Re:
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Papa John's International, Inc.
Form 10-K for the Fiscal Year Ended December 29, 2019
Filed February 26, 2020
File No. 000-21660
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1.
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Please tell us the consideration you gave to Question 100.01 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in adjusting your
non-GAAP measures to remove marketing fund investments made by you.
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2.
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Please tell us the consideration you gave to Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in adjusting your
non-GAAP measures to add revenues you did not receive due to royalty relief.
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3.
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For your reconciliations of adjusted net income attributable to common shareholders and adjusted diluted earnings per share, please tell us the consideration you
gave to Question 102.11 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations, including presenting the income tax impact attributable to your non-GAAP adjustments as a separate adjustment and disclosing how it was
computed.
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Year Ended
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||||||||||||
Dec. 29,
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Dec. 30,
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Dec. 31,
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||||||||||
(In thousands, except per share amounts)
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2019
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2018
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2017
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|||||||||
GAAP income before income taxes
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$
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5,046
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$
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6,697
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$
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140,342
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||||||
Special items:
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||||||||||||
Special charges (1)
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60,817
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50,732
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—
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|||||||||
Refranchising (gains) losses, net (2)(3)
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(4,739
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)
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289
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1,674
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||||||||
Adjusted income before income taxes
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61,124
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57,718
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142,016
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|||||||||
53rd week of operations
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—
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—
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(5,900
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)
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||||||||
Adjusted income before income taxes - 52 weeks
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$
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61,124
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$
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57,718
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$
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136,116
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||||||
GAAP net (loss) income attributable to common shareholders
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$
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(7,633
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)
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$
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2,474
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$
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102,292
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|||||
Special items:
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||||||||||||
Special charges (1)
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60,817
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50,732
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—
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|||||||||
Refranchising (gains) losses, net (2)(3)
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(4,739
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)
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289
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1,674
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||||||||
Tax effect of Special charges and Refranchising (gains) losses, net (4)
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(11,236
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)
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(11,842
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)
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(351
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)
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||||||
Tax impact of China refranchising (3)
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—
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2,435
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—
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|||||||||
Equity compensation tax benefit (6)
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—
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—
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(1,879
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)
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||||||||
Adjusted net income attributable to common shareholders
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37,209
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44,088
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94,716
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|||||||||
53rd week of operations
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—
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—
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(5,900
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)
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||||||||
Tax effect of 53rd week of operations (7)
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—
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—
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2,000
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|||||||||
Adjusted net income attributable to common shareholders - 52 weeks
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$
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37,209
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$
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44,088
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$
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90,816
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||||||
GAAP diluted (loss) earnings per share
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$
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(0.24
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)
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$
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0.08
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$
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2.83
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|||||
Special items:
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||||||||||||
Special charges (1)
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1.91
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1.57
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—
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|||||||||
Refranchising (gains) losses, net (2)(3)
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(0.15
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)
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0.01
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0.05
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||||||||
Tax effect of Special charges and Refranchising (gains) losses, net (4)
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(0.35
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)
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(0.36
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)
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(0.01
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)
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||||||
Tax impact of China refranchising (3)
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—
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0.07
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—
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|||||||||
U.S. tax legislation effect on deferred taxes (5)
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—
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—
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(0.20
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)
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||||||||
Equity compensation tax benefit (6)
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—
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—
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(0.05
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)
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||||||||
Adjusted diluted earnings per share
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$
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1.17
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$
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1.37
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$
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2.62
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||||||
53rd week of operations
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—
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—
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(0.16
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)
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||||||||
Tax effect of 53rd week of operations (7)
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—
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—
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0.05
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|||||||||
Adjusted diluted earnings per share - 52 weeks
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$
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1.17
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$
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1.37
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$
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2.51
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(1)
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The Company incurred $60.8 million of special costs (defined as “Special charges”) in 2019 compared to $50.7 million for the prior year comparable periods,
including the following (in thousands):
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Year ended
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|||||||
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December 29, 2019 |
December 30, 2018
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||||||
Special charges before income taxes: |
||||||||
Royalty relief (a) |
$
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19,097
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$
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15,416
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||||
Marketing fund investments (b) |
27,500
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10,000
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||||||
Legal and advisory fees (c) |
5,921
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19,475
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||||||
Reimaging costs and write-off of branded assets (d) |
-
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5,841
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||||||
Other costs (e) |
2,385
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-
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||||||
Mark to market adjustment on option valuation (f) |
5,914
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-
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||||||
Total Special charges before income taxes
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$
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60,817
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$
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50,732
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(a)
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Represents financial assistance provided to the North America system in the form of royalty reductions that are above and beyond the level of franchise support
the Company would incur in the ordinary course of its business.
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(b)
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Represents marketing fund investments as part of our support package to our franchisees.
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(c)
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Represents advisory and legal costs primarily associated with the review of a wide range of strategic opportunities that culminated in a strategic investment in
the Company by affiliates of Starboard. The costs in 2018 also include a third-party audit of the culture at Papa John’s commissioned by a special committee of the Board of Directors.
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(d)
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2018 includes re-imaging costs at nearly all domestic restaurants and costs to replace or write-off certain branded assets.
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(e)
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2019 includes severance costs for our former CEO and costs related to the termination of a license agreement for intellectual property no longer being utilized.
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(f)
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Represents a one-time mark-to-market adjustment of $5.9 million in 2019 related to the increase in the fair value of the Starboard option to purchase Series B
preferred stock that culminated in the purchase of an additional $52.5 million of preferred stock in late March 2019.
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(2)
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The refranchising and impairment (gains)/losses, net gain of $4.7 million before tax and $3.7 million after tax in 2019 are primarily associated with the
refranchise of 46 domestic restaurants, including 19 restaurants in Georgia and 23 restaurants in South Florida.
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(3)
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The refranchising and impairment (gains)/losses, net loss of $289,000 before tax and $222,000 net loss after tax in 2018 are primarily due to the loss associated
with the China refranchise of the 34 Company-owned restaurants and the QC Center in China with an impairment loss of $1.7 million related to these stores in 2017, substantially offset by refranchising gains related to the refranchising of
62 Company-owned restaurants in North America in 2018. We also had $2.4 million of additional tax expense associated with the China refranchise. This additional tax expense is primarily attributable to the required recapture of operating
losses previously taken by Papa John’s International.
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(4)
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The tax effect of Special charges and Refranchising (gains) losses, net was calculated as follows: For 2019, the full year marginal rate of 22.4% was applied to each
category of Special charges as listed in footnote (1) (a-e) in the table above, as well as Refranchising (gains) losses, net. The mark to market adjustment on option valuation, item (f) in the table above, was non-deductible for tax
purposes. For 2018, the full year marginal rate of 23.2% was applied. For 2017, the full year marginal rate of 21.0% was applied.
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(5)
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The U.S. income tax legislation effect on deferred taxes is related to the remeasurement of the net deferred tax liability due to the Tax Cuts and Jobs Act
enacted in 2017.
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(6)
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The favorable impact of adopting the new guidance for accounting for share-based compensation is included in 2017. This guidance requires excess tax benefits
recognized on stock-based awards to be recorded as a reduction of income tax expense rather than stockholders’ equity. Beginning in 2018, and on a go-forward basis, the benefit or reduction in income from this change will not be shown as
an adjustment in GAAP results.
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(7)
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The tax effect of the 53rd week of operations was calculated using a rate of 33.9%, which represents the Company’s applicable rate for the monthly period in which the 53rd week of operations occurred. This tax rate is before the impact of the U.S. income tax legislation effect on deferred taxes
related to the remeasurement of the new deferred tax liability due to the Tax Cuts and Jobs Act.
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4.
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You indicate under Notes Receivable on pages 78 and 98 that you provided certain franchisees with royalty payment plans. You also have reclassified reserves for
uncollectible accounts receivable to reserves for franchise notes receivable in Schedule II. Please tell us whether notes receivable issued and presented as cash outflows from investing activities include amounts that are effectively the
transfer of accounts receivable to notes receivable whereby investing cash outflows are shortly followed by operating cash inflows to repay accounts receivable or other amounts due from the sales of goods or services, including but not
limited to royalties. If so, please tell us the amount of the gross up in operating and investing cash flows for each period presented and explain why you believe these represent investing cash outflows. Also, tell us whether notes
receivable repayments presented as cash inflows from investing activities relate to amounts due from the sales of goods or services. If so, please tell us the amount for each period presented. Please also disclose your accounting policy
for determining when cash flows related to notes receivable are included in operating activities versus investing activities. Refer to ASC 230-10-45-16(a).
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Year ended
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December 29,
2019
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December 30,
2018
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December 31,
2017
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||||||||||
Transfers from accounts receivable to notes receivable for royalty payment plans (classified as non-cash transactions within the Consolidated Statements of Cash Flows)
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$
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2,147
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$
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6,606
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$
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50
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||||||
Notes receivable repayments from amounts due from the sale of goods and services (royalty payment plans)
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$
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188
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-
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-
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