14.0 million, net of transaction costs. The assets and liabilities associated with the joint venture are classified as held for sale in the Condensed Consolidated Balance Sheet as of March 27, 2022 and we recorded a one-time, non-cash charge of $8.4 million in the first quarter. The Company also recorded an impairment loss of $2.8 million for reacquired franchise rights due to the financial and operational impact of the conflict in Ukraine and government actions taken in response to that conflict, including, but not limited to, international sanctions.
Net Interest Expense
Net interest expense increased $0.6 million for the first quarter of 2022 due to higher average outstanding debt on our revolving credit facility. Total debt outstanding was $537.0 million and $490.0 million as of March 27, 2022 and December 26, 2021, respectively.
Income Before Income Taxes
For the reasons discussed above, income before income taxes decreased approximately $33.0 million for the first quarter of 2022 over the first quarter of 2021.
Income Tax (Benefit) Expense
The effective income tax rate was negative 12.3% for the three months ended March 27, 2022 compared to 18.4% for the prior year comparable period. The decrease in the effective rate was caused by higher excess tax benefits generated by stock option exercises and vesting of restricted shares along with a decrease in pre-tax income attributable to the establishment of reserves for receivables discussed in “Note 2”, the Legal Settlement discussed in “Note 9” and the impairments discussed in “Note 10” of the “Notes to Condensed Consolidated Financial Statements”.
Quarter Ended
March 27, 2022
March 28, 2021
Income before income taxes
$
10,171
$
43,215
Income tax (benefit) expense
$
(1,256)
$
7,932
Effective tax rate
-12.3%
18.4%
Diluted Earnings Per Common Share
Diluted earnings per common share was $0.29 for the first quarter of 2022, compared to diluted earnings per share of $0.82 in the first quarter of 2021, a decrease of $0.53. Excluding Special items, adjusted diluted earnings per common share was $0.95 for the first quarter of 2022, compared to adjusted diluted earnings per common share of $0.91 in the first quarter of 2021, an increase of $0.04. Diluted earnings per common share for the three months ended March 27, 2022 included Special items of $23.9 million, net of tax, related to refranchising losses associated with the divestiture of our controlling interest in a 90 restaurant joint venture, impairment losses of certain loans and reacquired franchised rights, and the Legal Settlement. See “Items Impacting Comparability; Non-GAAP Measures” for additional information.
Impact of Inflation
Given the accelerating inflationary environment and short-term commodity volatility experienced in the first quarter of 2022, there have been and may continue to be increases in food costs and labor costs which have and could further impact our profitability. Factors such as inflation, increased food costs, increased labor and employee health and benefit costs, increased rent costs and increased energy costs have and may continue to adversely affect our operating costs and
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profitability. Severe increases in inflation could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of operations. To the extent permitted by competition, increased costs are recovered through a combination of selective menu price increases, product mix, and/or implementing operational improvements.
Items Impacting Comparability; Non-GAAP Measures
The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures. We present these non-GAAP measures because we believe the Special items impact the comparability of our results of operations . See “Note 2”, “Note 9”, and “Note 10” of “Notes to Condensed Consolidated Financial Statements,” for additional information about the Special items.
Three Months Ended
March 27,
March 28,
(In thousands, except per share amounts)
2022
2021
GAAP operating income
$
14,435
$
46,862
Refranchising and impairment loss (1)
25,796
—
Legal settlement (2)
5,000
—
Strategic corporate reorganization costs (3)
—
3,883
Adjusted operating income
$
45,231
$
50,745
GAAP net income attributable to common shareholders
$
10,434
$
27,113
Refranchising and impairment loss (1)
25,796
—
Legal settlement (2)
5,000
—
Strategic corporate reorganization costs (3)
—
3,883
Tax effect of Non-GAAP adjustment on special items (4)
(6,929)
(874)
Adjusted net income attributable to common shareholders
$
34,301
$
30,122
GAAP diluted earnings per common share
$
0.29
$
0.82
Refranchising and impairment loss (1)
0.71
—
Legal settlement (2)
0.14
—
Strategic corporate reorganization costs (3)
—
0.12
Tax effect of Non-GAAP adjustment on special items (4)
(0.19)
(0.03)
Adjusted diluted earnings per common share
$
0.95
$
0.91
(Note) The above table does not include the impact of allocation of undistributed earnings to participating securities for Special items.
(1) Includes on a pre-tax basis (a) a one-time, non-cash charge of $8.4 million ($0.23 loss per diluted share) associated with the refranchising of the Company’s majority stake in a 90 restaurant joint venture, recorded as Refranchising and impairment loss; and (b) $17.4 million ($0.48 loss per diluted share) in one-time, non-cash expense related to the reserve of certain loans and impairment of reacquired franchised rights resulting from the conflict in Ukraine and subsequent international government actions and sanctions, which were recorded as Refranchising and impairment loss of $2.8 million and General and administrative expenses of $14.6 million .
(2) Represents an accrual of the Legal Settlement, recorded in General and administrative expenses.
(3) Represents strategic corporate reorganization costs associated with our new office in Atlanta, Georgia.
(4) The tax effect for Special items included in the Reconciliation of Non-GAAP Financial Measures was calculated by applying the marginal tax rate of 22.5% for the three months ended March 27, 2022 and March 28, 2021.
The 2022 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
Cash Flows
The table below summarizes our cash flows from continuing operations for the three months ended March 27, 2022 and March 28, 2021:
Three Months Ended
March 27,
March 28,
2022
2021
Total cash provided by (used in):
Operating activities
$
25,394
$
63,217
Investing activities
(8,315)
(6,299)
Financing activities
(6,787)
(16,080)
Change in cash and cash equivalents, excluding the impact of foreign currency
$
10,292
$
40,838
Operating Activities
Cash flow provided by operating activities was $25.4 million for the first quarter of 2022 compared to $63.2 million in the first quarter of 2021. The decrease of $37.8 million was primarily due to unfavorable working capital changes; principally a decrease of $19.7 million due to the timing of payments associated within accrued expenses and other current liabilities and $15.8 million in accounts receivable related to the timing of cash receipts in the prior year.
Investing Activities
Cash flow used in investing activities was $8.3 million for the first quarter of 2022 compared to $6.3 million in the first quarter of 2021, or an increase of $2.0 million. The increase in cash flow used in investing activities was primarily due to an increase in capital expenditures. Our capital expenditures consisted primarily of capital investments for existing stores, new store locations and capital expenditures for strategic initiatives. We estimate that our capital expenditures during 2022 will be approximately $85.0 million. This estimate includes the acquisition of sites and construction costs for new Company-owned stores that have opened or that we expect to open during 2022. We intend to fund our capital expenditures with cash generated by operations and borrowings under our PJI Revolving Facility, as necessary.
Financing Activities
Cash flow used in financing activities was $6.8 million for the first quarter of 2022 compared to $16.1 million in the first quarter of 2021. The decrease of $9.3 million in cash flow used in financing activities reflects increased borrowings on the PJI Revolving Facility during the first quarter of 2022, partially offset by increased repurchases of Company common stock.
Debt
Our outstanding debt as of March 27, 2022 was $537.0 million, which was comprised of $400.0 million outstanding under the Notes and $137.0 million under the PJI Revolving Facility. Remaining availability under the PJI Revolving Facility was approximately $463.0 million as of March 27, 2022.
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
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financial covenants, as shown in the following table, that could restrict or impose constraints on the liquidity of our business:
Actual Ratio as of
Permitted Ratio
March 27, 2022
Leverage ratio
Not to exceed 5.25 to 1.0
2.2 to 1.0
Interest coverage ratio
Not less than 2.00 to 1.0
4.8 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 March 27, 2022.
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; sell assets; incur liens; 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 with U.S. Bank National Association, as lender. There was no debt outstanding under the PJMF Revolving Facility as of March 27, 2022 or December 26, 2021. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the Amended Credit Agreement .
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 three months ended March 27, 2022 and March 28, 2021:
Maximum Dollar
Total
Average
Aggregate
Value of Shares
Number
Price
Cost of
that May Yet Be
(in thousands, except average price per share)
of Shares
Paid per
Shares
Purchased Under the
Three Months Ended
Purchased
Share
Purchased
Plans or Programs
March 27, 2022
301
$
108.76
$
32,709
$
392,091
March 28, 2021
15
$
84.63
$
1,267
$
71,031
Subsequent to March 27, 2022, we acquired an additional 223,000 shares at an aggregate cost of $23.0 million. Approximately $369.1 million remained available under the Company’s share repurchase program as of April 29, 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.
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Dividends
The Company recorded dividends of approximately $12.6 million ($0.35 per share) in the first quarter of 2022. On April 26, 2022, our Board of Directors declared a second quarter dividend of $0.35 per common share, approximately $12.6 million in the aggregate, which will be paid on May 27, 2022 to stockholders of record as of the close of business on May 16, 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 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 first quarter of 2022 and 2021 (in thousands):
Three Months Ended
March 27,
March 28,
2022
2021
Net cash provided by operating activities
$
25,394
$
63,217
Purchases of property and equipment
(10,233)
(7,076)
Dividends paid to preferred stockholders
—
(3,412)
Free cash flow
$
15,161
$
52,729
Cash Requirements
There have been no material changes in our cash requirements other than in the ordinary course of business since the end of 2021. Refer to “Cash Requirements” presented within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021 for additional information regarding our cash requirements.
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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 coronavirus 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, royalty relief, the effectiveness of our menu innovations and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, impairments, 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 coronavirus pandemic, including governmental restrictions, changes in consumer demand or behavior, vaccine mandates and changing governmental programs and regulations relating to the pandemic;
● the ability of the Company to manage labor shortages at Company and/or franchised stores and our quality control centers;
● increases in labor costs, food costs or sustained higher other operating costs, including as a result of supply chain disruption and inflation;
● the potential for delayed new store openings, both domestically and internationally;
● the increased risk of phishing, ransomware and other cyber-attacks;
● risks to the global economy and our business related to the conflict in Ukraine.
● 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;
● 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, 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 the coronavirus pandemic;
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● 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;
● 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 26, 2021 and “Part II. Item IA. – Risk Factors” in this Quarterly Report on Form 10-Q, as well as subsequent filings. 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.