Papa John’s International, Inc. (NASDAQ: PZZA) today announced financial results for the three months and full year ended December 27, 2020.

Fourth quarter highlights compared to prior year

  • Total revenues of $469.8 million, up 12.5% over 2019
  • Comparable sales up by 13.5% in North America and 21.4% Internationally
  • Earnings per diluted share rose to $0.28 from loss per diluted share of ($0.18)
  • Adjusted earnings per diluted share grew to $0.40 versus adjusted loss per diluted share of ($0.25), excluding Special items
  • 40 net unit openings in the fourth quarter driven by International
  • Paid end-of-year bonuses to front-line team members of $2.7 million ($0.06 per diluted share)

Full year 2020 highlights compared to prior year

  • Total revenues of $1,813.2 million, up 12.0% over 2019
  • Comparable sales up by 17.6% in North America and 12.6% Internationally
  • Earnings per diluted share rose to $1.28 compared to loss per diluted share of ($0.24)
  • Adjusted earnings per diluted share grew to $1.40 from adjusted earnings per diluted share of $0.03, excluding Special items
  • Cash flow from operations of $186.4 million and free cash flow of $137.1 million for full year 2020

“2020 was a transformational year for Papa John’s, as we turned our focus to the future. We were able to deliver industry-leading sales growth and significant profitability by coming together as a system to take care of our team members, customers and communities in one of the most challenging years in history,” said President & CEO Rob Lynch. “Q4 2020 was the third consecutive quarter of double-digit comparable sales growth and the sixth straight quarter of positive comparable sales in North America. We ended the year with the launch of Epic Stuffed Crust, the biggest product innovation in the company’s history, and our future is extremely bright.”

Mr. Lynch continued, “We are confident that the foundations of our business – our company’s core values, our iconic brand, our dedicated team members, our strong franchise system and our rapidly improving financial performance – are stronger than ever, and we continue to build momentum. We remain hopeful for a swift end to the global pandemic and continue to prioritize the health and safety of our team and customers, while we meet our responsibility to serve millions of new and returning customers.”

Global Restaurant and Comparable Sales Information

Global restaurant and comparable sales information for the three months and full year ended December 27, 2020, compared to the three months and full year ended December 29, 2019 are as follows:

Three Months Ended Year Ended Dec. 27,2020 Dec. 29,2019 Dec. 27,2020 Dec. 29,2019   Global restaurant sales growth / (decline) (a)

15.5%

4.4%

15.1%

(0.8%)

  Global restaurant sales growth, excluding the impact of foreign currency (a)

15.4%

4.7%

15.9%

0.3%

  Comparable sales growth / (decline) (b) Domestic company-owned restaurants

10.2%

4.1%

14.2%

(2.7%)

North America franchised restaurants

14.5%

3.3%

18.6%

(2.0%)

System-wide North America restaurants

13.5%

3.5%

17.6%

(2.2%)

  System-wide international restaurants (c)

21.4%

2.4%

12.6%

1.1%

(a)

Includes both company-owned and franchised restaurant sales.

(b)

Represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable 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. See “Supplemental Information and Financial Statements” below for a discussion of comparable sales, a key operating metric.

(c)

Includes the impact of temporarily closed stores. Excluding those stores, comparable sales growth for System-wide international restaurants would have been approximately 22.9% and 15.9% for the three months and full year ended December 27, 2020, respectively. There were no temporarily closed stores for the comparable periods ended December 29, 2019.

Financial Highlights

Three Months Ended Year Ended In thousands, except per share amounts Dec. 27,2020 Dec. 29,2019 Increase Dec. 27,2020 Dec. 29,2019 Increase Revenue

$

469,811

$

417,514

 

$

52,297

$

1,813,234

$

1,619,248

 

$

193,986

Operating income (loss)

 

19,698

 

(132

)

 

19,830

 

90,253

 

24,535

 

 

65,718

Net income (loss)

 

13,167

 

(2,142

)

 

15,309

 

57,932

 

4,866

 

 

53,066

Diluted earnings (loss) per share

 

0.28

 

(0.18

)

 

0.46

 

1.28

 

(0.24

)

 

1.52

Adjusted diluted earnings per share (a)

 

0.40

 

(0.25

)

 

0.65

 

1.40

 

0.03

 

 

1.37

(a)

Adjusted diluted earnings per share is a non-GAAP measure that excludes “Special items,” which impact comparability. Special items for 2020 include strategic corporate reorganization costs associated with our new office in Atlanta, Georgia projected to open in the summer of 2021. The reconciliation of GAAP to non-GAAP financial results is included in “Reconciliation of Non-GAAP Financial Measures” below.

Revenues

Consolidated revenues of $469.8 million increased $52.3 million, or 12.5%, in the fourth quarter of 2020 compared to the fourth quarter of 2019 primarily due to strong comparable sales results for North America restaurants, including 10.2% for company-owned restaurants and 14.5% for franchised restaurants, resulting in higher company-owned restaurant revenues, franchise royalties and commissary sales. International revenues also increased primarily due to higher commissary revenues and higher royalties from strong comparable sales results of 21.4% for the quarter.

Operating Results

Consolidated operating income of $19.7 million for the fourth quarter of 2020 increased $19.8 million compared to the fourth quarter of 2019. Excluding the impact of Special items, consolidated operating income increased $28.7 million for the three months ended December 27, 2020. See “Reconciliation of Non-GAAP Financial Measures,” for additional information. The increase, excluding Special items, was primarily due to temporary franchise support of $25.4 million in the fourth quarter of 2019 (see “Temporary Franchise Support” below) and higher income from higher comparable sales both domestically and internationally.

Diluted earnings per share was $0.28 for the fourth quarter of 2020 representing an increase of $0.46 over the fourth quarter of 2019. Excluding Special items, diluted earnings per share was $0.40 representing an increase of $0.65 over the fourth quarter of 2019. Diluted earnings per share was reduced by approximately $0.01 per diluted share in the fourth quarter of 2020 ($0.03 impact when excluding Special items) due to income attributable to participating securities, including our Series B Convertible Preferred Stock (the “Series B Preferred Stock”), based on the allocation of undistributed earnings to participating securities in the period. See “Participating Securities Earnings Per Share” for additional information related to the calculation of income attributable to participating securities for the three months ended December 27, 2020.

Segment Results

Three Months Ended

Reported

 

Special

 

Adjusted

 

Reported

 

Special

 

Adjusted

 

Adjusted

Dec. 27,

 

items

 

Dec. 27,

 

Dec. 29,

 

items

 

Dec. 29,

 

Increase

(In thousands)

2020

 

in 2020

 

2020

 

2019

 

in 2019

 

2019

 

(Decrease)

  Domestic Company-owned restaurants

$

3,197

 

$

-

$

3,197

 

$

12,486

 

$

(2,850

)

$

9,636

 

$

(6,439

)

North America franchising

 

26,946

 

 

-

 

26,946

 

 

16,669

 

 

-

 

 

16,669

 

 

10,277

 

North America commissaries

 

8,606

 

 

-

 

8,606

 

 

8,488

 

 

-

 

 

8,488

 

 

118

 

International

 

7,198

 

 

-

 

7,198

 

 

4,084

 

 

-

 

 

4,084

 

 

3,114

 

All others

 

2,013

 

 

-

 

2,013

 

 

192

 

 

-

 

 

192

 

 

1,821

 

Unallocated corporate expenses

 

(28,091

)

 

5,985

 

(22,106

)

 

(42,121

)

 

-

 

 

(42,121

)

 

20,015

 

Elimination of intersegment (profits) losses

 

(171

)

 

-

 

(171

)

 

70

 

 

-

 

 

70

 

 

(241

)

Adjusted operating income (loss)

$

19,698

 

$

5,985

$

25,683

 

$

(132

)

$

(2,850

)

$

(2,982

)

$

28,665

 

   

Year Ended

Reported

 

Special

 

Adjusted

 

Reported

 

Special

 

Adjusted

 

 

Dec. 27,

 

items

 

Dec. 27,

 

Dec. 29,

 

items

 

Dec. 29,

 

Adjusted

(In thousands)

2020

 

in 2020

 

2020

 

2019

 

in 2019

 

2019

 

Increase

  Domestic Company-owned restaurants

$

37,049

 

$

-

$

37,049

 

$

33,957

 

$

(4,739

)

$

29,218

 

$

7,831

 

North America franchising

 

89,801

 

 

-

 

89,801

 

 

64,362

 

 

-

 

 

64,362

 

 

25,439

 

North America commissaries

 

33,185

 

 

-

 

33,185

 

 

30,690

 

 

-

 

 

30,690

 

 

2,495

 

International

 

24,034

 

 

-

 

24,034

 

 

18,738

 

 

-

 

 

18,738

 

 

5,296

 

All others

 

7,043

 

 

-

 

7,043

 

 

(1,966

)

 

-

 

 

(1,966

)

 

9,009

 

Unallocated corporate expenses

 

(100,069

)

 

5,985

 

(94,084

)

 

(120,280

)

 

14,221

 

 

(106,059

)

 

11,975

 

Elimination of intersegment (profits) losses

 

(790

)

 

-

 

(790

)

 

(966

)

 

-

 

 

(966

)

 

176

 

Adjusted operating income

$

90,253

 

$

5,985

$

96,238

 

$

24,535

 

$

9,482

 

$

34,017

 

$

62,221

 

Consolidated operating income of $19.7 million for the fourth quarter of 2020 increased $19.8 million from the fourth quarter of 2019. Excluding the impact of Special items, the increase was $28.7 million. Significant changes in operating income and operating income, excluding Special items, are as follows:

  • Domestic Company-owned restaurants operating income was $3.2 million for the fourth quarter of 2020, a decrease of $6.4 million. The higher profits from comparable sales of 10.2% were offset by labor initiatives, bonuses, including the previously announced special end-of-year bonus for front-line team members, and increased commodities costs. Additionally, the prior period benefited from the expiration of customer rewards associated with our Papa Rewards loyalty program ($2.6 million benefit for the fourth quarter of 2019).
  • North America franchising increased $10.3 million to $26.9 million primarily due to higher comparable sales of 14.5% and a higher effective royalty rate due to the completion of our franchise assistance program in the third quarter of 2020 (see “Temporary Franchise Support” for additional information).
  • North America commissaries was relatively flat as higher profits from higher volumes were substantially offset by higher bonuses, including the bonus for front-line team members previously mentioned.
  • International increased $3.1 million to $7.2 million primarily due to higher profits from higher comparable sales of 21.4% and higher PJUK commissary income attributable to higher comparable sales and increased units.
  • All others, which primarily includes our online and mobile ordering business, our wholly owned print and promotions subsidiary and our North America marketing funds, increased $1.8 million primarily due to higher online revenues.
  • Unallocated corporate expenses decreased approximately $20.0 million primarily due to lower discretionary marketing fund investments (see “Temporary Franchise Support” for additional information).

Full Year Results

Consolidated revenues increased 12.0% to $1,813.2 million for the year ended December 27, 2020, compared to the prior year comparable period, primarily due to higher comparable sales which benefited each of the company’s operating segments. Consolidated operating income increased $65.7 million for the year ended December 27, 2020 ($62.2 million excluding Special items), compared to the prior year comparable period, primarily due to improved results from North America franchising and Domestic Company-owned restaurants and lower temporary franchise support.

For the year ended December 27, 2020, diluted earnings per share was $1.28 representing an increase of $1.52 over the prior year period. Excluding Special items, diluted earnings per share was $1.40 representing an increase of $1.37 over the prior year period. Diluted earnings per share was reduced by approximately $0.07 per share for the year ($0.09 impact when excluding Special items) due to income attributable to participating securities, including Series B Preferred Stockholders, based on the allocation of undistributed earnings to participating securities in the period. See “Participating Securities Earnings Per Share” for additional information related to the calculation of income attributable to participating securities for the year ended December 27, 2020.

The company’s cash flow from operating activities for the year ended December 27, 2020 was $186.4 million, compared to $61.7 million a year ago, reflecting higher net income and favorable working capital changes, including timing of payments. This resulted in significantly higher free cash flow (a non-GAAP financial measure defined as net cash provided by operating activities, less purchases of property and equipment and dividends paid to preferred shareholders) of $137.1 million, compared to $14.0 million for the year ended December 29, 2019. See “Free Cash Flow” for additional information.

See the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K filed with the SEC for additional information concerning our operating results and cash flow for the year ended December 27, 2020.

Cash Dividend

The company paid common and preferred stock dividends of $10.9 million in the fourth quarter of 2020. The company declared first quarter 2021 dividends of approximately $10.8 million on January 25, 2021, which were paid to common shareholders on February 19, 2021. The first quarter preferred dividend will be paid on April 1, 2021. The declaration and payment of any future dividends on our common stock will be at the discretion of our Board of Directors, subject to the company’s financial results, cash requirements, and other factors deemed relevant by our Board of Directors. The holders of Series B Preferred Stock receive quarterly preferred dividends and common stock dividends on an as converted to common stock basis.

Global Restaurant Unit Data

As of December 27, 2020, there were 5,400 Papa John’s restaurants operating in 48 countries and territories, as follows:

DomesticCompany-owned FranchisedNorthAmerica Total NorthAmerica International System-wide Fourth Quarter Beginning - September 28, 2020

597

 

2,689

 

3,286

 

2,074

 

5,360

 

Opened

1

 

24

 

25

 

73

 

98

 

Closed

(10

)

(12

)

(22

)

(36

)

(58

)

Ending - December 27, 2020 (1)

588

 

2,701

 

3,289

 

2,111

 

5,400

 

  Year Ended Beginning - December 29, 2019

598

 

2,690

 

3,288

 

2,107

 

5,395

 

Opened

2

 

62

 

64

 

156

 

220

 

Closed

(12

)

(51

)

(63

)

(152

)

(215

)

Ending - December 27, 2020 (1)

588

 

2,701

 

3,289

 

2,111

 

5,400

 

Net unit growth (decline)

(10

)

11

 

1

 

4

 

5

 

% increase (decrease)

(1.7

%)

0.4

%

0.0

%

0.2

%

0.1

%

(1)

Temporary closures as a result of the COVID-19 outbreak are not reflected as “closed” in the restaurant progression above. Of the company’s 2,111 international franchised stores, approximately 65 stores were temporarily closed as of December 27, 2020, principally in Latin America and Europe, in accordance with government policies. In North America, almost all traditional restaurants remain open and fully operational. A number of non-traditional restaurants located in universities and stadiums are temporarily closed; these non-traditional locations are not significant to our revenues and operating results.

Our development pipeline as of December 27, 2020 included approximately 1,460 restaurants (210 units in North America and 1,250 units internationally), the majority of which are scheduled to open over the next six years.

Strategic Corporate Reorganization for Long-term Growth

On September 17, 2020, we announced plans to open an office in Atlanta, Georgia. 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. The opening of the Atlanta location and related organizational changes are expected to be completed by the summer of 2021. Affected employees who do not relocate to Atlanta have been offered a separation package. We expect to incur certain one-time corporate reorganization costs of approximately $15 to $20 million related to employee severance and transition, recruitment and relocation, and third-party and other costs through 2021, and $6.0 million (or approximately $0.12 per diluted share) of these strategic corporate reorganization costs were incurred in the fourth quarter of 2020. See “Reconciliation of Non-GAAP Financial Measures” for additional information.

2021 Outlook

Given on-going uncertainty surrounding the future impact of COVID-19, we are not providing outlook for 2021 at this time.

Conference Call and Website Information

A conference call is scheduled for February 25, 2021 at 8:00 a.m. Eastern Time to review the company’s fourth quarter and full year 2020 earnings results. The call can be accessed from the company’s web page at www.papajohns.com in a listen-only mode or dial 877-312-8816 (U.S. and Canada) or 253-237-1189 (International). The conference call will be available for replay, including by downloadable podcast, from the company’s web site at www.papajohns.com. The Conference ID is 9479043.

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to use our investor relations website as a means of disclosing information about our business, our financial condition and results of operations and other matters and for complying with our disclosure obligations under Regulation FD. The information we post on our investor relations website, including information contained in investor presentations, may be deemed material. Accordingly, investors should monitor our investor relations website, in addition to following our press releases, SEC filings and public conference calls and webcasts. We encourage investors and others to sign up for email alerts at our investor relations page under Shareholder Tools at the bottom right side of the page. These email alerts are intended to help investors and others to monitor our investor relations website by notifying them when new information is posted on the site.

Forward-Looking Statements

Certain matters discussed in this press release 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 novel coronavirus disease (COVID-19), including our cash on hand and access to our credit facilities, 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, the duration and number of temporary store closures, our plans to open a new office in Atlanta, the associated reorganization costs and the related organizational, employment and real estate changes that are expected, royalty relief, the effectiveness of our menu innovations and other business initiatives, marketing efforts, liquidity, compliance with debt covenants, strategic decisions and actions, dividends, effective tax rates, regulatory changes and impacts, adoption of new accounting standards, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control.

Our forward-looking statements are based on our assumptions which are based on currently available information, including assumptions about our ability to manage difficulties and opportunities associated with or related to the COVID-19 pandemic, including risks related to: the impact of governmental restrictions on freedom of movement and business operations including quarantines, social distancing requirements and mandatory business closures; the virus’s impact on the availability of our workforce; the potential disruption of our supply chain; changes in consumer demand or behavior; impact of delayed new store openings, both domestically and internationally; the overall contraction in global economic activity, including increased unemployment; our liquidity position; our ability to navigate changing governmental programs and regulations relating to the pandemic; the increased risk of phishing and other cyber-attacks; our ability to successfully implement or fully realize the anticipated benefits of our corporate reorganization and new office in Atlanta, Georgia and corporate reorganization in the timeframes we desire or within the expected range of expenses, or at all; In addition, turnover in our support teams due to our relocations to Georgia could distract our employees, decrease employee morale, harm our reputation, and negatively impact the overall performance of our corporate support teams. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. These and other risks, uncertainties and assumptions that are involved in our forward-looking statements are discussed in detail in “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.

For more information about the company, please visit www.papajohns.com.

Supplemental Information and Financial Statements

Definition

Comparable sales: We believe North America, international and global restaurant and comparable sales growth 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. 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.

Reconciliation of Non-GAAP Financial Measures

Effective as of the first quarter of 2020, the company modified its presentation of adjusted (non-GAAP) financial results to no longer present certain financial assistance provided to the North America system in the form of royalty relief and discretionary marketing fund investments as Special charges. This financial assistance, which began in the third quarter of 2018 in response to declining sales in North America, concluded in the third quarter of 2020. The adjusted financial results for the three months and full year ended December 27, 2019 have been revised to remove these items. See “Temporary Franchise Support” for additional information regarding this change in presentation.

The table below reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures. The non-GAAP adjusted results shown below and within this press release, which exclude the items in the table below (collectively defined as “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 comparison to current year results. In addition, management uses these metrics to evaluate the company’s underlying operating performance and to analyze trends.

Three Months Ended

 

Year Ended

Dec. 27,

 

Dec. 29,

 

Dec. 27,

 

Dec. 29,

(In thousands, except per share amounts)

2020

 

2019

 

2020

 

2019

  GAAP operating income (loss)

$

19,698

 

$

(132

)

$

90,253

 

$

24,535

 

Strategic corporate reorganization costs (1)

 

5,985

 

 

-

 

 

5,985

 

 

-

 

Special charges: Legal and advisory fees (2)

 

-

 

 

-

 

 

-

 

 

5,922

 

Mark-to-market adjustment on option valuation (3)

 

-

 

 

-

 

 

-

 

 

5,914

 

Other costs (4)

 

-

 

 

-

 

 

-

 

 

2,385

 

Refranchising gains

 

-

 

 

(2,850

)

 

-

 

 

(4,739

)

Adjusted operating income (loss)

$

25,683

 

$

(2,982

)

$

96,238

 

$

34,017

 

  GAAP net income (loss) attributable to common shareholders

$

9,319

 

$

(5,612

)

$

41,737

 

$

(7,633

)

Strategic corporate reorganization costs (1)

 

5,985

 

 

-

 

 

5,985

 

 

-

 

Special charges: Legal and advisory fees (2)

 

-

 

 

-

 

 

-

 

 

5,922

 

Mark-to-market adjustment on option valuation (3)

 

-

 

 

-

 

 

-

 

 

5,914

 

Other costs (4)

 

-

 

 

-

 

 

-

 

 

2,385

 

Refranchising gains

 

-

 

 

(2,850

)

 

-

 

 

(4,739

)

Tax effect of Non-GAAP items (5) (6)

 

(1,346

)

 

635

 

 

(1,346

)

 

(799

)

Two-class impact for Non-GAAP adjustment to net income (7)

 

(658

)

 

-

 

 

(662

)

 

-

 

Adjusted net income (loss) attributable to common shareholders

$

13,300

 

$

(7,827

)

$

45,714

 

$

1,050

 

  GAAP diluted earnings (loss) per share

$

0.28

 

$

(0.18

)

$

1.28

 

$

(0.24

)

Strategic corporate reorganization costs (1)

 

0.18

 

 

-

 

 

0.18

 

 

-

 

Special charges: Legal and advisory fees (2)

 

-

 

 

-

 

 

-

 

 

0.19

 

Mark-to-market adjustment on option valuation (3)

 

-

 

 

-

 

 

-

 

 

0.19

 

Other costs (4)

 

-

 

 

-

 

 

-

 

 

0.07

 

Refranchising gains

 

-

 

 

(0.09

)

 

-

 

 

(0.15

)

Tax effect of Non-GAAP items (5) (6)

 

(0.04

)

 

0.02

 

 

(0.04

)

 

(0.03

)

Two-class impact for Non-GAAP adjustment to earnings per share (7)

 

(0.02

)

 

-

 

 

(0.02

)

 

-

 

Adjusted diluted earnings (loss) per share

$

0.40

 

$

(0.25

)

$

1.40

 

$

0.03

 

(1)

Represents strategic corporate reorganization costs associated with our new office in Atlanta, Georgia projected to open in the summer of 2021. See “Strategic Corporate Reorganization for Long-term Growth” for additional information.

(2)

Represents advisory and legal costs incurred in 2019 primarily associated with the review of a wide range of strategic opportunities that culminated in the strategic investment in the company by affiliates of Starboard Value LP (“Starboard”) as well as certain litigation costs associated with legal proceedings initiated by our founder.

(3)

Represents a one-time mark-to-market adjustment of $5.9 million primarily related to the increase in the fair value of the Starboard option to purchase Series B Preferred Stock that culminated in the purchase of additional preferred stock in late March 2019.

(4)

Includes severance costs for our former CEO and costs related to the termination of a license agreement for intellectual property no longer being utilized.

(5)

The tax effect for strategic corporate reorganization costs was calculated by applying the 2020 full year marginal tax rate of 22.5%.

(6)

The tax effect for Legal and advisory fees, Other costs, and Refranchising gains was calculated by applying the 2019 full year marginal rate of 22.4%. The mark-to-market adjustment on option valuation was non-deductible for tax purposes.

(7)

Represents an adjustment to the allocation of undistributed earnings to participating securities for the strategic corporate reorganization costs.

Temporary Franchise Support

Beginning in the third quarter of 2018, the company began providing various forms of support and financial assistance to the North America franchise system in response to declining North America sales. In July 2019, the company announced a formal relief program to provide our North America franchisees with certainty regarding the availability and schedule of the temporary relief which concluded in the third quarter of 2020.

As previously mentioned, effective as of the first quarter of 2020, the company no longer presents certain royalty relief and discretionary marketing fund investments, included herein as “Temporary Franchise Support,” as Special items within its adjusted financial results. The prior period adjusted financial measures presented above in “Reconciliation of non-GAAP Financial Measures” have also been revised to remove the impact of these items. The Temporary Franchise Support concluded in the third quarter of 2020.

Temporary Franchise Support investments were $29.3 million (or approximately $0.69 per diluted share) for the full year ended December 27, 2020 (none for the three-month period), compared to $25.4 million (or approximately $0.62 per diluted share) and $46.6 million (or approximately $1.14 per diluted share) for the three and twelve months ended December 29, 2019, respectively, as follows (in thousands):

Three Months Ended

 

Year Ended

Dec. 27, 2020

 

Dec. 29, 2019

 

Dec. 27, 2020

 

Dec. 29, 2019

Royalty relief (a)

$

-

$

5,404

$

14,270

$

19,096

Marketing fund investments (b)

 

-

 

20,000

 

15,000

 

27,500

Total Temporary Franchise Support

$

-

$

25,404

$

29,270

$

46,596

(a)

Represents financial assistance provided to the North America system in the form of temporary royalty reductions that are above and beyond the level of franchise assistance the company would incur in the ordinary course of its business. These royalty reductions are not an expense, but rather consist of the amount of waived royalties that the company would otherwise have been entitled to absent the waiver. The waived royalties are not included in North America franchise royalties and fees revenues.

(b)

Represents incremental discretionary marketing fund investments in excess of contractual company-owned restaurant-level contributions, which were made as part of our previously announced temporary financial support package to our franchisees. The marketing fund investments are included in Unallocated corporate expenses.

Free Cash Flow

We define free cash flow 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 shareholders. We view free cash flow as an important measure because it is one factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the company’s performance than the company’s GAAP measures. The company’s free cash flow for the years ended December 27, 2020 and December 29, 2019, respectively were as follows (in thousands):

Year Ended

Dec. 27,

 

Dec. 29,

2020

 

2019

  Net cash provided by operating activities

$

186,439

 

$

61,749

 

Purchases of property and equipment

 

(35,652

)

 

(37,711

)

Dividends paid to preferred shareholders

 

(13,649

)

 

(10,020

)

Free cash flow

$

137,138

 

$

14,018

 

Participating Securities Earnings Per Share

We compute earnings per common share using the two-class method, by which net income attributable to participating securities, in addition to preferred stock dividends and accretion, is deducted from net income attributable to the company to determine net income attributable to common shareholders. Net income attributable to participating securities is the portion of undistributed earnings, defined as net income attributable to the company, less dividends paid to common and preferred shareholders, that would be allocated to the holders of participating securities on an as-converted basis.

The calculation to determine the amount of undistributed earnings to allocate to participating securities is as follow (in thousands):

Three Months Ended Year Ended Dec. 27,2020 Allocation% Dec. 27,2020 Allocation% Calculation of net income attributable to participating securities and common shareholders:   Share count allocation calculation: Diluted weighted average common shares outstanding

 

32,981

 

85.8

%

 

32,717

 

85.7

%

Participating preferred stock weighted average shares outstanding, as-converted (252,530,000/$50.06)

 

5,045

 

13.1

%

 

5,045

 

13.2

%

Participating unvested restricted stock weighted average shares outstanding

 

412

 

1.1

%

 

425

 

1.1

%

Total share count

 

38,438

 

100.0

%

 

38,187

 

100.0

%

  Undistributed earnings allocation: Net income attributable to the company

$

13,167

 

$

57,932

 

Dividends paid to common and preferred stock

 

(10,797

)

 

(43,011

)

Total undistributed earnings

$

2,370

 

$

14,921

 

  Net income attributable to participating securities: Total undistributed earnings - allocable to participating preferred stock

$

(311

)

13.1

%

$

(1,971

)

13.2

%

Total undistributed earnings - allocable to participating unvested restricted stock

 

(24

)

1.1

%

 

(165

)

1.1

%

Total net income attributable to participating securities

$

(335

)

14.2

%

$

(2,136

)

14.3

%

  Net income attributable to common shareholders: Net income attributable to the company

$

13,167

 

$

57,932

 

Dividends paid to participating securities and accretion

 

(3,513

)

 

(14,059

)

Net income attributable to participating securities

 

(335

)

 

(2,136

)

Net income attributable to common shareholders

$

9,319

 

$

41,737

 

  Papa John's International, Inc. and Subsidiaries Condensed Consolidated Balance Sheets    

December 27,

 

December 29,

2020

 

2019

(In thousands)   Assets Current assets: Cash and cash equivalents

$

130,204

 

$

27,911

 

Accounts receivable, net

 

90,135

 

 

70,462

 

Notes receivable, current portion

 

11,318

 

 

7,790

 

Income tax receivable

 

1,273

 

 

4,024

 

Inventories

 

30,265

 

 

27,529

 

Prepaid expenses and other current assets

 

43,212

 

 

43,830

 

Total current assets

 

306,407

 

 

181,546

 

  Property and equipment, net

 

200,895

 

 

211,741

 

Finance lease right-of-use assets, net

 

16,840

 

 

9,383

 

Operating lease right-of-use assets

 

148,110

 

 

148,229

 

Notes receivable, less current portion, net

 

36,538

 

 

33,010

 

Goodwill

 

80,791

 

 

80,340

 

Deferred income taxes

 

10,800

 

 

1,839

 

Other assets

 

72,389

 

 

64,633

 

Total assets

$

872,770

 

$

730,721

 

    Liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders' deficit Current liabilities: Accounts payable

$

37,370

 

$

29,141

 

Income and other taxes payable

 

10,263

 

 

7,599

 

Accrued expenses and other current liabilities

 

174,563

 

 

108,517

 

Current deferred revenue

 

19,590

 

 

17,673

 

Current finance lease liabilities

 

3,545

 

 

1,789

 

Current operating lease liabilities

 

23,538

 

 

23,226

 

Current portion of long-term debt

 

20,000

 

 

20,000

 

Total current liabilities

 

288,869

 

 

207,945

 

  Deferred revenue

 

13,664

 

 

14,722

 

Long-term finance lease liabilities

 

13,531

 

 

7,629

 

Long-term operating lease liabilities

 

124,666

 

 

125,297

 

Long-term debt, less current portion, net

 

328,292

 

 

347,290

 

Deferred income taxes

 

948

 

 

2,649

 

Other long-term liabilities

 

111,364

 

 

84,927

 

Total liabilities

 

881,334

 

 

790,459

 

  Series B Convertible Preferred Stock

 

251,901

 

 

251,133

 

Redeemable noncontrolling interests

 

6,474

 

 

5,785

 

  Total Stockholders' deficit

 

(266,939

)

 

(316,656

)

Total liabilities, Series B Convertible Preferred Stock, Redeemable noncontrolling interests and Stockholders' deficit

$

872,770

 

$

730,721

 

  Note: The Condensed Consolidated Balance Sheets have been derived from the audited consolidated financial statements, but do not include all information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements.   Papa John's International, Inc. and Subsidiaries Condensed Consolidated Statements of Operations  

Three Months Ended

 

Year Ended

Dec. 27, 2020

 

Dec. 29, 2019

 

Dec. 27, 2020

 

Dec. 29, 2019

(In thousands, except per share amounts) Revenues: Domestic company-owned restaurant sales

$

174,440

 

$

161,459

 

$

700,757

 

$

652,053

 

North America franchise royalties and fees

 

27,837

 

 

18,613

 

 

96,732

 

 

71,828

 

North America commissary revenues

 

176,414

 

 

161,917

 

 

680,793

 

 

612,652

 

International revenues

 

36,371

 

 

27,081

 

 

123,963

 

 

102,924

 

Other revenues

 

54,749

 

 

48,444

 

 

210,989

 

 

179,791

 

Total revenues

 

469,811

 

 

417,514

 

 

1,813,234

 

 

1,619,248

 

  Costs and expenses: Operating costs (excluding depreciation and amortization shown separately below): Domestic company-owned restaurant expenses

 

144,717

 

 

127,197

 

 

563,799

 

 

526,237

 

North America commissary expenses

 

164,261

 

 

149,255

 

 

630,937

 

 

569,180

 

International expenses

 

21,219

 

 

15,188

 

 

73,994

 

 

57,702

 

Other expenses

 

52,085

 

 

46,573

 

 

200,304

 

 

175,592

 

General and administrative expenses

 

55,562

 

 

70,104

 

 

204,242

 

 

223,460

 

Depreciation and amortization

 

12,269

 

 

12,179

 

 

49,705

 

 

47,281

 

Total costs and expenses

 

450,113

 

 

420,496

 

 

1,722,981

 

 

1,599,452

 

Refranchising gains

 

-

 

 

2,850

 

 

-

 

 

4,739

 

Operating income (loss)

 

19,698

 

 

(132

)

 

90,253

 

 

24,535

 

Investment income (loss)

 

436

 

 

(145

)

 

2,131

 

 

1,104

 

Interest expense

 

(4,097

)

 

(4,547

)

 

(17,022

)

 

(20,593

)

Income (loss) before income taxes

 

16,037

 

 

(4,824

)

 

75,362

 

 

5,046

 

Income tax expense (benefit)

 

2,764

 

 

(3,146

)

 

14,748

 

 

(611

)

Net income (loss) before attribution to noncontrolling interests

 

13,273

 

 

(1,678

)

 

60,614

 

 

5,657

 

Net income attributable to noncontrolling interests

 

(106

)

 

(464

)

 

(2,682

)

 

(791

)

Net income (loss) attributable to the company

$

13,167

 

$

(2,142

)

$

57,932

 

$

4,866

 

  Calculation of net income (loss) for earnings (loss) per share: Net income (loss) attributable to the company

$

13,167

 

$

(2,142

)

$

57,932

 

$

4,866

 

Dividends paid to participating securities and accretion

 

(3,513

)

 

(3,470

)

 

(14,059

)

 

(12,499

)

Net income attributable to participating securities

 

(335

)

 

-

 

 

(2,136

)

 

-

 

Net income (loss) attributable to common shareholders

$

9,319

 

$

(5,612

)

$

41,737

 

$

(7,633

)

  Basic earnings (loss) per common share

$

0.29

 

$

(0.18

)

$

1.29

 

$

(0.24

)

Diluted earnings (loss) per common share

$

0.28

 

$

(0.18

)

$

1.28

 

$

(0.24

)

  Basic weighted average common shares outstanding

 

32,698

 

 

31,783

 

 

32,421

 

 

31,632

 

Diluted weighted average common shares outstanding

 

32,981

 

 

31,783

 

 

32,717

 

 

31,632

 

  Dividends declared per common share

$

0.225

 

$

0.225

 

$

0.900

 

$

0.900

 

  Papa John's International, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows   Year Ended (In thousands) Dec. 27, 2020 Dec. 29, 2019   Operating activities Net income before attribution to noncontrolling interests

$

60,614

 

$

5,657

 

Adjustments to reconcile net income to net cash provided by operating activities: (Credit) provision for allowance for credit losses on accounts and notes receivable

 

(4,734

)

 

3,139

 

Depreciation and amortization

 

49,705

 

 

47,281

 

Deferred income taxes

 

(9,268

)

 

(3,764

)

Preferred stock option mark-to-market adjustment

 

 

 

5,914

 

Stock-based compensation expense

 

16,310

 

 

15,303

 

Refranchising gains

 

 

 

(4,739

)

Other

 

2,257

 

 

3,203

 

Changes in operating assets and liabilities: Accounts receivable

 

(22,420

)

 

(6,181

)

Income tax receivable

 

3,760

 

 

12,122

 

Inventories

 

(2,736

)

 

(326

)

Prepaid expenses and other current assets

 

2,884

 

 

1,367

 

Other assets and liabilities

 

20,879

 

 

(6,354

)

Accounts payable

 

8,229

 

 

2,035

 

Income and other taxes payable

 

2,664

 

 

1,009

 

Accrued expenses and other current liabilities

 

59,353

 

 

(11,331

)

Deferred revenue

 

(1,058

)

 

(2,586

)

Net cash provided by operating activities

 

186,439

 

 

61,749

 

  Investing activities Purchases of property and equipment

 

(35,652

)

 

(37,711

)

Notes issued

 

(16,589

)

 

(15,864

)

Repayments of notes issued

 

11,154

 

 

5,616

 

Proceeds from divestitures of restaurants

 

 

 

13,495

 

Other

 

16

 

 

1,889

 

Net cash used in investing activities

 

(41,071

)

 

(32,575

)

  Financing activities Repayments of term loan

 

(20,000

)

 

(15,000

)

Net repayments of revolving credit facilities

 

 

 

(240,026

)

Proceeds from exercise of stock options

 

30,622

 

 

16,010

 

Dividends paid to common stockholders

 

(29,362

)

 

(28,552

)

Dividends paid to preferred stockholders

 

(13,649

)

 

(10,020

)

Tax payments for equity award issuances

 

(3,974

)

 

(1,433

)

Acquisition of Company common stock

 

(2,701

)

 

 

Proceeds from issuance of preferred stock

 

 

 

252,530

 

Issuance costs associated with preferred stock

 

 

 

(7,527

)

Contributions from noncontrolling interests

 

 

 

840

 

Distributions to noncontrolling interests

 

(2,420

)

 

(870

)

Other

 

(1,977

)

 

(526

)

Net cash used in financing activities

 

(43,461

)

 

(34,574

)

  Effect of exchange rate changes on cash and cash equivalents

 

386

 

 

53

 

Change in cash and cash equivalents

 

102,293

 

 

(5,347

)

Cash and cash equivalents at beginning of period

 

27,911

 

 

33,258

 

  Cash and cash equivalents at end of period

$

130,204

 

$

27,911

 

 

Ann Gugino Chief Financial Officer 502-261-7272

Steve Coke Senior Vice President of Financial Operations, Accounting and Reporting 502-261-7272