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 (the “Company”) as of December 30, 2018 and December 31, 2017, and the related consolidated statements of income, statements of comprehensive income, statements of stockholders’ deficit, and statements of cash flows for each of the three years in the period ended December 30, 2018, including the related notes, the schedules of condensed financial information of the registrant as of December 30, 2018 and December 31, 2017 and for the three years in the period ended December 30, 2018 and valuation and qualifying accounts for each of the three years in the period December 30, 2018 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 30, 2018, 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 30, 2018 and December 31, 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2018 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 30, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.

Change in Accounting Principles

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue and the manner in which it accounts for restricted cash and cash equivalents in 2018. As discussed in Note 6 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 21, 2019

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 30, 2018				December 31, 2017
Assets
Current assets:
Cash and cash equivalents		$	25,438			$	35,768
Restricted cash and cash equivalents			166,993				191,762
Accounts receivable, net of reserves of $1,879 in 2018 and $1,424 in 2017			190,091				173,677
Inventories			45,975				39,961
Prepaid expenses and other			25,710				18,389
Advertising fund assets, restricted			112,744				120,223
Total current assets			566,951				579,780
Property, plant and equipment:
Land and buildings			41,147				29,171
Leasehold and other improvements			170,498				128,613
Equipment			243,654				216,599
Construction in progress			31,822				32,482
			487,121				406,865
Accumulated depreciation and amortization			(252,182	)			(237,279	)
Property, plant and equipment, net			234,939				169,586
Other assets:
Investments in marketable securities, restricted			8,718				8,119
Goodwill			14,919				15,423
Capitalized software, net of accumulated amortization of $89,161 in 2018 and $78,696 in 2017			63,809				52,823
Other assets, net of accumulated amortization of $776 in 2018 and $776 in 2017			12,523				8,272
Deferred income taxes			5,526				2,750
Total other assets			105,495				87,387
Total assets		$	907,385			$	836,753
Liabilities and stockholders’ deficit
Current liabilities:
Current portion of long-term debt		$	35,893			$	32,324
Accounts payable			92,546				106,894
Accrued compensation			40,962				37,417
Accrued interest			25,981				22,095
Insurance reserves			22,210				20,754
Advertising fund liabilities			107,150				120,223
Other accrued liabilities			55,001				58,578
Total current liabilities			379,743				398,285
Long-term liabilities:
Long-term debt, less current portion			3,495,691				3,121,490
Insurance reserves			31,065				30,611
Other accrued liabilities			40,807				21,751
Total long-term liabilities			3,567,563				3,173,852
Total liabilities			3,947,306				3,572,137
Commitments and contingencies
Stockholders’ deficit
Common stock, par value $0.01 per share; 170,000,000 shares authorized; 40,977,561 in 2018 and 42,898,329 in 2017 issued and outstanding			410				429
Preferred stock, par value $0.01 per share; 5,000,000 shares authorized, none issued			—				—
Additional paid-in capital			569				5,654
Retained deficit			(3,036,471	)			(2,739,437	)
Accumulated other comprehensive loss			(4,429	)			(2,030	)
Total stockholders’ deficit			(3,039,921	)			(2,735,384	)
Total liabilities and stockholders’ deficit		$	907,385			$	836,753

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 30,				December 31,				January 1,
		2018				2017				2017
Revenues:
U.S. Company-owned stores		$	514,804			$	490,846			$	439,024
U.S. franchise royalties and fees			391,493				351,387				312,260
Supply chain			1,943,297				1,739,038				1,544,345
International franchise royalties and fees			224,747				206,708				176,999
U.S. franchise advertising			358,526				—				—
Total revenues			3,432,867				2,787,979				2,472,628
Cost of sales:
U.S. Company-owned stores			398,158				377,674				331,860
Supply chain			1,732,030				1,544,314				1,373,077
Total cost of sales			2,130,188				1,921,988				1,704,937
Operating margin			1,302,679				865,991				767,691
General and administrative			372,464				344,759				313,649
U.S. franchise advertising			358,526				—				—
Income from operations			571,689				521,232				454,042
Interest income			3,334				1,462				685
Interest expense			(146,345	)			(122,541	)			(110,069	)
Income before provision for income taxes			428,678				400,153				344,658
Provision for income taxes			66,706				122,248				129,980
Net income		$	361,972			$	277,905			$	214,678
Earnings per share:
Common Stock – basic		$	8.65			$	6.05			$	4.41
Common Stock – diluted		$	8.35			$	5.83			$	4.30
Dividends declared per share		$	2.20			$	1.84			$	1.52

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

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

		For the Years Ended
		December 30,				December 31,				January 1,
		2018				2017				2017
Net income		$	361,972			$	277,905			$	214,678
Other comprehensive income (loss), before tax:
Currency translation adjustment			(2,048	)			1,080				(94	)
Tax attributes of items in other comprehensive income (loss):
Currency translation adjustment			—				—				532
Other comprehensive income (loss), net of tax			(2,048	)			1,080				438
Comprehensive income		$	359,924			$	278,985			$	215,116

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 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			—				—				—				—				1,080
Balance at December 31, 2017			42,898,329				429				5,654				(2,739,437	)			(2,030	)
Net income			—				—				—				361,972				—
Common stock dividends and equivalents			—				—				—				(92,211	)			—
Issuance of common stock, net			79,868				1				—				—				—
Tax payments for restricted stock upon vesting			(27,308	)			—				(6,962	)			—				—
Purchases of common stock			(2,387,430	)			(24	)			(30,743	)			(560,445	)			—
Exercises of stock options			414,102				4				9,828				—				—
Non-cash compensation expense			—				—				22,792				—				—
Adoption of ASC 606 (Note 1)			—				—				—				(6,701	)			—
Currency translation adjustment			—				—				—				—				(2,048	)
Reclassification adjustment for stranded taxes (Note 1)			—				—				—				351				(351	)
Balance at December 30, 2018			40,977,561			$	410			$	569			$	(3,036,471	)		$	(4,429	)

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 30,				December 31,				January 1,
		2018				2017				2017
Cash flows from operating activities:
Net income		$	361,972			$	277,905			$	214,678
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			53,665				44,369				38,140
(Gain) loss on sale/disposal of assets			(4,737	)			(3,148	)			863
Amortization of debt issuance costs			8,033				10,976				6,418
(Benefit) provision for deferred income taxes			(872	)			6,160				(3,059	)
Non-cash compensation expense			22,792				20,713				18,564
Excess tax benefits from equity-based compensation			(23,786	)			(27,227	)			(48,129	)
Provision (benefit) for losses and accounts and notes receivable			899				(277	)			(224	)
Changes in operating assets and liabilities:
Increase in accounts receivable			(18,172	)			(22,649	)			(18,724	)
(Increase) decrease in inventories, prepaid expenses and other			(12,455	)			1,527				(2,947	)
Increase in accounts payable and accrued liabilities			10,010				22,267				78,929
Increase in insurance reserves			2,174				8,420				2,764
Changes in advertising fund assets and liabilities, restricted			(5,352	)			2,225				5,187
Net cash provided by operating activities			394,171				341,261				292,460
Cash flows from investing activities:
Capital expenditures			(119,888	)			(90,011	)			(58,555	)
Proceeds from sale of assets			8,367				6,835				4,936
Maturities of advertising fund investments, restricted			94,007				—				—
Purchases of advertising fund investments, restricted			(70,152	)			—				—
Other			(591	)			(562	)			(1,661	)
Net cash used in investing activities			(88,257	)			(83,738	)			(55,280	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt			970,000				1,900,000				63,000
Repayments of long-term debt and capital lease obligations			(604,088	)			(928,193	)			(122,334	)
Proceeds from exercise of stock options			9,832				6,099				15,234
Excess tax benefits from equity-based compensation			—				—				48,129
Purchases of common stock			(591,212	)			(1,064,253	)			(300,250	)
Tax payments for restricted stock upon vesting			(6,962	)			(9,449	)			(5,646	)
Payments of common stock dividends and equivalents			(92,166	)			(84,298	)			(73,925	)
Cash paid for financing costs			(8,207	)			(16,846	)			—
Other			—				(205	)			—
Net cash used in financing activities			(322,803	)			(197,145	)			(375,792	)
Effect of exchange rate changes on cash			(538	)			66				(1,279	)
Change in cash and cash equivalents, restricted cash and cash equivalents		$	(17,427	)		$	60,444			$	(139,891	)
Cash and cash equivalents, beginning of period			35,768				42,815				133,449
Restricted cash and cash equivalents, beginning of period			191,762				126,496				180,940
Cash and cash equivalents included in advertising fund assets, restricted, beginning of period			27,316				25,091				19,904
Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, beginning of period		$	254,846			$	194,402			$	334,293
Cash and cash equivalents, end of period			25,438				35,768				42,815
Restricted cash and cash equivalents, end of period			166,993				191,762				126,496
Cash and cash equivalents included in advertising fund assets, restricted, end of period			44,988				27,316				25,091
Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, end of period		$	237,419			$	254,846			$	194,402

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; (iii) receipt of royalties, advertising contributions and fees from U.S. Domino’s Pizza franchisees; and (iv) receipt of royalties and fees from 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 2018 fiscal year ended on December 30, 2018, the 2017 fiscal year ended on December 31, 2017 and the 2016 fiscal year ended on January 1, 2017. The 2018, 2017 and 2016 fiscal years all consisted of fifty-two 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 30, 2018 includes approximately $130.3 million of restricted cash held for future principal and interest payments, $36.5 million of restricted cash held in a three-month interest reserve as required by the related debt agreements and $0.2 million of other restricted cash. As of December 30, 2018, the Company also held $45.0 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s Pizza brand.

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. As of December 31, 2017, the Company also held $27.3 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s Pizza brand.

Inventories

Inventories are valued at the lower of cost (on a first-in, first-out basis) or net realizable value. Inventories at December 30, 2018 and December 31, 2017 are comprised of the following (in thousands):

		2018				2017
Food		$	42,921			$	36,645
Equipment and supplies			3,054				3,316
Inventories		$	45,975			$	39,961

Other Assets

Current and long-term other assets primarily include prepaid expenses such as insurance, rent and taxes, deposits, notes receivable, software licenses, covenants not-to-compete and other intangible assets primarily arising from franchise acquisitions. As of December 30, 2018 and December 31, 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 are 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 30, 2018 are capital lease assets of approximately $22.2 million, which are related to the leases of five supply chain centers and the lease of one Company-owned store. Included in accumulated depreciation and amortization as of December 30, 2018 is $6.7 million of accumulated amortization related to these leases. Included in land and buildings as of December 31, 2017 are capital lease assets of approximately $10.5 million, which are related to the lease of one supply chain center building and the lease of one Company-owned store. Included in accumulated depreciation and amortization as of December 31, 2017 is $6.2 million of accumulated amortization related to these leases. 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 $35.0 million, $29.6 million and $27.3 million in 2018, 2017 and 2016, 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 2018, 2017 or 2016.

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.

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 2018, 2017 and 2016.

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 $18.7 million, $14.8 million and $10.8 million in 2018, 2017 and 2016, respectively. As of December 30, 2018, scheduled amortization for the next five fiscal years for capitalized software that has been placed in service was approximately $16.6 million, $11.5 million, $7.7 million, $4.2 million and $1.7 million for 2019, 2020, 2021, 2022 and 2023, respectively.

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Domino’s Pizza, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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 2018, 2017 and 2015 Recapitalizations. See Note 4 for a description of the 2018, 2017 and 2015 Recapitalizations. Amortization is recorded 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.

In connection with the 2018, 2017 and 2015 Recapitalizations, the Company recorded $8.2 million, $16.8 million and $17.4 million of debt issuance costs, respectively. In connection with 2018 Recapitalization, the Company repaid the 2015 Five-Year Fixed Rate Notes and expensed approximately $3.2 million for the remaining unamortized debt issuance costs associated with these notes. The remaining debt issuance costs are being amortized into interest expense over the expected terms of the 2018, 2017 and 2015 Notes, as described in Note 4.

The Company expensed debt issuance costs of approximately $3.4 million, $5.7 million and $0.6 million in 2018, 2017 and 2016, respectively in connection with the write-off of debt issuance costs resulting from the repayment of the Company’s outstanding notes, including scheduled principal payments. Debt issuance cost expense, including these write-off amounts, was approximately $8.0 million, $11.0 million and $6.4 million in 2018, 2017 and 2016, 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 twice per year and differences between these estimated actuarial exposures and the Company’s recorded amounts are adjusted as appropriate.

Contract Liabilities

Contract liabilities consist of deferred franchise fees and deferred development fees. As of December 30, 2018, $4.0 million of deferred franchise fees and deferred development fees were included in current other accrued liabilities and $15.9 million of deferred franchise fees and deferred development fees were included in long-term other accrued liabilities. As of December 31, 2017, $1.4 million of deferred development fees were included in current other accrued liabilities and $3.0 million of deferred development fees were included in long-term other accrued liabilities. On January 1, 2018, the Company recorded a contract liability of approximately $15.0 million (of which $2.4 million was current and $12.6 million was long-term) associated with deferred franchise fees received through December 31, 2017 in connection with the adoption of new revenue recognition guidance, which is discussed in the new accounting pronouncements section below.

Changes in deferred franchise fees and deferred development fees in 2018 were as follows:

		Fiscal Year Ended
(In thousands)		December 30, 2018
Deferred franchise fees and deferred development fees at beginning of period		$	19,404
Revenue recognized during the period			(5,235	)
New deferrals due to cash received and other			5,731
Deferred franchise fees and deferred development fees at end of period		$	19,900

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Domino’s Pizza, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The Company expects to recognize revenue of $4.0 million in 2019, $3.1 million in 2020, $2.8 million in 2021, $2.5 million in 2022, $2.2 million in 2023 and $5.3 million thereafter associated with the total deferred franchise fee and deferred development fee amount above.

The Company has applied the sales-based royalty exemption which permits exclusion of variable consideration in the form of sales-based royalties from the disclosure of remaining performance obligations.

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

U.S. Company-owned stores revenues are comprised of retail sales of food through Company-owned Domino’s Pizza stores located in the U.S. and are recognized when the items are delivered to or carried out by customers. Customer payments are generally due at the time of sale. Sales taxes related to these sales are collected from customers and remitted to the appropriate taxing authority and are not reflected in the Company’s consolidated statements of income as revenue.

U.S. franchise royalties and fees are primarily comprised of royalties and fees from Domino’s Pizza franchisees with operations in the U.S. Each franchisee is generally required to pay a 5.5% royalty fee on sales. In certain instances, the Company will collect lower rates based on area development agreements, sales initiatives and new store incentives. Royalty revenues are based on a percentage of franchise retail sales and are recognized when the items are delivered to or carried out by franchisees’ customers. U.S. franchise fee revenue primarily relates to per-transaction technology fees that are recognized as the related sales occur. Payments for U.S. royalties and fees are generally due within seven days of the prior week end date.

Supply chain revenues are primarily comprised of sales of food, equipment and supplies to franchised Domino’s Pizza stores located in the U.S. and Canada. Revenues from the sale of food are recognized upon delivery of the food to franchisees and payments for food purchases are generally due within 30 days of the shipping date. Revenues from the sale of equipment and supplies are recognized upon delivery or shipment of the related products to franchisees, based on shipping terms, and payments for equipment and supplies are generally due within 90 days of the shipping date. The Company also offers profit sharing rebates and volume discounts to its franchisees. Obligations for profit sharing rebates are calculated based on actual results of its supply chain centers and are recognized as a reduction to revenue. Volume discounts are based on annual sales. The Company estimates the amount that will be earned and records a reduction to revenue.

International franchise royalties and fees are primarily comprised of royalties and fees from Domino’s Pizza franchisees outside of the U.S. Royalty revenues are recognized when the items are delivered to or carried out by franchise customers. Store opening fees received from international franchisees are recognized as revenue on a straight-line basis over the term of each respective franchise store agreement, which is typically ten years. Development fees received from international master franchisees are also deferred when amounts are received and are recognized as revenue on a straight-line basis over the term of the respective master franchise agreement, which is typically ten years. International franchise royalties and fees are invoiced at least quarterly and payments are generally due within 60 days.

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(Continued)

U.S. franchise advertising revenues are primarily comprised of contributions from Domino’s Pizza franchisees with operations in the U.S. to the Domino’s National Advertising Fund Inc. (“DNAF”), the Company’s consolidated not-for-profit subsidiary that administers the Domino’s Pizza system’s national and market level advertising activities in the U.S. Each franchisee is generally required to contribute 6% of their retail sales to fund national marketing and advertising campaigns (subject, in certain instances, to lower rates based on certain incentives and waivers). These revenues are recognized when items are delivered to or carried out by franchisees’ customers. Payments for U.S. franchise advertising revenues are generally due within seven days of the prior week end date. Although these revenues are restricted to be used only for advertising and promotional activities to benefit franchised stores, the Company has determined there are not performance obligations associated with the franchise advertising contributions received by DNAF that are separate from its U.S. royalty payment stream and as a result, these franchise contributions and the related expenses are presented gross in the Company’s consolidated statement of income.

Reclassification of Revenues

In the first quarter of 2018, the Company began managing its franchised stores in Alaska and Hawaii as part of its U.S. Stores segment (Note 11). Prior to 2018, the revenues from these franchised stores were included in the Company’s International Franchise segment (Note 11). International franchise royalties and fees revenues in 2017 and 2016 included $2.6 million and $2.3 million, respectively, of franchise revenues related to these stores. These amounts have not been reclassified to conform to the current year presentation due to immateriality.

Disaggregation of Revenue

Current accounting standards require that companies disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company has included its revenues disaggregated in its consolidated statements of income to satisfy this requirement.

Supply Chain Profit-Sharing Arrangements

The Company enters into profit-sharing arrangements with U.S. 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 $132.7 million, $119.7 million and $99.8 million in 2018, 2017 and 2016, respectively.

Advertising

U.S. Stores (Note 11) are generally required to contribute 6% of sales to DNAF. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized, as DNAF is obligated to expend such revenues on advertising. Advertising costs funded by Company-owned stores are generally expensed as incurred and are included in general and administrative expense. The contributions from Company-owned stores that have not yet been expended are included in advertising fund assets, restricted on the Company’s consolidated balance sheet. As of December 30, 2018, advertising fund assets, restricted of $112.7 million included approximately $5.5 million of cash contributed from Company-owned stores that had not yet been expended and approximately $107.2 million of other assets which consisted of $95.1 million of cash, cash equivalents and investments, $15.3 million of accounts receivable and $2.3 million of prepaid expenses.

U.S. franchise advertising costs expended by DNAF are included in U.S. franchise advertising expenses in the Company’s consolidated statement of income. Certain costs incurred by the Company on behalf of DNAF were included in general and administrative expense in years prior to 2018. Refer to the New Accounting Pronouncements section within Note 1 for the full impact of the adoption of ASC 606 on the Company’s financial statements.

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 2034. Rent expenses totaled approximately $62.5 million, $57.9 million and $49.9 million during 2018, 2017 and 2016, respectively.

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Common Stock Dividends

The Company declared and paid dividends of approximately $92.2 million (or $2.20 per share) in 2018, approximately $84.2 million (or $1.84 per share) in 2017 and approximately $74.0 million (or $1.52 per share) in 2016.

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 $132.8 million, $107.4 million and $104.6 million during 2018, 2017 and 2016, respectively. Cash paid for income taxes was approximately $71.7 million, $122.6 million and $74.3 million in 2018, 2017 and 2016, respectively.

The Company had $3.8 million, $4.0 million and $3.8 million of non-cash investing activities related to accruals for capital expenditures at December 30, 2018, December 31, 2017, and January 1, 2017. The Company also had non-cash financing activities related to capital assets and liabilities in 2018. During 2018, the Company renewed the leases of four supply chain center buildings and extended the terms of the leases. As a result, the Company recorded non-cash financing activities of $12.0 million for the increase in capital lease assets and liabilities during 2018. The Company also recorded $1.9 million in non-cash financing activities related to a build-to-suit arrangement in which the Company’s landlord is constructing a new building that will be leased to the Company upon completion, which is expected to occur in 2019.

New Accounting Pronouncements

Recently Adopted Accounting Standards

Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) and has since issued various amendments which provide additional clarification and implementation guidance. This standard has been codified as ASC 606. This guidance outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most revenue recognition guidance issued by the FASB, including industry specific guidance. On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method.

The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The Company has determined that the store opening fees received from international franchisees do not relate to separate and distinct performance obligations from the franchise right and those upfront fees will therefore be recognized as revenue over the term of each respective franchise store agreement, which is typically 10 years. In the past, the Company recognized such fees as revenue when the related store opened. An adjustment to beginning retained deficit and a corresponding contract liability of approximately $15.0 million (of which $2.4 million was current and $12.6 million was long-term) was established on the date of adoption associated with the fees received through December 31, 2017 that would have been deferred and recognized over the term of each respective franchise store agreement if the new guidance had been applied in the past. A deferred tax asset of $3.5 million related to this contract liability was also established on the date of adoption.

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The Company has also determined that ASC 606 requires a gross presentation on the consolidated statement of income for franchisee contributions received by and related expenses of DNAF, the Company’s consolidated not-for-profit subsidiary. DNAF exists solely for the purpose of promoting the Domino’s Pizza brand in the U.S. Under prior accounting guidance, the Company had presented the restricted assets and liabilities of DNAF in its consolidated balance sheets and had determined that it acted as an agent for accounting purposes with regard to franchisee contributions and disbursements. As a result, the Company historically presented the activities of DNAF net in its statements of income and statements of cash flows.

Under the requirements of ASC 606, the Company determined that there are not performance obligations associated with the franchise advertising contributions received by DNAF that are separate from the Company’s U.S. royalty payment stream and as a result, these franchise contributions and the related expenses are presented gross in the Company’s consolidated statement of income and consolidated statement of cash flows. While this change materially impacted the gross amount of reported franchise revenues and expenses, the impact is generally expected to be an offsetting increase to both revenues and expenses such that the impact on income from operations and net income is not expected to be material. An adjustment to beginning retained deficit and advertising fund liabilities of approximately $6.4 million related to the timing of advertising expense recognition was recorded on the date of adoption. A deferred tax liability (which is reflected net against deferred tax assets in the consolidated balance sheet) of approximately $1.6 million related to this adjustment was also established on the date of adoption.

The cumulative effects of the changes made to the Company’s consolidated balance sheet as of January 1, 2018 for the adoption of ASC 606 were as follows (in thousands):

		Balance at December 31, 2017				Adjustments Due to ASC 606				Balance at January 1, 2018
Assets
Other assets:
Deferred income taxes		$	2,750			$	1,878			$	4,628
Liabilities and stockholders’ deficit
Current liabilities:
Advertising fund liabilities			120,223				(6,425	)			113,798
Other accrued liabilities			58,578				2,365				60,943
Long-term liabilities:
Other accrued liabilities			21,751				12,639				34,390
Stockholders’ deficit:
Retained deficit			(2,739,437	)			(6,701	)			(2,746,138	)

In accordance with the new revenue standard requirements, the impact of adoption on the Company’s consolidated statement of income for 2018 and consolidated balance sheet as of December 30, 2018 was as follows (in thousands):

		Fiscal Year Ended December 30, 2018
		As Reported				Balances without the Adoption of ASC 606				Effect of Change Higher/ (Lower)
Revenues:
U.S. franchise royalties and fees		$	391,493			$	409,379			$	(17,886	)
International franchise royalties and fees			224,747				225,708				(961	)
U.S. franchise advertising			358,526				—				358,526
General and administrative			372,464				389,520				(17,056	)
U.S. franchise advertising			358,526				—				358,526
Income from operations			571,689				573,481				(1,792	)
Income before provision for income taxes			428,678				430,470				(1,792	)
Provision for income taxes			66,706				67,111				(405	)
Net income			361,972				363,359				(1,387	)

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		As of December 30, 2018
		As Reported				Balances without the Adoption of ASC 606				Effect of Change Higher/ (Lower)
Assets
Other assets:
Deferred income taxes		$	5,526			$	3,243			$	2,283
Liabilities and stockholders’ deficit
Current liabilities:
Advertising fund liabilities			107,150				112,744				(5,594	)
Other accrued liabilities			55,001				52,396				2,605
Long-term liabilities:
Other accrued liabilities			40,807				27,447				13,360
Stockholders’ deficit:
Retained deficit			(3,036,471	)			(3,028,383	)			(8,088	)

ASU 2016-04, Liabilities – Extinguishment of Liabilities (Subtopic 405-20)

In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 aligns recognition of the financial liabilities related to prepaid stored value products (for example, gift cards) with ASC 606 for non-financial liabilities. In general, these liabilities may be extinguished proportionately in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value. The Company adopted this standard effective January 1, 2018 in connection with its adoption of ASC 606. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

ASU 2016-18, Statement of Cash Flows (Topic 230)

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

ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220)

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this updated standard allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The Company adopted this standard in 2018 and, as a result, recorded a $0.4 million reclassification from accumulated other comprehensive loss to the beginning balance of retained deficit in 2018.

ASU 2017-04, Intangibles – Goodwill and Other (Topic 350)

In January 2017, the FASB issued ASU 2017-04_, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment_ (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. ASU 2017-04 is effective for public companies’ annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this standard in 2018 and the adoption of this standard did not have a material impact on its consolidated financial statements.

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Accounting Standards Not Yet Adopted

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

ASU 2016-02, Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. The Company will adopt this standard as of December 31, 2018, the first day of its 2019 fiscal year, using the modified retrospective approach. The Company will elect an optional practical expedient to retain its current classification of leases, and as a result, anticipates that the initial impact of adopting this new standard on its consolidated statement of income and consolidated statement of cash flows will not be material. The Company is still finalizing its adoption procedures, but it anticipates that the adoption of this standard will result in the recognition of additional right-of-use assets and lease liabilities for minimum commitments under noncancelable operating leases of approximately $230 million as of the date of adoption. The Company’s undiscounted minimum lease commitments under its operating leases are disclosed in Note 5. The Company’s accounting for finance leases under the new guidance will remain consistent with the Company’s current accounting for capital leases.

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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.

(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):

		2018				2017				2016
Net income available to common stockholders – basic and diluted		$	361,972			$	277,905			$	214,678
Weighted average number of common shares			41,856,017				45,954,659				48,647,167
Earnings per common share – basic		$	8.65			$	6.05			$	4.41
Diluted weighted average number of common shares			43,331,278				47,677,834				49,923,859
Earnings per common share – diluted		$	8.35			$	5.83			$	4.30

The denominators used in calculating diluted earnings per share for common stock do not include 76,686 options to purchase common stock in 2018, 145,860 options to purchase common stock in 2017 and 121,075 options to purchase common stock in 2016, as the effect of including these options would be anti-dilutive. The denominator used in calculating diluted earnings per share for common stock does not include 28,570 shares subject to restricted stock awards in 2018, as the effect of including these shares would have been anti-dilutive. The denominators used in calculating diluted earnings per share for common stock do not include 81,545 restricted performance shares in 2018, 110,274 restricted performance shares in 2017 and 134,113 restricted performance shares in 2016 as the performance targets for these awards had not yet been met.

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(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 30, 2018:

		At December 30, 2018
						Fair Value Estimated Using
		Carrying Amount				Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
Cash equivalents		$	11,877			$	11,877			$	—			$	—
Restricted cash equivalents			112,272				112,272				—				—
Investments in marketable securities			8,718				8,718				—				—
Advertising fund cash equivalents, restricted			31,547				31,547				—				—
Advertising fund investments, restricted			50,152				50,152				—				—

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				—				—
Advertising fund cash equivalents, restricted			19,945				19,945				—				—
Advertising fund investments, restricted			74,007				74,007				—				—

(4)	Recapitalizations and Financing Arrangements

2018 Recapitalization

On April 24, 2018, the Company completed a recapitalization (the “2018 Recapitalization”) in which certain of the Company’s subsidiaries issued new notes pursuant to an asset-backed securitization. The new notes consist of $425.0 million Series 2018-1 4.116% Fixed Rate Senior Secured Notes, Class A-2-I with an anticipated term of 7.5 years (the “2018 7.5-Year Fixed Rate Notes”), and $400.0 million Series 2018-1 4.328% Fixed Rate Senior Secured Notes, Class A-2-II with an anticipated term of 9.25 years (the “2018 9.25-Year Fixed Rate Notes” and, collectively with the 2018 7.5-Year Fixed Rate Notes, the “2018 Notes”). Gross proceeds from the issuance of the 2018 Notes were $825.0 million.

A portion of the proceeds from the 2018 Recapitalization was used to repay the remaining $490.1 million in outstanding principal and interest under the Company’s 2015 Five-Year Fixed Rate Notes, pre-fund a portion of the principal and interest payable on the 2018 Notes, pay transaction fees and expenses and repurchase and retire shares of the Company’s common stock. In connection with the repayment of the 2015 Five-Year Fixed Rate notes, the Company expensed approximately $3.2 million for the remaining unamortized debt issuance costs associated with these notes. Additionally, in connection with the 2018 Recapitalization, the Company capitalized $8.2 million of debt issuance costs, which are being amortized into interest expense over the expected terms of the 2018 Notes.

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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 proceeds from the 2017 Recapitalization was used to repay the remaining $910.5 million in outstanding principal and interest under the outstanding Series 2012-1 5.216% Fixed Rate Senior Secured Notes, Class A-2 (the “2012 Fixed Rate Notes”), pre-fund a portion of the principal and interest payable on the 2017 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 Recapitalization

On October 21, 2015, the Company completed a recapitalization transaction (the “2015 Recapitalization”) in which certain of the Company’s subsidiaries issued new notes pursuant to an asset-backed securitization. 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 Fixed Rate Notes”) and $800.0 million Series 2015-1 4.474% Fixed Rate Senior Secured Notes, Class A-2-II (the “2015 Ten-Year Fixed Rate Notes” and, together with the 2015 Five-Year Fixed Rate 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 2018 Notes, 2017 Notes and 2015 Notes are collectively referred to as the “Notes.”

2018 Notes

The 2018 Notes have remaining scheduled principal payments of $8.3 million in each of 2019 through 2024, $401.4 million in 2025, $4.0 million in 2026 and $366.0 million in 2027. During fiscal 2018, the Company made principal payments of approximately $4.1 million on the 2018 Notes.

The legal final maturity date of the 2018 Notes is July 2048, but it is anticipated that, unless earlier prepaid to the extent permitted under the related debt agreements, the 2018 7.5-Year Fixed Rate Notes will be repaid on or prior to the anticipated repayment date occurring in October 2025, and the 2018 9.25-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 2018 Notes prior to the applicable anticipated repayment dates, additional interest of at least 5% per annum will accrue, as defined in the related agreements.

2017 Notes

The 2017 Notes have remaining scheduled principal payments of $19.0 million in each of 2019 through 2021, $871.8 million in 2022, $10.0 million in each of 2023 through 2026, and $907.5 million in 2027. During fiscal 2018, the Company made principal payments of approximately $19.0 million on the 2017 Notes.

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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. As of December 30, 2018, the Company had $65.0 million of outstanding borrowings and $61.9 million of available borrowing capacity under its 2017 Variable Funding Notes, net of letters of credit issued of $48.1 million.

2015 Notes

The 2015 Five-Year Fixed Rate Notes were repaid in connection with the 2018 Recapitalization. The 2015 Ten-Year Fixed Rate Notes have remaining scheduled principal payments of $8.0 million in 2019 through 2024 and $732.0 million in 2025. During fiscal 2018, the Company made principal payments of approximately $492.5 million on the 2015 Five-Year Fixed Rate Notes and $8.0 million on the 2015 Ten-Year Fixed Rate Notes.

The legal final maturity date of the 2015 Ten-Year Fixed Rate Notes is in October 2045, but it is anticipated that, unless earlier prepaid to the extent permitted under the related debt agreements, the 2015 Ten-Year Fixed Rate 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 Ten-Year 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.

Debt Issuance Costs and Transaction-Related Expenses

During 2018 and in connection with the 2018 Recapitalization, the Company incurred approximately $3.8 million of net pre-tax expenses, primarily related to $3.2 million in expense related to the write-off of debt issuance costs associated with the repayment of the 2015 Five-Year Fixed Rate Notes. The Company also incurred approximately $0.1 million of interest expense on the 2015 Five-Year Fixed Rate Notes subsequent to the closing of the 2018 Recapitalization but prior to the repayment of the 2015 Five-Year Fixed Rate Notes, resulting in the payment of interest on both the full amount of the 2015 Five-Year Fixed Rate Notes and 2018 Notes for a short period of time. Further, the Company incurred $0.5 million of other net 2018 Recapitalization-related general and administrative expenses, including legal and professional fees. In connection with the 2018 Recapitalization, the Company recorded $8.2 million of debt issuance costs, which are being amortized into interest expense over the 7.5 and 9.25-year expected terms of the 2018 Notes.

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 debt issuance costs 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.

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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.

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 U.S. and international stores, U.S. 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 the Company’s 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 2018 Notes, 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.

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 was to be suspended if the leverage ratios for the Company were less than or equal to 4.5x total debt to adjusted EBITDA, as defined, and there were no scheduled principal catch-up amounts outstanding; provided, that during any such suspension, principal payments would continue to accrue and were 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.

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Consolidated Long-Term Debt

At December 30, 2018 and December 31, 2017, consolidated long-term debt consisted of the following (in thousands):

		2018				2017
3.484% Class A-2-I Notes; repaid in connection with the 2018 Recapitalization		$	—			$	492,500
4.474% Class A-2-II Notes; expected repayment date October 2025; legal final maturity October 2045			780,000				788,000
3.082% Class A-2-II Notes; expected repayment date July 2022; legal final maturity July 2047			592,500				598,500
4.118% Class A-2-III Notes; expected repayment date July 2027; legal final maturity July 2047			987,500				997,500
Floating Rate Class A-2-I Notes; expected repayment date July 2022; legal final maturity July 2047			296,250				299,250
4.116% Class A-2-I Notes; expected repayment date October 2025; legal final maturity July 2048			422,875				—
4.328% Class A-2-II Notes; expected repayment date July 2027; legal final maturity July 2048			398,000				—
2017 Variable Funding Notes			65,000				—
Capital lease obligations			17,006				5,437
Debt issuance costs, net of accumulated amortization of $8.2 million in 2018 and $6.8 million in 2017			(27,547	)			(27,373	)
Total debt			3,531,584				3,153,814
Less – current portion			35,893				32,324
Consolidated long-term debt, net of debt issuance costs		$	3,495,691			$	3,121,490

At December 30, 2018, maturities of long-term debt and capital lease obligations are as follows (in thousands):

2019		$	35,893
2020			35,956
2021			36,026
2022			953,856
2023			27,195
Thereafter			2,470,205
		$	3,559,131

Fair Value Disclosures

Management estimated the approximate fair values of the 2018 Notes, 2017 Fixed and Floating Rate Notes and 2015 Notes as follows (in thousands):

		December 30, 2018								December 31, 2017
		Principal Amount				Fair Value				Principal Amount				Fair Value
2015 Five-Year Fixed Rate Notes		$	—			$	—			$	492,500			$	494,470
2015 Ten-Year Fixed Rate Notes			780,000				783,120				788,000				821,884
2017 Five-Year Fixed Rate Notes			592,500				575,910				598,500				592,515
2017 Ten-Year Fixed Rate Notes			987,500				956,888				997,500				1,023,435
2017 Five-Year Floating Rate Notes			296,250				295,065				299,250				300,746
2018 7.5-Year Fixed Rate Notes			422,875				416,955				—				—
2018 9.25-Year Fixed Rate Notes			398,000				396,010				—				—

At December 30, 2018, the Company had $65.0 million outstanding under its 2017 Variable Funding Notes, which is a variable rate loan. The fair value of this loan approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. This fair value represents a Level 2 measurement (Note 3). The Company did not have any borrowings outstanding under its 2017 Variable Funding Notes at December 31, 2017.

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The 2018 Notes, 2017 Fixed and Floating Rate Notes and 2015 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 30, 2018, the future minimum rental commitments for all non-cancelable leases are as follows (in thousands):

		Operating Leases				Capital Leases				Total
2019		$	40,752			$	2,396			$	43,148
2020			37,519				2,415				39,934
2021			34,538				2,433				36,971
2022			30,763				2,451				33,214
2023			27,388				2,474				29,862
Thereafter			100,310				23,781				124,091
Total future minimum rental commitments		$	271,270				35,950			$	307,220
Less – amounts representing interest							(18,944	)
Total principal payable on capital leases						$	17,006

Future minimum rental commitments for non-cancelable leases do not include non-lease components for common area maintenance, real estate taxes or insurance for the Company’s real estate leases or the variable rate per mile driven and fixed maintenance charges for the Company’s supply chain center tractors and trailers.

As of December 30, 2018, the Company has additional operating leases for supply chain center tractors and trailers and a build-to-suit arrangement for a new building constructed by the Company’s landlord that had not yet commenced with estimated future minimum rental commitments of approximately $39.1 million. The Company has also entered into an additional finance lease for a supply chain center that had not yet commenced with estimated future minimum rental commitments of approximately $28.7 million. These leases are expected to commence in 2019 with lease terms of up to 15 years. These amounts are not included in the table above.

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.

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On February 14, 2011, Domino’s Pizza LLC was named as a defendant in a lawsuit along with Fischler Enterprises of C.F., Inc., a franchisee, and Jeffrey S. Kidd, the franchisee’s delivery driver, filed by Yvonne Wiederhold, the plaintiff, as Personal Representative of the Estate of Richard E. Wiederhold, deceased. The case involved a traffic accident in which the franchisee’s delivery driver is alleged to have caused an accident involving a vehicle driven by Richard Wiederhold. Mr. Wiederhold sustained spinal injuries resulting in quadriplegia and passed away several months after the accident. The jury returned a $10.1 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 90% liable (after certain offsets and other deductions the final verdict was $8.9 million). In the second quarter of 2016, the trial court ruled on all post-judgment motions and entered the judgment. The Company denies liability and in the third quarter of 2016 filed an appeal of the verdict on a variety of grounds. On May 11, 2018, the court of appeals reversed and remanded the case to the trial court for a new trial based on the plaintiff’s improper closing argument. The Company continues to deny liability in this matter.

(6) Income Taxes

Income before provision for income taxes in 2018, 2017 and 2016 consists of the following (in thousands):

		2018				2017				2016
U.S.		$	414,804			$	386,989			$	334,892
Foreign			13,874				13,164				9,766
		$	428,678			$	400,153			$	344,658

The differences between the U.S. Federal statutory income tax provision (using the statutory rate of 21% in 2018 and the statutory rate of 35% in 2017 and 2016) and the Company’s consolidated provision for income taxes for 2018, 2017 and 2016 are summarized as follows (in thousands):

		2018				2017				2016
Federal income tax provision based on the statutory rate		$	90,022			$	140,054			$	120,630
State and local income taxes, net of related Federal income taxes			14,233				11,520				9,787
Non-resident withholding and foreign income taxes			21,369				20,210				17,275
Foreign tax and other tax credits			(25,301	)			(23,324	)			(20,049	)
Foreign derived intangible income			(11,760	)			—				—
Excess tax benefits from equity-based compensation			(23,786	)			(27,227	)			—
Non-deductible expenses, net			1,999				1,794				1,579
Unrecognized tax provision (benefit), net of related Federal income taxes			301				(173	)			(98	)
Other			(371	)			(606	)			856
		$	66,706			$	122,248			$	129,980

The Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“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 the Company’s provision for income taxes of $23.8 million in 2018 and $27.2 million in 2017, primarily due to the recognition of excess tax benefits for options exercised and the vesting of equity awards.

The components of the 2018, 2017 and 2016 consolidated provision for income taxes are as follows (in thousands):

		2018				2017				2016
Provision for Federal income taxes
Current provision		$	33,558			$	81,747			$	100,673
Deferred provision (benefit)			(1,543	)			6,732				(3,096	)
Total provision for Federal income taxes			32,015				88,479				97,577
Provision for state and local income taxes
Current provision			12,651				14,131				15,091
Deferred provision (benefit)			671				(572	)			37
Total provision for state and local income taxes			13,322				13,559				15,128
Provision for non-resident withholding and foreign income taxes			21,369				20,210				17,275
		$	66,706			$	122,248			$	129,980

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As of December 30, 2018 and December 31, 2017, the significant components of net deferred income taxes are as follows (in thousands):

		2018				2017
Deferred income tax assets
Insurance reserves		$	10,253			$	9,957
Equity compensation			9,705				9,277
Other accruals and reserves			10,636				8,532
Foreign tax credit			4,600				—
Other			6,029				4,801
Total deferred income tax assets			41,223				32,567
Deferred income tax liabilities
Depreciation, amortization and asset basis differences			10,505				4,655
Capitalized software			25,192				22,248
Gain on debt extinguishments			—				2,914
Total deferred income tax liabilities			35,697				29,817
Net deferred income taxes		$	5,526			$	2,750

As of December 30, 2018, the Company had unused foreign tax credits of $4.6 million which can be carried back for one year to be fully utilized against its U.S. federal income tax liability. 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 30, 2018, the amount of unrecognized tax benefits was $2.0 million of which, if ultimately recognized, $1.8 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. At December 30, 2018, the Company had less than $0.1 million of accrued interest and no accrued penalties.

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.

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

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
Additions for tax positions of current year			425
Additions for tax positions of prior years			115
Reductions in tax positions from prior years for:
Changes in prior year tax positions			(64	)
Lapses of applicable statute of limitations			(349	)
Balance as of December 30, 2018		$	1,964

The Company is currently under examination by the IRS for the 2015 tax year. The Company continues to be under examination by certain states. The Company’s Federal statute of limitation has expired for years prior to 2015 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

The Tax Cuts and Jobs Act (the “2017 Tax Act”), which was enacted on December 22, 2017, had a significant impact on the Company’s consolidated provision for income taxes for the year ended December 30, 2018. The most significant impacts include but are not limited to reducing the U.S. corporate income tax rate from 35 percent to 21 percent, establishing a deduction for foreign derived intangible income and imposing new limitations on certain executive compensation and foreign tax credits.

The Company recognized the enactment-date 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. As of December 30, 2018, the Company has completed its accounting for all enactment-date tax effects of the 2017 Tax Act and current period adjustments related to these items were immaterial.

(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 18 years of age are eligible to participate in the plan. During 2018, 2017 and 2016, the plan required 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. Effective January 1, 2019, the plan will require the Company to match 100% of the first 5% of each employee’s elective deferrals. During 2018, 2017 and 2016, 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 $7.3 million, $6.1 million and $5.2 million in 2018, 2017 and 2016, 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 base salary and up to 80% of their bonus 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 2018, 2017 or 2016.

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The Company has an employee stock payroll deduction 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 19,494 shares, 21,744 shares and 23,317 shares of common stock in 2018, 2017 and 2016, respectively, purchased on the open market for participating employees at a weighted-average price of $249.57 in 2018, $188.57 in 2017 and $131.74 in 2016. The expenses incurred under the ESPDP were approximately $0.7 million, $0.7 million and $0.5 million in 2018, 2017 and 2016, respectively.

(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 30, 2018 and December 31, 2017 are $48.1 million and $46.7 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 $2.4 million and $1.5 million as of December 30, 2018 and December 31, 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 30, 2018, 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 2,708,278 shares were authorized for grant but have not been granted.

The Company recorded total non-cash compensation expense of $22.8 million, $20.7 million and $18.6 million in 2018, 2017 and 2016, 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 $4.0 million in 2018 and $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.

Stock Options

As of December 30, 2018, the number of stock options granted and outstanding under the 2004 Equity Incentive Plan was 1,909,399 options. 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 2018 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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Stock option activity related to the 2004 Equity Incentive Plan is summarized as follows:

		Common Stock Options
		Outstanding				Weighted Average Exercise Price				Weighted Average Remaining Life				Aggregate Intrinsic Value
										(Years)				(In thousands)
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
Stock options granted			96,580				266.11
Stock options cancelled			(11,193	)			174.63
Stock options exercised			(414,102	)			23.74
Stock options at December 30, 2018			1,909,399			$	72.86				4.5			$	340,555
Exercisable at December 30, 2018			1,698,583			$	56.40				4.0			$	328,788

The total intrinsic value of stock options exercised was approximately $91.2 million, $62.0 million and $128.0 million in 2018, 2017 and 2016, respectively. Cash received from the exercise of stock options was approximately $9.8 million, $6.1 million and $15.2 million in 2018, 2017 and 2016, respectively. The tax benefit realized from stock options exercised was approximately $22.0 million, $23.0 million and $46.1 million in 2018, 2017 and 2016, respectively.

The Company recorded total non-cash compensation expense of $6.3 million, $6.8 million and $4.9 million in 2018, 2017 and 2016, respectively, related to stock option awards. As of December 30, 2018, there was $7.8 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 2.8 years.

Management estimated the fair value of each option grant made during 2018, 2017 and 2016 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.

		2018				2017				2016
Risk-free interest rate			2.7	%			2.0	%			1.3	%
Expected life (years)			5.5				5.5				5.5
Expected volatility			24.2	%			25.8	%			26.0	%
Expected dividend yield			0.8	%			0.9	%			1.2	%
Weighted average fair value per stock option		$	67.65			$	49.57			$	29.59

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.

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Other Equity-Based Compensation Arrangements

The Company granted 3,790 shares, 4,410 shares and 6,920 shares of restricted stock in 2018, 2017 and 2016, 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, $0.8 million and $0.9 million in 2018, 2017 and 2016, respectively, related to these restricted stock awards. As of December 30, 2018, there was less than $0.1 million of total unrecognized compensation cost related to these restricted stock grants.

In 2018, the Company granted 28,570 shares of restricted stock to two executives of the Company. These grants will vest four years 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 $1.1 million in 2018 related to these restricted stock awards. As of December 30, 2018, there was $7.0 million of total unrecognized compensation cost related to these restricted stock grants.

The Company granted 59,070 shares, 67,840 shares and 90,730 shares of performance-based restricted stock in 2018, 2017 and 2016, 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 $14.6 million, $13.1 million and $12.8 million in 2018, 2017 and 2016, respectively, related to these awards. As of December 30, 2018, there was an estimated $27.2 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:

		Shares				Weighted Average Grant Date Fair Value
Nonvested at January 3, 2016			316,332			$	75.74
Shares granted (1)			97,650				131.75
Shares cancelled			(13,970	)			88.34
Shares vested			(123,792	)			70.39
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
Shares granted (1)			91,430				271.33
Shares cancelled			(12,692	)			178.06
Shares vested			(82,963	)			128.57
Nonvested at December 30, 2018			190,379			$	213.57

	(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.

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(10)	Capital Structure

The Company has a Board of Directors-approved open market share repurchase program of the Company’s common stock, which was reset during the first quarter of 2018 to $750.0 million. The open market share repurchase program has historically been funded by excess operating cash flows, excess proceeds from the Company’s recapitalization transactions and borrowings under the Company’s variable funding notes.

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 Board of Directors-approved 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.

During 2018, 2017 and 2016, the Company repurchased 2,387,430 shares, 5,576,249 shares and 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 Company’s $600.0 million accelerated share repurchase agreement with a counterparty entered into on October 27, 2015) for approximately $591.2 million, $1.06 billion and $300.3 million, respectively. At December 30, 2018, the Company had $158.8 million remaining under its $750.0 million 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. From December 31, 2018 through February 14, 2019, the Company repurchased and retired an additional 33,549 shares of common stock for a total of approximately $8.1 million, or an average price of $242.74 per share.

As of December 30, 2018, 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 30, 2018 and December 31, 2017 are as follows:

		2018				2017
Voting			40,974,200				42,881,905
Non-Voting			3,361				16,424
Total Common Stock			40,977,561				42,898,329

(11)	Segment Information

The Company has three reportable segments: (i) U.S. 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 U.S. Stores segment includes operations with respect to all franchised and Company-owned stores throughout the U.S. 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 U.S. and Canada. The International Franchise segment primarily includes operations related to the Company’s franchising business in foreign 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.

The tables below summarize the financial information concerning the Company’s reportable segments for fiscal 2018, 2017 and 2016. Intersegment Revenues are comprised of sales of food, equipment and supplies from the Supply Chain segment to the Company-owned stores in the U.S. Stores segment. Intersegment sales prices are market based. The “Other” column as it relates to Segment Income 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.

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(Continued)

		U.S. Stores (1)				Supply Chain				International Franchise (2)				Intersegment Revenues				Other				Total
Revenues-
2018		$	1,264,823			$	2,087,408			$	224,747			$	(144,111	)			—			$	3,432,867
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
Segment Income-
2018		$	335,989			$	176,714			$	174,700				N/A			$	(43,462	)		$	643,941
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
Income from Operations-
2018		$	329,044			$	162,392			$	174,503				N/A			$	(94,250	)		$	571,689
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
Capital Expenditures-
2018		$	15,717			$	61,652			$	134				N/A			$	42,171			$	119,674
2017			20,579				34,123				28				N/A				35,527				90,257
2016			18,225				11,527				642				N/A				31,143				61,537

(1)

The adoption of ASC 606 in 2018 resulted in the recognition of $358.5 million in revenue in 2018 related to U.S. franchise contributions to DNAF. In prior years, under accounting standards in effect at that time, the Company had presented these contributions net with the related disbursements in its consolidated statement of income. Refer to Note 1 to the consolidated financial statements for additional information related to the adoption of this new accounting standard.

(2)

In 2018, the Company began managing its franchised stores in Alaska and Hawaii as part of its U.S. Stores segment. Prior to 2018, store counts, retail sales and royalty revenues from these franchised stores were included in the Company’s international operations in the table above. Consolidated results of the Company have not been impacted by this change and prior year amounts have not been reclassified to conform to the current year presentation due to immateriality.

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

		2018				2017				2016
Total Segment Income		$	643,941			$	583,788			$	511,609
Depreciation and amortization			(53,665	)			(44,369	)			(38,140	)
Gain (loss) on sale/disposal of assets			4,737				3,148				(863	)
Non-cash compensation expense			(22,792	)			(20,713	)			(18,564	)
Recapitalization-related expenses			(532	)			(622	)			—
Income from operations			571,689				521,232				454,042
Interest income			3,334				1,462				685
Interest expense			(146,345	)			(122,541	)			(110,069	)
Income before provision for income taxes		$	428,678			$	400,153			$	344,658

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(Continued)

The following table summarizes the Company’s identifiable asset information as of December 30, 2018 and December 31, 2017:

		2018				2017
U.S. Stores (1)		$	211,554			$	216,994
U.S. supply chain			283,351				206,059
Total U.S. assets			494,905				423,053
International Franchise			21,094				19,728
International supply chain			24,049				24,925
Total international assets			45,143				44,653
Unallocated			367,337				369,047
Total consolidated assets		$	907,385			$	836,753

(1)	Identifiable assets for U.S. Stores include $112.7 million and $120.2 million of advertising fund assets, restricted, as of December 30, 2018 and December 31, 2017, respectively. The 2017 amounts were previously classified as unallocated and have been recast due to the adoption of ASC 606.

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

The following table summarizes the Company’s goodwill balance as of December 30, 2018 and December 31, 2017:

		2018				2017
U.S. Stores		$	13,852			$	14,356
Supply Chain			1,067				1,067
Consolidated goodwill		$	14,919			$	15,423

(12)	Sale and Closure of Company-Owned Stores

During 2018, the Company sold 12 Company-owned stores to a former executive of the Company for proceeds of $7.9 million. The former executive terminated his employment with the Company prior to the closing date of the sale and became a franchisee. In connection with the sale of the stores, the Company recorded a $5.9 million pre-tax gain on the sale of the related assets, which was net of a $0.4 million reduction in goodwill. During 2018, the Company also sold two Company-owned stores to a franchisee for proceeds of $0.3 million. In connection with the sale of the stores, the Company recorded a pre-tax gain of less than $0.1 million on the sale of the related assets, which was net of a $0.1 million reduction in goodwill. The gains on these sales were recorded in general and administrative expense in the Company’s consolidated statements of income.

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.

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(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 2018 and 2017 are comprised of 16 weeks.

		For the Fiscal Quarter Ended																For the Fiscal Year Ended
		March 25, 2018				June 17, 2018				September 9, 2018				December 30, 2018				December 30, 2018
Total revenues		$	785,371			$	779,396			$	785,965			$	1,082,135			$	3,432,867
Operating margin			299,865				293,580				295,279				413,955				1,302,679
Income before provision for income taxes			103,670				91,197				99,248				134,563				428,678
Net income			88,827				77,408				84,095				111,642				361,972
Earnings per common share – basic (1)		$	2.07			$	1.84			$	2.02			$	2.71			$	8.65
Earnings per common share – diluted (1)		$	2.00			$	1.78			$	1.95			$	2.62			$	8.35
Common stock dividends declared per share		$	0.55			$	0.55			$	0.55			$	0.55			$	2.20

		For the Fiscal Quarter Ended																For the Fiscal Year Ended
		March 26, 2017				June 18, 2017				September 10, 2017				December 31, 2017				December 31, 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

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

(14)	Subsequent Events

On February 20, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.65 per common share payable on March 29, 2019 to shareholders of record at the close of business on March 15, 2019.

From December 31, 2018 through February 14, 2019, the Company repaid $15.0 million of its borrowings under its 2017 Variable Funding Notes. As of February 14, 2019, the Company had $50.0 million outstanding under its 2017 Variable Funding Notes.

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