filings.toolsItem 8. Financial Statements and Supplementary Data.
139K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data.
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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 January 3, 2021 and December 29, 2019, and the related consolidated statements of income, comprehensive income, stockholders’ deficit and cash flows for each of the three years in the period ended January 3, 2021, including the related notes and the schedule of condensed financial information of the registrant as of January 3, 2021 and December 29, 2019 and for each of the three years in the period ended January 3, 2021 appearing under Item 15 (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of January 3, 2021, 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 January 3, 2021 and December 29, 2019,
and the results of its operations and its cash flows for each of the three years in the period ended January 3, 2021
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 January 3, 2021, based on criteria established in
Internal Control—Integrated Framework
(2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue in 2018.
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.
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Insurance Reserves
As described in Note 1 to the consolidated financial statements, 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. As of January 3, 2021, the Company had accruals for these insurance matters of $54.6 million. The insurance reserves are based on undiscounted independent actuarial estimates, which are based on historical information along with assumptions about future events. Management utilizes various methods, including analyses of historical trends and actuarial valuation methods, to estimate the cost to settle reported claims and claims incurred but not yet reported. The actuarial valuation methods develop estimates of the future ultimate claim costs based on the claims incurred as of the balance sheet date. When estimating these liabilities, several factors are considered, including the severity, duration and frequency of claims, legal cost associated with claims, healthcare trends and projected inflation.
The principal considerations for our determination that performing procedures relating to the valuation of insurance reserves is a critical audit matter are (i) the significant judgment by management when developing the estimated reserves; (ii) a high degree of auditor judgment and effort in performing procedures relating to the actuarial valuation methods used to develop future ultimate claim costs and actuarial assumptions related to the severity, duration and frequency of claims, legal cost associated with claims, healthcare trends and projected inflation; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of insurance reserves. These procedures also included, among others, obtaining and evaluating the Company’s insurance program documents and testing the underlying historical claims data. Professionals with specialized skill and knowledge were used to assist in testing management’s process for estimating the valuation of insurance reserves, including evaluating the appropriateness of the actuarial valuation methods and the reasonableness of actuarial assumptions related to the severity, duration and frequency of claims, legal cost associated with claims, healthcare trends and projected inflation.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 25, 2021
We have served as the Company’s auditor since 2002.
Domino’s Pizza, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| January 3, | December 29, | |||||||
| 2021 | 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 168,821 | $ | 190,615 | ||||
| Restricted cash and cash equivalents | 217,453 | 209,269 | ||||||
| Accounts receivable, net of reserves of $1,793 in 2020 and $2,856 in 2019 | 244,560 | 210,260 | ||||||
| Inventories | 66,683 | 52,955 | ||||||
| Prepaid expenses and other | 24,169 | 19,129 | ||||||
| Advertising fund assets, restricted | 147,698 | 105,389 | ||||||
| Total current assets | 869,384 | 787,617 | ||||||
| Property, plant and equipment: | ||||||||
| Land and buildings | 88,063 | 44,845 | ||||||
| Leasehold and other improvements | 186,456 | 164,071 | ||||||
| Equipment | 292,456 | 243,708 | ||||||
| Construction in progress | 13,014 | 42,705 | ||||||
| 579,989 | 495,329 | |||||||
| Accumulated depreciation and amortization | (282,625 | ) | (252,448 | ) | ||||
| Property, plant and equipment, net | 297,364 | 242,881 | ||||||
| Other assets: | ||||||||
| Operating lease right-of-use assets | 228,268 | 228,785 | ||||||
| Investments in marketable securities, restricted | 13,251 | 11,982 | ||||||
| Goodwill | 15,061 | 15,093 | ||||||
| Capitalized software, net of accumulated amortization of $124,043 in 2020 and $104,237 in 2019 | 81,306 | 73,140 | ||||||
| Other assets | 60,630 | 12,521 | ||||||
| Deferred income taxes | 1,904 | 10,073 | ||||||
| Total other assets | 400,420 | 351,594 | ||||||
| Total assets | $ | 1,567,168 | $ | 1,382,092 | ||||
| Liabilities and stockholders’ deficit | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | 2,855 | $ | 43,394 | ||||
| Accounts payable | 94,499 | 111,101 | ||||||
| Accrued compensation | 58,520 | 46,214 | ||||||
| Accrued interest | 31,695 | 27,881 | ||||||
| Operating lease liabilities | 35,861 | 33,318 | ||||||
| Insurance reserves | 26,377 | 23,735 | ||||||
| Advertising fund liabilities | 141,175 | 101,921 | ||||||
| Other accrued liabilities | 79,837 | 66,267 | ||||||
| Total current liabilities | 470,819 | 453,831 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt, less current portion | 4,116,018 | 4,071,055 | ||||||
| Operating lease liabilities | 202,268 | 202,731 | ||||||
| Insurance reserves | 37,125 | 34,675 | ||||||
| Deferred income taxes | 6,099 | — | ||||||
| Other accrued liabilities | 35,244 | 35,559 | ||||||
| Total long-term liabilities | 4,396,754 | 4,344,020 | ||||||
| Total liabilities | 4,867,573 | 4,797,851 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ deficit | ||||||||
| Common stock, par value $0.01 per share; 170,000,000 shares authorized; 38,868,350 in 2020 and 38,934,009 in 2019 issued and outstanding | 389 | 389 | ||||||
| Preferred stock, par value $0.01 per share; 5,000,000 shares authorized, none issued | — | — | ||||||
| Additional paid-in capital | 5,122 | 243 | ||||||
| Retained deficit | (3,303,492 | ) | (3,412,649 | ) | ||||
| Accumulated other comprehensive loss | (2,424 | ) | (3,742 | ) | ||||
| Total stockholders’ deficit | (3,300,405 | ) | (3,415,759 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 1,567,168 | $ | 1,382,092 | ||||
The accompanying notes are an integral part of these consolidated statements.
Domino’s Pizza, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
| For the Years Ended | ||||||||||||
| January 3, | December 29, | December 30, | ||||||||||
| 2021 | 2019 | 2018 | ||||||||||
| Revenues: | ||||||||||||
| U.S. Company-owned stores | $ | 485,569 | $ | 453,560 | $ | 514,804 | ||||||
| U.S. franchise royalties and fees | 503,196 | 428,504 | 391,493 | |||||||||
| Supply chain | 2,416,651 | 2,104,936 | 1,943,297 | |||||||||
| International franchise royalties and fees | 249,757 | 240,975 | 224,747 | |||||||||
| U.S. franchise advertising | 462,238 | 390,799 | 358,526 | |||||||||
| Total revenues | 4,117,411 | 3,618,774 | 3,432,867 | |||||||||
| Cost of sales: | ||||||||||||
| U.S. Company-owned stores | 379,598 | 346,168 | 398,158 | |||||||||
| Supply chain | 2,143,320 | 1,870,107 | 1,732,030 | |||||||||
| Total cost of sales | 2,522,918 | 2,216,275 | 2,130,188 | |||||||||
| Operating margin | 1,594,493 | 1,402,499 | 1,302,679 | |||||||||
| General and administrative | 406,613 | 382,293 | 372,464 | |||||||||
| U.S. franchise advertising | 462,238 | 390,799 | 358,526 | |||||||||
| Income from operations | 725,642 | 629,407 | 571,689 | |||||||||
| Interest income | 1,654 | 4,048 | 3,334 | |||||||||
| Interest expense | (172,166 | ) | (150,818 | ) | (146,345 | ) | ||||||
| Income before provision for income taxes | 555,130 | 482,637 | 428,678 | |||||||||
| Provision for income taxes | 63,834 | 81,928 | 66,706 | |||||||||
| Net income | $ | 491,296 | $ | 400,709 | $ | 361,972 | ||||||
| Earnings per share: | ||||||||||||
| Common Stock – basic | $ | 12.61 | $ | 9.83 | $ | 8.65 | ||||||
| Common Stock – diluted | $ | 12.39 | $ | 9.56 | $ | 8.35 |
The accompanying notes are an integral part of these consolidated statements.
Domino’s Pizza, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| For the Years Ended | ||||||||||||
| January 3, | December 29, | December 30, | ||||||||||
| 2021 | 2019 | 2018 | ||||||||||
| Net income | $ | 491,296 | $ | 400,709 | $ | 361,972 | ||||||
| Currency translation adjustment | 1,318 | 687 | (2,048 | ) | ||||||||
| Comprehensive income | $ | 492,614 | $ | 401,396 | $ | 359,924 | ||||||
The accompanying notes are an integral part of these consolidated statements.
Domino’s Pizza, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(In thousands, except share data)
| Common Stock | Additional | Accumulated Other | ||||||||||||||||||
| Paid-in | Retained | Comprehensive | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (Loss) |
| Balance at December 31, 2017 | 42,898,329 | $ | 429 | $ | 5,654 | $ | (2,739,437 | ) | $ | (2,030 | ) | |||||||||
| Net income | — | — | — | 361,972 | — | |||||||||||||||
| Dividends declared on common stock and equivalents ($2.20) | — | — | — | (92,211 | ) | — | ||||||||||||||
| Issuance and cancellation of stock awards, 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 equity-based 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 | ) | |||||||||||||
| Net income | — | — | — | 400,709 | — | |||||||||||||||
| Dividends declared on common stock and equivalents ($2.60) | — | — | — | (105,605 | ) | — | ||||||||||||||
| Issuance and cancellation of stock awards, net | 46,913 | — | — | — | — | |||||||||||||||
| Tax payments for restricted stock upon vesting | (22,506 | ) | — | (5,951 | ) | — | — | |||||||||||||
| Purchases of common stock | (2,493,560 | ) | (25 | ) | (27,700 | ) | (671,282 | ) | — | |||||||||||
| Exercises of stock options | 425,601 | 4 | 13,060 | — | — | |||||||||||||||
| Non-cash equity-based compensation expense | — | — | 20,265 | — | — | |||||||||||||||
| Currency translation adjustment | — | — | — | — | 687 | |||||||||||||||
| Balance at December 29, 2019 | 38,934,009 | 389 | 243 | (3,412,649 | ) | (3,742 | ) | |||||||||||||
| Net income | — | — | — | 491,296 | — | |||||||||||||||
| Dividends declared on common stock and equivalents ($3.12) | — | — | — | (122,183 | ) | — | ||||||||||||||
| Issuance and cancellation of stock awards, net | 35,210 | — | — | — | — | |||||||||||||||
| Tax payments for restricted stock upon vesting | (18,681 | ) | — | (6,803 | ) | — | — | |||||||||||||
| Purchases of common stock | (838,871 | ) | (8 | ) | (43,524 | ) | (261,058 | ) | — | |||||||||||
| Exercises of stock options | 756,683 | 8 | 30,962 | — | — | |||||||||||||||
| Non-cash equity-based compensation expense | — | — | 24,244 | — | — | |||||||||||||||
| Adoption of ASC 326 (Note 1) | — | — | — | 1,102 | — | |||||||||||||||
| Currency translation adjustment | — | — | — | — | 1,318 | |||||||||||||||
| Balance at January 3, 2021 | 38,868,350 | $ | 389 | $ | 5,122 | $ | (3,303,492 | ) | $ | (2,424 | ) | |||||||||
The accompanying notes are an integral part of these consolidated statements.
Domino’s Pizza, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Years Ended | ||||||||||||
| January 3, | December 29, | December 30, | ||||||||||
| 2021 | 2019 | 2018 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 491,296 | $ | 400,709 | $ | 361,972 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 65,038 | 59,930 | 53,665 | |||||||||
| Loss (gain) on sale/disposal of assets | 2,922 | 2,023 | (4,737 | ) | ||||||||
| Amortization of debt issuance costs | 5,526 | 4,748 | 8,033 | |||||||||
| Provision (benefit) for deferred income taxes | 14,424 | (3,297 | ) | (872 | ) | |||||||
| Non-cash equity-based compensation expense | 24,244 | 20,265 | 22,792 | |||||||||
| Excess tax benefits from equity-based compensation | (60,364 | ) | (25,735 | ) | (23,786 | ) | ||||||
| Provision for losses on accounts and notes receivable | 2,134 | 1,195 | 899 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Changes in accounts receivable | (33,334 | ) | (20,900 | ) | (18,172 | ) | ||||||
| Changes in inventories, prepaid expenses and other | (24,959 | ) | (6,741 | ) | (12,455 | ) | ||||||
| Changes in accounts payable and accrued liabilities | 68,954 | 66,137 | 10,010 | |||||||||
| Changes in insurance reserves | 5,544 | 5,322 | 2,174 | |||||||||
| Changes in operating lease assets and liabilities | 2,592 | 3,302 | — | |||||||||
| Changes in advertising fund assets and liabilities, restricted | 28,777 | (10,008 | ) | (5,352 | ) | |||||||
| Net cash provided by operating activities | 592,794 | 496,950 | 394,171 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures | (88,768 | ) | (85,565 | ) | (119,888 | ) | ||||||
| Purchase of investments (Note 9) | (40,000 | ) | — | — | ||||||||
| Proceeds from sale of assets | 174 | 12,258 | 8,367 | |||||||||
| Maturities of advertising fund investments, restricted | — | 50,152 | 94,007 | |||||||||
| Purchases of advertising fund investments, restricted | — | — | (70,152 | ) | ||||||||
| Purchases of franchise operations and other assets | — | (3,423 | ) | — | ||||||||
| Other | (333 | ) | (1,276 | ) | (591 | ) | ||||||
| Net cash used in investing activities | (128,927 | ) | (27,854 | ) | (88,257 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of long-term debt | 158,000 | 675,000 | 970,000 | |||||||||
| Repayments of long-term debt and finance lease obligations | (202,058 | ) | (92,085 | ) | (604,088 | ) | ||||||
| Proceeds from exercise of stock options | 30,970 | 13,064 | 9,832 | |||||||||
| Purchases of common stock | (304,590 | ) | (699,007 | ) | (591,212 | ) | ||||||
| Tax payments for restricted stock upon vesting | (6,803 | ) | (5,951 | ) | (6,962 | ) | ||||||
| Payments of common stock dividends and equivalents | (121,925 | ) | (105,715 | ) | (92,166 | ) | ||||||
| Cash paid for financing costs | — | (8,098 | ) | (8,207 | ) | |||||||
| Net cash used in financing activities | (446,406 | ) | (222,792 | ) | (322,803 | ) | ||||||
| Effect of exchange rate changes on cash | 761 | 201 | (538 | ) | ||||||||
| Change in cash and cash equivalents, restricted cash and cash equivalents | 18,222 | 246,505 | (17,427 | ) | ||||||||
| Cash and cash equivalents, beginning of period | 190,615 | 25,438 | 35,768 | |||||||||
| Restricted cash and cash equivalents, beginning of period | 209,269 | 166,993 | 191,762 | |||||||||
| Cash and cash equivalents included in advertising fund assets, restricted, beginning of period | 84,040 | 44,988 | 27,316 | |||||||||
| Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, beginning of period | 483,924 | 237,419 | 254,846 | |||||||||
| Cash and cash equivalents, end of period | 168,821 | 190,615 | 25,438 | |||||||||
| Restricted cash and cash equivalents, end of period | 217,453 | 209,269 | 166,993 | |||||||||
| Cash and cash equivalents included in advertising fund assets, restricted, end of period | 115,872 | 84,040 | 44,988 | |||||||||
| Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, end of period | $ | 502,146 | $ | 483,924 | $ | 237,419 | ||||||
The accompanying notes are an integral part of these consolidated statements.
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 2020 fiscal year ended on January 3, 2021, the 2019 fiscal year ended on December 29, 2019 and the 2018 fiscal year ended on December 30, 2018. The 2020 fiscal year consisted of fifty-three weeks, and the 2019 and 2018 fiscal years each 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 January 3, 2021 included approximately $177.1 million of restricted cash and cash equivalents held for future principal and interest payments and other working capital requirements of the Company’s asset-backed securitization structure, $39.6 million of restricted cash equivalents held in a three-month interest reserve as required by the related debt agreements and $0.8 million of other restricted cash. As of
January 3, 2021, the Company also held
$115.9 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 29, 2019 included $157.4 million of restricted cash and cash equivalents held for future principal and interest payments and other working capital requirements of the Company’s asset-backed securitization structure, $48.7 million of restricted cash equivalents held in a three-month interest reserve as required by the related debt agreements and $3.2 million of other restricted cash. As of December 29, 2019, the Company also held $84.0 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s Pizza brand.
Allowances for Credit Losses
The Company closely monitors accounts and notes receivable balances and estimates the allowance for credit losses. These estimates are based on historical collection experience and other factors, including those related to current market conditions and events. The Company’s allowances for accounts and notes receivable have not historically been material.
The Company also monitors its off-balance sheet exposures under its letters of credit (Note 4), lease guarantees (Note 5) and surety bonds. Total conditional commitments under surety bonds
were $11.0 million as of January 3, 2021 and $7.6 million as of December 29, 2019. None of these arrangements has had or is likely to have a material effect on the Company’s results of operations, financial condition, revenues, expenses or liquidity.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories
Inventories are valued at the lower of cost (on a
first-in,
first-out
basis) or net realizable value. Inventories at January 3, 2021 and December 29, 2019
were
comprised of the following (in thousands):
| 2020 | 2019 | |||||||
| Food | $ | 57,116 | $ | 49,304 | ||||
| Equipment and supplies | 9,567 | 3,651 | ||||||
| Inventories | $ | 66,683 | $ | 52,955 | ||||
Other Assets
Current
and long-term other assets primarily include prepaid expenses such as insurance, taxes, deposits, notes receivable, software licenses, implementation costs for software as a service arrangements, equity investments without readily determinable fair values, covenants not-to-compete and other intangible assets primarily arising from franchise acquisitions. Other long-term assets included an amortizable intangible asset associated with the acquisition of three U.S. franchise stores during 2019 (Note 13). This intangible asset had a net carrying value, inclusive of accumulated amortization, of $0.9 million and
$
1.3
million as of January 3, 2021 and December 29, 2019, respectively.
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 are generally as follows (in years):
| Buildings | 20 | |
| Leasehold and other improvements | 7 – 15 | |
| Equipment | 3 – 15 |
Depreciation and amortization expense on property, plant and equipment was approximately $42.0 million, $37.1 million and $35.0 million in 2020, 2019 and 2018, 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 2020, 2019 and 2018.
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 8). 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 2020, 2019 and 2018.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Equity investments without readily determinable fair values
Equity investments without readily determinable fair values are recorded at cost with adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairments and are classified as long-term other assets in the Company’s consolidated balance sheet. Any adjustments to the carrying amount are recognized in other income (expense), net in the Company’s
consolidated statements of income.
The Company evaluates the potential impairment of its investments based on various analyses including financial results and operating trends, implied values from recent similar transactions and other relevant available information. If the carrying amount of the investment exceeds the estimated fair value of the investment, an impairment loss is recognized, and the investment is written down to its estimated fair value.
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 $23.0 million, $22.8 million and $18.7 million in 2020, 2019 and 2018, respectively. As of January 3, 2021, scheduled amortization for capitalized software that has been placed in service is approximately $20.5 million in 2021, $12.6 million in 2022, $4.3 million in 2023, $0.8 million in 2024, $0.5 million in 2025 and $0.2 million thereafter. As of January 3, 2021, the Company also had $42.4 million of capitalized software that had not yet been placed in service.
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 2019, 2018, 2017 and 2015 Recapitalizations. See Note 4 for a description of the 2019, 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 terms of the respective debt instrument to which the costs relate and is included in interest expense.
In connection with the 2019, 2018, 2017 and 2015 Recapitalizations, the Company recorded $8.1 million, $8.2 million, $16.8 million and $17.4 million of debt issuance costs, respectively. In connection with the 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.
Debt issuance cost expense was approximately $5.5 million, $4.7 million and $8.0 million in 2020, 2019 and 2018, 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 $2.0 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 $5.5 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 generally 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. The Company had reserves for these programs of $54.6 million and $50.3 million as of January 3, 2021 and December 29, 2019, respectively.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition, the Company maintains reserves for its share of employee health costs as part of the health care benefits offered to its employees. Reserves are based on estimated claims incurred that have not yet been paid, based on historical claims and payment lag times.
Contract Liabilities
Contract liabilities consist primarily of deferred franchise fees and deferred development fees. Deferred franchise fees and deferred development fees of $4.1 million and $4.2 million were included in current other accrued liabilities as of January 3, 2021 and December 29, 2019, respectively. Deferred franchise fees and deferred development fees of $15.0 million and $16.3 million were included in long-term other accrued liabilities as of January 3, 2021 and December 29, 2019, respectively.
Changes in deferred franchise fees and deferred development fees in 2020 and 2019 were as follows (in thousands):
| Fiscal Year Ended | ||||||||
| January 3, 2021 | December 29, 2019 | |||||||
| Deferred franchise fees and deferred development fees at beginning of period | $ | 20,463 | $ | 19,900 | ||||
| Revenue recognized during the period | (6,205 | ) | (5,695 | ) | ||||
| New deferrals due to cash received and other | 4,832 | 6,258 | ||||||
| Deferred franchise fees and deferred development fees at end of period | $ | 19,090 | $ | 20,463 | ||||
The Company expects to recognize revenue of $4.1 million in 2021, $3.0 million in 2022, $2.7 million in 2023, $2.4 million in 2024, $2.0 million in 2025 and $4.9 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, 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, store relocation incentives 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.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 franchisees’ 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 fee revenue primarily relates to per-transaction technology fees that are recognized as the related sales occur. International franchise royalties and fees are invoiced at least quarterly and payments are generally due within 60 days.
U.S. franchise advertising revenues are 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 statements of income.
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 the Company’s supply chain centers. 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 the pre-tax profit from the Company’s supply chain center operations. 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
$169.0 million, $143.5 million and $132.7 million in 2020, 2019 and 2018, respectively.
Advertising
U.S. stores (Note 12) 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. U.S. franchise advertising costs expended by DNAF are included in U.S. franchise advertising expenses in the Company’s consolidated statements of income. Advertising costs funded by Company-owned stores are generally expensed as incurred and are included in general and administrative expense. 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.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Advertising expense included $462.2 million, $390.8 million and $358.5 million of U.S. franchise advertising expense in 2020, 2019 and 2018, respectively. Advertising expense also included $35.7 million, $37.6 million and $43.4 million in 2020, 2019 and 2018, respectively, primarily related to advertising costs funded by U.S. Company-owned stores which is included in general and administrative expense in the consolidated statements of income.
As of January 3, 2021, advertising fund assets, restricted of $147.7 million consisted of $115.9 million of cash and cash equivalents, $27.0 million of accounts receivable and $4.8 million of prepaid expenses. As of January 3, 2021, advertising fund cash and cash equivalents included $6.5 million of cash contributed from U.S. Company-owned stores that had not yet been expended.
As of December 29, 2019, advertising fund assets, restricted of $105.4 million consisted of $84.0 million of cash and cash equivalents, $15.3 million of accounts receivable and $6.1 million of prepaid expenses. As of December 29, 2019, advertising fund cash and cash equivalents included $3.5 million of cash contributed from U.S. Company-owned stores that had not yet been expended.
Leases
The Company leases certain retail store and supply chain center locations, supply chain vehicles, equipment and its corporate headquarters. The Company determines whether an arrangement is or contains a lease at contract inception. The majority of the Company’s leases are classified as operating leases, which are included in operating lease
right-of-use
assets and operating lease liabilities in the Company’s consolidated balance sheet. Finance leases are included in property, plant and equipment, current portion of long-term debt and long-term debt on the Company’s consolidated balance sheet.
Right-of-use
assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement, as well as any variable rate payments that depend on an index, initially measured using the index at the lease commencement date. Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option.
The Company estimates its incremental borrowing rate for each lease using a portfolio approach based on the respective weighted average term of the agreements. This estimation considers the market rates of the Company’s outstanding collateralized borrowings and interpolations of rates outside of the terms of the outstanding borrowings, including comparisons to comparable borrowings of similarly rated companies with longer term borrowings.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales or general and administrative expense. Amortization expense for finance leases is recognized on a straight-line basis over the lease term and is included in cost of sales or general and administrative expense. Interest expense for finance leases is recognized using the effective interest method. Variable lease payments that do not depend on a rate or index, payments associated with
non-lease
components and short-term rentals (leases with terms less than 12 months) are expensed as incurred.
Common Stock Dividends
The Company declared dividends of approximately $122.2 million (or $3.12 per share) in 2020, approximately $105.6 million (or $2.60 per share) in 2019 and approximately $92.2 million (or $2.20 per share) in 2018.
The Company paid
dividends of approximately $121.9 million, $105.7 million and $92.2 million in 2020, 2019 and 2018, respectively.
On February 24, 2021, the Company’s Board of Directors declared a quarterly dividend of
$
0.94 per common share payable on March 30, 2021 to shareholders of record at the close of business on March 15, 2021.
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 (Note 10).
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Earnings Per Share
The Company discloses two calculations of earnings per share (“EPS”): basic EPS and diluted EPS (Note 2). 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 $160.6 million, $142.3 million and $132.8 million during 2020, 2019 and 2018, respectively, on its Notes (Note 4). Cash paid for income taxes was approximately $60.4 million, $80.3 million and $71.7 million in 2020, 2019 and 2018.
The Company had $4.3 million, $6.9 million and $3.8 million of
non-cash
investing activities related to accruals for capital expenditures at January 3, 2021, December 29, 2019 and December 30, 2018, respectively. The Company also had $0.7 million of
non-cash
investing activities related to lease incentives in 2020.
New Accounting Pronouncements
Recently Adopted Accounting Standards
Accounting Standards Update (“ASU”)
2016-13,
Financial Instruments – Credit Losses (Topic 326)
In June 2016, the Financial Accounting Standards Board (“FASB”) issued
ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASC 326”). ASC 326 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. The Company adopted this standard as of December 30, 2019, the first day of its 2020 fiscal year, using the modified retrospective approach and it did not have a material impact on its consolidated financial statements.
The effects of the changes made to the Company’s consolidated balance sheet as of December 30, 2019 for the adoption of ASC 326 were as follows:
| Balance at December 29, 2019 | Adjustments Due to ASC 326 | Balance at December 30, 2019 | ||||||||||
| Assets | ||||||||||||
| Current assets: | ||||||||||||
| Accounts receivable, net | $ | 210,260 | $ | 1,435 | $ | 211,695 | ||||||
| Prepaid expenses and other | 19,129 | 4 | 19,133 | |||||||||
| Other assets: | ||||||||||||
| Other assets | 12,521 | 27 | 12,548 | |||||||||
| Deferred income taxes | 10,073 | (364 | ) | 9,709 | ||||||||
| Liabilities and stockholders’ deficit | ||||||||||||
| Stockholders’ deficit: | ||||||||||||
| Retained deficit | (3,412,649 | ) | 1,102 | (3,411,547 | ) |
The Company recognized the cumulative effect of initially applying ASC 326 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 that period. An adjustment to beginning retained deficit and a corresponding adjustment to the allowance for doubtful accounts and notes receivable of approximately $1.5 million was recorded on the date of adoption, representing the remeasurement of these accounts to the Company’s estimate for current expected credit losses. The adjustment to beginning retained deficit was also net of a $0.4 million adjustment to deferred income taxes.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ASU
2016-02,
Leases (Topic 842)
In February 2016, the FASB issued ASU
2016-02,
Leases
(“ASC 842”) which requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. On December 31, 2018, the first day of its fiscal 2019 year, the Company adopted ASC 842 using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The adoption of ASC 842 had a material impact on the Company’s assets and liabilities due to the recognition of operating lease
right-of-use
assets and lease liabilities on its consolidated balance sheet. The Company elected the optional transition package, including practical expedients that permitted it not to reassess whether any expired or existing contracts are or contain leases, the classification of any expired or existing leases and initial direct costs of any existing leases, and accordingly, the adoption of ASC 842 did not have a material effect on the Company’s consolidated statement of income and consolidated statement of cash flows. Refer to Note 5 for additional disclosure related to the Company’s lease arrangements.
On December 31, 2018, the Company recorded an adjustment of $226.8 million for operating lease
right-of-use
assets and liabilities. The operating lease
right-of-use
assets recorded on the date of adoption were also net of a $7.9 million reclassification of other accrued liabilities and prepaid expenses representing previously deferred (prepaid) rent and lease incentives. The Company also derecognized $1.9 million of construction in progress and other long-term accrued liabilities associated with a new building that was completed and leased to the Company in the third quarter of 2019. During the construction phase, this lease was previously accounted for as a
build-to-suit
arrangement under prior lease accounting guidance.
ASU 2014-09, Revenue from
Contracts with Customers (Topic 606)
In May 2014, the FASB issued
ASU 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 that period.
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.
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 consolidated statements of income and consolidated statements of cash flows.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 of approximately $1.6 million related to this adjustment was also established on the date of adoption.
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
(“ASU
2018-02”).
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 ASU
2018-02
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.
Accounting Standards Not Yet Adopted
The Company has considered all new accounting pronouncements issued by the FASB. The following represent accounting pronouncements that are applicable to the Company, but for which the Company has not yet completed its assessment or has not yet adopted as of January 3, 2021.
ASU 2019-12, Income
Taxes – Simplifying the Accounting for Income Taxes (Topic 740)
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
(“ASU
2019-12”),
which simplifies the accounting for income taxes. ASU
2019-12
is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company will adopt this accounting standard in the first quarter of 2021 and does not expect that it will have a material impact on its consolidated financial statements.
ASU
2020-04,
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)
In March 2020, the FASB issued ASU
2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
(“ASU
2020-04”),
which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform. The Company’s floating rate notes and variable funding notes bear interest at fluctuating interest rates based on LIBOR. If LIBOR ceases to exist, the Company may need to renegotiate its loan documents and the Company cannot predict what alternative index would be negotiated with its lenders. ASU
2020-04
is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its 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.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| (2) | Earnings per Share |
|---|
The computation of basic and diluted earnings per common share for 2020, 2019 and 2018 is as follows (in thousands, except share and per share amounts):
| 2020 | 2019 | 2018 | ||||||||||
| Net income available to common stockholders – basic and diluted | $ | 491,296 | $ | 400,709 | $ | 361,972 | ||||||
| Weighted average number of common shares | 38,974,037 | 40,766,362 | 41,856,017 | |||||||||
| Earnings per common share – basic | $ | 12.61 | $ | 9.83 | $ | 8.65 | ||||||
| Diluted weighted average number of common shares | 39,640,791 | 41,923,062 | 43,331,278 | |||||||||
| Earnings per common share – diluted | $ | 12.39 | $ | 9.56 | $ | 8.35 |
The denominators used in calculating diluted earnings per share for common stock do not include 52,330 options to purchase common stock in 2020, 160,980 options to purchase common stock in 2019 and 76,686 options to purchase common stock in 2018, 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 68,159 restricted performance shares in 2020, 82,647 restricted performance shares in 2019 and 81,545 restricted performance shares in 2018 as the performance targets for these awards had not yet
been met.
| (3) | Fair Value Measurements |
|---|
Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair values of the Company’s cash equivalents and investments in marketable securities are based on quoted prices in active markets for identical assets. The fair value of the Company’s Level 3 investment (Note 9) is not readily determinable. The fair value represents its cost with adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairments. The following table summarizes the carrying amounts and fair values of certain assets at January 3, 2021 (in thousands):
| At January 3, 2021 | ||||||||||||||||
| Fair Value Estimated Using | ||||||||||||||||
| Carrying Amount | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||
| Cash equivalents | $ | 151,502 | $ | 151,502 | $ | — | $ | — | ||||||||
| Restricted cash equivalents | 126,595 | 126,595 | — | — | ||||||||||||
| Investments in marketable securities | 13,251 | 13,251 | — | — | ||||||||||||
| Advertising fund cash equivalents, restricted | 104,197 | 104,197 | — | — | ||||||||||||
| Investments (Note 9) | 40,000 | — | — | 40,000 |
The following table summarizes the carrying amounts and fair values of certain assets at December 29, 2019 (in thousands):
| At December 29, 2019 | ||||||||||||||||
| Fair Value Estimated Using | ||||||||||||||||
| Carrying | Level 1 | Level 2 | Level 3 | |||||||||||||
| Amount | Inputs | Inputs | Inputs | |||||||||||||
| Cash equivalents | $ | 180,459 | $ | 180,459 | $ | — | $ | — | ||||||||
| Restricted cash equivalents | 126,963 | 126,963 | — | — | ||||||||||||
| Investments in marketable securities | 11,982 | 11,982 | — | — | ||||||||||||
| Advertising fund cash equivalents, restricted | 67,851 | 67,851 | — | — |
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) Recapitalizations and Financing Arrangements
2019 Recapitalization
On November 19, 2019, the Company completed a recapitalization (the “2019 Recapitalization”) in which certain of the Company’s subsidiaries issued $675.0 million
Series 2019-1 3.668%
Fixed Rate Senior Secured
Notes, Class A-2 with
an anticipated term of 10 years (the “2019 Fixed Rate Notes”) pursuant to an asset-backed securitization. The Company also entered into a revolving financing facility on the Closing Date, which allows for the issuance of up to $200.0 million Series
2019-1
Variable Funding Senior Secured Notes,
Class A-1
(the “2019 Variable Funding Notes”) and certain other credit instruments, including letters of credit. The 2019 Fixed Rate Notes and the 2019 Variable Funding Notes are referred to collectively as the “2019 Notes.” Gross proceeds from the issuance of the 2019 Notes were $675.0 million.
The proceeds from the 2019 Recapitalization were used to
pre-fund a
portion of the principal and interest payable on the 2019 Notes, pay transaction fees and expenses and repurchase and retire shares of the Company’s common stock. Additionally, in connection with the 2019 Recapitalization, the Company capitalized $8.1 million of debt issuance costs, which are being amortized into interest expense over the expected term of the 2019 Fixed Rate Notes.
2018 Recapitalization
On April 24, 2018, the Company completed a recapitalization (the “2018 Recapitalization”) in which certain of the Company’s subsidiaries issued notes pursuant to an asset-backed securitization. The 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.
The proceeds from the 2018 Recapitalization were 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.
2017 Recapitalization
On July 24, 2017, the Company completed a recapitalization (the “2017 Recapitalization”) in which certain of the Company’s subsidiaries issued notes pursuant to an asset-backed securitization. The 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 Notes”). The interest rate on the 2017 Floating Rate Notes is payable at a rate equal to LIBOR plus 125 basis points. Gross proceeds from the issuance of the 2017 Notes were $1.9 billion.
2015 Recapitalization
On October 21, 2015, the Company completed a recapitalization transaction (the “2015 Recapitalization”) in which certain of the Company’s subsidiaries issued notes pursuant to an asset-backed securitization. The notes consisted 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 Notes”). Gross proceeds from the issuance of the 2015 Notes were $1.3 billion.
The 2019 Notes, 2018 Notes, 2017 Notes and 2015 Notes are collectively referred to as the “Notes.”
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2019 Notes
The 2019 Fixed Rate Notes have original remaining scheduled principal payments of $6.8 million in each of 2021 through 2028 and $614.3 million in 2029. During 2020, the Company made principal payments of approximately $6.8
million on the 2019 Fixed Rate Notes. As noted below with respect to guarantees and covenants of the notes, as of the fourth quarter of 2020, the Company had a leverage ratio of less than
5.0x, and accordingly, did not make the previously scheduled debt amortization payment beginning in the first quarter of 2021.
The legal final maturity date of the 2019 Fixed Rate Notes is October 2049, but it is anticipated that, unless earlier prepaid to the extent permitted under the related debt agreements, the 2019 Fixed Rate Notes will be repaid on or prior to the anticipated repayment date occurring in October 2029. If the Company has not repaid or refinanced the 2019 Fixed Rate 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 2019 Variable Funding Notes allow for advances of up to $200.0 million and issuance of certain other credit instruments, including letters of credit. The letters of credit are primarily related to our casualty insurance programs and certain supply chain center leases.
Interest on the 2019 Variable Funding Notes is payable at a per year rate equal to LIBOR plus 150 basis points. The 2019 Variable Funding Notes were undrawn at closing. The unused portion of the 2019 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 2019 Variable Funding Notes will be repaid in full on or prior to October 2024, 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 2019 Variable Funding Notes equal to 5% per annum.
The Company borrowed and repaid $158.0 million
under the 2019 Variable Funding Notes
in 2020. As of January 3, 2021, the Company had no outstanding borrowings and $157.5 million of available borrowing capacity under its 2019 Variable Funding Notes, net of letters of credit issued of $42.5 million.
2018 Notes
The 2018 Notes have original remaining scheduled principal payments of $8.3 million in each of 2021 through 2024, $402.4 million in 2025, $4.0 million in 2026 and $367.0 million in 2027. During 2020, the Company made principal payments of approximately $8.3 million on the 2018 Notes. As noted below with respect to guarantees and covenants of the notes,
as of the fourth
quarter of 2020, the Company had a leverage ratio of less than 5.0x, and accordingly, did not make the previously scheduled debt amortization payment beginning in the first quarter of 2021.
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 original remaining scheduled principal payments of $19.0 million in 2021, $874.0 million in 2022, $10.0 million in each of 2023 through 2026, and $910.0 million in 2027. During 2020, the Company made principal payments of approximately $19.0 million on the 2017 Notes. As noted below with respect to guarantees and covenants of the notes,
as of the fourth
quarter of 2020, the Company had a leverage ratio of less than 5.0x, and accordingly, did not make the previously scheduled debt amortization payment beginning in the first quarter of 2021.
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.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 original remaining scheduled principal payments of $8.0 million in 2021 through 2024 and $734.0 million in 2025. During 2020, the Company made principal payments of approximately $8.0 million on the 2015
Ten-Year
Fixed Rate Notes. As noted below with respect to guarantees and covenants of the notes,
as of the fourth
quarter of 2020, the Company had a leverage ratio of less than 5.0x, and accordingly, did not make the
previously
scheduled debt amortization payment beginning in the first quarter of 2021.
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 2019 and in connection with the 2019 Recapitalization, the Company incurred $0.5 million of net
pre-tax
2019 Recapitalization-related general and administrative expenses, including legal and professional fees. In connection with the 2019 Recapitalization, the Company recorded $8.1 million of debt issuance costs, which are being amortized into interest expense over the
ten-year
expected term of the 2019 Fixed Rate Notes.
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.
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 principal and 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 2019 Fixed Rate Notes, 2018 Notes, the 2017 Notes and the 2015 Notes may 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.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of the fourth quarter of 2020, the Company had a leverage ratio of less than
5.0x,
and accordingly, did not make the previously scheduled debt amortization payment beginning in the first quarter of 2021, and the Company does not intend to make any scheduled dept principal payments in 2021 while the leverage ratio is less than 5.0x. Accordingly, all principal amounts of the outstanding 2019 Fixed Rate Notes, 2018 Notes, the 2017 Notes and the 2015 Notes have been classified as long-term debt in the consolidated balance sheet as of January 3, 2021.
During the third quarter of 2019, the Company had a leverage ratio of less than 5.0x, and, in accordance with the Company’s debt agreements, ceased debt amortization payments in the fourth quarter of 2019. Subsequent to the 2019 Recapitalization, the Company’s leverage ratios exceeded the leverage ratio of 5.0x and, accordingly, the Company resumed making the scheduled amortization payments on the Notes in the first quarter of 2020.
Consolidated Long-Term Debt
At January 3, 2021 and December 29, 2019, consolidated long-term
debt
consisted of the following (in thousands):
| 2020 | 2019 | |||||||
| 2015 Ten-Year Fixed Rate Notes | $ | 766,000 | $ | 774,000 | ||||
| 2017 Five-Year Fixed Rate Notes | 582,000 | 588,000 | ||||||
| 2017 Ten-Year Fixed Rate Notes | 970,000 | 980,000 | ||||||
| 2017 Five-Year Floating Rate Notes | 291,000 | 294,000 | ||||||
| 2018 7.5-Year Fixed Rate Notes | 415,438 | 419,688 | ||||||
| 2018 9.25-Year Fixed Rate Notes | 391,000 | 395,000 | ||||||
| 2019 Ten-Year Fixed Rate Notes | 668,250 | 675,000 | ||||||
| Finance lease obligations | 60,555 | 19,657 | ||||||
| Debt issuance costs, net of accumulated amortization of $18.4 million in 2020 and $12.9 million in 2019 | (25,370 | ) | (30,896 | ) | ||||
| Total debt | 4,118,873 | 4,114,449 | ||||||
| Less – current portion | 2,855 | 43,394 | ||||||
| Consolidated long-term debt, net of debt issuance costs | $ | 4,116,018 | $ | 4,071,055 | ||||
At January 3, 2021, maturities of long-term debt and finance lease obligations are as follows (in thousands):
| 2021 | $ | 2,855 | ||
| 2022 | 876,027 | |||
| 2023 | 2,937 | |||
| 2024 | 3,198 | |||
| 2025 | 1,184,512 | |||
| Thereafter | 2,074,714 | |||
| $ | 4,144,243 | |||
Fair Value Disclosures
Management estimated the approximate fair values of the 2019 Fixed Rate Notes, 2018 Notes, 2017 Notes and 2015 Notes as follows (in thousands):
| January 3, 2021 | December 29, 2019 | |||||||||||||||
| Principal Amount | Fair Value | Principal Amount | Fair Value | |||||||||||||
| 2015 Ten-Year Fixed Rate Notes | $ | 766,000 | $ | 809,662 | $ | 774,000 | $ | 804,960 | ||||||||
| 2017 Five-Year Fixed Rate Notes | 582,000 | 582,582 | 588,000 | 588,588 | ||||||||||||
| 2017 Ten-Year Fixed Rate Notes | 970,000 | 1,035,960 | 980,000 | 1,017,240 | ||||||||||||
| 2017 Five-Year Floating Rate Notes | 291,000 | 291,000 | 294,000 | 294,000 | ||||||||||||
| 2018 7.5-Year Fixed Rate Notes | 415,438 | 437,456 | 419,688 | 431,439 | ||||||||||||
| 2018 9.25-Year Fixed Rate Notes | 391,000 | 422,280 | 395,000 | 414,355 | ||||||||||||
| 2019 Ten-Year Fixed Rate Notes | 668,250 | 712,355 | 675,000 | 675,675 |
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The 2019 Fixed Rate Notes, 2018 Notes, 2017 Notes and 2015 Notes are classified as a Level 2 measurement, 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 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 those 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.
At January 3, 2021 and December 29, 2019, the Company did not have any outstanding borrowings under its 2019 Variable Funding Notes. Borrowings under the 2019 Variable Funding Notes are a variable rate loan. The fair value of this loan approximated 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.
The fair values in the table above represent the fair value of such Notes at January 3, 2021 and December 29, 2019. In light of the novel coronavirus
(“COVID-19”)
pandemic (discussed further in Note 14) and its impact on financial markets, these fair values fluctuated significantly during 2020 and may continue to fluctuate based on market conditions and other factors.
(5) Leases
The Company leases certain retail store and supply chain center locations, supply chain vehicles, equipment and its corporate headquarters with expiration dates through 2041.
The components of operating and finance lease cost for 2020 and 2019 were as follows (in thousands):
| Fiscal Year Ended | ||||||||
| January 3, 2021 | December 29, 2019 | |||||||
| Operating lease cost | $ | 44,679 | $ | 42,903 | ||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | 2,186 | 1,167 | ||||||
| Interest on lease liabilities | 3,340 | 1,952 | ||||||
| Total finance lease cost | $ | 5,526 | $ | 3,119 | ||||
Rent expense totaled $73.7 million, $69.7 million and $67.4 million in 2020, 2019 and 2018 respectively. Rent expense includes operating lease cost, as well as expense for
non-lease
components including common area maintenance, real estate taxes and insurance for the Company’s real estate leases. Rent expense also includes the variable rate per mile driven and fixed maintenance charges for the Company’s supply chain center tractors and trailers and expense for short-term rentals. Variable rent expense and rent expense for short-term leases were immaterial for 2020 and 2019, respectively.
Supplemental balance sheet information related to the Company’s leases as of January 3, 2021 and December 29, 2019 was as follows (in thousands):
| January 3, | December 29, | |||||||
| 2021 | 2019 | |||||||
| Land and buildings | $ | 68,084 | $ | 25,476 | ||||
| Accumulated depreciation and amortization | (10,049 | ) | (7,846 | ) | ||||
| Finance lease assets, net | $ | 58,035 | $ | 17,630 | ||||
| Current portion of long-term debt | $ | 2,855 | $ | 1,394 | ||||
| Long-term debt, less current portion | 57,700 | 18,263 | ||||||
| Total principal payable on finance leases | $ | 60,555 | $ | 19,657 | ||||
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of January 3, 2021 and December 29, 2019, the
weighted
average remaining lease term and weighted average discount rate for the Company’s operating and finance leases were as follows:
| January 3, 2021 | December 29, 2019 | |||||||||||||||
| Operating | Finance | Operating | Finance | |||||||||||||
| Leases | Leases | Leases | Leases | |||||||||||||
| Weighted average remaining lease term | 7 years | 16 years | 8 years | 14 years | ||||||||||||
| Weighted average discount rate | 3.7 | % | 6.8 | % | 3.8 | % | 11.7 | % |
Supplemental cash flow information related to leases for 2020 and 2019 was as follows (in thousands):
| Fiscal Year Ended | ||||||||
| January 3, 2021 | December 29, 2019 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | 43,679 | $ | 43,608 | ||||
| Operating cash flows from finance leases | 3,340 | 1,952 | ||||||
| Financing cash flows from finance leases | 2,058 | 647 | ||||||
| Right-of-use assets obtained in exchange for new lease obligations: | ||||||||
| Operating leases | 37,375 | 63,685 | ||||||
| Finance leases | 42,894 | 3,255 |
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. During 2018, the Company also recorded $1.9 million in
non-cash
financing activities related to a
build-to-suit
arrangement, which was derecognized in connection with the Company’s adoption of ASC 842 in 2019.
Maturities of lease liabilities as of January 3, 2021 were as follows (in thousands):
| Operating Leases | Finance Leases | |||||||
| 2021 | $ | 45,143 | $ | 5,849 | ||||
| 2022 | 42,441 | 6,706 | ||||||
| 2023 | 36,879 | 6,227 | ||||||
| 2024 | 35,466 | 6,684 | ||||||
| 2025 | 28,758 | 6,479 | ||||||
| Thereafter | 84,440 | 69,687 | ||||||
| Total future minimum rental commitments | 273,127 | 101,632 | ||||||
| Less – amounts representing interest | (34,998 | ) | (41,077 | ) | ||||
| Total lease liabilities | $ | 238,129 | $ | 60,555 | ||||
As of January 3, 2021, the Company had additional leases for certain supply chain tractors and trailers that had not yet commenced with estimated future minimum rental commitments of approximately $2.0 million. These leases are expected to
commence
in 2021 with lease terms of up to 9 years. These undiscounted amounts are not included in the table above.
The Company has guaranteed lease payments related to certain franchisees’ lease arrangements. The maximum amount of potential future payments under these guarantees was $12.6 million and $16.7 million as of January 3, 2021 and December 29, 2019, respectively. The Company does not believe these arrangements have or are likely to have a material effect on its results of operations, financial condition, revenues or expenses, capital expenditures or liquidity.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
(6) Commitments and Contingencies
The Company is a party to lawsuits, revenue agent reviews by taxing authorities and legal proceedings, of which the majority involve workers’ compensation, employment practices liability, general liability and automobile and franchisee claims arising in the ordinary course of business. The Company records legal fees associated with loss contingencies when they are probable and reasonably estimable.
Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. These matters referenced above could be decided unfavorably to us and could require us to pay damages or make other expenditures in amounts or a range of amounts that cannot be estimated with accuracy. In management’s opinion, these matters, individually and in the aggregate, should not have a significant adverse effect on the financial condition of the Company, and the established accruals adequately provide for the estimated resolution of such claims.
On February 14, 2011, Domino’s Pizza LLC was named as a defendant in a lawsuit along with Fischler Enterprises of C.F., Inc., a franchisee, and Jeffrey S. Kidd, the franchisee’s delivery driver, filed by Yvonne Wiederhold, the plaintiff, as Personal Representative of the Estate of Richard E. Wiederhold, deceased. The case involved a traffic accident in which the franchisee’s delivery driver is alleged to have caused an accident involving a vehicle driven by Richard Wiederhold. Mr. Wiederhold sustained spinal injuries resulting in quadriplegia and passed away several months after the accident. The case went to trial in 2016 and the Company was found liable, but the verdict was reversed by the Florida Fifth District Court of Appeals in May 2018 and was remanded to the Ninth Judicial Circuit Court of Florida for a new trial. The case was tried again in June 2019 and the jury returned a $9.0 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 100% liable (after certain offsets and other deductions the final verdict was $8.0 million). In October 2020, the Florida Fifth District Court of Appeals issued a split two-judge majority with one dissent per curiam decision affirming the judgment entered by the Ninth Judicial Circuit Court of Florida. With all viable appellate options exhausted, the decision was made by the Company and its insurers to pay the verdict in the fourth quarter of 2020. This payment was subject to the Company’s insurance retention programs for non-owned automobile liabilities described in Note 1. This payment did not have a material impact on the Company’s results of operations.
(7) Income Taxes
Income before provision for income taxes in 2020, 2019 and 2018 consists of the following (in thousands):
| 2020 | 2019 | 2018 | ||||||||||
| U.S. | $ | 541,646 | $ | 468,467 | $ | 414,804 | ||||||
| Foreign | 13,484 | 14,170 | 13,874 | |||||||||
| Income before provision for income taxes | $ | 555,130 | $ | 482,637 | $ | 428,678 | ||||||
The differences between the U.S. Federal statutory income tax provision (using the statutory rate of 21%) and the Company’s consolidated provision for income taxes for 2020, 2019 and 2018 are summarized as follows (in thousands):
| 2020 | 2019 | 2018 | ||||||||||
| Federal income tax provision based on the statutory rate | $ | 116,577 | $ | 101,354 | $ | 90,022 | ||||||
| State and local income taxes, net of related Federal income taxes | 16,660 | 15,141 | 14,233 | |||||||||
| Non-resident withholding and foreign income taxes | 18,741 | 20,351 | 21,369 | |||||||||
| Foreign tax and other tax credits | (19,506 | ) | (20,090 | ) | (25,301 | ) | ||||||
| Foreign derived intangible income | (12,390 | ) | (12,810 | ) | (11,760 | ) | ||||||
| Excess tax benefits from equity-based compensation | (60,364 | ) | (25,735 | ) | (23,786 | ) | ||||||
| Non-deductible expenses, net | 4,359 | 3,090 | 1,999 | |||||||||
| Unrecognized tax provision, net of related Federal income taxes | 516 | 694 | 301 | |||||||||
| Other | (759 | ) | (67 | ) | (371 | ) | ||||||
| Provision for income taxes | $ | 63,834 | $ | 81,928 | $ | 66,706 | ||||||
Excess tax benefits or deficiencies from equity-based compensation activity resulted in a decrease in the Company’s provision for income taxes of $60.4 million in 2020, $25.7 million in 2019 and $23.8 million in 2018, primarily due to the recognition of excess tax benefits for options exercised and the vesting of equity awards.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The components of the 2020, 2019 and 2018 consolidated provision for income taxes are as follows (in thousands):
| 2020 | 2019 | 2018 | ||||||||||
| Provision for Federal income taxes | ||||||||||||
| Current provision | $ | 19,894 | $ | 49,539 | $ | 33,558 | ||||||
| Deferred provision (benefit) | 14,301 | (2,862 | ) | (1,543 | ) | |||||||
| Total provision for Federal income taxes | 34,195 | 46,677 | 32,015 | |||||||||
| Provision for state and local income taxes | ||||||||||||
| Current provision | 10,775 | 15,335 | 12,651 | |||||||||
| Deferred provision (benefit) | 123 | (435 | ) | 671 | ||||||||
| Total provision for state and local income taxes | 10,898 | 14,900 | 13,322 | |||||||||
| Provision for non-resident withholding and foreign income taxes | 18,741 | 20,351 | 21,369 | |||||||||
| Provision for income taxes | $ | 63,834 | $ | 81,928 | $ | 66,706 | ||||||
As of January 3, 2021 and December 29, 2019, the significant components of net deferred income taxes are as follows (in thousands):
| 2020 | 2019 | |||||||
| Deferred income tax assets | ||||||||
| Operating lease liabilities | $ | 58,885 | $ | 58,546 | ||||
| Accruals and reserves | 14,148 | 11,874 | ||||||
| Insurance reserves | 12,447 | 11,256 | ||||||
| Non-cash equity-based compensation expense | 8,331 | 10,357 | ||||||
| Foreign tax credit | 6,603 | 9,333 | ||||||
| Other | 7,720 | 6,980 | ||||||
| Deferred income tax assets before valuation allowance | 108,134 | 108,346 | ||||||
| Less: Valuation allowance | (7,600 | ) | (4,280 | ) | ||||
| Total deferred income tax assets | 100,534 | 104,066 | ||||||
| Deferred income tax liabilities | ||||||||
| Operating lease right-of-use assets | 56,446 | 56,744 | ||||||
| Depreciation, amortization and asset basis differences | 18,687 | 9,919 | ||||||
| Capitalized software | 29,596 | 27,330 | ||||||
| Total deferred income tax liabilities | 104,729 | 93,993 | ||||||
| Net deferred income taxes | $ | (4,195 | ) | $ | 10,073 | |||
Prior period amounts in the table above have been reclassified to conform to the current year presentation.
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 deferred tax assets is not assured, on an ongoing basis, management assesses whether it remains more likely than not the deferred tax assets will be realized.
As of January 3, 2021, the Company had total foreign tax credits of $6.6 million, which is fully offset with a corresponding valuation allowance. As of January 3, 2021, the Company also had a $1.0 million valuation allowance related to interest deductibility in
separately filed states
. As of December 29, 2019, the Company had total foreign tax credits of $9.3 million, of which $5.6 million was carried back one year to be fully utilized. As of December 29, 2019, the Company had a total valuation allowance of $4.3 million, related to expected limitations on foreign tax credits and interest deductibility in separately filed states. Management believes the remaining 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 authorities 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 recognizes penalties in income tax expense.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| 2020 | 2019 | 2018 | ||||||||||
| Unrecognized tax benefits at beginning of period | $ | 2,802 | $ | 1,964 | $ | 1,837 | ||||||
| Additions for tax positions of current year | 494 | 468 | 425 | |||||||||
| Additions for tax positions of prior years | 506 | 789 | 115 | |||||||||
| Reductions for changes in prior year tax positions | (178 | ) | (284 | ) | (64 | ) | ||||||
| Reductions for lapses of applicable statute of limitations | (306 | ) | (135 | ) | (349 | ) | ||||||
| Unrecognized tax benefits at end of period | $ | 3,318 | $ | 2,802 | $ | 1,964 | ||||||
As of January 3, 2021, the amount of unrecognized tax benefits was $3.3 million of which, if ultimately recognized, $2.4 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. As of January 3, 2021, the Company had $0.2 million of accrued interest and no accrued penalties.
As of December 29, 2019, the amount of unrecognized tax benefits was $2.8 million of which, if ultimately recognized, $2.2 million would be recognized as an income tax benefit and reduce the Company’s effective tax rate. As of December 29, 2019, the Company had $0.1 million of accrued interest and $0.2 million of accrued penalties.
There are currently no Internal Revenue Service audits in progress for the Company. The Company continues to be under examination by certain states. The Company’s Federal statute of limitation has expired for years prior to 2017, but it varies for state and foreign locations. The Company believes appropriate provisions for all outstanding tax issues have been made for all jurisdictions and all open years.
(8) 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 2020 and 2019, the plan required the Company to match 100% of the first 5% of each employee’s elective deferrals. During 2018, 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. 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 $12.0 million, $10.8 million and $7.3 million in 2020, 2019 and 2018, 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 2020, 2019 and 2018.
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 16,017 shares, 20,222 shares and 19,494 shares of common stock in 2020, 2019 and 2018, respectively, purchased on the open market for participating employees at a weighted-average price of $357.54 in 2020, $257.12 in 2019 and $249.57 in 2018. The expenses incurred under the ESPDP were approximately $1.0 million, $0.8 million and $0.7 million in 2020, 2019 and 2018, respectively.
(9) Investment in Dash Brands
During the second quarter of 2020, a subsidiary of the Company acquired a
non-controlling
interest in Dash Brands Ltd., a privately-held business company limited by shares incorporated with limited liability under the laws of the British Virgin Islands (“Dash Brands”), for $40.0 million.
Through its subsidiaries, Dash Brands serves as the Company’s master franchisee in China that owns and operates Domino’s Pizza stores in that market. The Company’s investment in Dash Brands’ senior ordinary shares, which are not in-substance common stock, represents an equity investment without a readily determinable fair value and is recorded at cost with adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairments within long-term other assets in the Company’s consolidated
balance sheet. The Company did not record any adjustments to the carrying amount of $40.0 million in 2020.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In the first quarter of 2021, the Company invested an additional $40.0 million in Dash Brands based on Dash Brands’ achievement of certain performance conditions. In the first quarter of 2021, the Company recorded a positive adjustment of $2.5 million to the original carrying amount of $40.0 million
resulting from the observable change in price from the valuation of the additional investment.
(10) 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 January 3, 2021, 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 2,559,832 shares were authorized for grant but have not been granted.
The Company recorded total
non-cash
compensation expense of $24.2 million, $20.3 million and $22.8 million in 2020, 2019 and 2018, 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 $3.6 million in 2020 and $3.8 million in 2019.
Stock Options
As of January 3, 2021, the number of stock options granted and outstanding under the 2004 Equity Incentive Plan was 832,666 options. Stock options granted in fiscal 2011 and fiscal 2012 were granted with an exercise price equal to the market price at the date of the grant and expire ten years from the date of grant. Stock options granted in fiscal 2013 through fiscal 2020 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.
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 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 | |||||||||||||
| Stock options granted | 96,280 | 272.64 | ||||||||||||||
| Stock options cancelled | (33,667 | ) | 196.47 | |||||||||||||
| Stock options exercised | (425,601 | ) | 30.70 | |||||||||||||
| Stock options at December 29, 2019 | 1,546,411 | $ | 94.21 | |||||||||||||
| Stock options granted | 52,730 | 413.80 | ||||||||||||||
| Stock options cancelled | (9,792 | ) | 268.94 | |||||||||||||
| Stock options exercised | (756,683 | ) | 40.93 | |||||||||||||
| Stock options at January 3, 2021 | 832,666 | $ | 160.82 | 5.3 | $ | 186,974 | ||||||||||
| Exercisable at January 3, 2021 | 687,570 | $ | 127.50 | 4.6 | $ | 176,053 | ||||||||||
The total intrinsic value of stock options exercised was approximately $249.7 million, $103.8 million and $91.2 million in 2020, 2019 and 2018, respectively. Cash received from the exercise of stock options was approximately $31.0 million, $13.1 million and $9.8 million in 2020, 2019 and 2018, respectively. The tax benefit realized from stock options exercised was approximately $59.1 million, $24.9 million and $22.0 million in 2020, 2019 and 2018, respectively.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company recorded total non-cash compensation expense of
$
6.3
million, $
4.0
million and $
6.3
million in 2020, 2019 and 2018, respectively, related to stock option awards. As of January 3, 2021, there was $
8.0
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
2.4
years.
Management estimated the fair value of each option grant made during 2020, 2019 and 2018 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.
| 2020 | 2019 | 2018 | ||||||||||
| Risk-free interest rate | 0.3 | % | 1.9 | % | 2.7 | % | ||||||
| Expected life (years) | 5.5 | 5.5 | 5.5 | |||||||||
| Expected volatility | 30.0 | % | 25.0 | % | 24.2 | % | ||||||
| Expected dividend yield | 0.8 | % | 0.9 | % | 0.8 | % | ||||||
| Weighted average fair value per stock option | $ | 105.76 | $ | 64.66 | $ | 67.65 |
Option valuation models require the input of highly subjective assumptions. In management’s opinion, existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options, as changes in subjective input assumptions can significantly affect the fair value estimate.
Other Equity-Based Compensation Arrangements
The Company granted 3,630 shares, 3,780 shares and 3,790 shares of restricted stock in 2020, 2019 and 2018, 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 $1.2 million, $1.0 million and $0.8 million in 2020, 2019 and 2018, respectively, related to these restricted stock awards. As of January 3, 2021, there was $0.2 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 $2.1 million, $2.1 million and $1.1 million in 2020, 2019 and 2018 related to these restricted stock awards. As of January 3, 2021, there was $2.7 million of total unrecognized compensation cost related to these restricted stock grants.
The Company granted 39,150 shares, 63,790 shares and 59,070 shares of performance-based restricted stock in 2020, 2019 and 2018, 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 established, which is generally in the fourth quarter of each year. The Company recorded total
non-cash
compensation expense of $14.6 million, $13.2 million and $14.6 million in 2020, 2019 and 2018, respectively, related to these awards. As of January 3, 2021, there was an estimated $30.8 million of total unrecognized compensation cost related to performance-based restricted stock.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 (1) | |||||||
| Nonvested at December 31, 2017 | 194,604 | $ | 147.94 | |||||
| Shares granted | 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 | |||||
| Shares granted | 67,570 | 275.06 | ||||||
| Shares cancelled | (17,923 | ) | 230.60 | |||||
| Shares vested | (68,956 | ) | 175.84 | |||||
| Nonvested at December 29, 2019 | 171,070 | $ | 251.29 | |||||
| Shares granted | 42,780 | 398.08 | ||||||
| Shares cancelled | (8,345 | ) | 273.70 | |||||
| Shares vested | (58,743 | ) | 221.58 | |||||
| Nonvested at January 3, 2021 | 146,762 | $ | 304.69 | |||||
| (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. |
|---|
(11) Capital Structure
The Company’s Board of Directors approved a $1.0 billion program to repurchase the Company’s common stock during the fourth quarter of 2019. The Company’s share repurchase programs have 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. 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.
During 2020, 2019 and 2018, the Company repurchased 838,871 shares, 2,493,560 shares and 2,387,430 shares for approximately $304.6 million, $699.0 million and $591.2 million, respectively. At January 3, 2021, the Company had $101.6 million remaining under its $1.0 billion authorization. From January 4, 2021 through February 18, 2021, the Company repurchased and retired an additional 65,870 shares of common stock for approximately $25.0 million.
On February 24, 2021, the Company’s Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of the Company’s common stock. This repurchase program replaces the remaining availability of approximately $76.6 million under the Company’s previously approved $1.0 billion share repurchase program.
As of January 3, 2021, 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 January 3, 2021 and December 29, 2019
were as follows
:
| 2020 | 2019 | |||||||
| Voting | 38,865,160 | 38,930,646 | ||||||
| Non-Voting | 3,190 | 3,363 | ||||||
| Total Common Stock | 38,868,350 | 38,934,009 | ||||||
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(Continued)
(12) 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 2020, 2019 and 2018. Intersegment revenues are comprised of sales of food, equipment and supplies from the supply chain segment to the Company-owned stores in the U.S. stores segment. Intersegment sales prices are market based.
The “Other” column as it relates to Segment Income below primarily includes corporate administrative costs that are not allocable to a reportable segment, including labor, computer expenses, professional fees, travel and entertainment, rent, insurance and other corporate administrative costs. The “Other” column as it relates to capital expenditures primarily includes capitalized software, certain equipment and leasehold improvements for our corporate offices. Tabular amounts presented below are in thousands.
| U.S. Stores | Supply Chain | International Franchise | Intersegment Revenues | Other | Total | |||||||||||||||||||
| Revenues- | ||||||||||||||||||||||||
| 2020 | $ | 1,451,003 | $ | 2,552,795 | $ | 249,757 | $ | (136,144 | ) | — | $ | 4,117,411 | ||||||||||||
| 2019 | 1,272,863 | 2,231,838 | 240,975 | (126,902 | ) | — | 3,618,774 | |||||||||||||||||
| 2018 | 1,264,823 | 2,087,408 | 224,747 | (144,111 | ) | — | 3,432,867 | |||||||||||||||||
| Segment Income- | ||||||||||||||||||||||||
| 2020 | $ | 435,089 | $ | 238,420 | $ | 197,602 | N/A | $ | (53,265 | ) | $ | 817,846 | ||||||||||||
| 2019 | 361,673 | 199,844 | 187,318 | N/A | (36,701 | ) | 712,134 | |||||||||||||||||
| 2018 | 335,989 | 176,714 | 174,700 | N/A | (43,462 | ) | 643,941 | |||||||||||||||||
| Capital Expenditures- | ||||||||||||||||||||||||
| 2020 | $ | 15,319 | $ | 36,229 | — | N/A | $ | 35,371 | $ | 86,919 | ||||||||||||||
| 2019 | 11,793 | 33,440 | 131 | N/A | 43,304 | 88,668 | ||||||||||||||||||
| 2018 | 15,717 | 61,652 | 134 | N/A | 42,171 | 119,674 |
The following table reconciles total Segment Income to income before provision for income taxes (in thousands):
| 2020 | 2019 | 2018 | ||||||||||
| Total Segment Income | $ | 817,846 | $ | 712,134 | $ | 643,941 | ||||||
| Depreciation and amortization | (65,038 | ) | (59,930 | ) | (53,665 | ) | ||||||
| (Loss) gain on sale/disposal of assets | (2,922 | ) | (2,023 | ) | 4,737 | |||||||
| Non-cash equity-based compensation expense | (24,244 | ) | (20,265 | ) | (22,792 | ) | ||||||
| Recapitalization-related expenses | — | (509 | ) | (532 | ) | |||||||
| Income from operations | 725,642 | 629,407 | 571,689 | |||||||||
| Interest income | 1,654 | 4,048 | 3,334 | |||||||||
| Interest expense | (172,166 | ) | (150,818 | ) | (146,345 | ) | ||||||
| Income before provision for income taxes | $ | 555,130 | $ | 482,637 | $ | 428,678 | ||||||
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the Company’s identifiable asset information as of January 3, 2021 and December 29, 2019 (in thousands):
| 2020 | 2019 | |||||||
| U.S. stores | $ | 308,088 | $ | 251,844 | ||||
| U.S. supply chain | 488,983 | 408,919 | ||||||
| Total U.S. assets | 797,071 | 660,763 | ||||||
| International franchise | 41,408 | 23,396 | ||||||
| International supply chain | 31,060 | 35,745 | ||||||
| Total international assets | 72,468 | 59,141 | ||||||
| Unallocated | 697,629 | 662,188 | ||||||
| Total assets | $ | 1,567,168 | $ | 1,382,092 | ||||
Unallocated assets primarily include cash and cash equivalents, restricted cash and cash equivalents, certain accounts receivable and prepaid expenses, investments in equity securities without readily determinable fair values and marketable securities, certain long-lived assets including certain property, plant and equipment and the operating lease
right-of-use
asset for the Company’s corporate headquarters and deferred income taxes.
The following table summarizes the Company’s goodwill balance as of January 3, 2021 and December 29, 2019 (in thousands):
| 2020 | 2019 | |||||||
| U.S. stores | $ | 13,994 | $ | 14,026 | ||||
| Supply chain | 1,067 | 1,067 | ||||||
| Consolidated goodwill | $ | 15,061 | $ | 15,093 | ||||
(13) Company-owned Store Transactions
During 2019, the Company sold 62 U.S. Company-owned stores to certain of its existing U.S.
franchisees
for proceeds of $12.3 million. In connection with the sale of the stores, the Company recorded a $0.3 million
pre-tax
loss on the sale of the related assets and liabilities, which was net of a $1.5 million reduction in goodwill. The net loss on these store sales was recorded in general and administrative expense in the Company’s consolidated statements of income. During 2019, the Company also purchased three U.S. franchised stores from a U.S. franchisee for $3.4 million, which included $1.7 million of goodwill, $1.3 million of intangibles and $0.4 million of leasehold improvements and other assets.
During 2018, the Company sold 12 U.S. 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 U.S. 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.
Domino’s Pizza, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(14)
COVID-19
Pandemic
In December 2019, the COVID-19 disease was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. During 2020 in the midst of the COVID-19 pandemic, the Company continued to increase its U.S. stores revenues. U.S. supply chain experienced higher volumes as a result of the increases in U.S. store sales. The COVID-19 pandemic negatively impacted the Company’s international franchise revenues during the second quarter of 2020 due to temporary store closures in certain markets as well as changes in operating procedures and store hours resulting from actions taken to increase social distancing across the Company’s international franchise markets. In the third and fourth quarters of 2020, these negative impacts lessened due to the reopening and resumption of normal store hours at a majority of the Company’s international franchised stores that had been temporarily closed for portions of the second quarter. The Company made certain investments during the COVID-19 pandemic related to safety and cleaning equipment, enhanced sick pay and compensation for frontline team members and support for the Company’s franchisees and their communities. Finally, given the market uncertainty arising from COVID-19, the Company took a precautionary measure and borrowed
$158.0
million under its 2019 Variable Funding Notes during the second quarter of 2020, which was fully repaid throughout the remainder of 2020. The Company is closely monitoring the impact of the pandemic on all aspects of its business and is unable at this time to predict the continued impact that
COVID-19
will have on its business, financial position and operating results in future periods due to numerous uncertainties.
Previous: Item 7A. Quantitative and Qualitative Disclosures About Market Risk. · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.