# PAPA JOHNS INTERNATIONAL INC (PZZA) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PAPA JOHNS INTERNATIONAL INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/901491/000162828023004682/pzza-20221225.htm
Accession: 0001628280-23-004682
Filing date: 2023-02-23
Report date: 2022-12-25
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/PZZA/
All MD&A years: /company/PZZA/mda/
Previous year: /company/PZZA/mda/fy2021/ (FY 2021)
Next year: /company/PZZA/mda/fy2023/ (FY 2023)

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

Introduction and Overview

The following Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data and the Risk Factors set forth in Item 1A. Risk Factors.

This section of this Annual Report on Form 10-K generally discusses fiscal 2022 and 2021 items and year-to-year comparisons between the years ended December 25, 2022 and December 26, 2021. Discussion of 2020 items and year-to-year comparisons between the years ended December 26, 2021 and December 27, 2020 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 Form 10-K for the fiscal year ended December 26, 2021.

Papa John’s International, Inc. (referred to as the “Company,” “Papa John’s,” “Papa Johns” or in the first-person notations of “we,” “us” and “our”) began operations in 1984. At December 25, 2022, there were 5,706 Papa John’s restaurants in operation, consisting of 522 Company-owned and 5,184 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 48% to 52% 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 UK, contributions received by Papa John’s Marketing Fund, Inc. (“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.

Recent Business Matters

In 2022, the Company focused on executing strategic priorities and building a foundation for long-term success, while navigating a challenging macroeconomic environment. Our progress and significant transactions during the year are described below.

Growth Strategy. The Company delivered its fourteenth consecutive quarter of Global system-wide restaurant sales growth and continues to expand both domestically and internationally, as evidenced by our comparable sales and restaurant unit growth.

Our menu and digital innovations are an important part of our long-term strategy to drive new customers and ticket sales. We focus our menu innovations on products that add both value and variety for our customers but do not add complexity to our restaurant operations or to our supply chain. Our menu innovation calendar is expansive, flexible and differentiated and allows us to adjust our offerings depending on what customers want – whether that is extending a Limited-Time-Offer or building upon existing platforms. We believe our digital innovations, like our website, digital app, third-party aggregator partnerships and Papa Call call centers are a differentiator for our customers and provide attractive channels that promote customer retention and help us grow our customer base. In 2022, approximately 85% of our Domestic transactions came through these digital channels.

Our expanding development pipeline is also a key long-term growth driver as there remains significant opportunity to offer our differentiated, premium position to more customers globally and domestically. In 2022, we expanded our global footprint by 4.5%, with 244 net new units (excluding the 188 restaurants suspended in Russia in the first quarter of 2022 and discussed below). We expect this growth to accelerate in 2023 with global development to be between 270 to 310 net new units. Our view of our long-term unit opportunity, both domestically and internationally, continues to expand as we sign historic deals to develop within key areas. In 2022, we announced that we expect 1,400 to 1,800 net new Papa Johns restaurants worldwide from 2022 through the end of 2025. We plan to continue focusing on our strategic innovative products and restaurant development across our platforms to drive sustainable growth this year and beyond.

Global Market Conditions. The differentiated brand positioning of Papa Johns and the agility of our business model have been critical to our success as we have had to navigate a constantly changing environment in recent years. Our brand positioning and ability to adapt are no less important today as we continue to adjust to a more inflationary and uncertain environment and consumers are increasingly seeking out value. As consumer demand for dining has softened over the past year, pizza offers tremendous value relative to other quick service restaurants. Using Papa Rewards, our loyalty program, we are able to target more price-sensitive customers with high-value promotions. At the same time, we have continued our

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successful strategy of letting our customers, especially those who are less price sensitive, self-select into our premium priced menu innovations. While we have increased pricing in response to inflation, partially offsetting higher food, labor and fuel costs in our supply chain and at our restaurants, our ticket growth has predominantly come through new premium products and add-ons over the past few years.

Macroeconomic conditions in the United Kingdom, the largest region in our International segment, have declined in light of ongoing inflation, rising interest rates and the recent energy crisis. Against this backdrop, the Company has experienced increasing declines in sales and profitability in the UK market. While uncertain how long these conditions will last, the Company is committed to its presence in the UK and is invested in the Company’s long-term success in this region. As we navigate this challenging economic environment, we will be investing in capabilities to improve our operations and will work to re-position the franchise base to further strengthen our UK business. The next step in our commitment includes a variety of support to help franchisees through this difficult time, including targeted marketing incentives of approximately $2 million to $3 million.

Refranchising. On March 28, 2022, the Company sold its 51 percent controlling interest in a joint venture between Papa Johns and Blue and Silver Ventures, Ltd. (“Blue and Silver Ventures”). Sun Holdings, Inc. (“Sun Holdings”), a leading multi-brand franchisee operator and one of Papa John’s largest Domestic franchise partners, assumed control of the 90 Papa John’s restaurants in Texas that operated under the joint venture. By strategically refranchising its controlling interests in its joint venture with Blue and Silver Ventures to Sun Holdings, the Company provided Sun Holdings substantial scale to support new restaurant openings under its current, 100-restaurant development agreement with the Company. This commitment is in addition to the 90 refranchised restaurants. As a result, the deal is expected to accelerate the Company’s Domestic development, contributing to long-term earnings via high-margin franchise royalty growth. The restaurants were consolidated in the Company’s results through the date of the transaction, and their results are included in the Company’s North America franchise royalties and fees beginning March 29, 2022. See “Note 22. Divestitures” of “Notes to Consolidated Financial Statements for further information.

Suspension of Franchisee Support in Russia. The Company has no Company-owned restaurants in Russia or Ukraine. At the end of fiscal year 2021, 188 franchised restaurants were located in Russia, all of which were operated and supplied through a master franchisee. As of March 2022, Papa John’s suspended its corporate operations and support for franchised restaurants in Russia, and fully reserved all receivables from the aforementioned master franchisee. The Company recognized $17.4 million in one-time, non-cash charges related to reserves for certain loans and impairments of reacquired franchised rights due to the conflict in Ukraine and subsequent international government actions and sanctions, which were recorded as Refranchising and impairment loss of $2.8 million and General and administrative expenses of $14.6 million. All assets related to the franchised operations in Russia have been fully reserved or impaired, so there are no additional Russia related charges for reserves, write-offs, or impairments of amounts recorded on the Consolidated Balance Sheet.

Coronavirus Pandemic and Related Market Impact. The restaurant industry has faced and managed staffing challenges since long before the pandemic. These challenges intensified with the increased demand for employees in the service industry as the economy recovered last year. In early 2022, the Omicron variant further exacerbated the situation, given the spike in infection rates and number of people out sick or quarantined at home. Our team members have been working harder than ever to continue to safely serve their customers and communities and we have benefited from their dedication to manage through staffing constraints. We will continue to strive to be the employer of choice in our industry and have taken many actions to create a strong culture and support our people.

Presentation of Financial Results

Critical Accounting Policies and Estimates

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. Significant Accounting Policies” 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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Insurance Reserves

Our insurance programs for workers’ compensation, owned and non-owned automobiles, general liability and property insurance coverage are funded by the Company up to certain retention levels. Retention limits range up to $0.5 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.

As of December 25, 2022, our insurance reserves were $67.3 million compared to $88.1 million at December 26, 2021. Reserves are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Consolidated Balance Sheets. Our insurance reserves primarily relate to auto liability and workers’ compensation claims and include 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.

Allowance for Credit Losses on Franchisee Notes Receivable

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.

The Company establishes an allowance for credit losses on franchisee notes receivables based on management’s estimate of the lifetime expected loss on the notes. The allowance for credit losses on notes receivable is judgmental and subjective based on management’s evaluation of historical collection experience, external market data and other factors, including those related to current market conditions and events. The Company is provided collateral rights of the franchisee’s restaurants (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. Therefore, the Company 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). Notes receivable balances are charged off against the allowance after recovery efforts have ceased.

Franchisee notes receivable was $42.6 million with an allowance for credit losses of $14.5 million as of December 25, 2022 compared to $49.4 million with an allowance for credit losses of $1.5 million as of December 26, 2021. The increase in the allowance for credit losses was primarily due to an increase for certain notes receivable primarily associated with a master franchisee with operations principally in Russia and the termination of significant franchisees in the UK. See “Note 10. Allowance for Credit Losses” of “Notes to Consolidated Financial Statements for further information.

Income Tax Accounts and Tax Reserves

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.

Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts we expect to realize and were $32.1 million and $28.6 million as of December 25, 2022 and December 26, 2021, 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.

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. We estimate that a one percent change in the effective income tax rate would impact the 2022 income tax expense by $0.8 million. See “Note 17. Income Taxes” of “Notes to Consolidated Financial Statements” for additional information.

Global Restaurant Sales and Unit Information

“Comparable sales” represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable sales excludes sales of restaurants that were not open during both the current and prior fiscal periods and franchisees for which we suspended corporate support. “Global system-wide restaurant sales” represents total restaurant sales for all Company-owned and franchised restaurants open during the comparable periods, and “Global system-wide restaurant sales growth (decline)” represents the change in total system restaurant sales year-over-year. Global system-wide restaurant sales and global system-wide sales growth (decline) exclude franchisees for which we suspended corporate support.

“Equivalent units” represents the number of restaurants open at the beginning of a given period, adjusted for restaurants opened, closed, acquired or sold during the period on a weighted average basis.

We believe 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.

[[GREPCENT_TABLE]]
[["","","Year Ended"],["Amounts below exclude the impact of foreign currency","","December 25, 2022","","December 26, 2021"],["Comparable sales growth (decline):"],["Domestic Company-owned restaurants","","(1.0)","%","","11.3","%"],["North America franchised restaurants","","1.2","%","","12.0","%"],["North America restaurants","","0.7","%","","11.8","%"],["International restaurants","","(5.3)","%","","13.0","%"],["Total comparable sales growth (decline)","","(0.8)","%","","12.1","%"],["System-wide restaurant sales growth:"],["Domestic Company-owned restaurants","","1.3","%","","11.1","%"],["North America franchised restaurants","","2.5","%","","13.0","%"],["North America restaurants","","2.3","%","","12.6","%"],["International restaurants (a)","","4.8","%","","24.4","%"],["Total global system-wide restaurant sales growth (a)","","2.9","%","","15.4","%"]]
[[/GREPCENT_TABLE]]

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(a)    The twelve months ended December 25, 2022 excludes the impact of franchisee suspended restaurants.

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[[GREPCENT_TABLE]]
[["Restaurant Progression","","Year Ended"],["","","December 25, 2022","","December 26, 2021"],["North America Company-owned:"],["Beginning of period","","600","","","588"],["Opened","","10","","","11"],["Acquired","","2","","","\u2014"],["Refranchised","","(90)","","","1"],["End of period","","522","","","600"],["North America franchised:"],["Beginning of period","","2,739","","","2,701"],["Opened","","76","","","74"],["Closed","","(49)","","","(35)"],["Refranchised","","90","","","\u2014"],["Sold","","(2)","","","(1)"],["End of period","","2,854","","","2,739"],["International franchised:"],["Beginning of period","","2,311","","","2,111"],["Opened","","292","","","304"],["Closed","","(85)","","","(104)"],["Suspended (a)","","(188)","","","\u2014"],["End of period","","2,330","","","2,311"],["Total restaurants \u2013 end of period","","5,706","","","5,650"],["Full year net store growth (b)","","244","","","250"]]
[[/GREPCENT_TABLE]]

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(a)    As previously disclosed, the Company has suspended corporate support for all franchised restaurants located in Russia. These suspended restaurants are excluded from net unit growth calculations.

Fiscal Year

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

Revenues

The following table sets forth the various components of Revenues from the Consolidated Statements of Operations.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","December 25, 2022","","December 26, 2021","","Increase (Decrease)"],["Revenues:"],["Domestic Company-owned restaurant sales","","$","708,389","","","$","778,323","","","(9.0)","%"],["North America franchise royalties and fees","","137,399","","","129,310","","","6.3","%"],["North America commissary revenues","","869,634","","","761,305","","","14.2","%"],["International revenues","","129,903","","","150,771","","","(13.8)","%"],["Other revenues","","256,778","","","248,712","","","3.2","%"],["Total revenues","","$","2,102,103","","","$","2,068,421","","","1.6","%"]]
[[/GREPCENT_TABLE]]

For the year ended December 25, 2022, the discussion of changes in revenues below for Domestic Company-owned restaurants and North America franchised restaurants include an explanation of the impact of refranchising 90 restaurants during the second quarter of 2022 (the “2022 refranchising”). See “Refranchising” above and “Note 22. Divestitures” of “Notes to Consolidated Financial Statements” for additional information.

Total revenues increased $33.7 million, or 1.6% to $2.10 billion for the year ended December 25, 2022, as compared to the prior year. Excluding the impact of the 2022 refranchising, total revenues increased $86.9 million, or 4.4%, for the year ended December 25, 2022.

Domestic Company-owned restaurant sales decreased $69.9 million, or 9.0% for the year ended December 25, 2022 compared to the prior year. Excluding the impact of the 2022 refranchising, Domestic Company-owned restaurant sales increased $8.7 million, or 1.3% for the year ended December 25, 2022, primarily due to innovations and strategic pricing actions to help offset food and labor inflation. Equivalent units also increased 3.7% for the year ended December 25, 2022, excluding the 2022 refranchising, and the related increase was partially offset by a comparable sales decline of 1.0%.

North America franchise royalties and fees increased $8.1 million, or 6.3% for the year ended December 25, 2022 compared to the prior year. Excluding the impact of 2022 refranchising, North America franchise royalties and fees increased $4.2 million, or 3.1% for the year ended December 25, 2022, primarily due to an increase in comparable sales of 1.2% and equivalent units of 1.4%.

North America franchise restaurant sales, excluding the impact of the 2022 refranchising, increased 2.3% to $2.99 billion for the year ended December 25, 2022 compared to the prior year. 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 $108.3 million or 14.2% for the year ended December 25, 2022 compared to the prior year. North America commissaries have increased prices in line with rising commodity prices driven by inflation, principally in cheese, soy oil, proteins and wheat.

International revenues decreased $20.9 million, or 13.8% for the year ended December 25, 2022 compared to the prior year, primarily due to lower UK commissary revenues. The overall declines in our International revenue performance were largely attributable to a decrease in comparable sales of 5.3% for the year ended December 25, 2022 related to inflationary pressures in the PJUK market.

International franchise restaurant sales decreased to $1.17 billion for the year ended December 25, 2022 compared to $1.27 billion for the year ended December 26, 2021. Excluding the impact of foreign currency fluctuations and the previously disclosed franchisee suspended restaurants, International franchise restaurant sales increased $58.2 million or 4.8% for the year ended December 25, 2022. International franchise restaurant sales are not included in Company revenues; however, our International royalty revenue is derived from these sales.

Other revenues, which primarily includes our national marketing funds, online and mobile ordering business and our wholly-owned print and promotions subsidiary, increased $8.1 million, or 3.2% in 2022 primarily due to higher revenues

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from our technology services from higher equivalent units and higher revenues from Preferred Marketing, our wholly-owned print and promotions company as they return to pre-pandemic levels.

Costs and Expenses

The following table sets forth the various components of Costs and expenses from the Consolidated Statements of Operations, expressed as a percentage of the associated revenue component.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Year Ended"],["","December 25, 2022","","% of Related Revenues","","December 26, 2021","","% of Related Revenues","","Increase (Decrease) in % of Revenues"],["Costs and expenses:"],["Operating costs (excluding depreciation and amortization shown separately below):"],["Domestic Company-owned restaurant expenses","","$","585,307","","","82.6","%","","$","621,871","","","79.9","%","","2.7","%"],["North America commissary expenses","","811,446","","","93.3","%","","703,622","","","92.4","%","","0.9","%"],["International expenses","","76,001","","","58.5","%","","87,286","","","57.9","%","","0.6","%"],["Other expenses","","238,810","","","93.0","%","","226,320","","","91.0","%","","2.0","%"],["General and administrative expenses","","217,412","","","10.3","%","","212,265","","","10.3","%","","\u2014","%"],["Depreciation and amortization","","52,032","","","2.5","%","","48,816","","","2.4","%","","0.1","%"],["Total costs and expenses","","1,981,008","","","94.2","%","","1,900,180","","","91.9","%","","2.3","%"],["Refranchising and impairment loss","","(12,065)","","","(0.6)","%","","\u2014","","","\u2014","%","","(0.6)","%"],["Operating income","","$","109,030","","","5.2","%","","$","168,241","","","8.1","%","","(2.9)","%"]]
[[/GREPCENT_TABLE]]

Total costs and expenses were approximately $1.98 billion, or 94.2% of total revenues in 2022, as compared to $1.90 billion, or 91.9% of total revenues for the prior year. The increase in total costs and expenses, as a percentage of revenues, was primarily due to the following:

Domestic Company-owned restaurant expenses were $585.3 million, or 82.6% of related revenues in 2022, compared to expenses of $621.9 million, or 79.9% of related revenues for the prior year. The expenses, as a percentage of revenues, increased 2.7% primarily due to increased food cost attributable to higher commodity prices driven by inflation and labor expenses as staffing levels recover at increased cost. Our strategic pricing actions implemented in 2022 helped reduce the impact of the underlying cost pressures.

North America commissary expenses were $811.4 million, or 93.3% of related revenues in 2022, compared to $703.6 million, or 92.4% of related revenues, for the prior year. The expenses, as a percentage of revenues, increased 0.9% primarily due to rising commodity prices driven by inflation, principally in cheese, soy oil, proteins and wheat, and higher delivery costs.

International expenses were $76.0 million, or 58.5% of related revenues, for 2022 compared to $87.3 million, or 57.9% of related revenues for the prior year. International expenses were flat as a percentage of revenues as lower labor costs and lower food costs from negative comparable sales were offset by higher distribution costs as a percentage of revenues.

Other expenses were $238.8 million, or 93.0% of related revenues in 2022, as compared to $226.3 million, or 91.0% of related revenues for the prior year. The expenses, as a percentage of related revenues, increased 2.0% primarily due to timing of expenditures on technology platform initiatives to further enhance our digital capabilities and the customer experience.

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General and Administrative Expenses General and administrative (“G&A”) expenses were $217.4 million, or 10.3% of total revenues for 2022 compared to $212.3 million, or 10.3% of total revenues for the prior year. G&A expenses consisted of the following (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","December 25, 2022","","December 26, 2021"],["Administrative expenses (a)","","$","181,538","","","$","199,452"],["Strategic corporate reorganization costs (b)","","\u2014","","","13,094"],["Legal settlement accruals (c)","","15,000","","","\u2014"],["Additional specific accounts receivable and notes receivable provisions (d)","","18,376","","","\u2014"],["Other general expenses (e)","","2,498","","","(281)"],["General and administrative expenses","","$","217,412","","","$","212,265"]]
[[/GREPCENT_TABLE]]

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(a)    The decrease in administrative expenses of $17.9 million for the year ended December 25, 2022 compared to the prior year was primarily due to lower incentive compensation linked to Company performance, which was partially offset by higher labor costs as well as travel and occupancy costs associated with the re-opening of corporate headquarters in the first quarter of 2022.

(b)    Represents strategic reorganization costs associated with our new corporate office in Atlanta which concluded at the end of 2021. See “Note 16. Strategic Corporate Reorganization for Long-term Growth” to our Notes to Consolidated Financial Statements for additional information.

(c)    Expense of $15.0 million related to certain legal settlements. See “Note 19. Litigation, Commitments and Contingencies” to our Notes to Consolidated Financial Statements for additional information.

(d)    Represents 2022 expenses for the following:

1.One-time, non-cash provision of $14.6 million on accounts receivable and notes receivable in connection with the conflict in Ukraine and related government actions,

2.One-time, non-cash provision of $3.7 million for certain accounts receivable and notes receivable in the United Kingdom.

(e)    Included in the Other general expenses for the year ended December 25, 2022 is $1.5 million related to advisory fees and severance costs associated with the transition of certain executives.

Depreciation and Amortization. Depreciation and amortization expense was $52.0 million, or 2.5% of revenues in 2022, as compared to $48.8 million, or 2.4% of revenues for the prior year, primarily due and increase in capital expenditures for our technology platforms and new restaurants.

Refranchising and Impairment Loss

Refranchising and impairment loss was $12.1 million for the year ended December 25, 2022 as compared to zero for the prior year. The 2022 amount was comprised of an $8.4 million loss on our 2022 refranchising, an impairment loss of $2.8 million for reacquired franchise rights due to the financial and operational impact of the conflict in Ukraine and lease impairment charges of $0.9 million related to the termination of a significant franchisee in the UK. See “Note 22. Divestitures” of “Notes to Consolidated Financial Statements” for additional information on the 2022 refranchising and the charge related to the conflict in Ukraine.

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Operating Income by Segment

Operating income is summarized in the following table on a reporting segment basis. Adjusted operating income, a non-GAAP measure, is presented below. See “Non-GAAP Measures” for a reconciliation to the most comparable U.S. GAAP measure. We believe this non-GAAP measure is important for comparability purposes.

[[GREPCENT_TABLE]]
[["(In thousands)","","Year Ended December 25, 2022","","Year Ended December 26, 2021"],["","Reported","","(a)Adjustments","","Adjusted","","Reported","","(a)Adjustments","","Adjusted","","Reported Increase (Decrease)","","Adjusted Increase (Decrease)"],["Domestic Company-owned restaurants","","$","15,966","","","$","8,412","","","$","24,378","","","$","49,628","","","$","\u2014","","","$","49,628","","","$","(33,662)","","","$","(25,250)"],["North America franchising","","127,882","","","\u2014","","","127,882","","","120,949","","","\u2014","","","120,949","","","6,933","","","6,933"],["North America commissaries","","42,531","","","\u2014","","","42,531","","","39,873","","","\u2014","","","39,873","","","2,658","","","2,658"],["International","","17,891","","","9,644","","","27,535","","","34,896","","","\u2014","","","34,896","","","(17,005)","","","(7,361)"],["All others","","10,084","","","\u2014","","","10,084","","","17,704","","","\u2014","","","17,704","","","(7,620)","","","(7,620)"],["Unallocated corporate expenses","","(104,419)","","","30,376","","","(74,043)","","","(94,114)","","","13,094","","","(81,020)","","","(10,305)","","","6,977"],["Elimination of intersegment (profits)","","(905)","","","\u2014","","","(905)","","","(695)","","","\u2014","","","(695)","","","(210)","","","(210)"],["Total","","$","109,030","","","$","48,432","","","$","157,462","","","$","168,241","","","$","13,094","","","$","181,335","","","$","(59,211)","","","$","(23,873)"]]
[[/GREPCENT_TABLE]]

______________________________

(a)    See “Non-GAAP Measures” below for a detail of the adjustments in each year and for a reconciliation to the most comparable U.S. GAAP measure.

Operating income was $109.0 million for the year ended December 25, 2022 compared to $168.2 million for the prior year, a decrease of $59.2 million. Adjusted operating income was $157.5 million for the year ended December 25, 2022 compared to $181.3 million for the prior year, a decrease of $23.9 million, or 13.2%. The decrease in adjusted operating income in 2022 compared to 2021 was primarily due to the following:

•Domestic Company-owned restaurants decreased $25.3 million for the year ended December 25, 2022. Excluding the impact of the 2022 refranchising in the second quarter, Domestic Company-owned restaurants decreased $21.3 million, primarily due to higher commodity and labor costs, partially offset by lower bonuses and higher revenues related to strategic pricing actions.

•North America franchising increased $6.9 million for the year ended December 25, 2022. Excluding the impact of the 2022 refranchising, North America franchising increased $4.3 million, due to an increase in comparable sales of 1.2% and higher equivalent units of 1.4%.

•North America commissaries increased $2.7 million for the year ended December 25, 2022. North America commissaries have increased prices in line with inflation, which has been partially offset with lower margins due to lower volume of items sold.

•International decreased $7.4 million for the year ended December 25, 2022, primarily due to significant inflation and high energy prices in the UK that attributed to lower comparable sales, which declined 5.3%.

•All Others, which primarily includes our online and mobile ordering business and our marketing funds, decreased $7.6 million for the year ended December 25, 2022, compared to the prior year, primarily due to timing of expenditures for technology support initiatives.

•Unallocated corporate expenses decreased $7.0 million for the year ended December 25, 2022, primarily due to lower incentive compensation costs, partially offset by higher labor, travel, professional fees and occupancy cost associated with the re-opening of corporate headquarters in the first quarter of 2022.

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Items Below Operating Income

The following table sets forth the various items below Operating income from the Consolidated Statements of Operations:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Year Ended"],["","December 25, 2022","","December 26, 2021","","Change"],["Operating income","","$","109,030","","","$","168,241","","","$","(59,211)"],["Net interest expense","","(25,261)","","","(17,293)","","","(7,968)"],["Income before income taxes","","83,769","","","150,948","","","(67,179)"],["Income tax expense","","14,420","","","25,993","","","(11,573)"],["Net income before attribution to noncontrolling interests","","69,349","","","124,955","","","(55,606)"],["Net income attributable to noncontrolling interests","","(1,577)","","","(4,939)","","","3,362"],["Net income attributable to the Company","","$","67,772","","","$","120,016","","","$","(52,244)"],["Calculation of net income for earnings per share:"],["Net income attributable to the Company","","$","67,772","","","$","120,016","","","$","(52,244)"],["Dividends on redemption of Series B Convertible Preferred Stock","","\u2014","","","(109,852)","","","109,852"],["Dividends paid to participating securities","","(306)","","","(6,091)","","","5,785"],["Net income attributable to participating securities","","(104)","","","\u2014","","","(104)"],["Net income attributable to common shareholders","","$","67,362","","","$","4,073","","","$","63,289"],["","","","","","","\u2014"],["Basic earnings per common share","","$","1.90","","","$","0.12","","","$","1.78"],["Diluted earnings per common share","","$","1.89","","","$","0.12","","","$","1.77"]]
[[/GREPCENT_TABLE]]

Net Interest Expense

Interest expense increased approximately $8.0 million for the year ended December 25, 2022 compared to the prior year, primarily due to higher average outstanding debt on our revolving credit facility. Total debt outstanding was $605.0 million and $490.0 million as of December 25, 2022 and December 26, 2021, respectively.

Income Tax Expense

The effective income tax rate was 17.2% for both 2022 and 2021. The effective rate was flat due to the income mix and items impacting tax expense being proportional to the pre-tax income year-over-year.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Year Ended"],["","December 25, 2022","","December 26, 2021"],["Income before income taxes","","$","83,769","","","$","150,948"],["Income tax expense","","$","14,420","","","$","25,993"],["Effective tax rate","","17.2","%","","17.2","%"]]
[[/GREPCENT_TABLE]]

See “Note 17. Income Taxes” of “Notes to Consolidated Financial Statements,” for additional information.

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Net Income Attributable to Noncontrolling Interests - see “Note 9. Noncontrolling Interests” of “Notes to Consolidated Financial Statements,” for information.

Diluted Earnings Per Share

Diluted earnings per common share was $1.89 for the year ended December 25, 2022 compared to $0.12 for the year ended December 26, 2021, representing an increase of $1.77. Diluted earnings per common share for the year ended December 26, 2021 was reduced by $3.10 from a reduction in net income attributable to common shareholders related to the repurchase and conversion of all of the shares of the Company’s previously outstanding Series B Convertible Preferred Stock (“Series B Preferred Stock”) during the second quarter of 2021. This reduction reflected the excess of the one-time cash payment over the carrying value of the Series B Preferred Stock. See “Note 6. Stockholders’ Deficit” and “Note 7. Earnings per Share” of “Notes to Consolidated Financial Statements,” for additional information. Adjusted diluted earnings per common share, a non-GAAP measure, was $2.94 for the year ended December 25, 2022 compared to $3.51 for the year ended December 26, 2021, representing a decrease of $0.57. See “Non-GAAP Measures” for additional information.

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Non-GAAP Measures

In addition to the results provided in accordance with U.S. GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with U.S. GAAP and include the following: adjusted operating income, adjusted net income attributable to common shareholders and adjusted diluted earnings per common share. We believe that our non-GAAP financial measures enable investors to assess the operating performance of our business relative to our performance based on U.S. GAAP results and relative to other companies. We believe that the disclosure of these non-GAAP measures is useful to investors as they reflect metrics that our management team and Board of Directors utilize to evaluate our operating performance, allocate resources and administer employee incentive plans. The most directly comparable U.S. GAAP measures to adjusted operating income, adjusted net income attributable to common shareholders and adjusted diluted earnings per common share are operating income, net income attributable to common shareholders and diluted earnings per common share, respectively. These non-GAAP measures should not be construed as a substitute for or a better indicator of the Company’s performance than the Company’s U.S. GAAP results. The table below reconciles our GAAP financial results to our non-GAAP financial measures.

[[GREPCENT_TABLE]]
[["","","Year Ended"],["(In thousands, except per share amounts)","","December 25, 2022","","December 26, 2021"],["Operating income","","$","109,030","","$","168,241"],["Refranchising and impairment losses (a)","","26,702","","\u2014"],["Legal settlements (b)","","15,000","","\u2014"],["Costs associated with the termination of significant franchisees (c)","","5,223","","\u2014"],["Strategic corporate reorganization costs (d)","","\u2014","","13,094"],["Other costs (e)","","1,507","","\u2014"],["Adjusted operating income","","$","157,462","","$","181,335"],["Net income attributable to common shareholders","","$","67,362","","$","4,073"],["Refranchising and impairment losses (a)","","26,702","","\u2014"],["Legal settlements (b)","","15,000","","\u2014"],["Costs associated with the termination of significant franchisees (c)","","5,223","","\u2014"],["Strategic corporate reorganization costs (d)","","\u2014","","13,094"],["Other costs (e)","","1,507","","\u2014"],["Repurchase and conversion of Series B Preferred Stock (f)","","\u2014","","","109,852"],["Tax effect of adjustments (g)","","(10,897)","","","(2,946)"],["Adjusted net income attributable to common shareholders (h)","","$","104,897","","$","124,073"],["Diluted earnings per common share","","$","1.89","","$","0.12"],["Refranchising and impairment losses (a)","","0.75","","\u2014"],["Legal settlements (b)","","0.42","","\u2014"],["Costs associated with the termination of significant franchisees (c)","","0.15","","\u2014"],["Strategic corporate reorganization costs (d)","","\u2014","","0.37"],["Other costs (e)","","0.04","","\u2014"],["Repurchase and conversion of Series B Preferred Stock (f)","","\u2014","","","3.10"],["Tax effect of adjustments (g)","","(0.31)","","","(0.08)"],["Adjusted diluted earnings per common share (h)","","$","2.94","","$","3.51"]]
[[/GREPCENT_TABLE]]
______________________________

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(a)    Refranchising and impairments losses consisted of the following pre-tax adjustments:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["(In thousands)","","December 25, 2022"],["Refranchising impairment loss (1)","","$","8,412"],["Ukraine-related charge (2)","","17,385"],["UK lease impairment (3)","","905"],["Total adjustment","","$","26,702"]]
[[/GREPCENT_TABLE]]

(1) Represents a one-time, non-cash charge of $8.4 million ($0.24 loss per diluted share) recorded in the first quarter of 2022 associated with the refranchising of the Company’s controlling interest in a 90-restaurant joint venture, recorded as Refranchising and impairment loss;

(2) Represents a one-time non-cash charge of $17.4 million ($0.49 loss per diluted share) recorded in the first quarter of 2022 related to the reserve of certain loans and impairment of reacquired franchised rights related to the conflict in Ukraine and subsequent international government actions and sanctions, which were recorded as Refranchising and impairment loss of $2.8 million and General and administrative expenses of $14.6 million;

(3) An impairment charge of $0.9 million on the right-of-use assets on leases recorded in the third quarter of 2022 associated with the termination of a significant franchisee in the UK, which was recorded in Refranchising and impairment loss.

(b)    Represents an accrual of certain legal settlements, recorded in General and administrative expenses. See “Note 19. Litigation, Commitments and Contingencies” of “Notes to Consolidated Financial Statements for further information.

(c)    Represents costs associated with the termination of significant franchisees in the UK, including costs related to the reserve of certain accounts and notes receivable.

(d)    Represents strategic corporate reorganization costs associated with our new corporate office in Atlanta, Georgia. See "Note 16. Strategic Corporate Reorganization for Long-term Growth of “Notes to Consolidated Financial Statements for additional information.

(e)    Represents advisory fees and severance costs associated with the transition of certain executives.

(f)    Represents the one-time charge related to the repurchase and conversion of all shares of Series B Preferred Stock and includes related professional fees incurred as part of the transaction. See “Note 6. Stockholders’ Deficit” of “Notes to Consolidated Financial Statements,” for additional information.

(g)    The tax effect on non-GAAP adjustments was calculated by applying the marginal tax rate of 22.5% for both years ended December 25, 2022 and December 26, 2021.

(h)    Amounts shown exclude the impact of allocation of undistributed earnings to participating securities.

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

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Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our credit facility. Our principal uses of cash are operating expenses, capital expenditures, and returning value to our shareholders in the form of cash dividends and share repurchases. Our capital priorities are:

•investing for growth

•maintaining a strong balance sheet, and

•returning capital to shareholders

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

Cash Flows

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

[[GREPCENT_TABLE]]
[["","","2022","","2021"],["Total cash provided by (used in):"],["Operating activities","","$","117,808","","","$","184,675"],["Investing activities","","(62,793)","","","(63,512)"],["Financing activities","","(76,240)","","","(180,526)"],["Change in cash and cash equivalents, excluding the effect of exchange rate changes on cash and cash equivalents","","$","(21,225)","","","$","(59,363)"]]
[[/GREPCENT_TABLE]]

Operating Activities

Total cash provided by operating activities was $117.8 million for the year ended December 25, 2022 compared to $184.7 million for the prior year. The decrease of $66.9 million primarily reflects lower net income in 2022 and a reduction in working capital. The working capital reduction is driven by lower accrued expenses at December 25, 2022 as compared to the prior year, primarily related to lower incentive compensation payable and lower taxes payable at December 25, 2022. The decrease in incentive compensation payable is linked to Company performance while the decrease in taxes payable is linked to the timing of payments related to the CARES Act. These decreases were partially offset by the provision for allowance for credit losses of $20.5 million (See “Note 10. Allowance for Credit Losses” of “Notes to Consolidated Financial Statements”) and refranchising and impairment losses of $12.1 million (discussed above in “Results of Operations”).

Investing Activities

Total cash used in investing activities was $62.8 million in 2022 compared to $63.5 million in 2021, a decrease of $0.7 million. 2022 cash flows included $13.6 million in proceeds, net of transaction costs, from the impact of the 2022 refranchising in the first quarter of 2022. Repayments of notes, net of issuances were $3.7 million in 2022 as compared to $2.4 million in 2021, an increase in inflows of $1.3 million for the year. The increased inflows from refranchising and notes were offset by larger purchases of property and equipment of $9.8 million in 2022, as the Company improved its digital infrastructure. Cash flows for 2021 also included an inflow of $3.3 million related to the sale of land that did not recur in 2022.

Financing Activities

Total cash used in financing activities was $76.2 million in 2022 compared to $180.5 million in 2021, an decrease of $104.3 million. In 2022, cash used for financing activities includes outflows of $125.0 million in share repurchases and $54.8 million of common dividends paid, offset by net borrowings of $115.0 million from the credit facility. In 2021, outflows include $340.0 million in repayments of the term loan, $188.6 million in payment of cash consideration for the repurchase and conversion of all of the Company’s Series B Preferred Stock outstanding, and dividends to common and preferred shareholders of $40.4 million, offset by inflows of $400.0 million in proceeds from the issuance of senior notes and net borrowings from the credit facility of $80.0 million.

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Debt

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.

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.

Our outstanding debt as of December 25, 2022 was $605.0 million, which was comprised of $400.0 million outstanding under the Notes and $205.0 million outstanding under the PJI Revolving Facility. Remaining availability under the PJI Revolving Facility was $395.0 million as of December 25, 2022.

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

[[GREPCENT_TABLE]]
[["","","Permitted Ratio","","Actual Ratio for the Year Ended December 25, 2022"],["Leverage ratio","","Not to exceed 5.25 to 1.0","","2.6 to 1.0"],["Interest coverage ratio","","Not less than 2.00 to 1.0","","4.1 to 1.0"]]
[[/GREPCENT_TABLE]]

Our leverage ratio is defined as outstanding debt divided by Consolidated EBITDA (as defined in our credit agreement), for the most recent four fiscal quarters. Our interest coverage ratio is defined as the sum of Consolidated EBITDA and consolidated rental expense for the most recent four fiscal quarters divided by the sum of consolidated interest expense and consolidated rental expense for the most recent four fiscal quarters. We were in compliance with all financial covenants as of December 25, 2022.

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

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. The PJMF Revolving Facility is secured by substantially all assets of PJMF. The PJMF Revolving Facility matures on September 30, 2023, but is subject to annual amendments. The borrowings under the PJMF Revolving Facility accrue interest at a variable rate of the one-month LIBOR plus 1.60%. There was no debt outstanding under the PJMF Revolving Facility as of December 25, 2022 or December 26, 2021. The PJMF operating results and the related debt outstanding do not impact the financial covenants under the Amended Credit Agreement.

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

Share Repurchases

As part of our long-term growth and capital allocation strategy, we are committed to investing in share repurchases to provide ongoing value and enhanced returns to our shareholders. On October 28, 2021, our Board of Directors approved a share repurchase program with an indefinite duration for up to $425.0 million of the Company’s common stock. This share

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repurchase program operated alongside our previous $75.0 million share repurchase authorization, which began on November 4, 2020 and expired on December 26, 2021.

The following table summarizes our repurchase activity for the years ended December 25, 2022 and December 26, 2021:

[[GREPCENT_TABLE]]
[["(In thousands, except average price per share) Year Ended","","Total Number of Shares Purchased","","Average Price Paid per Share","","Aggregate Cost of Shares Purchased","","Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs"],["December 25, 2022","","1,343","","$","93.07","","","$","125,000","","","$","299,800"],["December 26, 2021","","594","","$","121.96","","","$","72,499","","","$","424,800"]]
[[/GREPCENT_TABLE]]

Subsequent to year-end, we acquired an additional 319,307 shares at an aggregate cost of $27.6 million. Approximately $272.2 million remained available under the Company’s share repurchase program as of February 16, 2023.

The Company utilizes a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, from time to time to facilitate the repurchase of shares of our common stock under this share repurchase program. There can be no assurance that we will repurchase shares of our common stock either through a Rule 10b5-1 trading plan or otherwise.

Dividends

The Company paid aggregate dividends to common stockholders of $54.8 million ($1.54 per share) for the year ended December 25, 2022.

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

•$40.4 million paid to common stockholders ($1.15 per share);

•$3.0 million in preferred dividends on the Series B Preferred Stock (3.6% of the investment per annum)

•$1.5 million of common stock deemed dividend distributions in conjunction with the repurchase and conversion of the Series B Preferred Stock;

•$1.1 million in common stock “pass-through” dividends to Series B Preferred Stockholders on an as-converted basis ($0.45 per share).

On January 26, 2023, our Board of Directors declared a first quarter 2023 dividend of $0.42 per common share, representing a $14.6 million aggregate dividend that was paid on February 17, 2023 to stockholders of record as of the close of business on February 6, 2023. The declaration and payment of any future dividends will be at the discretion of our Board of Directors.

Free Cash Flow

Free cash flow, a non-GAAP measure, is defined as net cash provided by operating activities (from the Consolidated Statements of Cash Flows) less 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):

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","December 25, 2022","","December 26, 2021"],["Net cash provided by operating activities","","$","117,808","","$","184,675"],["Purchases of property and equipment","","(78,391)","","(68,559)"],["Dividends paid to preferred stockholders (a)","","\u2014","","(6,394)"],["Free cash flow","","$","39,417","","$","109,722"]]
[[/GREPCENT_TABLE]]
______________________________

(a)    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.

Contractual Obligations

The Company’s cash requirements greater than twelve months from contractual obligations and commitments include:

•Debt Obligations and Interest Payments: Refer to “Note 12. Debt” of “Notes to Consolidated Financial Statements” for further information on our obligations and the timing of expected payments.

•Operating and Finance Leases: Refer to “Note 3 Leases” of “Notes to Consolidated Financial Statements” for further information on our obligations and the timing of expected payments.

We estimate that our capital expenditures during 2023 will be approximately $80 million to $90 million. This estimate includes development of Company-owned restaurants and technology enhancements. We intend to fund our capital expenditures with cash generated by operations and borrowings under our senior secured revolving credit facility, as necessary.

We guarantee leases for certain Papa Johns North American franchisees who have purchased restaurants that were previously Company-owned. We are contingently liable on these leases. The leases have varying terms, the latest of which expires in 2036. As of December 25, 2022, the estimate maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was approximately $9.2 million.

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 for a total of $26.3 million as of December 25, 2022. The surety bond arrangements expire within one year but have automatic renewal clauses. See “Note 12. Debt” and “Note 19. Litigation, Commitments and Contingencies” of “Notes to Consolidated Financial Statements” for additional information related to contractual and other commitments.

Impact of Inflation

We experienced price increases in food items and other commodities, labor and benefits, and fuel and other energy costs during 2022 and expect further inflationary pressure during 2023. Inflationary pressures affect our profitability both directly, in our company-owned restaurants and delivery mechanisms and through gross margins experienced by sales of food and supply items via our Quality Control Centers, as well as indirectly, through higher food ingredient and paper and supply costs, rising fees from delivery aggregators driven by higher wage demands and increases in the cost of gasoline that, once reflected in upward price adjustments on their fees, can exert downward pressure on unit sales, reducing royalty fees we realize from our Domestic and International franchisees. Compensating menu price increases are subject to competitive pressure in the markets in which we operate. Expense control measures are also deployed to offset higher costs when possible. Food costs, in particular the cost of cheese, are managed to an extent by pricing agreements with suppliers and forward purchase contracts we enter into, as discussed in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

Forward-Looking Statements

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,” “outlook,” “plan,” “project,” or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided

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by the federal securities laws. Such forward-looking statements include or may relate to projections or guidance concerning business performance, revenue, earnings, cash flow, earnings per share, share repurchases, the current economic environment, the continuing impact of the coronavirus pandemic, commodity and labor costs, currency fluctuations, profit margins, net unit growth, unit level performance, capital expenditures, restaurant and franchise development, labor shortages and price increases, inflation, royalty relief, franchisee support, the effectiveness of our menu innovations and other business initiatives, investments in product and digital innovation, marketing efforts, liquidity, compliance with debt covenants, impairments, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:

•the ability of the Company to manage challenging macroeconomic conditions in the United States and internationally, including the United Kingdom;

•the ability of the Company to manage staffing and labor shortages at Company and/or franchised restaurants and our quality control centers;

•increases in labor costs, food costs or sustained higher other operating costs, including as a result of supply chain disruption, inflation or climate change;

•the potential for delayed new store openings, both domestically and internationally;

•the increased risk of phishing, ransomware and other cyber-attacks;

•risks to the global economy and our business related to the conflict in Ukraine and other international conflicts;

•increased costs for branding initiatives and launching new advertising and marketing campaigns and promotions to boost consumer sentiment and sales trends, and the risk that such initiatives will not be effective;

•risks related to social media, including publicity adversely and rapidly impacting our brand and reputation;

•aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors;

•changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending, including higher unemployment;

•the adverse impact on the Company or our results caused by global health concerns, product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our Company-owned or franchised restaurants or others in the restaurant industry;

•the effectiveness of our technology investments and changes in unit-level operations;

•the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites;

•increases in insurance claims and related costs for programs funded by the Company up to certain retention limits, including medical, owned and non-owned vehicles, workers’ compensation, general liability and property;

•disruption of our supply chain or commissary operations which could be caused by our sole source of supply of mozzarella cheese, desserts, garlic cups or limited source of suppliers for other key ingredients or more generally due to weather, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control, including the coronavirus pandemic;

•increased risks associated with our International operations, including economic and political conditions and risks associated with the withdrawal of the UK from the European Union, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth;

•the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the European Union General Data Protection Regulation;

•the Company’s ability to continue to pay dividends to stockholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline;

•continuing risks related to the outbreak of COVID-19 and other health crises;

•disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential Company, employee and customer information, including payment cards; and

•changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles.

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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, and they may be updated from time to time in our future reports filed with the Securities and Exchange Commission. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.