# Dominos Pizza Inc: Form 10-Q for the period ended Mar 25, 2018

- Company: [Dominos Pizza Inc](/companies/dpz.md) (CIK 1286681)
- Form: 10-Q
- Filed: 2018-04-26
- Accepted by EDGAR: Apr 26, 2018, 07:36 ET
- Period: 2018-03-25
- Accession: 0001193125-18-132848
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1286681/000119312518132848/d573874d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1286681/000119312518132848/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-25.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-25 | $785.4m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-01-01 to 2018-03-25 | $485.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-01-01 to 2018-03-25 | $299.9m | us-gaap:GrossProfit |
| Operating income | 3 months, 2018-01-01 to 2018-03-25 | $133.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-01-01 to 2018-03-25 | $30.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-25 | $14.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-25 | $88.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-25 | $2.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-25 | $2.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-25 | 44,377,509 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-25 | $13.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2018-01-01 to 2018-03-25 | $79.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2018-01-01 to 2018-03-25 | $101.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-03-25 | $44.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-25 | $536.4m | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-25 | $798.3m | us-gaap:Assets |
| Current liabilities | at 2018-03-25 | $384.8m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2018-03-25 | −$2.77bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,615 characters.

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

The 2018 and 2017 first quarters referenced herein represent the twelve-week periods ended March 25, 2018 and March 26, 2017.

### Overview

Domino’s is the largest pizza company in the world based on global retail sales, with nearly 15,000 locations in over 85 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 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. 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 profit by sub-franchising and selling ingredients and equipment to those sub-franchisees, as well as by running pizza stores. Everyone in the system can benefit, including the end consumer, who can feed 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.

| Global retail sales growth Same store sales growth: Domestic Company-owned stores Domestic franchise stores Domestic stores International stores (excluding foreign currency impact) Store counts (at end of period): | First Quarter of 2018 (1) +16.8% + 6.4% + 8.4% + 8.3% + 5.0% |  | First Quarter of 2017 +13.2% +14.1% + 9.8% +10.2% + 4.3% |  |
| --- | ---: | ---: | ---: | ---: |
| Domestic Company-owned stores | 397 |  | 395 |  |
| Domestic franchise stores | 5,252 |  | 5,004 |  |
| Domestic stores | 5,649 |  | 5,399 |  |
| International stores | 9,317 |  | 8,601 |  |
| Total stores | 14,966 |  | 14,000 |  |
| **Income statement data:** |  |  |  |  |
| Total revenues | $785.4 | 100.0% | $624.2 | 100.0% |
| Cost of sales | 485.5 | 61.8% | 430.4 | 69.0% |
| General and administrative | 84.2 | 10.7% | 77.8 | 12.4% |
| Domestic franchise advertising | 82.2 | 10.5% | — | —% |
| Income from operations | 133.5 | 17.0% | 116.0 | 18.6% |
| Interest expense, net | (29.8) | (3.8)% | (25.5) | (4.1)% |
| Income before provision for income taxes | 103.7 | 13.2% | 90.5 | 14.5% |
| Provision for income taxes | 14.8 | 1.9% | 28.0 | 4.5% |
| Net income | $88.8 | 11.3% | $62.5 | 10.0% |

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

During the first quarter of 2018, we sustained our strong domestic and international same store sales performance. Our Domino’s Piece of the Pie RewardsTM loyalty program continues to contribute to our domestic same store sales performance. Additionally, we remained focused on growing online ordering and improving the digital customer experience through our technology platforms.

We also continued our global expansion with the opening of 110 net new stores in the first quarter of 2018. We opened 79 net new stores internationally and 31 net new stores domestically during the first quarter of 2018. Overall, we believe this global store growth, along with our strong sales, emphasis on technology, operations, and marketing initiatives have combined to strengthen our brand.

Global retail sales, which are total retail sales at franchise and Company-owned stores worldwide, increased 16.8% in the first quarter of 2018. This increase was driven primarily by domestic and international same store sales growth, as well as an increase in our worldwide store counts during the trailing four quarters and the positive impact from changes in foreign currency exchange rates during the first quarter of 2018. Domestic same store sales growth reflected the sustained positive sales trends and the continued success of our products, marketing and technology platforms. International same store sales growth also reflected continued strong performance.

Total revenues increased $161.2 million, or 25.8%, in the first quarter of 2018. The adoption of Accounting Standards Codification 606, *Revenue from Contracts with Customers (“*ASC 606”) in the first quarter of 2018 resulted in the recognition of $82.2 million in revenue related to domestic franchise contributions to Domino’s National Advertising Fund Inc. (“DNAF”), our consolidated not-for-profit advertising fund. In the first quarter of 2017 under accounting standards in effect at that time, we had presented these contributions net with the related disbursements in our condensed consolidated statement of income. Refer to Note 12 to the consolidated financial statements for additional information related to the adoption of this new accounting standard. The remaining increase in revenues was due primarily to higher supply chain volumes resulting from order and store count growth, as well as higher Company-owned store, domestic franchise and international franchise revenues resulting from same store sales and store count growth. These changes in revenues are described in more detail below.

Income from operations increased $17.5 million, or 15.0%, in the first quarter of 2018. This increase was primarily driven by higher royalty revenues from domestic and international franchised stores, as well as increased supply chain volumes, but was partially offset by higher general and administrative expenses. The positive impact of changes in foreign currency exchange rates on international franchise royalties also contributed to the increase in the first quarter of 2018.

Net income increased $26.3 million, or 42.2%, in the first quarter of 2018. This increase was driven by higher income from operations, as noted above. A lower tax rate resulting from regulations under the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) and a higher deduction related to excess tax benefits from equity-based compensation also positively impacted net income in the first quarter of 2018 through a reduction in the provision for income taxes. This increase in net income was partially offset by higher interest expense resulting from a higher average debt balance due to our recapitalization in 2017.

### Revenues

|  | First Quarter of 2018 |  | First Quarter of 2017 |  |
| --- | ---: | ---: | ---: | ---: |
| Domestic Company-owned stores | $121.2 | 15.4% | $113.5 | 18.2% |
| Domestic franchise royalties and fees | 89.5 | 11.4% | 79.9 | 12.8% |
| Supply chain | 440.1 | 56.0% | 388.6 | 62.2% |
| International franchise royalties and fees | 52.4 | 6.7% | 42.2 | 6.8% |
| Domestic franchise advertising | 82.2 | 10.5% | — | —% |
| Total revenues | $785.4 | 100.0% | $624.2 | 100.0% |

Revenues primarily consist of retail sales from our Company-owned stores, royalties, advertising contributions and fees from our domestic franchised stores, royalties and fees from our international franchised stores and sales of food, equipment and supplies from our supply chain centers to all of our domestic franchised stores and certain international franchised stores. Company-owned store and franchised store revenues may vary from period to period due to changes in store count mix. Supply chain revenues may vary significantly from period to period as a result of fluctuations in commodity prices as well as the mix of products we sell. In years prior to 2018, the domestic franchise advertising contributions were shown net with the related disbursements in our condensed consolidated statement of income. In the first quarter of 2018, we adopted ASC 606, which requires these revenues and expenses to be presented gross on our condensed consolidated statement of income. Refer to Note 12 to the consolidated financial statements for additional information related to the adoption of this new accounting standard.

### Domestic Stores Revenues

|  | First Quarter of 2018 |  | First Quarter of 2017 |  |
| --- | ---: | ---: | ---: | ---: |
| Domestic Company-owned stores | $121.2 | 41.4% | $113.5 | 58.7% |
| Domestic franchise royalties and fees | 89.5 | 30.6% | 79.9 | 41.3% |
| Domestic franchise advertising | 82.2 | 28.0% | — | —% |
| Domestic stores | $292.9 | 100.0% | $193.4 | 100.0% |

Domestic stores revenues increased $99.5 million, or 51.4%, in the first quarter of 2018. This increase was driven by the adoption of ASC 606, which requires a gross presentation of domestic franchise advertising contributions on our condensed consolidated statement of income, as well as higher royalty revenues earned on higher franchise same store sales, higher domestic Company-owned same store sales and an increase in the average number of stores open during the period. These changes in domestic stores revenues are more fully described below.

#### Domestic Company-Owned Stores

Revenues from domestic Company-owned store operations increased $7.7 million, or 6.7%, in the first quarter of 2018 due primarily to higher same store sales. Same store sales increased 6.4% in the first quarter of 2018 and 14.1% in the first quarter of 2017.

#### Domestic Franchise Royalties and Fees

Revenues from domestic franchise operations increased $9.6 million, or 12.0%, in the first quarter of 2018 due primarily to higher same store sales and an increase in the average number of domestic franchised stores open during the period. Same store sales increased 8.4% in the first quarter of 2018 and 9.8% in the first quarter of 2017. Revenues further benefited from an increase in fees paid by franchisees for the use of our internally developed technology platforms.

#### Domestic Franchise Advertising

Revenues from domestic franchise advertising contributions were $82.2 million in the first quarter of 2018. In years prior to 2018, the domestic franchise advertising contributions were shown net with the related disbursements in our condensed consolidated statement of income. In the first quarter of 2018, we adopted ASC 606, which required these revenues and expenses to be presented gross on our condensed consolidated statement of income. Refer to Note 12 to the consolidated financial statements for additional information related to the adoption of this new accounting standard.

### Supply Chain Revenues

|  | First Quarter of 2018 |  | First Quarter of 2017 |  |
| --- | ---: | ---: | ---: | ---: |
| Domestic supply chain | $398.9 | 90.6% | $353.6 | 91.0% |
| International supply chain | 41.2 | 9.4% | 35.0 | 9.0% |
| Total supply chain | $440.1 | 100.0% | $388.6 | 100.0% |

#### Domestic Supply Chain

Domestic supply chain revenues increased $45.3 million, or 12.8%, in the first quarter of 2018. This increase was primarily attributable to higher volumes from increased order counts at the store level as well as store count growth. Our market basket pricing to stores increased 4.5% during the first quarter of 2018, which resulted in an estimated $13.8 million increase in domestic supply chain revenues.

#### International Supply Chain

Revenues from international supply chain operations increased $6.2 million, or 17.7%, in the first quarter of 2018. This increase resulted primarily from higher volumes from increased order counts at the store level. The positive impact of changes in foreign currency exchange rates of $1.8 million in the first quarter of 2018 also contributed to the increase.

### International Franchise Royalties and Fee Revenues

Revenues from international franchise operations increased $10.2 million, or 24.2%, in the first quarter of 2018. This increase was due to higher same store sales, an increase in the average number of international stores open during the period and the positive impact from changes in foreign currency exchange rates of $3.3 million. Excluding the impact of changes in foreign currency exchange rates, same store sales increased 5.0% in the first quarter of 2018 and 4.3% in the first quarter of 2017.

### Cost of Sales / Operating Margin

|  | First Quarter of 2018 |  | First Quarter of 2017 |  |
| --- | ---: | ---: | ---: | ---: |
| Consolidated revenues | $785.4 | 100.0% | $624.2 | 100.0% |
| Consolidated cost of sales | 485.5 | 61.8% | 430.4 | 69.0% |
| Consolidated operating margin | $299.9 | 38.2% | $193.8 | 31.0% |

Cost of sales consists primarily of Company-owned store and supply chain costs incurred to generate related revenues. Components of consolidated cost of sales primarily include food, labor and occupancy costs.

Consolidated operating margin (which we define as revenues less cost of sales) increased $106.1 million, or 54.7%, in the first quarter of 2018. This increase was driven by the adoption of ASC 606, which requires a gross presentation of domestic franchise advertising contributions on our condensed consolidated statement of income. Higher domestic and international franchise revenues, as well as higher supply chain volumes and higher Company-owned store margins also contributed to the increased operating margin in the first quarter of 2018. Franchise revenues and domestic franchise advertising revenues do not have a cost of sales component, so changes in franchise revenues have a disproportionate effect on the operating margin.

As a percentage of revenues, the consolidated operating margin increased 7.2 percentage points in the first quarter of 2018 due primarily to the adoption of ASC 606, which requires a gross presentation of domestic franchise advertising contributions on our condensed consolidated statement of income. Company-owned store operating margins were flat in the first quarter of 2018 as compared to the first quarter of 2017. Supply chain operating margins decreased 0.9 percentage points in the first quarter of 2018. These changes in margin are more fully discussed below.

### Domestic Company-Owned Stores Operating Margin

|  | First Quarter of 2018 |  | First Quarter of 2017 |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $121.2 | 100.0% | $113.5 | 100.0% |
| Cost of sales | 93.0 | 76.8% | 87.2 | 76.8% |
| Store operating margin | $28.1 | 23.2% | $26.3 | 23.2% |

The domestic Company-owned store operating margin (which does not include certain store-level costs such as royalties and advertising) increased $1.8 million, or 6.8%, in the first quarter of 2018. Higher same store sales positively contributed to operating margin in the first quarter of 2018. This increase was partially offset by higher food costs. As a percentage of store revenues, the store operating margin was flat in the first quarter of 2018 as compared to the first quarter of 2017, as discussed in more detail below.

- Food costs increased 0.3 percentage points to 27.2% in the first quarter of 2018.
- Labor costs decreased slightly in the first quarter of 2018 to 29.7%.
- Occupancy costs, which include rent, telephone, utilities and depreciation, decreased 0.3 percentage points to 7.3% in the first quarter of 2018 driven primarily by the leveraging of higher same store sales.

### Supply Chain Operating Margin

|  | First Quarter of 2018 |  | First Quarter of 2017 |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $440.1 | 100.0% | $388.6 | 100.0% |
| Cost of sales | 392.5 | 89.2% | 343.2 | 88.3% |
| Supply chain operating margin | $47.6 | 10.8% | $45.4 | 11.7% |

18

The supply chain operating margin increased $2.2 million, or 5.0%, in the first quarter of 2018, primarily driven by higher volumes from increased store orders. As a percentage of supply chain revenues, the supply chain operating margin decreased 0.9 percentage points in the first quarter of 2018. This decrease was due primarily to higher delivery and labor costs, offset in part by procurement savings.

### General and Administrative Expenses

General and administrative expenses increased $6.4 million, or 8.2%, in the first quarter of 2018. This increase was primarily driven by continued investments in technological initiatives (primarily in e-commerce and information technology) as well as investments in other strategic areas.

### Domestic Franchise Advertising Expenses

Domestic franchise advertising expenses were $82.2 million in the first quarter of 2018. In years prior to 2018, the domestic franchise advertising expenses were shown net with the related contributions in our condensed consolidated statement of income. In the first quarter of 2018, we adopted ASC 606, which required these revenues and expenses to be presented gross on our condensed consolidated statement of income. Refer to Note 12 to the consolidated financial statements for additional information related to the adoption of this new accounting standard.

### Interest Expense

Interest expense increased $4.7 million to $30.3 million in the first quarter of 2018 due to higher average borrowings resulting from our recapitalization transaction completed on July 24, 2017 (“2017 Recapitalization”), offset in part by a lower weighted average borrowing rate. The Company’s weighted average borrowing rate decreased to 3.9% in the first quarter of 2018, from 4.6% in the first quarter of 2017, resulting from the lower interest rates on the new debt issued as part of the 2017 Recapitalization.

### Provision for Income Taxes

Provision for income taxes decreased $13.2 million to $14.8 million in the first quarter of 2018. Although pre-tax income increased for the first quarter of 2018, the effective tax rate decreased due to the lower federal statutory rate of 21% resulting from the 2017 Tax Act enacted in December 2017. Higher tax benefits on equity-based compensation, recorded as a reduction to the income tax provision, further reduced the provision for income taxes by $1.9 million as compared to the first quarter of 2017. The effective tax rate decreased to 14.3% during the first quarter of 2018 as compared to 31.0% in the first quarter of 2017.

### Liquidity and Capital Resources

Historically, we have operated with minimal positive working capital or negative working capital, primarily because our receivable collection periods and inventory turn rates are faster than the normal payment terms on our current liabilities. We generally collect our receivables within three weeks from the date of the related sale, and we generally experience 35 to 45 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, invest in our business, pay dividends and repurchase our common stock, reduce our working capital amounts. As of March 25, 2018, we had working capital of less than $0.1 million, excluding restricted cash and cash equivalents of $145.2 million, advertising fund assets, restricted, of $112.3 million and advertising fund liabilities of $105.8 million. Working capital includes total unrestricted cash and cash equivalents of $44.6 million.

During the first quarter of 2018, we experienced increases in both domestic and international same store sales versus the comparable periods in the prior year. Additionally, our international and domestic businesses grew store counts in the first quarter of 2018. These factors contributed to our continued ability to generate positive operating cash flows. We expect to use our unrestricted cash and cash equivalents, cash flows from operations and available borrowings under the variable funding notes to, among other things, fund working capital requirements, invest in our core business, service our indebtedness, pay dividends and repurchase our common stock. We have historically funded our working capital requirements, capital expenditures, debt repayments and repurchases of common stock primarily from our cash flows from operations and, when necessary, our available borrowings under variable funding note facilities. We did not have any material commitments for capital expenditures as of March 25, 2018.

Based upon the current level of operations and anticipated growth, we believe that the cash generated from operations, our current unrestricted cash and cash equivalents and amounts available under our variable funding note facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for at least the next twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors” in our filings with the Securities and Exchange Commission. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under the variable funding notes or otherwise to enable us to service our indebtedness, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the fixed and floating rate notes and to service, extend or refinance the variable funding notes will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

#### Restricted Cash

As of March 25, 2018, we had approximately $112.7 million of restricted cash held for future principal and interest payments, $32.4 million of restricted cash held in a three-month interest reserve as required by the related debt agreements and $0.1 million of other restricted cash for a total of $145.2 million of restricted cash and cash equivalents. As of March 25, 2018, we also held $30.8 million of advertising fund restricted cash, which can only be used for activities that promote the Domino’s Pizza brand.

#### 2018 Recapitalization

On April 24, 2018, we completed a recapitalization (the “2018 Recapitalization”) in which certain of our subsidiaries issued new notes pursuant to an asset-backed securitization. The new notes consist of $425.0 million Series 2018-1 4.116% Fixed Rate Senior Secured Notes, Class A-2-I with an anticipated term of 7.5 years (the “2018 A-2-I 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 A-2-II Fixed Rate Notes” and, collectively with the 2018 A-2-I Fixed Rate Notes, the “2018 Notes”) in an offering exempt from registration under the Securities Act of 1933, as amended. The 2018 Notes have scheduled principal payments of $4.1 million in 2018, $8.3 million in each of 2019 through 2024, $401.4 million in 2025, $4.0 million in 2026 and $366.0 million in 2027. Gross proceeds from the issuance of the 2018 Notes was $825.0 million.

We will use a portion of the proceeds from the 2018 Recapitalization to repay the remaining $490.1 million in outstanding principal and interest under the 2015 five-year fixed rate notes on April 27, 2018. The proceeds will also be used to pay transaction-related fees and expenses in connection with the 2018 Recapitalization and to pre-fund a portion of the principal and interest payable on the 2018 Notes. We will use the remaining proceeds for general corporate purposes.

#### Long-Term Debt

As of March 25, 2018, we had approximately $3.15 billion of long-term debt, of which $32.3 million was classified as a current liability. Prior to the completion of the 2018 Recapitalization, our fixed and floating rate notes from the recapitalizations we completed in 2017 and 2015 had original scheduled principal payments of $24.0 million in the remainder of 2018, $32.0 million in 2019, $509.5 million in 2020, $27.0 million in 2021, $879.8 million in 2022, $18.0 million in each of 2023 and 2024, $742.0 million in 2025, $10.0 million in 2026 and $907.5 million in 2027. As of March 25, 2018, we had no outstanding borrowings under our variable funding notes and $128.3 million available for borrowing, net of letters of credit issued of $46.7 million. The letters of credit are primarily related to our casualty insurance programs and supply chain center leases. Subsequent to the first quarter of 2018, we borrowed $80.0 million under our variable funding notes to fund incremental share repurchases. Borrowings under the variable funding notes are available to fund our working capital requirements, capital expenditures, share repurchases and other general corporate purposes.

#### Share Repurchase Programs

Our open market share repurchase programs have historically been funded by excess cash flows. On February 14, 2018, our Board of Directors authorized a new share repurchase program to repurchase up to $750.0 million of the Company’s common stock, which replaced the remaining availability under its previous $1.25 billion authorization. We repurchased and retired 448,008 shares for approximately $101.1 million in the first quarter of 2018 and repurchased and retired 80,360 shares for approximately $12.7 million in the first quarter of 2017. We had approximately $648.9 million left under our $750.0 million authorization as of March 25, 2018.

Subsequent to the first quarter, we repurchased and retired an additional 351,699 shares for approximately $81.3 million under our Board of Directors-authorized open market share repurchase program. These share repurchases were funded by excess cash flows and borrowings of $80.0 million under our variable funding note facility.

During the first quarter of 2018, our Board of Directors declared a $0.55 per share quarterly dividend on the Company’s outstanding common stock for shareholders of record as of March 15, 2018, which was paid on March 30, 2018. We had approximately $24.0 million accrued for common stock dividends at March 25, 2018. Subsequent to the first quarter, on April 24, 2018, our Board of Directors declared a $0.55 per share quarterly dividend for shareholders of record as of June 15, 2018, to be paid on June 29, 2018.

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

*(In millions)*

| Cash Flows Provided By (Used In) | First Quarter of 2018(1) | First Quarter of 2017(1) |
| --- | ---: | ---: |
| Net cash provided by operating activities | $83.7 | $76.6 |
| Net cash used in investing activities | (10.1) | (11.1) |
| Net cash used in financing activities | (107.8) | (26.2) |
| Exchange rate changes | — | — |
| Change in cash and cash equivalents, restricted cash and cash equivalents | $(34.2) | $39.4 |

(1) In 2018, the Company adopted ASU 2016-18, *Statement of Cash Flows (Topic 230): Restricted Cash,* which requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as presented on the consolidated statement of cash flows. The prior year amounts have been recast. Refer to Note 12 to the consolidated financial statements for additional information related to the adoption of this new accounting standard.

### Operating Activities

Cash provided by operating activities increased $7.1 million in the first quarter of 2018, primarily due to an increase in net income of $26.4 million, but was partially offset by the negative impact of changes in operating assets and liabilities of $16.0 million and a decrease in non-cash amounts of $3.3 million. The negative impact of changes in operating assets and liabilities was primarily related to the timing of payments on accounts payable during 2018 as compared to 2017.

### Investing Activities

Cash used in investing activities was $10.1 million in the first quarter of 2018, which consisted primarily of $13.6 million of capital expenditures (driven primarily by investments in technological initiatives, Company-owned stores and supply chain centers) partially offset by maturities of restricted advertising fund investments of $4.0 million. The Company adopted ASC 606 in the first quarter of 2018, which superseded the agency guidance the Company historically applied to present these activities net in the Company’s consolidated statement of cash flows. Refer to Note 12 to the consolidated financial statements for additional information related to the Company’s adoption of ASC 606.

Cash used in investing activities was $11.1 million in the first quarter of 2017, which consisted primarily of $12.4 million of capital expenditures (driven primarily by investments in our technological initiatives, Company-owned stores and supply chain centers) partially offset by $0.8 million in proceeds from the sale of property, plant and equipment.

### Financing Activities

Cash used in financing activities was $107.8 million in the first quarter of 2018, primarily related to the repurchase of approximately $101.1 million in common stock under our Board of Directors-approved open market share repurchase program. We also used $8.1 million to make payments on our long-term debt obligations during the first quarter of 2018.

Cash used in financing activities was $26.2 million in the first quarter of 2017. We purchased common stock totaling $12.7 million, we made $9.7 million in payments on our long-term debt obligations, and we made $4.9 million in tax payments for restricted stock upon vesting.

### Forward-Looking Statements

This filing contains various forward-looking statements about the Company within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”) that are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “could,” “should,” “estimates,” “expects,” “intends,” “may,” “will,” “plans,” “predicts,” “projects,” “seeks,” “approximately,” “potential,” “outlook” and similar terms and phrases that concern our strategy, plans or intentions, including references to assumptions. These forward-looking statements address various matters including information concerning future results of operations and business strategy, our anticipated profitability, estimates in same store sales growth, the growth of our domestic and international business, ability to service our indebtedness, our future cash flows, our operating performance, trends in our business and other descriptions of future events reflect the Company’s expectations based upon currently available information and data. While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions. Important factors that could cause actual results to differ materially from our expectations are more fully described in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our annual report on Form 10-K. Actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors, including but not limited to: our substantial increased indebtedness as a result of our recapitalization transactions and our ability to incur additional indebtedness or refinance that indebtedness in the future; our future financial performance and our ability to pay principal and interest on our indebtedness; the effectiveness of our advertising, operations and promotional initiatives; the strength of our brand, including our ability to compete domestically and internationally in our intensely competitive industry; new product, digital ordering and concept developments by us, and other food-industry competitors; our ability to maintain good relationships with our franchisees and their ongoing level of profitability; our ability to successfully implement cost-saving strategies; our ability and that of our franchisees to successfully operate in the current and future credit environment; changes in the level of consumer spending given general economic conditions, including interest rates, energy prices and consumer confidence; our ability and that of our franchisees to open new restaurants and keep existing restaurants in operation; changes in operating expenses resulting from changes in prices of food (particularly cheese), fuel and other commodity costs, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness or general health concerns, severe weather conditions and natural disasters may have on our business and the economies of the countries where we operate; changes in foreign currency exchange rates; our ability to retain or replace our executive officers and other key members of management and our ability to adequately staff our stores and supply chain centers with qualified personnel; our ability to find and/or retain suitable real estate for our stores and supply chain centers; changes in government legislation and regulations, including changes in our effective tax rate; adverse legal judgments or settlements; food-borne illness or contamination of products; data breaches or other cyber risks; the effect of war, terrorism or catastrophic events; our ability to pay dividends and repurchase shares; changes in consumer preferences, spending and traffic patterns and demographic trends; changes in accounting policies; and adequacy of our insurance coverage. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this press release might not occur. All forward-looking statements speak only as of the date of this press release and should be evaluated with an understanding of their inherent uncertainty. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission, we will not undertake and specifically decline any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances arising after the date of this press release, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on the forward-looking statements included in this press release or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

## Market risk

As filed, 2,488 characters.

### Market Risk

The Company does not engage in speculative transactions nor does the Company hold or issue financial instruments for trading purposes. In connection with the recapitalizations of our business, we issued fixed and floating rate notes and entered into variable funding notes and, at March 25, 2018, we are exposed to interest rate risk on borrowings under our floating rate notes and variable funding notes. As of March 25, 2018, we had no outstanding borrowings under our variable funding notes and $128.3 million available for borrowing, net of letters of credit issued of $46.7 million. Subsequent to the first quarter of 2018, we borrowed $80.0 million under our variable funding notes. Our fixed rate debt exposes the Company to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate.

We are exposed to market risks from changes in commodity prices. During the normal course of business, we purchase cheese and certain other food products that are affected by changes in commodity prices and, as a result, we are subject to volatility in our food costs. We may periodically enter into financial instruments to manage this risk. As noted above, we do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In instances when we use fixed pricing agreements with our suppliers, these agreements cover our physical commodity needs, are not net-settled and are accounted for as normal purchases.

The Company is exposed to various foreign currency exchange rate fluctuations for revenues generated by operations outside the United States, which can adversely impact net income and cash flows. Approximately 6.7% of our total revenues in the first quarter of 2018 and 6.8% of our total revenues in the first quarter of 2017 were derived from our international franchise segment, a majority of which were denominated in foreign currencies. We also operate dough manufacturing and distribution facilities in Canada, which generate revenues denominated in Canadian dollars. We do not enter into financial instruments to manage this foreign currency exchange risk. A hypothetical 10% adverse change in the foreign currency rates in each of our top ten international markets, based on store count, would have resulted in a negative impact on revenues of approximately $3.3 million in the first quarter of 2018.

## Controls and procedures

As filed, 892 characters.

Management, with the participation of the Company’s President and Chief Executive Officer, J. Patrick Doyle, and Executive Vice President and Chief Financial Officer, Jeffrey D. Lawrence, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, Mr. Doyle and Mr. Lawrence concluded that the Company’s disclosure controls and procedures were effective.

During the quarterly period ended March 25, 2018, there were no changes in the Company’s internal controls over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Filed Apr 26, 2018.
Source: SEC EDGAR, the filing index for accession 0001193125-18-132848. Last ingested by Listed: Nov 4, 2026, 17:10 ET. No prices; not investment advice.