PAPA JOHNS INTERNATIONAL INC 10-Q

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 June 26, 2022, there were 5,571 Papa John’s restaurants in operation, consisting of 519 Company-owned and 5,052 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 Epic Pepperoni Stuffed Crust Pizza and Spicy Pepperoni Rolls in the second quarter of 2022. Epic Pepperoni Stuffed Crust Pizza features original, fresh, never-frozen, dough hand-stuffed with our signature pepperoni and melted cheese, then baked into a seasoned crust, which is finished with Papa John's signature pizza sauce, more cheese, and topped off with more pepperoni. Spicy Pepperoni Rolls feature signature pizza sauce and pepperoni rolled up with jalapenos and creamy melty cheese on our fresh dough. These offers are in addition to our first quarter launch of NY Style pizza which features eight oversized slices on a thin, foldable crust. These 2022 launches have proven to be popular with customers and highly incremental to revenues. Our digital innovation through Papa Rewards, our loyalty program, allows us to directly engage our customers with targeted personalized offers with the goal of driving higher frequency, higher ticket and higher customer satisfaction. Continued investment in one-to-one marketing capabilities is important to our business plan for 2022 and beyond. In the second quarter, we promoted exclusive members-only access to Epic Pepperoni Stuffed Crust before its launch, successfully adding nearly 150,000 new members during the one-week early access period. 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 accelerating commodity and labor inflation. We currently expect our 2022 global development outlook to be between 280 and 320 net new restaurants. 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 expect to open between 1,400 and 1,800 net new Papa John’s restaurants worldwide by the end of 2025, relative to the start of 2022. Restaurant Staffing and Related Market Impact . Throughout the first six months of 2022, our restaurants continued to navigate a challenging staffing environment. This has impacted customer service and, in limited cases, our ability to deliver or take orders. Our integrations with the aggregator marketplaces and our nationwide integrations with Delivery-as-a-Service providers have been key tools allowing us to continue to serve our customers during peak times. Though these Delivery-as-a-Service transactions are slightly lower margin versus using our own drivers, they are incremental, profitable orders that otherwise may have gone unfulfilled. Papa Call, our centralized order taking and customer service center is another example of our long-term investment to make our team members productive and help them focus on making and delivering great pizza. We will continue to invest capital in technology innovations that can make our teams more productive. Further, we remain focused on continuing to hire great employees and reducing turnover by providing competitive compensation, a great working environment, benefits and compelling career paths. Our goal is to be the employer of choice in our industry, and we've taken many actions to create a strong culture and support our people. In the second quarter of 2022, we released our 2021 Corporate Responsibility Report, outlining our progress against our priorities to create a positive impact on people, pizza and the planet that sets us up for long-term success. Papa John's is the first major publicly traded pizza chain to announce that our executive compensation plan now includes Environmental Social and Governance metrics. Suspension of Franchisee Support in Russi a . During the first quarter of 2022, the Company recognized $17.4 million ($0.48 loss per diluted share) on a pre-tax basis in one-time, non-cash charges 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 thus, no additional Russia-related charges for reserves, write-offs, or impairments are recorded on the Condensed Consolidated Balance Sheet. 26 Refranchising loss . On March 28, 2022, the Company sold its 51 percent controlling interest in a joint venture between Papa Johns and Blue and Silver Ventures, Ltd. ("Blue and Silver Ventures"). 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 one-time, non-cash $8.4 million impairment loss related to the divestiture in the first quarter of 2022 and realized upon consummation of the sale in the second quarter. Inflation. The differentiated brand positioning of Papa John's has been critical to our success over the past 2.5 years as we have been nimble and adapted our strategy to a constantly changing environment. It's no less important today as we adjust to a new more inflationary and uncertain environment with rising costs and consumers increasingly seeking out value. As consumer sentiment continues to soften, pizza offers tremendous value relative to other quick service restaurants. Using Papa Rewards, we are also able to target more price-sensitive customers with high-value promotions. At the same time, we will continue our successful strategy of letting our customers, especially those who are less price sensitive, to self-select into our premium-priced innovation. However, with unprecedented inflation, we have begun to take some pricing. This has helped partially offset higher food, labor, and fuel costs in our supply chain and restaurants. Our ticket growth has predominantly come through new premium products and add-ons over the past few years. This has afforded us more room to strategically raise prices in this inflationary environment. Papa John's has unique pricing flexibility given our value proposition is focused on delivering premium value, not hitting specific low price points. 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. For the three and six months ended June 26, 2022, global system-wide restaurant sales growth excludes franchisees for which we suspended corporate support during the quarter ended March 27, 2022. Also, for the three and six months ended June 26, 2022, both Comparable sales growth and System-wide restaurant sales growth for Domestic Company-owned restaurants and North America franchised restaurants have been adjusted to reflect the impact of refranchising 90-restaurants during the second quarter of 2022. 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. 27 Three Months Ended Six Months Ended June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 Comparable sales growth (decline): Domestic Company-owned restaurants (1.5)% 5.6% (1.3)% 13.8% North America franchised restaurants 1.4% 5.2% 2.1% 15.1% North America restaurants 0.9% 5.2% 1.4% 14.8% International restaurants (8.0)% 21.2% (3.6)% 22.2% Total comparable sales growth (1.4)% 9.0% 0.1% 16.6% System-wide restaurant sales growth (decline): (excluding the impact of foreign currency) Domestic Company-owned restaurants 1.2% 5.2% 8.9% 13.1% North America franchised restaurants 2.7% 6.4% 1.4% 15.8% North America restaurants 2.4% 6.2% 2.8% 15.2% International restaurants 3.4% 35.7% 8.3% 32.2% Total global system-wide restaurant sales growth 2.6% 12.2% 4.2% 19.0% Restaurant Progression Three Months Ended Six Months Ended June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 North America Company-owned: Beginning of period 608 589 600 588 Opened 1 — 8 — Acquired — — 1 1 Refranchised (90) — (90) — End of period 519 589 519 589 North America franchised: Beginning of period 2,746 2,709 2,739 2,701 Opened 17 24 32 36 Closed (16) (13) (23) (16) Refranchised 90 — 90 — Sold — — (1) (1) End of period 2,837 2,720 2,837 2,720 International franchised: Beginning of period 2,170 2,170 2,311 2,111 Opened 72 71 127 139 Closed (27) (27) (35) (36) Suspended (a) — — (188) — End of period 2,215 2,214 2,215 2,214 Total restaurants – end of period 5,571 5,523 5,571 5,523 Trailing four quarters net store growth (b) 236 176 (a) Represents all franchised restaurants located in Russia, for which the Company has suspended corporate support. (b) Excludes suspended restaurants. 28 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 June 26, 2022 June 27, 2021 ($ in thousands) % of Related Revenues % of Related Revenues Increase (Decrease) Revenues: Domestic Company-owned restaurant sales $ 171,411 $ 196,124 (12.6) % North America franchise royalties and fees 34,917 32,475 7.5 % North America commissary revenues 219,383 186,641 17.5 % International revenues 31,958 37,614 (15.0) % Other revenues 64,996 62,154 4.6 % Total revenues 522,665 515,008 1.5 % Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses 142,026 82.9% 154,293 78.7% 4.2% North America commissary expenses 204,470 93.2% 172,227 92.3% 0.9% International expenses 19,236 60.2% 21,430 57.0% 3.2% Other expenses 60,648 93.3% 56,246 90.5% 2.8% General and administrative expenses 44,646 8.5% 53,698 10.4% (1.9)% Depreciation and amortization 12,735 2.4% 12,477 2.4% —% Total costs and expenses 483,761 92.6% 470,371 91.3% 1.2% Operating income 38,904 7.4% 44,637 8.7% (1.2)% Net interest expense (6,081) (1.2) % (3,649) (0.7) % (0.5) % Income before income taxes $ 32,823 6.3% $ 40,988 8.0% (1.7)% 29 Six Months Ended June 26, 2022 June 27, 2021 ($ in thousands) % of Related Revenues % of Related Revenues Increase (Decrease) Revenues: Domestic Company-owned restaurant sales $ 370,176 $ 393,358 (5.9) % North America franchise royalties and fees 69,185 65,190 6.1 % North America commissary revenues 429,062 371,519 15.5 % International revenues 66,575 72,221 (7.8) % Other revenues 130,359 124,466 4.7 % Total revenues 1,065,357 1,026,754 3.8 % Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses 303,687 82.0% 310,181 78.9% 3.2% North America commissary expenses 401,560 93.6% 342,911 92.3% 1.3% International expenses 39,150 58.8% 41,048 56.8% 2.0% Other expenses 121,203 93.0% 112,053 90.0% 2.9% General and administrative expenses 110,584 10.4% 103,709 10.1% 0.3% Depreciation and amortization 24,674 2.3% 25,353 2.5% (0.2)% Total costs and expenses 1,000,858 93.9% 935,255 91.1% 2.9% Refranchising and impairment loss (11,160) (1.0) % — — % (1.0) % Operating income 53,339 5.0% 91,499 8.9% (3.9)% Net interest expense (10,344) (1.0) % (7,296) (0.7) % (0.3) % Income before income taxes $ 42,995 4.0% $ 84,203 8.2% (4.2)% Revenues Consolidated revenues increased $7.7 million, or 1.5% to $522.7 million, and $38.6 million, or 3.8% to $1.1 billion for the three and six months ended June 26, 2022, respectively, compared to prior year comparable periods. Excluding the impact of the Company refranchising its 51% ownership in a 90-restaurant consolidated joint venture, consolidated revenues increased $25.6 million, or 5.2%, and $56.9 million, or 5.7%, for the three and six months ended June 26, 2022, respectively. Domestic Company-owned restaurant sales decreased $24.7 million, or 12.6%, and $23.2 million, or 5.9% for the three and six months ended June 26, 2022, respectively, compared to the prior year comparable periods. Excluding the impact of refranchising, Domestic Company-owned restaurant sales increased $2.0 million, or 1.2%, and $3.0 million, or 0.9%, for the three and six months ended June 26, 2022, respectively, primarily due to innovations and strategic pricing actions to help offset food and labor inflation. North America franchise royalties and fees increased $2.4 million, or 7.5%, and $4.0 million, or 6.1% for the three and six months ended June 26, 2022, respectively, compared to prior year comparable periods. Excluding the impact of refranchising, North America franchise royalties and fees increased $1.1 million, or 3.3%, and $2.7 million, or 4.0% for the three and six months ended June 26, 2022, respectively, primarily due to positive comparable sales increases of 1.4% and 2.1% for the three and six months ended June 26, 2022, and higher equivalent units of 4.9% and 3.4% for the same periods, respectively. “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. 30 North America franchise restaurant sales, excluding the impact of refranchising, increased 2.7% to $753.8 million and 1.4% to $1.5 billion for the three and six months ended June 26, 2022, respectively, compared to the prior year comparable periods. North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales. North America commissary revenues increased $32.7 million, or 17.5% and $57.5 million, or 15.5% for the three and six months ended June 26, 2022, respectively, compared to the prior year comparable periods primarily due to higher pricing as a result of increased underlying costs associated with commodity price increases, partially offset by lower volumes. International revenues decreased $5.7 million, or 15.0% and $5.6 million, or 7.8% for the three and six months ended June 26, 2022, respectively, compared to prior year comparable periods, primarily due to lower United Kingdom ("PJUK") commissary revenues and royalties. Additionally, international comparable sales revenues decreased 8.0% and 3.6% for the three and six months ended June 26, 2022. The overall declines in our international revenue performance were largely attributable to a contracting PJUK market where consumer sentiment is reaching historical lows. International franchise restaurant sales increased to $281.3 million and $585.9 million for the three and six months ended June 26, 2022, respectively. Excluding the impact of foreign currency, international franchise restaurant sales increased 3.4% and 8.3% for the three and six months ended June 26, 2022, respectively. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales. Other revenues increased $2.8 million, or 4.6%, and $5.9 million, or 4.7%, for the three and six months ended June 26, 2022, respectively, compared to the prior year comparable periods primarily due to higher revenues from our technology services attributable to increased North America systemwide comparable sales and equivalent units. Costs and Expenses Total costs and expenses were approximately $483.8 million, or 92.6% of total revenues for the three months ended June 26, 2022, as compared to $470.4 million or 91.3% of related revenues for the prior year comparable period. For the six months ended June 26, 2022, total costs and expenses were approximately $1.0 billion or 93.9% of total revenues, as compared to $935.3 million, or 91.1% of total revenues for the prior year comparable period. The increases in total costs and expenses, as a percentage of revenues, were primarily due to the following: Domestic Company-owned restaurant expenses were $142.0 million, or 82.9% of related revenues for the three months ended June 26, 2022, as compared to $154.3 million, or 78.7% of related revenues for the prior year comparable period. For the six months ended June 26, 2022, Domestic Company-owned restaurant expenses were $303.7 million or 82.0% of related revenues, compared to expenses of $310.2 million or 78.9% of related revenues for the prior year comparable period. The expenses, as a percentage of revenues, increased 4.2% and 3.2%, respectively, due to higher food cost attributable to rising commodity prices, which accelerated in the second quarter, and increased labor expense as staffing levels recover at a higher cost. Our strategic pricing actions implemented in the first six months of 2022 helped reduce the impact of the underlying cost pressures. North America commissary expenses were $204.5 million, or 93.2% of related revenues for the three months ended June 26, 2022, as compared to $172.2 million, or 92.3% of related revenues for the prior year comparable period. For the six months ended June 26, 2022, North America commissary expenses were $401.6 million, or 93.6% of related revenues, compared to $342.9 million, or 92.3% of related revenues for the prior year comparable period. The expenses, as a percentage of related revenues, increased 0.9% and 1.3%, respectively, primarily due to rising commodity prices, principally in cheese, proteins and wheat, and higher delivery cost. International expenses were $19.2 million, or 60.2% of related revenues for the three months ended June 26, 2022, as compared to $21.4 million, or 57.0% of related revenues for the prior year comparable period. For the six months ended June 26, 2022, International expenses were $39.2 million, or 58.8% of related revenues, compared to $41.0 million, or 56.8% of related revenues for the prior year comparable period. The expenses as a percentage of related revenues, increased 3.2% and 2.0%, respectively, primarily due to higher commodity costs in the PJUK commissary. Other expenses were $60.6 million, or 93.3% of related revenues for the three months ended June 26, 2022, as compared to $56.2 million, or 90.5% of related revenues for the prior year comparable period. For the six months ended June 26, 2022, Other expenses were $121.2 million, or 93.0% of related revenues, compared to $112.1 million, or 90.0% of related revenues for the prior year comparable period. The expenses as a percentage of related revenues, increased 2.8% and 2.9% 31 respectively, primarily due to timing of expenditures on technology platform initiatives to further enhance our digital capabilities and the customer experience. General and administrative expenses (“G&A”) were $44.6 million, or 8.5% of revenues three months ended June 26, 2022, compared to $53.7 million, or 10.4% of revenues for the prior year comparable period. For the six months ended June 26, 2022, G&A was $110.6 million, or 10.4% of revenues, compared to $103.7 million, or 10.1% of revenues for the prior year comparable periods. For the three and six months ended June 26, 2022, G&A consisted of the following (in thousands): Three Months Ended Six Months Ended June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 Administrative expenses (a) $ 42,889 $ 51,052 $ 88,979 $ 97,135 Special items (b) (c) 1,507 3,328 21,143 7,211 Other general expenses 250 (682) 461 (637) General and administrative expenses $ 44,646 $ 53,698 $ 110,583 $ 103,709 (a) For both the three and six months ended June 26, 2022, Administrative expenses decreased $8.2 million compared to the prior year comparable periods primarily due to lower incentive compensation costs, partially offset by higher labor, travel, and occupancy cost associated with the re-opening of corporate headquarters in the first quarter of 2022. (b) For the three months ended June 26, 2022, Special items include a $1.5 million charge related to advisory fees and severance costs associated with the transition of certain executives. For the six months ended June 26, 2022, Special items include a one-time, non-cash provisions of $14.6 million on accounts receivable and notes receivable in connection with the conflict in Ukraine and related government actions, a charge of $5.0 million associated with a legal settlement. See “Note 2” of “Notes to Condensed Consolidated Financial Statements” for further information regarding one-time, non-cash provision recorded in the first quarter of 2022 and see “Note 9” of “Notes to Condensed Consolidated Financial Statements” for further discussion regarding the legal settlement. (c) For the three and six months ended June 27, 2021, Special items of $3.3 million and $7.2 million, respectively, include strategic reorganization costs associated with our new office in Atlanta which concluded at the end of 2021. Depreciation and amortization expense was $12.7 million, or 2.4% of revenues three months ended June 26, 2022, compared to $12.5 million, or 2.4% of revenues for the prior year comparable period. For the six months ended June 26, 2022, Depreciation and amortization expense was $24.7 million, or 2.3% of revenues, compared to$25.4 million, or 2.5% of revenues, for the prior year comparable periods. Operating Income by Segment Operating income decreased $5.7 million to $38.9 million and decreased $38.2 million to $53.3 million for the three and six months ended June 26, 2022, respectively, compared to the prior year comparable periods. The following table summarizes Operating income on a reporting segment basis. Along with reported Operating Income, “Adjusted” Operating income, which excludes Special items, has been presented. 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. 32 Three Months Ended (In thousands) Reported June 26, 2022 Special items in 2022 (a) Adjusted June 26, 2022 Reported June 27, 2021 Special items in 2021 (b) Adjusted June 27, 2021 Adjusted Increase (Decrease) Domestic Company-owned restaurants $ 5,924 $ — $ 5,924 $ 15,361 $ — $ 15,361 $ (9,437) North America franchising 32,624 — 32,624 30,518 — 30,518 2,106 North America commissaries 10,957 — 10,957 9,778 — 9,778 1,179 International 7,306 — 7,306 8,683 — 8,683 (1,377) All others 2,187 — 2,187 4,894 — 4,894 (2,707) Unallocated corporate expenses (19,344) 1,507 (17,837) (24,617) 3,328 (21,289) 3,452 Elimination of intersegment losses (profits) (750) — (750) 20 — 20 (770) Total $ 38,904 $ 1,507 $ 40,411 $ 44,637 $ 3,328 $ 47,965 $ (7,554) (a) For the three months ended June 26, 2022, Special items impacting Operating income include a charge of $1.5 million charge related to advisory fees and severance costs associated with the transition of certain executives. (b) For the three months ended June 27, 2021, Special items impacted Operating income include a charge of $3.3 million related to strategic reorganization costs associated with our new office in Atlanta. 33 Six Months Ended (In thousands) Reported June 26, 2022 Special items in 2022 (a) Adjusted June 26, 2022 Reported June 27, 2021 Special items in 2021 (b) Adjusted June 27, 2021 Adjusted Increase (Decrease) Domestic Company-owned restaurants $ 7,912 $ 8,412 $ 16,324 $ 30,685 $ — $ 30,685 $ (14,361) North America franchising 64,761 — 64,761 60,961 — 60,961 3,800 North America commissaries 20,292 — 20,292 19,491 — 19,491 801 International 11,761 3,515 15,276 17,047 — 17,047 (1,771) All others 5,906 — 5,906 11,012 — 11,012 (5,106) Unallocated corporate expenses (56,454) 20,376 (36,078) (47,779) 7,211 (40,568) 4,490 Elimination of intersegment losses (profits) (839) — (839) 82 — 82 (921) Total $ 53,339 $ 32,303 $ 85,642 $ 91,499 $ 7,211 $ 98,710 $ (13,068) (a) For the six months ended June 26, 2022, Special items impacting Operating income include a one-time, non-cash provisions of $14.6 million on accounts receivable and notes receivable in connection with the conflict in Ukraine and related government actions, a charge of $5.0 million associated with a legal settlement 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 a charge of $1.5 million charge related to advisory fees and severance costs associated with the transition of certain executives. (b) For the six months ended June 27, 2021, Special items impacting Operating income include a charge of $7.2 million related to strategic reorganization costs associated with our new office in Atlanta which concluded at the end of 2021. Excluding the impact of special items, Operating income decreased $7.6 million, or 15.7% and $13.1 million, or 13.2% for the three and six month ended June 26, 2022, respectively. These decreases were primarily due to the following: • Domestic Company-owned restaurants decreased $9.4 million and $14.4 million for the three and six months ended June 26, 2022, respectively. Excluding the impact of the Company refranchising its 51% ownership in a 90-restaurant consolidated joint venture in the second quarter, Domestic Company-owned restaurants decreased $6.8 million and $11.7 million primarily due to higher commodity and labor cost, partially offset by higher revenues related to strategic pricing actions from higher equivalent units. • North America franchising increased $2.1 million and $3.8 million for the three and six months ended June 26, 2022, respectively. Excluding the impact of the above mentioned refranchising, North America franchising increased $1.2 million and $2.9 million primarily due to positive comparable sales of 1.4% and 2.1% for three and six months ended June 26, 2022, respectively. • North America commissaries increased $1.2 million and $0.8 million for the three and six months ended June 26, 2022, respectively, primarily due to higher pricing as a result of increased underlying costs associated with commodity price increases, partially offset by lower volumes • International decreased $1.4 million and $1.8 million for the three and six months ended June 26, 2022, respectively, primarily due to lower United Kingdom ("PJUK") commissary revenues and royalties attributed to lower comparable sales, which declined 8.0% and 3.6%, for the three and six months ended June 26, 2022, respectively. • All Others, which primarily includes our online and mobile ordering business and our marketing funds, decreased $2.7 million and $5.1 million for the three and six months ended June 26, 2022 compared to the prior year comparable periods primarily due to timing of expenditures for technology support initiatives. • Unallocated corporate expenses decreased $3.5 million and $4.5 million for the three and six months ended June 26, 2022, respectively. The decrease for the six months ended June 26, 2022, compared to prior year 34 comparable period primarily due to lower incentive compensation costs, partially offset by higher labor, travel, and occupancy cost associated with the re-opening of corporate headquarters in the first quarter of 2022. Refranchising and Impairment loss On March 28, 2022, we refranchised our 51 percent ownership interest in a 90-restaurant consolidated joint venture between Papa Johns and Blue and Silver Ventures in Texas for cash proceeds of $14.0 million, net of transaction costs. We recorded a one-time, non-cash charge of $8.4 million in the first quarter related to the divestiture. 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 $2.4 million, or 66.7%, and $3.0 million, or 41.8% for three and six months ended June 26, 2022, respectively due to higher average outstanding debt on our revolving credit facility. Total debt outstanding was $545 million and $490 million as of June 26, 2022 and December 26, 2021, respectively. Income Before Income Taxes For the reasons discussed above, income before income taxes decreased approximately $8.2 million, or 19.9%, and $41.2 million, or 48.9%, for the three and six months ended June 26, 2022, respectively, over the prior year comparable periods. 35 Income Tax Expense Our effective income tax rates were 21.6% and 13.6% for three and six months ended June 26, 2022 compared to 18.0% and 18.2% for the prior year comparable periods. The decrease in the effective rate for the six months ended June 26, 2022 was caused by higher excess tax benefits generated by stock option exercises and vesting of restricted shares in addition to an overall decrease in pre-tax income. Quarter Ended Six Months Ended June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 Income before income taxes $32,823 $40,988 $42,995 $84,203 Income tax expense $7,093 $7,398 $5,838 $15,330 Effective tax rate 21.6% 18.0% 13.6% 18.2% Diluted Earnings (Loss) Per Common Share Diluted earnings per common share was $0.70 for the three months ended June 26, 2022, compared to diluted loss per common share of $(2.30) in the prior year comparable period. For the six months ended June 26, 2022, diluted earnings per common share was $0.99, compared to diluted loss per common share of $(1.47) for the prior year comparable period. Excluding the impact of Special items, adjusted diluted earnings per common share were $0.74 and $1.69 for the three and six months ended June 26, 2022, respectively, compared to adjusted diluted earnings per common share of $0.93 and $1.94 for the prior year comparable periods. Diluted earnings per common share for the six months ended June 26, 2022 included Special items of $25.0 million, net of tax, primarily related to refranchising losses associated with the divestiture of our controlling interest in the joint venture with Blue and Silver Ventures, impairment losses of certain loans and reacquired franchised rights, and the Legal Settlement. Diluted earnings per common share for the six months ended June 27, 2021 included Special items of $115.4 million, net of tax, primarily due to reorganization costs and the reduction in net income attributable to common shareholders related to the repurchase and conversion of all shares of the Company's former Series B Convertible Preferred Stock ("Series B Preferred Stock") in May 2021. These reductions reflect the excess of the one-time cash payment over the carrying value of the Series B Preferred Stock. See “Items Impacting Comparability; Non-GAAP Measures” for additional information. Impact of Inflation Given the accelerating inflationary environment and short-term commodity volatility experienced in the three and six months ended June 26, 2022, there have been and may continue to be increases in food costs and labor costs which have and could further impact our profitability. Inflationary factors such as 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 profitability. Severe sustained 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. 36 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 Six Months Ended (In thousands, except per share amounts) June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 GAAP operating income $ 38,904 $ 44,637 $ 53,339 $ 91,499 Refranchising and impairment loss (1) — — 25,796 — Legal settlement (2) — — 5,000 — Strategic corporate reorganization costs (3) — 3,328 — 7,211 Other costs (4) 1,507 — 1,507 — Adjusted operating income $ 40,411 $ 47,965 $ 85,642 $ 98,710 GAAP net income attributable to common shareholders $ 25,240 $ (79,898) $ 35,693 $ (49,542) Refranchising and impairment loss (1) — — 25,796 — Legal settlement (2) — — 5,000 — Strategic corporate reorganization costs (3) — 3,328 — 7,211 Other costs (4) 1,507 — 1,507 — Repurchase and conversion of Series B Preferred Stock — 109,852 — 109,852 Tax effect of Non-GAAP adjustment on special items (4) (339) (745) (7,269) (1,615) Adjusted net income attributable to common shareholders $ 26,408 $ 32,537 $ 60,727 $ 65,906 GAAP diluted earnings per common share $ 0.70 $ (2.30) $ 0.99 $ (1.47) Refranchising and impairment loss (1) — — 0.72 — Legal settlement (2) — — 0.14 — Strategic corporate reorganization costs (3) — 0.10 — 0.22 Other costs (4) 0.05 — 0.04 — Repurchase and conversion of Series B Preferred Stock — 3.15 — 3.23 Tax effect of Non-GAAP adjustment on special items (5) (0.01) (0.02) (0.20) (0.04) Adjusted diluted earnings per common share $ 0.74 $ 0.93 $ 1.69 $ 1.94 (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 controlling interest in the 90-restaurant joint venture, recorded as Refranchising and impairment loss; and (b) $17.4 million ($0.48 million loss per diluted share) in one-time, non-cash expense related to the reserve of certain loans and impairment of reacquired franchised rights related to the reserve of certain loans and impairment of reacquired franchised rights related 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. (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) Other costs of $1.5 million for the second quarter of 2022 include advisory fees and severance costs associated with the transition of certain executives. (5) The tax effect for Special items was calculated by applying the marginal tax rate of 22.5% and 22.4% for the three and six months ended June 26, 2022 and June 27, 2021, respectively. 37 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. Liquidity and Capital Resources Cash Flows The table below summarizes our cash flows from continuing operations for the six months ended June 26, 2022 and June 27, 2021: Six Months Ended June 26, 2022 June 27, 2021 Total cash provided by (used in): Operating activities $ 45,585 $ 128,030 Investing activities (12,523) (19,467) Financing activities (50,677) (142,871) Change in cash and cash equivalents, excluding the impact of foreign currency $ (17,615) $ (34,308) Operating Activities Cash flow provided by operating activities was $45.6 million for the six months ended June 26, 2022 compared to $128.0 million for the corresponding period of 2021. The decrease of $82.4 million was primarily reflects lower cash flow from operating activities as a result of overall business performance, lower accrued expenses, and the impact of timing of certain marketing payments. Investing Activities Cash flow used in investing activities was $12.5 million for the six months ended June 26, 2022 compared to $19.5 million for the same period in 2021, or a decrease of $6.9 million. The decrease in cash flow used in investing activities was primarily due to an increase in capital expenditures, partly offset by $14.0 million in proceeds, net of transaction costs, from the impact of refranchising 90-restaurants in the first quarter of 2022. 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 $75 million to $85 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 senior secured revolving credit facility with an aggregate available principal amount of the $600 million (the "PJI Revolving Facility"), as necessary. Financing Activities Cash flow used in financing activities was $50.7 million the six months ended June 26, 2022 compared to $142.9 million for the same period of 2021. The decrease of $92.2 million in cash flow used in financing activities reflects payment of cash consideration for the repurchase and conversion of all of the Company’s Series B Preferred Stock outstanding in 2021, offset by increased repurchases of Company common stock and a decrease in proceeds from our revolving credit facility. Debt Our outstanding debt as of June 26, 2022 was $545.0 million, which was comprised of $400.0 million outstanding under our 3.875% senior notes (the "Notes") and $145.0 million under the PJI Revolving Facility. Remaining availability under the PJI Revolving Facility was approximately $455.0 million as of June 26, 2022. 38 Our amended and restated credit agreement, dated September 14, 2021 (the "Amended Credit Agreement") contains affirmative and negative covenants that, among other things, require customary reporting obligations and restrict, subject to certain exceptions, the occurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates. The Company is also subject to certain financial covenants, as shown in the following table, that could restrict or impose constraints on the liquidity of our business: Permitted Ratio Actual Ratio as of June 26, 2022 Leverage ratio Not to exceed 5.25 to 1.0 2.3 to 1.0 Interest coverage ratio Not less than 2.00 to 1.0 4.5 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 June 26, 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 June 26, 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 under these programs for the three and six months ended June 26, 2022 and June 27, 2021: (in thousands, except average price per share) Total Number of Shares Purchased Average Price Paid per Share Aggregate Cost of Shares Purchased Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs Three Months Ended June 26, 2022 452 $ 94.56 $ 42,762 $ 349,329 June 27, 2021 68 $ 101.21 $ 6,921 $ 64,110 (in thousands, except average price per share) Total Number of Shares Purchased Average Price Paid per Share Aggregate Cost of Shares Purchased Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs Six Months Ended June 26, 2022 753 $ 100.23 $ 75,471 $ 349,329 June 27, 2021 83 $ 98.23 $ 8,188 $ 64,110 39 Subsequent to June 26, 2022, we acquired an additional 229,000 shares at an aggregate cost of $19.5 million. Approximately $329.8 million re mained available under the Company’s share repurchase program as of July 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. Dividends The Company recorded dividends of approximately $25.1 million ($0.70 per share) for the six months ended June 26, 2022. On August 2, 2022, our Board of Directors declared a second quarter dividend of $0.42 per common share (approximately $14.9 million in the aggregate), which will be paid on August 26, 2022 to stockholders of record as of the close of business on August 15, 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 six-months periods of 2022 and 2021 (in thousands): Six Months Ended June 26, 2022 June 27, 2021 Net cash provided by operating activities $ 45,585 $ 128,030 Purchases of property and equipment (30,744) (21,543) Dividends paid to preferred stockholders — (6,394) Free cash flow $ 14,841 $ 100,093 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. 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,” "outlook", “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 current economic environment, the financial impact of the temporary business disruptions and changes in demand we are experiencing related to the current outbreak of the coronavirus pandemic, commodity and labor 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 and price increases, 40 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, inflation or climate change; • 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; • 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. 41 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 our Quarterly Report on Form 10-Q for the quarter end March 27, 2022, 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.