SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 26, 2006
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 numbers:
| Domino’s Pizza, Inc. | 333-114442 | |||||||||
| Domino’s, Inc. | 333-107774 |
Domino’s Pizza, Inc.
Domino’s, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 38-2511577 | |
| Delaware | 38-3025165 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
30 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48106
(Address of principal executive offices)
(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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ (only with respect to Domino’s Pizza, Inc.)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 15, 2006, Domino’s Pizza, Inc. had 61,921,551 shares of common stock, par value $0.01 per share, outstanding. As of April 15, 2006, Domino’s, Inc. had 10 shares of common stock, par value $0.01 per share, outstanding. All of the stock of Domino’s, Inc. was held by Domino’s Pizza, Inc.
This Quarterly Report on Form 10-Q is a combined quarterly report being filed separately by two registrants: Domino’s Pizza, Inc. and Domino’s, Inc. Except where the context clearly indicates otherwise, any references in this report to Domino’s Pizza, Inc. includes all subsidiaries of Domino’s Pizza, Inc., including Domino’s, Inc. Domino’s, Inc. makes no representation as to the information contained in this report in relation to Domino’s Pizza, Inc. and its subsidiaries, other than Domino’s, Inc. and its subsidiaries.
Domino’s, Inc.
TABLE OF CONTENTS
| Page No. | ||||
| PART I. |
||||
| Item 1. |
||||
| Condensed Consolidated Balance Sheets (Unaudited) – March 26, 2006 and January 1, 2006 |
3 | |||
| 4 | ||||
| 5 | ||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
12 | ||
| Item 3. |
20 | |||
| Item 4. |
20 | |||
| PART II. |
||||
| Item 1. |
21 | |||
| Item 1A. |
21 | |||
| Item 2. |
21 | |||
| Item 3. |
21 | |||
| Item 4. |
21 | |||
| Item 5. |
21 | |||
| Item 6. |
22 | |||
| 22 | ||||
2
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
| (In thousands)
|
March 26, 2006 | January 1, 2006 (Note) |
||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 16,372 | $ | 66,919 | ||||
| Accounts receivable |
70,705 | 74,437 | ||||||
| Inventories |
19,726 | 24,231 | ||||||
| Notes receivable |
358 | 408 | ||||||
| Prepaid expenses and other |
14,582 | 13,771 | ||||||
| Advertising fund assets, restricted |
26,390 | 35,643 | ||||||
| Deferred income taxes |
5,937 | 5,937 | ||||||
| Total current assets |
154,070 | 221,346 | ||||||
| Property, plant and equipment: |
||||||||
| Land and buildings |
21,993 | 22,107 | ||||||
| Leasehold and other improvements |
83,826 | 82,802 | ||||||
| Equipment |
165,771 | 163,840 | ||||||
| Construction in progress |
2,030 | 2,892 | ||||||
| 273,620 | 271,641 | |||||||
| Accumulated depreciation and amortization |
(145,029 | ) | (140,186 | ) | ||||
| Property, plant and equipment, net |
128,591 | 131,455 | ||||||
| Other assets: |
||||||||
| Deferred financing costs |
10,994 | 11,652 | ||||||
| Goodwill |
22,063 | 22,084 | ||||||
| Capitalized software |
19,245 | 20,337 | ||||||
| Other assets |
14,021 | 15,543 | ||||||
| Deferred income taxes |
37,911 | 38,657 | ||||||
| Total other assets |
104,234 | 108,273 | ||||||
| Total assets |
$ | 386,895 | $ | 461,074 | ||||
| Liabilities and stockholders’ deficit |
||||||||
| Current liabilities: |
||||||||
| Current portion of long-term debt |
$ | 310 | $ | 35,304 | ||||
| Accounts payable |
50,974 | 60,330 | ||||||
| Accrued income taxes |
13,446 | 8,660 | ||||||
| Insurance reserves |
9,468 | 9,681 | ||||||
| Advertising fund liabilities |
26,390 | 35,643 | ||||||
| Other accrued liabilities |
63,505 | 67,767 | ||||||
| Total current liabilities |
164,093 | 217,385 | ||||||
| Long-term liabilities: |
||||||||
| Long-term debt, less current portion |
800,888 | 702,358 | ||||||
| Insurance reserves |
24,502 | 23,640 | ||||||
| Other accrued liabilities |
29,272 | 28,676 | ||||||
| Total long-term liabilities |
854,662 | 754,674 | ||||||
| Stockholders’ deficit: |
||||||||
| Common stock |
619 | 672 | ||||||
| Additional paid-in capital |
120,093 | 259,695 | ||||||
| Retained deficit |
(759,173 | ) | (777,906 | ) | ||||
| Accumulated other comprehensive income |
6,601 | 6,554 | ||||||
| Total stockholders’ deficit |
(631,860 | ) | (510,985 | ) | ||||
| Total liabilities and stockholders’ deficit |
$ | 386,895 | $ | 461,074 | ||||
Note: The balance sheet at January 1, 2006 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 26, 2006 |
March 27, 2005 |
||||||
| Revenues: |
||||||||
| Domestic Company-owned stores |
$ | 96,478 | $ | 98,225 | ||||
| Domestic franchise |
38,129 | 39,233 | ||||||
| Domestic distribution |
182,389 | 201,817 | ||||||
| International |
30,658 | 30,393 | ||||||
| Total revenues |
347,654 | 369,668 | ||||||
| Cost of sales: |
||||||||
| Domestic Company-owned stores |
75,206 | 78,140 | ||||||
| Domestic distribution |
162,643 | 182,110 | ||||||
| International |
15,510 | 16,405 | ||||||
| Total cost of sales |
253,359 | 276,655 | ||||||
| Operating margin |
94,295 | 93,013 | ||||||
| General and administrative |
40,404 | 42,965 | ||||||
| Income from operations |
53,891 | 50,048 | ||||||
| Interest income |
355 | 214 | ||||||
| Interest expense |
(12,065 | ) | (10,616 | ) | ||||
| Income before provision for income taxes |
42,181 | 39,646 | ||||||
| Provision for income taxes |
16,029 | 14,966 | ||||||
| Net income |
$ | 26,152 | $ | 24,680 | ||||
| Earnings per share: |
||||||||
| Common stock – basic |
$ | 0.39 | $ | 0.36 | ||||
| Common stock – diluted |
0.39 | 0.35 | ||||||
| Dividends declared per share |
$ | 0.12 | $ | 0.10 | ||||
See accompanying notes.
4
Domino’s Pizza, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Fiscal Quarter Ended | ||||||||
| (In thousands)
|
March 26, 2006 |
March 27, 2005 |
||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 26,152 | $ | 24,680 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
7,499 | 7,321 | ||||||
| Amortization of deferred financing costs and debt discount |
965 | 844 | ||||||
| Provision for deferred income taxes |
757 | 432 | ||||||
| Non-cash compensation expense |
1,017 | 526 | ||||||
| Other |
(265 | ) | 320 | |||||
| Changes in operating assets and liabilities |
(7,456 | ) | 4,473 | |||||
| Net cash provided by operating activities |
28,669 | 38,596 | ||||||
| Cash flows from investing activities: |
||||||||
| Capital expenditures |
(4,161 | ) | (6,693 | ) | ||||
| Other |
347 | 2,143 | ||||||
| Net cash used in investing activities |
(3,814 | ) | (4,550 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Net proceeds from issuance of common stock |
1,112 | 352 | ||||||
| Repurchase of common stock |
(145,000 | ) | — | |||||
| Proceeds from issuance of long-term debt |
100,000 | — | ||||||
| Repayments of long-term debt and capital lease obligation |
(35,074 | ) | (25,080 | ) | ||||
| Cash paid for financing fees |
(250 | ) | — | |||||
| Proceeds from exercise of stock options |
1,696 | 825 | ||||||
| Tax benefit from exercise of stock options |
2,116 | 2,075 | ||||||
| Capital contribution and other |
— | 722 | ||||||
| Net cash used in financing activities |
(75,400 | ) | (21,106 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents |
(2 | ) | (103 | ) | ||||
| Increase (decrease) in cash and cash equivalents |
(50,547 | ) | 12,837 | |||||
| Cash and cash equivalents, at beginning of period |
66,919 | 40,396 | ||||||
| Cash and cash equivalents, at end of period |
$ | 16,372 | $ | 53,233 | ||||
See accompanying notes.
5
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 26, 2006
1. Basis of Presentation
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 Article 10 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 thereto for the fiscal year ended January 1, 2006 included in our annual report on Form 10-K.
In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation have been included. Operating results for the fiscal quarter ended March 26, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006.
Domino’s Pizza, Inc. is the parent and holding company of Domino’s, Inc. Accordingly, all 10 outstanding shares of Domino’s, Inc. common stock, par value $0.01 per share, are owned by Domino’s Pizza, Inc. As the holding company of Domino’s, Inc., Domino’s Pizza, Inc. does not conduct ongoing business operations. As a result, the financial information for Domino’s Pizza, Inc. and subsidiaries and Domino’s, Inc. and subsidiaries is substantially similar. As the differences are minor, we have presented Domino’s Pizza, Inc. and subsidiaries information throughout this filing, except for the supplemental guarantor condensed consolidating financial statements of Domino’s, Inc. and subsidiaries included in footnote 8.
2. Comprehensive Income
| Fiscal Quarter Ended | ||||||||
| March 26, 2006 |
March 27, 2005 |
|||||||
| Net income |
$ | 26,152 | $ | 24,680 | ||||
| Unrealized gains on derivative instruments, net of tax |
579 | 3,205 | ||||||
| Reclassification adjustment for gains included in net income, net of tax |
(669 | ) | (298 | ) | ||||
| Currency translation adjustment |
137 | (698 | ) | |||||
| Comprehensive income |
$ | 26,199 | $ | 26,889 | ||||
3. 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 management allocates resources to its segments and which we refer to as Segment Income, for each of our reportable segments.
| Fiscal Quarters Ended March 26, 2006 and March 27, 2005 | ||||||||||||||||||||
| Domestic Stores |
Domestic Distribution |
International | Intersegment Revenues |
Other | Total | |||||||||||||||
| Revenues – |
||||||||||||||||||||
| 2006 |
$ | 134,607 | $ | 207,818 | $ | 30,658 | $ | (25,429 | ) | $ | — | $ | 347,654 | |||||||
| 2005 |
137,458 | 230,975 | 30,393 | (29,158 | ) | — | 369,668 | |||||||||||||
| Income from operations – |
||||||||||||||||||||
| 2006 |
$ | 36,641 | $ | 14,716 | $ | 11,195 | N/A | $ | (8,661 | ) | $ | 53,891 | ||||||||
| 2005 |
37,265 | 13,080 | 8,596 | N/A | (8,893 | ) | 50,048 | |||||||||||||
| Segment Income – |
||||||||||||||||||||
| 2006 |
$ | 39,646 | $ | 16,859 | $ | 11,499 | N/A | $ | (5,583 | ) | $ | 62,421 | ||||||||
| 2005 |
40,011 | 15,629 | 8,950 | N/A | (6,673 | ) | 57,917 | |||||||||||||
6
The following table reconciles Total Segment Income to consolidated income before provision for income taxes.
| Fiscal Quarter Ended | ||||||||
| March 26, 2006 |
March 27, 2005 |
|||||||
| Total Segment Income |
$ | 62,421 | $ | 57,917 | ||||
| Depreciation and amortization |
(7,499 | ) | (7,321 | ) | ||||
| Losses on sale/disposal of assets |
(14 | ) | (22 | ) | ||||
| Non-cash stock compensation expense |
(1,017 | ) | (526 | ) | ||||
| Income from operations |
53,891 | 50,048 | ||||||
| Interest income |
355 | 214 | ||||||
| Interest expense |
(12,065 | ) | (10,616 | ) | ||||
| Income before provision for income taxes |
$ | 42,181 | $ | 39,646 | ||||
4. Earnings Per Share
| Fiscal Quarter Ended | ||||||
| March 26, 2006 |
March 27, 2005 | |||||
| Net income available to common stockholders – basic and diluted |
$ | 26,152 | $ | 24,680 | ||
| Weighted average number of shares |
66,219,407 | 68,922,555 | ||||
| Earnings per share – basic |
$ | 0.39 | $ | 0.36 | ||
| Diluted weighted average number of shares |
67,672,576 | 71,308,343 | ||||
| Earnings per share – diluted |
$ | 0.39 | $ | 0.35 | ||
The denominator in calculating diluted earnings per share for common stock for the first quarter of 2006 does not include 1,970,000 options to purchase common stock as the effect of including these options would have been anti-dilutive.
5. Supplemental Disclosure of Cash Flow Information
During the first quarter of 2006, the Company recorded approximately $2.1 million of reductions in income tax payable as a result of tax benefits related to the exercise of stock options.
The Company recorded a $7.4 million dividend payable during the first quarter. The dividend was subsequently paid on March 30, 2006.
6. Related Party Share Repurchase and Senior Credit Facility Amendment
During the first quarter of 2006, the Company repurchased and retired approximately 5.6 million shares of its common stock from investment funds associated with Bain Capital, LLC (collectively “Bain”), for $145.0 million, or $25.78 per share. The repurchase price of $25.78 per share in this private transaction was based on a discount from the market price of the Company’s common stock negotiated between the Company and Bain.
Additionally, the Company amended its senior credit facility and borrowed an additional $100.0 million under its term loan. These proceeds, along with $45.0 million of available cash on hand, were used to fund the repurchase of shares from Bain. After this modification, the Company’s maturities of long-term debt and capital lease obligation are $0.2 million, $4.3 million, $5.7 million, $7.1 million, $507.3 million and $278.1 million for the remainder of 2006, 2007, 2008, 2009, 2010 and thereafter, respectively.
7. Effect of Adoption of Statement of Financial Accounting Standard No. 123R
During 2005, the Company adopted Statement of Financial Accounting Standard No. 123R (revised 2004), “Share-Based Payments” (SFAS 123R) using the modified retrospective method. This method allows the restatement of interim financial statements in the year of adoption based on the amounts previously calculated in the pro forma footnote disclosures required by SFAS 123. The amounts presented herein for the first quarter 2005 have been revised to include the effects of this adoption. As a result of the adoption, net income decreased $278,000 from the amount reported in the first quarter of 2005.
7
8. Supplemental Guarantor Condensed Consolidating Financial Statements of Domino’s, Inc. and Subsidiaries
The tables below present condensed consolidating financial information for the applicable periods for: (1) Domino’s, Inc.; (2) on a combined basis, the guarantor subsidiaries of Domino’s, Inc.’s senior subordinated notes due 2011, which includes most of the domestic subsidiaries of Domino’s, Inc. and one foreign subsidiary of Domino’s, Inc.; and (3) on a combined basis, the non-guarantor subsidiaries of Domino’s, Inc.’s senior subordinated notes due 2011. The separate financial statements of Domino’s, Inc. and subsidiaries are presented using the equity method of accounting. Accordingly, Domino’s, Inc.’s investment in subsidiaries is included in “Other assets” and the net earnings of the subsidiaries are included in “Equity earnings in subsidiaries.” Except for the minor differences noted in the footnotes to the condensed consolidating financial statements below, the consolidated financial statements of Domino’s, Inc. and subsidiaries are substantially similar to the consolidated financial statements of Domino’s Pizza, Inc. and subsidiaries. Each of the guarantor subsidiaries is jointly, severally, fully and unconditionally liable under the related guarantee.
Domino’s, Inc. and Subsidiaries
Supplemental Guarantor Condensed Consolidating Balance Sheets
| As of March 26, 2006 | ||||||||||||||||||
| Domino’s, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||
| Cash and cash equivalents |
$ | — | $ | 14,898 | $ | 1,474 | $ | — | $ | 16,372 | ||||||||
| Accounts receivable |
— | 67,670 | 8,507 | (5,472 | ) | 70,705 | ||||||||||||
| Advertising fund assets, restricted |
— | — | 26,390 | — | 26,390 | |||||||||||||
| Other current assets |
5,854 | 32,611 | 2,138 | — | 40,603 | |||||||||||||
| Current assets |
5,854 | 115,179 | 38,509 | (5,472 | ) | 154,070 | ||||||||||||
| Property, plant and equipment, net |
— | 125,956 | 2,635 | — | 128,591 | |||||||||||||
| Other assets |
176,342 | 60,793 | 2,059 | (134,960 | ) | 104,234 | ||||||||||||
| Total assets |
$ | 182,196 | $ | 301,928 | $ | 43,203 | $ | (140,432 | ) | $ | 386,895 | |||||||
| Current portion of long-term debt |
$ | — | $ | 269 | $ | 41 | $ | — | $ | 310 | ||||||||
| Accounts payable |
— | 47,444 | 9,002 | (5,472 | ) | 50,974 | ||||||||||||
| Advertising fund liabilities |
— | — | 26,390 | — | 26,390 | |||||||||||||
| Other current liabilities |
11,058 | 65,177 | 2,765 | — | 79,000 | |||||||||||||
| Current liabilities (1) |
11,058 | 112,890 | 38,198 | (5,472 | ) | 156,674 | ||||||||||||
| Long-term debt |
795,320 | 5,354 | 214 | — | 800,888 | |||||||||||||
| Other long-term liabilities |
259 | 53,376 | 139 | — | 53,774 | |||||||||||||
| Long-term liabilities |
795,579 | 58,730 | 353 | — | 854,662 | |||||||||||||
| Stockholder’s equity (deficit) (1) |
(624,441 | ) | 130,308 | 4,652 | (134,960 | ) | (624,441 | ) | ||||||||||
| Total liabilities and stockholder’s equity (deficit) |
$ | 182,196 | $ | 301,928 | $ | 43,203 | $ | (140,432 | ) | $ | 386,895 | |||||||
| (1) | Domino’s Pizza, Inc. and subsidiaries had current liabilities of $164,093, or $7,419 more than Domino’s, Inc. and subsidiaries at March 26, 2006. Domino’s Pizza, Inc. and subsidiaries had total stockholders’ deficit of $(631,860), or $7,419 more than Domino’s, Inc. and subsidiaries at March 26, 2006. These differences resulted from the inclusion of a dividend payable recorded on Domino’s Pizza, Inc. and subsidiaries that was not recorded on Domino’s, Inc. and subsidiaries. While Domino’s, Inc. and subsidiaries distributed funds to Domino’s Pizza, Inc. and subsidiaries subsequent to the first quarter to pay this dividend, it was not a liability for Domino’s, Inc. and subsidiaries at March 26, 2006. There were no other differences between Domino’s, Inc. and subsidiaries as compared to Domino’s Pizza, Inc. and subsidiaries for the periods presented. |
8
| As of January 1, 2006 | |||||||||||||||||||
| Domino’s, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
| Cash and cash equivalents |
$ | — | $ | 66,389 | $ | 530 | $ | — | $ | 66,919 | |||||||||
| Accounts receivable |
— | 78,533 | 8,281 | (12,377 | ) | 74,437 | |||||||||||||
| Advertising fund assets, restricted |
— | — | 35,643 | — | 35,643 | ||||||||||||||
| Other current assets |
6,098 | 36,253 | 1,996 | — | 44,347 | ||||||||||||||
| Current assets |
6,098 | 181,175 | 46,450 | (12,377 | ) | 221,346 | |||||||||||||
| Property, plant and equipment, net |
— | 128,724 | 2,731 | — | 131,455 | ||||||||||||||
| Other assets |
225,980 | 63,168 | 2,068 | (182,943 | ) | 108,273 | |||||||||||||
| Total assets |
$ | 232,078 | $ | 373,067 | $ | 51,249 | $ | (195,320 | ) | $ | 461,074 | ||||||||
| Current portion of long-term debt |
$ | 35,000 | $ | 264 | $ | 40 | $ | — | $ | 35,304 | |||||||||
| Accounts payable |
— | 57,900 | 14,807 | (12,377 | ) | 60,330 | |||||||||||||
| Advertising fund liabilities |
— | — | 35,643 | — | 35,643 | ||||||||||||||
| Other current liabilities |
11,349 | 72,062 | 2,697 | — | 86,108 | ||||||||||||||
| Current liabilities |
46,349 | 130,226 | 53,187 | (12,377 | ) | 217,385 | |||||||||||||
| Long-term debt |
696,714 | 5,423 | 221 | — | 702,358 | ||||||||||||||
| Other long-term liabilities |
— | 52,143 | 173 | — | 52,316 | ||||||||||||||
| Long-term liabilities |
696,714 | 57,566 | 394 | — | 754,674 | ||||||||||||||
| Stockholder’s equity (deficit) |
(510,985 | ) | 185,275 | (2,332 | ) | (182,943 | ) | (510,985 | ) | ||||||||||
| Total liabilities and stockholder’s equity (deficit) |
$ | 232,078 | $ | 373,067 | $ | 51,249 | $ | (195,320 | ) | $ | 461,074 | ||||||||
Domino’s, Inc. and Subsidiaries
Supplemental Guarantor Condensed Consolidating Statements of Income
| Fiscal Quarter Ended March 26, 2006 | |||||||||||||||||||
| Domino’s, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
| Revenues |
$ | — | $ | 341,013 | $ | 6,641 | $ | — | $ | 347,654 | |||||||||
| Cost of sales |
— | 248,691 | 4,668 | — | 253,359 | ||||||||||||||
| Operating margin |
— | 92,322 | 1,973 | — | 94,295 | ||||||||||||||
| General and administrative |
— | 38,826 | 1,578 | — | 40,404 | ||||||||||||||
| Income from operations |
— | 53,496 | 395 | — | 53,891 | ||||||||||||||
| Equity earnings in subsidiaries |
33,687 | — | — | (33,687 | ) | — | |||||||||||||
| Interest income (expense), net |
(11,916 | ) | 215 | (9 | ) | — | (11,710 | ) | |||||||||||
| Income (loss) before provision (benefit) for income taxes |
21,771 | 53,711 | 386 | (33,687 | ) | 42,181 | |||||||||||||
| Provision (benefit) for income taxes |
(4,381 | ) | 20,410 | — | — | 16,029 | |||||||||||||
| Net income (loss) |
$ | 26,152 | $ | 33,301 | $ | 386 | $ | (33,687 | ) | $ | 26,152 | ||||||||
9
| Fiscal Quarter Ended March 27, 2005 | |||||||||||||||||||
| Domino’s, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
| Revenues |
$ | — | $ | 361,694 | $ | 7,974 | $ | — | $ | 369,668 | |||||||||
| Cost of sales |
— | 270,885 | 5,770 | — | 276,655 | ||||||||||||||
| Operating margin |
— | 90,809 | 2,204 | — | 93,013 | ||||||||||||||
| General and administrative |
— | 40,479 | 2,486 | — | 42,965 | ||||||||||||||
| Income (loss) from operations |
— | 50,330 | (282 | ) | — | 50,048 | |||||||||||||
| Equity earnings in subsidiaries |
31,197 | — | — | (31,197 | ) | — | |||||||||||||
| Interest income (expense), net |
(10,445 | ) | 55 | (12 | ) | — | (10,402 | ) | |||||||||||
| Income (loss) before provision (benefit) for income taxes |
20,752 | 50,385 | (294 | ) | (31,197 | ) | 39,646 | ||||||||||||
| Provision (benefit) for income taxes |
(3,928 | ) | 18,894 | — | — | 14,966 | |||||||||||||
| Net income (loss) |
$ | 24,680 | $ | 31,491 | $ | (294 | ) | $ | (31,197 | ) | $ | 24,680 | |||||||
Domino’s, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statements of Cash Flows
| Fiscal Quarter Ended March 26, 2006 | |||||||||||||||||||
| Domino’s, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
| Net cash provided by (used in) operating activities |
$ | (11,283 | ) | $ | 39,881 | $ | 71 | $ | — | $ | 28,669 | ||||||||
| Capital expenditures |
— | (3,995 | ) | (166 | ) | — | (4,161 | ) | |||||||||||
| Other |
— | 347 | — | — | 347 | ||||||||||||||
| Net cash used in investing activities |
— | (3,648 | ) | (166 | ) | — | (3,814 | ) | |||||||||||
| Proceeds from the issuance of long-term debt |
100,000 | — | — | — | 100,000 | ||||||||||||||
| Repayments of debt |
(35,000 | ) | (64 | ) | (10 | ) | — | (35,074 | ) | ||||||||||
| Other |
(53,717 | ) | (86,609 | ) | — | — | (140,326 | ) | |||||||||||
| Net cash provided by (used in) financing activities |
11,283 | (86,673 | ) | (10 | ) | — | (75,400 | ) | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents |
— | — | (2 | ) | — | (2 | ) | ||||||||||||
| Decrease in cash and cash equivalents |
— | (50,440 | ) | (107 | ) | — | (50,547 | ) | |||||||||||
| Cash and cash equivalents, at beginning of period |
— | 65,338 | 1,581 | — | 66,919 | ||||||||||||||
| Cash and cash equivalents, at end of period |
$ | — | $ | 14,898 | $ | 1,474 | $ | — | $ | 16,372 | |||||||||
10
| Fiscal Quarter Ended March 27, 2005 | |||||||||||||||||||
| Domino’s, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
| Net cash provided by (used in) operating activities |
$ | (10,593 | ) | $ | 48,683 | $ | 506 | $ | — | $ | 38,596 | ||||||||
| Capital expenditures |
— | (6,603 | ) | (90 | ) | — | (6,693 | ) | |||||||||||
| Other |
— | 2,143 | — | — | 2,143 | ||||||||||||||
| Net cash used in investing activities |
— | (4,460 | ) | (90 | ) | — | (4,550 | ) | |||||||||||
| Repayments of debt |
(25,000 | ) | (21 | ) | (59 | ) | — | (25,080 | ) | ||||||||||
| Other |
32,469 | (28,495 | ) | — | — | 3,974 | |||||||||||||
| Net cash provided by (used in) financing activities |
7,469 | (28,516 | ) | (59 | ) | — | (21,106 | ) | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents |
— | (26 | ) | (77 | ) | — | (103 | ) | |||||||||||
| Increase (decrease) in cash and cash equivalents |
(3,124 | ) | 15,681 | 280 | — | 12,837 | |||||||||||||
| Cash and cash equivalents, at beginning of period |
3,124 | 36,331 | 941 | — | 40,396 | ||||||||||||||
| Cash and cash equivalents, at end of period |
$ | — | $ | 52,012 | $ | 1,221 | $ | — | $ | 53,233 | |||||||||
11
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 2006 and 2005 first quarters referenced herein represent the twelve-week periods ended March 26, 2006 and March 27, 2005, respectively.
Overview
During the first quarter of 2006, global retail sales, comprised of retail sales at both our franchise and Company-owned stores worldwide, grew 0.7%, as compared to the prior year period. This growth was driven primarily by same store sales growth in our international markets as well as an increase in our worldwide store counts during the trailing four quarters.
During the first quarter, same store sales in our international markets increased 3.0%, on a constant dollar basis, versus the prior year period. The first quarter marked the 49th consecutive quarter that we have grown our international same store sales when compared to the same quarter in the prior year. Also during the first quarter, domestic same store sales decreased 3.8%, comprised of a domestic franchise same store sales decrease of 4.0%, and a domestic Company-owned same store sales decrease of 3.0%. These decreases in domestic same store sales were due primarily to rolling over a same store sales increase of 11.2% in the first quarter of 2005. Additionally, we grew our worldwide net store counts by 45 and 325 stores during the first quarter and trailing four quarters, respectively. At March 26, 2006, there were 8,124 Domino’s Pizza stores operating worldwide.
Revenues decreased $22.0 million, or 6.0%, to $347.7 million in the first quarter, from $369.7 million in the comparable period in 2005. This decrease was driven by lower volumes in our distribution business, related to a decrease in domestic franchise same store sales, as well as lower food prices, primarily cheese.
Income from operations increased $3.9 million, or 7.7%, to $53.9 million in the first quarter, from $50.0 million in the comparable period in 2005. This increase was driven by strong performance in our international business, lower cheese prices, which benefited our Company-owned stores operating margins, and lower general and administrative expenses, including administrative labor. The average published cheese block price per pound decreased $0.24 to $1.30 in the first quarter, from $1.54 in the prior year period. These increases in income from operations were offset in part by lower royalty revenues from domestic franchise stores.
Net income increased $1.5 million to $26.2 million in the first quarter, from $24.7 million in the comparable period in 2005. This increase was driven primarily by the aforementioned increases in income from operations, offset in part by increases in interest expense and provision for income taxes.
Critical accounting policies and estimates
The following discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, our management evaluates its estimates, including those related to revenue recognition, allowance for uncollectible receivables, long-lived and intangible assets, insurance and legal matters and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Changes in our accounting policies and estimates could materially impact our results of operations and financial condition for any particular period. We believe that our most critical accounting policies and estimates are:
Revenue recognition. We earn revenues through our network of domestic Company-owned and franchise stores, dough manufacturing and distribution centers and international operations. Retail sales from Company-owned stores and royalty revenues resulting from the retail sales from franchise stores are recognized as revenues when the items are delivered to or carried out by customers. Sales of food from our distribution centers are recognized as revenues upon delivery of the food to franchisees while sales of equipment and supplies from our distribution centers are generally recognized as revenues upon shipment of the related products to franchisees.
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Allowance for uncollectible receivables. We closely monitor our accounts and notes receivable balances and provide allowances for uncollectible amounts as a result of our reviews. These estimates are based on, among other factors, historical collection experience and a review of our receivables by aging category. Additionally, we may also provide allowances for uncollectible receivables based on specific customer collection issues that we have identified. While write-offs of bad debts have historically been within our expectations and the provisions established, management cannot guarantee that future write-offs will not exceed historical rates. Specifically, if the financial condition of our franchisees were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required.
Long-lived and intangible assets. We record long-lived assets, including property, plant and equipment and capitalized software, at cost. For acquisitions of franchise operations, we estimate the fair values of the assets and liabilities acquired based on physical inspection of assets, historical experience and other information available to us regarding the acquisition. We depreciate and amortize long-lived assets using useful lives determined by us based on historical experience and other information available to us. We review long-lived assets for impairment when events or circumstances indicate that the related amounts might be impaired. We perform related impairment tests on a market level basis for Company-owned stores. At January 1, 2006, we determined that our long-lived assets were not impaired. However, if our future operating performance were to deteriorate, we may be required to recognize an impairment charge.
We evaluate goodwill for impairment by comparing the fair value of our reporting units to their carrying values. A significant portion of our goodwill relates to acquisitions of domestic franchise stores and is included in our domestic stores segment. At January 1, 2006, the fair value of our business operations with associated goodwill exceeded their recorded carrying value, including the related goodwill. However, if the future performance of our domestic Company-owned stores or other segment operations were to deteriorate, we may be required to recognize a goodwill impairment charge.
Insurance and legal matters. We are a party to lawsuits and legal proceedings arising in the ordinary course of business. Management closely monitors these legal matters and estimates the probable costs for the resolution of such matters. These estimates are primarily determined by consulting with both internal and external parties handling the matters and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. If our estimates relating to legal matters proved inaccurate for any reason, we may be required to increase or decrease the related expense in future periods.
For certain periods prior to December 1998 and for periods after December 2001, we maintain insurance coverage for workers’ compensation, general liability and owned and non-owned auto liability under insurance policies requiring payment of a deductible for each occurrence up to between $500,000 and $3.0 million, depending on the policy year and line of coverage. The related insurance reserves are based on undiscounted independent actuarial estimates, which are based on historical information along with assumptions about future events. Changes in assumptions for such factors as medical costs and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term which could result in an increase or decrease in the related expense in future periods.
Income taxes. Our net deferred tax assets assume that we will generate sufficient taxable income in specific tax jurisdictions, based on estimates and assumptions. The amounts relating to taxes recorded on the balance sheet, including tax reserves, also consider the ultimate resolution of revenue agent reviews based on estimates and assumptions. If these estimates and assumptions change in the future, we may be required to adjust our valuation allowance or other tax reserves resulting in additional income tax expense or benefit in future periods.
Same Store Sales Growth (versus the comparable period in 2005)
| First Quarter of 2006 |
|||
| Domestic Company-owned stores |
(3.0 | )% | |
| Domestic franchise stores |
(4.0 | )% | |
| Domestic stores |
(3.8 | )% | |
| International stores |
+3.0 | % | |
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Store Counts and Net Unit Growth
| Domestic Company-owned |
Domestic Franchise Stores |
Total Domestic |
International Stores |
Total | |||||||||||
| Store count at January 1, 2006 |
581 | 4,511 | 5,092 | 2,987 | 8,079 | ||||||||||
| Openings |
— | 9 | 9 | 55 | 64 | ||||||||||
| Closings |
(1 | ) | (14 | ) | (15 | ) | (4 | ) | (19 | ) | |||||
| Store count at March 26, 2006 |
580 | 4,506 | 5,086 | 3,038 | 8,124 | ||||||||||
| First quarter of 2006 net growth |
(1 | ) | (5 | ) | (6 | ) | 51 | 45 | |||||||
| Trailing 4 quarters net growth |
12 | 59 | 71 | 254 | 325 | ||||||||||
Income Statement Data
| First Quarter of 2006 |
First Quarter of 2005 |
|||||||||||
| Total revenues |
$ | 347.7 | 100.0 | % | $ | 369.7 | 100.0 | % | ||||
| Cost of sales |
253.4 | 72.9 | % | 276.7 | 74.8 | % | ||||||
| General and administrative |
40.4 | 11.6 | % | 43.0 | 11.6 | % | ||||||
| Income from operations |
53.9 | 15.5 | % | 50.0 | 13.6 | % | ||||||
| Interest expense, net |
11.7 | 3.4 | % | 10.4 | 2.8 | % | ||||||
| Income before provision for income taxes |
42.2 | 12.1 | % | 39.6 | 10.8 | % | ||||||
| Provision for income taxes |
16.0 | 4.6 | % | 15.0 | 4.1 | % | ||||||
| Net income |
$ | 26.2 | 7.5 | % | $ | 24.7 | 6.7 | % | ||||
Revenues
Revenues primarily include retail sales by our domestic and international Company-owned stores, royalties from our domestic and international franchise stores, and sales of food, equipment and supplies by our domestic and international distribution centers to certain domestic and international franchise stores. Company-owned store and franchise store revenues may vary significantly from period to period due to changes in store count mix while distribution revenues may vary significantly as a result of fluctuations in commodity prices, primarily cheese and meats.
Consolidated revenues decreased $22.0 million, or 6.0%, to $347.7 million in the first quarter of 2006, from $369.7 million in the comparable period in 2005. This decrease was driven by lower volumes in our distribution business, related to a decrease in domestic franchise same store sales, as well as lower food prices, primarily cheese, and are more fully described below.
Domestic Stores Revenues
Domestic stores revenues are comprised of revenues from our domestic Company-owned store operations and domestic franchise operations, as summarized in the following table.
| Domestic Stores |
First Quarter of 2006 |
First Quarter of 2005 |
||||||||||
| Domestic Company-owned stores |
$ | 96.5 | 71.7 | % | $ | 98.2 | 71.5 | % | ||||
| Domestic franchise |
38.1 | 28.3 | % | 39.2 | 28.5 | % | ||||||
| Total domestic stores revenues |
$ | 134.6 | 100.0 | % | $ | 137.5 | 100.0 | % | ||||
Domestic stores revenues decreased $2.9 million, or 2.1%, to $134.6 million in the first quarter of 2006, from $137.5 million in the comparable period in 2005. This decrease in revenues was due primarily to lower domestic Company-owned and franchise same store sales. Domestic same store sales decreased 3.8% in the first quarter of 2006, compared to the same period in 2005. Domestic stores were rolling over a same store sales increase of 11.2% in the first quarter of 2005. These changes in domestic stores revenues are more fully described below.
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Domestic Company-Owned Stores Revenues
Revenues from domestic Company-owned store operations decreased $1.7 million, or 1.8%, to $96.5 million in the first quarter of 2006, from $98.2 million in the comparable period in 2005. This decrease in revenues was due primarily to lower same store sales. Domestic Company-owned same store sales decreased 3.0% in the first quarter of 2006, compared to the same period in 2005. Domestic Company-owned stores were rolling over a same store sales increase of 13.8% in the first quarter of 2005. There were 580 and 568 domestic Company-owned stores in operation as of March 26, 2006 and March 27, 2005, respectively.
Domestic Franchise Revenues
Revenues from domestic franchise operations decreased $1.1 million, or 2.8%, to $38.1 million in the first quarter of 2006, from $39.2 million in the comparable period in 2005. This decrease in revenues was due primarily to lower same store sales, offset in part by an increase in the average number of domestic franchise stores open during 2006. Domestic franchise same store sales decreased 4.0% in the first quarter of 2006, compared to the same period in 2005. Domestic franchise stores were rolling over a same store sales increase of 10.8% in the first quarter of 2005. There were 4,506 and 4,447 domestic franchise stores in operation as of March 26, 2006 and March 27, 2005, respectively.
Domestic Distribution Revenues
Revenues from domestic distribution operations decreased $19.4 million, or 9.6%, to $182.4 million in the first quarter of 2006, from $201.8 million in the comparable period in 2005. This decrease in revenues was due primarily to lower volumes, related to a decrease in domestic franchise same store sales, as well as a decrease in cheese prices. The published cheese block price-per-pound averaged $1.30 in the first quarter of 2006, down from $1.54 in the comparable period in 2005. Had the 2006 average cheese prices been in effect during 2005, distribution revenues for the first quarter of 2005 would have been approximately $8.7 million lower than the reported 2005 amount.
International Revenues
Revenues from international operations increased $0.3 million, or 0.9%, to $30.7 million in the first quarter of 2006, from $30.4 million in the comparable period in 2005. This increase in revenues was due to higher same store sales, an increase in the average number of international stores open during 2006 and a related increase in revenues from our international distribution operations. On a constant dollar basis, same store sales increased 3.0% in the first quarter of 2006 versus the comparable period in 2005. There were 3,038 and 2,784 international stores in operation as of March 26, 2006 and March 27, 2005, respectively.
Cost of Sales / Operating Margin
Consolidated cost of sales is comprised primarily of domestic Company-owned store and domestic distribution costs incurred to generate related revenues. Components of consolidated cost of sales primarily include food, labor and occupancy costs.
The consolidated operating margin, which we define as revenues less cost of sales, increased $1.3 million, or 1.4%, to $94.3 million in the first quarter of 2006, from $93.0 million in the comparable period in 2005. These results are summarized in the following table.
| First Quarter of 2006 |
First Quarter of 2005 |
|||||||||||
| Consolidated revenues |
$ | 347.7 | 100.0 | % | $ | 369.7 | 100.0 | % | ||||
| Consolidated cost of sales |
253.4 | 72.9 | % | 276.7 | 74.8 | % | ||||||
| Consolidated operating margin |
$ | 94.3 | 27.1 | % | $ | 93.0 | 25.2 | % | ||||
The increase in the consolidated operating margin for the first quarter of 2006 was due primarily to improved margins at our Company-owned stores, driven by lower food prices, primarily cheese, and higher margins in our international business, offset in part by lower domestic franchise royalty revenues. Franchise revenues do not have a cost of sales component and, as a result, changes in franchise revenues have a disproportionate effect on the consolidated operating margin.
15
As a percentage of revenues, the consolidated operating margin increased 1.9 percentage points to 27.1% in the first quarter of 2006, from 25.2% in the comparable period in 2005. The consolidated operating margin as a percentage of revenues was positively impacted by lower cheese costs, which benefited both domestic Company-owned store and distribution operating margins as a percentage of revenues, as well as improvements in the operating margin in our international operations. The consolidated operating margin as a percentage of revenues was negatively impacted by lower domestic same store sales, which generated lower domestic franchise royalty revenues, lower distribution volumes and lower domestic Company-owned store revenues.
As mentioned above, the consolidated operating margin as a percentage of revenues was positively impacted by lower cheese costs. Cheese price changes are a “pass-through” in domestic distribution revenues and cost of sales and, as such, have no impact on the related operating margin. However, cheese price changes do impact operating margin as a percentage of revenues. Had the 2006 average cheese prices been in effect during 2005, the total operating margin for the first quarter of 2005 would have been approximately 25.8% of total revenues, versus the reported 25.2%. This would have resulted in an operating margin improvement of 1.3 percentage points in the first quarter of 2006, versus the reported improvement of 1.9 percentage points.
Domestic Company-Owned Stores Operating Margin
The domestic Company-owned store operating margin increased $1.2 million, or 6.0%, to $21.3 million in the first quarter of 2006, from $20.1 million in the comparable period in 2005. These results are summarized in the following table.
| Domestic Company-Owned Stores |
First Quarter of 2006 |
First Quarter of 2005 |
||||||||||
| Revenues |
$ | 96.5 | 100.0 | % | $ | 98.2 | 100.0 | % | ||||
| Cost of sales |
75.2 | 78.0 | % | 78.1 | 79.6 | % | ||||||
| Store operating margin |
$ | 21.3 | 22.0 | % | $ | 20.1 | 20.4 | % | ||||
The increase in the domestic Company-owned store operating margin during the first quarter of 2006 was due primarily to lower food prices, primarily cheese, and lower insurance costs, offset in part by higher occupancy costs, including rent and utilities.
As a percentage of store revenues, the store operating margin increased 1.6 percentage points to 22.0% in the first quarter of 2006, from 20.4% in the comparable period in 2005.
As a percentage of store revenues, food costs decreased 3.1 percentage points to 26.0% in the first quarter of 2006, from 29.1% in the comparable period in 2005. This decrease in food costs as a percentage of store revenues was due primarily to a reduction in food prices, primarily cheese, and a higher average ticket, offset by a change in product mix.
As a percentage of store revenues, labor costs increased 0.5 percentage points to 29.7% in the first quarter of 2006, from 29.2% in the comparable period in 2005. This increase in labor costs as a percentage of store revenues was due primarily to the negative impact of lower revenues.
As a percentage of store revenues, occupancy costs, which include rent, telephone, utilities and depreciation, increased 1.2 percentage points to 11.5% in the first quarter of 2006, from 10.3% in the comparable period in 2005. This increase in occupancy costs as a percentage of store revenues was due primarily to higher rent and utilities as well as the negative impact of lower revenues.
As a percentage of store revenues, insurance costs decreased 0.5 percentage points to 3.2% in the first quarter of 2006, from 3.7% in the comparable period in 2005. This decrease in insurance costs as a percentage of store revenues was due primarily to improved loss experience, offset in part by the negative impact of lower revenues.
16
Domestic Distribution Operating Margin
The domestic distribution operating margin remained flat at $19.7 million in the first quarter of 2006, versus the comparable period in 2005. These results are summarized in the following table.
| Domestic Distribution |
First Quarter of 2006 |
First Quarter of 2005 |
||||||||||
| Revenues |
$ | 182.4 | 100.0 | % | $ | 201.8 | 100.0 | % | ||||
| Cost of sales |
162.6 | 89.2 | % | 182.1 | 90.2 | % | ||||||
| Distribution operating margin |
$ | 19.7 | 10.8 | % | $ | 19.7 | 9.8 | % | ||||
The domestic distribution operating margin for the first quarter of 2006 versus the comparable period in 2005 was positively impacted by lower labor costs and was negatively impacted by higher delivery costs.
As a percentage of distribution revenues, the distribution operating margin increased 1.0 percentage points to 10.8% in the first quarter of 2006, from 9.8% in the comparable period in 2005. This increase was due primarily to lower food prices, primarily cheese and was offset in part by lower volumes as a result of lower domestic franchise same store sales. Had the 2006 average cheese prices been in effect during 2005, the distribution operating margin for the first quarter of 2005 would have been approximately 10.2% of distribution revenues, versus the reported 9.8%. This would have resulted in an operating margin improvement of 0.6 percentage points in the first quarter of 2006, versus the reported improvement of 1.0 percentage points.
General and Administrative Expenses
General and administrative expenses decreased $2.6 million, or 6.0%, to $40.4 million in the first quarter of 2006, from $43.0 million in the comparable period in 2005. This decrease in general and administrative expenses was due primarily to lower insurance costs, resulting from improved loss experience, and decreases in variable general and administrative expenses, including lower administrative labor. As a percentage of total revenues, general and administrative expenses remained flat at 11.6% in the first quarter of 2006, versus comparable period in 2005.
Interest Expense
Interest expense increased $1.5 million, or 13.6%, to $12.1 million in the first quarter of 2006, from $10.6 million in the comparable period in 2005. This increase was due primarily to higher effective borrowing rates offset in part by lower average debt balances during 2006.
Our effective borrowing rate increased 1.0 percentage point to 6.3% during the first quarter of 2006, from 5.3% in the comparable period in 2005. The effective borrowing rate for the first quarter of 2006 was negatively impacted by changes in our outstanding interest rate swaps as well as higher market interest rates and was offset in part by reduced senior credit facility margin pricing.
At June 30, 2005, two floating-to-fixed interest rate derivatives expired with total notional amounts of $375 million. We paid 1.62% under a $300 million notional amount contract and 3.25% under a $75 million notional amount contract while the counterparty paid a floating interest rate under each contract. Concurrently, a $350 million notional amount floating-to-fixed interest rate derivative started with the Company paying 3.21% under the contract while the counterparty pays a floating interest rate.
The average outstanding debt balance, excluding capital lease obligations, decreased $34.9 million to $718.0 million in the first quarter of 2006, from $752.9 million in the comparable period in 2005.
Provision for Income Taxes
Provision for income taxes increased $1.0 million to $16.0 million in the first quarter of 2006, from $15.0 million in the comparable period in 2005. The effective tax rate increased 0.2 percentage points to 38.0% during the first quarter of 2006, from 37.8% in the comparable period in 2005.
17
Liquidity and Capital Resources
We had negative working capital of $10.0 million and cash and cash equivalents of $16.4 million at March 26, 2006. Historically, we have operated with minimal positive 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 40 to 50 inventory turns per year. In addition, our sales are not typically seasonal, which further limits our working capital requirements. These factors, coupled with significant and ongoing cash flows from operations, which are primarily used to repay debt, invest in long-term assets, and pay dividends, reduce our working capital amounts. Our primary sources of liquidity are cash flows from operations and availability of borrowings under our revolving credit facility. We expect to fund planned capital expenditures, debt repayments and dividends from these sources. We did not have any material commitments for capital expenditures as of March 26, 2006.
As of March 26, 2006, we had $801.2 million of debt, of which $0.3 million was classified as a current liability. Letters of credit issued under the $125.0 million revolving credit facility were $31.3 million. These letters of credit are primarily related to our casualty insurance programs and distribution center leases. Borrowings under the revolving credit facility are available to fund our working capital requirements, capital expenditures and other general corporate purposes.
We enter into interest rate swaps, collars or similar instruments with the objective of managing volatility relating to our borrowing costs. As of March 26, 2006, we were party to interest rate derivatives in the total notional amount of $450.0 million.
Cash provided by operating activities was $28.7 million and $38.6 million in the first quarter of 2006 and 2005, respectively. The $9.9 million decrease was due primarily to an $11.9 million net change in operating assets and liabilities, offset in part by a $1.5 million increase in net income. The $11.9 million decrease in operating cash flow resulting from the net change in operating assets and liabilities was due primarily to changes in accruals for compensation and taxes.
Cash used in investing activities was $3.8 million and $4.6 million in the first quarter of 2006 and 2005, respectively. The $0.8 million decrease was due primarily to a $2.5 million decrease in capital expenditures, offset in part by a $1.4 million decrease in proceeds from the sale of property, plant and equipment.
Cash used in financing activities was $75.4 million and $21.1 million in the first quarter of 2006 and 2005, respectively. The $54.3 million increase was due primarily to a $145.0 million purchase of common stock during the first quarter of 2006 and a $10.0 million increase in repayments of long-term debt. These increases in cash used in financing activities were offset in part by $100.0 million of proceeds from the issuance of long-term debt that was used to partially fund the purchase of common stock during the first quarter of 2006.
Based upon the current level of operations and anticipated growth, we believe that the cash generated from operations and amounts available under the revolving credit facility will be adequate to meet our anticipated debt service requirements, capital expenditures, dividend payments and working capital needs for the next twelve months. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk Factors” in our filings with the Securities and Exchange Commission. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under the senior secured credit facility or otherwise to enable us to service our indebtedness, including the senior secured credit facility and the senior subordinated notes, or to make anticipated capital expenditures, or to make anticipated dividend payments. Our future operating performance and our ability to service or refinance the senior subordinated notes and to service, extend or refinance the senior secured credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. Additionally, Domino’s, Inc. may be requested to provide funds to its parent company, Domino’s Pizza, Inc. for dividends, distributions and/or other cash needs of Domino’s Pizza, Inc.
18
Forward-Looking Statements
This filing contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relating to our anticipated profitability and operating performance reflect management’s expectations based upon currently available information and data. However, actual results are subject to future risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that can cause actual results to differ materially include: the uncertainties relating to litigation; consumer preferences, spending patterns and demographic trends; the effectiveness of our advertising, operations and promotional initiatives; our ability to retain key personnel; new product and concept developments by Domino’s and other food-industry competitors; the ongoing profitability of our franchisees and the ability of Domino’s and our franchisees to open new restaurants; changes in food prices, particularly cheese, labor, utilities, insurance, employee benefits and other operating costs; the impact that widespread illness or general health concerns may have on our business and the economy of the countries in which we operate; severe weather conditions and natural disasters; changes in our effective tax rate; changes in government legislation and regulations; adequacy of our insurance coverage; costs related to future financings and changes in accounting policies. Further information about factors that could affect Domino’s financial and other results is included in our other filings with the Securities and Exchange Commission. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to market risks from interest rate changes on our variable rate debt. Management actively monitors this exposure. We do not engage in speculative transactions nor do we hold or issue financial instruments for trading purposes.
Interest Rate Derivatives
We enter into interest rate swaps, collars or similar instruments with the objective of managing volatility relating to our borrowing costs.
We are party to an interest rate swap agreement which effectively converts the variable LIBOR component of the effective interest rate on a portion of our debt under our senior secured credit facility to a fixed rate over a specified term. We are also party to two interest rate swap agreements which effectively convert the 8.25% interest rate on our senior subordinated notes to variable rates over the term of the senior subordinated notes.
These agreements are summarized in the following table.
| Derivative |
Total Notional Amount |
Term |
Company Pays |
Counterparty Pays |
||||||
| Interest Rate Swap |
$ | 50.0 million | August 2003 – July 2011 | LIBOR plus 319 basis points | 8.25 | % | ||||
| Interest Rate Swap |
$ | 50.0 million | August 2003 – July 2011 | LIBOR plus 324 basis points | 8.25 | % | ||||
| Interest Rate Swap |
$ | 350.0 million | June 2005 – June 2007 | 3.21% | LIBOR | |||||
Interest Rate Risk
Our variable interest expense is sensitive to changes in the general level of interest rates. At March 26, 2006, the weighted average interest rate on our $273.0 million of variable interest debt was 7.0%.
We had total interest expense of approximately $12.1 million in the first quarter of 2006. The estimated increase in interest expense for this period from a hypothetical 200 basis point adverse change in applicable variable interest rates would be approximately $0.9 million.
Item 4. Controls and Procedures
Management, with the participation of Domino’s Pizza, Inc.’s Chairman and Chief Executive Officer, David A. Brandon, and Executive Vice President and Chief Financial Officer, L. David Mounts, performed an evaluation of the effectiveness of Domino’s Pizza, Inc.’s and Domino’s, Inc.’s disclosure controls and procedures (as that term is defined in Rule 13a-15(e) under the Securities Exchange of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, Messrs. Brandon and Mounts concluded that each of Domino’s Pizza, Inc.’s and Domino’s, Inc.’s disclosure controls and procedures were effective.
During the quarterly period ended March 26, 2006 there have been no changes in either Domino’s Pizza, Inc.’s or Domino’s, Inc.’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect Domino’s Pizza, Inc.’s or Domino’s, Inc.’s internal control over financial reporting.
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We are a party to lawsuits, revenue agent reviews by taxing authorities and administrative proceedings in the ordinary course of business which include workers’ compensation, general liability, automobile and franchisee claims. We are also subject to suits related to employment practices and, specifically in California, wage and hour claims and two class actions pending in Orange County, California Superior Court brought by former employees. On June 10, 2003, a class action complaint was filed alleging that we failed to provide meal and rest breaks to our employees. This case is in the discovery stage and no determination with respect to class certification has been made.
On August 19, 2004, a class action complaint was filed by a former general manager alleging that we misclassified the position of general manager. We classify the general manager of a Domino’s Pizza store as an exempt employee. This case involves the issue of whether employees and former employees in the general manager position who worked in our 60 California stores during specified time periods were misclassified as exempt and deprived of overtime pay. We believe this case is without merit and intend to vigorously defend against the related claims. This case is in the earliest stages of discovery, and the status of the class action certification is yet to be determined. We are presently unable to predict the probable outcome of this matter or the amounts of any potential damages at issue.
We believe that these matters, individually and in the aggregate, will not have a significant adverse effect on our financial condition and that our established reserves adequately provide for the resolution of such claims.
There have been no material changes in the risk factors previously disclosed in the Company’s Form 10-K for the year ended January 1, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
c. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
| Period |
(a) Total Number of Shares (or Units) Purchased |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||
| Period #1 (January 2, 2006 to January 29, 2006) |
— | — | — | — | ||||||
| Period #2 (January 30, 2006 to February 26, 2006) |
— | — | — | — | ||||||
| Period #3 (February 27, 2006 to March 26, 2006) |
5,624,602 | (1) | $ | 25.78 | — | — | ||||
| Total |
5,624,602 | $ | 25.78 | — | — | |||||
| (1) | As previously reported, in the first quarter we repurchased and retired 5,624,602 shares of our Common Stock from investment funds associated with Bain Capital, LLC, for $145.0 million, or $25.78 per share. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
None.
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| Exhibit Number |
Description | |
| 31.1 | Certification by David A. Brandon 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 L. David Mounts 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. | |
| 31.3 | Certification by David A. Brandon 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, Inc. | |
| 31.4 | Certification by L. David Mounts 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, Inc. | |
| 32.1 | Certification by David A. Brandon 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 L. David Mounts 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. | |
| 32.3 | Certification by David A. Brandon 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, Inc. | |
| 32.4 | Certification by L. David Mounts 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, Inc. | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned duly authorized officer.
| DOMINO’S PIZZA, INC. | ||
| DOMINO’S, INC. | ||
| (Registrants) | ||
| Date: April 27, 2006 | /s/ L. David Mounts | |
| L. David Mounts | ||
| Chief Financial Officer | ||
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