Annual Statements Open main menu

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

10-Q
Table of Contents

 

 

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 June 15, 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 July 15, 2014, Domino’s Pizza, Inc. had 55,119,392 shares of common stock, par value $0.01 per share, outstanding.

 

 

 


Table of Contents

Domino’s Pizza, Inc.

TABLE OF CONTENTS

 

         Page No.  

PART I.

  FINANCIAL INFORMATION   
Item 1.  

Financial Statements

  
 

Condensed Consolidated Balance Sheets (Unaudited) – As of June 15, 2014 and December 29, 2013

     3   
 

Condensed Consolidated Statements of Income (Unaudited) – Fiscal quarter and two fiscal quarters ended June 15, 2014 and June 16, 2013

     4   
 

Consolidated Statements of Comprehensive Income (Unaudited) – Fiscal quarter and two fiscal quarters ended June 15, 2014 and June 16, 2013

     5   
 

Condensed Consolidated Statements of Cash Flows (Unaudited) – Two fiscal quarters ended June 15, 2014 and June 16, 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


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

           December 29, 2013  
(In thousands)    June 15, 2014     (Note)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 15,304      $ 14,383   

Restricted cash and cash equivalents

     74,710        125,453   

Accounts receivable

     105,970        105,779   

Inventories

     33,542        30,321   

Prepaid expenses and other

     30,354        20,199   

Advertising fund assets, restricted

     51,713        44,695   

Deferred income taxes

     9,387        10,710   
  

 

 

   

 

 

 

Total current assets

     320,980        351,540   
  

 

 

   

 

 

 

Property, plant and equipment:

    

Land and buildings

     23,659        23,423   

Leasehold and other improvements

     91,300        90,508   

Equipment

     178,318        174,667   

Construction in progress

     9,298        8,900   
  

 

 

   

 

 

 
     302,575        297,498   

Accumulated depreciation and amortization

     (204,519     (199,914
  

 

 

   

 

 

 

Property, plant and equipment, net

     98,056        97,584   
  

 

 

   

 

 

 

Other assets:

    

Deferred financing costs

     25,922        28,693   

Goodwill

     16,109        16,598   

Capitalized software

     17,222        14,464   

Other assets

     14,392        13,209   

Deferred income taxes

     2,990        3,167   
  

 

 

   

 

 

 

Total other assets

     76,635        76,131   
  

 

 

   

 

 

 

Total assets

   $ 495,671      $ 525,255   
  

 

 

   

 

 

 

Liabilities and stockholders’ deficit

    

Current liabilities:

    

Current portion of long-term debt

   $ 538      $ 24,144   

Accounts payable

     73,184        83,408   

Dividends payable

     14,437        11,849   

Insurance reserves

     13,688        13,297   

Advertising fund liabilities

     51,713        44,695   

Other accrued liabilities

     62,447        77,218   
  

 

 

   

 

 

 

Total current liabilities

     216,007        254,611   
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, less current portion

     1,523,882        1,512,299   

Insurance reserves

     24,981        25,528   

Deferred income taxes

     3,840        7,827   

Other accrued liabilities

     16,643        15,192   
  

 

 

   

 

 

 

Total long-term liabilities

     1,569,346        1,560,846   
  

 

 

   

 

 

 

Stockholders’ deficit:

    

Common stock

     551        558   

Additional paid-in capital

     120        669   

Retained deficit

     (1,287,995     (1,289,445

Accumulated other comprehensive loss

     (2,358     (1,984
  

 

 

   

 

 

 

Total stockholders’ deficit

     (1,289,682     (1,290,202
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 495,671      $ 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


Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

 

     Fiscal Quarter Ended     Two Fiscal Quarters Ended  
     June 15,     June 16,     June 15,     June 16,  
(In thousands, except per share data)    2014     2013     2014     2013  

Revenues:

        

Domestic Company-owned stores

   $ 78,814      $ 78,509      $ 161,271      $ 159,603   

Domestic franchise

     52,038        48,167        105,459        99,485   

Domestic supply chain

     257,552        233,307        515,079        464,839   

International

     62,059        54,026        122,506        107,700   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     450,463        414,009        904,315        831,627   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales:

        

Domestic Company-owned stores

     60,717        59,536        123,508        120,804   

Domestic supply chain

     230,698        207,319        461,065        412,732   

International

     24,403        21,167        48,055        42,298   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     315,818        288,022        632,628        575,834   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     134,645        125,987        271,687        255,793   

General and administrative

     53,282        52,146        106,149        106,427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     81,363        73,841        165,538        149,366   

Interest income

     27        30        58        73   

Interest expense

     (19,851     (20,426     (40,177     (41,372
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     61,539        53,445        125,419        108,067   

Provision for income taxes

     23,077        20,175        46,483        40,377   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 38,462      $ 33,270      $ 78,936      $ 67,690   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Common stock – basic

   $ 0.70      $ 0.60      $ 1.43      $ 1.22   

Common stock – diluted

     0.67        0.57        1.38        1.17   

Dividends declared per share

   $ 0.25      $ 0.20      $ 0.50      $ 0.40   

  

 

See accompanying notes.

 

4


Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

           Fiscal Quarter Ended           Two Fiscal Quarters Ended  
     June 15,     June 16,     June 15,     June 16,  
(In thousands)    2014     2013     2014     2013  

Net income

   $ 38,462      $ 33,270      $ 78,936      $ 67,690   

Other comprehensive income (loss), before tax:

        

Currency translation adjustment

     241        (112     (785     (90

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

        

Currency translation adjustment

     (31     156        411        83   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     210        44        (374     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 38,672      $ 33,314      $ 78,562      $ 67,683   
  

 

 

   

 

 

   

 

 

   

 

 

 

  

 

See accompanying notes.

 

5


Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Two Fiscal Quarters Ended  
     June 15,     June 16,  
(In thousands)    2014     2013  

Cash flows from operating activities:

    

Net income

   $ 78,936      $ 67,690   

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

    

Depreciation and amortization

     13,077        11,407   

Gains on sale/disposal of assets

     (1,687     (285

Amortization of deferred financing costs

     2,771        2,853   

Provision (benefit) for deferred income taxes

     (2,187     2,557   

Non-cash compensation expense

     8,080        10,240   

Tax impact from equity-based compensation

     (8,319     (6,043

Other

     (623     (1,090

Changes in operating assets and liabilities

     (29,258     (20,489
  

 

 

   

 

 

 

Net cash provided by operating activities

     60,790        66,840   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (18,948     (11,587

Proceeds from sale of assets

     4,967        2,077   

Changes in restricted cash

     50,743        303   

Other

     (1,049     1,266   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     35,713        (7,941
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayments of long-term debt and capital lease obligations

     (12,022     (12,219

Proceeds from exercise of stock options

     2,648        3,738   

Tax impact from equity-based compensation

     8,319        6,043   

Purchases of common stock

     (65,006     (56,057

Tax payments for restricted stock upon vesting

     (4,363     (2,845

Payments of common stock dividends and equivalents

     (25,130     (11,454
  

 

 

   

 

 

 

Net cash used in financing activities

     (95,554     (72,794
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (28     (80
  

 

 

   

 

 

 

Change in cash and cash equivalents

     921        (13,975

Cash and cash equivalents, at beginning of period

     14,383        54,813   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 15,304      $ 40,838   
  

 

 

   

 

 

 

  

 

See accompanying notes.

 

6


Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

June 15, 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 two fiscal quarters ended June 15, 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 June 15, 2014 and June 16, 2013  
     Domestic
Stores
     Domestic
Supply Chain
     International      Intersegment
Revenues
    Other     Total  

Revenues –

               

2014

   $ 130,852       $ 281,342       $ 62,059       $ (23,790   $ —        $ 450,463   

2013

     126,676         255,856         54,026         (22,549     —          414,009   

Income from operations –

               

2014

   $ 44,014       $ 20,769       $ 31,326         N/A      $ (14,746   $ 81,363   

2013

     42,328         20,288         26,562         N/A        (15,337     73,841   

Segment Income –

               

2014

   $ 45,673       $ 22,696       $ 31,140         N/A      $ (7,996   $ 91,513   

2013

     43,746         22,156         26,425         N/A        (8,283     84,044   
     Two Fiscal Quarters Ended June 15, 2014 and June 16, 2013  
     Domestic
Stores
     Domestic
Supply Chain
     International      Intersegment
Revenues
    Other     Total  

Revenues –

               

2014

   $ 266,730       $ 563,586       $ 122,506       $ (48,507   $ —        $ 904,315   

2013

     259,088         510,602         107,700         (45,763     —          831,627   

Income from operations –

               

2014

   $ 92,105       $ 41,998       $ 61,488         N/A      $ (30,053   $ 165,538   

2013

     86,163         40,825         53,614         N/A        (31,236     149,366   

Segment Income –

               

2014

   $ 93,652       $ 45,911       $ 61,413         N/A      $ (15,968   $ 185,008   

2013

     89,048         44,523         53,549         N/A        (16,392     170,728   

 

7


Table of Contents

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

 

     Fiscal Quarter Ended     Two Fiscal Quarters Ended  
     June 15,
2014
    June 16,
2013
    June 15,
2014
    June 16,
2013
 

Total Segment Income

   $ 91,513      $ 84,044      $ 185,008      $ 170,728   

Depreciation and amortization

     (6,656     (5,776     (13,077     (11,407

Gains on sale/disposal of assets

     131        197        1,687        285   

Non-cash compensation expense

     (3,625     (4,624     (8,080     (10,240
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     81,363        73,841        165,538        149,366   

Interest income

     27        30        58        73   

Interest expense

     (19,851     (20,426     (40,177     (41,372
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

   $ 61,539      $ 53,445      $ 125,419      $ 108,067   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

3. Earnings Per Share

 

     Fiscal Quarter Ended      Two Fiscal Quarters Ended  
     June 15,
2014
     June 16,
2013
     June 15,
2014
     June 16,
2013
 

Net income available to common stockholders – basic and diluted

   $ 38,462       $ 33,270       $ 78,936       $ 67,690   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average number of shares

     55,015,394         55,468,971         55,113,616         55,607,881   

Earnings per share – basic

   $ 0.70       $ 0.60       $ 1.43       $ 1.22   

Weighted average diluted number of shares

     57,124,457         57,960,232         57,246,871         58,091,126   

Earnings per share – diluted

   $ 0.67       $ 0.57       $ 1.38       $ 1.17   

The denominators used in calculating diluted earnings per share for common stock for the second quarter and two fiscal quarters of 2014 do not include 199,040 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 second quarter and two fiscal quarters of 2013 do not include 377,540 and 393,360 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 two 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

     —          —          —          78,936        —     

Common stock dividends

     —          —          —          (27,720     —     

Issuance of common stock, net

     23,714        —          —          —          —     

Tax payments for restricted stock upon vesting

     (57,946     (1     (4,362     —          —     

Purchases of common stock

     (909,231     (9     (15,231     (49,766     —     

Exercise of stock options

     280,920        3        2,645        —          —     

Tax impact from equity-based compensation

     —          —          8,319        —          —     

Non-cash compensation expense

     —          —          8,080        —          —     

Currency translation adjustment, net of tax

     —          —          —          —          (374
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 15, 2014

     55,106,129      $ 551      $ 120      $ (1,287,995   $ (2,358
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

8


Table of Contents
5. Dividends

During the two fiscal quarters of 2014, the Company paid approximately $25.1 million of common stock dividends. Additionally, during the second quarter of 2014, the Company’s Board of Directors declared a $0.25 per share quarterly dividend on its outstanding common stock. The Company had approximately $14.4 million accrued for common stock dividends at June 15, 2014.

On July 16, 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 to be paid on September 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 $2.4 million of accumulated other comprehensive loss at June 15, 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 two fiscal quarters of 2014 or the two fiscal quarters of 2013.

 

7. Open Market Share Repurchase Program

During the second quarter of 2014, the Company repurchased and retired 687,750 shares of common stock for a total of approximately $49.9 million, and during the two fiscal quarters of 2014, the Company repurchased and retired 909,231 shares of common stock for a total of approximately $65.0 million. As of June 15, 2014, the Company had approximately $150.1 million remaining for future share repurchases under its Board of Directors approved $200.0 million open market share repurchase program. Subsequent to the second quarter of 2014 and through July 15, 2014, the Company repurchased and retired an additional 5,000 shares of common stock for a total of approximately $0.4 million.

During the second quarter and two fiscal quarters of 2013, the Company repurchased and retired 655,248 and 1,018,147 shares of common stock for a total of approximately $38.0 million and $56.1 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


Table of Contents

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 June 15, 2014 and December 29, 2013:

 

     At June 15, 2014  
            Fair Value Estimated Using  
     Carrying
Amount
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Cash equivalents

   $ 4,755       $ 4,755       $ —         $ —     

Restricted cash equivalents

     52,489         52,489         —           —     

Investments in marketable securities

     3,897         3,897         —           —     

 

     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 June 15, 2014, the Company estimates that the $1.522 billion in principal amount of outstanding fixed rate notes had a fair value of approximately $1.629 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


Table of Contents

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 second quarters referenced herein represent the twelve-week periods ended June 15, 2014 and June 16, 2013, respectively. The 2014 and 2013 two fiscal quarters referenced herein represent the twenty-four-week periods ended June 15, 2014 and June 16, 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 70 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.

 

     Second Quarter
of 2014
    Second Quarter
of 2013
    Two Fiscal
Quarters of 2014
    Two Fiscal
Quarters of 2013
 

Global retail sales growth

     +11.5       +9.3       +10.3       +9.4  

Same store sales growth:

                

Domestic Company-owned stores

     +3.5       +5.7       +2.5       +5.3  

Domestic franchise stores

     +5.5       +6.8       +5.4       +6.6  
  

 

 

     

 

 

     

 

 

     

 

 

   

Domestic stores

     +5.4       +6.7       +5.1       +6.4  

International stores (excluding foreign currency impact)

     +7.7       +5.8       +7.5       +6.2  

Store counts (at end of period):

                

Domestic Company-owned stores

     376          389             

Domestic franchise stores

     4,626          4,543             
  

 

 

     

 

 

           

Domestic stores

     5,002          4,932             

International stores

     6,119          5,508             
  

 

 

     

 

 

           

Total stores

     11,121          10,440             
  

 

 

     

 

 

           

Income statement data:

                

Total revenues

   $ 450.5        100.0   $ 414.0        100.0   $ 904.3        100.0   $ 831.6        100.0

Cost of sales

     315.8        70.1     288.0        69.6     632.6        70.0     575.8        69.2

General and administrative

     53.3        11.8     52.1        12.6     106.1        11.7     106.4        12.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     81.4        18.1     73.8        17.8     165.5        18.3     149.4        18.0

Interest expense, net

     (19.8     (4.4 )%      (20.4     (4.9 )%      (40.1     (4.4 )%      (41.3     (5.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     61.5        13.7     53.4        12.9     125.4        13.9     108.1        13.0

Provision for income taxes

     23.1        5.2     20.2        4.9     46.5        5.2     40.4        4.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 38.5        8.5   $ 33.3        8.0   $ 78.9        8.7   $ 67.7        8.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the second quarter and two fiscal quarters of 2014, we experienced strong 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. Additionally, we produced earnings growth during the second quarter despite commodity and foreign currency exchange rate pressures. Internationally, we continued to have strong same store sales in both the second quarter and two fiscal quarters of 2014. International store growth continued to be strong during the second quarter, as we opened a net 122 stores, bringing the year-to-date total to a net 219 stores opened. We believe that our strong global brand and the factors described above drove our results for the second quarter and two 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


Table of Contents

Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, increased 11.5% in the second quarter of 2014, and 10.3% in the two fiscal quarters of 2014. These increases were driven primarily by domestic and international same store sales growth, as well as an increase in our worldwide store counts during the trailing four quarters. This was offset in part by the negative impact of foreign currency exchange rates. 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 $36.5 million, up 8.8% in the second quarter of 2014, and $72.7 million, up 8.7% in the two fiscal quarters of 2014 due primarily to higher domestic supply chain revenues attributable to higher commodity prices as well as increased volumes. Higher international and domestic franchise revenues also contributed to the increases in revenues as a result of higher same store sales and store count growth. These increases were offset in part by the negative impact on international revenues of changes in foreign currency exchange rates. These changes in revenues are described in more detail below.

Income from operations increased $7.6 million, up 10.2% in the second quarter of 2014, and $16.1 million, up 10.8% in the two 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. These increases were offset in part by the negative impact of the changes in foreign currency exchange rates. Additionally, the two fiscal quarters of 2014 benefited from a $1.7 million pre-tax gain on the sale of 14 Company-owned stores.

Net income increased $5.2 million, up 15.6% in the second quarter of 2014, and $11.2 million, up 16.6% in the two 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. These increases were offset in part by changes in foreign currency exchange rates. Additionally, the two fiscal quarters of 2014 benefitted 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

 

     Second Quarter
of 2014
    Second Quarter
of 2013
    Two Fiscal
Quarters of 2014
    Two Fiscal
Quarters of 2013
 

Domestic Company-owned stores

   $ 78.8         17.5   $ 78.5         19.0   $ 161.3         17.8   $ 159.6         19.2

Domestic franchise

     52.0         11.5     48.2         11.6     105.5         11.7     99.5         12.0

Domestic supply chain

     257.6         57.2     233.3         56.4     515.1         57.0     464.8         55.9

International

     62.1         13.8     54.0         13.0     122.5         13.5     107.7         12.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

   $ 450.5         100.0   $ 414.0         100.0   $ 904.3         100.0   $ 831.6         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, primarily cheese and meats.

Domestic Stores Revenues

 

     Second Quarter
of 2014
    Second Quarter
of 2013
    Two Fiscal
Quarters of 2014
    Two Fiscal
Quarters of 2013
 

Domestic Company-owned stores

   $ 78.8         60.2   $ 78.5         62.0   $ 161.3         60.5   $ 159.6         61.6

Domestic franchise

     52.0         39.8     48.2         38.0     105.5         39.5     99.5         38.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Domestic stores

   $ 130.9         100.0   $ 126.7         100.0   $ 266.7         100.0   $ 259.1         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Domestic stores revenues increased $4.2 million, up 3.3% in the second quarter of 2014, and $7.6 million, up 2.9% in the two 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


Table of Contents

Domestic Company-Owned Stores Revenues

Revenues from domestic Company-owned store operations increased $0.3 million, up 0.4% in the second quarter of 2014, and $1.7 million, up 1.0% in the two fiscal quarters of 2014. These increases were due primarily to higher same store sales during the second quarter and two 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 3.5% in the second quarter of 2014, and 2.5% in the two fiscal quarters of 2014. This compared to an increase of 5.7% in the second quarter of 2013, and 5.3% in the two fiscal quarters of 2013.

Domestic Franchise Revenues

Revenues from domestic franchise operations increased $3.8 million, up 8.0% in the second quarter of 2014, and $6.0 million, up 6.0% in the two 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 5.5% in the second quarter of 2014, and 5.4% in the two fiscal quarters of 2014. This compared to an increase of 6.8% in the second quarter of 2013, and 6.6% in the two fiscal quarters of 2013.

Domestic Supply Chain Revenues

Revenues from domestic supply chain operations increased $24.3 million, up 10.4% in the second quarter of 2014, and $50.3 million, up 10.8% in the two fiscal quarters of 2014. These increases were due primarily to higher overall commodity prices, including cheese and meats, and higher volumes as a result of increased order counts at the store level. The published cheese block price-per-pound averaged $2.20 in the second quarter of 2014 and $2.18 in the two fiscal quarters of 2014, up from $1.77 in the second quarter of 2013 and $1.72 in the two 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 $9.0 million increase in domestic supply chain revenues during the second quarter of 2014, and an $18.7 million increase in revenues in the two fiscal quarters of 2014.

International Revenues

 

     Second Quarter
of 2014
    Second Quarter
of 2013
    Two Fiscal
Quarters of 2014
    Two Fiscal
Quarters of 2013
 

International royalty and other

   $ 34.7         55.9   $ 30.2         55.9   $ 68.4         55.8   $ 60.1         55.8

International supply chain

     27.4         44.1     23.8         44.1     54.1         44.2     47.6         44.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International

   $ 62.1         100.0   $ 54.0         100.0   $ 122.5         100.0   $ 107.7         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International revenues primarily consist of royalties from our international franchise stores and international supply chain sales. Revenues from international operations increased $8.1 million, up 14.9% in the second quarter of 2014, and $14.8 million, up 13.7% in the two 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 $4.5 million, up 14.9% in the second quarter of 2014, and $8.3 million, up 13.8% in the two 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. These increases were offset in part by the negative impact of changes in foreign currency exchange rates of approximately $0.3 million in the second quarter of 2014 and $1.5 million in the two fiscal quarters of 2014 caused by the stronger dollar when compared to the currencies in the international markets in which we compete. When excluding the impact of foreign currency exchange rates, same store sales increased 7.7% in the second quarter of 2014, and 7.5% in the two fiscal quarters of 2014. This compared to an increase of 5.8% in the second quarter of 2013, and 6.2% in the two fiscal quarters of 2013. When including the impact of foreign currency exchange rates, same store sales increased 7.6% in the second quarter of 2014 and 5.6% in the two fiscal quarters of 2014. This compared to an increase of 3.9% in the second quarter of 2013, and 4.2% in the two fiscal quarters of 2013. The variance in our same store sales when including the impact of foreign currency exchange rates in 2014 was caused by the stronger dollar when compared to the currencies in the international markets in which we compete.

Revenues from international supply chain operations increased $3.6 million, up 15.1% in the second quarter of 2014, and $6.5 million, up 13.7% in the two fiscal quarters of 2014 due primarily to higher volumes.

 

13


Table of Contents

Cost of Sales / Operating Margin

 

     Second Quarter
of 2014
    Second Quarter
of 2013
    Two Fiscal
Quarters of 2014
    Two Fiscal
Quarters of 2013
 

Consolidated revenues

   $ 450.5         100.0   $ 414.0         100.0   $ 904.3         100.0   $ 831.6         100.0

Consolidated cost of sales

     315.8         70.1     288.0         69.6     632.6         70.0     575.8         69.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated operating margin

   $ 134.6         29.9   $ 126.0         30.4   $ 271.7         30.0   $ 255.8         30.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 $8.6 million, up 6.9% in the second quarter of 2014, and $15.9 million, up 6.2% in the two 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 decreased 0.5 percentage points in the second quarter of 2014 and 0.8 percentage points in the two fiscal quarters of 2014 due primarily to higher overall commodity prices, including cheese and meats, 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 second quarter of 2013 to be approximately 29.8% of revenues versus the reported 30.4% and approximately 30.1% of revenues for the two fiscal quarters of 2013 versus the reported 30.8%. However, the dollar margins for those same periods would have been unaffected.

Domestic Company-Owned Stores Operating Margin

 

Domestic Company-Owned Stores    Second Quarter
of 2014
    Second Quarter
of 2013
    Two Fiscal
Quarters of 2014
    Two Fiscal
Quarters of 2013
 

Revenues

   $ 78.8         100.0   $ 78.5         100.0   $ 161.3         100.0   $ 159.6         100.0

Cost of sales

     60.7         77.0     59.5         75.8     123.5         76.6     120.8         75.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Store operating margin

   $ 18.1         23.0   $ 19.0         24.2   $ 37.8         23.4   $ 38.8         24.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The domestic Company-owned store operating margin, which does not include certain store-level costs such as royalties and advertising, decreased $0.9 million, down 4.6% in the second quarter of 2014, and $1.0 million, down 2.7% in the two fiscal quarters of 2014. These decreases were due primarily to higher food costs, offset in part by higher same store sales.

As a percentage of store revenues, the store operating margin decreased 1.2 percentage points in the second quarter of 2014 and 0.9 percentage points in the two fiscal quarters of 2014.

Food costs increased 0.9 percentage points to 28.7% in the second quarter of 2014, and 0.8 percentage points in the two fiscal quarters of 2014 to 28.5% due primarily to higher cheese, meat and other commodity prices. The cheese block price per pound averaged $2.20 in the second quarter of 2014 and $2.18 in the two fiscal quarters of 2014. This compared to $1.77 in the second quarter of 2013 and $1.72 in the two fiscal quarters of 2013.

Occupancy costs (which include rent, telephone, utilities and depreciation) increased 0.4 percentage points to 9.2% in the second quarter of 2014 and 0.3 percentage points to 9.1% in the two fiscal quarters of 2014, due primarily to slightly higher depreciation and telephone costs per store.

Insurance costs remained flat at 2.8% in the second quarter of 2014 and decreased 0.1 percentage points to 2.8% in the two fiscal quarters of 2014.

Labor and related costs decreased 0.3 percentage points to 27.9% in both the second quarter and two fiscal quarters of 2014 due primarily to leveraging higher sales per store.

 

14


Table of Contents

Domestic Supply Chain Operating Margin

 

Domestic Supply Chain    Second Quarter
of 2014
    Second Quarter
of 2013
    Two Fiscal
Quarters of 2014
    Two Fiscal
Quarters of 2013
 

Revenues

   $ 257.6         100.0   $ 233.3         100.0   $ 515.1         100.0   $ 464.8         100.0

Cost of sales

     230.7         89.6     207.3         88.9     461.1         89.5     412.7         88.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Supply Chain operating margin

   $ 26.9         10.4   $ 26.0         11.1   $ 54.0         10.5   $ 52.1         11.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The domestic supply chain operating margin increased $0.9 million, up 3.3% in the second quarter of 2014, and $1.9 million, up 3.7% in the two 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 decreased 0.7 percentage points in both the second quarter of 2014 and the two fiscal quarters of 2014 as compared to the prior year periods. These decreases were 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 10.7% for the second quarter of 2013 versus the reported 11.1% and approximately 10.8% for the two fiscal quarters of 2013 versus the reported 11.2%. However, the dollar margins for those same periods would have been unaffected.

General and Administrative Expenses

General and administrative expenses increased $1.2 million, up 2.2% in the second quarter of 2014, and decreased $0.3 million, down 0.3% in the two fiscal quarters of 2014. The increase in the second quarter of 2014 was due primarily to our ongoing expenditures on technology and international initiatives. The decrease in the two fiscal quarters of 2014 was due primarily to a $1.7 million pre-tax gain on the sale of 14 Company-owned stores, the non-recurrence of the 2013 $1.8 million reimbursement to our national advertising fund related to their historical costs to support the Company’s gift card program, and a decrease in non-cash compensation expense of $2.2 million, partially offset by increased expenditures on technology and international initiatives.

Interest Expense

Interest expense decreased $0.6 million to $19.9 million in the second quarter of 2014, and $1.2 million to $40.2 million in the two fiscal quarters of 2014. These decreases were due primarily to an average lower debt balance during the second quarter and the two fiscal quarters of 2014 compared to the same periods in 2013 and lower fees from the cash collateralization of outstanding letters of credit.

The Company’s cash borrowing rate declined 0.1 percentage points to 5.3% for both the second quarter of 2014 and the two fiscal quarters of 2014 compared to the prior year periods.

Provision for Income Taxes

Provision for income taxes increased $2.9 million to $23.1 million in the second quarter of 2014, and $6.1 million to $46.5 million in the two fiscal quarters of 2014, due primarily to higher pre-tax income. The increase for the two 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 decreased 0.2 percentage points to 37.5% during the second quarter of 2014, from 37.7% in the comparable period in 2013. The effective tax rate decreased 0.3 percentage points to 37.1% during the two fiscal quarters of 2014, from 37.4% in the comparable period in 2013.

 

15


Table of Contents

Liquidity and Capital Resources

As of June 15, 2014, we had working capital of $30.3 million, excluding restricted cash and cash equivalents of $74.7 million, and including unrestricted cash and cash equivalents of $15.3 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 June 15, 2014, we had approximately $53.8 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 $74.7 million of restricted cash and cash equivalents.

As of June 15, 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 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 we intend to suspend our future debt amortization payments starting in the third quarter of 2014. Accordingly, we reclassified approximately $23.6 million from current portion of long-term debt to long-term debt.

As of June 15, 2014, we had $42.1 million of outstanding letters of credit and $57.9 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 second quarter and two fiscal quarters of 2014, the Company repurchased and retired 687,750 and 909,231 shares of common stock for a total of approximately $49.9 million and $65.0 million, respectively. As of June 15, 2014, we had approximately $150.1 million remaining for future share repurchases under the current Board of Directors approved $200.0 million open market share repurchase program. Subsequent to the second quarter of 2014 and through July 15, 2014, the Company repurchased and retired an additional 5,000 shares of common stock for a total of approximately $0.4 million. 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 two fiscal quarters of 2014, the Company paid approximately $25.1 million of common stock dividends. Additionally, during the second 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 June 15, 2014 that was paid on June 30, 2014. The Company had approximately $14.4 million accrued for common stock dividends at June 15, 2014. Subsequent to the second quarter, on July 16, 2014, the Company’s Board of Directors declared a $0.25 per share quarterly dividend for shareholders of record as of September 15, 2014 to be paid on September 30, 2014.

 

16


Table of Contents

During the second quarter and two 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 second quarter and two 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 June 15, 2014.

Cash provided by operating activities was $60.8 million in the two fiscal quarters of 2014 compared to $66.8 million in the two fiscal quarters of 2013. The $6.0 million decrease was due primarily to an $8.8 million net change in operating assets and liabilities, mainly from the timing of payments of current operating liabilities. This decrease was partially offset by a $2.8 million increase in net income, excluding non-cash adjustments versus the prior year period, resulting primarily from our improved operating performance.

Cash provided by investing activities was $35.7 million in the two fiscal quarters of 2014 and cash used in investing activities was $7.9 million in the two fiscal quarters of 2013. The $43.6 million change was due primarily to a $50.4 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 $95.6 million in the two fiscal quarters of 2014 and $72.8 million in the two fiscal quarters of 2013. The $22.8 million increase was due primarily to a $13.7 million increase in common stock dividends and equivalent payments and an $8.9 million increase in cash used to repurchase shares of the Company’s common stock versus the two fiscal quarters of 2013.

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.

 

17


Table of Contents

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 law, we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

18


Table of Contents

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 June 15, 2014, we had no outstanding variable funding note borrowings and $57.9 million available for borrowing, which is net of letters of credit of $42.1 million. Our outstanding fixed rate notes, which comprise substantially all of our outstanding borrowings, contain fixed interest rates until 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 13.8% in the second quarter of 2014, 13.0% in the second quarter of 2013, 13.5% in the two fiscal quarters of 2014 and 12.9% in the two 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 $4.9 million in the two 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 June 15, 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 control over financial reporting.

 

19


Table of Contents

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 #4 (March 24, 2014 to April 20, 2014)

     150,419       $ 74.46         148,812       $ 188,925,524   

Period #5 (April 21, 2014 to May 18, 2014)

     286,168         71.95         284,600         168,448,702   

Period #6 (May 19, 2014 to June 15, 2014)

     256,573         72.05         254,338         150,124,738   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     693,160       $ 72.53         687,750       $ 150,124,738   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes 5,410 shares purchased as part of the Company’s employee stock purchase discount plan. During the second quarter, the shares were purchased at an average price of $74.09. 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.

 

20


Table of Contents

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: July 22, 2014  

/s/ Michael T. Lawton

  Michael T. Lawton
  Chief Financial Officer

 

21