Note: The balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that
date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited; tabular amounts in thousands, except percentages, share and per share amounts)
June 17, 2018
1. Basis of Presentation and Updates
to Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended December 31, 2017
included in the Companys 2017 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 20, 2018 (the 2017 Form 10-K).
In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair statement have been
included. Operating results for the fiscal quarter ended June 17, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 2018.
Reclassification of Revenues
Beginning
in the first quarter of 2018, the Company began managing its franchised stores in Alaska and Hawaii as part of its Domestic Stores segment (Note 3). Prior to 2018, the revenues from these franchised stores were included in the Companys
International Franchise segment (Note 3). International franchise revenues for the second quarter and two fiscal quarters of 2017 include $0.6 million and $1.2 million, respectively, of franchise revenues related to these stores. These amounts have
not been reclassified to conform to the current year presentation due to immateriality.
Updates to Significant Accounting Policies
The Company adopted Accounting Standards Codification 606,
Revenue from Contracts with Customers
(ASC 606) in the first
quarter of 2018. As a result, the Company updated its significant accounting policies for revenue recognition, disaggregation of revenue and the recognition of advertising costs below. Refer to Note 13 for the full impact of the adoption of ASC 606
on the Companys financial statements.
Revenue Recognition
Domestic Company-owned stores revenues were $118.8 million in the second quarter of 2018 and were $240.0 million in the two
fiscal quarters of 2018. Domestic Company-owned stores revenues are comprised of retail sales of food through Company-owned Dominos Pizza stores located in the United States and are recognized when the items are delivered to or carried out by
customers. Customer payments are generally due at the time of sale. Sales taxes related to these sales are collected from customers and remitted to the appropriate taxing authority and are not reflected in the Companys condensed consolidated
statements of income as revenue.
Domestic franchise royalties and fees were $87.4 million in the second quarter of 2018
and were $176.9 million in the two fiscal quarters of 2018. Domestic franchise royalties and fees are primarily comprised of royalties and fees from Dominos Pizza franchisees with operations in the United States. Royalty revenues are based on
a percentage of franchise sales and are recognized when the items are delivered to or carried out by franchisees customers. Domestic franchise fee revenue primarily relates to per-transaction technology fees that are recognized as the related
sales occur. Payments for domestic royalties and fees are generally due within seven days of the prior week end date.
7
Supply chain revenues were $440.9 million in the second quarter of 2018 and were
$881.0 million in the two fiscal quarters of 2018. Supply chain revenues are primarily comprised of sales of food, equipment and supplies to franchised Dominos Pizza stores located in the United States and Canada. Revenues from the sale of
food are recognized upon delivery of the food to franchisees and payments for food purchases are generally due within 30 days of the shipping date. Revenues from the sale of equipment and supplies are recognized upon delivery or shipment of the
related products to franchisees, based on shipping terms, and payments for equipment and supplies are generally due within 90 days of the shipping date. The Company also offers profit sharing rebates and volume discounts to its franchisees.
Obligations for profit sharing rebates are calculated each period based on actual results of its supply chain centers and are recognized as a reduction to revenue. Volume discounts are based on annual sales. Each period, the Company estimates the
amount that will be earned and records a reduction to revenue.
International franchise royalties and fees were $51.3
million in the second quarter of 2018 and were $103.8 million in the two fiscal quarters of 2018. International franchise royalties and fees are primarily comprised of royalties and fees from Dominos Pizza franchisees outside of the United
States. Royalty revenues are recognized when the items are delivered to or carried out by franchise customers. Store opening fees received from international franchisees are recognized as revenue on a straight-line basis over the term of each
respective franchise store agreement, which is typically 10 years. Development fees received from international master franchisees are also deferred when amounts are received and are recognized as revenue on a straight-line basis over the term of
the respective master franchise agreement, which is typically 10 years. International franchise royalties and fees are invoiced at least quarterly and payments are generally due within 60 days.
Domestic franchise advertising revenues were $80.9 million in the second quarter of 2018 and were $163.1 million in the two
fiscal quarters of 2018. Domestic franchise advertising revenues are primarily comprised of contributions from Dominos Pizza franchisees with operations in the United States to the Dominos National Advertising Fund Inc.
(DNAF), the Companys not-for-profit subsidiary that administers the Dominos Pizza systems national and market level advertising activities in the United States. These contributions are based on a percentage of franchise
sales and are recognized when items are delivered to or carried out by franchisees customers. Payments for domestic franchise advertising revenues are generally due within seven days of the prior week end date. Although these revenues are
restricted to be used only for advertising and promotional activities to benefit franchised stores, the Company has determined there are not performance obligations associated with the franchise advertising contributions received by DNAF that are
separate from its domestic royalty payment stream and as a result, these franchise contributions and the related expenses are presented gross in the Companys condensed consolidated statement of income.
Disaggregation of Revenue
ASC 606 requires that companies disaggregate revenue from contracts with customers into categories that depict how the nature,
amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company has included its revenues disaggregated in its condensed consolidated statements of income to satisfy this requirement.
Advertising Costs
Domestic Stores (Note 3) are required to contribute a certain percentage of sales to DNAF. Domestic franchise advertising costs
are accrued and expensed when the related domestic franchise advertising revenues are recognized, as DNAF is obligated to expend such revenues on advertising. Advertising costs funded by Company-owned stores are generally expensed as incurred and
are included in general and administrative expense. The contributions from Company-owned stores that have not yet been expended are included in advertising fund assets, restricted on the Companys consolidated balance sheet. As of June 17,
2018, advertising fund assets, restricted of $123.8 million included approximately $6.4 million of cash contributed from Company-owned stores that had not yet been expended and approximately $117.4 million of assets which consisted of $106.6 million
of cash and investments, $9.6 million of accounts receivable and $1.2 million of prepaid expenses.
Domestic franchise
advertising costs expended by DNAF are included in domestic franchise advertising expenses in the Companys consolidated statement of income. Certain costs incurred by the Company on behalf of DNAF were included in general and administrative
expense in years prior to 2018. Refer to Note 13 for the full impact of the adoption of ASC 606 on the Companys financial statements.
8
2. Contract Liabilities
Contract liabilities consist of deferred franchise fees and deferred development fees. Changes in deferred franchise fees and deferred
development fees for the two fiscal quarters of 2018 were as follows:
|
|
|
|
|
|
|
Two Fiscal
Quarters Ended
|
|
(In thousands)
|
|
June 17,
2018
|
|
Deferred franchise fees and deferred development fees at beginning of period
|
|
$
|
19,404
|
|
Revenue recognized during the period
|
|
|
(2,325
|
)
|
New deferrals due to cash received and other
|
|
|
3,239
|
|
|
|
|
|
|
Deferred franchise fees and deferred development fees at end of period
|
|
$
|
20,318
|
|
|
|
|
|
|
3. Segment Information
The following table summarizes revenues, income from operations and earnings before interest, taxes, depreciation, amortization and other,
which is the measure by which the Company allocates resources to its segments and which the Company refers to as Segment Income, for each of its reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarters Ended June 17, 2018 and June 18, 2017
|
|
|
|
Domestic
Stores (1)
|
|
|
Supply
Chain
|
|
|
International
Franchise (2)
|
|
|
Intersegment
Revenues
|
|
|
Other
|
|
|
Total
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
287,142
|
|
|
$
|
474,471
|
|
|
$
|
51,337
|
|
|
$
|
(33,554
|
)
|
|
$
|
|
|
|
$
|
779,396
|
|
2017
|
|
|
194,833
|
|
|
|
420,725
|
|
|
|
43,674
|
|
|
|
(30,621
|
)
|
|
|
|
|
|
|
628,611
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
73,193
|
|
|
$
|
36,494
|
|
|
$
|
39,104
|
|
|
|
N/A
|
|
|
$
|
(22,646
|
)
|
|
$
|
126,145
|
|
2017
|
|
|
64,296
|
|
|
|
33,304
|
|
|
|
35,602
|
|
|
|
N/A
|
|
|
|
(20,335
|
)
|
|
|
112,867
|
|
Segment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
76,087
|
|
|
$
|
39,454
|
|
|
$
|
39,150
|
|
|
|
N/A
|
|
|
$
|
(10,241
|
)
|
|
$
|
144,450
|
|
2017
|
|
|
66,895
|
|
|
|
35,874
|
|
|
|
35,647
|
|
|
|
N/A
|
|
|
|
(10,698
|
)
|
|
|
127,718
|
|
|
|
|
|
Two Fiscal Quarters Ended June 17, 2018 and June 18, 2017
|
|
|
|
Domestic
Stores (1)
|
|
|
Supply
Chain
|
|
|
International
Franchise (2)
|
|
|
Intersegment
Revenues
|
|
|
Other
|
|
|
Total
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
580,029
|
|
|
$
|
948,426
|
|
|
$
|
103,758
|
|
|
$
|
(67,446
|
)
|
|
$
|
|
|
|
$
|
1,564,767
|
|
2017
|
|
|
388,279
|
|
|
|
840,731
|
|
|
|
85,892
|
|
|
|
(62,074
|
)
|
|
|
|
|
|
|
1,252,828
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
148,481
|
|
|
$
|
73,866
|
|
|
$
|
80,628
|
|
|
|
N/A
|
|
|
$
|
(43,354
|
)
|
|
$
|
259,621
|
|
2017
|
|
|
131,623
|
|
|
|
69,263
|
|
|
|
68,776
|
|
|
|
N/A
|
|
|
|
(40,761
|
)
|
|
|
228,901
|
|
Segment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
154,431
|
|
|
$
|
79,610
|
|
|
$
|
80,721
|
|
|
|
N/A
|
|
|
$
|
(19,337
|
)
|
|
$
|
295,425
|
|
2017
|
|
|
136,769
|
|
|
|
74,388
|
|
|
|
68,864
|
|
|
|
N/A
|
|
|
|
(21,369
|
)
|
|
|
258,652
|
|
|
(1)
|
The Domestic Stores segment includes $80.9 million in the second quarter of 2018 and $163.1 million in the two fiscal quarters of 2018 of revenues related to franchise advertising contributions due to the adoption of
ASC 606 (Note 13). These contributions did not have an impact on income from operations or Segment Income.
|
|
(2)
|
The International Franchise segment includes $0.6 million in revenues, income from operations and Segment Income in the fiscal quarter ended June 18, 2017 related to franchised stores in Alaska and Hawaii. The
International Franchise segment includes $1.2 million in revenues and $1.1 million in income from operations and Segment Income in the two fiscal quarters ended June 18, 2017 related to franchised stores in Alaska and Hawaii. Beginning in the
first quarter of 2018, franchised stores in Alaska and Hawaii are managed as part of the Companys Domestic Stores business and are included in the Domestic Stores segment results.
|
9
The following table reconciles Total Segment Income to consolidated income before provision for income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
Two Fiscal Quarters Ended
|
|
|
|
June 17,
2018
|
|
|
June 18,
2017
|
|
|
June 17,
2018
|
|
|
June 18,
2017
|
|
Total Segment Income
|
|
$
|
144,450
|
|
|
$
|
127,718
|
|
|
$
|
295,425
|
|
|
$
|
258,652
|
|
Depreciation and amortization
|
|
|
(12,240
|
)
|
|
|
(10,275
|
)
|
|
|
(23,310
|
)
|
|
|
(19,773
|
)
|
Losses on sale/disposal of assets
|
|
|
(154
|
)
|
|
|
(163
|
)
|
|
|
(519
|
)
|
|
|
(345
|
)
|
Non-cash compensation expense
|
|
|
(5,379
|
)
|
|
|
(4,413
|
)
|
|
|
(11,443
|
)
|
|
|
(9,633
|
)
|
Recapitalization-related expenses
|
|
|
(532
|
)
|
|
|
|
|
|
|
(532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
126,145
|
|
|
|
112,867
|
|
|
|
259,621
|
|
|
|
228,901
|
|
Interest income
|
|
|
1,179
|
|
|
|
276
|
|
|
|
1,659
|
|
|
|
387
|
|
Interest expense
|
|
|
(36,127
|
)
|
|
|
(24,611
|
)
|
|
|
(66,413
|
)
|
|
|
(50,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
$
|
91,197
|
|
|
$
|
88,532
|
|
|
$
|
194,867
|
|
|
$
|
179,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
Two Fiscal Quarters Ended
|
|
|
|
June 17,
2018
|
|
|
June 18,
2017
|
|
|
June 17,
2018
|
|
|
June 18,
2017
|
|
Net income available to common stockholders basic and diluted
|
|
$
|
77,408
|
|
|
$
|
65,741
|
|
|
$
|
166,235
|
|
|
$
|
128,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares
|
|
|
42,044,035
|
|
|
|
47,972,526
|
|
|
|
42,433,073
|
|
|
|
47,906,187
|
|
Earnings per share basic
|
|
$
|
1.84
|
|
|
$
|
1.37
|
|
|
$
|
3.92
|
|
|
$
|
2.68
|
|
Diluted weighted average number of shares
|
|
|
43,582,996
|
|
|
|
49,776,821
|
|
|
|
43,981,253
|
|
|
|
49,741,794
|
|
Earnings per share diluted
|
|
$
|
1.78
|
|
|
$
|
1.32
|
|
|
$
|
3.78
|
|
|
$
|
2.58
|
|
The denominators used in calculating diluted earnings per share for common stock for the second quarter and
two fiscal quarters of 2018 do not include 68,760 and 90,670 options, respectively, to purchase common stock, as the effect of including these options would have been anti-dilutive. The denominators used in calculating diluted earnings per share for
the second quarter and two fiscal quarters of 2018 do not include 116,624 restricted performance shares, as the performance targets for these awards had not yet been met. The denominators used in calculating diluted earnings per share for common
stock for the second quarter and two fiscal quarters of 2017 do not include 69,010 options to purchase common stock, as the effect of including these options would have been anti-dilutive. The denominators used in calculating diluted earnings per
share for the second quarter and two fiscal quarters of 2017 do not include 141,296 restricted performance shares, as the performance targets for these awards had not yet been met.
5. Stockholders Deficit
The following
table summarizes changes in Stockholders Deficit for the two fiscal quarters of 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Deficit
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
Balance at December 31, 2017
|
|
|
42,898,329
|
|
|
$
|
429
|
|
|
$
|
5,654
|
|
|
$
|
(2,739,437
|
)
|
|
$
|
(2,030
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,235
|
|
|
|
|
|
Common stock dividends and equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,561
|
)
|
|
|
|
|
Issuance of common stock, net
|
|
|
7,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax payments for restricted stock upon vesting
|
|
|
(10,237
|
)
|
|
|
|
|
|
|
(2,318
|
)
|
|
|
|
|
|
|
|
|
Purchases of common stock
|
|
|
(1,353,564
|
)
|
|
|
(14
|
)
|
|
|
(19,245
|
)
|
|
|
(300,808
|
)
|
|
|
|
|
Exercise of stock options
|
|
|
295,299
|
|
|
|
3
|
|
|
|
5,203
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense
|
|
|
|
|
|
|
|
|
|
|
11,443
|
|
|
|
|
|
|
|
|
|
Adoption of ASC 606 (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,701
|
)
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,058
|
)
|
Reclassification adjustment for stranded taxes (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351
|
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 17, 2018
|
|
|
41,837,693
|
|
|
$
|
418
|
|
|
$
|
737
|
|
|
$
|
(2,926,921
|
)
|
|
$
|
(3,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
6. Dividends
During the second quarter of 2018, on April 24, 2018, the Companys Board of Directors declared a $0.55 per share quarterly dividend
on its outstanding common stock for shareholders of record as of June 15, 2018, which was paid on June 29, 2018. The Company had approximately $23.6 million accrued for common stock dividends at June 17, 2018.
Subsequent to the second quarter, on July 18, 2018, the Companys Board of Directors declared a $0.55 per share quarterly dividend
on its outstanding common stock for shareholders of record as of September 14, 2018 to be paid on September 28, 2018.
7. Accumulated Other
Comprehensive Loss
Accumulated other comprehensive loss was approximately $3.4 million at June 17, 2018 and was approximately $2.0
million as of December 31, 2017 and represented currency translation adjustments, net of tax. During the first quarter of 2018, the Company adopted ASU 2018-02,
Income Statement Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. As a result, the Company recorded a $0.4 million reclassification from accumulated other comprehensive loss to the beginning balance of retained deficit during
the first quarter of 2018. Refer to Note 13 for additional information related to the adoption of this new standard. The Company did not record any reclassifications out of accumulated other comprehensive loss to net income in the two fiscal
quarters of 2018 or the two fiscal quarters of 2017.
8. Recapitalization
On April 24, 2018, the Company completed a recapitalization (the 2018 Recapitalization) in which certain of the Companys
subsidiaries issued new notes pursuant to an asset-backed securitization. The new notes consist of $425.0 million Series 2018-1 4.116% Fixed Rate Senior Secured Notes, Class A-2-I with an anticipated term of 7.5 years (the 2018 A-2-I
Fixed Rate Notes), and $400.0 million Series 2018-1 4.328% Fixed Rate Senior Secured Notes, Class A-2-II with an anticipated term of 9.25 years (the 2018 A-2-II Fixed Rate Notes and, collectively with the 2018 A-2-I Fixed Rate
Notes, the 2018 Notes) in an offering exempt from registration under the Securities Act of 1933, as amended. The 2018 Notes have scheduled principal payments of $4.1 million in 2018, $8.3 million in each of 2019 through 2024, $401.4
million in 2025, $4.0 million in 2026 and $366.0 million in 2027. Gross proceeds from the issuance of the 2018 Notes were $825.0 million.
A portion of the proceeds from the 2018 Recapitalization was used to repay the remaining $490.1 million in outstanding principal and interest
under the Companys 2015 five-year fixed rate notes, pre-fund a portion of the principal and interest payable on the 2018 Notes, pay transaction fees and expenses and repurchase and retire shares of the Companys common stock. In
connection with the repayment of the 2015 five-year fixed rate notes, the Company expensed approximately $3.2 million for the remaining unamortized debt issuance costs associated with these notes. Additionally, in connection with the 2018
Recapitalization, the Company capitalized $8.2 million of debt issuance costs, which are being amortized into interest expense over the expected terms of the 2018 Notes.
9. Open Market Share Repurchase Program
During
the second quarter of 2018, the Company repurchased and retired 905,556 shares of its common stock under its Board of Directors-approved open market share repurchase program for a total of approximately $219.0 million, or an average price of $241.82
per share. During the two fiscal quarters of 2018, the Company repurchased and retired 1,353,564 shares of its common stock under its Board of Directors-approved open market share repurchase program for a total of approximately $320.1 million, or an
average price of $236.46 per share. As of June 17, 2018, the end of the second quarter, the Company had a total remaining authorized amount for share repurchases of approximately $429.9 million.
The Company did not repurchase any shares of its common stock under its Board of Directors-approved open market share repurchase program in
the second quarter of 2017. During the two fiscal quarters of 2017, the Company repurchased and retired 80,360 shares of its common stock under its Board of Directors-approved open market share repurchase program for a total of approximately
$12.7 million, or an average price of $158.30 per share.
11
10. Fair Value Measurements
Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a
hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair values of the Companys cash equivalents and investments in marketable securities are based on quoted prices in active markets
for identical assets. The following tables summarize the carrying amounts and fair values of certain assets at June 17, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 17, 2018
|
|
|
|
Carrying
Amount
|
|
|
Fair Value Estimated Using
|
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
Cash equivalents
|
|
$
|
137,794
|
|
|
$
|
137,794
|
|
|
$
|
|
|
|
$
|
|
|
Restricted cash equivalents
|
|
|
90,837
|
|
|
|
90,837
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
8,866
|
|
|
|
8,866
|
|
|
|
|
|
|
|
|
|
Advertising fund cash equivalents, restricted
|
|
|
27,283
|
|
|
|
27,283
|
|
|
|
|
|
|
|
|
|
Advertising fund investments, restricted
|
|
|
80,152
|
|
|
|
80,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
|
Carrying
Amount
|
|
|
Fair Value Estimated Using
|
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
Cash equivalents
|
|
$
|
7,933
|
|
|
$
|
7,933
|
|
|
$
|
|
|
|
$
|
|
|
Restricted cash equivalents
|
|
|
96,375
|
|
|
|
96,375
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
8,119
|
|
|
|
8,119
|
|
|
|
|
|
|
|
|
|
Advertising fund cash equivalents, restricted
|
|
|
19,945
|
|
|
|
19,945
|
|
|
|
|
|
|
|
|
|
Advertising fund investments, restricted
|
|
|
74,007
|
|
|
|
74,007
|
|
|
|
|
|
|
|
|
|
Management estimated the approximate fair values of the 2015 fixed rate notes, the 2017 fixed and floating
rate notes and the 2018 fixed rate notes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 17, 2018
|
|
|
December 31, 2017
|
|
|
|
Principal Amount
|
|
|
Fair Value
|
|
|
Principal Amount
|
|
|
Fair Value
|
|
2015 Five-Year Fixed Rate Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
492,500
|
|
|
$
|
494,470
|
|
2015 Ten-Year Fixed Rate Notes
|
|
|
784,000
|
|
|
|
797,328
|
|
|
|
788,000
|
|
|
|
821,884
|
|
2017 Five-Year Fixed Rate Notes
|
|
|
595,500
|
|
|
|
578,826
|
|
|
|
598,500
|
|
|
|
592,515
|
|
2017 Ten-Year Fixed Rate Notes
|
|
|
992,500
|
|
|
|
981,583
|
|
|
|
997,500
|
|
|
|
1,023,435
|
|
2017 Five-Year Floating Rate Notes
|
|
|
297,750
|
|
|
|
298,941
|
|
|
|
299,250
|
|
|
|
300,746
|
|
2018 7.5-Year Fixed Rate Notes
|
|
|
425,000
|
|
|
|
422,875
|
|
|
|
|
|
|
|
|
|
2018 9.25-Year Fixed Rate Notes
|
|
|
400,000
|
|
|
|
402,400
|
|
|
|
|
|
|
|
|
|
The fixed and floating rate notes are classified as Level 2 measurements, as the Company estimates the fair
value amount by using available market information. The Company obtained quotes from two separate brokerage firms that are knowledgeable about the Companys fixed and floating rate notes and, at times, trade these notes. The Company also
performed its own internal analysis based on the information gathered from public markets, including information on notes that are similar to those of the Company. However, considerable judgment is required to interpret market data to estimate fair
value. Accordingly, the fair value estimates presented are not necessarily indicative of the amount that the Company or the debtholders could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may
have a material effect on the estimated fair values stated above.
12
11. Legal Matters
On February 14, 2011, Dominos Pizza LLC was named as a defendant in a lawsuit along with Fischler Enterprises of C.F., Inc., a
franchisee, and Jeffrey S. Kidd, the franchisees delivery driver, filed by Yvonne Wiederhold, the plaintiff, as Personal Representative of the Estate of Richard E. Wiederhold, deceased. The case involved a traffic accident in which the
franchisees delivery driver is alleged to have caused an accident involving a vehicle driven by Richard Wiederhold. Mr. Wiederhold sustained spinal injuries resulting in quadriplegia and passed away several months after the accident. The
jury returned a $10.1 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 90% liable (after certain offsets and other deductions the final verdict was $8.9 million). In the second quarter of 2016, the trial court
ruled on all post-judgment motions and entered the judgment. The Company denies liability and in the third quarter of 2016 filed an appeal of the verdict on a variety of grounds. On May 11, 2018, the court of appeals reversed and remanded the
case to the trial court for a new trial based on the plaintiffs improper closing argument. The Company continues to deny liability in this matter.
12. Supplemental Disclosures of Cash Flow Information
The Company had non-cash investing activities related to accruals for capital expenditures of $2.2 million at June 17, 2018 and $4.0
million at December 31, 2017. During the first quarter of 2018, the Company renewed the lease of a supply chain center building and extended the term of the lease through 2033. As a result of the new lease, the Company recorded non-cash
financing activities of $2.6 million for the increase in capital lease assets and liabilities during the two fiscal quarters of 2018.
13. New Accounting
Pronouncements
Recently Adopted Accounting Standards
Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update 2014-09,
Revenue from Contracts with Customers (Topic 606)
and has since issued various amendments which provide additional clarification and implementation guidance. This standard has been codified as ASC 606. This guidance
outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most revenue recognition guidance issued by the FASB, including industry specific guidance. On January 1,
2018, the Company adopted ASC 606 using the modified retrospective method.
The Company recognized the cumulative effect
of initially applying ASC 606 as an adjustment to the opening balance of retained deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The Company has determined that the store opening fees received from international franchisees do not relate to separate and
distinct performance obligations from the franchise right and those upfront fees will therefore be recognized as revenue over the term of each respective franchise store agreement, which is typically 10 years. In the past, the Company recognized
such fees as revenue when the related store opened. An adjustment to beginning retained deficit and a corresponding contract liability of approximately $15.0 million (of which $2.4 million was current and $12.6 million was long-term) was
established on the date of adoption associated with the fees received through December 31, 2017 that would have been deferred and recognized over the term of each respective franchise store agreement if the new guidance had been applied in the
past. A deferred tax asset of $3.5 million related to this contract liability was also established on the date of adoption.
The Company has also determined that ASC 606 requires a gross presentation on the consolidated statement of income for
franchisee contributions received by and related expenses of DNAF, the Companys consolidated not-for-profit subsidiary. DNAF exists solely for the purpose of promoting the Dominos Pizza brand in the U.S. Under prior accounting
guidance, the Company had presented the restricted assets and liabilities of DNAF in its consolidated balance sheets and had determined that it acted as an agent for accounting purposes with regard to franchisee contributions and disbursements. As a
result, the Company historically presented the activities of DNAF net in its statements of income and statements of cash flows.
13
Under the requirements of ASC 606, the Company determined that there are not
performance obligations associated with the franchise advertising contributions received by DNAF that are separate from the Companys domestic royalty payment stream and as a result, these franchise contributions and the related expenses are
presented gross in the Companys consolidated statement of income and consolidated statement of cash flows. While this change materially impacted the gross amount of reported franchise revenues and expenses, the impact is generally expected to
be an offsetting increase to both revenues and expenses such that the impact on income from operations and net income is not expected to be material. An adjustment to beginning retained deficit and advertising fund liabilities of approximately $6.4
million related to the timing of advertising expense recognition was recorded on the date of adoption. A deferred tax liability (which is reflected net against deferred tax assets in the consolidated balance sheet) of approximately $1.6 million
related to this adjustment was also established on the date of adoption.
The cumulative effect of the changes made to the
Companys consolidated balance sheet as of January 1, 2018 for the adoption of ASC 606 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2017
|
|
|
Adjustments
Due to ASC
606
|
|
|
Balance at
January 1,
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
2,750
|
|
|
$
|
1,878
|
|
|
$
|
4,628
|
|
|
|
|
|
Liabilities and stockholders deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising fund liabilities
|
|
|
120,223
|
|
|
|
(6,425
|
)
|
|
|
113,798
|
|
Other accrued liabilities
|
|
|
58,578
|
|
|
|
2,365
|
|
|
|
60,943
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
21,751
|
|
|
|
12,639
|
|
|
|
34,390
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained deficit
|
|
|
(2,739,437
|
)
|
|
|
(6,701
|
)
|
|
|
(2,746,138
|
)
|
In accordance with the new revenue standard requirements, the impact of adoption on the
Companys condensed consolidated statement of income for the second quarter and two fiscal quarters of 2018 and condensed consolidated balance sheet as of June 17, 2018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended June 17, 2018
|
|
|
|
As Reported
|
|
|
Balances
without the
Adoption of
ASC 606
|
|
|
Effect of
Change
Higher/
(Lower)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic franchise royalties and fees
|
|
$
|
87,418
|
|
|
$
|
91,216
|
|
|
$
|
(3,798
|
)
|
International franchise royalties and fees
|
|
|
51,337
|
|
|
|
51,333
|
|
|
|
4
|
|
Domestic franchise advertising
|
|
|
80,929
|
|
|
|
|
|
|
|
80,929
|
|
|
|
|
|
General and administrative
|
|
|
86,506
|
|
|
|
90,327
|
|
|
|
(3,821
|
)
|
Domestic franchise advertising
|
|
|
80,929
|
|
|
|
|
|
|
|
80,929
|
|
Income from operations
|
|
|
126,145
|
|
|
|
126,118
|
|
|
|
27
|
|
Income before provision for income taxes
|
|
|
91,197
|
|
|
|
91,170
|
|
|
|
27
|
|
Provision for income taxes
|
|
|
13,789
|
|
|
|
13,783
|
|
|
|
6
|
|
Net income
|
|
|
77,408
|
|
|
|
77,387
|
|
|
|
21
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Fiscal Quarters Ended June 17, 2018
|
|
|
|
As Reported
|
|
|
Balances
without the
Adoption of
ASC 606
|
|
|
Effect of
Change
Higher/
(Lower)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic franchise royalties and fees
|
|
$
|
176,908
|
|
|
$
|
185,284
|
|
|
$
|
(8,376
|
)
|
International franchise royalties and fees
|
|
|
103,758
|
|
|
|
103,716
|
|
|
|
42
|
|
Domestic franchise advertising
|
|
|
163,140
|
|
|
|
|
|
|
|
163,140
|
|
|
|
|
|
General and administrative
|
|
|
170,684
|
|
|
|
179,093
|
|
|
|
(8,409
|
)
|
Domestic franchise advertising
|
|
|
163,140
|
|
|
|
|
|
|
|
163,140
|
|
Income from operations
|
|
|
259,621
|
|
|
|
259,546
|
|
|
|
75
|
|
Income before provision for income taxes
|
|
|
194,867
|
|
|
|
194,792
|
|
|
|
75
|
|
Provision for income taxes
|
|
|
28,632
|
|
|
|
28,615
|
|
|
|
17
|
|
Net income
|
|
|
166,235
|
|
|
|
166,177
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 17, 2018
|
|
|
|
As Reported
|
|
|
Balances
without the
Adoption of
ASC 606
|
|
|
Effect of
Change
Higher/
(Lower)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
3,158
|
|
|
$
|
1,297
|
|
|
$
|
1,861
|
|
|
|
|
|
Liabilities and stockholders deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising fund liabilities
|
|
|
117,360
|
|
|
|
123,818
|
|
|
|
(6,458
|
)
|
Other accrued liabilities
|
|
|
100,185
|
|
|
|
97,760
|
|
|
|
2,425
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
36,181
|
|
|
|
23,644
|
|
|
|
12,537
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained deficit
|
|
|
(2,926,921
|
)
|
|
|
(2,920,278
|
)
|
|
|
(6,643
|
)
|
ASU 2016-04, Liabilities Extinguishment of Liabilities (Subtopic 405-20)
In March 2016, the FASB issued ASU 2016-04,
Liabilities Extinguishment of Liabilities
(Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products
(ASU 2016-04). ASU 2016-04 aligns recognition of the financial liabilities related to prepaid stored-value products (for
example, gift cards) with Topic 606, Revenues from Contracts with Customers, for non-financial liabilities. In general, these liabilities may be extinguished proportionately in earnings as redemptions occur, or when redemption is
remote if issuers are not entitled to the unredeemed stored value. The Company adopted this guidance effective January 1, 2018 in connection with its adoption of ASC 606. The adoption of this standard did not have a material impact on the
Companys consolidated financial statements.
ASU 2016-18, Statement of Cash Flows (Topic 230)
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted
Cash
(ASU 2016-18), which requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2017 and a retrospective transition method is required. The Company adopted this guidance in the first quarter of 2018 using the retrospective approach. The
Company historically presented changes in restricted cash and cash equivalents in the investing section of its consolidated statement of cash flows. This new guidance did not impact the Companys financial results, but did result in a change in
the presentation of restricted cash and restricted cash equivalents within the statement of cash flows.
15
ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220)
In February 2018, the FASB issued ASU 2018-02,
Income Statement Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The amendments in this updated standard allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects
resulting from the Tax Cuts and Jobs Act of 2017. The Company adopted this standard in the first quarter of 2018 and, as a result, recorded a $0.4 million reclassification from accumulated other comprehensive loss to the beginning balance of
retained deficit during the first quarter of 2018.
Accounting Standards Not Yet Adopted
The Company has considered all new accounting pronouncements issued by the FASB and concluded the following accounting
pronouncements may have a material impact on its consolidated financial statements, or represent accounting pronouncements for which the Company has not yet completed its assessment.
ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(ASU 2016-02).
ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2018, and early adoption is permitted. Based on a preliminary assessment, the Company expects the adoption of this guidance to have a material impact on its assets and liabilities due to the recognition
of right-of-use assets and lease liabilities on its consolidated balance sheets. The Company is continuing its assessment, which may identify additional impacts this guidance will have on its consolidated financial statements and
disclosures. The Companys current minimum lease commitments are disclosed in Note 5 to the 2017 Form 10-K.
ASU 2016-13,
Measurement of Credit Losses on Financial Instruments (Topic 326)
In June 2016, the FASB issued
ASU 2016-13,
Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments
(ASU 2016-13). ASU 2016-13 requires companies to measure credit losses
utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning
after December 15, 2019, including those interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard, but does not expect the adoption of this guidance to have a material impact on its
consolidated financial statements.
ASU 2017-04, Intangibles Goodwill and Other (Topic 350)
In January 2017, the FASB issued ASU 2017-04
, Intangibles Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment
(ASU 2017-04). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for
public companies annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017. The
Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
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