Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 27, 2021
OR
☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-21660
PAPA JOHN’S INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
61-1203323
(State or other jurisdiction of
(I.R.S. Employer Identification
incorporation or organization)
number)
2002 Papa John’s Boulevard
Louisville, Kentucky 40299-2367
(Address of principal executive offices)
(502) 261-7272
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol
Name of each exchange on which registered:
Common stock, $0.01 par value
PZZA
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At July 30, 2021, there were outstanding 36,563,793 shares of the registrant’s common stock, par value $0.01 per share.
INDEX
Page No.
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets — June 27, 2021 and December 27, 2020
3
Condensed Consolidated Statements of Operations — Three and Six months ended June 27, 2021 and June 28, 2020
4
Condensed Consolidated Statements of Comprehensive Income — Three and Six months ended June 27, 2021 and June 28, 2020
5
Condensed Consolidated Statements of Stockholders’ Deficit — Three and Six months ended June 27, 2021 and June 28, 2020
6
Condensed Consolidated Statements of Cash Flows — Six months ended June 27, 2021 and June 28, 2020
8
Notes to Condensed Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37
Item 4.
Controls and Procedures
38
PART II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
39
Item 5.
Other Information
40
Item 6.
Exhibits
41
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Papa John’s International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 27,
December 27,
(In thousands, except per share amounts)
2021
2020
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$
96,213
130,204
Accounts receivable, net
75,839
90,135
Notes receivable, current portion
11,398
11,318
Income tax receivable
1,084
1,273
Inventories
29,843
30,265
Prepaid expenses and other current assets
47,966
43,212
Total current assets
262,343
306,407
Property and equipment, net
198,818
200,895
Finance lease right-of-use assets, net
22,840
16,840
Operating lease right-of-use assets
166,090
148,110
Notes receivable, less current portion, net
34,418
36,538
Goodwill
81,103
80,791
Deferred income taxes
10,388
10,800
Other assets
79,744
72,389
Total assets
855,744
872,770
Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit
Current liabilities:
Accounts payable
31,496
37,370
Income and other taxes payable
28,763
10,263
Accrued expenses and other current liabilities
187,789
174,563
Current deferred revenue
20,536
19,590
Current finance lease liabilities
4,726
3,545
Current operating lease liabilities
23,194
23,538
Current portion of long-term debt
20,000
Total current liabilities
316,504
288,869
Deferred revenue
13,017
13,664
Long-term finance lease liabilities
18,555
13,531
Long-term operating lease liabilities
143,940
124,666
Long-term debt, less current portion, net
403,810
328,292
278
948
Other long-term liabilities
100,699
111,364
Total liabilities
996,803
881,334
Series B Convertible Preferred Stock; $0.01 par value; no shares authorized, issued or outstanding at June 27, 2021, compared to 260.0 shares authorized, 252.5 shares issued and outstanding at December 27, 2020
—
251,901
Redeemable noncontrolling interests
6,839
6,474
Stockholders’ deficit:
Common stock ($0.01 par value per share; issued 48,937 at June 27, 2021 and 45,288 at December 27, 2020)
489
453
Additional paid-in capital
435,608
254,103
Accumulated other comprehensive loss
(10,235)
(14,168)
Retained earnings
154,769
219,158
Treasury stock (12,722 shares at June 27, 2021 and 12,743 shares at December 27, 2020, at cost)
(743,819)
(741,724)
Total stockholders’ deficit
(163,188)
(282,178)
Noncontrolling interests in subsidiaries
15,290
15,239
Total Stockholders’ deficit
(147,898)
(266,939)
Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders’ deficit
See accompanying notes.
Condensed Consolidated Statements of Operations
Three Months Ended
Six Months Ended
June 28,
Revenues:
Domestic Company-owned restaurant sales
196,124
186,506
393,358
347,946
North America franchise royalties and fees
32,475
24,174
65,190
43,614
North America commissary revenues
186,641
167,619
371,519
323,041
International revenues
37,614
28,093
72,221
54,152
Other revenues
62,154
54,231
124,466
101,729
Total revenues
515,008
460,623
1,026,754
870,482
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses
154,293
145,168
310,181
274,279
North America commissary expenses
172,227
154,467
342,911
298,739
International expenses
21,430
18,304
41,048
33,405
Other expenses
56,246
51,345
112,053
97,302
General and administrative expenses
53,698
48,428
103,709
96,079
Depreciation and amortization
12,477
12,377
25,353
24,672
Total costs and expenses
470,371
430,089
935,255
824,476
Operating income
44,637
30,534
91,499
46,006
Net interest expense
(3,649)
(3,627)
(7,296)
(7,594)
Income before income taxes
40,988
26,907
84,203
38,412
Income tax expense
7,398
4,956
15,330
7,468
Net income before attribution to noncontrolling interests
33,590
21,951
68,873
30,944
Net income attributable to noncontrolling interests
(1,336)
(1,337)
(2,736)
(1,887)
Net income attributable to the Company
32,254
20,614
66,137
29,057
Calculation of net (loss) income for earnings per share:
Dividends on redemption of Series B Convertible Preferred Stock
(109,852)
Dividends paid to participating securities
(2,300)
(3,347)
(5,827)
(6,818)
Net income attributable to participating securities
(1,560)
(1,306)
Net (loss) income attributable to common shareholders
(79,898)
15,707
(49,542)
20,933
Basic (loss) earnings per common share
(2.30)
0.49
(1.47)
0.65
Diluted (loss) earnings per common share
0.48
Basic weighted average common shares outstanding
34,729
32,335
33,739
32,214
Diluted weighted average common shares outstanding
32,619
32,444
Dividends declared per common share
0.225
0.450
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments
437
(334)
1,496
(3,159)
Interest rate swaps (1)
1,817
(103)
3,612
(11,022)
Other comprehensive income (loss), before tax
2,254
(437)
5,108
(14,181)
Income tax effect:
(100)
77
(344)
727
Interest rate swaps (2)
(418)
(831)
2,535
Income tax effect
(518)
101
(1,175)
3,262
Other comprehensive income (loss), net of tax
1,736
(336)
3,933
(10,919)
Comprehensive income before attribution to noncontrolling interests
35,326
21,615
72,806
20,025
Less: comprehensive (income), redeemable noncontrolling interests
(713)
(707)
(1,500)
(883)
Less: comprehensive (income), nonredeemable noncontrolling interests
(623)
(630)
(1,236)
(1,004)
Comprehensive income attributable to the Company
33,990
20,278
70,070
18,138
Condensed Consolidated Statements of Stockholders’ Deficit
Papa John’s International, Inc.
Common
Accumulated
Stock
Additional
Other
Noncontrolling
Total
Shares
Paid-In
Comprehensive
Retained
Treasury
Interests in
Stockholders’
For the three months ended June 27, 2021
Outstanding
Capital
Loss
Earnings
Subsidiaries
Deficit
Balance at March 28, 2021
32,681
251,285
(11,971)
242,119
(737,268)
15,282
(240,100)
Net income (1)
623
32,877
Other comprehensive income, net of tax
Repurchase and conversion of Series B Convertible Preferred Stock
3,489
35
174,631
(110,783)
63,883
Cash dividends on common stock
31
(7,471)
(7,440)
Cash dividends on preferred stock
(709)
Exercise of stock options
107
1
5,801
5,802
Acquisition of Company common stock
(68)
(6,921)
Stock-based compensation expense
4,089
Issuance of restricted stock
(294)
294
Tax effect of restricted stock awards
(52)
Distributions to noncontrolling interests
(615)
117
(641)
76
(448)
Balance at June 27, 2021
36,215
For the six months ended June 27, 2021
Balance at December 27, 2020
32,545
1,236
67,373
62
(14,906)
(14,844)
(4,121)
148
8,099
8,100
(83)
(8,188)
8,202
109
(5,665)
5,665
(3,887)
(1,185)
7
63
(716)
428
(225)
At June 27, 2021, the accumulated other comprehensive loss of $10,235 was comprised of net unrealized foreign currency translation loss of $2,641 and net unrealized loss on the interest rate swap agreements of $7,594.
Condensed Consolidated Statements of Stockholders’ Deficit (continued)
For the three months ended June 28, 2020
Balance at March 29, 2020
31,971
448
220,187
(20,768)
202,287
(744,463)
16,009
(326,300)
Net income (2)
630
21,244
Other comprehensive loss, net of tax
(7,360)
(7,283)
(3,412)
346
20,460
20,463
4,792
30
(1,760)
1,760
(196)
(915)
17
(25)
103
95
Balance at June 28, 2020
32,349
451
243,577
(21,104)
212,104
(742,600)
15,724
(291,848)
For the six months ended June 28, 2020
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 (1)
(1,066)
Adjusted Balance at December 30, 2019
204,631
(317,722)
1,004
30,061
132
(14,652)
(14,520)
(6,825)
373
21,700
21,704
8,742
(4,468)
4,468
(1,579)
(945)
(107)
259
155
At June 28, 2020, the accumulated other comprehensive loss of $21,104 was comprised of net unrealized foreign currency translation loss of $8,031 and net unrealized loss on the interest rate swap agreements of $13,073.
Condensed Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
(Credit) provision for allowance for credit losses on accounts and notes receivable
(1,200)
1,051
(1,397)
(1,502)
467
1,090
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
13,299
(8,571)
189
4,278
430
(5,017)
1,092
9,657
Other assets and liabilities
(11,380)
8,065
(5,874)
1,558
18,500
3,601
12,123
10,269
(647)
(1,179)
Net cash provided by operating activities
128,030
87,658
Investing activities
Purchases of property and equipment
(21,543)
(13,795)
Notes issued
(5,263)
(9,596)
Repayments of notes issued
7,922
6,462
Acquisitions, net of cash acquired
(699)
116
14
Net cash used in investing activities
(19,467)
(16,915)
Financing activities
Repayments of term loan
(10,000)
Net proceeds (repayments) of revolving credit facilities
85,000
(9,884)
Proceeds from exercise of stock options
Dividends paid to common stockholders
Dividends paid to preferred stockholders
(6,394)
Tax payments for equity award issuances
Repurchase of Series B Convertible Preferred Stock
(188,647)
(2,320)
(1,691)
(704)
Net cash used in financing activities
(142,871)
(22,753)
Effect of exchange rate changes on cash and cash equivalents
317
(202)
Change in cash and cash equivalents
(33,991)
47,788
Cash and cash equivalents at beginning of period
27,911
Cash and cash equivalents at end of period
75,699
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 27, 2021
1.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 27, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for Papa John’s International, Inc. (referred to as the “Company”, “Papa John’s” or in the first-person notations of “we”, “us” and “our”) for the year ended December 27, 2020.
2.
Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant items that are subject to such estimates and assumptions include allowance for credit losses on doubtful accounts and notes receivable, intangible assets, contract assets and contract liabilities, including the online customer loyalty program obligation and gift card breakage, right-of-use assets and lease liabilities, 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.
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 80% 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, “Consolidations.”
Noncontrolling Interests
Papa John’s has four joint venture arrangements in which there are noncontrolling interests held by third parties that include 188 and 192 restaurants at June 27, 2021 and June 28, 2020, respectively.
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 Condensed Consolidated Statements of Operations of net income attributable to noncontrolling interests.
Net income attributable to these joint ventures for the three and six months ended June 27, 2021 and June 28, 2020 was as follows (in thousands):
2,296
2,320
4,645
3,451
Noncontrolling interests
1,336
1,337
2,736
1,887
Total net income
3,632
3,657
7,381
5,338
The following summarizes the redemption feature, location and related accounting within the Condensed Consolidated Balance Sheets for these joint venture arrangements:
Type of Joint Venture Arrangement
Location within the Balance Sheets
Recorded Value
Joint ventures with no redemption feature
Permanent equity
Carrying value
Joint ventures with option to require the Company to purchase the noncontrolling interest - not currently redeemable or redemption not probable
Temporary equity
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 Papa John’s 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. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. The effective income tax rate includes the estimated domestic state effective income tax rate and applicable foreign income tax rates. The effective income tax rate is also impacted by various permanent items and credits, net of any related valuation allowances, and can vary based on changes in estimated annual income. Discrete items are recorded in the quarter in which they occur.
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 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 on a quarterly basis to adjust for events, such as statute of limitations expirations, court or state rulings or audit settlements, which may impact our ultimate payment for such exposures.
Fair Value Measurements and Disclosures
The Company is required to determine 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. Fair value is a market-based measurement, not an entity-specific measurement. 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 fair value of the amounts outstanding under our term debt and revolving credit facility approximate their carrying values due to the variable market-based interest rate (Level 2).
10
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 categories:
Our financial assets and liabilities that were measured at fair value on a recurring basis as of June 27, 2021 and December 27, 2020 are as follows (in thousands):
Carrying
Fair Value Measurements
Value
Level 1
Level 2
Level 3
Financial assets:
Cash surrender value of life insurance policies (a)
40,863
Financial liabilities:
Interest rate swaps (b)
9,798
December 27, 2020
37,578
13,452
Allowance for Credit Losses
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
3,622
3,211
Current period credit for expected credit losses
(388)
(544)
Write-offs charged against the allowance
(1,136)
(844)
Recoveries collected
(268)
2,098
1,555
11
3. Leases
Lessor Operating Leases
We sublease certain retail space to our franchisees in the United Kingdom which are primarily operating leases. At June 27, 2021, we leased and subleased approximately 400 Papa John’s restaurants to franchisees in the United Kingdom. The initial lease terms on the franchised sites in the United Kingdom 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. Rental income, primarily derived from properties leased and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms. We recognized total sublease income of $6.1 million and $5.0 million for the six months ended June 27, 2021 and June 28, 2020, respectively.
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 75 domestic leases. These leases have varying terms, the latest of which expires in 2036. As of June 27, 2021, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $12.8 million. This contingent liability is not included in the Condensed Consolidated Balance Sheet as it is not probable to occur. The fair value of the guarantee is not material.
Supplemental Cash Flow & Other Information
Supplemental cash flow information related to leases for the periods reported is as follows:
June 28, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases
574
295
Financing cash flows from finance leases
2,188
939
Operating cash flows from operating leases (a)
19,139
18,744
Right-of-use assets obtained in exchange for new finance lease liabilities
8,393
19
Right-of-use assets obtained in exchange for new operating lease liabilities (b)
35,115
13,370
Cash received from sublease income
5,890
5,014
(a) Included within the change in Other assets and liabilities within the Condensed 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 $14.3 million in the six-month period ended June 27, 2021 associated with the lease commencement of our Atlanta, Georgia Corporate office.
12
4. Papa John’s Marketing Fund, Inc.
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 for all participating domestic restaurants. Contributions and expenditures are reported on a gross basis in the Condensed Consolidated Statements of Operations within Other revenues and Other expenses.
Assets and liabilities of PJMF, which are restricted in their use, included in the Condensed Consolidated Balance Sheets were as follows (in thousands):
26,769
9,394
12,832
23,711
192
2,238
1,914
42,031
35,211
506
588
42,537
35,799
Liabilities
615
5,429
40,538
32,578
3,272
3,938
44,427
41,947
1,923
2,419
46,350
44,366
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 Condensed Consolidated Balance Sheets. During the three and six months ended June 27, 2021, the Company recognized $9.0 million and $18.2 million in revenue, respectively, related to deferred revenue, compared to $8.4 million and $16.3 million for the three and six months ended June 28, 2020.
The following table includes a breakout of contract liability balances (in thousands):
Contract Liabilities
Change
Franchise fees and unredeemed gift card liabilities
18,619
19,890
(1,271)
Customer loyalty program obligations
14,934
13,364
1,570
Total contract liabilities
33,553
33,254
299
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 June 27, 2021 and December 27, 2020, the contract assets were approximately $5.6 million and $5.1 million, respectively. For the three and six months ended June 27, 2021, revenue was reduced approximately $0.6 million and $1.4 million,
13
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 Condensed Consolidated Balance Sheets.
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
Franchise fees
2,285
2,070
1,806
1,584
1,344
2,715
11,804
Approximately $1.6 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 $5.2 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. Common Stock and Series B Convertible Preferred Stock
Shares Authorized and Outstanding
The Company has authorized 5.0 million shares of preferred stock (of which none were issued or outstanding at June 27, 2021 and December 27, 2020, respectively) and 100.0 million shares of common stock as of June 27, 2021 and December 27, 2020, 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 Convertible Preferred Stock in the Condensed Consolidated Statement of Operations, which reduced net income attributable to common stockholders and also reduced diluted earnings per share by $3.15 and $3.23 for the three and six months ended June 27, 2021, respectively.
As a result of the repurchase and conversion, there were no shares of Series B Preferred Stock authorized or outstanding at June 27, 2021 compared to 260,000 and 252,530 shares of Series B Preferred Stock authorized and outstanding, respectively, at December 27, 2020. The Series B Preferred Stock was classified as temporary equity on the Condensed Consolidated Balance Sheets as of December 27, 2020. Following the repurchase and conversion of the Series B Preferred Stock, there were 36.2 million shares of the Company’s common stock outstanding at June 27, 2021 compared to 32.5 million shares at December 27, 2020.
Share Repurchase Program
Our Board of Directors has authorized the repurchase of up to $75.0 million of common stock under a share repurchase program that began on November 4, 2020 and is effective through December 31, 2021. Through June 27, 2021, a total of 116,000 shares with an aggregate cost of $10.9 million and an average price of $94.24 per share were repurchased under this program. Funding for the share repurchase program has been provided through our operating cash flows. Subsequent to June 27, 2021, we acquired an additional 41,000 shares at an aggregate cost of $4.3 million. Approximately $59.8 million remained available under the Company’s share repurchase program as of July 30, 2021.
The timing and volume of share repurchases 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 new program 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 program may be commenced or suspended from time to time at the Company’s discretion without prior notice. Funding for the share repurchase program will be provided through our credit facility, operating cash flow, stock option exercises and cash and cash equivalents.
Dividends
The Company recorded dividends of approximately $20.4 million for the six months ended June 27, 2021 consisting of the following:
On August 3, 2021, our Board of Directors approved a 55.6% increase in the Company’s dividend rate per common share, from $0.90 on an annual basis to $1.40 on an annual basis, and subsequently declared a third quarter dividend of $0.35 per common share, of which approximately $12.8 million will be paid to common stockholders. The common share dividend will be paid on August 27, 2021 to stockholders of record as of the close of business on August 16, 2021. The declaration and payment of any future dividends will be at the discretion of our Board of Directors.
7. (Loss) Earnings Per Share
We compute (loss) earnings per share using the two-class method. The two-class method requires an earnings allocation formula that determines (loss) earnings per share for common shareholders and participating security holders according to dividends declared and participating rights in undistributed earnings. The Series B Preferred Stock 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 participating securities and undistributed earnings allocated to participating securities, are subtracted from net income attributable to the Company in determining net (loss) 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 is treated as a deemed dividend in the two-class earnings per share calculation.
15
The calculations of basic and diluted (loss) earnings per common share are as follows (in thousands, except per-share data):
Weighted average common shares outstanding
Dilutive effect of outstanding equity awards (a)
284
230
Diluted weighted average common shares outstanding (b)
8.
Debt
Long-term debt, net, consists of the following (in thousands):
Outstanding debt
425,000
350,000
Unamortized debt issuance costs
(1,190)
(1,708)
(20,000)
Total long-term debt, net
The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $95.0 million and $10.0 million was outstanding as of June 27, 2021 and December 27, 2020, respectively, and a secured term loan facility with an outstanding balance of $330.0 million and $340.0 million as of June 27, 2021 and December 27, 2020, respectively (the “Term Loan Facility” and together with the Revolving Facility, the “PJI Facilities”). The PJI Facilities mature on August 30, 2022. The loans under the PJI Facilities accrue interest at a per annum rate equal to, at the Company’s election, either LIBOR plus a margin ranging from 125 to 250 basis points or a base rate (generally determined by a prime rate, federal funds rate or LIBOR plus 1.00%) plus a margin ranging from 25 to 150 basis points. In each case, the actual margin is determined according to a ratio of the Company’s total indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the then most recently ended four-quarter period (the “Leverage Ratio”). The Credit Agreement governing the PJI Facilities (the “PJI Credit Agreement”) places certain customary restrictions upon the Company based on its financial covenants. These include limiting the repurchase of common stock and not increasing the cash dividend above the lesser of $0.225 per share per quarter or $35 million per
16
fiscal year if the Company’s leverage ratio is above 3.75 to 1.0. Quarterly amortization payments are required to be made on the Term Loan Facility in the amount of $5.0 million. Loans outstanding under the PJI Facilities 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. Up to $35.0 million of the Revolving Facility may be advanced in certain agreed foreign currencies, including Euros, Pounds Sterling, Canadian Dollars, Japanese Yen, and Mexican Pesos.
The PJI Credit Agreement contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of the Leverage Ratio and a specified fixed charge coverage ratio. The PJI Credit Agreement allows for a permitted Leverage Ratio of 4.25 to 1.0, decreasing over time to 4.00 to 1.0 by 2022; and a fixed charge coverage ratio of 2.50 to 1.0. We were in compliance with these financial covenants at June 27, 2021.
Under the PJI Credit Agreement, we have the option to increase the Revolving Facility or the Term Loan Facility in an aggregate amount of up to $300.0 million, subject to the Leverage Ratio of the Company not exceeding 4.00 to 1.00. The Company and certain direct and indirect domestic subsidiaries are required to grant a security interest in substantially all of the capital stock and equity interests of their respective domestic and first tier material foreign subsidiaries to secure the obligations owed under the PJI Facilities. Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at June 27, 2021 was approximately $259.2 million.
We attempt to minimize interest rate risk exposure by fixing our rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions that participate in the PJI Credit Agreement. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract. We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities.
As of June 27, 2021, we have the following interest rate swap agreements with a total notional value of $350.0 million:
Effective Dates
Floating Rate Debt
Fixed Rates
April 30, 2018 through April 30, 2023
55
million
2.33
%
2.36
2.34
January 30, 2018 through August 30, 2022
100
1.99
75
50
2.00
The gain or loss on the swaps is recognized in Accumulated other comprehensive loss (“AOCL”) and reclassified into earnings as adjustments to interest expense in the same period or periods during which the swaps affect earnings. Gains or losses on the swaps representing hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The following table provides information on the location and amounts of our swaps in the accompanying condensed consolidated financial statements (in thousands):
Interest Rate Swap Derivatives
Fair Value
Balance Sheet Location
Other current and long-term liabilities
The effect of derivative instruments on the accompanying condensed consolidated financial statements is as follows (in thousands):
Location of Gain
Amount of Gain
Derivatives -
Amount of Gain or
or (Loss)
Total Net Interest Expense
Cash Flow
(Loss) Recognized
Reclassified from
on Condensed
Hedging
in AOCL
AOCL into
Consolidated Statements
Relationships
on Derivative
Income
of Operations
Interest rate swaps for the three months ended:
1,399
Interest expense
(1,730)
(79)
(1,372)
Interest rate swaps for the six months ended:
2,781
(3,439)
(8,487)
(1,702)
The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 3.2% for the three- and six-month periods ended June 27, 2021, compared to 3.8% for the three- and six-month periods ended June 28, 2020, respectively. Interest paid, including payments made or received under the swaps, was $3.6 million and $4.0 million for the three months ended June 27, 2021 and June 28, 2020, respectively, and $7.1 million and $8.1 million for the six months ended June 27, 2021 and June 28, 2020, respectively. As of June 27, 2021, the portion of the aggregate $9.8 million interest rate swap liability that would be reclassified into net interest expense during the next twelve months approximates $7.1 million.
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 secured by substantially all assets of PJMF. The PJMF Revolving Facility matures on September 30, 2021. The borrowings under the PJMF Revolving Facility accrue interest at a variable rate of the one-month LIBOR plus 1.75%. The applicable interest rates on the PJMF Revolving Facility were 2.3% and 2.8% for the three and six months ended June 28, 2020, respectively. There was no debt outstanding under the PJMF Revolving Facility as of June 27, 2021 or December 27, 2020. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.
9.
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 condensed consolidated financial statements. We review these provisions at least quarterly and adjust them 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. The Company continues to deny any liability or wrongdoing in this matter and intends to vigorously defend this action. The Company has not recorded any liability related to this lawsuit as of June 27, 2021 as it does not believe a loss is probable or reasonably estimable.
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10. 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. The 60,000 square foot modern space will be 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 will continue to operate in our Louisville, Kentucky office, which remains critical to our success. We also maintain an office outside of London, United Kingdom, where our international operations are managed.
The opening of the office in Atlanta and related organizational changes are projected to be completed in the fall of 2021. All affected employees were either offered an opportunity to continue with the organization or were offered a severance package. As a result, we expect to incur certain one-time corporate reorganization costs of approximately $17.0 to $20.0 million related to employee severance and transition, recruitment and relocation, and third party and other costs through 2021. Of these costs, we have cumulatively incurred approximately $13.2 million through June 27, 2021 which include $8.1 million of employee severance and other employee transition costs, $3.3 million of recruiting and professional fees, $1.8 million of relocation costs, and $0.9 million of other costs, offset by ($0.9) million of stock-based compensation forfeitures on unvested awards.
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 Condensed Consolidated Statement of Operations.
As of June 27, 2021 and December 27, 2020, the estimate of incurred but unpaid strategic corporate reorganization costs are included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The following table summarizes the activity for the six months ended June 27, 2021:
Balance at
Dec. 27
Charges
Payments
Employee severance and other employee transition costs
4,615
3,291
(6,258)
1,648
Recruiting and professional fees
145
1,671
(1,612)
204
Relocation costs
1,559
(766)
894
Other costs
690
(690)
Total strategic corporate reorganization liability
4,861
7,211
(9,326)
2,746
We expect to recognize additional costs associated with the corporate reorganization in the remainder of 2021 of approximately $4.0 to $7.0 million, including expenditures related to (i) employee severance and other employee transition costs of $0.1 to $0.5 million, (ii) relocation and recruiting costs of $3.7 million to $5.5 million, and (iii) third-party and other costs of $0.2 million to $1.0 million.
11.
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 (“domestic” is defined as contiguous United States) 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 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 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 international segment principally consists of distribution sales to franchised Papa John’s restaurants located in the United Kingdom 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 and intercompany eliminations. 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 consolidated revenues.
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Our segment information is as follows:
Domestic Company-owned restaurants
North America franchising
North America commissaries
International
46,277
34,366
88,881
66,518
All others
53,491
47,958
107,806
89,363
Intersegment revenues:
1,041
793
2,101
1,467
53,428
47,357
105,498
91,863
18,943
18,386
38,091
39,341
Total intersegment revenues
73,412
66,536
145,690
132,671
Operating income:
15,361
16,746
30,685
25,413
30,518
22,176
60,961
39,502
9,778
8,711
19,491
16,371
8,683
4,471
17,047
8,849
4,894
2,035
11,012
1,838
Unallocated corporate expenses
(24,617)
(22,881)
(47,779)
(45,057)
Elimination of intersegment losses (profits)
(724)
82
(910)
Total operating income
Property and equipment, net:
234,022
146,040
14,657
97,086
Unallocated corporate assets
220,627
Accumulated depreciation and amortization
(513,614)
Total property and equipment, net
21
Disaggregation of Revenue
In the following tables, revenues are disaggregated by major product/service line. The tables also include a reconciliation of the disaggregated revenues by the reportable segment (in thousands):
Reportable Segments
Three Months Ended June 27, 2021
Major Products/Services Lines
Company-owned restaurant sales
-
Franchise royalties and fees
33,516
13,156
46,672
Commissary sales
240,069
24,458
264,527
8,663
72,434
81,097
Eliminations
(1,041)
(53,428)
(18,943)
(73,412)
Total segment revenues
International other revenues (1)
(8,663)
Three Months Ended June 28, 2020
24,967
7,743
32,710
214,976
20,350
235,326
6,273
66,344
72,617
(793)
(47,357)
(18,386)
(66,536)
(6,273)
Six Months Ended June 27, 2021
67,291
25,364
92,655
477,017
46,857
523,874
16,660
145,897
162,557
(2,101)
(105,498)
(38,091)
(145,690)
(16,660)
Six Months Ended June 28, 2020
45,081
17,259
62,340
414,904
36,893
451,797
12,366
128,704
141,070
(1,467)
(91,863)
(39,341)
(132,671)
(12,366)
22
23
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s” or in the first-person notations of “we,” “us” and “our”) began operations in 1984. As of June 27, 2021, there were 5,523 Papa John’s restaurants (589 Company-owned and 4,934 franchised) operating in 49 countries and territories. Our revenues are principally derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, sales of franchise and development rights, sales to franchisees of food and paper products, contributions received from franchisees for domestic and international marketing funds we control, revenues for printing and promotional items, and information systems and related services used in their operations.
Recent Developments and Trends
Repurchase & Conversion of Series B Convertible Preferred Stock (“Series B Preferred Stock”). In the second quarter of 2021, the Company repurchased 31.4% of the outstanding shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”), representing approximately 1.6 million shares of common stock on an as-converted basis, and the holders of the remaining outstanding shares of Series B Preferred Stock agreed to convert such shares into approximately 3.5 million shares of the Company’s common stock. The Company made one-time cash payments of $188.6 million to the holders in exchange for the repurchase and conversion of the Series B Preferred Stock. The excess of the cash payment over the carrying value of the shares of Series B Preferred Stock redeemed resulted in a decrease of $109.9 million to Net (loss) income attributable to common shareholders and reduced diluted earnings per share by $3.15 and $3.23 for the three and six months ended June 27, 2021, respectively, in the Condensed Consolidated Statement of Operations. See “Items Impacting Comparability; Non-GAAP Measures” for additional information.
There are no shares of Series B Preferred Stock outstanding as of the end of the quarter. We plan to use our strong financial position to optimize our capital structure, support our long-term earnings growth and provide continued value creation for our shareholders.
Innovation. The Company continued our culture of innovation in the second quarter of 2021 as we delivered an eighth consecutive quarter of system-wide sales growth. Our two-year comparable sales were 33% in North America and 27% internationally. New store openings also accelerated in the second quarter with the opening of 55 restaurants, net. As interest has increased in our renewed brand, our expanding development pipeline is on track to be a key long-term growth driver. We plan to focus on the continued strategy execution of innovation across our platforms to drive sustainable differentiation and growth this year and beyond.
Strategic Corporate Reorganization for Long-term Growth. In the third quarter of 2020, we announced plans to open an office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlanta, which is projected to open in the fall of 2021. The Atlanta office is part of a broader strategic reorganization of corporate functions reflecting the Company’s ongoing transformation into a brand and culture that can effectively and efficiently deliver on the Company’s purpose, values and strategic business priorities. Affected employees who do not relocate to Atlanta have been offered a separation package. As a result, we expect to incur certain one-time corporate reorganization costs of approximately $17.0 to $20.0 million related to employee severance and transition, recruitment and relocation and other third-party costs through 2021. Of that amount, we have incurred costs of approximately $13.2 million as of June 27, 2021 ($6.0 million in 2020 and $3.3 million and $7.2 million for the three and six months ended June 27, 2021, respectively). See “Items Impacting Comparability; Non-GAAP Measures” for additional information.
Coronavirus (“COVID-19”). The COVID-19 outbreak has presented evolving risks and developments domestically and internationally, as well as new opportunities for our business. Our delivery and carryout model has positioned us to continue to experience strong demand for our products. Increased demand partly driven by the pandemic contributed to our strong sustainable comparable sales growth during the second quarter. To ensure we can continue to meet the demand of our customers, we continue to monitor our supply chain and have not experienced material disruptions. Our primary focus continues to be the safety of our team members, franchisees, and customers. The Company has taken steps to mitigate the impact of the COVID-19 pandemic by implementing extra health and safety measures across our business, including No Contact Delivery and enhanced cleaning and sanitization measures, for the protection of both our customers and team members.
We believe the pandemic has accelerated our previously announced efforts to innovate and bring new and former customers to the Papa John’s system. We believe that as the pandemic-related restrictions are lifted we will benefit from the increase in customers we have experienced due to our menu innovation, customer loyalty programs and our offerings of high-quality pizza and other menu items. Due to the substantial uncertainty related to the effects of the pandemic and its duration, we are unable to predict the specific impact the pandemic and related restrictions (including the lifting or re-imposing of restrictions due to the Delta variant or otherwise) will have on our results of operations, liquidity or long-term financial condition, including whether and to what extent the increased demand for our products will continue. For a discussion of the risks to our business presented by the COVID-19 pandemic, see the risk factors disclosed in the Company’s Annual Report on Form-10-K for the fiscal year ended December 27, 2020.
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Global Restaurant Sales Information
“Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. “Global system-wide restaurant sales growth” represents the change in such sales year-over-year. We believe North America, international and global restaurant and comparable sales growth and Global system-wide restaurant sales information is useful in analyzing our results since our franchisees pay royalties and marketing fund contributions that are based on a percentage of franchise sales. Comparable sales and Global system-wide restaurant sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation. Franchise sales also generate commissary revenue in the United States and in certain international markets. Franchise restaurant and comparable sales growth information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of franchise restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in the Company’s revenues.
Comparable sales growth:
5.6%
22.6%
13.8%
14.4%
North America franchised restaurants
5.2%
29.7%
15.1%
17.2%
North America restaurants
28.0%
14.8%
16.6%
International restaurants
21.2%
5.3%
22.2%
3.8%
Total comparable sales growth
9.0%
13.3%
System-wide restaurant sales growth:
(excluding the impact of foreign currency)
13.9%
13.1%
6.9%
6.4%
29.4%
15.8%
17.5%
6.2%
25.7%
15.2%
15.0%
35.7%
5.5%
32.2%
6.8%
Total global system-wide restaurant sales growth
12.2%
20.8%
19.0%
13.0%
Restaurant Progression
North America Company-owned:
Beginning of period
589
599
598
Opened
Closed
(1)
Acquired
End of period
North America franchised:
2,709
2,686
2,701
2,690
36
(13)
(9)
(16)
(28)
Sold
2,720
International franchised:
2,170
2,093
2,111
2,107
71
139
43
(27)
(55)
(36)
(87)
2,214
2,063
Total restaurants – end of period
5,523
5,347
Trailing four quarters net store growth
176
26
Results of Operations
The following table sets forth the various components of our Condensed Consolidated Statements of Operations expressed as a percentage of total revenues, except operating costs which are expressed as a percentage of the associated revenue component.
% of Related
Increase
($ in thousands)
Revenues
(Decrease)
78.7%
77.8%
0.9%
92.3%
92.2%
0.1%
57.0%
65.2%
(8.2)%
90.5%
94.7%
(4.2)%
10.4%
10.5%
(0.1)%
2.4%
2.7%
(0.3)%
91.3%
93.4%
(2.1)%
8.7%
6.6%
2.1%
(0.7)%
(0.8)%
8.0%
5.8%
2.2%
78.9%
78.8%
92.5%
(0.2)%
56.8%
61.7%
(4.9)%
90.0%
95.6%
(5.6)%
10.1%
11.0%
(0.9)%
2.5%
2.8%
91.1%
(3.6)%
8.9%
3.6%
0.2%
8.2%
4.4%
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Consolidated revenues increased $54.4 million, or 11.8% to $515.0 million, and $156.3 million, or 18.0% to $1.03 billion, for the three and six months ended June 27, 2021, respectively.
Domestic Company-owned restaurant sales increased $9.6 million, or 5.2%, and $45.4 million, or 13.1%, for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods. The increases were primarily due to positive comparable sales increases of 5.6% and 13.8% for the three and six months ended June 27, 2021, respectively. The comparable sales increases were significantly impacted by new product innovation, including the successful launch of our new Epic Stuffed Crust pizza in the first quarter of 2021. The comparable sales increase for the six-month periods is partly due to higher demand that has been sustained during the pandemic, which was not reflected in the first quarter of 2020. “Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods.
North America franchise royalties and fees increased $8.3 million, or 34.3%, and $21.6 million, or 49.5% for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods. The increases were primarily due to positive comparable sales increases of 5.2% and 15.1% for the three and six months ended June 27, 2021, respectively. Additionally, the three and six months ended June 27, 2021 benefited from a higher effective royalty rate and higher franchise royalties of $5.1 million and $10.8 million, respectively, compared to the prior comparable periods primarily as a result of ending our temporary franchise assistance program in the third quarter of 2020. The franchise assistance program was above and beyond the level of franchise assistance the Company would incur in the ordinary course of its business.
North America franchise restaurant sales increased 6.4% to $708.6 million and 15.8% to $1.42 billion for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods. North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales.
North America commissary revenues increased $19.0 million, or 11.3%, and $48.5 million, or 15.0%, for the three and six months ended June 27, 2021, respectively, primarily due to higher volumes and higher pricing on higher commodities.
International revenues increased $9.5 million, or 33.9%, and $18.1 million, or 33.4%, for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods, primarily due to higher royalties from increased equivalent units, higher comparable sales of 21.2% and 22.2% for the three and six months ended June 27, 2021, respectively, and higher Papa John’s United Kingdom (“PJUK”) commissary revenues from higher equivalent units and higher comparable sales. International revenues also increased $3.8 million and $5.8 million for three and six months ended June 27, 2021 due to favorable foreign exchange rates. “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.
International franchise restaurant sales increased 35.7% to $295.3 million and 32.2% to $586.4 million for the three and six months ended June 27, 2021, respectively, excluding the impact of foreign currency, primarily due to increases in comparable sales and equivalent units. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.
Other revenues increased $7.9 million, or 14.6%, and $22.7 million, or 22.4%, for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable period. The increases were primarily due to higher marketing revenues from an increase in franchise sales and higher revenues from our technology platform, including our mobile ordering business which benefited from increased restaurant sales.
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Costs and Expenses
Total costs and expenses were approximately $470.4 million, or 91.3% of total revenues for the three months ended June 27, 2021, as compared to $430.1 million, or 93.4% of related revenues for the prior year comparable period. For the six months ended June 27, 2021, total costs and expenses were approximately $935.3 million, or 91.1% of total revenues, as compared to $824.5 million, or 94.7% of total revenues for the prior year comparable period. The decreases in total costs and expenses, as a percentage of revenues, were primarily due to the following:
Domestic Company-owned restaurant expenses were $154.3 million, or 78.7% of related revenues for the three months ended June 27, 2021, as compared to $145.2 million, or 77.8% of related revenues for the prior year comparable period. For the six months ended June 27, 2021, Domestic Company-owned restaurant expenses were $310.2 million or 78.9% of related revenues, compared to expenses of $274.3 million, or 78.8% of related revenues for the prior year comparable period. The 0.9% and 0.1% increases in expenses, as a percentage of revenues, were primarily due to higher commodities costs and labor initiatives.
North America commissary expenses were $172.2 million, or 92.3% of related revenues, for the three months ended June 27, 2021, compared to $154.5 million, or 92.2% of related revenues for the comparable period in 2020. North America commissary expenses were $342.9 million, or 92.3% of related revenues, for the six months ended June 27, 2021, compared to $298.7 million, or 92.5% of related revenues, for the prior year comparable period. The 0.1% increase and 0.2% decrease in expenses, as a percentage of related revenues, for the three and six months ended June 27, 2021, were relatively consistent with the prior year comparable periods.
International expenses were $21.4 million, or 57.0% of related revenues for the three months ended June 27, 2021 compared to expenses of $18.3 million, or 65.2% of related revenues for the prior year comparable period. International expenses were $41.0 million, or 56.8% of related revenues, for the six months ended June 27, 2021, compared to $33.4 million, or 61.7% of related revenues for the prior year comparable period. The 8.2% and 4.9% decreases in expenses as a percentage of revenues were primarily due to lower operating costs on higher royalties due to 21.2% and 22.2% increases in comparable sales for the three and six months ended June 27, 2021, respectively.
Other expenses were $56.2 million, or 90.5% of related revenues for the three months ended June 27, 2021 compared to expenses of $51.3 million, or 94.7% of related revenues for the prior year comparable period. For the six months ended June 27, 2021, Other expenses were $112.1 million, or 90.0% of related revenues, as compared to $97.3 million, or 95.6% of related revenues for the prior year comparable period. The 4.2% and 5.6% decreases in expenses, as a percentage of related revenues, were primarily due to higher margins from our online and mobile ordering business from higher comparable sales.
General and administrative expenses (“G&A”) were $53.7 million, or 10.4% of revenues, and $103.7 million, or 10.1% of revenues, for the three and six months ended June 27, 2021, respectively, compared to $48.4 million, or 10.5% of revenues, and $96.1 million, or 11.0% of revenues for the prior year comparable periods, respectively. G&A consisted of the following (in thousands):
Jun. 27,
Administrative expenses (a)
51,052
47,875
97,135
90,852
Strategic corporate reorganization costs (b)
3,328
Other general expenses (c)
(682)
553
(637)
5,227
29
Depreciation and amortization expense was $12.5 million, or 2.4% of revenues, and $25.4 million, or 2.5% of revenues, for the three and six months ended June 27, 2021, respectively, compared to $12.4 million, or 2.7% of revenues, and $24.7 million, or 2.8% of revenues, for the prior year comparable periods, respectively.
Operating Income
Operating income increased approximately $14.1 million and $45.5 million for the three and six months ended June 27, 2021, respectively, compared to the prior year comparable periods. Operating income is summarized in the following table on a reporting segment basis. Alongside the GAAP operating income data, we have included “adjusted” operating income to exclude Special items. Special items impacting operating income for 2021 include strategic corporate reorganization costs associated with our new office in Atlanta, Georgia projected to open in the fall of 2021. The reconciliation of GAAP to non-GAAP financial results, as well as the Special items, are included in “Items Impacting Comparability; Non-GAAP Measures.” We believe this non-GAAP measure is important for comparability purposes.
Reported
Special
Adjusted
items
Jun. 28,
in 2021
(1,385)
8,342
1,067
4,212
2,859
(21,289)
1,592
744
47,965
17,431
5,272
21,459
3,120
8,198
9,174
(40,568)
4,489
992
98,710
52,704
The increase in operating income, excluding Special items, of $17.4 million, or 57.1%, and $52.7 million, or 114.6%, for the three- and six- month periods in 2021, respectively were primarily due to the following:
Net Interest Expense
Net interest expense was relatively flat for the three months ended June 27, 2021 and decreased approximately $0.3 million for the six months ended June 27, 2021 due to lower interest rates, partially offset by a higher average outstanding debt primarily from a higher balance outstanding on our revolving credit facility drawn to partially fund the repurchase of Series B Preferred Stock. Total debt outstanding was $425.0 million and $350.0 million as of June 27, 2021 and December 27, 2020, respectively.
Income Before Income Taxes
For the reasons discussed above, income before income taxes increased approximately $14.1 million, or 52.3%, and $45.8 million, or 119.2%, for the three and six months ended June 27, 2021, respectively over the prior year comparable periods.
Income Tax Expense
The effective income tax rates were 18.0% and 18.2% for the three and six months ended June 27, 2021 representing decreases of 0.4% and 1.2%, respectively, from the prior year comparable periods. The decreases in the effective rates were primarily due to higher excess tax benefits from stock option exercises and restricted shares vesting activity for the three and six months ended June 27, 2021.
Diluted (Loss) Earnings Per Common Share
Diluted loss per common share was $2.30 for the three months ended June 27, 2021, compared to diluted earnings per share of $0.48 in the prior year comparable period. For the six months ended June 27, 2021, diluted loss per common share was $1.47, compared to diluted earnings per share of $0.65 for the prior year comparable period. Excluding Special items, adjusted diluted earnings per common share were $0.93 and $1.94 for the three- and six-months ended June 27, 2021, respectively. Diluted loss per common share for the three and six months ended June 27, 2021 included Special items of $3.15 and $3.23, respectively, from a reduction in net income attributable to common shareholders related to the repurchase and conversion of all shares of Series B Preferred Stock. These reductions reflect the excess of the one-time cash payment over the carrying value of the Series B Preferred Stock. See “Items Impacting Comparability; Non-GAAP Measures” for additional information.
Items Impacting Comparability; Non-GAAP Measures
The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures (collectively defined as “Special items”). We present these non-GAAP measures because we believe the Special items in 2021 impact the comparability of our results of operations.
GAAP operating income
Strategic corporate reorganization costs (1)
Adjusted operating income
GAAP net (loss)/income attributable to common shareholders
Repurchase and conversion of Series B Preferred Stock (2)
109,852
Tax effect of strategic corporate reorganization costs (3)
(745)
(1,615)
Adjusted net income attributable to common shareholders
32,537
65,906
GAAP diluted (loss)/earnings per share
0.10
0.22
3.15
3.23
(0.02)
(0.04)
Adjusted diluted earnings per share
0.93
1.94
(Note) The above table does not include the impact of allocation of undistributed earnings to participating securities for Special items.
The 2021 non-GAAP adjusted results shown above and within this document, which exclude Special items, should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP results. Management believes presenting certain financial information excluding Special items is important for purposes of comparison to prior year results. In addition, management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends.
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Liquidity and Capital Resources
The Company has a secured revolving credit facility with available borrowings of $400.0 million (the “Revolving Facility”), of which $95.0 million and $10.0 million was outstanding as of June 27, 2021 and December 27, 2020, respectively, and a secured term loan facility with an outstanding balance of $330.0 million and $340.0 million as of June 27, 2021 and December 27, 2020, respectively (the “Term Loan Facility” and together with the Revolving Facility, the “PJI Facilities”). Including outstanding letters of credit, the Company’s remaining availability under the PJI Facilities at June 27, 2021 was approximately $259.2 million.
We use interest rate swaps to hedge against the effects of potential interest rate increases on borrowings under our PJI Facilities. As of June 27, 2021, we have the following interest rate swap agreements with a total notional value of $350.0 million:
55 million
35 million
100 million
75 million
50 million
The weighted average interest rates on our PJI Facilities, including the impact of the interest rate swap agreements, were 3.2% for the three- and six- month periods ended June 27, 2021, compared to 3.8% for the three- and six- month periods ending June 28, 2020, respectively.
Our PJI Credit Agreement contains affirmative and negative covenants, including the following financial covenants, as defined by the Amended Credit Agreement:
Actual Ratio as of
Permitted Ratio
Leverage ratio
Not to exceed 4.25 to 1.0
2.2 to 1.0
Interest coverage ratio
Not less than 2.50 to 1.0
4.8 to 1.0
Our leverage ratio is defined as outstanding debt divided by consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all financial covenants as of June 27, 2021.
Papa John’s Marketing Fund, Inc. (“PJMF”), our national marketing fund, has a $20.0 million revolving line of credit (the “PJMF Revolving Facility”) pursuant to a Revolving Loan Agreement, dated September 30, 2015 with U.S. Bank National Association, as lender. There was no debt outstanding under the PJMF Revolving Facility as of June 27, 2021 and December 27, 2020. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the PJI Credit Agreement.
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Cash Flows
Cash flow provided by operating activities was $128.0 million for the six months ended June 27, 2021 compared to $87.7 million for the corresponding period of 2020. The increase of $40.3 million was primarily due to higher net income.
Cash flow used in investing activities was $19.5 million for the six months ended June 27, 2021 compared to $16.9 million for the same period in 2020, or an increase of $2.6 million. The increase in cash flow used in investing activities was primarily due to an increase in capital expenditures, partially offset by lower notes issued and higher repayments.
Cash flow used in financing activities was $142.9 million for the six months ended June 27, 2021 compared to $22.8 million for the same period of 2020. The increase of $120.1 million in cash flow used in financing activities was primarily due to the payment of cash consideration to Starboard and certain franchisees for the repurchase and conversion of all of the Company’s Series B Preferred Stock outstanding, offset by an increase in proceeds from our revolving credit facility.
Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the Condensed Consolidated Statements of Cash Flows) less the purchases of property and equipment and dividends paid to preferred stockholders. We view free cash flow as an important financial measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s GAAP measures. See “Items Impacting Comparability; Non-GAAP Measures” for a discussion of free cash flow. The Company’s free cash flow was as follows for the six-month periods of 2021 and 2020 (in thousands):
Dividends paid to preferred stockholders (1)
Free cash flow
100,093
67,038
(1) This does not include the cash consideration paid for the repurchase and conversion of the Series B Preferred Stock. See “Recent Developments and Trends” for additional information.
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Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q and other Company communications that are not statements of historical fact constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as “expect,” “intend,” “estimate,” “believe,” “anticipate,” “will,” “forecast,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the financial impact of the temporary business opportunities, disruptions and temporary changes in demand we are experiencing related to the current outbreak of the COVID-19 pandemic and the related restrictions, commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, the duration of changes in consumer behavior caused by the pandemic, our plans to open a new office in Atlanta, the associated reorganization costs and the related organizational, employment and real estate changes that are expected, royalty relief, the effectiveness of our menu innovations and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, 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:
For a discussion of these and other risks that may cause actual results to differ from expectations, refer to “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020. 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to the impact of interest rate changes on our Revolving Facility and our Term Loan Facility, which comprise the PJI Facilities. We attempt to minimize interest rate risk exposure by fixing our interest rate through the utilization of interest rate swaps, which are derivative financial instruments. Our swaps are entered into with financial institutions that participate in the PJI Facilities. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract. We do not enter into contracts for trading purposes and do not use leveraged instruments. The market risks associated with our debt obligations as of June 27, 2021 have not changed from those reported in “Part II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020. See “Note 8” of “Notes to Condensed Consolidated Financial Statements” for additional information on our debt obligations and derivative instruments.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate fluctuations from our operations outside of the United States, which can adversely impact our revenues, net income and cash flows. Our international operations principally consist of distribution sales to franchised Papa John’s restaurants located in the United Kingdom 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. Approximately 7% of our revenues were derived from these operations for the three and six months ended June 27, 2021, as compared to 6% for the prior year comparable periods.
We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had a favorable impact of approximately $3.8 million and $5.8 million on International revenues for the three and six months ended June 27, 2021, and an unfavorable impact of $1.5 million and $2.0 million for the three and six months ended June 28, 2020, respectively. Foreign currency exchange rate fluctuations had a favorable impact of approximately $900,000 and $1.4 million on operating income for the three and six months ended June 27, 2021, respectively, and an unfavorable impact of $600,000 and $900,000 on operating income for the three and six months ended June 28, 2020, respectively.
Commodity Price Risk
In the ordinary course of business, the food and paper products we purchase, including cheese (our largest individual food cost item), are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our control. We have pricing agreements with some of our vendors, including forward pricing agreements for a portion of our cheese purchases for our domestic Company-owned restaurants, which are accounted for as normal purchases; however, we remain exposed to on-going commodity volatility.
The following table presents the actual average block price for cheese by quarter through the second quarter of 2021 and the projected average block price by quarter for 2021 (based on the July 30, 2021 Chicago Mercantile Exchange cheese futures market prices):
Projected
Actual
Block Price
Quarter 1
1.676
1.857
Quarter 2
1.680
1.679
Quarter 3
1.677
2.262
Quarter 4
1.822
2.235
Full Year
1.714
*
2.008
*The full year estimate is based on futures prices and does not include the impact of forward pricing agreements we have for a portion of our cheese purchases for our domestic Company-owned restaurants. Additionally, the price charged to restaurants can vary somewhat by quarter from the actual block price based upon our monthly pricing mechanism.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon this evaluation, the chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, there was no change made in the Company’s internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in a number of lawsuits, claims, investigations and proceedings consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with Financial Accounting Standards Board Accounting Standards Codification 450, “Contingencies”, the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s condensed 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. The legal proceedings described in Note 9 of “Notes to the Condensed Consolidated Financial Statements” are incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Board of Directors has authorized the repurchase of up to $75.0 million of common stock under a share repurchase program that began on November 4, 2020 and is effective through December 31, 2021. Through June 27, 2021, a total of 116,000 shares with an aggregate cost of $10.9 million and an average price of $94.24 per share were repurchased under this program. Funding for the share repurchase program has been provided through our operating cash flows. Subsequent to June 27, 2021, we acquired an additional 41,000 shares at an aggregate cost of $4.3 million. Approximately $59.8 million remained available for repurchase of common stock under this authorization as of July 30, 2021.
The following table summarizes our repurchase activity by fiscal period during the three months ended June 27, 2021 (in thousands, except per share amounts):
Total Number
Maximum Dollar
Average
of Shares Purchased
Value of Shares
Number
Price
as Part of Publicly
that May Yet Be
of Shares
Paid per
Announced Plans
Purchased Under the
Fiscal Period
Purchased
Share
or Programs
Plans or Programs
5/24/2021 - 6/27/2021
68
101.20
64,110
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.
Repurchase & Conversion of Series B Preferred Stock
On May 11, 2021, the Company entered into a Share Repurchase Agreement with Starboard, pursuant to which (i) the Company repurchased from Starboard 78,387 shares of 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.
Repurchases of Stock for Tax Withholdings
During the fiscal quarter ended June 27, 2021, the Company acquired approximately 500 shares of its common stock from employees to satisfy minimum tax withholding obligations that arose upon (i) vesting of restricted stock granted pursuant to approved plans and (ii) distribution of shares of common stock issued pursuant to deferred compensation obligations.
Item 5. Other Information
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. No shares of Series B Preferred Stock were issued or outstanding following the repurchase and conversion thereof in the second quarter of 2021. 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.
Item 6. Exhibits
Exhibit
Description
3.1
Certificate of Elimination of Series B Convertible Preferred Stock of Papa John’s International, Inc., effective August 3, 2021.
10.1
Share Repurchase Agreement, dated May 11, 2021, by and among Papa John’s International, Inc. and the sellers listed on the schedule of sellers attached thereto. Exhibit 10.1 to our report on Form 8-K as filed on May 12, 2021 is incorporated herein by reference.
10.2
Amendment No. 2 to the March 15, 2019 Endorsement Agreement for personal services of Shaquille O’Neal by and among ABG-Shaq, LLC, Papa John’s Marketing Fund, Inc. and Papa John’s International, Inc., effective July 29, 2021.
31.1
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Financial statements from the quarterly report on Form 10-Q of Papa John’s International, Inc. for the quarter ended June 27, 2021, filed on August 5, 2021, formatted in iXBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Deficit, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: August 5, 2021
/s/ Ann B. Gugino
Ann B. Gugino
Chief Financial Officer
42