The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of
Business
Dominos Pizza, Inc. (DPI), a Delaware corporation, conducts its operations and derives substantially all
of its operating income and cash flows through its wholly-owned subsidiary, Dominos, Inc. (Dominos) and Dominos wholly-owned subsidiary, Dominos Pizza LLC (DPLLC). DPI and its wholly-owned subsidiaries
(collectively, the Company) are primarily engaged in the following business activities: (i) retail sales of food through Company-owned Dominos Pizza stores; (ii) sales of food, equipment and supplies to Company-owned and
franchised Dominos Pizza stores through Company-owned supply chain centers; and (iii) receipt of royalties and fees from domestic and international Dominos Pizza franchisees.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of DPI and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Fiscal Year
The Companys fiscal year ends on the Sunday closest to December 31. The 2017 fiscal year ended on December 31, 2017, the 2016
fiscal year ended on January 1, 2017 and the 2015 fiscal year ended on January 3, 2016. The 2017 and 2016 fiscal years consisted of
fifty-two
weeks and the 2015 fiscal year consisted of fifty-three
weeks.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. These
investments are carried at cost, which approximates fair value.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at December 31, 2017 includes $122.9 million of cash and cash equivalents held for future
principal and interest payments, $32.1 million of cash equivalents held in a three-month interest reserve, $36.7 million of cash held as collateral for outstanding letters of credit and $0.1 million of other restricted cash.
Restricted cash and cash equivalents at January 1, 2017 includes $99.8 million of cash and cash equivalents held for future
principal and interest payments and $26.7 million of cash equivalents held in a three-month interest reserve.
Inventories
Inventories are valued at the lower of cost (on a
first-in,
first-out
basis) or net realizable value. Inventories at December 31, 2017 and January 1, 2017 are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Food
|
|
$
|
36,645
|
|
|
$
|
36,644
|
|
Equipment and supplies
|
|
|
3,316
|
|
|
|
3,537
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
39,961
|
|
|
$
|
40,181
|
|
|
|
|
|
|
|
|
|
|
Other Assets
Current and long-term other assets primarily include prepaid expenses such as insurance, rent and taxes, deposits, notes receivable, as well
as covenants
not-to-compete
and other intangible assets primarily arising from franchise acquisitions. As of December 31, 2017 and January 1, 2017, all
intangible assets with useful lives were fully amortized.
49
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Property, Plant and Equipment
Additions to property, plant and equipment are recorded at cost. Repair and maintenance costs are expensed as incurred.
Depreciation
and amortization expense is provided using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives, other than the estimated useful life of the capital lease assets as described below, are generally as
follows (in years):
|
|
|
Buildings
|
|
20
|
Leasehold and other improvements
|
|
7 15
|
Equipment
|
|
3 15
|
Included in land and buildings as of December 31, 2017 and January 1, 2017 are capital lease assets
of approximately $4.3 million and $4.7 million, which are net of $6.2 million and $5.8 million of accumulated amortization, respectively, related to the lease of a supply chain center building and the lease of a Company-owned
store. The capital lease assets are being amortized using the straight-line method over the respective lease terms.
Depreciation and
amortization expense on property, plant and equipment was approximately $29.6 million, $27.3 million and $24.1 million in 2017, 2016 and 2015, respectively.
Impairments of Long-Lived Assets
The Company evaluates the potential impairment of long-lived assets at least annually based on various analyses including the projection of
undiscounted cash flows and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. For Company-owned stores, the Company performs this evaluation on an operating market basis, which the
Company has determined to be the lowest level for which identifiable cash flows are largely independent of other cash flows. If the carrying amount of a long-lived asset exceeds the amount of the expected future undiscounted cash flows of that
asset, the Company estimates the fair value of the assets. If the carrying amount of the asset exceeds the estimated fair value of the asset, an impairment loss is recognized and the asset is written down to its estimated fair value. The Company did
not record any impairment losses on long-lived assets in 2017, 2016 or 2015.
Investments in Marketable Securities
Investments in marketable securities consist of investments in various mutual funds made by eligible individuals as part of the Companys
deferred compensation plan (Note 7). These investments are stated at aggregate fair value, are restricted and have been placed in a rabbi trust whereby the amounts are irrevocably set aside to fund the Companys obligations under the deferred
compensation plan. The Company classifies and accounts for these investments in marketable securities as trading securities.
Debt
Issuance Costs
Debt issuance costs are recorded as a reduction to the Companys debt balance and primarily include the expenses
incurred by the Company as part of the 2015 and 2017 Recapitalizations (Note 4). Amortization is provided on a straight-line basis (which is materially consistent with the effective interest method) over the expected term of the respective debt
instrument to which the costs relate and is included in interest expense.
50
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In connection with the 2012 Recapitalization, the Company recorded approximately
$39.9 million of debt issuance costs. In connection with the 2015 Recapitalization, the Company expensed approximately $6.9 million of these costs in connection with the extinguishment of $551.3 million of the 2012 Fixed Rate Notes
(Note 4). In connection with the 2017 Recapitalization, the Company expensed the approximately $5.5 million in remaining unamortized debt issuance costs associated with the extinguishment of the remaining $910.2 million of the 2012 Fixed
Rate Notes. Additionally, in connection with the 2015 and 2017 Recapitalizations, the Company recorded $17.4 million and $16.8 million of debt issuance costs, respectively, which are being amortized into interest expense over the five and
ten-year
expected terms of the 2017 Notes (Note 4).
In connection with the aforementioned
write-off
of debt issuance costs and scheduled principal payments of its outstanding notes, the Company expensed debt issuance costs of approximately $5.7 million, $0.6 million and $6.9 million in
2017, 2016 and 2015, respectively. Debt issuance cost expense, including the aforementioned amounts, was approximately $11.0 million, $6.4 million and $12.4 million in 2017, 2016 and 2015, respectively.
Goodwill
The
Companys goodwill amounts primarily relate to franchise store acquisitions and are not amortized. The Company performs its required impairment tests in the fourth quarter of each fiscal year and did not recognize any goodwill impairment
charges in 2017, 2016 or 2015.
Capitalized Software
Capitalized software is recorded at cost and includes purchased, internally-developed and externally-developed software used in the
Companys operations. Amortization expense is provided using the straight-line method over the estimated useful lives of the software, which range from one to seven years. Capitalized software amortization expense was approximately
$14.8 million, $10.8 million and $8.3 million in 2017, 2016 and 2015, respectively. As of December 31, 2017, scheduled amortization for the next five fiscal years was approximately $14.3 million, $9.4 million,
$5.3 million, $3.3 million and $1.6 million for 2018, 2019, 2020, 2021 and 2022, respectively.
Insurance Reserves
The Company has retention programs for workers compensation, general liability and owned and
non-owned
automobile liabilities for certain periods prior to December 1998 and for periods after December 2001. The Company is generally responsible for up to $1.0 million per occurrence under these
retention programs for workers compensation and general liability exposures. The Company is also generally responsible for between $500,000 and $3.0 million per occurrence under these retention programs for owned and
non-owned
automobile liabilities depending on the year. Total insurance limits under these retention programs vary depending on the year covered and range up to $110.0 million per occurrence for general
liability and owned and
non-owned
automobile liabilities and up to the applicable statutory limits for workers compensation.
Insurance reserves relating to our retention programs are based on undiscounted actuarial estimates. These estimates are based on historical
information and on certain assumptions about future events. Changes in assumptions for such factors as medical costs and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term. The Company
receives estimates of outstanding insurance exposures from its independent actuary and differences between these estimated actuarial exposures and the Companys recorded amounts are adjusted as appropriate.
51
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Other Accrued Liabilities
Current and long-term other accrued liabilities primarily include accruals for income, sales, property and other taxes, legal reserves, store
operating expenses, deferred rent expense, dividends payable and deferred compensation liabilities.
Foreign Currency Translation
The Companys foreign entities use their local currency as the functional currency. For these entities, the Company translates net
assets into U.S. dollars at year end exchange rates, while income and expense accounts are translated at average annual exchange rates. Currency translation adjustments are included in accumulated other comprehensive income (loss) and foreign
currency transaction gains and losses are included in determining net income.
Revenue Recognition
Domestic Company-owned stores revenues are comprised of retail sales of food through Company-owned Dominos Pizza stores located in the
contiguous United States and are recognized when the items are delivered to or carried out by customers.
Domestic franchise revenues are
primarily comprised of royalties and fees from Dominos Pizza franchisees with operations in the contiguous United States. Royalty revenues are recognized when the items are delivered to or carried out by franchise customers.
Supply chain revenues are primarily comprised of sales of food, equipment and supplies to franchised Dominos Pizza stores located in the
United States and Canada. Revenues from the sales of food are recognized upon delivery of the food to franchisees, while revenues from the sales of equipment and supplies are generally recognized upon shipment of the related products to franchisees.
International franchise revenues are primarily comprised of royalties and fees from Dominos Pizza franchisees outside the
contiguous United States. These revenues are recognized consistently with the policies applied for franchise revenues generated in the contiguous United States.
Supply Chain Profit-Sharing Arrangements
The Company enters into profit-sharing arrangements with domestic and Canadian stores that purchase all of their food from Supply Chain (Note
11). These profit-sharing arrangements generally offer Company-owned stores and participating franchisees with 50% (or a higher percentage in the case of Company-owned stores and certain franchisees who operate a larger number of stores) of their
regional supply chain centers
pre-tax
profits based upon each stores purchases from the supply chain center. Profit-sharing obligations are recorded as a revenue reduction in Supply Chain in the
same period as the related revenues and costs are recorded, and were $119.7 million, $99.8 million and $85.8 million in 2017, 2016 and 2015, respectively.
Advertising
Advertising
costs are expensed as incurred. Advertising expense, which relates primarily to Company-owned stores, was approximately $39.8 million, $34.5 million and $32.0 million during 2017, 2016 and 2015, respectively.
Domestic Stores (Note 11) are required to contribute a certain percentage of sales to the Dominos National Advertising Fund Inc.
(DNAF), a
not-for-profit
subsidiary that administers the Dominos Pizza systems national and market level advertising activities in the United
States. Included in advertising expense were advertising contributions from Company-owned stores to DNAF of approximately $30.4 million, $27.2 million and $24.9 million in 2017, 2016 and 2015, respectively. DNAF also received
advertising contributions from franchisees of approximately $323.8 million, $293.8 million and $266.0 million during 2017, 2016 and 2015, respectively. Franchisee contributions to DNAF and offsetting disbursements are presented net in
the accompanying consolidated statements of income, as we have determined we are an agent for accounting purposes in this arrangement.
52
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DNAF assets, consisting primarily of cash received from franchisees and accounts receivable
from franchisees, can only be used for activities that promote the Dominos Pizza brand. Accordingly, all assets held by the DNAF are considered restricted.
Rent
The Company leases
certain equipment, vehicles, retail store and supply chain center locations and its corporate headquarters under operating leases with expiration dates through 2033. Rent expenses totaled approximately $57.9 million, $49.9 million and
$46.1 million during 2017, 2016 and 2015, respectively.
Common Stock Dividends
The Company declared and paid dividends of approximately $84.2 million (or $1.84 per share) in 2017, approximately $74.0 million (or
$1.52 per share) in 2016 and approximately $66.5 million (or $1.24 per share) in 2015. The Company also paid dividends of $13.8 million in 2015 related to a dividend declaration in 2014.
Stock Options and Other Equity-Based Compensation Arrangements
The cost of all of the Companys stock options, as well as other equity-based compensation arrangements, is reflected in the financial
statements based on the estimated fair value of the awards.
Earnings Per Share
The Company discloses two calculations of earnings per share (EPS): basic EPS and diluted EPS. The numerator in calculating common
stock basic and diluted EPS is consolidated net income. The denominator in calculating common stock basic EPS is the weighted average shares outstanding. The denominator in calculating common stock diluted EPS includes the additional dilutive effect
of outstanding stock options, unvested restricted stock grants and unvested performance-based restricted stock grants.
Supplemental
Disclosures of Cash Flow Information
The Company paid interest of approximately $107.4 million, $104.6 million and
$80.8 million during 2017, 2016 and 2015, respectively. Cash paid for income taxes was approximately $122.6 million, $74.3 million and $80.1 million in 2017, 2016 and 2015, respectively.
The Company had $4.0 million, $3.8 million and $0.8 million of
non-cash
investing
activities related to accruals for capital expenditures at December 31, 2017, January 1, 2017, and January 3, 2016. The Company also had
non-cash
financing activities related to capital assets
and liabilities in 2015. Specifically, the Company recorded $3.4 million for the renewal of a capital lease of a supply chain center building in the first quarter of 2015, and recorded $0.6 million as a result of entering into a capital
lease for a corporate store in the third quarter of 2015.
53
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
New Accounting Pronouncements
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU
2016-09,
Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. ASU
2016-09
is intended to simplify several areas of accounting for share-based compensation
arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The 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 $27.2 million in fiscal 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
$27.2 million in fiscal 2017 are presented as an operating activity, while $48.1 million and $17.8 million of excess tax benefits from equity-based compensation in fiscal 2016 and fiscal 2015, respectively, are 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.
Accounting Standards Not Yet Adopted
The Company has considered all new accounting pronouncements issued by the FASB and concluded the following accounting pronouncements may have
a material impact on our consolidated financial statements, or represent accounting pronouncements for which the Company has not yet completed its assessment.
In May 2014, the FASB issued Accounting Standards Update
2014-09,
Revenue from Contracts with
Customers (Topic 606)
, or Accounting Standards Codification 606 (ASC 606). This guidance outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most
current revenue recognition guidance issued by the FASB, including industry specific guidance. Under the new revenue recognition standard, entities apply a five-step model that depicts the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, companies identify the performance obligations within their contracts with customers, allocate the transaction
price received from customers to each performance obligation identified within their contracts, and recognize revenue as the performance obligations are satisfied. During 2015, 2016, and 2017, the FASB issued various amendments which provide
additional clarification and implementation guidance on ASC 606. Specifically, these amendments 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, clarify how an entity should identify performance obligations and licensing implementation guidance, as well as account for shipping and handling fees and freight service, assess collectability, present
sales tax, treat
non-cash
consideration, and account for completed and modified contracts at the time of transition. 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 ASC 606 and amendments is for fiscal years, and for interim periods within those years,
beginning after December 15, 2017, and the Company will adopt this guidance using the modified retrospective approach effective January 1, 2018.
54
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has substantially completed its assessment of ASC 606, and the adoption of this
guidance is not expected to have a material impact on its recognition of sales from Company-owned stores, ongoing royalty fees which are based on a percentage of franchise sales, revenues from its supply chain centers, development fees or technology
fees.
The Company has determined that the store opening fees received from international franchisees do not contain separate and distinct
performance obligations from the franchise right and those upfront fees will therefore be recognized as revenue over the term of each respective franchise agreement. Currently, we recognize such fees as revenue when received. The Company does not
expect this to have a material impact on its international franchise revenues. However, an adjustment to beginning retained earnings and a corresponding contract liability of approximately $15 million will be established on the date of adoption
associated with the fees received through December 31, 2017 that would have been deferred and recognized over the term of each respective franchise agreement if the new guidance had been applied in the past.
The Company has also determined that ASC 606 requires a gross presentation on the consolidated statement of income for franchisee
contributions received by and related expenses of 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 DNAF in its consolidated balance sheets and, under existing accounting guidance, has determined that it acts as an agent for accounting purposes with
regard to franchise store contributions and disbursements. As a result, the Company currently presents the activities of DNAF net in its statements of income. Under ASC 606, the Company has determined that there are not separate performance
obligations associated with the franchise advertising contributions received by DNAF and as a result, these franchise contributions and the related expenses will be presented gross in the Companys consolidated statement of income. The Company
expects this change to have a material impact on its total revenues and expenses beginning in fiscal 2018. However, as the amount of revenues to be recorded is directly tied to future franchise retail sales and advertising contribution rates, the
Company is not able to reasonably estimate the impact. If this guidance were in effect in fiscal 2017, the Company would have reported incremental franchise advertising revenues and expenses of approximately $324 million in its consolidated
statement of income. While this change will materially impact the gross amount of reported franchise revenues and expenses, the impact will generally be an offsetting increase to both revenues and expenses such that the impact on income from
operations and net income, if any, would not be material. We will also present the activity associated with DNAF on a gross basis in the statement of cash flows beginning in fiscal 2018.
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. Our current minimum lease commitments are disclosed in Note 5.
In March 2016, the FASB issued ASU
2016-04,
Liabilities Extinguishment of Liabilities
(Subtopic
405-20):
Recognition of Breakage for Certain Prepaid Stored-Value Products
. ASU
2016-04
aligns recognition of the financial liabilities related to prepaid
stored-value products (for example, gift cards) with Topic 606,
Revenues from Contracts with Customers
, for
non-financial
liabilities. In general, these liabilities may be extinguished proportionately
in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value. ASU
2016-04
is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2017, and early adoption is permitted. The Company plans to adopt this guidance effective January 1, 2018 in connection with our adoption of ASC 606 and does not expect it to have a material impact on its
consolidated financial statements.
55
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 2016, the FASB issued ASU
2016-13,
Measurement of Credit Losses on Financial Instruments
. 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 those interim periods
within those fiscal years. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial
statements.
In November 2016, the FASB issued ASU
2016-18,
Statement of Cash Flows (Topic
230): Restricted Cash
(ASU
2016-18),
which requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU
2016-18
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and a retrospective transition method is required. The Company currently presents changes in
restricted cash and cash equivalents in the investing section of its consolidated statement of cash flows. The new guidance will not impact financial results, but will result in a change in the presentation of restricted cash and restricted cash
equivalents within the statement of cash flows. The Company currently plans to adopt this guidance in the first quarter of 2018 using the retrospective approach.
In January 2017, the FASB issued ASU
2017-04
, Intangibles Goodwill and Other (Topic 35):
Simplifying the Test for Goodwill Impairment
, or ASU
2017-04.
ASU
2017-04
simplifies the subsequent measurement of goodwill by eliminating Step 2 from
the goodwill impairment test. ASU
2017-04
is effective for public companies annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted
for annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance
to have a material impact on its consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
56
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The computation of basic and diluted earnings per common share is
as follows (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income available to common stockholders basic and diluted
|
|
$
|
277,905
|
|
|
$
|
214,678
|
|
|
$
|
192,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
45,954,659
|
|
|
|
48,647,167
|
|
|
|
53,828,609
|
|
Earnings per common share basic
|
|
$
|
6.05
|
|
|
$
|
4.41
|
|
|
$
|
3.58
|
|
Diluted weighted average number of common shares
|
|
|
47,677,834
|
|
|
|
49,923,859
|
|
|
|
55,532,955
|
|
Earnings per common share diluted
|
|
$
|
5.83
|
|
|
$
|
4.30
|
|
|
$
|
3.47
|
|
The denominators used in calculating diluted earnings per share for common stock do not include 145,860 options
to purchase common stock in 2017, 121,075 options to purchase common stock in 2016 and 188,080 options to purchase common stock in 2015, as the effect of including these options would be anti-dilutive. The denominators used in calculating diluted
earnings per share for common stock do not include 110,274 restricted performance shares in 2017, 134,113 restricted performance shares in 2016 and 189,532 restricted performance shares in 2015, as the performance targets for these awards had not
yet been met.
(3)
|
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 table summarizes the carrying amounts and fair values of certain assets at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
|
|
|
|
Fair Value Estimated Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
Cash equivalents
|
|
$
|
7,933
|
|
|
$
|
7,933
|
|
|
$
|
|
|
|
$
|
|
|
Restricted cash equivalents
|
|
|
96,375
|
|
|
|
96,375
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
8,119
|
|
|
|
8,119
|
|
|
|
|
|
|
|
|
|
The following table summarizes the carrying amounts and fair values of certain assets at January 1,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2017
|
|
|
|
|
|
|
Fair Value Estimated Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
Cash equivalents
|
|
$
|
7,017
|
|
|
$
|
7,017
|
|
|
$
|
|
|
|
$
|
|
|
Restricted cash equivalents
|
|
|
69,113
|
|
|
|
69,113
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
7,260
|
|
|
|
7,260
|
|
|
|
|
|
|
|
|
|
57
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4)
|
RECAPITALIZATIONS AND FINANCING ARRANGEMENTS
|
2017 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 2017 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 2017 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 ten years (the 2017
Ten-year
Fixed Rate Notes and, collectively with the 2017 Floating Rate Notes and the 2017 Five-year Fixed Rate Notes, the 2017 Fixed and Floating Rate Notes). The interest rate on the 2017
Floating Rate Notes is payable at a rate equal to LIBOR plus 125 basis points. 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
(the 2017 Variable Funding Notes) and certain other credit instruments, including letters of
credit. The 2017 Fixed and Floating Rate Notes and the 2017 Variable Funding Notes are collectively referred to as the 2017 Notes. The 2017 Variable Funding Notes were undrawn on the closing date. Gross proceeds from the issuance of the
2017 Notes were $1.9 billion.
A portion of the proceeds from the 2017 Recapitalization was used to repay the remaining
$910.5 million in outstanding principal and interest under the Companys 2012 Fixed Rate Notes,
pre-fund
a portion of the principal and interest payable on the 2017 Fixed and Floating Rate Notes and
pay transaction fees and expenses, described in additional detail below. In connection with the issuance of the 2017 Variable Funding Notes, the Company permanently reduced to zero the commitment to fund the 2015 Variable Funding Notes and the 2015
Variable Funding Notes were cancelled. The Company also used a portion of the proceeds from the 2017 Recapitalization to enter into a $1.0 billion accelerated share repurchase agreement (the 2017 ASR Agreement) with a counterparty.
See Note 10 for additional detail related to this transaction.
2015 and 2012 Recapitalizations
The Company previously entered into refinancing transactions in October 2015 (the 2015 Recapitalization) and in April 2012 (the
2012 Recapitalization). In connection with the 2015 Recapitalization, the Company issued $1.3 billion aggregate principal amount of fixed rate notes consisting of $500.0 million Series
2015-1
3.484% Fixed Rate Senior Secured Notes,
Class A-2-I
(the 2015 Five-Year Notes) and $800.0 million
Series
2015-1
4.474% Fixed Rate Senior Secured Notes,
Class A-2-II
(the 2015
Ten-Year
Notes and, together with the 2015 Five-Year Notes, the 2015 Fixed Rate Notes). Concurrent with the 2015 Recapitalization, the Company also issued a revolving financing facility which
allowed for advances of up to $125.0 million of Series
2015-1
Variable Funding Senior Secured Notes,
Class A-1
and issuances of letters of credit (the
2015 Variable Funding Notes and together with the 2015 Fixed Rate Notes, the 2015 Notes). The 2017 Notes and 2015 Notes are collectively referred to as the Notes.
A portion of the proceeds from the 2015 Recapitalization was used to make an optional prepayment of approximately $551.3 million in
aggregate principal amount of the 2012 Fixed Rate Notes, at par, pay scheduled principal
catch-up
amounts on the 2012 Fixed Rate Notes, make an interest reserve deposit,
pre-fund
a portion of the principal and interest payable on the 2015 Fixed Rate Notes and pay transaction fees and expenses. In connection with the issuance and sale of the 2015 Variable Funding Notes, the
Company permanently reduced to zero the commitment to fund the 2012 Variable Funding Notes and the 2012 Variable Funding Notes were cancelled. The Company also used a portion of the proceeds from the 2015 Recapitalization to enter into a
$600.0 million accelerated share repurchase agreement (the 2015 ASR Agreement) with a counterparty. See Note 10 for additional detail related to this transaction.
58
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In connection with the 2012 Recapitalization, the Company issued $1.575 billion of
Series
2012-1
5.216% Fixed Rate Senior Secured Notes,
Class A-2
(the 2012 Fixed Rate Notes) and a revolving financing facility that allowed for advances
of up to $100.0 million of Series
2012-1
Variable Funding Senior Secured Notes,
Class A-1
Notes (the 2012 Variable Funding Notes).
2017 Notes
The 2017
Notes have remaining scheduled principal payments of $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. During fiscal 2017, the Company made
principal payments of approximately $4.8 million on the 2017 Notes.
The legal final maturity date of the 2017 Notes is October 2047,
but it is anticipated that, unless earlier prepaid to the extent permitted under the related debt agreements, the 2017 Floating Rate Notes and 2017 Five-year Fixed Rate Notes will be repaid on or prior to the anticipated repayment date occurring in
July 2022, and the 2017
Ten-year
Fixed Rate Notes will be repaid on or prior to the anticipated repayment date occurring in July 2027. If the Company has not repaid or refinanced the 2017 Notes prior to the
applicable anticipated repayment dates, additional interest of at least 5% per annum will accrue, as defined in the related agreements.
The 2017 Variable Funding Notes allow for advances of up to $175.0 million and issuance of certain other credit instruments, including
letters of credit. At the closing date of the 2017 Recapitalization, interest on the 2017 Variable Funding Notes was payable at a per year rate equal to LIBOR plus 180 basis points. On December 15, 2017, certain of the Companys
subsidiaries entered into an agreement to reduce the rate from LIBOR plus 180 basis points to LIBOR plus 150 basis points. The 2017 Variable Funding Notes were undrawn at closing. The unused portion of the 2017 Variable Funding Notes is subject to a
commitment fee ranging from 50 to 100 basis points depending on utilization. It is anticipated that any amounts outstanding on the 2017 Variable Funding Notes will be repaid in full on or prior to July 2022, subject to two additional
one-year
extensions at the option of the Company, subject to certain conditions. Following the anticipated repayment date (and any extensions thereof), additional interest will accrue on the 2017 Variable Funding
Notes equal to 5% per annum. At December 31, 2017, there were $46.7 million of letters of credit and $128.3 million of borrowing capacity under the $175.0 million 2017 Variable Funding Notes.
2015 Notes
The 2015
Notes have remaining scheduled principal payments of $13.0 million in each of 2018 and 2019, $490.5 million in 2020, $8.0 million in each of 2021 through 2024, and $732.0 million in 2025. During fiscal 2017, the Company made
principal payments of approximately $6.5 million on the 2015 Notes.
The legal final maturity date of the 2015 Notes is in October
2045, but it is anticipated that, unless earlier prepaid to the extent permitted under the related debt agreements, the 2015 Five-Year Notes will be repaid on or prior to the anticipated repayment date occurring in October 2020 and the 2015
Ten-Year
Notes will be repaid on or prior to the anticipated repayment date occurring in October 2025. If the Company has not repaid or refinanced the 2015 Fixed Rate Notes prior to the applicable anticipated
repayment date, additional interest will accrue of at least 5% per annum, as defined in the related agreements.
59
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Debt Issuance Costs and Transaction-Related Expenses
During 2017 and in connection with the 2017 Recapitalization, the Company incurred approximately $6.4 million of net
pre-tax
expenses, primarily related to $5.5 million in expense related to the
write-off
of deferred financing fees associated with the repayment of the 2012 Fixed Rate
Notes. The Company also incurred approximately $0.3 million of interest expense on the 2012 Fixed Rate Notes subsequent to the closing of the 2017 Recapitalization but prior to the repayment of the 2012 Fixed Rate Notes, resulting in the
payment of interest on both the full amount of the 2012 and 2017 Notes for a short period of time. Further, the Company incurred $0.6 million of other net 2017 Recapitalization-related general and administrative expenses, including legal and
professional fees. In connection with the 2017 Recapitalization, the Company recorded $16.8 million of debt issuance costs, which are being amortized into interest expense over the five and
ten-year
expected terms of the 2017 Notes.
During fiscal 2015 and in connection with the 2015 Recapitalization, the Company incurred approximately
$8.1 million of net
pre-tax
expenses, primarily related to $6.9 million in expense related to the
write-off of
debt issuance costs associated with the
partial repayment of the 2012 Fixed Rate Notes. The Company also incurred approximately $0.4 million of interest expense on the 2012 Fixed Rate Notes subsequent to the closing of the 2015 Recapitalization but prior to the repayment of the 2012
Fixed Rate Notes, resulting in the payment of interest on both the full amount of the 2012 and 2015 Fixed Rate Notes for a short period of time. Further, the Company incurred $0.9 million of other net 2015 Recapitalization-related general and
administrative expenses, including legal and professional fees. In connection with the 2015 Recapitalization, the Company recorded $17.4 million of debt issuance costs, which are being amortized into interest expense over the five and
ten-year
expected terms of the 2015 Notes.
Guarantees and Covenants of the Notes
The Notes are guaranteed by certain subsidiaries of DPLLC and secured by a security interest in substantially all of the assets of the
Company, including royalty and certain other income from all domestic and international stores, domestic supply chain income and intellectual property. The restrictions placed on the Companys subsidiaries require that the Companys
principal and interest obligations have first priority and amounts are segregated weekly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of weekly cash flow that exceeds the required
weekly interest reserve is generally remitted to the Company in the form of a dividend. However, once the required obligations are satisfied, there are no further restrictions, including payment of dividends, on the cash flows of the subsidiaries.
The Notes are subject to certain financial and
non-financial
covenants, including a debt service
coverage ratio calculation, as defined in the related agreements. The covenants, among other things, may limit the ability of certain of our subsidiaries to declare dividends, make loans or advances or enter into transactions with affiliates. In the
event that certain covenants are not met, the Notes may become partially or fully due and payable on an accelerated schedule. In addition, the Company may voluntarily prepay, in part or in full, the Notes at any time, subject to certain make-whole
interest obligations.
While the Notes are outstanding, scheduled payments of principal and interest are required to be made on a
quarterly basis. The payment of principal of the 2017 Fixed and Floating Rate Notes and the 2015 Fixed Rate Notes shall be suspended if the leverage ratio for the Company is less than or equal to 5.0x total debt, as defined, to adjusted EBITDA,
as defined. Scheduled principal payments will resume upon failure to satisfy the aforementioned leverage ratio on an ongoing basis and no
catch-up
provisions are applicable.
60
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Prior to the 2017 Recapitalization and the repayment of the remaining principal and interest
under the 2012 Fixed Rate Notes, the payment of principal of the 2012 Fixed Rate Notes and 2015 Fixed Rate Notes (i) shall be suspended if the leverage ratios for the Company are less than or equal to 4.5x total debt to adjusted EBITDA, as
defined, 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 aforementioned leverage ratios on an ongoing basis.
During the
first quarter of 2017, the Company met the maximum leverage ratios under the Companys then outstanding 2012 Fixed Rate Notes and 2015 Notes of less than 4.5x, and, in accordance with the Companys debt agreements, ceased debt amortization
payments beginning in the second quarter of 2017. The Company continued to meet the maximum leverage ratios of less than 4.5x in the third quarter prior to the 2017 Recapitalization and accordingly, did not make previously scheduled debt
amortization payments in accordance with the debt agreements. Subsequent to the 2017 Recapitalization, the Companys leverage ratios exceeded the new maximum leverage ratio of 5.0x and, accordingly, the Company began making the scheduled
amortization payments on the Notes.
In 2015 and up until the 2015 Recapitalization, the Company met the maximum leverage ratios of less
than 4.5x and accordingly, did not make previously scheduled debt amortization payments in accordance with the debt agreements. Subsequent to the 2015 Recapitalization, the Companys leverage ratios exceeded 4.5x and, accordingly, the Company
began making the scheduled amortization payments as well as the required
catch-up
payments.
Consolidated Long-Term Debt
At December 31, 2017 and January 1, 2017, consolidated long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
5.216%
Class A-2
Notes; repaid in connection with the
2017 Recapitalization
|
|
$
|
|
|
|
$
|
916,650
|
|
3.484%
Class A-2-I
Notes; expected repayment date October 2020; legal final maturity October 2045
|
|
|
492,500
|
|
|
|
495,000
|
|
4.474%
Class A-2-II
Notes; expected repayment date October 2025; legal final maturity October 2045
|
|
|
788,000
|
|
|
|
792,000
|
|
3.082%
Class A-2-II
Notes; expected repayment date July 2022; legal final maturity July 2047
|
|
|
598,500
|
|
|
|
|
|
4.118%
Class A-2-III
Notes; expected repayment date July 2027; legal final maturity July 2047
|
|
|
997,500
|
|
|
|
|
|
Floating Rate
Class A-2-I
Notes; expected repayment date July 2022; legal final maturity July 2047
|
|
|
299,250
|
|
|
|
|
|
2017 Variable Funding Notes
|
|
|
|
|
|
|
|
|
2015 Variable Funding Notes
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
5,437
|
|
|
|
5,730
|
|
Debt issuance costs, net of accumulated amortization of $6.8 million in 2017 and
$21.1 million in 2016
|
|
|
(27,373
|
)
|
|
|
(21,503
|
)
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
3,153,814
|
|
|
|
2,187,877
|
|
Less current portion
|
|
|
32,324
|
|
|
|
38,887
|
|
|
|
|
|
|
|
|
|
|
Consolidated long-term debt, net of debt issuance costs
|
|
$
|
3,121,490
|
|
|
$
|
2,148,990
|
|
|
|
|
|
|
|
|
|
|
61
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2017, maturities of long-term debt and capital lease obligations are as
follows (in thousands):
|
|
|
|
|
2018
|
|
$
|
32,324
|
|
2019
|
|
|
32,358
|
|
2020
|
|
|
509,896
|
|
2021
|
|
|
27,440
|
|
2022
|
|
|
880,238
|
|
Thereafter
|
|
|
1,698,931
|
|
|
|
|
|
|
|
|
$
|
3,181,187
|
|
|
|
|
|
|
Fair Value Disclosures
Management estimated the approximate fair values of the 2012 Fixed Rate Notes, 2015 Notes and 2017 Notes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
January 1, 2017
|
|
|
|
Principal
Amount
|
|
|
Fair Value
|
|
|
Principal
Amount
|
|
|
Fair Value
|
|
2012 Seven-Year Fixed Rate Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
916,650
|
|
|
$
|
932,233
|
|
2015 Five-Year Fixed Rate Notes
|
|
|
492,500
|
|
|
|
494,470
|
|
|
|
495,000
|
|
|
|
485,595
|
|
2015
Ten-Year
Fixed Rate Notes
|
|
|
788,000
|
|
|
|
821,884
|
|
|
|
792,000
|
|
|
|
765,864
|
|
2017 Five-Year Fixed Rate Notes
|
|
|
598,500
|
|
|
|
592,515
|
|
|
|
|
|
|
|
|
|
2017
Ten-Year
Fixed Rate Notes
|
|
|
997,500
|
|
|
|
1,023,435
|
|
|
|
|
|
|
|
|
|
2017 Five-Year Floating Rate Notes
|
|
|
299,250
|
|
|
|
300,746
|
|
|
|
|
|
|
|
|
|
The Notes are classified as a Level 2 measurement (Note 3), as the Company estimated the fair value
amount by using available market information. The Company obtained broker quotes from two separate brokerage firms that are knowledgeable about the Companys Notes and, at times, trade these notes. Further, the Company performs its own internal
analysis based on the information it gathers from public markets, including information on notes that are similar to that of the Company. However, considerable judgment is required in interpreting market data to develop estimates of fair value.
Accordingly, the fair value estimates presented herein 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 calculated above.
(5)
|
COMMITMENTS AND CONTINGENCIES
|
Lease Commitments
As of December 31, 2017, the future minimum rental commitments for all
non-cancelable
leases are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
2018
|
|
$
|
45,064
|
|
|
$
|
826
|
|
|
$
|
45,890
|
|
2019
|
|
|
40,265
|
|
|
|
828
|
|
|
|
41,093
|
|
2020
|
|
|
35,124
|
|
|
|
831
|
|
|
|
35,955
|
|
2021
|
|
|
31,298
|
|
|
|
833
|
|
|
|
32,131
|
|
2022
|
|
|
26,668
|
|
|
|
836
|
|
|
|
27,504
|
|
Thereafter
|
|
|
58,982
|
|
|
|
4,343
|
|
|
|
63,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future minimum rental commitments
|
|
$
|
237,401
|
|
|
|
8,497
|
|
|
$
|
245,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
|
|
|
|
(3,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal payable on capital leases
|
|
|
|
|
|
$
|
5,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Future minimum rental commitments for
non-cancelable
leases do not include variable payments for common area maintenance, real estate taxes or insurance for our real estate leases or the rate per mile driven for our supply chain center tractors and trailers.
Legal Proceedings and Related Matters
The Company is a party to lawsuits, revenue agent reviews by taxing authorities and legal proceedings, of which the majority involve
workers compensation, employment practices liability, general liability and automobile and franchisee claims arising in the ordinary course of business. The Company records legal fees associated with loss contingencies when they are probable
and reasonably estimable.
Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable
with assurance. These matters referenced above could be decided unfavorably to us and could require us to pay damages or make other expenditures in amounts or a range of amounts that cannot be estimated with accuracy. In managements opinion,
these matters, individually and in the aggregate, should not have a significant adverse effect on the financial condition of the Company, and the established accruals adequately provide for the estimated resolution of such claims.
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.
Income before provision for income taxes in 2017, 2016 and 2015 consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
386,989
|
|
|
$
|
334,892
|
|
|
$
|
298,055
|
|
Foreign
|
|
|
13,164
|
|
|
|
9,766
|
|
|
|
8,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
400,153
|
|
|
$
|
344,658
|
|
|
$
|
306,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between the United States Federal statutory income tax provision (using the statutory rate of
35%) and the Companys consolidated provision for income taxes for 2017, 2016 and 2015 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Federal income tax provision based on the statutory rate
|
|
$
|
140,054
|
|
|
$
|
120,630
|
|
|
$
|
107,175
|
|
State and local income taxes, net of related Federal income taxes
|
|
|
11,520
|
|
|
|
9,787
|
|
|
|
8,589
|
|
Non-resident
withholding and foreign income taxes
|
|
|
20,210
|
|
|
|
17,275
|
|
|
|
15,750
|
|
Foreign tax and other tax credits
|
|
|
(23,324
|
)
|
|
|
(20,049
|
)
|
|
|
(18,345
|
)
|
Excess tax benefits from equity-based compensation
|
|
|
(27,227
|
)
|
|
|
|
|
|
|
|
|
Non-deductible
expenses, net
|
|
|
1,794
|
|
|
|
1,579
|
|
|
|
1,180
|
|
Unrecognized tax provision (benefit), net of related Federal income taxes
|
|
|
(173
|
)
|
|
|
(98
|
)
|
|
|
110
|
|
Other
|
|
|
(606
|
)
|
|
|
856
|
|
|
|
(1,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,248
|
|
|
$
|
129,980
|
|
|
$
|
113,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company adopted ASU
2016-09
during 2017, which is
intended to simplify several areas of accounting for share-based compensation arrangements. As a result, excess tax benefits or deficiencies from equity-based compensation activity are now reflected in the Companys 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 adoption of ASU
2016-09
resulted in a decrease
in our provision for income taxes of $27.2 million in 2017, primarily due to the recognition of excess tax benefits for options exercised and the vesting of equity awards. Refer to Note 1 for additional information related to the impact of
adopting ASU
2016-09.
The components of the 2017, 2016 and 2015 consolidated provision for income
taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Provision for Federal income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
81,747
|
|
|
$
|
100,673
|
|
|
$
|
84,071
|
|
Deferred provision (benefit)
|
|
|
6,732
|
|
|
|
(3,096
|
)
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for Federal income taxes
|
|
|
88,479
|
|
|
|
97,577
|
|
|
|
84,933
|
|
Provision for state and local income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
|
14,131
|
|
|
|
15,091
|
|
|
|
11,892
|
|
Deferred provision (benefit)
|
|
|
(572
|
)
|
|
|
37
|
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for state and local income taxes
|
|
|
13,559
|
|
|
|
15,128
|
|
|
|
12,743
|
|
Provision for
non-resident
withholding and foreign income
taxes
|
|
|
20,210
|
|
|
|
17,275
|
|
|
|
15,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,248
|
|
|
$
|
129,980
|
|
|
$
|
113,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017 and January 1, 2017, the significant components of net deferred income taxes
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Deferred Federal income tax assets
|
|
|
|
|
|
|
|
|
Insurance reserves
|
|
$
|
8,290
|
|
|
$
|
11,202
|
|
Equity compensation
|
|
|
7,724
|
|
|
|
11,978
|
|
Other accruals and reserves
|
|
|
7,187
|
|
|
|
18,741
|
|
Bad debt reserves
|
|
|
309
|
|
|
|
1,005
|
|
Other
|
|
|
3,164
|
|
|
|
5,732
|
|
|
|
|
|
|
|
|
|
|
Total deferred Federal income tax assets
|
|
|
26,674
|
|
|
|
48,658
|
|
|
|
|
|
|
|
|
|
|
Deferred Federal income tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation, amortization and asset basis differences
|
|
|
4,823
|
|
|
|
6,352
|
|
Capitalized software
|
|
|
18,522
|
|
|
|
25,869
|
|
Gain on debt extinguishments
|
|
|
2,722
|
|
|
|
9,073
|
|
|
|
|
|
|
|
|
|
|
Total deferred Federal income tax liabilities
|
|
|
26,067
|
|
|
|
41,294
|
|
|
|
|
|
|
|
|
|
|
Net deferred Federal income tax asset
|
|
|
607
|
|
|
|
7,364
|
|
Net deferred state and local income tax asset
|
|
|
2,143
|
|
|
|
1,571
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
2,750
|
|
|
$
|
8,935
|
|
|
|
|
|
|
|
|
|
|
64
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Realization of the Companys deferred tax assets is dependent upon many factors,
including, but not limited to, the Companys ability to generate sufficient taxable income. Although realization of the Companys net deferred tax assets is not assured, management believes it is more likely than not that the net deferred
tax assets will be realized. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax assets will be realized.
For financial reporting purposes, the Companys investment in foreign subsidiaries does not exceed its tax basis. Therefore, no deferred
income taxes have been provided.
The Company recognizes the financial statement benefit of a tax position if it is more likely than not
that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authoritys widely understood administrative practices and precedents. For tax positions meeting the more likely than
not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company
recognizes accrued interest related to unrecognized tax benefits in interest expense and penalties in income tax expense.
At
December 31, 2017, the amount of unrecognized tax benefits was $1.8 million of which, if ultimately recognized, $1.5 million would be recognized as an income tax benefit and reduce the Companys effective tax rate. At
December 31, 2017, the Company had less than $0.1 million of accrued interest and no accrued penalties.
At January 1, 2017,
the amount of unrecognized tax benefits was $2.0 million of which, if ultimately recognized, $1.6 million would be recognized as an income tax benefit and reduce the Companys effective tax rate. At January 1, 2017, the Company
had less than $0.1 million of accrued interest and no accrued penalties.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
Balance as of December 28, 2014
|
|
$
|
2,939
|
|
Additions for tax positions of current year
|
|
|
233
|
|
Additions for tax positions of prior years
|
|
|
171
|
|
Reductions in tax positions from prior years for:
|
|
|
|
|
Changes in prior year tax positions
|
|
|
(100
|
)
|
Settlements during the period
|
|
|
(27
|
)
|
Lapses of applicable statute of limitations
|
|
|
(1,101
|
)
|
|
|
|
|
|
Balance as of January 3, 2016
|
|
|
2,115
|
|
Additions for tax positions of current year
|
|
|
209
|
|
Reductions in tax positions from prior years for:
|
|
|
|
|
Changes in prior year tax positions
|
|
|
(33
|
)
|
Lapses of applicable statute of limitations
|
|
|
(337
|
)
|
|
|
|
|
|
Balance as of January 1, 2017
|
|
|
1,954
|
|
Additions for tax positions of current year
|
|
|
224
|
|
Additions for tax positions of prior years
|
|
|
42
|
|
Reductions in tax positions from prior years for:
|
|
|
|
|
Changes in prior year tax positions
|
|
|
(10
|
)
|
Lapses of applicable statute of limitations
|
|
|
(373
|
)
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
1,837
|
|
|
|
|
|
|
65
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company continues to be under examination by certain states. The Companys Federal
statute of limitation has expired for years prior to 2014 and the relevant state and foreign statutes vary. The Company expects the current ongoing examinations to be concluded in the next twelve months and does not expect the assessment of any
significant additional amounts in excess of amounts reserved.
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the 2017 Tax Act) was enacted. The 2017 Tax Act includes many changes to
existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017.
The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with Staff Accounting
Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740,
Income Taxes
, in the reporting period in which the 2017 Tax Act was signed into law. The Company did not identify items for which the income tax
effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.
The
remeasurement of the deferred tax assets and liabilities was not material to our 2017 financial statements. However, the remeasured amounts incorporate assumptions made based upon the Companys current interpretation of the 2017 Tax Act, mainly
related to the deductibility of certain officers compensation, and may change as the Company receives additional clarification and implementation guidance.
The Company has a retirement savings plan which qualifies under Internal
Revenue Code Section 401(k). All employees of the Company who have completed 1,000 hours of service and are at least 21 years of age are eligible to participate in the plan. Effective January 1, 2018, employees of the Company who have
completed 1,000 hours of service and are at least 18 years of age are eligible to participate in the plan. The plan requires the Company to match 100% of the first 3% of each employees elective deferrals and 50% of the next 2% of each
employees elective deferrals. During 2017, 2016 and 2015, the Companys matching contributions were made in the form of cash and vested immediately. The expenses incurred for Company contributions to the plan were approximately
$6.1 million, $5.2 million and $4.6 million in 2017, 2016 and 2015, respectively.
The Company has established a
non-qualified
deferred compensation plan available for certain key employees. Under this self-funding plan, the participants may defer up to 40% of their annual compensation. The participants direct the investment
of their deferred compensation within several investment funds. The Company is not required to contribute and did not contribute to this plan during 2017, 2016 or 2015.
The Company has an employee stock purchase discount plan (the ESPDP). Under the ESPDP, eligible employees may deduct up to 15% of
their eligible wages to purchase common stock at 85% of the market price of the stock at the purchase date. The ESPDP requires employees to hold their purchased common stock for at least one year. The Company purchases common stock on the open
market for the ESPDP at the current market price. There were 21,744 shares, 23,317 shares and 23,994 shares of common stock in 2017, 2016 and 2015, respectively, purchased on the open market for participating employees at a weighted-average price of
$188.57 in 2017, $131.74 in 2016 and $105.16 in 2015. The expenses incurred under the ESPDP were approximately $0.7 million, $0.5 million and $0.4 million in 2017, 2016 and 2015, respectively.
66
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(8)
|
FINANCIAL INSTRUMENTS WITH
OFF-BALANCE
SHEET RISK
|
The
Company is a party to
stand-by
letters of credit. The Companys exposure to credit loss for
stand-by
letters of credit is represented by the contractual amounts of
these instruments. The Company uses the same credit policies in making conditional obligations as it does for
on-balance
sheet instruments. Total conditional commitments under letters of credit as of
December 31, 2017 and January 1, 2017 are $46.7 million and $44.3 million, respectively, and relate to the Companys insurance programs and supply chain center leases. The Company has also guaranteed lease payments related
to certain franchisees lease arrangements. The maximum amount of potential future payments under these guarantees was $1.5 million and $1.0 million as of December 31, 2017 and January 1, 2017, respectively.
(9)
|
EQUITY INCENTIVE PLANS
|
The cost of all employee stock options, as well as other equity-based
compensation arrangements, is reflected in the consolidated statements of income based on the estimated fair value of the awards and is amortized over the requisite service period of each award.
The Companys current equity incentive plan benefits certain of the Companys employees and directors and is named the Dominos
Pizza, Inc. 2004 Equity Incentive Plan (the 2004 Equity Incentive Plan). As of December 31, 2017, the maximum number of shares that may be granted under the 2004 Equity Incentive Plan is 15,600,000 shares of voting common stock of
which 2,845,095 shares were authorized for grant but have not been granted.
The Company recorded total
non-cash
compensation expense of $20.7 million, $18.6 million and $17.6 million in 2017, 2016 and 2015 respectively. All
non-cash
compensation expense
amounts are recorded in general and administrative expense. The Company recorded a deferred tax benefit related to
non-cash
compensation expense of approximately $5.2 million in 2017.
The Company adopted ASU
2016-09
during 2017, which is intended to simplify several areas of accounting
for share-based compensation arrangements. As a result, excess tax benefits or deficiencies from equity-based compensation activity are now reflected in the Companys 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 Companys election to account for forfeitures as they occur had an immaterial impact on its equity-based compensation expense. Refer to Note 1 for additional information related to the impact of adopting ASU
2016-09.
Stock Options
As of December 31, 2017, the number of stock options granted and outstanding under the 2004 Equity Incentive Plan was 2,238,114 options.
Stock options granted under the 2004 Equity Incentive Plan and a predecessor plan prior to fiscal 2009 were generally granted with an exercise price equal to the market price at the date of the grant, expired ten years from the date of grant and
vested over five years from the date of grant. Stock options granted in fiscal 2009 through fiscal 2012 were granted with an exercise price equal to the market price at the date of the grant, expire ten years from the date of grant and generally
vest over three years from the date of grant. Stock options granted in fiscal 2013 through fiscal 2017 were granted with an exercise price equal to the market price at the date of the grant, expire ten years from the date of grant and generally vest
over four years from the date of grant. Additionally, all stock options granted become fully exercisable upon vesting. These awards also contain provisions for accelerated vesting upon the retirement of holders that have achieved specific service
and age requirements.
67
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock option activity related to the 2004 Equity Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Options
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(Years)
|
|
|
(In thousands)
|
|
Stock options at December 28, 2014
|
|
|
3,590,115
|
|
|
$
|
22.47
|
|
|
|
|
|
|
|
|
|
Stock options granted
|
|
|
193,970
|
|
|
|
111.63
|
|
|
|
|
|
|
|
|
|
Stock options cancelled
|
|
|
(32,176
|
)
|
|
|
73.55
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
(428,433
|
)
|
|
|
11.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options at January 3, 2016
|
|
|
3,323,476
|
|
|
$
|
28.57
|
|
|
|
|
|
|
|
|
|
Stock options granted
|
|
|
233,280
|
|
|
|
129.42
|
|
|
|
|
|
|
|
|
|
Stock options cancelled
|
|
|
(12,798
|
)
|
|
|
104.23
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
(1,045,648
|
)
|
|
|
14.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options at January 1, 2017
|
|
|
2,498,310
|
|
|
$
|
43.54
|
|
|
|
|
|
|
|
|
|
Stock options granted
|
|
|
126,720
|
|
|
|
201.19
|
|
|
|
|
|
|
|
|
|
Stock options cancelled
|
|
|
(28,991
|
)
|
|
|
101.97
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
(357,925
|
)
|
|
|
17.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options at December 31, 2017
|
|
|
2,238,114
|
|
|
$
|
55.94
|
|
|
|
4.7
|
|
|
$
|
299,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
|
1,827,568
|
|
|
$
|
36.61
|
|
|
|
3.9
|
|
|
$
|
278,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised was approximately $62.0 million, $128.0 million
and $41.7 million in 2017, 2016 and 2015, respectively. Cash received from the exercise of stock options was approximately $6.1 million, $15.2 million and $4.8 million in 2017, 2016 and 2015, respectively. The tax benefit
realized from stock options exercised was approximately $23.0 million, $46.1 million and $14.7 million in 2017, 2016 and 2015, respectively.
The Company recorded total
non-cash
compensation expense of $6.8 million, $4.9 million and
$3.9 million in 2017, 2016 and 2015, respectively, related to stock option awards. All
non-cash
compensation expense amounts are recorded in general and administrative expense. As of December 31,
2017, there was $8.1 million of total unrecognized compensation cost related to unvested stock options granted under the 2004 Equity Incentive Plan which generally will be recognized on a straight-line basis over the related vesting period.
This unrecognized compensation cost is expected to be recognized over a weighted average period of 2.5 years.
Management estimated the
fair value of each option grant made during 2017, 2016 and 2015 as of the date of the grant using the Black-Scholes option pricing method. Weighted average assumptions are presented in the following table. The risk-free interest rate is based on the
estimated effective life, and is estimated based on U.S. Treasury Bond rates as of the grant date. The expected life is based on several factors, including, among other things, the vesting term and contractual term as well as historical experience.
The expected volatility is based principally on the historical volatility of the Companys share price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
2.0
|
%
|
|
|
1.3
|
%
|
|
|
1.7
|
%
|
Expected life (years)
|
|
|
5.5
|
|
|
|
5.5
|
|
|
|
5.5
|
|
Expected volatility
|
|
|
25.8
|
%
|
|
|
26.0
|
%
|
|
|
28.4
|
%
|
Expected dividend yield
|
|
|
0.9
|
%
|
|
|
1.2
|
%
|
|
|
1.1
|
%
|
Weighted average fair value per stock option
|
|
$
|
49.57
|
|
|
$
|
29.59
|
|
|
$
|
28.45
|
|
68
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Option valuation models require the input of highly subjective assumptions. In
managements opinion, existing models do not necessarily provide a reliable single measure of the fair value of the Companys stock options, as changes in subjective input assumptions can significantly affect the fair value estimate.
Other Equity-Based Compensation Arrangements
The Company granted 4,410 shares, 6,920 shares and 8,350 shares of restricted stock in 2017, 2016 and 2015, respectively, to members of its
Board of Directors. These grants generally vest one year from the date of the grant and have a fair value equal to the market price of the Companys stock on the grant date. These awards also contain provisions for accelerated vesting upon the
retirement of holders that have achieved specific service and age requirements. The Company recorded total
non-cash
compensation expense of $0.8 million, $0.9 million and $0.9 million in 2017,
2016 and 2015, respectively, related to these restricted stock awards. All
non-cash
compensation expense amounts are recorded in general and administrative expense. As of December 31, 2017, there was less
than $0.1 million of total unrecognized compensation cost related to these restricted stock grants.
The Company granted 67,840
shares, 90,730 shares and 88,250 shares of performance-based restricted stock in 2017, 2016 and 2015, respectively, to certain employees of the Company. These performance-based restricted stock awards are separated into four tranches and have
time-based and performance-based vesting conditions with the last tranche vesting four years from the issuance date. These awards also contain provisions for accelerated vesting upon the retirement of holders that have achieved specific service and
age requirements. These awards are considered granted for accounting purposes when the performance target is set, which is generally in the fourth quarter of each year. The Company recorded total
non-cash
compensation expense of $13.1 million, $12.8 million and $12.8 million in 2017, 2016 and 2015, respectively, related to these awards. All
non-cash
compensation expense amounts are recorded in
general and administrative expense. As of December 31, 2017, there was an estimated $24.1 million of total unrecognized compensation cost related to performance-based restricted stock.
Restricted stock and performance-based restricted stock activity related to the 2004 Equity Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Nonvested at January 1, 2017
|
|
|
276,220
|
|
|
$
|
97.48
|
|
Shares granted (1)
|
|
|
72,250
|
|
|
|
205.21
|
|
Shares cancelled
|
|
|
(16,109
|
)
|
|
|
115.71
|
|
Shares vested
|
|
|
(137,757
|
)
|
|
|
80.55
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2017
|
|
|
194,604
|
|
|
$
|
147.94
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The weighted average grant date fair value for performance-based restricted shares granted was calculated based on the market price on the grant dates. Certain tranches will ultimately be valued when the performance
condition is established for each tranche, which generally occurs in the fourth quarter of each fiscal year.
|
The Company has a Board of Directors-approved open market share repurchase
program of the Companys common stock. The open market share repurchase program has historically been funded by excess cash flow.
69
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On July 27, 2017, the Companys Board of Directors authorized a new share
repurchase program to repurchase up to $1.25 billion of the Companys common stock. This repurchase program replaced the remaining availability under the Companys previous $250.0 million share repurchase program. On
August 2, 2017, the Company entered into the $1.0 billion 2017 ASR Agreement with a counterparty. Pursuant to the terms of the 2017 ASR Agreement, on August 3, 2017, as part of its new $1.25 billion share repurchase program, the
Company used a portion of the proceeds from the 2017 Recapitalization to pay the counterparty $1.0 billion in cash to repurchase shares of the Companys common stock. Final settlement of the 2017 ASR Agreement occurred on October 11,
2017. In connection with the 2017 ASR Agreement, the Company received and retired a total of 5,218,670 shares of its common stock at an average price of $191.62.
On October 23, 2015, the Companys Board of Directors authorized a share repurchase program to repurchase up to $800.0 million
of the Companys common stock. On October 27, 2015, the Company entered into the $600.0 million 2015 ASR Agreement with a counterparty. Pursuant to the terms of the 2015 ASR Agreement, on October 30, 2015, as part of its
$800.0 million share repurchase authorization, the Company used a portion of the proceeds from the 2015 Recapitalization to pay the counterparty $600.0 million in cash and received 4,858,994 shares of the Companys common stock.
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 $600.0 million accelerated share repurchase program. In connection with the 2015 ASR Agreement,
the Company received and retired a total of 5,315,930 shares of its common stock at an average price of $112.87.
During 2017, 2016 and
2015, the Company repurchased 5,576,249 shares, 2,816,716 shares (including the 456,936 shares of its common stock received in the first quarter of 2016 in connection with the settlement of the 2015 ASR Agreement), and 6,152,918 shares of common
stock for approximately $1.06 billion, $300.3 million and $738.6 million, respectively. At December 31, 2017, the Company had $198.5 million remaining under the $1.25 billion authorization. The Companys policy is
to recognize the difference between the purchase price and par value of the common stock in additional
paid-in
capital. In instances where there is no additional
paid-in
capital, the difference is recognized in retained deficit.
As of December 31, 2017, authorized common stock consists of 160,000,000
voting shares and 10,000,000
non-voting
shares. The share components of outstanding common stock at December 31, 2017 and January 1, 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Voting
|
|
|
42,881,905
|
|
|
|
48,083,721
|
|
Non-Voting
|
|
|
16,424
|
|
|
|
16,422
|
|
|
|
|
|
|
|
|
|
|
Total Common Stock
|
|
|
42,898,329
|
|
|
|
48,100,143
|
|
|
|
|
|
|
|
|
|
|
The Company has three reportable segments: (i) Domestic Stores;
(ii) Supply Chain; and (iii) International Franchise.
The Companys operations are organized by management on the combined
basis of line of business and geography. The Domestic Stores segment includes operations with respect to all franchised and Company-owned stores throughout the contiguous United States. The Supply Chain segment primarily includes the distribution of
food, equipment and supplies to stores from the Companys supply chain center operations in the United States and Canada. The International Franchise segment primarily includes operations related to the Companys franchising business in
foreign and
non-contiguous
United States markets.
The accounting policies of the reportable
segments are the same as those described in Note 1. The Company evaluates the performance of its segments and allocates resources to them based on earnings before interest, taxes, depreciation, amortization and other, referred to as Segment Income.
70
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The tables below summarize the financial information concerning the Companys reportable
segments for fiscal 2017, 2016 and 2015. Intersegment Revenues are comprised of sales of food, equipment and supplies from the Supply Chain segment to the Company-owned stores in the Domestic Stores segment. Intersegment sales prices are market
based. The Other column as it relates to Segment Income and income from operations information below primarily includes corporate administrative costs. The Other column as it relates to capital expenditures primarily includes
capitalized software, certain equipment and leasehold improvements. Tabular amounts presented below are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
International
|
|
|
Intersegment
|
|
|
|
|
|
|
|
|
|
Stores
|
|
|
Supply Chain
|
|
|
Franchise
|
|
|
Revenues__
|
|
|
Other
|
|
|
Total
|
|
Revenues-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
842,233
|
|
|
$
|
1,874,943
|
|
|
$
|
206,708
|
|
|
$
|
(135,905
|
)
|
|
|
|
|
|
$
|
2,787,979
|
|
2016
|
|
|
751,284
|
|
|
|
1,669,000
|
|
|
|
176,999
|
|
|
|
(124,655
|
)
|
|
|
|
|
|
|
2,472,628
|
|
2015
|
|
|
669,724
|
|
|
|
1,495,308
|
|
|
|
163,643
|
|
|
|
(112,147
|
)
|
|
|
|
|
|
|
2,216,528
|
|
Segment Income-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
306,406
|
|
|
$
|
163,077
|
|
|
$
|
161,263
|
|
|
|
N/A
|
|
|
$
|
(46,958
|
)
|
|
$
|
583,788
|
|
2016
|
|
|
271,794
|
|
|
|
144,130
|
|
|
|
138,487
|
|
|
|
N/A
|
|
|
|
(42,802
|
)
|
|
|
511,609
|
|
2015
|
|
|
240,942
|
|
|
|
127,155
|
|
|
|
130,650
|
|
|
|
N/A
|
|
|
|
(42,075
|
)
|
|
|
456,672
|
|
Income from Operations-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
298,852
|
|
|
$
|
151,622
|
|
|
$
|
161,066
|
|
|
|
N/A
|
|
|
$
|
(90,308
|
)
|
|
$
|
521,232
|
|
2016
|
|
|
261,826
|
|
|
|
133,745
|
|
|
|
138,306
|
|
|
|
N/A
|
|
|
|
(79,835
|
)
|
|
|
454,042
|
|
2015
|
|
|
233,248
|
|
|
|
117,185
|
|
|
|
130,601
|
|
|
|
N/A
|
|
|
|
(75,595
|
)
|
|
|
405,439
|
|
Capital Expenditures-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
20,579
|
|
|
$
|
34,123
|
|
|
$
|
28
|
|
|
|
N/A
|
|
|
$
|
35,527
|
|
|
$
|
90,257
|
|
2016
|
|
|
18,225
|
|
|
|
11,527
|
|
|
|
642
|
|
|
|
N/A
|
|
|
|
31,143
|
|
|
|
61,537
|
|
2015
|
|
|
25,120
|
|
|
|
9,928
|
|
|
|
|
|
|
|
N/A
|
|
|
|
27,317
|
|
|
|
62,365
|
|
The following table reconciles total Segment Income to income before provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Total Segment Income
|
|
$
|
583,788
|
|
|
$
|
511,609
|
|
|
$
|
456,672
|
|
Depreciation and amortization
|
|
|
(44,369
|
)
|
|
|
(38,140
|
)
|
|
|
(32,434
|
)
|
Gains (losses) on sale/disposal of assets
|
|
|
3,148
|
|
|
|
(863
|
)
|
|
|
(316
|
)
|
Non-cash
compensation expense
|
|
|
(20,713
|
)
|
|
|
(18,564
|
)
|
|
|
(17,623
|
)
|
Recapitalization-related expenses
|
|
|
(622
|
)
|
|
|
|
|
|
|
(860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
521,232
|
|
|
|
454,042
|
|
|
|
405,439
|
|
Interest income
|
|
|
1,462
|
|
|
|
685
|
|
|
|
313
|
|
Interest expense
|
|
|
(122,541
|
)
|
|
|
(110,069
|
)
|
|
|
(99,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
$
|
400,153
|
|
|
$
|
344,658
|
|
|
$
|
306,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the Companys identifiable asset information as of
December 31, 2017 and January 1, 2017:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Domestic Stores
|
|
$
|
96,771
|
|
|
$
|
89,220
|
|
Domestic supply chain
|
|
|
206,059
|
|
|
|
172,210
|
|
Total domestic assets
|
|
|
302,830
|
|
|
|
261,430
|
|
|
|
|
|
|
|
|
|
|
International Franchise
|
|
|
19,728
|
|
|
|
17,436
|
|
International supply chain
|
|
|
24,925
|
|
|
|
19,368
|
|
|
|
|
|
|
|
|
|
|
Total international assets
|
|
|
44,653
|
|
|
|
36,804
|
|
Unallocated
|
|
|
489,270
|
|
|
|
418,061
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
836,753
|
|
|
$
|
716,295
|
|
|
|
|
|
|
|
|
|
|
Unallocated assets primarily include cash and cash equivalents, restricted cash and cash equivalents,
advertising fund assets, investments in marketable securities, certain long-lived assets and deferred income taxes.
The following table
summarizes the Companys goodwill balance as of December 31, 2017 and January 1, 2017:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Domestic Stores
|
|
$
|
14,356
|
|
|
$
|
14,991
|
|
Supply Chain
|
|
|
1,067
|
|
|
|
1,067
|
|
|
|
|
|
|
|
|
|
|
Consolidated goodwill
|
|
$
|
15,423
|
|
|
$
|
16,058
|
|
|
|
|
|
|
|
|
|
|
(12)
|
SALE AND CLOSURE OF COMPANY-OWNED STORES
|
During 2017, the Company sold 17 Company-owned stores
to franchisees for proceeds of $6.8 million. In connection with the sale of the stores, the Company recorded a $4.0 million
pre-tax
gain on the sale of the related assets, which was net of a
$0.6 million reduction in goodwill. The gain was recorded in general and administrative expense in the Companys consolidated statements of income.
The Company closed one Company-owned store in 2016. In connection with the closure, the Company recorded a reduction of goodwill of less than
$0.1 million in general and administrative expense in the Companys consolidated statements of income.
During 2015, the Company
sold four Company-owned stores to franchisees for proceeds of $1.2 million. In connection with the sale of the four stores, the Company recorded a $0.7 million
pre-tax
gain on the sale of the related
assets, which was net of a $0.2 million reduction in goodwill. The gain was recorded in general and administrative expense in the Companys consolidated statements of income.
72
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(13) PERIODIC FINANCIAL DATA (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Companys convention with respect to reporting periodic financial data is such that each of the first three fiscal quarters consists
of 12 weeks while the last fiscal quarter consists of 16 weeks or 17 weeks. The fourth quarters of 2017 and 2016 are comprised of 16 weeks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal
|
|
|
|
For the Fiscal Quarter Ended
|
|
|
Year Ended
|
|
|
|
March 26,
|
|
|
June 18,
|
|
|
September 10,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
Total revenues
|
|
$
|
624,217
|
|
|
$
|
628,611
|
|
|
$
|
643,642
|
|
|
$
|
891,509
|
|
|
$
|
2,787,979
|
|
Operating margin
|
|
|
193,816
|
|
|
|
192,845
|
|
|
|
198,478
|
|
|
|
280,852
|
|
|
|
865,991
|
|
Income before provision for income taxes
|
|
|
90,514
|
|
|
|
88,532
|
|
|
|
84,551
|
|
|
|
136,556
|
|
|
|
400,153
|
|
Net income
|
|
|
62,469
|
|
|
|
65,741
|
|
|
|
56,368
|
|
|
|
93,327
|
|
|
|
277,905
|
|
Earnings per common share basic (1)
|
|
$
|
1.31
|
|
|
$
|
1.37
|
|
|
$
|
1.22
|
|
|
$
|
2.17
|
|
|
$
|
6.05
|
|
Earnings per common share diluted (1)
|
|
$
|
1.26
|
|
|
$
|
1.32
|
|
|
$
|
1.18
|
|
|
$
|
2.09
|
|
|
$
|
5.83
|
|
Common stock dividends declared per share
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal
|
|
|
|
For the Fiscal Quarter Ended
|
|
|
Year Ended
|
|
|
|
March 27,
|
|
|
June 19,
|
|
|
September 11,
|
|
|
January 1,
|
|
|
January 1,
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
|
2017
|
|
Total revenues
|
|
$
|
539,175
|
|
|
$
|
547,341
|
|
|
$
|
566,677
|
|
|
$
|
819,435
|
|
|
$
|
2,472,628
|
|
Operating margin
|
|
|
167,216
|
|
|
|
171,838
|
|
|
|
173,903
|
|
|
|
254,734
|
|
|
|
767,691
|
|
Income before provision for income taxes
|
|
|
72,842
|
|
|
|
78,692
|
|
|
|
75,814
|
|
|
|
117,310
|
|
|
|
344,658
|
|
Net income
|
|
|
45,451
|
|
|
|
49,261
|
|
|
|
47,232
|
|
|
|
72,734
|
|
|
|
214,678
|
|
Earnings per common share basic
|
|
$
|
0.91
|
|
|
$
|
1.00
|
|
|
$
|
0.98
|
|
|
$
|
1.52
|
|
|
$
|
4.41
|
|
Earnings per common share diluted (1)
|
|
$
|
0.89
|
|
|
$
|
0.98
|
|
|
$
|
0.96
|
|
|
$
|
1.48
|
|
|
$
|
4.30
|
|
Common stock dividends declared per share
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
1.52
|
|
(1)
|
Earnings per share figures may not sum to the total due to the rounding of each individual calculation.
|
73
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(14) SUBSEQUENT EVENTS
On February 14, 2018, the Companys Board of Directors declared a quarterly dividend of $0.55 per common share payable on
March 30, 2018 to shareholders of record at the close of business on March 15, 2018. The Board of Directors also authorized a new share repurchase program to repurchase up to $750.0 million of the Companys common stock. This
repurchase program replaces the remaining availability of approximately $198.5 million under the Companys previously approved $1.25 billion share repurchase program that was authorized by the Board on July 27, 2017.
74