PAPA JOHNS INTERNATIONAL INC 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) Consolidated Financial Statements: • Consolidated Balance Sheets as of December 25, 2022 and December 26, 2021 • Consolidated Statements of Operations for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 • Consolidated Statements of Comprehensive Income for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 • Consolidated Statements of Stockholders’ Deficit for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 • Consolidated Statements of Cash Flows for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 • Notes to Consolidated Financial Statements 47 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Papa John’s International, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Papa John’s International, Inc. and Subsidiaries (the Company) as of December 25, 2022 and December 26, 2021, the related consolidated statements of operations, comprehensive income, stockholders' deficit and cash flows for each of the three years in the period ended December 25, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 25, 2022 and December 26, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 25, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 25, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated February 23, 2023, expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. 48 Table of Contents Measurement and valuation of insurance reserves Description of the Matter As described in Note 2 to the consolidated financial statements, the Company is self-insured for certain obligations up to stated retention levels under its retention programs related to workers’ compensation, automobile, property and general liability programs. As of December 25, 2022, the Company has $ 67.3 million accrued for self-insurance reserves (“Insurance Reserves”). Judgments and estimates are used by the Company in determining the potential value associated with incurred but not reported claims. Auditing the measurement and valuation of the Insurance Reserves is highly judgmental and complex due to the significant uncertainty in estimating the potential value of reported claims, estimating the number and potential value of incurred but not reported claims and the use of actuarial valuation methods. The reserve estimate is sensitive to actuarial assumptions (e.g., future emergence of losses, incurred but not reported claims) used to estimate the ultimate liability for reported claims and claims that have been incurred but have not been reported. How We Addressed the Matter in Our Audit We tested controls related to the measurement and valuation of the Insurance Reserves. For example, we tested controls over management’s review of the assumptions and methods used to establish the estimate, the underlying data, significant actuarial assumptions and the related reconciliations. To test the measurement and valuation of the Insurance Reserves, our audit procedures included, among others, performing transactional tests of details over the completeness and accuracy of claims data and vouching payments made to third parties. Furthermore, we involved our actuarial specialists to assist in the evaluation of the key assumptions and methodologies used by management to determine the Insurance Reserves. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2019. Louisville, Kentucky February 23, 2023 49 Table of Contents Papa John’s International, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except per share amounts) December 25, 2022 December 26, 2021 Assets Current assets: Cash and cash equivalents $ 47,373 $ 70,610 Accounts receivable (less allowance for credit losses of $ 6,718 in 2022 and $ 2,364 in 2021) 102,533 81,370 Notes receivable, current portion 6,848 12,352 Income tax receivable 8,780 9,386 Inventories 41,382 34,981 Prepaid expenses and other current assets 44,123 46,310 Total current assets 251,039 255,009 Property and equipment, net 249,793 223,856 Finance lease right-of-use assets, net 24,941 20,907 Operating lease right-of-use assets 172,425 176,256 Notes receivable, less current portion (less allowance for credit losses of $ 14,499 in 2022 and $ 1,500 in 2021) 21,248 35,504 Goodwill 70,616 80,632 Deferred income taxes 1,920 5,156 Other assets 72,245 88,384 Total assets $ 864,227 $ 885,704 Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit Current liabilities: Accounts payable $ 62,316 $ 28,092 Income and other taxes payable 8,766 19,996 Accrued expenses and other current liabilities 142,535 190,116 Current deferred revenue 21,272 21,700 Current finance lease liabilities 6,850 4,977 Current operating lease liabilities 23,418 22,543 Total current liabilities 265,157 287,424 Deferred revenue 23,204 13,846 Long-term finance lease liabilities 19,022 16,580 Long-term operating lease liabilities 160,905 160,672 Long-term debt, net 597,069 480,730 Deferred income taxes — 258 Other long-term liabilities 68,317 93,154 Total liabilities 1,133,674 1,052,664 Redeemable noncontrolling interests 1,217 5,498 Stockholders’ deficit: Common stock ($ 0.01 par value per share; issued 49,138 at December 25, 2022 and 49,002 at December 26, 2021) 491 490 Additional paid-in capital 449,829 445,126 Accumulated other comprehensive loss ( 10,135 ) ( 9,971 ) Retained earnings 195,856 183,157 Treasury stock ( 14,402 shares at December 25, 2022 and 13,205 shares at December 26, 2021, at cost) ( 922,434 ) ( 806,472 ) Total stockholders’ deficit ( 286,393 ) ( 187,670 ) Noncontrolling interests in subsidiaries 15,729 15,212 Total Stockholders’ deficit ( 270,664 ) ( 172,458 ) Total Liabilities, Redeemable noncontrolling interests and Stockholders’ deficit $ 864,227 $ 885,704 See accompanying notes. 50 Table of Contents Papa John’s International, Inc. and Subsidiaries Consolidated Statements of Operations Year ended (In thousands, except per share amounts) December 25, 2022 December 26, 2021 December 27, 2020 Revenues: Domestic Company-owned restaurant sales $ 708,389 $ 778,323 $ 700,757 North America franchise royalties and fees 137,399 129,310 96,732 North America commissary revenues 869,634 761,305 680,793 International revenues 129,903 150,771 123,963 Other revenues 256,778 248,712 210,989 Total revenues 2,102,103 2,068,421 1,813,234 Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses 585,307 621,871 563,799 North America commissary expenses 811,446 703,622 630,937 International expenses 76,001 87,286 73,994 Other expenses 238,810 226,320 200,304 General and administrative expenses 217,412 212,265 204,242 Depreciation and amortization 52,032 48,816 49,705 Total costs and expenses 1,981,008 1,900,180 1,722,981 Refranchising and impairment loss ( 12,065 ) — — Operating income 109,030 168,241 90,253 Net interest expense ( 25,261 ) ( 17,293 ) ( 14,891 ) Income before income taxes 83,769 150,948 75,362 Income tax expense 14,420 25,993 14,748 Net income before attribution to noncontrolling interests 69,349 124,955 60,614 Net income attributable to noncontrolling interests ( 1,577 ) ( 4,939 ) ( 2,682 ) Net income attributable to the Company $ 67,772 $ 120,016 $ 57,932 Calculation of net income for earnings per share: Net income attributable to the Company $ 67,772 $ 120,016 $ 57,932 Dividends on redemption of Series B Convertible Preferred Stock — ( 109,852 ) — Dividends paid to participating securities ( 306 ) ( 6,091 ) ( 14,059 ) Net income attributable to participating securities ( 104 ) — ( 2,136 ) Net income attributable to common shareholders $ 67,362 $ 4,073 $ 41,737 Basic earnings per common share $ 1.90 $ 0.12 $ 1.29 Diluted earnings per common share $ 1.89 $ 0.12 $ 1.28 Basic weighted average common shares outstanding 35,497 35,007 32,421 Diluted weighted average common shares outstanding 35,717 35,337 32,717 Dividends declared per common share $ 1.54 $ 1.15 $ 0.90 See accompanying notes. 51 Table of Contents Papa John’s International, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income Year Ended (In thousands) December 25, 2022 December 26, 2021 December 27, 2020 Net income before attribution to noncontrolling interests $ 69,349 $ 124,955 $ 60,614 Other comprehensive income (loss), before tax: Foreign currency translation adjustments ( 4,970 ) ( 1,397 ) 2,344 Interest rate swaps (1) 4,757 6,848 ( 7,517 ) Other comprehensive income (loss), before tax ( 213 ) 5,451 ( 5,173 ) Income tax effect: Foreign currency translation adjustments 1,143 321 ( 539 ) Interest rate swaps (2) ( 1,094 ) ( 1,575 ) 1,729 Income tax effect 49 ( 1,254 ) 1,190 Other comprehensive income (loss), net of tax ( 164 ) 4,197 ( 3,983 ) Comprehensive income before attribution to noncontrolling interests 69,185 129,152 56,631 Less: comprehensive income, redeemable noncontrolling interests ( 574 ) ( 2,609 ) ( 824 ) Less: comprehensive income, nonredeemable noncontrolling interests ( 1,003 ) ( 2,330 ) ( 1,858 ) Comprehensive income attributable to the Company $ 67,608 $ 124,213 $ 53,949 ___________________________________ (1) Amounts reclassified out of accumulated other comprehensive loss into interest expense included ($ 2,384 ), ($ 5,965 ) and ($ 5,068 ) for the years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively. (2) The income tax effects of amounts reclassified out of accumulated other comprehensive loss were $ 536 , $ 1,342 and $ 1,140 for the years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively. See accompanying notes. 52 Table of Contents Papa John’s International, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Deficit Papa John’s International, Inc. (In thousands) Common Stock Shares Outstanding Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss (3) Retained Earnings Treasury Stock Noncontrolling Interests in Subsidiaries Total Stockholders’ Deficit Balance at December 29, 2019 31,894 $ 447 $ 219,047 $ ( 10,185 ) $ 205,697 $ ( 747,327 ) $ 15,665 $ ( 316,656 ) Cumulative effect of adoption of ASU 2016-13 (2) — — — — ( 1,066 ) — — ( 1,066 ) Adjusted balance at December 30, 2019 31,894 $ 447 $ 219,047 $ ( 10,185 ) $ 204,631 $ ( 747,327 ) $ 15,665 $ ( 317,722 ) Net income (1) — — — — 57,932 — 1,858 59,790 Other comprehensive loss, net of tax — — — ( 3,983 ) — — — ( 3,983 ) Cash dividends on common stock — — 141 — ( 29,503 ) — — ( 29,362 ) Cash dividends on preferred stock — — — — ( 13,649 ) — — ( 13,649 ) Exercise of stock options 540 6 30,616 — — — — 30,622 Acquisition of Company common stock ( 32 ) — — — — ( 2,701 ) — ( 2,701 ) Stock-based compensation expense — — 16,310 — — — — 16,310 Issuance of restricted stock 119 — ( 6,922 ) — — 6,922 — — Tax effect of restricted stock awards — — ( 3,974 ) — — — — ( 3,974 ) Distributions to noncontrolling interests — — — — — — ( 2,284 ) ( 2,284 ) Other 24 — ( 1,115 ) — ( 253 ) 1,382 — 14 Balance at December 27, 2020 32,545 $ 453 $ 254,103 $ ( 14,168 ) $ 219,158 $ ( 741,724 ) $ 15,239 $ ( 266,939 ) Net income (1) — — — — 120,016 — 2,330 122,346 Other comprehensive income, net of tax — — — 4,197 — — — 4,197 Repurchase and conversion of Series B Convertible Preferred Stock 3,489 35 174,631 — ( 110,498 ) — — 64,168 Cash dividends on common stock — — 158 — ( 40,514 ) — — ( 40,356 ) Cash dividends on preferred stock — — — — ( 4,121 ) — — ( 4,121 ) Exercise of stock options 212 2 11,967 — — — — 11,969 Acquisition of Company common stock ( 594 ) — — — — ( 72,499 ) — ( 72,499 ) Stock-based compensation expense — — 16,919 — — — — 16,919 Issuance of restricted stock 132 — ( 6,970 ) — — 6,970 — — Tax effect of restricted stock awards — — ( 5,847 ) — — — — ( 5,847 ) Distributions to noncontrolling interests — — — — — — ( 2,357 ) ( 2,357 ) Other 13 — 165 — ( 884 ) 781 — 62 Balance at December 26, 2021 35,797 $ 490 $ 445,126 $ ( 9,971 ) $ 183,157 $ ( 806,472 ) $ 15,212 $ ( 172,458 ) 53 Table of Contents Papa John’s International, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Deficit (continued) Papa John’s International, Inc. (In thousands) Common Stock Shares Outstanding Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss (3) Retained Earnings Treasury Stock Noncontrolling Interests in Subsidiaries Total Stockholders’ Deficit Balance at December 26, 2021 35,797 $ 490 $ 445,126 $ ( 9,971 ) $ 183,157 $ ( 806,472 ) $ 15,212 $ ( 172,458 ) Net income (1) — — — — 67,772 — 1,003 68,775 Other comprehensive income, net of tax — — — ( 164 ) — — — ( 164 ) Cash dividends on common stock — — 210 — ( 54,977 ) — — ( 54,767 ) Exercise of stock options 82 1 4,035 — — — — 4,036 Acquisition of Company common stock ( 1,343 ) — — — — ( 125,000 ) — ( 125,000 ) Stock-based compensation expense — — 18,388 — — — — 18,388 Issuance of restricted stock 285 — ( 8,443 ) — — 8,443 — — Tax effect of restricted stock awards ( 94 ) — ( 9,546 ) — — — — ( 9,546 ) Distributions to noncontrolling interests — — — — — — ( 486 ) ( 486 ) Other 9 — 59 — ( 96 ) 595 — 558 Balance at December 25, 2022 34,736 $ 491 $ 449,829 $ ( 10,135 ) $ 195,856 $ ( 922,434 ) $ 15,729 $ ( 270,664 ) ___________________________________ (1) Net income to the Company for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 excludes $ 574 , $ 2,609 and $ 824 , respectively, allocable to the redeemable noncontrolling interests for our joint venture arrangements. (2) As of December 30, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “ Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments .” See “Note 10. Allowance for Credit Losses” of “Notes to Consolidated Financial Statements” for additional information. (3) At December 25, 2022, the accumulated other comprehensive loss of $ 10,135 was comprised of net unrealized foreign currency translation loss of $ 8,696 and a net unrealized loss on the interest rate swap agreements of $ 1,439 . At December 26, 2021, the accumulated other comprehensive loss of $ 9,971 was comprised of net unrealized foreign currency translation loss of $ 4,869 and a net unrealized loss on the interest rate swap agreements of $ 5,102 . At December 27, 2020, the accumulated other comprehensive loss of $ 14,168 was comprised of net unrealized foreign currency translation loss of $ 3,793 and a net unrealized loss on the interest rate swap agreements of $ 10,375 . See accompanying notes. 54 Table of Contents Papa John’s International, Inc. and Subsidiaries Consolidated Statements of Cash Flows Year ended (In thousands) December 25, 2022 December 26, 2021 December 27, 2020 Operating activities Net income before attribution to noncontrolling interests $ 69,349 $ 124,955 $ 60,614 Adjustments to reconcile net income to net cash provided by operating activities: Provision (benefit) for allowance for credit losses on accounts and notes receivable 20,539 ( 852 ) ( 4,734 ) Depreciation and amortization 52,032 48,816 49,705 Refranchising and impairment loss 12,065 — — Deferred income taxes 2,798 3,753 ( 9,268 ) Stock-based compensation expense 18,388 16,919 16,310 Other 1,056 581 2,257 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ( 29,167 ) 4,023 ( 22,420 ) Income tax receivable 586 ( 8,113 ) 3,760 Inventories ( 7,496 ) ( 4,708 ) ( 2,736 ) Prepaid expenses and other current assets 5,587 2,866 2,884 Other assets and liabilities ( 13,458 ) ( 20,077 ) 20,879 Accounts payable ( 8,350 ) ( 9,278 ) 8,229 Income and other taxes payable ( 10,710 ) 9,733 2,664 Accrued expenses and other current liabilities 4,846 15,875 59,353 Deferred revenue ( 257 ) 182 ( 1,058 ) Net cash provided by operating activities 117,808 184,675 186,439 Investing activities Purchases of property and equipment ( 78,391 ) ( 68,559 ) ( 35,652 ) Notes issued ( 9,296 ) ( 16,132 ) ( 16,589 ) Repayments of notes issued 13,045 18,555 11,154 Acquisitions, net of cash acquired ( 1,219 ) ( 699 ) — Proceeds from refranchising, net of cash transferred 13,588 — — Other ( 520 ) 3,323 16 Net cash used in investing activities ( 62,793 ) ( 63,512 ) ( 41,071 ) Financing activities Proceeds from issuance of senior notes — 400,000 — Net proceeds of revolving credit facilities 115,000 80,000 — Debt issuance costs — ( 9,179 ) — Proceeds from exercise of stock options 4,036 11,969 30,622 Repurchase of Series B Convertible Preferred Stock — ( 188,647 ) — Acquisition of Company common stock ( 125,000 ) ( 72,499 ) ( 2,701 ) Dividends paid to common stockholders ( 54,767 ) ( 40,356 ) ( 29,362 ) Dividends paid to preferred stockholders — ( 6,394 ) ( 13,649 ) Tax payments for equity award issuances ( 9,546 ) ( 5,847 ) ( 3,974 ) Distributions to noncontrolling interests ( 1,211 ) ( 5,942 ) ( 2,420 ) Repayments of term loan — ( 340,000 ) ( 20,000 ) Other ( 4,752 ) ( 3,631 ) ( 1,977 ) Net cash used in financing activities ( 76,240 ) ( 180,526 ) ( 43,461 ) Effect of exchange rate changes on cash and cash equivalents ( 2,012 ) ( 231 ) 386 Change in cash and cash equivalents ( 23,237 ) ( 59,594 ) 102,293 Cash and cash equivalents at beginning of period 70,610 130,204 27,911 Cash and cash equivalents at end of period $ 47,373 $ 70,610 $ 130,204 See accompanying notes. 55 Table of Contents Papa John’s International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Description of Business Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s,” “Papa Johns” or in the first person notations of “we,” “us” and “our”), operates and franchises pizza delivery and carryout restaurants under the trademark “Papa John’s,” in 48 countries and territories as of December 25, 2022. 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, printing and promotional items and information systems equipment, and software and related services. We generate revenues from the operation of our Quality Control Centers (“QC Centers”) which supply pizza sauce, dough, food products, paper products, smallwares and cleaning supplies to restaurants. We also derive revenue from contributions received into our national marketing funds. In discussions of our business, “Domestic” is defined as within the contiguous United States, “North America” includes Canada, and “International” includes the rest of the world other than North America. 2. Significant Accounting Policies Principles of Consolidation The accompanying Consolidated Financial Statements include the accounts of Papa John’s International, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated. Variable Interest Entity Papa John’s Domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the Domestic restaurants, of which approximately 85 percent are franchised, and does not have sufficient equity to fund its operations without these ongoing financial contributions. Based on an assessment of the governance structure and operating procedures of PJMF, the Company determined it has the power to control certain significant activities of PJMF, and therefore, is the primary beneficiary. The Company has consolidated PJMF in its financial results in accordance with Accounting Standards Codification (“ASC”) 810, “ Consolidation .” Fiscal Year Our fiscal year ends on the last Sunday in December of each year. All fiscal years presented consist of 52 weeks. Use of Estimates The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Significant items that are subject to such estimates and assumptions include the allowance for credit losses on accounts and notes receivable, intangible assets, contract assets and contract liabilities including the customer loyalty program obligation, right-of-use assets and lease liabilities, gift card breakage, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates. Revenue Recognition Revenue is measured based on consideration specified in contracts with customers and excludes waivers or incentives and amounts collected on behalf of third parties, primarily sales tax. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Delivery costs, including freight associated with our Domestic commissary and other sales, are accounted for as fulfillment costs and are included in operating costs. 56 Table of Contents The following describes principal activities, separated by major product or service, from which the Company generates its revenues: Domestic Company-owned Restaurant Sales The Domestic Company-owned restaurants principally generate revenue from retail sales of high-quality pizza, Papadias, which are flatbread-style sandwiches, and side items including breadsticks, Papa Bites, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. Revenues from Company-owned restaurants are recognized when the products are delivered to or carried out by customers. Our North American customer loyalty program, Papa Rewards, is a spend-based program that rewards customers with points for each purchase. Papa Rewards points are accumulated and redeemed for dollar off discounts (“Papa Dough”) to be used on future purchases within a six-month expiration window. The accrued liability in the Consolidated Balance Sheets, and corresponding reduction of Company-owned restaurant sales in the Consolidated Statements of Operations, is for the estimated reward redemptions at Domestic Company-owned restaurants based upon estimated redemption patterns. The liability related to Papa Rewards is calculated using the estimated redemption value for which the points and accumulated rewards are expected to be redeemed. Revenue is recognized when the customer redeems the Papa Dough reward and when the points or Papa Dough reward expires. Franchise Royalties and Fees Franchise royalties, which are based on a percentage of franchise restaurant sales, are recognized as sales occur. Incentives offered from time to time, including new store incentives, will reduce the contractual royalty rate paid. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other behaviors, including acceleration of restaurant remodels or equipment upgrades, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty rate. Our current standard franchise agreement requires the franchisee to pay a royalty fee of 5 % of sales, and the majority of our existing franchised restaurants have a 5 % contractual royalty rate in effect. Franchise royalties are billed on a monthly basis. The majority of initial franchise license fees and area development exclusivity fees are from International locations. Initial franchise license fees are billed at the store opening date. The pre-opening services provided to franchisees do not contain separate and distinct performance obligations from the franchise right; thus, the fees collected will be deferred and amortized on a straight-line basis beginning at the store opening date through the term of the franchise agreement, which is typically 10 years. Franchise license renewal fees for both Domestic and International locations, which generally occur every 10 years, are billed before the renewal date. Fees received for future license renewal periods are deferred and amortized over the life of the renewal period. Area development exclusivity fees are billed upon execution of the development agreements which grant the right to develop franchised restaurants in future periods in specific geographic areas. Area development exclusivity fees are allocated on a pro rata basis to all restaurants opened under that specific development agreement. These fees are deferred and amortized over the term of the related franchise agreements, which is typically 10 years. Commissary Revenues Commissary revenues are comprised of food and supplies sold to franchised restaurants and are recognized as revenue upon shipment of the related products to the franchisees. Payments are generally due within 30 days. There are various incentive programs available to franchisees related to new restaurant openings including discounts on initial commissary orders and new store equipment incentives, at substantially no cost to franchisees. Commissary revenues are reduced to reflect incentives in the form of direct discounts on initial commissary orders. The new store equipment incentive is also recorded as a reduction of commissary sales over the term of the incentive agreement, which is generally three to five years . Other Revenues Franchise Marketing Fund revenues represent a required established percentage of monthly restaurant sales collected by PJMF, which is our national marketing fund, and various other international and Domestic marketing funds (“Co-op” or “Co-operative” Funds) where we have determined for purposes of accounting that we have control over the significant activities of the funds. PJMF funds its operations with ongoing financial support and contributions from Domestic Papa John’s restaurants, of which approximately 85 % are franchised restaurant members. Contributions are based on a percentage of monthly restaurant sales and are billed monthly. When we are determined to be the principal in these 57 Table of Contents arrangements, advertising fund contributions and expenditures are reported on a gross basis in the Consolidated Statements of Operations. Our obligation related to these funds is to develop and conduct advertising activities in a specific country, region, or market, including the placement of electronic and print materials. There are no expiration dates and we do not deduct non-usage fees from outstanding gift cards. While the Company and the franchisees continue to honor all gift cards presented for payment, the likelihood of redemption may be determined to be remote for certain cards due to long periods of inactivity. In these circumstances, the Company recognizes breakage revenue for amounts not subject to unclaimed property laws. Based upon our analysis of historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote. Breakage revenue is recognized over time in proportion to estimated redemption patterns as Other revenues. Commissions on gift cards sold by third parties are recorded as a reduction to Deferred revenue and a reduction to Other revenues based upon estimated redemption patterns. Fees for information services, including software maintenance fees, help desk fees, centralized call center fees, and online ordering fees are recognized as revenue as such services are provided and are included in Other revenues. Revenues for printing, promotional items, and direct mail marketing services are recognized upon shipment of the related products to franchisees and other customers. Direct mail advertising discounts are also periodically offered by our Preferred Marketing Solutions subsidiary. Other revenues are reduced to reflect these advertising discounts. Rental income, primarily derived from properties leased by the Company and subleased to franchisees in the UK, is recognized on a straight-line basis over the respective operating lease terms. Advertising and Related Costs Domestic Company-owned advertising and related costs of $ 55.2 million, $ 61.7 million and $ 56.7 million in 2022, 2021, and 2020, respectively, include the costs of Domestic Company-owned local restaurant activities such as mail coupons, door hangers and promotional items and advertising activities administered through PJMF and various local market cooperative advertising funds. PJMF is responsible for developing and conducting marketing and advertising for the Domestic Papa John’s system. The Co-op Funds are responsible for developing and conducting advertising activities in a specific market, including the placement of electronic and print materials developed by PJMF. During 2020 the Company recorded additional amounts of $ 15.0 million to PJMF, representing incremental discretionary marketing fund investments in excess of contractual Company-owned restaurant-level contributions as part of our temporary financial support package to our franchisees. The marketing fund investments are included in General and administrative expenses within the accompanying Consolidated Statements of Operations. Leases Lease expense is recognized on a straight-line basis over the expected life of the lease term for operating leases, whereas lease expense follows an accelerated expense recognition for finance leases. A lease term often includes option periods, available at the inception of the lease. Lease expense is comprised of operating and finance lease costs, short-term lease costs, and variable lease costs, which primarily include common area maintenance, real estate taxes, and insurance for the Company’s real estate leases. Lease costs also include variable rent, which is primarily related to the Company’s supply chain tractor and trailer leases that are based on a rate per mile. Stock-Based Compensation Compensation expense for equity grants is estimated on the grant date, net of projected forfeitures, and is recognized over the vesting period (graded vesting over three years ). Restricted stock is valued based on the market price of the Company’s shares on the date of grant. Management evaluates its award grants and modifications and will adjust the fair value if any are determined to be spring-loaded. Cash Equivalents Cash equivalents consist of highly liquid investments with maturity of three months or less at date of purchase. These investments are carried at cost, which approximates fair value. Accounts Receivable Substantially all accounts receivable is due from franchisees for purchases of food, paper products, point of sale equipment, printing and promotional items, information systems and related services, marketing and royalties. Credit is extended based 58 Table of Contents on an evaluation of the franchisee’s financial condition and collateral is generally not required. An allowance for credit losses is an estimate, even if remote, based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics and macroeconomic factors. Account balances are charged off against the allowance after recovery efforts have ceased. Notes Receivable The Company has provided financing to select Domestic and International franchisees principally for use in the construction and development of their restaurants and for the purchase of restaurants from the Company or other franchisees. Most notes receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant and the ownership interests in the franchise. The Company has provided long-term financing to certain franchisees with royalty payment plans. We establish an allowance for credit losses for franchisee notes receivables to reduce the outstanding notes receivable to their net realizable values based on a review of each franchisee’s economic performance and market conditions after consideration of the fair value of our underlying collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees. Note balances are charged off against the allowance after recovery efforts have ceased. Interest income recorded on franchisee loans was approximately $ 1.3 million in 2022, $ 1.9 million in 2021 and $ 2.1 million in 2020 and is reported in Net interest expense in the accompanying Consolidated Statements of Operations. Inventories Inventories, which consist of food products, paper goods and supplies, smallwares, and printing and promotional items, are stated at the lower of cost, determined under the first-in, first-out (FIFO) method, or net realizable value. Property and Equipment Property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets (generally five to ten years for restaurant, commissary and other equipment, twenty to forty years for buildings and improvements, and five years for technology and communication assets). Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the respective leases, including the first renewal period (generally five to ten years ). Depreciation expense was $ 45.6 million in 2022, $ 43.0 million in 2021 and $ 46.6 million in 2020. Deferred Costs We capitalize certain information systems development and related costs that meet established criteria. Amounts capitalized, which are included in property and equipment, are amortized principally over periods not exceeding five years upon completion of the related information systems project. Total costs capitalized were approximately $ 4.1 million in 2022, $ 4.1 million in 2021 and $ 3.3 million in 2020. The unamortized information systems development costs approximated $ 9.6 and $ 10.5 million as of December 25, 2022 and December 26, 2021, respectively. Intangible Assets — Goodwill We evaluate goodwill annually in the fourth quarter or whenever we identify certain triggering events or circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Such tests are completed separately with respect to the goodwill of each of our reporting units, which includes our Domestic Company-owned restaurants, United Kingdom (“PJUK”), China, and Preferred Marketing Solutions operations. We may perform a qualitative assessment or move directly to the quantitative assessment for any reporting unit in any period if we believe that it is more efficient or if impairment indicators exist. We elected to perform a quantitative assessment for our Domestic Company-owned restaurants, PJUK, China, and Preferred Marketing Solutions operations in the fourth quarter of 2022. Our Domestic Company-owned restaurants, PJUK, China and Preferred Marketing Solutions fair value calculations considered both an income approach and a market approach. The income approach used projected net cash flows, with various growth assumptions, over a ten-year discrete period and a terminal value, which were discounted using appropriate rates. The selected discount rate considered the risk and nature of each reporting unit’s cash flow and the rates of return market participants would require to invest their capital in the reporting unit. In determining the fair value from a market approach, we considered sales multiples and earnings 59 Table of Contents before interest, taxes, depreciation and amortization multiples that a potential buyer would pay based on third-party transactions in similar markets. As a result of our quantitative analyses, we determined that it was more-likely-than-not that the fair values of our reporting units were greater than their carrying amounts. Subsequent to completing our goodwill impairment tests, no indicators of impairment were identified. See “Note 11. Goodwill” for additional information. Deferred Income Tax Accounts and Tax Reserves We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets and liabilities are netted by tax jurisdiction. Deferred tax assets are also recognized for the estimated future effects of tax attribute carryforwards (e.g., net operating losses, capital losses, and foreign tax credits). The effect on deferred taxes of changes in tax rates is recognized in the period in which the new tax rate is enacted. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize. Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures. See “Note 17. Income Taxes” for additional information. Insurance Reserves Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability and property insurance coverage provided to our employees are funded by the Company up to certain retention limits which range up to $ 0.5 million. Losses are accrued based upon undiscounted estimates of the liability for claims incurred and for events that have occurred but have not been reported using certain third-party actuarial projections and our claims loss experience. The determination of the recorded insurance reserves is highly judgmental and complex due to the significant uncertainty in the potential value of reported claims and the number and potential value of incurred but not reported claims, the application of significant judgment in making those estimates and the use of various actuarial valuation methods. The estimated insurance claims losses could be significantly affected should the frequency or ultimate cost of claims differ significantly from historical trends used to estimate the insurance reserves recorded by the Company. The Company records estimated losses above retention within its reserve with a corresponding receivable for expected amounts due from insurance carriers. As of December 25, 2022, our insurance reserve was $ 67.3 million as compared to $ 88.1 million as of December 26, 2021 primarily related to auto liability and workers’ compensation claims. Of these amounts, approximately $ 29.7 million and $ 34.7 million were recorded in Accrued expenses and other current liabilities and $ 37.6 million and $ 53.6 million were recorded in Other long-term liabilities on the Consolidated Balance Sheets as of December 25, 2022 and December 26, 2021, respectively. Our reserves include claim costs above our retention that have a corresponding receivable. Our insurance receivable for claims above retention totaled $ 38.4 million and $ 48.1 million as of December 25, 2022 and December 26, 2021, respectively. Of these amounts, approximately $ 17.0 million and $ 18.7 million were recorded in Prepaid expenses and other current assets, and $ 21.4 million and $ 29.4 million were recorded in Other assets on the Consolidated Balance Sheets as of December 25, 2022 and December 26, 2021, respectively. Derivative Financial Instruments We recognize all derivatives on the balance sheet at fair value. At inception and on an ongoing basis, we assess whether each derivative that qualifies for hedge accounting continues to be highly effective in offsetting changes in the cash flows of the hedged item. If the derivative meets the hedge criteria as defined by certain accounting standards, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in accumulated other comprehensive income/(loss) until the hedged item is recognized in earnings. In 2021, ou r interest rate swaps were de-designated as cash flow hedges following the issuance of the Notes (as defined in “Note 12. Debt”) and remained undesignated as hedges through June 26, 2022. For 60 Table of Contents these de-designated hedges, the portion of gains or losses on the derivative instruments previously recognized in accumulated other comprehensive loss (“AOCL”) will be reclassified into earnings as adjustments to interest expense on a straight-line basis over the remaining life of the originally hedged transactions. As of June 27, 2022, the interest rate swaps were re-designated as cash flow hedges to provide a hedge against changes in variable rate cash flows regarding fluctuations in the London Interbank Offered Rates (“LIBOR”) rate utilized on the revolving credit facility. Therefore, beginning in the third quarter of 2022, our interest rate swaps are accounted for utilizing cash flow hedge accounting treatment. The interest rate swaps are marked to market at each reporting date and any unrealized gains or losses are included in AOCL and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings. Noncontrolling Interests Papa John’s has joint venture arrangements in which there are noncontrolling interests held by third parties that included 98 and 188 restaurants at December 25, 2022 and December 26, 2021, respectively. As further described in “Note 22. Divestitures,” the Company divested its 51 percent interest in one joint venture that owned 90 restaurants in the second quarter of 2022. Consolidated net income is required to be reported separately at amounts attributable to both the Company and the noncontrolling interests. Additionally, disclosures are required to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners, including a disclosure on the face of the Consolidated Statements of Operations of income attributable to the noncontrolling interest holder. The following summarizes the redemption feature, location and related accounting within the Consolidated Balance Sheets for these joint venture arrangements: Type of Joint Venture Arrangement Location within the Consolidated Balance Sheets Recorded Value Joint ventures with no redemption feature Permanent equity Carrying value Joint venture with option to require the Company to purchase the noncontrolling interest - not currently redeemable or redemption not probable Temporary equity Carrying value See “Note 9. Noncontrolling Interests” for additional information regarding noncontrolling interests. Foreign Currency Translation The local currency is the functional currency for each of our foreign subsidiaries. Revenues and expenses are translated into United States (“U.S.”) dollars using monthly average exchange rates, while assets and liabilities are translated using year-end exchange rates and historical rates. The resulting translation adjustments are included as a component of AOCL, net of income taxes. Recent Accounting Pronouncements Reference Rate Reform – Hedging In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, “ Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ” The ASU provides optional expedients and exceptions for applying guidance on contract modifications and hedge accounting related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates if certain criteria are met. This guidance was effective beginning on March 12, 2020, and amendments could be applied prospectively through December 31, 2022. The hedge accounting expedients may be applied, on an individual hedging relationship basis, to eligible hedge accounting relationships that existed as of the beginning of the effective date of this guidance, and to new eligible hedging relationships entered into after the effective date of this guidance; however, those expedients generally could not be applied to hedging relationships for periods after December 31, 2022. The FASB issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848,” which deferred the sunset date from December 31, 2022 to December 31, 2024. The Company adopted certain optional hedge accounting expedients provided by ASU 2020-04 during fiscal 2020. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. 61 Table of Contents 3. Leases The Company has significant leases that include most Domestic Company-owned restaurant and commissary locations as well as our corporate office located in Atlanta, Georgia. Other Domestic leases include tractor and trailer leases used by our distribution subsidiary as well as commissary equipment. Additionally, the Company leases a significant number of restaurants within the United Kingdom (“UK”); these restaurants are then subleased to the franchisees. The Company’s leases have terms as follows: Average lease term Domestic Company-owned restaurants Five years , plus at least one renewal UK franchise-owned restaurants 15 years Domestic commissary locations 10 years, plus at least one renewal Domestic and International tractors and trailers Five to seven years Domestic and International commissary and office equipment Three to five years The Company determines if an arrangement is or contains a lease at contract inception and recognizes a right-of-use asset and a lease liability at the lease commencement date. Leases with an initial term of 12 months or less but greater than one month are not recorded on the balance sheet for select asset classes. The lease liability is measured at the present value of future lease payments as of the lease commencement date. The right-of-use asset recognized is based on the lease liability adjusted for prepaid and deferred rent and unamortized lease incentives. An operating lease right-of-use asset is amortized on a straight-line basis over the lease term and is recognized as a single lease cost against the operating lease liability. A finance lease right-of-use asset is amortized on a straight-line basis, with interest costs reported separately, over the lesser of the useful life of the leased asset or lease term. Operating lease expense is recognized on a straight-line basis over the lease term and is included in Operating costs or General and administrative expenses. Variable lease payments are expensed as incurred. The Company uses its incremental borrowing rates as the discount rate for its leases, which is equal to the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The lease terms for all the Company’s leases include the contractually obligated period of the leases, plus any additional periods covered by Company options to extend the leases that the Company is reasonably certain to exercise. Certain leases provide that the lease payments may be increased annually based on the fixed rate terms or adjustable terms such as the Consumer Price Index. Future base rent escalations that are not contractually quantifiable as of the lease commencement date are not included in our lease liability. The following schedule details the total right-of-use assets and lease liabilities on the Consolidated Balance Sheets as of December 25, 2022 and December 26, 2021 (in thousands): Leases Classification December 25, 2022 December 26, 2021 Assets Finance lease assets, net Finance lease right-of-use assets, net $ 24,941 $ 20,907 Operating lease assets, net Operating lease right-of-use assets 172,425 176,256 Total lease assets $ 197,366 $ 197,163 Liabilities Current finance lease liabilities Current finance lease liabilities $ 6,850 $ 4,977 Current operating lease liabilities Current operating lease liabilities 23,418 22,543 Noncurrent finance lease liabilities Long-term finance lease liabilities 19,022 16,580 Noncurrent operating lease liabilities Long-term operating lease liabilities 160,905 160,672 Total lease liabilities $ 210,195 $ 204,772 62 Table of Contents Lease costs for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 were as follows (in thousands): Year Ended December 25, 2022 Year Ended December 26, 2021 Year Ended December 27, 2020 Finance lease: Amortization of right-of-use assets $ 5,704 $ 4,980 $ 2,342 Interest on lease liabilities 1,029 1,140 606 Operating lease: Operating lease cost 42,815 43,072 40,026 Short-term lease cost 4,171 2,032 3,960 Variable lease cost 9,129 8,572 6,503 Total lease costs 62,848 59,796 53,437 Sublease income ( 11,654 ) ( 12,039 ) ( 10,407 ) Total lease costs, net of sublease income $ 51,194 $ 47,757 $ 43,030 Future minimum lease payments under contractually-obligated leases and associated sublease income as of December 25, 2022 were as follows (in thousands): Fiscal Year Finance Lease Costs Operating Lease Costs Expected Sublease Income 2023 $ 7,849 $ 32,860 $ 10,303 2024 6,801 32,267 10,371 2025 5,171 30,695 9,952 2026 4,125 26,973 9,251 2027 2,971 21,568 8,523 Thereafter 1,440 92,002 42,089 Total future minimum lease payments 28,357 236,365 90,489 Less imputed interest ( 2,485 ) ( 52,042 ) — Total present value of lease liabilities $ 25,872 $ 184,323 $ 90,489 Lessor Operating Leases The Company subleases certain retail space to our franchisees in the UK which are primarily operating leases. At December 25, 2022, we leased and subleased approximately 442 Papa John’s restaurants to franchisees in the UK. The initial lease terms on the franchised sites in the UK are generally 15 years. The Company has the option to negotiate an extension toward the end of the lease term at the landlord’s discretion. The initial lease terms of the franchisee subleases are generally five to ten years . Rental income, primarily derived from properties leased and subleased to franchisees in the UK, is recognized on a straight-line basis over the respective operating lease terms. The Company recognized total sublease income of $ 11.7 million, $ 12.0 million and $ 10.4 million for the years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively, within Other revenues in the Consolidated Statements of Operations. Lease Guarantees As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of approximately 53 Domestic leases. These leases have varying terms, the latest of which expires in 2036. As of December 25, 2022, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $ 9.2 million. This contingent liability is not included in the Consolidated Balance Sheet or future minimum lease obligation. The fair value of the guarantee is not material. There were no leases recorded between related parties. 63 Table of Contents Supplemental Cash Flow & Other Information The following table presents supplemental cash flow information related to leases for the years ended December 25, 2022, December 26, 2021 and December 27, 2020: (Dollars in thousands) Year Ended December 25, 2022 December 26, 2021 December 27, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 1,029 $ 1,140 $ 606 Financing cash flows from finance leases $ 5,416 $ 4,566 $ 2,139 Operating cash flows from operating leases (a) $ 35,573 $ 38,530 $ 37,113 Right-of-use assets obtained in exchange for new finance lease liabilities $ 9,875 $ 9,486 $ 9,152 Right-of-use assets obtained in exchange for new operating lease liabilities (b) $ 53,869 $ 64,420 $ 30,266 Cash received from sublease income $ 10,847 $ 11,597 $ 10,545 Weighted-average remaining lease term (in years): Finance leases 4.43 4.51 4.71 Operating leases 8.44 8.30 7.00 Weighted-average discount rate: Finance leases 4.59 % 5.08 % 5.34 % Operating leases 5.63 % 6.20 % 6.65 % ______________________________ (a) Included within the change in Other assets and liabilities within the Consolidated Statements of Cash Flows offset by non-cash operating lease right-of-use asset amortization and lease liability accretion. (b) Includes right-of-use assets of approximately $ 21.8 million for the year ended December 25, 2021 associated with the lease commencement of our Atlanta, Georgia corporate office. 4. Papa John’s Marketing Fund, Inc. PJMF, which is a consolidated variable interest entity where the Company has been identified as the primary beneficiary, collects a percentage of revenues from Company-owned and franchised restaurants in the United States, for the purpose of designing and administering advertising and promotional programs for all participating Domestic restaurants. Contributions and expenditures are reported on a gross basis in the Consolidated Statements of Operations within Other revenues and Other expenses. PJMF also has a wholly-owned subsidiary, Papa Card, Inc., which administers the Company’s gift card programs. 64 Table of Contents Assets and liabilities of PJMF, which are utilized solely for the Company’s advertising and promotional programs, were as follows in the Consolidated Balance Sheets (in thousands): December 25, 2022 December 26, 2021 Assets Current assets: Cash and cash equivalents $ 17,174 $ 24,481 Accounts receivable, net 14,780 14,150 Income tax receivable — 300 Prepaid expenses and other current assets 1,815 1,718 Total current assets 33,769 40,649 Deferred income taxes 655 614 Total assets $ 34,424 $ 41,263 Liabilities Current liabilities: Accounts payable $ 12,428 $ 140 Income and other taxes payable 8 2 Accrued expenses and other current liabilities 17,928 40,154 Current deferred revenue 4,395 4,317 Total current liabilities 34,759 44,613 Deferred revenue 2,503 2,478 Total liabilities $ 37,262 $ 47,091 5. Revenue Recognition Contract Balances Our contract liabilities primarily relate to franchise fees, unredeemed gift card liabilities, and loyalty program obligations, which we classify as Deferred revenue on the Consolidated Balance Sheets. During the years ended December 25, 2022 and December 26, 2021, the Company recognized $ 33.4 million and $ 36.3 million in revenue, respectively, related to deferred revenue. The following table includes a breakout of contract liability balances (in thousands): Contract Liabilities December 25, 2022 December 26, 2021 Change Franchise fees and unredeemed gift card liabilities $ 30,710 $ 20,410 $ 10,300 Customer loyalty program obligations 13,766 15,136 ( 1,370 ) Total contract liabilities $ 44,476 $ 35,546 $ 8,930 Our contract assets consist primarily of equipment incentives provided to franchisees. Equipment incentives are related to the future value of commissary revenue the Company will receive over the term of the incentive agreement. As of December 25, 2022 and December 26, 2021, the contract assets were approximately $ 4.5 million and $ 5.8 million, respectively. For the years ended December 25, 2022 and December 26, 2021, revenue was reduced approximately $ 3.4 million and $ 3.0 million, respectively, for the amortization of contract assets over the applicable contract terms. Contract assets are included in Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheets. 65 Table of Contents Transaction Price Allocated to the Remaining Performance Obligations The following table (in thousands) includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied at the end of the reporting period. Performance Obligations by Period Less than 1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years Thereafter Total Franchise fees $ 3,098 $ 2,927 $ 2,755 $ 2,524 $ 2,210 $ 7,120 $ 20,634 Approximately $ 3.2 million of area development fees related to unopened stores and International unearned royalties are included in Deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings and franchisees’ revenues. Gift card liabilities of approximately $ 6.9 million, included in Deferred revenue, will be recognized in Company-owned restaurant revenues when gift cards are redeemed. The Company will recognize redemption fee revenue in Other revenues when cards are redeemed at franchised restaurant locations. The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. 6. Stockholders’ Deficit Common Stock The Company has authorized 100.0 million shares of common stock as of December 25, 2022 and December 26, 2021, respectively. The Company’s outstanding shares of common stock, net of repurchased common stock held as treasury stock, were 34.7 million shares at December 25, 2022 and 35.8 million shares at December 26, 2021. Share Repurchase Program 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. This share repurchase program operated alongside our previous $ 75.0 million share repurchase authorization, which began on November 4, 2020 and expired on December 26, 2021. The following table summarizes our repurchase activity for the years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively: (In thousands, except average price per share) Year Ended 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 December 25, 2022 1,343 $ 93.07 $ 125,000 $ 299,800 December 26, 2021 594 $ 121.96 $ 72,499 $ 424,800 December 27, 2020 32 $ 83.90 $ 2,701 $ 72,299 Subsequent to year-end, we acquired an additional 319,307 shares at an aggregate cost of $ 27.6 million. Approximately $ 272.2 million remained available under the Company’s share repurchase program as of February 16, 2023. The timing and volume of share repurchases under the Company’s share repurchase programs may be executed at the discretion of management on an opportunistic basis, subject to market and business conditions, regulatory requirements and other factors, or pursuant to trading plans or other arrangements. Repurchases under the programs may be made through open market, block, and privately negotiated transactions, including Rule 10b5-1 plans, at times and in such amounts as management deems appropriate. Repurchases under the Company’s share repurchase programs may be commenced or suspended from time to time at the Company’s discretion without prior notice. Funding for the share repurchase programs will be provided through our credit facility, operating cash flow, stock option exercises and cash and cash equivalents. 66 Table of Contents Dividends on Common Stock The Company paid dividends of approximately $ 54.8 million ($ 1.54 per share), $ 40.4 million and $ 29.4 million to common stockholders for the years 2022, 2021 and 2020, respectively. On January 26, 2023, our Board of Directors declared a first quarter 2023 dividend of $ 0.42 per common share, representing a $ 14.6 million aggregate dividend that was paid on February 17, 2023 to stockholders of record as of the close of business on February 6, 2023. The declaration and payment of any future dividends will be at the discretion of our Board of Directors. Preferred Stock The Company has authorized 5.0 million shares of preferred stock (of which none were issued or outstanding at December 25, 2022 or December 26, 2021, respectively). On May 11, 2021, the Company entered into a Share Repurchase Agreement with certain funds affiliated with, or managed by, Starboard Value LP (collectively, “Starboard”), pursuant to which (i) the Company repurchased from Starboard 78,387 shares of the Series B Convertible Preferred Stock, par value $ 0.01 per share, of the Company (“Series B Preferred Stock”) and (ii) Starboard converted the remaining 171,613 shares of Series B Preferred Stock that it owned into 3,458,360 shares of the Company’s common stock pursuant to the terms of the Certificate of Designation of the Series B Preferred Stock. On June 3, 2021, the Company entered into agreements with certain franchisee investors to repurchase 1,000 shares of the outstanding Series B Preferred Stock and convert the remaining 1,530 shares of Series B Preferred Stock into 30,769 shares of common stock. The Company paid Starboard and the franchisee investors aggregate one-time cash payments of $ 188.6 million for the repurchase and conversion of all of the outstanding shares of Series B Preferred Stock. The excess of the cash payment over the carrying value of the respective Series B Preferred Stock redeemed resulted in $ 109.9 million of dividends on redemption of Series B Preferred Stock in the Consolidated Statement of Operations, which reduced net income attributable to common stockholders and also reduced diluted earnings per share by $ 3.10 for the year ended December 26, 2021. On August 3, 2021, the Company filed a Certificate of Elimination (the “Certificate of Elimination”) with the Secretary of State of the State of Delaware to eliminate the Series B Preferred Stock. Effective upon filing, the Certificate of Elimination eliminated from the Company’s Amended and Restated Certificate of Incorporation all matters set forth in the Certificate of Designation with respect to the Series B Preferred Stock. The shares that were designated to such series were returned to the status of authorized but unissued shares of preferred stock, par value $ 0.01 per share, of the Company, without designation as to series. As a result of the repurchase and conversion, there were no shares of Series B Preferred Stock authorized or outstanding at December 25, 2022 or December 26, 2021. The following table summarizes changes to our Series B Preferred Stock in 2021 (in thousands): Balance at December 27, 2020 $ 251,901 Accretion 629 Redemption ( 252,530 ) Balance at December 26, 2021 $ — Dividends on Series B Preferred Stock The Company paid common stock “pass-through” dividends on an as-converted basis to Series B Preferred Stockholders of $ 1.1 million and $ 4.6 million and preferred dividends on the Series B Preferred Stock of $ 3.0 million and $ 9.1 million, in 2021 and 2020, respectively. The Company also paid $ 1.5 million of common stock deemed dividend distributions in connection with the repurchase and conversion of the Series B Preferred Stock in 2021. 7. Earnings per Share We compute earnings per share using the two-class method. The two-class method requires an earnings allocation formula that determines earnings per share for common shareholders and participating security holders according to dividends declared and participating rights in undistributed earnings. The shares of Series B Preferred Stock, which were repurchased by the Company or converted into shares of common stock during the second quarter of 2021, and time-based restricted stock awards are participating securities because holders of such shares have non-forfeitable dividend rights and participate in undistributed earnings with common stock. Under the two-class method, total dividends provided to the holders of 67 Table of Contents participating securities and undistributed earnings allocated to participating securities, are subtracted from net income attributable to the Company in determining net income attributable to common shareholders. Additionally, any accretion to the redemption value for the Series B Preferred Stock or cash payments in excess of their respective carrying values upon redemption was treated as a deemed dividend in the two-class earnings per share calculation. Basic earnings per common share are computed by dividing net income attributable to common shareholders by the weighted-average common shares outstanding. Diluted earnings per common share are computed by dividing the net income attributable to common shareholders by the diluted weighted average common shares outstanding. Diluted weighted average common shares outstanding consist of basic weighted average common shares outstanding plus weighted average awards outstanding under our equity compensation plans, which are dilutive securities. The calculations of basic earnings per common share and diluted earnings per common share for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 are as follows (in thousands, except per share data): 2022 2021 2020 Basic earnings per common share Net income attributable to the Company $ 67,772 $ 120,016 $ 57,932 Dividends on redemption of Series B Convertible Preferred Stock — ( 109,852 ) — Dividends paid to participating securities ( 306 ) ( 6,091 ) ( 14,059 ) Net income attributable to participating securities ( 104 ) — ( 2,136 ) Net income attributable to common shareholders $ 67,362 $ 4,073 $ 41,737 Basic weighted average common shares outstanding 35,497 35,007 32,421 Basic earnings per common share $ 1.90 $ 0.12 $ 1.29 Diluted earnings per common share Net income attributable to common shareholders $ 67,362 $ 4,073 $ 41,737 Weighted average common shares outstanding 35,497 35,007 32,421 Dilutive effect of outstanding equity awards (a) 220 330 296 Diluted weighted average common shares outstanding (b) 35,717 35,337 32,717 Diluted earnings per common share $ 1.89 $ 0.12 $ 1.28 ______________________________ (a) Shares subject to options to purchase common stock with an exercise price greater than the average market price for the year were not included in the computation of diluted earnings per common share because the effect would have been antidilutive. The weighted average number of shares subject to antidilutive options was 100,000 in 2020 ( none in 2022 or 2021). (b) The Company had 252,500 shares of Series B Preferred Stock outstanding as of December 27, 2020 ( none as of December 25, 2022 or December 26, 2021). For the fully diluted calculation, the Series B Preferred Stock dividends were added back to net income attributable to common shareholders. The Company then applied the if-converted method to calculate dilution on the Series B Preferred Stock, which resulted in 5.0 million additional common shares. This calculation was anti-dilutive in 2020 and as such was excluded. See “Note 20. Equity Compensation” for additional information regarding our equity awards, including restricted stock. 8. Fair Value Measurements and Disclosures The Company determines the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following three categories: • Level 1: Quoted market prices in active markets for identical assets or liabilities. • Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. • Level 3: Unobservable inputs that are not corroborated by market data. 68 Table of Contents Fair value is a market-based measurement, not an entity specific measurement. Considerable judgment is required to interpret market data to estimate fair value; accordingly, the fair values presented do not necessarily indicate what the Company or its debtholders could realize in a current market exchange. Our financial assets and liabilities that were measured at fair value on a recurring basis as of December 25, 2022 and December 26, 2021 are as follows: Carrying Value Fair Value Measurements (in thousands) Level 1 Level 2 Level 3 December 25, 2022 Financial assets: Cash surrender value of life insurance policies (a) $ 30,120 $ 30,120 $ — $ — Interest rate swaps (b) $ 986 $ — $ 986 $ — December 26, 2021 Financial assets: Cash surrender value of life insurance policies (a) $ 41,904 $ 41,904 $ — $ — Financial liabilities: Interest rate swaps (b) $ 5,536 $ — $ 5,536 $ — ______________________________ (a) Represents life insurance policies held in our non-qualified deferred compensation plan. See “Note 21. Employee Benefit Plans” for additional information. (b) The fair value of our interest rate swaps is based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swaps, as well as considering published discount factors, and projected London Interbank Offered Rates (“LIBOR”). There were no transfers among levels within the fair value hierarchy during fiscal 2022 or 2021. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash and cash equivalents, accounts receivable, net of allowances, and accounts payable. The carrying value of notes receivable, net of allowances, also approximates fair value. The Company’s revolving credit facilities and term debt under the Company’s credit agreement approximate carrying value due to their variable market-based interest rate. The Company’s 3.875 % senior notes are classified as a Level 2 fair value measurement since the Company estimates the fair value by using recent trading transactions, and have the following estimated fair values and carrying values (excluding the impact of unamortized debt issuance costs) as of December 25, 2022 and December 26, 2021: December 25, 2022 December 26, 2021 (in thousands) Carrying Value Fair Value Carrying Value Fair Value 3.875 % Senior Notes $ 400,000 $ 339,500 $ 400,000 $ 396,000 9. Noncontrolling Interests As of December 25, 2022, the Company had three joint venture arrangements comprising 98 restaurants as compared to four joint venture arrangements comprising 188 restaurants at December 26, 2021. As further described in “Note 22. Divestitures,” the Company divested its 51 percent interest in one joint venture that owned 90 restaurants in the second quarter of 2022. 69 Table of Contents Net income attributable to these joint ventures for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 was as follows (in thousands): 2022 2021 2020 Papa John’s International, Inc. $ 3,136 $ 8,457 $ 5,654 Noncontrolling interests 1,577 4,939 2,682 Total net income $ 4,713 $ 13,396 $ 8,336 The following summarizes changes in our redeemable noncontrolling interests in 2022 and 2021 (in thousands): Balance at December 27, 2020 $ 6,474 Net income 2,609 Distributions ( 3,585 ) Balance at December 26, 2021 $ 5,498 Net income 574 Distributions ( 4,855 ) Balance at December 25, 2022 $ 1,217 10. Allowance for Credit Losses The Company adopted ASU 2016-13, “ Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ,” (“ASU 2016-13”) as of December 30, 2019 (the first day of fiscal 2020) under the modified retrospective transition method. Topic 326 requires measurement and recognition of expected versus incurred losses for financial assets held. Financial instruments subject to Topic 326 include trade accounts receivable, notes receivable and interest receivable (classified as Other assets in the Consolidated Balance Sheets) from franchisees. The impact of the adoption was not material to our consolidated financial statements. Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors. Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer. Account and note balances are charged off against the allowance after recovery efforts have ceased. The following table summarizes changes in our allowances for credit losses for accounts receivable and notes receivable: (In thousands) Accounts Receivable Notes Receivable Balance at December 27, 2020 $ 3,622 $ 3,211 Current period provision (benefit) for expected credit losses 16 ( 583 ) Write-offs charged against the allowance ( 1,274 ) ( 843 ) Recoveries collected — ( 285 ) Balance at December 26, 2021 $ 2,364 $ 1,500 Current period provision for expected credit losses (a) 6,474 14,066 Write-offs charged against the allowance ( 2,120 ) ( 1,042 ) Recoveries collected — ( 25 ) Balance at December 25, 2022 $ 6,718 $ 14,499 ______________________________ (a) The Company recorded $ 14.6 million of one-time, non-cash reserves in the first quarter of 2022 for certain accounts receivable and notes receivable primarily associated with a master franchisee with operations principally in Russia. The Company recorded $ 3.7 million of one-time, non-cash reserves in the second half of 2022 for certain accounts receivable and notes receivable primarily associated with the termination of significant franchisees in the UK. 70 Table of Contents 11. Goodwill The following summarizes changes in the Company’s goodwill, by reportable segment (in thousands): Domestic Company- owned Restaurants International (a) All Others Total Balance at December 27, 2020 $ 64,254 $ 16,101 $ 436 $ 80,791 Foreign currency adjustments — ( 159 ) — ( 159 ) Balance at December 26, 2021 $ 64,254 $ 15,942 $ 436 $ 80,632 Acquisitions (b) 1,161 — — 1,161 Divestitures (c) ( 9,908 ) — — ( 9,908 ) Foreign currency adjustments — ( 1,269 ) — ( 1,269 ) Balance at December 25, 2022 $ 55,507 $ 14,673 $ 436 $ 70,616 ______________________________ (a) The International goodwill balances for all years presented are net of accumulated impairment of $ 2.3 million associated with our PJUK reporting unit. (b) Goodwill from acquisitions was $ 1.2 million in 2022, due to acquisitions of two stores. (c) In conjunction with the refranchising of our 51.0 % ownership interest in a 90 -restaurant consolidated joint venture in Texas, goodwill was allocated to the disposal group based on relative fair value within the Domestic Company-owned restaurants reporting group. See “Note 22. Divestitures” for further information. 12. Debt Long-term debt, net consists of the following (in thousands): December 25, 2022 December 26, 2021 Senior notes $ 400,000 $ 400,000 Revolving facilities 205,000 90,000 Outstanding debt 605,000 490,000 Unamortized debt issuance costs ( 7,931 ) ( 9,270 ) Total long-term debt, net $ 597,069 $ 480,730 Senior Notes On September 14, 2021, the Company issued $ 400.0 million of 3.875 % senior notes (the “Notes”) which will mature on September 15, 2029. The Notes are guaranteed by each of the Company’s existing and future Domestic restricted subsidiaries that are guarantors or borrowers under the Amended Credit Agreement (as defined below) or other certain indebtedness. The Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), or to persons outside the United States under Regulation S of the Securities Act. Interest on the Notes is payable semi-annually in cash in arrears on March 15 and September 15 of each year, beginning March 15, 2022, at a fixed interest rate of 3.875 % per annum. In connection with the Notes, the Company recorded $ 7.1 million of debt issuance costs, which are being amortized into net interest expense over the term of the Notes. The net proceeds from the Notes, together with borrowings under the Amended Credit Agreement (as defined below), were used to repay outstanding revolver and term loan borrowings under the Company’s Previous Credit Agreement (as defined below). The Company may redeem the Notes, in whole or in part, at any time on or after September 15, 2024 at established redemption prices ranging from 97 to 194 basis points depending on when the Notes are redeemed. At any time prior to September 15, 2024, the Company may also redeem up to 40 % of the Notes with net cash proceeds of certain equity offerings at a redemption price equal to 103.875 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, excluding the redemption date. In addition, at any time prior to September 15, 2024, the Company may 71 Table of Contents redeem the Notes, in whole or in part, at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest and an applicable “make-whole” premium. The Notes also contain customary redemption provisions related to asset sales and certain change of control transactions. The Indenture governing the Notes contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Notes and certain provisions related to bankruptcy events. The Indenture also contains customary negative covenants. Amended Credit Agreement Concurrently with the issuance of the Notes, the Company entered into an amended and restated credit agreement (the “Amended Credit Agreement”) replacing the previous credit agreement (“Previous Credit Agreement”). The Amended Credit Agreement provides for a senior secured revolving credit facility in an aggregate available principal amount of $ 600.0 million (the “PJI Revolving Facility”), of which up to $ 40.0 million is available as swingline loans and up to $ 80.0 million is available as letters of credit. The PJI Revolving Facility will mature on September 14, 2026. In connection with the Amended Credit Agreement, the Company recorded $ 2.1 million of debt issuance costs, which are being amortized into net interest expense over the term of the Amended Credit Agreement. The remaining availability under the PJI Revolving Facility was $ 395.0 million as of December 25, 2022. Up to $ 50.0 million of the PJI Revolving Facility may be advanced in certain agreed foreign currencies, including Euros, Pounds Sterling, Canadian Dollars, Japanese Yen, and Mexican Pesos. Additionally, the Amended Credit Agreement includes an accordion feature allowing for a future increase of the PJI Revolving Facility and/or incremental term loans in an aggregate amount of up to $ 500.0 million, subject to certain conditions, including obtaining commitments from one or more new or existing lenders to provide such increased amounts and ongoing compliance with financial covenants. Loans under the PJI Revolving Facility accrue interest at a per annum rate equal to, at the Company’s election, either a LIBOR rate plus a margin ranging from 1.25 % to 2.00 % or a base rate (generally determined according to the greater of a prime rate, federal funds rate plus 0.50 %, or a LIBOR rate plus 1.00 %) plus a margin ranging from 0.25 % to 1.00 %. In each case, the actual margin is determined according to a ratio of the Company’s total indebtedness to an earnings calculation, Consolidated EBITDA (as defined in our credit agreement), for the then most recently ended four quarter period (the “Leverage Ratio”). An unused commitment fee ranging from 18 to 30 basis points per annum, determined according to the Leverage Ratio, applies to the underutilized commitments under the PJI Revolving Facility. Loans outstanding under the PJI Revolving Facility may be prepaid at any time without premium or penalty, subject to customary breakage costs in the case of borrowings for which a LIBOR rate election is in effect. The Amended Credit Agreement also contain provisions specifying alternative interest rate calculations to be used at such time as LIBOR ceases to be available as a benchmark for establishing the interest rate on floating interest rate borrowings. The Amended Credit Agreement contains customary affirmative and negative covenants that, among other things, require customary reporting obligations, and restrict, subject to certain exceptions, the incurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates. The Company is subject to the following financial covenants: (1) a maximum Leverage Ratio of 5.25 to 1.00, subject to the Company’s election to increase the maximum Leverage Ratio by 0.50 to 1.00 in connection with material acquisitions if the Company satisfies certain requirements, and (2) a minimum interest coverage ratio defined as Consolidated EBITDA (as defined in our credit agreement) plus consolidated rental expense to consolidated interest expense plus consolidated rental expense of 2.00 to 1.00. We were in compliance with these financial covenants at December 25, 2022. Obligations under the Amended Credit Agreement are guaranteed by certain direct and indirect material Domestic subsidiaries of the Company (the “Guarantors”) and are secured by a security interest in substantially all of the capital stock and equity interests of the Company’s and the Guarantors’ Domestic and first tier material foreign subsidiaries. The Amended Credit Agreement contains customary events of default including, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, judgment defaults, and the occurrence of certain change of control events. The occurrence of an event of default may result in the termination of the PJI Revolving Facility, acceleration of repayment obligations and the exercise of remedies by the Lenders with respect to the Guarantors. PJMF Revolving Facility PJMF 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. The PJMF Revolving Facility is 72 Table of Contents secured by substantially all assets of PJMF. The PJMF Revolving Facility matures on September 30, 2023, but is subject to annual amendments. The borrowings under the PJMF Revolving Facility accrue interest at a variable rate of the one-month LIBOR plu s 1.60 %. There was no debt outstanding under the PJMF Revolving Facility as of December 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. Derivative Financial Instruments As of December 25, 2022, we have the following interest rate swap agreements with a total notional value of $ 125.0 million : Effective Dates Floating Rate Debt Fixed Rates April 30, 2018 through April 30, 2023 $ 55 million 2.33 % April 30, 2018 through April 30, 2023 $ 35 million 2.36 % April 30, 2018 through April 30, 2023 $ 35 million 2.34 % In 2021, ou r interest rate swaps were de-designated as cash flow hedges following the issuance of the Notes and remained undesignated as hedges through June 26, 2022. For these de-designated hedges, the portion of gains or losses on the derivative instruments previously recognized in AOCL will be reclassified into earnings as adjustments to interest expense on a straight-line basis over the remaining life of the originally hedged transactions. As of June 27, 2022, the interest rate swaps were re-designated as cash flow hedges to provide a hedge against changes in variable rate cash flows regarding fluctuations in the LIBOR rate utilized on the revolving credit facility. Therefore, beginning in the third quarter of 2022, our interest rate swaps are accounted for utilizing cash flow hedge accounting treatment. The interest rate swaps are marked to market at each reporting date and any unrealized gains or losses are included in AOCL and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings. We recognized income of $ 4.8 million ($ 3.7 million after tax) in 2022 and $ 6.8 million ($ 5.3 million after tax) in 2021, and a loss of $ 7.5 million ($ 5.8 million after tax) in 2020 in other comprehensive income (loss) for the net change in the fair value of our interest rate swaps. The following table provides information on the location and amounts of our swaps in the accompanying Consolidated Financial Statements (in thousands): Interest Rate Swap Derivatives Balance Sheet Location Fair Value December 25, 2022 Fair Value December 26, 2021 Other current and long-term assets $ 986 $ — Other current and long-term liabilities $ — $ 5,536 As of December 25, 2022, the portion of the aggregate $ 1.0 million interest rate swap liability that would be reclassified into interest expense during the next twelve months approximates $ 1.0 million. 73 Table of Contents The effect of derivative instruments on the accompanying Consolidated Financial Statements is as follows (in thousands): Derivatives - Cash Flow Hedging Relationships Amount of Gain or (Loss) Recognized in AOCL on Derivative Location of (Loss) or Gain Reclassified from AOCL into Income Amount of (Loss) or Gain Reclassified from AOCL into Income Total Interest Expense on Consolidated Statements of Operations Interest rate swaps: 2022 $ 3,663 Interest expense $ ( 2,384 ) $ ( 26,653 ) 2021 $ 5,273 Interest expense $ ( 5,965 ) $ ( 19,205 ) 2020 $ ( 5,788 ) Interest expense $ ( 5,068 ) $ ( 17,022 ) Interest paid, including payments made or received under the swaps, was $ 24.4 million , $ 13.4 million and $ 15.8 million in fiscal 2022, 2021 and 2020, respectively. 13. Property and Equipment, Net Property and equipment, net consists of the following (in thousands): December 25, 2022 December 26, 2021 Land $ 31,679 $ 31,032 Buildings and improvements 91,462 91,508 Leasehold improvements 136,095 138,016 Equipment and other 498,792 465,813 Construction in progress 32,265 23,725 Total property and equipment 790,293 750,094 Accumulated depreciation and amortization ( 540,500 ) ( 526,238 ) Property and equipment, net $ 249,793 $ 223,856 14. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (in thousands): December 25, 2022 December 26, 2021 Marketing $ 36,858 $ 59,248 Insurance reserves, current 29,676 34,661 Salaries, benefits and bonuses 21,934 48,728 Legal settlement accrual (a) 15,000 — Purchases 13,789 13,319 Other 25,278 34,160 Total $ 142,535 $ 190,116 ______________________________ (a) See “Note 19. Litigation, Commitments and Contingencies” for additional information. 74 Table of Contents 15. Other Long-term Liabilities Other long-term liabilities consist of the following (in thousands): December 25, 2022 December 26, 2021 Insurance reserves $ 37,624 $ 53,551 Deferred compensation plan (a) 28,285 36,170 Other 2,408 3,433 Total $ 68,317 $ 93,154 ______________________________ (a) See “Note 21. Employee Benefit Plans” for additional information on our non-qualified deferred compensation plan. 16. Strategic Corporate Reorganization for Long-term Growth On September 17, 2020, we announced plans to open an office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlanta, which opened in October 2021. The space is designed to drive continued menu innovation and optimize integration across marketing, communications, customer experience, operations, human resources, diversity, equity and inclusion, financial planning and analysis, investor relations and development functions. Our information technology, finance, supply chain, and legal teams continue to operate in our Louisville, Kentucky office, which remains critical to our success. We also maintain an office outside of London, UK, where our International operations are managed. Employees whose positions were relocated to the new Atlanta office were either offered an opportunity to continue with the organization or were offered a severance package. As a result, we incurred one-time corporate reorganization costs of approximately $ 13.1 million and $ 6.0 million through December 26, 2021 and December 27, 2020, respectively, as detailed in the table below (in thousands). There were no additional corporate reorganization costs incurred during the year ended December 25, 2022. December 26, 2021 December 27, 2020 Employee severance and other employee transition costs $ 5,429 $ 4,775 Recruiting and professional fees 3,815 1,598 Relocation costs 3,100 267 Other costs 750 285 Total strategic corporate reorganization costs 13,094 6,925 Stock-based compensation forfeitures on unvested awards — ( 940 ) Total strategic corporate reorganization costs, net of stock forfeitures $ 13,094 $ 5,985 We record severance as a one-time termination benefit and recognize the expense ratably over the employees’ required future service period. All other costs, including employee transition costs, recruitment and relocation costs, and third-party costs, are recognized in the period incurred. All strategic corporate reorganization costs have been recorded in General and administrative expenses on the Consolidated Statement of Operations. As of December 26, 2021, the estimate of unpaid strategic corporate reorganization costs was included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets. The following tables summarize the activity for the years ended December 25, 2022 and December 26, 2021, respectively (in thousands): Balance at December 26, 2021 Charges Payments Balance at December 25, 2022 Employee severance and other employee transition costs $ 2,122 $ — $ ( 2,122 ) $ — Recruiting and professional fees 92 — ( 92 ) — Relocation costs 740 — ( 740 ) — Total strategic corporate reorganization liability $ 2,954 $ — $ ( 2,954 ) $ — 75 Table of Contents Balance at December 27, 2020 Charges Payments Balance at December 26, 2021 Employee severance and other employee transition costs $ 4,615 $ 5,429 $ ( 7,922 ) $ 2,122 Recruiting and professional fees 145 3,815 ( 3,868 ) 92 Relocation costs 101 3,100 ( 2,461 ) 740 Other costs — 750 ( 750 ) — Total strategic corporate reorganization liability $ 4,861 $ 13,094 $ ( 15,001 ) $ 2,954 17. Income Taxes The following table presents the domestic and foreign components of income before income taxes for 2022, 2021 and 2020 (in thousands): 2022 2021 2020 Domestic income $ 65,434 $ 115,221 $ 48,616 Foreign income 18,335 35,727 26,746 Total income $ 83,769 $ 150,948 $ 75,362 Included within the foreign income before income taxes above is $ 23.6 million, $ 22.4 million, and $ 14.7 million of foreign sourced income subject to foreign withholding taxes in 2022, 2021, and 2020, respectively. A summary of the expense (benefit) for income tax follows (in thousands): 2022 2021 2020 Current: Federal $ 3,496 $ 10,591 $ 16,400 Foreign 5,335 8,812 6,047 State and local 2,791 2,837 1,569 Deferred: Federal 4,243 2,430 ( 7,375 ) Foreign ( 1,152 ) 769 357 State and local ( 293 ) 554 ( 2,250 ) Total income tax expense $ 14,420 $ 25,993 $ 14,748 76 Table of Contents The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 is as follows in both dollars and as a percentage of income before income taxes (dollars in thousands): 2022 2021 2020 Income Tax Expense (Benefit) Income Tax Rate Income Tax Expense (Benefit) Income Tax Rate Income Tax Expense (Benefit) Income Tax Rate Tax at U.S. federal statutory rate $ 17,591 21.0 % $ 31,699 21.0 % $ 15,826 21.0 % State and local income taxes 1,422 1.7 % 2,317 1.5 % 1,149 1.5 % Foreign income taxes 4,672 5.6 % 9,144 6.1 % 6,463 8.6 % Income of consolidated partnerships attributable to noncontrolling interests ( 355 ) ( 0.4 ) % ( 1,110 ) ( 0.7 ) % ( 603 ) ( 0.8 ) % Non-qualified deferred compensation plan expense (income) 1,278 1.5 % ( 911 ) ( 0.6 ) % ( 898 ) ( 1.2 ) % Excess tax (benefits) on equity awards ( 3,902 ) ( 4.7 ) % ( 3,697 ) ( 2.5 ) % ( 2,029 ) ( 2.7 ) % Tax credits ( 8,981 ) ( 10.7 ) % ( 8,830 ) ( 5.9 ) % ( 6,002 ) ( 8.0 ) % Non-deductible executive compensation 2,450 2.9 % 2,636 1.7 % 1,314 1.7 % Foreign-derived intangible income ( 1,452 ) ( 1.7 ) % ( 1,519 ) ( 1.0 ) % ( 924 ) ( 1.2 ) % US deferred offset on foreign deferreds 1,183 1.4 % 238 0.2 % — — % Other 514 0.6 % ( 3,974 ) ( 2.6 ) % 452 0.6 % Total $ 14,420 17.2 % $ 25,993 17.2 % $ 14,748 19.5 % Significant deferred tax assets (liabilities) follow (in thousands): December 25, 2022 December 26, 2021 Accrued liabilities $ 17,424 $ 14,802 Accrued bonuses 351 6,404 Other liabilities and asset reserves 14,607 14,583 Equity awards 7,905 7,323 Lease liabilities 45,646 41,999 Other 2,904 2,712 Net operating losses 11,738 8,127 Foreign tax credit carryforwards 20,198 18,611 Total deferred tax assets 120,773 114,561 Valuation allowances ( 32,052 ) ( 28,598 ) Total deferred tax assets, net of valuation allowances 88,721 85,963 Deferred expenses ( 5,756 ) ( 7,087 ) Accelerated depreciation ( 31,098 ) ( 23,858 ) Goodwill ( 7,690 ) ( 10,052 ) Right-of-use assets ( 41,892 ) ( 39,814 ) Other ( 365 ) ( 254 ) Total deferred tax liabilities ( 86,801 ) ( 81,065 ) Net deferred tax assets $ 1,920 $ 4,898 77 Table of Contents The following table summarizes changes in the Company’s valuation allowances on deferred tax (in thousands): Balance at December 27, 2020 $ 22,972 Charged to costs and expenses 5,658 Other ( 32 ) Balance at December 26, 2021 $ 28,598 Charged to costs and expenses 3,454 Balance at December 25, 2022 $ 32,052 The Company had approximately $ 10.2 million and $ 8.8 million of state deferred tax assets primarily related to state net operating loss carryforwards as of December 25, 2022 and December 26, 2021, respectively. Our ability to utilize these state deferred tax assets is dependent on our ability to generate earnings in future years in the respective state jurisdictions. The Company provided a full valuation allowance of $ 10.2 million and $ 8.8 million for these state deferred tax assets as we believe realization based on the more-likely-than-not criteria has not been met as of December 25, 2022 and December 26, 2021, respectively. The Company had approximately $ 2.0 million and $ 1.4 million of state deferred tax assets related to state income tax credit carryforwards as of December 25, 2022 and December 26, 2021, respectively. Our ability to fully utilize these deferred tax assets related to state income tax credit carryforwards is dependent on our ability to generate earnings in future years in the respective state jurisdictions. In 2022, the Company provided a partial valuation allowance of $ 0.5 million against these state deferred tax assets as we believe that a portion of these state income tax credit carryforwards would not be realizable before expiration. The Company had approximately $ 8.7 million and $ 4.5 million of foreign net operating loss and capital loss carryovers as of December 25, 2022 and December 26, 2021, respectively. The Company had approximately $ 1.2 million of valuation allowances primarily related to the foreign capital losses at both December 25, 2022 and December 26, 2021. A substantial majority of our foreign net operating losses do not have an expiration date. In addition, the Company had approximately $ 20.2 million and $ 18.6 million in foreign tax credit carryforwards as of December 25, 2022 and December 26, 2021, respectively, that expire ten years from inception in years 2026 through 2032. Our ability to utilize these foreign tax credit carryforwards is dependent on our ability to generate foreign earnings in future years sufficient to claim foreign tax credits in excess of foreign taxes paid in those years. The Company provided a full valuation allowance of $ 20.2 million and $ 18.6 million for these foreign tax credit carryforwards as we believe realization based on the more-likely-than-not criteria has not been met as of December 25, 2022 and December 26, 2021, respectively. Cash for income taxes paid were $ 11.7 million in 2022, $ 32.6 million in 2021 and $ 19.3 million in 2020. The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company, with few exceptions, is no longer subject to U.S. federal, state and local, or non-US income tax examinations by tax authorities for years before 2018. The Company is currently undergoing examinations by various tax authorities. The Company anticipates that the finalization of these current examinations and other issues could result in a decrease in the liability for unrecognized tax benefits (and a decrease of income tax expense) of approximately $ 68,000 during the next 12 months. The Company had $ 1.2 million of unrecognized tax benefits at December 25, 2022 which, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending liability for unrecognized tax benefits excluding interest and penalties is as follows, which is recorded in Other long-term liabilities in the Consolidated Balance Sheets (in thousands): Balance at December 27, 2020 $ 1,030 Additions for tax positions of prior years 81 Reductions for tax positions of prior years ( 215 ) Balance at December 26, 2021 $ 896 Additions for tax positions of prior years 331 Reductions for tax positions of prior years ( 65 ) Balance at December 25, 2022 $ 1,162 78 Table of Contents The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of income tax expense. The Company has accrued approximately $ 146,000 and $ 132,000 for the payment of interest and penalties as of December 25, 2022 and December 26, 2021, respectively. 18. Related Party Transactions On March 21, 2019, Shaquille O’Neal was appointed to our Board of Directors. On June 11, 2019, PJMF entered into an Endorsement Agreement (the “Original Endorsement Agreement”), effective March 15, 2019, with ABG-Shaq, LLC (“ABG-Shaq”), an entity affiliated with Mr. O’Neal, for the personal services of Mr. O’Neal. Pursuant to the Original Endorsement Agreement, the Company received the right and license to use Mr. O’Neal’s name, nickname, initials, autograph, voice, video or film portrayals, photograph, likeness and certain other intellectual property rights (individually and collectively, the “Personality Rights”), in each case, solely as approved by ABG-Shaq, in connection with the advertising, promotion and sale of Papa John’s-branded products. Mr. O’Neal also agreed to provide brand ambassador services related to appearances, social media and public relations matters, and to collaborate with us to develop one or more co-branded products using the Personality Rights. Mr. O’Neal and the Company developed a co-branded extra-large pizza product using the Personality Rights under an amendment to the Original Endorsement Agreement signed July 27, 2020 (the “First Amendment”). As consideration for the rights and services granted under the Original Endorsement Agreement, the Company agreed to pay to ABG-Shaq aggregate cash payments of $ 4.1 million over the three years of the Original Endorsement Agreement. The Company also paid expenses related to the marketing and personal services provided by Mr. O’Neal. In addition, the Company agreed to grant 87,136 restricted stock units to Mr. O’Neal (as agent of ABG) under our 2018 Omnibus Incentive Plan. On July 29, 2021, the Company and PJMF entered into Amendment No. 2 (the “ Second Amendment”) to the Original Endorsement Agreement with ABG-Shaq. Pursuant to the Second Amendment, the Company was granted the ability to use the Personality Rights for a limited time to promote, advertise, and sell our co-branded extra-large pizza developed under the First Amendment. ABG-Shaq did not receive any additional royalty fees from the Company beyond the cash payment already contemplated under the Original Endorsement Agreement under the Amendment. In addition, the Company donated one U.S. dollar for each unit of the pizza sold in the United States and one Canadian dollar for each unit sold in Canada to The Papa John’s Foundation for Building Community. On March 15, 2022, the Original Endorsement Agreement expired by its terms. On April 10, 2022, the Company and PJMF entered into a new Endorsement Agreement (the “New Endorsement Agreement”), effective March 15, 2022, with ABG-Shaq, LLC (“ABG-Shaq”), to replace the Original Endorsement Agreement. The terms of the New Endorsement Agreement are substantially similar to the Original Endorsement Agreement. As consideration for the rights and services granted under the New Endorsement Agreement, the Company and PJMF agreed to pay to ABG-Shaq aggregate cash payments of $ 5.6 million over the three years of the New Endorsement Agreement. The Company and PJMF will also pay ABG-Shaq a royalty fee for the co-branded pizza product if the total amount of royalties in a given contract year (calculated as $ 0.20 per co-branded pizza sold) exceeds the contractual cash payment for that year, in which case the amount of the royalty payment will be the excess of the royalties over the cash payment amount. The Company did not pay ABG-Shaq any royalties in 2022 for the co-branded pizza promotion. The Company and PJMF will also pay expenses related to the marketing and personal services provided by Mr. O’Neal. In addition, the Company agreed to grant 55,898 restricted stock units (the “RSUs”) to Mr. O’Neal (as agent of ABG) under the Company’s 2018 Omnibus Incentive Plan. The RSUs will vest into an equivalent number of shares of the Company’s common stock according to the following vesting schedule: ● 33 % ( 18,632 ) of the RSUs will vest on April 12, 2023; ● 33 % ( 18,632 ) of the RSUs will vest on March 15, 2024; and ● 33 % ( 18,634 ) of the RSUs will vest on March 15, 2025. The initial term of the New Endorsement Agreement ends on March 15, 2025, with an option for a one-year extension upon the parties’ mutual agreement. The New Endorsement Agreement also includes customary exclusivity, termination and indemnification clauses. 79 Table of Contents 19. Litigation, Commitments and Contingencies Litigation The Company is involved in a number of lawsuits, claims, investigations and proceedings, including those specifically identified below, consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with ASC 450, “ Contingencies ,” the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Durling et al v. Papa John’s International, Inc., is a conditionally certified collective action filed in May 2016 in the United States District Court for the Southern District of New York, alleging that corporate restaurant delivery drivers were not properly reimbursed for vehicle mileage and expenses in accordance with the Fair Labor Standards Act. In July 2018, the District Court granted a motion to certify a conditional corporate collective class and the opt-in notice process has been completed. As of the close of the opt-in period on October 29, 2018, 9,571 drivers opted into the collective class. On September 30, 2022, the parties reached a settlement in principle to resolve the case. Pursuant to the terms of the proposed settlement, in exchange for the Company’s payment of a total aggregate settlement amount of no more than $ 20.0 million subject to a claims-made process, all claims in the action will be dismissed, the litigation will be terminated, and the Company will receive a release. The proposed settlement also includes resolution of a companion case, Hubbard, et al. v. Papa John’s International, Inc. , pending in the United States District Court for the Western District of Kentucky. The proposed settlement is subject to a claims-made process whereby unclaimed funds revert to the Company, and the Company is only responsible for payments to class and collective action members who timely submit a claim form. Although the return rate for timely claims is unknown and not within the Company’s control, the Company estimates its actual exposure resulting from the settlement to be approximately $ 10.0 million and this amount was recorded in General and administrative expenses in the Consolidated Statements of Operations. On December 19, 2022, the District Court granted preliminary approval of the proposed settlement; however, the settlement remains subject to final approval by the District Court and contains certain customary contingencies. Subsequent to year end, the Company remitted $ 5.0 million to the settlement administrator as partial funding of the settlement in accordance with the terms of the applicable settlement agreement. The Company continues to deny any liability or wrongdoing in this matter. In re Papa John’s Employee & Franchise Employee Antitrust Litigation is a putative class action filed in December 2018 in the United States District Court for the Western District of Kentucky. The suit alleges that the “no-poaching” provision previously contained in the Company’s franchise agreement constituted an unlawful agreement or conspiracy in restraint of trade and commerce in violation of Section 1 of the Sherman Antitrust Act. On April 14, 2022, the parties reached a settlement in principle to resolve the case. Pursuant to the terms of the proposed settlement, in exchange for the Company’s payment of a total aggregate settlement amount of $ 5.0 million and other non-monetary consideration, all claims in the action will be dismissed, the litigation will be terminated, and the Company will receive a release. The settlement amount was recorded in General and administrative expenses in the Consolidated Statements of Operations. The proposed settlement is subject to approval by the District Court and contains certain customary contingencies. The Company continues to deny any liability or wrongdoing in this matter. 20. Equity Compensation We award stock options, time-based restricted stock and performance-based restricted stock units from time to time under the Papa John’s International, Inc. 2018 Omnibus Incentive Plan. There were approximately 3.6 million shares of common stock authorized for issuance and remaining available under the 2018 Omnibus Incentive Plan as of December 25, 2022, which includes 5.9 million shares transferred from the Papa John’s International 2011 Omnibus Incentive Plan. We recorded stock-based employee compensation expense of $ 18.4 million in 2022, $ 16.9 million in 2021 and $ 16.3 million in 2020. At December 25, 2022, there was $ 22.2 million of unrecognized compensation cost related to nonvested awards, of which the Company expects to recognize $ 14.6 million in 2023, $ 6.5 million in 2024 and $ 1.1 million in 2025. Stock Options Options exercised, which were issued from authorized shares, included 82,000 shares in 2022, 212,000 shares in 2021 and 541,000 shares in 2020. The total intrinsic value of the options exercised during 2022, 2021 and 2020 was $ 3.4 million, $ 10.1 million and $ 13.8 million, respectively. 80 Table of Contents There were no options granted in 2022, 2021 or 2020. Information pertaining to option activity during 2022 is as follows (number of options and aggregate intrinsic value in thousands): Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Outstanding at December 26, 2021 319 $ 54.65 Exercised ( 82 ) 49.48 Cancelled ( 2 ) 45.29 Outstanding at December 25, 2022 235 $ 56.53 4.47 $ 6,452 Exercisable at December 25, 2022 235 $ 56.53 4.47 $ 6,452 Restricted Stock We granted shares of restricted stock that are time-based and generally vest in equal installments over three years ( 165,000 in 2022, 130,000 in 2021 and 207,000 in 2020). Upon vesting, the shares are issued from treasury stock. These restricted shares are intended to focus participants on our long-range objectives, while at the same time serving as a retention mechanism. We consider time-based restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights. We declared dividends totaling $ 467,000 ($ 1.54 per share) in 2022, $ 410,000 ($ 1.15 per share) in 2021 and $ 366,000 ($ 0.90 per share) in 2020 to holders of time-based restricted stock. We granted 69,000 , 11,000 and 15,000 restricted stock units that are time-based and vest over a period of one to three years in 2022, 2021 and 2020, respectively. Upon vesting, the units are issued from treasury stock. Total dividends declared for these awards were insignificant to the results of our operations. Additionally, we granted stock settled performance-based restricted stock units to executive management ( 64,000 units in 2022, 61,000 units in 2021, and 92,000 units in 2020). The performance-based restricted stock units require the achievement of certain performance and market factors, which consist of the Company’s Total Shareholder Return (“TSR”) relative to a predetermined peer group. The grant-date fair value of the performance-based restricted stock units was determined through the use of a Monte Carlo simulation model. The following is a summary of the significant assumptions used in estimating the fair value of the performance-based restricted stock units granted in 2022, 2021 and 2020: Assumptions: 2022 2021 2020 Risk-free interest rate 1.5 % 0.2 % 0.9 % Expected volatility 45.0 % 48.3 % 36.3 % The risk-free interest rate for the periods within the contractual life of the performance-based restricted stock unit is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility was estimated using the Company’s historical share price volatility for a period similar to the expected life of the performance-based restricted stock unit. The performance-based restricted stock units granted vest over three years (cliff vest) and are expensed over the performance period. The weighted average grant-date fair value of performance-based restricted stock units granted during 2022, 2021 and 2020 was $ 113.90 , $ 103.14 and $ 59.52 , respectively. 81 Table of Contents The fair value of time-based restricted stock and performance-based restricted stock units is based on the market price of the Company’s shares on the grant date. Information pertaining to these awards during 2022 is as follows (shares in thousands): Shares Weighted Average Grant-Date Fair Value Total as of December 26, 2021 582 $ 68.06 Granted 298 103.18 Forfeited ( 82 ) 89.87 Vested ( 280 ) 57.40 Total as of December 25, 2022 518 $ 91.23 21. Employee Benefit Plans We have established the Papa John’s International, Inc. 401(k) Plan (the “401(k) Plan”), as a defined contribution benefit plan, in accordance with Section 401(k) of the Internal Revenue Code. The 401(k) Plan is open to employees who meet certain eligibility requirements and allows participating employees to defer receipt of a portion of their compensation and contribute such amount to one or more investment funds. In late 2021, the Company adopted a Safe Harbor 401k Plan effective for the 2022 benefit year. In addition, we maintain a non-qualified deferred compensation plan available to certain employees and directors. Under this plan, the participants may defer a certain amount of their compensation, which is credited to the participants’ accounts. The participant-directed investments associated with this plan are included in Other assets ($ 30.1 million and $ 41.9 million at December 25, 2022 and December 26, 2021, respectively) and the associated liabilities ($ 28.3 million and $ 36.2 million at December 25, 2022 and December 26, 2021, respectively) are included in Other long-term liabilities in the accompanying Consolidated Balance Sheets. We contributed a matching payment of 4.0 % in 2022, up to a maximum of 6.0 % of a participating employee’s earnings deferred into the 401(k) Plan. At our discretion, the Company contributed 4.0 % in 2021 and 2.1 % in 2020, up to a maximum of 6.0 % of a participating employee’s earnings deferred into both the 401(k) Plan and the non-qualified deferred compensation plan. Such costs were $ 4.4 million in 2022, $ 3.5 million in 2021 and $ 1.8 million in 2020. 22. Divestitures Refranchising Loss On March 28, 2022, we refranchised our 51.0 % ownership interest in a 90 -restaurant consolidated joint venture in Texas for $ 14.0 million, net of transaction costs. In connection with the divestiture, we recorded a one-time, non-cash charge of $ 8.4 million as a Refranchising Loss in the Consolidated Statement of Operations, which reflects net sale proceeds of $ 14.0 million, the noncontrolling interest of $ 4.2 million, and the recognition of an unearned royalty stream of $ 12.2 million to be recognized as revenue over the 10 -year term of the franchise agreement executed concurrent with the disposition in accordance with ASC 810, “ Consolidation .” Goodwill of $ 9.9 million was allocated to the disposal group based on relative fair value within the Domestic Company-owned restaurants reporting group. The $ 8.4 million of the one-time, non-cash refranchising loss was recorded in the first quarter of 2022 and realized upon consummation of the sale in the second quarter. Impairment of Reacquired Master Franchise Rights In the first quarter of 2022, the Company recorded an impairment 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. The reacquired franchise rights were previously acquired from a former master franchisee and capitalized by the Company. 82 Table of Contents 23. Segment Information We have four reportable segments: Domestic Company-owned restaurants, North America franchising, North America commissaries, and International operations. The Domestic Company-owned restaurant segment consists of the operations of all Domestic Company-owned restaurants and derives its revenues principally from retail sales of pizza, Papadias, which are flatbread-style sandwiches, and side items, including breadsticks, cheesesticks, chicken poppers and wings, dessert items and canned or bottled beverages. The North America franchising segment consists of our franchise sales and support activities and derives its revenues from sales of franchise and development rights and collection of royalties from our franchisees located in the United States and Canada. The North America commissary segment consists of the operations of our regional dough production and product distribution centers and derives its revenues principally from the sale and distribution of food and paper products to Domestic Company-owned and franchised restaurants in the United States and Canada. The International segment principally consists of distribution sales to franchised Papa Johns restaurants located in the UK and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our International franchisees. International franchisees are defined as all franchise operations outside of the United States and Canada. All other business units that do not meet the quantitative thresholds for determining reportable segments, which are not operating segments, we refer to as “all other,” which consists of operations that derive revenues from the sale, principally to Company-owned and franchised restaurants, of printing and promotional items, franchise contributions to marketing funds and information systems and related services used in restaurant operations, including our point-of-sale system, online and other technology-based ordering platforms. Generally, we evaluate performance and allocate resources based on operating income. Certain administrative and capital costs are allocated to segments based upon predetermined rates or estimated resource usage. We account for intercompany sales and transfers as if the sales or transfers were to third parties and eliminate the activity in consolidation. Our reportable segments are business units that provide different products or services. Separate management of each segment is required because each business unit is subject to different operational issues and strategies. No single external customer accounted for 10% or more of our total revenues. 83 Table of Contents The following tables present our segment information. (In thousands) 2022 2021 2020 Revenues: Domestic Company-owned restaurants $ 708,389 $ 778,323 $ 700,757 North America franchising 137,399 129,310 96,732 North America commissaries 869,634 761,305 680,793 International 158,682 184,099 150,939 All others 227,999 215,384 184,013 Total revenues $ 2,102,103 $ 2,068,421 $ 1,813,234 Intersegment revenues: North America franchising $ 4,122 $ 4,179 $ 3,229 North America commissaries 217,570 215,393 192,332 All others 70,283 75,366 83,635 Total intersegment revenues $ 291,975 $ 294,938 $ 279,196 Depreciation and amortization: Domestic Company-owned restaurants $ 11,495 $ 11,728 $ 11,905 North America commissaries 13,299 11,974 9,660 International 1,774 2,326 1,975 All others 12,681 9,928 10,254 Unallocated corporate expenses 12,783 12,860 15,911 Total depreciation and amortization $ 52,032 $ 48,816 $ 49,705 Operating income: Domestic Company-owned restaurants (a) $ 15,966 $ 49,628 $ 37,049 North America franchising 127,882 120,949 89,801 North America commissaries 42,531 39,873 33,185 International (b) 17,891 34,896 24,034 All others 10,084 17,704 7,043 Unallocated corporate expenses (c) ( 104,419 ) ( 94,114 ) ( 100,069 ) Elimination of intersegment (profits) ( 905 ) ( 695 ) ( 790 ) Total operating income $ 109,030 $ 168,241 $ 90,253 ______________________________ (a) Includes a one-time, non-cash charge of $ 8.4 million associated with the refranchising of the Company’s ownership interest in a 90 -restaurant joint venture, recorded as Refranchising and impairment loss for the year ended December 25, 2022. See “Note 22. Divestitures” for additional information. (b) Includes charges of $ 3.5 million related to one-time, non-cash reserves for certain accounts receivable and impairments of reacquired franchise rights due to the financial and operational impact of the conflict in Ukraine and $ 6.1 million of costs associated with the termination of significant franchisees in the UK, including the reserve of certain accounts and notes receivable and operating lease right-of-use assets impairment. See “Note 22. Divestitures” and “Note 10. Allowance for Credit Losses” for additional information. (c) For the year ended December 25, 2022, Unallocated corporate expenses includes $ 15.0 million for certain legal settlements, $ 13.9 million of one-time, non-cash reserves of certain notes receivable, and $ 1.5 million of advisory fees and severance costs associated with the transition of certain executives. For the year ended December 26, 2021, Unallocated corporate expense includes $ 13.1 million of reorganization costs. See “Note 16. Strategic Corporate Reorganization for Long-term Growth” for additional information. 84 Table of Contents (In thousands) 2022 2021 2020 Property and equipment, net: Domestic Company-owned restaurants $ 238,658 $ 241,050 $ 228,077 North America commissaries 149,920 149,218 145,282 International 16,080 14,642 13,604 All others 131,210 109,052 91,724 Unallocated corporate assets 254,425 236,132 213,828 Accumulated depreciation and amortization ( 540,500 ) ( 526,238 ) ( 491,620 ) Property and equipment, net $ 249,793 $ 223,856 $ 200,895 Expenditures for property and equipment: Domestic Company-owned restaurants $ 23,057 $ 16,108 $ 12,848 North America commissaries 5,729 4,007 4,447 International 5,175 1,979 1,065 All others 18,296 18,645 11,700 Unallocated corporate 26,134 27,820 5,592 Total expenditures for property and equipment (a) $ 78,391 $ 68,559 $ 35,652 ______________________________ (a) Increases of $ 9.8 million and $ 32.9 million in expenditures for property and equipment in 2022 and 2021, respectively, were primarily driven by investment in growth, including technology and development initiatives. Disaggregation of Revenue In the following tables, revenues are disaggregated by major product line. The tables also include a reconciliation of the disaggregated revenues by the reportable segment: Reportable Segments (In thousands) Year Ended December 25, 2022 Major Products/Services Lines Domestic Company-owned restaurants North America franchising North America commissaries International All others Total Company-owned restaurant sales $ 708,389 $ — $ — $ — $ — $ 708,389 Franchise royalties and fees — 141,521 — 49,422 — 190,943 Commissary sales — — 1,087,204 80,481 — 1,167,685 Other revenues — — — 28,779 298,282 327,061 Eliminations — ( 4,122 ) ( 217,570 ) — ( 70,283 ) ( 291,975 ) Total segment revenues 708,389 137,399 869,634 158,682 227,999 2,102,103 International other revenues (a) — — — ( 28,779 ) 28,779 — Total revenues $ 708,389 $ 137,399 $ 869,634 $ 129,903 $ 256,778 $ 2,102,103 85 Table of Contents Reportable Segments (In thousands) Year Ended December 26, 2021 Major Products/Services Lines Domestic Company-owned restaurants North America franchising North America commissaries International All others Total Company-owned restaurant sales $ 778,323 $ — $ — $ — $ — $ 778,323 Franchise royalties and fees — 133,489 — 53,148 — 186,637 Commissary sales — — 976,698 97,623 — 1,074,321 Other revenues — — — 33,328 290,750 324,078 Eliminations — ( 4,179 ) ( 215,393 ) — ( 75,366 ) ( 294,938 ) Total segment revenues 778,323 129,310 761,305 184,099 215,384 2,068,421 International other revenues (a) — — — ( 33,328 ) 33,328 — Total revenues $ 778,323 $ 129,310 $ 761,305 $ 150,771 $ 248,712 $ 2,068,421 Reportable Segments (In thousands) Year Ended December 27, 2020 Major Products/Services Lines Domestic Company-owned restaurants North America franchising North America commissaries International All others Total Company-owned restaurant sales $ 700,757 $ — $ — $ — $ — $ 700,757 Franchise royalties and fees — 99,961 — 39,920 — 139,881 Commissary sales — — 873,125 84,043 — 957,168 Other revenues — — — 26,976 267,648 294,624 Eliminations — ( 3,229 ) ( 192,332 ) — ( 83,635 ) ( 279,196 ) Total segment revenues 700,757 96,732 680,793 150,939 184,013 1,813,234 International other revenues (a) — — — ( 26,976 ) 26,976 — Total revenues $ 700,757 $ 96,732 $ 680,793 $ 123,963 $ 210,989 $ 1,813,234 ______________________________ (a) Other revenues as reported in the Consolidated Statements of Operations include $ 28.8 million, $ 33.3 million and $ 27.0 million of revenue for the years ended December 25, 2022, December 26, 2021, and December 27, 2020 respectively, that are part of the International reporting segment. These amounts include marketing fund contributions and sublease rental income from International franchisees in the UK that provide no significant contribution to income before income taxes but must be reported on a gross basis under accounting requirements. The related expenses for these Other revenues are reported in Other expenses in the Consolidated Statements of Operations. 86 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.