Dominos Pizza Inc: Form 10-Q for the period ended Jun 17, 2018

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

The 2018 and 2017 second quarters referenced herein represent the twelve-week periods ended June 17, 2018 and June 18, 2017. The 2018 and 2017 two fiscal quarters referenced herein represent the twenty-four-week periods ended June 17, 2018 and June 18, 2017.

Overview

Domino’s is the largest pizza company in the world based on global retail sales, with more than 15,100 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 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. 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.

(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 second quarter and two fiscal quarters 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, including the launch of Domino’s HotSpotsTM in the second quarter of 2018.

We also continued our global expansion with the opening of 156 net new stores in the second quarter of 2018, bringing our year-to-date total to 266 net new stores. We opened 113 net new stores internationally and 43 net new stores domestically during the second 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 12.6% in the second quarter of 2018 and 14.7% in the two fiscal quarters of 2018. These increases were driven primarily by an increase in worldwide store counts during the trailing four quarters as well as domestic and international same store sales growth and the positive impact from changes in foreign currency exchange rates. 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 $150.8 million, or 24.0%, in the second quarter of 2018 and $312.0 million, or 24.9%, in the two fiscal quarters 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 $80.9 million in revenue in the second quarter of 2018 and $163.1 million in revenue in the two fiscal quarters of 2018 related to domestic franchise contributions to Domino’s National Advertising Fund Inc. (“DNAF”), our consolidated not-for-profit advertising fund. In the second quarter and two fiscal quarters 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 13 to the consolidated financial statements for additional information related to the adoption of this new accounting standard. The remaining increases in revenues were due primarily to higher supply chain volumes resulting from order and store count growth, as well as higher international franchise, Company-owned store and domestic 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 $13.2 million, or 11.8%, in the second quarter of 2018 and $30.7 million, or 13.4%, in the two fiscal quarters of 2018. These increases were primarily driven by higher royalty revenues from domestic and international franchised stores, as well as increased supply chain volumes and higher Company-owned store margins, but were 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 second quarter and two fiscal quarters of 2018.

Net income increased $11.7 million, or 17.7%, in the second quarter of 2018 and $38.0 million, or 29.7%, in the two fiscal quarters of 2018. These increases were 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”) also positively impacted net income in the second quarter and two fiscal quarters of 2018 through a reduction in the provision for income taxes, but was partially offset by lower excess tax benefits from equity-based compensation. These increases in net income were also partially offset by higher interest expense resulting from a higher average debt balance and the amortization of approximately $3.2 million of remaining unamortized debt issuance costs resulting from the repayment of our 2015 five-year fixed rates notes in connection with our 2018 recapitalization.

Revenues

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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, based on accounting guidance in effect at that time, 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 13 to the consolidated financial statements for additional information related to the adoption of this new accounting standard.

Domestic Stores Revenues

Domestic stores revenues increased $92.3 million, or 47.4%, in the second quarter of 2018 and increased $191.7 million, or 49.4% in the two fiscal quarters of 2018. These increases were driven by the adoption of ASC 606, which requires a gross presentation of domestic franchise advertising contributions in our condensed consolidated statement of income, as well as higher royalty revenues earned on higher franchise same store sales and an increase in the average number of stores open in each period of 2018 as compared to the prior year. Higher domestic Company-owned same store sales also contributed to the increases in revenue. These changes in domestic stores revenues are more fully described below.

Domestic Company-Owned Stores

Revenues from domestic Company-owned store operations increased $6.4 million, or 5.7%, in the second quarter of 2018 and increased $14.0 million, or 6.2%, in the two fiscal quarters of 2018 due primarily to higher same store sales. Company-owned same store sales increased 5.1% in the second quarter of 2018 and 5.8% in the two fiscal quarters of 2018. Company-owned same store sales increased 11.2% in the second quarter of 2017 and 12.6% in the two fiscal quarters of 2017.

Domestic Franchise Royalties and Fees

Revenues from domestic franchise operations increased $5.0 million, or 6.1%, in the second quarter of 2018 and increased $14.6 million, or 9.0%, in the two fiscal quarters of 2018 due primarily to higher same store sales and an increase in the average number of domestic franchised stores open during the period. Domestic franchise same store sales increased 7.0% in the second quarter of 2018 and 7.7% in the two fiscal quarters of 2018. Domestic franchise same store sales increased 9.3% in the second quarter of 2017 and 9.6% in the two fiscal quarters 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 $80.9 million in the second quarter of 2018 and were $163.1 million in the two fiscal quarters of 2018. In years prior to 2018, based on accounting guidance in effect at the time, 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 13 to the consolidated financial statements for additional information related to the adoption of this new accounting standard.

Supply Chain Revenues

Domestic Supply Chain

Domestic supply chain revenues increased $43.7 million, or 12.3%, in the second quarter of 2018 and increased $89.0 million, or 12.5%, in the two fiscal quarters of 2018. These increases were primarily attributable to higher volumes from increased order counts at the store level and store count growth. Our market basket pricing to stores increased 4.5% during the second quarter and two fiscal quarters of 2018, which resulted in an estimated increase in domestic supply chain revenues of $14.6 million in the second quarter of 2018 and $29.2 million in the two fiscal quarters of 2018.

International Supply Chain

Revenues from international supply chain operations increased $7.1 million, or 20.8%, in the second quarter of 2018 and increased $13.3 million, or 19.2%, in the two fiscal quarters of 2018. These increases resulted primarily from higher volumes from increased order counts at the store level. The positive impact of changes in foreign currency exchange rates of $1.7 million in the second quarter of 2018 and $3.5 million in the two fiscal quarters of 2018 also contributed to the increases.

International Franchise Royalties and Fee Revenues

Revenues from international franchise operations increased $7.6 million, or 17.5%, in the second quarter of 2018 and increased $17.9 million, or 20.8%, in the two fiscal quarters of 2018. These increases were due primarily 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 $1.1 million in the second quarter of 2018 and $4.4 million in the two fiscal quarters of 2018. Excluding the impact of changes in foreign currency exchange rates, international franchise same store sales increased 4.0% in the second quarter of 2018 and 4.4% in the two fiscal quarters of 2018. Excluding the impact of changes in foreign currency exchange rates, international franchise same store sales increased 2.6% in the second quarter of 2017 and 3.4% in the two fiscal quarters of 2017. Revenues further benefited from an increase in fees paid by franchisees for the use of our internally developed technology platforms.

Cost of Sales / Operating Margin

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 $100.8 million, or 52.2%, in the second quarter of 2018 and increased $206.7 million, or 53.5%, in the two fiscal quarters of 2018. These increases were primarily 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 international and domestic franchise revenues, as well as higher supply chain volumes and higher Company-owned store margins also contributed to the increased operating margin in the second quarter and two fiscal quarters of 2018. Franchise revenues and domestic franchise advertising revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on the operating margin.

As a percentage of revenues, the consolidated operating margin increased 7.0 percentage points in both the second quarter and two fiscal quarters 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 increased 1.8 percentage points in the second quarter of 2018 and increased 0.9 percentage points in the two fiscal quarters of 2018. Supply chain operating margins decreased 0.4 percentage points in the second quarter of 2018 and decreased 0.7 percentage points in the two fiscal quarters of 2018. These changes in margin are more fully discussed below.

Domestic Company-Owned Stores Operating Margin

The domestic Company-owned store operating margin (which does not include certain store-level costs such as royalties and advertising) increased $3.4 million, or 14.7%, in the second quarter of 2018 and increased $5.2 million, or 10.5%, in the two fiscal quarters of 2018. Higher same store sales and lower insurance expense positively contributed to operating margin in the second quarter and two fiscal quarters of 2018. These increases were partially offset by higher food and labor costs. As a percentage of store revenues, the store operating margin increased 1.8 percentage points in the second quarter of 2018 and increased 0.9 percentage points in the two fiscal quarters of 2018, as discussed in more detail below.

• Food costs increased 0.7 percentage points to 27.5% in the second quarter of 2018 and increased 0.5 percentage points to 27.4% in the two fiscal quarters of 2018.
• Labor costs increased 0.5 percentage points to 30.0% in the second quarter of 2018 and increased 0.2 percentage points to 29.8% in the two fiscal quarters of 2018. These increases were due primarily to an increase in labor rates in certain markets.
• Insurance costs decreased 2.0 percentage points to 3.2% in the second quarter of 2018 and decreased 0.9 percentage points to 3.1% in the two fiscal quarters of 2018. These decreases resulted from incremental insurance expense recorded in the second quarter of 2017 related to updated independent actuarial estimates for our casualty insurance program.
• Transaction-related expenses decreased 0.6 percentage points to 3.1% in the second quarter of 2018 and decreased 0.4 percentage points to 3.2% in the two fiscal quarters of 2018. These decreases were primarily attributable to reduced credit card-related expenses in certain markets in which we operate.
• Delivery costs decreased 0.2 percentage points to 3.4% in the second quarter of 2018 and decreased 0.3 percentage points to 3.3% in the two fiscal quarters of 2018 due primarily to the leveraging of higher same store sales.

Supply Chain Operating Margin

The supply chain operating margin increased $3.7 million, or 8.5%, in the second quarter of 2018 and $6.0 million, or 6.7% in the two fiscal quarters of 2018, primarily driven by higher volumes from increased store orders. As a percentage of supply chain revenues, the supply chain operating margin decreased 0.4 percentage points in the second quarter of 2018 and decreased 0.7 percentage points in the two fiscal quarters of 2018. These decreases were due primarily to higher delivery and labor costs, offset in part by procurement savings.

General and Administrative Expenses

General and administrative expenses increased $6.5 million, or 8.2%, in the second quarter of 2018 and increased $12.9 million, or 8.2%, in the two fiscal quarters of 2018. These increases were primarily driven by continued investments in technological initiatives (primarily in e-commerce and information technology) as well as investments in other strategic areas. The reclassification of certain advertising expenses from general and administrative expenses to domestic franchise advertising expenses in 2018 partially offset these increases.

Domestic Franchise Advertising Expenses

Domestic franchise advertising expenses were $80.9 million in the second quarter of 2018 and were $163.1 million in the two fiscal quarters 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 13 to the consolidated financial statements for additional information related to the adoption of this new accounting standard.

Interest Expense

Interest expense increased $11.5 million to $36.1 million in the second quarter of 2018 and increased $16.2 million to $66.4 million in the two fiscal quarters of 2018. These increases were driven by higher average borrowings resulting from our recapitalization transactions completed on April 24, 2018 (“2018 Recapitalization”) and July 24, 2017 (“2017 Recapitalization”), offset in part by a lower weighted average borrowing rate. We also expensed approximately $3.2 million for the remaining unamortized debt issuance costs on the 2015 five-year fixed rate notes repaid in connection with the 2018 Recapitalization. The Company’s weighted average borrowing rate decreased to 4.0% in the second quarter of 2018 and decreased to 3.9% in the two fiscal quarters of 2018, from 4.6% in both the second quarter and two fiscal quarters of 2017, resulting from the lower interest rates on the debt outstanding in the second quarter and two fiscal quarters of 2018 as compared to the same periods in 2017.

Provision for Income Taxes

Provision for income taxes decreased $9.0 million to $13.8 million in the second quarter of 2018 and decreased $22.2 million to $28.6 million in the two fiscal quarters of 2018. Although pre-tax income increased in both the second quarter and two fiscal quarters of 2018, the effective tax rate for both periods decreased due to the lower federal statutory rate of 21% resulting from the 2017 Tax Act enacted in December 2017. These decreases were partially offset by lower excess tax benefits on equity-based compensation, which are recorded as a reduction to the income tax provision. Excess tax benefits recorded were lower by $3.5 million in the second quarter of 2018 and were lower by $1.6 million in the two fiscal quarters of 2018 as compared to the prior year periods. The effective tax rate decreased to 15.1% during the second quarter of 2018 and decreased to 14.7% in the two fiscal quarters of 2018 as compared to 25.7% in the second quarter of 2017 and 28.4% in the two fiscal quarters 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 June 17, 2018, we had working capital of $154.1 million, excluding restricted cash and cash equivalents of $145.0 million, advertising fund assets, restricted, of $123.8 million and advertising fund liabilities of $117.4 million. Working capital includes total unrestricted cash and cash equivalents of $157.8 million.

During the second quarter and two fiscal quarters 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 second 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 our 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. As of June 17, 2018, we had approximately $18.3 million in commitments for capital expenditures related to building a new supply chain center that is expected to open in 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 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 our fixed and floating rate notes and to service, extend or refinance our 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 June 17, 2018, we had approximately $108.3 million of restricted cash held for future principal and interest payments, $36.6 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 $145.0 million of restricted cash and cash equivalents. As of June 17, 2018, we also held $32.8 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s Pizza brand.

2018 Recapitalization

On April 24, 2018, we completed 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.

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

Long-Term Debt

As of June 17, 2018, we had approximately $3.47 billion of long-term debt, of which $35.6 million was classified as a current liability. Our fixed and floating rate notes from the recapitalizations we completed in 2018, 2017 and 2015 have original scheduled principal payments of $17.6 million in the remainder of 2018, $35.3 million in each of 2019 through 2021, $888.0 million in 2022, $26.3 million in each of 2023 through 2025, $1.13 billion in 2026 and $1.27 billion in 2027. As of June 17, 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. During the second quarter of 2018, we borrowed $80.0 million under our variable funding notes to fund incremental share repurchases. These borrowings were repaid during the second quarter of 2018. 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. During the second quarter of 2018, we repurchased and retired 905,556 shares of our common stock under our Board of Directors-approved open market share repurchase program for a total of approximately $219.0 million, or an average price of $241.82 per share. During the two fiscal quarters of 2018, we repurchased and retired 1,353,564 shares of our common stock under our Board of Directors-approved open market share repurchase program for a total of approximately $320.1 million, or an average price of $236.46 per share. As of June 17, 2018, the Company had a total remaining authorized amount for share repurchases of approximately $429.9 million.

The Company did not repurchase any shares of its common stock under its Board of Directors-approved open market share repurchase program in the second quarter of 2017. During the two fiscal quarters of 2017, the Company repurchased and retired 80,360 shares of its common stock under its Board of Directors-approved open market share repurchase program for a total of approximately $12.7 million, or an average price of $158.30 per share.

Dividends

During the second quarter of 2018, on April 24, 2018, the Company’s Board of Directors declared a $0.55 per share quarterly dividend on its outstanding common stock for shareholders of record as of June 15, 2018, which was paid on June 29, 2018. The Company had approximately $23.6 million accrued for common stock dividends at June 17, 2018.

Subsequent to the second quarter, on July 18, 2018, the Company’s Board of Directors declared a $0.55 per share quarterly dividend on its outstanding common stock for shareholders of record as of September 14, 2018 to be paid on September 28, 2018.

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

(In millions)

(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 13 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 $41.9 million in the two fiscal quarters of 2018, primarily due to an increase in net income of $38.0 million and an increase in non-cash amounts of $6.1 million. The negative impact of changes in operating assets and liabilities of $2.2 million partially offset these increases.

Investing Activities

Cash used in investing activities was $43.8 million in the two fiscal quarters of 2018, which consisted primarily of $37.3 million of capital expenditures (driven primarily by investments in technological initiatives, supply chain centers and Company-owned stores) and purchases of restricted advertising fund investments of $35.2 million. These uses of cash were partially offset by maturities of restricted advertising fund investments of $29.0 million. The Company adopted ASC 606 in the first quarter of 2018, which superseded the agency guidance the Company historically applied to present advertising fund investment activities net in the Company’s consolidated statement of cash flows. Refer to Note 13 to the consolidated financial statements for additional information related to the Company’s adoption of ASC 606.

Cash used in investing activities was $24.7 million in the two fiscal quarters of 2017, which consisted primarily of $25.2 million of capital expenditures (driven primarily by investments in our technological initiatives, Company-owned stores and supply chain centers).

Financing Activities

Cash used in financing activities was $30.1 million in the two fiscal quarters of 2018. We issued $825.0 million of debt in connection with our 2018 Recapitalization and borrowed $80.0 million under our variable funding notes. However, these increases in cash were offset by repayments of long-term debt of $586.1 million (of which $490.0 million was an optional prepayment on our 2015 five-year fixed rate notes using a portion of the proceeds received from the 2018 Recapitalization and $80.0 million related to the repayment of the borrowings under our variable funding notes), purchases of common stock of $320.1 million, dividend payments to our shareholders of $23.5 million, and cash paid for financing costs related to our 2018 Recapitalization of $8.2 million. We also made $2.3 million in tax payments for restricted stock upon vesting and received proceeds of $5.2 million from the exercise of stock options.

Cash used in financing activities was $45.8 million in the two fiscal quarters of 2017. We paid $22.3 million in dividends to our shareholders, used $12.7 million to repurchase shares of common stock, paid $9.8 million on our long-term debt obligations, and made $4.9 million in tax payments for restricted stock upon vesting. Proceeds of $3.9 million from the exercise of stock options partially offset these uses of cash in financing activities.

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

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 June 17, 2018, we are exposed to interest rate risk on borrowings under our floating rate notes and variable funding notes. As of June 17, 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. 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 6.6% of our total revenues in both the second quarter and two fiscal quarters of 2018 and 6.9% of our total revenues in both the second quarter and two fiscal quarters 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 $6.5 million in the two fiscal quarters of 2018.

Management, with the participation of the Company’s Chief Executive Officer, Richard E. Allison, Jr., 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. Allison and Mr. Lawrence concluded that the Company’s disclosure controls and procedures were effective.

During the quarterly period ended June 17, 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.