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DOMINOS PIZZA INC - Quarter Report: 2019 September (Form 10-Q)

10-Q
Table of Contents
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 8, 2019
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)
 
 
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
 
Trading
Symbol
 
Name of Each Exchange
on Which Registered
Domino’s Pizza, Inc. Common Stock, $0.01 par value
 
DPZ
 
New York Stock Exchange
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  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated filer
 
 
Smaller reporting company
 
             
 
 
 
 
Emerging growth company
 
☐​​​​​​​
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  
    No  
As of October 1, 2019, Domino’s Pizza, Inc. had 40,900,458 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.
     
 
             
Item 1.
     
3
 
             
     
3
 
             
     
4
 
             
     
5
 
             
     
6
 
             
     
7
 
             
Item 2.
     
16
 
             
Item 3.
     
24
 
             
Item 4.
     
24
 
             
PART II.
     
 
             
Item 1.
     
25
 
             
Item 1A.
     
25
 
             
Item 2.
     
25
 
             
Item 3.
     
25
 
             
Item 4.
     
25
 
             
Item 5.
     
25
 
             
Item 6.
     
26
 
         
   
27
 
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)
 
September 8, 2019
   
December 30, 2018 (1)
 
Assets
   
     
 
Current assets:
   
     
 
Cash and cash equivalents
  $
66,706
    $
25,438
 
Restricted cash and cash equivalents
   
177,292
     
166,993
 
Accounts receivable, net
   
185,403
     
190,091
 
Inventories
   
51,010
     
45,975
 
Prepaid expenses and other
   
15,438
     
25,710
 
Advertising fund assets, restricted
   
109,490
     
112,744
 
                 
Total current assets
   
605,339
     
566,951
 
                 
Property, plant and equipment:
   
     
 
Land and buildings
   
41,408
     
41,147
 
Leasehold and other improvements
   
160,850
     
170,498
 
Equipment
   
241,972
     
243,654
 
Construction in progress
   
26,649
     
31,822
 
                 
   
470,879
     
487,121
 
Accumulated depreciation and amortization
   
(254,669
)    
(252,182
)
                 
Property, plant and equipment, net
   
216,210
     
234,939
 
                 
Other assets:
   
     
 
Operating lease
right-of-use
assets
   
227,495
     
—  
 
Goodwill
   
13,542
     
14,919
 
Capitalized software, net
   
71,055
     
63,809
 
Other assets
   
22,743
     
21,241
 
Deferred income taxes
   
3,888
     
5,526
 
                 
Total other assets
   
338,723
     
105,495
 
                 
Total assets
  $
1,160,272
    $
907,385
 
                 
Liabilities and stockholders’ deficit
   
     
 
Current liabilities:
   
     
 
Current portion of long-term debt
  $
35,935
    $
35,893
 
Accounts payable
   
95,657
     
92,546
 
Operating lease liabilities
   
32,203
     
—  
 
Insurance reserves
   
22,337
     
22,210
 
Dividends payable
   
27,006
     
581
 
Advertising fund liabilities
   
104,945
     
107,150
 
Other accrued liabilities
   
103,162
     
121,363
 
                 
Total current liabilities
   
421,245
     
379,743
 
                 
Long-term liabilities:
   
     
 
Long-term debt, less current portion
   
3,407,101
     
3,495,691
 
Operating lease liabilities
   
202,128
     
—  
 
Insurance reserves
   
32,858
     
31,065
 
Other accrued liabilities
   
32,589
     
40,807
 
                 
Total long-term liabilities
   
3,674,676
     
3,567,563
 
                 
Stockholders’ deficit:
   
     
 
Common stock
   
409
     
410
 
Additional
paid-in
capital
   
75
     
569
 
Retained deficit
   
(2,932,195
)    
(3,036,471
)
Accumulated other comprehensive loss
   
(3,938
)    
(4,429
)
                 
Total stockholders’ deficit
   
(2,935,649
)    
(3,039,921
)
                 
Total liabilities and stockholders’ deficit
  $
1,160,272
    $
907,385
 
                 
 
 
 
 
(1) The balance sheet at December 30, 2018 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
   
Three Fiscal Quarters Ended
 
 
September 8,
   
September 9,
   
September 8,
   
September 9,
 
(In thousands, except per share data)
 
2019
   
2018
   
2019
   
2018
 
Revenues:
   
     
     
     
 
U.S. Company-owned stores
  $
94,575
    $
118,540
    $
323,026
    $
358,521
 
U.S. franchise royalties and fees
   
97,047
     
89,427
     
289,349
     
266,335
 
Supply chain
   
485,110
     
445,096
     
1,424,787
     
1,326,076
 
International franchise royalties and fees
   
54,586
     
50,424
     
164,145
     
154,182
 
U.S. franchise advertising
   
89,494
     
82,478
     
267,115
     
245,618
 
                                 
Total revenues
   
820,812
     
785,965
     
2,468,422
     
2,350,732
 
                                 
Cost of sales:
   
     
     
     
 
U.S. Company-owned stores
   
71,610
     
92,998
     
247,516
     
278,012
 
Supply chain
   
432,951
     
397,688
     
1,265,695
     
1,183,996
 
                                 
Total cost of sales
   
504,561
     
490,686
     
1,513,211
     
1,462,008
 
                                 
Operating margin
   
316,251
     
295,279
     
955,211
     
888,724
 
                                 
General and administrative
   
83,728
     
80,369
     
262,640
     
251,053
 
U.S. franchise advertising
   
89,494
     
82,478
     
267,115
     
245,618
 
                                 
Income from operations
   
143,029
     
132,432
     
425,456
     
392,053
 
Interest income
   
968
     
792
     
2,583
     
2,451
 
Interest expense
   
(33,752
)    
(33,976
)    
(102,672
)    
(100,389
)
                                 
Income before provision for income taxes
   
110,245
     
99,248
     
325,367
     
294,115
 
Provision for income taxes
   
23,872
     
15,153
     
53,985
     
43,785
 
                                 
Net income
  $
86,373
    $
84,095
    $
271,382
    $
250,330
 
                                 
Earnings per share:
   
     
     
     
 
Common stock - basic
  $
2.11
    $
2.02
    $
6.63
    $
5.94
 
Common stock - diluted
   
2.05
     
1.95
     
6.44
     
5.73
 
See accompanying notes.
 
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Table of Contents
 
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
                                 
 
Fiscal Quarter Ended
   
Three Fiscal Quarters Ended
 
 
September 8,
   
September 9,
   
September 8,
   
September 9,
 
(In thousands)
 
2019
   
2018
   
2019
   
2018
 
Net income
  $
86,373
    $
84,095
    $
271,382
    $
250,330
 
Currency translation adjustment
   
270
     
(84
)    
491
     
(1,142
)
                                 
Comprehensive income
  $
86,643
    $
84,011
    $
271,873
    $
249,188
 
                                 
See accompanying notes.
 
5
 

 
Table of Contents
 
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
 
Three Fiscal Quarters Ended
 
 
September 8,
   
September 9,
 
(In thousands)
 
2019
   
2018
 
Cash flows from operating activities:
   
     
 
Net income
  $
271,382
    $
250,330
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
 
Depreciation and amortization
   
40,982
     
35,770
 
Loss (gain) on sale/disposal of assets
   
3,141
     
(5,187
)
Amortization of debt issuance costs
   
3,288
     
6,581
 
Provision for deferred income taxes
   
1,627
     
1,737
 
Non-cash
compensation expense
   
13,269
     
15,660
 
Excess tax benefits from equity-based compensation
   
(19,670
)    
(22,722
)
Other
   
774
     
356
 
Changes in operating assets and liabilities
   
16,214
     
(25,580
)
Changes in advertising fund assets and liabilities, restricted
   
(6,411
)    
5,574
 
                 
Net cash provided by operating activities
   
324,596
     
262,519
 
                 
Cash flows from investing activities:
   
     
 
Capital expenditures
   
(42,676
)    
(65,074
)
Proceeds from sale of assets
   
9,738
     
8,213
 
Maturities of advertising fund investments, restricted
   
30,152
     
44,007
 
Purchases of advertising fund investments, restricted
   
—  
     
(50,152
)
Other
   
(351
)    
(2,357
)
                 
Net cash used in investing activities
   
(3,137
)    
(65,363
)
                 
Cash flows from financing activities:
   
     
 
Proceeds from issuance of long-term debt
   
—  
     
905,000
 
Repayments of long-term debt and finance lease obligations
   
(91,860
)    
(595,067
)
Proceeds from exercise of stock options
   
10,122
     
8,967
 
Purchases of common stock
   
(105,149
)    
(429,190
)
Tax payments for restricted stock upon vesting
   
(5,820
)    
(6,849
)
Payments of common stock dividends and equivalents
   
(53,598
)    
(46,720
)
Cash paid for financing costs
   
—  
     
(8,207
)
                 
Net cash used in financing activities
   
(246,305
)    
(172,066
)
                 
Effect of exchange rate changes on cash
   
139
     
(235
)
                 
Change in cash and cash equivalents, restricted cash and cash equivalents
   
75,293
     
24,855
 
                 
Cash and cash equivalents, beginning of period
   
25,438
     
35,768
 
Restricted cash and cash equivalents, beginning of period
   
166,993
     
191,762
 
Cash and cash equivalents included in advertising fund assets, restricted, beginning of period
   
44,988
     
27,316
 
                 
Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, beginning of period
   
237,419
     
254,846
 
                 
Cash and cash equivalents, end of period
   
66,706
     
84,600
 
Restricted cash and cash equivalents, end of period
   
177,292
     
168,170
 
Cash and cash equivalents included in advertising fund assets, restricted, end of period
   
68,714
     
26,931
 
                 
Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, end of period
  $
312,712
    $
279,701
 
                 
See accompanying notes.
 
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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)
September 8, 2019
1. Basis of Presentation and Updates to Significant Accounting Policies
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 30, 2018 included in the Company’s 2018 Annual Report on Form
10-K,
filed with the Securities and Exchange Commission on February 21, 2019 (the “2018 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 September 8, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2019.
Updates to Significant Accounting Policies
The Company adopted Accounting Standards Codification 842,
Leases
(“ASC 842”) in the first quarter of 2019. As a result, the Company updated its significant accounting policies for leases below. Refer to Note 7 for additional information related to the Company’s lease arrangements and Note 11 for the impact of the adoption of ASC 842 on the Company’s condensed consolidated financial statements.
Leases
The Company leases certain retail store and supply chain center locations, supply chain vehicles and its corporate headquarters. The Company determines whether an arrangement is or contains a lease at contract inception. The majority of the Company’s leases are classified as operating leases, which are included in operating lease
right-of-use
assets and operating lease liabilities in the Company’s condensed consolidated balance sheet. Finance leases are included in property, plant and equipment, current portion of long-term debt and long-term debt on the Company’s condensed consolidated balance sheet.
Right-of-use
assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement, as well as any variable rate payments that depend on an index, initially measured using the index at the lease commencement date. Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option.
The Company estimates its incremental borrowing rate for each lease using a portfolio approach based on the respective weighted average term of the agreements. This estimation considers the market rates of the Company’s outstanding collateralized borrowings and interpolations of rates outside of the terms of the outstanding borrowings, including comparisons to comparable borrowings of similarly-rated companies with longer term borrowings.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales or general and administrative expense. Amortization expense for finance leases is recognized on a straight-line basis over the lease term and is included in cost of sales, while interest expense for finance leases is recognized using the effective interest method. Variable lease payments that do not depend on a rate or index, payments associated with
non-lease
components and short-term rentals (leases with terms less than 12 months) are expensed as incurred.
 
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Table of Contents
 
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 the Company refers to as Segment Income, for each of its reportable segments.
                                                 
 
Fiscal Quarters Ended September 8, 2019 and September 9, 2018
 
 
U.S.
   
Supply
   
International
   
Intersegment
   
   
 
 
Stores
   
Chain
   
Franchise
   
Revenues
   
Other
   
Total
 
Revenues
   
     
     
     
     
     
 
2019
  $
281,116
    $
511,709
    $
54,586
    $
(26,599
)   $
—  
    $
820,812
 
2018
   
290,445
     
478,517
     
50,424
     
(33,421
)    
—  
     
785,965
 
Income from operations
   
     
     
     
     
     
 
2019
  $
80,188
    $
40,513
    $
42,281
     
N/A
    $
(19,953
)   $
143,029
 
2018
   
78,636
     
35,452
     
39,374
     
N/A
     
(21,030
)    
132,432
 
Segment Income
   
     
     
     
     
     
 
2019
  $
82,556
    $
44,432
    $
42,337
     
N/A
    $
(8,172
)   $
161,153
 
2018
   
75,721
     
38,561
     
39,416
     
N/A
     
(10,295
)    
143,403
 
       
 
Three Fiscal Quarters Ended September 8, 2019 and September 9, 2018
 
 
U.S.
   
Supply
   
International
   
Intersegment
   
   
 
 
Stores
   
Chain
   
Franchise
   
Revenues
   
Other
   
Total
 
Revenues
   
     
     
     
     
     
 
2019
  $
879,490
    $
1,513,380
    $
164,145
    $
(88,593
)   $
—  
    $
2,468,422
 
2018
   
870,474
     
1,426,943
     
154,182
     
(100,867
)    
—  
     
2,350,732
 
Income from operations
   
     
     
     
     
     
 
2019
  $
237,852
    $
123,840
    $
126,467
     
N/A
    $
(62,703
)   $
425,456
 
2018
   
227,117
     
109,319
     
120,002
     
N/A
     
(64,385
)    
392,053
 
Segment Income
   
     
     
     
     
     
 
2019
  $
248,160
    $
135,861
    $
126,628
     
N/A
    $
(27,801
)   $
482,848
 
2018
   
230,152
     
118,171
     
120,138
     
N/A
     
(29,633
)    
438,828
 
 
The following table reconciles Total Segment Income to consolidated income before provision for income taxes.
                                 
 
Fiscal Quarter Ended
   
Three Fiscal Quarters Ended
 
 
September 8,
   
September 9,
   
September 8,
   
September 9,
 
 
2019
   
2018
   
2019
   
2018
 
Total Segment Income
  $
161,153
    $
143,403
    $
482,848
    $
438,828
 
Depreciation and amortization
   
(13,132
)    
(12,460
)    
(40,982
)    
(35,770
)
(Loss) gain on sale/disposal of assets
   
(312
)    
5,706
     
(3,141
)    
5,187
 
Non-cash
compensation expense
   
(4,680
)    
(4,217
)    
(13,269
)    
(15,660
)
Recapitalization-related expenses
   
—  
     
—  
     
—  
     
(532
)
                                 
Income from operations
   
143,029
     
132,432
     
425,456
     
392,053
 
Interest income
   
968
     
792
     
2,583
     
2,451
 
Interest expense
   
(33,752
)    
(33,976
)    
(102,672
)    
(100,389
)
                                 
Income before provision for income taxes
  $
110,245
    $
99,248
    $
325,367
    $
294,115
 
                                 
 
 
 
 
3. Earnings Per Share
                                 
 
Fiscal Quarter Ended
   
Three Fiscal Quarters Ended
 
 
September 8,
   
September 9,
   
September 8,
   
September 9,
 
 
2019
   
2018
   
2019
   
2018
 
Net income available to common stockholders - basic and diluted
  $
86,373
    $
84,095
    $
271,382
    $
250,330
 
                                 
Basic weighted average number of shares
   
40,954,279
     
41,585,933
     
40,947,693
     
42,150,693
 
Earnings per share – basic
  $
2.11
    $
2.02
    $
6.63
    $
5.94
 
Diluted weighted average number of shares
   
42,040,291
     
43,067,191
     
42,158,447
     
43,675,627
 
Earnings per share – diluted
  $
2.05
    $
1.95
    $
6.44
    $
5.73
 
 
 
 
 
 
 
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The denominators used in calculating diluted earnings per share for the third quarter and three fiscal quarters of 2019 do not include 161,670 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 third quarter and three fiscal quarters of 2019 each do not include 142,477 restricted performance shares, as the performance targets for these awards had not yet been met.
The denominators used in calculating diluted earnings per share for the third quarter and three fiscal quarters of 2018 do not include 76,130 and 137,156 options to purchase common stock, respectively, as the effect of including these options would have been anti-dilutive. The denominator used in calculating diluted earnings per share for the three fiscal quarters of 2018 does not include 28,570 shares subject to restricted stock awards, as the effect of including these shares would have been anti-dilutive. The denominators used in calculating diluted earnings per share for the third quarter and three fiscal quarters of 2018 each do not include 160,998 restricted performance shares, as the performance targets for these awards had not yet been met.
4. Changes in Stockholders’ Deficit
The following table summarizes changes in stockholders’ deficit for the third quarter of 2019.
 
   
   
   
   
Accumulated
 
 
   
   
Additional
   
   
Other
 
 
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
 
 
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
 
Balance at June 16, 2019
   
41,232,358
    $
412
    $
10,788
    $
(2,911,278
)   $
(4,208
)
Net income
   
—  
     
—  
     
—  
     
86,373
     
—  
 
Dividends declared on common stock and equivalents ($0.65 per share)
   
—  
     
—  
     
—  
     
(26,569
)    
—  
 
Issuance and cancellation of stock awards, net
   
45,479
     
—  
     
—  
     
—  
     
—  
 
Tax payments for restricted stock upon vesting
   
(12,603
)    
—  
     
(3,253
)    
—  
     
—  
 
Purchases of common stock
   
(384,338
)    
(3
)    
(12,972
)    
(80,721
)    
—  
 
Exercise of stock options
   
18,100
     
—  
     
832
     
—  
     
—  
 
Non-cash
compensation expense
   
—  
     
—  
     
4,680
     
—  
     
—  
 
Currency translation adjustment
   
—  
     
—  
     
—  
     
—  
     
270
 
                                         
Balance at September 8, 2019
   
40,898,996
    $
409
    $
75
    $
(2,932,195
)   $
(3,938
)
                                         
The following table summarizes changes in stockholders’ deficit for the three fiscal quarters of 2019.
 
   
   
   
   
Accumulated
 
 
   
   
Additional
   
   
Other
 
 
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
 
 
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
 
Balance at December 30, 2018
   
40,977,561
    $
410
    $
569
    $
(3,036,471
)   $
(4,429
)
Net income
   
—  
     
—  
     
—  
     
271,382
     
—  
 
Dividends declared on common stock and equivalents ($1.95 per share)
   
—  
     
—  
     
—  
     
(80,023
)    
—  
 
Issuance and cancellation of stock awards, net
   
50,640
     
     
—  
     
—  
     
—  
 
Tax payments for restricted stock upon vesting
   
(22,044
)    
—  
     
(5,820
)    
—  
     
—  
 
Purchases of common stock
   
(430,182
)    
(4
)    
(18,062
)    
(87,083
)    
—  
 
Exercise of stock options
   
323,021
     
3
     
10,119
     
—  
     
—  
 
Non-cash
compensation expense
   
—  
     
—  
     
13,269
     
—  
     
—  
 
Currency translation adjustment
   
—  
     
—  
     
—  
     
—  
     
491
 
                                         
Balance at September 8, 2019
   
40,898,996
    $
409
    $
75
    $
(2,932,195
)   $
(3,938
)
                                         
Subsequent to the third quarter, on
October 4, 2019
, the Company’s Board of Directors declared a $0.65 per share quarterly dividend on its outstanding common stock for shareholders of record as of
December 13, 2019
to be paid on
December 27, 2019
. On October 4, 2019, the Company’s Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of the Company’s common stock 
with no expiration date
. This repurchase program replaces the remaining availability of approximately $53.6 million under the Company’s
existing
$750.0 million share repurchase program
. Authorization for the repurchase program may be modified, suspended, or discontinued at any time.
 
 
 
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The following table summarizes changes in stockholders’ deficit for the third quarter of 2018.
 
   
   
   
   
Accumulated
 
 
   
   
Additional
   
   
Other
 
 
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
 
 
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
 
Balance at June 17, 2018
   
41,837,693
    $
418
    $
737
    $
(2,926,921
)   $
(3,439
)
Net income
   
—  
     
—  
     
—  
     
84,095
     
—  
 
Dividends declared on common stock and equivalents ($0.55 per share)
   
—  
     
—  
     
—  
     
(22,889
)    
—  
 
Issuance and cancellation of stock awards, net
   
72,990
     
1
     
—  
     
—  
     
—  
 
Tax payments for restricted stock upon vesting
   
(16,580
)    
—  
     
(4,531
)    
—  
     
—  
 
Purchases of common stock
   
(397,490
)    
(4
)    
(2,269
)    
(106,850
)    
—  
 
Exercise of stock options
   
99,549
     
1
     
3,760
     
—  
     
—  
 
Non-cash
compensation expense
   
—  
     
—  
     
4,217
     
—  
     
—  
 
Currency translation adjustment
   
—  
     
—  
     
—  
     
—  
     
(84
)
                                         
Balance at September 9, 2018
   
41,596,162
    $
416
    $
1,914
    $
(2,972,565
)   $
(3,523
)
                                         
The following table summarizes changes in stockholders’ deficit for the three fiscal quarters of 2018.
 
   
   
   
   
Accumulated
 
 
   
   
Additional
   
   
Other
 
 
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
 
 
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
 
Balance at December 31, 2017
   
42,898,329
    $
429
    $
5,654
    $
(2,739,437
)   $
(2,030
)
Net income
   
—  
     
—  
     
—  
     
250,330
     
—  
 
Dividends declared on common stock and equivalents ($1.65 per share)
   
—  
     
—  
     
—  
     
(69,450
)    
—  
 
Issuance and cancellation of stock awards, net
   
80,932
     
1
     
—  
     
—  
     
—  
 
Tax payments for restricted stock upon vesting
   
(26,893
)    
—  
     
(6,849
)    
—  
     
—  
 
Purchases of common stock
   
(1,751,054
)    
(18
)    
(21,514
)    
(407,658
)    
—  
 
Exercise of stock options
   
394,848
     
4
     
8,963
     
—  
     
—  
 
Non-cash
compensation expense
   
—  
     
—  
     
15,660
     
—  
     
—  
 
Adoption of revenue recognition accounting standard
   
—  
     
—  
     
—  
     
(6,701
)    
—  
 
Currency translation adjustment
   
—  
     
—  
     
—  
     
—  
     
(1,142
)
Reclassification adjustment for stranded taxes
   
—  
     
—  
     
—  
     
351
     
(351
)
                                         
Balance at September 9, 2018
   
41,596,162
    $
416
    $
1,914
    $
(2,972,565
)   $
(3,523
)
                                         
5. 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 September 8, 2019 and December 30, 2018:
 
At September 8, 2019
 
 
   
Fair Value Estimated Using
 
 
Carrying
   
Level 1
   
Level 2
   
Level 3
 
 
Amount
   
Inputs
   
Inputs
   
Inputs
 
Cash equivalents
  $
58,993
    $
58,993
    $
—  
    $
—  
 
Restricted cash equivalents
   
104,424
     
104,424
     
—  
     
—  
 
Investments in marketable securities
   
10,851
     
10,851
     
—  
     
—  
 
Advertising fund cash equivalents, restricted
   
57,682
     
57,682
     
—  
     
—  
 
Advertising fund investments, restricted
   
20,000
     
20,000
     
—  
     
—  
 
 
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Table of Contents
 
 
At December 30, 2018
 
 
   
Fair Value Estimated Using
 
 
Carrying
   
Level 1
   
Level 2
   
Level 3
 
 
Amount
   
Inputs
   
Inputs
   
Inputs
 
Cash equivalents
  $
11,877
    $
11,877
    $
—  
    $
—  
 
Restricted cash equivalents
   
112,272
     
112,272
     
—  
     
—  
 
Investments in marketable securities
   
8,718
     
8,718
     
—  
     
—  
 
Advertising fund cash equivalents, restricted
   
31,547
     
31,547
     
—  
     
—  
 
Advertising fund investments, restricted
   
50,152
     
50,152
     
—  
     
—  
 
Management estimated the approximate fair values of the 2015 fixed rate notes, the 2017 fixed and floating rate notes and the 2018 fixed rate notes as follows:
 
September 8, 2019
   
December 30, 2018
 
 
Principal Amount
   
Fair Value
   
Principal Amount
   
Fair Value
 
2015
Ten-Year
Fixed Rate Notes
  $
774,000
    $
817,344
    $
780,000
    $
783,120
 
2017 Five-Year Fixed Rate Notes
   
588,000
     
590,352
     
592,500
     
575,910
 
2017
Ten-Year
Fixed Rate Notes
   
980,000
     
1,038,800
     
987,500
     
956,888
 
2017 Five-Year Floating Rate Notes
   
294,000
     
293,706
     
296,250
     
295,065
 
2018
7.5-Year
Fixed Rate Notes
   
419,688
     
438,573
     
422,875
     
416,955
 
2018
9.25-Year
Fixed Rate Notes
   
395,000
     
421,465
     
398,000
     
396,010
 
At September 8, 2019, the Company did not have any outstanding borrowings under its variable funding notes. The Company had $65.0 million outstanding under its variable funding notes at December 30, 2018. Borrowings under the variable funding notes are a variable rate loan. The fair value of this loan approximated book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. This fair value represents a Level 2 measurement.
The fixed and floating rate notes are classified as Level 2 measurements, 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 and floating 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.
6. Revenue Disclosures
Contract Liabilities
Contract liabilities consist of deferred franchise fees and deferred development fees. Changes in contract liabilities were as follows:
 
Three Fiscal Quarters Ended
 
 
September 8,
   
September 9,
 
 
2019
   
2018
 
Contract liabilities at beginning of period
  $
19,900
    $
19,404
 
Revenue recognized during the period
   
(3,923
)    
(3,540
)
New deferrals due to cash received and other
   
4,613
     
3,917
 
                 
Contract liabilities at end of period
  $
20,590
    $
19,781
 
                 
Advertising Fund Assets
As of September 8, 2019, advertising fund assets, restricted of $109.5 million consisted of $88.7 million of cash, cash equivalents and investments, $18.3 million of accounts receivable and $2.5 million of prepaid expenses. As of September 8, 2019, advertising fund cash, cash equivalents and investments included $4.6 million of cash contributed from Company-owned stores that had not yet been expended.
As of December 30, 2018, advertising fund assets, restricted of $112.7 million consisted of $95.1 million of cash, cash equivalents and investments, $15.3 million of accounts receivable and $2.3 million of prepaid expenses. As of December 30, 2018, advertising fund cash, cash equivalents and investments included $5.5 million of cash contributed from Company-owned stores that had not yet been expended.
 
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7. Lease Disclosures
The Company leases certain retail store and supply chain center locations, supply chain vehicles and its corporate headquarters with expiration dates through 2037.
The components of operating and finance lease cost for the third quarter and three fiscal quarters of 2019 were as follows:
 
Fiscal
Quarter
Ended
   
Three Fiscal
Quarters
Ended
 
 
September 8,
   
September 8,
 
 
2019
   
2019
 
Operating lease cost
  $
9,150
    $
29,464
 
Finance lease cost:
   
     
 
Amortization of
right-of-use
assets
   
254
     
763
 
Interest on lease liabilities
   
473
     
1,269
 
                 
Total finance lease cost
  $
727
    $
2,032
 
                 
Rent expense totaled $16.1 million and $48.4 million in the third quarter and three fiscal quarters of 2019, respectively, and totaled $15.7 million and $46.3 million in the third quarter and three fiscal quarters of 2018, respectively. Rent expense includes operating lease cost, as well as expense for
non-lease
components including common area maintenance, real estate taxes and insurance for the Company’s real estate leases. Rent expense also includes the variable rate per mile driven and fixed maintenance charges for the Company’s supply chain center tractors and trailers and expense for short-term rentals. Variable rent expense and rental expense for short-term leases was immaterial for both the third quarter and three fiscal quarters of 2019.
Supplemental balance sheet information related to the Company’s leases as of September 8, 2019 and December 30, 2018 was as follows:
 
September 8,
   
December 30,
 
 
2019
   
2018
 
Land and buildings
  $
22,195
    $
22,171
 
Accumulated depreciation and amortization
   
(7,441
)    
(6,678
)
                 
Finance lease assets, net
  $
14,754
    $
15,493
 
                 
Current portion of long-term debt
  $
685
    $
643
 
Long-term debt, less current portion
   
15,922
     
16,363
 
                 
Total principal payable on finance leases
  $
16,607
    $
17,006
 
                 
As of September 8, 2019, the weighted average remaining lease term and weighted average discount rate for the Company’s operating and finance leases were as follows:
 
Operating
   
Finance
 
 
Leases
   
Leases
 
Weighted average remaining lease term
   
8 years
     
14 years
 
Weighted average discount rate
   
3.8
%    
11.4
%
Supplemental cash flow information related to leases for the third quarter and three fiscal quarters of 2019 was as follows:
 
Fiscal Quarter
Ended
   
Three Fiscal Quarters
Ended
 
 
September 8,
   
September 8,
 
 
2019
   
2019
 
Cash paid for amounts included in the measurement of lease liabilities:
   
     
 
Operating cash flows from operating leases
  $
9,968
    $
30,056
 
Operating cash flows from finance leases
   
473
     
1,269
 
Financing cash flows from finance leases
   
161
     
422
 
Right-of-use
assets obtained in exchange for new lease obligations:
   
     
 
Operating leases
   
23,434
     
49,802
 
Finance leases
   
—  
     
—  
 
During the first quarter of 2018, the Company renewed the lease of a supply chain center building and extended the term of the lease through 2033. During the third quarter of 2018, the Company renewed the leases of two supply chain center buildings and extended the terms of the leases through
2036
 and
2037
, respectively. As a result of these extended leases, the Company recorded
non-cash
financing activities of $11.4 million for the increase in finance lease assets and liabilities during the three fiscal quarters of 2018.
 
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Maturities of lease liabilities as of September 8, 2019 were as follows:
 
Operating
   
Finance
 
 
Leases
   
Leases
 
2019
  $
12,212
    $
791
 
2020
   
40,157
     
2,417
 
2021
   
37,979
     
2,435
 
2022
   
34,819
     
2,453
 
2023
   
32,245
     
2,477
 
Thereafter
   
116,664
     
23,810
 
                 
Total future minimum rental commitments
   
274,076
     
34,383
 
Less – amounts representing interest
   
(39,745
)    
(17,776
)
                 
Total lease liabilities
  $
234,331
    $
16,607
 
                 
Maturities of lease liabilities as of December 30, 2018 were as follows:
 
Operating
   
Finance
 
 
Leases
   
Leases
 
2019
  $
40,752
    $
2,396
 
2020
   
37,519
     
2,415
 
2021
   
34,538
     
2,433
 
2022
   
30,763
     
2,451
 
2023
   
27,388
     
2,474
 
Thereafter
   
100,310
     
23,781
 
                 
Total future minimum rental commitments
  $
271,270
     
35,950
 
                 
Less – amounts representing interest
   
     
(18,944
)
                 
Total principal payable on finance leases
   
    $
17,006
 
                 
As of September 8, 2019, the Company has additional leases for two supply chain centers and certain supply chain tractors and trailers that had not yet commenced with estimated future minimum rental commitments of approximately $50.6 million. These leases are expected to commence in 2019 with lease terms of up to 15 years. These undiscounted amounts are not included in the tables above.
The Company has guaranteed lease payments related to certain franchisees’ lease arrangements. The maximum amount of potential future payments under these guarantees is $17.9 million and $2.4 million as of September 8, 2019 and December 30, 2018, respectively. The Company does not believe these arrangements have or are likely to have a material effect on its results of operations, financial condition, revenues or expenses, capital expenditures or liquidity.
8. 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 case went to trial in 2016 and the Company was found liable, but the verdict was reversed by the Florida Fifth District Court of Appeals in May 2018 and was remanded to the Ninth Judicial Circuit Court of Florida for a new trial. The case was tried again in June 2019 and the jury returned a $9.0 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 100% liable (after certain offsets and other deductions the final verdict was $8.0 million). The Company continues to deny liability and has filed
an appeal
.
9. Supplemental Disclosures of Cash Flow Information
The Company had
non-cash
investing activities related to accruals for capital expenditures of $4.7 million at September 8, 2019 and $3.8 million at December 30, 2018.
 
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10. Sale of Company-owned Stores
During the second quarter of 2019, the Company sold 59 U.S. Company-owned stores to certain of its existing U.S. franchisees for proceeds of $9.7 million, of which $8.1 million was received in cash during the second quarter. The remaining $1.6 million was collected during the third quarter. In connection with the sale of the stores, the Company recorded a $2.4 million
pre-tax
loss on the sale of the related assets and liabilities, which included a $1.4 million reduction in goodwill. The loss was recorded in general and administrative expense in the Company’s condensed consolidated statements of income.
11. New Accounting Pronouncements
Recently Adopted Accounting Standard
Accounting Standards Update
2016-02,
Leases (Topic 842)
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU
2016-02,
Leases (Topic 842)
which requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. On December 31, 2018, the Company adopted ASC 842 using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The adoption of ASC 842 had a material impact on the Company’s assets and liabilities due to the recognition of operating lease
right-of-use
assets and lease liabilities on its condensed consolidated balance sheet. The Company elected the optional practical expedient to retain its current classification of leases, and accordingly, the adoption of ASC 842 did not have a material effect on the Company’s condensed consolidated statement of income and condensed consolidated statement of cash flows. Refer to Note 7 for additional disclosure related to the Company’s lease arrangements.
The effects of the changes made to the Company’s condensed consolidated balance sheet as of December 31, 2018 for the adoption of ASC 842 were as follows:
 
Balance at
December 30,
2018
   
Adjustments
Due to ASC
842
   
Balance at
December 31,
2018
 
Assets
   
     
     
 
Current assets:
   
     
     
 
Prepaid expenses and other
  $
25,710
    $
(35
)   $
25,675
 
Property, plant and equipment:
   
     
     
 
Construction in progress
   
31,822
     
(1,904
)    
29,918
 
Other assets:
   
     
     
 
Operating lease
right-of-use
assets
   
—  
     
218,860
     
218,860
 
Liabilities and stockholders’ deficit
   
     
     
 
Current liabilities:
   
     
     
 
Operating lease liabilities
   
—  
     
32,033
     
32,033
 
Other accrued liabilities
   
55,001
     
(136
)    
54,865
 
Long-term liabilities:
   
     
     
 
Operating lease liabilities
   
—  
     
194,736
     
194,736
 
Other accrued liabilities
   
40,807
     
(9,712
)    
31,095
 
On December 31, 2018, the Company recorded an adjustment of $226.8 million for operating lease
right-of-use
assets and liabilities. The operating lease
right-of-use
assets recorded on the date of adoption were also net of a $7.9 million reclassification of other accrued liabilities and prepaid expenses representing previously deferred (prepaid) rent and lease incentives. The Company also derecognized $1.9 million of construction in progress and other long-term accrued liabilities associated with a new building that was leased to the Company in the third quarter of  2019. This lease was previously accounted for as a
build-to-suit
arrangement under prior lease accounting guidance. 
 
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ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40)
In August 2018, the FASB issued ASU 2018-15,
 Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
(“ASU 2018-15”), which aligns the accounting for implementation costs of a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. ASU 2018-15 also requires companies to amortize these implementation costs over the life of the service contract in the same line in the statement of income as the fees associated with the hosting service. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this accounting standard prospectively in the third quarter of 2019, and the adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
Accounting Standards Not Yet Adopted
The Company has considered all new accounting standards issued by the FASB. The Company has not yet completed its assessment of the following standards.
ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326)
In June 2016, the FASB issued ASU
 2016-13,
 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU
2016-13”).
ASU
 2016-13
 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU
 2016-13
 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
 
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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 2019 and 2018 third quarters referenced herein represent the twelve-week periods ended September 8, 2019 and September 9, 2018, respectively. The 2019 and 2018 three fiscal quarters referenced herein represent the
thirty-six-week
periods ended September 8, 2019 and September 9, 2018, respectively.
Overview
Domino’s is the largest pizza company in the world based on global retail sales, with more than 16,500 locations in over 85 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 and fees 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 in the U.S. 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 can profit by
sub-franchising
and selling ingredients and equipment to those
sub-franchisees,
as well as by running pizza stores directly. 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 we 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.
                                                                 
 
Third Quarter
   
Third Quarter
   
Three Fiscal
   
Three Fiscal
 
 
of 2019
   
of 2018
   
Quarters of 2019
   
Quarters of 2018
 
Global retail sales growth
   
+5.8
%    
     
+8.3
%    
     
+5.2
%    
     
+12.5
%    
 
Same store sales growth:
   
     
     
     
     
     
     
     
 
U.S. Company-owned stores (1)
   
+1.7
%    
     
+4.9
%    
     
+2.3
%    
     
+5.4
%    
 
U.S. franchise stores (1)
   
+2.5
%    
     
+6.4
%    
     
+3.2
%    
     
+7.3
%    
 
                                                                 
U.S. stores
   
+2.4
%    
     
+6.3
%    
     
+3.1
%    
     
+7.1
%    
 
International stores (excluding foreign currency impact)
   
+1.7
%    
     
+3.3
%    
     
+2.0
%    
     
+4.0
%    
 
Store counts (at end of period):
   
     
     
     
     
     
     
     
 
U.S. Company-owned stores (1)
   
333
     
     
386
     
     
     
     
     
 
U.S. franchise stores (1)
   
5,652
     
     
5,365
     
     
     
     
     
 
                                                                 
U.S. stores
   
5,985
     
     
5,751
     
     
     
     
     
 
International stores
   
10,543
     
     
9,603
     
     
     
     
     
 
                                                                 
Total stores
   
16,528
     
     
15,354
     
     
     
     
     
 
                                                                 
Income statement data:
   
     
     
     
     
     
     
     
 
Total revenues
  $
820.8
     
100.0
%   $
786.0
     
100.0
%   $
2,468.4
     
100.0
%   $
2,350.7
     
100.0
%
Cost of sales
   
504.6
     
61.5
%    
490.7
     
62.4
%    
1,513.2
     
61.3
%    
1,462.0
     
62.2
%
General and administrative
   
83.7
     
10.2
%    
80.4
     
10.2
%    
262.6
     
10.7
%    
251.1
     
10.7
%
U.S. franchise advertising
   
89.5
     
10.9
%    
82.5
     
10.6
%    
267.1
     
10.8
%    
245.6
     
10.4
%
                                                                 
Income from operations
   
143.0
     
17.4
%    
132.4
     
16.8
%    
425.5
     
17.2
%    
392.1
     
16.7
%
Interest expense, net
   
(32.8
)    
(4.0
)%    
(33.2
)    
(4.2
)%    
(100.1
)    
(4.0
)%    
(97.9
)    
(4.2
)%
                                                                 
Income before provision for income taxes
   
110.2
     
13.4
%    
99.2
     
12.6
%    
325.4
     
13.2
%    
294.1
     
12.5
%
Provision for income taxes
   
23.9
     
2.9
%    
15.2
     
1.9
%    
54.0
     
2.2
%    
43.8
     
1.9
%
                                                                 
Net income
  $
86.4
     
10.5
%   $
84.1
     
10.7
%   $
271.4
     
11.0
%   $
250.3
     
10.6
%
                                                                 
 
 
(1) During the second quarter of 2019, the Company sold 59 U.S. Company-owned stores to certain of its existing U.S. franchisees. The same store sales growth for these stores is reflected in U.S. franchise stores in the third quarter and three fiscal quarters of 2019.
 
 
 

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During the third quarter and three fiscal quarters of 2019, we experienced global retail sales growth and positive U.S. and international same store sales growth. Our U.S. carryout business experienced continued strong growth. While our overall U.S. delivery business continues to grow, our U.S. delivery same store sales growth has been pressured by our current strategy to increase store concentration in certain markets where we compete as well as from aggressive competitive activity.
 
We also continued our global expansion with the opening of 214 net new stores in the third quarter of 2019, bringing our
year-to-date
total to 614. We opened 174 net new stores internationally and 40 net new stores in the U.S. during the third quarter of 2019. 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 worldwide retail sales at franchise and Company-owned stores, increased 5.8% in the third quarter of 2019 and increased 5.2% in the three fiscal quarters of 2019. These increases were driven by an increase in worldwide store counts during the trailing four quarters as well as U.S. and international same store sales growth. The negative impact of changes in foreign currency exchange rates partially offset this increase, resulting from a generally stronger U.S. dollar when compared to the currencies in the international markets in which we compete. U.S. 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 positive performance.
Total revenues increased $34.8 million, or 4.4%, in the third quarter of 2019 and increased $117.7 million, or 5.0%, in the three fiscal quarters of 2019. These increases were due primarily to higher global retail sales, which resulted in higher supply chain and global franchise revenues. The increases in international franchise revenues were partially offset by the negative impact of changes in foreign currency exchange rates. These increases in revenues were also partially offset by lower U.S. Company-owned store revenues resulting from the sale of 59 Company-owned stores to certain of our existing U.S. franchisees during the second quarter of 2019 (the “Second Quarter Store Sale”). These changes in revenues are described in more detail below.
Income from operations increased $10.6 million, or 8.0%, in the third quarter of 2019 and increased $33.4 million, or 8.5%, in the three fiscal quarters of 2019. These increases were primarily driven by higher royalty revenues from U.S. and international franchised stores, as well as higher supply chain margins. A
pre-tax
gain of $5.9 million recognized from the sale of 12 Company-owned stores in the third quarter of 2018 partially offset these increases. A $2.4 million
pre-tax
loss related to the Second Quarter Store Sale and continued investments in technological initiatives and other areas also partially offset these increases in the three fiscal quarters of 2019.
Net income increased $2.3 million, or 2.7%, in the third quarter of 2019 and increased $21.1 million, or 8.4%, in the three fiscal quarters of 2019, driven by higher income from operations. These increases in net income were partially offset by a higher effective tax rate in 2019 resulting primarily from lower excess tax benefits from equity-based compensation. The increase in net income in the three fiscal quarters of 2019 was also partially offset by higher interest expense resulting from a higher average debt balance and a slightly higher weighted average borrowing rate following our debt recapitalization transaction completed on April 24, 2018 (the “2018 Recapitalization”).
Revenues
                                                                 
 
Third Quarter
   
Third Quarter
   
Three Fiscal
   
Three Fiscal
 
 
of 2019
   
of 2018
   
Quarters of 2019
   
Quarters of 2018
 
U.S. Company-owned stores
  $
94.6
     
11.5
%   $
118.5
     
15.1
%   $
323.0
     
13.1
%   $
358.5
     
15.3
%
U.S. franchise royalties and fees
   
97.0
     
11.8
%    
89.4
     
11.4
%    
289.3
     
11.7
%    
266.3
     
11.3
%
Supply chain
   
485.1
     
59.1
%    
445.1
     
56.6
%    
1,424.8
     
57.8
%    
1,326.1
     
56.4
%
International franchise royalties and fees
   
54.6
     
6.7
%    
50.4
     
6.4
%    
164.1
     
6.6
%    
154.2
     
6.6
%
U.S. franchise advertising
   
89.5
     
10.9
%    
82.5
     
10.5
%    
267.1
     
10.8
%    
245.6
     
10.4
%
                                                                 
Total revenues
  $
820.8
     
100.0
%   $
786.0
     
100.0
%   $
2,468.4
     
100.0
%   $
2,350.7
     
100.0
%
                                                                 
 
 
 
 
 
Revenues primarily consist of retail sales from our Company-owned stores, royalties, advertising contributions and fees from our U.S. franchised stores, royalties and fees from our international franchised stores and sales of food, equipment and supplies from our supply chain centers to all of our U.S. franchised stores and certain international franchised stores. Company-owned store, franchised store and supply chain revenues may vary from period to period due to changes in store count mix. Supply chain revenues may also vary significantly from period to period as a result of fluctuations in commodity prices as well as the mix of products we sell.
U.S. Stores Revenues
                                                                 
 
Third Quarter
   
Third Quarter
   
Three Fiscal
   
Three Fiscal
 
 
of 2019
   
of 2018
   
Quarters of 2019
   
Quarters of 2018
 
U.S. Company-owned stores
  $
94.6
     
33.6
%   $
118.5
     
40.8
%   $
323.0
     
36.7
%   $
358.5
     
41.2
%
U.S. franchise royalties and fees
   
97.0
     
34.5
%    
89.4
     
30.8
%    
289.3
     
32.9
%    
266.3
     
30.6
%
U.S. franchise advertising
   
89.5
     
31.9
%    
82.5
     
28.4
%    
267.1
     
30.4
%    
245.6
     
28.2
%
                                                                 
U.S. stores
  $
281.1
     
100.0
%   $
290.4
     
100.0
%   $
879.5
     
100.0
%   $
870.5
     
100.0
%
                                                                 
 
 
 
 
 
 
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U.S. Company-Owned Stores
Revenues from U.S. Company-owned store operations decreased $23.9 million, or 20.2%, in the third quarter of 2019 and decreased $35.5 million, or 9.9%, in the three fiscal quarters of 2019 due primarily to the Second Quarter Store Sale. These decreases in revenues were partially offset by higher same store sales. Company-owned same store sales increased 1.7% in the third quarter of 2019 and increased 2.3% in the three fiscal quarters of 2019. Company-owned same store sales increased 4.9% in the third quarter of 2018 and increased 5.4% in the three fiscal quarters of 2018.
U.S. Franchise Royalties and Fees
Revenues from U.S. franchise royalties and fees increased $7.6 million, or 8.5%, in the third quarter of 2019 and increased $23.0 million, or 8.6%, in the three fiscal quarters of 2019 due primarily to higher same store sales and an increase in the average number of U.S. franchised stores open during the period due to net store growth and, to a lesser extent, the Second Quarter Store Sale. U.S. franchise same store sales increased 2.5% in the third quarter of 2019 and increased 3.2% in the three fiscal quarters of 2019. U.S. franchise same store sales increased 6.4% in the third quarter of 2018 and increased 7.3% in the three fiscal quarters of 2018.
U.S. Franchise Advertising
Revenues from U.S. franchise advertising increased $7.0 million, or 8.5%, in the third quarter of 2019 and increased $21.5 million, or 8.8%, in the three fiscal quarters of 2019 due primarily to higher same store sales and an increase in the average number of U.S. franchised stores open during the period due to net store growth and, to a lesser extent, the Second Quarter Store Sale.
Supply Chain Revenues
                                                                 
 
Third Quarter
   
Third Quarter
   
Three Fiscal
   
Three Fiscal
 
 
of 2019
   
of 2018
   
Quarters of 2019
   
Quarters of 2018
 
U.S. supply chain
  $
440.1
     
90.7
%   $
403.8
     
90.7
%   $
1,293.3
     
90.8
%   $
1,202.3
     
90.7
%
International supply chain
   
45.0
     
9.3
%    
41.3
     
9.3
%    
131.5
     
9.2
%    
123.8
     
9.3
%
                                                                 
Total supply chain
  $
485.1
     
100.0
%   $
445.1
     
100.0
%   $
1,424.8
     
100.0
%   $
1,326.1
     
100.0
%
                                                                 
 
 
 
 
 
U.S. Supply Chain
U.S. supply chain revenues increased $36.3 million, or 9.0%, in the third quarter of 2019 and increased $91.0 million, or 7.6%, in the three fiscal quarters of 2019. These increases were due primarily to higher volumes from increased orders resulting from an increase in the average number of U.S. franchise stores open during the period, as a result of the factors described above, and an increase in market basket pricing. Our market basket pricing to stores increased 2.8% in the third quarter of 2019 and increased 2.3% in the three fiscal quarters of 2019, which resulted in an estimated increase in U.S. supply chain revenues of $9.8 million in the third quarter of 2019 and $21.6 million in the three fiscal quarters of 2019.
International Supply Chain
Revenues from international supply chain operations increased $3.7 million, or 9.0%, in the third quarter of 2019 and increased $7.7 million, or 6.2%, in the three fiscal quarters of 2019 due primarily to higher volumes from increased orders and an increase in market basket pricing. These increases in revenues were partially offset by the negative impact of changes in foreign currency exchange rates of $0.2 million in the third quarter of 2019 and $4.1 million in the three fiscal quarters of 2019.
International Franchise Royalties and Fee Revenues
Revenues from international franchise royalties and fees increased $4.2 million, or 8.3%, in the third quarter of 2019 and increased $9.9 million, or 6.5%, in the three fiscal quarters of 2019. These increases were due primarily to an increase in the average number of international stores open during the period and higher same store sales. These increases in revenues were partially offset by the negative impact of changes in foreign currency exchange rates of $1.5 million in the third quarter of 2019 and $8.1 million in the three fiscal quarters of 2019. Excluding the impact of changes in foreign currency exchange rates, international franchise same store sales increased 1.7% in the third quarter of 2019 and increased 2.0% in the three fiscal quarters of 2019. Excluding the impact of changes in foreign currency exchange rates, international franchise same store sales increased 3.3% in the third quarter of 2018 and 4.0% in the three fiscal quarters of 2018.
 
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Cost of Sales / Operating Margin
                                                                 
 
Third Quarter
   
Third Quarter
   
Three Fiscal
   
Three Fiscal
 
 
of 2019
   
of 2018
   
Quarters of 2019
   
Quarters of 2018
 
Consolidated revenues
  $
820.8
     
100.0
%   $
786.0
     
100.0
%   $
2,468.4
     
100.0
%   $
2,350.7
     
100.0
%
Consolidated cost of sales
   
504.6
     
61.5
%    
490.7
     
62.4
%    
1,513.2
     
61.3
%    
1,462.0
     
62.2
%
                                                                 
Consolidated operating margin
  $
316.3
     
38.5
%   $
295.3
     
37.6
%   $
955.2
     
38.7
%   $
888.7
     
37.8
%
                                                                 
 
 
 
 
 
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, delivery and occupancy costs.
Consolidated operating margin (which we define as revenues less cost of sales) increased $21.0 million, or 7.1%, in the third quarter of 2019 and increased $66.5 million, or 7.5%, in the three fiscal quarters of 2019 due primarily to higher global franchise revenues and higher supply chain volumes. Franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on the operating margin.
As a percentage of revenues, the consolidated operating margin increased 0.9 percentage points in the third quarter of 2019 and increased 0.9 percentage points in the three fiscal quarters of 2019. Company-owned store operating margin increased 2.8 percentage points in the third quarter of 2019 and increased 0.9 percentage points in the three fiscal quarters of 2019. Supply chain operating margin increased 0.1 percentage points in the third quarter of 2019 and increased 0.5 percentage points in the three fiscal quarters of 2019. These changes in operating margin are more fully discussed below.
U.S. Company-Owned Stores Operating Margin
                                                                 
 
Third Quarter
   
Third Quarter
   
Three Fiscal
   
Three Fiscal
 
 
of 2019
   
of 2018
   
Quarters of 2019
   
Quarters of 2018
 
Revenues
  $
94.6
     
100.0
%   $
118.5
     
100.0
%   $
323.0
     
100.0
%   $
358.5
     
100.0
%
Cost of sales
   
71.6
     
75.7
%    
93.0
     
78.5
%    
247.5
     
76.6
%    
278.0
     
77.5
%
                                                                 
Store operating margin
  $
23.0
     
24.3
%   $
25.5
     
21.5
%   $
75.5
     
23.4
%   $
80.5
     
22.5
%
                                                                 
 
 
 
 
 
The U.S. Company-owned store operating margin (which does not include certain store-level costs such as royalties and advertising) decreased $2.5 million, or 10.1%, in the third quarter of 2019 and decreased $5.0 million, or 6.2%, in the three fiscal quarters of 2019 due primarily to the Second Quarter Store Sale. Operating margin in both the third quarter and the three fiscal quarters of 2019 was also negatively impacted by higher labor costs, partially offset by higher same store sales. As a percentage of store revenues, the U.S. Company-owned store operating margin increased 2.8 percentage points in the third quarter of 2019 and increased 0.9 percentage points in the three fiscal quarters of 2019. These changes in operating margin as a percentage of revenues are discussed in more detail below.
  Food costs decreased 0.3 percentage points to 27.4% in the third quarter of 2019 and decreased 0.4 percentage points to 27.1% in the three fiscal quarters of 2019 due primarily to the leveraging of higher same store sales. These decreases were partially offset by higher food prices.
 
 
  Labor costs decreased 2.2 percentage points to 28.1% in the third quarter of 2019 and decreased 0.4 percentage points to 29.6% in the three fiscal quarters of 2019. The Second Quarter Store Sale contributed to the reduction in labor costs as a percentage of store revenues in both the third quarter and three fiscal quarters of 2019 due to the high labor rates in the market in which the sold stores operated. The reduction in labor costs as a percentage of store revenues in the three fiscal quarters of 2019 was partially offset by an increase in average labor rates in our remaining Company-owned store markets.
 
 
Supply Chain Operating Margin
                                                                 
 
Third Quarter
   
Third Quarter
   
Three Fiscal
   
Three Fiscal
 
 
of 2019
   
of 2018
   
Quarters of 2019
   
Quarters of 2018
 
Revenues
  $
485.1
     
100.0
%   $
445.1
     
100.0
%   $
1,424.8
     
100.0
%   $
1,326.1
     
100.0
%
Cost of sales
   
433.0
     
89.2
%    
397.7
     
89.3
%    
1,265.7
     
88.8
%    
1,184.0
     
89.3
%
                                                                 
Supply chain operating margin
  $
52.2
     
10.8
%   $
47.4
     
10.7
%   $
159.1
     
11.2
%   $
142.1
     
10.7
%
                                                                 
 
 
 
 
 
The supply chain operating margin increased $4.8 million, or 10.0%, in the third quarter of 2019 and increased $17.0 million, or 12.0%, in the three fiscal quarters of 2019, primarily driven by higher volumes from increased orders. As a percentage of supply chain revenues, the supply chain operating margin increased 0.1 percentage points in the third quarter of 2019. As a percentage of supply chain revenues, the supply chain operating margin increased 0.5 percentage points in the three fiscal quarters of 2019 due primarily to procurement savings, offset in part by higher labor costs.
 
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General and Administrative Expenses
General and administrative expenses increased $3.3 million, or 4.2%, in the third quarter of 2019 and increased $11.5 million, or 4.6%, in the three fiscal quarters of 2019. A
pre-tax
gain of $5.9 million recognized from the sale of 12 Company-owned stores in the third quarter of 2018 resulted in an increase in general and administrative expenses as compared to the prior year. Lower advertising expenses, resulting primarily from the Second Quarter Store Sale, partially offset these increases. A $2.4 million
pre-tax
loss related to the Second Quarter Store Sale and continued investments in technological initiatives and other areas also contributed to the increase in the three fiscal quarters of 2019.
U.S. Franchise Advertising Expenses
U.S. franchise advertising expenses increased $7.0 million, or 8.5%, in the third quarter of 2019 and increased $21.5 million, or 8.8%, in the three fiscal quarters of 2019 due to higher U.S. franchise advertising revenues. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized, as our consolidated
not-for-profit
advertising fund is obligated to expend such revenues on advertising and these revenues cannot be used for general corporate purposes.
Interest Expense, Net
Interest expense, net decreased $0.4 million, or 1.2%, in the third quarter of 2019 and increased $2.2 million, or 2.2%, in the three fiscal quarters of 2019. The increase in the three fiscal quarters of 2019 was driven by a higher weighted average debt balance, primarily due to higher average borrowings resulting from the 2018 Recapitalization and outstanding borrowings under our variable funding notes. A higher weighted average borrowing rate also contributed to higher interest expense during the three fiscal quarters of 2019. The increase in the three fiscal quarters of 2019 was partially offset by $3.3 million of incremental interest expense recorded in the second quarter of 2018 in connection with the 2018 Recapitalization.
The Company’s weighted average borrowing rate was 4.1% in both the third quarter and the three fiscal quarters of 2019 and was 4.1% in the third quarter of 2018 and 4.0% in the three fiscal quarters of 2018.
Provision for Income Taxes
Provision for income taxes increased $8.7 million, or 57.5%, in the third quarter of 2019 and increased $10.2 million, or 23.3%, in the three fiscal quarters of 2019. The effective tax rate increased to 21.7% in the third quarter of 2019 and increased to 16.6% in the three fiscal quarters of 2019 as compared to 15.3% in the third quarter of 2018 and 14.9% in the three fiscal quarters of 2018. Higher
pre-tax
income and lower excess tax benefits from equity-based compensation contributed to higher tax expense in both the third quarter and the three fiscal quarters of 2019.
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 35 to 45 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. 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 reduces our working capital amounts. As of September 8, 2019, we had working capital of $2.3 million, excluding restricted cash and cash equivalents of $177.3 million, advertising fund assets, restricted, of $109.5 million and advertising fund liabilities of $104.9 million. Working capital includes total unrestricted cash and cash equivalents of $66.7 million.
During the third quarter and three fiscal quarters of 2019, we experienced increases in both U.S. and international same store sales versus the comparable periods in the prior year. Additionally, our international and U.S. businesses grew store counts in the third quarter and the three fiscal quarters of 2019. These factors contributed to our continued ability to generate positive operating cash flows. We expect to continue to use our unrestricted cash and cash equivalents, cash flows from operations, excess cash from our recapitalization transactions and available borrowings under our 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 did not have any material commitments for capital expenditures as of September 8, 2019.
 
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Based upon our 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 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 our fixed and floating rate notes and to service, extend or refinance our variable funding notes will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
Restricted Cash
As of September 8, 2019, we had approximately $140.9 million of restricted cash held for future principal and interest payments and other working capital requirements of our asset-backed securitization structure, $36.2 million of restricted cash held in a three-month interest reserve as required by the related debt agreements and $0.2 million of other restricted cash for a total of $177.3 million of restricted cash and cash equivalents. As of September 8, 2019, we also held $68.7 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s Pizza brand.
Long-Term Debt
As of September 8, 2019, we had approximately $3.44 billion of long-term debt, of which $35.9 million was classified as a current liability. Our fixed and floating rate notes from the recapitalizations we completed in 2018, 2017 and 2015 have original scheduled principal payments of $8.8 million in the remainder of 2019, $35.3 million in each of 2020 and 2021, $888.0 million in 2022, $26.3 million in each of 2023 and 2024, $1.14 billion in 2025, $14.0 million in 2026 and $1.27 billion in 2027. As of September 8, 2019, we had no outstanding borrowings under our variable funding notes and $126.9 million available for borrowing, net of letters of credit issued of $48.1 million. 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, subject to other limitations, other general corporate purposes including dividend payments and repurchases of our common stock.
Share Repurchase Programs
Our share repurchase programs have historically been funded by excess cash flows. On February 14, 2018, our Board of Directors authorized a share repurchase program to repurchase up to $750.0 million of the Company’s common stock. During the third quarter of 2019, we repurchased and retired 384,338 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $93.7 million, or an average price of $243.79 per share. During the three fiscal quarters of 2019, we repurchased and retired 430,182 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $105.1 million, or an average price of $244.43 per share. As of September 8, 2019, we had a total remaining authorized amount for share repurchases of approximately $53.6 million.
During the third quarter of 2018, we repurchased and retired 397,490 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $109.1 million, or an average price of $274.53 per share. During the three fiscal quarters of 2018, we repurchased and retired 1,751,054 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $429.2 million, or an average price of $245.10 per share.
Subsequent to the third quarter, on October 4, 2019, the Company’s Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of the Company’s common stock, which has no expiration date. This repurchase program replaces the remaining availability of approximately $53.6 million under the Company’s existing $750.0 million share repurchase program. Authorization for the repurchase program may be modified, suspended, or discontinued at any time.
Dividends
On June 28, 2019, the Company paid a $0.65 dividend to its shareholders of record as of June 14, 2019. During the third quarter of 2019, on July 10, 2019, the Company’s Board of Directors declared a $0.65 per share quarterly dividend on its outstanding common stock for shareholders of record as of September 13, 2019, which was paid subsequent to the third quarter on September 30, 2019.
Subsequent to the third quarter, on October 4, 2019, the Company’s Board of Directors declared a $0.65 per share quarterly dividend on its outstanding common stock for shareholders of record as of December 13, 2019 to be paid on December 27, 2019.
 
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The following table illustrates the main components of our cash flows:
                 
(In millions)
 
Three Fiscal Quarters
of 2019
   
Three Fiscal Quarters
of 2018
 
Cash Flows Provided By (Used In)
   
     
 
Net cash provided by operating activities
  $
324.6
    $
262.5
 
Net cash used in investing activities
   
(3.1
)    
(65.4
)
Net cash used in financing activities
   
(246.3
)    
(172.1
)
Exchange rate changes
   
0.1
     
(0.2
)
                 
Change in cash and cash equivalents, restricted cash and cash equivalents
  $
75.3
    $
24.9
 
                 
 
 
 
 
Operating Activities
Cash provided by operating activities increased $62.1 million in the three fiscal quarters of 2019 due to the positive impact of changes in operating assets and liabilities of $32.9 million, an increase in net income of $21.1 million and higher
non-cash
amounts of $8.2 million. The positive impact of changes in operating assets and liabilities was primarily related to the timing of receipts on accounts receivable and timing of payments on accounts payable and accrued liabilities during 2019 as compared to 2018 and was partially offset by the negative impact of changes in advertising fund assets and liabilities, restricted in 2019 as compared to 2018 due to higher spending of fund assets.
Investing Activities
Cash used in investing activities was $3.1 million in the three fiscal quarters of 2019. We used $42.7 million of cash for capital expenditures (driven primarily by investments in technological initiatives and supply chain centers). This use of cash was partially offset by maturities of advertising fund investments, restricted of $30.2 million and proceeds from the sale of assets of $9.7 million, which primarily related to the Second Quarter Store Sale.
Cash used in investing activities was $65.4 million in the three fiscal quarters of 2018, which consisted primarily of $65.1 million of capital expenditures (driven primarily by investments in supply chain centers, technological initiatives and U.S. Company-owned stores) and purchases of restricted advertising fund investments of $50.2 million. These uses of cash were partially offset by maturities of restricted advertising fund investments of $44.0 million.
Financing Activities
Cash used in financing activities was $246.3 million in the three fiscal quarters of 2019, primarily related to purchases of common stock of $105.1 million under our Board of Directors-approved share repurchase program, repayments of long-term debt of $91.9 million (of which $65.0 million related to the repayment of borrowings under our variable funding notes), dividend payments to our shareholders of $53.6 million and tax payments for restricted stock upon vesting of $5.8 million. These uses of cash were partially offset by proceeds from the exercise of stock options of $10.1 million.
Cash used in financing activities was $172.1 million in the three fiscal quarters of 2018. We issued $825.0 million of debt in connection with our 2018 Recapitalization and borrowed $80.0 million under our variable funding notes. However, these increases in cash were offset by repayments of long-term debt of $595.1 million (of which $490.0 million was an optional prepayment on our 2015 five-year fixed rate notes using a portion of the proceeds received from the 2018 Recapitalization and $80.0 million related to the repayment of the borrowings under our variable funding notes), purchases of common stock of $429.2 million, dividend payments to our shareholders of $46.7 million, and cash paid for financing costs related to our 2018 Recapitalization of $8.2 million. We also received proceeds of $9.0 million from the exercise of stock options and made $6.8 million in tax payments for restricted stock upon vesting.
 
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Forward-Looking Statements
This filing contains various forward-looking statements about the Company within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”) that are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “could,” “should,” “estimates,” “expects,” “intends,” “may,” “will,” “plans,” “predicts,” “projects,” “seeks,” “approximately,” “potential,” “outlook” and similar terms and phrases that concern our strategy, plans or intentions, including references to assumptions. These forward-looking statements address various matters including information concerning future results of operations and business strategy, our anticipated profitability, estimates in same store sales growth, the growth of our U.S. and 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. While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions. 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.
 Actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors, including but not limited to: our substantial increased indebtedness as a result of our recapitalization transactions and our ability to incur additional indebtedness or refinance or renegotiate key terms of that indebtedness in the future; the impact a downgrade in our credit rating may have on our business, financial condition and results of operations; our future financial performance and our ability to pay principal and interest on our indebtedness; the effectiveness of our advertising, operations and promotional initiatives; the strength of our brand, including our ability to compete in the U.S. and internationally in our intensely competitive industry; the impact of social media and other consumer-oriented technologies on our business, brand and reputation; new product, digital ordering and concept developments by us, and other food-industry competitors; our ability to maintain good relationships with our franchisees and their ongoing level of profitability; our ability to successfully implement cost-saving strategies; our ability and that of our franchisees to successfully operate in the current and future credit environment; changes in the level of consumer spending given general economic conditions, including interest rates, energy prices and consumer confidence; 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), fuel and other commodity costs, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness or general health concerns, severe weather conditions and natural disasters may have on our business and the economies of the countries where we operate; changes in foreign currency exchange rates; our ability to retain or replace our executive officers and other key members of management and our ability to adequately staff our stores and supply chain centers with qualified personnel; our ability to find and/or retain suitable real estate for our stores and supply chain centers; changes in government legislation and regulations, including changes in laws and regulations regarding information privacy and consumer protection; adverse legal judgments or settlements; food-borne illness or contamination of products; data breaches, power loss, technological failures, user error or other cyber risks; the effect of war, terrorism or catastrophic events; our ability to pay dividends and repurchase shares; changes in consumer preferences, spending and traffic patterns and demographic trends; changes in accounting policies; and adequacy of our insurance coverage. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this filing might not occur. All forward-looking statements speak only as of the date of this filing and should be evaluated with an understanding of their inherent uncertainty. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission, or other applicable law, we will not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances arising after the date of this filing, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on the forward-looking statements included in this filing or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
 
23
 

 
Table of Contents
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In connection with the recapitalizations of our business, we issued fixed and floating rate notes and entered into variable funding notes and, at September 8, 2019, we are exposed to interest rate risk on borrowings under our floating rate notes and variable funding notes. As of September 8, 2019, we had no outstanding borrowings under our variable funding notes. Our floating rate notes and our variable funding notes bear interest at fluctuating interest rates based on LIBOR.
There is currently uncertainty around whether LIBOR will continue to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate our loan documents and we cannot predict what alternative index would be negotiated with our lenders. As a result, our interest expense could increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.
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 or 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.
We have exposure to various foreign currency exchange rate fluctuations for revenues generated by our operations outside the U.S., which can adversely impact our net income and cash flows. Approximately 6.7% of our total revenues in the third quarter of 2019, 6.4% of our total revenues in the third quarter of 2018 and 6.6% of our total revenues in the three fiscal quarters of 2019 and 2018 were derived from our international franchise segment, a majority of which were denominated in foreign currencies. We also operate dough manufacturing and distribution facilities in Canada, which generate revenues denominated in Canadian dollars. We do not enter into financial instruments to manage this foreign currency exchange rate risk. A hypothetical 10% adverse change in the foreign currency exchange rates for our international markets would have resulted in a negative impact on royalty revenues of approximately $14.4 million in the three fiscal quarters of 2019.
Item 4. Controls and Procedures.
Management, with the participation of the Company’s Chief Executive Officer, Richard E. Allison, Jr., 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. Allison and Mr. Lawrence concluded that the Company’s disclosure controls and procedures were effective.
During the quarterly period ended September 8, 2019, there were no changes in the Company’s internal control over financial reporting, as defined in Rules
 13a-15(f)
 and
 15d-15(f)
 under the Securities and Exchange Act of 1934, as amended, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
 
24
 

 
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.
As previously disclosed in our 2018 Form
10-K,
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 case went to trial in 2016 and the Company was found liable, but the verdict was reversed by the Florida Fifth District Court of Appeals in May 2018 and was remanded to the Ninth Judicial Circuit Court of Florida for a new trial. The case was tried again in June 2019 and the jury returned a $9.0 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 100% liable (after certain offsets and other deductions the final verdict was $8.0 million). The Company continues to deny liability and has filed an appeal.
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 our 2018 Form
 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
c. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
                                 
 
   
   
   
Maximum
Approximate Dollar
 
 
   
   
Total Number of Shares
   
Value of Shares that
 
 
Total Number
   
   
Purchased as Part of
   
May Yet Be Purchased
 
 
of Shares
   
Average Price Paid
   
Publicly Announced
   
Under the Program
 
Period
 
Purchased (1)
   
Per Share
   
Program (2)
   
(in thousands)
 
Period #7 (June 17, 2019 to July 14, 2019)
   
1,194
    $
275.16
     
—  
    $
147,336
 
Period #8 (July 15, 2019 to August 11, 2019)
   
231,739
     
252.72
     
230,097
     
89,166
 
Period #9 (August 12, 2019 to September 8, 2019)
   
157,402
     
230.44
     
154,241
     
53,640
 
                                 
Total
   
390,335
    $
243.81
     
384,338
    $
53,640
 
                                 
 
 
 
(1) 5,997 shares in the third quarter of 2019 were purchased as part of the Company’s employee stock payroll deduction plan at an average price of $245.21.
 
 
 
(2) As previously disclosed, on February 14, 2018, the Company’s Board of Directors authorized a $750.0 million share repurchase program, which has no expiration date. As of September 8, 2019, the Company had approximately $53.6 million remaining for future share repurchases under this program. On October 4, 2019, the Company’s Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of the Company’s common stock, which has no expiration date. This repurchase program replaces the remaining availability of approximately $53.6 million under the Company’s existing $750.0 million share repurchase program. 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.
 
 
 
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
 
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Table of Contents
 
Item 6. Exhibits.
         
Exhibit
Number
   
Description
         
 
31.1
   
         
 
31.2
   
         
 
32.1
   
         
 
32.2
   
         
 
101.INS
   
XBRL Instance Document – the instance document does not appear in the Interactive Data file because its XBLR tags are embedded within the Inline XBRL document.
         
 
101.SCH
   
Inline XBRL Taxonomy Extension Schema Document.
         
 
101.CAL
   
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
         
 
101.LAB
   
Inline XBRL Taxonomy Extension Label Linkbase Document.
         
 
101.PRE
   
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
         
 
101.DEF
   
Inline XBRL Taxonomy Extension Definition Linkbase Document.
         
 
104
   
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
 
 
 
26
 

 
Table of Contents
 
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
             
 
    
 
    
 
DOMINO’S PIZZA, INC.
(Registrant)
             
Date: October 8, 2019
 
 
 
/s/ Jeffrey D. Lawrence
 
 
 
Jeffrey D. Lawrence
 
 
 
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
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