PAPA JOHNS INTERNATIONAL INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s,” “Papa Johns” or in the first-person notations of “we,” “us” and “our”) operates and franchises pizza delivery and carryout restaurants and, in certain international markets, dine-in and delivery restaurants under the trademark “Papa John’s.” Papa John’s began operations in 1984. As of March 26, 2023, there were 5,733 Papa John’s restaurants in operation, consisting of 520 Company-owned and 5,213 franchised restaurants operating in 48 countries and territories. Our revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, and sales of franchise and development rights. Additionally, we derive revenues from sales to franchisees of various items including food and paper products from our Domestic Quality Control Centers (“QC Centers”), operation of our International QC Center in the (United Kingdom (“UK”), contributions received by Papa John’s Marketing Fund (“PJMF”) which is our national marketing fund, printing and promotional items and information systems equipment, and software and related services. We believe that in addition to supporting both Company and franchised profitability and growth, these activities contribute to product quality and consistency throughout the Papa John’s system. 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. Recent Developments and Trends The Company has focused on executing strategic priorities and building a foundation for long-term success, while navigating a challenging macroeconomic environment. Our progress and significant transactions during the first quarter of 2023 are described below. Growth Strategy . The Company delivered its fifteenth consecutive quarter of Global system-wide restaurant sales growth and continues to expand both domestically and internationally. This growth will be fueled by continued product innovation and our development strategy. Our expanding development pipeline is a key long-term growth driver as we believe there is significant opportunity to offer our differentiated, premium position to more customers globally and domestically. In the first quarter of 2023, we opened 27 net new restaurants, for global unit growth of 0.5%. We expect this growth to accelerate in 2023 with global development to be between 270 to 310 net new units. Our view of our long-term unit opportunity, both domestically and internationally, continues to expand as we sign significant deals to develop within key areas. In April 2023, we announced our future expansion into India through a development agreement to open 650 new restaurants in India by 2033. In 2022, we announced that we expect 1,400 to 1,800 net new Papa Johns restaurants worldwide from 2022 through the end of 2025. We plan to continue focusing on our strategic innovative products and restaurant development across our platforms to drive sustainable growth this year and beyond. Operational Initiatives. We launched the “Back to BETTER” initiative in late 2022, which focuses on improving operational execution at the store level in order to drive better financial performance. We have aligned the organization on improving out the door times, overall customer satisfaction, increasing orders and optimization. Running BETTER operations is intended to increase customer and employee satisfaction, as well as drive customer loyalty. We are seeing improvement in our restaurant level operating margins, and we experienced a 3.4% increase in comparable sales for Domestic Company-owned restaurants in the first quarter of 2023. We expect this initiative to continue throughout 2023. Global Market Conditions. Macroeconomic conditions in the UK, the largest region in our International segment, continue to present challenges in light of ongoing inflation and rising interest rates. Against this backdrop, the Company and franchisees have experienced declines in sales and profitability in the UK market. While uncertain how long these conditions will last, the Company is committed to its presence in the UK and is invested in the Company’s long-term success in this region. As we navigate this challenging economic environment, we are investing in capabilities to improve our operations and are working to reposition the franchise base to further strengthen our UK business. In addition to the targeted marketing support announced in February, we continue to innovate and implement capabilities and strategies from the US for the UK market. Also, as our franchise base is repositioned in a way that ensures our franchisees and this market are aligned to drive long-term growth, strategic store closures and refranchising will likely occur. Share Repurchases. As part of our long-term growth and capital allocation strategy, we are committed to investing in share repurchases to provide ongoing value and enhanced returns to our shareholders. During the first quarter of 2023, the Company repurchased 2.5 million shares of common stock for $209.6 million pursuant to its share repurchase program. 20 Included in these repurchases were approximately 2.2 million shares repurchased from certain funds affiliated with, or managed by, Starboard Value LP (collectively, “Starboard”) on March 1, 2023, at $82.52 per share, for a total aggregate consideration of $179.6 million. The transaction was negotiated by an independent committee of the Board of Directors formed for the purpose of evaluating a possible transaction involving Starboard, and was approved by the full Board upon such independent committee’s recommendation. Starboard’s Chief Executive Officer is Jeffrey Smith, who previously served as the Company’s Chairman of the Board until his resignation on March 1, 2023. The repurchase was funded with cash on hand and funds drawn under the Company’s PJI Revolving Facility. Following the repurchases, the Company has $90.2 million available under its existing share repurchase authorization as of March 26, 2023. Global Restaurant Sales and Unit Information “Comparable sales” represents sales for the same base of restaurants for the same fiscal periods. “Comparable sales growth (decline)” represents the change in year-over-year comparable sales. “Global system-wide restaurant sales” represents total restaurant sales for all Company-owned and franchised restaurants open during the comparable periods, and “Global system-wide restaurant sales growth (decline)” represents the change in global system-wide restaurant sales year-over-year. Comparable sales, Comparable sales growth (decline), Global system-wide restaurant sales and Global system-wide sales growth (decline) exclude franchisees for which we suspended corporate support. “Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis. We believe Domestic Company-owned, North America franchised, and International Comparable sales growth (decline) and Global system-wide restaurant sales information is useful in analyzing our results since our franchisees pay royalties and marketing fund contributions that are based on a percentage of franchise sales. Comparable sales and Global system-wide restaurant sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation. Franchise sales also generate commissary revenue in the United States and in certain international markets. Comparable sales growth (decline) and Global system-wide restaurant sales information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of Global system-wide restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in the Company’s revenues. Three Months Ended Amounts below exclude the impact of foreign currency March 26, 2023 March 27, 2022 Comparable sales growth (decline): Domestic Company-owned restaurants 3.4% (1.2)% North America franchised restaurants (0.8)% 2.8% North America restaurants —% 1.9% International restaurants (5.8)% 0.8% Total comparable sales growth (decline) (1.3)% 1.6% System-wide restaurant sales growth (decline): Domestic Company-owned restaurants 4.9% 0.8% North America franchised restaurants 0.8% 4.0% North America restaurants 1.6% 3.3% International restaurants (a) 3.3% 11.6% Total global system-wide restaurant sales growth (decline) 2.0% 5.3% _______________________________ (a) The three months ended March 26, 2023 excludes the impact of franchisee suspended restaurants 21 Restaurant Progression Three Months Ended March 26, 2023 March 27, 2022 North America Company-owned: Beginning of period 522 600 Opened — 7 Closed (2) — Acquired — 1 End of period 520 608 North America franchised: Beginning of period 2,854 2,739 Opened 16 15 Closed (6) (7) Sold — (1) End of period 2,864 2,746 International franchised: Beginning of period 2,330 2,311 Opened 43 55 Closed (24) (8) Suspended (a) — (188) End of period 2,349 2,170 Total restaurants – end of period 5,733 5,524 Trailing four quarters net store growth (b) 209 244 ___________________________________ (a) As previously disclosed, the Company has suspended corporate support for all franchised restaurants located in Russia. These suspended restaurants are excluded from net unit growth calculations. (b) Excludes suspended restaurants. Results of Operations Revenues The following table sets forth the various components of Revenues from the Condensed Consolidated Statements of Operations. Three Months Ended (Dollars in thousands) March 26, 2023 March 27, 2022 Increase (Decrease) Revenues: Domestic Company-owned restaurant sales $ 179,866 $ 198,765 (9.5) % North America franchise royalties and fees 36,072 34,268 5.3 % North America commissary revenues 212,566 209,679 1.4 % International revenues 31,463 34,617 (9.1) % Other revenues 67,082 65,363 2.6 % Total revenues $ 527,049 $ 542,692 (2.9) % For the three months ended March 26, 2023, the discussion of changes in revenues below for Domestic Company-owned restaurants and North America franchised restaurants include explanations of the impact to the comparable results of the 22 refranchising of 90 restaurants during the second quarter of 2022 (the “2022 refranchising”). See “Note 10. Divestitures” of the “Notes to Condensed Consolidated Financial Statements” for additional information. Total revenues decreased $15.6 million or 2.9% to $527.0 million for the three months ended March 26, 2023, as compared to the prior year period. Excluding the impact of the 2022 refranchising, total revenues increased $2.2 million, or 0.4%, for the three months ended March 26, 2023. Domestic Company-owned restaurant sales decreased $18.9 million, or 9.5% for the three months ended March 26, 2023, compared to the prior year period. Excluding the impact of the 2022 refranchising, Domestic Company-owned restaurant sales increased $8.4 million, or 4.9%, for the three months ended March 26, 2023, primarily due to comparable sales of 3.4% and an increase in equivalent units of 1.2 % . North America franchise royalties and fees increased $1.8 million, or 5.3% for the three months ended March 26, 2023, compared to prior year period. Excluding the impact of the 2022 refranchising, North America franchise royalties and fees increased $0.4 million, or 1.3%, for the three months ended March 26, 2023, primarily due to an increase in equivalent units of 1.4%, partially offset by negative comparable sales of 0.8%. North America franchise restaurant sales, excluding the impact of the 2022 refranchising, increased 0.6% to $771.4 million for the three months ended March 26, 2023, compared to the prior year period. North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales. North America commissary revenues increased $2.9 million, or 1.4% for the three months ended March 26, 2023, compared to the prior year period. Excluding the impact of the 2022 refranchising, North America commissary decreased $5.2 million primarily due to lower volumes, partially offset by increased prices in line with rising commodity prices driven by inflation. International revenues decreased $3.2 million, or 9.1% for the three months ended March 26, 2023, compared to the prior year period, primarily due to lower UK royalties and commissary revenues. The overall declines in our International revenue performance were largely attributable to lower comparable sales of 5.8% for the three months ended March 26, 2023, related to inflationary pressures in the UK market. International franchise restaurant sales decreased to $293.5 million for the three months ended March 26, 2023, compared to $321.7 million for the prior year period. Excluding the impact of previously disclosed suspended restaurants and foreign currency fluctuations, International franchise restaurant sales increased 3.3% for the three months ended March 26, 2023. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales. Other revenues, which primarily includes our national marketing funds, online and mobile ordering business and our wholly-owned print and promotions subsidiary, increased $1.7 million, or 2.6%, for the three months ended March 26, 2023, compared to the prior year period primarily due to higher revenues from our technology services from point of sale hardware sales and higher equivalent units. 23 Costs and Expenses The following table sets forth the various components of Costs and expenses from the Condensed Consolidated Statements of Operations, expressed as a percentage of the associated revenue component. (Dollars in thousands) Three Months Ended March 26, 2023 % of Related Revenues March 27, 2022 % of Related Revenues Increase (Decrease) in % of Revenues Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic Company-owned restaurant expenses $ 147,784 82.2 % $ 161,661 81.3 % 0.9 % North America commissary expenses 196,415 92.4 % 197,090 94.0 % (1.6) % International expenses 17,311 55.0 % 19,914 57.5 % (2.5) % Other expenses 61,078 91.0 % 60,555 92.6 % (1.6) % General and administrative expenses 51,944 9.9 % 65,937 12.1 % (2.2) % Depreciation and amortization 14,721 2.8 % 11,940 2.2 % 0.6 % Total costs and expenses 489,253 92.8 % 517,097 95.3 % (2.5) % Refranchising and impairment loss — — % (11,160) (2.1) % 2.1 % Operating income $ 37,796 7.2 % $ 14,435 2.7 % 4.5 % Total costs and expenses were $489.3 million or 92.8% of total revenues for the three months ended March 26, 2023 , as compared to $517.1 million, or 95.3% of total revenues for the prior year period. The decrease in total costs and expenses, as a percentage of revenues, was primarily due to the following: Domestic Company-owned restaurant expenses were $147.8 million or 82.2% of related revenues for the three months ended March 26, 2023, compared to expenses of $161.7 million or 81.3% of related revenues for the prior year period. The expenses, as a percentage of revenues, increased 0.9% primarily due to increases in certain commodity, labor, and utility expenses. North America commissary expenses were $196.4 million, or 92.4% of related revenues for the three months ended March 26, 2023, compared to $197.1 million or 94.0% of related revenues for the prior year period. The expenses, as a percentage of related revenues, decreased 1.6% primarily due to pricing adjustments stemming from higher commodity pricing driven by inflation, principally paper, dough and desserts. International expenses were $17.3 million, or 55.0% of related revenues for the three months ended March 26, 2023, compared to $19.9 million, or 57.5% of related revenues for the prior year period. The expenses as a percentage of related revenues, decreased 2.5%, primarily due to pricing adjustments stemming from higher commodity pricing driven by inflation, principally paper, dough and desserts. Other expenses were $61.1 million, or 91.0% of related revenues for the three months ended March 26, 2023, compared to $60.6 million, or 92.6% of related revenues for the prior year period. The expenses as a percentage of related revenues, decreased 1.6% primarily due to timing of expenditures on technology platform initiatives to further enhance our digital capabilities and the customer experience. 24 General and Administrative Expenses General and administrative (“G&A”) expenses were $51.9 million, or 9.9% of revenues for the three months ended March 26, 2023, compared to $65.9 million, or 12.1% of revenues for the prior year periods. G&A expenses consisted of the following (in thousands): Three Months Ended March 26, 2023 March 27, 2022 Administrative expenses (a) $ 51,192 $ 46,090 Legal settlement accruals (b) — 5,000 Additional specific accounts receivable and notes receivable provisions (c) — 14,636 Executive severance costs (d) 1,356 — Other general expenses 752 211 General and administrative expenses $ 51,944 $ 65,937 ___________________________________ (a) For the three months ended March 26, 2023, Administrative expenses increased $5.1 million, primarily due to higher labor and incentive compensation costs. (b) Represents expenses related to certain legal settlements. See “Note 9. Litigation, Commitments and Contingencies” to our “Notes to Condensed Consolidated Financial Statements” for additional information. (c) Represents a one-time, non-cash provision of $14.6 million on accounts receivable and notes receivable in connection with the conflict in Ukraine and related government actions in the first quarter of 2022. (d) Represents severance and related costs associated with the transition of certain executives. Depreciation and Amortization Depreciation and amortization expense was $14.7 million, or 2.8% of revenues for the three months ended March 26, 2023, compared to $11.9 million, or 2.2% of revenues, for the prior year period. The increase was primarily due to higher depreciation expense related to our investments in technology support initiatives. Refranchising and Impairment Loss There was no Refranchising and impairment loss during the three months ended March 26, 2023. Refranchising and impairment loss was $11.2 million for the three months ended March 27, 2022, consisting of an $8.4 million loss on the 2022 refranchising and an impairment loss of $2.8 million for reacquired franchise rights due to the financial and operational impact of the conflict in Ukraine and government actions taken in response to that conflict. See “Note 10. Divestitures” of “Notes to Condensed Consolidated Financial Statements” for additional information on these items. 25 Operating Income by Segment Operating income is summarized in the following table on a reporting segment basis. Adjusted operating income, a non-GAAP measure, is also presented below. See “Non-GAAP Measures” for a reconciliation to the most comparable U.S. GAAP measure. We believe this non-GAAP measure is important for comparability purposes. Three Months Ended March 26, 2023 Three Months Ended March 27, 2022 (In thousands) Reported (a) Adjustments Adjusted Reported (a) Adjustments Adjusted Reported Increase (Decrease) Adjusted Increase (Decrease) Domestic Company-owned restaurants $ 6,650 $ — $ 6,650 $ 1,989 $ 8,412 $ 10,401 $ 4,661 $ (3,751) North America franchising 33,400 — 33,400 32,137 — 32,137 1,263 1,263 North America commissaries 10,730 — 10,730 9,334 — 9,334 1,396 1,396 International 7,232 — 7,232 4,455 3,515 7,970 2,777 (738) All others 3,157 — 3,157 3,719 — 3,719 (562) (562) Unallocated corporate expenses (23,366) 1,356 (22,010) (37,111) 18,869 (18,242) 13,745 (3,768) Elimination of intersegment (profits) (7) — (7) (88) — (88) 81 81 Total $ 37,796 $ 1,356 $ 39,152 $ 14,435 $ 30,796 $ 45,231 $ 23,361 $ (6,079) ___________________________________ (a) See “Non-GAAP Measures” below for a detail of the adjustments in each period and for a reconciliation to the most comparable U.S. GAAP measure. Operating income was $37.8 million for the three months ended March 26, 2023 compared to $14.4 million for the prior year period, an increase of $23.4 million. Adjusted operating income was $39.2 million for the three months ended March 26, 2023 compared to $45.2 million for the prior year period, a decrease of $6.1 million. The decrease in adjusted operating income in 2023 compared to 2022 was primarily due to the following: • Domestic Company-owned restaurants decreased $3.8 million for the three months ended March 26, 2023. Excluding the impact of the 2022 refranchising, Domestic Company-owned restaurants decreased $1.5 million, primarily due to increases in certain commodity, labor, and utility expenses, partially offset by higher revenues from comparable sales growth of 3.4% driven by strategic pricing actions. • North America franchising increased $1.3 million for the three months ended March 26, 2023. Excluding the impact of the 2022 refranchising, North America franchising decreased $0.1 million. The decrease was primarily due to a 0.8% decrease in comparable sales, partially offset by an increase in equivalent units of 1.2%. • North America commissaries increased $1.4 million for the three months ended March 26, 2023. Excluding the impact of the 2022 refranchising, North America commissaries increased $1.1 million primarily due to price increases in line with inflation and lower delivery costs, partially offset by lower volumes. • International decreased $0.7 million for the three months ended March 26, 2023, primarily due to lower UK restaurant and commissary revenues and royalties attributed to lower comparable sales, which declined 5.8% , for the three months ended March 26, 2023. • All Others, which primarily includes our online and mobile ordering business and our marketing funds, decreased $0.6 million for the three months ended March 26, 2023 compared to the prior year period, primarily due to higher depreciation expense related to our investments in technology support initiatives. • Unallocated corporate expenses increased $3.8 million for the three months ended March 26, 2023. The increase is primarily due to higher labor and incentive compensation costs and higher deprecation expense related to our investments in technology support initiatives. 26 Items Below Operating Income The following table sets forth the various items below Operating income from the Condensed Consolidated Statements of Operations: Three Months Ended (In thousands, except per share amounts) March 26, 2023 March 27, 2022 Increase (Decrease) Operating income $ 37,796 $ 14,435 $ 23,361 Net interest expense (9,021) (4,264) (4,757) Income before income taxes 28,775 10,171 18,604 Income tax expense (benefit) 6,229 (1,256) 7,485 Net income before attribution to noncontrolling interests 22,546 11,427 11,119 Net income attributable to noncontrolling interests (170) (933) 763 Net income attributable to the Company $ 22,376 $ 10,494 $ 11,882 Calculation of net income for earnings per share: Net income attributable to the Company $ 22,376 $ 10,494 $ 11,882 Dividends paid to participating securities — (60) 60 Net income attributable to participating securities — — — Net income attributable to common shareholders $ 22,376 $ 10,434 $ 11,942 Basic earnings per common share $ 0.66 $ 0.29 $ 0.37 Diluted earnings per common share $ 0.65 $ 0.29 $ 0.36 Net Interest Expense Net interest expense increased $4.8 million, or 111.6% for the three months ended March 26, 2023 due to an increase in the LIBOR rate as well as higher average outstanding debt on the PJI Revolving Facility that was primarily utilized to finance share repurchases. Total debt outstanding was $813.1 million and $605.0 million as of March 26, 2023 and December 25, 2022, respectively. Income Tax Expense (Benefit) Our effective income tax rate was 21.6% for three months ended March 26, 2023, compared to a benefit of 12.3% for the prior year period. The prior year benefit of 12.3% was caused by higher excess tax benefits generated by stock option exercises and vesting of restricted shares along with a lower pre-tax income. Three Months Ended (Dollars in thousands) March 26, 2023 March 27, 2022 Income before income taxes $ 28,775 $ 10,171 Income tax expense (benefit) $ 6,229 $ (1,256) Effective tax rate 21.6 % (12.3) % Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests was $0.2 million for the three months ended March 26, 2023, compared with $0.9 million for the prior year period. The decrease was due to the refranchising of our 51% ownership interest in a 90-restaurant consolidated joint venture in Texas on March 28, 2022. Diluted Earnings Per Common Share Diluted earnings per common share was $0.65 for the three months ended March 26, 2023 compared to $0.29 for the prior year period, representing an increase of $0.36. Adjusted diluted earnings per common share, a non-GAAP measure, was $0.68 for the three months ended March 26, 2023, compared to adjusted diluted earnings per common share of $0.95 for the prior year period, representing a decrease of $0.27. See “Non-GAAP Measures” for additional information. 27 Non-GAAP Measures In addition to the results provided in accordance with U.S. GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with U.S. GAAP and include the following: adjusted operating income, adjusted net income attributable to common shareholders and adjusted diluted earnings per common share. We believe that our non-GAAP financial measures enable investors to assess the operating performance of our business relative to our performance based on U.S. GAAP results and relative to other companies. We believe that the disclosure of these non-GAAP measures is useful to investors as they reflect metrics that our management team and Board utilize to evaluate our operating performance, allocate resources and administer employee incentive plans. The most directly comparable U.S. GAAP measures to adjusted operating income, adjusted net income attributable to common shareholders and adjusted diluted earnings per common share are operating income, net income attributable to common shareholders and diluted earnings per common share, respectively. These non-GAAP measures should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s U.S. GAAP results. The table below reconciles our GAAP financial results to our non-GAAP financial measures. Three Months Ended (In thousands, except per share amounts) March 26, 2023 March 27, 2022 Operating income $ 37,796 $ 14,435 Refranchising and impairment losses (a) — 25,796 Legal settlement (b) — 5,000 Other costs (c) 1,356 — Adjusted operating income $ 39,152 $ 45,231 Net income attributable to common shareholders $ 22,376 $ 10,434 Refranchising and impairment losses (a) — 25,796 Legal settlement (b) — 5,000 Other costs (c) 1,356 — Tax effect of adjustments (d) (309) (6,929) Adjusted net income attributable to common shareholders (e) $ 23,423 $ 34,301 Diluted earnings per common share $ 0.65 $ 0.29 Refranchising and impairment losses (a) — 0.71 Legal settlement (b) — 0.14 Other costs (c) 0.04 — Tax effect of adjustments (d) (0.01) (0.19) Adjusted diluted earnings per common share (e) $ 0.68 $ 0.95 28 ___________________________________ (a) Refranchising and impairment losses consisted of the following pre-tax adjustments: Three Months Ended (In thousands) March 27, 2022 Refranchising impairment loss (1) $ 8,412 Ukraine-related charge (2) 17,384 Total adjustment $ 25,796 (1) Represents a one-time, non-cash charge of $8.4 million ($0.23 loss per diluted share) recorded in the first quarter of 2022 associated with the refranchising of the Company’s controlling interest in the 90-restaurant joint venture, recorded as Refranchising and impairment loss. (2) Represents a one-time non-cash charge of $17.4 million ($0.48 loss per diluted share) recorded in the first quarter of 2022 related to the reserve of certain loans and impairment of reacquired franchised rights related to the conflict in Ukraine and subsequent international government actions and sanctions, which were recorded as Refranchising and impairment loss of $2.8 million and General and administrative expenses of $14.6 million. (b) Represents an accrual of a certain legal settlement, recorded in General and administrative expenses. See “Note 9. Litigation, Commitments and Contingencies” for further information. (c) Represents severance and related costs associated with the transition of certain executives. (d) The tax effect on non-GAAP adjustments was calculated by applying the marginal tax rates of 22.8% and 22.5% for the three-month periods ended March 26, 2023 and March 27, 2022, respectively. (e) Amounts shown exclude the impact of allocation of undistributed earnings to participating securities. In addition, we present free cash flow in this report, which is a non-GAAP measure. Please see “Liquidity and Capital Resources – Free Cash Flow” for a discussion of why we believe free cash flow provides useful information regarding our financial condition and results of operations, and a reconciliation of free cash flow to the most directly comparable U.S. GAAP measure. Liquidity and Capital Resources Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our credit facility. Our principal uses of cash are operating expenses, capital expenditures, and returning value to our shareholders in the form of cash dividends and share repurchases. Our capital priorities are: • investing for growth • maintaining a strong balance sheet, and • returning capital to shareholders The Company believes that its balances of cash and cash equivalents and borrowing capacity, along with cash generated by operations, will be sufficient to satisfy its cash requirements, cash dividends, interest payments and share repurchases over the next twelve months and beyond. Cash Flows The table below summarizes our cash flows from continuing operations for the three months ended March 26, 2023 and March 27, 2022 (in thousands): Three Months Ended March 26, 2023 March 27, 2022 Total cash provided by (used in): Operating activities $ 40,788 $ 25,394 Investing activities (18,275) (8,315) Financing activities (23,212) (6,787) Change in cash and cash equivalents, excluding the effect of exchange rate changes on cash and cash equivalents $ (699) $ 10,292 29 Operating Activities Total cash provided by operating activities was $40.8 million for the three months ended March 26, 2023 compared to $25.4 million for the corresponding period of 2022. The increase of $15.4 million primarily reflects favorable working capital changes, principally related to increases in accrued expenses and other current liabilities as well as lower inventory and accounts receivable balances primarily due to lower volumes. Investing Activities Total cash used in investing activities was $18.3 million for the three months ended March 26, 2023 compared to $8.3 million for the same period in 2022, or an increase of $10.0 million. The increase in cash used in investing activities was primarily due to an increase in capital expenditures. Our capital expenditures consisted primarily of capital investments for existing stores, new store locations and capital expenditures for strategic initiatives. We estimate that our capital expenditures during 2023 will be approximately $80 million to $90 million. This estimate includes the acquisition of sites and construction costs for new Company-owned stores that have opened or that we expect to open during 2023. We intend to fund our capital expenditures with cash generated by operations and borrowings under our PJI Revolving Facility, as necessary. Financing Activities Total cash used in financing activities was $23.2 million for the three months ended March 26, 2023 compared to $6.8 million for the same period of 2022, an increase of $16.4 million. In 2023, cash used for financing activities includes outflows of $209.6 million in share repurchases, and $14.6 million of common stock dividends paid, partially offset by net borrowings of $208.2 million from the PJI Revolving Facility. In 2022, cash used for financing activities includes outflows of $32.7 million in share repurchases, and $12.6 million of common dividends paid partially offset by net borrowings of $47.0 million from the PJI Revolving Facility. Debt Our outstanding debt as of March 26, 2023 was $813.1 million, which was comprised of $400.0 million of our 3.875% senior notes (the “Notes”) and $413.1 million outstanding under the PJI Revolving Facility and PJMF Revolving Facility. Remaining availability under the PJI Revolving Facility was approximately $195.0 million as of March 26, 2023. Our Credit Agreement, dated September 14, 2021, contains affirmative and negative covenants that, among other things, require customary reporting obligations and restrict, subject to certain exceptions, the incurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates. The Company is also subject to certain financial covenants, as shown in the following table, that could restrict or impose constraints on the liquidity of our business: Permitted Ratio Actual Ratio as of March 26, 2023 Leverage ratio Not to exceed 5.25 to 1.0 3.5 to 1.0 Interest coverage ratio Not less than 2.00 to 1.0 3.8 to 1.0 Our leverage ratio is defined as outstanding debt divided by Consolidated EBITDA (as defined in the Credit Agreement) for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of Consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all financial covenants as of March 26, 2023. In addition, the Indenture governing the Notes contains customary covenants that, among other things and subject to certain exceptions, limit our ability and the ability of certain of our subsidiaries to: incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions or repurchase or redeem our capital stock; prepay, redeem or repurchase certain debt; issue certain preferred stock or similar equity securities; make loans and investments; sell assets; incur liens; enter into transactions with affiliates; enter into agreements restricting our subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or substantially all of our assets. 30 The PJMF Revolving Facility consists of a $20.0 million revolving line of credit pursuant to a Revolving Loan Agreement, dated September 30, 2015 with U.S. Bank National Association, as lender. Debt outstanding under the PJMF Revolving Facility was approximately $8.2 million as of March 26, 2023. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the Credit Agreement. See “Note 8. Debt” of our “Notes to Condensed Consolidated Financial Statements” for additional information. Share Repurchases As part of our long-term growth and capital allocation strategy, we are committed to investing in share repurchases to provide ongoing value and enhanced returns to our shareholders. On October 28, 2021, our Board of Directors approved a share repurchase program with an indefinite duration for up to $425.0 million of the Company’s common stock. The following table summarizes our repurchase activity under these programs for the three months ended March 26, 2023 and March 27, 2022: (In thousands, except average price per share) Total Number of Shares Purchased Average Price Paid per Share Aggregate Cost of Shares Purchased (a) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs Three Months Ended March 26, 2023 2,523 $ 83.10 $ 209,640 $ 90,160 March 27, 2022 301 $ 108.76 $ 32,709 $ 392,091 (a) The shares repurchased during the three months ended March 26, 2023 included 2,176,928 shares repurchased on March 1, 2023 from Starboard at a price of $82.52 per share for aggregate consideration of $179.6 million. The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program. There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise. Dividends The Company paid aggregate dividends to common stockholders of $14.6 million ($0.42 per share) and $12.6 million ($0.35 per share) for the three months ended March 26, 2023 and March 27, 2022, respectively. O n April 25, 2023, our Board of Directors declared a second quarter dividend of $0.42 per common share (approximately $13.8 million in the aggregate), which will be paid on May 26, 2023 to stockholders of record as of the close of business on May 15, 2023. The declaration and payment of any future dividends will be at the discretion of our Board of Directors. Free Cash Flow Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the Condensed Consolidated Statements of Cash Flows) less the purchases of property and equipment. We view free cash flow as an important financial measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. The Company’s free cash flow was as follows for the three month periods of 2023 and 2022 (in thousands): Three Months Ended March 26, 2023 March 27, 2022 Net cash provided by operating activities $ 40,788 $ 25,394 Purchases of property and equipment (18,410) (10,233) Free cash flow $ 22,378 $ 15,161 31 Cash Requirements There have been no material changes in our cash requirements other than in the ordinary course of business since the end of 2022. Refer to “Contractual Obligations” presented within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022 for additional information regarding our cash requirements. Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q and other Company communications that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “intend,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “outlook”, “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the current economic environment, commodity and labor costs, currency fluctuations, profit margins, net unit growth, unit level performance, capital expenditures, restaurant and franchise development, labor shortages, labor cost increases, inflation, royalty relief, franchisee support, the effectiveness of our menu innovations and other business initiatives, investments in product and digital innovation, marketing efforts and investments, liquidity, compliance with debt covenants, impairments, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to: • the ability of the Company to manage challenging macroeconomic conditions in the United States and internationally, including the United Kingdom; • the ability of the Company to manage staffing and labor shortages at Company and/or franchised restaurants and our quality control centers; • increases in labor costs, food costs or sustained higher other operating costs, including as a result of supply chain disruption, inflation or climate change; • the potential for delayed new store openings, both domestically and internationally; • the increased risk of phishing, ransomware and other cyber-attacks; • risks to the global economy and our business related to the conflict in Ukraine and other international conflicts; • increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to boost consumer sentiment and sales trends, and the risk that such initiatives will not be effective; • risks related to a possible economic recession or downturn that could, among other things, reduce consumer spending or demand and result in changing consumer practices; • risks related to social media, including publicity adversely and rapidly impacting our brand and reputation; • aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors; • changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending, including higher unemployment; • the adverse impact on the Company or our results caused by global health concerns, product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our Company-owned or franchised restaurants or others in the restaurant industry; • the effectiveness of our technology investments and changes in unit-level operations; • the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites; • increases in insurance claims and related costs for programs funded by the Company up to certain retention limits, including medical, owned and non-owned vehicles, workers’ compensation, general liability and property; • disruption of our supply chain or commissary operations which could be caused by our sole source of supply of mozzarella cheese, desserts, garlic cups or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control, including the coronavirus pandemic; • increased risks associated with our International operations, including economic and political conditions and risks associated with the withdrawal of the UK from the European Union, instability or uncertainty in our international 32 markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth; • the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the European Union General Data Protection Regulation; • risks related to our indebtedness, including increased interest rates, and the current state of the credit markets; • the Company’s ability to continue to pay dividends to stockholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline; • disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential Company, employee and customer information, including payment cards; and • changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles. These and other risk factors are discussed in detail in “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022, and they may be updated from time to time in our future reports filed with the Securities and Exchange Commission. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.