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 September 25, 2022, there were 5,589 Papa John’s restaurants in operation, consisting of 521 Company-owned and 5,068 franchised restaurants operating in 47 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 Global Market Conditions. The differentiated brand positioning of Papa Johns has been critical to our success as we have navigated the global pandemic and adapted our strategy to a constantly changing environment in recent years. Our brand positioning and adapted strategy are no less important today as we continue to adjust to a more inflationary and uncertain environment with rising costs and consumers increasingly seeking out value. As consumer demand has continued to soften, pizza offers tremendous value relative to other quick service restaurants. Using Papa Rewards, our loyalty program, we are also able to target more price-sensitive customers with high-value promotions. At the same time, we have continued our successful strategy of letting our customers, especially those who are less price sensitive, self-select into our premium-priced menu innovations. While we have increased pricing in response to inflation, partially offsetting higher food, labor and fuel costs in our supply chain and at our restaurants, our ticket growth has predominantly come through new premium products and add-ons over the past few years. Macroeconomic conditions in the United Kingdom ("PJUK"), the largest region in our international segment, have declined in light of ongoing inflation, rising interest rates and the recent energy crisis. Against this backdrop, the Company has experienced increasing declines in sales and profitability in the PJUK market. While uncertain how long these conditions will last, the Company is committed to its presence in the PJUK and is invested in the Company’s long-term success in this region. As we navigate this challenging economic environment, we will be investing in capabilities to improve our operations and will work to re-position the franchise base to further strengthen our PJUK business. We are currently evaluating the types and level of franchisee support as part of our plans to support the PJUK business, which may result in future costs to the Company in upcoming quarters. During the third quarter of 2022, the Company recorded a charge of $4.1 million associated with the termination of a significant franchisee in the United Kingdom, as an initial step forward in our commitment to re-position our PJUK portfolio for future success. Development Outlook . 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 240 and 260 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. Innovation. Papa Johns continues to make strides in menu innovation, with Football Pizza and Papa Bowls launched in the third quarter this year following Epic Pepperoni-Stuffed Crust Pizza in the second quarter and NY Style pizza during the first quarter. These 2022 launches have proven to be popular with customers. Our digital innovation through Papa Rewards 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 strategy. Restaurant Staffing and Related Market Impact . Throughout the first nine months of 2022, our restaurants continued to navigate a challenging staffing environment. 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 meet our customers in the channel of their choice. 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 23 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. 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. “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. Global system-wide restaurant sales and global system-wide sales growth exclude franchisees for which we suspended corporate support. “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. For the nine months ended September 25, 2022, 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. See "Note 10" of "Notes to Condensed Consolidated Financial Statements" for additional information. We believe North America, international and global restaurant and comparable sales growth and Global system-wide restaurant sales information is useful in analyzing our results since our franchisees pay royalties and marketing fund contributions that are based on a percentage of franchise sales. Comparable sales and Global system-wide restaurant sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation. Franchise sales also generate commissary revenue in the United States and in certain international markets. Franchise restaurant and comparable sales growth information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of franchise restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in the Company’s revenues. Three Months Ended Nine Months Ended September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 Comparable sales (decline) growth: Domestic Company-owned restaurants (2.2)% 7.4% (1.6)% 11.6% North America franchised restaurants (0.5)% 6.8% 1.2% 12.3% North America restaurants (0.8)% 6.9% 0.6% 12.1% International restaurants (10.1)% 8.3% (5.8)% 17.1% Total comparable sales (decline) growth (3.4)% 7.3% (1.1)% 13.4% System-wide restaurant sales growth (decline): (excluding the impact of foreign currency) Domestic Company-owned restaurants 0.5% 7.3% 0.8% 11.1% North America franchised restaurants 0.9% 8.0% 2.5% 13.1% North America restaurants 0.8% 7.9% 2.2% 12.7% International restaurants (0.4)% 21.4% 5.3% 28.2% Total global system-wide restaurant sales growth 0.5% 11.2% 2.9% 16.2% 24 Restaurant Progression Three Months Ended Nine Months Ended September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 North America Company-owned: Beginning of period 519 589 600 588 Opened 1 2 9 2 Acquired 1 — 2 1 Refranchised — — (90) — End of period 521 591 521 591 North America franchised: Beginning of period 2,837 2,720 2,739 2,701 Opened 17 21 49 57 Closed (16) (9) (39) (25) Refranchised — — 90 — Sold (1) — (2) (1) End of period 2,837 2,732 2,837 2,732 International franchised: Beginning of period 2,215 2,214 2,311 2,111 Opened 48 71 175 210 Closed (a) (32) (39) (67) (75) Suspended (b) — — (188) — End of period 2,231 2,246 2,231 2,246 Total restaurants – end of period 5,589 5,569 5,589 5,569 Trailing four quarters net store growth (c) 208 209 (a) Temporary store closures are not treated as store closures in the table above. Subsequent to September 25, 2022, 12 franchised restaurants in the United Kingdom were permanently closed. (b) Represents all franchised restaurants located in Russia, for which the Company has suspended corporate support. (c) Excludes suspended restaurants. 25 Results of Operations The following table sets forth the various components of our Condensed Consolidated Statements of Operations expressed as a percentage of total revenues, except operating costs which are expressed as a percentage of the associated revenue component. Three Months Ended September 25, 2022 September 26, 2021 ($ in thousands) % of Related Revenues % of Related Revenues Increase (Decrease) Revenues: Domestic Company-owned restaurant sales $ 166,050 $ 191,584 (13.3) % North America franchise royalties and fees 33,712 31,933 5.6 % North America commissary revenues 216,115 189,224 14.2 % International revenues 30,735 38,408 (20.0) % Other revenues 63,900 61,633 3.7 % Total revenues 510,512 512,782 (0.4) % Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses 138,299 83.3% 155,477 81.2% 2.1% North America commissary expenses 203,129 94.0% 175,399 92.7% 1.3% International expenses 18,196 59.2% 21,743 56.6% 2.6% Other expenses 59,249 92.7% 56,039 90.9% 1.8% General and administrative expenses 57,935 11.3% 54,070 10.5% 0.8% Depreciation and amortization 13,338 2.6% 11,477 2.2% 0.4% Total costs and expenses 490,146 96.0% 474,205 92.5% 3.5% Refranchising and impairment loss (905) (0.2) % — — % (0.2) % Operating income 19,461 3.8% 38,577 7.5% (3.7)% Net interest expense (7,623) (1.5) % (3,979) (0.8) % (0.7) % Income before income taxes $ 11,838 2.3% $ 34,598 6.7% (4.4)% 26 Nine months ended September 25, 2022 September 26, 2021 ($ in thousands) % of Related Revenues % of Related Revenues Increase (Decrease) Revenues: Domestic Company-owned restaurant sales $ 536,226 $ 584,942 (8.3) % North America franchise royalties and fees 102,897 97,123 5.9 % North America commissary revenues 645,177 560,743 15.1 % International revenues 97,310 110,629 (12.0) % Other revenues 194,259 186,099 4.4 % Total revenues 1,575,869 1,539,536 2.4 % Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses 441,986 82.4% 465,658 79.6% 2.8% North America commissary expenses 604,689 93.7% 518,310 92.4% 1.3% International expenses 57,346 58.9% 62,791 56.8% 2.1% Other expenses 180,452 92.9% 168,092 90.3% 2.6% General and administrative expenses 168,519 10.7% 157,779 10.2% 0.5% Depreciation and amortization 38,012 2.4% 36,830 2.4% —% Total costs and expenses 1,491,004 94.6% 1,409,460 91.6% 3.0% Refranchising and impairment loss (12,065) (0.8) % — — % (0.8) % Operating income 72,800 4.6% 130,076 8.4% (3.8)% Net interest expense (17,967) (1.1) % (11,275) (0.7) % (0.4) % Income before income taxes $ 54,833 3.5% $ 118,801 7.7% (4.2)% Revenues For the nine months ended September 25, 2022, revenue explanations for Domestic Company-owned restaurants and North America franchised restaurants also include an adjusted figure to reflect the impact of refranchising 90 restaurants during the second quarter of 2022. See "Note 10" of "Notes to Condensed Consolidated Financial Statements" for additional information. Consolidated revenues decreased $2.3 million, or 0.4% to $510.5 million for the three months ended September 25, 2022, and increased $36.3 million, or 2.4% to $1.6 billion for the nine months ended September 25, 2022, as compared to each prior year comparable period. Excluding the impact of the Company refranchising its 51% ownership in a 90-restaurant consolidated joint venture, consolidated revenues increased $15.5 million, or 3.1%, and $72.4 million, or 4.9%, for the three and nine months ended September 25, 2022, respectively. Domestic Company-owned restaurant sales decreased $25.5 million, or 13.3%, and $48.7 million, or 8.3% for the three and nine months ended September 25, 2022, respectively, compared to the prior year comparable periods. Excluding the impact of refranchising, Domestic Company-owned restaurant sales increased $0.9 million, or 0.5%, and $3.9 million, or 0.8%, for the three and nine months ended September 25, 2022, respectively, primarily due to innovations and strategic pricing actions to help offset food and labor inflation. Equivalent units increased 4.1% and 3.8% for the three and nine months ended September 25, 2022, respectively. North America franchise royalties and fees increased $1.8 million, or 5.6%, and $5.8 million, or 5.9% for the three and nine months ended September 25, 2022, respectively, compared to prior year comparable periods. Excluding the impact of refranchising, North America franchise royalties and fees increased $0.5 million, or 1.4%, and $3.1 million, or 3.1%, for the three and nine months ended September 25, 2022, respectively, primarily due to higher equivalent units of 1.2% and 1.5% for the three and nine months ended September 25, 2022, respectively. 27 North America franchise restaurant sales, excluding the impact of refranchising, increased 0.9% to $728.3 million and 2.5% to $2.3 billion for the three and nine months ended September 25, 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 $26.9 million, or 14.2% and $84.4 million, or 15.1% for the three and nine months ended September 25, 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 $7.7 million, or 20.0% and $13.3 million, or 12.0% for the three and nine months ended September 25, 2022, respectively, compared to prior year comparable periods, primarily due to lower United Kingdom commissary revenues. The overall declines in our international revenue performance were largely attributable to lower comparable sales of 10.1% and 5.8% for the three and nine months ended September 25, 2022, which are largely attributable to the economic downturn of the PJUK market. International franchise restaurant sales increased to $309.4 million and $939.2 million for the three and nine months ended September 25, 2022, respectively. Excluding the impact of foreign currency, international franchise restaurant sales decreased 0.4% and increased 5.3% for the three and nine months ended September 25, 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 $2.3 million, or 3.7%, and $8.2 million, or 4.4%, for the three and nine months ended September 25, 2022, respectively, compared to the prior year comparable periods primarily due to higher revenues from our technology services from higher equivalent units. Costs and Expenses Total costs and expenses were approximately $490.1 million, or 96.0% of total revenues for the three months ended September 25, 2022, as compared to $474.2 million or 92.5% of related revenues for the prior year comparable period. For the nine months ended September 25, 2022, total costs and expenses were approximately $1.5 billion or 94.6% of total revenues, as compared to $1.4 billion, or 91.6% 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 $138.3 million, or 83.3% of related revenues for the three months ended September 25, 2022, as compared to $155.5 million, or 81.2% of related revenues for the prior year comparable period. For the nine months ended September 25, 2022, Domestic Company-owned restaurant expenses were $442.0 million or 82.4% of related revenues, compared to expenses of $465.7 million or 79.6% of related revenues for the prior year comparable period. The expenses, as a percentage of revenues, increased 2.1% and 2.8%, respectively, due to increased food cost attributable to higher commodity prices and labor expenses as staffing levels recover at increased cost. Our strategic pricing actions implemented in 2022 helped reduce the impact of the underlying cost pressures. North America commissary expenses were $203.1 million, or 94.0% of related revenues for the three months ended September 25, 2022, as compared to $175.4 million, or 92.7% of related revenues for the prior year comparable period. For the nine months ended September 25, 2022, North America commissary expenses were $604.7 million, or 93.7% of related revenues, compared to $518.3 million, or 92.4% of related revenues for the prior year comparable period. The expenses, as a percentage of related revenues, increased 1.3% for both the three and nine month periods, primarily due to rising commodity prices, principally in cheese, soy oil, proteins and wheat, and higher delivery cost. International expenses were $18.2 million, or 59.2% of related revenues for the three months ended September 25, 2022, as compared to $21.7 million, or 56.6% of related revenues for the prior year comparable period. For the nine months ended September 25, 2022, International expenses were $57.3 million, or 58.9% of related revenues, compared to $62.8 million, or 56.8% of related revenues for the prior year comparable period. The expenses as a percentage of related revenues, increased 2.6% and 2.1%, respectively, primarily due to higher commodity costs in the PJUK commissary. Other expenses were $59.2 million, or 92.7% of related revenues for the three months ended September 25, 2022, as compared to $56.0 million, or 90.9% of related revenues for the prior year comparable period. For the nine months ended September 25, 2022, Other expenses were $180.5 million, or 92.9% of related revenues, compared to $168.1 million, or 28 90.3% of related revenues for the prior year comparable period. The expenses as a percentage of related revenues, increased 1.8% and 2.6% 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 $57.9 million, or 11.3% of revenues for the three months ended September 25, 2022, compared to $54.1 million, or 10.5% of revenues for the prior year comparable period. For the nine months ended September 25, 2022, G&A was $168.5 million, or 10.7% of revenues, compared to $157.8 million, or 10.2% of revenues for the prior year comparable periods. For the three and nine months ended September 25, 2022, G&A consisted of the following (in thousands): Three Months Ended Nine Months Ended September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 Administrative expenses (a) $ 44,391 $ 51,398 $ 133,370 $ 148,533 Special items (b, c) 13,227 2,153 34,370 9,364 Other general expenses 317 519 779 (118) General and administrative expenses $ 57,935 $ 54,070 $ 168,519 $ 157,779 (a) For the three months ended September 25, 2022, Administrative expense decreased $7.0 million compared to the prior year comparable period primarily due to lower incentive compensation costs, partially offset by higher labor. The decrease of $15.2 million for the nine months ended September 25, 2022 was primarily due to lower incentive compensation, which was partially offset by higher labor costs as well as travel and occupancy costs associated with the re-opening of corporate headquarters in the first quarter of 2022. (b) For the three months ended September 25, 2022, Special items include a $10.0 million charge related to certain legal settlements. See "Note 9" of "Notes to Condensed Consolidated Financial Statements" for additional information. Special items also include a charge of $3.2 million related to reserves recorded in the third quarter of 2022 for certain accounts and notes receivable primarily associated with the termination of a significant franchisee in the United Kingdom. For the nine months ended September 25, 2022, Special items include a first-quarter one-time, non-cash provision of $14.6 million on accounts receivable and notes receivable in connection with the conflict in Ukraine and related government actions in the first quarter, $3.2 million related to PJUK reserves in the third quarter, a second-quarter $1.5 million charge related to advisory fees and severance costs associated with the transition of certain executives in the second quarter, and charges of $15.0 million related to certain legal settlements occurring in the first and third quarters of 2022, respectively. See “Note 2” of “Notes to Condensed Consolidated Financial Statements” for further information regarding one-time, non-cash provision recorded in the first and third quarters of 2022 and see “Note 9” of “Notes to Condensed Consolidated Financial Statements” for further discussion regarding the legal settlements. (c) For the three and nine months ended September 26, 2021, the Special items of $2.2 million and $9.4 million, respectively, consist of strategic reorganization costs associated with our new corporate office in Atlanta which concluded at the end of 2021. Depreciation and amortization expense was $13.3 million, or 2.6% of revenues three months ended September 25, 2022, compared to $11.5 million, or 2.2% of revenues for the prior year comparable period. For the nine months ended September 25, 2022, Depreciation and amortization expense was $38.0 million, or 2.4% of revenues, compared to $36.8 million, or 2.4% of revenues, for the prior year comparable periods. 29 Operating Income by Segment Operating income decreased $19.1 million to $19.5 million and decreased $57.3 million to $72.8 million for the three and nine months ended September 25, 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. Three Months Ended (In thousands) Reported Sep. 25, 2022 Special items in 2022 (a) Adjusted Sep. 25, 2022 Reported Sep. 26, 2021 Special items in 2021 (b) Adjusted Sep. 26, 2021 Adjusted Increase (Decrease) Domestic Company-owned restaurants $ 3,667 $ — $ 3,667 $ 9,480 $ — $ 9,480 $ (5,813) North America franchising 31,464 — 31,464 29,830 — 29,830 1,634 North America commissaries 8,425 — 8,425 9,598 — 9,598 (1,173) International 1,136 4,132 5,268 9,618 — 9,618 (4,350) All others 2,037 — 2,037 3,848 — 3,848 (1,811) Unallocated corporate expenses (27,684) 10,000 (17,684) (23,158) 2,153 (21,005) 3,321 Elimination of intersegment losses (profits) 416 — 416 (639) — (639) 1,055 Total $ 19,461 $ 14,132 $ 33,593 $ 38,577 $ 2,153 $ 40,730 $ (7,137) (a) For the three months ended September 25, 2022, Special items impacting Operating income include a charge of $10.0 million related to certain legal settlements and $4.1 million related to PJUK reserves and impairment related to the termination of a significant franchisee in the UK in the third quarter. (b) For the three months ended September 26, 2021, Special items impacted Operating income include a charge of $2.2 million related to strategic reorganization costs associated with our new office in Atlanta. Nine Months Ended (In thousands) Reported Sep. 25, 2022 Special items in 2022 (a) Adjusted Sep. 25, 2022 Reported Sep. 26, 2021 Special items in 2021 (b) Adjusted Sep. 26, 2021 Adjusted Increase (Decrease) Domestic Company-owned restaurants $ 11,579 $ 8,412 $ 19,991 $ 40,165 $ — $ 40,165 $ (20,174) North America franchising 96,225 — 96,225 90,791 — 90,791 5,434 North America commissaries 28,717 — 28,717 29,089 — 29,089 (372) International 12,897 7,647 20,544 26,665 — 26,665 (6,121) All others 7,943 — 7,943 14,860 — 14,860 (6,917) Unallocated corporate expenses (84,138) 30,376 (53,762) (70,937) 9,364 (61,573) 7,811 Elimination of intersegment losses (profits) (423) — (423) (557) — (557) 134 Total $ 72,800 $ 46,435 $ 119,235 $ 130,076 $ 9,364 $ 139,440 $ (20,205) (a) For the nine months ended September 25, 2022, Special items impacting Operating income include a one-time, non-cash provision of $14.6 million on accounts receivable and notes receivable in connection with the conflict in Ukraine and related government actions in the first quarter, a charge of $15.0 million associated with certain legal settlements, an $8.4 million refranchising loss associated with the sale of our ownership interest in a joint venture including 90-restaurants, $4.1 million related to PJUK reserves and impairment related to the termination of a significant franchisee in the UK in the third quarter, $2.8 million for the impairment of certain reacquired franchise rights and a charge of 30 $1.5 million related to advisory fees and severance costs associated with the transition of certain executives in the second quarter. See Note 2 and Note 10 for more information. (b) For the nine months ended September 26, 2021, Special items impacting Operating income consist of a charge of $9.4 million related to strategic reorganization costs associated with our new corporate office in Atlanta which concluded at the end of 2021. Excluding the impact of special items, Operating income decreased $7.1 million, or 17.5% and $20.2 million, or 14.5% for the three and nine months ended September 25, 2022, respectively. These decreases were primarily due to the following: • Domestic Company-owned restaurants decreased $5.8 million and $20.2 million for the three and nine months ended September 25, 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 $3.4 million and $14.0 million, primarily due to higher commodity and labor cost, partially offset by higher revenues related to strategic pricing actions and lower bonuses. • North America franchising increased $1.6 million and $5.4 million for the three and nine months ended September 25, 2022, respectively. Excluding the impact of the above mentioned refranchising, North America franchising increased $0.5 million and $3.1 million, respectively. The three month period increase was primarily due to positive equivalent units of 1.2%, partially offset by a decrease in comparable sales of 0.5%. The nine month period increase was due to an increase in comparable sales of 1.2% and higher equivalent units of 1.5%. • North America commissaries decreased $1.2 million and $0.4 million for the three and nine months ended September 25, 2022, respectively, primarily due to commodity price increases and higher operating costs. The North America commissaries have increased prices, however margins have been declining due to lower volume of items sold. • International decreased $4.4 million and $6.1 million for the three and nine months ended September 25, 2022, respectively, primarily due to lower PJUK commissary revenues and royalties attributed to lower comparable sales, which declined 10.1% and 5.8%, for the three and nine months ended September 25, 2022, respectively. • All Others, which primarily includes our online and mobile ordering business and our marketing funds, decreased $1.8 million and $6.9 million for the three and nine months ended September 25, 2022, respectively, compared to the prior year comparable periods primarily due to timing of expenditures for technology support initiatives. • Unallocated corporate expenses decreased $3.3 million and $7.8 million for the three and nine months ended September 25, 2022, respectively. The decrease for the nine months ended September 25, 2022, compared to prior year 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 losses 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. In the third quarter of 2022, we terminated a significant franchisee in the United Kingdom, resulting in a charge of $0.9 million related to lease impairment. Net Interest Expense Net interest expense increased $3.6 million, or 91.6%, and $6.7 million, or 59.4% for three and nine months ended September 25, 2022, respectively due to higher average outstanding debt on our revolving credit facility. Total debt outstanding was $557.0 million and $490.0 million as of September 25, 2022 and December 26, 2021, respectively. 31 Income Tax Expense Our effective income tax rates were 28.5% and 16.8% for three and nine months ended September 25, 2022, respectively, compared to 11.7% and 16.3% for the prior year comparable periods. The increase in the effective rate for the three months ended September 25, 2022 was caused by a reduction in foreign tax credits, a shift in income between jurisdictions and an overall decrease in pre-tax income. A federal return to provision true-up was recorded in the third quarter of 2021 which positively impacted the effective tax rate in the three and nine months periods ended September 25, 2021. Quarter Ended Nine Months Ended September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 Income before income taxes $ 11,838 $ 34,598 $ 54,833 $ 118,801 Income tax expense $ 3,374 $ 4,057 $ 9,212 $ 19,387 Effective tax rate 28.5 % 11.7 % 16.8 % 16.3 % Diluted Earnings (Loss) Per Common Share Diluted earnings per common share was $0.23 for the three months ended September 25, 2022, compared to $0.79 in the prior year comparable period. For the nine months ended September 25, 2022, diluted earnings per common share was $1.22, compared to diluted loss per common share of $0.59 for the prior year comparable period. Excluding the impact of Special items, adjusted diluted earnings per common share were $0.54 and $2.23 for the three and nine months ended September 25, 2022, respectively, compared to adjusted diluted earnings per common share of $0.83 and $2.76 for the prior year comparable periods. Diluted earnings per common share for the nine months ended September 25, 2022 included Special items of $36.0 million, net of tax. Diluted earnings per common share for the nine months ended September 26, 2021 included Special items of $117.1 million, net of tax. See “Items Impacting Comparability; Non-GAAP Measures” for additional information on Special items. 32 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 Nine Months Ended (In thousands, except per share amounts) September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 GAAP operating income $ 19,461 $ 38,577 $ 72,800 $ 130,076 Refranchising and impairment losses (a) 905 — 26,701 — Legal settlements (b) 10,000 — 15,000 — Provision for uncollectible accounts and notes receivable (c) 3,227 — 3,227 Strategic corporate reorganization costs (d) — 2,153 — 9,364 Other costs (e) — — 1,507 — Adjusted operating income $ 33,593 $ 40,730 $ 119,235 $ 139,440 GAAP net income (loss) attributable to common shareholders $ 8,245 $ 28,961 $ 43,996 $ (20,423) Refranchising and impairment losses (a) 905 — 26,701 — Legal settlements (b) 10,000 — 15,000 — Provision for uncollectible accounts and notes receivable (c) 3,227 — 3,227 — Strategic corporate reorganization costs (d) — 2,153 — 9,364 Other costs (e) — — 1,507 — Repurchase and conversion of Series B Preferred Stock (f) — — — 109,852 Tax effect of Non-GAAP adjustments on special items (g) (3,180) (483) (10,449) (2,098) Adjusted net income attributable to common shareholders $ 19,197 $ 30,631 $ 79,982 $ 96,695 GAAP diluted earnings (loss) per common share $ 0.23 $ 0.79 $ 1.22 $ (0.59) Refranchising and impairment losses (a) 0.03 — 0.75 — Legal settlements (b) 0.28 — 0.42 — Provision for uncollectible accounts and notes receivable (c) 0.09 — 0.09 — Strategic corporate reorganization costs (d) — 0.05 — 0.27 Other costs (e) — — 0.04 — Repurchase and conversion of Series B Preferred Stock (f) — — — 3.14 Tax effect of Non-GAAP adjustments on special items (g) (0.09) (0.01) (0.29) (0.06) Adjusted diluted earnings per common share $ 0.54 $ 0.83 $ 2.23 $ 2.76 33 Amounts shown exclude include the impact of allocation of undistributed earnings to participating securities for Special items. (a) The following refranchising and impairment adjustments are included on a pre-tax basis: Three Months Ended Nine Months Ended (In thousands) September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 Refranchising impairment loss (1) $ — $ — $ 8,412 $ — Ukraine-related charge (2) — — 17,385 — PJUK lease impairment (3) 905 — 905 — Total adjustment $ 905 $ — $ 26,702 $ — (1) Represents a one-time, non-cash charge of $8.4 million ($0.23 loss per diluted share) recorded in the first quarter of 2022 associated with the refranchising of the Company’s controlling interest in the 90-restaurant joint venture, recorded as Refranchising and impairment loss; (2) A charge of $17.4 million ($0.48 loss per diluted share) was recorded in the first quarter of 2022 in one-time, non-cash expense 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; (3) An impairment charge of $0.9 million on the right-of-use assets on leases recorded in the third quarter of 2022 associated with the termination of a significant franchisee in the United Kingdom, which was recorded in Refranchising and impairment loss. (b) Represents an accrual of certain legal settlements, recorded in General and administrative expenses. See "Note 9" for further information. (c) Represents a $3.2 million charge recorded in the third quarter of 2022 associated with the termination of a significant franchisee in the United Kingdom related to the reserve of certain accounts and notes receivable. (d) Represents strategic corporate reorganization costs associated with our new corporate office in Atlanta, Georgia. (e) Represents advisory fees and severance costs associated with the transition of certain executives. (f) Represents the one-time charge related to the repurchase and conversion of all shares of Series B Preferred Stock and includes related professional fees incurred as part of the transaction. (g) The tax effect for Special items was calculated by applying the marginal tax rate of 22.5% and 22.4% for the three and nine months ended September 25, 2022 and September 26, 2021, respectively. 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. In addition, we present free cash flow in this report, which is a non-GAAP measure. Please see “Liquidity and Capital Resources – Free Cash Flow” for a discussion of why we believe free cash flow provides useful information regarding our financial condition and results of operations, and a reconciliation of free cash flow to the most directly comparable GAAP measure. 34 Liquidity and Capital Resources Cash Flows The table below summarizes our cash flows from continuing operations for the nine months ended September 25, 2022 and September 26, 2021: Nine Months Ended September 25, 2022 September 26, 2021 Total cash provided by (used in): Operating activities $ 76,553 $ 193,624 Investing activities (30,229) (41,191) Financing activities (79,216) (177,058) Change in cash and cash equivalents, excluding the impact of foreign currency $ (32,892) $ (24,625) Operating Activities Cash provided by operating activities was $76.6 million for the nine months ended September 25, 2022 compared to $193.6 million for the corresponding period of 2021. The decrease of $117.1 million primarily reflects lower cash from operating activities as a result of overall business performance and lower accrued expenses. Investing Activities Cash used in investing activities was $30.2 million for the nine months ended September 25, 2022 compared to $41.2 million for the same period in 2021, or a decrease of $11.0 million. The decrease in cash used in investing activities was primarily due to a larger net repayment of notes and $13.6 million in proceeds, net of transaction costs, from the impact of refranchising 90-restaurants in the first quarter of 2022, partially offset by 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 $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 remaining available principal amount of the $443.0 million million (the "PJI Revolving Facility"), as necessary. Financing Activities Cash used in financing activities was $79.2 million for the nine months ended September 25, 2022 compared to $177.1 million for the same period of 2021, a decrease of $97.8 million in cash used in financing activities. The nine months ended September 25, 2022 includes outflows of $95.0 million in share repurchases, and $40.0 million of common dividends paid offset by net borrowings of $67.0 million from the credit facility. The nine months ended September 26, 2021 reflects outflows of $340.0 million in repayment of the term loan, $188.6 million in payment of cash consideration for the repurchase and conversion of all of the Company’s Series B Preferred Stock outstanding, and dividends to common and preferred shareholders of $34.0 million and share repurchases of $20.6 million, offset by inflows of $400.0 million in proceeds from the issuance of senior notes and net borrowings from the credit facility of $15.0 million. Debt Our outstanding debt as of September 25, 2022 was $557.0 million, which was comprised of $400.0 million outstanding under our 3.875% senior notes (the "Notes") and $157.0 million outstanding under the PJI Revolving Facility. Remaining availability under the PJI Revolving Facility was approximately $443.0 million as of September 25, 2022. Our Amended Credit Agreement, dated September 14, 2021, 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 35 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 Sept. 25, 2022 Leverage ratio Not to exceed 5.25 to 1.0 2.4 to 1.0 Interest coverage ratio Not less than 2.00 to 1.0 4.2 to 1.0 Our leverage ratio is defined as outstanding debt divided by consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all financial covenants as of September 25, 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 September 25, 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 nine months ended September 25, 2022 and September 26, 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 September 25, 2022 229 $ 85.15 $ 19,529 $ 329,800 September 26, 2021 104 $ 119.47 $ 12,367 $ 51,743 (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 Nine Months Ended September 25, 2022 982 $ 96.71 $ 95,000 $ 329,800 September 26, 2021 187 $ 110.00 $ 20,555 $ 51,743 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. 36 Dividends The Company recorded dividends of approximately $39.9 million ($1.12 per share) for the nine months ended September 25, 2022. O n October 27, 2022, our Board of Directors declared a fourth quarter dividend of $0.42 per common share (approximately $14.9 million in the aggregate), which will be paid on November 25, 2022 to stockholders of record as of the close of business on November 14, 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. The Company’s free cash flow was as follows for the nine-months periods of 2022 and 2021 (in thousands): Nine Months Ended September 25, 2022 September 26, 2021 Net cash provided by operating activities $ 76,553 $ 193,624 Purchases of property and equipment (48,424) (41,328) Dividends paid to preferred stockholders — (6,394) Free cash flow $ 28,129 $ 145,902 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, inflation, royalty relief, franchisee support, 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 37 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; • the ability of the Company to successfully navigate the deteriorating macroeconomic conditions in the United Kingdom; • 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. 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, as updated by “Part II. Item IA. – Risk Factors” in our Quarterly Report on Form 10-Q for the quarter end March 27, 2022, and this Quarterly 38 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.