UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 22, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number: 001-32242

 

Domino’s Pizza, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

38-2511577

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

30 Frank Lloyd Wright Drive

Ann Arbor, Michigan

 

48105

(Address of Principal Executive Offices)

 

(Zip Code)

(734) 930-3030

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of April 16, 2015, Domino’s Pizza, Inc. had 55,192,823 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

 

 


Domino’s Pizza, Inc.

TABLE OF CONTENTS

 

 

 

 

  

Page No.

PART I.

 

FINANCIAL INFORMATION

  

 

 

 

 

Item 1.

 

Financial Statements

  

3

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) – As of March 22, 2015 and December 28, 2014

  

3

 

 

 

 

 

Condensed Consolidated Statements of Income (Unaudited) – Fiscal quarters ended March 22, 2015 and March 23, 2014

  

4

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) – Fiscal quarters ended March 22, 2015 and March 23, 2014

  

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) – Fiscal quarters ended March 22, 2015 and March 23, 2014

  

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

  

7

 

 

 

Item 2.

 

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

  

11

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

17

 

 

 

Item 4.

 

Controls and Procedures

  

17

 

 

 

PART II.

 

OTHER INFORMATION

  

 

 

 

 

Item 1.

 

Legal Proceedings

  

18

 

 

 

Item 1A.

 

Risk Factors

  

18

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

18

 

 

 

Item 3.

 

Defaults Upon Senior Securities

  

18

 

 

 

Item 4.

 

Mine Safety Disclosures

  

18

 

 

 

Item 5.

 

Other Information

  

18

 

 

 

Item 6.

 

Exhibits

  

19

 

 

SIGNATURES

  

20

 

 

 

2


PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements.

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

December 28, 2014

 

(In thousands)

 

March 22, 2015

 

 

(Note)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,991

 

 

$

30,855

 

Restricted cash and cash equivalents

 

 

121,533

 

 

 

120,954

 

Accounts receivable

 

 

118,085

 

 

 

118,395

 

Inventories

 

 

37,899

 

 

 

37,944

 

Prepaid expenses and other

 

 

13,267

 

 

 

32,569

 

Advertising fund assets, restricted

 

 

72,555

 

 

 

72,055

 

Deferred income taxes

 

 

7,711

 

 

 

9,857

 

Asset held for sale

 

 

 

 

 

5,732

 

Total current assets

 

 

446,041

 

 

 

428,361

 

Property, plant and equipment:

 

 

 

 

 

 

 

 

Land and buildings

 

 

28,759

 

 

 

25,859

 

Leasehold and other improvements

 

 

100,917

 

 

 

99,804

 

Equipment

 

 

181,573

 

 

 

178,378

 

Construction in progress

 

 

3,296

 

 

 

6,179

 

 

 

 

314,545

 

 

 

310,220

 

Accumulated depreciation and amortization

 

 

(199,801

)

 

 

(196,174

)

Property, plant and equipment, net

 

 

114,744

 

 

 

114,046

 

Other assets:

 

 

 

 

 

 

 

 

Deferred financing costs

 

 

21,673

 

 

 

22,947

 

Goodwill

 

 

16,297

 

 

 

16,297

 

Capitalized software

 

 

20,805

 

 

 

20,562

 

Other assets

 

 

15,072

 

 

 

14,592

 

Deferred income taxes

 

 

2,349

 

 

 

2,475

 

Total other assets

 

 

76,196

 

 

 

76,873

 

Total assets

 

$

636,981

 

 

$

619,280

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

234

 

 

$

565

 

Accounts payable

 

 

88,323

 

 

 

86,552

 

Dividends payable

 

 

17,579

 

 

 

14,351

 

Insurance reserves

 

 

14,307

 

 

 

14,465

 

Advertising fund liabilities

 

 

72,555

 

 

 

72,055

 

Other accrued liabilities

 

 

82,315

 

 

 

77,620

 

Total current liabilities

 

 

275,313

 

 

 

265,608

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

 

1,527,202

 

 

 

1,523,546

 

Insurance reserves

 

 

26,621

 

 

 

26,951

 

Deferred income taxes

 

 

3,201

 

 

 

5,588

 

Other accrued liabilities

 

 

18,222

 

 

 

17,052

 

Total long-term liabilities

 

 

1,575,246

 

 

 

1,573,137

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Common stock

 

 

554

 

 

 

556

 

Additional paid-in capital

 

 

6,758

 

 

 

29,561

 

Retained deficit

 

 

(1,217,800

)

 

 

(1,246,921

)

Accumulated other comprehensive loss

 

 

(3,090

)

 

 

(2,661

)

Total stockholders' deficit

 

 

(1,213,578

)

 

 

(1,219,465

)

Total liabilities and stockholders' deficit

 

$

636,981

 

 

$

619,280

 

 

Note: The balance sheet at December 28, 2014 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying notes.

3


Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

Fiscal Quarter Ended

 

 

 

 

March 22,

 

 

 

March 23,

 

(In thousands, except per share data)

 

 

2015

 

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

Domestic Company-owned stores

 

$

92,375

 

 

$

82,457

 

Domestic franchise

 

 

61,774

 

 

 

53,421

 

Supply chain

 

 

311,656

 

 

 

284,334

 

International franchise

 

 

36,222

 

 

 

33,640

 

Total revenues

 

 

502,027

 

 

 

453,852

 

Cost of sales:

 

 

 

 

 

 

 

 

Domestic Company-owned stores

 

 

68,152

 

 

 

62,791

 

Supply chain

 

 

276,809

 

 

 

254,019

 

Total cost of sales

 

 

344,961

 

 

 

316,810

 

Operating margin

 

 

157,066

 

 

 

137,042

 

General and administrative

 

 

62,813

 

 

 

52,867

 

Income from operations

 

 

94,253

 

 

 

84,175

 

Interest income

 

 

82

 

 

 

31

 

Interest expense

 

 

(20,153

)

 

 

(20,326

)

Income before provision for income taxes

 

 

74,182

 

 

 

63,880

 

Provision for income taxes

 

 

27,893

 

 

 

23,406

 

Net income

 

$

46,289

 

 

$

40,474

 

Earnings per share:

 

 

 

 

 

 

 

 

Common stock - basic

 

$

0.84

 

 

$

0.73

 

Common stock - diluted

 

 

0.81

 

 

 

0.71

 

Dividends declared per share

 

$

0.31

 

 

$

0.25

 

 

See accompanying notes.

 

 

 

4


Domino’s Pizza, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Fiscal Quarter Ended

 

 

 

 

March 22,

 

 

 

March 23,

 

(In thousands)

 

 

2015

 

 

 

2014

 

Net income

 

$

46,289

 

 

$

40,474

 

Other comprehensive loss, before tax:

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

(810

)

 

 

(1,026

)

Tax attributes of items in other comprehensive loss:

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

381

 

 

 

442

 

Other comprehensive loss, net of tax

 

 

(429

)

 

 

(584

)

Comprehensive income

 

$

45,860

 

 

$

39,890

 

 

See accompanying notes.

 

 

5


Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Fiscal Quarter Ended

 

 

 

 

March 22,

 

 

 

March 23,

 

(In thousands)

 

 

2015

 

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

46,289

 

 

$

40,474

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,347

 

 

 

6,421

 

(Gains) losses on sale/disposal of assets

 

 

150

 

 

 

(1,556

)

Amortization of deferred financing costs

 

 

1,274

 

 

 

1,390

 

Provision for deferred income taxes

 

 

198

 

 

 

700

 

Non-cash compensation expense

 

 

4,466

 

 

 

4,455

 

Tax impact from equity-based compensation

 

 

(4,677

)

 

 

(7,834

)

Other

 

 

74

 

 

 

45

 

Changes in operating assets and liabilities

 

 

29,624

 

 

 

(7,891

)

Net cash provided by operating activities

 

 

84,745

 

 

 

36,204

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(7,600

)

 

 

(6,561

)

Proceeds from sale of assets

 

 

6,789

 

 

 

3,906

 

Changes in restricted cash

 

 

(579

)

 

 

16,827

 

Other

 

 

1,556

 

 

 

(279

)

Net cash provided by investing activities

 

 

166

 

 

 

13,893

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of long-term debt and capital lease obligations

 

 

(103

)

 

 

(6,032

)

Proceeds from exercise of stock options

 

 

1,196

 

 

 

2,458

 

Tax impact from equity-based compensation

 

 

4,677

 

 

 

7,834

 

Purchases of common stock

 

 

(29,512

)

 

 

(15,131

)

Tax payments for restricted stock upon vesting

 

 

(3,632

)

 

 

(4,308

)

Payments of common stock dividends and equivalents

 

 

(13,965

)

 

 

(11,053

)

Net cash used in financing activities

 

 

(41,339

)

 

 

(26,232

)

Effect of exchange rate changes on cash and cash equivalents

 

 

564

 

 

 

128

 

Change in cash and cash equivalents

 

 

44,136

 

 

 

23,993

 

Cash and cash equivalents, at beginning of period

 

 

30,855

 

 

 

14,383

 

Cash and cash equivalents, at end of period

 

$

74,991

 

 

$

38,376

 

 

See accompanying notes.

 

 

 

6


Domino’s Pizza, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited; tabular amounts in thousands, except percentages, share and per share amounts)

March 22, 2015

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended December 28, 2014 included in our annual report on Form 10-K.

In the opinion of the Company, all adjustments, consisting of normal recurring items, considered necessary for a fair statement have been included. Operating results for the fiscal quarter ended March 22, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 2016.

 

 

2. Segment Information

The following table summarizes revenues, income from operations and earnings before interest, taxes, depreciation, amortization and other, which is the measure by which the Company allocates resources to its segments and which we refer to as Segment Income, for each of our reportable segments.

 

 

 

Fiscal Quarters Ended March 22, 2015 and March 23, 2014

 

 

 

Domestic

 

 

Supply

 

 

International

 

 

Intersegment

 

 

 

 

 

 

 

 

 

 

 

Stores

 

 

Chain

 

 

Franchise

 

 

Revenues

 

 

Other

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

$

154,149

 

 

$

337,756

 

 

$

36,222

 

 

$

(26,100

)

 

$

 

 

$

502,027

 

2014

 

 

135,878

 

 

 

309,052

 

 

 

33,640

 

 

 

(24,718

)

 

 

 

 

 

453,852

 

Income from operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

$

55,527

 

 

$

27,195

 

 

$

28,715

 

 

N/A

 

 

$

(17,184

)

 

$

94,253

 

2014

 

 

48,091

 

 

 

23,967

 

 

 

27,423

 

 

N/A

 

 

 

(15,306

)

 

 

84,175

 

Segment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

$

57,273

 

 

$

29,455

 

 

$

28,748

 

 

N/A

 

 

$

(9,260

)

 

$

106,216

 

2014

 

 

47,979

 

 

 

26,025

 

 

 

27,463

 

 

N/A

 

 

 

(7,972

)

 

 

93,495

 

 

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

 

 

 

Fiscal Quarter Ended

 

 

 

March 22,

 

 

March 23,

 

 

 

 

2015

 

 

 

2014

 

Total Segment Income

 

$

106,216

 

 

$

93,495

 

Depreciation and amortization

 

 

(7,347

)

 

 

(6,421

)

Gains (losses) on sale/disposal of assets

 

 

(150

)

 

 

1,556

 

Non-cash compensation expense

 

 

(4,466

)

 

 

(4,455

)

Income from operations

 

 

94,253

 

 

 

84,175

 

Interest income

 

 

82

 

 

 

31

 

Interest expense

 

 

(20,153

)

 

 

(20,326

)

Income before provision for income taxes

 

$

74,182

 

 

$

63,880

 

 


7


 

3. Earnings Per Share

 

 

 

Fiscal Quarter Ended

 

 

 

March 22,

 

 

March 23,

 

 

 

 

2015

 

 

 

2014

 

Net income available to common stockholders - basic and diluted

 

$

46,289

 

 

$

40,474

 

Basic weighted average number of shares

 

 

55,207,646

 

 

 

55,211,837

 

Earnings per share - basic

 

$

0.84

 

 

$

0.73

 

Diluted weighted average number of shares

 

 

57,013,552

 

 

 

57,372,471

 

Earnings per share - diluted

 

$

0.81

 

 

$

0.71

 

 

The denominator used in calculating diluted earnings per share for common stock for the first quarter of 2015 does not include 70,910 options to purchase common stock, as the effect of including these options would have been anti-dilutive. The denominator used in calculating diluted earnings per share for common stock for the first quarter of 2014 does not include 199,040 options to purchase common stock, as the effect of including these options would have been anti-dilutive.

 

 

4. Stockholders’ Deficit

The following table summarizes changes in Stockholders’ Deficit for the first quarter of 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

Balance at December 28, 2014

 

 

55,553,149

 

 

$

556

 

 

$

29,561

 

 

$

(1,246,921

)

 

$

(2,661

)

Net income

 

 

 

 

 

 

 

 

 

 

 

46,289

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(17,168

)

 

 

 

Issuance of common stock, net

 

 

23,155

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax payments for restricted stock upon vesting

 

 

(36,154

)

 

 

 

 

 

(3,632

)

 

 

 

 

 

 

Purchases of common stock

 

 

(290,877

)

 

 

(3

)

 

 

(29,509

)

 

 

 

 

 

 

Exercise of stock options

 

 

111,585

 

 

 

1

 

 

 

1,195

 

 

 

 

 

 

 

Tax impact from equity-based compensation

 

 

 

 

 

 

 

 

4,677

 

 

 

 

 

 

 

Non-cash compensation expense

 

 

 

 

 

 

 

 

4,466

 

 

 

 

 

 

 

Currency translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(429

)

Balance at March 22, 2015

 

 

55,360,858

 

 

$

554

 

 

$

6,758

 

 

$

(1,217,800

)

 

$

(3,090

)

 

 

5. Dividends

During the first quarter of 2015, the Company paid approximately $14.0 million of common stock dividends. Additionally, during the first quarter of 2015, the Company’s Board of Directors declared a $0.31 per share quarterly dividend on its outstanding common stock for shareholders of record as of March 13, 2015 which was paid on March 30, 2015. The Company had approximately $17.6 million accrued for common stock dividends at March 22, 2015.

Subsequent to the first quarter, on April 21, 2015, the Company’s Board of Directors declared a $0.31 per share quarterly dividend on its outstanding common stock for shareholders of record as of June 15, 2015 to be paid on June 30, 2015.

 

 

6. Accumulated Other Comprehensive Loss

The approximately $3.1 million of accumulated other comprehensive loss at March 22, 2015 and the approximately $2.7 million of accumulated other comprehensive loss at December 28, 2014 represent currency translation adjustments, net of tax. There were no reclassifications out of accumulated other comprehensive loss to net income in the first quarter of 2015 or the first quarter of 2014.

 


8


7. Open Market Share Repurchase Program

During the first quarter of 2015, the Company repurchased and retired 290,877 shares of common stock for a total of approximately $29.5 million. As of March 22, 2015, the Company had $103.2 million remaining for future share repurchases under its Board of Directors approved $200.0 million open market share repurchase program. Subsequent to the first quarter, and through April 16, 2015, the Company repurchased and retired an additional 177,695 shares of common stock for a total of approximately $18.0 million.

During the first quarter of 2014, the Company repurchased and retired 221,481 shares of common stock for a total of approximately $15.1 million.

 

 

8. Fair Value Measurements

Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The fair values of the Company’s cash equivalents and investments in marketable securities are based on quoted prices in active markets for identical assets. The following tables summarize the carrying amounts and fair values of certain assets at March 22, 2015 and December 28, 2014:

 

 

 

At March 22, 2015

 

 

 

 

 

 

 

Fair Value Estimated Using

 

 

 

Carrying

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

Amount

 

 

Inputs

 

 

Inputs

 

 

Inputs

 

Cash equivalents

 

$

59,822

 

 

$

59,822

 

 

$

 

 

$

 

Restricted cash equivalents

 

 

97,733

 

 

 

97,733

 

 

 

 

 

 

 

Investments in marketable securities

 

 

5,128

 

 

 

5,128

 

 

 

 

 

 

 

 

 

 

At December 28, 2014

 

 

 

 

 

 

 

Fair Value Estimated Using

 

 

 

Carrying

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

Amount

 

 

Inputs

 

 

Inputs

 

 

Inputs

 

Cash equivalents

 

$

16,290

 

 

$

16,290

 

 

$

 

 

$

 

Restricted cash equivalents

 

 

93,121

 

 

 

93,121

 

 

 

 

 

 

 

Investments in marketable securities

 

 

4,586

 

 

 

4,586

 

 

 

 

 

 

 

 

At March 22, 2015, the Company estimated that the $1.522 billion in principal amount of outstanding fixed rate notes had a fair value of approximately $1.592 billion; and at December 28, 2014 the $1.522 billion in principal amount of outstanding fixed rate notes had a fair value of approximately $1.597 billion. The fixed rate notes are classified as a Level 2 measurement, as the Company estimated the fair value amount by using available market information. The Company obtained quotes from two separate brokerage firms that are knowledgeable about the Company’s fixed rate notes and, at times, trade these notes. Further, the Company performed its own internal analysis based on the information gathered from public markets, including information on notes that are similar to that of the Company. However, considerable judgment is required to interpret market data to estimate 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 stated above.

 

 

9. Sale of Company-Owned Stores

During the first quarter of 2014, the Company sold 14 Company-owned stores to a franchisee. In connection with the sale of these 14 stores, the Company recorded a $1.7 million pre-tax gain on the sale of the related assets, which was net of a $0.5 million reduction in goodwill. The gain was recorded in general and administrative expense in the Company’s condensed consolidated statements of income. As a result of this capital gain, the Company also released $0.3 million of a deferred tax valuation allowance.

 

 

9


10. Legal Matters

In 2013, the Company was named as a defendant in a lawsuit along with a large franchisee and the franchisee’s delivery driver.  The jury delivered a $32.0 million judgment for the plaintiff where the Company was found to be 60% liable. The Company denied liability and filed an appeal of the verdict on a variety of grounds.  In the first quarter of 2015, the appellate court reversed the trial court’s decision and dismissed the claims against the Company. The plaintiff’s right to request an appeal with the Texas Supreme Court has not yet expired. The Company continues to deny liability in this matter.

 

 

11. Supplemental Disclosures of Cash Flow Information

At March 22, 2015, the Company had $0.7 million of non-cash investing activities related to accruals for capital expenditures.

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

 

 

 

10


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Unaudited; tabular amounts in millions, except percentages and store data)

The 2015 and 2014 first quarters referenced herein represent the twelve-week periods ended March 22, 2015 and March 23, 2014, respectively.

Overview

Domino’s is the second largest pizza restaurant chain in the world, with more than 11,600 locations in over 75 markets. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. Domino’s generates revenues and earnings by charging royalties to its franchisees. The Company also generates revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada, and by operating a number of our own stores. Everyone in the system can benefit, including the end consumer, who can feed their family Domino’s menu items conveniently and economically.

Our financial results are driven largely by retail sales at our franchise and Company-owned stores. Changes in retail sales are driven by changes in same store sales and store counts. We monitor both of these metrics very closely, as they directly impact our revenues and profits, and strive to consistently increase both metrics. Retail sales drive royalty payments from franchisees as well as Company-owned store and supply chain revenues. Retail sales are primarily impacted by the strength of the Domino's Pizza® brand, the results of our extensive advertising through various media channels, the impact of technological innovation and digital ordering, our ability to execute our strong and proven business model and the overall global economic environment.

 

 

 

First Quarter

 

 

First Quarter

 

 

 

of 2015

 

 

of 2014

 

Global retail sales growth

 

+10.4%

 

 

 

 

 

 

+9.1%

 

 

 

 

 

Same store sales growth:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned stores

 

+15.9%

 

 

 

 

 

 

+1.5%

 

 

 

 

 

Domestic franchise stores

 

+14.4%

 

 

 

 

 

 

+5.2%

 

 

 

 

 

Domestic stores

 

+14.5%

 

 

 

 

 

 

+4.9%

 

 

 

 

 

International stores (excluding foreign currency impact)

 

+7.8%

 

 

 

 

 

 

+7.4%

 

 

 

 

 

Store counts (at end of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Company-owned stores

 

 

379

 

 

 

 

 

 

 

376

 

 

 

 

 

Domestic franchise stores

 

 

4,705

 

 

 

 

 

 

 

4,615

 

 

 

 

 

Domestic stores

 

 

5,084

 

 

 

 

 

 

 

4,991

 

 

 

 

 

International stores

 

 

6,655

 

 

 

 

 

 

 

5,997

 

 

 

 

 

Total stores

 

 

11,739

 

 

 

 

 

 

 

10,988

 

 

 

 

 

Income statement data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

502.0

 

 

 

100.0

%

 

$

453.9

 

 

 

100.0

%

Cost of sales

 

 

345.0

 

 

 

68.7

%

 

 

316.8

 

 

 

69.8

%

General and administrative

 

 

62.8

 

 

 

12.5

%

 

 

52.9

 

 

 

11.6

%

Income from operations

 

 

94.3

 

 

 

18.8

%

 

 

84.2

 

 

 

18.5

%

Interest expense, net

 

 

(20.1

)

 

 

(4.0

)%

 

 

(20.3

)

 

 

(4.5

)%

Income before provision for income taxes

 

 

74.2

 

 

 

14.8

%

 

 

63.9

 

 

 

14.1

%

Provision for income taxes

 

 

27.9

 

 

 

5.6

%

 

 

23.4

 

 

 

5.2

%

Net income

 

$

46.3

 

 

 

9.2

%

 

$

40.5

 

 

 

8.9

%

 

During the first quarter of 2015, we continued our global expansion with the opening of 110 net new stores. Our international segment led the way with 93 net new store openings. We continued our focus on growing online ordering and the digital customer experience through our digital platforms and technology. Our emphasis on technology innovation helped us generate over 45% of U.S. sales from digital channels in the first quarter of 2015. Overall, we believe our focus on global growth and technology has strengthened our brand.

Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, increased 10.4% in the first quarter of 2015. This increase was driven primarily by domestic and international same store sales growth, as well as an increase in our worldwide store counts during the trailing four quarters. The impact of foreign currency exchange rates partially offset these increases, resulting from a generally stronger U.S. dollar when compared to the currencies in the international markets in which we compete. Domestic same store sales growth reflected the sustained positive sales trends and the continued success of our products and marketing. International same store sales growth also reflected continued strong performance.

11


Revenues increased $48.1 million, up 10.6% in the first quarter of 2015. This increase was due primarily to higher supply chain revenues from increased food volumes as well as increased sales of equipment to stores in connection with the Company’s store reimaging program. Higher Company-owned store, domestic franchise and international franchise revenues resulting from same store sales and store count growth also contributed to the increase. These increases were offset in part by the negative impact of changes in foreign currency exchange rates on international franchise and international supply chain revenues and lower commodity prices, specifically cheese. These changes in revenues are described in more detail below.

Income from operations increased $10.1 million, up 12.0% in the first quarter of 2015. This increase was driven by higher royalty revenues from domestic franchise stores as well as increased supply chain volumes. Higher Company-owned store and international franchise revenues also contributed to the increase in income from operations. The negative impact of changes in foreign currency exchange rates partially offset these increases. Additionally, in the comparable quarter of 2014, we recognized a non-recurring pre-tax gain of $1.7 million from the sale of 14 Company-owned stores.

Net income increased $5.8 million, up 14.4% in the first quarter of 2015. This increase was driven by domestic same store sales growth and higher supply chain volumes. International same store sales and store count growth also contributed to the increase in net income. The negative impact of changes in foreign currency exchange rates partially offset these increases. Additionally, in the comparable quarter of 2014, we recognized a non-recurring gain of $1.4 million from the sale of 14 Company-owned stores and the associated reversal of a deferred tax asset valuation allowance.

Revenues

 

 

 

First Quarter

 

 

First Quarter

 

 

 

of 2015

 

 

of 2014

 

Domestic Company-owned stores

 

$

92.4

 

 

 

18.4

%

 

$

82.5

 

 

 

18.2

%

Domestic franchise

 

 

61.8

 

 

 

12.3

%

 

 

53.4

 

 

 

11.8

%

Supply chain

 

 

311.7

 

 

 

62.1

%

 

 

284.3

 

 

 

62.6

%

International franchise

 

 

36.2

 

 

 

7.2

%

 

 

33.6

 

 

 

7.4

%

Total revenues

 

$

502.0

 

 

 

100.0

%

 

$

453.9

 

 

 

100.0

%

 

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

Domestic Stores Revenues

 

 

 

First Quarter

 

 

First Quarter

 

 

 

of 2015

 

 

of 2014

 

Domestic Company-owned stores

 

$

92.4

 

 

 

59.9

%

 

$

82.5

 

 

 

60.7

%

Domestic franchise

 

 

61.8

 

 

 

40.1

%

 

 

53.4

 

 

 

39.3

%

Domestic stores

 

$

154.1

 

 

 

100.0

%

 

$

135.9

 

 

 

100.0

%

 

Domestic stores revenues increased $18.2 million, up 13.4% in the first quarter of 2015. This increase was due to higher domestic Company-owned same store sales and royalty revenues earned on higher franchise same store sales. These changes in domestic stores revenues are more fully described below.

Domestic Company-Owned Stores Revenues

Revenues from domestic Company-owned store operations increased $9.9 million, up 12.0% in the first quarter of 2015. This increase was due to a 15.9% increase in same store sales as compared to 2014. The sale of 14 Company-owned stores during the first quarter of 2014 partially offset this increase.

Domestic Franchise Revenues

Revenues from domestic franchise operations increased $8.4 million, or 15.6%, in the first quarter of 2015. The increase was driven by a 14.4% increase in same store sales as compared to the first quarter of 2014 and, to a lesser extent, an increase in the average number of domestic franchised stores open during the first quarter of 2015. Revenues further benefited from fees paid by

12


franchisees related to our insourced online ordering platform. We also incurred an increase in expenses related to these technology initiatives.

Supply Chain Revenues

 

 

 

First Quarter

 

 

First Quarter

 

 

 

of 2015

 

 

of 2014

 

Domestic supply chain

 

$

284.0

 

 

 

91.1

%

 

$

257.5

 

 

 

90.6

%

International supply chain

 

 

27.7

 

 

 

8.9

%

 

 

26.8

 

 

 

9.4

%

Total supply chain

 

$

311.7

 

 

 

100.0

%

 

$

284.3

 

 

 

100.0

%

 

Domestic Supply Chain

Domestic supply chain revenues increased $26.5 million, or 10.3%, in the first quarter of 2015. The increase was primarily attributable to higher volumes from increased order counts at the store level and increases in sales of equipment and supplies and was partially offset by lower commodity prices, specifically cheese. We estimate that the lower cheese block price (passed through directly in domestic supply chain pricing to franchisees) resulted in an approximate $11.1 million decrease in domestic supply chain revenues during the first quarter of 2015.

 

International Supply Chain

Revenues from international supply chain operations increased $0.9 million, or 3.3%, in the first quarter of 2015. This increase resulted primarily from higher volumes, and was offset in part by the negative impact of foreign currency exchange rates of approximately $2.7 million during the quarter.

International Franchise

Revenues from international franchise operations increased $2.6 million, or 7.7%, in the first quarter of 2015. This increase was due to higher same store sales and an increase in the average number of international stores open during the quarter, and was offset in part by the negative impact of changes in foreign currency exchange rates of approximately $3.6 million. Excluding the impact of foreign currency exchange rates, same store sales increased 7.8% in the first quarter of 2015. The impact of foreign currency exchange rates more than offset the increased same store sales at our international franchise stores. As a result, when the impact of foreign currency is included, same store sales decreased 2.5% from the first quarter of 2014.

Cost of Sales / Operating Margin

 

 

 

First Quarter

 

 

First Quarter

 

 

 

of 2015

 

 

of 2014

 

Consolidated revenues

 

$

502.0

 

 

 

100.0

%

 

$

453.9

 

 

 

100.0

%

Consolidated cost of sales

 

 

345.0

 

 

 

68.7

%

 

 

316.8

 

 

 

69.8

%

Consolidated operating margin

 

$

157.1

 

 

 

31.3

%

 

$

137.0

 

 

 

30.2

%

 

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

Consolidated operating margin, which we define as revenues less cost of sales, increased $20.1 million, up 14.6% in the first quarter of 2015. This increase was due to higher domestic and international franchise revenues, higher margins at our Company-owned stores and increased supply chain margins. Franchise revenues do not have a cost of sales component, so changes in franchise revenues have a disproportionate effect on the operating margin.

As a percentage of revenues, the operating margin increased 1.1 percentage points in the first quarter of 2015, primarily resulting from lower overall commodity prices, specifically cheese.

 

13


Domestic Company-Owned Stores Operating Margin

 

 

 

First Quarter

 

 

First Quarter

 

Domestic Company-Owned Stores

 

of 2015

 

 

of 2014

 

Revenues

 

$

92.4

 

 

 

100.0

%

 

$

82.5

 

 

 

100.0

%

Cost of sales

 

 

68.2

 

 

 

73.8

%

 

 

62.8

 

 

 

76.1

%

Store operating margin

 

$

24.2

 

 

 

26.2

%

 

$

19.7

 

 

 

23.9

%

 

The domestic Company-owned store operating margin, which does not include certain store-level costs such as royalties and advertising, increased $4.5 million, up 23.2% in the first quarter of 2015. This increase was due primarily to lower food costs and higher same store sales.

As a percentage of store revenues, the store operating margin increased 2.3 percentage points in the first quarter of 2015, as discussed in more detail below.

·

Food costs decreased 1.8 percentage points to 26.5%, due primarily to lower overall commodity prices, specifically cheese. The cheese block price per pound averaged $1.54 in the first quarter of 2015 compared to $2.16 in the first quarter of 2014.

·

Occupancy costs, which include rent, telephone, utilities and depreciation, decreased 1.3 percentage points to 7.6% due primarily to the positive impact of higher sales per store.

·

Labor and related costs increased 1.0 percentage point due to additional overtime wages resulting from higher volumes and higher bonuses to our corporate store management team resulting from improved performance.

Supply Chain Operating Margin

 

 

 

First Quarter

 

 

First Quarter

 

Supply Chain

 

of 2015

 

 

of 2014

 

Revenues

 

$

311.7

 

 

 

100.0

%

 

$

284.3

 

 

 

100.0

%

Cost of sales

 

 

276.8

 

 

 

88.8

%

 

 

254.0

 

 

 

89.3

%

Supply chain operating margin

 

$

34.8

 

 

 

11.2

%

 

$

30.3

 

 

 

10.7

%

 

The $4.5 million or 14.9% increase in the supply chain operating margin was due primarily to higher volumes from increased store order counts.

As a percentage of supply chain revenues, the supply chain operating margin increased 0.5 percentage points in the first quarter of 2015 due to lower commodity prices and lower fuel costs. Decreases in certain food prices have a positive effect on the supply chain operating margin percentage due to the fixed dollar margin earned by supply chain on certain food items. Changes in our domestic cheese prices decreased both revenues and costs by $11.1 million in the first quarter of 2015. If our domestic cheese prices for the first quarter of 2015 had been in effect during the first quarter of 2014, the supply chain operating margin as a percentage of supply chain revenues would have increased by 0.4 percentage points. However, the dollar margin would have been unaffected.

General and Administrative Expenses

General and administrative expenses increased $9.9 million, up 18.8% in the first quarter of 2015. This increase primarily relates to continued investments in technology initiatives as well as higher volume-driven expenses resulting from our higher same store sales, including franchisee incentives, Company-owned store advertising and variable performance-based compensation. The non-recurrence of a $1.7 million pre-tax gain recognized from the sale of 14 Company-owned stores during the first quarter of 2014 also contributed to the increase.

Interest Expense

Interest expense decreased $0.2 million to $20.2 million in the first quarter of 2015. This decrease was due primarily to a lower average debt balance during the first quarter of 2015 compared to the same period in 2014.

The Company’s cash borrowing rate was flat at 5.3% for both the first quarter of 2015 and the first quarter of 2014.

 

14


Provision for Income Taxes

Provision for income taxes increased $4.5 million to $27.9 million in the first quarter of 2015, due primarily to higher pre-tax income. Additionally, during the first quarter of 2014, we recognized a reversal of a deferred tax valuation allowance of approximately $0.3 million in connection with the sale of 14 Company-owned stores during the quarter. The effective tax rate increased 1.0 percentage point to 37.6% during the first quarter of 2015, from 36.6% in the comparable period in 2014.

Liquidity and Capital Resources

Historically, we have operated with minimal positive working capital or negative working capital, primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities. We generally collect our receivables within three weeks from the date of the related sale, and we generally experience 30 to 40 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, invest in our business, pay dividends and repurchase our common stock, reduce our working capital amounts. As of March 22, 2015, we had working capital of $49.2 million, excluding restricted cash and cash equivalents of $121.5 million and including total unrestricted cash and cash equivalents of $75.0 million.

As of March 22, 2015, we had approximately $56.8 million of restricted cash held for future principal and interest payments, $43.9 million of cash held as collateral for outstanding letters of credit, $20.8 million of restricted cash held in a three month interest reserve as required by the related debt agreements and $0.1 million of other restricted cash, for a total of $121.5 million of restricted cash and cash equivalents.

As of March 22, 2015, we had approximately $1.53 billion of long-term debt, of which $0.2 million was classified as a current liability. Our fixed rate notes have original scheduled principal amortization payments of $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. In accordance with our debt agreements, once we meet certain conditions, including maximum leverage ratios as defined of less than or equal to 4.5x total debt to EBITDA, we cease to make the scheduled principal amortization payments. If one of the defined leverage ratios subsequently exceeds 4.5x, we must make-up the payments we had previously not made. During the second quarter of 2014, we met the maximum leverage ratios of less than 4.5x, and, in accordance with our debt agreements, ceased debt amortization payments in the third quarter of 2014. We continued to meet the maximum leverage ratios of less than 4.5x through the first quarter of 2015 and currently do not plan to make previously scheduled debt amortization payments as permitted in our debt agreements.

As of March 22, 2015, we had $44.1 million of outstanding letters of credit and $55.9 million of available capacity under our $100.0 million variable funding notes. The letters of credit are primarily related to our casualty insurance programs and supply chain center leases. Borrowings under the variable funding notes are available to fund our working capital requirements, capital expenditures and other general corporate purposes. However, our primary source of liquidity is cash flows from operations and availability of borrowings under our variable funding notes.

During the first quarter of 2015, the Company repurchased and retired 290,877 shares of common stock for a total of approximately $29.5 million. As of March 22, 2015, we had approximately $103.2 million remaining for future share repurchases under the current Board of Directors approved $200.0 million open market share repurchase program. Subsequent to the first quarter of 2015 and through April 16, 2015, the Company repurchased and retired an additional 177,695 shares of common stock for a total of approximately $18.0 million. We continue to maintain our flexibility to use ongoing excess cash flow generation and (subject to certain restrictions in the documents governing the variable funding notes) availability under the variable funding notes for, among other things, the repurchase of shares under the current authorized program, the payment of dividends and other corporate uses.

During the first quarter of 2015, the Company paid approximately $14.0 million of common stock dividends. Additionally, during the quarter, the Company’s Board of Directors declared a $0.31 per share quarterly dividend on its outstanding common stock for shareholders of record as of March 13, 2015 which was paid on March 30, 2015. The Company had approximately $17.6 million accrued for common stock dividends at March 22, 2015. Subsequent to the first quarter, on April 21, 2015, the Company’s Board of Directors declared a $0.31 per share quarterly dividend for shareholders of record as of June 15, 2015 to be paid on June 30, 2015.

During the first quarter of 2015, we experienced strong increases in both domestic and international same store sales versus the comparable period in the prior year. Additionally, our international business continued to grow store counts in the first quarter of 2015. These factors contributed to our continued ability to generate positive operating cash flows. We expect to use our unrestricted cash and cash equivalents, cash flows from operations and available borrowings under the variable funding notes to, among other things, fund working capital requirements, invest in our core business, service our indebtedness, pay dividends and repurchase our common stock. We have historically funded our working capital requirements, capital expenditures, debt repayments and repurchases of common stock primarily from our cash flows from operations and, when necessary, our available borrowings under variable funding note facilities. The Company believes its current unrestricted cash and cash equivalents balance and its expected cash flows from operations will be sufficient to fund operations for at least the next twelve months. We did not have any material commitments for capital expenditures as of March 22, 2015.

15


Based upon the current level of operations and anticipated growth, we believe that the cash generated from operations, our current unrestricted cash and cash equivalents and amounts available under our variable funding notes will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for at least the next twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors” in our filings with the Securities and Exchange Commission. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under the variable funding notes or otherwise to enable us to service our indebtedness, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the fixed rate notes and to service, extend or refinance the variable funding notes will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

 

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

 

 

(In millions)

 

 

March 22,

2015

 

 

 

March 23,

2014

 

Cash Flows Provided By (Used In)

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

84.7

 

 

$

36.2

 

Net cash provided by investing activities

 

 

0.2

 

 

 

13.9

 

Net cash used in financing activities

 

 

(41.3

)

 

 

(26.2

)

Exchange rate changes

 

 

0.6

 

 

 

0.1

 

Change in cash and cash equivalents

 

$

44.1

 

 

$

24.0

 

Operating Activities

Cash provided by operating activities was $84.7 million in the first quarter of 2015. This was mainly the result of net income of $46.3 million that was generated during the quarter, which included non-cash expenses of $8.8 million. Also, a $29.6 million increase in cash from changes in operating assets and liabilities contributed to the increase in cash generated from operating activities, primarily related to timing of tax payments.  

Cash provided by operating activities was $36.2 million in the first quarter of 2014, resulting primarily from net income of $40.5 million, which included non-cash expenses of $3.6 million. Changes in operating assets and liabilities also generated $7.9 million of cash inflows during the first quarter of 2014.

Investing Activities

Cash provided by investing activities was $0.2 million in the first quarter of 2015, which consisted primarily of proceeds from the sale of assets of $6.8 million and repayments of notes receivable of $2.0 million. Capital expenditures totaling $7.6 million (driven by increased investments in our technology initiatives, Company-owned stores and supply chain centers) and a $0.6 million increase in restricted cash partially offset the cash provided by investing activities.

Cash provided by investing activities was $13.9 million in the first quarter of 2014, which consisted primarily of a $16.8 million decrease in restricted cash and $3.9 million of proceeds from the sale of assets. Capital expenditures of $6.6 million partially offset the cash provided by investing activities.

Financing Activities

We used $41.3 million of cash in financing activities in the first quarter of 2015 compared to $26.2 million during the first quarter of 2014, both primarily related to purchases of common stock and funding dividend payments to our shareholders. Additionally, in the first quarter of 2014, we made $6.0 million in payments on our long-term debt obligations. The tax impact of equity-based compensation and proceeds from exercise of stock options offset the use of cash in financing activities in both the first quarter of 2015 and the first quarter of 2014.

Forward-Looking Statements

This filing contains forward-looking statements. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions that concern our strategy, plans or intentions. Forward-looking statements relating to our anticipated profitability, estimates in same store sales growth, the growth of our international business, ability to service our indebtedness, our future cash flows, our operating performance, trends in our business and other descriptions of future events reflect the Company’s expectations based upon currently available information and data. However, actual results are subject to future risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that could cause actual results to differ materially include: the level of and our ability to refinance our long-term and

16


other indebtedness; the uncertainties relating to litigation; consumer preferences, spending patterns and demographic trends; the effectiveness of our advertising, operations and promotional initiatives; the strength of our brand in the markets in which we compete; our ability to retain key personnel; new product, digital ordering and concept developments by us, and other food-industry competitors; the ongoing level of profitability of our franchisees; our ability and that of our franchisees to open new restaurants and keep existing restaurants in operation; changes in food prices, particularly cheese, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness or general health concerns may have on our business and the economy of the countries where we operate; severe weather conditions and natural disasters; changes in our effective tax rate; changes in foreign currency exchange rates; changes in government legislation and regulations; adequacy of our insurance coverage; costs related to future financings; our ability and that of our franchisees to successfully operate in the current credit environment; changes in the level of consumer spending given the general economic conditions including interest rates, energy prices and weak consumer confidence; availability of borrowings under our variable funding notes and our letters of credit; and changes in accounting policies. Important factors that could cause actual results to differ materially from our expectations are more fully described in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our annual report on Form 10-K. These forward-looking statements speak only as of the date of this filing, and you should not rely on such statements as representing the views of the Company as of any subsequent date. Except as required by applicable securities laws, we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

The Company is exposed to market risk from interest rate changes on our variable rate debt, which consists of variable funding note borrowings that are outstanding from time to time. The Company actively monitors this exposure when present. As of March 22, 2015, we had no outstanding variable funding note borrowings and $55.9 million available for borrowing, which is net of letters of credit of $44.1 million. Our outstanding fixed rate notes, which comprise substantially all of our outstanding borrowings, contain fixed interest rates until January 2019. We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes.

The Company is exposed to market risk from changes in commodity prices. During the normal course of business, we purchase cheese and certain other food products that are affected by changes in commodity prices and, as a result, we are subject to volatility in our food costs. We may periodically enter into financial instruments to manage this risk. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes. In instances where we use fixed pricing agreements with our suppliers, we use these agreements to cover our physical commodity needs; the agreements are not net-settled and are accounted for as normal purchases.

The Company is exposed to various foreign currency exchange rate fluctuations for revenues generated by operations outside the United States, which can adversely impact net income and cash flows. Total revenues of approximately 12.7% in the first quarter of 2015 and 13.3% in the first quarter of 2014 were derived from sales to customers and royalties from franchisees outside the contiguous United States. This business is conducted in the local currency but royalty payments are generally remitted to us in U.S. dollars. We do not enter into financial instruments to manage this foreign currency exchange risk. A hypothetical 10% adverse change in the foreign currency rates in each of our top ten international markets, based on store count, would have resulted in a negative impact on revenues of approximately $2.5 million in the first quarter of 2015.

 

 

Item 4. Controls and Procedures.

Management, with the participation of the Company’s President and Chief Executive Officer, J. Patrick Doyle, and Executive Vice President and Chief Financial Officer, Michael T. Lawton, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, Mr. Doyle and Mr. Lawton concluded that the Company’s disclosure controls and procedures were effective.

During the quarterly period ended March 22, 2015, there were no changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

 

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are a party to lawsuits, revenue agent reviews by taxing authorities and administrative proceedings in the ordinary course of business which include, without limitation, workers’ compensation, general liability, automobile and franchisee claims. We are also subject to suits related to employment practices as well as intellectual property, including patents.

In 2013, the Company was named as a defendant in a lawsuit along with a large franchisee and the franchisee’s delivery driver.  The jury delivered a $32.0 million judgment for the plaintiff where the Company was found to be 60% liable. The Company denied liability and filed an appeal of the verdict on a variety of grounds.  In the first quarter of 2015, the appellate court reversed the trial court’s decision and dismissed the claims against the Company. The plaintiff’s right to request an appeal with the Texas Supreme Court has not yet expired. The Company continues to deny liability in this matter.

While we may occasionally be party to large claims, including class action suits, we do not believe that any existing matters, individually or in the aggregate, will materially affect our financial position, results of operations or cash flows.

 

 

Item 1A. Risk Factors.

There have been no material changes in the risk factors previously disclosed in the Company’s Form 10-K for the fiscal year ended December 28, 2014.

 

 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(d) Maximum

 

 

 

 

 

 

 

 

 

 

 

(c) Total Number of Shares

 

 

Approximate Dollar

 

 

 

(a) Total Number

 

 

 

 

 

 

Purchased as Part of

 

 

Value of Shares that

 

 

 

of Shares

 

 

(b) Average Price Paid

 

 

Publicly Announced

 

 

May Yet Be Purchased

 

Period

 

Purchased (1)

 

 

per Share

 

 

Program (2)

 

 

Under the Program

 

Period #1 (December 29, 2014 to

     January 25, 2015)

 

 

1,209

 

 

$

95.46

 

 

 

 

 

$

132,726,701

 

Period #2 (January 26, 2015 to

     February 22, 2015)

 

 

5,104

 

 

 

98.93

 

 

 

 

 

 

132,726,701

 

Period #3 (February 23, 2015 to

     March 22, 2015)

 

 

292,588

 

 

 

101.46

 

 

 

290,877

 

 

 

103,213,781

 

Total

 

 

298,901

 

 

$

101.40

 

 

 

290,877

 

 

$

103,213,781

 

 

(1)

Includes 8,024 shares purchased as part of the Company’s employee stock purchase discount plan. During the first quarter, the shares were purchased at an average price of $99.04. All of the remaining shares presented were purchased pursuant to the publicly announced program.  

(2)

As previously disclosed, at their February 12, 2014 meeting, the Board of Directors authorized a $200 million share repurchase program, which has no expiration date. As of March 22, 2015, the Company had approximately $103.2 million remaining for future share repurchases under this program. Subsequent to the first quarter of 2015 and through April 16, 2015, the Company repurchased and retired an additional 177,695 shares of common stock for a total of approximately $18.0 million. Authorization for the repurchase program may be modified, suspended, or discontinued at any time. The repurchase of shares in any particular period and the actual amount of such purchases remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.

 

 

Item 3. Defaults Upon Senior Securities.

None.

 

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

 

Item 5. Other Information.

None.

 

 

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Item 6. Exhibits.

 

Exhibit

Number

  

Description

 

31.1

  

 

Certification by J. Patrick Doyle pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.

 

31.2

  

 

Certification by Michael T. Lawton pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.

 

32.1

  

 

Certification by J. Patrick Doyle pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.

 

32.2

  

 

Certification by Michael T. Lawton pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.

 

101.INS

  

XBRL Instance Document.

 

101.SCH

  

XBRL Taxonomy Extension Schema Document.

 

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document.

 

101.LAB

  

XBRL Taxonomy Extension Label Linkbase Document.

 

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document.

 

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

 

 

 

 

DOMINO’S PIZZA, INC.

(Registrant)

 

Date: April 23, 2015

 

 

 

 

 

/s/ Michael T. Lawton

 

 

 

 

 

 

Michael T. Lawton

 

 

 

 

 

 

Chief Financial Officer

 

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