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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
March 24, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
    
    
to
    
    
    
    
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)
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.
Large accelerated filer
 
 
Accelerated filer
 
       
Non-accelerated
filer
 
 
Smaller reporting company
 
       
Emerging growth company
 
 
 
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 April 17, 2019, Domino’s Pizza, Inc. had
41,103,909
shares of common stock, par value $0.01 per share, outstanding.
   
 

 
Domino’s Pizza, Inc.
TABLE OF CONTENTS
 
 
Page No.
 
  
  
       
Item 1.
   
3
 
       
   
3
 
       
   
4
 
       
   
5
 
       
   
6
 
       
   
7
 
       
Item 2.
   
15
 
       
Item 3.
   
22
 
       
Item 4.
   
22
 
      
  
  
       
Item 1.
   
23
 
       
Item 1A.
   
23
 
       
Item 2.
   
23
 
       
Item 3.
   
23
 
       
Item 4.
   
23
 
       
Item 5.
   
23
 
       
Item 6.
   
24
 
      
  
25
  
 
2
 
 

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
                 
(In thousands)
 
March 24, 
2019
   
December 30, 
2018 (1)
 
Assets
   
     
 
Current assets:
   
     
 
Cash and cash equivalents
  $
83,114
    $
25,438
 
Restricted cash and cash equivalents
   
150,055
     
166,993
 
Accounts receivable, net
   
194,064
     
190,091
 
Inventories
   
45,668
     
45,975
 
Prepaid expenses and other
   
19,544
     
25,710
 
Advertising fund assets, restricted
   
98,098
     
112,744
 
                 
Total current assets
   
590,543
     
566,951
 
                 
Property, plant and equipment:
   
     
 
Land and buildings
   
41,519
     
41,147
 
Leasehold and other improvements
   
171,859
     
170,498
 
Equipment
   
246,909
     
243,654
 
Construction in progress
   
27,832
     
31,822
 
                 
   
488,119
     
487,121
 
Accumulated depreciation and amortization
   
(260,252
)    
(252,182
)
                 
Property, plant and equipment, net
   
227,867
     
234,939
 
                 
Other assets:
   
     
 
Operating lease
right-of-use
assets
   
222,005
     
  
 
Goodwill
   
14,919
     
14,919
 
Capitalized software, net
   
66,159
     
63,809
 
Other assets
   
22,728
     
21,241
 
Deferred income taxes
   
4,054
     
5,526
 
                 
Total other assets
   
329,865
     
105,495
 
                 
Total assets
  $
1,148,275
    $
907,385
 
                 
Liabilities and stockholders’ deficit
   
     
 
Current liabilities:
   
     
 
Current portion of long-term debt
  $
35,909
    $
35,893
 
Accounts payable
   
84,888
     
92,546
 
Operating lease liabilities
   
31,753
     
  
 
Insurance reserves
   
22,034
     
22,210
 
Dividends payable
   
27,156
     
581
 
Advertising fund liabilities
   
93,040
     
107,150
 
Other accrued liabilities
   
117,233
     
121,363
 
                 
Total current liabilities
   
412,013
     
379,743
 
                 
Long-term liabilities:
   
     
 
Long-term debt, less current portion
   
3,447,819
     
3,495,691
 
Operating lease liabilities
   
198,508
     
  
 
Insurance reserves
   
32,558
     
31,065
 
Other accrued liabilities
   
32,542
     
40,807
 
                 
Total long-term liabilities
   
3,711,427
     
3,567,563
 
                 
Stockholders’ deficit:
   
     
 
Common stock
   
411
     
410
 
Additional
paid-in
capital
   
5,464
     
569
 
Retained deficit
   
(2,976,848
)    
(3,036,471
)
Accumulated other comprehensive loss
   
(4,192
)    
(4,429
)
                 
Total stockholders’ deficit
   
(2,975,165
)    
(3,039,921
)
                 
Total liabilities and stockholders’ deficit
  $
1,148,275
    $
907,385
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The balance sheet at December 30, 2018 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.
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes.
3

Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
                 
 
Fiscal Quarter Ended
 
(In thousands, except per share data)
 
March 24,
2019
   
March 25,
2018
 
Revenues:
   
     
 
U.S. Company-owned stores
  $
123,450
    $
121,186
 
U.S. franchise royalties and fees
   
96,708
     
89,490
 
Supply chain
   
472,100
     
440,063
 
International franchise royalties and fees
   
54,584
     
52,421
 
U.S. franchise advertising
   
89,121
     
82,211
 
                 
Total revenues
   
835,963
     
785,371
 
                 
Cost of sales:
   
     
 
U.S. Company-owned stores
   
95,540
     
93,038
 
Supply chain
   
418,134
     
392,468
 
                 
Total cost of sales
   
513,674
     
485,506
 
                 
Operating margin
   
322,289
     
299,865
 
                 
General and administrative
   
89,664
     
84,178
 
U.S. franchise advertising
   
89,121
     
82,211
 
                 
Income from operations
   
143,504
     
133,476
 
Interest income
   
693
     
480
 
Interest expense
   
(35,054
)    
(30,286
)
                 
Income before provision for income taxes
   
109,143
     
103,670
 
Provision for income taxes
   
16,493
     
14,843
 
                 
Net income
  $
92,650
    $
88,827
 
                 
Earnings per share:
   
     
 
Common stock - basic
  $
2.27
    $
2.07
 
Common stock - diluted
   
2.20
     
2.00
 
 
 
 
 
 
See accompanying notes.
4

Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
                 
 
Fiscal Quarter Ended
 
(In thousands)
 
March 24,
2019
   
March 25,
2018
 
Net income
  $
92,650
    $
88,827
 
Currency translation adjustment
   
237
     
(455
)
                 
Comprehensive income
  $
92,887
    $
88,372
 
                 
 
 
 
 
 
See accompanying notes.
5

Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
 
Fiscal Quarter Ended
 
(In thousands)
 
March 24,
2019
   
March 25,
2018
 
Cash flows from operating activities:
   
     
 
Net income
  $
92,650
    $
88,827
 
Adjustments to reconcile net income to net cash provided by operating
activities:
   
     
 
Depreciation and amortization
   
13,790
     
11,069
 
Loss on sale/disposal of assets
   
149
     
365
 
Amortization of debt issuance costs
   
1,101
     
1,177
 
Provision for deferred income taxes
   
1,467
     
566
 
Non-cash
compensation expense
   
4,608
     
6,063
 
Excess tax benefits from equity-based compensation
   
(8,663
)    
(8,410
)
Other
   
94
     
(57
)
Changes in operating assets and liabilities
   
1,974
     
(15,405
)
Changes in advertising fund assets and liabilities, restricted
   
(10,172
)    
(519
)
                 
Net cash provided by operating activities
   
96,998
     
83,676
 
                 
Cash flows from investing activities:
   
     
 
Capital expenditures
   
(12,222
)    
(13,647
)
Maturities of advertising fund investments, restricted
   
—  
     
4,007
 
Other
   
262
     
(499
)
                 
Net cash used in investing activities
   
(11,960
)    
(10,139
)
                 
Cash flows from financing activities:
   
     
 
Repayments of long-term debt and finance lease obligations
   
(48,968
)    
(8,078
)
Proceeds from exercise of stock options
   
4,537
     
3,718
 
Purchases of common stock
   
(8,144
)    
(101,084
)
Tax payments for restricted stock upon vesting
   
(2,467
)    
(2,299
)
Payments of common stock dividends and equivalents
   
(90
)    
(79
)
                 
Net cash used in financing activities
   
(55,132
)    
(107,822
)
                 
Effect of exchange rate changes on cash
   
124
     
48
 
                 
Change in cash and cash equivalents, restricted cash and cash equivalents
   
30,030
     
(34,237
)
                 
Cash and cash equivalents, beginning of period
   
25,438
     
35,768
 
Restricted cash and cash equivalents, beginning of period
   
166,993
     
191,762
 
Cash and cash equivalents included in advertising fund assets, restricted, beginning of period
   
44,988
     
27,316
 
                 
Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, beginning of period
   
237,419
     
254,846
 
                 
Cash and cash equivalents, end of period
   
83,114
     
44,609
 
Restricted cash and cash equivalents, end of period
   
150,055
     
145,186
 
Cash and cash equivalents included in advertising fund assets, restricted, end of period
   
34,280
     
30,814
 
                 
Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, end of period
  $
267,449
    $
220,609
 
                 
 
 
 
 
 
See accompanying notes.
6

Domino’s Pizza, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited; tabular amounts in thousands, except percentages, share and per share amounts)
March 24, 2019
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 30, 2018 included in the Company’s 2018 Annual Report on Form
10-K,
filed with the Securities and Exchange Commission on February 21, 2019 (the “2018 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 March 24, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2019.
Updates to Significant Accounting Policies
The Company adopted Accounting Standards Codification 842,
Leases
(“ASC 842”) in the first quarter of 2019. As a result, the Company updated its significant accounting policies for leases below. Refer to Note 11 for additional information related to the Company’s lease arrangements and Note 15 for the impact of the adoption of ASC 842 on the Company’s condensed consolidated financial statements.
Leases
The Company leases certain retail store and supply chain center locations, supply chain vehicles and its corporate headquarters. The Company determines whether an arrangement is or contains a lease at contract inception. The majority of the Company’s leases are classified as operating leases, which are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the Company’s condensed consolidated balance sheet. Finance leases are included in property and equipment, current portion of long-term debt and long-term debt on the Company’s condensed consolidated balance sheet.
ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement, as well as any variable rate payments that depend on an index, initially measured using the index at the lease commencement date. Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option.
The Company estimates its incremental borrowing rate for each lease using a portfolio approach based on the respective weighted average term of the agreements. This estimation considers the market rates of the Company’s outstanding collateralized borrowings and interpolations of rates outside of the terms of the outstanding borrowings, including comparisons to comparable borrowings of similarly-rated companies with longer term borrowings.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales or general and administrative expense. Amortization expense for finance leases is recognized on a straight-line basis over the lease term and is included in cost of sales or general and administrative expense, while interest expense for finance leases is recognized using the effective interest method. Variable lease payments that do not depend on a rate or index, payments associated with non-lease components and short-term rentals (leases with terms less than 12 months) are expensed as incurred.
7

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 March 24, 2019 and March 25, 2018
 
 
U.S.
Stores
  
Supply
Chain
  
International
Franchise
  
Intersegment
Revenues
  
Other
  
Total
 
Revenues
  
   
   
   
   
   
 
2019
 $
309,279
  $
505,681
  $
54,584
  $
(33,581
) $
—  
  $
835,963
 
2018
  
292,887
   
473,956
   
52,421
   
(33,893
)  
—  
   
785,371
 
Income from operations
  
   
   
   
   
   
 
2019
 $
80,615
  $
42,021
  $
42,754
   
N/A
  $
(21,886
) $
143,504
 
2018
  
75,289
   
37,372
   
41,524
   
N/A
   
(20,709
)  
133,476
 
Segment Income
  
   
   
   
   
   
 
2019
 $
83,598
  $
46,047
  $
42,800
   
N/A
  $
(10,394
) $
162,051
 
2018
  
78,344
   
40,156
   
41,572
   
N/A
   
(9,099
)  
150,973
 
The following table reconciles Total Segment Income to consolidated income before provision for income taxes.
 
Fiscal Quarter Ended
 
 
March 24,
2019
  
March 25,
2018
 
Total Segment Income
 $
162,051
  $
150,973
 
Depreciation and amortization
  
(13,790
)  
(11,069
)
Loss on sale/disposal of assets
  
(149
)  
(365
)
Non-cash
compensation expense
  
(4,608
)  
(6,063
)
         
Income from operations
  
143,504
   
133,476
 
Interest income
  
693
   
480
 
Interest expense
  
(35,054
)  
(30,286
)
         
Income before provision for income taxes
 $
109,143
  $
103,670
 
         
3. Earnings Per Share
 
Fiscal Quarter Ended
 
 
March 24,
2019
  
March 25,
2018
 
Net income available to common stockholders
– basic 
and diluted
 $
92,650
  $
88,827
 
         
Basic weighted average number of shares
  
40,865,532
   
42,822,112
 
Earnings per share – basic
 $
2.27
  $
2.07
 
Diluted weighted average number of shares
  
42,202,429
   
44,377,509
 
Earnings per share – diluted
 $
2.20
  $
2.00
 
The denominator used in calculating diluted earnings per share for the first quarter of 2019 does not include 71,880 options to purchase common stock as the effect of including these options would have been anti-dilutive. The denominator used in calculating diluted earnings per share for the first quarter of 2019 does not include 1,800 shares subject to restricted stock awards, as the effect of including these shares would have been anti-dilutive. The denominator used in calculating diluted earnings per share for the first quarter of 2019 does not include 96,712 restricted performance shares, as the performance targets for these awards had not yet been met.
The denominator used in calculating diluted earnings per share for common stock for the first quarter of 2018 does not include 87,420 options to purchase common stock, as the effect of including these options would have been anti-dilutive. The denominator used in calculating diluted earnings per share for the first quarter of 2018 did not include 117,062 restricted performance shares, as the performance targets for these awards had not yet been met.
8

4. Stockholders’ Deficit
The following table summarizes changes in stockholders’ deficit for the first quarter of 2019.
 
Common Stock
  
Additional
Paid-in
Capital
  
Retained
Deficit
  
Accumulated
Other
Comprehensive
Loss
  
 
Shares
  
Amount
  
Balance at December 30, 2018
  
40,977,561
  $
410
  $
569
  $
(3,036,471
) $
(4,429
)
Net income
  
—  
   
—  
   
—  
   
92,650
   
—  
 
Common stock dividends and equivalents
  
—  
   
—  
   
—  
   
(26,665
)  
—  
 
Issuance of common stock, net
  
8,240
   
   
—  
   
—  
   
—  
 
Tax payments for restricted stock upon vesting
  
(9,064
)  
—  
   
(2,467
)  
—  
   
—  
 
Purchases of common stock
  
(33,549
)  
   
(1,782
)  
(6,362
)  
—  
 
Exercise of stock options
  
140,702
   
1
   
4,536
   
—  
   
—  
 
Non-cash
compensation expense
  
—  
   
—  
   
4,608
   
—  
   
—  
 
Currency translation adjustment
  
—  
   
—  
   
—  
   
—  
   
237
 
                     
Balance at March 24, 2019
  
41,083,890
  $
411
  $
5,464
  $
(2,976,848
) $
(4,192
)
                     
The following table summarizes changes in stockholders’ deficit for the first quarter of 2018.
 
Common Stock
  
Additional
Paid-in
Capital
  
Retained
Deficit
  
Accumulated
Other
Comprehensive
Loss
  
 
Shares
  
Amount
  
Balance at December 31, 2017
  
42,898,329
  $
429
  $
5,654
  $
(2,739,437
) $
(2,030
)
Net income
  
—  
   
—  
   
—  
   
88,827
   
—  
 
Common stock dividends and equivalents
  
—  
   
—  
   
—  
   
(23,549
)  
—  
 
Issuance of common stock, net
  
9,282
   
—  
   
—  
   
—  
   
—  
 
Tax payments for restricted stock upon vesting
  
(10,237
)  
—  
   
(2,299
)  
—  
   
—  
 
Purchases of common stock
  
(448,008
)  
(5
)  
(12,997
)  
(88,082
)  
—  
 
Exercise of stock options
  
176,515
   
2
   
3,716
   
—  
   
—  
 
Non-cash
compensation expense
  
—  
   
—  
   
6,063
   
—  
   
—  
 
Adoption of revenue recognition accounting standard
  
—  
   
—  
   
—  
   
(6,701
)  
—  
 
Currency translation adjustment
  
—  
   
—  
   
—  
   
—  
   
(455
)
Reclassification adjustment for stranded taxes
  
—  
   
—  
   
—  
   
351
   
(351
)
                     
Balance at March 25, 2018
  
42,625,881
  $
426
  $
137
  $
(2,768,591
) $
(2,836
)
                     
5. Dividends
During the first quarter of 2019, on
February 20, 2019
, the Company’s Board of Directors declared a $0.65 per share quarterly dividend on its outstanding common stock for shareholders of record as of
March 15, 2019
which was paid on
March 29, 2019
. The Company had approximately $27.2 million accrued for common stock dividends at March 24, 2019.
Subsequent to the first quarter of 2019, on
April 23, 2019
, the Company’s Board of Directors declared a $0.65 per share quarterly dividend on its outstanding common stock for shareholders of record as of
June 14, 2019
to be paid on
June 28, 2019
.
During the first quarter of 2018, on
February 14, 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
March 15, 2018
which was paid on
March 30, 2018
.
6. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss was approximately $4.2 million at March 24, 2019 and was approximately $4.4 million as of December 30, 2018 and represented currency translation adjustments. During the first quarter of 2018, the Company adopted ASU
2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. As a result, the Company recorded a $0.4 million reclassification from accumulated other comprehensive loss to the beginning balance of retained deficit during the first quarter of 2018. The Company did not record any reclassifications out of accumulated other comprehensive loss to net income in the first quarter of 2019 or the first quarter of 2018.
9

7. Open Market Share Repurchase Program
During the first quarter of 2019, the Company repurchased and retired 33,549 shares of its common stock under its Board of Directors-approved open market share repurchase program for a total of approximately $8.1 million, or an average price of $242.74 per share. As of March 24, 2019, the Company had a total remaining authorized amount for share repurchases of approximately $150.6 million.
During the first quarter of 2018, the Company repurchased and retired 448,008 shares of its common stock under its Board of Directors-approved open market share repurchase program for a total of approximately $101.1 million, or an average price of $225.63 per share.
8. Fair Value Measurements
Fair value measurements enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair values of the Company’s cash equivalents and investments in marketable securities are based on quoted prices in active markets for identical assets. The following tables summarize the carrying amounts and fair values of certain assets at March 24, 2019 and December 30, 2018:
 
At March 24, 2019
 
 
  
Fair Value Estimated Using
 
 
Carrying
Amount
  
Level 1
Inputs
  
Level 2
Inputs
  
Level 3
Inputs
 
Cash equivalents
 $
48,467
  $
48,467
  $
—  
  $
—  
 
Restricted cash equivalents
  
90,014
   
90,014
   
—  
   
—  
 
Investments in marketable securities
  
10,187
   
10,187
   
—  
   
—  
 
Advertising fund cash equivalents, restricted
  
22,847
   
22,847
   
—  
   
—  
 
Advertising fund investments, restricted
  
50,152
   
50,152
   
—  
   
—  
 
 
At December 30, 2018
 
 
  
Fair Value Estimated Using
 
 
Carrying
Amount
  
Level 1
Inputs
  
Level 2
Inputs
  
Level 3
Inputs
 
Cash equivalents
 $
11,877
  $
11,877
  $
—  
  $
—  
 
Restricted cash equivalents
  
112,272
   
112,272
   
—  
   
—  
 
Investments in marketable securities
  
8,718
   
8,718
   
—  
   
—  
 
Advertising fund cash equivalents, restricted
  
31,547
   
31,547
   
—  
   
—  
 
Advertising fund investments, restricted
  
50,152
   
50,152
   
—  
   
—  
 
Management estimated the approximate fair values of the 2015 fixed rate notes, the 2017 fixed and floating rate notes and the 2018 fixed rate notes as follows:
 
March 24, 2019
  
December 30, 2018
 
 
Principal Amount
  
Fair Value
  
Principal Amount
  
Fair Value
 
2015
Ten-Year
Fixed Rate Notes
 $
778,000
  
$
804,452
  $
780,000
  $
783,120
 
2017 Five-Year Fixed Rate Notes
  
591,000
   
582,726
   
592,500
   
575,910
 
2017
Ten-Year
Fixed Rate Notes
  
985,000
   
991,895
   
987,500
   
956,888
 
2017 Five-Year Floating Rate Notes
  
295,500
   
294,318
   
296,250
   
295,065
 
2018
7.5-Year
Fixed Rate Notes
  
421,813
   
427,297
   
422,875
   
416,955
 
2018
9.25-Year
Fixed Rate Notes
  
397,000
   
404,940
   
398,000
   
396,010
 
At March 
24
,
2019
, the Company had $
25.0
 million outstanding under its variable funding notes, which is a variable rate loan. The fair value of this loan approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. This fair value represents a Level 
2
measurement. The Company had $
65.0
 million outstanding under its variable funding notes at December 
30
,
2018
.
10

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.
9. Contract Liabilities
Contract liabilities consist of deferred franchise fees and deferred development fees. Changes in deferred franchise fees and deferred development fees for the first quarter of 2019 and the first quarter of 2018 were as follows:
                 
 
Fiscal Quarter Ended
 
 
 
March 24,
2019
   
March 25,
2018
 
Deferred franchise fees and deferred development fees at beginning of period
  $
19,900
    $
19,404
 
Revenue recognized during the period
   
(1,361
)    
(1,083
)
New deferrals due to cash received and other
   
900
     
613
 
                 
Deferred franchise fees and deferred development fees at end of period
  $
19,439
    $
18,934
 
                 
 
 
 
 
 
 
 
 
 
 
10. Advertising Fund Assets
As of March 24, 2019, advertising fund assets, restricted of $98.1 million consisted of $84.4 million of cash, cash equivalents and investments, $12.1 million of accounts receivable and $1.6 million of prepaid expenses. As of March 24, 2019, advertising fund cash, cash equivalents and investments included $5.1 million of cash contributed from Company-owned stores that had not yet been expended.
As of December 30, 2018, advertising fund assets, restricted of $112.7 million consisted of $95.1 million of cash, cash equivalents and investments, $15.3 million of accounts receivable and $2.3 million of prepaid expenses. As of December 30, 2018, advertising fund cash, cash equivalents and investments included $5.5 million of cash contributed from Company-owned stores that had not yet been expended.
11. Leases
The Company leases certain retail store and supply chain center locations, supply chain vehicles and its corporate headquarters with expiration dates through 2034.
The components of operating and finance lease cost for the first quarter of 2019 were as follows:
         
 
Fiscal Quarter Ended
 
 
 
March 24, 
2019
 
Operating lease cost
  $
10,796
 
Finance lease cost:
   
 
Amortization of
right-of-use
assets
   
254
 
Interest on lease liabilities
   
479
 
         
Total finance lease cost
  $
733
 
         
 
 
 
 
 
 
 
 
 
 
Rent expense totaled $16.4 million and $15.4 million in the first quarter of 2019 and 2018, respectively, and 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.
11

Supplemental balance sheet information related to the Company’s finance leases as of March 24, 2019 and December 30, 2018 was as follows:
                 
 
 
March 24,
2019
   
December 30,
2018
 
Land and buildings
  $
22,182
    $
22,171
 
Accumulated depreciation and amortization
   
(6,932
)    
(6,678
)
                 
Finance lease assets, net
  $
15,250
    $
15,493
 
                 
Current portion of long-term debt
  $
659
    $
643
 
Long-term debt, less current portion
   
16,202
     
16,363
 
                 
Total principal payable on finance leases
  $
16,861
    $
17,006
 
                 
 
 
 
 
 
 
 
 
 
 
 
                 
 
Operating
Leases
   
Finance
Leases
 
Weighted average remaining lease term
   
7 years
     
14 years
 
Weighted average discount rate
   
4.1
%    
11.3
%
 
 
 
 
 
 
 
 
 
 
Supplemental cash flow information related to leases for the first quarter of 2019 was as follows:
         
 
Fiscal Quarter Ended
 
 
 
March 24, 
2019
 
Cash paid for amounts included in the measurement of lease liabilities:
   
 
Operating cash flows from operating leases
  $
10,690
 
Operating cash flows from finance leases
   
479
 
Financing cash flows from finance leases
   
155
 
Right-of-use
assets obtained in exchange for lease obligations:
   
 
Operating leases
   
12,977
 
Finance leases
   
—  
 
 
 
 
 
 
 
 
 
 
 
During the first quarter of 2018, the Company renewed the lease of a supply chain center building and extended the term of the lease through 2033. As a result of the lease renewal, the Company recorded
non-cash
financing activities of $2.6 million for the increase in finance lease assets and liabilities during the first quarter of 2018.
Maturities of lease liabilities as of March 24, 2019 were as follows:
                 
 
 
Operating
Leases
   
Finance
Leases
 
2019, excluding the quarter ended March 24, 2019
  $
29,314
    $
1,799
 
2020
   
38,791
     
2,416
 
2021
   
35,915
     
2,434
 
2022
   
32,545
     
2,452
 
2023
   
29,188
     
2,475
 
Thereafter
   
107,039
     
23,792
 
                 
Total future minimum rental commitments
   
272,792
     
35,368
 
Less – amounts representing interest
   
(42,531
)    
(18,507
)
                 
Total lease liabilities
  $
230,261
    $
16,861
 
                 
 
 
 
 
 
 
 
 
12
 
 
 
 

Maturities of lease liabilities as of December 30, 2018 were as follows:
                 
 
 
Operating
Leases
   
Finance
Leases
 
2019
  $
40,752
    $
2,396
 
2020
   
37,519
     
2,415
 
2021
   
34,538
     
2,433
 
2022
   
30,763
     
2,451
 
2023
   
27,388
     
2,474
 
Thereafter
   
100,310
     
23,781
 
                 
Total future minimum rental commitments
  $
271,270
     
35,950
 
                 
Less – amounts representing interest
   
     
(18,944
)
                 
Total principal payable on finance leases
   
    $
17,006
 
                 
 
 
 
 
 
 
 
 
 
 
As of March 24, 2019, the Company has additional operating leases for supply chain center tractors and trailers and a new office building being constructed by the Company’s landlord that had not yet commenced with estimated future minimum rental commitments of approximately $43.0 million. The Company has also entered into an additional finance lease for a supply chain center that had not yet commenced with estimated future minimum rental commitments of approximately $28.7 million. These leases are expected to commence in 2019 with lease terms of up to 15 years. These undiscounted amounts are not included in the tables above.
The Company has guaranteed lease payments related to certain franchisees’ lease arrangements. The maximum amount of potential future payments under these guarantees is $2.3 million and $2.4 million as of March 24, 2019 and December 30, 2018, respectively. We believe that none of these arrangements has or is likely to have a material effect on our results of operations, financial condition, revenues or expenses, capital expenditures or liquidity.
12. Legal Matters
On February 14, 2011, Domino’s Pizza LLC was named as a defendant in a lawsuit along with Fischler Enterprises of C.F., Inc., a franchisee, and Jeffrey S. Kidd, the franchisee’s delivery driver, filed by Yvonne Wiederhold, the plaintiff, as Personal Representative of the Estate of Richard E. Wiederhold, deceased. The case involved a traffic accident in which the franchisee’s delivery driver is alleged to have caused an accident involving a vehicle driven by Richard Wiederhold. Mr. Wiederhold sustained spinal injuries resulting in quadriplegia and passed away several months after the accident. The jury returned a $10.1 million judgment for the plaintiff where the Company and Mr. Kidd were found to be 90% liable (after certain offsets and other deductions the final verdict was $8.9 million). In the second quarter of 2016, the trial court ruled on all post-judgment motions and entered the judgment. The Company denies liability and in the third quarter of 2016 filed an appeal of the verdict on a variety of grounds. On May 11, 2018, the court of appeals reversed and remanded the case to the trial court for a new trial based on the plaintiff’s improper closing argument. The Company continues to deny liability in this matter.
13. Supplemental Disclosures of Cash Flow Information
The Company had
non-cash
investing activities related to accruals for capital expenditures of $2.6 million at March 24, 2019 and $3.8 million at December 30, 2018.
14. Sale of Company-owned Stores
Subsequent to the first quarter of 2019, the Company entered into agreements to sell 59 U.S. Company-owned stores to certain of its existing franchisees.
13

15. New Accounting Pronouncements
Recently Adopted Accounting Standard
Accounting Standards Update
2016-02,
Leases (Topic 842)
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU
2016-02,
Leases (Topic 842)
which requires a lessee to rec