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Significant Accounting Policies | 6 Months Ended
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Jun. 30, 2024
Accounting Policies [Abstract] |
Significant Accounting Policies | 2. Significant Accounting Policies Principles of Consolidation The accompanying Condensed Consolidated Financial Statements include the accounts of Papa John’s International, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated. Variable Interest Entity Papa Johns Domestic restaurants, both Company-owned and franchised, participate in Papa John’s Marketing Fund, Inc. (“PJMF”), a nonstock corporation designed to operate at break-even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States and Canada for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the Domestic restaurants, of which approximately 85 percent are franchised, and does not have sufficient equity to fund its operations without these ongoing financial contributions. Based on an assessment of the governance structure and operating procedures of PJMF, the Company determined it has the power to control certain significant activities of PJMF, and therefore, is the primary beneficiary. The Company has consolidated PJMF in its financial results in accordance with Accounting Standards Codification (“ASC”) 810, “Consolidation.” Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant items that are subject to such estimates and assumptions include the allowance for credit losses on accounts and notes receivable, intangible assets, contract assets and contract liabilities including the customer loyalty program obligation, property and equipment, right-of-use assets and lease liabilities, gift card breakage, insurance reserves and tax reserves. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates. Noncontrolling Interests Papa Johns has joint venture arrangements in which there are noncontrolling interests held by third parties that includ ed 98 restaurants at June 30, 2024 and June 25, 2023, respectively. Consolidated net income is required to be reported separately at amounts attributable to both the Company and the noncontrolling interests held by third parties. Net income attributable to these joint ventures for the three and six months ended June 30, 2024 and June 25, 2023 was as follows:
|  | Three Months Ended |  | Six Months Ended
(In thousands) |  | June 30, 2024 |  | June 25, 2023 |  | June 30, 2024 |  | June 25, 2023
Papa John’s International, Inc. |  | $ | 739 |  |  | $ | 228 |  |  | $ | 1,331 |  |  | $ | 625 |
Redeemable noncontrolling interests |  | 91 |  |  | 59 |  |  | 190 |  |  | 105 |
Nonredeemable noncontrolling interests |  | 202 |  |  | 32 |  |  | 381 |  |  | 156 |
Total net income |  | $ | 1,032 |  |  | $ | 319 |  |  | $ | 1,902 |  |  | $ | 886 |
The following summarizes the redemption feature, location and related accounting within the Condensed Consolidated Balance Sheets for these joint venture arrangements:
Type of Joint Venture Arrangement |  | Location within the Condensed Consolidated Balance Sheets |  | Recorded Value
Joint ventures with no redemption feature |  | Permanent equity |  | Carrying value
Joint ventures with option to require the Company to purchase the noncontrolling interest - not currently redeemable or redemption not probable |  | Temporary equity |  | Carrying value
Deferred Income Tax Accounts and Tax Reserves We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and those deferred. We use an estimated annual effective rate based on expected annual income to determine our quarterly provision for income taxes. The effective income tax rate includes the estimated domestic state effective income tax rate and applicable foreign income tax rates. The effective income tax rate is also impacted by various permanent items and credits, net of any related valuation allowances, and can vary based on changes in estimated annual income. Discrete items are recorded in the quarter in which they occur. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets and liabilities are netted by tax jurisdiction. 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 due to 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. Deferred tax assets and liabilities are recorded within Other assets and Other long-term liabilities on the Condensed Consolidated Balance Sheets. Tax authorities periodically audit the Company. We record reserves and related interest and penalties for identified exposures as income tax expense. We evaluate these issues on a quarterly basis to adjust for events, such as statute of limitations expirations, court rulings or audit settlements, which may impact our ultimate payment for such exposures. Fair Value Measurements and Disclosures The Company determines the fair value of financial assets and liabilities based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Certain assets and liabilities are measured at fair value on a recurring basis and are required to be classified and disclosed in one of the following three categories: •Level 1: Quoted market prices in active markets for identical assets or liabilities. •Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. •Level 3: Unobservable inputs that are not corroborated by market data. Fair value is a market-based measurement, not an entity-specific measurement. Considerable judgment is required to interpret market data to estimate fair value; accordingly, the fair values presented do not necessarily indicate what the Company or its debtholders could realize in a current market exchange. Our financial assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023 are as follows:
|  |  |  | Fair Value Measurements
(In thousands) |  | Carrying Value |  | Level 1 |  | Level 2 |  | Level 3
June 30, 2024 |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |
Cash surrender value of life insurance policies (a) |  | $ | 29,349 |  |  | $ | 29,349 |  |  | $ | — |  |  | $ | — |
Interest rate swaps (b) |  | $ | 364 |  |  | $ | — |  |  | $ | 364 |  |  | $ | — |
December 31, 2023 |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |
Cash surrender value of life insurance policies (a) |  | $ | 29,449 |  |  | $ | 29,449 |  |  | $ | — |  |  | $ | — |
Interest rate swaps (b) |  | $ | 107 |  |  | $ | — |  |  | $ | 107 |  |  | $ | — |
Financial liabilities: |  |  |  |  |  |  |  |
Interest rate swaps (b) |  | $ | 483 |  |  | $ | — |  |  | $ | 483 |  |  | $ | — |
___________________________________ (a)Represents life insurance policies held in our non-qualified deferred compensation plan. (b)The fair value of our interest rate swaps is based on the sum of all future net present value cash flows. The future cash flows are derived based on the terms of our interest rate swaps, as well as considering published discount factors, and projected Secured Overnight Financing Rates (“SOFR”). Interest rate swaps entered into prior to 2023 were based on London Interbank Offered Rates (“LIBOR”). There were no transfers among levels within the fair value hierarchy during the three and six months ended June 30, 2024 or fiscal year 2023. The fair value of certain assets and liabilities approximates carrying value because of the short-term nature of the accounts, including cash and cash equivalents, accounts receivable, net of allowances, and accounts payable. The carrying value of notes receivable, net of allowances, also approximates fair value. The Company’s revolving credit facilities under the Company’s credit agreement approximate carrying value due to their variable market-based interest rate. The Company’s 3.875% senior notes are classified as a Level 2 fair value measurement since the Company estimates the fair value by using recent trading transactions, and have the following estimated fair values and carrying values (excluding the impact of unamortized debt issuance costs) as of June 30, 2024 and December 31, 2023:
|  | June 30, 2024 |  | December 31, 2023
(In thousands) |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
3.875% Senior Notes |  | $ | 400,000 |  |  | $ | 353,000 |  |  | $ | 400,000 |  |  | $ | 352,500 |
Allowance for Credit Losses Estimates of expected credit losses, even if remote, are based upon historical account write-off trends, facts about the current financial condition of the debtor, forecasts of future operating results based upon current trends of select operating metrics, and macroeconomic factors. Credit quality is monitored through the timing of payments compared to the prescribed payment terms and known facts regarding the financial condition of the franchisee or customer. Account and note balances are charged against the allowance after recovery efforts have ceased. The following table summarizes changes in our allowances for credit losses for accounts receivable and notes receivable:
(In thousands) |  | Accounts Receivable |  | Notes Receivable
Balance at December 31, 2023 |  | $ | 8,353 |  |  | $ | 16,092 |
Current period provision for expected credit losses, net |  | 1,073 |  |  | 1,324 |
Write-offs charged against the allowance |  | (1,181) |  |  | — |
Balance at June 30, 2024 |  | $ | 8,245 |  |  | $ | 17,416 |
Assets Held for Sale Assets held for sale are recorded at the lower of their carrying value or fair value less estimated cost to sell. Certain assets previously classified within property and equipment, net, related to two Domestic Quality Control Centers (“QC Centers”) that were sold on August 2, 2024 for a purchase price of $46.7 million were classified within Assets held for sale in the Condensed Consolidated Balance Sheets at June 30, 2024 for $3.4 million, which represents their carrying value. Certain assets related to 20 Company-owned restaurants in the United Kingdom (“UK”) that were sold on July 1, 2024 were classified within Assets held for sale in the Condensed Consolidated Balance Sheets at June 30, 2024 and were remeasured to $0.8 million, which represents their fair value less estimated cost to sell. The remeasurement resulted in charges of $0.6 million during the three months ended June 30, 2024, which were recorded within General and administrative expenses in the Condensed Consolidated Statements of Operations. See also “Note 9. Restructuring” for more information on the UK Company-owned restaurants and “Note 12. Subsequent Events” for more information on the QC Centers. Impairment of Long-lived Assets The Company evaluates its property and equipment and other long-lived assets for potential indicators of impairment at least annually, or as facts and circumstances arise that indicate the carrying value of the asset group may not be recoverable. For Domestic Company-owned restaurants, the evaluation is performed at the operating market level while International Company-owned restaurants are evaluated at the store level as these represent the lowest level for which identifiable cash flows and are largely independent of the cash flows of other assets and liabilities. If the carrying amount of the long-lived asset group exceeds the amount of estimated future undiscounted cash flows, the fair value of the asset group is estimated and an impairment loss is recorded if the carrying value exceeds the estimated fair value. The assumptions used in the undiscounted cash flow calculation related to future growth are subjective and may be negatively impacted by future changes in operating performance or economic conditions. The Company determined that indicators of impairment existed as of June 30, 2024 within one Domestic Company-owned restaurant operating market and recorded non-cash impairment charges of $3.3 million for property and equipment and $0.7 million for intangible assets for the three and six months ended June 30, 2024. Separately, the Company recorded impairments related to International Company-owned restaurants in connection with its International Transformation Plan during the three and six months ended June 30, 2024, as further described in “Note 9. Restructuring”. These impairment charges were recorded within General and administrative expenses in the Condensed Consolidated Statements of Operations. Recent Accounting Pronouncements Segment Disclosures In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2023-07, “Improvements to Reportable Segment Disclosure s.” The ASU expands the scope and frequency of segment disclosures and introduces the concept of a “significant expense principle,” which requires entities to disclose significant expense categories and amounts that are regularly provided to the chief operating decision maker (“CODM”) and included within the reported measure of a segment’s profit or loss. The ASU also changes current disclosure requirements by allowing entities to report multiple measures of a segment’s profit or loss, provided the reported measures are used by the CODM to assess performance and allocate resources and that the measure closest to GAAP is also provided. Finally, the ASU requires all segment profit or loss and assets disclosures to be provided on both an annual and interim basis and requires entities to disclose the title and position of the individual identified as the CODM. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 and shall be applied retrospectively to all periods presented in the financial statements. The Company is currently evaluating the standard and determining the extent of additional interim and annual segment disclosures that will be required. Income Tax Disclosures In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The ASU provides for additional levels of details within the required rate reconciliation table to include additional categories of information about federal, state, and foreign income taxes and requires entities to further disaggregate information about income taxes paid, net of refunds. The ASU is effective for fiscal years beginning after December 15, 2024 and shall be applied prospectively. The Company is currently evaluating the standard and determining the extent of additional disclosures that will be required.

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