SEC Filing - Domino's Pizza

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10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 6, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission file number: 001-32242

Domino’s Pizza, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		38-2511577
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

30 Frank Lloyd Wright Drive Ann Arbor, Michigan		48105
(Address of Principal Executive Offices)		(Zip Code)

(734) 930-3030

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Domino’s Pizza, Inc. Common Stock, $0.01 par value	DPZ	New York Stock Exchange

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange

Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes ☐ No ☒

As of October 1, 2020, Domino’s Pizza, Inc. had

39,399,906

shares of common stock, par value $0.01 per share, outstanding.

Table of Contents

Domino’s Pizza, Inc.

TABLE OF CONTENTS


		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements		3

	Condensed Consolidated Balance Sheets (Unaudited) – As of September 6, 2020 and December 29, 2019		3

	Condensed Consolidated Statements of Income (Unaudited) – Fiscal quarters and three fiscal quarters ended September 6, 2020 and September 8, 2019		4

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Fiscal quarters and three fiscal quarters ended September 6, 2020 and September 8, 2019		5

	Condensed Consolidated Statements of Cash Flows (Unaudited) – Three fiscal quarters ended September 6, 2020 and September 8, 2019		6

	Notes to Condensed Consolidated Financial Statements (Unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24

Item 4.	Controls and Procedures		24

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		25

Item 1A.	Risk Factors		25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26

Item 3.	Defaults Upon Senior Securities		26

Item 4.	Mine Safety Disclosures		26

Item 5.	Other Information		26

Item 6.	Exhibits		26

SIGNATURES			27

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


(In thousands)	September 6, 2020			December 29, 2019 (1)
Assets
Current assets:
Cash and cash equivalents	$	330,719		$	190,615
Restricted cash and cash equivalents		160,330			209,269
Accounts receivable, net		229,403			210,260
Inventories		65,499			52,955
Prepaid expenses and other		26,288			19,129
Advertising fund assets, restricted		144,282			105,389

Total current assets		956,521			787,617

Property, plant and equipment:
Land and buildings		65,581			44,845
Leasehold and other improvements		181,556			164,071
Equipment		274,337			243,708
Construction in progress		14,784			42,705

		536,258			495,329
Accumulated depreciation and amortization		(273,994	)		(252,448	)

Property, plant and equipment, net		262,264			242,881

Other assets:
Operating lease right-of-use assets		229,653			228,785
Goodwill		15,061			15,093
Capitalized software, net		78,632			73,140
Other assets		72,787			24,503
Deferred income taxes		6,030			10,073

Total other assets		402,163			351,594

Total assets	$	1,620,948		$	1,382,092

Liabilities and stockholders’ deficit
Current liabilities:
Current portion of long-term debt	$	43,662		$	43,394
Accounts payable		88,188			111,101
Operating lease liabilities		36,508			33,318
Insurance reserves		23,816			23,735
Dividends payable		31,258			471
Advertising fund liabilities		138,348			101,921
Other accrued liabilities		126,745			139,891

Total current liabilities		488,525			453,831

Long-term liabilities:
Long-term debt, less current portion		4,062,175			4,071,055
Operating lease liabilities		201,981			202,731
Insurance reserves		37,428			34,675
Other accrued liabilities		42,370			35,559

Total long-term liabilities		4,343,954			4,344,020

Stockholders’ deficit:
Common stock		394			389
Additional paid-in capital		34,124			243
Retained deficit		(3,242,627	)		(3,412,649	)
Accumulated other comprehensive loss		(3,422	)		(3,742	)

Total stockholders’ deficit		(3,211,531	)		(3,415,759	)

Total liabilities and stockholders’ deficit	$	1,620,948		$	1,382,092

(1) The balance sheet at December 29, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

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

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Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)


	Fiscal Quarter Ended						Three Fiscal Quarters Ended
(In thousands, except per share data)	September 6, 2020			September 8, 2019			September 6, 2020			September 8, 2019
Revenues:
U.S. Company-owned stores	$	113,254		$	94,575		$	329,820		$	323,026
U.S. franchise royalties and fees		118,054			97,047			335,898			289,349
Supply chain		573,661			485,110			1,625,502			1,424,787
International franchise royalties and fees		54,602			54,586			160,202			164,145
U.S. franchise advertising		108,148			89,494			309,422			267,115

Total revenues		967,719			820,812			2,760,844			2,468,422

Cost of sales:
U.S. Company-owned stores		90,788			71,610			258,007			247,516
Supply chain		514,950			432,951			1,443,608			1,265,695

Total cost of sales		605,738			504,561			1,701,615			1,513,211

Operating margin		361,981			316,251			1,059,229			955,211

General and administrative		91,652			83,728			268,209			262,640
U.S. franchise advertising		108,148			89,494			309,422			267,115

Income from operations		162,181			143,029			481,598			425,456
Interest income		197			968			1,769			2,583
Interest expense		(38,605	)		(33,752	)		(117,802	)		(102,672	)

Income before provision for income taxes		123,773			110,245			365,565			325,367
Provision for income taxes		24,644			23,872			26,166			53,985

Net income	$	99,129		$	86,373		$	339,399		$	271,382

Earnings per share:
Common stock - basic	$	2.53		$	2.11		$	8.70		$	6.63
Common stock - diluted		2.49			2.05			8.54			6.44

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

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Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Fiscal Quarter Ended				Three Fiscal Quarters Ended
(In thousands)	September 6, 2020		September 8, 2019		September 6, 2020		September 8, 2019
Net income	$	99,129	$	86,373	$	339,399	$	271,382
Currency translation adjustment		1,113		270		320		491

Comprehensive income	$	100,242	$	86,643	$	339,719	$	271,873

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

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Domino’s Pizza, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three Fiscal Quarters Ended
(In thousands)	September 6, 2020			September 8, 2019
Cash flows from operating activities:
Net income	$	339,399		$	271,382
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		44,116			40,982
Loss on sale/disposal of assets		1,530			3,141
Amortization of debt issuance costs		3,853			3,288
Provision for deferred income taxes		3,681			1,627
Non-cash equity-based compensation expense		14,934			13,269
Excess tax benefits from equity-based compensation		(56,862	)		(19,670	)
Provision for losses on accounts and notes receivable		1,536			774
Changes in operating assets and liabilities		(14,146	)		16,214
Changes in advertising fund assets and liabilities, restricted		32,358			(6,411	)

Net cash provided by operating activities		370,399			324,596

Cash flows from investing activities:
Capital expenditures		(51,163	)		(42,676	)
Purchase of investments (Note 9)		(40,000	)		–
Proceeds from sale of assets		11			9,738
Maturities of advertising fund investments, restricted		–			30,152
Other		83			(351	)

Net cash used in investing activities		(91,069	)		(3,137	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		158,000			–
Repayments of long-term debt and finance lease obligations		(190,843	)		(91,860	)
Proceeds from exercise of stock options		26,526			10,122
Purchases of common stock		(79,590	)		(105,149	)
Tax payments for restricted stock upon vesting		(6,584	)		(5,820	)
Payments of common stock dividends and equivalents		(61,093	)		(53,598	)

Net cash used in financing activities		(153,584	)		(246,305	)

Effect of exchange rate changes on cash		243			139

Change in cash and cash equivalents, restricted cash and cash equivalents		125,989			75,293

Cash and cash equivalents, beginning of period		190,615			25,438
Restricted cash and cash equivalents, beginning of period		209,269			166,993
Cash and cash equivalents included in advertising fund assets, restricted, beginning of period		84,040			44,988

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

Cash and cash equivalents, end of period		330,719			66,706
Restricted cash and cash equivalents, end of period		160,330			177,292
Cash and cash equivalents included in advertising fund assets, restricted, end of period		118,864			68,714

Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, end of period	$	609,913		$	312,712

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

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Domino’s Pizza, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited; tabular amounts in thousands, except percentages, share and per share amounts)

September 6, 2020

1. Basis of Presentation and Updates to Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form

10-Q

and Rule

10-01

of Regulation

S-X.

Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended December 29, 2019 included in the Company’s 2019 Annual Report on Form

10-K,

filed with the Securities and Exchange Commission on February 20, 2020 (the “2019 Form

10-K”).

In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair statement have been included. Operating results for the fiscal quarter ended September 6, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 2021.

Updates to Significant Accounting Policies

The Company adopted Accounting Standards Codification 326,

Financial Instruments – Credit Losses

(“ASC 326”) in the first quarter of 2020. As a result, the Company updated its significant accounting policies for the measurement of credit losses below. Refer to Note 10 for information related to the impact of the adoption of ASC 326 on the Company’s condensed consolidated financial statements.

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, surety bonds and lease guarantees. 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.

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. As a result of the investment, the Company’s significant accounting policy related to equity investments without readily determinable fair values is stated below. Refer to Note 9 for information related to this investment and its impact on the Company’s condensed consolidated financial statements.

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 condensed consolidated balance sheet. Any adjustments to the carrying amount are recognized in other income (expense), net in the Company’s condensed consolidated statement 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.

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2. Segment Information

The following table summarizes revenues, income from operations and earnings before interest, taxes, depreciation, amortization and other, which is the measure by which the Company allocates resources to its segments and which the Company refers to as Segment Income, for each of its reportable segments.


	Fiscal Quarters Ended September 6, 2020 and September 8, 2019
	U.S. Stores		Supply Chain		International Franchise		Intersegment Revenues			Other			Total
Revenues
2020	$	339,456	$	605,481	$	54,602	$	(31,820	)	$	—		$	967,719
2019		281,116		511,709		54,586		(26,599	)		—			820,812
Income from operations
2020	$	98,743	$	46,356	$	44,420		N/A		$	(27,338	)	$	162,181
2019		80,188		40,513		42,281		N/A			(19,953	)		143,029
Segment Income
2020	$	101,513	$	51,114	$	44,461		N/A		$	(13,689	)	$	183,399
2019		82,556		44,432		42,337		N/A			(8,172	)		161,153


	Three Fiscal Quarters Ended September 6, 2020 and September 8, 2019
	U.S. Stores		Supply Chain		International Franchise		Intersegment Revenues			Other			Total
Revenues
2020	$	975,140	$	1,717,225	$	160,202	$	(91,723	)	$	—		$	2,760,844
2019		879,490		1,513,380		164,145		(88,593	)		—			2,468,422
Income from operations
2020	$	284,324	$	146,193	$	124,252		N/A		$	(73,171	)	$	481,598
2019		237,852		123,840		126,467		N/A			(62,703	)		425,456
Segment Income
2020	$	292,724	$	159,455	$	124,375		N/A		$	(34,376	)	$	542,178
2019		248,160		135,861		126,628		N/A			(27,801	)		482,848

The following table reconciles Total Segment Income to consolidated income before provision for income taxes.


	Fiscal Quarter Ended						Three Fiscal Quarters Ended
	September 6, 2020			September 8, 2019			September 6, 2020			September 8, 2019
Total Segment Income	$	183,399		$	161,153		$	542,178		$	482,848
Depreciation and amortization		(15,327	)		(13,132	)		(44,116	)		(40,982	)
Loss on sale/disposal of assets		(986	)		(312	)		(1,530	)		(3,141	)
Non-cash equity-based compensation expense		(4,905	)		(4,680	)		(14,934	)		(13,269	)

Income from operations		162,181			143,029			481,598			425,456
Interest income		197			968			1,769			2,583
Interest expense		(38,605	)		(33,752	)		(117,802	)		(102,672	)

Income before provision for income taxes	$	123,773		$	110,245		$	365,565		$	325,367

3. Earnings Per Share


	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	September 6, 2020		September 8, 2019		September 6, 2020		September 8, 2019
Net income available to common stockholders - basic and diluted	$	99,129	$	86,373	$	339,399	$	271,382

Basic weighted average number of shares		39,246,231		40,954,279		38,990,149		40,947,693
Earnings per share – basic	$	2.53	$	2.11	$	8.70	$	6.63
Diluted weighted average number of shares		39,791,805		42,040,291		39,724,289		42,158,447
Earnings per share – diluted	$	2.49	$	2.05	$	8.54	$	6.44

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The denominator used in calculating diluted earnings per share for the third quarter and three fiscal quarters of 2020 did not include 52,390 and 53,130 options to purchase common stock, respectively, as the effect of including these options would have been anti-dilutive. The denominators used in calculating diluted earnings per share for the third quarter and three fiscal quarters of 2020 each did not include 118,518 restricted performance shares, as the performance targets for these awards had not yet been met.

The denominators used in calculating diluted earnings per share for the third quarter and three fiscal quarters of 2019 each did not include 161,670 options to purchase common stock, as the effect of including these options would have been anti-dilutive. The denominators used in calculating diluted earnings per share for the third quarter and three fiscal quarters of 2019 each did not include 142,477 restricted performance shares, as the performance targets for these awards had not yet been met.

4. Changes in Stockholders’ Deficit

The following table summarizes changes in stockholders’ deficit for the third quarter of 2020.


						Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Loss

	Common Stock
	Shares			Amount
Balance at June 14, 2020		39,347,213		$	393	$	32,251		$	(3,311,015	)	$	(4,535	)
Net income		—			—		—			99,129			—
Dividends declared on common stock and equivalents ($ 0.78 per share)		—			—		—			(30,741	)		—
Issuance and cancellation of stock awards, net		32,676			1		—			—			—
Tax payments for restricted stock upon vesting		(12,195	)		—		(4,757	)		—			—
Exercise of stock options		24,781			—		1,725			—			—
Non-cash equity-based compensation expense		—			—		4,905			—			—
Currency translation adjustment		—			—		—			—			1,113

Balance at September 6, 2020		39,392,475		$	394	$	34,124		$	(3,242,627	)	$	(3,422	)

The following table summarizes changes in stockholders’ deficit for the three fiscal quarters of 2020.


							Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Loss

	Common Stock
	Shares			Amount
Balance at December 29, 2019		38,934,009		$	389		$	243		$	(3,412,649	)	$	(3,742	)
Net income		—			—			—			339,399			—
Dividends declared on common stock and equivalents ($2.34 per share)		—			—			—			(91,880	)		—
Issuance and cancellation of stock awards, net		38,389			1			—			—			—
Tax payments for restricted stock upon vesting		(18,215	)		—			(6,584	)		—			—
Purchases of common stock		(271,064	)		(3	)		(988	)		(78,599	)		—
Exercise of stock options		709,356			7			26,519			—			—
Non-cash equity-based compensation expense		—			—			14,934			—			—
Adoption of ASC 326 (Note 10)		—			—			—			1,102			—
Currency translation adjustment		—			—			—			—			320

Balance at September 6, 2020		39,392,475		$	394		$	34,124		$	(3,242,627	)	$	(3,422	)

Subsequent to the third quarter, on October 6, 2020, the Company’s Board of Directors declared a $0.78 per share quarterly dividend on its outstanding common stock for shareholders of record as of December 15, 2020 to be paid on December 30, 2020.

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The following table summarizes changes in stockholders’ deficit for the third quarter of 2019.


							Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Loss

	Common Stock
	Shares			Amount
Balance at June 16, 2019		41,232,358		$	412		$	10,788		$	(2,911,278	)	$	(4,208	)
Net income		—			—			—			86,373			—
Dividends declared on common stock and equivalents ($0.65 per share)		—			—			—			(26,569	)		—
Issuance and cancellation of stock awards, net		45,479			—			—			—			—
Tax payments for restricted stock upon vesting		(12,603	)		—			(3,253	)		—			—
Purchases of common stock		(384,338	)		(3	)		(12,972	)		(80,721	)		—
Exercise of stock options		18,100			—			832			—			—
Non-cash equity-based compensation expense		—			—			4,680			—			—
Currency translation adjustment		—			—			—			—			270

Balance at September 8, 2019		40,898,996		$	409		$	75		$	(2,932,195	)	$	(3,938	)

The following table summarizes changes in stockholders’ deficit for the three fiscal quarters of 2019.


							Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Loss

	Common Stock
	Shares			Amount
Balance at December 30, 2018		40,977,561		$	410		$	569		$	(3,036,471	)	$	(4,429	)
Net income		—			—			—			271,382			—
Dividends declared on common stock and equivalents ($1.95 per share)		—			—			—			(80,023	)		—
Issuance and cancellation of stock awards, net		50,640			—			—			—			—
Tax payments for restricted stock upon vesting		(22,044	)		—			(5,820	)		—			—
Purchases of common stock		(430,182	)		(4	)		(18,062	)		(87,083	)		—
Exercise of stock options		323,021			3			10,119			—			—
Non-cash equity-based compensation expense		—			—			13,269			—			—
Currency translation adjustment		—			—			—			—			491

Balance at September 8, 2019		40,898,996		$	409		$	75		$	(2,932,195	)	$	(3,938	)

5. 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 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 tables summarize the carrying amounts and estimated fair values of certain assets at September 6, 2020 and December 29, 2019:


	At September 6, 2020
			Fair Value Estimated Using
	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Cash equivalents	$	276,905	$	276,905	$	—	$	—
Restricted cash equivalents		102,763		102,763		—		—
Investments in marketable securities		12,043		12,043		—		—
Advertising fund cash equivalents, restricted		97,190		97,190		—		—
Investments (Note 9)		40,000		—		—		40,000

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	At December 29, 2019
			Fair Value Estimated Using
	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 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		—		—

Company management estimated the approximate fair values of the 2015 fixed rate notes, the 2017 fixed and floating rate notes, the 2018 fixed rate notes and the 2019 fixed rate notes as follows:


	September 6, 2020				December 29, 2019
	Principal Amount		Fair Value		Principal Amount		Fair Value
2015 Ten-Year Fixed Rate Notes	$	768,000	$	821,760	$	774,000	$	804,960
2017 Five-Year Fixed Rate Notes		583,500		585,251		588,000		588,588
2017 Ten-Year Fixed Rate Notes		972,500		1,046,410		980,000		1,017,240
2017 Five-Year Floating Rate Notes		291,750		291,458		294,000		294,000
2018 7.5-Year Fixed Rate Notes		416,500		443,156		419,688		431,439
2018 9.25-Year Fixed Rate Notes		392,000		425,320		395,000		414,355
2019 Ten-Year Fixed Rate Notes		669,938		706,114		675,000		675,675

The fixed and floating rate notes are classified as Level 2 measurements, as the Company estimates the fair value amount by using available market information. The Company obtained quotes from two separate brokerage firms that are knowledgeable about the Company’s fixed and floating rate notes and, at times, trade these notes. The Company also performed its own internal analysis based on the information gathered from public markets, including information on notes that are similar to those of the Company. However, considerable judgment is required to interpret market data to estimate fair value. Accordingly, the fair value estimates presented 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 stated above.

The Company’s variable funding notes are a variable rate loan and the fair value of this loan approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. This fair value represents a Level 2 measurement.

The Company borrowed $158.0 million under its variable funding notes in the second quarter of 2020. The Company repaid $100.0 million of these borrowings in the second quarter of 2020 and

approximately

$58.0 million in the third quarter of 2020.

The Company had less than $0.1 million of outstanding borrowings under its variable funding notes at September 6, 2020. The Company did not have any outstanding borrowings under its variable funding notes as of December 29, 2019.

The fair values in the table above represent the fair value of such notes at September 6, 2020 and December 29, 2019. In light of the

COVID-19

pandemic (discussed further in Note 11) and its impact on financial markets, these fair values fluctuated significantly during the three fiscal quarters of 2020 and may continue to fluctuate based on market conditions and other factors.

6. Revenue Disclosures

Contract Liabilities

Contract liabilities primarily consist of deferred franchise fees and deferred development fees. Changes in deferred franchise fees and deferred development fees were as follows:


	Three Fiscal Quarters Ended
	September 6, 2020			September 8, 2019
Deferred franchise fees and deferred development fees at beginning of period	$	20,463		$	19,900
Revenue recognized during the period		(4,302	)		(3,923	)
New deferrals due to cash received and other		3,937			4,613

Deferred franchise fees and deferred development fees at end of period	$	20,098		$	20,590

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Advertising Fund Assets

As of September 6, 2020, advertising fund assets, restricted of $144.3 million consisted of $118.9 million of cash and cash equivalents, $20.5 million of accounts receivable and $4.9 million of prepaid expenses. As of September 6, 2020, advertising fund cash and cash equivalents included $6.0 million of cash contributed from 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.

7. Leases

The Company leases certain retail store and supply chain center locations, supply chain vehicles and its corporate headquarters with expiration dates through 2041.

The components of operating and finance lease cost for the third quarter and three fiscal quarters of 2020 and the third quarter and three fiscal quarters of 2019 were as follows:


	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	September 6, 2020		September 8, 2019		September 6, 2020		September 8, 2019
Operating lease cost	$	10,267	$	9,150	$	30,099	$	29,464
Finance lease cost:
Amortization of right-of-use assets		548		254		1,248		763
Interest on lease liabilities		794		473		2,066		1,269

Total finance lease cost	$	1,342	$	727	$	3,314	$	2,032

Rent expense totaled $17.4 million and $50.0 million in the third quarter and three fiscal quarters of 2020, respectively, and totaled $16.1 million and $48.4 million in the third quarter and three fiscal quarters of 2019, 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 the third quarter and three fiscal quarters of 2020 and 2019, respectively.

Supplemental balance sheet information related to the Company’s leases as of September 6, 2020 and December 29, 2019 was as follows:


	September 6, 2020			December 29, 2019
Land and buildings	$	45,992		$	25,476
Accumulated depreciation and amortization		(9,208	)		(7,846	)

Finance lease assets, net	$	36,784		$	17,630

Current portion of long-term debt	$	1,662		$	1,394
Long-term debt, less current portion		36,986			18,263

Total principal payable on finance leases	$	38,648		$	19,657

As of September 6, 2020 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:


	September 6, 2020						December 29, 2019
	Operating Leases			Finance Leases			Operating Leases			Finance Leases
Weighted average remaining lease term		7 years			17 years			8 years			14 years
Weighted average discount rate		3.8	%		8.9	%		3.8	%		11.7	%

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Supplemental cash flow information related to leases for the third quarter and three fiscal quarters of 2020 and the third quarter and three fiscal quarters of 2019 was as follows:


	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	September 6,		September 8,		September 6,		September 8,
	2020		2019		2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	9,288	$	9,968	$	29,455	$	30,056
Operating cash flows from finance leases		794		473		2,066		1,269
Financing cash flows from finance leases		348		161		1,388		422
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases		10,719		23,434		26,297		49,802
Finance leases		1,717		—		20,463		—

Maturities of lease liabilities as of September 6, 2020 were as follows:


	Operating			Finance
	Leases			Leases
2020	$	15,170		$	1,275
2021		42,865			4,965
2022		40,942			5,016
2023		35,519			5,075
2024		34,148			4,870
Thereafter		106,034			53,491

Total future minimum rental commitments		274,678			74,692
Less – amounts representing interest		(36,189	)		(36,044	)

Total lease liabilities	$	238,489		$	38,648

As of September 6, 2020, the Company has additional leases for one supply chain center and certain supply chain tractors and trailers that had not yet commenced with estimated future minimum rental commitments of approximately $28.8 million. These leases are expected to commence in 2020 with lease terms of up to 15 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

$13.9 million as of September 6, 2020. The Company does not believe these arrangements have or are likely to have a material effect on its results of operations, financial condition, revenues, expenses or liquidity.

8. Supplemental Disclosures of Cash Flow Information

The Company had

non-cash

investing activities related to accruals for capital expenditures of $5.1 million at September 6, 2020 and $6.9

million at December 29, 2019.

9. Investment in Dash Brands

In the second quarter of 2020, a subsidiary of the Company acquired a

non-controlling

interest in Dash Brands for $40.0 million. This investment is 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 condensed consolidated balance sheet. The Company did not record any adjustments to the carrying amount of $40.0 million in the third quarter or three fiscal quarters of 2020. The Company is contractually required to invest an additional $40.0 million in Dash Brands in the first quarter of 2021, assuming certain performance conditions are satisfied. If such performance conditions are not satisfied, the Company has the option to make such additional investment

its discretion.

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10. New Accounting Pronouncements

Recently Adopted Accounting Standard

ASU

2016-13,

Financial Instruments – Credit Losses (Topic 326)

In June 2016, the Financial Accounting Standards Board (“FASB”) issued

Accounting Standard Update (“ASU”)

2016-13,

Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

. 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 condensed consolidated financial statements.

The effects of the changes made to the Company’s condensed consolidated balance sheet as of December

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.

Accounting Standards Not Yet Adopted

The Company has considered all new accounting standards issued by the FASB. The Company has not yet completed its assessment of the following standards.

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 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.

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,

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.

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11.

COVID-19

Pandemic

In December 2019, a novel coronavirus disease

(“COVID-19”)

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 the second and third fiscal quarters of 2020 in the midst of the

COVID-19

pandemic, the Company continued to increase its U.S. Stores revenues. Supply Chain also remained operational, with minimal interruptions due to

COVID-19

and experienced higher volumes as a result of the increases in 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 quarter of 2020, these negative impacts lessened due to the reopening and resumption of normal store hours at the majority of the Company’s international franchised stores that had been temporarily closed for portions of the prior quarter. The Company also 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. 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(Unaudited; tabular amounts in millions, except percentages and store data)

The 2020 and 2019 third quarters referenced herein represent the twelve-week periods ended September 6, 2020 and September 8, 2019, respectively. The 2020 and 2019 three fiscal quarters referenced herein represent the

thirty-six-week

periods ended September 6, 2020 and September 8, 2019, respectively.

Overview

Domino’s is the largest pizza company in the world based on global retail sales, with more than 17,200 locations in over 90 markets. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. Domino’s generates revenues and earnings by charging royalties and fees to our independent franchisees. The Company also generates revenues and earnings by selling food, equipment and supplies to franchisees primarily in the U.S. and Canada, and by operating a number of our own stores in the U.S. Franchisees profit by selling pizza and other complementary items to their local customers. In our international markets, we generally grant geographical rights to the Domino’s Pizza

brand to master franchisees. These master franchisees are charged with developing their geographical area, and they can profit by

sub-franchising

and selling ingredients and equipment to those

sub-franchisees,

as well as by running pizza stores directly. We believe that everyone in the system can benefit, including the end consumer, who can feed their family Domino’s menu items conveniently and economically.

Our financial results are driven largely by retail sales at our franchise and Company-owned stores. Changes in retail sales are driven by changes in same store sales and store counts. We monitor both of these metrics very closely, as they directly impact our revenues and profits, and we strive to consistently increase both metrics. Retail sales drive royalty payments from franchisees, as well as Company-owned store and supply chain revenues. Retail sales are primarily impacted by the strength of the Domino’s Pizza

brand, the results of our extensive advertising through various media channels, the impact of technological innovation and digital ordering, our ability to execute our strong and proven business model and the overall global economic environment.


	Third Quarter				Third Quarter				Three Fiscal				Three Fiscal
	of 2020				of 2019				Quarters of 2020				Quarters of 2019
Global retail sales growth (versus prior year period, excluding foreign currency impact)			+14.8	%			+7.5	%			+9.6	%			+8.1	%
Same store sales growth (1):
U.S. Company-owned stores			+16.6	%			+1.7	%			+12.4	%			+2.3	%
U.S. franchise stores			+17.5	%			+2.5	%			+11.6	%			+3.2	%

U.S. stores			+17.5	%			+2.4	%			+11.7	%			+3.1	%
International stores (excluding foreign currency impact)			+6.2	%			+1.7	%			+3.0	%			+2.0	%
Store counts (at end of period):
U.S. Company-owned stores			348				333
U.S. franchise stores			5,891				5,652

U.S. stores			6,239				5,985
International stores			11,017				10,543

Total stores (2)			17,256				16,528

Income statement data:
Total revenues	$	967.7	100.0	%	$	820.8	100.0	%	$	2,760.8	100.0	%	$	2,468.4	100.0	%
Cost of sales		605.7	62.6	%		504.6	61.5	%		1,701.6	61.7	%		1,513.2	61.3	%
General and administrative		91.7	9.4	%		83.7	10.2	%		268.2	9.7	%		262.6	10.7	%
U.S. franchise advertising		108.1	11.2	%		89.5	10.9