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DPZ Dominos Pizza

Filed: 29 Apr 21, 7:38am
 
 
 
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 28, 2021
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)
 
 
Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of Each Class
 
Trading
Symbol
 
Name of Each Exchange
on Which Registered
Domino’s Pizza, Inc. Common Stock, $0.01 par value
 
DPZ
 
New York Stock Exchange
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
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 22, 2021, Domino’s Pizza, Inc. had 38,828,393 shares of common stock, par value $0.01 per share, outstanding.
 
 
 

Domino’s Pizza, Inc.
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
 
(In thousands)  
March 28, 2021
  
January 3, 2021 (1)
 
Assets
         
Current assets:
         
Cash and cash equivalents
  $267,719  $168,821 
Restricted cash and cash equivalents
   176,029   217,453 
Accounts receivable, net
   235,789   244,560 
Inventories
   63,775   66,683 
Prepaid expenses and other
   20,372   24,169 
Advertising fund assets, restricted
   162,118   147,698 
          
Total current assets
   925,802   869,384 
          
Property, plant and equipment:
         
Land and buildings
   88,468   88,063 
Leasehold and other improvements
   187,896   186,456 
Equipment
   299,287   292,456 
Construction in progress
   9,792   13,014 
          
    585,443   579,989 
Accumulated depreciation and amortization
   (292,074  (282,625
          
Property, plant and equipment, net
   293,369   297,364 
          
Other assets:
         
Operating lease
right-of-use
assets
   224,359   228,268 
Goodwill
   15,034   15,061 
Capitalized software, net
   84,694   81,306 
Investments (Note 6)
   82,500   40,000 
Other assets
   35,376   33,881 
Deferred income taxes
   1,698   1,904 
          
Total other assets
   443,661   400,420 
          
Total assets
  $1,662,832  $1,567,168 
          
Liabilities and stockholders’ deficit
         
Current liabilities:
��        
Current portion of long-term debt
  $2,931  $2,855 
Accounts payable
   95,042   94,499 
Operating lease liabilities
   36,058   35,861 
Insurance reserves
   26,971   26,377 
Dividends payable
   37,140   729 
Advertising fund liabilities
   154,963   141,175 
Other accrued liabilities
   148,730   169,323 
          
Total current liabilities
   501,835   470,819 
          
Long-term liabilities:
         
Long-term debt, less current portion
   4,116,858   4,116,018 
Operating lease liabilities
   198,640   202,268 
Insurance reserves
   38,975   37,125 
Other accrued liabilities
   35,129   35,244 
Deferred income taxes
   7,475   6,099 
          
Total long-term liabilities
   4,397,077   4,396,754 
          
Stockholders’ deficit:
         
Common stock
   388   389 
Additional
paid-in
capital
   6,612   5,122 
Retained deficit
   (3,240,842  (3,303,492
Accumulated other comprehensive loss
   (2,238  (2,424
          
Total stockholders’ deficit
   (3,236,080  (3,300,405
          
Total liabilities and stockholders’ deficit
  $1,662,832  $1,567,168 
          
 
(1)
The balance sheet at January 3, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
The accompanying notes are an integral part of these condensed consolidated statements.
 
3

Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
 
   
Fiscal Quarter Ended
 
(In thousands, except per share data)  
March 28,
2021
  
March 22,

2020
 
Revenues:
         
U.S. Company-owned stores
  $112,744  $102,326 
U.S. franchise royalties and fees
   124,486   104,746 
Supply chain
   568,338   512,700 
International franchise royalties and fees
   66,770   57,496 
U.S. franchise advertising
   111,360   95,834 
          
Total revenues
   983,698   873,102 
          
Cost of sales:
         
U.S. Company-owned stores
   85,742   79,388 
Supply chain
   508,805   453,557 
          
Total cost of sales
   594,547   532,945 
          
Operating margin
   389,151   340,157 
          
General and administrative
   91,253   88,489 
U.S. franchise advertising
   111,360   95,834 
          
Income from operations
   186,538   155,834 
Other income
   2,500   —   
Interest income
   22   932 
Interest expense
   (39,422  (39,470
          
Income before provision (benefit) for income taxes
   149,638   117,296 
Provision (benefit) for income taxes
   31,877   (4,306
          
Net income
  $117,761  $121,602 
          
Earnings per share:
         
Common stock - basic
  $3.04  $3.14 
Common stock - diluted
   3.00   3.07 
The accompanying notes are an integral part of these condensed consolidated statements.
 
4

 
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
   
Fiscal Quarter Ended
 
(In thousands)  
March 28,

2021
   
March 22,

2020
 
Net income
  $117,761   $121,602 
Currency translation adjustment
   186    (2,326
           
Comprehensive income
  $117,947   $119,276 
           
The accompanying notes are an integral part of these condensed consolidated statements.
 
5

 
 
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
   
Fiscal Quarter Ended
 
(In thousands)  
March 28,
2021
  
March 22,
2020
 
Cash flows from operating activities:
         
Net income
  $117,761  $121,602 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation and amortization
   16,465   14,032 
Loss on sale/disposal of assets
   161   306 
Amortization of debt issuance costs
   1,203   1,291 
Provision for deferred income taxes
   1,578   702 
Non-cash
equity-based compensation expense
   5,204   4,914 
Excess tax benefits from equity-based compensation
   (914  (30,449
Provision for losses on accounts and notes receivable
   180   1,589 
Unrealized gain on investments
   (2,500  —   
Changes in operating assets and liabilities
   (1,634  (23,119
Changes in advertising fund assets and liabilities, restricted
   15,347   4,490 
          
Net cash provided by operating activities
   152,851   95,358 
          
Cash flows from investing activities:
         
Capital expenditures
   (16,561  (17,467
Purchase of investments (Note 6)
   (40,000  —   
Other
   121   (426
          
Net cash used in investing activities
   (56,440  (17,893
          
Cash flows from financing activities:
         
Repayments of long-term debt and finance lease obligations
   (704  (10,849
Proceeds from exercise of stock options
   3,693   10,105 
Purchases of common stock
   (25,000  (79,590
Tax payments for restricted stock upon vesting
   (1,044  (1,796
Payments of common stock dividends and equivalents
   (64  (80
Other
   —     152 
          
Net cash used in financing activities
   (23,119  (82,058
          
Effect of exchange rate changes on cash
   161   (961
          
Change in cash and cash equivalents, restricted cash and cash equivalents
   73,453   (5,554
          
Cash and cash equivalents, beginning of period
   168,821   190,615 
Restricted cash and cash equivalents, beginning of period
   217,453   209,269 
Cash and cash equivalents included in advertising fund assets, restricted, beginning of period
   115,872   84,040 
          
Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, beginning of period
   502,146   483,924 
          
Cash and cash equivalents, end of period
   267,719   200,801 
Restricted cash and cash equivalents, end of period
   176,029   189,370 
Cash and cash equivalents included in advertising fund assets, restricted, end of period
   131,851   88,199 
          
Cash and cash equivalents, restricted cash and cash equivalents and cash and cash equivalents included in advertising fund assets, restricted, end of period
  $575,599  $478,370 
          
The accompanying notes are an integral part of these condensed consolidated statements.
 
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 28, 2021
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 January 3, 2021 included in the Company’s 2020 Annual Report on Form
10-K,
filed with the Securities and Exchange Commission on February 25, 2021 (the “2020 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 28, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2022.
2. Segment Information
The following table summarizes revenues 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. Intersegment revenues are comprised of sales of food, equipment and supplies from the supply chain segment to the Company-owned stores in the U.S. stores segment. Intersegment sales prices are market based. The “Other” column as it relates to Segment Income below primarily includes corporate administrative costs that are not allocable to a reportable segment, including labor, computer expenses, professional fees, travel and entertainment, rent, insurance and other corporate administrative costs.
 
   
Fiscal Quarters Ended March 28, 2021 and March 22, 2020
 
   
U.S.
Stores
   
Supply
Chain
   
International
Franchise
   
Intersegment
Revenues
  
Other
  
Total
 
Revenues
                            
2021
  $348,590   $599,177   $66,770   $(30,839 $—    $983,698 
2020
   302,906    541,639    57,496    (28,939  —     873,102 
Segment Income
                            
2021
  $107,436   $52,552   $54,468    N/A  $(6,088 $208,368 
2020
   88,277    51,437    43,504    N/A   (8,132  175,086 
The following table reconciles Total Segment Income to consolidated income before provision (benefit) for income taxes.
 
   
Fiscal Quarter Ended
 
   
March 28,
2021
   
March 22,
2020
 
Total Segment Income
  $208,368   $175,086 
Depreciation and amortization
   (16,465   (14,032
Loss on sale/disposal of assets
   (161   (306
Non-cash
equity-based compensation expense
   (5,204   (4,914
           
Income from operations
   186,538    155,834 
Other income
   2,500    —   
Interest income
   22    932 
Interest expense
   (39,422   (39,470
           
Income before provision (benefit) for income taxes
  $149,638   $117,296 
           
 
7

 
 
3. Earnings Per Share
 
   
Fiscal Quarter Ended
 
   
March 28,
2021
   
March 22,
2020
 
Net income available to common stockholders - basic and diluted
  $117,761   $121,602 
           
Basic weighted average number of shares
   38,700,225    38,665,924 
Earnings per share – basic
  $3.04   $3.14 
Diluted weighted average number of shares
   39,208,383    39,633,404 
Earnings per share – diluted
  $3.00   $3.07 
The denominator used in calculating diluted earnings per share for the first quarter of 2021 does not include 51,490 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 2021 does not include 65,967 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 the first quarter of 2020 does not include 128,280 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 2020 does not include 84,765 restricted performance shares, as the performance targets for these awards had not yet been met.
4. Stockholders’ Deficit
The following table summarizes changes in stockholders’ deficit for the first quarter of 2021.
 
   
Common Stock
  
Additional
Paid-in
  
Retained
  
Accumulated
Other
Comprehensive
 
   
Shares
  
Amount
  
Capital
  
Deficit
  
Loss
 
Balance at January 3, 2021
   38,868,350  $389  $5,122  $(3,303,492 $(2,424
Net income
   —     —     —     117,761   —   
Dividends declared on common stock and equivalents ($0.94 per share)
   —     —     —     (36,475  —   
Issuance and cancellation of stock awards, net
   (2,755  —     —     —     —   
Tax payments for restricted stock upon vesting
   (2,791  —     (1,044  —     —   
Purchases of common stock
   (65,870  (1  (6,363  (18,636  —   
Exercise of stock options
   21,263   —     3,693   —     —   
Non-cash
equity-based compensation expense
   —     —     5,204   —     —   
Currency translation adjustment
   —     —     —     —     186 
                      
Balance at March 28, 2021
   38,818,197  $388  $6,612  $(3,240,842 $(2,238
                      
Subsequent to the first quarter, on April 27, 2021, the Company’s Board of Directors declared a $0.94 per share quarterly dividend on its outstanding common stock for shareholders of record as of June 15, 2021
,
 
to be paid on June 30, 2021.
The following table summarizes changes in stockholders’ deficit for the first quarter of 2020.
 
   
Common Stock
  
Additional
Paid-in
  
Retained
  
Accumulated
Other
Comprehensive
 
   
Shares
  
Amount
  
Capital
  
Deficit
  
Loss
 
Balance at December 29, 2019
   38,934,009  $389  $243  $(3,412,649 $(3,742
Net income
   —     —     —     121,602   —   
Dividends declared on common stock and equivalents ($0.78 per share)
   —     —     —     (30,442  —   
Issuance and cancellation of stock awards, net
   1,645   —     —     —     —   
Tax payments for restricted stock upon vesting
   (5,929  —     (1,796  —     —   
Purchases of common stock
   (271,064  (3  (988  (78,599  —   
Exercise of stock options
   380,938   4   10,101   —     —   
Non-cash
equity-based compensation expense
   —     —     4,914   —     —   
Adoption of credit losses standard
   —     —     —     1,102   —   
Currency translation adjustment
   —     —     —     —     (2,326
                      
Balance at March 22, 2020
   39,039,599  $390  $12,474  $(3,398,986 $(6,068
                      
 
8

 
 
5. Recapitalization
Subsequent to the end of the first quarter of 2021, on April 16, 2021 (the “closing date”), the Company completed a recapitalization (the “2021 Recapitalization”) in which certain of the Company’s subsidiaries issued new notes pursuant to an asset-backed securitization. The new notes consist of 
$
850.0
 million Series
2021-1
2.662
% Fixed Rate Senior Secured Notes,
Class A-2-I
with an anticipated term of
7.5
years (the “
2021
A-2-I
Fixed Rate Notes”), and $
1.0
 billion Series
2021-1
3.151
% Fixed Rate Senior Secured Notes,
Class A-2-II
with an anticipated term of
10
years (the “
2021
A-2-II
Fixed Rate Notes” and, collectively with the
2021
A-2-I
Fixed Rate Notes, the “
2021
Notes”) in an offering exempt from registration under the Securities Act of
1933
, as amended. The
2021
Notes have scheduled principal payments of $
9.3
 million in
2021
, $
18.5
 million in each of
2022
through
2027
, $
804.8
 million in
2028
, $
10.0
 million in each of
2029
and
2030
and $
905.0
 
million in
2031
. Gross proceeds from the issuance of the
2021
Notes were $
1.85
 billion.
Concurrently, certain of the Company’s subsidiaries also issued a new variable funding note facility which allows for advances of up to 
$
200.0
 
million of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 Notes and certain other credit instruments, including letters of credit (the “2021 Variable Funding Notes”). The 2021 Variable Funding Notes were undrawn on the closing date. In connection with the issuance of the 2021 Variable Funding Notes, the Company’s previous $200.0 million variable funding note facility was canceled.
A portion of proceeds from the
2021
Recapitalization was used to repay the remaining $
291.0
 million in outstanding principal under the Company’s
2017
five-year floating 
rate notes and $
582.0
 million in outstanding principal under the Company’s
2017
five
-year fixed rate notes, prefund a portion of the interest payable on the
2021
Notes and pay transaction fees and expenses. In connection with the repayment of the
2017
five-year floating 
rate notes and
2017
five
-year fixed rate notes, the Company expensed approximately $
2.0
 million for the remaining unamortized debt issuance costs associated with these notes. Additionally, in connection with the
2021
Recapitalization, the Company capitalized $
14.9
 million of debt issuance costs, which are being amortized into interest expense over the
7.5
and
10-year
expected terms of the
2021
Notes.
As of the first quarter of
2021
and the fourth quarter of
2020
, the Company had a leverage ratio of less than
5.0
x,
and accordingly, did not make the previously scheduled debt amortization payment for its then outstanding notes beginning in the first quarter of 2021. Accordingly, all principal amounts of the Company’s outstanding notes have been classified as long-term debt in the consolidated balance sheet as of March 28, 2021 and January 3, 2021. Subsequent to the closing of the 2021 Recapitalization, the Company had a leverage ratio of greater than
 
5.0
x and, accordingly, the Company resumed making the scheduled amortization payments on its notes in the second quarter of
2021
.
 
6. 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.
Fair Value of Cash Equivalents and Investments
The fair values of the Company’s cash equivalents and investments in marketable securities are based on quoted prices in active markets for identical assets. The fair value of the Company’s Level 3 investment is not readily determinable. The fair value represents its cost with adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairments. The following tables summarize the carrying amounts and fair values of certain assets at March 28, 2021 and January 3, 2021:
 
   
At March 28, 2021
 
       
Fair Value Estimated Using
 
   
Carrying
Amount
   
Level 1
Inputs
   
Level 2
Inputs
   
Level 3
Inputs
 
Cash equivalents
  $194,325   $194,325   $—     $—   
Restricted cash equivalents
   104,232    104,232    —      —   
Investments in marketable securities
   13,384    13,384    —      —   
Advertising fund cash equivalents, restricted
   113,384    113,384    —      —   
Investments
   82,500    —      —      82,500 
 
9

   
At January 3, 2021
 
       
Fair Value Estimated Using
 
   
Carrying
Amount
   
Level 1
Inputs
   
Level 2
Inputs
   
Level 3
Inputs
 
Cash equivalents
  $151,502   $151,502   $—     $—   
Restricted cash equivalents
   126,595    126,595    —      —   
Investments in marketable securities
   13,251    13,251    —      —   
Advertising fund cash equivalents, restricted
   104,197    104,197    —      —   
Investments
   40,000    —      —      40,000 
During the second quarter of 2020, a subsidiary of the Company acquired a
non-controlling
interest in Dash Brands Ltd., a privately-held business company limited by shares incorporated with limited liability under the laws of the British Virgin Islands (“Dash Brands”), for $40.0 million. Through its subsidiaries, Dash Brands serves as the Company’s master franchisee in China that owns and operates Domino’s Pizza stores in that market. The Company’s investment in Dash Brands’ senior ordinary shares, which are not
in-substance
common stock, represents an equity investment without a readily determinable fair value and is recorded at cost with adjustments for observable changes in prices resulting from orderly transactions for the identical or a similar investment of the same issuer or impairments.
In the first quarter of 2021, the Company invested an additional $40.0 million in Dash Brands based on Dash Brands’
achievement of certain preestablished performance conditions.
In the first quarter of 2021, the Company recorded a positive adjustment of $2.5 million to the original carrying amount of $40.0 million resulting from the observable change in price from the valuation of the
additional investment. This amount was recorded in other income in the Company’s condensed consolidated statements of income.
The following table summarizes the reconciliation of the carrying amount of the Company’s investment in Dash Brands from the opening balance at January 3, 2021 to the closing balance at March 28, 2021.
 
   
First Quarter

of 2021
 
   
Carrying
Amount
           
Carrying
Amount
 
   
January 3,
2021
   
Purchases
   
Unrealized
Gain
   
March 28,
2021
 
Investments
  $40,000   $40,000   $2,500   $82,500 
Fair Value of Debt
The estimated fair values of the Company’s 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.
Management estimated the approximate fair values of the 2015 fixed rate notes, the 2017 fixed and floating rate notes, the 2018 fixed rate notes and the 2019 fixed rate notes as follows:
 
   
March 28, 2021
   
January 3, 2021
 
   
Principal Amount
   
Fair Value
   
Principal Amount
   
Fair Value
 
2015
Ten-Year
Fixed Rate Notes
  $766,000   $808,896   $766,000   $809,662 
2017 Five-Year Fixed Rate Notes
   582,000    583,164    582,000    582,582 
2017
Ten-Year
Fixed Rate Notes
   970,000    1,034,020    970,000    1,035,960 
2017 Five-Year Floating Rate Notes
   291,000    291,291    291,000    291,000 
2018
7.5-Year
Fixed Rate Notes
   415,438    436,625    415,438    437,456 
2018
9.25-Year
Fixed Rate Notes
   391,000    422,671    391,000    422,280 
2019
Ten-Year
Fixed Rate Notes
   668,250    703,667    668,250    712,355 
The Company’s variable funding notes are a variable rate loan, and the fair value of this loan approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. This fair value represents a Level 2 measurement. The Company did not have any outstanding borrowings under its variable funding notes at March 28, 2021 or January 3, 2021.
 
10

7. Revenue Disclosures
Contract Liabilities
Contract liabilities primarily consist of deferred franchise fees and deferred development fees. Changes in deferred franchise fees and deferred development fees for the first quarter of 2021 and the first quarter of 2020 were as follows:
 
   
Fiscal Quarter Ended
 
   
March 28,
2021
   
March 22,
2020
 
Deferred franchise fees and deferred development fees at beginning of period
  $19,090   $20,463 
Revenue recognized during the period
   (1,390   (1,417
New deferrals due to cash received and other
   803    724 
           
Deferred franchise fees and deferred development fees at end of period
  $18,503   $19,770 
           
Advertising Fund Assets
As of March 28, 2021, advertising fund assets, restricted of $162.1 million consisted of $131.9 million of cash and cash equivalents, $28.8 million of accounts receivable and $1.4 million of prepaid expenses. As of March 28, 2021, advertising fund cash and cash equivalents included $7.2 
million of cash contributed from U.S. Company-owned stores that had not yet been expended.
As of January 3, 2021, advertising fund assets, restricted of $147.7 million consisted of $115.9 million of cash and cash equivalents, $27.0 million of accounts receivable and $4.8 million of prepaid expenses. As of January 3, 2021, advertising fund cash and cash equivalents included $6.5 million of cash contributed from U.S. Company-owned stores that had not yet been expended.
8. Leases
The Company leases certai
n
 retail store and supply chain center locations, supply chain vehicles, equipment and its corporate headquarters with expiration dates through 2041.
The components of operating and finance lease cost for the first quarter of 2021 and the first quarter of 2020 were as follows:
 
   
Fiscal Quarter Ended
 
   
March 28,
2021
   
March 22,
2020
 
Operating lease cost
  $10,424   $9,582 
Finance lease cost:
          
Amortization of
right-of-use
assets
   919    249 
Interest on lease liabilities
   1,026    375 
           
Total finance lease cost
  $1,945   $624 
           
Rent expense totaled $18.2 million and $16.4 million in the first quarter of 2021 and the first quarter of 2020, respectively. Rent expense includes operating lease cost, as well as expense for
non-lease
components including common area maintenance, real estate taxes and insurance for the Company’s real estate leases. Rent expense also includes the variable rate per mile driven and fixed maintenance charges for the Company’s supply chain center tractors and trailers and expense for short-term rentals. Variable rent expense and rent expense for short-term leases were immaterial in both the first quarter of 2021 and the first quarter of 2020.
Supplemental balance sheet information related to the Company’s finance leases as of March 28, 2021 and January 3, 2021 was as follows:
 
   
March 28,
2021
   
January 3,
2021
 
Land and buildings
  $68,489   $68,084 
Accumulated depreciation and amortization
   (10,973   (10,049
           
Finance lease assets, net
  $57,516   $58,035 
           
Current portion of long-term debt
  $2,931   $2,855 
Long-term debt, less current portion
   57,338    57,700 
           
Total principal payable on finance leases
  $60,269   $60,555 
           
 
11

As of March 28, 2021 and January 3, 2021, the weighted average remaining lease term and weighted average discount rate for the Company’s operating and finance leases were as follows:
 
   
March 28, 2021
  
January 3, 2021
 
   
Operating
Leases
  
Finance
Leases
  
Operating
Leases
  
Finance
Leases
 
Weighted average remaining lease term
   7 years   16 years   7 years   16 years 
Weighted average discount rate
   3.7  6.8  3.7  6.8
Supplemental cash flow information related to leases for the first quarter of 2021 and the first quarter of 2020 was as follows:
 
   
Fiscal Quarter Ended
 
   
March 28,
2021
   
March 22,
2020
 
Cash paid for amounts included in the measurement of lease liabilities:
          
Operating cash flows from operating leases
  $10,187   $10,119 
Operating cash flows from finance leases
   1,026    375 
Financing cash flows from finance leases
   704    349 
Right-of-use
assets obtained in exchange for lease obligations:
          
Operating leases
   4,672    8,982 
Finance leases
   399    0   
Maturities of lease liabilities as of March 28, 2021 were as follows:
 
   
Operating
Leases
   
Finance
Leases
 
2021
  $34,764   $4,620 
2022
   43,209    6,754 
2023
   37,620    6,274 
2024
   36,260    6,732 
2025
   29,559    6,527 
Thereafter
   87,007    69,983 
           
Total future minimum rental commitments
   268,419    100,890 
Less – amounts representing interest
   (33,721   (40,621
           
Total lease liabilities
  $234,698   $60,269 
           
As of March 28, 2021, the Company has additional leases for certain supply chain tractors and trailers that had not yet commenced with estimated future minimum rental commitments of approximately $15.7 million. These leases are expected to commence in 2021 with lease terms of up to 9 years. These undiscounted amounts are not included in the table above.
The Company has guaranteed lease payments related to certain franchisees’ lease arrangements. The maximum amount of potential future payments under these guarantees was $12.0 million and $12.6 million as of March 28, 2021 and January 3, 2021, respectively. The Company does not believe these arrangements have or are likely to have a material effect on its results of operations, financial condition, revenues, expenses or liquidity.
9. Supplemental Disclosures of Cash Flow Information
The Company had
non-cash
investing activities related to accruals for capital expenditures of $3.1 million at March 28, 2021 and $4.3 million at January 3, 2021.
 
12

 
 
10. New Accounting Pronouncements
Recently Adopted Accounting Standard
Accounting Standards Update (“ASU”)
2019-12,
Income Taxes – Simplifying the Accounting for Income Taxes (Topic 740)
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU
2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”)
, which simplifies the accounting for income taxes. ASU
2019-12
is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company adopted this accounting standard in the first quarter of 2021, and it did not have a material impact on its condensed consolidated financial statements.
Accounting Standards Not Yet Adopted
The Company has considered all new accounting standards issued by the FASB. The Company has not yet completed its assessment of the following standard.
ASU
2020-04,
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)
In March 2020, the FASB issued ASU
2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU
2020-04”)
, which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform. Subsequent to the closing of the 2021 Recapitalization, the Company’s 2021 Variable Funding Notes bear interest at fluctuating interest rates based on LIBOR and the associated loan documents contemplate a transition from LIBOR to secured overnight financing rate (“SOFR”) in the event that LIBOR ceases to exist. If the Company further needs to renegotiate its loan documents, the Company cannot predict what alternative index would be negotiated with its lenders. ASU
2020-
0
4
is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.
 
13

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(Unaudited; tabular amounts in millions, except percentages and store data)
The
2021 and 2020 first quarters referenced herein represent the twelve-week periods ended March 28, 2021 and March 22, 2020,
respectively. In this section, we discuss the results of our operations for the first quarter of 2021 as compared to the first quarter of 2020.
Overview
Domino’s is the largest pizza company in the world based on global retail sales, with a significant business in both delivery and carryout, and more than 17,800 locations in over 90 markets around the world as of March 28, 2021. Founded in 1960, our roots are in convenient pizza delivery, while a significant amount of our sales also come from carryout customers. We are a highly recognized global brand, and we focus on serving neighborhoods locally through our large global network of franchise owners and U.S. Company-owned stores. We are primarily a franchisor, with approximately 98% of Domino’s stores currently owned and operated by our independent franchisees. Franchising enables an individual to be his or her own employer and maintain control over all employment-related matters and pricing decisions, while also benefiting from the strength of the Domino’s global brand and operating system with limited capital investment by us.
The Domino’s business model is straightforward: Domino’s stores handcraft and serve quality food at a competitive price, with easy ordering access and efficient service, enhanced by our technological innovations. Our hand-tossed dough is made fresh and distributed to stores around the world by us and our franchisees.
Domino’s generates revenues and earnings by charging royalties and fees to our franchisees. Royalties are ongoing
percent-of-sales
fees for use of the Domino’s
®
brand marks. We also generate revenues and earnings by selling food, equipment and supplies to franchisees through our supply chain operations, primarily in the U.S. and Canada, and by operating a number of Company-owned stores in the U.S. Franchisees profit by selling pizza and other complementary items to their local customers. In our international markets, we generally grant geographical rights to the Domino’s Pizza
®
brand to master franchisees. These master franchisees are charged with developing their geographical area, and they may profit by
sub-franchising
and selling food and equipment to those
sub-franchisees,
as well as by running pizza stores. We believe that everyone in the system can benefit, including the end consumer, who can purchase Domino’s menu items for themselves and their family conveniently and economically.
The Domino’s business model can yield strong returns for our franchise owners and our Company-owned stores. It can also yield significant cash flows to us, through a consistent franchise royalty payment and supply chain revenue stream, with moderate capital expenditures. We have historically returned cash to shareholders through dividend payments and share repurchases. These factors emphasize our focus on our stakeholders, including our customers, team members, franchisees, communities and shareholders.
First Quarter of 2021 Highlights
 
  
Global retail sales, excluding foreign currency impact (which includes total retail sales at Company-owned and franchised stores worldwide) increased 14.0% as compared to 2020. U.S. retail sales increased 15.3% and international retail sales, excluding foreign currency impact, increased 12.8% as compared to 2020.
 
  
Same store sales increased 13.4% in our U.S. stores and increased 11.8% in our international stores.
 
  
Revenues increased 12.7%
 
  
Income from operations increased 19.7%.
 
  
Net income decreased 3.2%.
 
  
Diluted earnings per share decreased 2.3%.
During the first quarter of 2021, we experienced global retail sales growth and U.S. and international same store sales growth. We believe our commitment to value, convenience, quality and new products continues to keep consumers engaged with the brand. We also continued our strong U.S. and international same store sales performance with 40 straight quarters of positive U.S. same store sales and 109 straight quarters of positive international same store sales. Changes in consumer ordering behavior due to the
COVID-19
pandemic resulted in a significant increase in U.S. and international same store sales during the first quarter of 2021. Additionally, our U.S. supply chain experienced higher volumes from the increases in U.S. store sales. Our U.S. and international same store sales growth has been pressured by our fortressing strategy, which includes increasing store concentration in certain markets where we compete, as well as from aggressive competitive activity.
We continued our global expansion with the opening of 175 net stores in the first quarter of 2021. We had 36 net stores open in the U.S. and 139 net stores open internationally during the first quarter of 2021.
Overall, we believe our continued global store growth, along with our sales growth, emphasis on technology, operations, and marketing initiatives, have combined to strengthen our brand.
 
14

 
Statistical Measures
The tables below outline certain statistical measures we utilize to analyze our performance. This historical data is not necessarily indicative of results to be expected for any future period.
Global Retail Sales Growth (excluding foreign currency impact)
Global retail sales growth (excluding foreign currency impact) is a commonly used statistical measure in the quick-service restaurant industry that is important to understanding performance. Global retail sales growth refers to total worldwide retail sales at Company-owned and franchise stores. We believe global retail sales information is useful in analyzing revenues because franchisees pay royalties and, in the U.S., advertising fees that are based on a percentage of franchise retail sales. We review comparable industry global retail sales information to assess business trends and to track the growth of the Domino’s Pizza brand. In addition, supply chain revenues are directly impacted by changes in franchise retail sales in the U.S. and Canada. Retail sales for franchise stores are reported to us by our franchisees and are not included in our revenues. Global retail sales growth, excluding foreign currency impact, is calculated as the change of international local currency global retail sales against the comparable period of the prior year.
 
   
First Quarter

of 2021
  
First Quarter

of 2020
 
U.S. stores
   +15.3  +4.9
International stores (excluding foreign currency impact)
   +12.8  +6.8
  
 
 
  
 
 
 
Total (excluding foreign currency impact)
   +14.0  +5.9
Same Store Sales Growth
Same store sales growth is a commonly used statistical measure in the quick-service restaurant industry that is important to understanding performance. Same store sales growth is calculated by including only sales from stores that also had sales in the comparable weeks of both years. International same store sales growth is calculated similarly to U.S. same store sales growth. Changes in international same store sales are reported on a constant dollar basis which reflects changes in international local currency sales.
 
   
First Quarter

of 2021
  
First Quarter

of 2020
 
U.S. Company-owned stores
   +6.3  +3.9
U.S. franchise stores
   +13.9  +1.5
  
 
 
  
 
 
 
U.S. stores
   +13.4  +1.6
International stores (excluding foreign currency impact)
   +11.8  +1.5
Store Growth Activity
Store counts and net store growth are commonly used statistical measures in the quick-service restaurant industry that are important to understanding performance.
 
   
U.S.

Company-

owned

Stores
  
U.S.

Franchise

Stores
   
Total

U.S.

Stores
  
International
Stores
  
Total
 
Store count at January 3, 2021
   363   5,992    6,355   11,289   17,644 
Openings
   2   35    37   160   197 
Closings
   (1  —      (1  (21  (22
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Store count at March 28, 2021
   364   6,027    6,391   11,428   17,819 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
First quarter 2021 net store growth
   1   35    36   139   175 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Trailing four quarters net store growth
   19   216    235   495   730 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
 
15

Income Statement Data
 
   
First Quarter

of 2021
  
First Quarter

of 2020
 
U.S. Company-owned stores
  $112.7    $102.3   
U.S. franchise royalties and fees
   124.5     104.7   
Supply chain
   568.3     512.7   
International franchise royalties and fees
   66.8     57.5   
U.S. franchise advertising
   111.4     95.8   
  
 
 
   
 
 
  
 
 
   
 
 
 
Total revenues
   983.7    100.0  873.1    100.0
U.S. Company-owned stores
   85.7     79.4   
Supply chain
   508.8     453.6   
  
 
 
   
 
 
  
 
 
   
 
 
 
Total cost of sales
   594.5    60.4  532.9    61.0
  
 
 
   
 
 
  
 
 
   
 
 
 
Operating margin
   389.2    39.6  340.2    39.0
  
 
 
   
 
 
  
 
 
   
 
 
 
General and administrative
   91.3    9.3  88.5    10.2
U.S. franchise advertising
   111.4    11.3  95.8    11.0
  
 
 
   
 
 
  
 
 
   
 
 
 
Income from operations
   186.5    19.0  155.8    17.8
Other income
   2.5    0.2  —      0.0
Interest expense, net
   (39.4   (4.0)%   (38.5   (4.4)% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Income before provision (benefit) for income taxes
   149.6    15.2  117.3    13.4
Provision (benefit) for income taxes
   31.9    3.2  (4.3   (0.5)% 
  
 
 
   
 
 
  
 
 
   
 
 
 
Net income
  $117.8    12.0 $121.6    13.9
  
 
 
   
 
 
  
 
 
   
 
 
 
Revenues
 
   
First Quarter

of 2021
  
First Quarter

of 2020
 
U.S. Company-owned stores
  $112.7    11.4 $102.3    11.7
U.S. franchise royalties and fees
   124.5    12.7  104.7    12.0
Supply chain
   568.3    57.8  512.7    58.7
International franchise royalties and fees
   66.8    6.8  57.5    6.6
U.S. franchise advertising
   111.4    11.3  95.8    11.0
  
 
 
   
 
 
  
 
 
   
 
 
 
Total revenues
  $983.7    100.0 $873.1    100.0
  
 
 
   
 
 
  
 
 
   
 
 
 
Revenues primarily consist of retail sales from our Company-owned stores, royalties, advertising contributions and fees from our U.S. franchised stores, royalties and fees from our international franchised stores and sales of food, equipment and supplies from our supply chain centers to substantially all of our U.S. 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.
U.S. Stores Revenues
 
   
First Quarter

of 2021
  
First Quarter

of 2020
 
U.S. Company-owned stores
  $112.7    32.3 $102.3    33.8
U.S. franchise royalties and fees
   124.5    35.7  104.7    34.6
U.S. franchise advertising
   111.4    32.0  95.8    31.6
  
 
 
   
 
 
  
 
 
   
 
 
 
U.S. stores
  $348.6    100.0 $302.9    100.0
  
 
 
   
 
 
  
 
 
   
 
 
 
U.S. Company-Owned Stores
Revenues from U.S. Company-owned store operations increased $10.4 million, or 10.2%, in the first quarter of 2021 due primarily to same store sales growth and an increase in the average number of U.S. Company-owned stores open during the period, resulting from net store growth. Company-owned same store sales increased 6.3% in the first quarter of 2021 and 3.9% in the first quarter of 2020.
 
16

U.S. Franchise Royalties and Fees
Revenues from U.S. franchise royalties and fees increased $19.8 million, or 18.8%, in the first quarter of 2021 due primarily to same store sales growth and an increase in the average number of U.S. franchised stores open during the period, resulting from net store growth. U.S. franchise same store sales increased 13.9% in the first quarter of 2021 and 1.5% in the first quarter of 2020. U.S. franchise royalties and fees further benefited from an increase in revenues from fees paid by franchisees for the use of our technology platforms.
U.S. Franchise Advertising
Revenues from U.S. franchise advertising increased $15.6 million, or 16.2%, in the first quarter of 2021 due primarily to same store sales growth and an increase in the average number of U.S. franchised stores open during the period, resulting from net store growth.
Supply Chain
Supply chain revenues increased $55.6 million, or 10.9%, in the first quarter of 2021 due primarily to higher volumes from increased orders resulting from U.S. franchise retail sales growth. Our market basket pricing to stores increased 0.3% during the first quarter of 2021, which resulted in an estimated $2.0 million increase in supply chain revenue.
International Franchise Royalties and Fee Revenues
Revenues from international franchise royalties and fees increased $9.3 million, or 16.1%, in the first quarter of 2021 due primarily to same store sales growth and an increase in the average number of international franchised stores open during the period due to net store growth. Excluding the impact of foreign currency exchange rates, international franchise same store sales increased 11.8% in the first quarter of 2021 and increased 1.5% in the first quarter of 2020. The positive impact of changes in foreign currency exchange rates of $2.1 million also contributed to the increase in international franchise royalties and fees revenues in the first quarter of 2021.
Cost of Sales / Operating Margin
 
   
First Quarter

of 2021
  
First Quarter

of 2020
 
Consolidated revenues
  $983.7    100.0 $873.1    100.0
Consolidated cost of sales
   594.5    60.4  532.9    61.0
                    
Consolidated operating margin
  $389.2    39.6 $340.2    39.0
                    
Consolidated cost of sales consists primarily of U.S. Company-owned store and supply chain costs incurred to generate related revenues. Components of consolidated cost of sales primarily include food, labor, delivery and occupancy costs.
Consolidated operating margin (which we define as revenues less cost of sales) increased $49.0 million, or 14.4%, in the first quarter of 2021 due primarily to higher global franchise revenues. Franchise 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 0.6 percentage points in the first quarter of 2021. U.S. Company-owned store operating margin increased 1.5 percentage points in the first quarter of 2021 and supply chain operating margin decreased 1.0 percentage point in the first quarter of 2021. These changes in margin are described below.
U.S. Company-Owned Store Operating Margin
 
   
First Quarter

of 2021
  
First Quarter

of 2020
 
Revenues
  $112.7    100.0 $102.3    100.0
Cost of sales
   85.7    76.1  79.4    77.6
                    
Store operating margin
  $27.0    23.9 $22.9    22.4
                    
U.S. Company-owned store operating margin (which does not include certain store-level costs such as royalties and advertising) increased $4.1 million, or 17.7%, in the first quarter of 2021 due primarily to higher same store sales. As a percentage of store revenues, the store operating margin increased 1.5 percentage points in the first quarter of 2021, as discussed in more detail below.
 
  
Food costs decreased 0.7 percentage points to 27.1% in the first quarter of 2021, due primarily to the leveraging of higher same store sales.
 
  
Labor costs decreased 0.6 percentage points to 28.4% in the first quarter of 2021 due primarily to the leveraging of higher same store sales.
 
17

Supply Chain Operating Margin
 
   
First Quarter

of 2021
  
First Quarter

of 2020
 
Revenues
  $568.3    100.0 $512.7    100.0
Cost of sales
   508.8    89.5  453.6    88.5
                    
Supply chain operating margin
  $59.5    10.5 $59.1    11.5
                    
Supply chain operating margin increased $0.4 million, or 0.7%, in the first quarter of 2021, primarily driven by higher volumes from increased store orders. As a percentage of supply chain revenues, the supply chain operating margin decreased 1.0 percentage point in the first quarter of 2021, primarily due to higher operating costs, including depreciation and amortization, labor and insurance expense as a result of the two new supply chain centers and new thin crust facility that were opened in fiscal 2020.
General and Administrative Expenses
General and administrative expenses increased $2.8 million, or 3.1%, in the first quarter of 2021, driven primarily by higher advertising expense and labor costs. These increases were partially offset by lower travel expense resulting from travel restrictions associated with the
COVID-19
pandemic.
U.S. Franchise Advertising Expenses
U.S. franchise advertising expenses increased $15.6 million, or 16.2%, in the first quarter of 2021, consistent with the increase in U.S. franchise advertising revenues. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized, as our consolidated
not-for-profit
advertising fund is obligated to expend such revenues on advertising and these revenues cannot be used for general corporate purposes.
Other Income
Other income was $2.5 million in the first quarter of 2021, representing the unrealized gain recorded on the Company’s investment in Dash Brands (Note 6) resulting from the observable change in price from the valuation of the additional $40.0 million investment made in the first quarter of 2021.
Interest Expense, Net
Interest expense, net increased $0.9 million, or 2.2%, in the first quarter of 2021 driven primarily by lower interest income. The Company’s weighted average borrowing rate decreased to 3.9% in the first quarter of 2021, from 4.0% in the first quarter of 2020.
Provision for Income Taxes
Income tax expense increased $36.2 million, or 840.3%, in the first quarter of 2021 due primarily to lower excess tax benefits on equity-based compensation, which are recorded as a reduction to the income tax provision, as well as higher
pre-tax
income. The Company recognized $0.9 million in excess tax benefits in the first quarter of 2021 as compared to $30.4 million in the first quarter of 2020, resulting from a significant decrease in stock options exercised in the first quarter of 2021 as compared to the first quarter of 2020. The effective tax rate increased to 21.3% during the first quarter of 2021 as compared to negative 3.7% in the first quarter of 2020.
Segment Income
We evaluate the performance of our reportable segments and allocate resources to them based on earnings before interest, taxes, depreciation, amortization and other, referred to as Segment Income. Segment Income for each of our reportable segments is summarized in the table below. Other Segment Income primarily includes corporate administrative costs that are not allocable to an operating segment, including labor, computer expenses, professional fees, travel and entertainment, rent, insurance and other corporate administrative costs.
 
   
First Quarter

of 2021
   
First Quarter

of 2020
 
U.S. Stores
  $107.4   $88.3 
Supply Chain
   52.6    51.4 
International Franchise
   54.5    43.5 
Other
   (6.1   (8.1
 
18

U.S. Stores
U.S. stores Segment Income increased $19.2 million, or 21.7%, in the first quarter of 2021, primarily due to a $19.8 million increase in U.S. franchise royalties and fees revenues as discussed above. U.S. franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on U.S. stores Segment Income. U.S. franchise advertising costs are accrued and expensed when the related U.S. franchise advertising revenues are recognized and had no impact on U.S. stores Segment Income. The $4.1 million increase in U.S. Company-owned store operating margin discussed above also contributed to the increase in U.S. stores Segment Income. The increase in U.S. stores Segment Income was partially offset by increased investments in technological initiatives.
Supply Chain
Supply chain Segment Income increased $1.1 million, or 2.2%, in the first quarter of 2021, primarily due to the $0.4 million increase in operating margin described above.
International Franchise
International franchise Segment Income increased $11.0 million, or 25.2%, in the first quarter of 2021, due primarily to the $9.3 million increase in international franchise royalties and fees revenues discussed above. International franchise revenues do not have a cost of sales component, so changes in these revenues have a disproportionate effect on international franchise Segment Income. Lower bad debt expense and lower travel expenses, primarily due to travel restrictions associated with the
COVID-19
pandemic, also contributed to the increase in international franchise Segment Income.
Other
Other Segment Income increased $2.0 million, or 25.1%, in the first quarter of 2021, due primarily to higher corporate administrative costs allocated to our segments as compared to 2020. The increase in allocated costs in the first quarter of 2021 was due primarily to higher investments in technological initiatives to support technology for our U.S. and international franchise stores. Lower travel expenses, primarily due to travel restrictions resulting from the
COVID-19
pandemic, as well as lower professional fees, also contributed to the increase in other Segment Income.
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 multiple inventory turns per month. 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 28, 2021, we had working capital of $240.8 million, excluding restricted cash and cash equivalents of $176.0 million, advertising fund assets, restricted, of $162.1 million and advertising fund liabilities of $155.0 million. Working capital includes total unrestricted cash and cash equivalents of $267.7 million.
Our primary source of liquidity is cash flows from operations and availability of borrowings under our variable funding notes. During the first quarter of 2021, we experienced increases in both U.S. and international same store sales versus the comparable periods in the prior year. Additionally, our U.S. and international businesses grew store counts in the first quarter of 2021. These factors contributed to our continued ability to generate positive operating cash flows. As of March 28, 2021, we had a variable funding note facility which allowed for advances of up to $200.0 million of Series
2019-1
Variable Funding Senior Secured Notes,
Class A-1
Notes and certain other credit instruments, including letters of credit (the “2019 Variable Funding Notes”). The letters of credit are primarily related to our casualty insurance programs and certain supply chain center leases. As of March 28, 2021, we had no outstanding borrowings and $157.5 million of available borrowing capacity under our 2019 Variable Funding Notes, net of letters of credit issued of $42.5 million.
We expect to continue to use our unrestricted cash and cash equivalents, cash flows from operations, excess cash from our recapitalization transactions 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 shares of our common stock.
 
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Our ability to continue to fund these items and continue to service our 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 outstanding senior 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 March 28, 2021, we had approximately $136.1 million of restricted cash held for future principal and interest payments and other working capital requirements of our asset-backed securitization structure, $39.6 million of restricted cash held in a three-month interest reserve as required by the related debt agreements and $0.3 million of other restricted cash for a total of $176.0 million of restricted cash and cash equivalents. As of March 28, 2021, we also held $131.9 million of advertising fund restricted cash and cash equivalents, which can only be used for activities that promote the Domino’s brand.
Long-Term Debt
As of March 28, 2021, we had approximately $4.12 billion of long-term debt, of which $2.9 million was classified as a current liability. Our fixed and floating rate notes from the recapitalizations we completed in 2019, 2018, 2017 and 2015 had original scheduled principal payments of $42.0 million in 2021, $897.0 million in 2022, $33.0 million in each of 2023 and 2024, $1.15 billion in 2025, $20.8 million in 2026, $1.28 billion in 2027, $6.8 million in 2028 and $614.3 million in 2029. However, in accordance with our debt agreements, the payment of principal on the outstanding senior notes may be suspended if our leverage ratio is less than or equal to 5.0x total debt to adjusted EBITDA, as defined in the related agreements, and no
catch-up
provisions are applicable.
As of the first quarter of 2021 and fourth quarter of 2020, we had a leverage ratio of less than 5.0x, and accordingly, did not make the previously scheduled debt amortization payment on our then outstanding notes beginning in the first quarter of 2021. Accordingly, all principal amounts of our outstanding notes have been classified as long-term debt in the consolidated balance sheet as of March 28, 2021 and January 3, 2021.
2021 Recapitalization
Subsequent to the end of the first quarter of 2021, on April 16, 2021 (the “closing date”), we completed a recapitalization (the “2021 Recapitalization”) in which certain of our subsidiaries issued new notes pursuant to our asset-backed securitization structure. The new notes consist of $850.0 million Series
2021-1
2.662% Fixed Rate Senior Secured Notes,
Class A-2-I
with an anticipated term of 7.5 years (the “2021
A-2-I
Fixed Rate Notes”), and $1.0 billion Series
2021-1
3.151% Fixed Rate Senior Secured Notes,
Class A-2-II
with an anticipated term of 10 years (the “2021
A-2-II
Fixed Rate Notes” and, collectively with the 2021
A-2-I
Fixed Rate Notes, the “2021 Notes”) in an offering exempt from registration under the Securities Act of 1933, as amended. The 2021 Notes have scheduled principal payments of $9.3 million in 2021, $18.5 million in each of 2022 through 2027, $804.8 million in 2028, $10.0 million in each of 2029 and 2030 and $905.0 million in 2031. Gross proceeds from the issuance of the 2021 Notes were $1.85 billion.
Concurrently, certain of our subsidiaries also issued a new variable funding note facility which allows for advances of up to $200.0 million of Series
2021-1
Variable Funding Senior Secured Notes,
Class A-1
Notes and certain other credit instruments, including letters of credit (the “2021 Variable Funding Notes”). The 2021 Variable Funding Notes were undrawn on the closing date. In connection with the issuance of our 2021 Variable Funding Notes, our 2019 Variable Funding Notes were canceled.
A portion of proceeds from the 2021 Recapitalization was used to repay the remaining $291.0 million in outstanding principal under our 2017 five-year floating rate notes and $582.0 million in outstanding principal under our 2017 five-year fixed rate notes. The proceeds were also used to
pre-fund
a portion of the interest payable on the 2021 Notes and pay transaction fees and expenses. We expect to use the remaining proceeds for general corporate purposes, which may include distributions to holders of our common stock, other equivalent payments and/or stock repurchases.
Subsequent to the closing of the 2021 Recapitalization, we had a leverage ratio of greater than 5.0x and, accordingly, we resumed making the scheduled amortization payments on our notes in the second quarter of 2021.
 
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Share Repurchase Programs
Our share repurchase programs have historically been funded by excess operating cash flows, excess proceeds from our recapitalization transactions and borrowings under our variable funding notes.
During the first quarter of 2021, we repurchased and retired 65,870 shares of our common stock under our Board of Directors-approved share repurchase program for a total of approximately $25.0 million. Our Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of our common stock on February 24, 2021 which replaced the remaining availability of approximately $76.6 million under our previously approved $1.0 billion share repurchase program. As of March 28, 2021, we had a total remaining authorized amount for share repurchases of $1.0 billion.
Dividends
On February 24, 2021, our Board of Directors declared a $0.94 per share quarterly dividend on our outstanding common stock for shareholders of record as of March 15, 2021, which was paid on March 30, 2021. We had approximately $37.1 million accrued for common stock dividends at March 28, 2021.
Subsequent to the first quarter, on April 27, 2021, our Board of Directors declared a $0.94 per share quarterly dividend on our outstanding common stock for shareholders of record as of June 15, 2021, to be paid on June 30, 2021.
Sources and Uses of Cash
The following table illustrates the main components of our cash flows:
 
(In millions)  
First Quarter

of 2021
   
First Quarter

of 2020
 
Cash Flows Provided By (Used In)
    
Net cash provided by operating activities
  $152.9   $95.4 
Net cash used in investing activities
   (56.4   (17.9
Net cash used in financing activities
   (23.1   (82.1
Exchange rate changes
   0.2    (1.0
  
 
 
   
 
 
 
Change in cash and cash equivalents, restricted cash and cash equivalents
  $73.5   $(5.6
  
 
 
   
 
 
 
Operating Activities
Cash provided by operating activities increased $57.5 million in the first quarter of 2021 primarily due to the positive impact of changes in operating assets and liabilities of $51.0 million. The positive impact of changes in operating assets and liabilities was primarily related to the timing of collections on accounts receivable in 2021 as compared to 2020, and to a lesser extent, the timing of payments on accounts payable and accrued liabilities. The increase in cash provided by operating activities was also due to a $10.9 million positive impact of changes in advertising fund assets and liabilities, restricted, in 2021 as compared to 2020 due to the receipt of advertising contributions outpacing payments for advertising activities. These increases were partially offset by a decrease in net income of $3.8 million.
Investing Activities
Cash used in investing activities was $56.4 million in the first quarter of 2021, which primarily consisted of an additional investment in Dash Brands (Note 6) of $40.0 million and $16.6 million of capital expenditures (driven primarily by investments in technological initiatives, corporate store operations and supply chain centers).
Financing Activities
Cash used in financing activities was $23.1 million in the first quarter of 2021, primarily related to the repurchase of approximately $25.0 million in common stock under our Board of Directors-approved share repurchase program, tax payments for restricted stock upon vesting of $1.0 million and repayments of finance lease obligations of $0.7 million. These uses of cash were partially offset by proceeds from the exercise of stock options of $3.7 million.
Critical Accounting Policies and Estimates
For a description of the Company’s critical accounting policies and estimates, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Form
10-K.
The Company considers its most significant accounting policies and estimates to be revenue recognition, long-lived assets, insurance and legal matters, share-based payments and income taxes. There have been no material changes to the Company’s critical accounting policies and estimates since January 3, 2021.
 
21

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 U.S. 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 under the section headed “Risk Factors” in this filing and in our other filings with the Securities and Exchange Commission, including under the section headed “Risk Factors” in our 2020 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 or renegotiate key terms of that indebtedness in the future; the impact a downgrade in our credit rating may have on our business, financial condition and results of operations; our future financial performance and our ability to pay principal and interest on our indebtedness; our ability to manage difficulties associated with or related to the
COVID-19
pandemic and the effects of
COVID-19
on our business and supply chain; the effectiveness of our advertising, operations and promotional initiatives; the strength of our brand, including our ability to compete in the U.S. and internationally in our intensely competitive industry, including the food service and food delivery markets; the impact of social media and other consumer-oriented technologies on our business, brand and reputation; the impact of new or improved technologies and alternative methods of delivery on consumer behavior; new product, digital ordering and concept developments by us, and other food-industry competitors; our ability to maintain good relationships with and attract new franchisees, and franchisees’ ability to successfully manage their operations without negatively impacting our royalty payments and fees or our brand’s reputation; 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, health epidemics 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; changes in income tax 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 laws and regulations regarding information privacy, payment methods consumer protection and social media; adverse legal judgments or settlements; food-borne illness or contamination of products; data breaches, power loss, technological failures, user error or other cyber risks threatening us or our franchisees; the effect of war, terrorism, catastrophic events or climate change; our ability to pay dividends and repurchase shares; changes in consumer tastes, spending and traffic patterns and demographic trends; actions by activist investors; 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 filing might not occur. All forward-looking statements speak only as of the date of this filing 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, or other applicable law, we will not undertake, and specifically disclaim, any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances arising after the date of this filing, 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 filing 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.
 
22

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes. In connection with the recapitalizations of our business, we have issued fixed and floating rate notes and entered into variable funding notes and, at March 28, 2021, we are exposed to interest rate risk on borrowings under our floating rate notes and variable funding notes. As of March 28, 2021, we had no outstanding borrowings under our variable funding notes. Our floating rate notes and our variable funding notes bear interest at fluctuating interest rates based on LIBOR.
There is currently uncertainty around whether LIBOR will continue to exist after 2023. Subsequent to the first quarter of 2021, in connection with the 2021 Recapitalization, our loan documents contemplate a transition from LIBOR to secured overnight financing rate (“SOFR”) in the event that LIBOR ceases to exist. Because the composition and characteristics of SOFR are not the same as those of LIBOR, in such event, there can be no assurance that SOFR will perform the same way LIBOR would have at any given time or for any applicable period. As a result, our interest expense could increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.
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. We do not engage in speculative transactions or 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.
We have exposure to various foreign currency exchange rate fluctuations for revenues generated by our operations outside the U.S., which can adversely impact our net income and cash flows. Approximately 6.8% of our total revenues in the first quarter of 2021 and approximately 6.6% of our total revenues in the first quarter of 2020 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 for our international markets would have resulted in a negative impact on royalty revenues of approximately $6.0 million in the first quarter of 2021.
Item 4. Controls and Procedures.
Management, with the participation of the Company’s Chief Executive Officer, Richard E. Allison, Jr., and Executive Vice President and Chief Financial Officer, Stuart A. Levy, 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. Levy concluded that the Company’s disclosure controls and procedures were effective.
During the quarterly period ended March 28, 2021, there were no changes in the Company’s internal control 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.
 
23

PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party to lawsuits, revenue agent reviews by taxing authorities and administrative proceedings in the ordinary course of business which include, without limitation, workers’ compensation, general liability, automobile and franchisee claims. We are also subject to suits related to employment practices.
While we may occasionally be party to large claims, including class action suits, we do not believe that any existing matters, individually or in the aggregate, will materially affect our financial position, results of operations or cash flows.
Item 1A. Risk Factors.
There have been no material changes with respect to those risk factors previously disclosed in Item 1A “Risk Factors” in Part I of our 2020 Form
10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
c. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
 
Period
  
Total Number

of Shares

Purchased (1)
   
Average Price Paid

Per Share
   
Total Number of Shares

Purchased as Part of

Publicly Announced

Program (2)
   
Maximum

Approximate Dollar

Value of Shares that

May Yet Be Purchased

Under the Program

(in thousands)
 
Period #1 (January 4, 2021 to January 31, 2021)
   67,407   $379.58    65,870   $76,553 
Period #2 (February 1, 2021 to February 28, 2021)
   1,316    377.02    —      1,000,000 
Period #3 (March 1, 2021 to March 28, 2021)
   4,046    341.77    —      1,000,000 
                    
Total
   72,769   $377.44    65,870   $1,000,000 
                    
 
(1)
6,899 shares in the first quarter of 2021 were purchased as part of the Company’s employee stock payroll deduction plan. During the first quarter, the shares were purchased at an average price of $357.43.
(2)
On February 24, 2021, the Company’s Board of Directors authorized a new share repurchase program to repurchase up to $1.0 billion of the Company’s common stock. This repurchase program replaced the remaining availability of approximately $76.6 million under the Company’s previously approved $1.0 billion share repurchase program.
As of March 28, 2021, $1.0 billion remained available for future purchases of the Company’s common stock under the Company’s Board of Directors approved share repurchase program. Authorization for the repurchase program may be modified, suspended, or discontinued at any time. The repurchase of shares in any particular period and the actual amount of such purchases remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
 
24

Item 6. Exhibits.
 
Exhibit
Number
  
Description
  
  31.1  Certification by Richard E. Allison, Jr. pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
  
  31.2  Certification by Stuart A. Levy pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
  
  32.1  Certification by Richard E. Allison, Jr. pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
  
  32.2  Certification by Stuart A. Levy pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Domino’s Pizza, Inc.
  
101.INS  XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
  
101.SCH  Inline XBRL Taxonomy Extension Schema Document.
  
101.CAL  Inline XBRL Taxonomy Extension Calculation Linkbase Document.
  
101.LAB  Inline XBRL Taxonomy Extension Label Linkbase Document.
  
101.PRE  Inline XBRL Taxonomy Extension Presentation Linkbase Document.
  
101.DEF  Inline XBRL Taxonomy Extension Definition Linkbase Document.
  
104  Cover page Interactive Data File (formatted as Inline XBRL and contained in exhibit 101).
 
25

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
   
DOMINO’S PIZZA, INC.
(Registrant)
Date: April 29, 2021   
/s/ Stuart A. Levy
   Stuart A. Levy
   
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
 
26