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 2011 fiscal year ended January 1, 2012, the 2012
fiscal year ended December 30, 2012 and the 2013 fiscal year ended on December 29, 2013. The 2011, 2012 and 2013 fiscal years each consisted of fifty-two 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 at December 29, 2013 includes $51.3 million of cash held for future principal and interest payments, $21.0 million of
cash held in a three month interest reserve, $42.0 million of cash held as collateral for outstanding letters of credit, $11.1 million of cash related to the Companys third quarter 2013 dividend payment to shareholders, and $0.1 million of
other restricted cash.
Inventories
Inventories are valued at the lower of cost (on a first-in, first-out basis) or market. Inventories at December 30, 2012 and
December 29, 2013 are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
Food
|
|
$
|
27,946
|
|
|
$
|
25,673
|
|
Equipment and supplies
|
|
|
3,115
|
|
|
|
4,648
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
31,061
|
|
|
$
|
30,321
|
|
|
|
|
|
|
|
|
|
|
Notes Receivable
During the normal course of business, the Company may provide financing to franchisees in the form of notes. Notes receivable generally
require monthly payments of principal and interest, or monthly payments of interest only, generally ranging from 8% to 10%, with balloon payments of the remaining principal due two to seven years from the original issuance date. Such notes are
generally secured by the related assets or business. The carrying amounts of these notes approximate fair value.
55
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Other Assets
Current and long-term other assets primarily include prepaid expenses such as insurance, rent and taxes, deposits, as well as covenants
not-to-compete and other intangible assets primarily arising from franchise acquisitions. Amortization expense related to intangible assets for financial reporting purposes is provided using the straight-line method over the useful lives for
covenants not-to-compete and other intangible assets and was approximately $0.3 million in 2011, 2012 and 2013. As of December 29, 2013, scheduled amortization of these assets for the next five fiscal years is approximately $0.1 million in
2014. There is no scheduled amortization in fiscal years 2015, 2016, 2017 and 2018. The carrying value of intangible assets as of December 30, 2012 and December 29, 2013 was approximately $0.4 million and $0.1 million, respectively.
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 for financial reporting purposes 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 30, 2012 and December 29, 2013 are capital lease
assets of approximately $2.6 million and $1.9 million, which are net of $5.2 million and $5.5 million of accumulated amortization, respectively, primarily related to the lease of a supply chain center building, and to a lesser extent, leases of
computer equipment. The capital lease assets are being amortized using the straight-line method over the lease terms.
Depreciation and
amortization expense on property, plant and equipment was approximately $20.1 million, $19.5 million and $20.5 million in 2011, 2012 and 2013, 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
or 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 an impairment loss on long-lived assets in 2011, 2012 or 2013.
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.
56
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Deferred Financing Costs
Deferred financing costs primarily include debt issuance costs incurred by the Company as part of the 2012 Recapitalization (Note 4).
Amortization is provided on a straight-line basis over the expected term of the respective debt instrument to which the costs relate and is included in interest expense.
In connection with the 2012 Recapitalization, the Company recorded an additional $32.5 million of deferred financing costs as an asset during
fiscal 2012. This amount, in addition to the $7.4 million recorded on the consolidated balance sheet at January 1, 2012, is being amortized into interest expense over the seven-year expected term of the debt. Additionally, in connection with
the 2012 Recapitalization, the Company had write-offs of financing costs totaling approximately $8.0 million related to the extinguishment of the previous debt facility.
In connection with scheduled principal payments of its Fixed Rate Notes (Note 4), the Company expensed financing costs of approximately $0.4
million in 2012 and approximately $0.5 million in 2013. Deferred financing cost expense, including the aforementioned amounts, was approximately $3.7 million, $13.8 million and $6.1 million in 2011, 2012 and 2013, 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 2011, 2012 or 2013.
Capitalized Software
Capitalized software is recorded at cost and includes purchased, internally-developed and externally-developed software used in the
Companys operations. Amortization expense for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the software, which range from one to three years. Capitalized software amortization
expense was approximately $3.6 million, $3.3 million and $5.0 million in 2011, 2012 and 2013, respectively. The Company received $2.5 million, $2.7 million and $3.0 million from franchisees from sales and enhancements of internally developed
point-of-sale software during 2011, 2012 and 2013, 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.
57
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 sales, property and other taxes, store operating expenses,
deferred rent expense and deferred compensation liabilities.
Foreign Currency Translation
The Companys foreign entities use their local currency as the functional currency. Where the functional currency is the local currency,
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.
Domestic supply chain revenues are primarily comprised of sales of food, equipment and supplies to franchised Dominos Pizza stores
located in the contiguous United States. 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 revenues are primarily comprised of sales of food to, and royalties and fees from Dominos Pizza
franchisees outside the contiguous United States. These revenues are recognized consistently with the policies applied for revenues generated in the contiguous United States.
Domestic Supply Chain Profit-Sharing Arrangements
The Company enters into profit-sharing arrangements with Domestic Stores (Note 11) that purchase all of their food from Domestic Supply Chain
(Note 11). These profit-sharing arrangements generally offer domestic 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 Domestic Supply Chain in the same period as
the related revenues and costs are recorded, and were $62.5 million, $64.5 million and $68.8 million in 2011, 2012 and 2013, respectively.
Advertising
Advertising
costs are expensed as incurred. Advertising expense, which relates primarily to Company-owned stores, was approximately $28.5 million, $27.6 million and $29.6 million during 2011, 2012 and 2013, respectively.
58
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Domestic Stores 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. Included in advertising expense were national advertising
contributions from Company-owned stores to DNAF of approximately $18.5 million, $17.8 million and $20.1 million in 2011, 2012 and 2013, respectively. DNAF also received national advertising contributions from franchisees of approximately $165.8
million, $173.6 million and $199.4 million during 2011, 2012 and 2013, respectively. Franchisee contributions to DNAF and offsetting disbursements are presented net in the accompanying statements of income.
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 2024. Rent expenses totaled approximately $39.7 million during both 2011 and 2012 and
$40.2 million during 2013.
Common Stock Dividends
During 2012, the Company declared dividends and dividend equivalents totaling approximately $187.0 million, or $3.00 per share, of which
approximately $185.5 million were paid in 2012. During 2013, the Company declared dividends of approximately $44.2 million, or $0.80 per share, of which approximately $34.2 million were paid in 2013. The third quarter 2013 dividend of
approximately $11.1 million was paid to shareholders on December 30, 2013, the first day of fiscal 2014.
Derivative
Instruments
The Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those
instruments at fair value. The Company had no outstanding derivative instruments as of December 30, 2012 and December 29, 2013.
In connection with the 2007 Recapitalization, the Company entered into a five-year forward-starting interest rate swap agreement with
a notional amount of $1.25 billion. This interest rate swap was entered into to hedge the variability of future interest rates in contemplation of the recapitalization-related debt issuances. The Company subsequently settled the swap
agreement with a cash payment of $11.5 million, in accordance with its terms, concurrent with the issuance of debt as part of the 2007 Recapitalization. In connection with this settlement, the accumulated other comprehensive loss amount was adjusted
for the after-tax net settlement amount of $7.1 million which was being amortized into interest expense over the term of the hedged item. As part of the 2012 Recapitalization, the remaining amount of this swap settlement that was included in
accumulated other comprehensive loss was recorded into interest expense.
Stock Options and Other Equity-Based Compensation
Arrangements
The cost of all of the Companys employee 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.
59
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 and unvested restricted stock and unvested performance-based restricted stock grants.
Supplemental
Disclosures of Cash Flow Information
The Company paid interest of approximately $85.0 million, $87.3 million and $82.9 million during
2011, 2012 and 2013, respectively. Cash paid for income taxes was approximately $41.2 million, $46.1 million and $62.8 million in 2011, 2012 and 2013, respectively.
New Accounting Pronouncements
The accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on our consolidated financial statements upon adoption.
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.
The computation of basic and diluted earnings per common share is as follows (in thousands, except share and per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Net income available to common stockholders basic and diluted
|
|
$
|
105,361
|
|
|
$
|
112,392
|
|
|
$
|
142,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
58,918,038
|
|
|
|
56,419,645
|
|
|
|
55,345,554
|
|
Earnings per common share basic
|
|
$
|
1.79
|
|
|
$
|
1.99
|
|
|
$
|
2.58
|
|
Diluted weighted average number of common shares
|
|
|
61,653,519
|
|
|
|
58,997,476
|
|
|
|
57,720,998
|
|
Earnings per common share diluted
|
|
$
|
1.71
|
|
|
$
|
1.91
|
|
|
$
|
2.48
|
|
The denominator in calculating the common stock diluted EPS does not include 206,800 stock options in 2011,
210,820 stock options in 2012 and 152,340 stock options in 2013, as their inclusion would be anti-dilutive.
60
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 30, 2012
|
|
|
|
|
|
|
Fair Value Estimated Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
Cash equivalents
|
|
$
|
44,531
|
|
|
$
|
44,531
|
|
|
$
|
|
|
|
$
|
|
|
Restricted cash equivalents
|
|
|
50,591
|
|
|
|
50,591
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
2,097
|
|
|
|
2,097
|
|
|
|
|
|
|
|
|
|
The following table summarizes the carrying amounts and fair values of certain assets at December 29,
2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 29, 2013
|
|
|
|
|
|
|
Fair Value Estimated Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
Cash equivalents
|
|
$
|
5,303
|
|
|
$
|
5,303
|
|
|
$
|
|
|
|
$
|
|
|
Restricted cash equivalents
|
|
|
93,608
|
|
|
|
93,608
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
3,269
|
|
|
|
3,269
|
|
|
|
|
|
|
|
|
|
(4)
|
RECAPITALIZATIONS AND FINANCING ARRANGEMENTS
|
2007 Recapitalization
During 2007, the Company completed a recapitalization transaction (the 2007 Recapitalization) consisting of, among other things,
(i) issuing $1.7 billion of fixed rate notes, (ii) purchasing and retiring all of the outstanding 8
1
⁄
4
% senior subordinated notes due 2011,
(iii) the repayment of all outstanding borrowings under a previous credit agreement, and (iv) a special cash dividend to stockholders and related anti-dilution payments and adjustments to certain stock option holders. Borrowings under the
2007 Recapitalization had an expected repayment date of April 2014, with legal final maturity in April 2037.
61
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2012 Recapitalization
On March 16, 2012, the Company completed a recapitalization transaction (the 2012 Recapitalization). As part of the 2012
Recapitalization, a wholly-owned subsidiary of DPLLC and three of its wholly-owned subsidiaries completed an asset-backed securitization (ABS) by co-issuing a $1.675 billion facility in a private transaction consisting of $1.575 billion of Series
2012-1 5.216% Fixed Rate Senior Secured Notes, Class A-2 (the Fixed Rate Notes) and $100.0 million of Series 2012-1 Variable Funding Senior Secured Notes, Class A-1 (the Variable Funding Notes). Gross proceeds from the issuance of the
Fixed Rate Notes were $1.575 billion. The Variable Funding Notes were undrawn upon at issuance.
The Company used a portion of the
proceeds from the 2012 Recapitalization to repay approximately $1.447 billion in outstanding fixed rate notes under the 2007 Recapitalization. The proceeds were also used to pay accrued interest on fixed rate notes under the 2007 Recapitalization
and transaction-related fees and expenses incurred in connection with the 2012 Recapitalization and to fund reserve accounts for the payments related to the Fixed Rate Notes.
Also on March 16, 2012, the Companys Board of Directors declared a $3.00 per share special cash dividend on its outstanding common
stock totaling $171.1 million, which was paid on April 2, 2012 to stockholders of record at the close of business on March 26, 2012. Additionally, pursuant to the anti-dilution provisions in the Companys underlying stock option
plans, on April 2, 2012, the Company made a corresponding cash payment of approximately $13.5 million on certain stock options, reduced the exercise price on certain other stock options by an equivalent per share amount and, in certain
circumstances, both reduced the stock option exercise price and made a cash payment for amounts totaling $3.00 per share. On April 2, 2012, the Company also accrued an estimated $2.4 million for payments to be made as certain performance-based
restricted stock grants vest. The dividend and related dividend equivalent payments were funded with the remaining proceeds from the 2012 Recapitalization and cash on hand. These anti-dilution payments were accounted for as modifications/settlements
and were recorded as increases in total stockholders deficit. As of December 30, 2012, total cash paid for common stock dividends and related anti-dilution equivalent payments was approximately $185.5 million and the total estimated
liability recorded for future cash dividend payments on certain performance-based restricted stock was approximately $1.5 million. As of December 29, 2013, the total estimated liability recorded for future cash dividend payments on certain
performance-based restricted stock was approximately $0.8 million. Of the total amount of $187.0 million recorded for common stock dividends and related anti-dilution payments, $10.2 million was recorded as a reduction of additional paid-in capital
and $176.8 million was recorded as an increase in retained deficit.
During fiscal 2012 and in connection with the 2012 Recapitalization,
the Company incurred approximately $10.5 million of net expenses. This consisted primarily of $8.1 million of net write-offs of deferred financing fees and the interest rate swap related to the extinguished debt. The Company also incurred $2.1
million of interest expense on the 2007 Recapitalization borrowings subsequent to the closing of the 2012 Recapitalization but prior to the repayment of the 2007 Recapitalization borrowings, resulting in the payment of interest on both the 2007 and
2012 facilities for a short period of time. Further, the Company incurred $0.3 million of other net 2012 Recapitalization-related general and administrative expenses, including stock compensation expenses, payroll taxes related to the payments made
to certain stock option holders and legal and professional fees incurred in connection with the 2012 Recapitalization.
In connection with
the 2012 Recapitalization, the Company recorded an additional $32.5 million of deferred financing costs as an asset in the consolidated balance sheet during fiscal 2012. This amount, in addition to the $7.4 million recorded on the consolidated
balance sheet at January 1, 2012, is being amortized into interest expense over the seven-year expected term of the debt.
62
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Fixed Rate Notes and the Variable Funding Notes
The Fixed Rate Notes bear interest at 5.216% payable quarterly. The Fixed Rate Notes have scheduled principal amortization payments while the
Variable Funding Notes require no scheduled principal amortization payments. The Fixed Rate Notes future scheduled principal amortization payments are $23.6 million in 2014, $29.5 million in 2015, $37.4 million in 2016, $39.4 million in each of 2017
and 2018, and $9.8 million in 2019. During fiscal 2013, the Company made principal payments of approximately $23.6 million. If the Company meets certain conditions, including maximum leverage ratios of less than 4.5x total debt to EBITDA, as defined
in the related agreements, it may elect to not make the scheduled principal amortization payments on the Fixed Rate Notes. If one of the leverage ratios subsequently exceeds 4.5x, it must make up the payments it had elected not to make. The expected
repayment date for the Fixed Rate Notes is January 2019, with legal final maturity in January 2042.
The Fixed Rate Notes and the Variable
Funding Notes are guaranteed by four subsidiaries of DPLLC and secured by a security interest in substantially all of the assets of the Company, including royalty income from all domestic stores, domestic supply chain income, international income
and intellectual property. The restrictions placed on the Companys subsidiaries require that the Companys interest obligations have first priority and amounts are segregated weekly to ensure appropriate funds are reserved to pay the
quarterly 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 interest obligations are satisfied, there are no
further restrictions, including payment of dividends, on the cash flows of the subsidiaries.
The Fixed Rate 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, 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 Fixed Rate 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 Fixed Rate Notes at any time, subject to certain make-whole interest obligations. All make-whole interest obligations cease after July 2017. Further, the Company may elect to prepay up to $551.3 million of its Fixed Rate Notes
at par on or after July 2015.
The Variable Funding Notes allowed for the issuance of up to $100.0 million of financing and certain other
credit instruments, including letters of credit in support of various obligations of the Company. Interest on a portion of any outstanding Variable Funding Note borrowings is payable quarterly at a rate equal to a commercial paper rate plus 50 basis
points, with the remainder at LIBOR plus 50 basis points. The Variable Funding Notes have an expected maturity in January 2017, with an option for up to two one-year renewals (subject to certain conditions, including a minimum debt service coverage
ratio), and a legal final maturity in January 2042. At December 29, 2013, there were $42.3 million of outstanding letters of credit and $57.7 million of borrowing capacity available under the $100.0 million Variable Funding Notes.
63
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 29, 2013, management estimates that the approximately $1.534 billion in
principal amount of outstanding Fixed Rate Notes had a fair value of approximately $1.643 billion, and at December 30, 2012 the approximately $1.557 billion in principal amount of Fixed Rate Notes had a fair value of approximately $1.732
billion. The Fixed Rate 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 estimated the fair value amounts by using available market information.
The Company obtained broker quotes from two separate brokerage firms that are knowledgeable about the Companys Fixed Rate Notes and, at times, trade these notes. Further, the Company performs its own internal analysis based on the information
it gathers from public markets, including information on notes that are similar to that of the Company. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimates
presented 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 value.
Consolidated Long-Term Debt
At December 30, 2012 and December 29, 2013, consolidated long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
5.216% Class A-2 Notes; expected repayment date January 2019; legal final maturity January 2042
|
|
$
|
1,557,281
|
|
|
$
|
1,533,656
|
|
Variable Funding Notes
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
3,511
|
|
|
|
2,787
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,560,792
|
|
|
|
1,536,443
|
|
Less current portion
|
|
|
24,349
|
|
|
|
24,144
|
|
|
|
|
|
|
|
|
|
|
Consolidated long-term debt
|
|
$
|
1,536,443
|
|
|
$
|
1,512,299
|
|
|
|
|
|
|
|
|
|
|
At December 29, 2013, maturities of long-term debt and capital lease obligations are as follows (in
thousands):
|
|
|
|
|
2014
|
|
$
|
24,144
|
|
2015
|
|
|
30,096
|
|
2016
|
|
|
38,021
|
|
2017
|
|
|
40,045
|
|
2018
|
|
|
39,793
|
|
Thereafter
|
|
|
1,364,344
|
|
|
|
|
|
|
|
|
$
|
1,536,443
|
|
|
|
|
|
|
64
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5)
|
COMMITMENTS AND CONTINGENCIES
|
Lease Commitments
As of December 29, 2013, the future minimum rental commitments for all non-cancelable leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
|
Total
|
|
2014
|
|
$
|
38,117
|
|
|
$
|
736
|
|
|
$
|
38,853
|
|
2015
|
|
|
35,152
|
|
|
|
736
|
|
|
|
35,888
|
|
2016
|
|
|
31,459
|
|
|
|
736
|
|
|
|
32,195
|
|
2017
|
|
|
27,731
|
|
|
|
736
|
|
|
|
28,467
|
|
2018
|
|
|
22,978
|
|
|
|
492
|
|
|
|
23,470
|
|
Thereafter
|
|
|
47,969
|
|
|
|
|
|
|
|
47,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future minimum rental commitments
|
|
$
|
203,406
|
|
|
|
3,436
|
|
|
$
|
206,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
|
|
|
|
(608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal payable on capital leases
|
|
|
|
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Included in the matters referenced above, the Company is party to six employment practice cases and five casualty cases. We have established legal and insurance accruals for losses relating to these cases which we believe are
reasonable based upon our assessment of the current facts and circumstances. However, it is reasonably possible that our ultimate losses could exceed the amounts recorded by $5.0 million. The remaining cases 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.
Additionally, the Company was also named as a defendant in a lawsuit along with a large franchisee and the franchisees delivery driver.
During the third quarter of 2013, the jury delivered a $32.0 million judgment for the plaintiff where the Company was found to be 60% liable. The Company denies liability and filed an appeal of the verdict on a variety of grounds. This case is
covered under the Companys casualty insurance program, subject to a $3.0 million deductible. The Company also has indemnity provisions in its franchise agreements.
65
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income before provision for income taxes in 2011, 2012 and 2013 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Domestic
|
|
$
|
164,996
|
|
|
$
|
180,270
|
|
|
$
|
217,468
|
|
Foreign
|
|
|
2,810
|
|
|
|
917
|
|
|
|
7,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
167,806
|
|
|
$
|
181,187
|
|
|
$
|
225,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2011, 2012 and 2013 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Federal income tax provision based on the statutory rate
|
|
$
|
58,732
|
|
|
$
|
63,415
|
|
|
$
|
78,785
|
|
State and local income taxes, net of related Federal income taxes
|
|
|
5,418
|
|
|
|
5,179
|
|
|
|
5,880
|
|
Non-resident withholding and foreign income taxes
|
|
|
12,036
|
|
|
|
12,860
|
|
|
|
13,923
|
|
Foreign tax and other tax credits
|
|
|
(15,073
|
)
|
|
|
(14,678
|
)
|
|
|
(16,423
|
)
|
Non-deductible expenses, net
|
|
|
2,184
|
|
|
|
1,368
|
|
|
|
1,161
|
|
Valuation allowance
|
|
|
|
|
|
|
868
|
|
|
|
29
|
|
Unrecognized tax benefits, net of related Federal income taxes
|
|
|
(640
|
)
|
|
|
80
|
|
|
|
232
|
|
Other
|
|
|
(212
|
)
|
|
|
(297
|
)
|
|
|
(1,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,445
|
|
|
$
|
68,795
|
|
|
$
|
82,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the 2011, 2012 and 2013 consolidated provision for income taxes are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Provision for Federal income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
36,165
|
|
|
$
|
45,110
|
|
|
$
|
54,115
|
|
Deferred provision
|
|
|
7,000
|
|
|
|
3,264
|
|
|
|
5,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for Federal income taxes
|
|
|
43,165
|
|
|
|
48,374
|
|
|
|
59,395
|
|
|
|
|
|
Provision for state and local income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
|
6,075
|
|
|
|
6,632
|
|
|
|
8,021
|
|
Deferred provision
|
|
|
1,169
|
|
|
|
929
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for state and local income taxes
|
|
|
7,244
|
|
|
|
7,561
|
|
|
|
8,796
|
|
|
|
|
|
Provision for non-resident withholding and foreign income taxes
|
|
|
12,036
|
|
|
|
12,860
|
|
|
|
13,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,445
|
|
|
$
|
68,795
|
|
|
$
|
82,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 30, 2012 and December 29, 2013, the significant components of net
deferred income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
Deferred Federal income tax assets
|
|
|
|
|
|
|
|
|
Depreciation, amortization and asset basis differences
|
|
$
|
1,405
|
|
|
$
|
|
|
Insurance reserves
|
|
|
9,774
|
|
|
|
10,143
|
|
Equity compensation
|
|
|
11,564
|
|
|
|
12,586
|
|
Other accruals and reserves
|
|
|
12,732
|
|
|
|
11,606
|
|
Bad debt reserves
|
|
|
2,868
|
|
|
|
2,239
|
|
Valuation allowance
|
|
|
(770
|
)
|
|
|
(799
|
)
|
Other
|
|
|
6,187
|
|
|
|
4,579
|
|
|
|
|
|
|
|
|
|
|
Total deferred Federal income tax assets
|
|
|
43,760
|
|
|
|
40,354
|
|
|
|
|
|
|
|
|
|
|
Deferred Federal income tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation, amortization and asset basis differences
|
|
|
|
|
|
|
1,772
|
|
Capitalized software
|
|
|
11,674
|
|
|
|
13,017
|
|
Gain on debt extinguishments
|
|
|
22,682
|
|
|
|
22,682
|
|
Other
|
|
|
1,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred Federal income tax liabilities
|
|
|
35,471
|
|
|
|
37,471
|
|
|
|
|
|
|
|
|
|
|
Net deferred Federal income tax asset
|
|
|
8,289
|
|
|
|
2,883
|
|
Net deferred state and local income tax asset
|
|
|
3,953
|
|
|
|
3,167
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
12,242
|
|
|
$
|
6,050
|
|
|
|
|
|
|
|
|
|
|
As of December 30, 2012, the classification of net deferred income taxes is summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Deferred tax assets
|
|
$
|
16,405
|
|
|
$
|
31,308
|
|
|
$
|
47,713
|
|
Deferred tax liabilities
|
|
|
(1,115
|
)
|
|
|
(34,356
|
)
|
|
|
(35,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
15,290
|
|
|
$
|
(3,048
|
)
|
|
$
|
12,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 29, 2013, the classification of net deferred income taxes is summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Deferred tax assets
|
|
$
|
15,246
|
|
|
$
|
28,275
|
|
|
$
|
43,521
|
|
Deferred tax liabilities
|
|
|
(4,536
|
)
|
|
|
(32,935
|
)
|
|
|
(37,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
10,710
|
|
|
$
|
(4,660
|
)
|
|
$
|
6,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
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.
During 2011, the Company accrued
interest expense of $0.1 million and released interest of $0.2 million. At January 1, 2012, the amount of unrecognized tax benefits was $3.5 million of which, if ultimately recognized, $2.2 million would be recognized as an income tax benefit
and reduce the Companys effective tax rate. At January 1, 2012, the Company had $0.4 million of accrued interest and no accrued penalties. This amount is excluded from the $3.5 million total unrecognized tax benefit.
During 2012, the Company recorded a tax benefit of approximately $0.7 million to reflect an increased tax basis for certain Company assets due
to the issuance of final tax regulations. Additionally, during 2012 and in connection with the sale of its six remaining Company-owned stores in a certain market to a franchisee, the Company recorded a deferred tax asset related to the capital loss
that resulted from the write-off of the tax basis goodwill associated with the market that was sold. Management believes it is more likely than not that a portion of the deferred tax asset will not be realized and provided a valuation allowance of
approximately $0.9 million. The valuation allowance was recorded as an increase to the provision for income taxes and increased the Companys 2012 effective tax rate. On an ongoing basis, management will assess whether it remains more likely
than not that the net deferred tax asset will be realized.
During 2012, the Company accrued interest expense of $0.1 million. At
December 30, 2012, the amount of unrecognized tax benefits was $3.5 million of which, if ultimately recognized, $2.1 million would be recognized as an income tax benefit and reduce the Companys effective tax rate. At December 30,
2012, the Company had $0.5 million of accrued interest and no accrued penalties. This amount is excluded from the $3.5 million total unrecognized tax benefit.
During 2013, the Company accrued interest expense of $0.1 million. At December 29, 2013, the amount of unrecognized tax benefits was $3.6
million of which, if ultimately recognized, $2.1 million would be recognized as an income tax benefit and reduce the Companys effective tax rate. At December 29, 2013, the Company had $0.6 million of accrued interest and no accrued
penalties. This amount is excluded from the $3.6 million total unrecognized tax benefit.
68
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows (in thousands):
|
|
|
|
|
Balance as of January 2, 2011
|
|
$
|
4,405
|
|
Additions for tax positions of current year
|
|
|
138
|
|
Additions for tax positions of prior years
|
|
|
119
|
|
Reductions in tax positions from prior years for:
|
|
|
|
|
Changes in prior year tax positions
|
|
|
(444
|
)
|
Lapses of applicable statute of limitations
|
|
|
(731
|
)
|
|
|
|
|
|
Balance as of January 1, 2012
|
|
|
3,487
|
|
Additions for tax positions of current year
|
|
|
239
|
|
Additions for tax positions of prior years
|
|
|
373
|
|
Reductions in tax positions from prior years for:
|
|
|
|
|
Changes in prior year tax positions
|
|
|
(111
|
)
|
Settlements during the period
|
|
|
(11
|
)
|
Lapses of applicable statute of limitations
|
|
|
(505
|
)
|
|
|
|
|
|
Balance as of December 30, 2012
|
|
|
3,472
|
|
Additions for tax positions of current year
|
|
|
337
|
|
Additions for tax positions of prior years
|
|
|
398
|
|
Reductions in tax positions from prior years for:
|
|
|
|
|
Changes in prior year tax positions
|
|
|
(157
|
)
|
Settlements during the period
|
|
|
(133
|
)
|
Lapses of applicable statute of limitations
|
|
|
(344
|
)
|
|
|
|
|
|
Balance as of December 29, 2013
|
|
$
|
3,573
|
|
|
|
|
|
|
The Company continues to be under examination by certain states. The Companys Federal statute of
limitation has expired for years prior to 2010 and the relevant state 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.
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. 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 2011, 2012 and 2013, 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 $3.7 million in 2011, $3.8 million in 2012 and $3.9 million in 2013.
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 2011, 2012 or 2013.
69
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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. There are
1,000,000 shares authorized to be issued under the ESPDP. There were 40,107 shares, 130 shares and 230 shares issued under the ESPDP in 2011, 2012 and 2013, respectively. During 2011, the Company began to purchase common stock on the open market for
the ESPDP at the current market price as soon as practicable under the plan. There were 23,468 shares, 37,769 shares and 27,404 shares of common stock in 2011, 2012 and 2013, respectively, purchased on the open market for participating employees at
a weighted-average price of $27.99 in 2011, $34.60 in 2012 and $55.24 in 2013. The expenses incurred under the ESPDP were approximately $0.1 million in 2011 and $0.2 million in both 2012 and 2013.
(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 29, 2013 are $42.3 million, and relate to the Companys insurance programs and supply chain center leases. As of December 29, 2013, significantly all of the Companys stand-by letters of credit were collateralized
with cash, which is classified as restricted cash. The Company has guaranteed lease payments related to certain franchisees lease arrangements. The maximum amount of potential future payments under these guarantees is $0.6 million as of
December 29, 2013.
(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.
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 29, 2013, 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 3,595,914 shares were authorized for grant but have not been granted.
The Company recorded total non-cash compensation expense of $14.0 million, $17.6 million and $22.0 million in 2011, 2012 and 2013,
respectively, which reduced net income by $8.8 million, $10.9 million and $14.0 million in 2011, 2012 and 2013, respectively. All non-cash compensation expense amounts are recorded in general and administrative expense.
Stock Options
As of
December 29, 2013, the number of stock options granted and outstanding under the 2004 Equity Incentive Plan was 4,317,065 shares of common stock. Stock options granted under the 2004 Equity Incentive Plan and a predecessor plan prior to fiscal
2009 were generally granted at the market price at the date of the grant, expire ten years from the date of grant and vest over five years from the date of grant. Stock options granted from 2009 to 2012 were granted at 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 were granted at 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.
70
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As part of the 2012 Recapitalization and pursuant to the anti-dilution provisions in the
2004 Equity Incentive Plan, the Company made cash payments totaling approximately $13.5 million on certain stock options, reduced the exercise price on certain other stock options by an equivalent per share amount and, in certain circumstances, both
reduced the stock option exercise price and made a cash payment totaling $3.00 per share. In accordance with the equity restructuring guidance, these anti-dilution payments were accounted for as modifications/settlements and were recorded as
increases in total stockholders deficit. Affected stock option exercise prices presented below have been adjusted to reflect these 2012 Recapitalization-related actions.
Stock option activity related to the 2004 Equity Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Options
|
|
|
|
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
(Years)
|
|
|
(In thousands)
|
|
Stock options at January 2, 2011
|
|
|
8,995,667
|
|
|
$
|
9.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted
|
|
|
392,000
|
|
|
|
19.24
|
|
|
|
|
|
|
|
|
|
Stock options cancelled
|
|
|
(170,213
|
)
|
|
|
10.30
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
(3,773,763
|
)
|
|
|
8.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options at January 1, 2012
|
|
|
5,443,691
|
|
|
$
|
10.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted
|
|
|
215,670
|
|
|
|
32.28
|
|
|
|
|
|
|
|
|
|
Stock options cancelled
|
|
|
(58,153
|
)
|
|
|
11.91
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
(938,669
|
)
|
|
|
9.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options at December 30, 2012
|
|
|
4,662,539
|
|
|
$
|
11.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted
|
|
|
591,490
|
|
|
|
50.83
|
|
|
|
|
|
|
|
|
|
Stock options cancelled
|
|
|
(8,500
|
)
|
|
|
7.63
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
(928,464
|
)
|
|
|
10.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options at December 29, 2013
|
|
|
4,317,065
|
|
|
$
|
17.17
|
|
|
|
5.5
|
|
|
$
|
228,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 29, 2013
|
|
|
3,464,614
|
|
|
$
|
11.15
|
|
|
|
4.7
|
|
|
$
|
204,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised was approximately $50.2 million, $27.5 million and $46.0
million in 2011, 2012 and 2013, respectively. Cash received from the exercise of stock options was approximately $33.5 million, $8.9 million and $9.5 million in 2011, 2012 and 2013, respectively. The tax benefit realized from stock options exercised
was approximately $13.5 million, $8.7 million and $15.5 million in 2011, 2012 and 2013, respectively.
The Company recorded total non-cash
compensation expense of $6.1 million, $5.3 million and $6.9 million in 2011, 2012 and 2013, respectively, related to these awards. As of December 29, 2013, there was $6.6 million of total unrecognized compensation cost related to unvested stock
options granted under the 2004 Equity Incentive Plan which 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 3.0 years.
71
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Management estimated the fair value of each option grant made during 2011, 2012 and 2013 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 term, and is estimated based on U.S. Treasury
Bond rates as of the grant date. The expected life (years) 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Risk-free interest rate
|
|
|
2.1
|
%
|
|
|
1.0
|
%
|
|
|
1.1
|
%
|
Expected life (years)
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
5.5
|
|
Expected volatility
|
|
|
45.0
|
%
|
|
|
45.0
|
%
|
|
|
38.7
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
1.6
|
%
|
|
|
|
|
Weighted average fair value per share
|
|
$
|
8.04
|
|
|
$
|
13.70
|
|
|
$
|
15.84
|
|
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 53,125 shares, 22,420 shares and 24,540 shares of restricted stock in 2011, 2012 and 2013, 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. The Company recorded total non-cash compensation expense of $0.7
million, $0.8 million and $1.0 million in 2011, 2012 and 2013, respectively, related to these restricted stock awards. All non-cash compensation expense amounts are recorded in general and administrative expense. As of December 29, 2013, there
was approximately $0.2 million of total unrecognized compensation cost related to these restricted stock grants.
The Company granted
376,309 shares, 282,170 shares and 312,330 shares of performance-based restricted stock in 2011, 2012 and 2013, respectively, to certain employees of the Company. The performance-based restricted stock awards granted in 2011 and 2012 are separated
into three tranches and have time-based and performance-based vesting conditions with the last tranche vesting three years from the issuance date. The performance-based restricted stock awards granted in 2013 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 $7.2 million,
$11.5 million and $14.1 million in 2011, 2012 and 2013, respectively, related to these awards. All non-cash compensation expense amounts are recorded in general and administrative expense. As of December 29, 2013, there was an estimated $24.7
million of total unrecognized compensation cost related to performance-based restricted stock.
72
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Restricted stock and performance-based restricted stock activity related to the 2004 Equity
Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Nonvested at December 30, 2012
|
|
|
691,842
|
|
|
$
|
17.61
|
|
|
|
|
Shares granted (1)
|
|
|
336,870
|
|
|
$
|
52.26
|
|
Shares cancelled
|
|
|
(7,776
|
)
|
|
$
|
51.98
|
|
Shares vested
|
|
|
(393,760
|
)
|
|
$
|
31.58
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 29, 2013
|
|
|
627,176
|
|
|
$
|
23.41
|
|
|
|
|
|
|
|
|
|
|
|
(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,
which was reset during the third quarter of 2012 at $200.0 million. The open market share repurchase program has historically been funded by excess cash flow and, if necessary, borrowings available under the Variable Funding Notes. During 2011, 2012
and 2013 the Company repurchased 6,414,813 shares, 2,472,863 shares and 1,666,435 shares of common stock for approximately $165.0 million, $88.2 million and $97.1 million, respectively. At December 29, 2013, the Company had approximately $55.2
million remaining under the $200.0 million 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 29, 2013, 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 30, 2012 and December 29, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
Voting
|
|
|
56,295,495
|
|
|
|
55,750,918
|
|
Non-Voting
|
|
|
17,754
|
|
|
|
17,754
|
|
|
|
|
|
|
|
|
|
|
Total Common Stock
|
|
|
56,313,249
|
|
|
|
55,768,672
|
|
|
|
|
|
|
|
|
|
|
73
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has three reportable segments: (i) Domestic Stores; (ii) Domestic Supply Chain; and
(iii) International. 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 Domestic Supply Chain segment primarily includes the distribution of food, equipment and supplies to the Domestic Stores segment from the Companys regional supply chain centers. The International
segment primarily includes operations related to the Companys franchising business in foreign and non-contiguous United States markets and its supply chain center operations in Canada, Alaska and Hawaii.
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.
The tables below summarize the financial information concerning the Companys reportable segments for 2011, 2012 and 2013. Intersegment
Revenues are comprised of sales of food, equipment and supplies from the Domestic 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
Stores
|
|
|
Domestic
Supply Chain
|
|
|
International
|
|
|
Intersegment
Revenues
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
523,356
|
|
|
$
|
1,024,495
|
|
|
$
|
200,933
|
|
|
$
|
(96,591
|
)
|
|
|
|
|
|
$
|
1,652,193
|
|
2012
|
|
|
518,652
|
|
|
|
1,033,545
|
|
|
|
217,568
|
|
|
|
(91,326
|
)
|
|
|
|
|
|
|
1,678,439
|
|
2013
|
|
|
549,783
|
|
|
|
1,106,551
|
|
|
|
242,589
|
|
|
|
(96,700
|
)
|
|
|
|
|
|
|
1,802,223
|
|
|
|
|
|
|
|
|
Segment Income-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
160,624
|
|
|
$
|
78,970
|
|
|
$
|
92,771
|
|
|
|
N/A
|
|
|
$
|
(37,345
|
)
|
|
$
|
295,020
|
|
2012
|
|
|
176,042
|
|
|
|
81,987
|
|
|
|
104,902
|
|
|
|
N/A
|
|
|
|
(39,016
|
)
|
|
|
323,915
|
|
2013
|
|
|
188,180
|
|
|
|
92,842
|
|
|
|
119,031
|
|
|
|
N/A
|
|
|
|
(38,105
|
)
|
|
|
361,948
|
|
|
|
|
|
|
|
|
Income from Operations-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
154,814
|
|
|
$
|
71,801
|
|
|
$
|
93,119
|
|
|
|
N/A
|
|
|
$
|
(60,589
|
)
|
|
$
|
259,145
|
|
2012
|
|
|
169,922
|
|
|
|
73,829
|
|
|
|
105,298
|
|
|
|
N/A
|
|
|
|
(66,718
|
)
|
|
|
282,331
|
|
2013
|
|
|
181,995
|
|
|
|
84,503
|
|
|
|
118,866
|
|
|
|
N/A
|
|
|
|
(71,553
|
)
|
|
|
313,811
|
|
|
|
|
|
|
|
|
Capital Expenditures-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
5,575
|
|
|
$
|
7,281
|
|
|
$
|
254
|
|
|
|
N/A
|
|
|
$
|
11,239
|
|
|
$
|
24,349
|
|
2012
|
|
|
7,357
|
|
|
|
8,804
|
|
|
|
454
|
|
|
|
N/A
|
|
|
|
12,652
|
|
|
|
29,267
|
|
2013
|
|
|
9,884
|
|
|
|
8,585
|
|
|
|
2,380
|
|
|
|
N/A
|
|
|
|
19,538
|
|
|
|
40,387
|
|
74
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table reconciles total Segment Income to income before provision for income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Total Segment Income
|
|
$
|
295,020
|
|
|
$
|
323,915
|
|
|
$
|
361,948
|
|
Depreciation and amortization
|
|
|
(24,042
|
)
|
|
|
(23,171
|
)
|
|
|
(25,783
|
)
|
Gains (losses) on sale/disposal of assets
|
|
|
2,436
|
|
|
|
(540
|
)
|
|
|
(367
|
)
|
Non-cash compensation expense
|
|
|
(13,954
|
)
|
|
|
(17,621
|
)
|
|
|
(21,987
|
)
|
Expenses related to the sale of Company-owned stores
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
2012 recapitalization-related expenses
|
|
|
|
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
259,145
|
|
|
|
282,331
|
|
|
|
313,811
|
|
|
|
|
|
Interest income
|
|
|
296
|
|
|
|
304
|
|
|
|
160
|
|
Interest expense
|
|
|
(91,635
|
)
|
|
|
(101,448
|
)
|
|
|
(88,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
$
|
167,806
|
|
|
$
|
181,187
|
|
|
$
|
225,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys identifiable asset information as of December 30, 2012
and December 29, 2013:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
Domestic Stores
|
|
$
|
54,750
|
|
|
$
|
57,879
|
|
Domestic Supply Chain
|
|
|
130,241
|
|
|
|
140,020
|
|
|
|
|
|
|
|
|
|
|
Total domestic assets
|
|
|
184,991
|
|
|
|
197,899
|
|
International
|
|
|
38,884
|
|
|
|
40,823
|
|
Unallocated
|
|
|
254,322
|
|
|
|
286,533
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
478,197
|
|
|
$
|
525,255
|
|
|
|
|
|
|
|
|
|
|
Unallocated assets primarily include cash and cash equivalents, restricted cash, advertising fund assets,
investments in marketable securities, deferred financing costs, certain long-lived assets and deferred income taxes.
The following table
summarizes the Companys goodwill balance as of December 30, 2012 and December 29, 2013:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
Domestic Stores
|
|
$
|
15,531
|
|
|
$
|
15,531
|
|
Domestic Supply Chain
|
|
|
1,067
|
|
|
|
1,067
|
|
|
|
|
|
|
|
|
|
|
Consolidated goodwill
|
|
$
|
16,598
|
|
|
$
|
16,598
|
|
|
|
|
|
|
|
|
|
|
The Company sold 58 stores in 2011 and six stores in 2012 to domestic franchisees. In connection with these
sales of Company-owned stores, goodwill was reduced by approximately $0.7 million in 2011 and $0.1 million in 2012. Additionally, the closure of three Company-owned stores in 2011 resulted in a decrease in goodwill of approximately $76,000. No
Company-owned stores were sold or closed during 2013.
75
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(12)
|
SALE AND CLOSURE OF COMPANY-OWNED STORES
|
During 2011, the Company sold 58 Company-owned stores in a series of transactions to multiple franchisees. In connection
with the sale of these stores, the Company recognized pre-tax gains on the sale of assets of approximately $2.2 million, which was net of a reduction in goodwill of approximately $0.7 million. Additionally, the Company incurred other related
expenses of approximately $0.3 million. These items were included in general and administrative expenses.
During 2012, the Company sold
its six remaining Company-owned stores in a certain market to a franchisee. In connection with the sale of these stores, the Company recognized minimal pre-tax gains on the sale of assets, which was net of a minimal reduction in goodwill.
During 2013, the Company did not sell or close any of its Company-owned stores.
(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 twelve weeks while the last fiscal quarter consists of sixteen weeks or seventeen weeks. The fourth quarter of 2012 and 2013 are both comprised of sixteen weeks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Quarter Ended
|
|
|
For the Fiscal
Year Ended
|
|
|
|
March 25,
2012
|
|
|
June 17,
2012
|
|
|
September 9,
2012
|
|
|
December 30,
2012
|
|
|
December 30,
2012
|
|
Total revenues
|
|
$
|
384,587
|
|
|
$
|
376,124
|
|
|
$
|
378,077
|
|
|
$
|
539,651
|
|
|
$
|
1,678,439
|
|
Operating margin
|
|
|
114,649
|
|
|
|
114,607
|
|
|
|
111,407
|
|
|
|
160,675
|
|
|
|
501,338
|
|
Income before provision for income taxes
|
|
|
34,799
|
|
|
|
45,113
|
|
|
|
40,969
|
|
|
|
60,306
|
|
|
|
181,187
|
|
Net income
|
|
|
20,742
|
|
|
|
28,095
|
|
|
|
25,976
|
|
|
|
37,579
|
|
|
|
112,392
|
|
Earnings per common share basic
|
|
$
|
0.36
|
|
|
$
|
0.50
|
|
|
$
|
0.46
|
|
|
$
|
0.67
|
|
|
$
|
1.99
|
|
Earnings per common share diluted
|
|
$
|
0.35
|
|
|
$
|
0.47
|
|
|
$
|
0.44
|
|
|
$
|
0.64
|
|
|
$
|
1.91
|
|
Common stock dividends declared per share
|
|
$
|
3.00
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3.00
|
|
76
DOMINOS PIZZA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Quarter Ended
|
|
|
For the Fiscal
Year Ended
|
|
|
|
March 24,
2013
|
|
|
June 16,
2013
|
|
|
September 8,
2013
|
|
|
December 29,
2013
|
|
|
December 29,
2013
|
|
Total revenues
|
|
$
|
417,617
|
|
|
$
|
414,009
|
|
|
$
|
404,050
|
|
|
$
|
566,547
|
|
|
$
|
1,802,223
|
|
Operating margin
|
|
|
129,806
|
|
|
|
125,987
|
|
|
|
120,634
|
|
|
|
172,547
|
|
|
|
548,974
|
|
Income before provision for income taxes
|
|
|
54,622
|
|
|
|
53,445
|
|
|
|
46,453
|
|
|
|
70,579
|
|
|
|
225,099
|
|
Net income
|
|
|
34,420
|
|
|
|
33,270
|
|
|
|
30,632
|
|
|
|
44,663
|
|
|
|
142,985
|
|
Earnings per common share basic
|
|
$
|
0.62
|
|
|
$
|
0.60
|
|
|
$
|
0.56
|
|
|
$
|
0.81
|
|
|
$
|
2.58
|
|
Earnings per common share diluted
|
|
$
|
0.59
|
|
|
$
|
0.57
|
|
|
$
|
0.53
|
|
|
$
|
0.78
|
|
|
$
|
2.48
|
|
Common stock dividends declared per share
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.80
|
|
Subsequent to December 29, 2013, the Company repurchased and retired 221,481 shares of its common stock for
approximately $15.1 million, or an average of $68.32 per share.
On February 12, 2014, the Company granted 77,630 stock options,
10,640 restricted shares and 18,750 performance-based restricted shares to certain employees and the members of the Board of Directors of the Company. Additionally, On February 12, 2014, the Board of Directors declared a quarterly dividend of
$0.25 per common share payable on March 28, 2014 to shareholders of record at the close of business on March 14, 2014. Further, on February 12, 2014, the Board of Directors approved an increase to the Companys open market share
repurchase program, resulting in a total remaining authorized amount for additional share repurchases of $200.0 million.
77