PAPA JOHNS INTERNATIONAL INC (PZZA) FY 2021 MD&A

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Introduction

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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. At December 26, 2021, there were 5,650 Papa John’s restaurants in operation, consisting of 600 Company-owned and 5,050 franchised restaurants. Our revenues are derived from retail sales of pizza and other food and beverage products to the general public by Company-owned restaurants, franchise royalties, and sales of franchise and development rights. Additionally, approximately 47% of our North America revenues in each of the last two fiscal years were derived from sales to franchisees of various items including food and paper products from our domestic Quality Control Centers (“QC Centers”), operation of our international QC Center in the United Kingdom (“UK”), contributions received by Papa John’s Marketing Fund (“PJMF”) which is our national marketing fund, printing and promotional items and information systems equipment, and software and related services. We believe that in addition to supporting both Company and franchised profitability and growth, these activities contribute to product quality and consistency throughout the Papa John’s system.

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Recent Business Matters

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In 2021, the Company focused on executing strategic priorities and building a foundation for long-term success, including the specific items described below.

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Growth Strategy. The Company delivered its tenth consecutive quarter of system-wide sales growth and continues to expand both domestically and internationally, as evidenced by our comparable sales and restaurant unit growth.  Our two-year comparable sales increases were 29.4% in North America and 25.6% internationally, driven by menu innovation and customer retention.  Product innovation is an important part of our plan to continue building sales and also represents our platform for longer-term strategy and opportunity. Additionally, our expanding development pipeline is on track to be a key long-term growth driver.  In 2021, we announced one of our largest domestic development deals to open 100 new locations in high growth markets in Texas and the South by 2029.  We also announced our expanded partnership with Drake Food Service International to open over 220 Papa John’s restaurants internationally by 2025, and most recently announced a partnership with FountainVest Partners to open more than 1,350 new stores across South China by 2040, the largest franchisee development agreement in Papa John’s history.  We plan to continue focusing on our strategic innovative products and restaurant development across our platforms to drive sustainable growth this year and beyond.

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Capital Allocation Strategy.  During 2021, we executed on key components of our capital structure and allocation strategy by aligning our capital structure to support the long-term growth potential of the Company. During the fourth quarter of 2021, we announced a $425.0 million share repurchase program. Earlier in the year, we issued $400.0 million of 3.875% senior notes which will mature on September 15, 2029 and concurrently refinanced our revolving credit facility. We also increased our annual dividend rate and completed the repurchase and conversion of all of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”). This strategic capital realignment will allow us to deliver on our broader growth strategy and provide ongoing value to our shareholders.

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Coronavirus (“COVID-19”) and Related Market Impact. 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 positioned us to continue to experience strong demand for our products. Increased demand partly driven by changes in consumer behavior during the pandemic contributed to our strong comparable sales growth during 2021 and 2020. To ensure we can continue to meet the demand of our customers, we continue to monitor our supply chain and labor force availability. We have recently experienced inflation in commodities prices, including food ingredients, which has increased our operating expenses. Our ability to attract and retain hourly employees in our restaurants has also become more challenging, especially as the job market has become more competitive. We have continued to address labor shortages during 2021 through new hiring, referral and appreciation bonuses in the Company’s corporate restaurants and supply chain, holding national recruiting events, supplementing delivery drivers with delivery aggregator partnerships as needed and technology advancements. We expect labor and inflationary cost challenges, including the impact on store development, to be a continued priority focus for us in 2022. We continue to monitor the progression of the COVID-19 pandemic and state, local and federal government regulatory and public health responses thereto, including the federal

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Occupational Health and Safety Administration’s efforts to implement a nationwide vaccine requirement for large employers.

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We believe the pandemic has accelerated our efforts to innovate and bring new customers to the Papa John’s system. While we believe that as the pandemic-related restrictions are lifted, we will benefit in the long-term from the increase in customers we have experienced during the duration of the pandemic due to our menu innovation, customer loyalty program and our offerings of high-quality pizza and other menu items, we do not expect to be able to maintain the same level of annual growth rates in comparable sales and revenues in the future.

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Strategic Corporate Reorganization for Long-term Growth. Our corporate office in Atlanta, Georgia located in Three Ballpark Center at The Battery Atlanta opened in October 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 did not relocate to Atlanta were offered a separation package. As a result, we incurred certain one-time corporate reorganization costs of approximately $19.1 million related to employee severance and transition, recruitment and relocation and other third-party costs from the fourth quarter of 2020 through 2021. Of that amount, we incurred costs of approximately $13.1 million in 2021 and $6.0 million in 2020.  Looking forward to 2022, our one-time corporate reorganization costs are substantially complete and we do not anticipate that any significant remaining reorganization costs will be incurred.  See “Items Impacting Comparability; Non-GAAP Measures” for additional information.

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Presentation of Financial Results

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Critical Accounting Policies and Estimates

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The results of operations are based on our Consolidated Financial Statements, which were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of Consolidated Financial Statements requires management to select accounting policies for critical accounting areas as well as estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements. The Company’s significant accounting policies, including recently issued accounting pronouncements, are more fully described in “Note 2” of “Notes to Consolidated Financial Statements.” A number of our significant accounting policies are critical due to the fact that they involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.  Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results.

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Allowance for Credit Losses on Franchisee Notes Receivable

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The Company has provided financing (recorded as notes receivable) to select domestic and international franchisees principally for use in the construction and development of their restaurants and for the purchase of restaurants from the Company or other franchisees. Most notes receivable bear interest at fixed or floating rates and are generally secured by the assets of each restaurant and the ownership interests in the franchise. The Company has also provided long-term financing to certain franchisees with royalty payment plans.

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The Company establishes an allowance for credit losses on franchisee notes receivables when it is more likely than not that some portion or all of the balance will not be realized. The allowance for credit losses on notes receivable is highly judgmental and subjective based on management’s judgments of each franchisee’s economic performance and future market conditions.  The Company considers each individual note receivable separately for evaluation of its allowance for credit losses which represent specific reserve calculations, except for certain notes receivable issued related to equipment development incentives where a general portfolio reserve exists supported by historical write-off experiences.  Included in the terms of the notes receivable agreements, the Company is provided collateral rights of the franchisee’s stores (e.g., underlying franchise business, property and equipment) and personal guarantees from the operators to recover the carrying value of the outstanding note receivable in the event collectability concerns arise.  As a result, the Company also considers the fair value of the underlying collateral rights (e.g., underlying franchisee business, property and equipment) and any guarantees when assessing the allowance for credit losses (which may require third-party valuations of fair value). Further, the Company also considers overall franchisee credit quality, which is monitored through the timing of payments compared

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to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer, including metrics such as comparable store sales of the franchisees operations and weekly per store sales averages. Notes receivable balances are charged off against the allowance after recovery efforts have ceased.

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Franchisee notes receivable was $49.4 million with an allowance for credit losses of $1.5 million as of December 26, 2021 compared to $51.1 million with an allowance for credit losses of $3.2 million as of December 27, 2020.

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Insurance Reserves

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Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability and property insurance coverage provided to our employees are funded by the Company up to certain retention. Retention limits range up to $1.0 million.  We record the liability for losses based upon undiscounted estimates of the liability for claims incurred and for events that have occurred but have not been reported using certain third-party actuarial projections and our historical claims loss experience.

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As of December 26, 2021, our insurance reserves were $88.1 million as compared to $82.0 million at December 27, 2020.  Our insurance reserves primarily relate to auto liability and workers’ compensation claims and includes the gross up of claims above our retention levels, with a corresponding receivable recorded in Prepaid and other current assets and Other assets on the Consolidated Balance Sheets. The insurance reserves represent the mid-point of the range as determined by our actuarial analysis, which considered various actuarial valuation methodologies.  The determination of the recorded insurance reserves is highly complex due to the significant uncertainty in the potential value of reported claims and the number and potential value of incurred but not reported claims.

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Income Tax Accounts and Tax Reserves

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Papa John’s is 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. 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.

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Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize and were $28.6 million and $23.0 million as of December 26, 2021 and December 27, 2020, respectively. The determination as to whether a deferred tax asset will be realized is based on the evaluation of historical profitability, future market growth, future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company assesses deferred taxes and the adequacy or need for a valuation allowance on a quarterly basis.

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Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues and adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures.

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In the event the Company is unable to generate future taxable income, there is a material change in the actual effective tax rates, the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then we could be required to increase the valuation allowance against deferred tax assets, resulting in an increase in income tax expense and the effective tax rate. Each change of income tax expense of $1.5 million would impact the fiscal 2021 effective tax rate by one percentage point. See “Note 17” of “Notes to Consolidated Financial Statements” for additional information.

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Global Restaurant Sales and Unit Information

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“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” represents total restaurant sales for all company-owned and franchised stores open during the comparable periods, and “Global system-wide restaurant sales growth” represents the change in total system restaurant sales year-over-year. 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.

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Fiscal Year

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Our fiscal year ends on the last Sunday in December of each year. All fiscal years presented in the accompanying Consolidated Financial Statements consist of 52 weeks.

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Results of Operations

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2021 Compared to 2020

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This section of this Annual Report on Form 10-K generally discusses fiscal 2021 and 2020 items and year-to-year comparisons between fiscal 2021 and 2020.  Discussion of 2019 items and year-to-year comparisons between fiscal 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on From 10-K for the fiscal year ended December 27, 2020.

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The following table sets forth the various components of the 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.

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Revenues

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Consolidated revenues increased $255.2 million, or 14.1%, to $2.07 billion in 2021, compared to $1.81 billion in 2020.

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Domestic Company-owned restaurant sales increased $77.6 million, or 11.1%, in 2021. The increase was primarily due to positive comparable sales of 11.3%, which were positively impacted  by new product innovation, including the successful launch of our new Epic Stuffed Crust pizza in the first quarter of 2021, and due to higher demand that has been sustained during the pandemic, which was not reflected in the first quarter of 2020.

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North America franchise royalties and fees increased $32.6 million, or 33.7%, in 2021.  The increase was primarily due to positive comparable sales of 12.0% and a higher effective royalty rate from higher franchise royalties of $14.3 million in 2021 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.

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North America franchise restaurant sales increased 13.0% to $2.8 billion for 2021 compared to prior year.  North America franchise restaurant sales are not included in Company revenues; however, our North America franchise royalties are derived from these sales.

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North America commissary revenues increased $80.5 million, or 11.8%, primarily due to higher volumes and higher pricing from higher commodities costs.

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International revenues increased $26.8 million, or 21.6% in 2021 primarily due to higher royalties from increased equivalent units and higher comparable sales of 13.0%.  International revenues also increased $8.1 million in 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.

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International franchise restaurant sales increased 24.4% to $1.2 billion in 2021, excluding the impact of foreign currency, primarily due to increases in comparable sales and net new restaurant openings. International franchise restaurant sales are not included in Company revenues; however, our international royalty revenue is derived from these sales.

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Other revenues, which primarily includes our national marketing funds, online and mobile ordering business and our wholly-owned print and promotions subsidiary, increased $37.7 million, or 17.9% in 2021 primarily due to higher marketing fund 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

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Total costs and expenses were approximately $1.90 billion, or 91.9% of total revenues in 2021, as compared to $1.7 billion, or 95.0% of total revenues for the prior year. The decrease in total costs and expenses, as a percentage of revenues, were primarily due to the following:

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Domestic Company-owned restaurant expenses were $621.9 million or 79.9% of related revenues in 2021, compared to expenses of $563.8 million, or 80.5% of related revenues for the prior year.  The 0.6% decrease in expenses, as a percentage of revenues, was primarily due to leveraging fixed costs on higher revenues, partially offset by higher commodity and labor costs.

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North America commissary expenses were $703.6 million, or 92.4% of related revenues in 2021, compared to $630.9 million, or 92.7% of related revenues, for the prior year. The 0.3% decrease in expenses, as a percentage of revenues, was primarily due to leveraging fixed costs on higher revenues.

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International expenses were $87.3 million, or 57.9% of related revenues, for 2021 compared to $74.0 million, or 59.7% of related revenues for the prior year. The 1.8% decrease in expenses as a percentage of revenues was primarily due to lower operating costs on higher royalties from a 13.0% increase in comparable sales for 2021 and the favorable impact of foreign currency exchange rates in 2021.

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Other expenses were $226.3 million, or 91.0% of related revenues in 2021, as compared to $200.3 million, or 94.9% of related revenues for the prior year. The 3.9% decrease in expenses, as a percentage of related revenues, was primarily due to higher margins from our technology platform, including our mobile ordering business.

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General and administrative (“G&A”) expenses were $212.3 million, or 10.3% of revenues for 2021 compared to $204.2 million, or 11.3% of revenues for 2020.  G&A expenses consisted of the following (dollars in thousands):

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See “Items Impacting Comparability; Non-GAAP Measures” for additional information regarding the Special items.

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Depreciation and amortization.  Depreciation and amortization expense was $48.8 million, or 2.4% of revenues in 2021, as compared to $49.7 million, or 2.7% of revenues for 2020.  The 0.3% decrease is primarily due to higher revenues in 2021.

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Operating Income by Segment

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Operating income is summarized in the following table on a reporting segment basis. Operating income increased approximately $78.0 million for the year ended December 26, 2021 as compared to the prior year. Alongside the GAAP operating income data, we have included “adjusted” operating income to exclude Special items. Special items in 2021 and 2020 consist of strategic corporate reorganization costs associated with our corporate office in Atlanta, Georgia. 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 these non-GAAP measures are important for comparability purposes.

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The increase in operating income, excluding Special items, of $85.1 million, or 88.4% in 2021 compared to 2020 was primarily due to the following:

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Interest expense. Interest expense increased approximately $2.2 million for the year ended December 26, 2021 primarily due to higher interest rate for our senior notes and higher average outstanding debt on our revolving credit facility drawn to partially fund the repurchase and conversion of our Series B Preferred Stock. Total debt outstanding was $490.0 million and $350.0 million as of December 26, 2021 and December 27, 2020, respectively.

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Income before income taxes.  Income before income taxes was $150.9 million in 2021, compared to $75.4 million in 2020, or an increase of $75.5 million due to the reasons discussed above.

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Income tax expense. The effective income tax rate was 17.2% for 2021, compared to 19.6% for 2020. The effective rate was lower in 2021 due to the finalization of our 2020 federal income tax return, which resulted in a $2.7 million benefit to income tax expense. The rate also included excess tax benefits from stock option exercise and restricted shares vesting activity. The following compares income tax expense for 2021 and 2020:

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See “Items Impacting Comparability; Non-GAAP Measures” and “Note 7” and “Note 17” of “Notes to Consolidated Financial Statements,” for additional information.

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Diluted earnings per share. Diluted earnings per common share was $0.12 for 2021 compared to diluted earnings per common share of $1.28 in 2020, representing a decrease of $1.16. Excluding Special items, adjusted diluted earnings per common share was $3.51 in 2021, compared to $1.40 in 2020, representing an increase of $2.11. Diluted earnings per common share for the year ended December 26, 2021 included $3.10 from a reduction in net income attributable to common shareholders related to the repurchase and conversion of all shares of previously outstanding Series B Preferred Stock during the second quarter. This reduction reflects the excess of the one-time cash payment over the carrying value of the Series B Preferred Stock. See “Note 6” and “Note 7” of “Notes to Consolidated Financial Statements” for additional information.

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Items Impacting Comparability; Non-GAAP Measures

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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 impact the comparability of our results of operations. See “Note 6”, “Note 16”, and “Note 17” of “Notes to Consolidated Financial Statements,” for additional information about the Special items.

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(Note)   The above table does not include the impact of the allocation of undistributed earnings to participating securities for Special items in 2021.

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The non-GAAP adjusted results shown above and within this document, which exclude the 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 the Special items is important for purposes of comparing our historical operating results and providing transparency in how we evaluate our operating performance.  Management uses these metrics to evaluate the Company’s underlying operating performance and to analyze trends.

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In addition, we present free cash flow in this report, which is a non-GAAP measure. Please see “Liquidity and Capital Resources – Free Cash Flow” for a discussion of why we believe free cash flow provides useful information regarding our financial condition and results of operations, and a reconciliation of free cash flow to the most directly comparable GAAP measure.

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The presentation of the non-GAAP measures in this report is made alongside the most directly comparable GAAP measures.

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Liquidity and Capital Resources

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Cash Flows

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The table below summarizes our cash flows from continuing operations for each of the last two fiscal years (in thousands):

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Operating Activities

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Total cash provided by operating activities was $184.7 million for the year ended December 26, 2021 which was generally consistent with the prior year comparable period.  The Company benefited from strong comparable sales growth of 12.1% in 2021 driven by our product innovation, customer retention and expansion both domestically and internationally, which more than doubled our net income to $125.0 million from $60.6 million a year ago.  This was offset by unfavorable changes in working capital, including the repayment of previously deferred employer payroll taxes from the Coronavirus Aid, Relief, and Economic Security Act and the timing of payments associated with our national marketing fund.

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Investing Activities

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Cash flow used in investing activities was $63.5 million in 2021 compared to $41.1 million in 2020.  The increase of $22.4 million was primarily driven by a $32.9 million increase in capital spend as part of our long-term growth strategy and expansion both domestically and internationally, including expenditures for the buildout of our corporate office located in Atlanta, Georgia, information technology upgrades for our corporate and restaurant facilities, and the development of Company-owned restaurants.  This was partially offset by higher repayments from notes issued to franchisees.

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Financing Activities

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Cash flow used in financing activities was $180.5 million in 2021 compared to $43.5 million in 2020, an increase of $137.0 million.  During 2021, the Company executed a new capital allocation strategy to optimize its capital structure, accelerating our long-term earnings potential and providing ongoing value to our shareholders. This strategy included cash consideration paid for the repurchase of the Company’s outstanding shares of Series B Preferred stock totaling $188.6 million, share repurchases made under the Company’s share repurchase programs of $72.5 million, and an increase to our dividend rate per common share, from $0.90 to $1.40 on an annual basis. These cash uses were partially offset by net proceeds of $60.0 million from the issuance of our 3.875% senior notes due 2029 and refinancing of our revolving credit facility, and also $80.0 million in net proceeds received from our revolving credit facility which were mainly used to fund our share repurchases.

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Debt

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On September 14, 2021, the Company issued $400.0 million of 3.875% senior notes (the “Notes”) which will mature on September 15, 2029.  Concurrently with the issuance of the Notes, the Company entered into an amended and restated credit agreement (the “Amended Credit Agreement”) replacing the previous credit agreement (“Previous Credit Agreement”).  The Amended Credit Agreement provides for a senior secured revolving credit facility in an aggregate available principal amount of $600.0 million (the “PJI Revolving Facility”), of which up to $40.0 million is available as swingline loans and up to $80.0 million is available as letters of credit.  The PJI Revolving Facility will mature on September 14, 2026.

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The net proceeds from the Notes, together with borrowings under the PJI Revolving Facility, were used to repay outstanding revolver and term loan borrowings under the Company’s Previous Credit Agreement.

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Our outstanding debt as of December 26, 2021 was $490.0 million, which was comprised of $400.0 million outstanding under the Notes and $90.0 million outstanding under the PJI Revolving Facility. Remaining availability under the PJI Revolving Facility was approximately $510.0 million as of December 26, 2021.

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Our Amended Credit Agreement contains affirmative and negative covenants that, among other things, require customary reporting obligations and restrict, subject to certain exceptions, the incurrence of additional indebtedness and liens, the consummation of certain mergers, consolidations, sales of assets and similar transactions, the making of investments, equity distributions and other restricted payments, and transactions with affiliates.  The Company is also subject to certain financial covenants, as shown in the following table, that could restrict or impose constraints on the liquidity of our business:

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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 December 26, 2021.

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In addition, the Indenture governing the Notes contains customary covenants that, among other things and subject to certain exceptions, limit our ability and the ability of certain of our subsidiaries to: incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions or repurchase or redeem our capital stock; prepay, redeem or repurchase certain debt; issue certain preferred stock or similar equity securities; make loans and investments; sell assets; incur liens; enter into transactions with affiliates; enter into agreements restricting our subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or substantially all of our assets.

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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 December 26, 2021 or December 27, 2020. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the Amended Credit Agreement.

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See “Note 12” of “Notes to Consolidated Financial Statements” for additional information.

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Share Repurchases

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As part of our long-term growth and capital allocation strategy, we are committed to investing in share repurchases to provide ongoing value and enhanced returns to our shareholders.  On October 28, 2021, our Board of Directors approved a share repurchase program with an indefinite duration for up to $425.0 million of the Company’s common stock.  The share repurchase program operated alongside our previous $75.0 million share repurchase authorization, which began on November 4, 2020 and expired on December 26, 2021.

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The following table summarizes our repurchase activity for the years ended December 26, 2021 and December 27, 2020:

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Subsequent to year-end, we acquired an additional 109,000 shares at an aggregate cost of $13.3 million.  Approximately $411.5 million remained available under the Company’s share repurchase program as of February 17, 2022.

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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.

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Dividends

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The Company recorded dividends of approximately $46.0 million for the year ended December 26, 2021 consisting of the following:

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The Company paid common stock dividends of $29.4 million, common stock “pass-through” dividends to Series B Preferred Stockholders of $4.6 million, and $9.1 million in preferred dividends on the Series B Preferred Stock in 2020.

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On January 27, 2022, our Board of Directors declared a first quarter dividend of $0.35 per share of common stock, representing an approximate $12.7 million aggregate dividend that was paid on February 18, 2022 to common stockholders of record as of the close of business on February 7, 2022.  The declaration and payment of any future dividends will be at the discretion of our Board of Directors.

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Free Cash Flow

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Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the 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.

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The Company’s free cash flow for the last two years was as follows (in thousands):

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(1) Excludes $188.6 million of cash consideration paid for the repurchase and conversion of the Series B Preferred Stock in the second quarter of 2021.

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Cash Requirements

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The Company believes that its balances of cash and cash equivalents and borrowing capacity, along with cash generated by operations, will be sufficient to satisfy its cash requirements, cash dividends, interest payments and share repurchases over the next twelve months and beyond.

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The Company’s material cash requirements as of December 26, 2021 include the following contractual obligations (in thousands):

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The above table does not include the following:

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Impact of Inflation

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From time to time, we experience the impacts of inflation, which cause increased food, labor and benefits costs and higher operating expenses. To the extent permitted by competition, increased costs are recovered through a combination of menu price increases and/or implementing other cost reductions.

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Off-Balance Sheet Arrangements

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We guarantee leases for certain Papa John’s North American franchisees who have purchased restaurants that were previously Company-owned.  We are contingently liable on these leases. These leases have varying terms, the latest of which expires in 2036.  As of December 26, 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 approximately $11.5 million.

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We have certain other commercial commitments where payment is contingent upon the occurrence of certain events. With our insurance programs, we are party to surety bonds with off-balance sheet risk as follows by year (in thousands):

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The surety bond arrangements expire within one year but have automatic renewal clauses.  See “Note 12” and “Note 19” of “Notes to Consolidated Financial Statements” for additional information related to contractual and other commitments.

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Forward-Looking Statements

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Certain matters discussed in this Annual Report on Form 10-K 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, labor shortages, inflation, reorganization costs and the related organizational, employment and real estate changes from opening our new office in Atlanta, 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:

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These and other risk factors are discussed in detail in “Part I. Item 1A. — Risk Factors” of this Annual Report on Form 10-K. 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.

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