filings.toolsDomino's Pizza 10-K 2017-01-01
Filed 2017-02-28. 23 sections, 367K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
10-K 1 d350071d10k.htm FORM 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|
For the fiscal year ended January 1, 2017
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|
Commission File Number 001-32242
Domino’s Pizza, Inc.
(Exact name of registrant as specified in its charter)
| DELAWARE | 38-2511577 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 30 Frank Lloyd Wright Drive | ||
| Ann Arbor, Michigan | 48105 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (734) 930-3030
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Name of each exchange on which registered: | |
| Domino’s Pizza, Inc. Common Stock, $0.01 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☐ (do not check if a smaller reporting company) | Smaller reporting company | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of Domino’s Pizza, Inc. as of June 19, 2016 computed by reference to the closing price of Domino’s Pizza, Inc.’s common stock on the New York Stock Exchange on such date was $6,127,024,302.
As of February 21, 2017, Domino’s Pizza, Inc. had 48,051,144 shares of common stock, par value $0.01 per share, outstanding.
Documents incorporated by reference:
Portions of the definitive proxy statement to be furnished to shareholders of Domino’s Pizza, Inc. in connection with the annual meeting of shareholders to be held on April 25, 2017 are incorporated by reference into Part III.
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TABLE OF CONTENTS
Throughout this document, Domino’s Pizza, Inc. (NYSE: DPZ) is referred to as the “Company,” “Domino’s”, “Domino’s Pizza” or in the first person notations of “we,” “us” and “our.”
In this document, we rely on and refer to information regarding the U.S. quick service restaurant, or QSR, sector and the U.S. QSR pizza category from the CREST® report (years ending November) prepared by The NPD Group, as well as market research reports, analyst reports and other publicly-available information. Although we believe this information to be reliable, we have not independently verified it. Domestic sales information relating to the U.S. QSR sector and the U.S. QSR pizza category represent reported consumer spending obtained by The NPD Group’s CREST® report from consumer surveys. This information relates to both our Company-owned and franchised stores.
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Part I
Item 1. Business.
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Overview
Domino’s is the second largest pizza restaurant chain in the world, with more than 13,800 locations in over 85 markets around the world. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. Although we are a highly-recognized global brand, we focus on serving the local neighborhoods in which we live and do business through our large network of franchise owners and Company-owned stores. On average, we sell more than 2 million pizzas each day throughout our global system.
Our business model is straightforward: we handcraft and serve quality food at a competitive price, with easy ordering access and efficient service, enhanced by our technology innovations. Our dough is generally made fresh and distributed to stores around the world by us and our franchisees.
Domino’s generates revenues and earnings by charging royalties to its franchisees. Royalties are ongoing percent-of-sales fees for use of the Domino’s brand marks. The Company also generates revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada, and by operating a number of our own stores. 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 ingredients and equipment to those sub-franchisees, as well as by running pizza stores. Everyone in the system can benefit, including the end consumer, who can feed their family Domino’s menu items conveniently and economically.
Our business model can yield strong returns for our franchise owners and Company-owned stores. It can also yield significant cash flow 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 since becoming a publicly-traded company.
Our History
We pioneered the pizza delivery business and built Domino’s Pizza® into one of the most widely-recognized consumer brands in the world. We have been delivering quality, affordable food to our customers since 1960, when brothers Thomas and James Monaghan borrowed $900 to purchase a small pizza store in Ypsilanti, Michigan. Thomas purchased his brother’s share of the business shortly thereafter. Concentrating first on building stores near college campuses and military bases in the 1960s and 1970s, the brand grew quickly in the 1980s in urban markets and near residential communities. We became “Domino’s Pizza” in 1965 and opened our first franchised store in 1967. The first international stores opened in 1983, in Canada and Australia.
Monaghan sold 93% of his economic stake in the Company in 1998 to Bain Capital, LLC, then sold and transferred his remaining stake in the Company in 2004, when we completed our initial public offering.
Since 1998, the Company has been structured with a leveraged balance sheet and has completed a number of recapitalization events. The Company’s most recent recapitalization transaction in 2015 (the “2015 Recapitalization”) primarily consisted of the issuance of $1.3 billion of fixed rate notes and the repurchase and retirement of $551.3 million of previously outstanding fixed rate notes. Following the 2015 Recapitalization, and including debt from its previous recapitalization in 2012 (the “2012 Recapitalization”), the Company had $2.24 billion in long-term debt.
We re-launched our brand in the U.S. in late 2009 by introducing a new recipe for our core pizza product. Since 2008, the majority of our menu has changed, either through the improvement of existing products or the introduction of new products, such as our Handmade Pan Pizza and Specialty Chicken. During this time frame, we also began expanding our focus on technology through our development of innovative ordering platforms and other technological advancements. Globally, we opened our 10,000th store in 2012 and our 13,000th store in 2016. In 2013, we announced a plan requiring all stores to adopt our new “Pizza Theater” store design, which is more inviting to customers and allows them to see their orders being made fresh in front of them. Our goal is to be substantially complete with these remodels by the end of 2017.
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Our Industry
The U.S. QSR pizza category is large and fragmented. From 2006 through 2016, the U.S. QSR pizza category has grown from $33.1 billion to $35.8 billion. It is the second-largest category within the $281.9 billion U.S. QSR sector. The U.S. QSR pizza category is primarily comprised of delivery, dine-in and carryout.
In the U.S., we compete primarily in the delivery and carryout segments of the pizza industry. We are the market share leader in the delivery segment and we are amongst the top three chains in share in the carryout segment. Delivery segment sales of $10.0 billion in 2016 (down from $11.4 billion in 2006) account for approximately 28% of total U.S. QSR pizza. The delivery segment declined during the period from 2006 to 2012, and has increased slightly since 2012, from $9.7 billion in 2012 to $10.0 billion in 2016. The three industry leaders, including Domino’s, account for approximately 56% of U.S. pizza delivery, based on reported consumer spending, with the remaining sales going to regional chains and independent establishments. From 2006 to 2016, the carryout segment grew from $13.9 billion to $16.5 billion. The four industry leaders, including Domino’s, account for approximately 47% of the carryout segment.
In contrast to the U.S., international pizza delivery is relatively underdeveloped, with only Domino’s and two other competitors having a significant global presence. We believe that demand for pizza and pizza delivery is large and growing throughout the world, driven by international consumers’ increasing emphasis on convenience, and the proven success of our 30 years of conducting business abroad.
Our Competition
The global pizza delivery and carryout segments are highly competitive. In the U.S., we compete against regional and local companies as well as national chains Pizza Hut®, Papa John’s® and Little Caesars Pizza®. Internationally, we compete primarily with Pizza Hut®, Papa John’s® and country-specific national and local pizzerias. We generally compete on the basis of product quality, location, image, service, technology and price. Our business and those of our competitors can be affected by changes in consumer tastes, economic conditions, demographic trends and consumers’ disposable income. We compete not only for customers, but also for employees, suitable real estate sites and qualified franchisees.
Our Customers
The Company’s business is not dependent upon a single retail customer or small group of customers, including franchisees. No customer accounted for more than 10% of total consolidated revenues in 2016, 2015 or 2014. Our largest franchisee based on store count, Domino’s Pizza Enterprises (ASX: DMP), operates 1,990 stores in seven international markets, and accounts for 14% of our total store count. Revenues from this master franchisee accounted for 1.5% of our consolidated revenues in 2016. Our international business unit only requires a minimal amount of general and administrative expenses to operate its markets, and does not have costs of sales. Therefore, the vast majority of these royalty revenues result in profits to us.
Our Menu
We offer a menu designed to present an attractive, quality offering to customers, while keeping it simple enough to minimize order errors and expedite order-taking and food preparation. Our basic menu features pizza products with varying sizes and crust types. Our typical store also offers oven-baked sandwiches, pasta, boneless chicken and wings, bread side items, desserts and Coca-Cola® soft drink products. International markets vary toppings by country and culture, such as squid topping in Japan or spicy cheese in India, and often feature regional specialty items, such as a banana and cinnamon dessert pizza in Brazil.
Store Image and Operations
We have been focused primarily on pizza delivery for over 50 years, as well as carryout as a significant component of our business. In 2012, we introduced our carryout-friendly Pizza Theater store design; we expect that substantially all of our stores will convert to this design by the end of 2017. Many stores will offer casual seating and will enable customers to watch the preparation of their orders, but will not offer a full-service dine-in experience. As a result, our stores generally do not require expensive restaurant facilities and staffing.
Research and Development
We conduct research and product development at our World Resource Center in Ann Arbor, Michigan. Company-sponsored research and development activities, which include testing new products for possible menu additions, are an important activity for us and our franchisees. We do not consider the amounts spent on research and development to be material.
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Our Business Segments
We operate, and report, three business segments: domestic stores, international franchise and supply chain.
Domestic Stores
Our domestic stores segment consists primarily of our franchise operations, which consist of 4,979 franchised stores located in the contiguous United States. We also operate a network of 392 domestic Company-owned stores located in the contiguous United States.
During 2016, our domestic stores segment accounted for $751.3 million, or 30% of our consolidated revenues. We use our Company-owned stores as test sites for new products and promotions as well as operational improvements. We also use them for training new store managers and operations team members, as well as developing prospective franchisees. While we are primarily a franchised business, we continuously evaluate our mix of domestic Company-owned and franchise stores.
We maintain a productive relationship with our independent franchise owners through regional franchise teams, distributing materials that help franchise stores comply with our standards and using franchise advisory groups that facilitate communications between us and our franchisees.
Domestic Franchise Profile
As of January 1, 2017, our network of 4,979 domestic franchise stores were owned and operated by 799 domestic franchisees. Our franchise formula enables franchisees to benefit from our brand name with a relatively low initial capital investment. As of January 1, 2017, the average domestic franchisee owned and operated six stores and had been in our franchise system for over 17 years. At the same time, 14 of our domestic franchisees operated more than 50 stores (including our largest domestic franchisee who operated 189 stores) and 277 of our domestic franchisees each operated one store.
We apply rigorous standards to prospective domestic franchisees. We generally require them to manage a store for at least one year before being granted a franchise. This enables us to observe the operational and financial performance of a potential franchisee prior to entering into a long-term contract. Approximately 90% of our 799 independent domestic franchise owners started their careers with us as delivery drivers or in other in-store positions. We generally restrict the ability of domestic franchisees to be involved in other businesses, which focuses our franchisees’ attention on operating their stores. As a result, the majority of our domestic franchisees have historically come from within the Domino’s Pizza system. We believe these standards are largely unique to the franchise industry and result in qualified and focused franchisees operating their stores.
Domestic Franchise Agreements
We enter into franchise agreements with domestic franchisees under which the franchisee is generally granted the right to operate a store in a particular location for a term of ten years, with an ability to renew for an additional term of ten years. We have a franchise contract renewal rate of approximately 99%. Under the current standard franchise agreement, we assign an exclusive area of primary responsibility to each franchised store. Each franchisee is generally required to pay a 5.5% royalty fee on sales. In certain instances, we will collect lower rates based on area development agreements, sales initiatives and new store incentives.
Our domestic stores currently contribute 6% of their retail sales to fund national marketing and advertising campaigns (subject, in limited instances, to lower rates based on certain incentives and waivers). These funds are administered by Domino’s National Advertising Fund Inc. (“DNAF”), our not-for-profit advertising subsidiary. The funds are primarily used to purchase media for advertising, but also support market research, field communications, public relations, commercial production, talent payments and other activities to promote the brand. In addition to the national and market-level advertising contributions, domestic stores spend additional funds on local store marketing activities.
We have the contractual right, subject to state law, to terminate a franchise agreement for a variety of reasons, including, but not limited to, a franchisee’s failure to adhere to the Company’s franchise agreement, failure to make required payments, or failure to adhere to specified Company policies and standards.
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International Franchise
Our international franchise segment is comprised of a network of franchised stores in more than 85 international markets. At January 1, 2017, we had 8,440 international franchise stores. During 2016, this segment accounted for $177.0 million, or 7% of our consolidated revenues. The principal sources of revenues from those operations are royalty payments generated by retail sales from franchised stores.
Our international franchisees employ our basic standard operating model, and adapt it to satisfy the local eating habits and consumer preferences of various regions outside the United States. Currently, the vast majority of our international stores operate under master franchise agreements.
We believe Domino’s appeals to potential international franchisees because of our recognized brand name and technological leadership, the moderate capital expenditures required to open and operate our stores and our system’s favorable store economics. In our top ten markets, four master franchise companies are publicly traded on stock exchanges: in Australia (ASX: DMP), India (JUBLFOOD: NS), Mexico (ALSEA: MX) and the United Kingdom (DOM: L). The following table shows our store count as of January 1, 2017 in our top ten international markets, which account for approximately 67% of our international stores.
| Market | Number of stores | |||
| India | 1,106 | |||
| United Kingdom | 947 | |||
| Mexico | 655 | |||
| Australia | 623 | |||
| Turkey | 477 | |||
| Japan | 472 | |||
| Canada | 438 | |||
| South Korea | 433 | |||
| France | 325 | |||
| Germany | 213 |
International Franchisee Profile
The vast majority of our markets outside of the contiguous United States are operated by master franchisees with franchise and distribution rights for entire regions or countries. In a few select markets, we franchise directly to individual store operators. Prospective master franchisees are required to possess local market knowledge to establish and develop Domino’s Pizza stores, with the ability to identify and access targeted real estate sites, as well as expertise in local laws, customs, culture and consumer behavior. We also seek candidates that have access to sufficient capital to meet growth and development plans.
Master Franchise Agreements
Our master franchise agreements generally grant the franchisee exclusive rights to develop or sub-franchise stores and the right to operate supply chain centers in particular geographic areas. Agreements are generally for a term of ten to 20 years, with options to renew for additional terms. The agreements typically contain growth clauses requiring franchisees to open a minimum number of stores within a specified period. The master franchisee is generally required to pay an initial, one-time franchise fee as well as an additional franchise fee upon the opening of each new store. The master franchisee is also required to pay a continuing royalty fee as a percentage of retail sales, which varies among international markets, and averaged approximately 3.0% in 2016.
Supply Chain
Our supply chain segment operates 18 regional dough manufacturing and food supply chain centers in the U.S., one thin crust manufacturing center, one vegetable processing center and one center providing equipment and supplies to certain of our domestic and international stores. We also operate five dough manufacturing and food supply chain centers in Canada. Our supply chain segment leases a fleet of more than 650 tractors and trailers. During 2016, our supply chain segment accounted for $1.54 billion, or 62% of our consolidated revenues.
Our centers produce fresh dough and purchase, receive, store and deliver quality food and other complementary items to over 99% of our U.S. and Canadian franchised stores and all of our Company-owned stores. We regularly supply over 5,800 stores with various food and supplies. Our supply chain segment made approximately 593,000 full-service deliveries in 2016 or approximately two deliveries per store per week, and we produced over 462 million pounds of dough during 2016.
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We believe our franchisees voluntarily choose to obtain food, supplies and equipment from us because we offer the most efficient, convenient and cost-effective alternative, while also offering both quality and consistency. Our supply chain segment offers profit-sharing arrangements to franchisees who purchase all of their food for their stores from our centers. These profit-sharing arrangements generally offer participating franchisees and Company-owned stores with 50% (or a higher percentage in the case of Company-owned stores and certain franchisees who operate a larger number of stores) of their regional supply chain center’s pre-tax profits. We believe these arrangements strengthen our ties and provide aligned benefits with franchisees.
Third-Party Suppliers
Over half of our annual food spend is with suppliers where we have maintained a partnership of at least 20 years. Our supply partners are required to meet strict quality standards to ensure food safety. We review and evaluate these partners’ quality assurance programs through (among other actions) on-site visits, third party audits and product evaluations to ensure compliance with our standards. We believe the length and quality of our relationships with third-party suppliers provides us with priority service and quality products at competitive prices.
Cheese is our largest food cost. The price we charge to our domestic franchisees for cheese is based on the Chicago Mercantile Exchange cheddar block price, plus a supply chain markup. As cheese prices fluctuate, our revenues and margin percentages in our supply chain segment also fluctuate; however, actual supply chain dollar margins remain unchanged. We currently purchase our domestic pizza cheese from a single supplier. Under the September 2012 agreement, our domestic supplier agreed to provide an uninterrupted supply of cheese and the Company agreed to a five-year pricing schedule to purchase all of its domestic pizza cheese from this supplier. While we expect to meet the terms of this agreement, if we do not, we will be required to repay the cost savings as outlined in the agreement. The majority of our meat toppings in the U.S. come from a single supplier under contracts that expire in March of 2017. We have the right to terminate these arrangements for quality failures and for uncured breaches.
We are party to a multi-year agreement with Coca-Cola for the contiguous United States. This contract, renegotiated in December 2013, provides for Coca-Cola to continue to be our exclusive beverage supplier and expires on December 31, 2018 or at such time as a minimum number of cases of Coca-Cola products are purchased by us, whichever occurs later.
We believe alternative third-party suppliers are available for all of these referenced products. While we may incur additional costs if we are required to replace any of our supply partners, we do not believe such additional costs would have a material adverse effect on our business. We continually evaluate each supply category to determine the optimal sourcing strategy.
We have not experienced any significant shortages of supplies or delays in receiving our inventories or products. Prices charged to us by our supply partners are subject to fluctuation, and we have historically been able to pass increased costs and savings on to our stores. We periodically enter into supplier contracts to manage the risk from changes in commodity prices. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes.
Our Strengths
Strong Brand Equity
We are the second largest pizza company in the world. We believe our Domino’s Pizza® brand is one of the most widely-recognized consumer brands in the world. We are the recognized world leader in pizza delivery and have a significant business in carryout. We believe consumers associate our brand with the timely delivery of quality, affordable food.
Over the past five years, our U.S. franchise and Company-owned stores have invested an estimated $1.6 billion in national, co-operative and local advertising. Our international franchisees also invest significant amounts in advertising efforts in their markets. We continue to reinforce our brand with extensive advertising through various media channels. We have also enhanced the strength of our brand through marketing affiliations with brands such as Coca-Cola.
We are the number one pizza delivery company in the United States with a 27.0% share of pizza delivery based on reported consumer spending. With 5,371 stores located in the contiguous United States, our store delivery areas cover a majority of U.S. households. Our share position and scale allow us to leverage our purchasing power, supply chain strength and marketing investments. We believe our scale and market coverage allow us to effectively serve our customers’ demands for convenience and timely delivery. Outside the U.S., we have significant market share positions in many of the markets in which we compete.
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Strong and Proven Business Model
Our business model is comprised of domestic and international franchise royalties and fees, revenue from supply chain and revenue from retail sales at Company-owned stores. We have developed this model over our many years of operation and it is anchored by strong store-level economics, which provide an entrepreneurial incentive for our franchisees and historically has generated demand for new stores. Our franchise system, in turn, has produced strong and consistent earnings for us through royalty payments and through supply chain revenues, with moderate capital expenditures by us.
We developed a cost-efficient store model, characterized by a delivery- and carryout-oriented store design, with moderate capital requirements and a menu of quality, affordable items. At the store level, we believe the simplicity and efficiency of our operations give us significant advantages over our competitors, who, in many cases, also focus on dine-in or have broader menu offerings. At the supply chain level, we believe we provide quality and consistency for our franchise customers while also driving profits for us, which we share with our franchisees.
Our menu simplifies and streamlines production and delivery processes and maximizes economies of scale on purchases of our principal food items. In addition, our stores are small (historically averaging approximately 1,500 square feet) and less expensive to build, furnish and maintain as compared to many other restaurant concepts. Although new stores built in our Pizza Theater design may be slightly larger than stores we have built in the past, they are still generally smaller and less expensive than many other restaurant concepts. The combination of this efficient store model and strong sales volume has resulted in strong store-level financial returns and, we believe, makes Domino’s Pizza an attractive business opportunity for existing and prospective franchisees around the world.
We believe our store economics have led to a strong, well-diversified franchise system. This established franchise system has produced strong cash flow and earnings for us, enabling us to invest in the Domino’s Pizza® brand, stores, technology and supply chain centers, pay significant dividends, repurchase and retire shares of our common stock and repurchase and retire outstanding principal on our fixed rate notes.
Technological Innovation
Technological innovation is vital to our brand and our long-term success. Digital ordering is critical to competing in the global pizza industry. In 2016, more than half of our U.S. sales came via digital platforms. That metric is higher in some of our international markets. We believe we are among the largest e-commerce retailers in terms of annual transactions. After launching digital ordering domestically in 2008, we made the strategic decision in 2010 to develop our own online ordering platform and to manage this important and growing area of our business internally. Over the next five years, we launched mobile applications that cover 95% of the smartphones and tablets on the U.S. market. In 2013, we launched an enhanced online ordering profiles platform, allowing customers the ability to reorder their favorite order in as few as five clicks, or 30 seconds. In 2014, we introduced “Dom,” a voice ordering application, which we believe is the first in the restaurant industry, and we also made the Domino’s Tracker® available on the Pebble smartwatch platform. In 2015, we introduced several innovative ordering platforms including Samsung Smart TV®, Twitter, and text message using a pizza emoji. We continued this trend of innovation in 2016 with the introduction of zero-click ordering as well as adding Google Home, Facebook Messenger, Apple Watch, and Amazon Echo to our ordering platforms.
During 2015, the Company also launched its “Piece of the Pie Rewards” loyalty program, which is meant to reward customers with a program that is simple to understand and easy to use. Upon signing up for the program, customers become rewards members and can earn points for online orders. When rewards members reach a certain amount of points, they can redeem their points for free pizza. Rewards members may also receive exclusive members-only discounts and bonus offers. We may also occasionally provide additional opportunities for participating customers to benefit under the “Piece of the Pie Rewards” program.
All of this improved functionality has been developed to work seamlessly with our Domino’s PULSE™ point-of-sale system. Our Domino’s PULSE system is designed to drive operating efficiencies for our franchisees and our corporate management and assist franchisees in independently managing their business. We have installed Domino’s PULSE in every Company-owned store in the U.S., in more than 99% of our domestic franchised stores and in over 65% of our international stores.
We believe utilizing Domino’s PULSE with our integrated technology solutions throughout our system, provides us with competitive advantages over other concepts. We intend to continue to enhance and grow our online ordering, digital marketing and technological capabilities.
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Product Innovation
In late 2009, we reintroduced our core pizza in the U.S. with a new recipe, which we believe has been key to our continued growth in customer reorder rate, consumer traffic and increased sales. This recipe is now in use in the vast majority of markets around the world. Our more than 50 years of innovation have resulted in numerous new product developments, including our more recent innovations of Handmade Pan Pizza, Specialty Chicken, Parmesan Bread Bites, Stuffed Cheesy Bread, and Marbled Cookie Brownie, among others. Product innovation is also present in our global markets, where our master franchisees have the ability to recommend products to suit their local market tastes. Products include the Mayo Jaga in Japan (bacon, potatoes and sweet mayonnaise) and the Saumoneta in France (light cream, potatoes, onions, smoked salmon and dill).
Internal Dough Manufacturing and Supply Chain System
In addition to generating significant revenues and earnings in the United States and Canada, we believe our vertically integrated dough manufacturing and supply chain system enhances the quality and consistency of our products, enhances our relationships with franchisees and leverages economies of scale to offer lower costs to our stores. It also allows store managers to better focus on store operations and customer service by relieving them of the responsibility of mixing dough in the stores and sourcing other ingredients. Many of our international master franchisees also profit from running supply chain businesses.
Our Ideals
We believe in: opportunity, hard work, inspired solutions, winning together, embracing community, and uncommon honesty.
Opportunity abounds at Domino’s. You can start in an entry-level position and become a store owner – in fact, approximately 90% of our independent domestic franchise owners started their careers with us as delivery drivers or in other in-store positions. Thousands of other team members – supervisors, trainers, quality auditors, international business consultants, marketers and executives – also began their careers in the stores. Internal growth and providing opportunities for anyone willing to work hard is the foundation of our core beliefs.
The ideals of inspired solutions, uncommon honesty and winning together were driving forces behind the relaunch of our brand. We were inspired by our harshest critics when it came to the perceived taste of our pizza. Our solution was not simply more advertising; the solution was to create a new recipe and a broader menu of great-tasting products. Our marketing campaign was shockingly honest in its approach: telling consumers (and showing them via television ads) that we heard their negative feedback and were listening. And, without the buy-in from our franchise owners, we couldn’t have done it. We believe that we can’t focus solely on the Company’s success; we must focus on making our stores and our franchisees successful. That’s winning together.
Community Involvement
We believe in supporting the communities we serve through donating our time, money and pizza. You can find more information about our community giving at biz.dominos.com. Here are two organizations worthy of note:
Our national philanthropic partner is St. Jude Children’s Research Hospital®. St. Jude is internationally-recognized for its pioneering work in finding cures and saving children with cancer and other catastrophic diseases. Through a variety of internal and consumer-based activities, including a national fundraising campaign called St. Jude Thanks and Giving_®_, the Domino’s Pizza system has contributed more than $38.0 million to St. Jude since our partnership began in 2004, including raising $7.3 million in 2016. In addition to raising funds, we have supported St. Jude through in-kind donations, including hosting hospital-wide pizza parties for patients and their families. Our system also helps St. Jude build awareness through the inclusion of the St. Jude logo on millions of our pizza boxes and through a link on our consumer website.
We also support the Domino’s Pizza Partners Foundation. Founded in 1986, the mission of the Partners Foundation is “Team Members Helping Team Members.” Primarily funded by team member and franchise contributions, the foundation is a separate, not-for-profit organization that has disbursed more than $5.3 million over the past five years to meet the needs of Domino’s team members facing crisis situations, such as fire, illness, or other personal tragedies.
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Additional Disclosures
Employees
As of January 1, 2017, we had approximately 14,100 employees in our Company-owned stores, supply chain centers, World Resource Center (our corporate headquarters) and regional offices. None of our employees are represented by a labor union or covered by a collective bargaining agreement. As franchisees are independent business owners, they and their employees are not included in our employee count. We consider our relationship with our employees and franchisees to be good. We estimate the total number of people who work in the Domino’s Pizza system, including our employees, franchisees and the employees of franchisees, was more than 290,000 as of January 1, 2017.
Working Capital
Information about the Company’s working capital is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7., pages 34 through 37.
Government Regulation
We, along with our franchisees, are subject to various federal, state and local laws affecting the operation of our business. Each store is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the jurisdiction in which the store is located. In connection with maintaining our stores, we may be required to expend funds to meet certain federal, state and local regulations, including regulations requiring that remodeled or altered stores be accessible to persons with disabilities. Difficulties in obtaining, or the failure to obtain, required licenses or approvals could delay or prevent the opening of a new store in a particular area or cause an existing store to cease operations. Our supply chain facilities are also licensed and subject to similar regulations by federal, state and local health and fire codes.
We are also subject to the Fair Labor Standards Act and various other federal and state laws governing such matters as minimum wage requirements, overtime and other working conditions and citizenship requirements. A significant number of both our and our franchisees’ food service personnel are paid at rates related to the applicable minimum wage, and past increases in the minimum wage have increased labor costs, as would future increases.
We are subject to the rules and regulations of the Federal Trade Commission and various state laws regulating the offer and sale of franchises. The Federal Trade Commission and various state laws require that we furnish a franchise disclosure document containing certain information to prospective franchisees, and a number of states require registration of the franchise disclosure document with state authorities. We are operating under exemptions from registration in several states based on the net worth of our subsidiary, Domino’s Pizza Franchising LLC, and experience. We believe our franchise disclosure document, together with any applicable state versions or supplements, and franchising procedures comply in all material respects with both the Federal Trade Commission guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises.
Internationally, our franchise stores are subject to national and local laws and regulations that are often similar to those affecting our domestic stores, including laws and regulations concerning franchises, labor, health, sanitation and safety. Our international stores are also often subject to tariffs and regulations on imported commodities and equipment, and laws regulating foreign investment. We believe our international disclosure statements, franchise offering documents and franchising procedures comply in all material respects with the laws of the foreign countries in which we have offered franchises.
Privacy and Data Protection
We are subject to a number of privacy and data protection laws and regulations globally. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increase in attention given to privacy and data protection issues with the potential to directly affect our business. This includes recently-enacted laws and regulations in the United States and internationally requiring notification to individuals and government authorities of security breaches involving certain categories of personal information. We have a privacy policy posted on our website at www.dominos.com and believe that we are in material compliance therewith.
Trademarks
We have many registered trademarks and service marks and believe that the Domino’s® mark and Domino’s Pizza® names and logos, in particular, have significant value and are important to our business. Our policy is to pursue registration of our trademarks and to vigorously oppose the infringement of any of our trademarks. We license the use of our registered marks to franchisees through franchise agreements.
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Environmental Matters
We are not aware of any federal, state or local environmental laws or regulations that we would expect to materially affect our earnings or competitive position, or result in material capital expenditures. However, we cannot predict the effect of possible future environmental legislation or regulations. During 2016, there were no material environmental compliance-related capital expenditures, and no such material expenditures are anticipated in 2017.
Seasonal Operations
The Company’s business is not typically seasonal.
Backlog Orders
The Company has no backlog orders as of January 1, 2017.
Government Contracts
No material portion of the Company’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the United States government.
Financial Information about Business Segments and Geographic Areas
Financial information about international and United States markets and business segments is incorporated herein by reference to Selected Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related footnotes in Part II, Item 6., pages 23 through 24, Item 7. and 7A., pages 25 through 41 and Item 8., pages 42 through 73, respectively, of this Form 10-K.
Available Information
The Company makes available, free of charge, through its internet website biz.dominos.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant to Section 13(a), 15(d), or 16 of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission. You may read and copy any materials filed with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. This information is also available at www.sec.gov. The reference to these website addresses does not constitute incorporation by reference of the information contained on the websites and information appearing on those websites, including biz.dominos.com, should not be considered a part of this document.
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Item 1A. Risk Factors.
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The quick service restaurant pizza category is highly competitive and such competition could adversely affect our operating results.
In the U.S., we compete against regional and local companies as well as national chains Pizza Hut®, Papa John’s® and Little Caesars Pizza®. Internationally, we compete primarily with Pizza Hut®, Papa John’s® and country-specific national and local pizzerias. We could experience increased competition from existing or new companies in the pizza category which could create increasing pressures to grow our business in order to maintain our market share. If we are unable to maintain our competitive position, we could experience downward pressure on prices, lower demand for our products, reduced margins, the inability to take advantage of new business opportunities and the loss of market share, all of which would have an adverse effect on our operating results and could cause our stock price to decline.
We also compete on a broader scale with quick service and other international, national, regional and local restaurants. The overall food service market and the quick service restaurant sector are intensely competitive with respect to food quality, price, service, image, convenience and concept, and are often affected by changes in:
| • | consumer tastes; |
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| • | international, national, regional or local economic conditions; |
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| • | disposable purchasing power; |
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| • | demographic trends; and |
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| • | currency fluctuations related to international operations. |
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We compete within the food service market and the quick service restaurant sector not only for customers, but also for management and hourly employees, suitable real estate sites and qualified franchisees. Our supply chain segment is also subject to competition from outside suppliers. While over 99% of domestic franchisees purchased food, equipment and supplies from us in 2016, domestic franchisees are not required to purchase food, equipment or supplies from us and they may choose to purchase from outside suppliers. If other suppliers who meet our qualification standards were to offer lower prices or better service to our franchisees for their ingredients and supplies and, as a result, our franchisees chose not to purchase from our domestic supply chain centers, our financial condition, business and results of operations would be adversely affected.
If we fail to successfully implement our growth strategy, which includes opening new domestic and international stores, our ability to increase our revenues and operating profits could be adversely affected.
A significant component of our growth strategy includes the opening of new domestic and international stores. We and our franchisees face many challenges in opening new stores, including, among others:
| • | availability of financing with acceptable terms; |
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| • | selection and availability of suitable new store sites and the ability to renew leases in quality locations; |
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| • | negotiation of acceptable lease or financing terms; |
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| • | securing required domestic or foreign governmental permits, licenses and approvals; |
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| • | employment and training of qualified personnel; and |
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| • | general economic and business conditions. |
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The opening of additional franchise stores also depends, in part, upon the availability of prospective franchisees who meet our criteria. Our failure to add a significant number of new stores would adversely affect our ability to increase revenues and operating income. Additionally, our growth strategy and the success of new stores depend in large part on the availability of suitable store sites. If we and our franchisees are not able to secure leases in desired locations on favorable terms, or to renew such leases, our business and results of operations may be adversely affected.
We and our franchisees are currently planning to expand our international operations in many of the markets where we currently operate and in select new markets. This may require considerable management time as well as start-up expenses for market development before any significant revenues and earnings are generated. Operations in new foreign markets may achieve low margins or may be unprofitable, and expansion in existing markets may be affected by local economic and market conditions. Therefore, as we expand internationally, we or our franchisees may not experience the operating margins we expect, our results of operations may be negatively impacted and our common stock price may decline.
We may also pursue strategic acquisitions as part of our business. If we are able to identify acquisition candidates, such acquisitions may be financed, to the extent permitted under our debt agreements, with substantial debt or with potentially dilutive issuances of equity securities.
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The food service market is affected by consumer preferences and perceptions. Changes in these preferences and perceptions may reduce the demand for our products, which would reduce sales and harm our business.
Food service businesses are affected by changes in consumer tastes, international, national, regional and local economic conditions, and demographic trends. For instance, if prevailing health or dietary preferences cause consumers to avoid pizza and other products we offer in favor of foods that are perceived as more healthy, our business and operating results would be harmed. Moreover, because we are primarily dependent on a single product, if consumer demand for pizza should decrease, our business would suffer more than if we had a more diversified menu, as many other food service businesses do. The preferences of customers also may change as a result of advances in technology or alternative delivery methods or channels. If we are not able to respond to these changes, or our competitors respond to these changes more effectively, our business and operating results could be adversely affected.
Reports of food-borne illness or food tampering could reduce sales and harm our business.
Reports, whether true or not, of food-borne illnesses (such as E. coli, avian flu, bovine spongiform encephalopathy, hepatitis A, trichinosis or salmonella) and injuries caused by food tampering have in the past severely injured the reputations of participants in the QSR sector and could in the future as well. The potential for acts of terrorism on our global food supply also exists and, if such an event occurs, it could have a negative impact on us and could severely hurt sales and profits. In addition, our reputation is an important asset; as a result, anything that damages our reputation could immediately and severely affect our sales and profits. Media reports of illnesses and injuries, whether accurate or not, could force some stores to close or otherwise reduce sales at such stores. In addition, reports of food-borne illnesses or food tampering, even those occurring solely at the restaurants of competitors, could, by resulting in negative publicity about the restaurant industry, adversely affect us on a local, regional, national or international basis.
Increases in food, labor and other costs could adversely affect our profitability and operating results.
An increase in our operating costs could adversely affect our profitability. Factors such as inflation, increased food costs, increased labor and employee health and benefit costs, increased rent costs and increased energy costs may adversely affect our operating costs. Most of the factors affecting costs are beyond our control and, in many cases, we may not be able to pass along these increased costs to our customers or franchisees. Most ingredients used in our pizza, particularly cheese, are subject to significant price fluctuations as a result of seasonality, weather, demand and other factors. The cheese block price per pound averaged $1.56 in 2016, and the estimated increase in Company-owned store food costs from a hypothetical $0.25 adverse change in the average cheese block price per pound would have been approximately $2.5 million in 2016. Labor costs are largely a function of the minimum wage for a majority of our store personnel and certain supply chain center personnel and, generally, are also a function of the availability of labor. Labor costs and food costs, including cheese, represent approximately 50% to 60% of the sales at a typical Company-owned store.
We do not have long-term contracts with certain of our suppliers, and as a result they could seek to significantly increase prices or fail to deliver.
We do not have long-term contracts or arrangements with certain of our suppliers. Although in the past we have not experienced significant problems with our suppliers, our suppliers may implement significant price increases or may not meet our requirements in a timely fashion, or at all. The occurrence of any of the foregoing could have a material adverse effect on our results of operations.
Shortages or interruptions in the supply or delivery of fresh food products could adversely affect our operating results.
We and our franchisees are dependent on frequent deliveries of food products that meet our specifications. In addition, we have single suppliers or a limited number of suppliers for certain of our ingredients, including pizza cheese. While we believe there are adequate reserve quantities and potential alternative suppliers, shortages or interruptions in the supply of food products caused by unanticipated demand, problems in production or distribution, financial or other difficulties of suppliers, inclement weather or other conditions could adversely affect the availability, quality and cost of ingredients, could adversely affect our operating results.
Any prolonged disruption in the operations of any of our dough manufacturing and supply chain centers could harm our business.
We operate 18 regional dough manufacturing and supply chain centers, one thin crust manufacturing center and one vegetable processing center in the United States and five dough manufacturing and supply chain centers in Canada. Our domestic dough manufacturing and supply chain centers service all of our Company-owned stores and over 99% of our domestic franchise stores.
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As a result, any prolonged disruption in the operations of any of these facilities, whether due to technical or labor difficulties, destruction or damage to the facility, real estate issues, limited capacity or other reasons, could adversely affect our business and operating results.
Our success depends in part upon effective advertising, and lower advertising funds may reduce our ability to adequately market the Domino’s Pizza® brand.
We have been routinely named a Leading National Advertiser by Advertising Age. Each Domino’s store located in the contiguous United States is obligated to pay a percentage of its sales in advertising fees. In fiscal 2016, each store in the contiguous United States generally was required to contribute 6% of their sales to DNAF (subject, in limited instances, to lower rates based on certain incentives and waivers), which uses such fees for national advertising in addition to contributions for local market-level advertising. We currently anticipate that this 6% contribution rate will remain in place for the foreseeable future. While additional funds for advertising in the past have been provided by us, our franchisees and other third parties, none of these additional funds are legally required. The lack of continued financial support for advertising activities could significantly curtail our marketing efforts, which may in turn materially and adversely affect our business and our operating results.
We face risks of litigation and negative publicity from customers, franchisees, suppliers, employees and others in the ordinary course of business, which can or could divert our financial and management resources. Any adverse litigation or publicity may negatively impact our financial condition and results of operations.
Claims of illness or injury relating to food quality or food handling are common in the food service industry, and vehicular accidents and injuries occur in the food delivery business. Claims within our industry of improper supplier actions also occasionally arise that, if made against one of our suppliers, could potentially damage our brand image. In addition, class action lawsuits have been filed, and may continue to be filed, against various quick service restaurants alleging, among other things, that quick service restaurants have failed to disclose the health risks associated with high-fat foods and that quick service restaurant marketing practices have encouraged obesity. In addition to decreasing our sales and profitability and diverting our management resources, adverse publicity or a substantial judgment against us could negatively impact our financial condition, results of operations and brand reputation, thereby hindering our ability to attract and retain franchisees and grow our business.
Further, we may be subject to employee, franchisee and other claims in the future based on, among other things, discrimination, harassment, wrongful termination and wage, rest break and meal break issues, and those claims relating to overtime compensation. We are currently subject to these types of claims and have been subject to these types of claims in the past. If one or more of these claims were to be successful or if there is a significant increase in the number of these claims or if we receive significant negative publicity, our business, financial condition and operating results could be harmed.
Loss of key employees or our inability to attract and retain new qualified employees could hurt our business and inhibit our ability to operate and grow successfully.
Our success in the highly competitive pizza delivery and carry-out business will continue to depend to a significant extent on our leadership team and other key management personnel. Other than with our President and Chief Executive Officer, J. Patrick Doyle, we do not have long-term employment agreements with any of our executive officers. As a result, we may not be able to retain our executive officers and key personnel or attract additional qualified management. While we do not have long-term employment agreements with our executive officers, for all of our executive officers we have non-compete and non-solicitation agreements that extend for 24 months following the termination of such executive officer’s employment. Our success will also continue to depend on our ability to attract and retain qualified personnel to operate our stores, dough manufacturing and supply chain centers and international operations. The loss of these employees or our inability to recruit and retain qualified personnel could have a material adverse effect on our operating results.
Adverse global economic conditions subject us to additional risk.
Our financial condition and results of operations are impacted by global markets and economic conditions over which neither we nor our franchisees have control. An economic downturn, including deterioration in the economic conditions in the U.S. or international markets where we compete, may result in a reduction in the demand for our products, longer payment cycles, slower adoption of new technologies and increased price competition. Poor economic conditions may adversely affect the ability of our franchisees to pay royalties or amounts owed, and could have a material adverse impact on our ability to pursue our growth strategy, which would reduce cash collections and in turn, may materially and adversely affect our ability to service our debt obligations.
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Our international operations subject us to additional risk. Such risks and costs may differ in each country in which we and our franchisees do business and may cause our profitability to decline due to increased costs.
We conduct a significant and growing portion of our business outside the United States. Our financial condition and results of operations may be adversely affected if global markets in which our franchise stores compete are affected by changes in political, economic or other factors. These factors, over which neither we nor our franchisees have control, may include:
| • | recessionary or expansive trends in international markets; |
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| • | changing labor conditions and difficulties in staffing and managing our foreign operations; |
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| • | increases in the taxes we pay and other changes in applicable tax laws; |
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| • | legal and regulatory changes, and the burdens and costs of our compliance with a variety of foreign laws; |
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| • | changes in inflation rates; |
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| • | changes in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds; |
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| • | difficulty in collecting our royalties and longer payment cycles; |
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| • | expropriation of private enterprises; |
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| • | increases in anti-American sentiment and the identification of the Domino’s Pizza® brand as an American brand; |
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| • | political and economic instability and uncertainty around the world, including uncertainty arising as a result of the United Kingdom’s referendum in June 2016 in which voters approved an exit from the European Union, commonly referred to as “Brexit”; and |
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| • | other external factors. |
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Fluctuations in the value of the U.S. dollar in relation to other currencies may lead to lower revenues and earnings.
Exchange rate fluctuations could have an adverse effect on our results of operations. Approximately 7.2% of our total revenues in 2016, 7.4% of our total revenues in 2015 and 7.7% of our total revenues in 2014 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. Sales made by franchise stores outside the United States are denominated in the currency of the country in which the store is located, and this currency could become less valuable in U.S. dollars as a result of exchange rate fluctuations. Unfavorable currency fluctuations could lead to increased prices to customers outside the United States or lower profitability to our franchisees outside the United States, or could result in lower revenues for us, on a U.S. dollar basis, from such customers and franchisees. A hypothetical 10% adverse change in the foreign currency rates in our international markets would have resulted in a negative impact on international royalty revenues of approximately $16.7 million in 2016.
We may not be able to adequately protect our intellectual property, which could harm the value of our brand and branded products and adversely affect our business.
We depend in large part on our brand and branded products and believe that they are very important to our business. We rely on a combination of trademarks, copyrights, service marks, trade secrets and similar intellectual property rights to protect our brand and branded products. The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We have registered certain trademarks and have other trademark registrations pending in the United States and foreign jurisdictions. Not all of the trademarks that we currently use have been registered in all of the countries in which we do business, and they may never be registered in all of these countries. We may not be able to adequately protect our trademarks and our use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. All of the steps we have taken to protect our intellectual property in the United States and in foreign countries may not be adequate. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Further, through acquisitions of third parties, we may acquire brands and related trademarks that are subject to the same risks as the brands and trademarks we currently own.
We may, from time to time, be required to institute or defend litigation to enforce our trademarks or other intellectual property rights, or to protect our trade secrets. Such litigation could result in substantial costs and diversion of resources and could negatively affect our sales, profitability and prospects regardless of whether we are able to successfully enforce our rights.
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Our earnings and business growth strategy depends on the success of our franchisees, and we may be harmed by actions taken by our franchisees, or employees of our franchisees, that are outside of our control.
A significant portion of our earnings comes from royalties and fees generated by our franchise stores. Franchisees are independent operators, and their employees are not our employees. We provide tools for franchisees to use in training their employees, but the quality of franchise store operations and our brand and branded products may be diminished by any number of factors beyond our control. Franchisees may not operate stores in a manner consistent with our standards and requirements or they or their employees may take other actions that adversely affect the value of our brand. In such event, our business and reputation may suffer, and as a result our revenues and stock price could decline.
As of January 1, 2017, we had 799 domestic franchisees operating 4,979 domestic stores. Fourteen of these franchisees each own and operate over 50 domestic stores, including our largest domestic franchisee who owns and operates 189 stores, and the average franchisee owns and operates six stores.
Our international master franchisees are generally responsible for the development of significantly more stores than our domestic franchisees. As a result, our international operations are more closely tied to the success of a smaller number of franchisees than our domestic operations. Our largest international master franchisee operates 1,990 stores in seven markets, which accounts for approximately 24% of our total international store count. Our domestic and international franchisees may not operate their franchises successfully. If one or more of our key franchisees were to become insolvent or otherwise were unable or unwilling to pay us our royalties or other amounts owed, our business and results of operations would be adversely affected.
The occurrence of cyber incidents, or a deficiency in cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of confidential information, or damage to our employee and business relationships, any of which could subject us to loss and harm our brand.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information about customers, franchisees, suppliers or employees. A number of retailers and other companies have recently experienced serious cyber incidents and breaches of their information technology systems. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. The three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationships with customers, franchisees and employees and private data exposure. In addition to maintaining insurance coverage to address cyber incidents, we have also implemented processes, procedures and controls to help mitigate these risks. However, these measures, as well as our increased awareness of the risk of a cyber incident, do not guarantee that our reputation and financial results will not be adversely affected by such an incident.
Because we and our franchisees accept electronic forms of payment from customers, our business requires the collection and retention of customer data, including sensitive data and other personally identifiable information in various information systems that we and our franchisees maintain and in those maintained by third parties with whom we and our franchisees contract to provide payment processing. We also maintain important internal Company data, such as personally identifiable information about our employees and franchisees and information relating to our operations. Our use of personally identifiable information is regulated by foreign, federal and state laws, as well as by certain third-party agreements. As privacy and information security laws and regulations change, we may incur additional costs to ensure that we remain in compliance with those laws and regulations. If our security and information systems are compromised or if our employees or franchisees fail to comply with these laws, regulations or contract terms, and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation and could disrupt our operations and result in costly litigation, judgments or penalties. A cyber incident could also require us to notify customers, employees or other groups, result in adverse publicity, loss of sales and profits, increase fees payable to third parties and result in penalties or remediation and other costs that could adversely affect our business and results of operations.
We are subject to extensive government regulation and requirements issued by other groups and our failure to comply with existing or increased regulations could adversely affect our business and operating results.
We are subject to numerous federal, state, local and foreign laws and regulations, as well as requirements issued by other groups, including those relating to:
| • | the preparation, sale and labeling of food; |
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| • | building and zoning requirements; |
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| • | environmental protection; |
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| • | minimum wage, overtime and other labor requirements; |
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| • | compliance with securities laws and New York Stock Exchange listed company rules; |
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| • | compliance with the Americans with Disabilities Act of 1990, as amended; |
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| • | working and safety conditions; |
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| • | menu labeling and other nutritional requirements; |
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| • | compliance with the Payment Card Industry Data Security Standards and similar requirements; |
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| • | compliance with the Patient Protection and Affordable Care Act, and subsequent amendments (the “Affordable Care Act”); and |
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| • | compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules promulgated thereunder. |
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The Affordable Care Act requires employers such as us to provide health insurance for all qualifying employees or pay penalties for not providing coverage. The majority of the increases in these costs began in 2015, and while the incremental costs of this program have not been material to us to date, we cannot predict what effect these costs will have on our results of operations and financial position, or the effects of the Affordable Care Act on some of our larger franchisees. Modifications to, or repeal of, all or certain provisions of the Affordable Care Act are possible, consistent with statements made by certain elected officials.
We may also become subject to legislation or regulation seeking to tax and/or regulate high-fat foods, foods with high sugar and salt content, or foods otherwise deemed to be “unhealthy.” If we fail to comply with existing or future laws and regulations, we may be subject to governmental or judicial fines or sanctions. In addition, our capital expenditures could increase due to remediation measures that may be required if we are found to be noncompliant with any of these laws or regulations.
We are also subject to a Federal Trade Commission rule and to various state and foreign laws that govern the offer and sale of franchises. Additionally, these laws regulate various aspects of the franchise relationship, including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines or other penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and operating results.
Our current insurance coverage may not be adequate, insurance premiums for such coverage may increase and we may not be able to obtain insurance at acceptable rates, or at all.
We have retention programs for workers’ compensation, general liability and owned and non-owned automobile liabilities. We are generally responsible for up to $1.0 million per occurrence under these retention programs for workers’ compensation and general liability. We are also generally responsible for between $500,000 and $3.0 million per occurrence under these retention programs for owned and non-owned automobile liabilities. Total insurance limits under these retention programs vary depending upon the period covered and range up to $110.0 million per occurrence for general liability and owned and non-owned automobile liabilities and up to the applicable statutory limits for workers’ compensation. These insurance policies may not be adequate to protect us from liabilities that we incur in our business. In addition, in the future our insurance premiums may increase and we may not be able to obtain similar levels of insurance on reasonable terms, or at all. Any such inadequacy of, or inability to obtain insurance coverage could have a material adverse effect on our business, financial condition and results of operations.
Our annual and quarterly financial results are subject to significant fluctuations depending on various factors, many of which are beyond our control, and if we fail to meet the expectations of securities analysts or investors, our share price may decline significantly.
Our sales and operating results can vary significantly from quarter-to-quarter and year-to-year depending on various factors, many of which are beyond our control. These factors include, among other things:
| • | variations in the timing and volume of our sales and our franchisees’ sales; |
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| • | the timing of expenditures in anticipation of future sales; |
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| • | sales promotions by us and our competitors; |
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| • | changes in competitive and economic conditions generally; |
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| • | changes in the cost or availability of our ingredients or labor; and |
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| • | foreign currency exposure. |
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As a result, our operational performance may decline quickly and significantly in response to changes in order patterns or rapid decreases in demand for our products. We anticipate that fluctuations in operating results will continue in the future.
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Our common stock price could be subject to significant fluctuations and/or may decline.
The market price of our common stock could be subject to significant fluctuations. Among the factors that could affect our stock price are:
| • | planned or actual changes to our capital or debt structure; |
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| • | variations in our operating results; |
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| • | changes in revenues or earnings estimates or publication of research reports by analysts; |
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| • | speculation in the press or investment community; |
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| • | strategic actions by us or our competitors, such as sales promotions, acquisitions or restructurings; |
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| • | actions by institutional and other stockholders; |
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| • | changes in our dividend policy or any share repurchase program; |
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| • | changes in the market values of public companies that operate in our business segments; |
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| • | general market conditions; and |
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| • | domestic and international economic factors unrelated to our performance. |
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The stock markets in general have experienced volatility that has sometimes been unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline.
Our substantial indebtedness could adversely affect our business and limit our ability to plan for or respond to changes in our business.
We have a substantial amount of indebtedness. As of January 1, 2017, our consolidated long-term indebtedness was approximately $2.19 billion. We may also incur additional debt, which would not be prohibited under the terms of our current securitized debt agreements. Our substantial indebtedness could have important consequences to our business and our shareholders. For example, it could:
| • | make it more difficult for us to satisfy our obligations with respect to our debt agreements; |
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| • | increase our vulnerability to general adverse economic and industry conditions; |
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| • | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes; and |
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| • | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, thereby placing us at a competitive disadvantage compared to our peers that may have less debt. |
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In addition, the financial and other covenants we agreed to with our lenders may limit our ability to incur additional indebtedness, make investments, pay dividends and engage in other transactions, and the leverage may cause potential lenders to be less willing to loan funds to us in the future. Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of repayment of all of our indebtedness.
We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which would adversely affect our financial condition and results of operations.
Our ability to make principal and interest payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations, in the amounts projected or at all, or if future borrowings are not available to us under our variable funding notes in amounts sufficient to fund our other liquidity needs, our financial condition and results of operations may be adversely affected. If we cannot generate sufficient cash flow from operations to make scheduled principal amortization and interest payments on our debt obligations in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. If we are unable to refinance any of our indebtedness on commercially reasonable terms or at all or to effect any other action relating to our indebtedness on satisfactory terms or at all, our business may be harmed.
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The terms of our securitized debt financing of certain of our wholly-owned subsidiaries have restrictive terms and our failure to comply with any of these terms could put us in default, which would have an adverse effect on our business and prospects.
Unless and until we repay all outstanding borrowings under our securitized debt, we will remain subject to the restrictive terms of these borrowings. The securitized debt, under which certain of our wholly-owned subsidiaries issued and guaranteed fixed rate notes and variable funding senior revolving notes, contain a number of covenants, with the most significant financial covenant being a debt service coverage calculation. These covenants limit the ability of certain of our subsidiaries to, among other things:
| • | sell assets; |
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| • | alter the business we conduct; |
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| • | engage in mergers, acquisitions and other business combinations; |
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| • | declare dividends or redeem or repurchase capital stock; |
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| • | incur, assume or permit to exist additional indebtedness or guarantees; |
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| • | make loans and investments; |
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| • | incur liens; and |
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| • | enter into transactions with affiliates. |
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The securitized debt also requires us to maintain specified financial ratios at the end of each fiscal quarter. These restrictions could affect our ability to pay dividends or repurchase shares of our common stock. Our ability to meet these financial ratios can be affected by events beyond our control, and we may not satisfy such a test. A breach of this covenant could result in a rapid amortization event or default under the securitized debt. If amounts owed under the securitized debt are accelerated because of a default under the securitized debt and we are unable to pay such amounts, the investors may have the right to assume control of substantially all of the securitized assets.
During the term following issuance, the outstanding senior notes will accrue interest at fixed rates. Additionally, our senior notes have original scheduled principal payments of $38.6 million in each of 2017 and 2018, $878.5 million in 2019, $488.0 million in 2020, $8.0 million in each of 2021 through 2024 and $728.0 million in 2025. In accordance with our debt agreements, the payment of principal on the outstanding senior notes (i) shall be suspended if the leverage ratios for the Company are less than or equal to 4.5x total debt to EBITDA and there are no scheduled principal catch-up amounts outstanding; provided, that during any such suspension, principal payments will continue to accrue and are subject to catch-up upon failure to satisfy the leverage ratios, or (ii) on and after the payment in full of the 2012 fixed rate senior secured notes, may be suspended if the leverage ratios for the Company are less than or equal to 5.0x total debt to EBITDA and no catch up provisions are applicable.
If we are unable to refinance or repay amounts under the securitized debt prior to the expiration of the term, our cash flow would be directed to the repayment of the securitized debt and, other than a weekly management fee sufficient to cover minimal selling, general and administrative expenses, would not be available for operating our business.
No assurance can be given that any refinancing or additional financing will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and capital markets and other factors beyond our control. There can be no assurance that market conditions will be favorable at the times that we require new or additional financing.
The indenture governing the securitized debt will restrict the cash flow from the entities subject to the securitization to any of our other entities and upon the occurrence of certain events, cash flow would be further restricted.
In the event that a rapid amortization event occurs under the indenture (including, without limitation, upon an event of default under the indenture or the failure to repay the securitized debt at the end of its term), the funds available to us would be reduced or eliminated, which would in turn reduce our ability to operate or grow our business.
Item 1B. Unresolved Staff Comments.
| --- | --- |
None.
Item 2. Properties.
| --- | --- |
We lease approximately 235,000 square feet for our World Resource Center located in Ann Arbor, Michigan under an operating lease with Domino’s Farms Office Park, L.L.C., an unrelated company. The lease, as amended, expires in December 2022 and has two five-year renewal options.
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We own one domestic Company-owned store building and five supply chain center buildings. We also own two store buildings that we lease to domestic franchisees. All other domestic Company-owned stores are leased by us, typically under five-year leases with one or two five-year renewal options. All other domestic and international supply chain centers are leased by us, typically under leases ranging between five and 15 years with one or two five-year renewal options. All other franchise stores are leased or owned directly by the respective franchisees. We believe that our existing headquarters and other leased and owned facilities are adequate to meet our current requirements.
Item 3. Legal Proceedings.
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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.
Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Included in the ordinary course litigation matters referenced above, we are party to three employment practice cases and two casualty cases. We have established legal and insurance accruals for losses relating to these cases which we believe are reasonable based upon our assessment of the current facts and circumstances. However, it is reasonably possible that our ultimate losses could exceed the amounts recorded by $6.9 million. The remaining cases referenced above could be decided unfavorably to us and could require us to pay damages or make other expenditures in amounts or a range of amounts that cannot be estimated with accuracy. In management’s opinion, these matters, individually and in the aggregate, should not have a significant adverse effect on the financial condition of the Company, and the established accruals adequately provide for the estimated resolution of such claims.
On February 14, 2011, Domino’s Pizza LLC was named as a defendant in a lawsuit along with Fischler Enterprises of C.F., Inc., a franchisee, and Jeffrey S. Kidd, the franchisee’s delivery driver, filed by Yvonne Wiederhold, the plaintiff, as Personal Representative of the Estate of Richard E. Wiederhold, deceased. The case involved a traffic accident in which the franchisee’s delivery driver is alleged to have caused an accident involving a vehicle driven by Richard Wiederhold. Mr. Wiederhold sustained spinal injuries resulting in quadriplegia and passed away several months after the accident. The jury returned a $10.1 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 90% liable (after certain offsets and other deductions the final verdict was $8.9 million). In the second quarter of 2016, the trial court ruled on all post-judgment motions and entered the judgment. The Company denies liability and in the third quarter of 2016 filed an appeal of the verdict on a variety of grounds.
On September 11, 2012, Domino’s Pizza LLC was named as a defendant in a lawsuit along with MAC Pizza Management, Inc., a large franchisee, and Joshua Balka, the franchisee’s delivery driver, filed by Raghurami Reddy, the plaintiff. The case involved a traffic accident in which the franchisee’s delivery driver collided with another vehicle, where the driver of the other vehicle sustained head injuries and the passenger of the other vehicle sustained fatal injuries. The jury delivered a $32.0 million judgment for the plaintiff where the Company was found to be 60% liable. The Company denied liability and filed an appeal of the verdict on a variety of grounds. In the first quarter of 2015, the appellate court reversed the trial court’s decision and dismissed the claims against the Company. The plaintiff filed a Petition for Review with the Supreme Court of the State of Texas. The Company filed opposition to the writ of review and asserted that the claims were appropriately dismissed by the Court of Appeals of the State of Texas. In the second quarter of 2016, the Texas Supreme Court rejected the plaintiffs’ writ of certiorari, leaving the appellate court’s favorable decision to stand. During the fourth quarter of 2016, the Plaintiff filed a petition for writ of certiorari with the United States Supreme Court. In the fourth quarter of 2016, the United States Supreme Court denied the writ of certiorari. Plaintiff has exhausted all appellate rights and the Texas Court of Appeals order dismissing all claims against Domino’s Pizza LLC stands.
While we may occasionally be party to large claims, including class action suits, we do not believe that these matters, individually or in the aggregate, will materially affect our financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
| --- | --- |
Not applicable.
Item 4A. Executive Officers of the Registrant.
| --- | --- |
The listing of executive officers of the Company is set forth under Part III Item 10. Directors, Executive Officers and Corporate Governance on pages 75 through 77, which is incorporated herein by reference.
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Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
| --- | --- |
As of February 21, 2017, Domino’s Pizza, Inc. had 170,000,000 authorized shares of common stock, par value $0.01 per share, of which 48,051,144 were issued and outstanding. Domino’s Pizza, Inc.’s common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “DPZ.”
The following table presents the high and low closing prices by quarter for Domino’s Pizza, Inc.’s common stock, as reported by the NYSE, and dividends declared per common share.
| High | Low | Dividends Declared Per Share | ||||||||||
| 2015: | ||||||||||||
| First quarter (December 29, 2014 – March 22, 2015) | $ | 104.63 | $ | 94.17 | $ | 0.31 | ||||||
| Second quarter (March 23, 2015 – June 14, 2015) | 113.96 | 98.36 | 0.31 | |||||||||
| Third quarter (June 15, 2015 – September 6, 2015) | 119.43 | 101.78 | 0.31 | |||||||||
| Fourth quarter (September 7, 2015 – January 3, 2016) | 112.95 | 101.62 | 0.31 | |||||||||
| 2016: | ||||||||||||
| First quarter (January 4, 2016 – March 27, 2016) | $ | 134.39 | $ | 104.16 | $ | 0.38 | ||||||
| Second quarter (March 28, 2016 – June 19, 2016) | 140.01 | 118.56 | 0.38 | |||||||||
| Third quarter (June 20, 2016 – September 11, 2016) | 151.00 | 122.08 | 0.38 | |||||||||
| Fourth quarter (September 12, 2016 – January 1, 2017) | 172.26 | 149.66 | 0.38 | |||||||||
Our Board of Directors declared a quarterly dividend of $0.46 per common share on February 15, 2017 payable on March 30, 2017 to shareholders of record at the close of business on March 15, 2017.
We currently anticipate continuing the payment of quarterly cash dividends. The actual amount of such dividends, if any, will depend upon future earnings, results of operations, capital requirements, our financial condition and certain other factors. There can be no assurance as to the amount of free cash flow that we will generate in future years and, accordingly, dividends will be considered after reviewing returns to shareholders, profitability expectations and financing needs and will be declared at the discretion of our Board of Directors.
As of February 21, 2017, there were 1,306 registered holders of record of Domino’s Pizza, Inc.’s common stock.
We have a Board of Directors-approved share repurchase program for up to $250.0 million of our common stock, of which $149.1 million remained available at January 1, 2017 for future purchases of our common stock. Any future purchases of our common stock would be funded by current cash amounts, available borrowings or future excess cash flow. The following table summarizes our repurchase activity during the fourth quarter ended January 1, 2017:
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program | ||||||||||||
| Period #1 (September 12, 2016 to October 9, 2016) | — | $ | — | — | $ | 165,531,424 | ||||||||||
| Period #2 (October 10, 2016 to November 6, 2016) | 1,827 | 151.85 | — | 165,531,424 | ||||||||||||
| Period #3 (November 7, 2016 to December 4, 2016) | 39,939 | 160.57 | 38,894 | 159,295,327 | ||||||||||||
| Period #4 (December 5, 2016 to January 1, 2017) | 64,567 | 160.07 | 63,500 | 149,139,484 | ||||||||||||
| Total | 106,333 | $ | 160.12 | 102,394 | $ | 149,139,484 | ||||||||||
| (1) | 3,939 shares were purchased as part of the Company’s employee stock purchase discount plan. During the fourth quarter, the shares were purchased at an average price of $160.85. |
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The following comparative stock performance line graph compares the cumulative shareholder return on the common stock of Domino’s Pizza, Inc. for the five-year period between December 31, 2011 and December 31, 2016, with cumulative total return on (i) the Total Return Index for the New York Stock Exchange (the “NYSE Composite Index”), (ii) the Standard & Poor’s 500 Index (the “S&P 500”) and (iii) the peer group, the Standard & Poor’s 400 Restaurant Index (the “S&P 400 Restaurant Index”). Management believes that the companies included in the S&P 400 Restaurant Index appropriately reflect the scope of the Company’s operations and match the competitive market in which the Company operates. The cumulative total return computations set forth in the performance graph assume the investment of $100 in the Company’s common stock, the NYSE Composite Index, the S&P 500 Index and the S&P 400 Restaurant Index on December 31, 2011.
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Item 6. Selected Financial Data.
| --- | --- |
The following selected financial data set forth should be read in conjunction with, and is qualified by reference to, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in this Form 10-K. The selected financial data, with the exception of store counts and same store sales growth, has been derived from the audited consolidated financial statements of Domino’s Pizza, Inc. and subsidiaries. This historical data is not necessarily indicative of results to be expected for any future period.
| Fiscal year ended (5) | ||||||||||||||||||||
| (dollars in millions, except per share data) | January 1, 2017 | January 3, 2016 (3) | December 28, 2014 | December 29, 2013 | December 30, 2012 (4) | |||||||||||||||
| Income statement data: | ||||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Domestic Company-owned stores | $ | 439.0 | $ | 396.9 | $ | 348.5 | $ | 337.4 | $ | 323.7 | ||||||||||
| Domestic franchise | 312.3 | 272.8 | 230.2 | 212.4 | 195.0 | |||||||||||||||
| Domestic stores | 751.3 | 669.7 | 578.7 | 549.8 | 518.7 | |||||||||||||||
| Supply chain | 1,544.3 | 1,383.2 | 1,262.5 | 1,118.9 | 1,039.8 | |||||||||||||||
| International franchise | 177.0 | 163.6 | 152.6 | 133.6 | 120.0 | |||||||||||||||
| Total revenues | 2,472.6 | 2,216.5 | 1,993.8 | 1,802.2 | 1,678.4 | |||||||||||||||
| Cost of sales | 1,704.9 | 1,533.4 | 1,399.1 | 1,253.2 | 1,177.1 | |||||||||||||||
| Operating margin | 767.7 | 683.1 | 594.8 | 549.0 | 501.3 | |||||||||||||||
| General and administrative expense | 313.6 | 277.7 | 249.4 | 235.2 | 219.0 | |||||||||||||||
| Income from operations | 454.0 | 405.4 | 345.4 | 313.8 | 282.3 | |||||||||||||||
| Interest income | 0.7 | 0.3 | 0.1 | 0.2 | 0.3 | |||||||||||||||
| Interest expense | (110.1 | ) | (99.5 | ) | (86.9 | ) | (88.9 | ) | (101.4 | ) | ||||||||||
| Income before provision for income taxes | 344.7 | 306.2 | 258.6 | 225.1 | 181.2 | |||||||||||||||
| Provision for income taxes | 130.0 | 113.4 | 96.0 | 82.1 | 68.8 | |||||||||||||||
| Net income | $ | 214.7 | $ | 192.8 | $ | 162.6 | $ | 143.0 | $ | 112.4 | ||||||||||
| Earnings per share: | ||||||||||||||||||||
| Common stock – basic | $ | 4.41 | $ | 3.58 | $ | 2.96 | $ | 2.58 | $ | 1.99 | ||||||||||
| Common stock – diluted | 4.30 | 3.47 | 2.86 | 2.48 | 1.91 | |||||||||||||||
| Dividends declared per share | $ | 1.52 | $ | 1.24 | $ | 1.00 | $ | 0.80 | $ | 3.00 | ||||||||||
| Balance sheet data (at end of period): | ||||||||||||||||||||
| Cash and cash equivalents | $ | 42.8 | $ | 133.4 | $ | 30.9 | $ | 14.4 | $ | 54.8 | ||||||||||
| Restricted cash and cash equivalents | 126.5 | 180.9 | 121.0 | 125.5 | 60.0 | |||||||||||||||
| Working capital (1) | (34.3 | ) | 45.7 | 41.8 | (28.5 | ) | 16.8 | |||||||||||||
| Total assets | 716.3 | 799.8 | 596.3 | 496.6 | 443.4 | |||||||||||||||
| Total debt net of debt issuance cost | 2,187.9 | 2,240.8 | 1,500.6 | 1,507.7 | 1,526.0 | |||||||||||||||
| Total stockholders’ deficit | (1,883.1 | ) | (1,800.3 | ) | (1,219.5 | ) | (1,290.2 | ) | (1,335.5 | ) | ||||||||||
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| Fiscal year ended (5) | ||||||||||||||||||||
| (dollars in millions) | January 1, 2017 | January 3, 2016(3) | December 28, 2014 | December 29, 2013 | December 30, 2012 (4) | |||||||||||||||
| Other financial data: | ||||||||||||||||||||
| Depreciation and amortization | $ | 38.1 | $ | 32.4 | $ | 35.8 | $ | 25.8 | $ | 23.2 | ||||||||||
| Capital expenditures | 61.5 | 62.4 | 71.8 | 40.4 | 29.3 | |||||||||||||||
| Same store sales growth (2): | ||||||||||||||||||||
| Domestic Company-owned stores | 10.4 | % | 12.2 | % | 6.2 | % | 3.9 | % | 1.3 | % | ||||||||||
| Domestic franchise stores | 10.5 | % | 11.9 | % | 7.7 | % | 5.5 | % | 3.2 | % | ||||||||||
| Domestic stores | 10.5 | % | 12.0 | % | 7.5 | % | 5.4 | % | 3.1 | % | ||||||||||
| International stores | 6.3 | % | 7.8 | % | 6.9 | % | 6.2 | % | 5.2 | % | ||||||||||
| Store counts (at end of period): | ||||||||||||||||||||
| Domestic Company-owned stores | 392 | 384 | 377 | 390 | 388 | |||||||||||||||
| Domestic franchise stores | 4,979 | 4,816 | 4,690 | 4,596 | 4,540 | |||||||||||||||
| Domestic stores | 5,371 | 5,200 | 5,067 | 4,986 | 4,928 | |||||||||||||||
| International stores | 8,440 | 7,330 | 6,562 | 5,900 | 5,327 | |||||||||||||||
| Total stores | 13,811 | 12,530 | 11,629 | 10,886 | 10,255 |
| (1) | The working capital amounts exclude restricted cash amounts of $126.5 million in 2016, $180.9 million in 2015, $121.0 million in 2014, $125.5 million in 2013 and $60.0 million in 2012. |
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| (2) | Same store sales growth is calculated including only sales from stores that also had sales in the comparable period of the prior year, but excluding sales from certain seasonal locations such as stadiums and concert arenas. International same store sales growth is calculated similarly to domestic 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. The 53rd week in fiscal 2015 had no impact on reported same store sales growth amounts. |
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| (3) | In connection with our 2015 Recapitalization, the Company issued $1.3 billion of fixed rate notes. A portion of the proceeds from the 2015 Recapitalization were used to make an optional prepayment of approximately $551.3 million in aggregate principal amount of the 2012 fixed rate notes, at par, pay scheduled principal catch-up amounts on the 2012 fixed rate notes, make an interest reserve deposit, pre-fund a portion of the principal and interest payable on the 2015 fixed rate notes and pay transaction fees and expenses. Additionally, as part of the 2015 Recapitalization, the Company’s Board of Directors authorized a share repurchase program to repurchase up to $800.0 million of the Company’s common stock. This share repurchase program replaced a previously existing $200.0 million share repurchase program. Refer to Note 4 of the financial statements for additional detail related to the 2015 Recapitalization. |
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| (4) | In connection with our 2012 Recapitalization, the Company borrowed $1.575 billion of fixed rate notes and used a portion of the proceeds from the borrowings to repay in full the outstanding principal under the Company’s notes, pay accrued interest on the Company’s notes, pay transaction-related fees and expenses and fund a reserve account for the payment of interest on the 2012 fixed rate notes. Refer to Note 4 of the financial statements for additional detail related to the 2012 Recapitalization. |
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| (5) | The 2015 fiscal year includes 53 weeks and the 2016, 2014, 2013, and 2012 fiscal years each include 52 weeks. |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Overview
Our fiscal year typically includes 52 weeks, comprised of three twelve-week quarters and one sixteen-week quarter. Every five or six years our fiscal year includes an extra (or 53rd) week in the fourth quarter. Fiscal 2015 consisted of 53 weeks, while fiscal 2016 and fiscal 2014 each consisted of 52 weeks.
Description of the Business
Domino’s is the second largest pizza restaurant chain in the world, with more than 13,800 locations in over 85 markets around the world. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. Although we are a highly-recognized global brand, we focus on serving the local neighborhoods in which we live and do business through our large network of franchise owners and Company-owned stores. On average, we sell more than 2 million pizzas each day throughout our global system.
Our business model is straightforward: we handcraft and serve quality food at a competitive price, with easy ordering access and efficient service, enhanced by our technology innovations. Our dough is generally made fresh and distributed to stores around the world by us and our franchisees.
Domino’s generates revenues and earnings by charging royalties to its franchisees. Royalties are ongoing percent-of-sales fees for use of the Domino’s brand marks. The Company also generates revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada, and by operating a number of our own stores. 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 ingredients and equipment to those sub-franchisees, as well as by running pizza stores. Everyone in the system can benefit, including the end consumer, who can feed their family Domino’s menu items conveniently and economically.
Our business model can yield strong returns for our franchise owners and Company-owned stores. It can also yield significant cash flow 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 since becoming a publicly-traded company.
Fiscal 2016 Highlights
| • | Global retail sales (which are total retail sales at Company-owned and franchised stores worldwide) increased 9.8% as compared to 2015. |
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| • | Same store sales increased 10.5% in our domestic stores and increased 6.3% in our international stores. |
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| • | Our revenues increased 11.6%. |
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| • | Our income from operations increased 12.0%. |
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| • | Our net income increased 11.4%. |
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During 2016, we continued our rapid global expansion with the opening of 1,281 net new stores. Our international franchise segment led the way with a record 1,110 net new store openings.
We continued our focus on growing online ordering and the digital customer experience as we introduced new innovative ordering platforms including zero-click ordering, Google Home, Facebook Messenger, Apple Watch, and Amazon Echo. Our emphasis on technology innovation helped us generate more than half of U.S. sales from digital channels in 2016, as well as reach an estimated $5.6 billion in global digital sales. Overall, we believe our focus in 2016 on global growth and technology will continue to strengthen our brand in the future.
Fiscal 2015 Highlights
| • | Global retail sales increased 11.1% as compared to 2014. |
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| • | Same store sales increased 12.0% in our domestic stores and increased 7.8% in our international stores. |
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| • | Our revenues increased 11.2%. |
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| • | Our income from operations increased 17.4%. |
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| • | Our net income increased 18.6%. |
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| • | The inclusion of the 53rd week in 2015 positively impacted our results. |
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During 2015, we continued our rapid global expansion with the opening of 901 net new stores. Our international franchise segment led the way with 768 net new store openings.
We continued our focus on growing online ordering and the digital customer experience as we introduced several innovative ordering platforms, including Samsung Smart TV® as well as Twitter and text message using a pizza emoji. Our emphasis on technology innovation helped us generate approximately 50% of U.S. sales from digital channels in 2015, as well as reach an estimated $4.7 billion in global digital sales. During the year, the Company also launched its “Piece of the Pie Rewards” loyalty program, which is meant to reward customers with a program that is simple to understand and easy to use. Upon signing up for the program, customers become rewards members and can earn points for online orders. When rewards members reach a certain amount of points, they can redeem their points for free pizza.
Critical accounting policies and estimates
The following discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, our management evaluates its estimates, including those related to revenue recognition, long-lived and intangible assets, insurance and legal matters, share-based payments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Changes in our accounting policies and estimates could materially impact our results of operations and financial condition for any particular period. We believe that our most critical accounting policies and estimates are:
Revenue recognition. We earn revenues through our network of domestic Company-owned and franchised stores, dough manufacturing and supply chain centers and international operations. Retail sales from franchise stores are reported to the Company by its franchisees and are not included in Company revenues. Retail sales from Company-owned stores and royalty revenues resulting from the retail sales from franchised stores are recognized as revenues when the items are delivered to or carried out by customers. Retail sales are generally reported and related royalties paid to the Company based on a percentage of retail sales, as specified in the related standard franchise agreement (generally 5.5% of domestic franchise retail sales and, on average, 3.0% of international franchise retail sales). Revenues from Company-owned stores and royalty revenues and fees from franchised stores can fluctuate from time-to-time as a result of store count and sales level changes. This can occur when a Company-owned store is sold to a franchisee. If a Company-owned store that generated $500,000 in revenue in fiscal 2015 was sold to a franchisee in fiscal 2016, revenues from Company-owned stores would have decli
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
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Market risk
We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In connection with the 2015 Recapitalization, we issued fixed rate notes and, at January 1, 2017, we are only exposed to interest rate risk on borrowings under our 2015 Variable Funding Notes. As of January 1, 2017, we had no outstanding borrowings under our 2015 Variable Funding Notes. 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. We do not engage in speculative transactions nor do we 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.
Foreign currency exchange rate risk
We have exposure to various foreign currency exchange rate fluctuations for revenues generated by our operations outside the United States, which can adversely impact our net income and cash flows. Approximately 7.2% of our total revenues in 2016, 7.4% of our total revenues in 2015 and 7.7% of our total revenues in 2014 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 $16.7 million in 2016.
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Item 8. Financial Statements and Supplementary Data.
| --- | --- |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
of Domino’s Pizza, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Domino’s Pizza, Inc. and its subsidiaries at January 1, 2017 and January 3, 2016, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2017 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting, appearing under Item 9(A). Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 28, 2017
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DOMINO’S PIZZA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| January 1, 2017 | January 3, 2016 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 42,815 | $ | 133,449 | ||||
| Restricted cash and cash equivalents | 126,496 | 180,940 | ||||||
| Accounts receivable, net of reserves of $2,342 in 2016 and $2,662 in 2015 | 150,369 | 131,582 | ||||||
| Inventories | 40,181 | 36,861 | ||||||
| Prepaid expenses and other | 17,635 | 20,646 | ||||||
| Advertising fund assets, restricted | 118,377 | 99,159 | ||||||
| Total current assets | 495,873 | 602,637 | ||||||
| PROPERTY, PLANT AND EQUIPMENT: | ||||||||
| Land and buildings | 29,129 | 29,064 | ||||||
| Leasehold and other improvements | 120,726 | 111,071 | ||||||
| Equipment | 201,827 | 186,405 | ||||||
| Construction in progress | 7,816 | 9,633 | ||||||
| 359,498 | 336,173 | |||||||
| Accumulated depreciation and amortization | (220,964 | ) | (204,283 | ) | ||||
| Property, plant and equipment, net | 138,534 | 131,890 | ||||||
| OTHER ASSETS: | ||||||||
| Investments in marketable securities, restricted | 7,260 | 6,054 | ||||||
| Goodwill | 16,058 | 16,097 | ||||||
| Capitalized software, net of accumulated amortization of $68,727 in 2016 and $61,330 in 2015 | 40,256 | 28,505 | ||||||
| Other assets, net of accumulated amortization of $776 in 2016 and $776 in 2015 | 9,379 | 8,797 | ||||||
| Deferred income taxes | 8,935 | 5,865 | ||||||
| Total other assets | 81,888 | 65,318 | ||||||
| Total assets | $ | 716,295 | $ | 799,845 | ||||
The accompanying notes are an integral part of these consolidated statements.
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DOMINO’S PIZZA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(In thousands, except share and per share amounts)
| January 1, 2017 | January 3, 2016 | |||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Current portion of long-term debt | $ | 38,887 | $ | 59,333 | ||||
| Accounts payable | 111,510 | 106,927 | ||||||
| Accrued compensation | 42,089 | 32,999 | ||||||
| Accrued interest | 18,826 | 20,459 | ||||||
| Insurance reserves | 16,742 | 17,597 | ||||||
| Advertising fund liabilities | 118,377 | 99,159 | ||||||
| Other accrued liabilities | 57,267 | 39,509 | ||||||
| Total current liabilities | 403,698 | 375,983 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Long-term debt, less current portion | 2,148,990 | 2,181,46 |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
| --- | --- |
None.
Item 9A. Controls and Procedures.
| --- | --- |
(a) Evaluation of Disclosure Controls and Procedures.
The Company carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that all information required in the reports it files or submits under the Exchange Act was accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and was recorded, processed, summarized and reported within the time period required by the rules and regulations of the Securities and Exchange Commission.
(b) Changes in Internal Control over Financial Reporting.
There have been no changes in internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
(c) Management’s Annual Report on Internal Control over Financial Reporting.
The management of Domino’s Pizza, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of January 1, 2017 based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that its internal control over financial reporting was effective as of January 1, 2017. The effectiveness of the Company’s internal control over financial reporting as of January 1, 2017, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Item 9B. Other Information.
Item 10. Directors, Executive Officers and Corporate Governance.
| --- | --- |
The following table sets forth information about our executive officers and directors.
| Name | Age | Position | ||
| David A. Brandon | 64 | Chairman of the Board of Directors | ||
| J. Patrick Doyle | 53 | President, Chief Executive Officer and Director | ||
| Jeffrey D. Lawrence | 43 | Executive Vice President, Chief Financial Officer | ||
| Eric B. Anderson | 44 | Executive Vice President, International Operations | ||
| Richard E. Allison, Jr. | 50 | President, Domino’s International | ||
| Troy A. Ellis | 51 | Executive Vice President, Supply Chain Services | ||
| Stanley J. Gage | 50 | Executive Vice President, Team USA | ||
| Scott R. Hinshaw | 54 | Executive Vice President, Franchise Operations and Development | ||
| Timothy P. McIntyre | 54 | Executive Vice President, Communication, Investor Relations and Legislative Affairs | ||
| Kevin S. Morris | 56 | Executive Vice President, General Counsel | ||
| J. Kevin Vasconi | 56 | Executive Vice President, Chief Information Officer | ||
| Russell J. Weiner | 48 | President, Domino’s USA | ||
| Judith L. Werthauser | 51 | Executive Vice President, Chief People Officer | ||
| C. Andrew Ballard | 44 | Director | ||
| Andrew B. Balson | 50 | Director | ||
| Diana F. Cantor | 59 | Director | ||
| Richard L. Federico | 62 | Director | ||
| James A. Goldman | 58 | Director | ||
| Gregory A. Trojan | 57 | Director |
David A. Brandon has served as our Chairman of the Board of Directors since March 1999. Mr. Brandon is currently Chairman and CEO of Toys “R” Us, Inc., the world’s largest specialty retailer of toy and baby products. Previously, he was the Director of Athletics at the University of Michigan from March 2010 to October 2014. Mr. Brandon also served as Chief Executive Officer from March 1999 to March 2010. Mr. Brandon was retained by the Company as a Special Advisor from March 2010 to January 2011. Prior to joining Domino’s, Mr. Brandon was President and Chief Executive Officer of Valassis, Inc., a company in the sales promotion and coupon industries, from 1989 to 1998 and Chairman of the Board of Directors of Valassis, Inc. from 1997 to 1998. In addition to serving on the Boards of Directors for Domino’s and Toys “R” Us, Mr. Brandon also serves on the boards of DTE Energy and Herman Miller Inc. He previously served on the boards of Burger King Corporation, Kaydon Corporation, Northwest Airlines and the TJX Companies, Inc.
J. Patrick Doyle has served as our President and Chief Executive Officer since March 2010 and was appointed to the Board of Directors in February 2010. Mr. Doyle served as President, Domino’s USA from September 2007 to March 2010, Executive Vice President, Team USA from 2004 to 2007, Executive Vice President of International from May 1999 to October 2004 and as interim Executive Vice President of Build the Brand from December 2000 to July 2001. Mr. Doyle served as Senior Vice President of Marketing from the time he joined Domino’s in 1997 until May 1999. Mr. Doyle serves on the Board of Directors of Best Buy Co., Inc. and also previously served on the Board of Directors of G&K Services, Inc.
Jeffrey D. Lawrence has served as Executive Vice President and Chief Financial Officer since August 2015. He previously served as Vice President – Finance and Treasurer from January 2014 to August 2015, and as Vice President of International Finance, Strategy & Insights and Administration from 2008 to January 2014. Prior to joining the International team, Mr. Lawrence served as Vice President and Corporate Controller from 2002 to 2008. Mr. Lawrence began his career at Domino’s in 2000. Prior to joining Domino’s, Mr. Lawrence was a Manager of Audit and Business Advisory Services in the Detroit office of Arthur Andersen LLP.
Eric B. Anderson has served as Executive Vice President of International Operations since January 2016. Mr. Anderson joined Domino’s in 2010 as Regional Vice President for the Americas and Business Strategy. In 2012, he took over as Regional Vice President of Domino’s EMEA (Europe, Middle East, and Africa). Prior to joining Domino’s, Mr. Anderson was a leader in the restaurant and retail practice of Bain & Company, a global strategic consulting firm, where he was also a founding member of Bain’s Corporate Renewal Group, a specialized turnaround management group that led hands-on turnarounds of distressed companies.
Richard E. Allison, Jr. has served as our President, Domino’s International since October 2014. Mr. Allison served as Executive Vice President, International from March 2011 to October 2014. Mr. Allison served as a Partner at Bain & Company, Inc. from 2004 through December 2010, as co-leader of Bain’s restaurant practice and was employed with Bain & Company for more than 13 years.
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Troy A. Ellis has served as our Executive Vice President, Supply Chain Services since June 2015. Prior to joining Domino’s, Mr. Ellis served as Senior Vice President of Conversion of Coca-Cola Refreshments, overseeing manufacturing, transportation planning and third-party logistics. Prior to that role, he spent nearly three years as Senior Vice President of Manufacturing after joining Coca-Cola Refreshments in 2010. From 2000 to 2010, Mr. Ellis held various leadership roles with Coca-Cola Enterprises including Central Business Unit Vice President of Supply Chain. Prior to joining Coca-Cola, he worked for PepsiCo and Kimberly Clark Corp., after serving in the U.S. Army from 1988-1991.
Stanley J. Gage has served as our Executive Vice President, Team USA (which represents our Company-owned store division) since August 2014. Prior to his appointment, Mr. Gage served as Vice President of the Americas Region and International Training since October 2012 and as Vice President of Operations Training and Support from 2008 through October 2012. Mr. Gage joined Domino’s Pizza in 1985.
Scott R. Hinshaw has served as our Executive Vice President, Franchise Operations and Development since January 2008. Mr. Hinshaw served as Executive Vice President, Team USA from September 2007 to January 2008. Mr. Hinshaw also served as a Vice President within Team USA from 1994 through September 2007. Mr. Hinshaw joined Domino’s in 1986.
Timothy P. McIntyre has served as Executive Vice President, Communication, Investor Relations and Legislative Affairs since May 2016. Mr. McIntyre served as Vice President of Communication from August 1997 to May 2016. Mr. McIntyre serves on the Board of Directors of Food Gatherers, a food rescue organization dedicated to eliminating hunger and its causes in Washtenaw County, MI. Mr. McIntyre also serves on Eastern Michigan University’s College of Business Marketing Advisory Board. Mr. McIntyre joined Domino’s in 1985.
Kevin S. Morris has served as our Executive Vice President, General Counsel since January 2017. Prior to joining Domino’s, Mr. Morris previously served at New York-based Equinox Holdings, Inc. and its various operating subsidiaries and affiliates from December 2012 to January 2017, most recently as Senior Vice President, General Counsel and Corporate Secretary. Mr. Morris operated his own private legal practice from July 2009 to November 2012. Prior to 2009, Mr. Morris served as Vice President and Associate General Counsel at Global Hyatt Corporation (the predecessor in interest to Hyatt Hotels Corporation) from 1999 to 2008. Prior to 1999, Mr. Morris served as a Senior International Attorney and Staff Director at McDonald’s Corporation after beginning his career as an attorney at Rudnick & Wolfe.
J. Kevin Vasconi has served as our Executive Vice President and Chief Information Officer since March 2012. Mr. Vasconi served as Chief Information Officer and Vice President of Engineering at Stanley Black & Decker – Stanley Security Solutions from 2011 to March 2012. Prior to his role at Stanley Security Solutions, Mr. Vasconi served in a variety of roles at R.L. Polk & Co. from 2003 to 2011, most recently as Senior Vice President and Chief Information Officer of Polk Global Automotive.
Judith L. Werthauser has served as Executive Vice President and Chief People Officer since January 2016. Ms. Werthauser previously served as Senior Vice President of Human Resources at Target Corp. She joined Target in 2008, holding increasing levels of human resources responsibilities there. Prior to Target, Werthauser was Senior Vice President of Human Resources for U.S. Bancorp in Minneapolis. She also held several senior human resources positions at Marshall Field’s department stores and directed student programs at the University of Minnesota. Ms. Werthauser was also the co-owner and operations leader of Aljohn’s and Junkyard Retailers, a diverse retailing and manufacturing company that she grew from one to 11 locations.
Russell J. Weiner has served as President, Domino’s USA (which represents our domestic franchised and Company-owned store operations, in addition to U.S. marketing) since October 2014. Mr. Weiner served as Executive Vice President and Chief Marketing Officer, from September 2008 to October 2014. Mr. Weiner held various marketing positions at PepsiCo, Inc. from 1998 to 2008, most recently serving as Vice President of Marketing, Colas for Pepsi-Cola North America. Mr. Weiner serves on the Board of Directors of The Clorox Company.
C. Andrew Ballard has served on our Board of Directors since July 2015 and is a member of the Compensation Committee of the Board of Directors. Mr. Ballard currently serves as the CEO and Co-founder of Quad Analytix, a technology and data company, and is also the Founder and Managing Partner of Figtree Partners, an investment firm focused on digital media. In addition, he is a Senior Advisor at the private equity firm Hellman & Friedman, where he was previously a Managing Director. Prior to joining Hellman & Friedman in 2003, Mr. Ballard worked at Bain Capital in San Francisco and Boston, as well as Bain & Company from 1994 to 2002. In addition to serving on Domino’s Board, Mr. Ballard is currently Chairman of Datacor and Vice Chairman of Zignal Labs, and has held previous board roles at Activant Solutions, Catalina Marketing, DoubleClick, Getty Images, Internet Brands and Vertafore. Mr. Ballard is the Chair of the Board of Trustees and Chair of the Investment Committee of the San Francisco Foundation. He is also actively involved with Family Connections, a tuition free preschool for under-served families.
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Andrew B. Balson has served on our Board of Directors since March 1999 and also serves as the Chairperson of the Compensation Committee of the Board of Directors. Mr. Balson is currently the Managing Partner of Cove Hill Partners, a firm formed to make private equity investments. Previously, Mr. Balson was the CEO of Match Beyond, a position he held from January 2015 to June 2016. Prior to becoming the CEO of Match Beyond, Mr. Balson was a Managing Director at Bain Capital, a global investment company, from 2001 to 2013. Mr. Balson became a Principal of Bain Capital in June 1998. Mr. Balson previously served on the Boards of Directors of Bloomin’ Brands, Inc., FleetCor Technologies, Inc., Dunkin’ Brands, Inc., Skylark Co., Ltd., Bellsystem24, Burger King Corporation, and Bright Horizons Solutions, as well as numerous private companies.
Diana F. Cantor has served on our Board of Directors since October 2005, serves as the Chairperson of the Audit Committee of the Board of Directors and also serves on the Nominating and Corporate Governance Committee of the Board of Directors. Ms. Cantor is currently a Partner at Alternative Investment Management, LLC, a position she has held since January 2010 and is the Vice Chairman of the Virginia Retirement System, where she also serves on the Audit and Compliance Committee. Ms. Cantor was a Managing Director with New York Private Bank and Trust from January 2008 through the end of 2009. Ms. Cantor served as Executive Director of the Virginia College Savings Plan, the state’s 529 college savings program, from 1996 to January 2008. Ms. Cantor served seven years as Vice President of Richmond Resources, Ltd. from 1990 through 1996, and as Vice President of Goldman, Sachs & Co. from 1985 to 1990. Ms. Cantor serves on the Board of Directors of Universal Corporation, and she previously served on the Boards of Directors of Media General, Inc., Revlon, Inc., Vistage International, Knowledge Universe – US, Edelman Financial Services and Service King Body and Paint LLC.
Richard L. Federico has served on our Board of Directors since February 2011 and also serves on the Compensation Committee of the Board of Directors. Mr. Federico is currently the Non-Executive Chairman of P.F. Chang’s China Bistro Inc., based in Scottsdale, Arizona. Mr. Federico previously served as the Chairman and Chief Executive Officer or Co-Chief Executive Officer of P.F. Chang’s from September 1997 to March 2015 and as Executive Chairman from March 2015 to February 2016. Mr. Federico serves as the Chairman of the Board of Directors of Jamba Inc., also serves on a private company board, and is a founding director of Chances for Children.
James A. Goldman has served on our Board of Directors since March 2010 and serves as the Chairperson of the Nominating and Corporate Governance Committee and as a member of the Audit Committee of the Board of Directors. Mr. Goldman served as President and CEO and Board member of Godiva Chocolatier Inc., based in New York City from 2004 to 2014. He was President of the Food and Beverage Division at Campbell Soup Company from 2001 to 2004. He worked in various executive positions at Nabisco Inc. from 1992 to 2000. Prior to his work at Nabisco Inc., Mr. Goldman was a senior consulting associate at McKinsey & Co. Mr. Goldman served as a member of the Board of Directors at The Children’s Place Retail from 2006 to 2008, on the Compensation Committee. Mr. Goldman is currently a Senior Advisor at Eurazeo, a private equity firm listed on the Paris Stock Exchange. Mr. Goldman is also currently on the Board of Trustees of Save the Children in Fairfield, CT, the Board of Governors of the International Tennis Hall of Fame in Newport, RI and the Advisory Boards of FEED Projects in New York, NY and Sugarfina in Los Angeles, CA. Mr. Goldman previously served on the Board of Trustees at the YMCA Camps Becket and Chimney Corners in Becket, MA.
Gregory A. Trojan has served on our Board of Directors since March 2010 and serves on the Nominating and Corporate Governance Committee and the Audit Committee of the Board of Directors. Mr. Trojan is currently the CEO and President of BJ’s Restaurants, Inc., a casual dining restaurant company located in Huntington Beach, California. He was elected to the BJ’s Board of Directors in December 2012. Prior to joining BJ’s, he was the CEO of Guitar Center, Inc. from 2010 through 2012, where he served as President and Chief Operating Officer from 2007 to 2010. From 1998 to 2006, he was CEO of House of Blues Entertainment, Inc., having served as the Company’s President from 1996 to 1998. Mr. Trojan worked in various executive positions at PepsiCo Inc. from 1990 to 1996, most recently as CEO of California Pizza Kitchen. Prior to that, he was a consultant at Bain & Company, The Wharton Small Business Development Center and Arthur Andersen & Co. In addition, Mr. Trojan previously served on the Board of Directors of Oakley, Inc.
The remaining information required by this item is incorporated by reference from Domino’s Pizza, Inc.‘s definitive proxy statement, which will be filed within 120 days of January 1, 2017.
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Item 11. Executive Compensation.
| --- | --- |
Information regarding executive compensation is incorporated by reference from Domino’s Pizza, Inc.’s definitive proxy statement, which will be filed within 120 days of January 1, 2017. However, no information set forth in the proxy statement regarding the Audit Committee Report shall be deemed incorporated by reference into this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
| --- | --- |
Information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference from Domino’s Pizza, Inc.’s definitive proxy statement, which will be filed within 120 days of January 1, 2017.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
| --- | --- |
Information regarding certain relationships and related transactions is incorporated by reference from Domino’s Pizza, Inc.’s definitive proxy statement, which will be filed within 120 days of January 1, 2017.
Item 14. Principal Accountant Fees and Services.
| --- | --- |
Information regarding principal accountant fees and services is incorporated by reference from Domino’s Pizza, Inc.’s definitive proxy statement, which will be filed within 120 days of January 1, 2017.
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Part IV
Item 15. Exhibits, Financial Statement Schedules.
| --- | --- |
| (a) 1. | Financial Statements: The following financial statements for Domino’s Pizza, Inc. and subsidiaries are included in Item 8, “Financial Statements and Supplementary Data”: |
|---|
| Report of Independent Registered Public Accounting Firm |
| Consolidated Balance Sheets as of January 1, 2017 and January 3, 2016 |
| Consolidated Statements of Income for the Years Ended January 1, 2017, January 3, 2016 and December 28, 2014 |
| Consolidated Statements of Comprehensive Income for the Years Ended January 1, 2017, January 3, 2016 and December 28, 2014 |
| Consolidated Statements of Stockholders’ Deficit for the Years Ended January 1, 2017, January 3, 2016 and December 28, 2014 |
| Consolidated Statements of Cash Flows for the Years Ended January 1, 2017, January 3, 2016 and December 28, 2014 |
| Notes to Consolidated Financial Statements |
| 2. | Financial Statement Schedules: The following financial statement schedules are attached to this report. |
|---|
Schedule I – Condensed Financial Information of the Registrant
Schedule II – Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not required, or the information is included in the financial statements or the notes thereto.
| 3. | Exhibits: Certain of the following Exhibits have been previously filed with the Securities and Exchange Commission pursuant to the requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such exhibits are identified by the parenthetical references following the listing of each such exhibit and are incorporated herein by reference. |
|---|
| Exhibit Number | Description | |
| 3.1 | Form of Second Restated Certificate of Incorporation of Domino’s Pizza, Inc. (Incorporated by reference to Exhibit 3.1 to the Domino’s Pizza, Inc. registration statement on Form S-1 filed on April 13, 2004 (Reg. No. 333-114442) (the “S-1”)). | |
| 3.2 | Certificate of Amendment to the Second Restated Certificate of Incorporation of Domino’s Pizza, Inc. (Incorporated by reference to Exhibit 3.2 to the Form 10-Q for the quarter ended June 14, 2015). | |
| 3.3 | Second Amended and Restated By-Laws of Domino’s Pizza, Inc. (Incorporated by reference to Exhibit 3.3 to the registrant’s annual report on Form 10-K for the year ended January 3, 2016). | |
| 10.1 | Lease Agreement dated as of December 21, 1998 by and between Domino’s Farms Office Park Limited Partnership and Domino’s, Inc. (Incorporated by reference to Exhibit 10.3 to the Domino’s, Inc. registration statement on Form S-4 filed on March 22, 1999 (Reg. No. 333-74797)). | |
| 10.2 | Fourth Amendment to the Lease Agreement between Domino’s Farms Office Park, L.L.C. and Domino’s Pizza LLC, dated as of August 28, 2012 (Incorporated by reference to Exhibit 10.2 to the registrant’s annual report on Form 10-K for the year ended December 30, 2012 (the “2012 10-K”)). | |
| 10.3 | Fifth Amendment to a Lease Agreement between Domino’s Farms Office Park, L.L.C. and Domino’s Pizza LLC, dated as of February 1, 2015. | |
| 10.4 | Sixth Amendment to a Lease Agreement between Domino’s Farms Office Park, L.L.C. and Domino’s Pizza LLC, dated as of February 1, 2015. | |
| 10.5 | Seventh Amendment to a Lease Agreement between Domino’s Farms Office Park, L.L.C. and Domino’s Pizza LLC, dated as of April 19, 2016. | |
| 10.6 | Eighth Amendment to a Lease Agreement between Domino’s Farms Office Park, L.L.C. and Domino’s Pizza LLC, dated as of November 4, 2016. |
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| 10.7 | Ninth Amendment to a Lease Agreement between Domino’s Farms Office Park, L.L.C. and Domino’s Pizza LLC, dated as of February 16, 2017. | |
| 10.8* | Domino’s Pizza, Inc. Deferred Compensation Plan adopted effective January 1, 2005 (Incorporated by reference to Exhibit 10.9 to the registrant’s annual report on Form 10-K for the year ended January 1, 2006). | |
| 10.9* | First Amendment to the Domino’s Pizza Deferred Compensation Plan effective January 1, 2007 (Incorporated by reference to Exhibit 10.9 to the registrant’s annual report on Form 10-K for the year ended December 31, 2006). | |
| 10.10* | Second Amendment to the Domino’s Pizza Deferred Compensation Plan effective February 8, 2013 (Incorporated by reference to Exhibit 10.5 to the 2012 10-K). | |
| 10.11* | Amended Domino’s Pizza, Inc. 2004 Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 to the registrant’s quarterly report on Form 10-Q for the quarter ended March 22, 2009 (the “March 2009 10-Q”)). | |
| 10.12* | Form of Employee Stock Option Agreement under the Amended Domino’s Pizza, Inc. 2004 Equity Incentive Plan (Incorporated by reference to Exhibit 10.8 to the 2012 10-K). | |
| 10.13* | Form of 2013 Special Employee Stock Option Agreement under the Amended Domino’s Pizza, Inc. 2004 Equity Incentive Plan (Incorporated by reference to Exhibit 10.9 to the 2012 10-K). | |
| 10.14* | Form of Director Stock Option Agreement under the Amended Domino’s Pizza, Inc. 2004 Equity Incentive Plan (Incorporated by reference to Exhibit 10.3 to the March 2009 10-Q). | |
| 10.15* | Form of Amendment to Existing Director Stock Option Grants (Incorporated by reference to Exhibit 10.5 to the March 2009 10-Q). | |
| 10.16* | Form of Performance-Based Restricted Stock Agreement (Incorporated by reference to Exhibit 10.12 to the 2012 10-K). | |
| 10.17* | Form of 2013 Special Performance-Based Restricted Stock Agreement (Incorporated by reference to Exhibit 10.13 to the 2012 10-K). | |
| 10.18* | Form of Performance-Based Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.14 to the 2012 10-K). | |
| 10.19* | Form of 2013 Special Performance-Based Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.15 to the 2012 10-K). | |
| 10.20* | Form of Domino’s Pizza, Inc. 2004 Equity Incentive Plan Restricted Stock Agreement for Directors (Incorporated by reference to Exhibit 10.19 to the registrant’s annual report on Form 10-K for the year ended January 3, 2010). | |
| 10.21* | Amended and Restated Domino’s Pizza Senior Executive Annual Incentive Plan. (Incorporated by reference to Exhibit 10.20 to the registrant’s annual report on Form 10-K for the year ended January 2, 2011). | |
| 10.22* | Amended and Restated Domino’s Pizza, Inc. Employee Stock Payroll Deduction Plan (Incorporated by reference to Exhibit 10.18 to the registrant’s annual report on Form 10-K for the year ended December 29, 2013). | |
| 10.23* | Form of Domino’s Pizza, Inc. Dividend Reinvestment & Direct Stock Purchase and Sale Plan (Incorporated by reference to Exhibit 10.32 to the S-1). | |
| 10.24* | Employment Agreement dated as of February 23, 2015 between Domino’s Pizza LLC and J. Patrick Doyle (Incorporated by reference to Exhibit 10.20 to the registrant’s annual report on Form 10-K for the year ended December 28, 2014 (the “2014 10-K”)). | |
| 10.25* | Time Sharing Agreement dated as of February 23, 2015 between Domino’s Pizza LLC and J. Patrick Doyle (Incorporated by reference to Exhibit 10.21 to the 2014 10-K). |
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| 10.26* | Employment Agreement dated as of August 28, 2015 between Domino’s Pizza LLC and Jeffrey Lawrence (Incorporated by reference to Exhibit 10.1 to the registrant’s quarterly report on Form 10-Q for the quarter ended September 6, 2015). | |
| 10.27* | Employment Agreement dated as of September 2, 2008 between Domino’s Pizza LLC and Russell J. Weiner (Incorporated by reference to Exhibit 1.01 to the registrant’s current report on Form 8-K filed on September 4, 2008). | |
| 10.28* | Amendment to the Employment agreement dated as of September 2, 2008 between Domino’s Pizza LLC and Russell J. Weiner (Incorporated by reference to Exhibit 10.4 to the registrant’s current report on Form 8-K filed on December 24, 2008). | |
| 10.29* | Amendment to the Employment Agreement dated as of July 26, 2010 between Domino’s Pizza LLC and Russell J. Weiner (Incorporated by reference to Exhibit 10.3 to the registrant’s quarterly report on Form 10-Q for the quarter ended June 20, 2010). | |
| 10.30* | Employment Agreement dated as of March 14, 2011 between Domino’s Pizza LLC and Richard E. Allison, Jr. (Incorporated by reference to Exhibit 10.1 to the registrant’s quarterly report on Form 10-Q for the quarter ended March 27, 2011). | |
| 10.31* | Employment Agreement dated as of November 20, 2015 between Domino’s Pizza LLC and Judith L. Werthauser. | |
| 10.32 | Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.33 to the S-1). | |
| 10.33 | Amended and Restated Base Indenture dated March 15, 2012 among Domino’s Pizza Master Issuer LLC, Domino’s Pizza Distribution LLC, Domino’s IP Holder LLC and Domino’s SPV Canadian Holding Company Inc., each as Co-Issuer , and Citibank, N.A., as Trustee and Securities Intermediary (Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on March 19, 2012 (the “March 2012 8-K”)). | |
| 10.34 | First Supplement dated as of September 16, 2013 to the Amended and Restated Base Indenture dated as of March 15, 2012 (Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on October 22, 2015 (the “October 2015 8-K”)). | |
| 10.35 | Second Supplement dated as of October 21, 2015 to the Amended and Restated Base Indenture dated as of March 15, 2012 (Incorporated by reference to Exhibit 4.2 to the October 2015 8-K). | |
| 10.36 | Third Supplement dated as of October 21, 2015 to the Amended and Restated Base Indenture dated as of March 15, 2012 (Incorporated by reference to Exhibit 4.3 to the October 2015 8-K). | |
| 10.37 | Series 2012-1 Supplement dated March 15, 2012 to the Amended and Restated Base Indenture dated March 15, 2012 among Domino’s Pizza Master Issuer LLC, Domino’s Pizza Distribution LLC, Domino’s IP Holder LLC and Domino’s SPV Canadian Holding Company Inc., each as a Co-Issuer of the Series 2012-1 5.216% Fixed Rate Senior Secured Notes, Class A-2 and the Series 2012-1 Variable Funding Senior Notes, Class A-1, and Citibank, N.A., as Trustee and Series 2012-1 Securities Intermediary (Incorporated by reference to Exhibit 4.2 to the March 2012 8-K). | |
| 10.38 | Series 2015-1 Supplement dated as of October 21, 2015 to the Amended and Restated Base Indenture dated March 15, 2012 among Domino’s Pizza Master Issuer LLC, Domino’s Pizza Distribution LLC, Domino’s IP Holder LLC and Domino’s SPV Canadian Holding Company Inc., each as a Co-Issuer of the Series 2015-1 3.484% Fixed Rate Senior Secured Notes, Class A-2-I, the Series 2015-1 4.474% Fixed Rate Senior Secured Notes, Class A-2-II and the Series 2015-1 Variable Funding Senior Notes, Class A-1, and Citibank, N.A., as Trustee and Series 2015-1 Securities Intermediary (Incorporated by reference to Exhibit 4.4 to the October 2015 8-K). | |
| 10.39 | Purchase Agreement dated as of October 14, 2015 among Domino’s Pizza Master Issuer LLC, Domino’s IP Holder LLC, Domino’s Pizza Distribution LLC and Domino’s SPV Canadian Holding Company Inc. for the Series 2015-1 3.484% Fixed Rate Senior Secured Notes, Class A-2-I and the Series 2015-1 4.474% Fixed Rate Senior Secured Notes, Class A-2-II (Incorporated by reference to Exhibit 10.1 to the October 2015 8-K). |
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| 10.40 | Class A-1 Note Purchase Agreement dated as of March 15, 2012 among Domino’s Pizza Master Issuer LLC, Domino’s IP Holder LLC, Domino’s Pizza Distribution LLC and Domino’s SPV Canadian Holding Company Inc., each as a Co-Issuer, Domino’s Pizza LLC, as Manager, certain conduit investors, certain financial institutions and certain funding agents, Barclays Bank PLC, as L/C Provider, as Swingline Lender and as Administrative Agent (Incorporated by reference to Exhibit 10.1 to the March 2012 8-K). | |
| 10.41 | Class A-1 Note Purchase Agreement dated as of October 21, 2015 among Domino’s Pizza Master Issuer LLC, Domino’s SPV Canadian Holding Company Inc., Domino’s Pizza Distribution LLC and Domino’s IP Holder LLC, each as a Co-Issuer, Domino’s Pizza Franchising LLC, Domino’s Pizza International Franchising Inc., Domino’s Pizza Canadian Distribution ULC, Domino’s RE LLC, Domino’s EQ LLC and Domino’s SPV Guarantor LLC, each as Guarantor, Domino’s Pizza LLC, as Manager, certain conduit investors, certain financial institutions and certain funding agents, Rabobank Nederland, New York Branch, as L/C Provider, as Swingline Lender and as Administrative Agent (Incorporated by reference to Exhibit 10.2 to the October 2015 8-K). | |
| 10.42 | Amended and Restated Guarantee and Collateral Agreement dated as of March 15, 2012 among Domino’s SPV Guarantor LLC, Domino’s Pizza Franchising LLC, Domino’s Pizza International Franchising Inc., Domino’s Pizza Canadian Distribution ULC, Domino’s RE LLC and Domino’s EQ LLC, each as a Guarantor, in favor of Citibank, N.A., as Trustee (Incorporated by reference to Exhibit 10.2 to the March 2012 8-K). | |
| 10.43 | Amended and Restated Management Agreement dated as of March 15, 2012 among Domino’s Pizza Master Issuer LLC, certain subsidiaries of Domino’s Pizza Master Issuer LLC party thereto, Domino’s Pizza LLC, as Manager and in its individual capacity, Domino’s Pizza NS Co., and Citibank, N.A. as Trustee (Incorporated by reference to Exhibit 10.3 to the March 2012 8-K). | |
| 10.44 | Amendment No. 1 dated as of October 21, 2015 to the Amended and Restated Management Agreement dated as of March 15, 2012 among Domino’s Pizza Master Issuer LLC, certain subsidiaries of Domino’s Pizza Master Issuer LLC party thereto, Domino’s Pizza LLC, as Manager and in its individual capacity, Domino’s Pizza NS Co., and Citibank, N.A. as Trustee (Incorporated by reference to Exhibit 10.3 to the October 2015 8-K). | |
| 10.45 | Parent Company Support Agreement dated as of March 15, 2012 made by Domino’s Pizza, Inc. in favor of Citibank, N.A., as Trustee (Incorporated by reference to Exhibit 10.4 to the October 2015 8-K). | |
| 10.46 | Amendment No. 1 dated as of October 21, 2015 to the Parent Company Support Agreement dated as of March 15, 2012 made by Domino’s Pizza, Inc. in favor of Citibank, N.A., as Trustee (Incorporated by reference to Exhibit 10.5 to the October 2015 8-K). | |
| 10.47 | Master Confirmation – Uncollared Accelerated Share Repurchase dated as of October 27, 2015 between Domino’s Pizza, Inc., and JP Morgan Chase Bank, National Association (Incorporated by reference to Exhibit 10.1 to the registrant’s the current report on Form 8-K filed on October 27, 2015). | |
| 10.48 | Agreement dated as of January 6, 2009 between Domino’s Pizza, Inc., Blue Harbour Strategic Value Partners Master Fund, LP and Blue Harbour Institutional Partners Master Fund, L.P. (Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on January 9, 2009). | |
| 10.49 | Board of Directors’ Compensation. | |
| 12.1 | Ratio of Earnings to Fixed Charges. | |
| 21.1 | Subsidiaries of Domino’s Pizza, Inc. | |
| 23.1 | Consent of PricewaterhouseCoopers LLP. | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc. |
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| 32.1 | Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc. | |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc. | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
| * | A management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 15(b) of Form 10-K. |
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Item 16. Form 10-K Summary.
| --- | --- |
Not applicable**.**
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SCHEDULE I – CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
DOMINO’S PIZZA, INC.
PARENT COMPANY CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
| January 1, | January 3, | |||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| ASSETS: | ||||||||
| Cash and cash equivalents | $ | 6 | $ | 6 | ||||
| Total assets | $ | 6 | $ | 6 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| LIABILITIES: | ||||||||
| Equity in net deficit of subsidiaries | $ | 1,883,143 | $ | 1,800,251 | ||||
| Due to subsidiary | 6 | 6 | ||||||
| Total liabilities | 1,883,149 | 1,800,257 | ||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Common stock, par value $0.01 per share; 170,000,000 shares authorized; 48,100,143 in 2016 and | ||||||||
| 49,838,221 in 2015 issued and outstanding | 481 | 498 | ||||||
| Preferred stock, par value $0.01 per share; 5,000,000 shares authorized, none issued | — | — | ||||||
| Additional paid-in capital | 1,006 | 6,942 | ||||||
| Retained deficit | (1,881,520 | ) | (1,804,143 | ) | ||||
| Accumulated other comprehensive loss | (3,110 | ) | (3,548 | ) | ||||
| Total stockholders’ deficit | (1,883,143 | ) | (1,800,251 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 6 | $ | 6 | ||||
See accompanying notes to the Schedule I.
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DOMINO’S PIZZA, INC.
PARENT COMPANY CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
| For the Years Ended | ||||||||||||
| January 1, 2017 | January 3, 2016 | December 28, 2014 | ||||||||||
| REVENUES | $ | — | $ | — | $ | — | ||||||
| Total revenues | — | — | — | |||||||||
| OPERATING EXPENSES | — | — | — | |||||||||
| Total operating expenses | — | — | — | |||||||||
| INCOME FROM OPERATIONS | — | — | — | |||||||||
| Equity earnings in subsidiaries | 214,678 | 192,789 | 162,587 | |||||||||
| INCOME BEFORE PROVISION FOR INCOME TAXES | 214,678 | 192,789 | 162,587 | |||||||||
| PROVISION FOR INCOME TAXES | — | — | — | |||||||||
| NET INCOME | $ | 214,678 | $ | 192,789 | $ | 162,587 | ||||||
| COMPREHENSIVE INCOME | $ | 215,116 | $ | 191,902 | $ | 161,910 | ||||||
| EARNINGS PER SHARE: | ||||||||||||
| Common Stock – basic | $ | 4.41 | $ | 3.58 | $ | 2.96 | ||||||
| Common Stock – diluted | $ | 4.30 | $ | 3.47 | $ | 2.86 |
See accompanying notes to the Schedule I.
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DOMINO’S PIZZA, INC.
PARENT COMPANY CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Years Ended | ||||||||||||
| January 1, | January 3, | December 28, | ||||||||||
| 2017 | 2016 | 2014 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net cash provided by operating activities | $ | 281,731 | $ | 226,912 | $ | 134,149 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Dividends from subsidiaries | 82,856 | 594,591 | — | |||||||||
| Net cash provided by investing activities | 82,856 | 594,591 | — | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Payments of common stock dividends | (73,925 | ) | (80,329 | ) | (52,843 | ) | ||||||
| Purchase of common stock | (300,250 | ) | (738,557 | ) | (82,407 | ) | ||||||
| Other | 9,588 | (2,617 | ) | 1,101 | ||||||||
| Net cash used in financing activities | (364,587 | ) | (821,503 | ) | (134,149 | ) | ||||||
| CHANGE IN CASH AND CASH EQUIVALENTS | — | — | — | |||||||||
| CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD | 6 | 6 | 6 | |||||||||
| CASH AND CASH EQUIVALENTS, AT END OF PERIOD | $ | 6 | $ | 6 | $ | 6 | ||||||
See accompanying notes to the Schedule I.
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DOMINO’S PIZZA, INC.
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
| (1) | INTRODUCTION AND BASIS OF PRESENTATION |
|---|
Domino’s Pizza, Inc., on a stand-alone basis, (the “Parent Company”) has accounted for majority-owned subsidiaries using the equity method of accounting. The accompanying condensed financial statements of the Parent Company should be read in conjunction with the consolidated financial statements of Domino’s Pizza, Inc. and its subsidiaries (the “Company”) and the notes thereto included in Item 8 of this Form 10-K. These financial statements have been provided to comply with Rule 4-08(e) of Regulation S-X.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. These investments are carried at cost, which approximates fair value.
Use of Estimates
The use of estimates is inherent in the preparation of financial statements in accordance with generally accepted accounting principles. Actual results could differ from those estimates.
| (2) | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|---|
During 2016 and 2015, the Parent Company received dividends from its subsidiaries primarily consisting of amounts received to repurchase common stock in connection with the Company’s 2015 recapitalization transaction. See Note 4 to the Company’s consolidated financial statements as filed in this Form 10-K for a description of the recapitalization transaction that occurred in 2015.
Non-cash activities of $67.1 million, $34.1 million and $42.3 million were recorded in 2016, 2015 and 2014, respectively, related to stock-based compensation plans and amounts recorded in other comprehensive income related to the Company’s subsidiaries.
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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Domino’s Pizza, Inc. and Subsidiaries
| (in thousands) | Balance Beginning of Year | Provision (Benefit) | Additions/ Deductions **from Reserves *** | Translation Adjustments | Balance End of Year | |||||||||||||||
| Allowance for doubtful accounts receivable: | ||||||||||||||||||||
| 2016 | $ | 2,662 | $ | (51 | ) | $ | (269 | ) | $ | — | $ | 2,342 | ||||||||
| 2015 | 3,361 | (582 | ) | (109 | ) | (8 | ) | 2,662 | ||||||||||||
| 2014 | 5,107 | (308 | ) | (1,428 | ) | (10 | ) | 3,361 | ||||||||||||
| Allowance for doubtful notes receivable: | ||||||||||||||||||||
| 2016 | $ | 264 | $ | (173 | ) | $ | 132 | $ | — | $ | 223 | |||||||||
| 2015 | 931 | (502 | ) | (165 | ) | — | 264 | |||||||||||||
| 2014 | 750 | (262 | ) | 443 | — | 931 |
| * | Consists primarily of write-offs, recoveries of bad debt and certain reclassifications. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this annual report to be signed on their behalf by the undersigned, thereunto duly authorized.
| DOMINO’S PIZZA, INC. |
| /s/ Jeffrey D. Lawrence |
| Jeffrey D. Lawrence |
| Chief Financial Officer |
| February 28, 2017 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the dates indicated.
| /s/ J. Patrick Doyle | President, Chief Executive Officer and Director (Principal Executive Officer) | |||
| J. Patrick Doyle | ||||
| February 28, 2017 | ||||
| /s/ Jeffrey D. Lawrence | Chief Financial Officer (Principal Financial and Accounting Officer) | |||
| Jeffrey D. Lawrence | ||||
| February 28, 2017 | ||||
| /s/ David A. Brandon | Chairman of the Board of Directors | |||
| David A. Brandon | ||||
| February 28, 2017 | ||||
| /s/ C. Andrew Ballard | Director | |||
| C. Andrew Ballard | ||||
| February 28, 2017 | ||||
| /s/ Andrew B. Balson | Director | |||
| Andrew B. Balson | ||||
| February 28, 2017 | ||||
| /s/ Diana F. Cantor | Director | |||
| Diana F. Cantor | ||||
| February 28, 2017 | ||||
| /s/ Richard L. Federico | Director | |||
| Richard L. Federico | ||||
| February 28, 2017 | ||||
| /s/ James A. Goldman | Director | |||
| James A. Goldman | ||||
| February 28, 2017 | ||||
| /s/ Gregory A. Trojan | Director | |||
| Gregory A. Trojan | ||||
| February 28, 2017 |