Dominos Pizza Inc 10-Q for FY2021 Q3
Dominos Pizza Inc (DPZ)
About this 10-Q
Dominos Pizza Inc filed this 10-Q on October 14, 2021, covering the quarter ended September 12, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 12, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $997.99M
- up 3.1% from $967.72M a year earlier
- Net income
- $120.4M
- up 21.5% from net income of $99.13M a year earlier
- Diluted EPS
- $3.24
- up 30.1% from $2.49 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission file number:
Domino’s Pizza, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class |
Trading Symbol |
Name of Each Exchange on Which Registered |
Domino’s Pizza, Inc. |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 7, 2021, Domino’s Pizza, Inc. had
Domino’s Pizza, Inc.
TABLE OF CONTENTS
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Page No. |
PART I. |
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets (Unaudited) – As of September 12, 2021 and January 3, 2021 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands) |
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September 12, 2021 |
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January 3, 2021 (1) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash and cash equivalents |
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Accounts receivable, net |
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Inventories |
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Prepaid expenses and other |
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Advertising fund assets, restricted |
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Total current assets |
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Property, plant and equipment: |
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Land and buildings |
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Leasehold and other improvements |
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Equipment |
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Construction in progress |
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Accumulated depreciation and amortization |
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Property, plant and equipment, net |
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Other assets: |
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Operating lease right-of-use assets |
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Goodwill |
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Capitalized software, net |
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Investments |
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Other assets |
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Deferred income taxes |
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Total other assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders' deficit |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
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$ |
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Accounts payable |
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Operating lease liabilities |
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Insurance reserves |
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Dividends payable |
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Advertising fund liabilities |
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Other accrued liabilities |
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Total current liabilities |
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Long-term liabilities: |
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Long-term debt, less current portion |
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Operating lease liabilities |
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Insurance reserves |
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Other accrued liabilities |
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Deferred income taxes |
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Total long-term liabilities |
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Stockholders' deficit: |
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Common stock |
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Additional paid-in capital |
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Retained deficit |
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Accumulated other comprehensive loss |
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Total stockholders' deficit |
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Total liabilities and stockholders' deficit |
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$ |
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$ |
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(1)
The accompanying notes are an integral part of these condensed consolidated statements.
3
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
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Fiscal Quarter Ended |
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Three Fiscal Quarters Ended |
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September 12, |
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September 6, |
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September 12, |
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September 6, |
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(In thousands, except per share data) |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenues: |
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U.S. Company-owned stores |
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$ |
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$ |
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$ |
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$ |
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U.S. franchise royalties and fees |
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Supply chain |
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International franchise royalties and fees |
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U.S. franchise advertising |
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Total revenues |
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Cost of sales: |
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U.S. Company-owned stores |
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Supply chain |
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Total cost of sales |
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Operating margin |
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General and administrative |
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U.S. franchise advertising |
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Income from operations |
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Other income |
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Interest income |
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Interest expense |
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Income before provision for income taxes |
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Provision for income taxes |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Earnings per share: |
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Common stock - basic |
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$ |
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$ |
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$ |
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$ |
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Common stock - diluted |
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The accompanying notes are an integral part of these condensed consolidated statements.
4
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
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Fiscal Quarter Ended |
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Three Fiscal Quarters Ended |
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September 12, |
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September 6, |
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September 12, |
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September 6, |
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(In thousands) |
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2021 |
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2020 |
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2021 |
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2020 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Currency translation adjustment |
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Comprehensive income |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated statements.
5
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Three Fiscal Quarters Ended |
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September 12, |
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September 6, |
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(In thousands) |
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2021 |
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2020 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Loss on sale/disposal of assets |
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Amortization of debt issuance costs |
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Provision for deferred income taxes |
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Non-cash equity-based compensation expense |
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Excess tax benefits from equity-based compensation |
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Provision for losses on accounts and notes receivable |
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Unrealized gain on investments |
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— |
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Changes in operating assets and liabilities |
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Changes in advertising fund assets and liabilities, restricted |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
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Purchase of investments |
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Other |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Proceeds from issuance of long-term debt |
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Repayments of long-term debt and finance lease obligations |
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Proceeds from exercise of stock options |
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Purchases of common stock |
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Tax payments for restricted stock upon vesting |
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Payments of common stock dividends and equivalents |
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Cash paid for financing costs |
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— |
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Other |
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— |
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Net cash used in financing activities |
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Effect of exchange rate changes on cash |
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Change in cash and cash equivalents, restricted cash and cash equivalents |
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Cash and cash equivalents, beginning of period |
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Restricted cash and cash equivalents, beginning of period |
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Cash and cash equivalents included in advertising fund assets, restricted, |
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Cash and cash equivalents, restricted cash and cash equivalents and cash and |
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Cash and cash equivalents, end of period |
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Restricted cash and cash equivalents, end of period |
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Cash and cash equivalents included in advertising fund assets, restricted, |
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Cash and cash equivalents, restricted cash and cash equivalents and cash and |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated statements.
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)
September 12, 2021
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 January 3, 2021 included in the Company’s 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 25, 2021 (the “2020 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 September 12, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2022.
2. Segment Information
The following tables summarize revenues 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. Intersegment revenues are comprised of sales of food, equipment and supplies from the supply chain segment to the Company-owned stores in the U.S. stores segment. Intersegment sales prices are market based. The “Other” column as it relates to Segment Income below primarily includes corporate administrative costs that are not allocable to a reportable segment, including labor, computer expenses, professional fees, travel and entertainment, rent, insurance and other corporate administrative costs.
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Fiscal Quarters Ended September 12, 2021 and September 6, 2020 |
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U.S. |
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Supply |
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International |
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Intersegment |
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Stores |
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Chain |
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Franchise |
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Revenues |
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Other |
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Total |
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Revenues |
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2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
— |
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$ |
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2020 |
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— |
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Segment Income |
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2021 |
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$ |
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$ |
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$ |
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N/A |
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$ |
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$ |
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2020 |
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N/A |
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Three Fiscal Quarters Ended September 12, 2021 and September 6, 2020 |
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U.S. |
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Supply |
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International |
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Intersegment |
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Stores |
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Chain |
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Franchise |
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Revenues |
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Other |
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Total |
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Revenues |
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2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
— |
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$ |
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2020 |
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( |
) |
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— |
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Segment Income |
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2021 |
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$ |
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$ |
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$ |
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N/A |
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$ |
( |
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$ |
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2020 |
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N/A |
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( |
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The following table reconciles Total Segment Income to consolidated income before provision for income taxes.
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Fiscal Quarter Ended |
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Three Fiscal Quarters Ended |
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September 12, |
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September 6, |
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September 12, |
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September 6, |
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2021 |
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2020 |
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2021 |
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2020 |
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Total Segment Income |
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$ |
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$ |
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$ |
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$ |
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Depreciation and amortization |
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( |
) |
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( |
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( |
) |
|
|
( |
) |
Loss on sale/disposal of assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Non-cash equity-based compensation expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Recapitalization-related expenses |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other income |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income before provision for income taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
7
3. Earnings Per Share
|
|
Fiscal Quarter Ended |
|
|
Three Fiscal Quarters Ended |
|
||||||||||
|
|
September 12, |
|
|
September 6, |
|
|
September 12, |
|
|
September 6, |
|
||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Net income available to common stockholders - basic and diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Basic weighted average number of shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share – basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted weighted average number of shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share – diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The denominators used in calculating diluted earnings per share for the third quarter and three fiscal quarters of 2021 did not include
The denominators used in calculating diluted earnings per share for the third quarter and three fiscal quarters of 2020 did not include
4. Stockholders’ Deficit
The following table summarizes changes in stockholders’ deficit for the third quarter of 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|||||
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|||||
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|||||
Balance at June 20, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Dividends declared on common stock and equivalents |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Issuance and cancellation of stock awards, net |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Tax payments for restricted stock upon vesting |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Purchases of common stock |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
Non-cash equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance at September 12, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
The following table summarizes changes in stockholders’ deficit for the three fiscal quarters of 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|||||
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|||||
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|||||
Balance at January 3, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Dividends declared on common stock and equivalents |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Issuance and cancellation of stock awards, net |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Tax payments for restricted stock upon vesting |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Purchases of common stock |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
Non-cash equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Balance at September 12, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
8
On April 30, 2021, the Company entered into a $
On July 20, 2021, the Company’s Board of Directors authorized a new share repurchase program to repurchase up to $
Subsequent to the end of the third quarter, on
The following table summarizes changes in stockholders’ deficit for the third quarter of 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|||||
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|||||
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|||||
Balance at June 14, 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Dividends declared on common stock and equivalents |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Issuance and cancellation of stock awards, net |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Tax payments for restricted stock upon vesting |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Non-cash equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Balance at September 6, 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
The following table summarizes changes in stockholders’ deficit for the three fiscal quarters of 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|||||
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|||||
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|||||
Balance at December 29, 2019 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Dividends declared on common stock and equivalents |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Issuance and cancellation of stock awards, net |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Tax payments for restricted stock upon vesting |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Purchases of common stock |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
Non-cash equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Adoption of credit losses standard |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Balance at September 6, 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
9
5. Recapitalization
On April 16, 2021 (the “closing date”), the Company completed a recapitalization transaction (the “2021 Recapitalization”) in which certain of the Company’s subsidiaries issued new notes pursuant to an asset-backed securitization. The new notes consist of $
Concurrently, certain of the Company’s subsidiaries also issued a new variable funding note facility which allows for advances of up to $
A portion of proceeds from the 2021 Recapitalization was used to repay the remaining $
As of the fourth quarter of 2020, the Company had a leverage ratio of less than
On April 30, 2021, the Company entered into the $
10
6. 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.
Fair Value of Cash Equivalents and Investments
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 fair value of the Company’s Level 3 investment is not readily determinable. The fair value represents its cost with adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairments.
The following tables summarize the carrying amounts and fair values of certain assets at September 12, 2021 and January 3, 2021:
|
|
At September 12, 2021 |
|
|||||||||||||
|
|
|
|
|
Fair Value Estimated Using |
|
||||||||||
|
|
Carrying |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
Amount |
|
|
Inputs |
|
|
Inputs |
|
|
Inputs |
|
||||
Cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
||
Restricted cash equivalents |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Investments in marketable securities |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Advertising fund cash equivalents, restricted |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Investments |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
|
|
At January 3, 2021 |
|
|||||||||||||
|
|
|
|
|
Fair Value Estimated Using |
|
||||||||||
|
|
Carrying |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
Amount |
|
|
Inputs |
|
|
Inputs |
|
|
Inputs |
|
||||
Cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
||
Restricted cash equivalents |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Investments in marketable securities |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Advertising fund cash equivalents, restricted |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Investments |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
During the second quarter of 2020, a subsidiary of the Company acquired a non-controlling interest in Dash Brands Ltd., a privately-held business company limited by shares incorporated with limited liability under the laws of the British Virgin Islands (“Dash Brands”), for $
In the first quarter of 2021, the Company invested an additional $
The following table summarizes the reconciliation of the carrying amount of the Company’s investment in Dash Brands from the opening balance at January 3, 2021 to the closing balance at September 12, 2021.
|
|
Three Fiscal Quarters of 2021 |
|
|||||||||||||
|
|
Carrying Amount |
|
|
|
|
|
|
|
|
Carrying Amount |
|
||||
|
|
January 3, |
|
|
|
|
|
Unrealized |
|
|
September 12, |
|
||||
|
|
2021 |
|
|
Purchases |
|
|
Gain |
|
|
2021 |
|
||||
Investments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
11
Fair Value of Debt
The estimated fair values of the Company’s 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 Company’s 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 below.
Management estimated the approximate fair values of the 2015 fixed rate notes, the 2017 fixed and floating rate notes, the 2018 fixed rate notes, the 2019 fixed rate notes and the 2021 fixed rate notes as follows:
|
|
September 12, 2021 |
|
|
January 3, 2021 |
|
||||||||||
|
|
Principal Amount |
|
|
Fair Value |
|
|
Principal Amount |
|
|
Fair Value |
|
||||
2015 Ten-Year Fixed Rate Notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
2017 Five-Year Fixed Rate Notes |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
2017 Ten-Year Fixed Rate Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
2017 Five-Year Floating Rate Notes |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
2018 7.5-Year Fixed Rate Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
2018 9.25-Year Fixed Rate Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
2019 Ten-Year Fixed Rate Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
2021 7.5-Year Fixed Rate Notes |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
2021 Ten-Year Fixed Rate Notes |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
7. Revenue Disclosures
Contract Liabilities
Contract liabilities primarily consist of deferred franchise fees and deferred development fees. Deferred franchise fees and deferred development fees of $
Changes in deferred franchise fees and deferred development fees for the three fiscal quarters of 2021 and the three fiscal quarters of 2020 were as follows:
|
|
Three Fiscal Quarters Ended |
|
|||||
|
|
September 12, |
|
|
September 6, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Deferred franchise fees and deferred development fees at beginning of period |
|
$ |
|
|
$ |
|
||
Revenue recognized during the period |
|
|
( |
) |
|
|
( |
) |
New deferrals due to cash received and other |
|
|
|
|
|
|
||
Deferred franchise fees and deferred development fees at end of period |
|
$ |
|
|
$ |
|
||
Advertising Fund Assets
As of September 12, 2021, advertising fund assets, restricted of $
As of January 3, 2021, advertising fund assets, restricted of $
12
8. Leases
The Company leases certain retail store and supply chain center locations, supply chain vehicles, equipment and its corporate headquarters with expiration dates through 2041.
The components of operating and finance lease cost for the third quarter and three fiscal quarters of 2021 and the third quarter and three fiscal quarters of 2020 were as follows:
|
|
Fiscal Quarter Ended |
|
|
Three Fiscal Quarters Ended |
|
||||||||||
|
|
September 12, |
|
|
September 6, |
|
|
September 12, |
|
|
September 6, |
|
||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Operating lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of right-of-use assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total finance lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Rent expense totaled $
Supplemental balance sheet information related to the Company’s finance leases as of September 12, 2021 and January 3, 2021 was as follows:
|
|
September 12, |
|
|
January 3, |
|
||
|
|
2021 |
|
|
2021 |
|
||
Land and buildings |
|
$ |
|
|
$ |
|
||
Accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Finance lease assets, net |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Current portion of long-term debt |
|
$ |
|
|
$ |
|
||
Long-term debt, less current portion |
|
|
|
|
|
|
||
Total principal payable on finance leases |
|
$ |
|
|
$ |
|
||
As of September 12, 2021 and January 3, 2021, the weighted average remaining lease term and weighted average discount rate for the Company’s operating and finance leases were as follows:
|
|
September 12, 2021 |
|
January 3, 2021 |
||||
|
|
Operating |
|
Finance |
|
Operating |
|
Finance |
|
|
Leases |
|
Leases |
|
Leases |
|
Leases |
Weighted average remaining lease term |
|
|
|
|
||||
Weighted average discount rate |
|
|
|
|
||||
Supplemental cash flow information related to leases for the third quarter and three fiscal quarters of 2021 and the third quarter and three fiscal quarters of 2020 were as follows:
|
|
Fiscal Quarter Ended |
|
|
Three Fiscal Quarters Ended |
|
||||||||||
|
|
September 12, |
|
|
September 6, |
|
|
September 12, |
|
|
September 6, |
|
||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating cash flows from operating leases |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financing cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
13
Maturities of lease liabilities as of September 12, 2021 were as follows:
|
|
Operating |
|
|
Finance |
|
||
|
|
Leases |
|
|
Leases |
|
||
2021 |
|
$ |
|
|
$ |
|
||
2022 |
|
|
|
|
|
|
||
2023 |
|
|
|
|
|
|
||
2024 |
|
|
|
|
|
|
||
2025 |
|
|
|
|
|
|
||
Thereafter |
|
|
|
|
|
|
||
Total future minimum rental commitments |
|
|
|
|
|
|
||
Less – amounts representing interest |
|
|
( |
) |
|
|
( |
) |
Total lease liabilities |
|
$ |
|
|
$ |
|
||
As of September 12, 2021, the Company has additional leases for one supply chain center and certain supply chain tractors and trailers that had not yet commenced with estimated future minimum rental commitments of approximately $
The Company has guaranteed lease payments related to certain franchisees’ lease arrangements. The maximum amount of potential future payments under these guarantees was $
9. Supplemental Disclosures of Cash Flow Information
The Company had non-cash investing activities related to accruals for capital expenditures of $
10. Equity Incentive Plans
The Company’s current equity incentive plan, named the Domino’s Pizza, Inc. 2004 Equity Incentive Plan (the “2004 Equity Incentive Plan”), benefits certain of the Company’s employees and members of the Company’s Board of Directors. In the three fiscal quarters of 2021, the Company granted non-qualified stock options, restricted stock awards, restricted stock units and performance-based restricted stock units to certain employees and members of its Board of Directors under the 2004 Equity Incentive Plan. As a result of the changes to the characteristics and types of awards granted to date in 2021 under the 2004 Equity Incentive Plan, the Company has included disclosure of the nature and terms of these awards granted in the three fiscal quarters of 2021, as well as the methods used to estimate their fair values below.
The cost of all employee stock options, as well as other equity-based compensation arrangements, is reflected in the condensed consolidated statements of income based on the estimated fair value of the awards and is amortized over the requisite service period of each award. All non-cash compensation expense amounts are recorded in general and administrative expense.
Stock Options
Stock options granted in fiscal 2021 were granted with an exercise price equal to the market price of the Company’s common stock at the date of the grant, expire
14
Other Equity-Based Compensation Arrangements
Restricted stock awards granted to members of the Company’s Board of Directors in fiscal 2021 were granted with a fair value equal to the market price of the Company’s common stock on the grant date and vest
Restricted stock units granted in fiscal 2021 were granted with a fair value equal to the market price of the Company’s common stock on the grant date. These restricted stock units are separated into
Performance-based restricted stock units granted in fiscal 2021 were granted with a fair value equal to the market price of the Company’s common stock on the grant date, adjusted for the estimated fair value of the market condition included in the award. These performance-based restricted stock units may vest
11. New Accounting Pronouncements
Recently Adopted Accounting Standard
Accounting Standards Update (“ASU”) 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes (Topic 740)
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 was effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company adopted this accounting standard in the first quarter of 2021, and it did not have a material impact on its condensed consolidated financial statements.
Accounting Standards Not Yet Adopted
The Company has considered all new accounting standards issued by the FASB. The Company has not yet completed its assessment of the following standard.
ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform. Subsequent to the closing of the 2021 Recapitalization, the Company’s 2021 Variable Funding Notes bear interest at fluctuating interest rates based on LIBOR. However, the associated loan documents contemplate a transition from LIBOR to secured overnight financing rate (“SOFR”) in the event that LIBOR ceases to exist. If the Company further needs to renegotiate its loan documents, the Company cannot predict what alternative index would be negotiated with its lenders. ASU 2020-04 may currently be adopted and may be applied prospectively to contract modifications made on or before December 31, 2022. 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 condensed consolidated financial statements.
15
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 2021 and 2020 third quarters referenced herein represent the twelve-week periods ended September 12, 2021 and September 6, 2020, respectively. The 2021 and 2020 three fiscal quarters referenced herein represent the thirty-six-week periods ended September 12, 2021 and September 6, 2020, respectively. In this section, we discuss the results of our operations for the third quarter and three fiscal quarters of 2021 as compared to the respective periods of 2020.
Description of the Business
Domino’s is the largest pizza company in the world, with a significant business in both delivery and carryout, and more than 18,300 locations in over 90 markets around the world as of September 12, 2021. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. We are a highly recognized global brand, and we focus on serving neighborhoods locally through our large worldwide network of franchise owners and U.S. Company-owned stores. We are primarily a franchisor, with approximately 98% of Domino’s stores currently owned and operated by our independent franchisees. Franchising enables an individual to be his or her own employer and maintain control over all employment-related matters and pricing decisions, while also benefiting from the strength of the Domino’s global brand and operating system with limited capital investment by us.
The Domino’s business model is straightforward: Domino’s stores handcraft and serve quality food at a competitive price, with easy ordering access and efficient service, enhanced by our technological innovations. Our hand-tossed dough is made fresh and distributed to stores around the world by us and our franchisees.
Domino’s generates revenues and earnings by charging royalties and fees to our franchisees. Royalties are ongoing percent-of-sales fees for use of the Domino’s® brand marks. We also generate revenues and earnings by selling food, equipment and supplies to franchisees through our supply chain operations, primarily in the U.S. and Canada, and by operating a number of Company-owned stores in the U.S. Franchisees profit by selling pizza and other complementary items to their local customers. In our international markets, we generally grant geographical rights to the Domino’s Pizza® brand to master franchisees. These master franchisees are charged with developing their geographical area, and they may profit by sub-franchising and selling food and equipment to those sub-franchisees, as well as by running pizza stores. We believe that everyone in the system can benefit, including the end consumer, who can purchase Domino’s menu items for themselves and their family conveniently and economically.
The Domino’s business model can yield strong returns for our franchise owners and our Company-owned stores. It can also yield significant cash flows to us, through a consistent franchise royalty payment and supply chain revenue stream, with moderate capital expenditures. We have historically returned cash to shareholders through dividend payments and share repurchases. These factors emphasize our focus on our stakeholders, including our customers, team members, franchisees, communities and shareholders.
Third Quarter of 2021 Highlights
Three Fiscal Quarters of 2021 Highlights
16
Overview
Domino's experienced global retail sales growth during both the third quarter and three fiscal quarters of 2021. We believe our commitment to value, convenience, quality and new products continues to keep consumers engaged with the brand. We continued our strong international same store sales performance with 111 straight quarters of positive international same store sales. Although U.S. same store sales were positive for the three fiscal quarters of 2021, U.S. same store sales declined 1.9% in the third quarter of 2021, rolling over an increase in U.S. same store sales of 17.5% in the third quarter of 2020. This decrease in U.S. same store sales was attributable in part to labor shortages affecting store hours and staffing levels in many of our markets, as well as a waning in the level of economic stimulus activity in the U.S in the third quarter of 2021. Same store sales in the U.S. continue to be positively affected by changes in consumer ordering behavior observed since the onset of the COVID-19 pandemic. Internationally, we continued to experience sustained increases in retail sales during the third quarter and three fiscal quarters of 2021 resulting from evolving consumer trends, as well as the reopening and resumption of normal store hours and operating procedures at certain of our international franchised stores that had been temporarily closed or affected by changes in operating procedures and store hours for portions of the second and third quarters of 2020 as a result of the COVID-19 pandemic. Our U.S. and international same store sales results continue to be pressured by our fortressing strategy, which includes increasing store concentration in certain markets where we compete, as well as from aggressive competitive activity.
We continued our global expansion with the opening of 323 net stores in the third quarter of 2021, bringing our year-to-date total to 736 net store openings. We had 45 net stores open in the U.S. and 278 net stores open internationally during the third quarter of 2021.
Overall, we believe our continued global store growth, along with our sales growth, emphasis on technology, operations, and marketing initiatives, have combined to strengthen our brand.
Statistical Measures
The tables below outline certain statistical measures we utilize to analyze our performance. This historical data is not necessarily indicative of results to be expected for any future period.
Global Retail Sales Growth (excluding foreign currency impact)
Global retail sales growth (excluding foreign currency impact) is a commonly used statistical measure in the quick-service restaurant industry that is important to understanding performance. Global retail sales refers to total worldwide retail sales at Company-owned and franchise stores. We believe global retail sales information is useful in analyzing revenues because franchisees pay royalties and, in the U.S., advertising fees that are based on a percentage of franchise retail sales. We review comparable industry global retail sales information to assess business trends and to track the growth of the Domino’s Pizza brand. In addition, supply chain revenues are directly impacted by changes in franchise retail sales in the U.S. and Canada. Retail sales for franchise stores are reported to us by our franchisees and are not included in our revenues. Global retail sales growth, excluding foreign currency impact, is calculated as the change of international local currency global retail sales against the comparable period of the prior year.
|
|
Third Quarter |
|
Third Quarter |
|
Three Fiscal Quarters |
|
Three Fiscal Quarters |
U.S. stores |
|
+1.1% |
|
+21.3% |
|
+7.6% |
|
+15.3% |
International stores (excluding foreign currency impact) |
|
+16.5% |
|
+8.5% |
|
+19.2% |
|
+4.0% |
Total (excluding foreign currency impact) |
|
+8.5% |
|
+14.8% |
|
+13.1% |
|
+9.6% |
Same Store Sales Growth
Same store sales growth is a commonly used statistical measure in the quick-service restaurant industry that is important to understanding performance. Same store sales growth is calculated by including only sales from stores that also had sales in the comparable weeks of both years. International same store sales growth is calculated similarly to U.S. same store sales growth. Changes in international same store sales are reported on a constant dollar basis which reflects changes in international local currency sales.
|
|
Third Quarter |
|
Third Quarter |
|
Three Fiscal Quarters |
|
Three Fiscal Quarters |
U.S. Company-owned stores |
|
(8.9)% |
|
+16.6% |
|
(2.0)% |
|
+12.4% |
U.S. franchise stores |
|
(1.5)% |
|
+17.5% |
|
+5.1% |
|
+11.6% |
U.S. stores |
|
(1.9)% |
|
+17.5% |
|
+4.6% |
|
+11.7% |
International stores (excluding foreign currency impact) |
|
+8.8% |
|
+6.2% |
|
+11.4% |
|
+3.0% |
17
Store Growth Activity
Store counts and net store growth are commonly used statistical measures in the quick-service restaurant industry that are important to understanding performance.
|
|
U.S. |
|
|
U.S. |
|
|
Total |
|
|
International Stores |
|
|
Total |
|
|||||
Store count at June 20, 2021 |
|
|
366 |
|
|
|
6,060 |
|
|
|
6,426 |
|
|
|
11,631 |
|
|
|
18,057 |
|
Openings |
|
|
1 |
|
|
|
45 |
|
|
|
46 |
|
|
|
287 |
|
|
|
333 |
|
Closings (1) |
|
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(9 |
) |
|
|
(10 |
) |
Store count at September 12, 2021 |
|
|
367 |
|
|
|
6,104 |
|
|
|
6,471 |
|
|
|
11,909 |
|
|
|
18,380 |
|
Third quarter 2021 net store growth |
|
|
1 |
|
|
|
44 |
|
|
|
45 |
|
|
|
278 |
|
|
|
323 |
|
Trailing four quarters net store growth |
|
|
19 |
|
|
|
213 |
|
|
|
232 |
|
|
|
892 |
|
|
|
1,124 |
|
(1) Temporary store closures are not treated as store closures and affected stores are included in the ending store count. Based on information reported to us by our master franchisees, we estimate that as of September 12, 2021, there were fewer than 175 international stores temporarily closed.
Income Statement Data
|
|
Third Quarter |
|
Third Quarter |
|
Three Fiscal Quarters |
|
Three Fiscal Quarters |
|||||||||||||
U.S. Company-owned stores |
|
$108.4 |
|
|
|
$113.3 |
|
|
|
$337.7 |
|
|
|
$329.8 |
|
|
|||||
U.S. franchise royalties and fees |
|
121.6 |
|
|
|
118.1 |
|
|
|
372.9 |
|
|
|
335.9 |
|
|
|||||
Supply chain |
|
588.8 |
|
|
|
573.7 |
|
|
|
1,760.1 |
|
|
|
1,625.5 |
|
|
|||||
International franchise royalties and fees |
|
70.6 |
|
|
|
54.6 |
|
|
|
207.1 |
|
|
|
160.2 |
|
|
|||||
U.S. franchise advertising |
|
108.6 |
|
|
|
108.1 |
|
|
|
336.3 |
|
|
|
309.4 |
|
|
|||||
Total revenues |
|
998.0 |
|
100.0% |
|
967.7 |
|
100.0% |
|
3,014.2 |
|
100.0% |
|
2,760.8 |
|
100.0% |
|||||
U.S. Company-owned stores |
|
86.9 |
|
|
|
90.8 |
|
|
|
260.7 |
|
|
|
258.0 |
|
|
|||||
Supply chain |
|
525.9 |
|
|
|
515.0 |
|
|
|
1,571.4 |
|
|
|
1,443.6 |
|
|
|||||
Total cost of sales |
|
612.8 |
|
61.4% |
|
605.7 |
|
62.6% |
|
1,832.1 |
|
60.8% |
|
1,701.6 |
|
61.7% |
|||||
Operating margin |
|
385.2 |
|
38.6% |
|
362.0 |
|
37.4% |
|
1,182.0 |
|
39.2% |
|
1,059.2 |
|
38.4% |
|||||
General and administrative |
|
96.3 |
|
9.6% |
|
91.7 |
|
9.4% |
|
288.0 |
|
9.6% |
|
268.2 |
|
9.7% |
|||||
U.S. franchise advertising |
|
108.6 |
|
10.9% |
|
108.1 |
|
11.2% |
|
336.3 |
|
11.1% |
|
309.4 |
|
11.2% |
|||||
Income from operations |
|
180.3 |
|
18.1% |
|
162.2 |
|
16.8% |
|
557.7 |
|
18.5% |
|
481.6 |
|
17.4% |
|||||
Other income |
|
— |
|
0.0% |
|
— |
|
0.0% |
|
2.5 |
|
0.1% |
|
— |
|
0.0% |
|||||
Interest expense, net |
|
(45.5) |
|
(4.6)% |
|
(38.4) |
|
(4.0)% |
|
(130.7) |
|
(4.3)% |
|
(116.0) |
|
(4.2)% |
|||||
Income before provision for income taxes |
|
134.8 |
|
13.5% |
|
123.8 |
|
12.8% |
|
429.5 |
|
14.3% |
|
365.6 |
|
13.2% |
|||||
Provision for income taxes |
|
14.4 |
|
1.4% |
|
24.6 |
|
2.6% |
|
74.8 |
|
2.5% |
|
26.2 |
|
0.9% |
|||||
Net income |
|
$120.4 |
|
12.1% |
|
$99.1 |
|
10.2% |
|
$354.80 |
|
11.8% |
|
$339.4 |
|
12.3% |
|||||
Revenues
|
|
Third Quarter |
|
|
Third Quarter |
|
|
Three Fiscal Quarters |
|
|
Three Fiscal Quarters |
|
||||||||||||||||||||
U.S. Company-owned stores |
|
$ |
108.4 |
|
|
|
10.8 |
% |
|
$ |
113.3 |
|
|
|
11.7 |
% |
|
$ |
337.7 |
|
|
|
11.2 |
% |
|
$ |
329.8 |
|
|
|
11.9 |
% |
U.S. franchise royalties and fees |
|
|
121.6 |
|
|
|
12.2 |
% |
|
|
118.1 |
|
|
|
12.2 |
% |
|
|
372.9 |
|
|
|
12.4 |
% |
|
|
335.9 |
|
|
|
12.2 |
% |
Supply chain |
|
|
588.8 |
|
|
|
59.0 |
% |
|
|
573.7 |
|
|
|
59.3 |
% |
|
|
1,760.1 |
|
|
|
58.4 |
% |
|
|
1,625.5 |
|
|
|
58.9 |
% |
International franchise royalties and fees |
|
|
70.6 |
|
|
|
7.1 |
% |
|
|
54.6 |
|
|
|
5.6 |
% |
|
|
207.1 |
|
|
|
6.9 |
% |
|
|
160.2 |
|
|
|
5.8 |
% |
U.S. franchise advertising |
|
|
108.6 |
|
|
|
10.9 |
% |
|
|
108.1 |
|
|
|
11.2 |
% |
|
|
336.3 |
|
|
|
11.1 |
% |
|
|
309.4 |
|
|
|
11.2 |
% |
Total revenues |
|
$ |
998.0 |
|
|
|
100.0 |
% |
|
$ |
967.7 |
|
|
|
100.0 |
% |
|
$ |
3,014.2 |
|
|
|
100.0 |
% |
|
$ |
2,760.8 |
|
|
|
100.0 |
% |
Revenues primarily consist of retail sales from our Company-owned stores, royalties, advertising contributions and fees from our U.S. franchised stores, royalties and fees from our international franchised stores and sales of food, equipment and supplies from our supply chain centers to substantially all of our U.S. franchised stores and certain international franchised stores. Company-owned store and franchised store revenues may vary from period to period due to changes in store count mix. Supply chain revenues may vary significantly from period to period as a result of fluctuations in commodity prices as well as the mix of products we sell.
18
U.S. Stores Revenues
|
|
Third Quarter |
|
|
Third Quarter |
|
|
Three Fiscal Quarters |
|
|
Three Fiscal Quarters |
|
||||||||||||||||||||
U.S. Company-owned stores |
|
$ |
108.4 |
|
|
|
32.0 |
% |
|
$ |
113.3 |
|
|
|
33.4 |
% |
|
$ |
337.7 |
|
|
|
32.3 |
% |
|
$ |
329.8 |
|
|
|
33.8 |
% |
U.S. franchise royalties and fees |
|
|
121.6 |
|
|
|
35.9 |
% |
|
|
118.1 |
|
|
|
34.8 |
% |
|
|
372.9 |
|
|
|
35.6 |
% |
|
|
335.9 |
|
|
|
34.5 |
% |
U.S. franchise advertising |
|
|
108.6 |
|
|
|
32.1 |
% |
|
|
108.1 |
|
|
|
31.8 |
% |
|
|
336.3 |
|
|
|
32.1 |
% |
|
|
309.4 |
|
|
|
31.7 |
% |
U.S. stores |
|
$ |
338.6 |
|
|
|
100.0 |
% |
|
$ |
339.5 |
|
|
|
100.0 |
% |
|
$ |
1,047.0 |
|
|
|
100.0 |
% |
|
$ |
975.1 |
|
|
|
100.0 |
% |
U.S. Company-owned Stores
Revenues from U.S. Company-owned store operations decreased $4.8 million, or 4.3%, in the third quarter of 2021 due to a decrease in U.S. Company-owned same store sales. This decrease was partially offset by an increase in the average number of U.S. Company-owned stores open during the period resulting from net store growth. Revenues from U.S. Company-owned store operations increased $7.9 million, or 2.4%, in the three fiscal quarters of 2021 due to an increase in the average number of U.S. Company-owned stores open during the period resulting from net store growth, partially offset by a decrease in U.S. Company-owned same store sales.
U.S. Company-owned same store sales decreased 8.9% in the third quarter of 2021 and decreased 2.0% in the three fiscal quarters of 2021. U.S. Company-owned same store sales increased 16.6% in the third quarter of 2020 and increased 12.4% in the three fiscal quarters of 2020.
U.S. Franchise Royalties and Fees
Revenues from U.S. franchise royalties and fees increased $3.6 million, or 3.0%, in the third quarter of 2021 due primarily to an increase in the average number of U.S. franchised stores open during the period resulting from net store growth. The decrease in U.S. franchise same store sales partially offset the increase in U.S. franchise royalties and fee revenues. Revenues from U.S. franchise royalties and fees increased $37.0 million, or 11.0%, in the three fiscal quarters of 2021 due primarily to higher same store sales and an increase in the average number of U.S. franchised stores open during the period resulting from net store growth. U.S. franchise royalties were also negatively impacted by $3.0 million in the three fiscal quarters of 2020 as a result of funding we provided to our franchisees as part of an effort to donate 10 million slices of pizza to people and organizations at the frontlines of the COVID-19 pandemic in the franchisees’ local communities. U.S. franchise royalties and fees further benefited in both the third quarter and three fiscal quarters of 2021 from an increase in revenues from fees paid by franchisees for the use of our technology platforms.
U.S. franchise same store sales decreased 1.5% in the third quarter of 2021 and increased 5.1% in the three fiscal quarters of 2021. U.S. franchise same store sales increased 17.5% in the third quarter of 2020 and increased 11.6% in the three fiscal quarters of 2020.
U.S. Franchise Advertising
Revenues from U.S. franchise advertising increased $0.4 million, or 0.4%, in the third quarter of 2021 due primarily to an increase in the average number of U.S. franchised stores open during the period, resulting from net store growth. This increase was partially offset by a decrease in U.S. franchise same store sales as well as approximately $2.8 million in advertising incentives related to the Domino’s Surprise FreesTM promotion. Revenues from U.S. franchise advertising increased $26.9 million, or 8.7%, in the three fiscal quarters of 2021, due primarily to same store sales growth and an increase in the average number of U.S. franchised stores open during the period, resulting from net store growth. These increases were partially offset by the advertising incentives referenced above.
Supply Chain
Supply chain revenues increased $15.2 million, or 2.6%, in the third quarter of 2021, due primarily to higher market basket pricing to stores and higher revenues from sales of equipment to U.S. franchised stores. Supply chain revenues increased $134.6 million, or 8.3%, in the three fiscal quarters of 2021, due primarily to higher volumes from increased orders and higher market basket pricing to stores. Our market basket pricing to stores increased 2.1% during the third quarter of 2021, which resulted in an estimated $6.3 million increase in supply chain revenues. Our market basket pricing to stores increased 2.6% during the three fiscal quarters of 2021, which resulted in an estimated $38.0 million increase in supply chain revenues.
19
International Franchise Royalties and Fee Revenues
Revenues from international franchise royalties and fees increased $16.0 million, or 29.2%, in the third quarter of 2021, and increased $46.9 million, or 29.3%, in the three fiscal quarters of 2021 due primarily to higher retail sales resulting from same store sales growth and an increase in the average number of international franchised stores open during the period, resulting from net store growth. These increases in retail sales were benefited by the reopening and resumption of normal store hours and operating procedures at certain of the Company’s international franchised stores that had been temporarily closed or affected by changes in operating procedures and store hours for portions of the second and third quarters of 2020 as a result of the COVID-19 pandemic. The positive impact of changes in foreign currency exchange rates of $1.3 million and $7.4 million in the third quarter of 2021 and three fiscal quarters of 2021, respectively, also contributed to the increases in international franchise royalties and fees revenues.
Excluding the impact of foreign currency exchange rates, international franchise same store sales increased 8.8% in the third quarter of 2021, and increased 11.4% in the three fiscal quarters of 2021. Excluding the impact of foreign currency exchange rates, international franchise same store sales increased 6.2% in the third quarter of 2020, and increased 3.0% in the three fiscal quarters of 2020.
Cost of Sales / Operating Margin
|
|
Third Quarter |
|
|
Third Quarter |
|
|
Three Fiscal Quarters |
|
|
Three Fiscal Quarters |
|
||||||||||||||||||||
Consolidated revenues |
|
$ |
998.0 |
|
|
|
100.0 |
% |
|
$ |
967.7 |
|
|
|
100.0 |
% |
|
$ |
3,014.2 |
|
|
|
100.0 |
% |
|
$ |
2,760.8 |
|
|
|
100.0 |
% |
Consolidated cost of sales |
|
|
612.8 |
|
|
|
61.4 |
% |
|
|
605.7 |
|
|
|
62.6 |
% |
|
|
1,832.1 |
|
|
|
60.8 |
% |
|
|
1,701.6 |
|
|
|
61.6 |
% |
Consolidated operating margin |
|
$ |
385.2 |
|
|
|
38.6 |
% |
|
$ |
362.0 |
|
|
|
37.4 |
% |
|
$ |
1,182.0 |
|
|
|
39.2 |
% |
|
$ |
1,059.2 |
|
|
|
38.4 |
% |
Consolidated cost of sales consists primarily of U.S. Company-owned store and supply chain costs incurred to generate related revenues. Components of consolidated cost of sales primarily include food, labor, delivery and occupancy costs. Consolidated operating margin (which we define as revenues less cost of sales) increased $23.2 million, or 6.4%, in the third quarter of 2021, and increased $122.8 million, or 11.6%, in the three fiscal quarters of 2021, due primarily to higher global franchise revenues. Franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on the operating margin.
As a percentage of revenues, the consolidated operating margin increased 1.2 percentage points in the third quarter of 2021 and increased 0.8 percentage points in the three fiscal quarters of 2021. U.S. Company-owned store operating margin remained consistent in the third quarter of 2021 and increased 1.0 percentage point in the three fiscal quarters of 2021. Supply chain operating margin increased 0.5 percentage points in the third quarter of 2021 and decreased 0.5 percentage points in the three fiscal quarters of 2021. These changes in operating margin are described below.
U.S. Company-Owned Store Operating Margin
|
|
Third Quarter |
|
|
Third Quarter |
|
|
Three Fiscal Quarters |
|
|
Three Fiscal Quarters |
|
||||||||||||||||||||
Revenues |
|
$ |
108.4 |
|
|
|
100.0 |
% |
|
$ |
113.3 |
|
|
|
100.0 |
% |
|
$ |
337.7 |
|
|
|
100.0 |
% |
|
$ |
329.8 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
86.9 |
|
|
|
80.2 |
% |
|
|
90.8 |
|
|
|
80.2 |
% |
|
|
260.7 |
|
|
|
77.2 |
% |
|
|
258.0 |
|
|
|
78.2 |
% |
Store operating margin |
|
$ |
21.5 |
|
|
|
19.8 |
% |
|
$ |
22.5 |
|
|
|
19.8 |
% |
|
$ |
77.0 |
|
|
|
22.8 |
% |
|
$ |
71.8 |
|
|
|
21.8 |
% |
U.S. Company-owned store operating margin (which does not include certain store-level costs such as royalties and advertising) decreased $1.0 million, or 4.4%, in the third quarter of 2021, due primarily to lower same store sales, partially offset by lower labor costs. U.S. Company-owned store operating margin increased $5.2 million, or 7.3%, in the three fiscal quarters of 2021, due primarily to lower labor costs and higher retail sales due to net store growth, but these increases were partially offset by lower same store sales. As a percentage of store revenues, the U.S. Company-owned store operating margin remained consistent in the third quarter of 2021 and increased 1.0 percentage point in the three fiscal quarters of 2021. These changes in operating margin as a percentage of revenues are discussed in additional detail below.
20
Supply Chain Operating Margin
|
|
Third Quarter |
|
|
Third Quarter |
|
|
Three Fiscal Quarters |
|
|
Three Fiscal Quarters |
|
||||||||||||||||||||
Revenues |
|
$ |
588.8 |
|
|
|
100.0 |
% |
|
$ |
573.7 |
|
|
|
100.0 |
% |
|
$ |
1,760.1 |
|
|
|
100.0 |
% |
|
$ |
1,625.5 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
525.9 |
|
|
|
89.3 |
% |
|
|
515.0 |
|
|
|
89.8 |
% |
|
|
1,571.4 |
|
|
|
89.3 |
% |
|
|
1,443.6 |
|
|
|
88.8 |
% |
Supply chain operating margin |
|
$ |
62.9 |
|
|
|
10.7 |
% |
|
$ |
58.7 |
|
|
|
10.2 |
% |
|
$ |
188.7 |
|
|
|
10.7 |
% |
|
$ |
181.9 |
|
|
|
11.2 |
% |
Supply chain operating margin increased $4.2 million, or 7.2%, in the third quarter of 2021, primarily due to higher equipment revenues as well as lower supply cost. As a percentage of supply chain revenues, the supply chain operating margin increased 0.5 percentage points in the third quarter of 2021. While the market basket pricing to stores increased 2.1% during the third quarter of 2021, we incurred additional supply costs during the third quarter of 2020 as a result of certain expenses related to the provision of safety and cleaning equipment in connection with the COVID-19 pandemic. Higher labor cost as a percentage of revenues in the third quarter of 2021 partially offset the effect of the lower supply costs. Supply chain operating margin increased $6.8 million, or 3.6%, in the three fiscal quarters of 2021, primarily due to higher equipment revenues as well as lower supply cost and higher volumes from increased store orders. As a percentage of supply chain revenues, the supply chain operating margin decreased 0.5 percentage points in the three fiscal quarters of 2021 primarily due to higher food and labor cost.
General and Administrative Expenses
General and administrative expenses increased $4.7 million, or 5.1%, in the third quarter of 2021, and increased $19.8 million, or 7.4%, in the three fiscal quarters of 2021, driven primarily by higher labor costs, including non-cash equity-based compensation expense as well as higher travel expense. The increases in general and administrative expenses were partially offset by lower professional fees in both the third quarter and three fiscal quarters of 2021.
U.S. Franchise Advertising Expenses
U.S. franchise advertising expenses increased $0.4 million, or 0.4%, in the third quarter of 2021, and increased $26.9 million, or 8.7%, in the three fiscal quarters of 2021, consistent with the increase in U.S. franchise advertising revenues. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized, as our consolidated not-for-profit advertising fund is obligated to expend such revenues on advertising and these revenues cannot be used for general corporate purposes.
Other Income
Other income was $2.5 million in the three fiscal quarters of 2021, representing the unrealized gain recorded on the Company’s investment in Dash Brands (Note 6) resulting from the observable change in price from the valuation of the additional $40.0 million investment made in the first quarter of 2021.
Interest Expense, Net
Interest expense, net increased $7.1 million, or 18.4%, in the third quarter of 2021, and increased $14.7 million, or 12.6%, in the three fiscal quarters of 2021. These increases were driven by higher average borrowings resulting from our recapitalization transaction completed on April 16, 2021 (the “2021 Recapitalization”). In connection with the 2021 Recapitalization, we recorded $2.3 million of incremental interest expense in the second quarter of 2021, primarily representing the expense for $2.0 million of the remaining unamortized debt issuance costs associated with the 2017 five-year fixed rate notes and 2017 five-year floating rate notes, and $0.3 million of additional interest expense incurred on the 2017 five-year fixed rate notes and 2017 five-year floating rate notes subsequent to the closing of the 2021 Recapitalization but prior to the repayment of the 2017 five-year fixed rate notes and 2017 five-year floating rate notes, resulting in the payment of interest on both the 2017 five-year fixed rate notes and 2017 five-year floating rate notes and the 2021 Notes (as defined in the "2021 Recapitalization" section below) for a short period of time.
The Company’s weighted average borrowing rate decreased to 3.8% in the third quarter of 2021 from 3.9% in the third quarter of 2020, resulting from the lower interest rates on the debt outstanding due to the 2021 Recapitalization. The Company's weighted average borrowing rate was 3.9% in the three fiscal quarters of both 2021 and 2020.
21
Provision for Income Taxes
Income tax expense decreased $10.2 million, or 41.6%, in the third quarter of 2021, and increased $48.6 million, or 185.7%, in the three fiscal quarters of 2021, due to changes in excess tax benefits on non-cash equity-based compensation, which are recorded as a reduction to the income tax provision, as well as higher pre-tax income in the respective periods of 2021. The Company recognized $14.0 million in excess tax benefits in the third quarter of 2021 as compared to $3.4 million in the third quarter of 2020, and $18.3 million in excess tax benefits in the three fiscal quarters of 2021 as compared to $56.9 million in the three fiscal quarters of 2020. These changes in excess tax benefits from non-cash equity-based compensation resulted primarily from the timing of stock options exercised in the third quarter and three fiscal quarters of 2021 as compared to the same periods in 2020. The effective tax rate decreased to 10.7% during the third quarter of 2021 as compared to 19.9% in the third quarter of 2020. The effective tax rate increased to 17.4% during the three fiscal quarters of 2021 as compared to 7.2% in the three fiscal quarters of 2020.
Segment Income
We evaluate the performance of our reportable segments and allocate resources to them based on earnings before interest, taxes, depreciation, amortization and other, referred to as Segment Income. Segment Income for each of our reportable segments is summarized in the table below. Other Segment Income primarily includes corporate administrative costs that are not allocable to a reportable segment, including labor, computer expenses, professional fees, travel and entertainment, rent, insurance and other corporate administrative costs.
|
|
Third Quarter |
|
|
Third Quarter |
|
|
Three Fiscal Quarters |
|
|
Three Fiscal Quarters |
|
||||
U.S. Stores |
|
$ |
102.0 |
|
|
$ |
101.5 |
|
|
$ |
321.3 |
|
|
$ |
292.7 |
|
Supply Chain |
|
|
53.6 |
|
|
|
51.1 |
|
|
|
164.7 |
|
|
|
159.5 |
|
International Franchise |
|
|
57.3 |
|
|
|
44.5 |
|
|
|
168.1 |
|
|
|
124.4 |
|
Other |
|
|
(10.0 |
) |
|
|
(13.7 |
) |
|
|
(25.7 |
) |
|
|
(34.4 |
) |
U.S. Stores
U.S. stores Segment Income increased $0.5 million, or 0.4%, in the third quarter of 2021, primarily due to the $3.6 million increase in U.S. franchise royalties and fees revenues, partially offset by the $1.0 million decrease in U.S. Company-owned store operating margin, as discussed above. U.S. stores Segment Income increased $28.5 million, or 9.7%, in the three fiscal quarters of 2021, primarily due to the $37.0 million increase in U.S. franchise royalties and fees revenues and the $5.2 million increase in U.S. Company-owned store operating margin, as discussed above. U.S. franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on U.S. stores Segment Income. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized and had no impact on U.S. stores Segment Income. These increases in U.S. stores Segment Income were partially offset by increased investments in technological initiatives for the respective periods.
Supply Chain
Supply chain Segment Income increased $2.5 million, or 4.8%, in the third quarter of 2021, primarily due to the $4.2 million increase in operating margin described above. Supply chain Segment Income increased $5.3 million, or 3.3%, in the three fiscal quarters of 2021, primarily due to the $6.8 million increase in operating margin described above.
International Franchise
International franchise Segment Income increased $12.9 million or 28.9%, in the third quarter of 2021, due primarily to the $16.0 million increase in international franchise royalties and fees revenues discussed above. International franchise Segment Income increased $43.8 million or 35.2%, in the three fiscal quarters of 2021, due primarily to the $46.9 million increase in international franchise royalties and fees revenues discussed above. International franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on international franchise Segment Income. The increases in international franchise Segment Income were partially offset by increased investments in technological initiatives in the third quarter and three fiscal quarters of 2021.
Other
Other Segment Income increased $3.7 million, or 26.9%, in the third quarter of 2021, and increased $8.7 million, or 25.2%, in the three fiscal quarters of 2021, due primarily to higher corporate administrative costs allocated to our segments as compared to 2020, as well as lower professional fees. The increase in allocated costs in the third quarter and three fiscal quarters of 2021 was due primarily to higher investments in technological initiatives to support technology for our U.S. and international franchise stores. Higher labor and travel costs partially offset the increases in other Segment Income.
22
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 multiple inventory turns per month. 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 September 12, 2021, we had working capital of $215.1 million, excluding restricted cash and cash equivalents of $206.3 million, advertising fund assets, restricted, of $186.8 million and advertising fund liabilities of $178.5 million. Working capital includes total unrestricted cash and cash equivalents of $295.4 million.
Our primary source of liquidity is cash flows from operations and availability of borrowings under our variable funding notes. During the third quarter and three fiscal quarters of 2021, we experienced increases in international same store sales versus the comparable periods in the prior year. While our U.S. same store sales declined in the third quarter of 2021, same store sales increased during the three fiscal quarters of 2021. Additionally, both our U.S. and international businesses grew store counts in the third quarter and three fiscal quarters of 2021. These factors contributed to our global retail sales growth realized in both the third quarter and three fiscal quarters of 2021 which resulted in our continued ability to generate positive operating cash flows. As of September 12, 2021, we had a variable funding note facility which allowed for advances of up to $200.0 million of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 Notes and certain other credit instruments, including letters of credit (the “2021 Variable Funding Notes”). The letters of credit are primarily related to our casualty insurance programs and certain supply chain center leases. As of September 12, 2021, we had no outstanding borrowings and $157.5 million of available borrowing capacity under our 2021 Variable Funding Notes, net of letters of credit issued of $42.5 million.
We expect to continue to use our unrestricted cash and cash equivalents, cash flows from operations, excess cash from our recapitalization transactions and available borrowings under our variable funding notes to, among other things, fund working capital requirements, invest in our core business, service our indebtedness, pay dividends and repurchase shares of our common stock.
Our ability to continue to fund these items and continue to service our 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 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 our outstanding senior notes and to service, extend or refinance our variable funding notes will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
Restricted Cash
As of September 12, 2021, we had $158.6 million of restricted cash held for future principal and interest payments and other working capital requirements of our asset-backed securitization structure, $47.5 million of restricted cash held in a three-month interest reserve as required by the related debt agreements and $0.2 million of other restricted cash for a total of $206.3 million of restricted cash and cash equivalents. As of September 12, 2021, we also held $166.7 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s brand.
Long-Term Debt
As of September 12, 2021, we had approximately $5.07 billion of long-term debt, of which $54.8 million was classified as a current liability. As of September 12, 2021, our fixed rate notes from the recapitalizations we completed in 2021, 2019, 2018, 2017 and 2015 had original scheduled principal payments of $12.9 million in the remainder of 2021, $51.5 million in each of 2022, 2023 and 2024, $1.17 billion in 2025, $39.3 million in 2026, $1.31 billion in 2027, $811.5 million in 2028, $625.9 million in 2029, $10.0 million in 2030 and $905.0 million in 2031.
In accordance with our debt agreements, the payment of principal on the outstanding senior notes may be suspended if our leverage ratio is less than or equal to 5.0x total debt to adjusted EBITDA, as defined in the related agreements, and no catch-up provisions are applicable. As of the fourth quarter of 2020, we had a leverage ratio of less than 5.0x, and accordingly, did not make the previously scheduled debt amortization payment on our then-outstanding notes beginning in the first quarter of 2021. Accordingly, all principal amounts of our outstanding notes were classified as long-term debt in the condensed consolidated balance sheet as of January 3, 2021. Subsequent to the closing of the 2021 Recapitalization, we had a leverage ratio of greater than 5.0x, and accordingly, resumed making the previously scheduled debt amortization payment on our outstanding notes beginning in the second quarter of 2021.
23
2021 Recapitalization
During the second quarter of 2021, on April 16, 2021 (the “closing date”), we completed the 2021 Recapitalization in which certain of our subsidiaries issued new notes pursuant to our asset-backed securitization structure. The new notes consist of $850.0 million Series 2021-1 2.662% Fixed Rate Senior Secured Notes, Class A-2-I with an anticipated term of 7.5 years (the “2021 A-2-I Fixed Rate Notes”), and $1.0 billion Series 2021-1 3.151% Fixed Rate Senior Secured Notes, Class A-2-II with an anticipated term of 10 years (collectively with the 2021 A-2-I Fixed Rate Notes, the “2021 Notes”) in an offering exempt from registration under the Securities Act of 1933, as amended. As of September 12, 2021, the 2021 Notes had scheduled principal payments of $4.6 million in 2021, $18.5 million in each of 2022 through 2027, $804.8 million in 2028, $10.0 million in each of 2029 and 2030 and $905.0 million in 2031. Gross proceeds from the issuance of the 2021 Notes were $1.85 billion.
Concurrently, certain of our subsidiaries also issued the 2021 Variable Funding Notes, which allow for advances of up to $200.0 million of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 Notes and certain other credit instruments, including letters of credit. The 2021 Variable Funding Notes were undrawn on the closing date. In connection with the issuance of our 2021 Variable Funding Notes, our previous variable funding note facility was canceled.
A portion of proceeds from the 2021 Recapitalization was used to repay the remaining $291.0 million in outstanding principal under our 2017 five-year floating rate notes and $582.0 million in outstanding principal under our 2017 five-year fixed rate notes. The proceeds were also used to pre-fund a portion of the interest payable on the 2021 Notes and pay transaction fees and expenses. In connection with the repayment of the 2017 five-year floating rate notes and 2017 five-year fixed rate notes, we expensed approximately $2.0 million for the remaining unamortized debt issuance costs associated with these notes. Additionally, in connection with the 2021 Recapitalization, we capitalized $14.9 million of debt issuance costs, which are being amortized into interest expense over the 7.5 and 10-year expected terms of the 2021 Notes. We used the remaining proceeds for general corporate purposes, which primarily included a $1.0 billion accelerated share repurchase agreement (the “ASR Agreement”) with a counterparty. The ASR Agreement is described in additional detail below.
Share Repurchase Programs
Our share repurchase programs have historically been funded by excess operating cash flows, excess proceeds from our recapitalization transactions and borrowings under our variable funding notes.
During the first quarter of 2021, we repurchased and retired 65,870 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $25.0 million. Our Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of our common stock on February 24, 2021.
On April 30, 2021, we entered into the ASR Agreement. Pursuant to the terms of the ASR Agreement, on May 3, 2021, we used a portion of the proceeds from the 2021 Recapitalization to pay the counterparty $1.0 billion in cash and received and retired 2,012,596 shares of our common stock. Final settlement of the ASR Agreement occurred on July 21, 2021. In connection with the ASR Agreement, we received and retired a total of 2,250,786 shares of our common stock at an average price of $444.29, including the 2,012,596 shares of our common stock received and retired during the second quarter of 2021.
On July 20, 2021, our Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of our common stock. This repurchase program replaced our previously approved $1.0 billion share repurchase program, which was fully utilized in connection with the ASR Agreement.
During the third quarter of 2021, we repurchased and retired 152,817 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $79.7 million. During the three fiscal quarters of 2021, we repurchased and retired 2,469,473 shares of our common stock (including 2,250,786 shares of common stock repurchased under the ASR Agreement and 218,687 shares of common stock repurchased under our Board of Directors-approved share repurchase program) for a total of approximately $1.1 billion. As of September 12, 2021, we had a total remaining authorized amount for share repurchases of approximately $920.3 million. Subsequent to the end of the third quarter and through October 12, 2021, we repurchased and retired an additional 205,145 shares of common stock for a total of approximately $100.1 million.
Dividends
On July 20, 2021, our Board of Directors declared a $0.94 per share quarterly dividend on our outstanding common stock for shareholders of record as of September 15, 2021, which was paid on September 30, 2021. We had approximately $35.1 million accrued for common stock dividends at September 12, 2021. Subsequent to the end of the third quarter, on October 12, 2021, our Board of Directors declared a $0.94 per share quarterly dividend on our outstanding common stock for shareholders of record as of December 15, 2021, to be paid on December 30, 2021.
24
Sources and Uses of Cash
The following table illustrates the main components of our cash flows:
(In millions) |
|
Three Fiscal Quarters |
|
|
Three Fiscal Quarters |
|
||
Cash flows provided by (used in) |
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
$ |
484.6 |
|
|
$ |
370.4 |
|
Net cash used in investing activities |
|
|
(90.3 |
) |
|
|
(91.1 |
) |
Net cash used in financing activities |
|
|
(228.1 |
) |
|
|
(153.6 |
) |
Effect of exchange rate changes on cash |
|
|
0.1 |
|
|
|
0.2 |
|
Change in cash and cash equivalents, restricted cash and cash equivalents |
|
$ |
166.2 |
|
|
$ |
126.0 |
|
Operating Activities
Cash provided by operating activities increased $114.2 million in the three fiscal quarters of 2021 primarily due to the positive impact of changes in operating assets and liabilities of $73.0 million. The positive impact of changes in operating assets and liabilities related to the timing of payments on accounts payable and accrued liabilities, income tax payments as well as the timing of collections on accounts receivable in 2021 as compared to 2020. The increase in net income, adjusted for the impact of non-cash transactions, of $24.5 million in the three fiscal quarters of 2021 also contributed to the increase in cash provided by operating activities. The increase in cash provided by operating activities was also due to a $16.7 million positive impact of changes in advertising fund assets and liabilities, restricted, in 2021 as compared to 2020 due to the receipt of advertising contributions outpacing payments for advertising activities.
Investing Activities
Cash used in investing activities was $90.3 million in the three fiscal quarters of 2021, which primarily consisted of $50.7 million of capital expenditures (driven primarily by investments in technological initiatives, supply chain centers and corporate store operations) and an additional investment in Dash Brands (Note 6) of $40.0 million.
Financing Activities
Cash used in financing activities was $228.1 million in the three fiscal quarters of 2021, primarily related to the repurchase of approximately $1.1 billion in common stock under our Board of Directors-approved share repurchase program (including $1.0 billion under the ASR Agreement), repayments of long-term debt and finance lease obligations of $896.2 million, dividend payments of $71.2 million, cash paid for financing costs as part of the 2021 Recapitalization of $14.9 million and tax payments for the vesting of restricted stock of $6.8 million. Of the total amount of repayments of long-term debt and finance lease obligations, $873.0 million represents the repayment of the remaining principal under our then-outstanding 2017 five-year floating rate notes and 2017 five-year fixed rate notes as part of the 2021 Recapitalization. These uses of cash were partially offset by proceeds from our 2021 Recapitalization of $1.85 billion and proceeds from the exercise of stock options of $15.9 million.
Critical Accounting Policies and Estimates
For a description of the Company’s critical accounting policies and estimates, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2020 Form 10-K. The Company considers its most significant accounting policies and estimates to be revenue recognition, long-lived assets, insurance and legal matters, share-based payments and income taxes. There have been no material changes to the Company’s critical accounting policies and estimates since January 3, 2021.
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Forward-Looking Statements
This filing contains various forward-looking statements about the Company within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”) that are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “could,” “should,” “estimates,” “expects,” “intends,” “may,” “will,” “plans,” “predicts,” “projects,” “seeks,” “approximately,” “potential,” “outlook” and similar terms and phrases that concern our strategy, plans or intentions, including references to assumptions. These forward-looking statements address various matters including information concerning future results of operations and business strategy, our anticipated profitability, estimates in same store sales growth, the growth of our U.S. and international business, our 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. While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions. Important factors that could cause actual results to differ materially from our expectations are more fully described under the section headed “Risk Factors” in this filing and in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our 2020 Form 10-K. Actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors, including but not limited to: our substantial increased indebtedness as a result of our recapitalization transactions and our ability to incur additional indebtedness or refinance or renegotiate key terms of that indebtedness in the future; the impact a downgrade in our credit rating may have on our business, financial condition and results of operations; our future financial performance and our ability to pay principal and interest on our indebtedness; our ability to manage difficulties associated with or related to the COVID-19 pandemic and the effects of COVID-19 on our business and supply chain; the effectiveness of our advertising, operations and promotional initiatives; the strength of our brand, including our ability to compete in the U.S. and internationally in our intensely competitive industry, including the food service and food delivery markets; the impact of social media and other consumer-oriented technologies on our business, brand and reputation; the impact of new or improved technologies and alternative methods of delivery on consumer behavior; new product, digital ordering and concept developments by us, and other food-industry competitors; our ability to maintain good relationships with and attract new franchisees, and franchisees’ ability to successfully manage their operations without negatively impacting our royalty payments and fees or our brand’s reputation; our ability to successfully implement cost-saving strategies; our ability and that of our franchisees to successfully operate in the current and future credit environment; changes in the level of consumer spending given general economic conditions, including interest rates, energy prices and consumer confidence; our ability and that of our franchisees to open new restaurants and keep existing restaurants in operation; changes in operating expenses resulting from changes in prices of food (particularly cheese), fuel and other commodity costs, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness, health epidemics or general health concerns, severe weather conditions and natural disasters may have on our business and the economies of the countries where we operate; changes in foreign currency exchange rates; changes in income tax rates; our ability to retain or replace our executive officers and other key members of management and our ability to adequately staff our stores and supply chain centers with qualified personnel; our ability to find and/or retain suitable real estate for our stores and supply chain centers; changes in government legislation and regulations, including changes in laws and regulations regarding information privacy, payment methods consumer protection and social media; adverse legal judgments or settlements; food-borne illness or contamination of products; data breaches, power loss, technological failures, user error or other cyber risks threatening us or our franchisees; the effect of war, terrorism, catastrophic events or climate change; our ability to pay dividends and repurchase shares; changes in consumer tastes, spending and traffic patterns and demographic trends; actions by activist investors; changes in accounting policies; and adequacy of our insurance coverage. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this filing might not occur. All forward-looking statements speak only as of the date of this filing and should be evaluated with an understanding of their inherent uncertainty. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission, or other applicable law, we will not undertake, and specifically disclaim, any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances arising after the date of this filing, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on the forward-looking statements included in this filing or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In connection with the recapitalizations of our business, we have issued fixed rate notes and entered into variable funding notes and, at September 12, 2021, we are exposed to interest rate risk on borrowings under our variable funding notes. As of September 12, 2021, we had no outstanding borrowings under our 2021 Variable Funding Notes.
Our 2021 Variable Funding Notes bear interest at fluctuating interest rates based on LIBOR. There is currently uncertainty around whether LIBOR will continue to exist after 2023. Our 2021 Variable Funding Notes loan documents contemplate a transition from LIBOR to secured overnight financing rate (“SOFR”) in the event that LIBOR ceases to exist. Because the composition and characteristics of SOFR are not the same as those of LIBOR, in such event, there can be no assurance that SOFR will perform the same way LIBOR would have at any given time or for any applicable period. As a result, our interest expense could increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.
Our fixed rate debt exposes the Company to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate.
We are exposed to market risks 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, although we have not done so historically. We do not engage in speculative transactions or hold or issue financial instruments for trading purposes. In instances when we use fixed pricing agreements with our suppliers, these agreements cover our physical commodity needs, are not net-settled and are accounted for as normal purchases.
We have exposure to various foreign currency exchange rate fluctuations for revenues generated by our operations outside the U.S., which can adversely impact our net income and cash flows. Approximately 7.1% of our total revenues in the third quarter of 2021, approximately 6.9% of our total revenues in the three fiscal quarters of 2021, approximately 5.6% of our total revenues in the third quarter of 2020 and approximately 5.8% of our total revenues in the three fiscal quarters of 2020 were derived from our international franchise segment, a majority of which were denominated in foreign currencies. We also operate dough manufacturing and distribution facilities in Canada, which generate revenues denominated in Canadian 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 for our international markets would have resulted in a negative impact on royalty revenues of approximately $18.4 million in the three fiscal quarters of 2021.
Item 4. Controls and Procedures.
Management, with the participation of the Company’s Chief Executive Officer (who is also serving as the Company’s interim principal financial officer), Richard E. Allison, Jr., performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-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. Allison concluded that the Company’s disclosure controls and procedures were effective.
During the quarterly period ended September 12, 2021, there were no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) 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.
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 with respect to those risk factors previously disclosed in Item 1A “Risk Factors” in Part I of our 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
c. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
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Maximum |
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Total Number of Shares |
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Value of Shares that |
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Total Number |
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Purchased as Part of |
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May Yet Be Purchased |
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of Shares |
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Average Price Paid |
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Publicly Announced |
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Under the Program |
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Period |
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Purchased (1) |
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Per Share |
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Program (2) |
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(in thousands) |
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Period #7 (June 21, 2021 |
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913 |
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$ |
475.82 |
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— |
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$ |
— |
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Period #8 (July 19, 2021 |
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300,483 |
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530.80 |
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299,265 |
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967,586 |
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Period #9 (August 16, 2021 |
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93,194 |
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515.30 |
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91,742 |
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920,312 |
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Total |
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394,590 |
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$ |
521.24 |
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391,007 |
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$ |
920,312 |
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(1) |
3,583 shares in the third quarter of 2021 were purchased as part of the Company’s employee stock payroll deduction plan. During the third quarter, the shares were purchased at an average price of $511.95.
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(2) |
On April 30, 2021, the Company entered into the ASR Agreement. Pursuant to the terms of the ASR Agreement, on May 3, 2021, the Company received and retired 2,012,596 shares of its common stock. Final settlement of the ASR Agreement occurred on July 21, 2021. The total number of shares purchased in Period 8, 2021 (July 19, 2021 to August 15, 2021) includes 238,190 shares received at final settlement of the ASR Agreement. In connection with the ASR Agreement, the Company received and retired a total of 2,250,786 shares of its common stock at an average price of $444.29.
On July 20, 2021, the Company’s Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of the Company’s common stock. As of September 12, 2021, $920.3 million remained available for future purchases of the Company’s common stock under this share repurchase program.
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Subsequent to the end of the third quarter and through October 12, 2021, the Company repurchased and retired an additional 205,145 shares of common stock for a total of approximately $100.1 million, or an average price of $487.90 per share.
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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 |
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Description |
10.1 |
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31.1 |
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32.1 |
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101.INS |
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XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
104 |
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Cover page Interactive Data File (formatted as Inline XBRL and contained in exhibit 101). |
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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.
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DOMINO’S PIZZA, INC. (Registrant) |
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Date: October 14, 2021 |
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/s/ Richard E. Allison, Jr. |
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Richard E. Allison, Jr. |
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Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) |
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