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 2017 and 2016 each consisted of 52 weeks, while fiscal 2015 consisted of 53 weeks.

Description of the Business

Domino’s is the largest pizza company in the world based on global retail sales, with more than 14,800 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 and our franchisees sell more than 2.5 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 our 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 food 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 Domino’s menu items to their family 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 2017 Highlights

	•		Global retail sales (which are total retail sales at Company-owned and franchised stores worldwide) increased 12.7% as compared to 2016.

	•		Same store sales increased 7.7% in our domestic stores and increased 3.4% in our international stores.

	•		Our revenues increased 12.8%.

	•		Our income from operations increased 14.8%.

	•		Our net income increased 29.5%.

During 2017, we continued our rapid global expansion with the opening of 1,045 net new stores. Our international franchise segment led the way with 829 net new store openings.

We continued our focus on growing online ordering and the digital customer experience as well as other technological advancements. In 2017, as part of an industry-first collaboration with Ford Motor Company, Domino’s began a meaningful test of delivery using self-driving vehicles. Our emphasis on technology innovation helped the Domino’s system generate more than half of global retail sales from digital channels in 2017. Overall, we believe our focus in 2017 on global growth and technology will continue to strengthen our brand in the future.

Fiscal 2016 Highlights

	•		Global retail sales increased 9.8% as compared to 2015.

	•		Same store sales increased 10.5% in our domestic stores and increased 6.3% in our international stores.

	•		Our revenues increased 11.6%.

	•		Our income from operations increased 12.0%.

	•		Our net income increased 11.4%.

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.

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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 the Domino’s system generate more than half of global retail sales from digital channels in 2016.

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 $1,000,000 in revenue in fiscal 2016 was sold to a franchisee in fiscal 2017, revenues from Company-owned stores would have declined by $1,000,000 in fiscal 2017, while franchise royalty revenues would have increased by only $55,000 in fiscal 2017, as we generally collect 5.5% of a domestic franchisee’s retail sales. Sales of food from our supply chain centers are recognized as revenues upon delivery of the food to franchisees, while sales of equipment and supplies are generally recognized as revenues upon shipment of the related products to franchisees.

Long-lived and intangible assets. We record long-lived assets, including property, plant and equipment and capitalized software, at cost. For acquisitions of franchise operations, we estimate the fair values of the assets and liabilities acquired based on physical inspection of assets, historical experience and other information available to us regarding the acquisition. We depreciate and amortize long-lived assets using useful lives determined by us based on historical experience and other information available to us. We evaluate the potential impairment of long-lived assets at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Our evaluation is based on various analyses, including the projection of undiscounted cash flows. For Company-owned stores, we perform related impairment tests on an operating market basis, which the Company has determined to be the lowest level for which identifiable cash flows are largely independent of other cash flows. If the carrying amount of a long-lived asset exceeds the amount of the expected future undiscounted cash flows of that asset, the Company estimates the fair value of the asset. If the carrying amount of the asset exceeds the estimated fair value of the asset, an impairment loss is recognized and the asset is written down to its estimated fair value.

We have not made any significant changes in the methodology used to project the future market cash flows of Company-owned stores during the years presented. Same store sales fluctuations and the rates at which operating costs will fluctuate in the future are key factors in evaluating recoverability of the related assets. If our same store sales significantly decline or if operating costs increase and we are unable to recover these costs, the carrying value of our Company-owned stores, by market, may be unrecoverable and we may be required to recognize an impairment charge. The Company did not record any impairment charges during fiscal 2017, fiscal 2016 or fiscal 2015.

A significant portion of our goodwill relates to acquisitions of domestic franchise stores and is included in our domestic stores segment, specifically, in our Company-owned stores division. We evaluate goodwill annually for impairment by comparing the fair value of the reporting unit (which is primarily determined using the present value of future cash flows) to its carrying value. If the carrying value of the reporting unit exceeds the fair value, goodwill would be impaired. We have not made any significant changes in the methodology used to evaluate goodwill impairment during the years presented. At December 31, 2017, the fair value of our business operations with

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associated goodwill exceeded their recorded carrying value, including the related goodwill. If cash flows generated by our Company-owned stores were to decline significantly in the future or there were negative revisions to the market multiple assumption, we may be required to recognize a goodwill impairment charge. However, based on the latest impairment analysis, we do not believe it is reasonably likely that there could be changes in assumptions that would trigger impairment.

Insurance and legal matters. We are a party to lawsuits and legal proceedings arising in the ordinary course of business. Management closely monitors these legal matters and estimates the probable costs for the resolution of such matters. These estimates are primarily determined by consulting with both internal and external parties handling the matters and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Legal judgments can be volatile and difficult to predict. Accordingly, if our estimates relating to legal matters proved inaccurate for any reason, we may be required to increase or decrease the related expense in future periods. We had accruals for legal matters of approximately $1.7 million at December 31, 2017 and $2.7 million at January 1, 2017.

For certain periods prior to December 1998 and for periods after December 2001, we maintain insurance coverage for workers’ compensation, general liability and owned and non-owned auto liability under insurance policies requiring payment of a deductible for each occurrence up to between $500,000 and $3.0 million, depending on the policy year and line of coverage. The related insurance reserves are based on undiscounted independent actuarial estimates, which are based on historical information along with assumptions about future events. Specifically, various methods, including analyses of historical trends and actuarial valuation methods, are utilized to estimate the cost to settle reported claims and claims incurred but not yet reported. The actuarial valuation methods develop estimates of the future ultimate claim costs based on the claims incurred as of the balance sheet date. When estimating these liabilities, several factors are considered, including the severity, duration and frequency of claims, legal cost associated with claims, healthcare trends and projected inflation.

Our methodology for determining our exposure has remained consistent throughout the years presented. Management believes that the various assumptions developed and actuarial methods used to determine our self-insurance reserves are reasonable and provide meaningful data that management uses to make its best estimate of our exposure to these risks. Changes in assumptions for such factors as medical costs and legal actions, as well as changes in actual experience, could cause our estimates to change in the near term which could result in an increase or decrease in the related expense in future periods. A 10% change in our self-insurance liability at December 31, 2017 would have affected our income before provision for income taxes by approximately $5.1 million for fiscal 2017. We had accruals for insurance matters of approximately $51.4 million at December 31, 2017 and $43.9 million at January 1, 2017.

Share-based payments. We recognize compensation expense related to our share-based compensation arrangements over the requisite service period based on the grant date fair value of the awards. The grant date fair value of each restricted stock and performance-based restricted stock award is equal to the market price of our stock on the date of grant. The grant date fair value of each stock option award is estimated using a Black-Scholes option pricing model. The pricing model requires assumptions, including the expected life of the stock option, the risk-free interest rate, the expected dividend yield and expected volatility of our stock over the expected life, which significantly impact the assumed fair value. We account for forfeitures as they occur. Additionally, our stock option, restricted stock and performance-based restricted stock arrangements provide for accelerated vesting and the ability to exercise during the remainder of the ten-year stock option life upon the retirement of individuals holding the awards who have achieved specified service and age requirements.

Management believes that the methods and various assumptions used to determine compensation expense related to these arrangements are reasonable, but if the assumptions change significantly for future grants, share-based compensation expense will fluctuate in future years.

Income taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We measure deferred tax assets and liabilities using current enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid. Judgment is required in determining the provision for income taxes, related reserves and deferred tax assets and liabilities. These include establishing a valuation allowance related to the ability to realize certain deferred tax assets, if necessary. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax assets will be realized. The Company did not have any valuation allowances recorded for deferred tax assets as of December 31, 2017 and had valuation allowances recorded for deferred tax assets of approximately $0.1 million as of January 1, 2017. Our accounting for deferred tax assets represents our best estimate of future events. Our net deferred tax assets assume that we will generate sufficient taxable income in specific tax jurisdictions, based on our estimates and assumptions. Changes in our current estimates due to unanticipated events could have a material impact on our financial condition and results of operations.

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The amounts recorded on the balance sheet relating to uncertain tax positions consider the ultimate resolution of revenue agent reviews based on estimates and assumptions. We believe we have appropriately accounted for our uncertain tax positions; however, tax audits, changes in tax laws and other unforeseen matters may result in us owing additional taxes. We adjust our reserves for uncertain tax positions when facts and circumstances change or due to the passage of time. The completion of a tax audit or the expiration of a statute of limitations associated with uncertain tax positions are examples of situations when we may adjust our reserves. Management believes that our tax positions comply with applicable tax law and that we have adequately provided for these matters. However, to the extent the final tax outcome of these matters is different than our recorded amounts, we may be required to adjust our tax reserves resulting in additional income tax expense or benefit in future periods.

Same Store Sales Growth

		2017				2016				2015
Domestic Company-owned stores			8.7	%			10.4	%			12.2	%
Domestic franchise stores			7.6	%			10.5	%			11.9	%
Domestic stores			7.7	%			10.5	%			12.0	%
International stores (excluding foreign currency impact)			3.4	%			6.3	%			7.8	%

Store Growth Activity

		Domestic Company-owned Stores				Domestic Franchise				Total Domestic Stores				International Stores				Total
Store count at December 28, 2014			377				4,690				5,067				6,562				11,629
Openings			12				148				160				867				1,027
Closings			(1	)			(26	)			(27	)			(99	)			(126	)
Transfers			(4	)			4				—				—				—
Store count at January 3, 2016			384				4,816				5,200				7,330				12,530
Openings			8				186				194				1,178				1,372
Closings			(1	)			(22	)			(23	)			(68	)			(91	)
Transfers			1				(1	)			—				—				—
Store count at January 1, 2017			392				4,979				5,371				8,440				13,811
Openings			16				213				229				891				1,120
Closings			—				(13	)			(13	)			(62	)			(75	)
Transfers			(16	)			16				—				—				—
Store count at December 31, 2017			392				5,195				5,587				9,269				14,856

Income Statement Data

(dollars in millions)		2017								2016								2015
Domestic Company-owned stores		$	490.8							$	439.0							$	396.9
Domestic franchise			351.4								312.3								272.8
Supply chain			1,739.0								1,544.3								1,383.2
International franchise			206.7								177.0								163.6
Total revenues			2,788.0				100.0	%			2,472.6				100.0	%			2,216.5				100.0	%
Domestic Company-owned stores			377.7								331.9								299.3
Supply chain			1,544.3								1,373.1								1,234.1
Cost of sales			1,922.0				68.9	%			1,704.9				69.0	%			1,533.4				69.2	%
Operating margin			866.0				31.1	%			767.7				31.0	%			683.1				30.8	%
General and administrative			344.8				12.4	%			313.6				12.7	%			277.7				12.5	%
Income from operations			521.2				18.7	%			454.0				18.3	%			405.4				18.3	%
Interest expense, net			(121.1	)			(4.3	)%			(109.4	)			(4.4	)%			(99.2	)			(4.5	)%
Income before provision for income taxes			400.2				14.4	%			344.7				13.9	%			306.2				13.8	%
Provision for income taxes			122.2				4.4	%			130.0				5.2	%			113.4				5.1	%
Net income		$	277.9				10.0	%		$	214.7				8.7	%		$	192.8				8.7	%

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2017 compared to 2016

(tabular amounts in millions, except percentages)

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

Consolidated revenues increased $315.4 million or 12.8% in 2017. The increase was due primarily to higher supply chain food volumes as well as higher Company-owned store, domestic franchise and international franchise revenues resulting from same store sales and store count growth. These changes in revenues are more fully described below.

Domestic stores. Revenues from domestic stores are primarily comprised of retail sales from domestic Company-owned store operations as well as royalties from retail sales and other fees from domestic franchised stores, as summarized in the following table.

		2017								2016
Domestic Company-owned stores		$	490.8				58.3	%		$	439.0				58.4	%
Domestic franchise			351.4				41.7	%			312.3				41.6	%
Total domestic stores revenues		$	842.2				100.0	%		$	751.3				100.0	%

Higher domestic Company-owned same store sales, royalty revenues earned on higher franchise same store sales and an increase in the average number of stores open drove an increase in overall domestic store revenues of $90.9 million or 12.1%. These results are more fully described below.

Domestic Company-owned stores. Revenues from domestic Company-owned store operations increased $51.8 million or 11.8% in 2017. This increase was due to an 8.7% increase in same store sales as compared to 2016 and an increase in the average number of stores open during the year.

Domestic franchise. Revenues from domestic franchise operations increased $39.1 million or 12.5% in 2017. The increase was driven by a 7.6% increase in same store sales as compared to 2016 and an increase in the average number of stores open during the year. Revenues further benefited from higher fees paid by franchisees for the use of our internally developed technology platforms.

Supply chain. Revenues from supply chain operations are primarily comprised of sales of food, equipment and supplies from our supply chain centers to all of our domestic franchised stores and certain international franchised stores, as summarized in the following table.

		2017								2016
Domestic supply chain		$	1,574.9				90.6	%		$	1,408.8				91.2	%
International supply chain			164.1				9.4	%			135.5				8.8	%
Total supply chain		$	1,739.0				100.0	%		$	1,544.3				100.0	%

Domestic supply chain. Domestic supply chain revenues increased $166.1 million or 11.8% in 2017. These increases were primarily attributable to higher volumes from increased order counts at the store level as well as store count growth. Our market basket pricing to stores increased 1.7% during 2017, which resulted in an estimated $18.8 million increase in domestic supply chain revenues.

International supply chain. Revenues from international supply chain operations increased $28.6 million or 21.1% in 2017, driven primarily by higher volumes from increased order counts at the store level. The positive impact of foreign currency exchange rates of $3.4 million in 2017 also contributed to the increases.

International franchise. International franchise revenues primarily consist of royalties from retail sales and other fees from our international franchise stores. Revenues from international franchise operations increased $29.7 million or 16.8% in 2017. This increase was due to an increase in the average number of international stores open during 2017 as well as higher same store sales and an increase in technology fees, and was offset slightly by the negative impact of changes in foreign currency exchange rates of approximately $0.8 million in 2017. Excluding the impact of foreign currency exchange rates, same store sales increased 3.4% in 2017 compared to 2016.

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Cost of sales / Operating margin. Consolidated cost of sales consists primarily of domestic Company-owned store and supply chain costs incurred to generate related revenues. Components of consolidated cost of sales primarily include food, labor and occupancy costs. The changes to the consolidated operating margin, which we define as revenues less cost of sales are summarized in the following table.

		2017								2016
Consolidated revenues		$	2,788.0				100.0	%		$	2,472.6				100.0	%
Consolidated cost of sales			1,922.0				68.9	%			1,704.9				69.0	%
Consolidated operating margin		$	866.0				31.1	%		$	767.7				31.0	%

The $98.3 million or 12.8% increase in consolidated operating margin was due to higher domestic and international franchise revenues as well as higher supply chain and Company-owned store margins. Franchise revenues do not have a cost of sales component, so changes in franchise revenues have a disproportionate effect on the consolidated operating margin.

As a percentage of total revenues, our consolidated operating margin increased 0.1 percentage points in 2017 due to a higher mix of franchise revenues and higher supply chain margin as a percentage of supply chain revenues. Company-owned store operating margin decreased 1.3 percentage points during 2017. These changes in margin are more fully discussed below.

Domestic Company-owned stores. The changes to domestic Company-owned store operating margin, which do not include other store-level costs such as royalties and advertising, are summarized in the following table.

		2017								2016
Revenues		$	490.8				100.0	%		$	439.0				100.0	%
Cost of sales			377.7				76.9	%			331.9				75.6	%
Store operating margin		$	113.2				23.1	%		$	107.2				24.4	%

The $6.0 million or 5.6% increase in the domestic Company-owned store operating margin was due primarily to higher same store sales and an increase in the average number of stores open during the year.

As a percentage of store revenues, the store operating margin decreased 1.3 percentage points in 2017, as discussed in more detail below.

	•		Food costs increased 0.1 percentage points to 26.7% in 2017, due primarily to higher overall commodity prices.

	•		Labor costs increased 0.7 percentage points to 29.5% in 2017, due primarily to an increase in labor rates in certain markets. The leveraging of higher same store sales partially offset this increase.

	•		Insurance costs increased 0.6 percentage points to 3.4% in 2017, due primarily to incremental insurance expense related to updated independent actuarial estimates for our casualty insurance program.

	•		Occupancy costs, which include rent, telephone, utilities and depreciation, decreased 0.2 percentage points to 7.9% in 2017, due primarily to the leveraging of higher same store sales.

Supply chain. The changes to the supply chain operating margin are summarized in the following table.

		2017								2016
Revenues		$	1,739.0				100.0	%		$	1,544.3				100.0	%
Cost of sales			1,544.3				88.8	%			1,373.1				88.9	%
Supply chain operating margin		$	194.7				11.2	%		$	171.3				11.1	%

The $23.4 million or 13.7% increase in the supply chain operating margin was due primarily to higher volumes from increased store orders.

As a percentage of supply chain revenues, the supply chain operating margin increased 0.1 percentage points in 2017 due primarily to procurement savings. Increased labor and delivery costs partially offset this increase.

General and administrative expenses. General and administrative expenses increased $31.2 million or 9.9% in 2017, primarily driven by continued investments in technological initiatives (primarily in e-commerce and information technology) as well as investments in other strategic areas. Higher Company-owned store national advertising contributions resulting from higher same store sales also contributed to the increase. These increases were partially offset by lower performance-based compensation expense and a pre-tax gain recognized from the sale of 17 Company-owned stores during the fourth quarter of 2017 of $4.0 million.

Interest income. Interest income increased $0.8 million to $1.5 million in 2017.

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Interest expense. Interest expense increased $12.4 million to $122.5 million in 2017. This increase was driven by higher average borrowings and approximately $5.8 million of expenses related to the 2017 Recapitalization. These expenses include a $5.5 million write-off of debt issuance costs and $0.3 million of interest expense that was incurred on the 2012 debt subsequent to the closing of the 2017 Recapitalization but prior to the repayment of the 2012 debt. The increase in interest expense was offset in part by a lower weighted-average borrowing rate.

Our average outstanding debt balance, excluding capital lease obligations, was approximately $2.63 billion in 2017 and approximately $2.23 billion in 2016. The increase in the average outstanding debt balance was due to the issuance of debt in connection with the 2017 Recapitalization. Our weighted average borrowing rate decreased to 4.2% in fiscal 2017, from 4.6% in fiscal 2016. The decreases in the Company’s cash borrowing rate resulted from the lower interest rates on the debt issued as part of the 2017 Recapitalization.

Provision for income taxes. Provision for income taxes decreased $7.8 million to $122.2 million in 2017. Although pre-tax income increased in 2017, the effective tax rate decreased, primarily as a result of the Company’s adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which requires tax benefits on equity-based compensation to be recorded as a reduction to the income tax provision. The adoption of this standard benefitted the provision for income taxes by $27.2 million in 2017. The effective tax rate decreased to 30.6% in 2017 as compared to 37.7% in 2016.

The impact of the 2017 Tax Act was not material to our 2017 financial statements. For further discussion of risks and uncertainties associated with the implementation of the 2017 Tax Act, see Item 1A. Risk Factors.

2016 compared to 2015

(tabular amounts in millions, except percentages)

Revenues: Consolidated revenues increased $256.1 million or 11.6% in 2016. The increase was due primarily to higher supply chain food volumes as well as higher Company-owned store, domestic franchise and international franchise revenues resulting from same store sales and store count growth. These increases were offset in part by the inclusion of the 53rd week in 2015, which positively impacted revenues by an estimated $49.7 million in 2015. The negative impact of changes in foreign currency exchange rates on international franchise royalties and international supply chain revenues also partially offset the increases in revenues. These changes in revenues are more fully described below.

Domestic stores. Domestic stores revenues are summarized in the following table.

		2016								2015
Domestic Company-owned stores		$	439.0				58.4	%		$	396.9				59.3	%
Domestic franchise			312.3				41.6	%			272.8				40.7	%
Total domestic stores revenues		$	751.3				100.0	%		$	669.7				100.0	%

Higher franchise same store sales, store count growth and higher domestic Company-owned same store sales drove an increase in overall domestic store revenues of $81.6 million or 12.2%. These results are more fully described below.

Domestic Company-owned stores. Revenues from domestic Company-owned store operations increased $42.1 million or 10.6% in 2016. This increase was due to a 10.4% increase in same store sales as compared to 2015 and an increase in the average number of stores open during the year, and was offset in part by the estimated $9.1 million positive impact in 2015 related to the inclusion of the 53rd week.

Domestic franchise. Revenues from domestic franchise operations increased $39.5 million or 14.5% in 2016. The increase was driven by a 10.5% increase in same store sales as compared to 2015 and an increase in the average number of stores open during the year. Revenues further benefited from fees paid by franchisees for our internally developed online ordering platform, and were offset in part by the estimated $6.1 million positive impact in 2015 related to the inclusion of the 53rd week.

Supply chain. Supply chain revenues are summarized in the following table.

		2016								2015
Domestic supply chain		$	1,408.8				91.2	%		$	1,266.4				91.6	%
International supply chain			135.5				8.8	%			116.8				8.4	%
Total supply chain		$	1,544.3				100.0	%		$	1,383.2				100.0	%

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Domestic supply chain. Domestic supply chain revenues increased $142.4 million or 11.3% in 2016. These increases were primarily attributable to higher volumes from increased order counts at the store level. They were partially offset by lower commodity prices and the estimated $27.8 million positive impact in 2015 related to the inclusion of the 53rd week. The lower cheese block price (passed through directly in domestic supply chain pricing to franchisees) did not have a material impact on domestic supply chain revenues in 2016. We estimate that lower commodity prices resulted in an approximate $3.0 million decrease in domestic supply chain revenues during 2016.

International supply chain. Revenues from international supply chain operations increased $18.7 million or 16.0% in 2016. This increase resulted primarily from higher volumes from increased order counts at the store level in 2016 and was offset in part by the negative impact of foreign currency exchange rates of approximately $4.3 million in 2016 and the estimated $2.6 million positive impact in 2015 related to the inclusion of the 53rd week.

International franchise. Revenues from international franchise operations increased $13.4 million or 8.2% in 2016. This increase was due to an increase in the average number of international stores open during 2016 as well as higher same store sales, and was offset in part by the negative impact of changes in foreign currency exchange rates of approximately $8.9 million in 2016 and the estimated $4.1 million positive impact in 2015 related to the inclusion of the 53rd week. Excluding the impact of foreign currency exchange rates, same store sales increased 6.3% in 2016 compared to 2015.

Cost of sales / Operating margin. The changes to the consolidated operating margin, which we define as revenues less cost of sales, are summarized in the following table.

		2016								2015
Consolidated revenues		$	2,472.6				100.0	%		$	2,216.5				100.0	%
Consolidated cost of sales			1,704.9				69.0	%			1,533.4				69.2	%
Consolidated operating margin		$	767.7				31.0	%		$	683.1				30.8	%

The $84.6 million or 12.4% increase in consolidated operating margin was due primarily to higher domestic and international franchise revenues and higher supply chain margins. The increase in the consolidated operating margin was offset in part by the estimated $16.6 million positive impact in 2015 related to the inclusion of the 53rd week. Franchise revenues do not have a cost of sales component, so changes in franchise revenues have a disproportionate effect on the consolidated operating margin.

As a percentage of total revenues, our consolidated operating margin increased 0.2 percentage points in 2016, due to higher supply chain margins as a percentage of their revenues and a higher mix of franchise revenues. Lower Company-owned stores operating margins as a percentage of their revenues partially offset these increases. These changes are more fully described below.

Domestic Company-owned stores. The changes to domestic Company-owned store operating margin, which do not include other store-level costs such as royalties and advertising, are summarized in the following table.

		2016								2015
Revenues		$	439.0				100.0	%		$	396.9				100.0	%
Cost of sales			331.9				75.6	%			299.3				75.4	%
Store operating margin		$	107.2				24.4	%		$	97.6				24.6	%

The $9.6 million or 9.8% increase in the domestic Company-owned store operating margin was due primarily to higher same store sales. The estimated $3.1 million positive impact in 2015 related to the inclusion of the 53rd week partially offset this increase.

As a percentage of store revenues, the store operating margin decreased 0.2 percentage points in 2016, as discussed in more detail below.

	•		Food costs increased 0.5 percentage points to 26.6% in 2016, due primarily to promotional activities. Lower overall commodity prices partially offset these increases.

	•		Labor costs increased 0.3 percentage points to 28.8% in 2016, due primarily to an increase in labor rates in certain markets as well as higher performance based compensation and overtime as a result of increased same store sales. The leveraging impact of higher same store sales partially offset these increases.

	•		Insurance costs decreased 1.2 percentage points to 2.8% in 2016, due primarily to a $4.3 million insurance expense related to updated actuarial estimates for our casualty insurance program in the third quarter of 2015.

	•		Transaction-related expenses increased 0.9 percentage points to 3.2% in 2016. This increase was primarily attributable to higher credit card-related expenses in certain markets in which we operate.

	•		Delivery expenses decreased 0.4 percentage points to 3.4% in 2016, due primarily to lower fuel prices.

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Supply chain. The changes to the supply chain operating margin are summarized in the following table.

		2016								2015
Revenues		$	1,544.3				100.0	%		$	1,383.2				100.0	%
Cost of sales			1,373.1				88.9	%			1,234.1				89.2	%
Supply chain operating margin		$	171.3				11.1	%		$	149.1				10.8	%

The $22.2 million or 14.9% increase in the supply chain operating margin was due primarily to higher volumes from increased store order counts. Lower insurance expenses also contributed to the increased operating margin, as the third quarter of 2015 contained a $1.4 million insurance charge related to the Company’s casualty insurance program. The estimated $3.3 million positive impact in 2015 related to the inclusion of the 53rd week in 2015 partially offset the increase in operating margin.

As a percentage of supply chain revenues, the supply chain operating margin increased 0.3 percentage points in 2016 due to lower casualty and health insurance expenses, higher volumes from store count growth and increased store order counts, as well as lower fuel costs. Increased labor costs partially offset these increases. Decreases in certain food prices have a positive effect on the supply chain operating margin percentage due to the fixed dollar margin earned by supply chain on certain food items. Lower commodity prices decreased both revenues and costs by $3.0 million in fiscal 2016. Lower cheese prices did not have a material impact in 2016; if our U.S. cheese prices for 2016 had been in effect during 2015, the supply chain operating margin as a percentage of supply chain revenues would have remained the same. The dollar margin would also have been unaffected.

General and administrative expenses. General and administrative expenses increased $35.9 million or 12.9% in 2016. These increases were driven by continued investments in technological initiatives and labor (primarily in e-commerce, information technology and international operations) as well as higher performance-driven expenses resulting from improved operating performance and higher same store sales, including variable performance-based compensation and Company-owned store national advertising contributions. General and administrative expenses were positively impacted by the non-recurrence of an estimated $4.7 million of expenses from the inclusion of the 53rd week in 2015.

Interest income. Interest income increased slightly to $0.7 million in 2016.

Interest expense. Interest expense increased $10.5 million to $110.1 million in 2016. The increase was driven by a higher average debt balance as a result of the 2015 Recapitalization and was offset in part by a lower cash borrowing rate.

Our weighted average borrowing rate decreased to 4.6% in fiscal 2016, from 5.1% in fiscal 2015. The decreases in the Company’s cash borrowing rate resulted from the lower interest rates on the debt issued as part of the 2015 recapitalization. Our average outstanding debt balance, excluding capital lease obligations, was approximately $2.23 billion in 2016 and approximately $1.68 billion in 2015. The increase in the average outstanding debt balance was due to the issuance of debt in connection with the 2015 Recapitalization.

Provision for income taxes. Provision for income taxes increased $16.6 million to $130.0 million in 2016, due primarily to higher pre-tax income. The Company’s effective income tax rate increased by 0.7 percentage points to 37.7% of pre-tax income in 2016.

Liquidity and capital resources

Historically, we have operated with minimal positive working capital or negative working capital, primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities. We generally collect our receivables within three weeks from the date of the related sale and we generally experience 35 to 45 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, invest in our business, pay dividends and repurchase our common stock, reduce our working capital amounts. As of December 31, 2017, we had negative working capital of $10.3 million, excluding restricted cash and cash equivalents of $191.8 million and including total unrestricted cash and cash equivalents of $35.8 million.

As of December 31, 2017, we had approximately $122.9 million of restricted cash and cash equivalents held for future principal and interest payments and $32.1 million of restricted cash equivalents held in a three-month interest reserve as required by the related debt agreements, $36.7 million of cash held as collateral for outstanding letters of credit and $0.1 million of other restricted cash, for a total of $191.8 million of restricted cash and cash equivalents.

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Our primary source of liquidity is cash flows from operations and availability of borrowings under our variable funding notes. In connection with the 2017 Recapitalization, the Company issued a new variable funding note facility which allows for advances of up to $175.0 million of Series 2017-1 Variable Funding Senior Secured Notes, Class A-1 Notes and certain other credit instruments, including letters of credit (the “2017 Variable Funding Notes”). The Variable Funding Notes were undrawn on the closing date. The Company’s previous variable funding note facility was canceled.

As of December 31, 2017, we had $46.7 million of outstanding letters of credit and $128.3 million of available borrowing capacity under our 2017 Variable Funding Notes. The letters of credit are primarily related to our casualty insurance programs and certain supply chain center leases. Borrowings under the 2017 Variable Funding Notes are available to fund our working capital requirements, capital expenditures and, subject to other limitations, other general corporate purposes including dividend payments.

2017 Recapitalization

On July 24, 2017, the Company completed the 2017 Recapitalization in which certain of the Company’s subsidiaries issued new notes pursuant to an asset-backed securitization. The new notes consist of $300.0 million Series 2017-1 Floating Rate Senior Secured Notes, Class A-2-I with an anticipated term of five years (the “Floating Rate Notes”), $600.0 million Series 2017-1 3.082% Fixed Rate Senior Secured Notes, Class A-2-II with an anticipated term of five years (the “Five-year Fixed Rate Notes”), and $1.0 billion Series 2017-1 4.118% Fixed Rate Senior Secured Notes, Class A-2-III with an anticipated term of 10 years (the “Ten-year Fixed Rate Notes” and, collectively with the Floating Rate Notes and the Five-year Fixed Rate Notes, the “2017 Fixed and Floating Rate Notes”) in an offering exempt from registration under the Securities Act of 1933, as amended. The interest rate on the Floating Rate Notes is payable at a rate equal to LIBOR plus 125 basis points. The 2017 Fixed and Floating Rate Notes and the 2017 Variable Funding Notes are collectively referred to as the “2017 Notes”. Gross proceeds from the issuance of the 2017 Notes was $1.9 billion. Additional information related to the 2017 Recapitalization transaction is included in Note 4 to our consolidated financial statements.

A portion of proceeds from the 2017 Recapitalization was used to repay the remaining $910.5 million in outstanding principal and interest under the outstanding Series 2012-1 5.216% Fixed Rate Senior Secured Notes, Class A-2 (the “2012 Fixed Rate Notes”), pre-fund a portion of the principal and interest payable on the 2017 Notes and pay transaction fees and expenses. In connection with the repayment of the 2012 Fixed Rate Notes, the Company expensed approximately $5.5 million for the remaining unamortized debt issuance costs associated with these notes. Additionally, in connection with the 2017 Recapitalization, the Company capitalized $16.8 million of debt issuance costs, which are being amortized into interest expense over the five and ten-year expected terms of the 2017 Fixed and Floating Rate Notes.

On July 27, 2017, the Company’s Board of Directors authorized a new share repurchase program to repurchase up to $1.25 billion of the Company’s common stock. This repurchase program replaced the remaining availability of approximately $136.4 million under the Company’s previously approved $250.0 million share repurchase program that was authorized by the Board on May 25, 2016. On August 2, 2017, the Company entered into a $1.0 billion accelerated share repurchase agreement (the “2017 ASR Agreement”) with a counterparty. Pursuant to the terms of the 2017 ASR Agreement, on August 3, 2017, as part of its new $1.25 billion share repurchase authorization, the Company used a portion of the proceeds from the 2017 Recapitalization to pay the counterparty $1.0 billion in cash and received 4,558,863 shares of the Company’s common stock. Final settlement of the 2017 ASR Agreement occurred on October 11, 2017. In connection with the 2017 ASR Agreement, the Company received and retired a total of 5,218,670 shares of its common stock at an average price of $191.62.

2015 Recapitalization

The Company also entered into a recapitalization transaction in 2015, in which certain of our subsidiaries, among other things, replaced $551.3 million of the 2012 Fixed Rate Notes and its 2012 variable funding notes with new notes (the “2015 Fixed Rate Notes”) issued pursuant to an asset-backed securitization. The 2015 Fixed Rate Notes consist of $500.0 million of Series 2015-1 3.484% Fixed Rate Senior Secured Notes, Class A-2-I (the “2015 Five-Year Notes”), $800.0 million Series 2015-1 4.474% Fixed Rate Senior Secured Notes, Class A-2-II (the “2015 Ten-Year Notes”) and $125.0 million of Series 2015-1 Variable Funding Senior Secured Notes, Class A-1 (the “2015 Variable Funding Notes”). The “2015 Fixed Rate Notes” and the “2017 Fixed and Floating Rate Notes” are collectively referred to as the “2015 and 2017 Notes.” Additional information related to the 2015 Recapitalization transaction is included in Note 4 to our consolidated financial statements.

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In connection with the 2015 Recapitalization, the Company used a portion of proceeds 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. In connection with the 2015 Recapitalization, the Company recorded $17.4 million of debt issuance costs, which are being amortized into interest expense over the five and ten-year expected terms of the 2015 Fixed Rate Notes. Additionally, in connection with the 2015 Recapitalization, the Company wrote off approximately $6.9 million of these costs in connection with the extinguishment of $551.3 million of previous fixed rate notes. Further, in connection with the 2015 Recapitalization, the Company incurred approximately $8.1 million of net expenses.

On October 23, 2015, the Company’s Board of Directors authorized a new share repurchase program to repurchase up to $800.0 million of the Company’s common stock. On October 27, 2015, the Company entered into a $600.0 million accelerated share repurchase agreement (the “2015 ASR Agreement”) with a counterparty. Pursuant to the terms of the 2015 ASR Agreement, on October 30, 2015, the Company used a portion of the proceeds from the 2015 Recapitalization to pay the counterparty $600.0 million in cash and received approximately 4,858,994 shares of the Company’s common stock. During the first quarter of 2016, the Company received and retired 456,936 shares of its common stock in connection with the final settlement of the 2015 ASR Agreement.

2015 and 2017 Notes

The 2015 and 2017 Notes have scheduled principal payments of $32.0 million in each of 2018 and 2019, $509.5 million in 2020, $27.0 million in 2021, $879.8 million in 2022, $18.0 million in each of 2023 and 2024, $742.0 million in 2025, $10.0 million in 2026, and $907.5 million in 2027. However, in accordance with our debt agreements, the payment of principal on the outstanding senior notes shall be suspended if the leverage ratio for the Company is less than or equal to 5.0x total debt, as defined, to adjusted EBITDA, as defined, and no catch-up provisions are applicable.

The 2015 and 2017 Notes are subject to certain financial and non-financial covenants, including a debt service coverage calculation, as defined in the related agreements. In the event that certain covenants are not met, the 2015 and 2017 Notes may become due and payable on an accelerated schedule.

Under the provisions of the Company’s previously existing debt agreements, during the first and second quarters of 2017, the Company met the maximum leverage ratios of less than 4.5x and accordingly, did not make previously scheduled debt amortization payments in accordance with the debt agreements. Subsequent to the 2017 Recapitalization, the Company’s leverage ratios exceeded the new maximum leverage ratio of 5.0x and, accordingly, the Company began making the scheduled amortization payments.

Share Repurchase Programs

The Company’s open market share repurchase programs have historically been funded by excess cash flows. The Company used cash of approximately $1.06 billion in 2017, $300.3 million in 2016 and $738.6 million in 2015 for share repurchases. The Company had approximately $198.5 million left under its $1.25 billion authorization as of December 31, 2017. The Company’s Board of Directors authorized a new share repurchase program to repurchase up to $750.0 million of the Company’s common stock on February 14, 2018. This repurchase program replaces the remaining availability of approximately $198.5 million under its previously approved $1.25 billion share repurchase program.

Capital Expenditures

In the past three years, we have invested approximately $214.2 million in capital expenditures. In 2017, we invested $90.3 million in capital expenditures which primarily related to investments in our supply chain centers, our proprietary internally developed point-of-sale system (Domino’s PULSE), our digital ordering platform, new Company-owned stores, our internal enterprise systems, reimaging our existing Company-owned stores and other technology initiatives. We did not have any material commitments for capital expenditures as of December 31, 2017.

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

		Fiscal Year Ended
(In millions)		December 31, 2017				January 1, 2017				January 3, 2016
Cash Flows Provided By (Used In)
Net cash provided by operating activities		$	339.0			$	287.3			$	291.8
Net cash used in investing activities			(149.0	)			(0.8	)			(109.3	)
Net cash used in financing activities			(197.1	)			(375.8	)			(80.9	)
Exchange rate changes			0.1				(1.3	)			1.0
Change in cash and cash equivalents		$	(7.0	)		$	(90.6	)		$	102.6

Operating Activities

Cash provided by operating activities increased $51.7 million in 2017 from 2016, primarily due to an increase in net income of $63.2 million. Net income in 2017 included a $27.2 million benefit from the adoption of ASU 2016-09, which requires tax benefits on equity-based compensation to be recorded as a reduction to the provision from income taxes in net income and as a component of cash provided by operating activities. In 2016, these tax benefits were recorded directly to stockholders’ deficit and as a financing activity in the statement of cash flows. Cash provided by operating activities was also positively impacted by an increase in non-cash amounts of $18.1 million. These increases were offset in part by the negative impact of changes in operating assets and liabilities of $29.6 million, primarily related to the timing of payments on accounts payable and accrued liabilities during 2017 as compared to 2016.

Cash provided by operating activities decreased $4.5 million in 2016 from 2015, primarily due to the negative impact of changes in operating assets and liabilities of $23.7 million resulting from the timing of payments for accounts payable and accrued liabilities in 2016 as compared to 2015. This decrease was offset in part by an increase in net income of $21.9 million.

We are focused on continually improving our net income and cash flow from operations and management expects to continue to generate positive cash flows from operating activities for the foreseeable future.

Investing Activities

During fiscal 2017, cash used in investing activities was $149.0 million, which consisted primarily of $90.0 million of capital expenditures (driven by investments in our technological initiatives, supply chain centers and Company-owned stores) and the increase in restricted cash and cash equivalents of $65.3 million. These uses of cash were offset in part by the proceeds from the sale of assets of $6.8 million.

During fiscal 2016, cash used in investing activities was $0.8 million, which consisted primarily of $58.6 million of capital expenditures (driven by investments related to the reimaging of our existing Company-owned stores and investments in our supply chain centers and training facilities, our proprietary internally developed point-of-sale system, our digital ordering platform, our internal enterprise systems and other technology initiatives), offset in part by the decrease in restricted cash and cash equivalents of $54.4 million and by proceeds from the sale of assets of $4.9 million.

During fiscal 2015, cash used in investing activities was $109.3 million, which consisted primarily of $63.3 million of capital expenditures (driven by investments related to the reimaging of our existing Company-owned stores and investments in our supply chain centers and training facilities, our proprietary internally developed point-of-sale system, our digital ordering platform, our internal enterprise systems and other technology initiatives), increases in restricted cash and cash equivalents of $60.0 million, and offset by proceeds from the sale of assets of $12.7 million.

Financing Activities

During fiscal 2017, cash used in financing activities was $197.1 million. We issued $1.9 billion of debt in connection with our 2017 Recapitalization, which was offset by purchases of common stock of $1.06 billion, repayments of long-term debt of $928.2 million (of which, $910.2 million was repayment of the remaining 2012 Fixed Rate Notes using a portion of the proceeds received from the 2017 Recapitalization), funding dividend payments to our shareholders of $84.3 million, and cash paid for financing costs related to our 2017 Recapitalization of $16.8 million. We also made $9.4 million in tax payments for restricted stock upon vesting and received proceeds of $6.1 million from the exercise of stock options.

During fiscal 2016, cash used in financing activities was $375.8 million. Purchases of common stock totaled $300.3 million, repayments of long-term debt and capital lease obligations totaled $122.3 million, and funding dividend payments to our shareholders totaled $73.9 million. The net tax impact of equity-based compensation was $42.5 million, proceeds from issuance of debt (from our draws on our variable funding note facility) totaled $63.0 million, and proceeds from the exercise of stock options totaled $15.2 million.

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During fiscal 2015, cash used in financing activities was $80.9 million. In fiscal 2015, we issued $1.3 billion of debt in connection with our 2015 Recapitalization, which was offset by the purchases of common stock of $738.6 million, repayments of long-term debt of $564.4 million (of which, $551.3 million was an optional prepayment on our 2012 Fixed Rate Notes using a portion of the proceeds received from the 2015 Recapitalization), funding dividend payments to our shareholders of $80.3 million, and cash paid for financing costs related to our 2015 Recapitalization of $17.4 million. The net tax impact of equity-based compensation of $10.3 million increased cash from financing activities in fiscal 2015.

Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described in Item 1A. Risk Factors. There can be no assurance that our business will generate sufficient cash flows from operations or that future borrowings will be available under the 2017 Variable Funding Notes or otherwise to enable us to service our indebtedness, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the Fixed and Floating Rate Notes and to service, extend or refinance the 2017 Variable Funding Notes will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

Impact of inflation

Inflation did not have a material impact on our operations in 2017, 2016 or 2015. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of operations. Further discussion on the impact of commodities and other cost pressures is included above as well as in Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

New accounting pronouncements

Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The new standard was effective for the Company beginning January 2, 2017.

As a result, excess tax benefits or deficiencies from equity-based compensation activity are reflected in the consolidated statements of income as a component of the provision for income taxes, whereas they previously were recognized in the consolidated statement of stockholders’ deficit. The Company also elected to account for forfeitures as they occur, rather than to use an estimate of expected forfeitures for financial statement reporting purposes. The adoption of ASU 2016-09 resulted in a decrease in our provision for income taxes of $27.2 million in fiscal 2017, primarily due to the recognition of excess tax benefits for options exercised and the vesting of equity awards. The Company’s election to account for forfeitures as they occur had an immaterial impact on its equity-based compensation expense.

The Company adopted the cash flow presentation prospectively, and accordingly, excess tax benefits from equity-based compensation of $27.2 million in fiscal 2017 are presented as an operating activity, while $48.1 million and $17.8 million of excess tax benefits from equity-based compensation in fiscal 2016 and fiscal 2015, respectively, are presented as a financing activity. The presentation requirements for cash flows related to taxes paid for restricted stock upon vesting had no impact on our consolidated statements of cash flows for any of the periods presented because such cash flows have historically been presented as a financing activity.

Accounting Standards Not Yet Adopted

The Company has considered all new accounting pronouncements issued by the FASB and concluded the following accounting pronouncements may have a material impact on our consolidated financial statements, or represent accounting pronouncements for which the Company has not yet completed its assessment.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), or Accounting Standards Codification 606 (“ASC 606”). This guidance outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. Under the new revenue recognition standard, entities apply a five-step model that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, companies identify the performance obligations within their contracts with customers, allocate the transaction price received from customers to each performance obligation

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identified within their contracts, and recognize revenue as the performance obligations are satisfied. During 2015, 2016, and 2017, the FASB issued various amendments which provide additional clarification and implementation guidance on ASC 606. Specifically, these amendments clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, clarify how an entity should identify performance obligations and licensing implementation guidance, as well as account for shipping and handling fees and freight service, assess collectability, present sales tax, treat non-cash consideration, and account for completed and modified contracts at the time of transition. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The effective date and transition requirements for ASC 606 and amendments is for fiscal years, and for interim periods within those years, beginning after December 15, 2017, and the Company will adopt this guidance using the modified retrospective approach effective January 1, 2018.

The Company has substantially completed its assessment of ASC 606, and the adoption of this guidance is not expected to have a material impact on its recognition of sales from Company-owned stores, ongoing royalty fees which are based on a percentage of franchise sales, revenues from its supply chain centers, development fees or technology fees.

The Company has determined that the store opening fees received from international franchisees do not contain separate and distinct performance obligations from the franchise right and those upfront fees will therefore be recognized as revenue over the term of each respective franchise agreement. Currently, we recognize such fees as revenue when received. The Company does not expect this to have a material impact on its international franchise revenues. However, an adjustment to beginning retained earnings and a corresponding contract liability of approximately $15 million will be established on the date of adoption associated with the fees received through December 31, 2017 that would have been deferred and recognized over the term of each respective franchise agreement if the new guidance had been applied in the past.

The Company has also determined that ASC 606 requires a gross presentation on the consolidated statement of income for franchisee contributions received by and related expenses of Domino’s National Advertising Fund Inc. (“DNAF”), our consolidated not-for-profit subsidiary. DNAF exists solely for the purpose of promoting the Domino’s Pizza brand in the U.S. The Company currently presents the restricted assets and liabilities of DNAF in its consolidated balance sheets and, under existing accounting guidance, has determined that it acts as an agent for accounting purposes with regard to franchise store contributions and disbursements. As a result, the Company currently presents the activities of DNAF net in its statements of income. Under ASC 606, the Company has determined that there are not separate performance obligations associated with the franchise advertising contributions received by DNAF and as a result, these franchise contributions and the related expenses will be presented gross in the Company’s consolidated statement of income. The Company expects this change to have a material impact on its total revenues and expenses beginning in fiscal 2018. However, as the amount of revenues to be recorded is directly tied to future franchise retail sales and advertising contribution rates, the Company is not able to reasonably estimate the impact. If this guidance were in effect in fiscal 2017, the Company would have reported incremental franchise advertising revenues and expenses of approximately $324 million in its consolidated statement of income. While this change will materially impact the gross amount of reported franchise revenues and expenses, the impact will generally be an offsetting increase to both revenues and expenses such that the impact on income from operations and net income, if any, would not be material. We will also present the activity associated with DNAF on a gross basis in the statement of cash flows beginning in fiscal 2018.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Based on a preliminary assessment, the Company expects the adoption of this guidance to have a material impact on its assets and liabilities due to the recognition of right-of-use assets and lease liabilities on its consolidated balance sheets at the beginning of the earliest period presented. The Company is continuing its assessment, which may identify additional impacts this guidance will have on its consolidated financial statements and disclosures. Our current minimum lease commitments are disclosed in Note 5.

In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU 2016-04 aligns recognition of the financial liabilities related to prepaid stored-value products (for example, gift cards) with Topic 606, Revenues from Contracts with Customers, for non-financial liabilities. In general, these liabilities may be extinguished proportionately in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value. ASU 2016-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company plans to adopt this guidance effective January 1, 2018 in connection with our adoption of ASC 606 and does not expect it to have a material impact on its consolidated financial statements.

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In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and a retrospective transition method is required. The Company currently presents changes in restricted cash and cash equivalents in the investing section of its consolidated statement of cash flows. The new guidance will not impact financial results, but will result in a change in the presentation of restricted cash and restricted cash equivalents within the statement of cash flows. The Company currently plans to adopt this guidance in the first quarter of 2018 using the retrospective approach.

In January 2017, the FASB issued ASU 2017-04_, Intangibles – Goodwill and Other (Topic 35): Simplifying the Test for Goodwill Impairment_, or ASU 2017-04. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. ASU 2017-04 is effective for public companies’ annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Contractual obligations

The following is a summary of our significant contractual obligations at December 31, 2017.

(dollars in millions)		2018				2019				2020				2021				2022				Thereafter				Total
Long-term debt (1):
Principal		$	32.0			$	32.0			$	509.5			$	27.0			$	879.8			$	1,695.5			$	3,175.8
Interest (2)			120.1				119.0				116.3				100.0				87.5				266.6				809.5
Capital leases (3)			0.8				0.8				0.8				0.8				0.8				4.3				8.5
Operating leases (4)			45.1				40.3				35.1				31.3				26.7				59.0				237.4

(1)	We have outstanding long-term secured notes with varying maturities. For additional information, see Note 4 of the Notes to Consolidated Financial Statements under “Part II – Item 8 – Financial Statements and Supplementary Data.”

(2)	Represents interest payments on our 2015 and 2017 Notes and 2017 Variable Funding Notes. The interest rate on the 2017 Variable Funding Notes will be payable at a per year rate equal to LIBOR plus 150 basis points.

(3)	The principal portion of the capital lease obligation amounts above, which totaled $5.4 million at December 31, 2017, are classified as debt in our consolidated financial statements.

(4)	We lease certain retail store and supply chain center locations, supply chain vehicles, various equipment and our World Resource Center under leases with expiration dates through 2033.

Liabilities for unrecognized tax benefits of $1.8 million are excluded from the above table, as we are unable to make a reasonably reliable estimate of the amount and period of payment. For additional information on unrecognized tax benefits see Note 6 to the consolidated financial statements included in this Form 10-K.

Off-balance sheet arrangements

We are party to letters of credit and, to a lesser extent, financial guarantees with off-balance sheet risk. Our exposure to credit loss for letters of credit and financial guarantees is represented by the contractual amounts of these instruments. Total conditional commitments under letters of credit as of December 31, 2017 were approximately $46.7 million and relate to our insurance programs and supply chain center leases. The Company has guaranteed lease payments related to certain franchisees’ lease arrangements. The maximum amount of potential future payments under these guarantees is $1.5 million as of December 31, 2017. We believe that none of these arrangements has or is likely to have a material effect on our results of operations, financial condition, revenues or expenses, capital expenditures or liquidity.

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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report on Form 10-K includes various forward-looking statements about the Company within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”) that are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act.

These forward-looking statements generally can be identified by the use of words such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “predict,” “project,” “seek,” “approximately,” “potential,” “outlook” and similar terms and phrases that concern our strategy, plans or intentions, including references to assumptions. These forward-looking statements address various matters including information concerning future results of operations and business strategy, the expected demand for future pizza delivery, our expectation that we will meet the terms of our agreement with our third-party supplier of pizza cheese, our belief that alternative third-party suppliers are available for our key ingredients in the event we are required to replace any of our supply partners, our intention to continue to enhance and grow online ordering, digital marketing and technological capabilities, our expectation that there will be no material capital expenditures for environmental control facilities, our plans to expand domestic and international operations in many of the markets where we currently operate and in selected new markets, our expectation that the contribution rate for advertising fees payable to DNAF will remain in place for the foreseeable future, and our expectation that we will use our unrestricted cash and cash equivalents, ongoing cash flows from operations and available borrowings under the 2017 Variable Funding Notes to, among other things, fund working capital requirements, invest in our core business, pay dividends and repurchase our common stock.

Forward-looking statements relating to our anticipated profitability, estimates in same store sales growth, the growth of our domestic and international business, ability to service our indebtedness, our future cash flows, our operating performance, trends in our business and other descriptions of future events reflect management’s expectations based upon currently available information and data. While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including the risk factors listed under Item 1A. Risk Factors, as well as other cautionary language in this Form 10-K.

Actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors, including but not limited to, the following:

	•		our substantial increased indebtedness as a result of the 2015 Recapitalization and the 2017 Recapitalization and our ability to incur additional indebtedness or refinance that indebtedness in the future;

	•		our future financial performance and our ability to pay principal and interest on our indebtedness;

	•		the effectiveness of our advertising, operations and promotional initiatives;

	•		the strength of our brand, including our ability to compete domestically and internationally in our intensely competitive industry;

	•		new product, digital ordering and concept developments by us, and other food-industry competitors;

	•		our ability to maintain good relationships with our franchisees and their ongoing level of profitability;

	•		our ability to successfully implement cost-saving strategies;

	•		our ability and that of our franchisees to successfully operate in the current and future credit environment;

	•		changes in the level of consumer spending given general economic conditions, including interest rates, energy prices and consumer confidence;

	•		our ability and that of our franchisees to open new restaurants and keep existing restaurants in operation;

	•		changes in operating expenses resulting from changes in prices of food (particularly cheese), fuel and other commodity costs, labor, utilities, insurance, employee benefits and other operating costs;

	•		the impact that widespread illness or general health concerns, severe weather conditions and natural disasters may have on our business and the economies of the countries where we operate;

	•		changes in foreign currency exchange rates;

	•		our ability to retain or replace our executive officers and other key members of management and our ability to adequately staff our stores and supply chain centers with qualified personnel;

	•		our ability to find and/or retain suitable real estate for our stores and supply chain centers;

	•		changes in government legislation or regulation, including changes in our effective tax rate;

	•		adverse legal judgments or settlements;

	•		food-borne illness or contamination of products;

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	•		data breaches or other cyber risks;

	•		the effect of war, terrorism or catastrophic events;

	•		our ability to pay dividends and repurchase shares;

	•		changes in consumer taste, spending and traffic patterns and demographic trends;

	•		changes in accounting policies; and

	•		adequacy of our insurance coverage.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report on Form 10-K might not occur. All forward-looking statements speak only as of the date of this Form 10-K and should be evaluated with an understanding of their inherent uncertainty. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission, we will not undertake and specifically decline any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-K, whether as a result of new information, future events or otherwise.

Readers are cautioned not to place undue reliance on the forward-looking statements included in this Form 10-K or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.