Item 1. Financial Statements.
Dominos Pizza, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
(In thousands)
|
|
June 18, 2017
|
|
|
(Note)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
52,243
|
|
|
$
|
42,815
|
|
Restricted cash and cash equivalents
|
|
|
161,685
|
|
|
|
126,496
|
|
Accounts receivable, net
|
|
|
151,641
|
|
|
|
150,369
|
|
Inventories
|
|
|
37,664
|
|
|
|
40,181
|
|
Prepaid expenses and other
|
|
|
41,512
|
|
|
|
17,635
|
|
Advertising fund assets, restricted
|
|
|
116,158
|
|
|
|
118,377
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
560,903
|
|
|
|
495,873
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
|
29,159
|
|
|
|
29,129
|
|
Leasehold and other improvements
|
|
|
124,918
|
|
|
|
120,726
|
|
Equipment
|
|
|
209,267
|
|
|
|
201,827
|
|
Construction in progress
|
|
|
5,254
|
|
|
|
7,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368,598
|
|
|
|
359,498
|
|
Accumulated depreciation and amortization
|
|
|
(230,805
|
)
|
|
|
(220,964
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
137,793
|
|
|
|
138,534
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
16,058
|
|
|
|
16,058
|
|
Capitalized software, net
|
|
|
45,519
|
|
|
|
40,256
|
|
Other assets
|
|
|
16,170
|
|
|
|
16,639
|
|
Deferred income taxes
|
|
|
5,354
|
|
|
|
8,935
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
83,101
|
|
|
|
81,888
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
781,797
|
|
|
$
|
716,295
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
305
|
|
|
$
|
38,887
|
|
Accounts payable
|
|
|
104,620
|
|
|
|
111,510
|
|
Insurance reserves
|
|
|
16,978
|
|
|
|
16,742
|
|
Dividends payable
|
|
|
22,648
|
|
|
|
619
|
|
Advertising fund liabilities
|
|
|
116,158
|
|
|
|
118,377
|
|
Other accrued liabilities
|
|
|
90,803
|
|
|
|
117,563
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
351,512
|
|
|
|
403,698
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
2,180,518
|
|
|
|
2,148,990
|
|
Insurance reserves
|
|
|
33,255
|
|
|
|
27,141
|
|
Other accrued liabilities
|
|
|
19,583
|
|
|
|
19,609
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
2,233,356
|
|
|
|
2,195,740
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
482
|
|
|
|
481
|
|
Additional
paid-in
capital
|
|
|
8,064
|
|
|
|
1,006
|
|
Retained deficit
|
|
|
(1,808,789
|
)
|
|
|
(1,881,520
|
)
|
Accumulated other comprehensive loss
|
|
|
(2,828
|
)
|
|
|
(3,110
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(1,803,071
|
)
|
|
|
(1,883,143
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
781,797
|
|
|
$
|
716,295
|
|
|
|
|
|
|
|
|
|
|
Note: The balance sheet at January 1, 2017 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
Dominos Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
Two Fiscal Quarters Ended
|
|
|
|
June 18,
|
|
|
June 19,
|
|
|
June 18,
|
|
|
June 19,
|
|
(In thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Company-owned stores
|
|
$
|
112,430
|
|
|
$
|
97,834
|
|
|
$
|
225,975
|
|
|
$
|
194,278
|
|
Domestic franchise
|
|
|
82,403
|
|
|
|
69,675
|
|
|
|
162,304
|
|
|
|
137,826
|
|
Supply chain
|
|
|
390,104
|
|
|
|
339,259
|
|
|
|
778,657
|
|
|
|
674,954
|
|
International franchise
|
|
|
43,674
|
|
|
|
40,573
|
|
|
|
85,892
|
|
|
|
79,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
628,611
|
|
|
|
547,341
|
|
|
|
1,252,828
|
|
|
|
1,086,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Company-owned stores
|
|
|
89,040
|
|
|
|
73,795
|
|
|
|
176,224
|
|
|
|
146,550
|
|
Supply chain
|
|
|
346,726
|
|
|
|
301,708
|
|
|
|
689,943
|
|
|
|
600,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
435,766
|
|
|
|
375,503
|
|
|
|
866,167
|
|
|
|
747,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
192,845
|
|
|
|
171,838
|
|
|
|
386,661
|
|
|
|
339,055
|
|
General and administrative
|
|
|
79,978
|
|
|
|
68,137
|
|
|
|
157,760
|
|
|
|
136,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
112,867
|
|
|
|
103,701
|
|
|
|
228,901
|
|
|
|
202,414
|
|
Interest income
|
|
|
276
|
|
|
|
197
|
|
|
|
387
|
|
|
|
473
|
|
Interest expense
|
|
|
(24,611
|
)
|
|
|
(25,206
|
)
|
|
|
(50,242
|
)
|
|
|
(51,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
88,532
|
|
|
|
78,692
|
|
|
|
179,046
|
|
|
|
151,534
|
|
Provision for income taxes
|
|
|
22,791
|
|
|
|
29,431
|
|
|
|
50,836
|
|
|
|
56,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65,741
|
|
|
$
|
49,261
|
|
|
$
|
128,210
|
|
|
$
|
94,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - basic
|
|
$
|
1.37
|
|
|
$
|
1.00
|
|
|
$
|
2.68
|
|
|
$
|
1.92
|
|
Common stock - diluted
|
|
|
1.32
|
|
|
|
0.98
|
|
|
|
2.58
|
|
|
|
1.86
|
|
Dividends declared per share
|
|
$
|
0.46
|
|
|
$
|
0.38
|
|
|
$
|
0.92
|
|
|
$
|
0.76
|
|
See accompanying notes.
4
Dominos Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
Two Fiscal Quarters Ended
|
|
|
|
June 18,
|
|
|
June 19,
|
|
|
June 18,
|
|
|
June 19,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
65,741
|
|
|
$
|
49,261
|
|
|
$
|
128,210
|
|
|
$
|
94,712
|
|
Other comprehensive income, before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
215
|
|
|
|
456
|
|
|
|
282
|
|
|
|
1,113
|
|
Tax attributes of items in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
215
|
|
|
|
388
|
|
|
|
282
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
65,956
|
|
|
$
|
49,649
|
|
|
$
|
128,492
|
|
|
$
|
95,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
Dominos Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Two Fiscal Quarters Ended
|
|
|
|
June 18,
|
|
|
June 19,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
128,210
|
|
|
$
|
94,712
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
19,773
|
|
|
|
16,756
|
|
Losses on sale/disposal of assets
|
|
|
345
|
|
|
|
247
|
|
Amortization of debt issuance costs
|
|
|
2,714
|
|
|
|
3,133
|
|
Provision for deferred income taxes
|
|
|
3,581
|
|
|
|
1,775
|
|
Non-cash
compensation expense
|
|
|
9,633
|
|
|
|
8,617
|
|
Other
|
|
|
204
|
|
|
|
16
|
|
Excess tax benefits from equity-based compensation
|
|
|
(16,906
|
)
|
|
|
(34,852
|
)
|
Changes in operating assets and liabilities
|
|
|
(32,468
|
)
|
|
|
(20,951
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
115,086
|
|
|
|
69,453
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(25,230
|
)
|
|
|
(25,045
|
)
|
Changes in restricted cash
|
|
|
(35,189
|
)
|
|
|
73,505
|
|
Other
|
|
|
519
|
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(59,900
|
)
|
|
|
50,321
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
10,000
|
|
Repayments of long-term debt and capital lease obligations
|
|
|
(9,766
|
)
|
|
|
(39,878
|
)
|
Proceeds from exercise of stock options
|
|
|
3,884
|
|
|
|
10,848
|
|
Excess tax benefits from equity-based compensation
|
|
|
|
|
|
|
34,852
|
|
Purchases of common stock
|
|
|
(12,721
|
)
|
|
|
(224,139
|
)
|
Tax payments for restricted stock upon vesting
|
|
|
(4,911
|
)
|
|
|
(3,036
|
)
|
Payments of common stock dividends and equivalents
|
|
|
(22,280
|
)
|
|
|
(19,099
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(45,794
|
)
|
|
|
(230,452
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
36
|
|
|
|
(466
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
9,428
|
|
|
|
(111,144
|
)
|
Cash and cash equivalents, at beginning of period
|
|
|
42,815
|
|
|
|
133,449
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of period
|
|
$
|
52,243
|
|
|
$
|
22,305
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
Dominos Pizza, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited; tabular amounts in thousands, except percentages, share and per share amounts)
June 18, 2017
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the instructions to Form
10-Q
and Rule
10-01
of Regulation
S-X.
Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information,
refer to the consolidated financial statements and footnotes for the fiscal year ended January 1, 2017 included in the Companys 2016 Annual Report on Form
10-K,
filed with the Securities and
Exchange Commission on February 28, 2017 (the 2016 Form
10-K).
In the opinion of
management, all adjustments, consisting of normal recurring items, considered necessary for a fair statement have been included. Operating results for the fiscal quarter ended June 18, 2017 are not necessarily indicative of the results that may
be expected for the fiscal year ending December 31, 2017.
2. Segment Information
The following table summarizes revenues, income from operations and earnings before interest, taxes, depreciation, amortization and other,
which is the measure by which the Company allocates resources to its segments and which we refer to as Segment Income, for each of our reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarters Ended June 18, 2017 and June 19, 2016
|
|
|
|
Domestic
|
|
|
Supply
|
|
|
International
|
|
|
Intersegment
|
|
|
|
|
|
|
|
|
|
Stores
|
|
|
Chain
|
|
|
Franchise
|
|
|
Revenues
|
|
|
Other
|
|
|
Total
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
194,833
|
|
|
$
|
420,725
|
|
|
$
|
43,674
|
|
|
$
|
(30,621
|
)
|
|
$
|
|
|
|
$
|
628,611
|
|
2016
|
|
|
167,509
|
|
|
|
367,858
|
|
|
|
40,573
|
|
|
|
(28,599
|
)
|
|
|
|
|
|
|
547,341
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
64,296
|
|
|
$
|
33,304
|
|
|
$
|
35,602
|
|
|
|
N/A
|
|
|
$
|
(20,335
|
)
|
|
$
|
112,867
|
|
2016
|
|
|
58,731
|
|
|
|
29,299
|
|
|
|
32,204
|
|
|
|
N/A
|
|
|
|
(16,533
|
)
|
|
|
103,701
|
|
Segment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
66,895
|
|
|
$
|
35,874
|
|
|
$
|
35,647
|
|
|
|
N/A
|
|
|
$
|
(10,698
|
)
|
|
$
|
127,718
|
|
2016
|
|
|
60,936
|
|
|
|
31,682
|
|
|
|
32,238
|
|
|
|
N/A
|
|
|
|
(8,739
|
)
|
|
|
116,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Fiscal Quarters Ended June 18, 2017 and June 19, 2016
|
|
|
|
Domestic
|
|
|
Supply
|
|
|
International
|
|
|
Intersegment
|
|
|
|
|
|
|
|
|
|
Stores
|
|
|
Chain
|
|
|
Franchise
|
|
|
Revenues
|
|
|
Other
|
|
|
Total
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
388,279
|
|
|
$
|
840,731
|
|
|
$
|
85,892
|
|
|
$
|
(62,074
|
)
|
|
$
|
|
|
|
$
|
1,252,828
|
|
2016
|
|
|
332,104
|
|
|
|
730,377
|
|
|
|
79,459
|
|
|
|
(55,423
|
)
|
|
|
|
|
|
|
1,086,517
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
131,623
|
|
|
$
|
69,263
|
|
|
$
|
68,776
|
|
|
|
N/A
|
|
|
$
|
(40,761
|
)
|
|
$
|
228,901
|
|
2016
|
|
|
117,150
|
|
|
|
57,644
|
|
|
|
61,945
|
|
|
|
N/A
|
|
|
|
(34,325
|
)
|
|
|
202,414
|
|
Segment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
136,769
|
|
|
$
|
74,388
|
|
|
$
|
68,864
|
|
|
|
N/A
|
|
|
$
|
(21,369
|
)
|
|
$
|
258,652
|
|
2016
|
|
|
121,405
|
|
|
|
62,354
|
|
|
|
62,010
|
|
|
|
N/A
|
|
|
|
(17,735
|
)
|
|
|
228,034
|
|
7
The following table reconciles Total Segment Income to consolidated income before provision for
income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
Two Fiscal Quarters Ended
|
|
|
|
June 18,
|
|
|
June 19,
|
|
|
June 18,
|
|
|
June 19,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Total Segment Income
|
|
$
|
127,718
|
|
|
$
|
116,117
|
|
|
$
|
258,652
|
|
|
$
|
228,034
|
|
Depreciation and amortization
|
|
|
(10,275
|
)
|
|
|
(8,535
|
)
|
|
|
(19,773
|
)
|
|
|
(16,756
|
)
|
Losses on sale/disposal of assets
|
|
|
(163
|
)
|
|
|
(161
|
)
|
|
|
(345
|
)
|
|
|
(247
|
)
|
Non-cash
compensation expense
|
|
|
(4,413
|
)
|
|
|
(3,720
|
)
|
|
|
(9,633
|
)
|
|
|
(8,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
112,867
|
|
|
|
103,701
|
|
|
|
228,901
|
|
|
|
202,414
|
|
Interest income
|
|
|
276
|
|
|
|
197
|
|
|
|
387
|
|
|
|
473
|
|
Interest expense
|
|
|
(24,611
|
)
|
|
|
(25,206
|
)
|
|
|
(50,242
|
)
|
|
|
(51,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
$
|
88,532
|
|
|
$
|
78,692
|
|
|
$
|
179,046
|
|
|
$
|
151,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
Two Fiscal Quarters Ended
|
|
|
|
June 18,
|
|
|
June 19,
|
|
|
June 18,
|
|
|
June 19,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income available to common stockholders - basic and diluted
|
|
$
|
65,741
|
|
|
$
|
49,261
|
|
|
$
|
128,210
|
|
|
$
|
94,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares
|
|
|
47,972,526
|
|
|
|
49,213,330
|
|
|
|
47,906,187
|
|
|
|
49,455,412
|
|
Earnings per share - basic
|
|
$
|
1.37
|
|
|
$
|
1.00
|
|
|
$
|
2.68
|
|
|
$
|
1.92
|
|
Diluted weighted average number of shares
|
|
|
49,776,821
|
|
|
|
50,459,754
|
|
|
|
49,741,794
|
|
|
|
50,846,941
|
|
Earnings per share - diluted
|
|
$
|
1.32
|
|
|
$
|
0.98
|
|
|
$
|
2.58
|
|
|
$
|
1.86
|
|
The denominators used in calculating diluted earnings per share for common stock for the second quarter of
2017 and two fiscal quarters of 2017 do not include 69,010 options to purchase common stock, as the effect of including these options would have been anti-dilutive. The denominator used in calculating diluted earnings per share for the two fiscal
quarters of 2017 does not include 13,050 restricted performance shares, as the effect of including these shares would have been anti-dilutive. The denominators used in calculating diluted earnings per share for common stock for the second quarter of
2016 and two fiscal quarters of 2016 do not include 216,690 options to purchase common stock, as the effect of including these options would have been anti-dilutive. The denominators used in calculating diluted earnings per share for the second
quarter of 2016 and two fiscal quarters of 2016 do not include 17,870 and 23,560 restricted performance shares, respectively, as the effect of including these shares would have been anti-dilutive.
4. Stockholders Deficit
The following
table summarizes changes in Stockholders Deficit for the two fiscal quarters of 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
Balance at January 1, 2017
|
|
|
48,100,143
|
|
|
$
|
481
|
|
|
$
|
1,006
|
|
|
$
|
(1,881,520
|
)
|
|
$
|
(3,110
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,210
|
|
|
|
|
|
Common stock dividends and equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,305
|
)
|
|
|
|
|
Issuance of common stock, net
|
|
|
15,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax payments for restricted stock upon vesting
|
|
|
(25,951
|
)
|
|
|
|
|
|
|
(4,911
|
)
|
|
|
|
|
|
|
|
|
Purchases of common stock
|
|
|
(80,360
|
)
|
|
|
(1
|
)
|
|
|
(1,546
|
)
|
|
|
(11,174
|
)
|
|
|
|
|
Exercise of stock options
|
|
|
237,529
|
|
|
|
2
|
|
|
|
3,882
|
|
|
|
|
|
|
|
|
|
Non-cash
compensation expense
|
|
|
|
|
|
|
|
|
|
|
9,633
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 18, 2017
|
|
|
48,247,144
|
|
|
$
|
482
|
|
|
$
|
8,064
|
|
|
$
|
(1,808,789
|
)
|
|
$
|
(2,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Dividends
During the second quarter of 2017, on April 25, 2017, the Companys Board of Directors declared a $0.46 per share quarterly dividend
on its outstanding common stock for shareholders of record as of June 15, 2017 which was paid on June 30, 2017. The Company had approximately $22.6 million accrued for common stock dividends at June 18, 2017.
Subsequent to the second quarter, on July 19, 2017, the Companys Board of Directors declared a $0.46 per share quarterly dividend
on its outstanding common stock for shareholders of record as of September 15, 2017 to be paid on September 30, 2017.
8
6. Accumulated Other Comprehensive Loss
The approximately $2.8 million of accumulated other comprehensive loss at June 18, 2017 and the approximately $3.1 million of
accumulated other comprehensive loss at January 1, 2017 represent currency translation adjustments, net of tax. There were no reclassifications out of accumulated other comprehensive loss to net income in the two fiscal quarters of 2017 or the
two fiscal quarters of 2016.
7. Open Market Share Repurchase Program
The Company did not repurchase any shares of its common stock under its Board of Directors approved open market share repurchase program in the
second quarter of 2017. During the two fiscal quarters of 2017, the Company repurchased and retired 80,360 shares of its common stock under its Board of Directors-approved open market share repurchase program for a total of approximately
$12.7 million. As of June 18, 2017, the end of the second quarter, the Company had a total remaining authorized amount for share repurchases of approximately $136.4 million.
During the first quarter of 2016, the Company received and retired 456,936 shares of its common stock in connection with the final settlement
of its previously announced $600.0 million accelerated share repurchase program. During the second quarter of 2016, the Company repurchased and retired 1,845,126 shares of its common stock under its Board of Directors approved open market share
repurchase program for a total of approximately $224.1 million.
8. Fair Value Measurements
Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a
hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair values of the Companys cash equivalents and investments in marketable securities are based on quoted prices in active markets
for identical assets. The following tables summarize the carrying amounts and fair values of certain assets at June 18, 2017 and January 1, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 18, 2017
|
|
|
|
|
|
|
Fair Value Estimated Using
|
|
|
|
Carrying
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
Amount
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
Cash equivalents
|
|
$
|
34,153
|
|
|
$
|
34,153
|
|
|
$
|
|
|
|
$
|
|
|
Restricted cash equivalents
|
|
|
69,139
|
|
|
|
69,139
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
6,943
|
|
|
|
6,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2017
|
|
|
|
|
|
|
Fair Value Estimated Using
|
|
|
|
Carrying
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
Amount
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
Cash equivalents
|
|
$
|
7,017
|
|
|
$
|
7,017
|
|
|
$
|
|
|
|
$
|
|
|
Restricted cash equivalents
|
|
|
69,113
|
|
|
|
69,113
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
7,260
|
|
|
|
7,260
|
|
|
|
|
|
|
|
|
|
Management estimated the approximate fair values of the 2012 fixed rate notes and the 2015 fixed rate notes as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 18, 2017
|
|
|
January 1, 2017
|
|
|
|
Principal Amount
|
|
|
Fair Value
|
|
|
Principal Amount
|
|
|
Fair Value
|
|
2012 Seven-Year Fixed Rate Notes
|
|
$
|
910,252
|
|
|
$
|
918,444
|
|
|
$
|
916,650
|
|
|
$
|
932,233
|
|
2015 Five-Year Fixed Rate Notes
|
|
|
493,750
|
|
|
|
493,256
|
|
|
|
495,000
|
|
|
|
485,595
|
|
2015
Ten-Year
Fixed Rate Notes
|
|
|
790,000
|
|
|
|
797,110
|
|
|
|
792,000
|
|
|
|
765,864
|
|
9
The fixed rate notes are classified as a Level 2 measurement, as the Company estimates the
fair value amount by using available market information. The Company obtained quotes from two separate brokerage firms that are knowledgeable about the Companys fixed rate notes and, at times, trade these notes. The Company also performed its
own internal analysis based on the information gathered from public markets, including information on notes that are similar to those of the Company. However, considerable judgment is required to interpret market data to estimate fair value.
Accordingly, the fair value estimates presented are not necessarily indicative of the amount that the Company or the debtholders could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a
material effect on the estimated fair values stated above.
9. Legal Matters
On February 14, 2011, Dominos 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 franchisees 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
franchisees delivery driver is alleged to have caused an accident involving a vehicle driven by Richard Wiederhold. Mr. Wiederhold sustained spinal injuries resulting in quadriplegia and passed away several months after the accident. The
jury returned a $10.1 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 90% liable (after certain offsets and other deductions the final verdict was $8.9 million). In the second quarter of 2016, the trial
court ruled on all post-judgment motions and entered the judgment. The Company denies liability and in the third quarter of 2016 filed an appeal of the verdict on a variety of grounds. The Company continues to deny liability in this matter.
10. Supplemental Disclosures of Cash Flow Information
The Company had
non-cash
investing activities related to accruals for capital expenditures of
$2.8 million at June 18, 2017 and $0.7 million at June 19, 2016.
11. Recapitalization
On July 24, 2017, the Company completed a recapitalization (the 2017 Recapitalization) in which certain of the Companys
subsidiaries issued new notes pursuant to an asset-backed securitization. The new notes consist of $300.0 million
Series 2017-1 Floating
Rate Senior Secured
Notes, Class A-2-I
with an anticipated term of five years (the Floating Rate Notes), $600.0 million
Series 2017-1 3.082%
Fixed Rate Senior Secured
Notes, Class A-2-II with
an anticipated term of five years (the Five-year Fixed Rate Notes), and
$1.0 billion
Series 2017-1 4.118%
Fixed Rate Senior Secured
Notes, Class A-2-III with
an
anticipated term of 10 years
(the Ten-year
Fixed Rate Notes and, collectively with the Floating Rate Notes and the Five-year Fixed Rate Notes, the 2017
Notes) in an offering exempt from registration under the Securities Act of 1933, as amended. The interest rate on the Floating Rate Notes will be payable at a rate equal to LIBOR plus 125 basis points. The 2017 Notes have scheduled principal
payments of $4.8 million in 2017, $19.0 million in each of 2018 through 2021, $871.8 million in 2022, $10.0 million in each of 2023 through 2026, and $907.5 million in 2027.
Concurrently, the Company also issued a new variable funding note facility which allows for advances of up to $175.0 million of Series
2017-1
Variable Funding Senior Secured Notes,
Class A-1
Notes and certain other credit instruments, including letters of credit (the Variable Funding Notes).
The Variable Funding Notes were undrawn on the closing date. The Companys previous variable funding note facility was canceled. Gross proceeds from the issuance of the 2017 Notes was $1.9 billion.
12. New Accounting Pronouncements
In February
2016, the FASB issued
ASU 2016-02, Leases
(Topic 842).
ASU 2016-02 requires
a lessee to recognize assets and liabilities on the balance sheet for
leases with lease terms greater than 12 months.
ASU 2016-02 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is
permitted. Based on a preliminary assessment, the Company expects the adoption of this guidance to have a material impact on its assets and liabilities due to the recognition
of right-of-use assets
and lease liabilities on its consolidated balance sheets at the beginning of the earliest period presented. The Company is continuing
its assessment, which may identify additional impacts this guidance will have on its consolidated financial statements and disclosures.
In March 2016, the FASB issued
ASU 2016-08,
Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. In April 2016, the FASB issued
ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing
. In May 2016, the FASB issued
ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients
and
ASU 2016-11,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates
2014-09
and
2014-16
Pursuant to Staff Announcements at the March
3, 2016 EITF Meeting
. In
December 2016, the FASB
10
issued
ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
. These amendments provide
additional clarification and implementation guidance on the previously issued
ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
.
The amendments in
ASU 2016-08 clarify
how an entity should identify the specified good or
service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements.
ASU 2016-10 clarifies
the following two aspects of
ASU 2014-09: identifying
performance obligations and licensing implementation guidance.
ASU 2016-11 rescinds
several SEC Staff Announcements that are
codified in Topic 605, including, among other items, guidance relating to accounting for consideration given by a vendor to a customer, as well as accounting for shipping and handling fees and freight services.
ASU 2016-12 provides
clarification to Topic 606 on how to assess collectability, present sales tax, treat noncash consideration, and account for completed and modified contracts at the time of
transition.
ASU 2016-12 clarifies
that an entity retrospectively applying the guidance in Topic 606 is not required to disclose the effect of the accounting change in the period of adoption.
Additionally,
ASU 2016-20 clarifies
certain narrow aspects within Topic 606 including its scope, contract cost accounting, and disclosures. The new guidance requires enhanced disclosures, including
revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The effective date and transition requirements for these amendments are the same as the effective date and
transition requirements of
ASU 2014-09, which
is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating
the overall impact that ASU
2014-09
and its related amendments will have on the Companys consolidated financial statements, as well as the expected timing and method of adoption effective January 1,
2018. Based on a preliminary assessment, the adoption of this guidance is not expected to have a material impact on our recognition of sales from Company-owned stores, ongoing royalty fees which are based on a percentage of franchise sales, or
revenues from our supply chain centers. The Company is continuing to evaluate the impact of the adoption of this guidance on the recognition of less significant revenues such as development fees, franchise fees, and technology fees.
The Company is currently evaluating whether the standards will require a different accounting treatment for contributions received by and
disbursements made by Dominos National Advertising Fund Inc. (DNAF), our consolidated not for profit subsidiary. DNAF exists solely for the purpose of promoting the Dominos Pizza brand in the U.S. The Company currently
presents the restricted assets and liabilities of the DNAF in its Condensed Consolidated Balance Sheets and, under existing accounting guidance, has determined that it acts as an agent in regard to franchise store contributions and disbursements.
Accordingly, these franchisee contributions and disbursements are presented net in the Condensed Consolidated Statements of Income. See Note 1 to the consolidated financial statements in the 2016 Form
10-K
for
additional details.
In March 2016, the FASB issued
ASU 2016-09,
Compensation
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09). ASU 2016-09 is
intended to simplify
several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The new standard was effective for the Company beginning January 2, 2017.
As a result, excess tax benefits or deficiencies from equity-based compensation activity are reflected in the consolidated statements of
income as a component of the provision for income taxes, whereas they previously were recognized in the consolidated statement of stockholders deficit. The Company also elected to account for forfeitures as they occur, rather than to use an
estimate of expected forfeitures for financial statement reporting purposes. The adoption of
ASU 2016-09 resulted
in a decrease in our provision for income taxes of $10.4 million in the second
quarter of 2017 and $16.9 million in the two fiscal quarters of 2017. This represents a decrease in the Companys effective tax rate of 11.8 percentage points for the second quarter of 2017 and 9.4 percentage points for the two fiscal
quarters of 2017, primarily due to the recognition of excess tax benefits for options exercised and the vesting of equity awards. The Companys election to account for forfeitures as they occur had an immaterial impact on its equity-based
compensation expense.
The Company adopted the cash flow presentation prospectively, and accordingly, excess tax benefits from
equity-based compensation of $16.9 million in the two fiscal quarters of 2017 are presented as an operating activity, while $34.9 million of excess tax benefits from equity-based compensation in the two fiscal quarters of 2016 is presented
as a financing activity. The presentation requirements for cash flows related to taxes paid for restricted stock upon vesting had no impact on our consolidated statements of cash flows for any of the periods presented because such cash flows have
historically been presented as a financing activity.
11
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations.
(Unaudited; tabular amounts in millions, except percentages and store data)
The 2017 and 2016 second quarters referenced herein represent the twelve-week periods ended June 18, 2017 and June 19, 2016. The 2017
and 2016 two fiscal quarters referenced herein represent the twenty-four-week periods ended June 18, 2017 and June 19, 2016.
Overview
Dominos is the second largest pizza restaurant chain in the world, with more than 14,200 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. Dominos generates revenues and earnings by charging royalties to our independent franchisees. The Company
also generates revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada, and by operating a number of our own stores. Franchisees profit by selling pizza and other complementary items to their
local customers. In our international markets, we generally grant geographical rights to the Dominos Pizza
®
brand to master franchisees. These master franchisees are charged with
developing their geographical area, and they profit by
sub-franchising
and selling ingredients and equipment to those
sub-franchisees,
as well as by running pizza
stores. Everyone in the system can benefit, including the end consumer, who can feed their family Dominos menu items conveniently and economically.
Our financial results are driven largely by retail sales at our franchise and Company-owned stores. Changes in retail sales are driven by
changes in same store sales and store counts. We monitor both of these metrics very closely, as they directly impact our revenues and profits, and strive to consistently increase both metrics. Retail sales drive royalty payments from franchisees, as
well as Company-owned store and supply chain revenues. Retail sales are primarily impacted by the strength of the Dominos 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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
Second Quarter
|
|
|
Two Fiscal
|
|
|
Two Fiscal
|
|
|
|
of 2017
|
|
|
of 2016
|
|
|
Quarters of 2017
|
|
|
Quarters of 2016
|
|
Global retail sales growth
|
|
|
+11.8
|
%
|
|
|
|
|
|
|
+11.7
|
%
|
|
|
|
|
|
|
+12.5
|
%
|
|
|
|
|
|
|
+9.5
|
%
|
|
|
|
|
Same store sales growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Company-owned stores
|
|
|
+11.2
|
%
|
|
|
|
|
|
|
+9.1
|
%
|
|
|
|
|
|
|
+12.6
|
%
|
|
|
|
|
|
|
+6.5
|
%
|
|
|
|
|
Domestic franchise stores
|
|
|
+9.3
|
%
|
|
|
|
|
|
|
+9.8
|
%
|
|
|
|
|
|
|
+9.6
|
%
|
|
|
|
|
|
|
+8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic stores
|
|
|
+9.5
|
%
|
|
|
|
|
|
|
+9.7
|
%
|
|
|
|
|
|
|
+9.8
|
%
|
|
|
|
|
|
|
+8.0
|
%
|
|
|
|
|
International stores (excluding foreign currency impact)
|
|
|
+2.6
|
%
|
|
|
|
|
|
|
+7.1
|
%
|
|
|
|
|
|
|
+3.4
|
%
|
|
|
|
|
|
|
+7.5
|
%
|
|
|
|
|
Store counts (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Company-owned stores
|
|
|
396
|
|
|
|
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic franchise stores
|
|
|
5,042
|
|
|
|
|
|
|
|
4,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic stores
|
|
|
5,438
|
|
|
|
|
|
|
|
5,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International stores
|
|
|
8,779
|
|
|
|
|
|
|
|
7,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores
|
|
|
14,217
|
|
|
|
|
|
|
|
12,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
628.6
|
|
|
|
100.0
|
%
|
|
$
|
547.3
|
|
|
|
100.0
|
%
|
|
$
|
1,252.8
|
|
|
|
100.0
|
%
|
|
$
|
1,086.5
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
435.8
|
|
|
|
69.3
|
%
|
|
|
375.5
|
|
|
|
68.6
|
%
|
|
|
866.2
|
|
|
|
69.1
|
%
|
|
|
747.5
|
|
|
|
68.8
|
%
|
General and administrative
|
|
|
80.0
|
|
|
|
12.7
|
%
|
|
|
68.1
|
|
|
|
12.4
|
%
|
|
|
157.8
|
|
|
|
12.6
|
%
|
|
|
136.6
|
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
112.9
|
|
|
|
18.0
|
%
|
|
|
103.7
|
|
|
|
19.0
|
%
|
|
|
228.9
|
|
|
|
18.3
|
%
|
|
|
202.4
|
|
|
|
18.6
|
%
|
Interest expense, net
|
|
|
(24.3
|
)
|
|
|
(3.9
|
)%
|
|
|
(25.0
|
)
|
|
|
(4.6
|
)%
|
|
|
(49.9
|
)
|
|
|
(4.0
|
)%
|
|
|
(50.9
|
)
|
|
|
(4.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
88.5
|
|
|
|
14.1
|
%
|
|
|
78.7
|
|
|
|
14.4
|
%
|
|
|
179.0
|
|
|
|
14.3
|
%
|
|
|
151.5
|
|
|
|
13.9
|
%
|
Provision for income taxes
|
|
|
22.8
|
|
|
|
3.6
|
%
|
|
|
29.4
|
|
|
|
5.4
|
%
|
|
|
50.8
|
|
|
|
4.1
|
%
|
|
|
56.8
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65.7
|
|
|
|
10.5
|
%
|
|
$
|
49.3
|
|
|
|
9.0
|
%
|
|
$
|
128.2
|
|
|
|
10.2
|
%
|
|
$
|
94.7
|
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter and two fiscal quarters of 2017, we sustained our strong domestic same store sales
performance and also continued our growth in international same store sales. Our Dominos Piece of the Pie Rewards
TM
loyalty program contributed significantly to our domestic same store sales
performance. Additionally, we remained focused on growing online ordering and improving the digital customer experience through our technology platforms.
We also continued our global expansion with the opening of 217 net new stores in the second quarter of 2017, bringing our
year-to-date
total to 406 stores. We opened 178 net new stores internationally and 39 net new stores domestically during the second quarter of 2017. 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.
12
Global retail sales, which are total retail sales at franchise and Company-owned stores
worldwide, increased 11.8% in the second quarter of 2017 and 12.5% in the two fiscal quarters of 2017. These increases were driven primarily by domestic and international same store sales growth, as well as an increase in our worldwide store counts
during the trailing four quarters. The impact of foreign currency exchange rates partially offset these increases, resulting from a generally stronger U.S. dollar when compared to the currencies in the international markets in which we compete.
Domestic same store sales growth reflected the sustained positive sales trends and the continued success of our products, marketing and technology platforms. International same store sales also continued to grow.
Total revenues increased $81.3 million, or 14.8%, in the second quarter of 2017, and $166.3 million, or 15.3% in the two fiscal
quarters of 2017. These increases were due primarily to higher supply chain volumes resulting from order and store count growth, as well as higher Company-owned store, domestic franchise and international franchise revenues resulting from same store
sales and store count growth. These changes in revenues are described in more detail below.
Income from operations increased
$9.2 million, or 8.8%, in the second quarter of 2017, and $26.5 million, or 13.1%, in the two fiscal quarters of 2017. These increases were driven by higher royalty revenues from domestic and international franchise stores, as well as
increased supply chain volumes. The negative impact of changes in foreign currency exchange rates on international franchise royalties as well as higher general and administrative expenses partially offset these increases.
Net income increased $16.4 million, or 33.5%, in the second quarter of 2017, and $33.5 million, or 35.4%, in the two fiscal quarters
of 2017. These increases were driven by higher income from operations, as noted above. The adoption of the new equity-based compensation standard also positively impacted net income through a reduction in the provision for income taxes.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
Second Quarter
|
|
|
Two Fiscal
|
|
|
Two Fiscal
|
|
|
|
of 2017
|
|
|
of 2016
|
|
|
Quarters of 2017
|
|
|
Quarters of 2016
|
|
Domestic Company-owned stores
|
|
$
|
112.4
|
|
|
|
17.9
|
%
|
|
$
|
97.8
|
|
|
|
17.9
|
%
|
|
$
|
226.0
|
|
|
|
18.0
|
%
|
|
$
|
194.3
|
|
|
|
17.9
|
%
|
Domestic franchise
|
|
|
82.4
|
|
|
|
13.1
|
%
|
|
|
69.7
|
|
|
|
12.7
|
%
|
|
|
162.3
|
|
|
|
13.0
|
%
|
|
|
137.8
|
|
|
|
12.7
|
%
|
Supply chain
|
|
|
390.1
|
|
|
|
62.1
|
%
|
|
|
339.3
|
|
|
|
62.0
|
%
|
|
|
778.7
|
|
|
|
62.1
|
%
|
|
|
675.0
|
|
|
|
62.1
|
%
|
International franchise
|
|
|
43.7
|
|
|
|
6.9
|
%
|
|
|
40.6
|
|
|
|
7.4
|
%
|
|
|
85.9
|
|
|
|
6.9
|
%
|
|
|
79.5
|
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
628.6
|
|
|
|
100.0
|
%
|
|
$
|
547.3
|
|
|
|
100.0
|
%
|
|
$
|
1,252.8
|
|
|
|
100.0
|
%
|
|
$
|
1,086.5
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues primarily consist of retail sales from our Company-owned stores, royalties and fees from our domestic
and international franchised stores and sales of food, equipment and supplies from our supply chain centers to substantially all of our domestic franchised stores and certain international franchised stores. Company-owned store and franchised store
revenues may vary from period to period due to changes in store count mix. Supply chain revenues may vary significantly from period to period as a result of fluctuations in commodity prices as well as the mix of products we sell.
Domestic Stores Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
Second Quarter
|
|
|
Two Fiscal
|
|
|
Two Fiscal
|
|
|
|
of 2017
|
|
|
of 2016
|
|
|
Quarters of 2017
|
|
|
Quarters of 2016
|
|
Domestic Company-owned stores
|
|
$
|
112.4
|
|
|
|
57.7
|
%
|
|
$
|
97.8
|
|
|
|
58.4
|
%
|
|
$
|
226.0
|
|
|
|
58.2
|
%
|
|
$
|
194.3
|
|
|
|
58.5
|
%
|
Domestic franchise
|
|
|
82.4
|
|
|
|
42.3
|
%
|
|
|
69.7
|
|
|
|
41.6
|
%
|
|
|
162.3
|
|
|
|
41.8
|
%
|
|
|
137.8
|
|
|
|
41.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic stores
|
|
$
|
194.8
|
|
|
|
100.0
|
%
|
|
$
|
167.5
|
|
|
|
100.0
|
%
|
|
$
|
388.3
|
|
|
|
100.0
|
%
|
|
$
|
332.1
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic stores revenues increased $27.3 million, or 16.3%, in the second quarter of 2017, and
$56.2 million, or 16.9%, in the two fiscal quarters of 2017. These increases were driven by higher domestic Company-owned same store sales, royalty revenues earned on higher franchise same store sales, and an increase in the average number of
stores open during each period. These changes in domestic stores revenues are more fully described below.
Domestic Company-Owned Stores
Revenues from domestic Company-owned store operations increased $14.6 million, or 14.9%, in the second quarter of 2017, and
$31.7 million, or 16.3%, in the two fiscal quarters of 2017. These increases were due primarily to higher same store sales during the second quarter and two fiscal quarters of 2017. Domestic Company-owned same store sales increased 11.2% in the
second quarter of 2017, and 12.6% in the two fiscal quarters of 2017. This compared to an increase of 9.1% in the second quarter of 2016 and 6.5% in the two fiscal quarters of 2016. An increase in the average number of Company-owned stores open
during the second quarter and two fiscal quarters of 2017 also contributed to the increases in revenues.
13
Domestic Franchise
Revenues from domestic franchise operations increased $12.7 million, or 18.3%, in the second quarter of 2017, and $24.5 million, or
17.8%, in the two fiscal quarters of 2017. These increases were driven by growth of 9.3% in same store sales in the second quarter of 2017 and a 9.6% increase in the two fiscal quarters of 2017. This compared to an increase of 9.8% in the second
quarter of 2016, and 8.2% in the two fiscal quarters of 2016. An increase in the average number of domestic franchised stores open during the second quarter and two fiscal quarters of 2017 also contributed to the increase in revenues. Revenues
further benefited from fees paid by franchisees for our digital ordering platform.
Supply Chain Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
Second Quarter
|
|
|
Two Fiscal
|
|
|
Two Fiscal
|
|
|
|
of 2017
|
|
|
of 2016
|
|
|
Quarters of 2017
|
|
|
Quarters of 2016
|
|
Domestic supply chain
|
|
$
|
356.0
|
|
|
|
91.3
|
%
|
|
$
|
309.4
|
|
|
|
91.2
|
%
|
|
$
|
709.6
|
|
|
|
91.1
|
%
|
|
$
|
617.0
|
|
|
|
91.4
|
%
|
International supply chain
|
|
|
34.1
|
|
|
|
8.7
|
%
|
|
|
29.9
|
|
|
|
8.8
|
%
|
|
|
69.1
|
|
|
|
8.9
|
%
|
|
|
58.0
|
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total supply chain
|
|
$
|
390.1
|
|
|
|
100.0
|
%
|
|
$
|
339.3
|
|
|
|
100.0
|
%
|
|
$
|
778.7
|
|
|
|
100.0
|
%
|
|
$
|
675.0
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Supply Chain
Domestic supply chain revenues increased $46.6 million, or 15.1%, in the second quarter of 2017, and $92.6 million, or 15.0%, in the
two fiscal quarters of 2017. These increases were primarily attributable to higher volumes from increased order counts at the store level as well as store count growth. The cheese block price per pound averaged $1.54 in the second quarter of 2017 as
compared to $1.40 in the second quarter of 2016. The cheese block price per pound averaged $1.59 in the two fiscal quarters of 2017 as compared to $1.43 in the two fiscal quarters of 2016. Our market basket pricing increased slightly during the
second quarter and two fiscal quarters of 2017. We estimate that the higher market basket pricing resulted in an increase in domestic supply chain revenues of approximately $1.5 million in the second quarter of 2017 and $5.8 million during
the two fiscal quarters of 2017.
International Supply Chain
Revenues from international supply chain operations increased $4.2 million, or 14.2%, in the second quarter of 2017, and
$11.1 million, or 19.1%, in the two fiscal quarters of 2017. The increases resulted primarily from higher volumes from increased order counts at the store level. The increase for the second quarter of 2017 was partially offset by an approximate
$1.4 million negative impact of foreign currency exchange rates. The impact of foreign currency exchange rates was flat for the two fiscal quarters of 2017.
International Franchise Revenues
Revenues from international franchise operations increased $3.1 million, or 7.6%, in the second quarter of 2017, and $6.4 million, or
8.1%, in the two fiscal quarters of 2017. These increases were due to higher same store sales and an increase in the average number of international stores open during each period. These increases were offset in part by the negative impact of
changes in foreign currency exchange rates of approximately $1.6 million in the second quarter of 2017, and $3.1 million in the two fiscal quarters of 2017. Excluding the impact of foreign currency exchange rates, same store sales
increased 2.6% in the second quarter of 2017, and 3.4% in the two fiscal quarters of 2017. This compared to an increase of 7.1% in the second quarter of 2016, and 7.5% in the two fiscal quarters of 2016.
Cost of Sales / Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
Second Quarter
|
|
|
Two Fiscal
|
|
|
Two Fiscal
|
|
|
|
of 2017
|
|
|
of 2016
|
|
|
Quarters of 2017
|
|
|
Quarters of 2016
|
|
Consolidated revenues
|
|
$
|
628.6
|
|
|
|
100.0
|
%
|
|
$
|
547.3
|
|
|
|
100.0
|
%
|
|
$
|
1,252.8
|
|
|
|
100.0
|
%
|
|
$
|
1,086.5
|
|
|
|
100.0
|
%
|
Consolidated cost of sales
|
|
|
435.8
|
|
|
|
69.3
|
%
|
|
|
375.5
|
|
|
|
68.6
|
%
|
|
|
866.2
|
|
|
|
69.1
|
%
|
|
|
747.5
|
|
|
|
68.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating margin
|
|
$
|
192.8
|
|
|
|
30.7
|
%
|
|
$
|
171.8
|
|
|
|
31.4
|
%
|
|
$
|
386.7
|
|
|
|
30.9
|
%
|
|
$
|
339.1
|
|
|
|
31.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and occupancy costs.
Consolidated operating margin
(which we define as revenues less cost of sales) increased $21.0 million, or 12.2%, in the second quarter of 2017, and $47.6 million, or 14.0%, in the two fiscal quarters of 2017. Higher domestic and international franchise revenues as
well as higher supply chain volumes contributed to the increased operating margin in the second quarter of 2017 and the two fiscal quarters of 2017. Franchise revenues do not have a cost of sales component, so changes in franchise revenues have a
disproportionate effect on the operating margin.
14
As a percentage of revenues, the operating margin decreased 0.7 percentage points in the second
quarter of 2017 and 0.3 percentage points in the two fiscal quarters of 2017. Company-owned store operating margins were lower for both the second quarter and two fiscal quarters of 2017 due to higher insurance expense and higher transaction-related
expenses as well as increased labor and food costs. Supply chain operating margins remained flat in the second quarter of 2017, but were higher for the two fiscal quarters of 2017 due primarily to lower food costs, lower insurance costs, and the
leveraging of higher volumes.
Domestic Company-Owned Stores Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
Second Quarter
|
|
|
Two Fiscal
|
|
|
Two Fiscal
|
|
|
|
of 2017
|
|
|
of 2016
|
|
|
Quarters of 2017
|
|
|
Quarters of 2016
|
|
Revenues
|
|
$
|
112.4
|
|
|
|
100.0
|
%
|
|
$
|
97.8
|
|
|
|
100.0
|
%
|
|
$
|
226.0
|
|
|
|
100.0
|
%
|
|
$
|
194.3
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
89.0
|
|
|
|
79.2
|
%
|
|
|
73.8
|
|
|
|
75.4
|
%
|
|
|
176.2
|
|
|
|
78.0
|
%
|
|
|
146.6
|
|
|
|
75.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store operating margin
|
|
$
|
23.4
|
|
|
|
20.8
|
%
|
|
$
|
24.0
|
|
|
|
24.6
|
%
|
|
$
|
49.8
|
|
|
|
22.0
|
%
|
|
$
|
47.7
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The domestic Company-owned store operating margin (which does not include certain store-level costs such as
royalties and advertising) decreased $0.6 million, or 2.7%, in the second quarter of 2017. The operating margin increased $2.1 million, or 4.2%, in the two fiscal quarters of 2017. Higher same store sales positively contributed to
operating margins for the second quarter and two fiscal quarters of 2017. However, incremental insurance expense, higher transaction-related expenses, and increased labor and food costs, discussed in more detail below, more than offset the positive
impact of higher same store sales in the second quarter of 2017 and offset the positive impact of higher same store sales, in part, in the two fiscal quarters of 2017.
As a percentage of store revenues, the store operating margin decreased 3.8 percentage points in the second quarter of 2017, and 2.6
percentage points in the two fiscal quarters of 2017, as discussed in more detail below.
Management has historically included costs to support digital
ordering as part of labor and related costs. Costs to support digital ordering are now included within transaction-related expenses and the prior year costs have been reclassified to conform to current year presentation.
|
|
|
Food costs increased 0.2 percentage points to 26.8% in second quarter of 2017, and 0.5 percentage points to 26.9% in the two fiscal quarters of 2017. These increases were due to slightly higher commodity prices as well
as promotional activities.
|
|
|
|
Labor costs increased 0.7 percentage points to 29.4% in the second quarter of 2017, and 0.5 percentage points to 29.6% in the two fiscal quarters of 2017. These increases were due primarily to an increase in labor rates
in certain markets. The leveraging of higher same store sales partially offset these increases.
|
|
|
|
Insurance costs increased 1.8 percentage points to 5.2% in the second quarter of 2017, and 0.8 percentage points to 4.0% in the two fiscal quarters of 2017. These increases resulted from incremental insurance expense
related to updated independent actuarial estimates for our casualty insurance program.
|
|
|
|
Transaction-related expenses increased 0.9 percentage points to 3.7% in the second quarter of 2017, and 0.8 percentage points to 3.6% in the two fiscal quarters of 2017. These increases were primarily attributable to
higher credit card-related expenses in certain markets in which we operate.
|
|
|
|
Occupancy costs, which include rent, telephone, utilities and depreciation, decreased 0.4 percentage points to 7.6% in the second quarter of 2017, and 0.3 percentage points to 7.6% in the two fiscal quarters of 2017.
These decreases were driven primarily by the leveraging of higher same store sales.
|
Supply Chain Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
Second Quarter
|
|
|
Two Fiscal
|
|
|
Two Fiscal
|
|
|
|
of 2017
|
|
|
of 2016
|
|
|
Quarters of 2017
|
|
|
Quarters of 2016
|
|
Revenues
|
|
$
|
390.1
|
|
|
|
100.0
|
%
|
|
$
|
339.3
|
|
|
|
100.0
|
%
|
|
$
|
778.7
|
|
|
|
100.0
|
%
|
|
$
|
675.0
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
346.7
|
|
|
|
88.9
|
%
|
|
|
301.7
|
|
|
|
88.9
|
%
|
|
|
689.9
|
|
|
|
88.6
|
%
|
|
|
600.9
|
|
|
|
89.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply chain operating margin
|
|
$
|
43.4
|
|
|
|
11.1
|
%
|
|
$
|
37.6
|
|
|
|
11.1
|
%
|
|
$
|
88.7
|
|
|
|
11.4
|
%
|
|
$
|
74.0
|
|
|
|
11.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The supply chain operating margin increased $5.8 million, or 15.5%, in the second quarter of 2017, and
$14.7 million, or 19.8%, in the two fiscal quarters of 2017. These increases were driven by higher volumes from increased store order counts.
As a percentage of supply chain revenues, the supply chain operating margin was flat for the second quarter of 2017 and increased 0.4
percentage points in the two fiscal quarters of 2017. The operating margin benefited from lower food costs, lower insurance expense and the leveraging of higher volumes, offset entirely in the second quarter of 2017 and in part in the two fiscal
quarters of 2017 by increased labor and delivery costs.
15
General and Administrative Expenses
General and administrative expenses increased $11.9 million, or 17.4%, in the second quarter of 2017, and $21.2 million, or 15.5%, in
the two fiscal quarters of 2017. These increases were primarily driven by continued investments in technological initiatives and labor (primarily in
e-commerce
and information technology) as well as
investments in other strategic areas. Higher performance-driven expenses resulting from higher same store sales, including Company-owned store national advertising contributions, also contributed to the increases. Higher variable performance-based
compensation resulting from improved operating performance also contributed to the increase in the two fiscal quarters of 2017.
Interest Expense
Interest expense decreased $0.6 million to $24.6 million in the second quarter of 2017, and $1.1 million to
$50.2 million in the two fiscal quarters of 2017. The Companys weighted average borrowing rate was 4.6% in all of the periods presented.
Provision for Income Taxes
Provision for income taxes decreased $6.6 million to $22.8 million in the second quarter of 2017, and $6.0 million to
$50.8 million in the two fiscal quarters of 2017. Although
pre-tax
income increased for both the second quarter and two fiscal quarters of 2017, the effective tax rate decreased, primarily as a result of
the Companys adoption of the
ASU 2016-09 accounting
standard, which requires tax benefits on equity-based compensation to be recorded as a reduction to the income tax provision. The adoption of
this standard benefitted the provision for income taxes by $10.4 million in the second quarter of 2017 and $16.9 million in the two fiscal quarters of 2017. The effective tax rate decreased to 25.7% during the second quarter of 2017 as
compared to 37.4% in the second quarter of 2016, and decreased to 28.4% during the two fiscal quarters of 2017 as compared to 37.5% in the two fiscal quarters of 2016.
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. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, invest in our business,
pay dividends and repurchase our common stock, reduce our working capital amounts. As of June 18, 2017, we had working capital of $47.7 million, excluding restricted cash and cash equivalents of $161.7 million and including total
unrestricted cash and cash equivalents of $52.2 million.
As of June 18, 2017, we had approximately $89.2 million of
restricted cash held for future principal and interest payments, $45.7 million of cash held as collateral for outstanding letters of credit, $26.7 million of restricted cash held in a three-month interest reserve as required by the related
debt agreements, and $0.1 million of other restricted cash for a total of $161.7 million of restricted cash and cash equivalents.
On July 24, 2017, the Company completed a recapitalization (the 2017 Recapitalization) in which certain of the Companys
subsidiaries issued new notes pursuant to an asset-backed securitization. The new notes consist of $300.0 million Series
2017-1
Floating Rate Senior Secured Notes,
Class A-2-I
with an anticipated term of five years (the Floating Rate Notes), $600.0 million Series
2017-1
3.082% Fixed Rate Senior Secured Notes,
Class A-2-II
with an anticipated term of five years (the Five-year Fixed Rate Notes), and $1.0 billion Series
2017-1
4.118% Fixed Rate Senior Secured Notes,
Class A-2-III
with an anticipated term of 10 years (the
Ten-year
Fixed Rate Notes and, collectively with the Floating Rate Notes and the Five-year Fixed Rate Notes, the 2017 Notes) in an offering exempt from registration under the Securities Act
of 1933, as amended. The interest rate on the Floating Rate Notes will be payable at a rate equal to LIBOR plus 125 basis points. The 2017 Notes have scheduled principal payments of $4.8 million in 2017, $19.0 million in each of 2018
through 2021, $871.8 million in 2022, $10.0 million in each of 2023 through 2026, and $907.5 million in 2027.
Concurrently, the Company also issued a new variable funding note facility which allows for advances of up to $175.0 million of Series
2017-1
Variable Funding Senior Secured Notes,
Class A-1
Notes and certain other credit instruments, including letters of credit (the Variable Funding Notes).
The Variable Funding Notes were undrawn on the closing date. The Companys previous variable funding note facility was canceled. Gross proceeds from the issuance of the 2017 Notes was $1.9 billion.
The Company will use a portion of the proceeds from the 2017 Recapitalization to repay the remaining $910.5 million in outstanding
principal and interest under the 2012 Notes on July 27, 2017. The proceeds will also be used to pay transaction-related fees and expenses in connection with the 2017 Recapitalization and to
pre-fund
a
portion of the principal and interest payable on the 2017 Notes. The Company will use the remaining proceeds for general corporate purposes.
16
As of June 18, 2017, we had approximately $2.18 billion of long-term debt, of which
$0.3 million was classified as a current liability. Prior to the completion of the 2017 Recapitalization, our fixed rate notes from the recapitalizations we completed in 2015 and 2012 had original scheduled principal payments of
$38.6 million in each of 2017 and 2018, $878.5 million in 2019, $488.0 million in 2020, $8.0 million in each of 2021 through 2024 and $728.0 million in 2025. However, in accordance with our debt agreements, the payment of
principal on the fixed rate notes (i) shall be suspended if the leverage ratios are less than or equal to 4.5x total debt to EBITDA and there are no scheduled
principal catch-up amounts
outstanding; provided, that during any such suspension, principal payments will continue to accrue and are subject
to catch-up upon
failure to satisfy the leverage ratios, or (ii) on and after
the payment in full of the 2012 fixed rate notes, may be suspended if the leverage ratios are less than or equal to 5.0x total debt to EBITDA and
no catch-up provisions
are applicable. During the
first quarter of 2017, we met the maximum leverage ratios of less than 4.5x, and, in accordance with our debt agreements, ceased debt amortization payments beginning in the second quarter of 2017. Accordingly, all principal amounts of our
outstanding fixed rate notes have been classified as long-term debt on the condensed consolidated balance sheet as of June 18, 2017.
As of June 18, 2017, we had $45.7 million of outstanding letters of credit and $79.3 million of available capacity under our
$125.0 million variable funding note facility. The letters of credit are primarily related to our casualty insurance programs and supply chain center leases. Borrowings under the variable funding notes are available to fund our working capital
requirements, capital expenditures and other general corporate purposes. However, our primary source of liquidity is cash flows from operations and availability of borrowings under our variable funding notes.
The Company did not repurchase any shares of its common stock in the second quarter of 2017. During the two fiscal quarters of 2017, the
Company repurchased and retired 80,360 shares of its common stock under its Board of Directors-approved open market share repurchase program for a total of approximately $12.7 million. As of June 18, 2017, the end of the second quarter,
the Company had a total remaining authorized amount for share repurchases of approximately $136.4 million. We continue to maintain our flexibility to use ongoing excess cash flow generation and (subject to certain restrictions in the documents
governing the variable funding notes) availability under the variable funding notes for, among other things, the repurchase of shares under the current authorized program, the payment of dividends and other corporate uses.
During the second quarter of 2017, the Companys Board of Directors declared a $0.46 per share quarterly dividend on its outstanding
common stock for shareholders of record as of June 15, 2017 which was paid on June 30, 2017. The Company had approximately $22.6 million accrued for common stock dividends at June 18, 2017. Subsequent to the second quarter, on
July 19, 2017, the Companys Board of Directors declared a $0.46 per share quarterly dividend for shareholders of record as of September 15, 2017 to be paid on September 30, 2017.
During the second quarter and two fiscal quarters of 2017, we experienced increases in both domestic and international same store sales versus
the comparable periods in the prior year. Additionally, our international and domestic businesses continued to grow store counts in the second quarter of 2017. These factors contributed to our continued ability to generate positive operating cash
flows. We expect to use our unrestricted cash and cash equivalents, cash flows from operations and available borrowings under the variable funding notes to, among other things, fund working capital requirements, invest in our core business, service
our indebtedness, pay dividends and repurchase our common stock. We have historically funded our working capital requirements, capital expenditures, debt repayments and repurchases of common stock primarily from our cash flows from operations and,
when necessary, our available borrowings under variable funding note facilities. We did not have any material commitments for capital expenditures as of June 18, 2017.
Based upon the current level of operations and anticipated growth, we believe that the cash generated from operations, our current
unrestricted cash and cash equivalents and amounts available under our variable funding note facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for at least the next twelve
months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under Risk Factors in our filings with the Securities and Exchange Commission
(the SEC). There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under the variable funding notes or otherwise to enable us to service our
indebtedness, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the fixed rate notes and to service, extend or refinance the variable funding notes will be subject to future
economic conditions and to financial, business and other factors, many of which are beyond our control.
17
The following table illustrates the main components of our cash flows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Two Fiscal
Quarters of 2017
|
|
|
Two Fiscal
Quarters of 2016
|
|
Cash Flows Provided By (Used In)
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
115.1
|
|
|
$
|
69.5
|
|
Net cash provided by (used in) investing activities
|
|
|
(59.9
|
)
|
|
|
50.3
|
|
Net cash used in financing activities
|
|
|
(45.8
|
)
|
|
|
(230.5
|
)
|
Exchange rate changes
|
|
|
(0.0
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
$
|
9.4
|
|
|
$
|
(111.1
|
)
|
|
|
|
|
|
|
|
|
|
Operating Activities
Cash provided by operating activities was $115.1 million in the two fiscal quarters of 2017. This resulted from net income of
$128.2 million generated during the period, which included $16.9 million of tax benefits from equity-based compensation and net positive
non-cash amounts
of $36.3 million. Changes in
operating assets and liabilities negatively impacted cash provided by operating activities by $32.5 million, primarily due to the timing of payments for income taxes.
Cash provided by operating activities was $69.5 million in the two fiscal quarters of 2016. This resulted from net income of
$94.7 million generated during the period, which included net negative
non-cash
amounts of $4.3 million, and a $21.0 million decrease in cash from changes in operating assets and liabilities,
primarily related to the timing of payments of accounts payable balances.
Investing Activities
Cash used in investing activities was $59.9 million in the two fiscal quarters of 2017, which consisted primarily of an increase in
restricted cash of $35.2 million and capital expenditures totaling $25.2 million (driven by increased investments in our technological initiatives, Company-owned stores and supply chain centers).
Cash provided by investing activities was $50.3 million in the two fiscal quarters of 2016, which consisted primarily of a decrease in
restricted cash of $73.5 million due to scheduled payments on our long-term debt and proceeds from the sale of assets of $2.8 million. Capital expenditures totaling $25.0 million (driven by increased investments in our technological
initiatives, Company-owned stores and supply chain centers) partially offset the cash provided by investing activities.
Financing Activities
Cash used in financing activities was $45.8 million in the two fiscal quarters of 2017. We paid $22.3 million in
dividends to our shareholders, we used $12.7 million to repurchase shares of common stock, we made $9.8 million in payments on our long-term debt obligations, and we made $4.9 million in tax payments for restricted stock upon vesting.
Proceeds of $3.9 million from exercise of stock options partially offset these uses of cash in financing activities in the two fiscal quarters of 2017.
Cash used in financing activities was $230.5 million in the two fiscal quarters of 2016. We used $224.1 million to repurchase shares
of common stock, and we made $39.9 million in payments on our long-term debt obligations, which included a required
catch-up
amortization payment on the fixed rate notes from the recapitalization we
completed in 2012 upon exceeding the 4.5x leverage covenant as defined in the related agreements. We also paid $19.1 million in dividends to our shareholders, and made $3.0 million in tax payments for restricted stock upon vesting. The tax
impact of equity-based compensation, proceeds of $10.8 million from the exercise of stock options, and $10.0 million draw on our variable funding note facility partially offset these uses of cash in financing activities in the two fiscal
quarters of 2016.
Forward-Looking Statements
This filing contains forward-looking statements. You can identify forward-looking statements because they contain words such as
believes, expects, may, will, should, seeks, approximately, intends, plans, estimates, or anticipates or similar
expressions that concern our strategy, plans or intentions. These forward-looking statements relating to our anticipated profitability, estimates in same store sales growth, the growth of our international business, ability to service our
indebtedness, our future cash flows, our operating performance, trends in our business and other descriptions of future events reflect the Companys expectations based upon currently available information and data. However, actual results are
subject to future risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that could cause actual results to differ materially
include: the level of our long-term and other indebtedness; uncertainties relating to litigation; consumer preferences, spending patterns and demographic trends; the effectiveness of our advertising, operations and promotional initiatives; the
strength of our brand in the markets in which we compete; our ability to retain key personnel; new product, digital ordering and concept developments by us, and other food-industry competitors; the ongoing level of profitability of our franchisees;
our ability and that of our franchisees to open new restaurants and keep existing restaurants in
18
operation; changes in operating expenses resulting from changes in prices of food (particularly cheese), labor, utilities, insurance, employee benefits and other operating costs; the impact that
widespread illness or general health concerns may have on our business and the economy of the countries where we operate; severe weather conditions and natural disasters; changes in our effective tax rate; changes in foreign currency exchange rates;
changes in government legislation and regulations; adequacy of our insurance coverage; costs related to future financings; our ability and that of our franchisees to successfully operate in the current credit environment; changes in the level of
consumer spending given the general economic conditions including interest rates, energy prices and consumer confidence; availability of borrowings under our variable funding notes and our letters of credit; and changes in accounting policies.
Important factors that could cause actual results to differ materially from our expectations are more fully described in our other filings with the SEC, including under the section headed Risk Factors in our 2016 Annual Report on
Form 10-K,
filed with the SEC on February 28, 2017 (2016 Form
10-K). These
forward-looking statements speak only as of the date of this filing, and
you should not rely on such statements as representing the views of the Company as of any subsequent date. Except as required by applicable securities laws, we do not undertake to publicly update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise.