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DOMINOS PIZZA INC - Quarter Report: 2016 June (Form 10-Q)

Form 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 19, 2016

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

Incorporation or Organization)

 

(I.R.S. Employer

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 14, 2016, Domino’s Pizza, Inc. had 48,257,672 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

     3   
  

Condensed Consolidated Balance Sheets (Unaudited) – As of June 19, 2016 and January 3, 2016

     3   
  

Condensed Consolidated Statements of Income (Unaudited) – Fiscal quarters and two fiscal quarters ended June 19, 2016 and June 14, 2015

     4   
  

Consolidated Statements of Comprehensive Income (Unaudited) – Fiscal quarters and two fiscal quarters ended June 19, 2016 and June 14, 2015

     5   
  

Condensed Consolidated Statements of Cash Flows (Unaudited) – Two fiscal quarters ended June 19, 2016 and June 14, 2015

     6   
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

     7   

Item 2.

  

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

     12   

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      21   

Item 4.

   Mine Safety Disclosures      21   

Item 5.

   Other Information      21   

Item 6.

   Exhibits      21   

SIGNATURES

     22   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

(In thousands)    June 19, 2016     January 3, 2016
(Note)
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 22,305      $ 133,449   

Restricted cash and cash equivalents

     107,435        180,940   

Accounts receivable

     132,533        131,582   

Inventories

     36,473        36,861   

Prepaid expenses and other

     42,678        20,646   

Advertising fund assets, restricted

     109,025        99,159   
  

 

 

   

 

 

 

Total current assets

     450,449        602,637   
  

 

 

   

 

 

 

Property, plant and equipment:

    

Land and buildings

     29,063        29,064   

Leasehold and other improvements

     115,172        111,071   

Equipment

     195,359        186,405   

Construction in progress

     6,141        9,633   
  

 

 

   

 

 

 
     345,735        336,173   

Accumulated depreciation and amortization

     (213,763     (204,283
  

 

 

   

 

 

 

Property, plant and equipment, net

     131,972        131,890   
  

 

 

   

 

 

 

Other assets:

    

Goodwill

     16,097        16,097   

Capitalized software

     34,426        28,505   

Other assets

     15,697        14,851   

Deferred income taxes

     3,637        5,865   
  

 

 

   

 

 

 

Total other assets

     69,857        65,318   
  

 

 

   

 

 

 

Total assets

   $ 652,278      $ 799,845   
  

 

 

   

 

 

 

Liabilities and stockholders’ deficit

    

Current liabilities:

    

Current portion of long-term debt

   $ 48,870      $ 59,333   

Accounts payable

     84,902        106,927   

Dividends payable

     18,815        557   

Insurance reserves

     18,495        17,597   

Advertising fund liabilities

     109,025        99,159   

Other accrued liabilities

     76,620        92,410   
  

 

 

   

 

 

 

Total current liabilities

     356,727        375,983   
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, less current portion

     2,165,177        2,181,460   

Insurance reserves

     24,642        23,314   

Other accrued liabilities

     20,486        19,339   
  

 

 

   

 

 

 

Total long-term liabilities

     2,210,305        2,224,113   
  

 

 

   

 

 

 

Stockholders’ deficit:

    

Common stock

     483        498   

Additional paid-in capital

     93        6,942   

Retained deficit

     (1,912,755     (1,804,143

Accumulated other comprehensive loss

     (2,575     (3,548
  

 

 

   

 

 

 

Total stockholders’ deficit

     (1,914,754     (1,800,251
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 652,278      $ 799,845   
  

 

 

   

 

 

 

Note: The balance sheet at January 3, 2016 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.

 

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Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

 

     Fiscal Quarter Ended     Two Fiscal Quarters Ended  
(In thousands, except per share data)    June 19,
2016
    June 14,
2015
    June 19,
2016
    June 14,
2015
 

Revenues:

        

Domestic Company-owned stores

   $ 97,834      $ 88,794      $ 194,278      $ 181,169   

Domestic franchise

     69,675        60,827        137,826        122,601   

Supply chain

     339,259        302,903        674,954        614,559   

International franchise

     40,573        36,098        79,459        72,320   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     547,341        488,622        1,086,517        990,649   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales:

        

Domestic Company-owned stores

     73,795        66,082        146,550        134,234   

Supply chain

     301,708        269,868        600,912        546,677   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     375,503        335,950        747,462        680,911   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     171,838        152,672        339,055        309,738   

General and administrative

     68,137        60,441        136,641        123,254   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     103,701        92,231        202,414        186,484   

Interest income

     197        57        473        139   

Interest expense

     (25,206     (19,010     (51,353     (39,163
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     78,692        73,278        151,534        147,460   

Provision for income taxes

     29,431        27,369        56,822        55,262   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 49,261      $ 45,909      $ 94,712      $ 92,198   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Common stock - basic

   $ 1.00      $ 0.84      $ 1.92      $ 1.68   

Common stock - diluted

     0.98        0.81        1.86        1.62   

Dividends declared per share

   $ 0.38      $ 0.31      $ 0.76      $ 0.62   

 

See accompanying notes.

 

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Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Fiscal Quarter Ended      Two Fiscal Quarters Ended  
(In thousands)    June 19,
2016
    June 14,
2015
     June 19,
2016
    June 14,
2015
 

Net income

   $ 49,261      $ 45,909       $ 94,712      $ 92,198   

Other comprehensive income (loss), before tax:

         

Currency translation adjustment

     456        77         1,113        (733

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

         

Currency translation adjustment

     (68     84         (140     465   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     388        161         973        (268
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 49,649      $ 46,070       $ 95,685      $ 91,930   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Two Fiscal Quarters Ended  
(In thousands)    June 19,
2016
    June 14,
2015
 

Cash flows from operating activities:

    

Net income

   $ 94,712      $ 92,198   

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

    

Depreciation and amortization

     16,756        15,028   

Loss (gain) on sale/disposal of assets

     247        (272

Amortization of debt issuance costs

     3,133        2,550   

Provision (benefit) for deferred income taxes

     1,775        (1,964

Non-cash compensation expense

     8,617        7,776   

Tax impact from equity-based compensation

     (34,852     (7,556

Other

     16        (725

Changes in operating assets and liabilities

     (20,951     (3,441
  

 

 

   

 

 

 

Net cash provided by operating activities

     69,453        103,594   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (25,045     (20,238

Proceeds from sale of assets

     2,765        8,785   

Changes in restricted cash

     73,505        24,137   

Other

     (904     1,449   
  

 

 

   

 

 

 

Net cash provided by investing activities

     50,321        14,133   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of long-term debt

     10,000        —     

Repayments of long-term debt and capital lease obligations

     (39,878     (141

Proceeds from exercise of stock options

     10,848        2,067   

Tax impact from equity-based compensation

     34,852        7,556   

Purchases of common stock

     (224,139     (97,634

Tax payments for restricted stock upon vesting

     (3,036     (3,737

Payments of common stock dividends and equivalents

     (19,099     (31,039
  

 

 

   

 

 

 

Net cash used in financing activities

     (230,452     (122,928
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (466     237   
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (111,144     (4,964

Cash and cash equivalents, at beginning of period

     133,449        30,855   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 22,305      $ 25,891   
  

 

 

   

 

 

 

 

See accompanying notes.

 

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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 19, 2016

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 January 3, 2016 included in our annual report on Form 10-K.

In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair statement have been included. Operating results for the fiscal quarter ended June 19, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2017.

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 19, 2016 and June 14, 2015  
     Domestic
Stores
     Supply
Chain
     International
Franchise
     Intersegment
Revenues
    Other     Total  

Revenues

               

2016

   $ 167,509       $ 367,858       $ 40,573       $ (28,599   $ —        $ 547,341   

2015

     149,621         327,374         36,098         (24,471     —          488,622   

Income from operations

               

2016

   $ 58,731       $ 29,299       $ 32,204         N/A      $ (16,533   $ 103,701   

2015

     52,723         26,012         29,569         N/A        (16,073     92,231   

Segment Income

               

2016

   $ 60,936       $ 31,682       $ 32,238         N/A      $ (8,739   $ 116,117   

2015

     54,279         28,315         29,509         N/A        (9,303     102,800   
     Two Fiscal Quarters Ended June 19, 2016 and June 14, 2015  
     Domestic
Stores
     Supply
Chain
     International
Franchise
     Intersegment
Revenues
    Other     Total  

Revenues

               

2016

   $ 332,104       $ 730,377       $ 79,459       $ (55,423   $ —        $ 1,086,517   

2015

     303,770         665,130         72,320         (50,571     —          990,649   

Income from operations

               

2016

   $ 117,150       $ 57,644       $ 61,945         N/A      $ (34,325   $ 202,414   

2015

     108,250         53,207         58,284         N/A        (33,257     186,484   

Segment Income

               

2016

   $ 121,405       $ 62,354       $ 62,010         N/A      $ (17,735   $ 228,034   

2015

     111,552         57,771         58,258         N/A        (18,565     209,016   

 

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

 

     Fiscal Quarter Ended      Two Fiscal Quarters Ended  
     June 19,
2016
     June 14,
2015
     June 19,
2016
     June 14,
2015
 

Total Segment Income

   $ 116,117       $ 102,800       $ 228,034       $ 209,016   

Depreciation and amortization

     (8,535      (7,681      (16,756      (15,028

(Loss) gain on sale/disposal of assets

     (161      422         (247      272   

Non-cash compensation expense

     (3,720      (3,310      (8,617      (7,776
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     103,701         92,231         202,414         186,484   

Interest income

     197         57         473         139   

Interest expense

     (25,206      (19,010      (51,353      (39,163
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

   $ 78,692       $ 73,278       $ 151,534       $ 147,460   
  

 

 

    

 

 

    

 

 

    

 

 

 

3. Earnings Per Share

 

     Fiscal Quarter Ended      Two Fiscal Quarters Ended  
     June 19,
2016
     June 14,
2015
     June 19,
2016
     June 14,
2015
 

Net income available to common stockholders - basic and diluted

   $ 49,261       $ 45,909       $ 94,712       $ 92,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average number of shares

     49,213,330         54,833,094         49,455,412         55,020,404   

Earnings per share - basic

   $ 1.00       $ 0.84       $ 1.92       $ 1.68   

Diluted weighted average number of shares

     50,459,754         56,628,237         50,846,941         56,820,743   

Earnings per share - diluted

   $ 0.98       $ 0.81       $ 1.86       $ 1.62   

The denominators used in calculating diluted earnings per share for common stock for the second quarter of 2016 and two fiscal quarters of 2016 do not include 216,690 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 the second quarter of 2016 and two fiscal quarters of 2016 do not include 17,870 and 23,560 restricted performance shares, respectively, as the effect of including these shares 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 2015 do not include 70,910 options to purchase common stock, 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 2016.

 

    

 

Common Stock

    Additional
Paid-in

Capital
    Retained
Deficit
    Accumulated
Other
Comprehensive

Loss
 
     Shares     Amount        

Balance at January 3, 2016

     49,838,221      $ 498      $ 6,942      $ (1,804,143   $ (3,548

Net income

     —          —          —          94,712        —     

Common stock dividends

     —          —          —          (37,330     —     

Issuance of common stock, net

     20,200        —          —          —          —     

Tax payments for restricted stock upon vesting

     (24,947     —          (3,036     —          —     

Purchases of common stock

     (2,302,062     (23     (58,122     (165,994     —     

Exercise of stock options

     805,100        8        10,840        —          —     

Tax impact from equity-based compensation

     —          —          34,852        —          —     

Non-cash compensation expense

     —          —          8,617        —          —     

Currency translation adjustment, net of tax

     —          —          —          —          973   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 19, 2016

     48,336,512      $ 483      $ 93      $ (1,912,755   $ (2,575
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

On March 14, 2016, the Company received and retired 456,936 shares of its common stock in connection with the final settlement of its previously announced $600.0 million accelerated share repurchase (“ASR”) program. At the commencement of the program, in the fourth quarter of 2015, the Company paid $600.0 million to a counterparty and received and retired a portion of the shares from the ASR program, based on the terms of the related ASR agreement.

 

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5. Dividends

During the second quarter of 2016, on April 26, 2016, the Company’s Board of Directors declared a $0.38 per share quarterly dividend on its outstanding common stock for shareholders of record as of June 15, 2016 which was paid on June 30, 2016. The Company had approximately $18.8 million accrued for common stock dividends at June 19, 2016.

Subsequent to the second quarter, on July 20, 2016, the Company’s Board of Directors declared a $0.38 per share quarterly dividend on its outstanding common stock for shareholders of record as of September 15, 2016 to be paid on September 30, 2016.

6. Accumulated Other Comprehensive Loss

The approximately $2.6 million of accumulated other comprehensive loss at June 19, 2016 and the approximately $3.5 million of accumulated other comprehensive loss at January 3, 2016 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 2016 or the two fiscal quarters of 2015.

7. Open Market Share Repurchase Program

During the first quarter of 2016, the Company received and retired 456,936 shares of its common stock in connection with the final settlement of its previously announced $600.0 million accelerated share repurchase program. The Company did not repurchase any shares of its common stock under its Board of Directors approved open market share repurchase program in the first quarter of 2016.

During the second quarter of 2016, the Company repurchased and retired 1,845,126 shares of its common stock under its Board of Directors approved open market share repurchase program for a total of approximately $224.1 million. On May 25, 2016, the Board of Directors approved an increase to the Company’s open market share repurchase program, so that the Company had an aggregate of $250.0 million available for future share repurchases as of May 25, 2016. As of June 19, 2016, the end of the second quarter, the Company had a total remaining authorized amount for share repurchases of approximately $225.2 million.

Subsequent to the second quarter of 2016, the Company repurchased and retired 85,020 shares for approximately $10.8 million. As of July 14, 2016, the Company had $214.5 million remaining for future share repurchases under its Board of Directors approved open market share repurchase program.

During the second quarter of 2015, the Company repurchased and retired 637,587 shares of common stock for a total of approximately $68.1 million; during the two fiscal quarters of 2015, the Company repurchased and retired 928,464 shares of common stock for approximately $97.6 million.

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.

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 19, 2016 and January 3, 2016:

 

     At June 19, 2016  
            Fair Value Estimated Using  
     Carrying
Amount
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Cash equivalents

   $ 9,678       $ 9,678       $ —         $ —     

Restricted cash equivalents

     70,263         70,263         —           —     

Investments in marketable securities

     7,110         7,110         —           —     

 

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     At January 3, 2016  
            Fair Value Estimated Using  
     Carrying
Amount
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Cash equivalents

   $ 108,766       $ 108,766       $ —         $ —     

Restricted cash equivalents

     128,554         128,554         —           —     

Investments in marketable securities

     6,054         6,054         —           —     

At June 19, 2016, management estimates that the approximately $929.4 million in principal amount of outstanding fixed rate notes from its 2012 recapitalization had a fair value of approximately $964.8 million; and at January 3, 2016, management estimates that the approximately $962.7 million in principal amount of outstanding fixed rate notes from its 2012 recapitalization had a fair value of approximately $991.6 million.

At June 19, 2016, management estimates that the $497.5 million in principal amount of outstanding five-year fixed rate notes from its 2015 recapitalization had a fair value of approximately $504.5 million; and at January 3, 2016, management estimates that the $500.0 million in principal amount of outstanding five-year fixed rate notes from its 2015 recapitalization had a fair value of approximately $489.5 million. At June 19, 2016, management estimates that the $796.0 million in principal amount of outstanding ten-year fixed rate notes from its 2015 recapitalization had a fair value of approximately $812.7 million; and at January 3, 2016, management estimates that the $800.0 million in principal amount of outstanding ten-year fixed rate notes from its 2015 recapitalization had a fair value of approximately $781.6 million.

The fixed rate notes are classified as a Level 2 measurement, as the Company estimates the fair value amount by using available market information. The Company obtained quotes from two separate brokerage firms that are knowledgeable about the Company’s fixed rate notes and, at times, trade these notes. The Company also performed its own internal analysis based on the information gathered from public markets, including information on notes that are similar to those of the Company. However, considerable judgment is required to interpret market data to estimate fair value. Accordingly, the fair value estimates presented 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 values stated above.

9. Legal Matters

On February 14, 2011, Domino’s Pizza LLC was named as a defendant in a lawsuit along with Fischler Enterprises of C.F., Inc., a franchisee, and Jeffrey S. Kidd, the franchisee’s delivery driver, filed by Yvonne Wiederhold, the plaintiff, as Personal Representative of the Estate of Richard E. Wiederhold, deceased. The case involved a traffic accident in which the franchisee’s delivery driver is alleged to have caused an accident involving a vehicle driven by Richard Wiederhold. Mr. Wiederhold sustained spinal injuries resulting in quadriplegia and passed away several months after the accident. The jury returned a $10.1 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 90% liable (after certain offsets and other deductions the final verdict was $8.9 million). In the second quarter of 2016, the trial court ruled on all post-judgment motions and entered the judgment. The Company denies liability and is in the process of filing an appeal of the verdict on a variety of grounds.

On September 11, 2012, Domino’s Pizza LLC was named as a defendant in a lawsuit along with MAC Pizza Management, Inc., a large franchisee, and Joshua Balka, the franchisee’s delivery driver, filed by Raghurami Reddy, the plaintiff. The case involved a traffic accident in which the franchisee’s delivery driver collided with another vehicle, where the driver of the other vehicle sustained head injuries and the passenger of the other vehicle sustained fatal injuries. The jury delivered a $32.0 million judgment for the plaintiff where the Company was found to be 60% liable. The Company denied liability and filed an appeal of the verdict on a variety of grounds. In the first quarter of 2015, the appellate court reversed the trial court’s decision and dismissed the claims against the Company. The plaintiff filed a Petition for Review with the Supreme Court of the State of Texas. The Company filed opposition to the writ of review and asserted that the claims were appropriately dismissed by the Court of Appeals of the State of Texas. In the second quarter of 2016, the Texas Supreme Court rejected the plaintiffs’ writ of certiorari, leaving the appellate court’s favorable decision to stand.

10. Supplemental Disclosures of Cash Flow Information

The Company had non-cash investing activities related to accruals for capital expenditures of $0.7 million at June 19, 2016 and $1.1 million at June 14, 2015.

During the two fiscal quarters of 2015, the Company renewed the capital lease of a supply chain center building and extended the term of the lease through August 2028. As a result of the new lease, the Company recorded non-cash financing activities of $3.4 million for the increase in capital lease assets and liabilities during the first quarter of 2015.

 

10


Table of Contents

11. New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-02, Leases (Topic 842). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU 2016-04 aligns recognition of the financial liabilities related to prepaid stored-value products (for example, gift cards) with Topic 606, Revenues from Contracts with Customers, for non-financial liabilities. In general, these liabilities may be extinguished proportionately in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value. ASU 2016-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients and ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. ASU 2016-10 clarifies the following two aspects of ASU 2014-09: identifying performance obligations and licensing implementation guidance. ASU 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for consideration given by a vendor to a customer, as well as accounting for shipping and handling fees and freight services. ASU 2016-12 provides clarification to Topic 606 on how to assess collectability, present sales tax, treat noncash consideration, and account for completed and modified contracts at the time of transition. In addition, ASU 2016-12 clarifies that an entity retrospectively applying the guidance in Topic 606 is not required to disclose the effect of the accounting change in the period of adoption. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU 2014-09, which is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017. The Company is currently assessing the impact of these ASUs on its consolidated financial statements.

 

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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 2016 and 2015 second quarters referenced herein represent the twelve-week periods ended June 19, 2016 and June 14, 2015. The 2016 and 2015 two fiscal quarters referenced herein represent the twenty-four-week periods ended June 19, 2016 and June 14, 2015.

Overview

Domino’s is the second largest pizza restaurant chain in the world, with more than 12,900 locations in over 80 markets. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. Domino’s generates revenues and earnings by charging royalties to our independent franchisees. The Company also generates revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada, and by operating a number of our own stores. Franchisees profit by selling pizza and other complementary items to their local customers. In our international markets, we generally grant geographical rights to the Domino’s Pizza® brand to master franchisees. These master franchisees are charged with developing their geographical area, and they profit by sub-franchising and selling ingredients and equipment to those sub-franchisees, as well as by running pizza stores. Everyone in the system can benefit, including the end consumer, who can feed their family Domino’s menu items conveniently and economically.

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 extensive advertising through various media channels, the impact of technological innovation and digital ordering, our ability to execute our strong and proven business model and the overall global economic environment.

 

     Second Quarter
of 2016
    Second Quarter
of 2015
    Two Fiscal
Quarters
of 2016
    Two Fiscal
Quarters
of 2015
 

Global retail sales growth

     +11.7       +7.5       +9.5       +8.9  

Same store sales growth:

                

Domestic Company-owned stores

     +9.1       +12.5       +6.5       +14.2  

Domestic franchise stores

     +9.8       +12.8       +8.2       +13.6  
  

 

 

     

 

 

     

 

 

     

 

 

   

Domestic stores

     +9.7       +12.8       +8.0       +13.7  

International stores (excluding foreign currency impact)

     +7.1       +6.7       +7.5       +7.2  

Store counts (at end of period):

                

Domestic Company-owned stores

     386          376             

Domestic franchise stores

     4,859          4,722             
  

 

 

     

 

 

           

Domestic stores

     5,245          5,098             

International stores

     7,691          6,827             
  

 

 

     

 

 

           

Total stores

     12,936          11,925             
  

 

 

     

 

 

           

Income statement data:

                

Total revenues

   $ 547.3        100.0   $ 488.6        100.0   $ 1,086.5        100.0   $ 990.6        100.0

Cost of sales

     375.5        68.6     336.0        68.8     747.5        68.8     680.9        68.7

General and administrative

     68.1        12.4     60.4        12.3     136.6        12.6     123.3        12.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     103.7        19.0     92.2        18.9     202.4        18.6     186.5        18.8

Interest expense, net

     (25.0     (4.6 )%      (19.0     (3.9 )%      (50.9     (4.7 )%      (39.0     (3.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     78.7        14.4     73.3        15.0     151.5        13.9     147.5        14.9

Provision for income taxes

     29.4        5.4     27.4        5.6     56.8        5.2     55.3        5.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 49.3        9.0   $ 45.9        9.4   $ 94.7        8.7   $ 92.2        9.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the second quarter and two fiscal quarters of 2016, we sustained our strong domestic same store sales performance and also continued our solid growth in international same store sales. Our Domino’s Piece of the Pie RewardsTM loyalty program contributed significantly to our domestic same store sales performance. Additionally, we remained focused on growing online ordering and improving the digital customer experience through our technology platforms.

 

12


Table of Contents

We also continued our global expansion with the opening of 244 net new stores in the second quarter of 2016, bringing our year-to date total to 406 stores. We opened 215 net new stores internationally and 29 net new stores domestically during the second quarter of 2016. Overall, we believe this global store growth, along with our strong sales, emphasis on technology, operations, and marketing initiatives have combined to strengthen our brand.

Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, increased 11.7% in the second quarter of 2016 and 9.5% in the two fiscal quarters of 2016. 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. The impact of foreign currency exchange rates partially offset these increases, resulting from a generally stronger U.S. dollar when compared to the currencies in the international markets in which we compete. Domestic same store sales growth reflected the sustained positive sales trends and the continued success of our products, marketing and technology platforms. International same store sales growth also reflected continued strong performance.

Total revenues increased $58.7 million, or 12.0%, in the second quarter of 2016, and $95.9 million, or 9.7% in the two fiscal quarters of 2016. These increases were due primarily to higher supply chain volumes resulting from order and store count growth, as well as higher Company-owned store, domestic franchise and international franchise revenues resulting from same store sales and store count growth. These increases were offset in part by the negative impact of changes in foreign currency exchange rates on international franchise royalties and international supply chain revenues. These changes in revenues are described in more detail below.

Income from operations increased $11.5 million, or 12.4%, in the second quarter of 2016, and $15.9 million, or 8.5%, in the two fiscal quarters of 2016. These increases were driven by higher royalty revenues from domestic and international franchise stores, as well as increased supply chain volumes. Higher general and administrative expenses partially offset these increases.

Net income increased $3.4 million, or 7.3%, in the second quarter of 2016, and $2.5 million, or 2.7%, in the two fiscal quarters of 2016. These increases were driven by higher income from operations, as noted above. Higher interest expense as a result of our recapitalization in 2015 partially offset these increases.

Revenues

 

     Second Quarter
of 2016
    Second Quarter
of 2015
    Two Fiscal
Quarters
of 2016
    Two Fiscal
Quarters
of 2015
 

Domestic Company-owned stores

   $ 97.8         17.9   $ 88.8         18.2   $ 194.3         17.9   $ 181.2         18.3

Domestic franchise

     69.7         12.7     60.8         12.4     137.8         12.7     122.6         12.4

Supply chain

     339.3         62.0     302.9         62.0     675.0         62.1     614.6         62.0

International franchise

     40.6         7.4     36.1         7.4     79.5         7.3     72.3         7.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

   $ 547.3         100.0   $ 488.6         100.0   $ 1,086.5         100.0   $ 990.6         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

Domestic Stores Revenues

 

     Second Quarter
of 2016
    Second Quarter
of 2015
    Two Fiscal
Quarters of 2016
    Two Fiscal
Quarters
of 2015
 

Domestic Company-owned stores

   $ 97.8         58.4   $ 88.8         59.3   $ 194.3         58.5   $ 181.2         59.6

Domestic franchise

     69.7         41.6     60.8         40.7     137.8         41.5     122.6         40.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Domestic stores

   $ 167.5         100.0   $ 149.6         100.0   $ 332.1         100.0   $ 303.8         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Domestic stores revenues increased $17.9 million, or 12.0%, in the second quarter of 2016, and $28.3 million, or 9.3%, in the two fiscal quarters of 2016. These increases were driven by 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.

 

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Table of Contents

Domestic Company-Owned Stores

Revenues from domestic Company-owned store operations increased $9.0 million, or 10.2%, in the second quarter of 2016, and $13.1 million, or 7.2%, in the two fiscal quarters of 2016. Domestic Company-owned same store sales increased 9.1% in the second quarter of 2016, and 6.5% in the two fiscal quarters of 2016. This compared to an increase of 12.5% in the second quarter of 2015 and 14.2% in the two fiscal quarters of 2015. An increase in the average number of Company-owned stores open during the second quarter and two fiscal quarters of 2016 also contributed, to a lesser extent.

Domestic Franchise

Revenues from domestic franchise operations increased $8.9 million, or 14.5%, in the second quarter of 2016, and $15.2 million, or 12.4%, in the two fiscal quarters of 2016. These increases were driven by growth of 9.8% in same store sales in the second quarter of 2016 and an 8.2% increase in the two fiscal quarters of 2016. This compared to an increase of 12.8% in the second quarter of 2015, and 13.6% in the two fiscal quarters of 2015. An increase in the average number of domestic franchised stores open during the second quarter and two fiscal quarters of 2016 also contributed, to a lesser extent. Revenues further benefited from fees paid by franchisees for technology initiatives.

Supply Chain Revenues

 

     Second Quarter
of 2016
    Second Quarter
of 2015
    Two Fiscal
Quarters
of 2016
    Two Fiscal
Quarters
of 2015
 

Domestic supply chain

   $ 309.4         91.2   $ 276.9         91.4   $ 617.0         91.4   $ 563.0         91.6

International supply chain

     29.9         8.8     26.0         8.6     58.0         8.6     51.6         8.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total supply chain

   $ 339.3         100.0   $ 302.9         100.0   $ 675.0         100.0   $ 614.6         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

In fiscal 2016, the Company began managing the Alaska and Hawaii supply chain centers as part of its domestic supply chain business. Prior to fiscal 2016, these centers were managed as part of the Company’s international supply chain business. Revenues from these supply chain centers are included in the second quarter of 2016 and the second quarter of 2015 domestic supply chain revenues, as well as the two fiscal quarters of 2016 and the two fiscal quarters of 2015 in the table above.

Domestic Supply Chain

Domestic supply chain revenues increased $32.5 million, or 11.7%, in the second quarter of 2016, and $54.0 million, or 9.6%, in the two fiscal quarters of 2016. These increases were primarily attributable to higher volumes from increased order counts at the store level as well as store count growth. Our commodity market basket remained relatively flat during the second quarter of 2016 and two fiscal quarters of 2016, as decreases in cheese costs were offset by higher meat prices. We estimate that the lower cheese block price resulted in an approximate $0.7 million decrease in domestic supply chain revenues during the second quarter of 2016, and an approximate $1.1 million decrease in the two fiscal quarters of 2016.

International Supply Chain

Revenues from international supply chain operations increased $3.9 million, or 14.9%, in the second quarter of 2016, and $6.4 million, or 12.5%, in the two fiscal quarters of 2016. The increases resulted primarily from higher volumes, but were partially offset by an approximate $1.3 million negative impact of foreign currency exchange rates in the second quarter of 2016 and an approximate $4.1 million negative impact of foreign currency exchange rates in the two fiscal quarters of 2016.

International Franchise Revenues

Revenues from international franchise operations increased $4.5 million, or 12.4%, in the second quarter of 2016, and $7.2 million, or 9.9%, in the two fiscal quarters of 2016. These increases were due to higher same store sales and an increase in the average number of international stores open during each period. These increases were offset in part by the negative impact of changes in foreign currency exchange rates of approximately $1.8 million in the second quarter of 2016, and $4.7 million in the two fiscal quarters of 2016. Excluding the impact of foreign currency exchange rates, same store sales increased 7.1% in the second quarter of 2016, and 7.5% in the two fiscal quarters of 2016. This compared to an increase of 6.7% in the second quarter of 2015, and 7.2% in the two fiscal quarters of 2015. Including the impact of foreign currency in the second quarter and two fiscal quarters of 2016, same store sales increased 2.8% from the second quarter of 2015, and 1.8% from the two fiscal quarters of 2015.

 

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Table of Contents

Cost of Sales / Operating Margin

 

     Second Quarter
of 2016
    Second Quarter
of 2015
    Two Fiscal
Quarters
of 2016
    Two Fiscal
Quarters

of 2015
 

Consolidated revenues

   $ 547.3         100.0   $ 488.6         100.0   $ 1,086.5         100.0   $ 990.6         100.0

Consolidated cost of sales

     375.5         68.6     336.0         68.8     747.5         68.8     680.9         68.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated operating margin

   $ 171.8         31.4   $ 152.7         31.2   $ 339.1         31.2   $ 309.7         31.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

Consolidated operating margin (which we define as revenues less cost of sales) increased $19.1 million, or 12.6%, in the second quarter of 2016, and $29.4 million, or 9.5%, in the two fiscal quarters of 2016. Higher domestic and international franchise revenues as well as higher supply chain volumes contributed to the increased operating margin in the second quarter of 2016 and the two fiscal quarters of 2016. Franchise revenues do not have a cost of sales component, so changes in franchise revenues have a disproportionate effect on the operating margin.

As a percentage of revenues, the operating margin increased 0.2 percentage points in the second quarter of 2016, and decreased 0.1 percentage points in the two fiscal quarters of 2016. In the second quarter of 2016, a higher percentage of international and domestic royalty revenue positively impacted the margin. This increase was offset in part by lower Company-owned store operating margins.

In the two fiscal quarters of 2016, lower Company-owned store operating margins negatively impacted the margin. This decrease was partially offset by a higher percentage of international and domestic royalty revenue.

Domestic Company-Owned Stores Operating Margin

 

     Second Quarter
of 2016
    Second Quarter
of 2015
    Two Fiscal
Quarters
of 2016
    Two Fiscal
Quarters

of 2015
 

Revenues

   $ 97.8         100.0   $ 88.8         100.0   $ 194.3         100.0   $ 181.2         100.0

Cost of sales

     73.8         75.4     66.1         74.4     146.6         75.4     134.2         74.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Store operating margin

   $ 24.0         24.6   $ 22.7         25.6   $ 47.7         24.6   $ 46.9         25.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The domestic Company-owned store operating margin (which does not include certain store-level costs such as royalties and advertising) increased $1.3 million, or 5.8%, in the second quarter of 2016. The operating margin also increased $0.8 million, or 1.7%, in the two fiscal quarters of 2016. These increases were due primarily to higher same store sales and lower delivery expenses. Higher food costs, labor rates, transaction-related expenses, and insurance expenses partially offset these positive factors.

As a percentage of store revenues, the store operating margin decreased 1.0 percentage points in the second quarter of 2016, and 1.3 percentage points in the two fiscal quarters, as discussed in more detail below.

 

    Food costs increased 0.6 percentage points to 26.6% in second quarter of 2016, and 0.1 percentage points to 26.4% in the two fiscal quarters of 2016. The increase in the second quarter of 2016 was due primarily to promotional activities.

 

    Labor and related costs increased 0.1 percentage points in the second quarter of 2016 to 29.4%, and 0.7 percentage points in the two fiscal quarters of 2016 to 29.8%. These increases were due to higher wages resulting primarily from an increase in labor rates in certain markets.

 

    Insurance costs increased 0.5 percentage points to 3.4% in the second quarter of 2016, and 0.4 percentage points to 3.2% in the two fiscal quarters of 2016. These increases were driven by increased frequency and severity of casualty insurance claims.

 

    Transaction-related expenses increased 0.4 percentage points to 2.1% in the second quarter of 2016, and 0.4 percentage points to 2.1% in the two fiscal quarters of 2016.

 

    Delivery expenses decreased 0.3 percentage points to 3.4% in the second quarter of 2016, and 0.4 percentage points to 3.4% in the two fiscal quarters of 2016, due primarily to lower fuel prices.

 

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Table of Contents

Supply Chain Operating Margin

 

     Second Quarter
of 2016
    Second Quarter
of 2015
    Two Fiscal
Quarters

of 2016
    Two Fiscal
Quarters

of 2015
 

Revenues

   $ 339.3         100.0   $ 302.9         100.0   $ 675.0         100.0   $ 614.6         100.0

Cost of sales

     301.7         88.9     269.9         89.1     600.9         89.0     546.7         89.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Supply chain operating margin

   $ 37.6         11.1   $ 33.0         10.9   $ 74.0         11.0   $ 67.9         11.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The supply chain operating margin increased $4.6 million, or 13.7%, in the second quarter of 2016, and $6.1 million, or 9.1%, in the two fiscal quarters of 2016. These increases were driven by higher volumes from store count growth and increased store order counts.

As a percentage of supply chain revenues, the supply chain operating margin increased 0.2 percentage points in the second quarter of 2016, and remained flat in the two fiscal quarters of 2016. In both the second quarter of 2016 and the two fiscal quarters of 2016, higher volumes and lower fuel costs benefited the operating margin while higher labor and casualty insurance claims negatively impacted the operating margin. Food costs as a percentage of supply chain revenues decreased in the second quarter of 2016. Our commodity market basket remained relatively flat during the second quarter of 2016 and two fiscal quarters of 2016, as decreases in cheese costs were offset by higher meat prices. Decreases in certain commodity prices have a positive effect on the supply chain operating margin percentage due to the fixed dollar margin earned by supply chain on certain food items. The cheese block price per pound averaged $1.40 in the second quarter of 2016 as compared to $1.59 in the second quarter of 2015. The cheese block price per pound averaged $1.43 in the two fiscal quarters of 2016 as compared to $1.57 in the two fiscal quarters of 2015. Changes in our U.S. cheese prices decreased both revenues and costs by $0.7 million in the second quarter of 2016 and by $1.1 million in the two fiscal quarters of 2016. If our U.S. cheese prices for 2016 had been in effect during 2015, the supply chain operating margin as a percentage of supply chain revenues would have remained the same in the second quarter of 2015 and two fiscal quarters of 2015. The dollar margin would also have been unaffected.

General and Administrative Expenses

General and administrative expenses increased $7.7 million, or 12.7%, in the second quarter of 2016, and $13.4 million, or 10.9%, in the two fiscal quarters of 2016. These increases were primarily driven by continued investments in technology, specifically in e-commerce and other technological initiatives, as well as other labor and related expenses. Investments in labor and other expenses to support the growth of our international markets and performance-based compensation expenses also contributed to these increases.

Interest Expense

Interest expense increased $6.2 million to $25.2 million in the second quarter of 2016, and $12.2 million to $51.4 million in the two fiscal quarters of 2016. The increases were driven by a higher average debt balance as a result of the 2015 recapitalization and were offset in part by a lower weighted average borrowing rate.

The Company’s weighted average borrowing rate decreased to 4.6% in the second quarter of 2016 and the two fiscal quarters of 2016, from 5.3% in the second quarter and the two fiscal quarters of 2015. The decreases in the Company’s weighted average borrowing rate resulted from the lower interest rates on the new debt issued as part of the 2015 recapitalization.

Provision for Income Taxes

Provision for income taxes increased $2.1 million to $29.4 million in the second quarter of 2016, and $1.6 million to $56.8 million in the two fiscal quarters of 2016 due primarily to higher pre-tax income. The effective tax rate increased slightly to 37.4% during the second quarter of 2016 as compared to the second quarter of 2015, and remained flat at 37.5% during the two fiscal quarters of 2016 as compared to the two fiscal quarters of 2015.

Liquidity and Capital Resources

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 the use of our ongoing cash flows from operations to service our debt obligations, invest in our business, pay dividends and repurchase our common stock, reduce our working capital amounts. As of June 19, 2016, we had negative working capital of $13.7 million, excluding restricted cash and cash equivalents of $107.4 million and including total unrestricted cash and cash equivalents of $22.3 million.

 

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As of June 19, 2016, we had approximately $80.7 million of restricted cash held for future principal and interest payments, $26.6 million of restricted cash held in a three-month interest reserve as required by the related debt agreements, and $0.1 million of other restricted cash for a total of $107.4 million of restricted cash and cash equivalents.

As of June 19, 2016, we had approximately $2.21 billion of long-term debt, of which $48.9 million was classified as a current liability. Our fixed rate notes from the recapitalizations we completed in 2015 and 2012 have original scheduled principal payments of $59.0 million in 2016, $38.6 million in each of 2017 and 2018, $878.5 million in 2019, $488.0 million in 2020, $8.0 million in each of 2021 through 2024 and $728.0 million in 2025. As of June 19, 2016, we had $46.2 million of outstanding letters of credit, $10.0 million of borrowings, and $68.8 million of available capacity under our $125.0 million variable funding note facility. 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 first quarter of 2016, the Company’s previously announced $600.0 million accelerated share repurchase (ASR) program was completed. On March 14, 2016, at final settlement, the Company received and retired 456,936 shares of its common stock based on the terms of the related ASR agreement. The Company received and retired a total of 5,315,930 shares over the entirety of the $600.0 million ASR program at an average purchase price per share of $112.87.

In the second quarter of 2016, the Company repurchased and retired 1,845,126 shares of common stock for a total of approximately $224.1 million. On May 25, 2016, the Board of Directors approved an increase to the Company’s open market share repurchase program, so that the Company had an aggregate of $250.0 million available for future share repurchases as of that date. As of June 19, 2016, the end of the second quarter, the Company had a total remaining authorized amount for share repurchases of approximately $225.2 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 second quarter of 2016, the Company’s Board of Directors declared a $0.38 per share quarterly dividend on its outstanding common stock for shareholders of record as of June 15, 2016 which was paid on June 30, 2016. The Company had approximately $18.8 million accrued for common stock dividends at June 19, 2016. Subsequent to the second quarter, the Company’s Board of Directors declared a $0.38 per share quarterly dividend for shareholders of record as of September 15, 2016 to be paid on September 30, 2016.

During the second quarter and two fiscal quarters of 2016, we experienced increases in both domestic and international same store sales versus the comparable periods in the prior year. Additionally, our international and domestic businesses continued to grow store counts in the second quarter of 2016. These factors 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. We did not have any material commitments for capital expenditures as of June 19, 2016.

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 note facility 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.

The following table illustrates the main components of our cash flows:

 

(In millions)

   Two Fiscal
Quarters of 2016
     Two Fiscal
Quarters of 2015
 

Cash Flows Provided By (Used In)

     

Net cash provided by operating activities

   $ 69.5       $ 103.6   

Net cash provided by investing activities

     50.3         14.1   

Net cash used in financing activities

     (230.5      (122.9

Exchange rate changes

     (0.5      0.2   
  

 

 

    

 

 

 

Change in cash and cash equivalents

   $ (111.1    $ (5.0
  

 

 

    

 

 

 

 

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Operating Activities

Cash provided by operating activities was $69.5 million in the two fiscal quarters of 2016. This resulted from net income of $94.7 million generated during the period, which included net non-cash expenses of $4.3 million, and a $21.0 million decrease in cash from changes in operating assets and liabilities, primarily related to the timing of payments of accounts payable balances.

Cash provided by operating activities was $103.6 million in the two fiscal quarters of 2015. This was mainly the result of net income of $92.2 million that was generated during the quarter, which included net non-cash expenses of $14.8 million. Also, a $3.4 million decrease in cash from changes in operating assets and liabilities reduced the cash generated from operating activities, primarily related to the timing of tax payments.

Investing Activities

Cash provided by investing activities was $50.3 million in the two fiscal quarters of 2016, which consisted primarily of a decrease in restricted cash of $73.5 million due to scheduled payments on our long-term debt and proceeds from the sale of assets of $2.8 million. Capital expenditures totaling $25.0 million (driven by increased investments in our technological initiatives, Company-owned stores and supply chain centers) partially offset the cash provided by investing activities.

Cash provided by investing activities was $14.1 million in the two fiscal quarters of 2015, which consisted primarily of a decrease in restricted cash of $24.1 million due to scheduled payments on our long-term debt and proceeds from the sale of assets of $8.8 million. Capital expenditures of $20.2 million partially offset the cash provided by investing activities.

Financing Activities

We used $230.5 million of cash in financing activities in the two fiscal quarters of 2016. We used $224.1 million to repurchase and retire shares of common stock, and we made $39.9 million in payments on our long-term debt obligations, which included a required catch-up amortization payment on the fixed rate notes from the recapitalization we completed in 2012 upon exceeding the 4.5x leverage covenant as defined in the related agreements. We also paid $19.1 million in dividends to our shareholders, and made $3.0 million in tax payments for restricted stock upon vesting. The tax impact of equity-based compensation, proceeds from the exercise of stock options, and $10.0 million draw on our variable funding note facility partially offset these uses of cash in financing activities in the two fiscal quarters of 2016.

We used $122.9 million of cash in financing activities in the two fiscal quarters of 2015, primarily related to purchases of common stock and funding dividend payments to our shareholders. The tax impact of equity-based compensation and proceeds from exercise of stock options offset the use of cash in financing activities in the two fiscal quarters of 2015.

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. These 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 our long-term and other indebtedness; uncertainties relating to litigation; consumer preferences, spending patterns and demographic trends; the effectiveness of our advertising, operations and promotional initiatives; the strength of our brand in the markets in which we compete; our ability to retain key personnel; new product, digital ordering 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 operating expenses resulting from changes in prices of food (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; 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 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 does not engage in speculative transactions nor does the Company hold or issue financial instruments for trading purposes. In connection with the recapitalizations of our business, we issued fixed rate notes and, at June 19, 2016, we are only exposed to interest rate risk on borrowings under our variable funding notes. As of June 19, 2016, we had $10.0 million of outstanding borrowings under our variable funding notes and $68.8 million available for borrowing, which is net of letters of credit issued of $46.2 million. Our fixed rate debt exposes the Company to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate.

We are exposed to market risks 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 when we use fixed pricing agreements with our suppliers, these agreements cover our physical commodity needs, 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 13.4% in the second quarter of 2016, approximately 13.1% in the second quarter of 2015, 13.1% in the two fiscal quarters of 2016, and 12.9% in the two fiscal quarters of 2015 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 $5.2 million in the two fiscal quarters of 2016.

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, Jeffrey D. Lawrence, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-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. Lawrence concluded that the Company’s disclosure controls and procedures were effective.

During the quarterly period ended June 19, 2016, there were no changes in the Company’s internal controls over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) that have materially affected or are reasonably likely to materially affect the Company’s internal control 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.

As previously disclosed in our annual report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2016, on September 11, 2012, Domino’s Pizza LLC was named as a defendant in a lawsuit along with MAC Pizza Management, Inc., a large franchisee, and Joshua Balka, the franchisee’s delivery driver, filed by Raghurami Reddy, the plaintiff. The case involved a traffic accident in which the franchisee’s delivery driver collided with another vehicle, where the driver of the other vehicle sustained head injuries and the passenger of the other vehicle sustained fatal injuries. The jury delivered a $32.0 million judgment for the plaintiff where the Company was found to be 60% liable. The Company denied liability and filed an appeal of the verdict on a variety of grounds. In the first quarter of 2015, the appellate court reversed the trial court’s decision and dismissed the claims against the Company. The plaintiff filed a Petition for Review with the Supreme Court of the State of Texas. The Company filed opposition to the writ of review and asserted that the claims were appropriately dismissed by the Court of Appeals of the State of Texas. In the second quarter of 2016, the Texas Supreme Court rejected the plaintiffs’ writ of certiorari, leaving the appellate court’s favorable decision to stand.

On February 14, 2011, Domino’s Pizza LLC was named as a defendant in a lawsuit along with Fischler Enterprises of C.F., Inc., a franchisee, and Jeffrey S. Kidd, the franchisee’s delivery driver, filed by Yvonne Wiederhold, the plaintiff, as Personal Representative of the Estate of Richard E. Wiederhold, deceased. The case involved a traffic accident in which the franchisee’s delivery driver is alleged to have caused an accident involving a vehicle driven by Richard Wiederhold. Mr. Wiederhold sustained spinal injuries resulting in quadriplegia and passed away several months after the accident. The jury returned a $10.1 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 90% liable (after certain offsets and other deductions the final verdict was $8.9 million). In the second quarter of 2016, the trial court ruled on all post-judgment motions and entered the judgment. The Company denies liability and is in the process of filing an appeal of the verdict on a variety of grounds.

While we may occasionally be party to large claims, including class action suits, we do not believe that any existing 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 January 3, 2016.

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

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

 

Period

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

Period #4 (March 28, 2016 to April 24, 2016)

     1,569       $ 131.86         —         $ 200,000,000   

Period #5 (April 25, 2016 to May 22, 2016)

     1,111,558         120.71         1,109,181         66,106,412   

Period #6 (May 23, 2016 to June 19, 2016) (2)

     737,507         122.62         735,945         225,247,185   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,850,634       $ 121.48         1,845,126       $ 225,247,185   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes 5,508 shares purchased in the second quarter of 2016 which were 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 $124.01.
(2) The Board of Directors reset the open market share repurchase program so that the Company had $250.0 million remaining for future share repurchases at May 25, 2016. Authorization for the repurchase program may be modified, suspended, or discontinued at any time. The repurchase of shares in any particular period and the actual amount of such purchases remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.

 

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Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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 Jeffrey D. Lawrence 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 Jeffrey D. Lawrence 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.

 

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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 21, 2016    

/s/ Jeffrey D. Lawrence

   

Jeffrey D. Lawrence

Chief Financial Officer

 

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