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DOMINOS PIZZA INC - Quarter Report: 2014 September (Form 10-Q)

10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 7, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-32242

 

 

Domino’s Pizza, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   38-2511577
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
30 Frank Lloyd Wright Drive  
Ann Arbor, Michigan   48105
(Address of Principal Executive Offices)   (Zip Code)

(734) 930-3030

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

As of October 7, 2014, Domino’s Pizza, Inc. had 55,005,780 shares of common stock, par value $0.01 per share, outstanding.

 

 

 


Domino’s Pizza, Inc.

TABLE OF CONTENTS

 

PART I.    FINANCIAL INFORMATION    Page No.  

Item 1.

   Financial Statements.   
  

Condensed Consolidated Balance Sheets (Unaudited) – As of September 7, 2014 and December 29, 2013

     3   
  

Condensed Consolidated Statements of Income (Unaudited) – Fiscal quarter and three fiscal quarters ended September 7, 2014 and September 8, 2013

     4   
  

Consolidated Statements of Comprehensive Income (Unaudited) – Fiscal quarter and three fiscal quarters ended September 7, 2014 and September 8, 2013

     5   
  

Condensed Consolidated Statements of Cash Flows (Unaudited) – Three fiscal quarters ended September 7, 2014 and September 8, 2013

     6   
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

     7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      11   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      19   

Item 4.

   Controls and Procedures      19   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      20   

Item 1A.

   Risk Factors      20   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      20   

Item 3.

   Defaults Upon Senior Securities      20   

Item 4.

   Mine Safety Disclosures      20   

Item 5.

   Other Information      20   

Item 6.

   Exhibits      21   

SIGNATURES

        21   

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

           December 29, 2013  
(In thousands)    September 7, 2014     (Note)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 30,936      $ 14,383   

Restricted cash and cash equivalents

     73,592        125,453   

Accounts receivable

     103,540        105,779   

Inventories

     35,213        30,321   

Prepaid expenses and other

     21,846        20,199   

Advertising fund assets, restricted

     60,111        44,695   

Deferred income taxes

     8,086        10,710   
  

 

 

   

 

 

 

Total current assets

     333,324        351,540   
  

 

 

   

 

 

 

Property, plant and equipment:

    

Land and buildings

     25,995        23,423   

Leasehold and other improvements

     96,325        90,508   

Equipment

     182,540        174,667   

Construction in progress

     3,042        8,900   
  

 

 

   

 

 

 
     307,902        297,498   

Accumulated depreciation and amortization

     (207,411     (199,914
  

 

 

   

 

 

 

Property, plant and equipment, net

     100,491        97,584   
  

 

 

   

 

 

 

Other assets:

    

Deferred financing costs

     24,647        28,693   

Goodwill

     16,109        16,598   

Capitalized software

     18,700        14,464   

Other assets

     14,899        13,209   

Deferred income taxes

     2,713        3,167   
  

 

 

   

 

 

 

Total other assets

     77,068        76,131   
  

 

 

   

 

 

 

Total assets

   $ 510,883      $ 525,255   
  

 

 

   

 

 

 

Liabilities and stockholders’ deficit

    

Current liabilities:

    

Current portion of long-term debt

   $ 549      $ 24,144   

Accounts payable

     73,942        83,408   

Dividends payable

     14,111        11,849   

Insurance reserves

     13,880        13,297   

Advertising fund liabilities

     60,111        44,695   

Other accrued liabilities

     57,793        77,218   
  

 

 

   

 

 

 

Total current liabilities

     220,386        254,611   
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, less current portion

     1,523,740        1,512,299   

Insurance reserves

     26,030        25,528   

Deferred income taxes

     5,455        7,827   

Other accrued liabilities

     17,014        15,192   
  

 

 

   

 

 

 

Total long-term liabilities

     1,572,239        1,560,846   
  

 

 

   

 

 

 

Stockholders’ deficit:

    

Common stock

     549        558   

Additional paid-in capital

     1,036        669   

Retained deficit

     (1,280,993     (1,289,445

Accumulated other comprehensive loss

     (2,334     (1,984
  

 

 

   

 

 

 

Total stockholders’ deficit

     (1,281,742     (1,290,202
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 510,883      $ 525,255   
  

 

 

   

 

 

 

 

Note: The balance sheet at December 29, 2013 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying notes.

 

3


Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

 

     Fiscal Quarter Ended     Three Fiscal Quarters Ended  
     September 7,     September 8,     September 7,     September 8,  
(In thousands, except per share data)    2014     2013     2014     2013  

Revenues:

        

Domestic Company-owned stores

   $ 77,644      $ 75,923      $ 238,915      $ 235,526   

Domestic franchise

     51,858        47,846        157,317        147,330   

Domestic supply chain

     254,820        226,315        769,899        691,154   

International

     62,246        53,966        184,752        161,666   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     446,568        404,050        1,350,883        1,235,676   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales:

        

Domestic Company-owned stores

     59,754        58,662        183,262        179,466   

Domestic supply chain

     228,422        203,004        689,487        615,736   

International

     24,878        21,750        72,933        64,047   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     313,054        283,416        945,682        859,249   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     133,514        120,634        405,201        376,427   

General and administrative

     56,573        53,858        162,722        160,286   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     76,941        66,776        242,479        216,141   

Interest income

     22        24        80        97   

Interest expense

     (19,974     (20,347     (60,151     (61,718
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     56,989        46,453        182,408        154,520   

Provision for income taxes

     21,371        15,821        67,854        56,198   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 35,618      $ 30,632      $ 114,554      $ 98,322   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Common stock – basic

   $ 0.65      $ 0.56      $ 2.08      $ 1.77   

Common stock – diluted

     0.63        0.53        2.01        1.70   

Dividends declared per share

   $ 0.25      $ 0.20      $ 0.75      $ 0.60   

 

See accompanying notes.

 

4


Domino’s Pizza, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Fiscal Quarter Ended     Three Fiscal Quarters Ended  
     September 7,     September 8,     September 7,     September 8,  
(In thousands)    2014     2013     2014     2013  

Net income

   $ 35,618      $ 30,632      $ 114,554      $ 98,322   

Other comprehensive income (loss), before tax:

        

Currency translation adjustment

     (5     175        (790     85   

Tax attributes of items in other comprehensive income (loss):

        

Currency translation adjustment

     29        (49     440        34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     24        126        (350     119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 35,642      $ 30,758      $ 114,204      $ 98,441   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes.

 

5


Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Fiscal Quarters Ended  
     September 7,     September 8,  
(In thousands)    2014     2013  

Cash flows from operating activities:

  

Net income

   $ 114,554      $ 98,322   

Adjustments to reconcile net income to net cash provided by operating activities:

  

Depreciation and amortization

     20,024        17,480   

Gains on sale/disposal of assets

     (1,381     (71

Amortization of deferred financing costs

     4,046        4,264   

Provision for deferred income taxes

     1,008        6,031   

Non-cash compensation expense

     11,897        14,866   

Tax impact from equity-based compensation

     (10,899     (12,025

Other

     (888     (1,283

Changes in operating assets and liabilities

     (19,476     (23,009
  

 

 

   

 

 

 

Net cash provided by operating activities

     118,885        104,575   
  

 

 

   

 

 

 

Cash flows from investing activities:

  

Capital expenditures

     (30,983     (20,286

Proceeds from sale of assets

     5,802        3,184   

Changes in restricted cash

     51,861        (3,273

Other

     (1,365     1,539   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     25,315        (18,836
  

 

 

   

 

 

 

Cash flows from financing activities:

  

Repayments of long-term debt and capital lease obligations

     (12,152     (18,268

Proceeds from exercise of stock options

     3,094        5,804   

Tax impact from equity-based compensation

     10,899        12,025   

Purchases of common stock

     (82,407     (76,892

Tax payments for restricted stock upon vesting

     (7,889     (7,888

Payments of common stock dividends and equivalents

     (39,208     (23,223
  

 

 

   

 

 

 

Net cash used in financing activities

     (127,663     (108,442
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     16        (31
  

 

 

   

 

 

 

Change in cash and cash equivalents

     16,553        (22,734

Cash and cash equivalents, at beginning of period

     14,383        54,813   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 30,936      $ 32,079   
  

 

 

   

 

 

 

 

See accompanying notes.

 

6


Domino’s Pizza, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited; tabular amounts in thousands, except percentages, share and per share amounts)

September 7, 2014

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended December 29, 2013 included in our annual report on Form 10-K.

In the opinion of the Company, all adjustments, consisting of normal recurring items, considered necessary for a fair statement have been included. Operating results for the fiscal quarter and three fiscal quarters ended September 7, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2014.

2. Segment Information

The following table summarizes revenues, income from operations and earnings before interest, taxes, depreciation, amortization and other, which is the measure by which the Company allocates resources to its segments and which we refer to as Segment Income, for each of our reportable segments.

 

     Fiscal Quarters Ended September 7, 2014 and September 8, 2013  
     Domestic
Stores
     Domestic
Supply Chain
     International      Intersegment
Revenues
    Other     Total  

Revenues –

               

2014

   $ 129,502       $ 278,445       $ 62,246       $ (23,625   $ —        $ 446,568   

2013

     123,769         248,299         53,966         (21,984     —          404,050   

Income from operations –

               

2014

   $ 43,000       $ 20,523       $ 30,717         N/A      $ (17,299   $ 76,941   

2013

     39,719         17,426         25,953         N/A        (16,322     66,776   

Segment Income –

               

2014

   $ 44,761       $ 22,453       $ 30,907         N/A      $ (10,110   $ 88,011   

2013

     41,205         19,370         26,052         N/A        (8,939     77,688   

 

     Three Fiscal Quarters Ended September 7, 2014 and September 8, 2013  
     Domestic
Stores
     Domestic
Supply Chain
     International      Intersegment
Revenues
    Other     Total  

Revenues –

               

2014

   $ 396,232       $ 842,031       $ 184,752       $ (72,132   $ —        $ 1,350,883   

2013

     382,856         758,901         161,666         (67,747     —          1,235,676   

Income from operations –

               

2014

   $ 135,105       $ 62,521       $ 92,205         N/A      $ (47,352   $ 242,479   

2013

     125,882         58,250         79,567         N/A        (47,558     216,141   

Segment Income –

               

2014

   $ 138,413       $ 68,364       $ 92,320         N/A      $ (26,078   $ 273,019   

2013

     130,253         63,893         79,601         N/A        (25,331     248,416   

 

7


The following table reconciles Total Segment Income to consolidated income before provision for income taxes.

 

     Fiscal Quarter Ended     Three Fiscal Quarters Ended  
     September 7,
2014
    September 8,
2013
    September 7,
2014
    September 8,
2013
 

Total Segment Income

   $ 88,011      $ 77,688      $ 273,019      $ 248,416   

Depreciation and amortization

     (6,947     (6,072     (20,024     (17,480

(Loss) gain on sale/disposal of assets

     (306     (214     1,381        71   

Non-cash compensation expense

     (3,817     (4,626     (11,897     (14,866
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     76,941        66,776        242,479        216,141   

Interest income

     22        24        80        97   

Interest expense

     (19,974     (20,347     (60,151     (61,718
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

   $ 56,989      $ 46,453      $ 182,408      $ 154,520   
  

 

 

   

 

 

   

 

 

   

 

 

 

3. Earnings Per Share

 

     Fiscal Quarter Ended      Three Fiscal Quarters Ended  
     September 7,
2014
     September 8,
2013
     September 7,
2014
     September 8,
2013
 

Net income available to common stockholders – basic and diluted

   $ 35,618       $ 30,632       $ 114,554       $ 98,322   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average number of shares

     54,620,539         55,065,450         54,949,257         55,427,070   

Earnings per share – basic

   $ 0.65       $ 0.56       $ 2.08       $ 1.77   

Weighted average diluted number of shares

     56,610,608         57,345,677         57,030,669         57,831,660   

Earnings per share – diluted

   $ 0.63       $ 0.53       $ 2.01       $ 1.70   

The denominators used in calculating diluted earnings per share for common stock for both the third quarter and three fiscal quarters of 2014 do not include 335,420 options to purchase common stock as the effect of including these options would have been anti-dilutive. The denominators used in calculating diluted earnings per share for common stock for the third quarter and three fiscal quarters of 2013 do not include 152,340 and 500,180 options to purchase common stock, respectively, as the effect of including these options would have been anti-dilutive.

4. Stockholders’ Deficit

The following table summarizes changes in Stockholders’ Deficit for the three fiscal quarters of 2014.

 

                 Accumulated  
           Additional           Other  
     Common Stock     Paid-in     Retained     Comprehensive  
     Shares     Amount     Capital     Deficit     Loss  

Balance at December 29, 2013

     55,768,672      $ 558      $ 669      $ (1,289,445   $ (1,984

Net income

     —          —          —          114,554        —     

Common stock dividends

     —          —          —          (41,339     —     

Issuance of common stock, net

     105,161        1        —          —          —     

Tax payments for restricted stock upon vesting

     (104,594     (1     (7,888     —          —     

Purchases of common stock

     (1,151,931     (12     (17,632     (64,763     —     

Exercise of stock options

     328,055        3        3,091        —          —     

Tax impact from equity-based compensation

     —          —          10,899        —          —     

Non-cash compensation expense

     —          —          11,897        —          —     

Currency translation adjustment, net of tax

     —          —          —          —          (350
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 7, 2014

     54,945,363      $ 549      $ 1,036      $ (1,280,993   $ (2,334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

8


5. Dividends

During the three fiscal quarters of 2014, the Company paid approximately $39.2 million of common stock dividends. Additionally, during the third quarter of 2014, the Company’s Board of Directors declared a $0.25 per share quarterly dividend on its outstanding common stock for shareholders of record as of September 15, 2014 that was paid on September 30, 2014. The Company had approximately $14.1 million accrued for common stock dividends at September 7, 2014.

On October 8, 2014, the Company’s Board of Directors declared a $0.25 per share quarterly dividend on its outstanding common stock for shareholders of record as of December 15, 2014 to be paid on December 30, 2014.

6. Accumulated Other Comprehensive Loss

In 2013, the Company adopted Accounting Standards Update 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to present either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items of net income.

The approximately $2.3 million of accumulated other comprehensive loss at September 7, 2014 and the approximately $2.0 million of accumulated other comprehensive loss at December 29, 2013 represent currency translation adjustments, net of tax. There were no reclassifications out of accumulated other comprehensive loss to net income in the three fiscal quarters of 2014 or the three fiscal quarters of 2013.

7. Open Market Share Repurchase Program

During the third quarter of 2014, the Company repurchased and retired 242,700 shares of common stock for a total of approximately $17.4 million, and during the three fiscal quarters of 2014, the Company repurchased and retired 1,151,931 shares of common stock for a total of approximately $82.4 million. As of September 7, 2014, the Company had approximately $132.7 million remaining for future share repurchases under its Board of Directors approved $200.0 million open market share repurchase program.

During the third quarter and three fiscal quarters of 2013, the Company repurchased and retired 351,085 and 1,369,232 shares of common stock for a total of approximately $20.8 million and $76.9 million, respectively, under the Company’s open market share repurchase program.

8. Fair Value Measurements

Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value 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.

 

9


The fair values of the Company’s cash equivalents and investments in marketable securities are based on quoted prices in active markets for identical assets. The following tables summarize the carrying amounts and fair values of certain assets at September 7, 2014 and December 29, 2013:

 

     At September 7, 2014  
            Fair Value Estimated Using  
     Carrying
Amount
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Cash equivalents

   $ 21,108       $ 21,108       $ —         $ —     

Restricted cash equivalents

     54,834         54,834         —           —     

Investments in marketable securities

     4,365         4,365         —           —     

 

     At December 29, 2013  
            Fair Value Estimated Using  
     Carrying
Amount
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Cash equivalents

   $ 5,303       $ 5,303       $ —         $ —     

Restricted cash equivalents

     93,608         93,608         —           —     

Investments in marketable securities

     3,269         3,269         —           —     

At September 7, 2014, the Company estimates that the $1.522 billion in principal amount of outstanding fixed rate notes had a fair value of approximately $1.604 billion, and at December 29, 2013 the $1.534 billion in principal amount of outstanding fixed rate notes had a fair value of approximately $1.643 billion. The fixed rate notes are classified as a Level 2 measurement, as the Company estimated the fair value amount by using available market information. The Company obtained broker quotes from two separate brokerage firms that are knowledgeable about the Company’s fixed rate notes and, at times, trade these notes. Further, the Company performs its own internal analysis based on the information it gathers from public markets, including information on notes that are similar to that of the Company. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimates presented here are not necessarily indicative of the amount that the Company or the debtholders could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value.

9. Sale of Company-Owned Stores

During the first quarter of 2014, the Company sold 14 Company-owned stores to a franchisee. In connection with the sale of these 14 stores, the Company recorded a $1.7 million pre-tax gain on the sale of the related assets, which was net of a $0.5 million reduction in goodwill. The gain was recorded in general and administrative expense in the Company’s condensed consolidated statements of income. This transaction will not have a material ongoing impact on the Company’s consolidated financial results.

As a result of the capital gain recognized in connection with the sale of the 14 Company-owned stores, the Company also released $0.3 million of a deferred tax valuation allowance.

10. Subsequent Event

During the third quarter of 2014, the Company received approval from its Board of Directors to replace its corporate airplane with a newer model used airplane. Subsequent to the quarter, a purchase agreement was executed to purchase the newer airplane for approximately $20.0 million, including taxes and transfer fees. This purchase will be a capital expenditure in the fourth quarter and will be paid for in cash.

Additionally, during the third quarter of 2014, its Board of Directors approved the sale of the existing corporate airplane, which the Company began actively marketing in the fourth quarter of 2014. As a result of these actions, the Company estimates that it will classify its existing airplane as held for sale and record approximately $6.0 million of pre-tax expense in the fourth quarter of 2014 to reduce the asset to its fair value less cost to sell. This impairment loss will be recorded in general and administrative expenses on the consolidated statement of income.

 

10


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Unaudited; tabular amounts in millions, except percentages and store data)

The 2014 and 2013 third quarters referenced herein represent the twelve-week periods ended September 7, 2014 and September 8, 2013, respectively. The 2014 and 2013 three fiscal quarters referenced herein represent the thirty-six-week periods ended September 7, 2014 and September 8, 2013, respectively.

Overview

We are the number one pizza delivery company in the United States based on reported consumer spending, and the second largest pizza company in the world based on number of units. We operate through a substantially franchised network of stores, located in all 50 states and in more than 75 international markets, as well as Company-owned stores, all of which are in the United States. In addition, we operate regional dough manufacturing and supply chain centers in the United States and Canada.

Our financial results are driven largely by retail sales at our franchise and Company-owned stores. Changes in retail sales are driven by changes in same store sales and store counts. We monitor both of these metrics very closely, as they directly impact our revenues and profits, and strive to consistently increase both metrics. Retail sales drive royalty payments from franchisees as well as Company-owned store and supply chain revenues. Retail sales are primarily impacted by the strength of the Domino’s Pizza® brand, the results of our marketing, the effectiveness of our digital platforms and technology, our ability to execute our store operating model, the overall global economic environment and the success of our business strategies.

 

     Third Quarter
of 2014
    Third Quarter
of 2013
    Three fiscal
Quarters of 2014
    Three fiscal
Quarters of 2013
 

Global retail sales growth

     +13.8       +7.4       +11.4       +8.7  

Same store sales growth:

                

Domestic Company-owned stores

     +6.1       +4.6       +3.7       +5.1  

Domestic franchise stores

     +7.8       +5.5       +6.2       +6.2  
  

 

 

     

 

 

     

 

 

     

 

 

   

Domestic stores

     +7.7       +5.4       +6.0       +6.1  

International stores (excluding foreign currency impact)

     +7.1       +5.0       +7.4       +5.8  

Store counts (at end of period):

                

Domestic Company-owned stores

     376          390             

Domestic franchise stores

     4,640          4,549             
  

 

 

     

 

 

           

Domestic stores

     5,016          4,939             

International stores

     6,265          5,627             
  

 

 

     

 

 

           

Total stores

     11,281          10,566             
  

 

 

     

 

 

           

Income statement data:

                

Total revenues

   $ 446.6        100.0   $ 404.1        100.0   $ 1,350.9        100.0   $ 1,235.7        100.0

Cost of sales

     313.1        70.1     283.4        70.1     945.7        70.0     859.2        69.5

General and administrative

     56.6        12.7     53.9        13.3     162.7        12.0     160.3        13.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     76.9        17.2     66.8        16.6     242.5        18.0     216.1        17.5

Interest expense, net

     (20.0     (4.4 )%      (20.3     (5.1 )%      (60.1     (4.5 )%      (61.6     (5.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     57.0        12.8     46.5        11.5     182.4        13.5     154.5        12.5

Provision for income taxes

     21.4        4.8     15.8        3.9     67.9        5.0     56.2        4.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 35.6        8.0   $ 30.6        7.6   $ 114.6        8.5   $ 98.3        8.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the third quarter and three fiscal quarters of 2014, we experienced robust domestic same store sales increases, driven by our continued consumer offerings of high quality food at value pricing with effective marketing. Our innovative digital platforms and technology also contributed to those increases, as we believe that our platforms and technology provide us with a competitive advantage. Internationally, we achieved robust same store sales in both the third quarter and three fiscal quarters of 2014. International store growth continued to be strong during the third quarter, as we opened a net 146 stores, bringing the year-to-date total to a net 365 stores opened. We believe that our strong global brand and the factors described above drove our results for the third quarter and three fiscal quarters of 2014, and we intend to further grow our business by continuing to focus on operational excellence, effective marketing, industry-leading technology platforms and delivering high quality food and service to our customers.

 

11


Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, rose 13.8% in the third quarter of 2014, and 11.4% in the three fiscal quarters of 2014. These increases were driven primarily by domestic and international same store sales growth, as well as expansion of our worldwide store counts during the trailing four quarters. Foreign currency exchange rates had a positive impact during the third quarter of 2014, but negatively impacted global retail sales for the three fiscal quarters of 2014. Domestic same store sales growth reflected the sustained positive sales trends and the continued success of our products and marketing. International same store sales growth reflected continued strong performance.

Revenues increased $42.5 million, up 10.5% in the third quarter of 2014, and $115.2 million, up 9.3% in the three fiscal quarters of 2014 due primarily to higher domestic supply chain revenues from an increase in supply chain center volumes combined with higher cheese prices as well as increased sales of equipment and supplies to stores in connection with our store reimaging program. Higher international and domestic store revenues also contributed to the increases in revenues as a result of higher same store sales and store count growth. These changes in revenues are described in more detail below.

Income from operations increased $10.1 million, up 15.2% in the third quarter of 2014, and $26.4 million, up 12.2% in the three fiscal quarters of 2014. These increases were driven primarily by higher royalty revenues from both domestic and international franchise stores and higher domestic supply chain profits driven primarily by higher volumes. Additionally, the three fiscal quarters of 2014 benefited from a $1.7 million pre-tax gain on the sale of 14 Company-owned stores.

Net income increased $5.0 million, up 16.3% in the third quarter of 2014, and $16.3 million, up 16.5% in the three fiscal quarters of 2014. These increases were driven by domestic and international same store sales growth, international store count growth and higher domestic supply chain profits and were offset in part by a higher effective tax rate in third quarter of 2014. Additionally, the three fiscal quarters of 2014 benefited from a $1.4 million positive impact from the sale of 14 Company-owned stores and the associated reversal of a deferred tax asset valuation allowance during the first quarter of 2014.

Revenues

 

     Third Quarter
of 2014
    Third Quarter
of 2013
    Three fiscal
Quarters of 2014
    Three fiscal
Quarters of 2013
 

Domestic Company-owned stores

   $ 77.6         17.4   $ 75.9         18.8   $ 238.9         17.7   $ 235.5         19.1

Domestic franchise

     51.9         11.6     47.8         11.8     157.3         11.6     147.3         11.9

Domestic supply chain

     254.8         57.1     226.3         56.0     769.9         57.0     691.2         55.9

International

     62.2         13.9     54.0         13.4     184.8         13.7     161.7         13.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

   $ 446.6         100.0   $ 404.1         100.0   $ 1,350.9         100.0   $ 1,235.7         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Revenues primarily consist of retail sales from our Company-owned stores, royalties from our domestic and international franchise stores and sales of food, equipment and supplies from our supply chain centers to substantially all of our domestic franchise stores and certain international franchise stores. Company-owned store and franchise store revenues may vary significantly from period to period due to changes in store count mix, while supply chain revenues may vary significantly as a result of fluctuations in commodity prices.

Domestic Stores Revenues

 

     Third Quarter
of 2014
    Third Quarter
of 2013
    Three fiscal
Quarters of 2014
    Three fiscal
Quarters of 2013
 

Domestic Company-owned stores

   $ 77.6         60.0   $ 75.9         61.3   $ 238.9         60.3   $ 235.5         61.5

Domestic franchise

     51.9         40.0     47.8         38.7     157.3         39.7     147.3         38.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Domestic stores

   $ 129.5         100.0   $ 123.8         100.0   $ 396.2         100.0   $ 382.9         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Domestic stores revenues increased $5.7 million, up 4.6% in the third quarter of 2014, and $13.3 million, up 3.5% in the three fiscal quarters of 2014. These increases were due primarily to royalty revenues earned on higher franchise same store sales and higher domestic Company-owned same store sales. These changes in domestic stores revenues are more fully described below.

 

12


Domestic Company-Owned Stores Revenues

Revenues from domestic Company-owned store operations increased $1.7 million, up 2.3% in the third quarter of 2014, and $3.4 million, up 1.4% in the three fiscal quarters of 2014. These increases were due primarily to higher same store sales during the third quarter and three fiscal quarters of 2014, offset in part by the sale of 14 company-owned stores to a franchisee in the first quarter of 2014. Domestic Company-owned same store sales increased 6.1% in the third quarter of 2014, and 3.7% in the three fiscal quarters of 2014. This compared to an increase of 4.6% in the third quarter of 2013, and 5.1% in the three fiscal quarters of 2013.

Domestic Franchise Revenues

Revenues from domestic franchise operations increased $4.1 million, up 8.4% in the third quarter of 2014, and $10.0 million, up 6.8% in the three fiscal quarters of 2014. These increases were due primarily to higher domestic franchise same store sales, and to a lesser extent, an increase in the average number of domestic franchise stores open during 2014. Domestic franchise same store sales increased 7.8% in the third quarter of 2014, and 6.2% in the three fiscal quarters of 2014. This compared to an increase of 5.5% in the third quarter of 2013, and 6.2% in the three fiscal quarters of 2013.

Domestic Supply Chain Revenues

Revenues from domestic supply chain operations increased $28.5 million, up 12.6% in the third quarter of 2014, and $78.7 million, up 11.4% in the three fiscal quarters of 2014. These increases were due primarily to higher volumes in the supply chain centers and elevated commodity prices, specifically cheese, as well as increased sales of equipment and supplies to stores as our store reimaging program accelerates. The published cheese block price-per-pound averaged $2.04 in the third quarter of 2014 and $2.13 in the three fiscal quarters of 2014, up from $1.72 in both the third quarter and three fiscal quarters of 2013. We estimate that the higher cheese block price (passed through directly in domestic supply chain pricing to franchisees) resulted in an approximate $6.1 million increase in domestic supply chain revenues during the third quarter of 2014, and a $24.7 million increase in revenues in the three fiscal quarters of 2014.

International Revenues

 

     Third Quarter
of 2014
    Third Quarter
of 2013
    Three fiscal
Quarters of 2014
    Three fiscal
Quarters of 2013
 

International royalty and other

   $ 34.6         55.6   $ 29.6         54.7   $ 103.0         55.7   $ 89.6         55.4

International supply chain

     27.7         44.4     24.4         45.3     81.8         44.3     72.1         44.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International

   $ 62.2         100.0   $ 54.0         100.0   $ 184.8         100.0   $ 161.7         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International revenues primarily consist of royalties from our international franchise stores and international supply chain sales. Revenues from international operations increased $8.2 million, up 15.3% in the third quarter of 2014, and $23.1 million, up 14.3% in the three fiscal quarters of 2014. These increases were due primarily to higher international royalty and other revenues as well as higher international supply chain revenues as discussed below.

Revenues from international royalties and other increased $5.0 million, up 17.1% in the third quarter of 2014, and $13.4 million, up 14.9% in the three fiscal quarters of 2014. These increases were due primarily to higher same store sales and an increase in the average number of international stores open during 2014. Foreign currency exchange rates also had a positive impact of $0.6 million in the third quarter of 2014. For the three fiscal quarters of 2014, foreign currency exchange rates had a negative impact of approximately $0.9 million. When excluding the impact of foreign currency exchange rates, same store sales increased 7.1% in the third quarter of 2014, and 7.4% in the three fiscal quarters of 2014. This compared to an increase of 5.0% in the third quarter of 2013, and 5.8% in the three fiscal quarters of 2013. When including the impact of foreign currency exchange rates, same store sales increased 9.8% in the third quarter of 2014, and 7.0% in the three fiscal quarters of 2014. This compared to an increase of 0.4% in the third quarter of 2013, and 2.9% in the three fiscal quarters of 2013. The increase in our same store sales when including the impact of foreign currency exchange rates in third quarter of 2014 was caused by a weaker dollar when compared to the currencies in the international markets in which we compete, while a stronger dollar in the three fiscal quarters of 2014 led to a decrease in our same store sales when including the impact of foreign currency exchange rates.

Revenues from international supply chain operations increased $3.3 million, up 13.2% in the third quarter of 2014, and $9.7 million, up 13.5% in the three fiscal quarters of 2014 due primarily to higher volumes. These increases were offset in part the negative impact of foreign currency exchange rates of $1.0 million in the third quarter of 2014 and $4.7 million in the three fiscal quarters of 2014.

 

13


Cost of Sales / Operating Margin

 

     Third Quarter
of 2014
    Third Quarter
of 2013
    Three fiscal
Quarters of 2014
    Three fiscal
Quarters of 2013
 

Consolidated revenues

   $ 446.6         100.0   $ 404.1         100.0   $ 1,350.9         100.0   $ 1,235.7         100.0

Consolidated cost of sales

     313.1         70.1     283.4         70.1     945.7         70.0     859.2         69.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated operating margin

   $ 133.5         29.9   $ 120.6         29.9   $ 405.2         30.0   $ 376.4         30.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Cost of sales consists primarily of domestic Company-owned store and domestic supply chain costs incurred to generate related revenues. Components of cost of sales primarily include food, labor and occupancy costs.

The operating margin, which we define as revenues less cost of sales, increased $12.9 million, up 10.7% in the third quarter of 2014, and $28.8 million, up 7.6% in the three fiscal quarters of 2014. These increases in the operating margin were due primarily to higher domestic and international franchise revenues and higher supply chain volumes. Franchise revenues do not have a cost of sales component and, as such, changes in franchise revenues have a disproportionate effect on the operating margin.

As a percentage of revenues, the operating margin remained flat in the third quarter of 2014 and decreased 0.5 percentage points in the three fiscal quarters of 2014 due primarily to higher overall commodity prices, including cheese, meats and other commodity costs, and lower Company-owned stores operating margins.

As indicated above, the operating margin as a percentage of revenues was negatively impacted by higher cheese costs. Cheese price changes are a “pass-through” in domestic supply chain revenues and cost of sales and, as such, have no impact on the related operating margin as measured in dollars. However, cheese price changes do impact operating margin when measured as a percentage of revenues. For example, if the 2014 average cheese prices had been in effect during 2013, the impact on supply chain margins would have caused the operating margin for the third quarter of 2013 to be approximately 29.4% of revenues versus the reported 29.9% and approximately 29.9% of revenues for the three fiscal quarters of 2013 versus the reported 30.5%. However, the dollar margins for those same periods would have been unaffected.

Domestic Company-Owned Stores Operating Margin

 

Domestic Company-Owned Stores    Third Quarter
of 2014
    Third Quarter
of 2013
    Three fiscal
Quarters of 2014
    Three fiscal
Quarters of 2013
 

Revenues

   $ 77.6         100.0   $ 75.9         100.0   $ 238.9         100.0   $ 235.5         100.0

Cost of sales

     59.8         77.0     58.7         77.3     183.3         76.7     179.5         76.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Store operating margin

   $ 17.8         23.0   $ 17.3         22.7   $ 55.6         23.3   $ 56.1         23.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The domestic Company-owned store operating margin, which does not include certain store-level costs such as royalties and advertising, increased $0.5 million, up 3.6% in the third quarter of 2014, and decreased $0.5 million, down 0.7% in the three fiscal quarters of 2014. The increase in the third quarter was mainly attributable to higher same store sales, offset in part by higher food costs. The decrease in the three fiscal quarters was due primarily to higher food costs, offset in part by higher same store sales.

As a percentage of store revenues, the store operating margin increased 0.3 percentage points in the third quarter of 2014 and decreased 0.5 percentage points in the three fiscal quarters of 2014.

Food costs remained flat at 27.9% in the third quarter of 2014, and increased 0.5 percentage points in the three fiscal quarters of 2014 to 28.3% due primarily to higher cheese, meat and other commodity prices. The cheese block price per pound averaged $2.04 in the third quarter of 2014 and $2.13 in the three fiscal quarters of 2014. This compared to $1.72 in both the third quarter and three fiscal quarters of 2013.

Labor and related costs decreased 0.2 percentage points to 28.0% in the third quarter of 2014 and decreased 0.2 percentage points to 27.9% in the three fiscal quarters of 2014 due primarily to leveraging higher sales per store.

Occupancy costs (which include rent, telephone, utilities and depreciation) decreased 0.5 percentage points to 9.5% in the third quarter of 2014 and remained flat at 9.2% in the three fiscal quarters of 2014. The decrease in the third quarter was due primarily to slightly lower rent and telephone costs per store.

Insurance costs increased by 0.1 percentage points to 2.8% in the third quarter of 2014 and remained flat at 2.8% in the three fiscal quarters of 2014.

 

14


Domestic Supply Chain Operating Margin

 

Domestic Supply Chain    Third Quarter
of 2014
    Third Quarter
of 2013
    Three fiscal
Quarters of 2014
    Three fiscal
Quarters of 2013
 

Revenues

   $ 254.8         100.0   $ 226.3         100.0   $ 769.9         100.0   $ 691.2         100.0

Cost of sales

     228.4         89.6     203.0         89.7     689.5         89.6     615.7         89.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Supply Chain operating margin

   $ 26.4         10.4   $ 23.3         10.3   $ 80.4         10.4   $ 75.4         10.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The domestic supply chain operating margin increased $3.1 million, up 13.2% in the third quarter of 2014, and $5.0 million, up 6.6% in the three fiscal quarters of 2014. These increases were due primarily to higher volumes resulting from higher order counts at the store level.

As a percentage of supply chain revenues, the supply chain operating margin increased 0.1 percentage points in the third quarter of 2014 and decreased 0.5 percentage points in the three fiscal quarters of 2014 as compared to the prior year periods. While the operating margin was relatively flat in the third quarter of 2014, the decrease in the three fiscal quarters of 2014 was due primarily to higher cheese, meat and other commodity costs, offset in part by the positive impact of higher volumes. Increases in certain food prices have a negative effect on the domestic supply chain operating margin percent due to the fixed dollar margin earned by domestic supply chain on certain food items. Had the 2014 cheese prices been in effect during 2013, the domestic supply chain operating margin as a percentage of domestic supply chain revenues would have been approximately 10.0% for the third quarter of 2013 versus the reported 10.3% and approximately 10.5% for the three fiscal quarters of 2013 versus the reported 10.9%. However, the dollar margins for those same periods would have been unaffected.

General and Administrative Expenses

General and administrative expenses increased $2.7 million, up 5.0% in the third quarter of 2014, and increased $2.4 million, up 1.5% in the three fiscal quarters of 2014. The increase in the third quarter of 2014 was due primarily to our ongoing expenditures on e-commerce and technology support as well as international initiatives. The increase in the three fiscal quarters of 2014 was due primarily to increased expenditures on technology and international initiatives, partially offset by a decrease in non-cash compensation expense of $3.0 million and a $1.7 million pre-tax gain on the sale of 14 Company-owned stores.

Interest Expense

Interest expense decreased $0.4 million to $20.0 million in the third quarter of 2014, and $1.6 million to $60.2 million in the three fiscal quarters of 2014. The decrease in the third quarter of 2014 was due primarily to a lower average debt balance. The decrease in the three fiscal quarters of 2014 was due to a lower average debt balance and lower fees from the cash collateralization of outstanding letters of credit.

The Company’s cash borrowing rate increased 0.1 percentage points to 5.4% for the third quarter of 2014 and remained flat at 5.3% for the three fiscal quarters of 2014.

Provision for Income Taxes

Provision for income taxes increased $5.6 million to $21.4 million in the third quarter of 2014, and $11.7 million to $67.9 million in the three fiscal quarters of 2014, due primarily to higher pre-tax income. The increase for the three fiscal quarters of 2014 was offset in part by a reversal of a deferred tax valuation allowance of approximately $0.3 million recognized in connection with the sale of 14 Company-owned stores. The effective tax rate increased 3.4 percentage points to 37.5% during the third quarter of 2014, from 34.1% in the comparable period in 2013, and increased 0.8 percentage points to 37.2% during the three fiscal quarters of 2014, from 36.4% in the comparable period in 2013. The lower effective tax rates for the third quarter and three fiscal quarters of 2013 primarily resulted from a tax benefit recorded for prior tax years in connection with the Company revising its calculation for a deduction related to its domestic dough production.

 

15


Liquidity and Capital Resources

As of September 7, 2014, we had working capital of $39.3 million, excluding restricted cash and cash equivalents of $73.6 million, and including unrestricted cash and cash equivalents of $30.9 million. Historically, we have operated with minimal positive working capital, or negative working capital, primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities. We generally collect our receivables within three weeks from the date of the related sale, and we generally experience 30 to 40 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. These factors, coupled with servicing our debt obligations, paying our quarterly dividend, investing in our business and repurchasing our common stock, all of which are generally funded by cash flows from operations, also reduce our working capital amounts. As of September 7, 2014, we had approximately $52.7 million of restricted cash held for future principal and interest payments and $20.9 million of restricted cash held in a three month interest reserve as required by the related debt agreements, for a total of $73.6 million of restricted cash and cash equivalents.

As of September 7, 2014, we had approximately $1.52 billion of long-term debt, of which $0.5 million was classified as a current liability. Our fixed rate notes have original scheduled principal amortization payments of $23.6 million in 2014, $29.5 million in 2015, $37.4 million in 2016, $39.4 million in each of 2017 and 2018, and $9.8 million in 2019. In accordance with our debt agreements, once we meet certain conditions, including maximum leverage ratios as defined of less than 4.5x, we may elect to not make the scheduled principal amortization payments. If one of the defined leverage ratios subsequently exceeds 4.5x, we must make-up the payments we had elected not to make out of future cash flows. During the second quarter of 2014, we met the maximum leverage ratios of less than 4.5x, and, in accordance with our debt agreements, suspended our debt amortization payment in the third quarter of 2014. We continued to meet the maximum leverage ratios of less than 4.5x in the third quarter of 2014 and will suspend our future debt amortization payments in accordance with our debt agreements.

As of September 7, 2014, we had $40.2 million of outstanding letters of credit and $59.8 million of available capacity under our $100.0 million variable funding notes. The letters of credit are primarily related to our casualty insurance programs and supply chain center leases. Borrowings under the variable funding notes are available to fund our working capital requirements, capital expenditures and other general corporate purposes. However, our primary source of liquidity is cash flows from operations and availability of borrowings under our variable funding notes.

During the third quarter and three fiscal quarters of 2014, the Company repurchased and retired 242,700 and 1,151,931 shares of common stock for a total of approximately $17.4 million and $82.4 million, respectively. As of September 7, 2014, we had approximately $132.7 million remaining for future share repurchases under the current Board of Directors approved $200.0 million open market share repurchase program. We continue to maintain our flexibility to use ongoing excess cash flow generation and (subject to certain restrictions in the documents governing the variable funding notes) availability under the variable funding notes for, among other things, the repurchase of shares under the current authorized program, the payment of dividends and other corporate uses.

During the three fiscal quarters of 2014, the Company paid approximately $39.2 million of common stock dividends. Additionally, during the third quarter of 2014, the Company’s Board of Directors declared a $0.25 per share dividend on its outstanding common stock for shareholders of record as of September 15, 2014 that was paid on September 30, 2014. The Company had approximately $14.1 million accrued for common stock dividends at September 7, 2014. Subsequent to the third quarter, on October 8, 2014, the Company’s Board of Directors declared a $0.25 per share quarterly dividend for shareholders of record as of December 15, 2014 to be paid on December 30, 2014.

 

 

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During the third quarter and three fiscal quarters of 2014, we experienced strong increases in both domestic and international same store sales versus the comparable periods in the prior year. Additionally, our international business continued to grow store counts in the third quarter and three fiscal quarters of 2014. These factors have contributed to our continued ability to generate positive operating cash flows. We expect to use our unrestricted cash and cash equivalents, cash flows from operations and available borrowings under the variable funding notes to, among other things, fund working capital requirements, invest in our core business, service our indebtedness, pay dividends and repurchase our common stock. We have historically funded our working capital requirements, capital expenditures, debt repayments and repurchases of common stock primarily from our cash flows from operations and, when necessary, our available borrowings under variable funding note facilities. The Company believes its current unrestricted cash and cash equivalents balance and its expected cash flows from operations will be sufficient to fund operations for at least the next twelve months. We did not have any material commitments for capital expenditures as of September 7, 2014.

Cash provided by operating activities was $118.9 million in the three fiscal quarters of 2014 compared to $104.6 million in the three fiscal quarters of 2013. The $14.3 million increase was due to a $10.8 million increase in net income, excluding non-cash adjustments versus the prior year period, resulting primarily from our improved operating performance, and a $3.5 million net change in operating assets and liabilities, mainly from the timing of payments of current operating liabilities.

Cash provided by investing activities was $25.3 million in the three fiscal quarters of 2014 and cash used in investing activities was $18.8 million in the three fiscal quarters of 2013. The $44.1 million change was due primarily to a $55.1 million change in restricted cash and cash equivalents, mainly as a result of the payment of the third quarter 2013 dividend that was included as restricted cash at the end of fiscal 2013 and the withdrawal of the $42.0 million that had been pledged as collateral for outstanding letters of credit.

Cash used in financing activities was $127.7 million in the three fiscal quarters of 2014 and $108.4 million in the three fiscal quarters of 2013. The $19.3 million increase was due primarily to a $16.0 million increase in common stock dividend and equivalent payments, a $5.5 million increase in cash used to repurchase shares of the Company’s common stock and a $2.7 million decrease in proceeds from the exercise of stock options versus the three fiscal quarters of 2013. The increase in cash used was partially offset by a $6.1 million reduction in repayments of long-term debt and capital lease obligations.

Based upon the current level of operations and anticipated growth, we believe that the cash generated from operations, our current unrestricted cash and cash equivalents and amounts available under our variable funding notes will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for at least the next twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors” in our filings with the Securities and Exchange Commission. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under the variable funding notes or otherwise to enable us to service our indebtedness, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the fixed rate notes and to service, extend or refinance the variable funding notes will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

 

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Forward-Looking Statements

This filing contains forward-looking statements. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions that concern our strategy, plans or intentions. Forward-looking statements relating to our anticipated profitability, estimates in same store sales growth, the growth of our international business, ability to service our indebtedness, our future cash flows, our operating performance, trends in our business and other descriptions of future events reflect the Company’s expectations based upon currently available information and data. However, actual results are subject to future risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that could cause actual results to differ materially include: the level of and our ability to refinance our long-term and other indebtedness; the uncertainties relating to litigation; consumer preferences, spending patterns and demographic trends; the effectiveness of our advertising, operations and promotional initiatives; our reputation and the strength of our brand in the markets in which we compete; our ability to retain key personnel; new product and concept developments by us, and other food-industry competitors; the ongoing level of profitability of our franchisees; our ability and that of our franchisees to open new restaurants and keep existing restaurants in operation; changes in food prices, particularly cheese, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness or general health concerns may have on our business and the economy of the countries where we operate; severe weather conditions and natural disasters; cyber-attacks or other catastrophic events; changes in our effective tax rate; changes in foreign currency exchange rates; changes in government legislation and regulations; adequacy of our insurance coverage; costs related to future financings; our ability and that of our franchisees to successfully operate in the current credit environment; changes in the level of consumer spending given the general economic conditions including interest rates, energy prices and weak consumer confidence; availability of borrowings under our variable funding notes and our letters of credit; and changes in accounting policies. Important factors that could cause actual results to differ materially from our expectations are more fully described in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our annual report on Form 10-K. These forward-looking statements speak only as of the date of this filing, and you should not rely on such statements as representing the views of the Company as of any subsequent date. Except as required by applicable securities laws, we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

The Company is exposed to market risk from interest rate changes on our variable rate debt, which consists of variable funding note borrowings that are outstanding from time to time. The Company actively monitors this exposure when present. As of September 7, 2014, we had no outstanding variable funding note borrowings and $59.8 million available for borrowing, which is net of letters of credit of $40.2 million. Our outstanding fixed rate notes, which comprise substantially all of our outstanding borrowings, contain fixed interest rates until the anticipated repayment date in January 2019. We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes.

The Company is exposed to market risk from changes in commodity prices. During the normal course of business, we purchase cheese and certain other food products that are affected by changes in commodity prices and, as a result, we are subject to volatility in our food costs. We may periodically enter into financial instruments to manage this risk. We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In instances where we use fixed pricing agreements with our suppliers, we use these agreements to cover our physical commodity needs; the agreements are not net-settled and are accounted for as normal purchases.

The Company is exposed to various foreign currency exchange rate fluctuations for revenues generated by operations outside the United States, which can adversely impact net income and cash flows. Total revenues of approximately 13.9% in the third quarter of 2014, 13.4% in the third quarter of 2013, 13.7% in the three fiscal quarters of 2014 and 13.1% in the three fiscal quarters of 2013 were derived from sales to customers and royalties from franchisees outside the contiguous United States. This business is conducted in the local currency but royalty payments are generally remitted to us in U.S. dollars. We do not enter into financial instruments to manage this foreign currency exchange risk. A hypothetical 10% adverse change in the foreign currency rates in each of our top ten international markets, based on store count, would have resulted in a negative impact on revenues of approximately $7.4 million in the three fiscal quarters of 2014.

Item 4. Controls and Procedures.

Management, with the participation of the Company’s President and Chief Executive Officer, J. Patrick Doyle, and Executive Vice President and Chief Financial Officer, Michael T. Lawton, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, Mr. Doyle and Mr. Lawton concluded that the Company’s disclosure controls and procedures were effective.

During the quarterly period ended September 7, 2014, there were no changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are a party to lawsuits, revenue agent reviews by taxing authorities and administrative proceedings in the ordinary course of business which include, without limitation, workers’ compensation, general liability, automobile and franchisee claims. We are also subject to suits related to employment practices as well as intellectual property, including patents.

While we may occasionally be party to large claims, including class action suits, we do not believe that these matters, individually or in the aggregate, will materially affect our financial position, results of operations or cash flows.

Item 1A. Risk Factors.

There have been no material changes in the risk factors previously disclosed in the Company’s Form 10-K for the fiscal year ended December 29, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

c. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

 

Period

   (a) Total Number
of Shares
Purchased (1)
     (b) Average Price Paid
per Share
     (c) Total Number of Shares
Purchased as Part of
Publicly Announced
Program
     (d) Maximum
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Program
 

Period #7 (June 16, 2014 to July 13, 2014)

     6,550       $ 73.10         5,000       $ 149,760,690   

Period #8 (July 14, 2014 to August 10, 2014)

     99,766         71.63         96,700         142,832,359   

Period #9 (August 11, 2014 to September 7, 2014)

     142,745         71.72         141,000         132,726,701   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     249,061       $ 71.72         242,700       $ 132,726,701   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes 6,361 shares purchased as part of the Company’s employee stock purchase discount plan. During the third quarter, the shares were purchased at an average price of $73.21. All of the remaining shares presented were purchased pursuant to the publicly announced program.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

 

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Item 6. Exhibits.

 

Exhibit
Number

  

Description

  31.1    Certification by J. Patrick Doyle pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
  31.2    Certification by Michael T. Lawton pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
  32.1    Certification by J. Patrick Doyle pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
  32.2    Certification by Michael T. Lawton pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  DOMINO’S PIZZA, INC.
  (Registrant)
Date: October 14, 2014  

/s/ Michael T. Lawton

  Michael T. Lawton
  Chief Financial Officer

 

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