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.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Domino’s Pizza, Inc. and its subsidiaries as of December 31, 2017 and January 1, 2017, and the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2017, including the related notes, the schedule of condensed financial information of the registrant as of December 31, 2017 and January 1, 2017 and for the three years in the period ended December 31, 2017 appearing under Item 16, and the schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2017 appearing under Item 16 (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and January 1, 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2017.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, 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 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.

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Definition and Limitations of Internal Control over Financial Reporting

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 20, 2018

We have served as the Company’s auditor since 2002.

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DOMINO’S PIZZA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

		December 31, 2017				January 1, 2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	35,768			$	42,815
Restricted cash and cash equivalents			191,762				126,496
Accounts receivable, net of reserves of $1,424 in 2017 and $2,342 in 2016			173,677				150,369
Inventories			39,961				40,181
Prepaid expenses and other			18,389				17,635
Advertising fund assets, restricted			120,223				118,377
Total current assets			579,780				495,873
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings			29,171				29,129
Leasehold and other improvements			128,613				120,726
Equipment			216,599				201,827
Construction in progress			32,482				7,816
			406,865				359,498
Accumulated depreciation and amortization			(237,279	)			(220,964	)
Property, plant and equipment, net			169,586				138,534
OTHER ASSETS:
Investments in marketable securities, restricted			8,119				7,260
Goodwill			15,423				16,058
Capitalized software, net of accumulated amortization of $78,696 in 2017 and $68,727 in 2016			52,823				40,256
Other assets, net of accumulated amortization of $776 in 2017 and $776 in 2016			8,272				9,379
Deferred income taxes			2,750				8,935
Total other assets			87,387				81,888
Total assets		$	836,753			$	716,295

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)

		December 31, 2017				January 1, 2017
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt		$	32,324			$	38,887
Accounts payable			106,894				111,510
Accrued compensation			37,417				42,089
Accrued interest			22,095				18,826
Insurance reserves			20,754				16,742
Advertising fund liabilities			120,223				118,377
Other accrued liabilities			58,578				57,267
Total current liabilities			398,285				403,698
LONG-TERM LIABILITIES:
Long-term debt, less current portion			3,121,490				2,148,990
Insurance reserves			30,611				27,141
Other accrued liabilities			21,751				19,609
Total long-term liabilities			3,173,852				2,195,740
Total liabilities			3,572,137				2,599,438
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Common stock, par value $0.01 per share; 170,000,000 shares authorized; 42,898,329 in 2017 and 48,100,143 in 2016 issued and outstanding			429				481
Preferred stock, par value $0.01 per share; 5,000,000 shares authorized, none issued			—				—
Additional paid-in capital			5,654				1,006
Retained deficit			(2,739,437	)			(1,881,520	)
Accumulated other comprehensive loss			(2,030	)			(3,110	)
Total stockholders’ deficit			(2,735,384	)			(1,883,143	)
Total liabilities and stockholders’ deficit		$	836,753			$	716,295

The accompanying notes are an integral part of these consolidated statements.

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DOMINO’S PIZZA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

		For the Years Ended
		December 31, 2017				January 1, 2017				January 3, 2016
REVENUES:
Domestic Company-owned stores		$	490,846			$	439,024			$	396,916
Domestic franchise			351,387				312,260				272,808
Supply chain			1,739,038				1,544,345				1,383,161
International franchise			206,708				176,999				163,643
Total revenues			2,787,979				2,472,628				2,216,528
COST OF SALES:
Domestic Company-owned stores			377,674				331,860				299,294
Supply chain			1,544,314				1,373,077				1,234,103
Total cost of sales			1,921,988				1,704,937				1,533,397
OPERATING MARGIN			865,991				767,691				683,131
GENERAL AND ADMINISTRATIVE			344,759				313,649				277,692
INCOME FROM OPERATIONS			521,232				454,042				405,439
INTEREST INCOME			1,462				685				313
INTEREST EXPENSE			(122,541	)			(110,069	)			(99,537	)
INCOME BEFORE PROVISION FOR INCOME TAXES			400,153				344,658				306,215
PROVISION FOR INCOME TAXES			122,248				129,980				113,426
NET INCOME		$	277,905			$	214,678			$	192,789
EARNINGS PER SHARE:
Common Stock – basic		$	6.05			$	4.41			$	3.58
Common Stock – diluted		$	5.83			$	4.30			$	3.47
DIVIDENDS DECLARED PER SHARE		$	1.84			$	1.52			$	1.24

The accompanying notes are an integral part of these consolidated statements.

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DOMINO’S PIZZA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

		For the Years Ended
		December 31, 2017				January 1, 2017				January 3, 2016
NET INCOME		$	277,905			$	214,678			$	192,789
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Currency translation adjustment			1,080				(94	)			(2,076	)
TAX ATTRIBUTES OF ITEMS IN OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustment			—				532				1,189
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX			1,080				438				(887	)
COMPREHENSIVE INCOME		$	278,985			$	215,116			$	191,902

The accompanying notes are an integral part of these consolidated statements.

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DOMINO’S PIZZA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(In thousands, except share data)

		Common Stock								Additional Paid-in Capital				Retained Deficit				Accumulated Other Comprehensive Income (Loss)
		Shares				Amount
BALANCE AT DECEMBER 28, 2014			55,553,149			$	556			$	29,561			$	(1,246,921	)		$	(2,661	)
Net income			—				—				—				192,789				—
Common stock dividends and equivalents			—				—				—				(66,524	)			—
Issuance of common stock, net			78,891				1				—				—				—
Tax payments for restricted stock upon vesting			(69,334	)			(1	)			(7,430	)			—				—
Purchases of common stock			(6,152,918	)			(62	)			(55,008	)			(683,487	)			—
Exercises of stock options			428,433				4				4,810				—				—
Tax impact from equity-based compensation			—				—				17,775				—				—
Non-cash compensation expense			—				—				17,623				—				—
Other			—				—				(389	)			—				—
Currency translation adjustment, net of tax			—				—				—				—				(887	)
BALANCE AT JANUARY 3, 2016			49,838,221				498				6,942				(1,804,143	)			(3,548	)
Net income			—				—				—				214,678				—
Common stock dividends and equivalents			—				—				—				(73,958	)			—
Issuance of common stock, net			80,267				1				—				—				—
Tax payments for restricted stock upon vesting			(47,277	)			—				(5,646	)			—				—
Purchases of common stock			(2,816,716	)			(28	)			(82,125	)			(218,097	)			—
Exercises of stock options			1,045,648				10				15,224				—				—
Tax impact from equity-based compensation			—				—				48,129				—				—
Non-cash compensation expense			—				—				18,564				—				—
Other			—				—				(82	)			—				—
Currency translation adjustment, net of tax			—				—				—				—				438
BALANCE AT JANUARY 1, 2017			48,100,143				481				1,006				(1,881,520	)			(3,110	)
Net income			—				—				—				277,905				—
Common stock dividends and equivalents			—				—				—				(84,215	)			—
Issuance of common stock, net			65,669				1				—				—				—
Tax payments for restricted stock upon vesting			(49,159	)			(1	)			(9,448	)			—				—
Purchases of common stock			(5,576,249	)			(56	)			(12,590	)			(1,051,607	)			—
Exercises of stock options			357,925				4				6,095				—				—
Non-cash compensation expense			—				—				20,713				—				—
Other			—				—				(122	)			—				—
Currency translation adjustment, net of tax			—				—				—				—				1,080
BALANCE AT DECEMBER 31, 2017			42,898,329			$	429			$	5,654			$	(2,739,437	)		$	(2,030	)

The accompanying notes are an integral part of these consolidated statements.

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DOMINO’S PIZZA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		For the Years Ended
		December 31, 2017				January 1, 2017				January 3, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	277,905			$	214,678			$	192,789
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization			44,369				38,140				32,434
(Gains) losses on sale/disposal of assets			(3,148	)			863				316
Benefit for losses on accounts and notes receivable			(277	)			(224	)			(1,084	)
Provision (benefit) for deferred income taxes			6,160				(3,059	)			1,713
Amortization of debt issuance costs			10,976				6,418				12,393
Non-cash compensation expense			20,713				18,564				17,623
Excess tax benefits from equity-based compensation			(27,227	)			(48,129	)			(17,775	)
Changes in operating assets and liabilities-
Increase in accounts receivable			(22,649	)			(18,724	)			(13,678	)
Decrease (increase) in inventories, prepaid expenses and other			1,527				(2,947	)			(2,262	)
Increase in accounts payable and accrued liabilities			22,267				78,929				69,032
Increase in insurance reserves			8,420				2,764				285
Net cash provided by operating activities			339,036				287,273				291,786
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(90,011	)			(58,555	)			(63,282	)
Proceeds from sale of assets			6,835				4,936				12,724
Change in restricted cash			(65,266	)			54,444				(59,986	)
Other			(562	)			(1,661	)			1,252
Net cash used in investing activities			(149,004	)			(836	)			(109,292	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt			1,900,000				63,000				1,305,000
Repayments of long-term debt and capital lease obligations			(928,193	)			(122,334	)			(564,403	)
Proceeds from exercises of stock options			6,099				15,234				4,814
Excess tax benefits from equity-based compensation			—				48,129				17,775
Purchases of common stock			(1,064,253	)			(300,250	)			(738,557	)
Tax payments for restricted stock upon vesting			(9,449	)			(5,646	)			(7,431	)
Payments of common stock dividends and equivalents			(84,298	)			(73,925	)			(80,329	)
Cash paid for financing costs			(16,846	)			—				(17,367	)
Other			(205	)			—				(438	)
Net cash used in financing activities			(197,145	)			(375,792	)			(80,936	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			66				(1,279	)			1,036
CHANGE IN CASH AND CASH EQUIVALENTS			(7,047	)			(90,634	)			102,594
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD			42,815				133,449				30,855
CASH AND CASH EQUIVALENTS, AT END OF PERIOD		$	35,768			$	42,815			$	133,449

The accompanying notes are an integral part of these consolidated statements.

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DOMINO’S PIZZA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Domino’s Pizza, Inc. (“DPI”), a Delaware corporation, conducts its operations and derives substantially all of its operating income and cash flows through its wholly-owned subsidiary, Domino’s, Inc. (“Domino’s”) and Domino’s wholly-owned subsidiary, Domino’s Pizza LLC (“DPLLC”). DPI and its wholly-owned subsidiaries (collectively, “the Company”) are primarily engaged in the following business activities: (i) retail sales of food through Company-owned Domino’s Pizza stores; (ii) sales of food, equipment and supplies to Company-owned and franchised Domino’s Pizza stores through Company-owned supply chain centers; and (iii) receipt of royalties and fees from domestic and international Domino’s Pizza franchisees.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of DPI and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Fiscal Year

The Company’s fiscal year ends on the Sunday closest to December 31. The 2017 fiscal year ended on December 31, 2017, the 2016 fiscal year ended on January 1, 2017 and the 2015 fiscal year ended on January 3, 2016. The 2017 and 2016 fiscal years consisted of fifty-two weeks and the 2015 fiscal year consisted of fifty-three weeks.

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.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents at December 31, 2017 includes $122.9 million of cash and cash equivalents held for future principal and interest payments, $32.1 million of cash equivalents held in a three-month interest reserve, $36.7 million of cash held as collateral for outstanding letters of credit and $0.1 million of other restricted cash.

Restricted cash and cash equivalents at January 1, 2017 includes $99.8 million of cash and cash equivalents held for future principal and interest payments and $26.7 million of cash equivalents held in a three-month interest reserve.

Inventories

Inventories are valued at the lower of cost (on a first-in, first-out basis) or net realizable value. Inventories at December 31, 2017 and January 1, 2017 are comprised of the following (in thousands):

		2017				2016
Food		$	36,645			$	36,644
Equipment and supplies			3,316				3,537
Inventories		$	39,961			$	40,181

Other Assets

Current and long-term other assets primarily include prepaid expenses such as insurance, rent and taxes, deposits, notes receivable, as well as covenants not-to-compete and other intangible assets primarily arising from franchise acquisitions. As of December 31, 2017 and January 1, 2017, all intangible assets with useful lives were fully amortized.

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DOMINO’S PIZZA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Property, Plant and Equipment

Additions to property, plant and equipment are recorded at cost. Repair and maintenance costs are expensed as incurred. Depreciation and amortization expense is provided using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives, other than the estimated useful life of the capital lease assets as described below, are generally as follows (in years):

Buildings		20
Leasehold and other improvements		7 – 15
Equipment		3 – 15

Included in land and buildings as of December 31, 2017 and January 1, 2017 are capital lease assets of approximately $4.3 million and $4.7 million, which are net of $6.2 million and $5.8 million of accumulated amortization, respectively, related to the lease of a supply chain center building and the lease of a Company-owned store. The capital lease assets are being amortized using the straight-line method over the respective lease terms.

Depreciation and amortization expense on property, plant and equipment was approximately $29.6 million, $27.3 million and $24.1 million in 2017, 2016 and 2015, respectively.

Impairments of Long-Lived Assets

The Company evaluates the potential impairment of long-lived assets at least annually based on various analyses including the projection of undiscounted cash flows and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. For Company-owned stores, the Company performs this evaluation 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 assets. 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. The Company did not record any impairment losses on long-lived assets in 2017, 2016 or 2015.

Investments in Marketable Securities

Investments in marketable securities consist of investments in various mutual funds made by eligible individuals as part of the Company’s deferred compensation plan (Note 7). These investments are stated at aggregate fair value, are restricted and have been placed in a rabbi trust whereby the amounts are irrevocably set aside to fund the Company’s obligations under the deferred compensation plan. The Company classifies and accounts for these investments in marketable securities as trading securities.

Debt Issuance Costs

Debt issuance costs are recorded as a reduction to the Company’s debt balance and primarily include the expenses incurred by the Company as part of the 2015 and 2017 Recapitalizations (Note 4). Amortization is provided on a straight-line basis (which is materially consistent with the effective interest method) over the expected term of the respective debt instrument to which the costs relate and is included in interest expense.

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DOMINO’S PIZZA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

In connection with the 2012 Recapitalization, the Company recorded approximately $39.9 million of debt issuance costs. In connection with the 2015 Recapitalization, the Company expensed approximately $6.9 million of these costs in connection with the extinguishment of $551.3 million of the 2012 Fixed Rate Notes (Note 4). In connection with the 2017 Recapitalization, the Company expensed the approximately $5.5 million in remaining unamortized debt issuance costs associated with the extinguishment of the remaining $910.2 million of the 2012 Fixed Rate Notes. Additionally, in connection with the 2015 and 2017 Recapitalizations, the Company recorded $17.4 million and $16.8 million of debt issuance costs, respectively, which are being amortized into interest expense over the five and ten-year expected terms of the 2017 Notes (Note 4).

In connection with the aforementioned write-off of debt issuance costs and scheduled principal payments of its outstanding notes, the Company expensed debt issuance costs of approximately $5.7 million, $0.6 million and $6.9 million in 2017, 2016 and 2015, respectively. Debt issuance cost expense, including the aforementioned amounts, was approximately $11.0 million, $6.4 million and $12.4 million in 2017, 2016 and 2015, respectively.

Goodwill

The Company’s goodwill amounts primarily relate to franchise store acquisitions and are not amortized. The Company performs its required impairment tests in the fourth quarter of each fiscal year and did not recognize any goodwill impairment charges in 2017, 2016 or 2015.

Capitalized Software

Capitalized software is recorded at cost and includes purchased, internally-developed and externally-developed software used in the Company’s operations. Amortization expense is provided using the straight-line method over the estimated useful lives of the software, which range from one to seven years. Capitalized software amortization expense was approximately $14.8 million, $10.8 million and $8.3 million in 2017, 2016 and 2015, respectively. As of December 31, 2017, scheduled amortization for the next five fiscal years was approximately $14.3 million, $9.4 million, $5.3 million, $3.3 million and $1.6 million for 2018, 2019, 2020, 2021 and 2022, respectively.

Insurance Reserves

The Company has retention programs for workers’ compensation, general liability and owned and non-owned automobile liabilities for certain periods prior to December 1998 and for periods after December 2001. The Company is generally responsible for up to $1.0 million per occurrence under these retention programs for workers’ compensation and general liability exposures. The Company is also generally responsible for between $500,000 and $3.0 million per occurrence under these retention programs for owned and non-owned automobile liabilities depending on the year. Total insurance limits under these retention programs vary depending on the year 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.

Insurance reserves relating to our retention programs are based on undiscounted actuarial estimates. These estimates are based on historical information and on certain assumptions about future events. Changes in assumptions for such factors as medical costs and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term. The Company receives estimates of outstanding insurance exposures from its independent actuary and differences between these estimated actuarial exposures and the Company’s recorded amounts are adjusted as appropriate.

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DOMINO’S PIZZA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Other Accrued Liabilities

Current and long-term other accrued liabilities primarily include accruals for income, sales, property and other taxes, legal reserves, store operating expenses, deferred rent expense, dividends payable and deferred compensation liabilities.

Foreign Currency Translation

The Company’s foreign entities use their local currency as the functional currency. For these entities, the Company translates net assets into U.S. dollars at year end exchange rates, while income and expense accounts are translated at average annual exchange rates. Currency translation adjustments are included in accumulated other comprehensive income (loss) and foreign currency transaction gains and losses are included in determining net income.

Revenue Recognition

Domestic Company-owned stores revenues are comprised of retail sales of food through Company-owned Domino’s Pizza stores located in the contiguous United States and are recognized when the items are delivered to or carried out by customers.

Domestic franchise revenues are primarily comprised of royalties and fees from Domino’s Pizza franchisees with operations in the contiguous United States. Royalty revenues are recognized when the items are delivered to or carried out by franchise customers.

Supply chain revenues are primarily comprised of sales of food, equipment and supplies to franchised Domino’s Pizza stores located in the United States and Canada. Revenues from the sales of food are recognized upon delivery of the food to franchisees, while revenues from the sales of equipment and supplies are generally recognized upon shipment of the related products to franchisees.

International franchise revenues are primarily comprised of royalties and fees from Domino’s Pizza franchisees outside the contiguous United States. These revenues are recognized consistently with the policies applied for franchise revenues generated in the contiguous United States.

Supply Chain Profit-Sharing Arrangements

The Company enters into profit-sharing arrangements with domestic and Canadian stores that purchase all of their food from Supply Chain (Note 11). These profit-sharing arrangements generally offer Company-owned stores and participating franchisees 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 based upon each store’s purchases from the supply chain center. Profit-sharing obligations are recorded as a revenue reduction in Supply Chain in the same period as the related revenues and costs are recorded, and were $119.7 million, $99.8 million and $85.8 million in 2017, 2016 and 2015, respectively.

Advertising

Advertising costs are expensed as incurred. Advertising expense, which relates primarily to Company-owned stores, was approximately $39.8 million, $34.5 million and $32.0 million during 2017, 2016 and 2015, respectively.

Domestic Stores (Note 11) are required to contribute a certain percentage of sales to the Domino’s National Advertising Fund Inc. (“DNAF”), a not-for-profit subsidiary that administers the Domino’s Pizza system’s national and market level advertising activities in the United States. Included in advertising expense were advertising contributions from Company-owned stores to DNAF of approximately $30.4 million, $27.2 million and $24.9 million in 2017, 2016 and 2015, respectively. DNAF also received advertising contributions from franchisees of approximately $323.8 million, $293.8 million and $266.0 million during 2017, 2016 and 2015, respectively. Franchisee contributions to DNAF and offsetting disbursements are presented net in the accompanying consolidated statements of income, as we have determined we are an agent for accounting purposes in this arrangement.

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DNAF assets, consisting primarily of cash received from franchisees and accounts receivable from franchisees, can only be used for activities that promote the Domino’s Pizza brand. Accordingly, all assets held by the DNAF are considered restricted.

Rent

The Company leases certain equipment, vehicles, retail store and supply chain center locations and its corporate headquarters under operating leases with expiration dates through 2033. Rent expenses totaled approximately $57.9 million, $49.9 million and $46.1 million during 2017, 2016 and 2015, respectively.

Common Stock Dividends

The Company declared and paid dividends of approximately $84.2 million (or $1.84 per share) in 2017, approximately $74.0 million (or $1.52 per share) in 2016 and approximately $66.5 million (or $1.24 per share) in 2015. The Company also paid dividends of $13.8 million in 2015 related to a dividend declaration in 2014.

Stock Options and Other Equity-Based Compensation Arrangements

The cost of all of the Company’s stock options, as well as other equity-based compensation arrangements, is reflected in the financial statements based on the estimated fair value of the awards.

Earnings Per Share

The Company discloses two calculations of earnings per share (“EPS”): basic EPS and diluted EPS. The numerator in calculating common stock basic and diluted EPS is consolidated net income. The denominator in calculating common stock basic EPS is the weighted average shares outstanding. The denominator in calculating common stock diluted EPS includes the additional dilutive effect of outstanding stock options, unvested restricted stock grants and unvested performance-based restricted stock grants.

Supplemental Disclosures of Cash Flow Information

The Company paid interest of approximately $107.4 million, $104.6 million and $80.8 million during 2017, 2016 and 2015, respectively. Cash paid for income taxes was approximately $122.6 million, $74.3 million and $80.1 million in 2017, 2016 and 2015, respectively.

The Company had $4.0 million, $3.8 million and $0.8 million of non-cash investing activities related to accruals for capital expenditures at December 31, 2017, January 1, 2017, and January 3, 2016. The Company also had non-cash financing activities related to capital assets and liabilities in 2015. Specifically, the Company recorded $3.4 million for the renewal of a capital lease of a supply chain center building in the first quarter of 2015, and recorded $0.6 million as a result of entering into a capital lease for a corporate store in the third quarter of 2015.

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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 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 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.

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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 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.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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(2)	EARNINGS PER SHARE

The computation of basic and diluted earnings per common share is as follows (in thousands, except share and per share amounts):

		2017				2016				2015
Net income available to common stockholders – basic and diluted		$	277,905			$	214,678			$	192,789
Weighted average number of common shares			45,954,659				48,647,167				53,828,609
Earnings per common share – basic		$	6.05			$	4.41			$	3.58
Diluted weighted average number of common shares			47,677,834				49,923,859				55,532,955
Earnings per common share – diluted		$	5.83			$	4.30			$	3.47

The denominators used in calculating diluted earnings per share for common stock do not include 145,860 options to purchase common stock in 2017, 121,075 options to purchase common stock in 2016 and 188,080 options to purchase common stock in 2015, as the effect of including these options would be anti-dilutive. The denominators used in calculating diluted earnings per share for common stock do not include 110,274 restricted performance shares in 2017, 134,113 restricted performance shares in 2016 and 189,532 restricted performance shares in 2015, as the performance targets for these awards had not yet been met.

(3)	FAIR VALUE MEASUREMENTS

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

Level 1:		Quoted market prices in active markets for identical assets or liabilities.
Level 2:		Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3:		Unobservable inputs that are not corroborated by market data.

The fair values of the Company’s cash equivalents and investments in marketable securities are based on quoted prices in active markets for identical assets. The following table summarizes the carrying amounts and fair values of certain assets at December 31, 2017:

		At December 31, 2017
						Fair Value Estimated Using
		Carrying Amount				Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
Cash equivalents		$	7,933			$	7,933			$	—			$	—
Restricted cash equivalents			96,375				96,375				—				—
Investments in marketable securities			8,119				8,119				—				—

The following table summarizes the carrying amounts and fair values of certain assets at January 1, 2017:

		At January 1, 2017
						Fair Value Estimated Using
		Carrying Amount				Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
Cash equivalents		$	7,017			$	7,017			$	—			$	—
Restricted cash equivalents			69,113				69,113				—				—
Investments in marketable securities			7,260				7,260				—				—

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(4)	RECAPITALIZATIONS AND FINANCING ARRANGEMENTS

2017 Recapitalization

On July 24, 2017, the Company completed a recapitalization (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 “2017 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 “2017 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 ten years (the “2017 Ten-year Fixed Rate Notes” and, collectively with the 2017 Floating Rate Notes and the 2017 Five-year Fixed Rate Notes, the “2017 Fixed and Floating Rate Notes”). The interest rate on the 2017 Floating Rate Notes is payable at a rate equal to LIBOR plus 125 basis points. Concurrently, the Company also 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 (the “2017 Variable Funding Notes”) and certain other credit instruments, including letters of credit. The 2017 Fixed and Floating Rate Notes and the 2017 Variable Funding Notes are collectively referred to as the “2017 Notes.” The 2017 Variable Funding Notes were undrawn on the closing date. Gross proceeds from the issuance of the 2017 Notes were $1.9 billion.

A portion of the proceeds from the 2017 Recapitalization was used to repay the remaining $910.5 million in outstanding principal and interest under the Company’s 2012 Fixed Rate Notes, pre-fund a portion of the principal and interest payable on the 2017 Fixed and Floating Rate Notes and pay transaction fees and expenses, described in additional detail below. In connection with the issuance of the 2017 Variable Funding Notes, the Company permanently reduced to zero the commitment to fund the 2015 Variable Funding Notes and the 2015 Variable Funding Notes were cancelled. The Company also used a portion of the proceeds from the 2017 Recapitalization to enter into a $1.0 billion accelerated share repurchase agreement (the “2017 ASR Agreement”) with a counterparty. See Note 10 for additional detail related to this transaction.

2015 and 2012 Recapitalizations

The Company previously entered into refinancing transactions in October 2015 (the “2015 Recapitalization”) and in April 2012 (the “2012 Recapitalization”). In connection with the 2015 Recapitalization, the Company issued $1.3 billion aggregate principal amount of fixed rate notes consisting of $500.0 million Series 2015-1 3.484% Fixed Rate Senior Secured Notes, Class A-2-I (the “2015 Five-Year Notes”) and $800.0 million Series 2015-1 4.474% Fixed Rate Senior Secured Notes, Class A-2-II (the “2015 Ten-Year Notes” and, together with the 2015 Five-Year Notes, the “2015 Fixed Rate Notes”). Concurrent with the 2015 Recapitalization, the Company also issued a revolving financing facility which allowed for advances of up to $125.0 million of Series 2015-1 Variable Funding Senior Secured Notes, Class A-1 and issuances of letters of credit (the “2015 Variable Funding Notes” and together with the 2015 Fixed Rate Notes, the “2015 Notes”). The 2017 Notes and 2015 Notes are collectively referred to as the “Notes.”

A portion of the proceeds from the 2015 Recapitalization was 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. In connection with the issuance and sale of the 2015 Variable Funding Notes, the Company permanently reduced to zero the commitment to fund the 2012 Variable Funding Notes and the 2012 Variable Funding Notes were cancelled. The Company also used a portion of the proceeds from the 2015 Recapitalization to enter into a $600.0 million accelerated share repurchase agreement (the “2015 ASR Agreement”) with a counterparty. See Note 10 for additional detail related to this transaction.

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In connection with the 2012 Recapitalization, the Company issued $1.575 billion of Series 2012-1 5.216% Fixed Rate Senior Secured Notes, Class A-2 (the “2012 Fixed Rate Notes”) and a revolving financing facility that allowed for advances of up to $100.0 million of Series 2012-1 Variable Funding Senior Secured Notes, Class A-1 Notes (the “2012 Variable Funding Notes”).

2017 Notes

The 2017 Notes have remaining scheduled principal payments of $19.0 million in each of 2018 through 2021, $871.8 million in 2022, $10.0 million in each of 2023 through 2026, and $907.5 million in 2027. During fiscal 2017, the Company made principal payments of approximately $4.8 million on the 2017 Notes.

The legal final maturity date of the 2017 Notes is October 2047, but it is anticipated that, unless earlier prepaid to the extent permitted under the related debt agreements, the 2017 Floating Rate Notes and 2017 Five-year Fixed Rate Notes will be repaid on or prior to the anticipated repayment date occurring in July 2022, and the 2017 Ten-year Fixed Rate Notes will be repaid on or prior to the anticipated repayment date occurring in July 2027. If the Company has not repaid or refinanced the 2017 Notes prior to the applicable anticipated repayment dates, additional interest of at least 5% per annum will accrue, as defined in the related agreements.

The 2017 Variable Funding Notes allow for advances of up to $175.0 million and issuance of certain other credit instruments, including letters of credit. At the closing date of the 2017 Recapitalization, interest on the 2017 Variable Funding Notes was payable at a per year rate equal to LIBOR plus 180 basis points. On December 15, 2017, certain of the Company’s subsidiaries entered into an agreement to reduce the rate from LIBOR plus 180 basis points to LIBOR plus 150 basis points. The 2017 Variable Funding Notes were undrawn at closing. The unused portion of the 2017 Variable Funding Notes is subject to a commitment fee ranging from 50 to 100 basis points depending on utilization. It is anticipated that any amounts outstanding on the 2017 Variable Funding Notes will be repaid in full on or prior to July 2022, subject to two additional one-year extensions at the option of the Company, subject to certain conditions. Following the anticipated repayment date (and any extensions thereof), additional interest will accrue on the 2017 Variable Funding Notes equal to 5% per annum. At December 31, 2017, there were $46.7 million of letters of credit and $128.3 million of borrowing capacity under the $175.0 million 2017 Variable Funding Notes.

2015 Notes

The 2015 Notes have remaining scheduled principal payments of $13.0 million in each of 2018 and 2019, $490.5 million in 2020, $8.0 million in each of 2021 through 2024, and $732.0 million in 2025. During fiscal 2017, the Company made principal payments of approximately $6.5 million on the 2015 Notes.

The legal final maturity date of the 2015 Notes is in October 2045, but it is anticipated that, unless earlier prepaid to the extent permitted under the related debt agreements, the 2015 Five-Year Notes will be repaid on or prior to the anticipated repayment date occurring in October 2020 and the 2015 Ten-Year Notes will be repaid on or prior to the anticipated repayment date occurring in October 2025. If the Company has not repaid or refinanced the 2015 Fixed Rate Notes prior to the applicable anticipated repayment date, additional interest will accrue of at least 5% per annum, as defined in the related agreements.

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Debt Issuance Costs and Transaction-Related Expenses

During 2017 and in connection with the 2017 Recapitalization, the Company incurred approximately $6.4 million of net pre-tax expenses, primarily related to $5.5 million in expense related to the write-off of deferred financing fees associated with the repayment of the 2012 Fixed Rate Notes. The Company also incurred approximately $0.3 million of interest expense on the 2012 Fixed Rate Notes subsequent to the closing of the 2017 Recapitalization but prior to the repayment of the 2012 Fixed Rate Notes, resulting in the payment of interest on both the full amount of the 2012 and 2017 Notes for a short period of time. Further, the Company incurred $0.6 million of other net 2017 Recapitalization-related general and administrative expenses, including legal and professional fees. In connection with the 2017 Recapitalization, the Company recorded $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 Notes.

During fiscal 2015 and in connection with the 2015 Recapitalization, the Company incurred approximately $8.1 million of net pre-tax expenses, primarily related to $6.9 million in expense related to the write-off of debt issuance costs associated with the partial repayment of the 2012 Fixed Rate Notes. The Company also incurred approximately $0.4 million of interest expense on the 2012 Fixed Rate Notes subsequent to the closing of the 2015 Recapitalization but prior to the repayment of the 2012 Fixed Rate Notes, resulting in the payment of interest on both the full amount of the 2012 and 2015 Fixed Rate Notes for a short period of time. Further, the Company incurred $0.9 million of other net 2015 Recapitalization-related general and administrative expenses, including legal and professional fees. 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 Notes.

Guarantees and Covenants of the Notes

The Notes are guaranteed by certain subsidiaries of DPLLC and secured by a security interest in substantially all of the assets of the Company, including royalty and certain other income from all domestic and international stores, domestic supply chain income and intellectual property. The restrictions placed on the Company’s subsidiaries require that the Company’s principal and interest obligations have first priority and amounts are segregated weekly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of weekly cash flow that exceeds the required weekly interest reserve is generally remitted to the Company in the form of a dividend. However, once the required obligations are satisfied, there are no further restrictions, including payment of dividends, on the cash flows of the subsidiaries.

The Notes are subject to certain financial and non-financial covenants, including a debt service coverage ratio calculation, as defined in the related agreements. The covenants, among other things, may limit the ability of certain of our subsidiaries to declare dividends, make loans or advances or enter into transactions with affiliates. In the event that certain covenants are not met, the Notes may become partially or fully due and payable on an accelerated schedule. In addition, the Company may voluntarily prepay, in part or in full, the Notes at any time, subject to certain make-whole interest obligations.

While the Notes are outstanding, scheduled payments of principal and interest are required to be made on a quarterly basis. The payment of principal of the 2017 Fixed and Floating Rate Notes and the 2015 Fixed Rate 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. Scheduled principal payments will resume upon failure to satisfy the aforementioned leverage ratio on an ongoing basis and no catch-up provisions are applicable.

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Prior to the 2017 Recapitalization and the repayment of the remaining principal and interest under the 2012 Fixed Rate Notes, the payment of principal of the 2012 Fixed Rate Notes and 2015 Fixed Rate Notes (i) shall be suspended if the leverage ratios for the Company are less than or equal to 4.5x total debt to adjusted EBITDA, as defined, 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 aforementioned leverage ratios on an ongoing basis.

During the first quarter of 2017, the Company met the maximum leverage ratios under the Company’s then outstanding 2012 Fixed Rate Notes and 2015 Notes of less than 4.5x, and, in accordance with the Company’s debt agreements, ceased debt amortization payments beginning in the second quarter of 2017. The Company continued to meet the maximum leverage ratios of less than 4.5x in the third quarter prior to the 2017 Recapitalization 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 on the Notes.

In 2015 and up until the 2015 Recapitalization, 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 2015 Recapitalization, the Company’s leverage ratios exceeded 4.5x and, accordingly, the Company began making the scheduled amortization payments as well as the required catch-up payments.

Consolidated Long-Term Debt

At December 31, 2017 and January 1, 2017, consolidated long-term debt consisted of the following (in thousands):

		2017				2016
5.216% Class A-2 Notes; repaid in connection with the 2017 Recapitalization		$	—			$	916,650
3.484% Class A-2-I Notes; expected repayment date October 2020; legal final maturity October 2045			492,500				495,000
4.474% Class A-2-II Notes; expected repayment date October 2025; legal final maturity October 2045			788,000				792,000
3.082% Class A-2-II Notes; expected repayment date July 2022; legal final maturity July 2047			598,500				—
4.118% Class A-2-III Notes; expected repayment date July 2027; legal final maturity July 2047			997,500				—
Floating Rate Class A-2-I Notes; expected repayment date July 2022; legal final maturity July 2047			299,250				—
2017 Variable Funding Notes			—				—
2015 Variable Funding Notes			—				—
Capital lease obligations			5,437				5,730
Debt issuance costs, net of accumulated amortization of $6.8 million in 2017 and $21.1 million in 2016			(27,373	)			(21,503	)
Total debt			3,153,814				2,187,877
Less – current portion			32,324				38,887
Consolidated long-term debt, net of debt issuance costs		$	3,121,490			$	2,148,990

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At December 31, 2017, maturities of long-term debt and capital lease obligations are as follows (in thousands):

2018		$	32,324
2019			32,358
2020			509,896
2021			27,440
2022			880,238
Thereafter			1,698,931
		$	3,181,187

Fair Value Disclosures

Management estimated the approximate fair values of the 2012 Fixed Rate Notes, 2015 Notes and 2017 Notes as follows (in thousands):

		December 31, 2017								January 1, 2017
		Principal Amount				Fair Value				Principal Amount				Fair Value
2012 Seven-Year Fixed Rate Notes		$	—			$	—			$	916,650			$	932,233
2015 Five-Year Fixed Rate Notes			492,500				494,470				495,000				485,595
2015 Ten-Year Fixed Rate Notes			788,000				821,884				792,000				765,864
2017 Five-Year Fixed Rate Notes			598,500				592,515				—				—
2017 Ten-Year Fixed Rate Notes			997,500				1,023,435				—				—
2017 Five-Year Floating Rate Notes			299,250				300,746				—				—

The Notes are classified as a Level 2 measurement (Note 3), as the Company estimated the fair value amount by using available market information. The Company obtained broker quotes from two separate brokerage firms that are knowledgeable about the Company’s Notes and, at times, trade these notes. Further, the Company performs its own internal analysis based on the information it gathers from public markets, including information on notes that are similar to that of the Company. However, considerable judgment is required in interpreting market data to develop estimates of fair value.

Accordingly, the fair value estimates presented herein are not necessarily indicative of the amount that the Company or the debtholders could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair values calculated above.

(5)	COMMITMENTS AND CONTINGENCIES

Lease Commitments

As of December 31, 2017, the future minimum rental commitments for all non-cancelable leases are as follows (in thousands):

		Operating				Capital
		Leases				Leases				Total
2018		$	45,064			$	826			$	45,890
2019			40,265				828				41,093
2020			35,124				831				35,955
2021			31,298				833				32,131
2022			26,668				836				27,504
Thereafter			58,982				4,343				63,325
Total future minimum rental commitments		$	237,401				8,497			$	245,898
Less – amounts representing interest							(3,060	)
Total principal payable on capital leases						$	5,437

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Future minimum rental commitments for non-cancelable leases do not include variable payments for common area maintenance, real estate taxes or insurance for our real estate leases or the rate per mile driven for our supply chain center tractors and trailers.

Legal Proceedings and Related Matters

The Company is a party to lawsuits, revenue agent reviews by taxing authorities and legal proceedings, of which the majority involve workers’ compensation, employment practices liability, general liability and automobile and franchisee claims arising in the ordinary course of business. The Company records legal fees associated with loss contingencies when they are probable and reasonably estimable.

Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. These matters 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. The Company continues to deny liability in this matter.

(6)	INCOME TAXES

Income before provision for income taxes in 2017, 2016 and 2015 consists of the following (in thousands):

		2017				2016				2015
Domestic		$	386,989			$	334,892			$	298,055
Foreign			13,164				9,766				8,160
		$	400,153			$	344,658			$	306,215

The differences between the United States Federal statutory income tax provision (using the statutory rate of 35%) and the Company’s consolidated provision for income taxes for 2017, 2016 and 2015 are summarized as follows (in thousands):

		2017				2016				2015
Federal income tax provision based on the statutory rate		$	140,054			$	120,630			$	107,175
State and local income taxes, net of related Federal income taxes			11,520				9,787				8,589
Non-resident withholding and foreign income taxes			20,210				17,275				15,750
Foreign tax and other tax credits			(23,324	)			(20,049	)			(18,345	)
Excess tax benefits from equity-based compensation			(27,227	)			—				—
Non-deductible expenses, net			1,794				1,579				1,180
Unrecognized tax provision (benefit), net of related Federal income taxes			(173	)			(98	)			110
Other			(606	)			856				(1,033	)
		$	122,248			$	129,980			$	113,426

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The Company adopted ASU 2016-09 during 2017, which is intended to simplify several areas of accounting for share-based compensation arrangements. As a result, excess tax benefits or deficiencies from equity-based compensation activity are now reflected in the Company’s 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 adoption of ASU 2016-09 resulted in a decrease in our provision for income taxes of $27.2 million in 2017, primarily due to the recognition of excess tax benefits for options exercised and the vesting of equity awards. Refer to Note 1 for additional information related to the impact of adopting ASU 2016-09.

The components of the 2017, 2016 and 2015 consolidated provision for income taxes are as follows (in thousands):

		2017				2016				2015
Provision for Federal income taxes
Current provision		$	81,747			$	100,673			$	84,071
Deferred provision (benefit)			6,732				(3,096	)			862
Total provision for Federal income taxes			88,479				97,577				84,933
Provision for state and local income taxes
Current provision			14,131				15,091				11,892
Deferred provision (benefit)			(572	)			37				851
Total provision for state and local income taxes			13,559				15,128				12,743
Provision for non-resident withholding and foreign income taxes			20,210				17,275				15,750
		$	122,248			$	129,980			$	113,426

As of December 31, 2017 and January 1, 2017, the significant components of net deferred income taxes are as follows (in thousands):

		2017				2016
Deferred Federal income tax assets
Insurance reserves		$	8,290			$	11,202
Equity compensation			7,724				11,978
Other accruals and reserves			7,187				18,741
Bad debt reserves			309				1,005
Other			3,164				5,732
Total deferred Federal income tax assets			26,674				48,658
Deferred Federal income tax liabilities
Depreciation, amortization and asset basis differences			4,823				6,352
Capitalized software			18,522				25,869
Gain on debt extinguishments			2,722				9,073
Total deferred Federal income tax liabilities			26,067				41,294
Net deferred Federal income tax asset			607				7,364
Net deferred state and local income tax asset			2,143				1,571
Net deferred income taxes		$	2,750			$	8,935

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(Continued)

Realization of the Company’s deferred tax assets is dependent upon many factors, including, but not limited to, the Company’s ability to generate sufficient taxable income. Although realization of the Company’s net deferred tax assets is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. On an ongoing basis, management will assess whether it remains more likely than not that the net deferred tax assets will be realized.

For financial reporting purposes, the Company’s investment in foreign subsidiaries does not exceed its tax basis. Therefore, no deferred income taxes have been provided.

The Company recognizes the financial statement benefit of a tax position if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. For tax positions meeting the “more likely than not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes accrued interest related to unrecognized tax benefits in interest expense and penalties in income tax expense.

At December 31, 2017, the amount of unrecognized tax benefits was $1.8 million of which, if ultimately recognized, $1.5 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At December 31, 2017, the Company had less than $0.1 million of accrued interest and no accrued penalties.

At January 1, 2017, the amount of unrecognized tax benefits was $2.0 million of which, if ultimately recognized, $1.6 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At January 1, 2017, the Company had less than $0.1 million of accrued interest and no accrued penalties.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance as of December 28, 2014		$	2,939
Additions for tax positions of current year			233
Additions for tax positions of prior years			171
Reductions in tax positions from prior years for:
Changes in prior year tax positions			(100	)
Settlements during the period			(27	)
Lapses of applicable statute of limitations			(1,101	)
Balance as of January 3, 2016			2,115
Additions for tax positions of current year			209
Reductions in tax positions from prior years for:
Changes in prior year tax positions			(33	)
Lapses of applicable statute of limitations			(337	)
Balance as of January 1, 2017			1,954
Additions for tax positions of current year			224
Additions for tax positions of prior years			42
Reductions in tax positions from prior years for:
Changes in prior year tax positions			(10	)
Lapses of applicable statute of limitations			(373	)
Balance as of December 31, 2017		$	1,837

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(Continued)

The Company continues to be under examination by certain states. The Company’s Federal statute of limitation has expired for years prior to 2014 and the relevant state and foreign statutes vary. The Company expects the current ongoing examinations to be concluded in the next twelve months and does not expect the assessment of any significant additional amounts in excess of amounts reserved.

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes many changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017.

The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. The Company did not identify items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.

The remeasurement of the deferred tax assets and liabilities was not material to our 2017 financial statements. However, the remeasured amounts incorporate assumptions made based upon the Company’s current interpretation of the 2017 Tax Act, mainly related to the deductibility of certain officers’ compensation, and may change as the Company receives additional clarification and implementation guidance.

(7)	EMPLOYEE BENEFITS

The Company has a retirement savings plan which qualifies under Internal Revenue Code Section 401(k). All employees of the Company who have completed 1,000 hours of service and are at least 21 years of age are eligible to participate in the plan. Effective January 1, 2018, employees of the Company who have completed 1,000 hours of service and are at least 18 years of age are eligible to participate in the plan. The plan requires the Company to match 100% of the first 3% of each employee’s elective deferrals and 50% of the next 2% of each employee’s elective deferrals. During 2017, 2016 and 2015, the Company’s matching contributions were made in the form of cash and vested immediately. The expenses incurred for Company contributions to the plan were approximately $6.1 million, $5.2 million and $4.6 million in 2017, 2016 and 2015, respectively.

The Company has established a non-qualified deferred compensation plan available for certain key employees. Under this self-funding plan, the participants may defer up to 40% of their annual compensation. The participants direct the investment of their deferred compensation within several investment funds. The Company is not required to contribute and did not contribute to this plan during 2017, 2016 or 2015.

The Company has an employee stock purchase discount plan (the “ESPDP”). Under the ESPDP, eligible employees may deduct up to 15% of their eligible wages to purchase common stock at 85% of the market price of the stock at the purchase date. The ESPDP requires employees to hold their purchased common stock for at least one year. The Company purchases common stock on the open market for the ESPDP at the current market price. There were 21,744 shares, 23,317 shares and 23,994 shares of common stock in 2017, 2016 and 2015, respectively, purchased on the open market for participating employees at a weighted-average price of $188.57 in 2017, $131.74 in 2016 and $105.16 in 2015. The expenses incurred under the ESPDP were approximately $0.7 million, $0.5 million and $0.4 million in 2017, 2016 and 2015, respectively.

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(Continued)

(8)	FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to stand-by letters of credit. The Company’s exposure to credit loss for stand-by letters of credit is represented by the contractual amounts of these instruments. The Company uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments. Total conditional commitments under letters of credit as of December 31, 2017 and January 1, 2017 are $46.7 million and $44.3 million, respectively, and relate to the Company’s insurance programs and supply chain center leases. The Company has also guaranteed lease payments related to certain franchisees’ lease arrangements. The maximum amount of potential future payments under these guarantees was $1.5 million and $1.0 million as of December 31, 2017 and January 1, 2017, respectively.

(9)	EQUITY INCENTIVE PLANS

The cost of all employee stock options, as well as other equity-based compensation arrangements, is reflected in the consolidated statements of income based on the estimated fair value of the awards and is amortized over the requisite service period of each award.

The Company’s current equity incentive plan benefits certain of the Company’s employees and directors and is named the Domino’s Pizza, Inc. 2004 Equity Incentive Plan (the “2004 Equity Incentive Plan”). As of December 31, 2017, the maximum number of shares that may be granted under the 2004 Equity Incentive Plan is 15,600,000 shares of voting common stock of which 2,845,095 shares were authorized for grant but have not been granted.

The Company recorded total non-cash compensation expense of $20.7 million, $18.6 million and $17.6 million in 2017, 2016 and 2015 respectively. All non-cash compensation expense amounts are recorded in general and administrative expense. The Company recorded a deferred tax benefit related to non-cash compensation expense of approximately $5.2 million in 2017.

The Company adopted ASU 2016-09 during 2017, which is intended to simplify several areas of accounting for share-based compensation arrangements. As a result, excess tax benefits or deficiencies from equity-based compensation activity are now reflected in the Company’s 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 Company’s election to account for forfeitures as they occur had an immaterial impact on its equity-based compensation expense. Refer to Note 1 for additional information related to the impact of adopting ASU 2016-09.

Stock Options

As of December 31, 2017, the number of stock options granted and outstanding under the 2004 Equity Incentive Plan was 2,238,114 options. Stock options granted under the 2004 Equity Incentive Plan and a predecessor plan prior to fiscal 2009 were generally granted with an exercise price equal to the market price at the date of the grant, expired ten years from the date of grant and vested over five years from the date of grant. Stock options granted in fiscal 2009 through fiscal 2012 were granted with an exercise price equal to the market price at the date of the grant, expire ten years from the date of grant and generally vest over three years from the date of grant. Stock options granted in fiscal 2013 through fiscal 2017 were granted with an exercise price equal to the market price at the date of the grant, expire ten years from the date of grant and generally vest over four years from the date of grant. Additionally, all stock options granted become fully exercisable upon vesting. These awards also contain provisions for accelerated vesting upon the retirement of holders that have achieved specific service and age requirements.

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(Continued)

Stock option activity related to the 2004 Equity Incentive Plan is summarized as follows:

		Common Stock Options
						Weighted				Weighted
						Average				Average				Aggregate
						Exercise				Remaining				Intrinsic
		Outstanding				Price				Life				Value
										(Years)				(In thousands)
Stock options at December 28, 2014			3,590,115			$	22.47
Stock options granted			193,970				111.63
Stock options cancelled			(32,176	)			73.55
Stock options exercised			(428,433	)			11.70
Stock options at January 3, 2016			3,323,476			$	28.57
Stock options granted			233,280				129.42
Stock options cancelled			(12,798	)			104.23
Stock options exercised			(1,045,648	)			14.38
Stock options at January 1, 2017			2,498,310			$	43.54
Stock options granted			126,720				201.19
Stock options cancelled			(28,991	)			101.97
Stock options exercised			(357,925	)			17.05
Stock options at December 31, 2017			2,238,114			$	55.94				4.7			$	299,518
Exercisable at December 31, 2017			1,827,568			$	36.61				3.9			$	278,438

The total intrinsic value of stock options exercised was approximately $62.0 million, $128.0 million and $41.7 million in 2017, 2016 and 2015, respectively. Cash received from the exercise of stock options was approximately $6.1 million, $15.2 million and $4.8 million in 2017, 2016 and 2015, respectively. The tax benefit realized from stock options exercised was approximately $23.0 million, $46.1 million and $14.7 million in 2017, 2016 and 2015, respectively.

The Company recorded total non-cash compensation expense of $6.8 million, $4.9 million and $3.9 million in 2017, 2016 and 2015, respectively, related to stock option awards. All non-cash compensation expense amounts are recorded in general and administrative expense. As of December 31, 2017, there was $8.1 million of total unrecognized compensation cost related to unvested stock options granted under the 2004 Equity Incentive Plan which generally will be recognized on a straight-line basis over the related vesting period. This unrecognized compensation cost is expected to be recognized over a weighted average period of 2.5 years.

Management estimated the fair value of each option grant made during 2017, 2016 and 2015 as of the date of the grant using the Black-Scholes option pricing method. Weighted average assumptions are presented in the following table. The risk-free interest rate is based on the estimated effective life, and is estimated based on U.S. Treasury Bond rates as of the grant date. The expected life is based on several factors, including, among other things, the vesting term and contractual term as well as historical experience. The expected volatility is based principally on the historical volatility of the Company’s share price.

		2017				2016				2015
Risk-free interest rate			2.0	%			1.3	%			1.7	%
Expected life (years)			5.5				5.5				5.5
Expected volatility			25.8	%			26.0	%			28.4	%
Expected dividend yield			0.9	%			1.2	%			1.1	%
Weighted average fair value per stock option		$	49.57			$	29.59			$	28.45

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Option valuation models require the input of highly subjective assumptions. In management’s opinion, existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options, as changes in subjective input assumptions can significantly affect the fair value estimate.

Other Equity-Based Compensation Arrangements

The Company granted 4,410 shares, 6,920 shares and 8,350 shares of restricted stock in 2017, 2016 and 2015, respectively, to members of its Board of Directors. These grants generally vest one year from the date of the grant and have a fair value equal to the market price of the Company’s stock on the grant date. These awards also contain provisions for accelerated vesting upon the retirement of holders that have achieved specific service and age requirements. The Company recorded total non-cash compensation expense of $0.8 million, $0.9 million and $0.9 million in 2017, 2016 and 2015, respectively, related to these restricted stock awards. All non-cash compensation expense amounts are recorded in general and administrative expense. As of December 31, 2017, there was less than $0.1 million of total unrecognized compensation cost related to these restricted stock grants.

The Company granted 67,840 shares, 90,730 shares and 88,250 shares of performance-based restricted stock in 2017, 2016 and 2015, respectively, to certain employees of the Company. These performance-based restricted stock awards are separated into four tranches and have time-based and performance-based vesting conditions with the last tranche vesting four years from the issuance date. These awards also contain provisions for accelerated vesting upon the retirement of holders that have achieved specific service and age requirements. These awards are considered granted for accounting purposes when the performance target is set, which is generally in the fourth quarter of each year. The Company recorded total non-cash compensation expense of $13.1 million, $12.8 million and $12.8 million in 2017, 2016 and 2015, respectively, related to these awards. All non-cash compensation expense amounts are recorded in general and administrative expense. As of December 31, 2017, there was an estimated $24.1 million of total unrecognized compensation cost related to performance-based restricted stock.

Restricted stock and performance-based restricted stock activity related to the 2004 Equity Incentive Plan is summarized as follows:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Nonvested at January 1, 2017			276,220			$	97.48
Shares granted (1)			72,250				205.21
Shares cancelled			(16,109	)			115.71
Shares vested			(137,757	)			80.55
Nonvested at December 31, 2017			194,604			$	147.94

(1)	The weighted average grant date fair value for performance-based restricted shares granted was calculated based on the market price on the grant dates. Certain tranches will ultimately be valued when the performance condition is established for each tranche, which generally occurs in the fourth quarter of each fiscal year.

(10)	CAPITAL STRUCTURE

The Company has a Board of Directors-approved open market share repurchase program of the Company’s common stock. The open market share repurchase program has historically been funded by excess cash flow.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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 under the Company’s previous $250.0 million share repurchase program. On August 2, 2017, the Company entered into the $1.0 billion 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 program, the Company used a portion of the proceeds from the 2017 Recapitalization to pay the counterparty $1.0 billion in cash to repurchase 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.

On October 23, 2015, the Company’s Board of Directors authorized a share repurchase program to repurchase up to $800.0 million of the Company’s common stock. On October 27, 2015, the Company entered into the $600.0 million 2015 ASR Agreement with a counterparty. Pursuant to the terms of the 2015 ASR Agreement, on October 30, 2015, as part of its $800.0 million share repurchase authorization, the Company used a portion of the proceeds from the 2015 Recapitalization to pay the counterparty $600.0 million in cash and received 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 its $600.0 million accelerated share repurchase program. In connection with the 2015 ASR Agreement, the Company received and retired a total of 5,315,930 shares of its common stock at an average price of $112.87.

During 2017, 2016 and 2015, the Company repurchased 5,576,249 shares, 2,816,716 shares (including the 456,936 shares of its common stock received in the first quarter of 2016 in connection with the settlement of the 2015 ASR Agreement), and 6,152,918 shares of common stock for approximately $1.06 billion, $300.3 million and $738.6 million, respectively. At December 31, 2017, the Company had $198.5 million remaining under the $1.25 billion authorization. The Company’s policy is to recognize the difference between the purchase price and par value of the common stock in additional paid-in capital. In instances where there is no additional paid-in capital, the difference is recognized in retained deficit.

As of December 31, 2017, authorized common stock consists of 160,000,000 voting shares and 10,000,000 non-voting shares. The share components of outstanding common stock at December 31, 2017 and January 1, 2017 are as follows:

		2017				2016
Voting			42,881,905				48,083,721
Non-Voting			16,424				16,422
Total Common Stock			42,898,329				48,100,143

(11)	SEGMENT INFORMATION

The Company has three reportable segments: (i) Domestic Stores; (ii) Supply Chain; and (iii) International Franchise.

The Company’s operations are organized by management on the combined basis of line of business and geography. The Domestic Stores segment includes operations with respect to all franchised and Company-owned stores throughout the contiguous United States. The Supply Chain segment primarily includes the distribution of food, equipment and supplies to stores from the Company’s supply chain center operations in the United States and Canada. The International Franchise segment primarily includes operations related to the Company’s franchising business in foreign and non-contiguous United States markets.

The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its segments and allocates resources to them based on earnings before interest, taxes, depreciation, amortization and other, referred to as Segment Income.

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(Continued)

The tables below summarize the financial information concerning the Company’s reportable segments for fiscal 2017, 2016 and 2015. Intersegment Revenues are comprised of sales of food, equipment and supplies from the Supply Chain segment to the Company-owned stores in the Domestic Stores segment. Intersegment sales prices are market based. The “Other” column as it relates to Segment Income and income from operations information below primarily includes corporate administrative costs. The “Other” column as it relates to capital expenditures primarily includes capitalized software, certain equipment and leasehold improvements. Tabular amounts presented below are in thousands.

		Domestic								International				Intersegment
		Stores				Supply Chain				Franchise				Revenues__				Other				Total
Revenues-
2017		$	842,233			$	1,874,943			$	206,708			$	(135,905	)			—			$	2,787,979
2016			751,284				1,669,000				176,999				(124,655	)			—				2,472,628
2015			669,724				1,495,308				163,643				(112,147	)			—				2,216,528
Segment Income-
2017		$	306,406			$	163,077			$	161,263				N/A			$	(46,958	)		$	583,788
2016			271,794				144,130				138,487				N/A				(42,802	)			511,609
2015			240,942				127,155				130,650				N/A				(42,075	)			456,672
Income from Operations-
2017		$	298,852			$	151,622			$	161,066				N/A			$	(90,308	)		$	521,232
2016			261,826				133,745				138,306				N/A				(79,835	)			454,042
2015			233,248				117,185				130,601				N/A				(75,595	)			405,439
Capital Expenditures-
2017		$	20,579			$	34,123			$	28				N/A			$	35,527			$	90,257
2016			18,225				11,527				642				N/A				31,143				61,537
2015			25,120				9,928				—				N/A				27,317				62,365

The following table reconciles total Segment Income to income before provision for income taxes:

		2017				2016				2015
Total Segment Income		$	583,788			$	511,609			$	456,672
Depreciation and amortization			(44,369	)			(38,140	)			(32,434	)
Gains (losses) on sale/disposal of assets			3,148				(863	)			(316	)
Non-cash compensation expense			(20,713	)			(18,564	)			(17,623	)
Recapitalization-related expenses			(622	)			—				(860	)
Income from operations			521,232				454,042				405,439
Interest income			1,462				685				313
Interest expense			(122,541	)			(110,069	)			(99,537	)
Income before provision for income taxes		$	400,153			$	344,658			$	306,215

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The following table summarizes the Company’s identifiable asset information as of December 31, 2017 and January 1, 2017:

		2017				2016
Domestic Stores		$	96,771			$	89,220
Domestic supply chain			206,059				172,210
Total domestic assets			302,830				261,430
International Franchise			19,728				17,436
International supply chain			24,925				19,368
Total international assets			44,653				36,804
Unallocated			489,270				418,061
Total consolidated assets		$	836,753			$	716,295

Unallocated assets primarily include cash and cash equivalents, restricted cash and cash equivalents, advertising fund assets, investments in marketable securities, certain long-lived assets and deferred income taxes.

The following table summarizes the Company’s goodwill balance as of December 31, 2017 and January 1, 2017:

		2017				2016
Domestic Stores		$	14,356			$	14,991
Supply Chain			1,067				1,067
Consolidated goodwill		$	15,423			$	16,058

(12)	SALE AND CLOSURE OF COMPANY-OWNED STORES

During 2017, the Company sold 17 Company-owned stores to franchisees for proceeds of $6.8 million. In connection with the sale of the stores, the Company recorded a $4.0 million pre-tax gain on the sale of the related assets, which was net of a $0.6 million reduction in goodwill. The gain was recorded in general and administrative expense in the Company’s consolidated statements of income.

The Company closed one Company-owned store in 2016. In connection with the closure, the Company recorded a reduction of goodwill of less than $0.1 million in general and administrative expense in the Company’s consolidated statements of income.

During 2015, the Company sold four Company-owned stores to franchisees for proceeds of $1.2 million. In connection with the sale of the four stores, the Company recorded a $0.7 million pre-tax gain on the sale of the related assets, which was net of a $0.2 million reduction in goodwill. The gain was recorded in general and administrative expense in the Company’s consolidated statements of income.

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(Continued)

(13) PERIODIC FINANCIAL DATA (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The Company’s convention with respect to reporting periodic financial data is such that each of the first three fiscal quarters consists of 12 weeks while the last fiscal quarter consists of 16 weeks or 17 weeks. The fourth quarters of 2017 and 2016 are comprised of 16 weeks.

																		For the Fiscal
		For the Fiscal Quarter Ended																Year Ended
		March 26,				June 18,				September 10,				December 31,				December 31,
		2017				2017				2017				2017				2017
Total revenues		$	624,217			$	628,611			$	643,642			$	891,509			$	2,787,979
Operating margin			193,816				192,845				198,478				280,852				865,991
Income before provision for income taxes			90,514				88,532				84,551				136,556				400,153
Net income			62,469				65,741				56,368				93,327				277,905
Earnings per common share – basic (1)		$	1.31			$	1.37			$	1.22			$	2.17			$	6.05
Earnings per common share – diluted (1)		$	1.26			$	1.32			$	1.18			$	2.09			$	5.83
Common stock dividends declared per share		$	0.46			$	0.46			$	0.46			$	0.46			$	1.84

																		For the Fiscal
		For the Fiscal Quarter Ended																Year Ended
		March 27,				June 19,				September 11,				January 1,				January 1,
		2016				2016				2016				2017				2017
Total revenues		$	539,175			$	547,341			$	566,677			$	819,435			$	2,472,628
Operating margin			167,216				171,838				173,903				254,734				767,691
Income before provision for income taxes			72,842				78,692				75,814				117,310				344,658
Net income			45,451				49,261				47,232				72,734				214,678
Earnings per common share – basic		$	0.91			$	1.00			$	0.98			$	1.52			$	4.41
Earnings per common share – diluted (1)		$	0.89			$	0.98			$	0.96			$	1.48			$	4.30
Common stock dividends declared per share		$	0.38			$	0.38			$	0.38			$	0.38			$	1.52

(1)	Earnings per share figures may not sum to the total due to the rounding of each individual calculation.

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(Continued)

(14) SUBSEQUENT EVENTS

On February 14, 2018, the Company’s Board of Directors declared a quarterly dividend of $0.55 per common share payable on March 30, 2018 to shareholders of record at the close of business on March 15, 2018. The Board of Directors also authorized a new share repurchase program to repurchase up to $750.0 million of the Company’s common stock. This repurchase program replaces the remaining availability of approximately $198.5 million under the Company’s previously approved $1.25 billion share repurchase program that was authorized by the Board on July 27, 2017.

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